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Consolidated Fund (Appropriation) (No. 2) Bill

Second Reading and Remaining Stages

7.07 pm

Moved By Lord Myners

Bill read a second time. Committee negatived. Standing Order 47 having been dispensed with, the Bill was read a third time and passed.

Finance Bill

Bill Main Page
Copy of the Bill
Explanatory Notes
20th Report from JCHR

Second Reading and Remaining Stages

7.08 pm

Moved By Lord Myners

The Financial Services Secretary to the Treasury (Lord Myners): My Lords, I am pleased to open the debate on this year's Finance Bill. As has now become customary, the Bill has been carefully looked at by the Economic Affairs Sub-Committee on the Finance Bill.

I start by thanking the noble Lord, Lord Vallance, for his chairmanship of the committee, and its other members for their dedication and diligence in scrutinising what is, by necessity, a lengthy and complex Bill. I will respond to the points raised in the sub-committee's report later in my remarks, but I hope noble Lords will

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find it useful if I first briefly set out the context for our discussions today and describe some of the major effects that this legislation will have.

This debate comes as both the UK and global economies continue to face major challenges. The financial crisis has caused a world recession, with consequences that are hurting individuals and firms in every country. In the UK, the Government understand the serious impact that the international credit crunch and economic slowdown are having on people and businesses, and have taken comprehensive action to support the economy and protect jobs through these difficult times.

Recent figures from the National Institute of Economic and Social Research show that UK output fell by 0.4 per cent in the three months ending in June, after the decline of 1.3 per cent in the three months ending in May. The institute's assessment is that the UK economy is now standing still rather than continuing to contract at a sharp pace. The first part of 2009 was difficult for all advanced economies. The global downturn meant that growth fell in all G7 countries and in many major economies across the world. Figures for the first quarter of this year show Japan and Germany contracting by 3.8 per cent, Italy contracting by 2.6 percent and the US by 1.4 per cent. We always knew that the start of the year would be tough. However, as my right honourable friend the Chancellor said in the 2009 Budget, we expect growth to return in the UK at the end of 2009 as the action taken by the Government to tackle the global downturn takes full effect.

We have seen other tentative signs that output is stabilising, but the Government remain cautious about the prospects for the economy. We cannot afford to be complacent; and, while we are confident about a strong and sustained recovery, we must follow through on delivering support for families and businesses. The Finance Bill provides for vital measures to support the economy this year and to help families and businesses through difficult times. It also provides for help to support the long-term prosperity of Britain and to ensure that public finances are sustainable in the future.

The Bill extends until the end of the year the temporary VAT cut that is stimulating the economy by leaving more than £11 billion that otherwise would have been taken in tax in the pockets of consumers and businesses. There has been growing recognition that the measure is working. The Centre for Economics and Business Research stated that,

Crucially, the Bill also introduces measures to support the public finances, which is a critical focus for the Government. We know that we must live within our means, and we are acting to keep the public finances on a sustainable path over the medium term. Consistent with our progressive principles, the fiscal consolidation asks for most from those who are most able to contribute and who have benefited most from the growth of the last decade. Consequently, the Bill creates the structure for the 50p rate of income tax from 2010 for those on incomes of more £150,000 per year-around the highest 1 per cent of earners. The Bill also provides for anti-forestalling provisions in respect of the planned restriction of higher-rate relief on pension contributions for the

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very wealthiest. To further support the public finances, the Bill implements increases in alcohol duty, which remained at or below the level of inflation between 1997 and 2007, and an increase in landfill tax from 2011, which will deliver emission savings equivalent to 700,000 tonnes of carbon dioxide by 2013.

The current circumstances make it imperative that the tax base is protected and sustainable. We will not tolerate tax evasion and avoidance, which undermine fiscal sustainability, damage the delivery of policy objectives, impose significant costs on society and shift a greater tax burden onto ordinary taxpayers. Consequently, in addition to the measures to support the public finances in the medium term, the Finance Bill includes a package of measures to protect tax revenues that will raise more than £1 billion during the period 2009-10 to 2011-12, and protect a further £3 billion of tax receipts per year from evasion and avoidance by 2010-11.

The Bill provides help for businesses, targeting it at those in most need while encouraging investment for growth in the future. The freeze in the small companies' rate of corporation tax will help more than 800,000 companies. The temporary extension of the loss carry-back rules, benefiting more than 140,000 businesses, will help many viable firms that face cash-flow difficulties. The Bill is helping to support investment by temporarily doubling, to 40 per cent, capital allowances for businesses investing now. That will benefit a further 60,000 businesses, and is in addition to the business payment support scheme, under which 168,000 agreements have already been reached with businesses, deferring tax payments of £3 billion.

The Bill also introduces measures to support investment in North Sea oil, to bring in new fields while ensuring existing revenue is protected. The Government are determined to ensure that the UK is a competitive location for multinational businesses. This is why the Bill introduces a package of reforms to the taxation of foreign profits. The main change will enable a group's worldwide profits to be repatriated to the UK without tax being charged and without the need for complex double-taxation-relief calculations.

The main change is complemented by further measures to enhance the attractiveness of the UK as a location for multinational businesses, while protecting the Exchequer. These include a reasonable restriction on our generous interest-relief rules; consequential changes to the controlled-foreign-company rules; and the replacement of the unpopular Treasury-consent rules with a much simpler reporting requirement. All of these changes have been subject to consultation and stakeholder engagement, and have been broadly welcomed by all sides, including by Opposition Members in the other place.

I have already mentioned briefly the admirable efforts of the members of the Finance Bill sub-committee of the Economic Affairs Committee in scrutinising the Bill. I re-emphasise my thanks to the sub-committee for the thorough and helpful report that it has published. The report made a number of recommendations in certain important areas, and I will address some of the points now.

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Throughout the development of the draft Finance Bill, the Government have been guided by extensive consultation with industry and other stakeholders. Our approach to consultation in respect of the foreign profits elements of the Bill was specifically praised by the Finance Bill sub-committee's report. The report went on to say that the Government should apply the best aspects of this consultation to other consultations in future. It will not surprise noble Lords to hear that I and the Government are delighted to accept this recommendation.

The report queried why, when the draft was published, it contained gaps, specifically on the debt cap. Normally it would be preferable to publish a complete draft, and we will continue to endeavour to do so, as far as we are able, across the board. However, on the occasion in question, we were making important progress in respect of those particular clauses in frank and productive dialogue with industry. We felt it preferable to continue to develop the clauses in the light of those discussions, rather than to present Parliament with half-cooked clauses that we would then seek to change significantly.

The sub-committee's report went on to recommend that the changes to the taxation regime on high-value pension contributions be carefully monitored and reviewed to ensure that they do not adversely affect the UK's competitiveness as a global business centre. The Government have confidence that the measures in question will not significantly impact on our competitiveness. Other countries around the world are having to take comparable measures necessary for fiscal consolidation during these difficult economic times.

Tax is only one factor in the UK's competitiveness, and the UK remains an attractive place to do business, as confirmed by the World Bank's Doing Business 2009 report, which found that the UK ranks second in the G7 and second in the EU for ease of doing business. However, we are not complacent and of course we will continue to keep all tax legislation under review to ensure that it continues to meet our policy objectives.

The sub-committee's report also raised concerns that the anti-forestalling provisions in the Bill might negatively affect those who, for whatever reason, might legitimately make irregular contributions to their pension schemes. In response to this issue, the Government tabled an amendment to ensure that, where irregular contributions have been made over the past three years, the special annual allowance will be increased to the average of those contributions, with an upper limit of £30,000. For those with average irregular contributions of below £20,000, the special annual allowance will remain at £20,000. This extends full protection to the majority of non-regular pension savers and means that even the highest contributors see their cap on savings attracting higher-rate relief lifted by half as much again.

This is a measured change, striking a reasonable balance between preventing the anti-forestalling regime driving up the costs of pension tax relief for the wealthiest individuals and enabling individuals to continue to receive higher-rate tax relief on pension contributions

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that they would have made in the absence of any announcement on the restriction of pensions tax relief from April 2011.

Lord Forsyth of Drumlean: My Lords, I am grateful to the Minister for giving way. On this specific point, when the pension reforms in 2006 were introduced, together with the very good rationalisation in the so-called A-day regime, the Government's policy was to encourage people in their year of retirement to make large contributions to their pension fund. How do these anti-forestalling provisions not result in those people being penalised, and what happens to people who were planning to proceed along that route on the basis of an undertaking from the Government only three years ago?

Lord Myners: My Lords, the Government would clearly encourage people to make appropriate provision for their retirement. At the same time, we wish to increase higher rates of taxation to ensure that the burden falls on those who, as a consequence of the great prosperity of the past 10 years, have enjoyed significant increases in income and to ensure that that increase in taxation cannot in some way be subverted by people contributing funds into pension schemes. Accordingly, a balance needs to be struck. We have listened to the contributions of those in the other place and have made amendments to our proposals to reflect the arguments that we have heard. I will no doubt come back to the subject of pensions in my closing speech in response to other points that I imagine will be made by noble Lords as the debate progresses.

Lord Forsyth of Drumlean: My Lords, perhaps the Minister will allow me to intervene again. I am not making a debating point here; this is a serious point. People thought, and were encouraged to think by the Government-it was the Government's policy-that they might be able to pay the whole of their final salary into the scheme in order to provide a pension. Of course, that is even more important now because of what has happened in the markets. People who contribute more than £30,000-which, I accept, is an improvement-will find themselves having to pay 20 per cent tax on that contribution. How can that be fair, and how can people depend on what the Government say if they change their mind so quickly and undermine people's planning?

Lord Myners: My Lords, the Government have not changed their mind; their position has been quite consistent in this area. We encourage people to save for their pensions but, at the same time, we cannot make commitments which necessarily bind future Chancellors or future Governments. No one was given an assurance that that arrangement would remain in place in perpetuity. As I said, I am sure that we will come back to pensions later in the debate and I will cover any points raised in my closing remarks.

The final recommendation in the report that I would like to touch on relates to real estate investment trusts. The report recommended that the Government look again, taking account of international experience,

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at what kind of measures would be necessary to get more REITs. The acquisition of property by a UK REIT is subject to the normal rules on stamp duty land tax. The charge to companies becoming REITs at the rate of 2 per cent of the market value of their investment properties at the time of conversion was essential to ensure that the UK REITs regime was introduced at no overall cost to the Exchequer. That is a reflection not just of the latent capital gains of existing companies converting to UK REITs but also, importantly, of the favourable tax regime offered to any UK REIT in the future. We will continue to keep the UK REITs regime under review as part of the normal Budget process.

Once again, I thank members of the Finance Bill sub-committee for their hard work and thoughtful recommendations. In the development of the Finance Bill, and during its passage through Parliament, the Government have at all times been guided by our progressive principles and our desire to build a stronger, fairer Britain. We believe that the policies that the Bill implements will help us to overcome the current economic challenges and will lay the foundations from which Britain can grow and prosper. The measures in the Bill are good for individuals, good for business and good for the economy as a whole. I commend it to the House.

7.27 pm

Lord Lang of Monkton: My Lords, I begin by declaring my interests as set out in the Register of Lords' Interests in case anything that I may say could be thought to impinge on them. I continue by complimenting in advance the noble Lord, Lord Vallance of Tummel, and, through him, the Select Committee on Economic Affairs for its report on aspects of the Finance Bill 2009, which we now debate at Second Reading.

As usual, the committee has chosen specific items from the Bill and provided useful scrutiny and comment on them. However, the Bill is derived from the Budget, and the Budget and more recent developments in the economy form the background to today's debate. The fact that the economy shrank by 2.4 per cent in the first quarter-as the committee points out, the fastest rate for more than half a century and far worse than expected-provides a truly serious background to our deliberations. Sadly, this House cannot amend the Finance Bill but we can question the Government and offer our own views and I begin by brief reference to the three topics that the committee chose to examine: foreign profits, the pension annual allowance and real estate investment trusts.

As so often these days, the recurring criticism which has coloured debate on the Bill and which the committee's report echoes is the lack of consultation before rushing to legislation. It was with masterly understatement that the committee concluded that,

This policy of "shoot first, ask questions later"-the kind of YouTube politics favoured by the Prime Minister-should have no part in consideration of a Finance Bill, or indeed of any other.

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The noble Lord, Lord Vallance, and other noble Lords participating in the debate will doubtless wish to debate these matters more fully but, on foreign profits, I simply urge the Government to take on board the recommendations of the committee and to delay implementation of the worldwide debt cap, which runs the risk of incentivising debt, until there has been a chance for further proper consultation, as the committee requested. The distinguished witnesses whom the committee met described this issue as a "Frankenstein monster". Clearly they felt strongly about it, being of the view that the Government had not yet got it right.

On REITs, the committee pointed out that the reforms,

They did not, as Deloitte pointed out, go far enough. That there are no residential REITs, nor any new ones, that are not converted from property companies suggests underlying structural defects in the design of the scheme.

On pensions, I acknowledge that some progress was made in Committee in another place on, for example, anti-forestalling and the responsibilities of senior accounting officers, but that progress was only very limited. Why do the Government not realise the importance of encouraging savings as part of a sound economy? Now they seem obsessed with restricting and penalising, through piecemeal and ill considered legislation, those who would save through their pensions. So soon after the redesign of the whole system, it is unsettling, to say the least, that what looks like a morass of potential tax traps has now been imported, piling on complications where simplification would be preferable. Surely the Prime Minister has damaged the pensions sector enough over the years. What is needed is a stable, predictable and fair environment.

As for the rest of the Finance Bill, lengthy and complex it may be, as the noble Lord, Lord Myners, said-that is the habit of Finance Bills-but it does little to address the great issues that we face. We see what can only be described as snide little political wheezes like the 50p tax rate brought forward by a year and increased by 5p simply to try to wrong-foot the Opposition. Is there no limit, one wonders, to the extent to which the Prime Minister is willing to demean himself and debase his office? Did he learn nothing from the 10p tax rate debacle?

The latest measure was condemned by all informed opinion, such as the Institute of Directors, the Institute for Fiscal Studies andErnst & Young. Far from raising the Treasury's planned £2.4 billion, the combination of avoidance, emigration and a consequential fall in indirect tax revenues must surely erode that figure substantially-similarly with the £12 billion VAT reduction, to which the noble Lord also referred. Notwithstanding the fact that he has rounded up support from one organisation, I believe that that was another ill judged irrelevance, denounced by retailers and the public alike, both of whom might have been thought to be beneficiaries at a time when massive discounts of 20 per cent and often much more were being offered to help them to survive the recession.

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What thought did the Chancellor give to the real impact that will come when he restores his cut on 1 January next year? That will be the sting in the tail to an economy in crisis. The fact is that the Budget managed to be both an odds-and-ends ragbag that contributed nothing to recovery and, by common consent, one of the worst in modern times. It was bad because of what it failed to do. It failed to provide a theme-a vision even-of how to address the debt crisis that is poised to overwhelm the country. How, for example, do the Government plan to solve a debt crisis by piling debt upon debt? The Budget failed to instil confidence. It breached manifesto commitments and it undermined competitiveness and still we wait to learn how the Government plan to tackle the public finances that they have so wantonly destroyed.

Last year, the Chancellor predicted that the Government would need to borrow £38 billion this year. Now that forecast has increased to £175 billion, almost five times as much. The Prime Minister had said that he wanted the International Monetary Fund to be an early warning system. On Budget Day, the IMF warned him within an hour of the Chancellor sitting down that the decline in GDP this year would be not 3.5 per cent but 4.1 per cent and that the budget deficit would be the worst in the G20 next year, at 11 per cent of GDP.

From the perspective of three months later, the Budget can be seen as inaccurate, inadequate, irrelevant and one more wasted opportunity to start the recovery process, just when it was most needed. But the IMF has gone on to warn that Britain is the only leading economy in the G20 that is unable to budget for any kind of package next year. Not only that, but the Chancellor must start paying back debt much earlier than next year's Budget. Is it not time now for the Government to spell out their plans, instead of hiding them for electoral reasons, so that we can start to shore up international confidence?

However, this is a Government with form. Despite the strong and growing economy that they inherited in 1997, they have not achieved a budget surplus since 2001, the year after the plans that they had inherited from their predecessors ran out. Through all the years of plenty that followed, while other countries were reducing taxes and building reserves, this country was doing the opposite. Even at the top of the cycle, the Chancellor was still running a 3 per cent deficit, while lecturing others on what they should be doing. As the OECD has pointed out with regard to the UK, fiscal policy is constrained by weak budgetary policy. It has also forecast that our fiscal deficit will climb to 14 per cent next year, the worst in the industrialised world.

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