Finance Bill

There are many ways in which we need seriously to reform the tax system so that it becomes much simpler, and in due course we will come forward with detailed proposals. According to the Institute of Chartered Accountants, we are already seeing the symptoms of the changes involving managed service companies, because well over 56,000 new companies were registered in February—around double the usual monthly figure. Freelancers, as well as having to set up their own companies and being unable to outsource, are likely to see the bill for professional advice go up because of the risk that their advisers could find themselves caught by the definition of a managed service company provider; those professionals could find themselves liable for the tax debts of their clients. It is difficult to know in advance how the carve-out for professional advisers in proposed new section 61B(3) will be interpreted. While some basic accountancy and legal services may steer clear of the rocks, how will everyday tax advice, company formation and company secretarial work be treated? We will have to wait for a court decision before we can understand the legal position with confidence, leaving freelance workers and their professional advisers in an expensive limbo in the meantime. The Contractors UK website reported many contractors feeling that"““this latest legislation is just part of an inevitable ongoing revenue attack. Freelance contractors are a valuable section of our flexible workforce, and once again, they feel victimised by this assault on their livelihoods.?" Freelance software development expert Mr. David Hazell recently wrote that the Chancellor"““and his ilk have spent the last 10 years slowly twisting the public view of my chosen way of keeping myself in work to something akin to benefit fraud. Contractors are not tax dodgers, and they have better things to do with their time than spend it getting their heads around Gordon’s corkscrew-like reinterpretations of tax and company law.?" Martin Hesketh, who provides professional services to freelance workers, said:"““The UK economy relies heavily on people freelancing, and the Government has promoted this ‘flexible’ way of working for some time now to attract more people into the work force. However, the new rules seem to work against the Government's own agenda. Not only are they adding more confusion to this already complex market, but…are also requiring contractors to take on additional layers of legal and accounting responsibilities—something they’ve clearly not asked for?." A major plank of the Government’s proposals is not even in the Bill for scrutiny this afternoon. Their highly controversial draft rules on making third parties liable for other people’s tax debts are still to come, so we only have part of the picture—the rest is to be inserted via regulations. Yet clause 25 would bring the rules into effect from 6 April. People are being asked to deal with that upheaval even before the rules have been finalised and agreed by the House. The Chancellor’s attack on enterprise and small business start-ups continues in schedule 4 with the restrictions imposed on sideways loss relief. Under the Bill, it seems that people are damned if they do incorporate and damned if they do not, with schedule 4 hitting business partnerships. Restricting the ability to set off partnership losses against other income could have an impact on several important high-risk investment areas. Several concerned entrepreneurs have contacted me about sideways loss relief, including Mr. Antony Blakey, who told me that many investors and scientists were worried about the impact on private collective investment. He told me that"““we now have a serious problem for environmental research and small business start-ups.?" Film production is an example of something that could be negatively affected. I acknowledge that not everyone in the film industry is worried, especially since the Government carried out their spectacularly rapid U-turn on applying the rules to section 42 and section 48 reliefs. However, some in the film industry are worried, and concern about schedule 4 stretches to several other sectors, including the multi-billion-pound computer games industry, in which the UK has such an important opportunity to compete alongside the best in the globalised world economy. I have also received representations about the damage that schedule 4 could do those trying to make use of the special capital allowances that the Chancellor introduced to encourage environmental projects. Biotech investment could also be hit. Rupert Lywood of Matrix Securities contacted me about a project to develop cancer vaccines. He told me that it would have been much harder to get that off the ground without sideways loss relief, because it would have been difficult to find a single investor who could fund the entire project. To get the necessary critical mass of investment for such high-risk projects, one generally needs several investors and, consequently, a partnership. If investors can no longer relieve losses against other income, the risk increases and ventures find it more difficult to get financial backing. In many cases, spending 10 hours a week on the project, as required by the new rules, simply would not be practical. Mr. Lywood tells me of a business venture concerning Down’s syndrome and genetic diseases, which is now in jeopardy as a result of schedule 4. Again, it is true that avoidance has occurred, and we support attempts to crack down on abusive schemes, but the Government already have extensive tools with which to deal with partnership-based avoidance. Schedule 4 fails to distinguish between abusive and non-abusive schemes. We need to find a way to save sideways loss relief for projects undertaken for genuine commercial and entrepreneurial motives rather than for tax reasons, and we will table amendments in Committee to bring that about. Coupled with the new restrictions on venture capital trusts in clause 50, schedule 4 comes as a body blow to enterprise in Britain, and we desperately need to encourage enterprise if more jobs are not to be sent offshore to India and China. Let us consider the Bill’s proposals on green issues. Tony Juniper of Friends of the Earth said that the measures announced were ““disappointingly weak? and described the Chancellor’s record as ““woeful?. During his 10 years at No. 11, green taxes have been falling as a proportion of total tax receipts. The much-hyped climate change levy is flawed because it targets the use of energy rather than focusing on carbon emissions. The Renewable Energy Association branded the low carbon buildings programme a fiasco. Clause 19’s stamp duty exemption for zero carbon homes will make a minimal difference, especially as the Chief Secretary cannot tell us with certainty whether any houses in the entire country qualify for that relief. The Chancellor’s tax break for microgenerated energy sold back to the national grid is not exactly a big giveaway, since HMRC admits that it has never collected income tax on such payments to date. The Renewable Energy Association called the £22 a year that that might save home owners"““a drop in the ocean?." The Bill may contain provisions that are labelled as environmental, but it is not a genuinely green Finance Bill. Part 6 deals with powers. Of course we acknowledge the importance of ensuring that the authorities have the right tools to fight tax fraud and organised crime such as missing trader intra-Community—MTIC—fraud. However, we also agree with the Chartered Institute of Taxation about the importance of"““ensuring those powers are used only by those who need them and are subject to proper control.?" We welcome the extensive consultation carried out on that issue. There has certainly been an improvement since the initial draft, which took an Inspector Gene Hunt-type approach: ““Kick the door down first and ask questions afterwards.? Real progress has been made since the ““PACE is for wimps? stance with which some of the proposals started. However, there are still a number of instances where the criminal powers granted by clause 81 to HMRC exceed those given to the police under the Police and Criminal Evidence Act 1984, so we will scrutinise those proposals with care. Vesting responsibility for both civil and criminal investigation in the hands of a single body does give rise to certain risks; I am sure the Chief Secretary will acknowledge that. HMRC’s criminal investigation officers should be separate and distinct from the rest of the organisation. There needs to be a limit to the range of people who can exercise the very considerable powers that the Government are asking the House to sanction in the Bill. We do not want to see every tax inspector given a power of arrest, so we seek assurance from the Government that the draconian powers to tackle smugglers that have built up at Customs and Excise over the years will not be allowed to leak into HMRC’s civil jurisdiction. Without even getting into the issue of the ferocious powers already vested in the Revenue and Customs Prosecution Office, we would welcome the clearest guarantees from the Financial Secretary in his summing up that that the powers of arrest and investigation contained in the Bill will not be used in the context of HMRC’s day-to-day tax collection duties. We hope and trust that he will also be able to assure us that submitting a late tax return will not mean a dawn raid and frozen bank accounts.