Finance Bill

I want to try to make some progress, if the hon. Gentleman does not mind. The anti-avoidance provisions in last year’s and this year’s Finance Bill constitute a cat-and-mouse game whereby the Government try to close a loophole and another one opens that requires subsequent revisions in other Finance Bills. No sooner does one loophole close than another opens and the process starts again. It is endless. That adds weight to the argument that we should get rid of swathes of legislation and provide for a general anti-avoidance rule. Such a rule has already been successfully rolled out in Australia. When I consulted some professional bodies before the Second Reading debate, they said that they opposed a general anti-avoidance rule. I was interested in the reasons for their objection and I asked them to explain why they would be unhappy about such a rule. They said that they had no confidence that a general anti-avoidance rule would not be introduced on top of all the current anti-avoidance legislation. If the Government made a clear commitment to get rid of swathes of legislation and introduce a system that has been effective elsewhere, it would remove a few pages from ““Tolley’s Tax Guide? and help restore confidence. Clause 25, which deals with managed service companies, is a case in point. It attempts to deal with a genuine problem. The Government believe that many people avoid paying the right amount of income tax and national insurance by providing their services through a managed service company and being paid through dividends rather than a salary. As a result of the changes for which the Bill provides, managed service companies will, among other things, have to operate PAYE, deducting income tax and national insurance contributions on all payments, regardless of whether the individual receives a salary or dividend. We accept that abuse is occurring and needs to be tackled, but I should like to flag up some of the implications of clause 25. First, do the changes deal with the underlying problem of why people choose to operate through managed service companies? There is no balance between the taxation systems for the employed and the self-employed. Instead of directly dealing with that, the Government are basically saying that anyone who operates through a managed service company will continue to bear the risk of being self-employed but enjoy none of the benefits. That problem has not been resolved. The other problem is that even flagging up issues and stating an intention to legislate has again encouraged behavioural changes with which HMRC will struggle. In response to consultation, the Institute of Chartered Accountants said that it had seen correspondence from managed service companies to their customers that already offers an alternative service. It involves setting up each individual in a personal service company, of which the individual is the sole shareholder or director. Customers are then asked to self-certify whether they are within the rules of IR35. Many of those individuals cannot realistically know that. The Institute of Chartered Accountants continues:"““We have had confirmation from Companies House that there were 56,218 new companies registered in February 2007, while a more usual monthly figure would be approximately 28,000.?" The figure has therefore nearly doubled. The institute goes on:"““In one week alone, there were 20,000 new companies registered. Our initial conclusion is that the proposed new rules may not work and may cause more problems than they solve.?" That will ultimately cause more problems for HMRC, which is cutting front-line staff at a point when there could be a massive explosion in the number of individuals who register themselves as personal service companies and therefore need closer attention from local HMRC officers. How will HMRC manage the additional burden of ensuring that all the PSCs are compliant? We are seeing more legislation with unintended consequences, which could ultimately occupy all HMRC resources. Equally frustrating is the way in which the consultation was undertaken. In many cases, as confirmed by my experience of last year’s Finance Bill, proposals are rushed through in order to fit in with the annual Finance Bill timetable without due consideration being given to professional opinions and concerns. The classic example last year was the inheritance tax treatment of trusts, which was launched on an unsuspecting industry and public without any consultation and then went through several iterations in Committee with significant changes being made to both the clauses and the schedules. Although we do not have anything on that scale this year, there are signs of a similar approach. I have already talked about air passenger duty and how it was introduced. My point also applies to clauses intended to expand the powers of HMRC in clauses 81 to 86. Even though there was a consultation process in January, in which concerns were raised about taking on arrest powers, the Treasury response was to concede that there was a need for guidance, but to state:"““This will be published as soon as possible and before any changes come into force.?" My understanding is that the guidance has not yet been published. Will we see it before next week when these issues are debated on the Floor of the House? It would certainly help to inform our debate. If it is not going to be available, I find it very worrying. I hope that the Minister will be able to confirm that the guidance will be available before next week. Concerns have also been raised about clarity and about how widely drafted the provisions are. Once again, the issue has been dismissed and we are told that the clarification will come through guidance. It is a cavalier approach. Ultimately, any legal action taken in future will be based on the law as it stands, not on the guidance, which can be subject to change without consultation or even without any reference to Parliament. Those concerns are depressingly familiar, as we have seen them in relation to previous Finance Bills. Key questions about process are raised. Surely the position could be improved by better pre-legislative consultation and scrutiny, so that we could have an open and public debate with professional bodies about the strategic approach of our tax system. It might also help if we had a full Finance Bill only once every two years, perhaps with a beefed-up Budget resolution in between. In that way, we could get back to the strategic perspective of what the tax system is supposed to achieve. It would then no longer be a vehicle just for tinkering on a minute level.