Finance Bill

My Lords, my point about the simplification related to the broader range of business taxation. The noble Lord will accept that we are talking about a relatively small group of companies. I accept his point that the increase throws an extra burden on them. He also will recognise that we have a clear rationale for the basis on which we hope to encourage investment and that in general terms we have produced an internationally competitive corporation tax rate. I think that his party—in fact, the noble Lord may have had quite a strong part in this with his zealous and diligent work behind the scenes lobbying for a reduction in corporation tax—will see the merits in us having done so. The Government have set out their rationale for refocusing incentives away from the small companies rate and on to businesses which really invest. Our prime concern is to ensure that investment takes place. The noble Lord and the House will recognise that it will reduce the differential between incorporated and unincorporated businesses. It will reduce the incidence of people incorporated for tax rather than commercial reasons and will make the system fairer. Although the noble Lord may quibble with me about the administrative dimension on this, the Government’s priority that we should be concerned that people should incorporate for commercial reasons rather than for tax is an advantage and reflects a strategic position. It is clear that tax should not drive the decision on incorporation. There are other good reasons why people might want to incorporate, but we maintain that tax should not be a driver. At the same time, small and medium-sized enterprises face very real challenges, which is why we have refocused tax incentives by bringing in a new £50,000 annual investment allowance targeted at helping all businesses to invest and grow and have increased the RandD tax credits for small and medium enterprises. Let me turn now to the important subject of managed service companies, which was identified by your Lordships’ committee. A regrettably large number of people have chosen to incorporate for the wrong reasons. As things stood, the vast majority of people operating through an MSC were getting an unfair advantage over other workers and compliant businesses playing by the rules. This Bill therefore contains provisions to tackle managed service companies and to stop those using such schemes from undercutting compliant workers and businesses. The committee chaired by the noble Lord, Lord Wakeham, described the Government’s measures as a ““sticking plaster””, suggesting that the underlying structural issues need to be tackled. I understand the importance of that point and the noble Lord in a short while will deploy his arguments, which the Government of course will take very seriously. Let me be clear: this legislation addresses the very specific issue of mass marketed schemes being used to disguise employment. Perhaps I may put it this way: it tackles a significant and growing compliance issue, not a structural problem. The company is being used to disguise the employer/employee relationship which exists. It certainly is true that managed service companies make up a particularly tricky area to legislate for. In all fairness, the committee recognised how challenging the issue was and it is important that we should get it right. We consulted widely on this issue and are grateful to all who participated. Almost everyone we consulted agreed that the existing rules are not being applied by managed service companies and therefore that some action was necessary. We are grateful for the evidence that we are on the right track. More importantly, we are grateful to those whom we consulted for providing us with practical, up-to-date insights into what we needed to do to deliver effective legislation. This Government have been willing to listen and to respond to what interested parties have told us about this issue in order to ensure that the legislation is accurately targeted to achieve objectives which I think others share with us. This collaborative approach is also reflected in the guidance that HMRC has recently published. I should like to thank your Lordships’ committee for welcoming HMRC’s efforts to consult business about these and other important issues. Any kind of tax avoidance creates uncertainty and distorts the tax system. In making the system fairer, we are creating commercial certainty for companies that pay their fair share and we are removing unfair competitive advantages. There will always be people who want to challenge the tax system and seek to avoid paying their fair share but ordinary, honest taxpayers deserve a tax system that is clear and easy to comply with. It is the Government’s responsibility to protect compliant taxpayers both by making it as easy as possible for them to pay and by coming down hard on those who do not. We believe that we have a good record of achievement here. The Economic Affairs Committee noted that all its private sector witnesses were content with the progress of Revenue and Customs towards the implementation of its delivery plan for the recommendations in the Varney review on how the needs of large business could be satisfied in the administration of the tax system. Let me now turn to the review of powers, deterrents and safeguards. Setting up Her Majesty’s Revenue and Customs out of the merger of the Inland Revenue and HM Customs and Excise has already helped to strengthen our system of tax administration. The merger made it possible to deliver more consistency and to reduce compliance costs for taxpayers. But merging two departments with two such distinct histories brings challenges as well as benefits. We must modernise the framework of law and practice that underpins our tax administration if we are to realise those benefits. HMRC’s review of powers, deterrents and safeguards was set up to respond to this challenge. The review seeks to provide modern tools for the department and corresponding safeguards for taxpayers. As announced in the 2007 Budget, HMRC has delivered more than £300 million a year in savings on administrative burdens, which I know will be welcome to the whole House and in particular to members of the committee. The powers review demonstrates once again the value of consultation. Through the review’s consultative committee, HMRC has been able to draw on the considerable talents and experience of business representatives, QCs, tax lawyers and accountants. This has formed one part of a widespread consultation process and has helped to produce a package that is effective and balanced. I should like to take the opportunity to speak briefly on the subject of online filing, on which the committee also commented. I have already made it clear that the Government are committed to reducing regulation and business costs and delivering a more efficient tax administration. I strongly believe that good e-government can and will play a key role in making this happen. In this I agree with my noble friend Lord Carter of Coles who found in his independent review: "““Online services have the potential to offer significant benefits to businesses, citizens and government. For the customer, online services can provide greater certainty, integral validation and help faster completion of the filing task and faster repayments””." I doubt whether anyone would disagree with my noble friend when he added: "““However, to maximise the benefits, the services need to be customer focused, designed to meet the needs of the users, and they need of course to be reliable””." There is room for some measured confidence here. We have had two successful self-assessment filing deadlines, 31 January this year and 31 January last year, when the service withstood huge volumes and worked solidly. However, we cannot afford to be complacent. Finally, let me put all these matters into context. As an economy, we are currently experiencing the longest combined period of sustained productivity and employment growth since records began. Today we have record levels of employment, low inflation, and the second highest GDP in the G7 as opposed to the lowest when we came into office. We also have unrivalled growth. Perhaps the best way of expressing the scale of the achievement is this: even in the hugely unlikely event that the UK economy were to stop growing tomorrow—I want to emphasise to the House that it will not—it would be at least nine years before any other major economy would be likely to overtake our record. This Bill and this Budget build on that record of achievement and strengthen it. The Bill will help our nation to continue to prosper in a rapidly changing and increasingly globalised world. I commend the Bill to the House. Moved, That the Bill be now read a second time.—(Lord Davies of Oldham.)