Finance Bill

My Lords, I am very pleased to introduce the report of the Economic Affairs Committee on the Finance Bill. It is the fifth annual report in what is already a well established series that confirms the role of this House in the parliamentary scrutiny of Finance Bills. In the past, critics of the Government have sometimes wrongly questioned this role. As I have explained in previous years, the House is entitled to debate supply Bills and to refer them to Select Committees for consideration and has been exercising with restraint those rights going back many years. Within that remit, the sub-committee on the Finance Bill offers taxpayers and advisers a forum to express their concerns, which our reports convey, together with our own views and recommendations, in order to inform the debate in Parliament. We do this in a pretty short time in order to publish our report before the Report stage in the House of Commons, which is the last opportunity to amend these Bills, and I think that that is appreciated by those who take part. I thank my fellow members of the sub-committee for the knowledge and wisdom that they have brought to bear, for their non-partisan approach and for their speedy and intensive work. Looking across the Chamber, I see at least two who fit the bill fully and who have been in place for many years doing exactly that. I am also grateful to the witnesses, professional and official, whose input is essential to our report. This is an opportunity for experts to make a real contribution to our legislation before it is finally passed into law. I thank our long-serving specialist adviser, Leonard Beighton, and his new colleague, Trevor Evans, for their invaluable contribution, as well as the Clerk and the secretary-administrator of our committee. With limited time and resources, the committee cannot sensibly look at the whole of the Finance Bill; it has to focus. This year it chose four topics: the business tax reform package; managed service companies; powers, deterrents and safeguards; and mandatory electronic filing and payment. First, however, I shall make two general points. There can be tensions over the desire for fairness without opening up the scope for avoidance, but this can be done if it is well researched and consulted on widely. That is important because we are deeply concerned in the committee with simplification. The present tax system is highly complex and simplification is essential. We saw only a very modest step this year, and the committee recommends a more determined and consistent approach to simplification over several years. Indeed, the Minister rather indicated that that is the way the Government see it as well. Consultation is another of the committee’s major concerns, especially after last year’s shambles over IHT and trusts. The committee welcomes the increasing consultation on technical, legislative and administrative matters; indeed, consultation has continued apace even since we reported. But it can be more difficult where there are sectoral changes with winners and losers, as this year with the changes to capital allowances and, in particular, the phased withdrawal of the industrial and buildings allowances. The concerns expressed to us and echoed in the debates in the House of Commons show that, none the less, ways need to be found of building on the present consultative process and of consulting on policy issues. Lessons should be learnt from the progress on consultation and followed through in the simplification of personal taxation next year. The business tax reform package comprises rate changes, capital allowance changes and increases in research and development tax credits. There were also two administrative changes. The package was said to have three main objectives: to enhance the international competitiveness of UK business; to encourage growth through investment and innovation; and to ensure fairness. First, the setting up by the CBI of a task force to consider whether the tax system is fit for purpose is itself evidence of concerns about the decline in our tax competitiveness. The committee considers the reduction in the headline rate of corporation tax helpful, but other countries are also reducing theirs. The extent of the burden as a whole is also important and we recognise that there is very little change here. Administrative measures are also important. As the Minister indicated, the committee welcomes the progress that HMRC has made on the Varney review of links with large businesses. HMRC told the committee that it regarded the recommendations as absolutely fundamental and it was confident that, despite the pressure on its skills and resources, it would deliver. Other countries provide greater certainty in their tax laws, so here again the recent consultative document on clearance procedures and advance rulings is particularly welcome. The committee recommends that this should have a high priority. The committee also recommends that HMRC should press ahead vigorously with its programme of reductions in administrative burdens. Small companies, not just large ones, also need certainty and simplicity. They should be able to take decisions on commercial, and not tax, grounds. Frequent changes in the rate of corporation tax have not helped. The phased changes in the rate now proposed along with the simplification of personal taxation will narrow, but not close, the difference between tax on unincorporated and incorporated businesses. The changes being made or foreshadowed this year have caused a lot of concern. The committee recommends a review of the issue as a whole in consultation with the small business sector. The aim should be to reduce complexity and distortions caused by tax and to provide greater clarity and consistency. The committee also recommends that, despite the pressure on its resources, HMRC should have regard to the needs of small businesses and their advisers. I think that HMRC will know exactly what I am saying. The second aim of the business tax reform package is growth through investment and innovation. The committee is doubtful whether the package will do much to encourage growth. Its overall impact is broadly revenue neutral. The annual investment allowance to come in next year is intended to provide some incentive, but we await the details. During the consultation on it, its impact across various types of businesses will need to be considered. Otherwise the changes in capital allowances are broadly designed to recognise economic depreciation and to remove any investment incentive. The RandD tax credits are being enhanced and the administration improved. It is too early to assess their effectiveness. The committee feels that, against the impact of the package as a whole, this year’s changes might not make a very positive impact overall. The third aim of the package is fairness. No one disagrees with that, but it is an elusive concept. There is a need to balance it with simplicity. The Minister was kind enough to refer to the managed service companies. The Finance Bill 2007 is the latest round in attempts to prevent employment income from being dressed up in a different form, producing less tax and national insurance. HMRC considered this legislation necessary because it had found applying the existing IR35 legislation impractical. The Minister rightly spotted that the committee report considered much of this legislation to be in the nature of a sticking plaster, addressing a perceived wound in the short term but not tackling the underlying cause. To address the underlying cause, the committee recommended that the Government review the taxation of employees and small businesses operating in varying forms with a view to making structural changes to reduce the differences in tax outcomes and national insurance contributions payable whether an individual is self-employed, employed or operating through a company. Only when these differences are markedly reduced will the incentive to dress up employment income in a different form, and the need for this type of legislation, be reduced. The review proposed by the committee would need to overlap with the review of small businesses that I mentioned and should generally help to meet our recommendation on simplification. Notwithstanding the firm recommendations on how to tackle this issue in the medium term, the committee was persuaded that the revenue lost from dressing up employment income had to be addressed in the short term. However, the committee was not as sure as the Treasury or HMRC that the new legislation would be effective. The committee therefore considered close scrutiny necessary, with a fallback plan involving the allocation of greater resources to applying the IR35 legislation should that be necessary. The committee was also troubled by the number of concerns about the breadth and imprecision of the legislation in two areas: the targeting provision that defines an MSC, which is central to appropriate operation of the legislation; and the debt-transfer provisions, which allow a tax debt of an MSC to be transferred to third parties when the MSC does not pay. The debates at the Report stage in the House of Commons showed that there remained widespread concerns in the private sector about the breadth of the legislation, which the Government have failed to calm down. As foreshadowed by the committee’s report, we are now thrown back on to guidance to provide clarity on issues of concern. We know how unsatisfactory it is for legislation to be drafted widely and then cut down in guidance. Guidance can be altered, is generally of little assistance when a case comes before the courts and is not subject to parliamentary scrutiny. A review of powers, deterrents and safeguards was announced in December 2004, on Second Reading of the Bill to provide the statutory framework for combining the Inland Revenue with Customs and Excise. The first results of the review are in this legislation, introducing new criminal investigation powers for the new department and new civil penalties for errors in tax returns. The committee was concerned that the new powers and penalties were being introduced before the safeguards. However, during our deliberations, the Government published a consultation document on safeguards—had they not done so, our report would have been expressed in considerably more forceful terms than it was. We strongly urge the adoption of appropriate safeguards, as quickly as possible. There was much concern about the balance between what is in primary legislation and what is in supporting guidance, and we would like to see as much as possible in primary legislation. Making a practical suggestion, the committee felt that a way should be found of keeping current and easily accessible a record of the assurances that are given in Parliament or elsewhere in respect of the application of these important powers and penalties, because they are an important factor in the interpretation of the law, which needs to be understood. The committee was reassured by the evidence of HMRC on how it intends to exercise the criminal investigation powers. The committee considers it very important that the assurances being given at the present time are adhered to in practice. Serious consideration should be given to providing an annual report to Parliament setting out the way in which the powers have been exercised in the previous year and how the assurances that have been given have been adhered to. On the penalties for errors in tax returns, the committee felt that, if the new regime is to influence behaviour and encourage better compliance, there needs to be a common understanding of what type of behaviour falls into which degree of culpability. The committee was concerned that some of our witnesses felt that there was a lack of clarity on this aspect and recommended that particular thought and effort go into the drafting of the guidance on this. Again, we have guidance to back up legislation. It was a disappointment that no amendments were proposed on Report in the House of Commons to address the issue. The review of powers and deterrents continues and HMRC issued a further consultation document on the developing programme of work in respect of payments and debt. The last issue that we discussed was online filing and electronic payment. The committee fully endorses the drive that HMRC is making to encourage online filing. There are significant benefits to be won by the department and by taxpayers, but we believe that this should be done by better marketing, by ensuring the reliability and robustness of the systems and by making the changes more attractive to those who are IT-illiterate. We recommend that online filing should not be mandatory for smaller businesses and employers. The proposals to make it compulsory for corporation tax, VAT, PAYE and NIC returns should be dropped. There may come a time when compulsion is possible, but it is not yet. As for electronic payment, we agree that there should be no cash-flow advantage for payment by cheque. We were reassured to learn that payment by cheque by the bank giro method will continue to be possible, but there may be some cases where even that is not practicable, so payment by post may still be needed. The committee did a good job in considerable detail and I think that it is right for me to give a report of our work. We were not entirely critical of the Government. We recognise that they have some considerable problems to deal with and I hope that our contribution is helpful to them and to the Revenue in the work that has to be done in years to come.