Finance Bill

My Lords, I congratulate the noble Lord, Lord Wakeham, on his admirable chairmanship of the committee in the preparation of its report on this year’s Finance Bill. I will restrict my remarks to business taxation and the business tax reform package. I declare an interest as a past president of the CBI and a current member of its President’s Committee, as well as a UK company director. I begin with a word of encouragement to HM Revenue and Customs. As our report noted, on Budget day HMRC published its progress report on the Varney Review of Links with Large Businesses and its plans for the delivery of all of that review’s proposals. It is not often that the business community gives its almost unqualified approval to a Revenue and Customs initiative but in this case it has done so. It is seen as a major step forward in encouraging trust and dialogue between HMRC and large businesses, and provided that the ambitious implementation plan can be achieved in practice, it will set new standards for the relationship between the two parties. It shows what can be done if the traditional hatchets are buried and the focus shifts from areas of contention to those of common ground. Indeed, it represents something of a culture shift which could beneficially be applied in a wider context. That wider context might be provided in the recent announcement by the CBI—to which the noble Lord, Lord Wakeham, alluded—that it has launched a tax taskforce to undertake a root-and-branch examination of whether the current UK corporate tax regime is fit for purpose over the longer term and to draw up proposals for how it might be adapted to ensure the continued competitiveness of UK-based companies. It aims to report early next year. I am not associated with the taskforce but I believe that its establishment is timely. The world economy is clearly becoming increasingly international. Economic liberalisation, boosted by new technologies, is creating more integrated markets and increasing competition on a global scale. That is all common knowledge. What is less well recognised is that, as a result, the challenges facing business are changing and becoming far more complex. Companies have wider choices to make about where they invest their capital, site their operations and, indeed, domicile their tax affairs. Business taxation has become a strategic issue for company boards in a way that it would not have been 20 years ago. This is not just a phenomenon affecting UK companies—you can see it almost anywhere you care to look. But against that backdrop, rightly or wrongly, over the past few years the UK corporate taxation system is perceived to have become more complicated, hostile, unpredictable and burdensome, leading many companies to believe that they are now operating at a competitive disadvantage, and an increasing number to consider relocating to places with more friendly tax regimes. Incidentally, This perception of the UK regime is not restricted to companies located here but is shared by firms in neighbouring countries. This is not just a problem for UK business. For government, too, problems will increasingly arise from the reduced ability to predict and collect a stable revenue stream and from increased administrative costs. There is more to this than just sabre-rattling. The forces of globalisation and market integration which I mentioned earlier are seismic changes that will sooner or later require a radical response on the business taxation front. Yet the overwhelming sense I have of the business tax reform package in the 2007 reform Bill is that it is incremental, not radical. The right buttons are pressed and all the right words are used—consultation, simplification, reduction of administrative costs, international competitiveness, encouragement of investment and innovation and so on—but the scale of the ambition of the package simply does not match its context. This is fine-tuning of an old model, not reform to match the needs of a new world. I would be the first to recognise that radical reform is much easier said than done, and this is not just the fault of the Treasury and HMRC—business can be to blame as well. Take the key issue of simplification, upon which certainty, reduction in administrative costs and so on depend. It is very easy for business to plead for greater simplification, but ask business precisely what simplification it would like and that can be a different matter. Let us take an example centred on what is now Liberal Democrat policy. A substantial contribution to simplification could be made by abolishing capital allowances altogether, not just industrial and agricultural buildings allowances. Businesses could then be taxed according to their financial accounts; there would be no requirement for separate computing systems for taxation purposes; there would be no problems in interpretation; administrative costs would tumble, and so forth. But the traditional business response to such a policy would tend to be negative, for two overt reasons. First, business believes that the total tax take would be greater if capital allowances were withdrawn. Secondly, simplification almost invariably results in winners and losers. The winners silently pocket the gains while the losers kick up an unwelcome fuss. Of course, neither reason is fundamentally compelling. Hold the tax-take constant and any disbenefits to business from dismantling the capital allowance regime could be recovered through, for example, a reduction in the headline corporation tax. Shocks to companies from the withdrawal of specific allowances could be mitigated by phasing out the changes over time. There is, I suspect, a third and unspoken reason why both government and business appear reluctant to take a truly radical approach to simplification; that is, that the practitioners—whether company finance directors, tax consultants or civil servants in the Treasury or HMRC—all share an interest in complexity. The mastery of complexity lies at the heart of their mystique, expertise, value and, ultimately, livelihood. Those forces of reaction are quite understandable but they need to be countered if we are not to end up with too little, too late. A shift in culture is required to wean the practitioners away from their great game of the past and to take a fresh look at the future. If the spirit behind HMRC’s enthusiastic pursuit of the Varney review recommendations could be extended to HM Treasury, I am encouraged to believe that the Government might just be up for it, just as I am encouraged to believe that, with the launch of the CBI’s tax taskforce, we can look forward to some fresh thinking that is aimed at promoting the UK’s international competitiveness in everyone’s interest. I hope that it is not too much to expect that the approach to business taxation in the 2008 Finance Bill can be shifted up a gear or two, from the predictably incremental to the refreshingly radical.