Finance Bill

My Lords, once again it is time to examine the Finance Bill. We are also grateful for the report produced by my noble friend Lord Wakeham. As usual, his committee has produced a thorough and professional document, to which I shall return shortly. First, I want to make some comments about the economic background to the Budget. Then I want to look at the area of simplifying tax. Then I shall look at the Budget in a bit more detail. Finally, I will look at some other areas of my noble friend Lord Wakeham’s report. First, I shall look at the economic background to the Budget. The Minister is right to emphasise the record of economic growth and the noble Lords, Lord Barnett and Lord Sheldon, the inflation record so far—although there might be a case for being more cautious now. The Chancellor claimed that, "““our fiscal discipline is the foundation of the strength of Britain's finances””." If the story were that simple, he would have had the cash to cut taxes uniformly, rather than reducing the burden on some taxpayers while raising it for others. Nor would he be planning a squeeze on taxation and public expenditure over the next three years that will raise the tax burden to levels last seen at the start of the 1980s. Let us look back at the Chancellor's record on public finances since Labour first came to power. Between 1997 and 2001, the public finances improved sharply as the result of extremely tight controls on public expenditure and unexpectedly rapid growth in tax revenues. Then the Chancellor started spending and a black hole of lost revenues emerged. The Treasury's forecasts moved from persistently pessimistic to overly optimistic. The cyclically adjusted current budget surplus fell into deficit and, at its worst, was 1.5 per cent of GDP in 2004-05. The Chancellor has been clawing back that deficit ever since, first with upfront and stealthy tax increases raising tax rates and revenues as a share of GDP, then by planning much tighter public spending control in the years ahead. Every year since 2001—for seven Budgets in a row—the Treasury public sector net borrowing forecasts have been too optimistic. Analysis of the Budget figures shows a current budget deficit that is £3 billion higher than the Chancellor's December forecast in 2007-08 and £1 billion worse in every subsequent year. The problems have come from forecasting taxes and public expenditure. Tax revenue predictions have again been too optimistic and the Treasury has had difficulty in living within its current generous spending totals. Compared with last year’s Budget, tax revenues are now projected to be £2.1 billion lower in 2007-08. Corporate tax revenue is the villain of the piece, with North Sea oil revenue falling far short of expectation. The Chancellor blamed a lower oil price, lower production, higher investment and a stronger pound for reducing sterling profits in the North Sea. I would argue that the tax increases in 2002 and 2005 have been a big hindrance. In addition, the Chancellor has extraordinarily excluded oil companies from the corporation tax cut, which I shall come to later. Can the Minister say why they have been excluded? On public expenditure, the Treasury was also unable to keep within spending plans for day-to-day bills, overshooting by £1 billion this year and £2 billion subsequently. ““So what””, you might say. Persistent forecasting errors delay the point at which the Government can stop squeezing the public with a higher tax burden and slower spending growth. I turn to my noble friend Lord Wakeham’s report. One of the three key topics covered by the report is the simplification of business tax. I agree with my noble friend’s conclusion that more needs to be done in this area, and would extend that observation to personal tax. As the noble Lord, Lord Forsyth, said, since 1997 Tolley’s Tax Guide, which is usually referred to as the accountant’s bible, has doubled in length to 9,841 pages. Prior to the 2006 Budget, a Pricewaterhouse and World Bank survey stated that the length of our tax code was second only to India: 8,300 pages of primary legislation compared with India’s 9,000 pages. The 2006 and 2007 Bills have probably made the UK’s tax code of primary legislation the longest in the world. According to the Financial Times of 22 March, in private briefings to a financially aware audience after the Budget, the Chancellor made a virtue of his reforming Budget. He claimed that it would secure his legacy as a tax simplifier, trumping even that of the noble Lord, Lord Lawson, between 1983 and 1989. But is this portrait of Mr Brown as a tax simplifier convincing? Did he not introduce many of the measures abolished yesterday? And will the personal and corporate tax system really be less complicated in future than it was, say, a decade ago? The Institute of Chartered Accountants described the Budget as, "““a piecemeal budget which tinkers with the system rather than starting the comprehensive reform which is so overdue””." While the Chancellor’s proposals reduce the number of tax and national insurance rates from five to three by April 2009, the story does not end there because many people will have to claim tax credits if they are to be winners from the personal tax changes. If tax credits are included, there are still myriad rates of tax. According to the Financial Times of 22 March, a lone parent with two children faces a 70 per cent tax rate until earning more than £25,000 a year. It states that more than 1.7 million people face these extremely high marginal tax rates, as my noble friend Lord Forsyth said, and have to deal with a tax system so complicated that a Revenue and Customs official admitted just before the Budget that she did not expect ordinary people to understand their tax credit awards. Since the personal tax reforms include another expansion of tax credits, the Financial Times believes that, "““it would take a bold chancellor to describe them as simpler than the current system””." Turning to the detail of the Finance Bill itself, as usual, I will give praise where it is due. I can applaud increased investment in science and technology innovation with support for research and development in the area of fuel efficiency. I can also respect some of the raft of environmental proposals, such as grants for home insulation and heating for pensioners. I can also applaud reduced VAT on energy efficiency in the home. In the area of savings, it is good that there has been an increase, albeit small, in the overall ISA limit from £7,000 to £7,200. On the Chancellor’s tax measures overall, however, they can be summed up in one sentence: what the Chancellor gave on the one hand, he took away with the other. For example, with regard to personal tax, the 2p cut in income tax was funded by the abolition of the lower 10p rate and an increase in the upper limit on national insurance contributions, moves which mean that few people will pay less tax and lower income households with no children will be worse off. It was curious though, that the Chancellor chose not to abolish the 10p band on certain interest income, prompting Mike Brewer of the Institute for Fiscal Studies to say that, "““if the budget was genuinely about simplification the chancellor would have gone the extra step and abolished this anomaly””." Likewise, on the corporation-tax front, the 2p cut will be funded by the clawback from raising the small business corporation tax rate and the overhaul of capital reliefs. Essentially, that means that while long-life assets are written off quicker, the vast majority of assets now take a further two years before 90 per cent of their value is written off. Many commentators were unhappy with the sudden scrapping of industrial building allowances and agricultural building allowances—which amounted in effect to retrospective taxation. In my view it would have been fairer if allowances for existing buildings had been kept. Also, the Chancellor is poised to recoup nearly £1 billion a year by clamping down on corporation tax relief for empty industrial buildings. Smaller and medium-sized companies were particularly badly hit by the Budget. They will see their tax rate rise by 1 per cent per annum to 22 per cent by 2009. While the Chancellor has put in place a 100 per cent investment allowance for the first £50,000 of capital spending, details of which were not in the Finance Bill, this will not help service companies. Smaller companies are now paying more tax than in 1997, according to Roy Maugham, a tax practitioner at the accountancy firm UHY Hacker Young. Does the Minister think that that sends the wrong signal if the Chancellor is trying to create an entrepreneurial environment? Another area that I wish to focus on, which may appear rather technical but I think goes clearly against the former Chancellor’s expressed wish for simplicity in taxation, is the so-called targeted anti-avoidance rule—TAAR—for capital losses. I am indebted to Simon Mabey, tax partner at Smith and Williamson, for alerting me to this. I am referring to the general CGT anti-avoidance rule in Clause 27 of the current Finance Bill. HMRC has issued guidance to the clause in a separate document completely outside the Bill. The Chartered Institute of Taxation, in its submission of 1 June, makes the following statement: "““The proposed guidance is likely to be ineffective as we believe it is (improperly) attempting to concede by concession relief from losses which Clause 27 has granted””." So we have the curious situation where, as Mr Mabey believes, HMRC is taxing by legislation and un-taxing by guidance. Taxpayers should also worry about the Wilkinson judgment which said inter alia: "““HMRC’s powers ... could not be construed so widely to enable the commissioners to concede, by extra statutory concession, an allowance which parliament could have granted but had not granted””." In another place, Mr Ed Balls defended the Government’s approach, saying that experience with the company TAAR had been good and he could not understand why the Chartered Institute of Taxation and the Institute of Chartered Accountants were concerned about Clause 27. That missed the point that companies are rather different from individuals and do not have spouses or trusts. The Chartered Institute of Taxation is considering judicial review of the guidance rules, and I would be grateful for the Minister’s up-to-date view on this area. The report of my noble friend Lord Wakeham and his committee’s views on managed service companies are full of good sense. The verdict in paragraph 305 is clear that, "““the Government should review the taxation of employees and small businesses operating in various forms with a view to making structural changes to reduce the differences in outcome in terms of tax and NICs payable””." The third topic covered by the report was the Finance Bill and the review of powers, deterrents and safeguards. I particularly support the sentiments of paragraph 320, which says: "““We see it as particularly important that where serious matters such as powers and penalties are under consideration, as much as possible is written into primary legislation””." This re-echoes my concern, which I have already stated, about Clause 27. I also like the idea expressed in paragraph 327 that serious consideration should be given to setting out the way these powers have been exercised in the previous year and how the assurances that have been given at the present time are being adhered to. The report’s section on online filing and electronic payment recommends in paragraph 336 that present proposals for requiring online filing by smaller businesses should be dropped because it is premature. I agree. However, I am surprised that the report makes no mention of the accelerated date of 31 October for income tax self-assessment returns from the tax year 2007-08 onwards that are filed manually. Will the Minister say why this date has been brought forward from 31 January, as it may well make it difficult for some taxpayers to provide the information in time? In summary, the Budget fails to simplify the tax system—a simplification that is desperately required. I like my noble friend Lord Forsyth’s idea of an economic impact assessment on any future tax changes.