Finance Bill

My Lords, like other noble Lords, I begin by congratulating the noble Lord, Lord Wakeham, and his colleagues on producing such a thorough and sensible report in such a very tight timetable. I join the noble Lord, Lord Barnett, in expressing the hope that this Chancellor will see this committee as having a major and positive part to play in developing public policy on taxation, unlike the current Prime Minister, who saw it in some way as a threat to the constitutional settlement that has been in place for about 100 years. I agree with the noble Lord, Lord Forsyth, that Parliament could do more to improve the way in which taxation is considered. I think that our colleagues in another place would find revolutionary his proposal for a Joint Committee of both Houses on taxation. Much as I am in favour of radical and revolutionary change in some things, I simply do not believe that that is within the bounds of possibility, although perhaps we could consider it in a review on the powers and operating structures of your Lordships’ House. However, I am not overly optimistic. We on these Benches have for a long time been in favour of a slightly different way of getting around this, although it may be no more realistic—a tax administration Act that would deal not with tax rates but with all tax administration issues. Such an Act could logically be subject to scrutiny in both places. We have advocated it for a long time, but I fear that we have made no more progress than the noble Lord, Lord Forsyth, in advocating a Joint Committee. We all agree, however, that the current scrutiny of tax legislation is inadequate, not least given its length and complexity. Although I congratulated the sub-committee—I have served on it and know how hard it works—I fear that it does not have the impact that its work really justifies. The part of the sub-committee report that has taken the most time to debate this evening and that is arguably the most important relates to tax simplification, particularly for businesses. I agree with the noble Lord, Lord Forsyth, that the noble Lord, Lord Barnett, was too pessimistic when he suggested that nothing can be done to simplify tax. The choice is not between the tax system that we have today and a simple tax system, which probably is a chimera, but between the tax system that we have today and a simpler tax system, which is possible. Incidentally, a simpler system is possible without being as generous as the noble Lord, Lord Forsyth, suggested when he said that the system can be simplified only within the context of reducing the overall tax burden. I do not see why one cannot have a simplification in which there are losers as well as winners, as we have seen with this Budget. I float two suggestions this evening. The first, made by my noble friend Lord Vallance, would be to abolish capital allowances and to replace them using tax-deductible depreciation as the basis of corporate taxation. That would be a simplification. For all the Government’s trumpeting of their simplification in this Budget in this area, they did not simplify it at all, as the noble Lord, Lord Sheldon, pointed out. In some respects, they have made things more difficult. The second simplification would be the introduction of a general anti-avoidance rule, which we believe would remove a minimum of 500 pages of tax legislation. That would undoubtedly be a simplification. We would need a sensible pre-clearance system, as this simplification would not be straightforward, but if we want to simplify the tax code, that is one way of doing it. It is by no means impossible to do. As the noble Lord, Lord Northbrook, said, the Budget was a sort of ““now you see it, now you don’t”” Budget. On the one hand, there were tax cuts such as the cut in the main rate of corporation tax. In the small print, however, the rate for small companies went up and the capital allowance changes meant that more revenue was coming in, so the overall effect was neutral. Equally, the two income tax changes more or less cancelled each other out. The one unambiguously tax-raising measure, which we debated a couple of weeks ago, related to empty property relief. I will not repeat those arguments again, except to say that the way of introducing this so-called rationalisation—a marvellous phrase in the Red Book to describe a major tax increase—and the economic costs that it will incur in areas of low demand and high unemployment mean that its net economic benefits are likely to be modest at best. Looking forward, reports in the press in recent days have said that the Chancellor is planning to announce the Comprehensive Spending Review and the Pre-Budget Report together. In many ways, this is a sensible approach. In our own lives, we tend to have to worry about expenditure and income together, but will the Minister confirm that this is going to happen this year? If it is, will he also confirm that it will happen on 17 October? What are the key challenges for the Chancellor? The main challenge for the macro-economy appears to relate to the consequences of higher interest rates and continuing higher inflationary pressures. These challenges are most likely to be seen when those who have incurred high levels of personal debt find that they can no longer cope as interest rates remain high. I fear that we will return to this issue a number of times in the months ahead. The second challenge relates to the public finances and the squeeze on public expenditure, particularly public sector salaries, which has been heralded in recent times. The Chancellor, now the Prime Minister, was planning and continues to plan on the basis of a rise in public sector pay of 1.9 per cent—a real-terms wage cut. The imposition of such a cut makes one wonder whether the Government are signalling that they believe that public sector workers have been paid too much in recent times, or is the real reason that, having increased public expenditure at unprecedented rates in recent years, public sector pay is the easiest element of expenditure to reign in? Either way, it seems to us that a period of rapidly rising public sector pay, followed by one in which there will be real wage cuts for the public sector, is not a wise way to manage employees or the public sector as a whole. The third challenge is almost new; it is an issue that, until recent months, has not reared its head much. It has to do with fairness and inequality. Today a number of noble Lords have discussed elements of the tax system which are now seen as encouraging inequality. There is evidence that inequality is rising, and stands at its highest level in more than 40 years, according to the report of the Joseph Rowntree Foundation. We know that the bottom 20 per cent of households pay a higher proportion of their income in taxes than the top 20 per cent of households. In this afternoon’s discussion we have heard that inequalities are rising, in part because the super rich are able to pay lower taxes at the margin than those on low incomes. When we last debated this issue, last week, it was suggested by a number of noble Lords that it did not matter that private equity millionaires paid tax at a lower rate than their cleaners, because in aggregate they paid a lot more. That does not sound fair or acceptable, but for many it is even worse than that. John Moulton, head of Alchemy Partners, recently stated that a large chunk of private equity players pay no tax at all. The debate about the tax treatment of the very wealthy, whether private equity magnates or the growing number of non-doms, is very important not only for tax receipts, but for the kind of society we want to live in. I accept that we should not impose a punitive tax regime that punishes effort and risk-taking, but paying a level of tax that broadly equates with the rest of the population is not an unduly harsh principle to apply to the very rich. The galling aspect of this is that, in part, at least, the problems we now see with the very rich and their ability to avoid tax, stem from changes that this Chancellor has made to the tax system itself. First, I refer to capital gains tax taper relief, which other noble Lords have discussed. The relief was originally designed to encourage enterprise but at its extreme it now accrues to second-home owners and those sophisticated financiers who are able to roll up interest on debt into capital. It now costs the Exchequer more than £6 billion per annum. Another issue, which has not really been discussed this afternoon but is an unacceptable anomaly, is the way that inheritance tax is now, for the very rich, in effect, a voluntary tax. However, for the affluent middle classes, it is a tax that bears increasingly heavily. Since 2000, the number of estates charged inheritance tax and valued at more than £2 million has fallen by 8 per cent, which is clearly crazy, given the vast increase in the number of such estates. The number of estates valued at between £300,000 and £500,000 and covered by inheritance tax has increased by 20 per cent. By transferring ownership of property to an offshore trust or company, the stamp duty bill on high-value property can be reduced from 4 per cent to a mere 0.5 per cent, which equates to £175,000 on a £5 million house. These are changes which have occurred because of changes to the tax system. The good news is that having changed them in one direction, it is equally possible to change them back. I have three or four suggestions for the Chancellor to consider over the summer. First, he can abolish capital gains tax taper relief altogether. That was the system before it was introduced by this Government; it can revert to the previous system. Secondly, he can make non-doms pay capital gains tax on the property they buy and sell in the UK by simply changing the rules that apply. Thirdly, he can close the loophole that allows individuals, in effect, to move their houses offshore. Fourthly, he could change the inheritance tax rules by extending the seven-year rule on gifts to 15 years, and using the proceeds to lift the threshold towards £500,000. These are simple changes which the Chancellor could make in the next Budget. They would begin to address some of the major issues of fairness and inequality discussed by noble Lords this afternoon. As ever, this debate has taken place at the end of a Session. When we next debate these issues, it will be unusually close to the beginning of the next Session. We hope that Treasury Ministers have a productive summer, considering the ideas noble Lords have given them this afternoon, but I doubt that they will.