Finance Bill

The hon. Gentleman is exactly right, but I do not want to pre-empt our debate on the next group of amendments. I do not deny that I have made some partisan points so far, but I hope that everyone will recognise that there is a genuine problem. I shall address it in more detail in a few moments, but the real problem is our capacity as parliamentarians to deal with vast volumes of complex and technical legislation. Of crucial importance is the Government's capacity, against what is a pretty tightly constrained timetable in respect of the Finance Bill, to deal with the many technical issues that need to be clarified between the headline announcements in a Budget speech and the passage of the legislation on to the statute book. It goes beyond that because, in addition to the capital gains tax changes, a raft of guidance has to be published, understood and commented on. As we shall see when we debate the next group of amendments, the guidance can sometimes be critical in debating the detail of legislation. Clearly, we need a new and more effective mechanism for the scrutiny of our tax legislation. As with CGT, the Government's original proposals for non-doms soon disintegrated as item after item on the Revenue's shopping list was scrapped as the political masters of the process finally grasped the scale of the damage that risked being inflicted and the extent to which they had lost control of the process to their own bureaucrats. I do not expect the Economic Secretary to answer this point, but it is pretty clear to us that the problem with the non-dom legislation was due to what is known in this place as gold-plating. The usual example is the European Union handing down a directive. In this instance, the Chancellor made a decision on the taxation of non-doms, and then handed it to British civil servants whose natural instinct is to reach for the nearest kitchen sink and try to bolt it on to the original decision. I have an image of officials of Her Majesty's Revenue and Customs going to filing cabinets that may have been left untouched for years, dusting off packets of documents containing various wish lists of ideas for taxing non-domiciled residents, and bolting them on to the original idea that the Chancellor and his team presented, in a way that not only made the legislation complex but—and I suspect that this is something that a politician might see more readily than a civil servant—caused it to send a very negative set of signals that would be extremely damaging. Again, the process was messy, with individual concessions painfully extracted and gracelessly awarded over a fairly long period. As the hon. Member for Taunton (Mr. Browne) has said, many technical but important issues were introduced only during the Committee stage. Indeed, the residence and domicile provisions, arguably the most complex, had to be timetabled for the very end of the Committee's deliberations to give the Government more time in which to work out the detailed provisions. Even today, as the hon. Gentleman said, we have before us a raft of new Government amendments to the clauses on residence and domicile. They will be debated today, and Opposition points about them will be put today to Ministers who cannot realistically be expected to consider them, digest the arguments, evaluate them and respond to them in the course of the debate. Unfortunately, however, there can be no further scrutiny of a Finance Bill with no stages in the House of Lords. This is the path to bad legislation. I predict, with no fear of contradiction, that next year's Finance Bill will contain provisions correcting, amending and clarifying the residence and domicile clauses in this Bill, precisely because many of the details have been introduced only at the very last moment. The reaction of those affected has been predictable. Many have prepared to leave the United Kingdom, and some have already done so, but all of them, whether they have left or stayed, have had their confidence in the transparency and predictability of the United Kingdom tax regime shattered, and that will have significant long-term consequences for the United Kingdom's attractiveness as a place in which to do business. The same applies to capital gains tax. Some businesses were sold prematurely, and some, as I am sure the Economic Secretary knows, were transferred through artificial transactions designed to salvage the benefit of taper relief. But far more businesses were not sold, and the entrepreneurs who run them have lost their faith in the tax system on which they had relied in calculating the returns that they would earn. That is serious not only because it reduces the attractiveness of the UK as a mature and stable place in which to do business, but because every time the Government undermine the incentive that they have given in earlier legislation, they significantly reduce the behaviour-influencing power of the Treasury. We all know that in all fields, including that of environmental taxation, the Treasury focuses, quite properly, on the ability to influence behaviour through the fiscal system. Taper relief was hailed by the Prime Minister, then the Chancellor, as one of the prime examples of Labour's commitments to business and enterprise. He said:"““I will introduce a new structure of capital gains tax which will explicitly reward long-term investment, and which is based on a downward taper and lower tax rates. It will encourage people to hold on to assets in the long term.””" There is no doubt in my mind that the taper relief regime did underpin the creation of many new businesses, and did inspire the effort and sacrifice required to grow many others. Many businesses are built by people who have made a conscious decision to forgo the relative comfort of a highly paid job in a large corporation for the rather rockier path of building up their own smaller businesses, with all the risks that that implies, and all the pressures on their personal lives that anyone who has ever been in that position will understand only too well. The fact that many entrepreneurs who engaged in that process have been now been left stranded without the benefits that they had calculated has left a bitter taste in their mouths, and will make the next set of incentive proposals from Government significantly less effective in driving their behaviour. Business hates nothing more than uncertainty. Uncertainty adds to the cost of doing business: it requires a risk premium to be factored into business return calculations. An unstable and unpredictable tax regime makes the UK less competitive, and clearly that is partly connected with the nature and instincts of the Government of the day. New Labour has demonstrated more clearly to business in its actions over the past eight months than any number of words could ever demonstrate that it does not understand how business works, that it does not understand the mentality of enterprise, and that it is no friend of business and cannot be trusted with Britain's business economy. But it is not only about political leadership. This is not only a party-political issue. The whole fiasco of the past eight months also says something about our process of tax law making. Good government can be delivered by the happy chance of good governors operating in a chaotic system. However, business, and even citizens, would prefer not to rely on chance to deliver them good government through good politicians, but rather to institutionalise good government through structures and processes that ensure that even when they are afflicted by bad politicians who fail to appreciate the significance and, sometimes, the unintended consequences of their actions, those politicians will be constrained to behave in a way that minimises the damage. It is not only about putting better politicians in place, although we are very keen to do that; it is also about ensuring that the institutions and the structures are right. So what have we learned from all this—the non-dom and CGT fiascos, and the disintegration of the pre-Budget report and the 2008 Budget? First, let me again quote the Treasury Committee. Surprise announcements designed to"““pull a political rabbit from a hat””" are simply not appropriate or responsible, certainly in the case of business taxation but also, I would argue, more generally in the case of taxation announcements. Businesses and investors will punish not Governments—and that is the problem: if they had a vote and punished Governments, it would be fine—but nations that allow their Governments to deliver unsatisfactory tax surprises in this way. Secondly, we have learned that tone is very important. Much of the reaction over residence and domicile was fuelled less by the substance than by the hostile tone of the announcement, and the failure of the politicians in charge of it to appreciate the damaging message that HMRC was sending. Ironically, it was left largely to Opposition politicians to run around the City trying to soothe nerves as we sought to persuade the Government of the need for change, and to persuade those who, in many cases, are critical to the wealth and prosperity of our economy that they should just sit on their hands a little longer while we saw what could be achieved in terms of getting the Government to change their mind. Thirdly, the finality of the proposals at the time when they were announced took business aback and shocked it. All complicated issues of this nature should be published in draft for proper consideration and consultation, for the avoidance of political embarrassment—as I hope the Economic Secretary will now clearly recognise—as well as for better management of the economy. What we have seen over the past eight months is no way to go about tax reform. The succession of hastily cobbled together announcements, climbdowns, confrontations and U-turns deliver the very opposite of the stable environment that businesses and individuals need so that they can understand the tax implications of their decisions and plan accordingly. Lest it appear that I am having a go at the current Chancellor, let me be clear that the puppet master behind him is the real target of my comments. This climate of chaos, confusion and policy reversal was not developed only in the past nine months. For years, Finance Bills have contained measures closing loopholes or reversing incentives created by their predecessors. In March 2004, the then Chancellor closed a tax loophole for the self-employed that he had created only two years previously. He introduced the zero rate of corporation tax for small companies and then changed that virtually every year before he eventually abolished it. In 2003, he announced that residential property would be permitted in self-invested personal pension plans. The industry spent millions of pounds gearing up for the change, and many individuals set about rearranging their retirement plans. The Government robustly rejected advice that came from all parts of the House, including their own Back Benches, that the proposals to include residential property in SIPPs would lead to a disaster, yet at the eleventh hour the decision was reversed, leaving tens of thousands of businesses and taxpayers out of pocket, having to pick up a bill for the Government's incompetence. The capital gains tax taper relief regime has fared only slightly better, lasting nine years before being consigned to the scrapheap, having only months before been held up as the symbol of the Government's supposedly business-friendly agenda. The lack of direction, the dithering over policy and the meddling in successive Budgets in an attempt to correct defective earlier legislation, smacks of political and fiscal opportunism, and points to the absence of a coherent underlying philosophy for our tax system—or, if there is such a coherent underlying philosophy, a failure to communicate it to the people who invest in the British economy. British taxpayers and the investors who pour billions of pounds into our economy deserve better. We must never forget—I hope the Economic Secretary never does forget this—that in the globalising economy of the 21st century, businesses, and, increasingly, skilled individuals, have a choice about where to locate, and also about where they choose to pay their taxes. It is clear that Britain cannot win this global contest by offering the lowest rates of tax, as it is faced with competition from emerging economies with a far less developed social and physical infrastructure. To try to do so would put at risk the high-quality public services to which the British people are rightly and understandably attached. However, we must recognise the competitive threat. Traditionally, the advantage to the taxpayer of a higher tax and more mature jurisdiction has been greater certainty, stability and transparency in the taxation system as well as a generally stronger social and physical infrastructure. If Britain is to remain in the competition to attract businesses and high earners while operating a higher cost tax regime than many emerging economies in competing locations, we must at the very minimum offer the stability and certainty that is so valuable to such organisations and people, and for which we are, effectively, with our higher tax rates, asking them to pay. We must be under no illusion that a combination of higher tax levels and the kind of capricious decision making that we have seen over the past eight months will quickly relegate UK plc to the sidelines of this global competition.