Finance Bill

My Lords, I beg to move that this Bill be now read a second time. I am pleased to open the debate on this year’s Finance Bill. I intend to provide a general overview of the main provisions of the Bill and, in doing so, shall address the key issues raised in the report on the Finance Bill by the Committee on Economic Affairs, Finance Bill sub-committee. I know that the noble Lord, Lord Vallance, and other members of that committee will also address themselves to these issues. I thank the noble Lord for the work that he and the other members of the sub-committee have done and for the well targeted and useful report that they have produced on this year’s Finance Bill. It contains a number of important points that I hope to address. This is the sixth report from the committee. Her Majesty’s Revenue and Customs and the Treasury seriously consider its recommendations and these help to inform our approach to, and handling of, future fiscal cycles. I hope that the noble Lord will recognise that we have various proposals which reflect the thinking of the committee and the influence that it has had on government departments. As we all know, we in the United Kingdom, like the rest of the world, are facing a tough economic time. The ongoing disruption to global financial markets and rising world food and fuel prices are both significant international trends. We need to support families and businesses at this difficult time. However, as well as dealing with today’s economic challenges, which the whole House will recognise as formidable, we have to make progress on our long-term objectives, and I shall hope to show how the Bill produces progress on those matters. The second priority in the Bill is to increase the fairness of our tax system, and, finally, the Budget and the Bill are directed towards supporting the Government’s commitment to protecting the environment, which we all recognise as a significant priority for policy-makers in this country. Supporting our economy and supporting business are the first priority of this Bill, helping the UK to respond to the challenges that the whole world is facing. The House will be aware that Clause 15 makes provision for the 2 pence per litre increase in fuel duty, which was expected to take place on 1 October 2008. However, in response to the sharp rises in world commodity prices, and with the price of oil almost doubling over the past year to reach a real-terms record high, the Chancellor of the Exchequer announced on Wednesday of this week that the increase would be postponed. That decision will help motorists and businesses to get through this very difficult time. Postponing the planned increase in fuel duty is also consistent with the Government’ commitment to support the Bank of England in maintaining low inflation. However, even in challenging times such as these, it is vital that we do not lose sight of other priorities. In particular, the Government are committed to increasing the fairness of our society, including the fairness of our tax system. The increase in personal allowances builds on the reduction in the basic rate to 20p, which is its lowest level for 75 years. The House will recognise that the significance of that change has been somewhat drummed out by difficulties over certain aspects of the 10p rate. Some 16 million households gained from the changes, which included removing the 10p starting rate, but some low-income households will have less income as a result of the changes announced last year. That is why, at the Commons Report stage, the Government introduced the amendment to raise the personal allowance to £6,035, benefiting all basic-rate taxpayers at a time when they are facing rising household bills. It will also mean that 4.2 million households will receive as much as, or more than, they originally lost, and 600,000 people on low incomes will be taken out of tax altogether. But we recognise and acknowledge that 1.1 million households will still lose, although we have now halved their losses. The Government are continuing to look at the best way to support those on low incomes in the future, and my right honourable friend the Chancellor has said that he will bring forward additional proposals to do that in the Pre-Budget Report later this year. We will continue to support families, but we also have to support Britain’s businesses and ensure that Britain remains a competitive place to do business. Last year’s Finance Bill reduced corporation tax to 28 per cent. That rate cut was part of a major package of business tax reforms announced in last year’s Budget. As well as enhancing the UK’s international competitiveness, those changes will encourage investment and promote innovation. Last year’s Budget, as the House will recall, also announced a phased increase in the small companies’ rate to 21 per cent from this April and 22 per cent next year, as set out in Clause 7. This was part of the wider package of changes included in this year’s Finance Bill, which refocuses the incentives for small businesses and encourages them to invest. The package includes the new annual investment allowance introduced by Clause 74, as well as the phasing-out of some out-dated allowances such as the industrial buildings and the agricultural buildings allowances. R&D tax credits are also being further increased by this Bill, and Clause 31 makes the enterprise investment scheme—a tax scheme that supports small businesses—more generous. The Finance Bill also restructures capital gains tax. The introduction of a single rate of 18 per cent will mean that the system is significantly simpler than before. Critics of the CGT proposals have recognised and approved of that point at least. The Finance Bill sub-committee raised concerns that the UK CGT position may not be internationally competitive, and I appreciate the points it made. However, I take this opportunity to reiterate that the rate is lower than in many other European countries, such as Germany and Italy, and it is also less than half of the rate 10 years ago. Furthermore, the 10 per cent rate for entrepreneurs is one of the lowest CGT rates in the world. I appreciate the concerns that the committee raised about the consultation on the reform of CGT. The Government have very close relationships with the professional bodies and their associations. Indeed, in direct response to concerns raised by business groups, Clause 9 of and Schedule 3 to the Bill also introduce a new entrepreneurs’ relief, providing a targeted 10 per cent tax rate for the first £1 million of business gains. This will benefit 80,000 business owners and investors this year alone, 90 per cent of whom will continue only to pay CGT at 10 per cent. Support such as this allows the Government to encourage enterprise in a positive way—targeting entrepreneurs who wish to invest in and grow their businesses. At last year’s Budget, we announced a package of changes that will take children out of poverty, pensioners out of paying income tax, and which will make the average household better off. This year’s Budget also included an extra £100 of winter fuel payments for the over-80s, and an extra £50 for the over-60s—benefiting around 9 million households. Those measures are not part of this Bill, but the increase in alcohol duty that helps to pay for these benefits is. Over recent years, as incomes have risen, alcohol has become more affordable, with the cost of the average supermarket bottle of wine falling from around £4.45 to around £4 in today’s prices. Given that, this is the right time to raise alcohol duty. The personal tax changes are not the only clauses that increase the fairness of our tax system. Clause 10 and Schedule 4 also make significant changes to inheritance tax, giving millions of married couples, civil partners, widows and widowers the reassurance and certainty that their heirs will benefit from both partners’ individual allowances. Therefore, in addition to the existing spouse relief, married couples and civil partners can now leave up to £624,000 to whomever they wish without triggering inheritance tax. In the round that means that fewer than 5 per cent of estates will pay inheritance tax this year. At the same time, the Bill introduces a number of measures that tackle tax avoidance because it clearly is not fair that people should avoid tax that could—and should—be used to pay for Britain’s public services and to alleviate poverty. The Bill therefore introduces a number of anti-avoidance measures, including ending the artificial use of sideways loss relief and improving the identification of users of disclosed tax avoidance schemes. Of course, increasing the fairness of our tax system means making sure that everyone pays their fair share. It is essential to update tax systems where necessary to ensure that they remain sustainable in today’s society. People who come to work in Britain from across the world make a huge contribution to our economy and our society. The Finance Bill sub-committee quite rightly highlighted the reform of the taxation of non-domiciled individuals as a very important part of this Finance Bill. The Government share the sub-committee’s desire that the UK tax system should remain internationally competitive. Non-domiciles will continue to be welcome here in Britain, and the UK will remain one of a small number of countries that allow non-domiciles to pay tax only on their earnings here and on money that they bring into the country from abroad. The overall aim of the changes to the residence and domicile personal tax rules is to deliver a remittance-basis tax system that will continue to support the competitiveness of the United Kingdom by providing an attractive regime for international talent and investment, but which is more sustainable than the current arrangements. This Bill therefore introduces a £30,000 charge for remittance-basis users who have lived here for seven years and choose to continue to use the remittance basis. As we have made clear, money that is not brought into the UK will be tax-free, children will not pay the charge and the charge should be creditable against US tax. We have tabled an admittedly large number of government amendments to the provisions in this part of the Bill. In large part, this is due to the lengthy and detailed consultations we have carried out with representative bodies and other interested parties on the detail of these changes. It will be recognised that the Government listened in the Commons and took appropriate action. The Finance Bill sub-committee also raised a number of concerns about the consultation on this issue. Since the Pre-Budget Report and throughout the Finance Bill, we have engaged with interested bodies. The amendments show that the Government listened and responded. They have resulted in several changes to our original proposals and in numerous improvements and simplifications to the Bill as first tabled. I hope they will be appreciated in this House. I can assure the House that the Government will continue to listen. Given the technical nature of these proposals, the Financial Secretary to the Treasury has asked HMRC officials and the representative bodies to establish a Joint Committee, following Royal Assent of the Bill, to review the operation of this legislation in practice to ensure that the legislation is working as intended by Parliament. Finally, I should reiterate the commitment made by my right honourable friends the Financial Secretary to the Treasury and the Chancellor of the Exchequer that while the Government will work to ensure that these provisions operate as they are supposed to, we have committed to making no further policy changes in this area in this Parliament or the next to ensure that there is stability and certainty. As I mentioned earlier, it is right that each person should pay his fair share. Equally, however, taxpayers should be treated fairly by those who act on behalf of and under the authority of the Government in matters of taxation. Part 7 of the Bill represents the latest stage of the introduction of a package of measures stemming from the review of HMRC’s powers, deterrents and safeguards. Penalties and time limits have been aligned across taxes where this has been practical and, on balance, of benefit to taxpayers. Other powers have been updated to reflect the changing nature of businesses and the technology they employ. Additional safeguards have also been introduced in the Bill. Safeguards are a key part of the package and where appropriate they have been built into this primary legislation. The main elements of Schedule 36 include: a requirement to act reasonably; a right to inspect statutory records; a right to visit and inspect business premises; and written information powers. There are also new appeal rights and authorisation requirements. Further safeguards are then planned in guidance and codes of practice, on which HMRC will consult. This is an example of where we have listened carefully to stakeholders throughout the process. The review of powers is a careful process. It takes between one and two years to develop each proposal, working throughout with business and the professions. We have responded to concerns throughout, making changes where a clear case to do so was made. This approach has been praised by key stakeholders. These powers were the subject of lengthy and rigorous debate in the other place. The Bill aligns powers across taxes where it makes sense to do so and introduces additional taxpayer safeguards. It is right that these matters should be legislated within the Finance Bill, and they will improve clarity and certainty for taxpayers. The third, but by no means the least, priority of the Bill is protecting the environment. We all know the economic, social and human costs that unmitigated climate change would cause, and the Government are leading UK and international efforts to challenge it. The Bill contains a number of measures to help us to do that. Clause 17 introduces new rates of vehicle excise duty to incentivise motorists to buy more fuel-efficient cars. We are also legislating for increases in the rates of the climate change levy, landfill tax and aggregates levy in 2009-10 to maintain their environmental effectiveness and to provide certainty to businesses. The exemption from stamp duty land tax for zero-carbon homes will also be extended to zero-carbon flats. The Bill also prepares the way for the use of auctioning in the forthcoming carbon reduction commitment. There will be a major UK emissions trading scheme, complementing the EU emissions trading scheme, demonstrating that the UK is leading the way in developing the use of trading schemes, just as we were instrumental in the establishment of the EU ETS. The Bill protects our environment, increases fairness and supports our economy. I commend it to the House. Moved, That the Bill be now read a second time.—(Lord Davies of Oldham.)