Finance Bill

My Lords, I congratulate the Economic Affairs Committee on its report, because it highlights a central and recurrent theme of the Government’s performance on economic management, tax and public expenditure, which has been a central theme of this debate—a total lack of competence. On capital gains tax, we on these Benches agree with the principle of abolishing taper relief; indeed, it was in our tax commission’s proposals. Where the Government started to go wrong was on their motivation for making the changes. They were panicked into them, because of the effective jibe by Jon Moulton that private equity bosses were paying less tax than their cleaners. That was clearly unacceptable, so the Government had to do something. Where we disagreed, and where the Government seem to have made a first fundamental error, was on the basis on which they made the changes. An 18 per cent single rate, as the noble Lord, Lord Forsyth, pointed out, is not a simplifying rate, because it does not align with income tax rates and there will undoubtedly be a significant amount of effort put into avoidance, particularly to avoid the 40 per cent rate. The new rate raises some curious anomalies, which the Government simply cannot support. How can we reduce the tax payable on the sale of second homes at a time when everyone agrees that we need to do more to encourage broader home ownership and broader occupation of homes in areas where there are high levels of second homes? There are major structural problems, which the Government did not really understand. The Government then had to make panic changes. The entrepreneurs’ relief was a panic response to the universal condemnation of the changes by the business community. The Economic Affairs Committee’s report makes it clear that the entrepreneurs’ relief changes are not sustainable and that further changes will be needed. It is clearly a botched job. However, the incompetence with which those changes were introduced pales into insignificance compared to the incompetence around the introduction of the residence and domicile changes. This will become a case study in how not to make tax changes. Again, we support the principle of taxing non-doms at a fair rate, as we made clear before the changes were introduced. Noble Lords will remember that the changes took place in the way that they did because, in his conference speech, Mr Osborne proposed taxing non-doms. I say to the noble Viscount, Lord Trenchard, and the noble Lord, Lord Northbrook, that although these may well be appalling changes that will devastate the economy, they should talk to their colleague Mr Osborne, because he panicked the Government into introducing the changes in the first place. After introducing those changes, the Treasury decided to slip in a lot of other changes via the back door. That was done in January. There was chaos and confusion. Therefore, in the Budget there was a series of concessions on trusts, the day counting rules and de minimis levels to deal with some of the problems. However, these were carried out at the last minute, so that when the Finance Bill was published the poor officials and parliamentary draftsmen had not got around to drafting the legislation. The noble Lord says that we should be grateful for that, because it allowed consultation to take place. However, we know that the Government were allegedly reviewing this from 2002. To say that as a result of their panic we should be grateful simply because they have been trying at the last minute to make sure that the problems that they were causing were minimised really will not wash. It is clear that further amendments to the changes will be needed, under pressure from the people who are affected and mere common sense. Although the Government said that they would not make any substantive changes to taxation of non-doms before the next election, I would be amazed if none at all was made in the next Finance Bill. As the Select Committee points out, there are three clear problems: first, a lack of clear policy rationale behind the changes; secondly, unstable changes, because they are badly thought through; and, thirdly, the exposure of serious rifts between the Treasury and HMRC on how to make the changes, which reflects the fact that the Treasury is unable to deal with detailed tax policy measures. Treasury morale may be bad, but the morale of HMRC, particularly among those who administer tax on the ground, is significantly worse, not least because of the cuts in staff and the clear failure to introduce priorities that reflect the changes. What should we do in this area to reduce the likelihood of repeat performances? The noble and learned Lord, Lord Howe of Aberavon, produced an interesting report that proposes an office of tax simplification. That is too narrow, because although we all want simpler taxes, a simple tax system is only one feature of a satisfactory one. A better proposal has been put forward by the Chartered Institute of Taxation, which is to establish a tax law commission that would be broadly analogous to the Law Commission. It would have three roles. First, it would have a statutory right to be consulted on any tax changes that affected the tax structure, as opposed to simple rate and threshold changes. Secondly, if the Government asked, the commission would have a duty to investigate any area of tax law that the Government wished to restructure and simplify. We have looked, for example, at the tax rewrite Bills as they come forward. It is clear that the present system, although valuable, is only partial. When we looked at the first of those Bills, on capital allowances, we saw a raft of historic bits of legislation. One that caught my eye related to dredgers. Clearly, there had been some problem with dredgers, donkey’s years ago, which was dealt with in a law that is still there. The Government should be able to say to the new tax law commission, ““Would you please look at this area of tax?””, and it could produce a report in the same way as the Law Commission does. Thirdly, the new commission should have the power itself to undertake reviews of the operation of particular areas of taxation that, in its view, could be improved and simplified. That would need legislation, but it could be easily done.