Finance Bill
(11 years, 5 months ago)
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The Commercial Secretary to the Treasury (Lord Deighton)
As noble Lords are aware, this Government came to power in the midst of an economic crisis and inherited the largest deficit in our peacetime history. Since then, the Government have taken resolute action to deal with our debts and get the economy moving again. The Finance Bill before us represents the latest stage in those plans by legislating for measures to deal with the deficit, to encourage economic growth and support businesses of all sizes and to create a fairer and more efficient tax system.
I turn first to growth and competitiveness. The Government have set out our ambition to have the most competitive tax system in the G20. We have already made significant progress towards that goal. In 2013, the main rate of corporation tax will be 23%, far lower than the uncompetitive 28% rate that we inherited. However, we want to do more to relieve the tax burden on business. Clauses 4 and 6 will reduce the main rate of corporation tax to 21% from April 2014, and to 20% from April 2015—the joint lowest rate in the G20, and lower than any comparable EU member state.
It was also announced in Budget 2013 that once the main rate has fallen to 20%, it will be unified with the small profits rate to create a single headline rate of corporation tax—simplifying the system. These changes have been widely welcomed by business groups such as the Confederation of British Industry and the British Chambers of Commerce, but competitiveness is not only about the corporation tax rate. The Government are also supporting the innovative sectors that will drive future economic growth.
Clause 7 and Schedule 1 increase the annual investment allowance from £25,000 to £250,000 for two years from April 2013. That will provide additional, time-limited support for businesses investing in plant and machinery, and will particularly benefit small and medium-sized firms. Clause 34 introduces a new, more generous above-the-line tax credit for large companies’ R&D expenditure, providing more visible and more certain relief to those companies engaged in ground-breaking research in the UK. Clause 35 introduces new tax reliefs to support the UK’s creative economy, including animation and high-end TV. Those will be among the most effective reliefs available anywhere in the world. As John Cridland, Director-General of the CBI, said:
“Providing further support for our world-beating creative industries … and increasing the rate of the above the line R&D tax credit will … have a material impact on some of the most important sectors of the UK economy”.
Creating a competitive tax system goes hand in hand with making sure that companies and individuals pay the taxes they owe. That is why this Finance Bill includes significant new measures to tackle tax avoidance by the small minority of individuals and businesses who are not willing to pay their fair share. I know that this is an area in which noble Lords have shown great interest.
Clauses 203 to 212 and Schedule 41 establish the UK’s first general anti-abuse rule, or GAAR. That is a major new development in UK tax law, and will provide HMRC with an important new tool to tackle abusive tax avoidance. It sends a clear message to those who create and promote abusive tax avoidance schemes that their activities will not be tolerated.
We are also strengthening the disclosure of tax-avoidance schemes—or DOTAS—regime. DOTAS has already been highly successful, with more than 2,000 tax avoidance schemes being disclosed to HMRC since its introduction in 2004. This Finance Bill will further improve the information that promoters of tax-avoidance schemes have to provide about the use of their schemes, making DOTAS an even more effective tool.
The Government will also continue to introduce anti-avoidance rules to address specific types of avoidance in areas of the tax system. This Finance Bill includes legislation to close 15 loopholes which have been used to avoid tax.
Taken together, those measures will raise tax revenues by almost £2 billion up to 2017-18, as well as protecting future revenues. Noble Lords will also be aware that the Government have been at the forefront of international efforts to strengthen tax standards and tackle avoidance by multinational companies. The OECD will present its action plan for tackling base erosion and profit shifting to the G20 in July.
Tackling tax avoidance is an important part of delivering a tax system that is fair. There is, however, more to fairness than tackling avoidance. This Government recognise the financial pressures that many families are currently experiencing and are determined that hard-working families should be able to keep more of the money they earn. That is why this Government have set an ambition for the personal allowance to increase to £10,000 by the end of this Parliament—an ambition which will in fact be reached one year early, in April 2014. Clause 2 takes an important step towards that ambition, by setting the value of the personal allowance at £9,440 from April this year. This is the largest ever cash increase in the personal allowance, and represents a tax cut for 24 million people. It will save a typical basic-rate taxpayer £267 a year.
This Finance Bill also takes action to ensure that the wealthiest members of society make a fair contribution. It introduces a new annual charge on enveloped dwellings to ensure that owners of high-value properties cannot avoid paying their fair share of tax by placing their property in a corporate envelope.
The Bill legislates for a new cap on certain unlimited tax reliefs from this April to curtail excessive use of these reliefs by high-income individuals who want to reduce their tax bills. The cap will be set at £50,000 or 25% of a person's income, whichever is the greater, ensuring that these reliefs cannot be exploited unfairly.
The Bill reduces the pensions tax relief lifetime and annual allowances to £1,250,000 and £40,000 respectively. This will limit the amount of relief available to the top 2% of pension savers and curb the growing cost of pensions tax relief, which has doubled in the decade since 2001.
By rewarding work and ensuring that reliefs are properly targeted, this is a Finance Bill that delivers a fairer tax system. The Government are committed to greater consultation on tax policy changes. Most of the measures in the Bill were announced at Budget 2012 and have been subject to extensive consultation. We published more than 400 pages of draft legislation for comment in December, and received more than 400 responses. This consultation has ensured better legislation with fewer changes required. I take this opportunity to thank the noble Lord, Lord MacGregor, and noble Lords on the Economic Affairs Committee for their detailed examination of the draft Finance Bill and the thoughtful and constructive comments in the report before us today.
To conclude, the Bill sets out measures to improve our competitiveness, tackle tax avoidance, and help hard-working families and businesses. It builds on the progress that the Government have already made to deal with the enormous debts we inherited and get the economy moving again. The underlying damage to our economy has turned out to be greater, and the road to recovery longer, than anyone had thought. We are, however, on the right path. I commend the Bill to the House.
Lord MacGregor of Pulham Market
My Lords, I am very pleased to introduce the report of the sub-committee of the Economic Affairs Committee on the draft Finance Bill 2013. In the time available, it is right that I should focus not on the Finance Bill as a whole, tempted though I am to do so, but on our report, much of which is technical but none the less important for that. Indeed, my noble friend has referred to the three measures already.
As always, we had to work at speed. I am grateful to our witnesses, professional and official, to Bill Sinton, our committee clerk, and his team, and to our special advisers Trevor Evans and Tony Orhnial, who served us well in previous years and have done so again, not least because of their expert knowledge and experience of HMRC and Finance Bills. I should also like to thank my fellow members of the sub-committee for their knowledge and wisdom, their objective approach and their speedy and intensive work.
I particularly want to emphasise an important and, as it turned out, for us valuable change this year, to which my noble friend has just referred. In December 2010, the Government introduced a new approach to tax policy-making which set out a number of stages at which consultation should be undertaken. It involved a draft of the Finance Bill being published in December, some three months before it was laid before Parliament. This was a very welcome change from many points of view, not least the work of the sub-committee. In previous years, we could start our work only after the Finance Bill had been published. Therefore, we had to work in great haste to have any influence at all on the debates in the other place. Inevitably it was always late in the day. However, outside commentators, including most chartered accountancy and taxation bodies and one former Treasury Minister, had frequently alluded to the expertise in our committee and the more useful role it could perform.
Consequent to this new approach, this House revised the terms of reference of the sub-committee so that it could start its work earlier in the year and examine the provisions of the draft Finance Bill. The draft Finance Bill was published in December 2012 and we began our inquiry in January 2013. Starting earlier provided us with the opportunity to influence the content of the Finance Bill as published, as well as the Committee stage debates in the House of Commons.
Not least because of the shortage of time, the sub-committee has to focus and this year it examined three topics concerned with the avoidance of tax: the general anti-abuse rule, or GAAR; the annual residential property tax, later renamed the annual tax on enveloped dwellings; and the cap on the availability of certain reliefs. I can touch on only some of the main points.
The sub-committee devoted the majority of its time to the general anti-abuse rule, which is a radical approach to countering the avoidance of tax. The GAAR is narrowly targeted at abusive transactions that fail a stringent “double reasonableness” test; the provisions also include the formation of an advisory panel to agree guidance and give its opinion on the application of the double reasonableness test to a given set of tax arrangements. It followed the recommendations of what became known as the Aaronson study.
Our report considered the narrow GAAR a “reasonable starting point” but recommended a wider post-implementation review after five years, which would look in particular at how the double reasonableness test had been applied in practice, and its deterrent effect. We thought it important that it be made clear to the press and the wider public that the GAAR would not apply to structural issues involving the taxation of multinational groups. These have to be dealt with by reviewing the international tax rules in fora such as the G8, the G20, the OECD and the EU. We argued that the Government need to communicate much more clearly what the GAAR can and cannot achieve.
Since we published our report in March, there has been a huge amount of publicity and debate in Parliament and the press about corporate tax avoidance among multinational companies, with the spotlight on Google, Starbucks and Amazon—not least from the Public Accounts Committee in the other place. Of course, we welcomed—and our report argued for—the lead given by the Prime Minister and the British Government at the recent G8 summit and the decisions taken there. It is important to recognise that the GAAR is only a small part of that and the two are in many ways separate.
I should add that having dealt with Scottish independence, in the spring our main committee embarked on a new topic: “Taxing Corporations in a Global Economy: Is a New Approach Needed?”. This does cover these wider issues and we hope to complete our report before the Summer Recess.
We agreed with our witnesses on the importance of guidance from HMRC and the advisory panel on how the GAAR would apply to particular transactions. We recognised that progress was being made in drafting this guidance but we remained concerned that our witnesses felt that it was far from acceptable as it stood at the time of our inquiry. We thought it important for the guidance to include as many examples as possible, illustrating up-to-date arrangements on both sides of the boundary between abusive and non-abusive.
We also thought it important for the advisory panel to have a balance of views and we recommended that the opinions of the panel on whether proposed tax planning schemes are caught by the GAAR should be publicised so that taxpayers can see how the GAAR is being applied. There were also concerns about the application of the GAAR to inheritance tax planning transactions, and a specific concern concerning the imposition of the charge where adjustments arose from the application of the GAAR.
The Finance Bill as published on 28 March was redrafted to deal with the point concerning the imposition of the charge and we were pleased to see this. The finalised guidance was published on 15 April and had been very substantially redrafted, consistent with the recommendations in our report. There was specific recognition that the GAAR could not apply to most structural international tax planning, and the number of examples had doubled, including an increase in the number of inheritance tax examples.
In the Commons debate on the GAAR, our report was quoted with approval. The Opposition had tabled an amendment to require a post-implementation review after two years. I have ploughed through all the Hansards of the Commons in relation to these issues and have noted the number of times that our report was commented on. The Government rejected the requirement to have a post-implementation review after two years, arguing that a two-year period was too short. We agree with this. However, while we welcome the Government’s acceptance that the operation of the GAAR will need to be monitored carefully, we continue to believe it necessary to set a timeframe for such a review, notwithstanding the difficulties that the Exchequer Secretary highlighted at Report stage in the Commons. Our report had suggested five years and we recommend that with a change as important as this the Government should commit themselves to a post-implementation review around the five-year point.
The application of the GAAR to the sorts of multinational company tax-planning issues to which I have referred was raised by several Members of Parliament. The tendency to promote the GAAR as a panacea for dealing with the problem of tax avoidance was deplored and we agree with that. “The valuable scrutiny” of the Bill provided by our report was commended. Building on this, the need for the taxation of multinational groups to be tackled in international fora was discussed in the debate on the GAAR and other clauses, including at Report stage. As we know, at the G8 summit the Prime Minister and other G8 leaders set the ball rolling by asking the OECD to draft a template for multinational companies to report the tax that they pay in each of the jurisdictions in which they operate.
It is important that this first step is treated as urgent and that the momentum achieved at the G8 is maintained. We argued for that in our report. The need for the advisory panel to have a wide balance of views was discussed in the Commons debates and the Exchequer Secretary assured the House that the panel would be broadly based and have commercial expertise to provide reassurance that the GAAR would not be abused, with too much power being placed in the hands of a part of the Executive. We welcome that too.
The annual tax on enveloped dwellings is part of a package of measures to address stamp duty land tax avoidance by using companies to buy expensive residential properties, a practice known as “enveloping”. We agreed with our witnesses that the Government’s proposals might have been more appropriately designed had they consulted interested parties at the outset, but we recognised that once consultation was under way, the Government responded to the need to exempt certain businesses and other organisations.
We remained concerned about the relief for farm houses and thought that this needed further work. We shared the concern of witnesses about the practical workability of this tax and encouraged HMRC to set out in detail how it would implement the provisions and we recommended a review of its operation after three years. We thought that further work was needed on the capital gains charges on de-enveloping properties. We agreed with a widespread concern about whether the problem that the legislation sought to address justified its length and complexity.
The Finance Bill as published responded to the need for further work on the relief for farm houses and the two clauses implementing this were substantially redrafted. Our concerns around the length and complexity of the legislation were not alleviated by what appeared in the Finance Bill as published. Much of Part 3 of the Bill is devoted to this particular tax. Some 107 pages involving 84 clauses and four schedules is hardly tax simplification.
Finally, on the cap on income tax reliefs, our report expressed concern about the potentially adverse effects of limiting relief for genuine trading losses and recommended a review of the potential impact of this measure in time to inform the Finance Bill debates in the House of Commons. It was disappointing that the Government did not respond to this recommendation. However, the measure’s impact on businesses, particularly smaller ones, was raised in the debates in the Commons. We continue to believe that it is important to monitor carefully the potential disadvantage to small businesses of restricting relief for genuine trading and other losses so that remedial steps can be taken if this proves to be a problem.
In conclusion, we were gratified by the extent to which the recommendations in our report were acted on by the Government and also informed the Finance Bill debates in the Commons. We continue to believe it important that the effect of these measures is assessed by way of systematic and independent post-implementation reviews. It is our view that a commitment to carry out post-implementation reviews is as important as the Government’s very welcome commitment in their new approach to tax policy-making to consult on the design and implementation of a measure.
To sum up, I believe that the new system overall has proved its worth and that it makes even more relevant the work of the sub-committee on Finance Bills of the Economic Affairs Committee in that it enables much wider debate and consultation with all the many relevant companies, private sector experts and tax and accountancy committees, not least through the medium of our committee, and it gives the House the opportunity to make recommendations to the other place in a timely manner, not, as in the past, rather late in the day. I commend our report to the House.
Lord Wakeham
My Lords, my noble friend Lord MacGregor has said in his usual clear way virtually all that needs to be said about our report, so I want to add very little. I would like to reflect for a few minutes on the process by which Parliament approves Finance Bills and how it has changed over the years. I have been involved in Finance Bills, year by year, for some 40 years, sometimes as a Minister in the Treasury, sometimes in opposition and sometimes as a Back-Bench supporter of the Government. In some ways things have improved and in some ways they have not, but there really is nothing more important in the parliamentary year than the granting of supply to the Government.
Many years ago, when I had some responsibility for these matters, one of the things that I tried to get agreement to was two annual finance Bills, one at this time of year dealing with rates of tax and major matters and one in the autumn to deal with technical and other smaller matters that otherwise get crowded out. For a number of reasons we were never able to get agreement to that and I do not think it has been pursued since, but it is an improvement that ought to be reconsidered. As a result, the passage of the Finance Bill is done mainly in a bit of a rush just before we rise for the summer.
The big change this year is that we have a draft Bill, which is an excellent innovation. The Minister has given us a good account of it and I congratulate him on what he said. What has also changed substantially in those 40 years is the ministerial representation in the House of Lords. For many years, under both Governments, we did not have a Treasury Minister in the House. That has now changed, and very good Ministers they have been, but quite often we did not have one.
I recall one instance when I was Leader of the House, when a Minister not in the Treasury made a very good speech from the Dispatch Box introducing the Finance Bill. Something made me ask to see the briefing that he had received from the Treasury, and it was an absolute disgrace—I was appalled. I put it in a brown paper bag and sent it to the Permanent Secretary, saying, “If you think this is the briefing a Minister in the Lords should be given to introduce your Finance Bill, it’s not my idea”. I got a very good letter of apology from him and I think that things have improved since, although of course now we also have Ministers who are able to look after themselves. Still, I hope that the message was received loud and clear in the Treasury that in this House there are many noble Lords who are more experienced than many Members of the House of Commons, and that that experience ought to be used.
Finance Bills are not always treated on their merits; sometimes they get caught up in a wider debate. For instance, a good many years ago the Opposition thought that a Conservative Government—this is strange, really—were about to bring in a Bill to change the trade union levy to opting in and not opting out. We were told that if this was true, their opposition to the Finance Bill would know no limits. I was government Chief Whip at the time and I knew this not to be true. I eventually managed to persuade the Opposition that it was not true, and the then opposition Chief Whip claimed credit for the whole thing. He had persuaded the Government not to go ahead with their proposal, but he had to agree to give us the Finance Bill in, I believe, one week, which was the object of the exercise in the first place. It was a great victory for their wonderful Chief Whip. The concession was given. The whole purpose of the exercise was to get a very difficult and dispirited Opposition into some sort of order and disciplined enough to pass the Finance Bill, with proper scrutiny but no filibustering, and to get both Houses up before the Summer Recess. I will not mention the name of the opposition Chief Whip but those sitting on the opposition Front Bench know exactly who I am talking about—a great man.
Some things change and some stay the same. One thing that has changed, of course, has been the Economic Affairs Select Committee sub-committee of this House that considers the Finance Bill. That has not always been easy. Gordon Brown, when he was Chancellor, strongly disapproved of it and did what he could to get rid of us because he did not approve of the House of Lords having any say on taxation matters. He was quite wrong. The House of Lords, of course, has an absolute right to discuss and debate Finance Bills in any way it wishes. What we do not have the right to do is to amend or delay them. The terms of reference under which the sub-committee operates are a self-denying ordinance that we, as the House of Lords, have imposed on the sub-committee, which we could change if we wanted to. In fact, I see no particular need to do so.
This year we considered, as my noble friend said, a draft Finance Bill under his excellent chairmanship, and we have done a very good job in a totally non-partisan way. We made a number of practical suggestions, which have found their way into the Finance Bill. They are sensible and often detailed suggestions that will make the legislation work better. One part of our work that I find particularly valuable is the hearing of evidence from experienced practitioners, who make mostly useful suggestions to us on how the legislation can be worked, with plenty of emphasis on the difficulties.
This year our deliberations on the so-called GAAR—the general anti-abuse rule—were especially important. We thought that the Government were right to bring this in, but it was never going to be able to solve all the problems of what we now call aggressive tax avoidance. We explain ourselves in some detail in our report, but I will make a further suggestion to HMRC to tackle these matters. Each new rule sets off clever people to think of ways to avoid it, and the more specific the rule, in some ways the easier it is to find a way around it. I was brought up in a different age, when “true and fair” were the watchwords. In a way, the GAAR seeks to replace them. However, the more we can relate our taxation, and particularly tax planning, so that the taxpayer is under an obligation to demonstrate that the records of the enterprise to be taxed show a “true and fair” view of what has been going on, the sooner aggressive tax avoidance will become yesterday’s problem. Years ago, in the Ramsay case in the House of Lords, which was a very special case, the courts gave a very clear signal that they would support that straightforward way of looking at things. The Government have certainly made a start in these matters, but there is still a long way to go.
Baroness Kramer
My Lords, it will surprise no one that, in my mind, the most significant measure in this Finance Bill is the lifting of the tax threshold to £9,440, shortly to rise to £10,000. More than 23 million people are now paying £700 a year less in tax—that is cash in their pocket—and 3 million of the lowest paid are out of income tax altogether. It has led to a fairer society. I was very pleased to read the ONS study, which named this as one of the key elements in income now being shared more equally between households than at any time since 1986. That is a very significant achievement.
I was also exceedingly pleased by the change in capital allowances—the temporary uplift in the capital allowance from £25,000 to £250,000. From my work with small businesses I am very aware that one of the competitive deficits in the UK is small businesses which have not invested in new technology in their production lines. This gives them a real incentive to do so and to do it now. The timing of that, as we begin to emerge from recession and companies have new opportunities to grow and expand, is absolutely essential and will be an important element in the economic growth that we are all seeking.
I was very privileged to be a member of the Finance Bill sub-committee. I thank the noble Lord, Lord MacGregor, for his fair but effective chairing of that committee. It has been one of the most enjoyable committees in which I have participated; that was shown by the work we achieved and the consensus that existed right across those from different political parties and on the Cross Benches. Like the noble Lord, Lord MacGregor, I emphasise that the work we looked at, particularly on the GAAR, does not cover international and multinational tax abuse. It does not cover issues such as forms of avoidance by deferring income from one year to another, as that is not its purpose. We have to emphasise that, as so often friendly politicians fall into the trap of thinking that the GAAR fulfils that role. It does not and should not. Christian Aid and others asked for clauses to be introduced into the Finance Bill that might do some of that work, but that is not appropriate as this has to be an international effort. I understand that they want a study—which seems right—on the impact of UK tax structures on developing countries. However, that is outside the scope of the Finance Bill.
Ironically, if the GAAR is a success, in a sense we may almost never see it used. Its role is very much one of deterrence. It makes the judgment as to whether a GAAR works quite difficult. However, the review is absolutely crucial. If it turns out that general rules—the noble Lord, Lord Wakeham, spoke eloquently on this issue—are far more effective in partnership with specific rules in managing the constant attempts of companies to find mechanisms around attempts to get them to pay their fair share of tax, we will need to start to think through whether or not we should consider an anti-avoidance GAAR. Like many others—I notice that the noble Lord, Lord Haskel, who spoke eloquently on this issue, is not here today—I note the importance of including a clearing system, which has been discarded as being too expensive at this time.
I am one of those who are somewhat concerned by the narrowness of the GAAR, not because it is anti-abuse but because we have the double reasonableness test. I understand where the Government are coming from in introducing such a test, but I have two concerns. One is that there is quite a lot of deference by the Government to the accounting profession. It would be wise sometimes to be more cynical and challenging to that profession around these issues. Also, if it is taken to its extreme so that nothing is ever an abuse because somebody can always come up with a reason as to why it has some economic basis, this whole exercise will have been in vain. Therefore we need to look at the application; that is a very particular vulnerability, and one in which we have to have an ongoing watching brief.
I will move quickly to the issues around stamp duty, land tax avoidance and the annual residential property tax which we also examined. I know the legislation is complex, but I believe that it is a crucial step. For many people the unfairness of watching those with very large and expensive properties avoiding the stamp duty and the inheritance tax that they bear on their smaller properties has tended to undermine the sense of common bond that is necessary in our tax system. My concern is less about what is in the legislation than the fact that, as yet, it does not capture some of those opportunities for abuse—for example, the use of the Cayman Islands for trusts and companies that have also been used by those seeking to avoid those kind of taxes. If I am wrong, I should be glad for the Minister to correct me. There are still loopholes and none of us wants to see them exploited.
I also found myself defending the Chancellor over his cap on income tax relief. This is not an approach which is palatable to everybody. For many years, I lived in the United States where the alternative minimum tax plays this kind of role. No matter how people choose to invest—whether or not it is in economic growth—on the basis of fairness, I believe that everyone should participate in the income tax system, and the tax on reliefs gets us much more into that territory. Fairness matters, especially in a time of austerity—we are all in this together.
This issue has been widely debated and there is little else that I can add to the speeches that came before mine, except to say that I think this has been an important Finance Bill which helps to position us for a fairer society, as well as one that is growing economically.
Baroness Wheatcroft
My Lords, I echo the words of my noble friend Baroness Kramer in saying what a pleasure it was to sit on the committee chaired by the noble Lord, Lord MacGregor. This is not a subject that everybody would find intensely intriguing, but our deliberations were always entertaining, as well as interesting.
The most important thing that this Government have done on income tax is to make sure that the wealthiest pay the most. The top 1% now contributes more to the coffers of the country than in the past. This is a principle to which we need to adhere and I am glad to see that it will continue. The theory is—and I am sure it will be proved right—that, even as the top rate comes down, we will get more income from the wealthy. There are ways that they can move their domicile and their tax status, should they find their surroundings uncongenial.
However, we need to go a lot further in simplifying tax. My noble friend Lord MacGregor referred to the Office of Tax Simplification. It was created in July 2010, though I fear that tax has not become much simpler since. Indeed, the latest edition of Tolley’s Tax Guide now runs to 16,220 pages. The individual guides on income tax, corporation tax and capital gains tax each run to more pages than War and Peace. There must be progress that we can make there; I would like to think so.
Moving to the Finance Bill, the two issues I wish to address are the GAAR—which has been much spoken about—and the income tax relief limit. The GAAR is going to be a disappointment to a lot of people, and we should not be surprised by that. The hostility to the way in which many multinationals organise their tax affairs runs deep. The hope is that the Government are doing something about it. The GAAR cannot and does not attempt to do that, nor can the Government do so alone. It is right that the route that we are taking is through international organisations such as the OECD and the G8 because, as a country, we cannot move unilaterally to deal with the taxation of multinationals.
Winston Churchill, always a good man to quote, said:
“We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle”.
It is a good image. If we go out on a limb and create a tax regime that is inhospitable to other countries’ companies, we will be the ultimate losers. We need a regime that is fair, and the only way that this can be done is on a multinational basis. We are going in the right direction and leading the discussion, but I am under no illusion about our chances of success any time soon.
In the mean time, what is to be done? The debate in the other House spent a long time discussing the possibility of companies having to declare the amount of corporation tax that they pay in this country. The Government do not want to go in that direction. However, they could encourage a degree of boasting. Would it not be a good idea if companies were encouraged to declare proudly how much tax they were paying in this country? I do not mean fudging it by folding into their total tax bill VAT, national insurance and anything else that they can think of. We want to know about corporation tax. It would be very good if some companies followed the lead of RTZ, for instance, and spelled out proudly what they were paying, to see whether that would win them a few brownie points from consumers. It was intriguing to see how Starbucks eventually reacted to public fury over its tax bill. While proclaiming all along that it was doing nothing wrong—which was absolutely true in legal terms—it felt obliged to offer a bung of £25 million. That was a strange thing to do in the circumstances: “I’m not guilty but, just in case I am, here you are”.
The GAAR cannot deal with this. As my noble friend Lady Kramer said, it will not be the easiest thing to operate. A double-reasonableness test is a hard one to get over. Not only must an action be seen to be reasonable, even if it is not in some minds reasonable, but the individual undertaking the action need only contend that he had a reasonable belief that it was a reasonable action for the action not to fall foul of the GAAR. One of the most interesting sessions that our committee had was when two tax counsel came before us. Their eyes lit up at the prospect of the work to come. These things will be contested.
Nevertheless, it has to be a step in the right direction, and it is already beginning to change behaviour. I am told that fewer questionable schemes are being put forward. It is good to think that the creativity that has gone into finding ways around the tax laws might be used in more positive ways. Avoidance on the aggressive scale that has been in evidence is against the interests of the country, and it is absolutely right that a measure such as the GAAR should be brought in to try to deal the worst cases of abuse.
The other item in the Finance Bill that I will talk about probably needs very speedy changing. It is the limit on reliefs. I understand why the Government feel that it is right to limit the amount of tax relief of which any individual can make use. However, the law of unintended consequences could mean that entrepreneurs are restricted in what they do at a time when we need businesses to flourish, and young businesses in particular to grow and invest. It would be perverse to bring in something that could involve an individual facing a tax bill that is higher than the profits from their business. The Minister may have seen the evidence put forward by the Chartered Institute of Taxation, which is deeply concerned about how this may work. In the end, our committee recommended that there should be a review of these provisions. It was perhaps unfortunate that the Government did not follow their own tax consultation framework in driving through the proposals. Therefore, a speedy review is a very good idea.
Lord Bilimoria
My Lords, I declare my interests in this area. I remember when qualifying as a chartered accountant it was very clear that tax avoidance was legal and tax evasion was illegal. Recently, there has been a huge public outcry about avoidance having escalated to abuse and companies operating within the law have been vilified.
The tax gap has been estimated at around £32 billion. Within that tax gap, it is estimated that the annual cost of tax avoidance is around £5 billion and the annual cost of tax evasion about £4 billion. The official definition of tax avoidance is,
“bending the rules of the tax system to gain a tax advantage that Parliament never intended. … It involves operating within the letter but not the spirit of the law. Tax avoidance is not the same as legitimate tax planning”.
Tomorrow an event will be held by the All-Party Parliamentary Group for Social Science and Policy entitled, “What can policy makers do to reduce tax avoidance by large companies?”. The invitation letter to the event states:
“Tax avoidance by multinational companies such as Google, Starbucks and Amazon has sparked a public outcry. A recent poll commissioned by ActionAid found that 80% of people want the government to take tougher action. In 2012 Amazon paid just £2.4m of UK corporation tax on UK sales of £4.2bn—less than the £2.5m it received in government grants. Thames Water paid no corporation tax and pocketed a £5m credit from the Treasury. Every pound lost through tax avoidance could have been spent on protecting public services—yet last year HM Revenue & Customs wrote off £5bn in tax as uncollectable. It estimates the … ‘tax gap’ at £32bn”—
as I said—
“while many tax experts believe the … figure is twice that”.
I thank the noble Lord, Lord MacGregor, and the Economic Affairs Committee, of which I was proud to be a member, and all the officials—Bill Sinton and the team. It was a tremendously constructive and pro-active committee in which to take part.
In his opening speech, the Minister said that the objectives are to improve competitiveness, tackle tax avoidance and help hard-working families. The noble Lord, Lord MacGregor, made the very important point that, for the first time, we as a committee were able to meet in advance of the Finance Bill being published and look at a draft version. I congratulate the Government on allowing us to do this and thus take advantage of this House’s expertise.
There is no question that the intentions of the GAAR—the general anti-abuse rule—are good. However, does the Minister accept that it is too narrowly targeted and focused through the double reasonableness test, and therefore will not catch the Googles, the Amazons and the Starbucks? Do the Government accept, as the noble Lord, Lord MacGregor, said, that they need to communicate very clearly to the press and public that this will not happen, although the intentions are very good, given that people have the expectation that now that the GAAR is there, all this tax avoidance—tax abuse on a large scale—will disappear?
As the noble Lord, Lord MacGregor, said, the important point is that this needs to be tackled internationally. Are the Government confident that they will be able to do that on an overall basis? Furthermore, I do not think that the public understand clearly where the tax that is generated comes from or the composition of the tax pie. Will the Government confirm that they will publish tax information to enable everyone to understand where the tax they are paying is going so that they understand clearly that corporation tax actually makes up a very small proportion of the tax that is generated in this country? The companies that are being attacked should pay more corporation tax but are they being sufficiently congratulated on the employment they are generating, the taxes generated through that employment, the innovation they are generating and the business they are bringing to this country? Are things being looked at in proportion? However, as the noble Baroness, Lady Kramer, said, there is no question that the GAAR should at the least be a deterrent and send out a signal that tax avoidance which becomes abuse is not acceptable.
The cap on income tax reliefs was not consulted on properly by the Government. It was ill thought through and I agree with the noble Baroness, Lady Wheatcroft, that it risks restricting reliefs for genuine trading and other losses. In fact, she described it as perverse. I request that the Government do a more detailed review to get a better understanding of the effect of the cap because it could hamper business investment. The Government did very well in consulting on the GAAR, but unfortunately I do not think that they consulted adequately on the caps and reliefs. The noble Lord, Lord MacGregor, spoke about simplification and the noble Baroness, Lady Wheatcroft, spoke about Tolley’s Tax Guide getting bigger and bigger. Surely the Minister would agree that the Government should be working towards simplifying tax. Could he confirm that?
President Clinton spoke here in London a few years ago and I remember him clearly saying that, increasingly, we live in a world that is more interconnected and integrated. Now the time has come to work together to tackle this tax abuse on a global scale. Better transparency is the only way that we can deal with it. The noble Lord, Lord Wakeham, as a fellow chartered accountant, summed it up beautifully when he talked about being true and fair. That is what we were brought up to do. Audit reports had to reflect a true and fair view. We have to aim for that.
Once again, I thank the committee, the noble Lord, Lord MacGregor, and the officials. I also thank the Government for consulting and allowing us to meet in advance so that the House of Lords can play a role and use our expertise, even though we have no power whatever over financial matters. Here is an opportunity for us to give our views in advance, and to have them listened to and taken into account by the other place, so that, as the Minister said, we have a tax system that will tackle avoidance, is fair and, most importantly, is competitive, transparent and simple.
Lord Bates
My Lords, I, too, pay tribute to the Select Committee on Economic Affairs for its excellent report. I did not serve on that committee, and I speak in the debate not because I want to speak about the report but to clarify Her Majesty’s Government’s position on another matter, which relates to hard-working families and specifically has to do with the position of the married couple’s tax allowance.
Page 41 of the Conservative Party manifesto, way back in 2010, states a desire to,
“make Britain the most family-friendly country in Europe”—
and specifically said that it would,
“end the couple penalty in the tax credit system”,
which it has largely done through the introduction of universal credit. Next, it said that it would,
“recognise marriage and civil partnerships in the tax system”.
This is a day when we have been celebrating marriage and its role in society. I welcome the Bill that has passed today for keeping marriage relevant and updated by reflecting the way in which some tax-paying citizens choose to live their lives in this country. That is a good thing. When my noble friend Lady Stowell introduced this important Bill at Second Reading, she set out clearly Her Majesty’s Government’s position, when she said:
“Marriage remains, as it has for centuries, the way in which most people choose to declare their commitment publicly and permanently to the person they love. When we hear two people exchange their marriage vows, whether in a place of worship or at a registry office, we know that we are witnessing a couple commit to the kind of values that we associate with the special enterprise of shared endeavour—loyalty, trust, honesty and forgiveness. We know that through marriage existing families are extended, as is their commitment and support to new family members. We think that it is a good thing”.—[Official Report, 3/6/13; col. 938.]
The tax system is a very useful tool for Governments to recognise things which they regard as a good thing. Twelve million people, or perhaps more, as a result of today’s legislation are part of that good thing—giving strength to their families, their communities and society.
Where are we vis-à-vis that commitment made in the manifesto? We had an unexpected turn last week. Following what was described as a lunch,
“with political reporters at Westminster”,
a report appeared on 11 July in the Daily Telegraph. It reported the Chancellor as saying:
“I have always been committed to introducing a married couples’ tax break ... David Cameron campaigned to be leader on that promise and I was his campaign manager”.
It went on to report the Chancellor as saying:
“I am absolutely committed to introducing it … and I think you can expect to see it in the Autumn Statement”.
That is all very encouraging. Some of us who have experienced the way politics works will perhaps be forgiven if we seek further general reassurance from the Minister, as it is possible that many a word of truth has slipped between the dining table of Westminster and the front-page splash of a national newspaper.
Can my noble friend clarify the position of Her Majesty’s Government in relation to the proposed married couples’ tax allowance in the Autumn Statement later this year? I particularly want clarification because we know that this was in the Conservative Party manifesto. We know that it did not make it through the negotiations with our Liberal Democrat coalition partners into the coalition agreement. In the same report of 11 July in the Daily Telegraph, there was a quote in response to this conversation at lunch from the Deputy Prime Minister, who ridiculed the proposals as,
“patronising drivel that belong in the Edwardian age”.
Later on in the report, clarification was sought from Downing Street—a great exercise in journalistic reporting; there was triangulation going on at a great level. The Prime Minister’s official spokesman said that the Prime Minister is a “big believer in marriage” and,
“That is why he thinks it is important to recognise the family—
and marriage—“in the tax system”.
There is a clear position there, perhaps a shift. I would very much appreciate if the Minister could help clarify and enlighten us.
Lord Davies of Oldham
My Lords, I shall leave that last contribution for the Minister to answer because it would be ill thought of me to intrude on coalition difficulties over an issue of that kind. I am sure the Minister will delight in replying to the noble Lord, Lord Bates, in a moment. I want to express, first, the gratitude of this side of the House to the Economic Affairs Committee and its chair the noble Lord, Lord MacGregor, for the work that they have done in this very important area. As the noble Lord indicated, there have been some advantages this year in being able to address these issues somewhat earlier than the actual arrival of legislation.
It has given them time also to concentrate in particular on the general anti-abuse rule. As the noble Baroness, Lady Wheatcroft, indicated, the proposals are sketchy enough at present that it is right that we return to evaluation of them fairly rapidly. I understand the Government’s resistance to the opposition amendment in the Commons on this matter for two years. However I take some succour from the point made by the noble Baroness, Lady Wheatcroft, that we will need to look at this carefully, not least because the problem with the GAAR is that it is a British concern but an international problem. It will work effectively only if we are able to broaden the similarities of other countries with regard to the operation of corporation tax and so on in their countries in order to make it effective.
The noble Lord, Lord MacGregor, indicated that although the committee had probed the Government, it had not got full clarity from them about how the GAAR would work. None of us is surprised by that—these are early days. However, none of us ought to underestimate either the enormous pressure from outside this House on the Government to do something about the scandals that were revealed of the avoidance of taxation—legitimate avoidance—by the multinational companies that have been identified, or the country’s obvious belief that fairness requires them to meet their dues in countries where they are making their profits and where they have vast numbers of customers.
We all recognise that this is a big challenge of the multinational age, which presents all Governments with very specific issues with regard to taxation. I am very grateful for the progress that the committee made on this matter but this is an enduring problem for us all and it will be recognised that the work done so far has merely proved a trailer for the major work that needs to be done. After all, Mr Aaronson, who commented on the general anti-avoidance rule, said that the scheme set out only to tackle egregious, unaggressive tax avoidance schemes. That indicates how narrowly focused it appears to him, as an expert. We need some breadth to it if it is to prove effective.
I welcome the contribution of the noble Lord, Lord Wakeham, although I did wince at the concept of two Finance Bills a year, as I am sure many Members of this House will and even more will at the other end. He made a very real and proper call for companies to be true and fair in their reports and in their responsiveness to the need for taxation. However, the problem there again is that we are not talking about the perspective of a decade or so ago but about a situation now where a great deal of British expenditure is on multinational companies in which these particular concepts may look a little too Anglo-Saxon, or even too British, to strike home with them. We clearly need a strategy that is embraced in our legislation but which fits with what other major powers, particularly of course the Americans, are able to do with regard to multinational challenges.
The Minister presented a short synthesis of the Finance Bill and I think we are all grateful for that—not many Ministers have been able to describe a Finance Bill in seven minutes. I am not going to criticise it for much more than seven minutes—indeed, I hope to criticise it in much less time—but criticise it I will. This Finance Bill does nothing to boost growth or improve living standards. Growth, as the Minister will recognise, is at an abysmal level and has been since this Government came to power. We are making the slowest recovery from a recession in the past 100 years and it will not do for the Minister to suggest that the Bill is apposite to our present circumstances. It is not.
The noble Baroness, Lady Kramer, commented on the fact that one element of the Bill gives some tax relief to the lowest paid in our society, but real wages have fallen by 2.4% in the past four years. That is a reflection of the fact that people are getting poorer at work—not the people who have to pay the bedroom tax and who the Government are able to challenge in those terms, nor those people who will be hit by the withdrawal of benefits, but people at work. They are poorer under this Government and it will not do for the Minister to ignore that fact; nor will it do—after all, he takes considerable responsibility for infrastructure—that the Government’s record on that at the present time is appalling. Of course, he was not directly in his post when the Government managed to produce only one school out of the 216 that the Secretary of State promised would begin under his programme of expansion.
The IMF made clear to the Government what could be done with investment. It said that £10 billion in social housing could produce circumstances in which 400,000 houses could be built and 600,000 jobs could be created. What have the Government done on that front? Nothing that any of us could notice. Meanwhile, this Finance Bill also causes affront to our people. This is not only over the question of how strongly it will address the issue of corporate taxation for the multinationals and those who do not pay their proper tax. How can one talk about fairness in our society when millionaires are singled out for the top-rate tax cut, and when hedge funds get a cut on their investment position as a result of the Bill?
The Government are giving away with one hand to the very well-off in our society, while the rest of the nation quakes under the strains of the Government’s failure to emerge from recession. That is why the Finance Bill, which we can merely comment on and not amend, has such weaknesses that the Minister surely ought to spend the next few minutes producing a rather more articulate defence of it than he did in his opening remarks.
Lord Deighton
My Lords, I thank all noble Lords for their excellent and insightful contributions. I will do my best to respond to them. Let me take first the attack of the noble Lord, Lord Davies, on current government policy. When I entered the Treasury I found myself confronted with the financial state which this Government inherited from the previous Government. I find it quite difficult to know where to begin in comparing and contrasting a government strategy which left this nation financially on its knees with the steady and consistent plan which this Government have put in place to recover the situation.
This Government have succeeded in reducing the deficit by a third, and have the confidence of international markets. This Government have put in place a growth strategy in terms of reducing taxes, and making sure that this is an economy in which investors want to invest and companies want to grow. This is the basis for sustained improvement in the decade to come. I agree that issues on infrastructure need addressing. This is because over generations—I think that this really applies to many previous Governments—we have not put in place the long-term approach to sorting out the economic infrastructure that was needed. This Government deserve credit for actually taking the right long-term steps to sort that out, which I hope will put in place a regime that will work very effectively for many years ahead.
Let me get to the specifics of this particular debate and the Finance Bill. The Bill reflects the Government’s continuing commitment to making tax policy in a transparent manner through improved consultation. Many measures in the Bill have been subject to extensive consultation and scrutiny. I take great comfort from the comments at large that the consultation process has been extraordinarily effective. My noble friends Lord MacGregor and Lord Wakeham made the point that we gave the Committee the ability to look at the draft and at the changes we put in place. I think that that is progress all round, which we should enjoy. That robust approach to making tax policy ensures that we can effectively legislate to restore the economy to growth and address the enormous deficit that was inherited. This Finance Bill is part of our plan to put the country on the right path through supporting enterprise, helping families and ensuring that everybody pays their fair share of tax. Part of this plan includes the biggest ever cash increase in the income tax personal allowance, as my noble friend Lady Kramer noted. In her view, that was the most important part of the Bill.
However, we also take firm action against those who do not pay their fair share of tax. There has been quite a detailed discussion of GAAR in this evening’s debate. Given the amount of consultation that has gone on around it and the debate that we have had, I am not sure that there is much more I can add. Insightful comments on it were made by my noble friends Lady Wheatcroft and Lady Kramer and the noble Lord, Lord Bilimoria. GAAR is part of an overall approach and works together with specific tax rules. It does not attempt to address the broader question of the tax behaviour of big multinational companies, which I think we all agree and understand needs to be dealt with through international collaboration. I am proud to be part of a Government who are leading on that issue. We will hear later this week the OECD’s proposals to the G20 to move forward on these issues following up on the ball that we rolled into play at the recent G8 meeting, so that is well under way.
On when we should review GAAR, we rejected the two-year suggestion. On whether five is the right number, the Government reserve the right to keep all taxes under review. I agree with the general sentiment that the way this works needs to be bedded into the system and therefore needs particularly careful management. Overall, I think that the Government’s approach of driving down taxes generally to make this economy more productive, and avoiding the Winston Churchill problem of the man in the bucket, is the right one. Combining that with our rigorous approach to the collection of taxes that are due is exactly the right balance for this age. I wish that our predecessors had got to grips with those two important issues much earlier so that we did not have to deal with them right from basics now.
I also agree with the general sentiment expressed by the noble Baroness, Lady Wheatcroft, and the noble Lord, Lord Bilimoria, that, in an ideal world, we would drive more simplification into the tax system. It is an easy concept to embrace but a difficult one to put into practice given everything that we are trying to accomplish. There is an Office of Tax Simplification whose mandate it is to cause some of these things to happen.
On whether we have done quite the right thing on tax reliefs, the Government are committed to supporting growth and we take action to support business tax relief in an effective way, but it cannot be without limit. We promote business investment through targeted tax relief schemes—some examples of those are the Enterprise Investment Scheme, the Seed Enterprise Investment Scheme and the venture capital trusts—and, as I have said previously, we are driving down the overall level of taxation. The balanced package leaves companies of all sizes in a very attractive tax environment which should be good for the growth of the economy.
In response to the question asked by my noble friend Lord Bates about tax relief for married couples, I can confirm that my right honourable friend the Prime Minister made a commitment to recognising marriage in the tax system. We intend to announce our plans shortly and it will be at the earliest opportunity. My noble friend was absolutely right to quote my right honourable friend the Chancellor, who said in an interview a few days ago that,
“the Government is committed to introducing it and I think you can expect to see it in the Autumn Statement”.
I hope that that is a strong enough commitment. It sounds pretty good to me.
As noble Lords are well aware, this Government inherited enormous debts. It was essential that we addressed that and got the economy moving. We have taken difficult decisions and resolute action to tackle the challenging legacy that we inherited. The Finance Bill 2013 is part of the Government’s plan to put this country back on the right path, through supporting enterprise, helping families and ensuring that everyone pays their fair share of tax. I commend the Bill to the House. I beg to move.