Finance (No. 3) Bill

Lord MacGregor of Pulham Market Excerpts

Monday 18th July 2011 Lords Chamber

[Lord MacGregor of Pulham Market]

I am very tempted to range more widely, as the noble Lord, Lord Myners, and my noble friend Lord Newby, have done. However, I think it is my role to introduce and invite the House to take note of the report of the Finance Bill Sub-Committee of the Economic Affairs Committee, of which I am chairman. I think, for once, this is not a Back-Bench contribution. I am grateful to the Minister for already giving some comments on our report; I would like to put on record in Hansard some of our main points, and hope that I may tempt some other answers from him later.

The report of the Economic Affairs Committee on the Finance Bill 2011 is the eighth report in a series which has now become well established and confirms the role of this House in the parliamentary scrutiny of Finance Bills. The report contains 32 conclusions and 15 specific recommendations, so I must be selective. I believe that our sub-committee provides a forum for taxpayers, and many leading experts outside, to express their concerns to Parliament. This includes all the institutes of chartered accountants, the Hundred Group of finance directors, the Chartered Institute of Taxation, the Association of Taxation Technicians, the CBI, the Institute of Directors, the Engineering Employers Federation, and various small business organisations. We also had the valuable session with senior officials from the Treasury and HMRC, which enables them to respond before we draw up our report. I believe this is becoming an increasingly useful forum—more of that in a moment. It means we have to work at speed, as my noble friend Lord Newby recognised, because we cannot begin until the Finance Bill is published, and have to report before the Report stage in the other place.

I would like to thank my fellow members of the sub-committee for their knowledge and wisdom, and their speedy and intensive work. Some who have not been able to be here tonight send their apologies. I am also most grateful to our witnesses, professional and official, our specialist advisers, the clerk, and our secretary administrator.

Not least for reasons for reasons of speed, the sub-committee has to focus, and this year it examined three topics: the Government’s new approach to tax policy-making; anti-avoidance, with special reference to one of the measures in the Finance Bill—disguised remuneration—on which my noble friend has already commented; and the corporation tax reform package.

The first topic we chose to look at this year was the Government’s new approach to tax policy-making. The new approach commits the Government to full and open consultation at each stage in the tax policy development process, except in exceptional circumstances. It alters the policy-making cycle to allow for such consultation, by publishing most of the Finance Bill in draft form some three months before it is published formally. This reflects the recommendations in our earlier reports, for full and effective consultation in developing tax policy, so the sub-committee considered it particularly important to have an early look at this new approach, and how it had worked in its first cycle of operation leading to the present Finance Bill.

We concluded, as did nearly all of our witnesses, that the new approach was a very welcome development. Great credit is due to the Government. Inevitably it was not a perfect operation, and in one point I will refer to more specifically, it was far from perfect. However, a report concentrates on where there are still issues or where improvements can be made, and in so doing I take it as read that the Government have made significant and positive steps forward.

We thought that most of the measures in this Finance Bill had followed the new procedures. They had been consulted on from the outset, and draft legislation had been published in December. As a result, there was little controversy surrounding most measures. But there were exceptions. By far the most important was the consultation on the clauses to tackle disguised remuneration, which began far too late. There was no consultation of any kind before the increase in the supplementary charge on oil and gas profits was announced in the Budget.

As a former Treasury Minister and as Chief Secretary taking Finance Bills through the other place—and there is another former Chief Secretary about to speak in the debate—I recognise that there are exceptional circumstances where the Government cannot follow their new approach to the letter, as did our committee. We do not think either of these cases fit that Bill. Even where open consultation before the Budget was not possible, informal, confidential discussions would have helped reduce the risk of unintended consequences.

Before I come to specific measures, there was a general refrain from many of our witnesses, whom I would describe as old hands in the tax system. They were concerned about the quality of some of the teams working on tax policy in HM Treasury and HMRC, and my noble friend Lord Newby referred to this. They complained of frequent changes of personnel, a general lack of tax and business knowledge, especially in the Treasury, and the difficulties both departments had in attracting the best talents to tax policy work. We share these concerns. There appears to be a severe and worrying disconnect between the perceptions of HM Treasury and HMRC, and those of their customers, as to how well the policy partnership between the two departments is working.

Now, HMT and HMRC officials put up a spirited defence and I recognise the difficulties that they have. The culture in the Treasury of moving highflyers on from one department to another to give them much wider experience is very well understood and I am afraid that very often some of HMRC’s best tax experts are poached by the private sector. I noticed, when I raised this point with members of the Institute of Chartered Accountants who had raised the matter, that there was a wry smile on their faces. Nevertheless, for the new approach to work, it is vital to have tax policy teams that are knowledgeable, experienced and stable and that they operate effectively across departmental boundaries. That is why our report also recommends a comprehensive skills audit and the publication of the findings of a recent internal review.

There are two other points that are worth stressing. First, although we support the new approach to tax policy, we think it can be improved and strengthened. The track record of consultation with big business is commendable, but there is still a long way to go in building effective arrangements for consulting smaller businesses. As a former Minister for small businesses—or small business Minister, as I was sometimes described—I recognise the difficulties of communicating with small businesses. Many of them do not want to belong to big organisations. Their organisations are not as well manned, financed and established as, say, the CBI, but they are a very important part of the economy and much affected by tax legislation. I believe that more can be done to consult them. I welcome the fact that HMT and HMRC now recognise that.

We also think—here I have in mind a recent debate on the working practices report in this House when there was much emphasis on post-legislative scrutiny—that there should be more emphasis on reviewing and evaluating tax changes after they have been implemented to see how well they have achieved their objectives.

I now turn to a point which my noble friend Lord Newby raised, not for the Minister and not even for our sub-committee. Time and again we were struck by the fact that while all our witnesses welcomed the extra opportunities, time and information for scrutinising tax policy, most also thought that there was scope for more effective parliamentary scrutiny of tax legislation, in particular drawing on the experience and skills of Members of this House and the time that we can give to this onerous work. Indeed, I have noticed that others, like Kitty Ussher, a former Treasury Minister, recommended, in a recent pamphlet, exactly the same points and suggested that it was a role that the House of Lords could perform. One particular suggestion made to us was that the remit of our sub-committee should be adapted to allow it to examine tax proposals that were being consulted on during the autumn, as well as inquiring into the draft Finance Bill when published in December. A more modest suggestion would amend the remit to allow the sub-committee to examine the draft Bill only from December onwards. Of course, these are not matters for the Economic Affairs Committee, but for the whole House to consider. We refer to them in our report because the need for greater parliamentary scrutiny of tax legislation, particularly in advance, formed a consistent theme in the evidence that we received.

For our second topic, we looked at tackling avoidance of tax, both generally and in a specific Finance Bill provision which seeks to address avoidance by so-called disguised remuneration. We fully agree with the Government's strategic commitment to tackle avoidance early, which is particularly important when avoidance has the potential to mushroom and lead to a large tax loss. I was somewhat astonished when I saw the proposals in the Budget to discover that the loss of revenue from disguised remuneration was calculated at £750 million a year. Many of our witnesses thought that it was probably a good deal higher than that because disguised remuneration had become a very well marketed process which many were taking up. Clearly, that had been allowed to grow. We believe, in the light of that, that HMRC should review why action was not taken earlier and learn lessons for the future.

Even with subsequent amendments, including many during the Commons stages of the Bill, there remained a deep and widespread unhappiness with this legislation. I should have mentioned that when the disguised remuneration draft proposals were produced in December, I think there were something like 25 clauses but by the time it went through the process of consultation, the number grew to nearly 60 and then there were many subsequent amendments in the other place. Our firm view was that had there been consultation at an earlier stage, this complexity could have been addressed and the legislation would have been better targeted. The criticisms that we received of disguised remuneration were very striking indeed, including, for example, some who argued that this was the worst legislation that they had ever seen. So clearly, the new approach to tax policy-making fell down in this case. All our witnesses agreed that this avoidance had to be tackled, but their concerns were about the way in which the legislation to tackle it had been framed. It was not a good advertisement for improvement through consultation.

Our report recommends that HMRC should carry out an in-depth examination of the alternative approaches that the legislation could have taken which should enable lessons to be learnt and similar pitfalls to be avoided in future. I recognise that the new Government and the Treasury Ministers had been in place only for a short time, with many other crucial issues absorbing their attention. Therefore, I understand why this may have happened on this occasion. I am clear that in future it is going to be very important that a different approach is taken to some of this consultation.

One other point is that the disclosure rules have made a major difference. I am sure that the new disclosure rules led to much of the legislation in dealing with disguised remuneration and they should enable HMRC now to frame more precise legislation on other avoidance disclosures in the future.

The Minister mentioned evasion and the tax loss through evasion far exceeds that from avoidance. We recommend that the Government should publish an anti-evasion strategy to complement their anti-avoidance strategy. According to the HMRC figures, I understand that the tax loss from all forms of evasion is £22 billion compared with £7.5 billion for avoidance.

Finally, on CT reform, the last two Budgets and the CT road map, published last November, contained proposals for reform of the corporation tax regime. We welcome the CT road map which should help to promote the stability, consistency and certainty which many of our witnesses saw as so important. It is an excellent example of a strategy outline which we think would strengthen the new approach if adopted more widely. Indeed, the reforms should make the UK's corporate tax regime more competitive, as we concluded. However, some of our witnesses were concerned at the overall balance of the package and that it might disadvantage some sectors, particularly smaller businesses and manufacturing. We consider that post-implementation reviews of outcomes are particularly important so that early action could be taken if the reform package proves to disadvantage some businesses.

We thought that there was much to commend in the Finance Bill and the processes that led to it. Our report has concentrated on recommendations that are intended to be helpful in taking forward this new advance and we see the desire for greater parliamentary scrutiny as an important issue for this House. I commend our report to the House.