Finance Bill

Lord Razzall Excerpts

Wednesday 16th July 2014 Lords Chamber

[Lord Razzall (LD)]

My Lords, I am glad that the noble Lord, Lord Lawson, has just contradicted his statement in The House magazine that the Liberal Democrats have only two policies; apparently, he has just added a third.

Many people outside your Lordships’ House regard this House as being rather pickled in aspic and stuck in procedures that have applied for the past God knows how many centuries. However, since I came to this House in 1997, there have been two significant procedural alterations. First, as demonstrated by this debate, although we cannot amend it, we now debate the Finance Bill. I remember the pressure to do that. The noble Lord, Lord MacGregor, was very much part of that and I think that the noble Lord, Lord Saatchi, also used to press for that to happen. Secondly, since 2003, we have had a Finance Bill Sub-Committee, which examines selected topics of the Finance Bill. This year, as we are debating today, it examined the detailed measures affecting changes in tax law for partnerships.

As a practising lawyer for over 30 years, I am well aware of the significant role that professional partnerships have played, especially the lawyers and accountants, in the development of the financial services industry. In my professional lifetime, there have been two very significant events in this area. First, a lot of people forget that, until 1967, no partnership could contain more than 20 partners. Our Victorian forefathers took the view that if you wanted to have a business with more than that, the appropriate thing to do was to have a limited liability company. Those of us who have attempted to manage professional partnerships in later years will realise their wisdom because of the significant problems of managing a large professional organisation where the owners of the business are also the means of production. The problem for the law and accountancy firms was that they could not incorporate because their professional organisations did not allow them to have limited liability. It was not until the Companies Act 1967 that, under pressure from the big firms of lawyers and accounts, the limit of 20 partners was removed. That has resulted in the huge organisations that have subsequently been created in both those industries.

The second major change was the Limited Liability Partnerships Act 2000. The major driver for that was the desire for individual firms of accountants and lawyers to obtain a limited liability to protect themselves against large negligence claims. Nowadays, almost all major professional firms have become limited liability partnerships and the structures of those organisations are well established. It would be common ground that, where a limited liability partner is in reality a salaried employee, he or she should be treated as such for tax purposes. However, as the noble Lord’s committee has indicated, there has been significant pressure from the professions that a case law test should apply to the definition of the nature of partnership rather than a legislative one. As the noble Lord, and his report, indicated, there has been significant concern that the consultation set up by the department was inadequate because the proposals on which it was based were not the same as those set out in the Finance Bill. I strongly support the recommendation by the sub-committee to delay implementation of these proposals until 15 April, not only to make sure that the rules are correct but to give a longer opportunity for firms to make any structural changes needed to comply with them. For example, this would enable them to put in place adequate resources so that the capital requirement needed by partners could be met.

As this House now has the opportunity to discuss the Finance Bill, I, like the previous speaker, cannot miss the opportunity to make an overall comment on the last effective Finance Bill before the general election. The tax provisions in the Bill must be looked at in the context of the overall economic position and the policy to reduce the deficit and the public sector borrowing requirement. As the Institute for Fiscal Studies has pointed out, no Government raise taxes in the year before an election but, surprise, surprise, taxes tend to go up straight after one. As noble Lords will be aware, both coalition parties are committed to eliminate the budget deficit in 2017-18, although there is some political difference about to how to do it. The Tories seem to propose that it should be done primarily through cuts in expenditure. I think that the Lib Dem members of the coalition think that there should be a mix between expenditure cuts and tax increases. The problem, as the Institute for Fiscal Studies has certainly demonstrated, is that if all the savings were to come from departmental cuts in order to get back to a budget equilibrium in that year, the cuts would have to accelerate from 2.3% per annum to 3.7% per annum.

Whoever is in government after 2015, if the decision is maintained to protect the National Health Service, the schools budget and overseas aid, and if they are immune to cuts in real terms, it is estimated that other departments will have to deliver annual cuts of more than 20% per annum for the three years after the election. The Home Office, the Ministry of Justice, Defra and DBIS, let alone other departments, could not deliver the current level of services if they were compelled to make cuts on that scale. Whatever political party, or combination of political parties, forms the Government after the general election, it would be impossible to achieve that in practice.

What is likely to happen? It may be that growth in tax revenues as the economy picks up will, to some extent, come to the rescue of a future Chancellor, or it may be that a future Chancellor will contemplate a modest deficit if the debt burden is falling as a share of GDP and if the economy is continuing to grow. In any case, I am sure that all noble Lords will accept that if we are forced by then to accept a drastically smaller state, a proper debate will need to take place.