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Finance Bill

My Lords, I am grateful to the Minister for introducing the debate and for giving your Lordships’ House the opportunity to discuss what I think will become the second Finance Act 2005. I congratulate my noble friend Lord Hamilton of Epsom on his thoughtful and measured maiden speech. He rightly gave credit, as do I, to the Government for their decision to give the Bank of England operational independence. Your Lordships’ House has welcomed many new noble Lords to these Benches and to all parts of the House in recent weeks, but we are lucky to have a   new colleague of the calibre of my noble friend Lord   Hamilton of Epsom. We have not been able to welcome as many new Peers as other parts of the House and therefore my noble friend’s experience and wisdom will be much appreciated on these Benches. In his introduction of the Bill, the Minister referred to the 50 consecutive quarters of economic growth. I was not surprised to hear him do so because his predecessor was fond of referring the House to that statistic. But, as the noble Lord knows well, the first 18   quarters of that period took place under the previous government, which set the tone and the trend for the opening years of this Government’s life. The Minister spoke about the abuse of tax codes. However, because the tax system has become so complicated under this Government, HMRC would do well to improve its record of accurately calculating tax codes. I understand that some 29 per cent of PAYE codes are incorrect. The noble Lord said a great deal about tax avoidance. Of course, we on these Benches also strongly believe that avoidance is to be avoided and evasion is to be sought out and punished, but he said too little about creating new incentives for savers, providing help for pensions and lessening the burden of cumbersome regulation which is now threatening to strangle the traditional free operation of the City. I congratulate the sub-committee on the Finance Bill, chaired by my noble friend Lord Wakeham, on its hard work in producing its excellent and interesting report. I agree with the noble Lord, Lord Barnett, that it is highly desirable that his right honourable friend the Chancellor of the Exchequer should pay more attention to the views of your Lordships’ House, especially those of the members of the sub-committee. However, I feel that whatever else I have to say will not find favour with the noble Lord, Lord Barnett, because I suspect he will consider it to be too party political. I do not entirely agree with the noble Lord that complex tax questions cannot be party political. Surely one of the great questions that divides our parties today is whether we want big government, which needs high taxes, or small government, which needs less high taxes. To say, therefore, that the whole question of tax can somehow be neutralised and isolated from party politics is rather more altruistic than realistic. My views are based on instincts and observations gained during 31 years’ experience in the financial services sector. I am sure that noble Lords opposite will not agree with much of what I have to say, but it is nevertheless what I believe. Opinion polls continue to show that the Chancellor of the Exchequer enjoys the public’s confidence and trust as a manager of the economy. It is true indeed that he has made the public sector a more comfortable place in which to work. Now, more than one in four of those in work is an employee of the state. The number of public sector employees decreased in every year from 1992 to 1998, since when it has increased in every year. It is also true that the Chancellor stuck to the previous Conservative government’s spending plans for his first two years. However, since 1999–2000, he has increased public spending as a proportion of GDP from 37.1 per cent to a projected 41.9 per cent in 2005–06. The Chancellor’s estimated tax and social security revenues for the current year amount to some £462 billion compared with some £297 billion when he took office. But there is little evidence of improved public services from all this extra spending, because most of it has been   wasted on bureaucratic regulation and a huge increase in non-productive public sector administrators. On 27 February last year, Stephen Timms admitted:"““Too often, a lot of money has been spent, but very little seems to have been achieved. People will say, ‘We’ve paid a lot of taxes but what has really been achieved with all that money?’””." The Chancellor has also succeeded in making our taxation system unnecessarily complicated. Two cases in point are the burgeoning system of tax credits, which is inefficient and expensive to administer, and the absurd 19 per cent charge on non-corporate distribution, which is almost totally incomprehensible to most operators of small businesses. The Treasury’s response to the shambles resulting from the attempt to claw back overpaid tax credits does the Chancellor no credit at all. He is adamant that he will meet his golden rule in this economic cycle, but if he does so, it will only be because he has three times changed the rules applying to the calculation of capital investment and current spending. That does not include the possible changes that we have heard about today. Additionally, he will clearly need to continue to increase taxes in order to achieve his forecasts. The Institute for Fiscal Studies has argued that he will have to raise taxes, or cut spending, by as much as £11 billion a year during the next economic cycle, beginning in April   2006. My noble friends Lady Noakes and Lord   MacGregor have made some important points in this connection. Clearly, we need an independent Office for National Statistics. Against this background, it is surprising that the Chancellor has such a strong reputation for economic management and fiscal rectitude. But Mr Brown’s long lucky streak has finally run out. Consumers can borrow no more and the housing market is flat. The Chancellor has frequently used his autumn Pre-Budget Report to confound his critics as the strong global economy has delivered higher profits to British companies and increased taxes to the Exchequer. This year, it seems likely that he will fail and that his critics will have the last   laugh. But it will be no laughing matter. It will be a long, hard slog to drag the economy back to the comparatively strong position that it enjoyed at the end of the last Conservative government. There is little in this Finance Bill which will improve the situation. The attack on employment remuneration through the grant of securities will affect many small companies which have not yet achieved a level of profitability where they can pay market-level salaries. The owners of many such companies have been able to align their employees’ interests with their own. This will be more difficult now. It is disappointing that the Government have not recognised the need to introduce tax legislation for real estate investments trusts as a priority. A prudent Chancellor would have ensured that the United Kingdom was up there with the leaders in providing the necessary infrastructure for the development of this investment medium, particularly against the background of a weaker housing market. The higher tax burden that will fall on life assurance companies is   most unfortunate, given the difficulties that that industry has faced in recent years. One principal reason for that was the Chancellor’s early move to tax pension funds and charities by effectively removing their tax-exempt status. In my contribution to the debate on the Address on 18   May, I explained why I believed that the cumulative costs to our pension schemes resulting from the Chancellor’s stealth tax raid could be as much as £166 billion. Killik & Co, the private client stockbroker, in a recent paper estimated that the Chancellor’s raid destroyed about £300 billion of stock market value. Of course that does not affect the rapidly growing public sector, whose employees still enjoy defined benefit pension schemes. The Economist, a newspaper not generally known for its unswerving allegiance to the Conservative Party, drew attention to that matter on 18 September last year, in an article called ““How Labour Wrecked Your Pension””. On 25 June this year, an article on pension reform pointed out that fewer employees are building up pension rights in private occupational schemes than in the public sector. Almost half the private defined-benefit active members are in schemes closed to new employees—and, worse, the National Association of Pension Funds predicts a fresh wave of closures of final salary schemes, this time to existing members. If the Chancellor had resisted the temptation to attack what were then healthy pension schemes, envied by the world, how much less serious and damaging would the pensions crisis be today. As noble Lords opposite will be quick to point out, the stock market is at a three-year high, but how much higher would it be—as indeed, it ought to be—given the superior economic performance that British companies have been able to deliver this country against the background of the radical reforms and the rolling back of the tentacles of the state achieved between 1979 and 1997. Another way in which the Government might have helped both the stock market and pensioners would have been to do something to restore the savings culture and incentives to save to something near where they were under the last Conservative government. The Chancellor deserves credit for deciding after all not to reduce the amount that can be invested in ISAs, but actually he needs to double the amount to £10,000 annually. The gap between what people are saving for their retirement and what they need to save is still widening rather than narrowing. It is true that Britain enjoyed a relatively low rate of corporation tax in 2000, at 30 per cent. The previous Conservative government had reduced the rate from 52 per cent to 33 per cent and the present Government then reduced it to 30 per cent. But whereas in 2000, 20   of the 30 major OECD countries had a higher corporation tax than the United Kingdom, today only 10 of them do. Even Germany is planning to reduce its federal business tax rate by 7 per cent. It seems that, inadvertently I am sure, the Government are doing their best to kill the goose that lays the golden egg, through their attack on the private equity and venture capital industry. The City owes its continued success in part to the fact that it has provided a comparatively lightly regulated, relatively benevolent tax and administrative infrastructure to those ready to take risks in creating thriving and profitable new businesses. The Treasury’s intention to change the rules governing private equity financing will make London a less attractive place for venture capitalists to operate in. Finally, I regret that the Government have blocked all attempts in another place to introduce changes to the Bill that would have provided for a binding statutory clearance system. As already mentioned by my noble friend Lady Noakes, this Bill passes interpretive powers to officials and also introduces retroaction that is totally alien to our traditional legal framework. The Government’s refusal to change the Bill so as to focus its effects more narrowly on specific tax avoidance issues will create uncertainty for business managers and this will also make London less attractive as compared with other financial centres. A much better way to deal with avoidance would be for the Government to simplify the hugely complicated tax system and to reduce the absolute levels of tax. That would do far more to reduce tax avoidance than the   cumbersome measures in the Bill described by the   Minister. My noble friend Lord Hamilton was absolutely right in what he said on this subject. My noble and learned friend Lord Howe also made the case well for tax simplification.