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Finance Bill

My Lords, the Government are not, and should not be, in the business of commenting on every set of statistics that come out during the course of a year or period. We have set occasions during the economic cycle when there is a Budget Report and a Pre-Budget Report, and they are the times for these forecasts to be reviewed in detail. The noble Baroness, Lady Noakes, said that too many changes were being made through regulations, particularly in relation to insurance companies, and that such substantial changes should be made through primary legislation. Regulations provide flexibility to respond to situations where there can be a regulatory change; for example, where the FSA has changed its rules. This happens frequently in life assurance, where FSA changes affect the tax rules. The life assurance apportionment regulations have a sunset clause which was specifically introduced so that it runs only for one year. Primary legislation will be needed next year to replace these temporary regulations. A question was asked about how the Government can expect manufacturing in the economy to keep on track with their forecasts. Business investment in manufacturing firms rose by 4.4 per cent in quarter one of 2005, compared to quarter one of 2004. Manufacturing and export volumes rose 5 per cent in the three months to May 2005. The UK continues its largest expansion on record, and GDP grew by 2.1 per cent in the year to quarter one of 2005. The noble Baroness, Lady Noakes, and other noble Lords asked about the delay in introducing legislation to do with real estate investment trusts. The Government have said that they aim to legislate for real estate investment trusts in the 2006 Finance Bill, subject to resolving the technical issues outlined in the Budget discussion paper and finding a workable model that meets the widely accepted objectives, including reform at no overall Exchequer cost. That framework and timetable is understood to be welcomed by the industry. The suggestion was made that the inheritance tax guidance is over complicated. There is nothing burdensome or intrusive about the IHT form. It is a four-page form, the first consisting of basic factual questions. Even if there were no IHT requirements to fulfil, that is the sort of information that executors would need to be on top of the circumstances that they face. The guidance material takes people through all that they should consider to get it right first time. Inheritance tax affects only about 6 per cent of estates in the UK and as a percentage of GDP has remained pretty much constant over an extended period. The noble Lord, Lord Wakeham, introduced the committee report and I thank him for his efforts in chairing the sub-committee and for its excellent work. The topic it chose was very relevant to our deliberations. The magnitude of the yield at stake here is very significant. I am pleased that it reasoned that the disclosure rules ended up in a significant and material fashion and added to combating tax avoidance. On employee securities, the committee was right to be concerned about the scale of what was going on and welcome the support on backdating. The noble Lord was right to say that 27 days until publication represents a sterling effort. My noble friend Lord Barnett ranged over what would happen if the golden rule were breached a little. We do not give a running commentary on the golden rule and it will be updated at the Pre-Budget Report stage. It was interesting to hear that, back in 1974, there was not much scrutiny of Finance Bills. When the current Chancellor of the Exchequer was shadow Chief Secretary to the Treasury, I spent a brief while considering the 1988 Finance Bill, a fairly substantial tome. It was a few of us versus the might of the Treasury. I think it is true to say that we came second. On the Government’s response to the report, we dealt with that, as we did in the previous two years. The Chancellor takes those matters very seriously and I will certainly ensure, as I am sure will my noble friend, that those matters continue to be brought to his attention. The noble Lord, Lord Hamilton, in his maiden speech, supported the independence of the Bank of England. That is a key part of a sound and prudent policy and a key plank of monetary policy. The UK Government’s position on the euro is that we will join when it is in the economic interests of the UK to do so—when there is a clear and unambiguous case for us to do so. We had an interesting debate on the euro just a couple of weeks ago in your Lordships’ House. I do not subscribe to the view that it is a dangerous economic experiment; what has happened in Europe is that the UK’s case for greater flexibility is underlined by the existence of a single interest rate. Various noble Lords mentioned flat rate tax systems. I will try to answer those points. Examples cited are those such as Estonia. Those are countries with emerging economies which may not have previously had a robust income tax system. Often, those regimes have other indirect taxes—such as social security taxes—that substantially supplement the revenue going to the Exchequer. Simplification comes not so much from having a single rate as from doing away with lots of reliefs. That is the point made by the noble Lord, Lord Newby: if you are to have fairness in a flat rate tax system, you must have a significant personal allowance. That is the difficulty. The Adam Smith model showed that if you did that and set it at a rate to remove some of the unfairness to people at the lower end, its cost would be about £50 billion per year. That is why we are not encouraged by that. The noble Lord, Lord Hamilton, talked about the tax burden in the UK. The UK is a relatively lightly taxed economy. The latest OECD figures from 2004, which relate to 2002, show that UK taxes on corporate income plus employers’ social security contributions were 6.3 per cent of GDP—the second lowest rate of the erstwhile EU 15 countries. I believe I am right in saying that we have the lowest corporation tax rate of any of the G7. My noble friend Lord Rosser said that his review of the evidence to the committee was an eye-opener. I welcome his powerful contribution. It is absolutely right that he drew to attention to the fact that what is going on is a moral as well as an economic case. He was right to be angry about some of the examples cited. The other day, someone said to me that in some of these schemes all you needed to do was to dial up to get the amount of the tax loss you wanted when there was no change in your economic circumstances. In no way can we or should we condone that. Some people who are availing themselves of those schemes are in receipt of big bonuses—bonuses that people would not earn in a lifetime. For them to seek to reduce their income tax and national insurance liabilities in that way is not to be supported in any way. My noble friend raised the issue of self-investment personal pensions and their possible exploitation. We   must keep that under review. The noble Lord, Lord Newby, also raised that point. Some of the financial press may be overstating the situation. We must recognise that for residential property to enter such a scheme, only 50 per cent of the value of the pension fund can be raised as a loan to buy the property; it becomes an asset of the pension fund; therefore access to that property would give rise to an income tax charge on those who avail themselves of it. There are various other restrictions. Only 25 per cent of the capital in the home can be taken as a lump sum at retirement; the rest can be taken only as a taxed pension. The Government want to keep that under review. That illustrates that as soon as the Government do something to simplify the tax system to encourage saving, an army of people seek to exploit that to gain advantage from it that was not intended and could challenge the whole system. The noble and learned Lord, Lord Howe of Aberavon, was kind enough to notify me in advance of the point he raised about the appeals process. It is absolutely right to say that the three appeals bodies for tax: the general commissioners, special commissioners—each ex-Inland Revenue—and the Customs, VAT and duties tribunal are to be amalgamated. That is the Government’s wish and a matter that the Department for Constitutional Affairs seeks to take forward. It is currently working on the legislation and aims to introduce a Bill at an appropriate stage. Legislation for those reforms will be brought forward when the parliamentary timetable allows. On the point about the appointment or lack of appointment of general commissioners, as I understand it, since the introduction of self-assessment, the caseload for general commissioners has declined substantially, such that there are sufficient numbers of general commissioners generally to cover all cases, but where there are geographical variations in workload, divisions are being merged or cross-appointments of general commissioners to other divisions are being made. I congratulate the noble and learned Lord on the work that he and others have done on the tax law rewrite project. It has already made a substantial difference in several areas. As he said, it does not substantially change the basis of tax law; it is tidying up and dealing with minor changes; but it is making legislation more readable and understandable. On what more should be done on simplification, we get to the heart of what a tax system should be about. I agree with the components of a tax system outlined by the noble Baroness, Lady Wilcox—being certain, fair and efficient. All of that is right, but there is an inevitable inconsistency between simplicity and fairness. We see that in some provisions of the Bill. It cannot be argued that complexity of the system has in any way engendered the scams that have taken place in relation to income tax and national insurance. Whatever the structure of the tax system, people would seek to do that. I also acknowledge the huge experience in your Lordships’ House—I refer to Members who have in the past been Chancellors of the Exchequer or Chief Secretaries. We must recognise that we, as a House, have a limited role in these matters and it would be constitutionally wrong to upset that. The noble Lord, Lord MacGregor, raised a challenging point about Railtrack shareholders. I have not seen the documentation to which he referred, but it is regrettable that he has suggested that individuals at the Office of National Statistics succumb to pressure, even if such pressure were ascertained. It is unfortunate that such a contribution was made in those terms. In relation to the classification of expenditure, I do not think that the rules about what is on or off the balance sheet have changed in relation to PFI and other expenditure. If the noble Lord can bring to my attention any change that there may have been, I shall apologise, but I do not believe that the rules have changed. Some of the PFI schemes are already on the balance sheets and some are not. It depends on where the analysis and the balance of risk lies. It was suggested that the Government have delayed the spending review because they are in financial trouble. It has already been touched on that the position was set out in Budget 2005 and will be reviewed in the Pre-Budget Report. The concept of, 10   years on from the first comprehensive spending review, taking another significant look over the next 10   years seems right. It is right to recognise that the world and global circumstances are changing. It is right to have a zero-based budgeting approach so that we do not just take last year’s Budget and add to or subtract from it. We should have something that builds from the bottom up, giving a proper budgeting profile for public expenditure. A number of noble Lords have cited the IFS’s projections, but again I make the point that the Government’s record is better than most. On the issue of an independent fiscal committee to look at the statistics, I remind the House that until this   Government there was no independent audit of the data that went into the projections of public expenditure. This Government involved the National Audit Office and got it to audit trend growth and other aspects of those projections. Until 1997 that was not the case. The Government consider that bio-ethanol and bio-fuels can offer significant cost-effective benefits through reduced emissions of greenhouse gases from road transport. To encourage the development of the   market the Government introduced a 20p per litre duty differential in 2002. From 1 January 2005 the Budget confirmed that a 20p per litre differential for both bio-diesel and bio-ethanol will continue until 2007–08. I shall nevertheless raise the matter further with colleagues. My good friend the noble Viscount, Lord Trenchard, with whom we perpetually seem to be destined to debate ACT and pension funds, raised the point about 50   consecutive quarters of economic growth, and that that certainly included 18 quarters of the previous Government. Right, but the point is that the previous government had two recessions in 18 years, and at the end of the period of that government there was rising inflation and debt had not been brought under control. Because of the economic stability that this Government have put in place that profile has not turned into deficit or recession. We have continued that growth, which is why we cite the 50 consecutive quarters. The noble Viscount referred to tax codes—I think that he was talking about fiscal regimes, not the pay-as-you-earn code. He said that we had done nothing to help savings, but we reduced capital gains tax rates; income tax rates are at their lowest for 70   years; and we reformed the pension fund. He asked whether we wanted big or small government. I said that we want effective government, which is what we have. The noble Viscount touched on public sector employment levels. I am pleased that we have more doctors, nurses, consultants, police officers and so on. On the question of whether public services have improved, the electorate cast their view a few weeks ago. As to tax credits, we have discussed and debated the issue in this place. If one targets resources and measures, they are inevitably complicated. We understand why the responsive nature of the tax credit system has given rise to some of the issues before us. The issue of employee remuneration would not affect the sort of companies to which the noble Viscount referred. People will not just walk innocently into those arrangements; those who avail themselves of such schemes know what they are doing and must therefore take the consequences of their actions. There was a report on ACT refunds from the Pensions Policy Institute, which the noble Viscount may have seen, saying that the claim for £5 billion a year was almost certainly overstated and certainly did not pick up the benefits of the reduced corporation tax.