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Finance (No. 2) Bill

My Lords, we are once again here on a hot July day to discuss the Finance Bill and the report on it produced by the committee chaired by my noble friend Lord Wakeham. As usual, the committee has done a fine job and deserves our congratulations on an excellent and impartial document. I very much regret that the Government do not respond to it officially in writing. Why does that remain the case, despite the report’s non-party-political tone? I declare an interest as an investment fund manager. I can support certain aspects of this Finance Bill. I welcome the broad thrust of the Government’s attempt to prevent the abuse of charitable reliefs, and their attempts in Clauses 95 to 98 to provide a legal and tax framework to accommodate the Sharia-compliant finance arrangements of wakala and diminishing musharaka. That is important, not only to make us more competitive in an increasingly global market in Islamic finance but also for tackling financial exclusion in Britain’s Muslim community. Like other speakers, I welcome the Government’s long-awaited framework for real estate investment trusts. Reform here has long been overdue as such structures have been in place in other developed countries for many years. I feel that more could be done to encourage residential properties into REITs. Like my noble friend Lady Noakes, I ask the Minister why REITs are not allowed to be quoted on the ““A”” market. I cannot see the objection, as they are permitted on the main market. Without this concession, smaller companies without the benefits of REIT status could be taken over and the UK property market increasingly dominated by a relatively few large REIT companies. Secondly, what is the progress of discussions between the Treasury and the property industry referred to in last Saturday’s Financial Times? On new real estate investment trusts not listed on the stock market, as I understand it, there is an opportunity to entice the £40 billion offshore property fund management industry back onshore, although at present it does not pay the 20 per cent tax on their income. Like many other speakers, I welcome Clauses 19 to 21, which crack down on missing trader intra-community fraud. My noble friend Lord Wakeham’s sub-committee’s report made an excellent study of this area of the Budget in a level of detail that I do not have time to debate today. I reiterate the sub-committee’s concern set out in paragraph 100(d), on whether the safeguard to protect the innocent trader is sufficient. Also some commentators, according to the accountants Smith and Williamson, have criticised the clause for appearing to transfer the responsibility for policing or controlling fraud from the state to the taxpayer rather than dealing with the fraud itself. My criticisms of the Budget focus on two main areas: first, the Chancellor’s habit of altering existing relief, which makes life so uncertain for companies, which are thus unable to plan with certainty; and, secondly, trusts. Since 1997, I have thought that the Government were going to have a go at trusts, as they seem automatically to consider them tax-avoidance vehicles, whereas the truth is often very different. Where some avoidance clearly has occurred, as my noble friend Lord Wakeham states in his report, this is far from the sole reason for setting them up. The problematic change to existing allowances this year comes in four areas: small companies corporation tax, film industry taxation, capital allowances and the home computer initiative. The Finance Bill clauses will remove a non-corporate distribution rate, a 0 per cent rate of tax on corporate profits and effectively take corporation tax for small businesses back to the situation in 2000. The Institute of Chartered Accountants in England and Wales stated in its parliamentary briefing note on the Budget: "““The changes in the Finance Bill will hopefully bring to an end the long run of uncertainty and complexity for the taxation of small business profits””." Effectively all the Chancellor has done is to abolish the small companies tax relief he introduced. Will the Minister justify that action? The pattern of volatility recurs in Clauses 31 to 47, introducing a new regime for the film industry. The Chancellor introduced major changes to film tax in the Finance Acts 2000, 2002 and 2004-05, yet the relief still haemorrhaged a staggering £560 million from the Exchequer in the last financial year. I hope that his latest attempt to focus tax breaks more accurately on people making films will provide better value for money than these reliefs have provided to date. I am not sorry to see the back of Section 42 and Section 48 relief, but hope that we will not be faced with more changes to the film tax regime in the Finance Bill 2007. The continual cycle of change has produced huge uncertainty in the film industry and has jeopardised some important projects. For instance, I understand that the filming of the latest James Bond film has moved to the Czech Republic, so even the Government’s most famous civil servant has moved offshore, partly as a result of the instability caused by changes in the film tax regime. Two more detailed but no less important areas are the changes to capital allowances and the home computer initiative. The Finance Bill announced an increase for one year only in the rate of first-year capital allowances for smaller businesses. This continues a pattern of small and temporary changes which the Institute of Chartered Accountants in England and Wales (ICAEW) says have been, "““ineffectual in encouraging business investment””." The ICAEW states that incentives for businesses to invest need to be provided by large changes to capital allowances announced well in advance. It also says that when capital allowance rates are changed, such changes should hold for a significant time. Does the Minister agree with his institute on those recommendations? The home computer initiative was announced with a great fanfare in 1999. It was repackaged in 2004 because not enough people were taking it up and was suddenly shut down in 2006 because too many people were using it. The HCI was supported by the home community initiative allowance (HCIA), the CBI and the TUC. The HCIA stated: "““HCI is a cornerstone of the Government’s digital strategy which sets out to make computing more universally accessible””." So, why abolish the scheme? This is another example of the Government confusing business, making it impossible to make long-term plans when tax breaks keep changing. The Minister’s description of the trust tax changes conveniently ignores the hullabaloo that first greeted their proposals, together with a subsequent battle to amend them. My noble friend Lord Wakeham’s sub-committee, to its credit, covered this in detail, but had to go to print before the story was complete. From the Economic Affairs Select Committee’s report the following picture emerges: first, there was no detail in the Budget speech itself and detail only emerged in the Budget notes issued by the HMRC. Secondly, the major IHT changes then announced provided that accumulation and maintenance trusts and IIP trusts would be charged in the same way as discretionary trusts unless they met much tighter conditions, with a 20 per cent entry charge and a 6 per cent periodic charge every 10 years, and an exit charge proportionate to the time elapsed since the last periodic charge. My noble friend Lord Wakeham’s report continues: "““This announcement gave rise to a storm of protest in the newspapers from a wide range of representative bodies. The main points made related to the lack of consultation on IHT within the framework of the on-going consultations on the modernisation of the taxation of trusts; the impact which the changes would have on ordinary families who used trusts for social reasons and not for avoidance; and the large number of people who would … have to review, and if appropriate alter, their will at a compliance cost which, it was said, would in total amount to very considerably more than the estimated Exchequer yield of the changes””." Those changes were estimated at £15 million. The accountants Smith and Williamson stated in their Budget commentary that these, "““significant changes … will broadly affect many families who have held assets in such trusts””" This will require much restructuring and seems to hit hardest on those planning for the future for instance paying towards children’s education, protecting assets for young children and planning post a divorce. With apologies to the House for going over the ground covered by the noble Lord, Lord Burnett, in his excellent maiden speech, the major additional change proposed originally by the Budget to accumulation and maintenance trusts was to effectively force them to distribute capital to children at 18 rather than 25. Another particularly sneaky change involved life-interest trusts where assets are left on a life interest for the deceased’s spouse. They would not be deemed to be comprised in the deceased spouse’s estate, which meant the spouse exemption would not be due. Another serious issue that remains with regard to trusts is that if an individual takes out a life assurance policy in A&M or life interest form after the Budget deadline, I understand that, for the first time, the policyholder will have to pay inheritance tax at a rate of 6 per cent on the excess above the IHT threshold. Following Budget day, the accountancy and legal industries formed a coalition to argue for the changes to be reviewed. As a result of that pressure, the Government, without issuing a press release, published amendments in June and further changes in early July. Without boring the House on the detail, they introduced a concession for those trusts wishing to carry on until the beneficiary reaches the age of 25, although still imposing a maximum IHT tax of 4.2 per cent of relevant assets. Despite the government climb-down, concerns remain. The Law Society has stated: "““We are concerned that existing trusts will still be adversely affected by the proposals—as will lifetime trusts such as those established on divorce; those set up by individuals facing diminishing capacity to deal with their affairs, such as people with early stage dementia; and grandparents wishing to help their grand-children””." Accordingly, our party tabled a large number of amendments on Report to address those concerns, all of which the Government ignored. I will leave the last word on the subject to the report of the sub-committee chaired by my noble friend Lord Wakeham. It states: "““As regards the IHT treatment of trusts, we are firmly in favour of consultation, which we believe to be necessary if clarity, certainty and simplicity are to be achieved, but there was none in respect of the IHT trust provisions. We did not hear evidence to show why measures to counter forestalling could not have been taken which would have enabled consultation to have taken place. The measures were announced in a low key way and lacked clarity about the Government's objectives. This led to considerable uncertainty about the impact of the provisions and to an exceptionally wide range of estimates of the numbers of people likely to be affected and the costs of having to review their wills.""We accept that, to the extent that there has been significant avoidance using A&M and IIP trusts, the Government is fully entitled to tackle it. But the measures proposed in the Finance Bill also impact on a wide range of trusts which are used as part of the responsible stewardship of family assets without an avoidance motive, making them less certain and more complex and costly. As the Government did not make clear what it was trying to achieve, we remain uncertain whether the policy of neutrality towards trusts has been altered or whether the impact of these changes on ordinary family business needs further consideration and the remedies used to counter avoidance need to be more closely targeted ... We believe that the way in which this whole matter has been handled is not the way in which tax changes should be made””." In conclusion, that once again shows the Government altering a perfectly good structure, in the form of accumulation and maintenance trusts, which a Labour Government introduced. As paragraph 180 of the report reminds us, and as the noble Lord, Lord Barnett, will remember, they were first introduced in 1975. I am sure that he will agree: by all means clamp down on avoidance, but not at the expense of innocent victims who have set up trusts for bona fide reasons.