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Finance (No. 2) Bill

My Lords, I, too, thank the Minister for giving us this opportunity to debate the Finance Bill today. I look forward to hearing his comments on those who think that the existence of the House of Lords Economic Affairs Committee somehow trespasses on the territory of another place. The Bill is, as usual, much too long and does nothing to simplify the complexity of our tax system after 10 Budget speeches by the present Chancellor of the Exchequer. There is little to help the country to develop the productivity and competitiveness required to operate successfully in the international economy today, still less to compete effectively with powerful new global players such as India and China. As my noble friend Lady Noakes has stated, we welcome the overdue introduction of a framework for real estate investment trusts. However, I ask the Minister to tell your Lordships why those trusts cannot be listed on the alternative investment market, which would seem to be well suited to provide liquidity for investors in such an instrument. I agree with my noble friend Lord Northbrook on this issue. I, too, congratulate the noble Lord, Lord Burnett, on his excellent maiden speech. I hesitate to talk about interests in possession trusts and accumulation in maintenance trusts, about which the noble Lord clearly knows a great deal more. The Minister referred to the criticism by the respected and generally measured Economic Affairs Committee that the Government completely failed to consult or to issue any detailed statement of their intention retrospectively to tax such trusts—I agree with my noble friend Lord Wakeham that that was a pity—and said that it had been impossible to consult because of the risk of forestalling. However, the Government have had to introduce 50 amendments to Schedule 20. If they had known that they would have to do so, would they really still not have consulted in advance? In any event, they have given a grace period of two years to make changes to the terms of certain trusts to mitigate unforeseen tax liabilities. As the result of a successful campaign by my right honourable and honourable friends in another place and by the Law Society and a number of other professional bodies, the Government have been forced to abandon many of the more aggressive retrospective proposals originally included in the Bill. However, the remaining provisions affecting the creation of new lifetime trusts and the disqualification of grandparents as creators of new trusts remain. The Chancellor has, by these provisions, created a new wealth tax. Even after his climbdown, he has created a system whereby there is an incentive imprudently to distribute trust assets to beneficiaries at 18 rather than at the more sensible age of 25. The Minister’s explanation implied that the Government believe that all trusts are set up purely to avoid tax, but I agree with my noble friends Lord Wakeham and Lord Northbrook and other noble Lords that very many trusts are set up to provide the prudent management and stewardship of family assets, often to the benefit of all those involved in the associated businesses. Perhaps the Chancellor hopes that encouraging the distribution of trust assets to 18 year-olds will lead to the profligate dissipation of inherited assets, thus making a major contribution to the levelling-down and socialist redistribution of wealth that it appears remains his not-so-hidden agenda. It is surprising that the Chancellor is still considered the favourite candidate to succeed the Prime Minister, given that he has presided over a period of material deterioration in the competitiveness of the British economy and that his stealth taxes have wrought so much harm on the lives of millions of pensioners who work or have worked in the private sector. As my noble friend Lady Noakes stated, the UK’s position has declined from the fourth most competitive country in the world in 1997 to the 13th today. If UK plc were properly accountable to its shareholders, the Government would surely have had to resign by now. The Chancellor has inexorably raised both corporate and individual taxes, repeatedly breaking his false promises not to do so. We have lost most of the comparatively competitive and attractive corporation tax position that we enjoyed when this Government came to power. The Government have massively increased public sector spending but to little beneficial effect, as much of the new investment has been wasted on the creation of unnecessary administrative posts and ill fated, expensive projects such as the disastrous new IT system for the National Health Service. London is now regarded as a very expensive and relatively less attractive centre for major international companies to maintain their European headquarters. The capital’s infrastructure remains very poor despite the massive revenues from the congestion charge and the sky-high Underground fares already accruing to the Greater London Authority, which clearly sees itself as a kind of second Exchequer. It is shameful that London Underground announces to the world that a good service is running on all, or certain, lines as if it expects approbation merely for providing the very expensive service that it is contracted to provide. It costs £3 in London to travel within one zone on the London Underground for a one-trip cash ticket, compared with the equivalent of 80p in Tokyo and £1 in Brussels to travel anywhere by underground railway or bus for up to an hour. In Tokyo last week, I heard that NHK—the Japan Broadcasting Corporation—has decided to relocate its European headquarters from London to Paris, despite London’s unrivalled position as by far the most important news and information centre in the European time zone. The reason for such a surprising move is that London has become too expensive. In her excellent maiden speech in the debate on the importance of London as a financial centre, the noble Baroness, Lady Valentine, said: "““While we remain broadly competitive with the rest of Europe on taxation, the gap with the euro-zone is closing. In 1993, the tax burden as a percentage of GDP was 8 per cent lower than Europe, whereas by last year that advantage had fallen to 3 per cent””.—[Official Report, 8/6/06; col. 1402.]" This Budget has done nothing to alleviate the rising costs of locating businesses in this country. The British Chambers of Commerce has shown that the total cost of regulation has risen by nearly a half since 1998, and this excludes the cost of the national minimum wage. As for the public finances that devour an ever-increasing proportion of GDP, the Chancellor argues that we continue to meet his golden rule. But he has lost all credibility because of his repeated retrospective reclassification of what expenditure counts as investment and his convenient revision of the start date of the current economic cycle in order to include the years 1997 to 1999, during which he had to follow the previous Conservative Government’s financial plans. These reclassifications and revisions have enabled the Chancellor to manipulate the figures so as to be able to claim that he has met his golden rule. His record of accurate prediction of the Government’s borrowing needs is, to put it mildly, unimpressive. In 2001, he predicted that he would have to borrow just £12 billion in 2005-06. In the event, he has borrowed £112 billion. A CBI study shows that government consumption is rising as business investment falls. The tax take has risen from 34.7 per cent of GDP in 1996 to a projected level of 38.5 per cent for 2008, whereas every one of our G7 competitors cut taxes between 1996 and 2004. Besides the damaging increases in personal and corporate taxation, and the crippling accretion of new regulatory burdens, the Government will stand condemned by history for the damage that they have done to our once excellent occupational pension schemes, which were the envy of the world when Mr Brown moved into No. 11 Downing Street. I make no apology for returning to the Government’s early misguided and bad decision to abolish the dividend tax credits previously and logically received by pension funds and charities. Although the Government still refuse to admit that they made a serious and damaging mistake with the introduction of that measure in 1997—its first and worst stealth tax—the effects of that catastrophic decision continue to become clearer. Noble Lords will be aware that the Government have lodged an appeal against the recent ruling of the Information Commissioner that the public have a right to know what forecasts the Treasury used when it decided on its pensions tax raid. As is now universally acknowledged, the tax raid’s effects took money out of pension schemes and damaged the stock market. I estimated a year ago that the cumulative effects of the Government’s action had cost our pension schemes £166 billion. It is very right that the thinking behind the Government’s decision should be made public. A year ago, on 19 July 2005, the Minister told your Lordships’ House that claims about the cost to pension funds of the abolition of tax credits were overstated because they did not take account of the benefits of the reduced corporation tax. It is true that the corporation tax rate has been reduced from 52 per cent to 30 per cent since 1979. However, only 3 percentage points of the total 22 percentage points reduction was carried out by this Government—none of that has been since 2000—during which time we have slipped by 10 places to 20th out of 30 among major OECD countries in terms of corporation tax rates. The noble Lord subsequently wrote to me on 5 August last year—I was grateful to him for that—saying: "““If, in one year, companies paid zero dividends and reinvested all their profits in the business, then presumably this would increase the future returns to existing shareholders, thereby increasing share prices””." We must look forward to the Government’s belated explanation for their action when, as it certainly should, the Information Tribunal overrules the Treasury’s appeal, although I can understand the Government’s reluctance to admit their astonishing failure to understand the relationship between dividend levels and share prices. It is the Government’s fault that Britain’s 100 leading companies have a pensions black hole of £150 billion, as revealed by a study for the actuarial profession’s pensions board. The Budget does nothing to restore incentives to save. It does nothing to alleviate the growing perception of the UK as a difficult place in which to do business and one with a massively complex taxation system. The Chancellor claims that he has brought stability to the economy, but the evidence is that he has brought uncertainty and volatility. Examples of that include his introduction and abolition of the home computer initiative and his introduction and abolition of the 0 per cent band of corporation tax. My honourable friend Mrs Theresa Villiers has said in another place that she strongly opposes the Government’s hare-brained proposal to bring forward the filing dates for tax returns to September. I hope that the Minister will confirm that this does not mean that the Government intend now or in the future to accelerate the payment dates for income tax: four months’ acceleration would represent a further significant increase in tax. The Government’s projections predict that income tax will raise £144.7 billion during the 2006-07 tax year, representing an increase of 109 per cent on the £69 billion raised in 1996-97. This huge increase in income tax is mirrored by the 125 per cent rise in inheritance tax paid since 1997. The number of people caught by the higher tax rate of 40 per cent has increased from 2.1 million in 1997 to 3.4 million last year. Forty per cent may not be as high a top tax rate as many other countries have, but it bites at a much lower level. It may not be all bad, but the Government cannot deny that we are slipping badly against our international competitors by many measures.