---

Finance Bill

My Lords, I am pleased to open the debate on this year’s Finance Bill. As has now become customary, the Bill has been carefully looked at by the Economic Affairs Sub-Committee on the Finance Bill. I start by thanking the noble Lord, Lord Vallance, for his chairmanship of the committee, and its other members for their dedication and diligence in scrutinising what is, by necessity, a lengthy and complex Bill. I will respond to the points raised in the sub-committee’s report later in my remarks, but I hope noble Lords will find it useful if I first briefly set out the context for our discussions today and describe some of the major effects that this legislation will have. This debate comes as both the UK and global economies continue to face major challenges. The financial crisis has caused a world recession, with consequences that are hurting individuals and firms in every country. In the UK, the Government understand the serious impact that the international credit crunch and economic slowdown are having on people and businesses, and have taken comprehensive action to support the economy and protect jobs through these difficult times. Recent figures from the National Institute of Economic and Social Research show that UK output fell by 0.4 per cent in the three months ending in June, after the decline of 1.3 per cent in the three months ending in May. The institute’s assessment is that the UK economy is now standing still rather than continuing to contract at a sharp pace. The first part of 2009 was difficult for all advanced economies. The global downturn meant that growth fell in all G7 countries and in many major economies across the world. Figures for the first quarter of this year show Japan and Germany contracting by 3.8 per cent, Italy contracting by 2.6 percent and the US by 1.4 per cent. We always knew that the start of the year would be tough. However, as my right honourable friend the Chancellor said in the 2009 Budget, we expect growth to return in the UK at the end of 2009 as the action taken by the Government to tackle the global downturn takes full effect. We have seen other tentative signs that output is stabilising, but the Government remain cautious about the prospects for the economy. We cannot afford to be complacent; and, while we are confident about a strong and sustained recovery, we must follow through on delivering support for families and businesses. The Finance Bill provides for vital measures to support the economy this year and to help families and businesses through difficult times. It also provides for help to support the long-term prosperity of Britain and to ensure that public finances are sustainable in the future. The Bill extends until the end of the year the temporary VAT cut that is stimulating the economy by leaving more than £11 billion that otherwise would have been taken in tax in the pockets of consumers and businesses. There has been growing recognition that the measure is working. The Centre for Economics and Business Research stated that, ""the VAT cut is working. It appears to be good value for taxpayers"." Crucially, the Bill also introduces measures to support the public finances, which is a critical focus for the Government. We know that we must live within our means, and we are acting to keep the public finances on a sustainable path over the medium term. Consistent with our progressive principles, the fiscal consolidation asks for most from those who are most able to contribute and who have benefited most from the growth of the last decade. Consequently, the Bill creates the structure for the 50p rate of income tax from 2010 for those on incomes of more £150,000 per year—around the highest 1 per cent of earners. The Bill also provides for anti-forestalling provisions in respect of the planned restriction of higher-rate relief on pension contributions for the very wealthiest. To further support the public finances, the Bill implements increases in alcohol duty, which remained at or below the level of inflation between 1997 and 2007, and an increase in landfill tax from 2011, which will deliver emission savings equivalent to 700,000 tonnes of carbon dioxide by 2013. The current circumstances make it imperative that the tax base is protected and sustainable. We will not tolerate tax evasion and avoidance, which undermine fiscal sustainability, damage the delivery of policy objectives, impose significant costs on society and shift a greater tax burden onto ordinary taxpayers. Consequently, in addition to the measures to support the public finances in the medium term, the Finance Bill includes a package of measures to protect tax revenues that will raise more than £1 billion during the period 2009-10 to 2011-12, and protect a further £3 billion of tax receipts per year from evasion and avoidance by 2010-11. The Bill provides help for businesses, targeting it at those in most need while encouraging investment for growth in the future. The freeze in the small companies’ rate of corporation tax will help more than 800,000 companies. The temporary extension of the loss carry-back rules, benefiting more than 140,000 businesses, will help many viable firms that face cash-flow difficulties. The Bill is helping to support investment by temporarily doubling, to 40 per cent, capital allowances for businesses investing now. That will benefit a further 60,000 businesses, and is in addition to the business payment support scheme, under which 168,000 agreements have already been reached with businesses, deferring tax payments of £3 billion. The Bill also introduces measures to support investment in North Sea oil, to bring in new fields while ensuring existing revenue is protected. The Government are determined to ensure that the UK is a competitive location for multinational businesses. This is why the Bill introduces a package of reforms to the taxation of foreign profits. The main change will enable a group’s worldwide profits to be repatriated to the UK without tax being charged and without the need for complex double-taxation-relief calculations. The main change is complemented by further measures to enhance the attractiveness of the UK as a location for multinational businesses, while protecting the Exchequer. These include a reasonable restriction on our generous interest-relief rules; consequential changes to the controlled-foreign-company rules; and the replacement of the unpopular Treasury-consent rules with a much simpler reporting requirement. All of these changes have been subject to consultation and stakeholder engagement, and have been broadly welcomed by all sides, including by Opposition Members in the other place. I have already mentioned briefly the admirable efforts of the members of the Finance Bill sub-committee of the Economic Affairs Committee in scrutinising the Bill. I re-emphasise my thanks to the sub-committee for the thorough and helpful report that it has published. The report made a number of recommendations in certain important areas, and I will address some of the points now. Throughout the development of the draft Finance Bill, the Government have been guided by extensive consultation with industry and other stakeholders. Our approach to consultation in respect of the foreign profits elements of the Bill was specifically praised by the Finance Bill sub-committee’s report. The report went on to say that the Government should apply the best aspects of this consultation to other consultations in future. It will not surprise noble Lords to hear that I and the Government are delighted to accept this recommendation. The report queried why, when the draft was published, it contained gaps, specifically on the debt cap. Normally it would be preferable to publish a complete draft, and we will continue to endeavour to do so, as far as we are able, across the board. However, on the occasion in question, we were making important progress in respect of those particular clauses in frank and productive dialogue with industry. We felt it preferable to continue to develop the clauses in the light of those discussions, rather than to present Parliament with half-cooked clauses that we would then seek to change significantly. The sub-committee’s report went on to recommend that the changes to the taxation regime on high-value pension contributions be carefully monitored and reviewed to ensure that they do not adversely affect the UK’s competitiveness as a global business centre. The Government have confidence that the measures in question will not significantly impact on our competitiveness. Other countries around the world are having to take comparable measures necessary for fiscal consolidation during these difficult economic times. Tax is only one factor in the UK’s competitiveness, and the UK remains an attractive place to do business, as confirmed by the World Bank’s Doing Business 2009 report, which found that the UK ranks second in the G7 and second in the EU for ease of doing business. However, we are not complacent and of course we will continue to keep all tax legislation under review to ensure that it continues to meet our policy objectives. The sub-committee’s report also raised concerns that the anti-forestalling provisions in the Bill might negatively affect those who, for whatever reason, might legitimately make irregular contributions to their pension schemes. In response to this issue, the Government tabled an amendment to ensure that, where irregular contributions have been made over the past three years, the special annual allowance will be increased to the average of those contributions, with an upper limit of £30,000. For those with average irregular contributions of below £20,000, the special annual allowance will remain at £20,000. This extends full protection to the majority of non-regular pension savers and means that even the highest contributors see their cap on savings attracting higher-rate relief lifted by half as much again. This is a measured change, striking a reasonable balance between preventing the anti-forestalling regime driving up the costs of pension tax relief for the wealthiest individuals and enabling individuals to continue to receive higher-rate tax relief on pension contributions that they would have made in the absence of any announcement on the restriction of pensions tax relief from April 2011.