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Finance Bill

My Lords, I am very pleased to introduce the report of the Economic Affairs Committee on the Finance Bill 2009. It is the seventh annual report in a series that has now become well established and confirms the role of this House in the parliamentary scrutiny of finance Bills. Our sub-committee on the Finance Bill provides a forum, not available in the other place, for taxpayers and their advisers to express their concerns and for officials to respond. I should like to thank my fellow members of the sub-committee for their wise contributions, their non-partisan approach and their necessarily speedy and intensive work. I am also grateful to our witnesses, professional and official, our specialist advisers, the clerk and our secretary-administrator. The sub-committee has to focus, and this year it examined three topics: tax relief for pensions contributions; the taxation of foreign profits; and real estate investment trusts, or REITs for short. We also followed up our examination last year of two cross-cutting issues: consultation and international competitiveness. First, on pensions, we accept that the Government have to be free to make such changes as they think fit, but we were concerned that the proposed restrictions to relief for pension contributions, limiting them to the basic rate of tax for high income individuals, risk damaging pensions savings. New rules for pensions came into effect only three years ago. It is very early to make a highly significant change. Although its scope is limited to high-income earners, it may be seen as the thin end of the wedge. A good tax system needs simplicity, consistency and certainty, especially in a long-term business such as pensions. The changes have an adverse effect on each of these qualities. Only a comparatively small number of taxpayers are directly affected, but they set the policy of their companies’ pension schemes and their approach may be coloured, especially as employers' contributions are also affected. We think there is a real risk that savings will switch away from pensions. We accept that the Government's aim is a level playing field between defined-benefit and defined-contribution schemes, but in practice that may be difficult to achieve. It is not easy to assess the value of contributions to a defined-benefit scheme. We are also concerned that the scheme may lead to exceptionally high marginal rates of tax. The CBI gave an example where the marginal rate was 145 per cent. More consideration is needed on both these areas in the consultations on the substantive scheme. Given the potential benefit of simplification, we were attracted by an alternative approach of simply restricting the annual and/or the lifetime allowance. By contrast with the Government's proposed changes, this would have been consistent with the present scheme of relief. However, the incidence and impact of a change of this nature would have been very different from those of the Government's proposals and, with considerable regret, we concluded that this was not a line we could pursue. We questioned the need for antiforestalling measures. There was a legitimate expectation that relief would continue at the taxpayer's marginal rate. It would not have been unreasonable to allow people time to adjust their affairs. In any case, additional contributions would have been limited by the annual and lifetime allowances as well as by what people could afford. In our report, we said that solutions would need to be found for all those individuals who have good reason for not making their pension savings regularly or frequently, who include the self-employed and those retiring or made redundant. As the noble Lord, Lord Myners, outlined, subsequent changes to the Bill have met some concerns, certainly those of the self-employed, and that is welcome, but it is disappointing that, as we understand it, there has been no real recognition of the impact on those who retire or are-made redundant. The taxation of foreign profits was our second chosen topic. The foreign profits package was introduced after much consultation. It encompasses the exemption of foreign dividends, a cap on allowable finance expenses and the replacement of the Treasury consent rules by a post-transaction reporting requirement. It was very difficult for our witnesses to assess the overall package while there were still gaps in the Finance Bill proposals. Many government amendments were made in the Commons Public Bill Committee. This is the second year in succession that we have had to comment on this aspect, which is very disappointing. The sub-committee was also disappointed that dividend exemption, which was universally welcomed in principle, had been marred by complicated and controversial drafting. We recommended that wherever possible in future, there should also be consultation on drafting. The restriction of interest relief via the debt cap was least welcomed, and we were not greatly reassured by the responses of officials. We were concerned that a long period of consultation had left some important issues unresolved. We were also very concerned about the complexity of the debt cap provisions, and we recommended further dialogue with the representative bodies, either to discuss changes or to persuade them that further changes were not appropriate. We recommended that in view of the problems with the debt cap provisions, their implementation should be further delayed unless those problems could be resolved during the passage of the Bill. The private sector will still be considering the amendments made in the Commons Committee. If it is content, that is a welcome outcome; if it is not, we urge the Government to consider holding off until there is resolution. We had few comments on the changes to the rules on controlled foreign companies. We welcomed the changes concerning the rules for Treasury consents and for putting their substance into regulations. Our third chosen topic was real estate investment trusts or REITs. The sub-committee was concerned that REITs had not lived up to expectations. Although they were introduced to promote greater efficiency and flexibility in the property market and to counter shortages in the housing market, there are no residential REITs or new commercial ones. Obviously, market conditions have been a major factor, but that was not the whole answer. There are also structural weaknesses in the legal framework for REITs, and the Finance Bill, as published, did not tackle those issues. We proposed that a variety of measures should be considered. Some were comparatively minor, such as looking again at the industry's "snagging list", and others could be tailored to meet the current economic circumstances, such as allowing the payment of scrip dividends. Others could be more significant, such as reducing the entry charge, which might enable the original purposes of the scheme to be met just as the market may be turning. At the Commons Report stage, the Government went some way towards meeting our concerns by introducing a provision to cater for REITs in severe financial difficulties and promised further discussion on scrip dividends. These are welcome responses, if far from addressing all the issues we raised. More generally, REITs were introduced following well handled consultations, but since then, officials have appeared complacent and unduly cautious, with perhaps too much emphasis on issues such as cost without looking at the broader picture. We suggest that much could be learnt from international experience, particularly that of France. I now return to the two cross-cutting issues that I mentioned earlier, the first of which is consultation. Given our sharp criticism of the consultation before last year’s Finance Bill, we were keen to see how good it had been this year. We were left with a favourable impression across the board of how the consultation on foreign profits had been handled. The one aspect that concerned us, as I mentioned earlier, was that when it was published, the Finance Bill was incomplete. We recommended that HMRC considers very carefully why it did not allow itself sufficient time to complete the consultation and the subsequent drafting process. We concluded that, given the nature of the changes, it would have been very difficult for the Government to consult on pensions, even informally. However, we thought that Her Majesty’s Treasury and HMRC were at fault in failing to consult on the novel and contentious measures on the duties of accounting officers of the largest companies and on naming and shaming serious tax defaulters. We were not persuaded by the reasons given by officials for this lack of consultation. Some changes to the accounting officers’ provision have been made in consultations since the Budget, but it would have been much better if they had been made earlier. We recommended that in future there should be consultation on all such issues, and we hope that it will not be necessary to revert to this aspect in a future report. The second cross-cutting issue is the effect of the measures that we examined on the international competitive position of the United Kingdom. There was general agreement that some parts of the foreign profits package were positive but others much less so. The outstanding issues clearly need to be resolved before the full impact on competitiveness can be determined. We thought that the opinion of officials that the pension changes would have little effect on competitiveness was likely to be overoptimistic, and we recommended that the effect of the changes should be monitored carefully. The likely impact on the UK’s competitiveness of the Finance Bill provisions as a whole is difficult to assess; it might be narrowly positive if the concerns about the debt cap rules can be resolved. In summary, our report was less critical than last year, with more things to welcome to balance our criticisms. Our main concern was that the Government have underestimated the risk of damaging pension savings by changing the long-standing rule that relief for pension contributions should be given at an individual’s marginal rate. Although only some of our concerns about this year’s Finance Bill have been met during its passage, I hope the House will agree that our reports are valuable in strengthening parliamentary scrutiny and drawing attention to the concerns of taxpayers and their representative bodies.