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Finance (No. 3) Bill

I can think of many things on which businesses lobby their MP, but the details of the tax system are a little way down that list. We would find that businesses take a different view of whether they benefit from the current regime. However, as we continually reduce the rate, this will become of greater interest to more and more businesses. Yes, businesses come to me and say, ““The general tax system is just far too complex. The corporation tax system as a whole is far too complex.”” The issue I have raised is just one particularly good example of where the system is now out of date. If the Minister needs more encouragement to simplify the system, I would add that the more complex we make a system, the more attractive we make tax avoidance and the more loopholes we create for tax avoidance. Through the Finance Bill we have had to introduce anti-avoidance measures to try to stop people exploiting the system's complexities. How much more attractive would it be if we simplified the regime either by retaining capital allowances that provide the attraction of a simple fixed rate of relief, or by allowing a business to relieve the depreciation charge it makes in its accounts? In previous debates, we have heard of the risk that businesses could massage their tax results to accelerate the deduction in advance of the economic life of those assets ending. These things can be tackled, however. In effect we are allowing a business with an intangible asset to take relief for its accounts depreciation. It is strange that we allow that for intangible assets that we cannot, by definition, touch and for which there is no scientific data proving the lifespan, yet for tangible assets—the core things we want businesses to invest in—people have to go down this hugely complex route. In reducing the allowance rate from 20% to 18%, the Government think that they will more closely align rates with the economic life of assets these days. I am not sure that businesses in my constituency are saying that that is their experience. These days, things move on so fast that the life of an asset is quite hard to predict. If someone is looking for a return on an asset over six years-plus, it is hard to be confident in the current market. There are many issues with the capital allowance system, and I suspect that each year a different aspect will become the hot topic. The Minister will be lobbied by different interest groups, as I suspect he was this year in his attempt to move—quite rightly—from four year to eight years, but when he is next lobbied and gets proposals in his Red Box to add another layer of complexity to the system, I hope he will say, ““Actually, there must be a better way we can do this.”” This is fundamental to our corporate tax system, it is fundamental to how we encourage investment in our country, and there must be a better, simpler, fairer way that removes some of the potential for abuse. New clause 12 would get the Office of Tax Simplification to consider whether a better system could be introduced. I would strongly encourage the Government to consider carefully going down that line. Let us step back in history to the time of President Reagan. One example of how not to simplify a tax system was his Tax Reform Act of 1986, which introduced what was called the ““double-declining balance method””, switching to the straight line method at a time to maximise the depreciation allowance. I raise that issue only to show that this is not as simple as saying that we need either the current system or accounts depreciation—different things could be done that might encourage investment, although I am not sure that the double-declining balance would meet my aim of simplifying, even if it might give businesses the joy of accelerated relief. I shall not ask the Minister to respond in detail on that particular method, however, as I suspect that it will not have featured in his recent studies. New clause 14 addresses a slightly less hot topic—groups of companies. These can range from groups with two companies through to multinationals with dozens or even hundreds of UK companies. For corporation tax purposes, we currently ask groups to file a tax return for each entity. Then we ask them to file separate claims and elections for all the various inter-group transfers and allocations. They are allowed to transfer a loss from one company against the profit of another, and they are allowed various elections on the transference of assets around the group. All these things create a huge compliance headache for taxpayers and the Revenue. It is worth considering whether there is a simpler way of getting groups to deal with their corporation tax compliance by filing a tax return covering the whole group. There are precedents: many other tax regimes under our competitors allow groups to file a single tax return for their whole group, and in fact we allow groups to make group VAT elections and effectively file single VAT calculations. I wonder how much easier it would be for a group if it had the same basis for VAT as for corporation tax. Let us consider all the potential savings for businesses and the Revenue in not having to go through dozens of individual tax returns. We should bear in mind the fact that many entities in a group will have few entries and will add very little. Under my proposal, we would no longer require all these group relief returns when businesses allocate losses from one company to another, then make a change following submission and have to change all those returns, after which one company makes a loss the next year that changes the previous year's return, meaning that they have to re-file them all. All these things add huge complexity and costs but very little value to the tax system. I accept that they add some value to the Treasury, however, through the hope that, somewhere in a group, some losses or something else will not get relieved but will get trapped, whereas under a simplified system they would get used. I am not sure that our predecessors, when they passed these reliefs to support and encourage business, were aiming to put in place systems so complex and out of date that some relief would get denied when it ought to be given. There are further reasons behind my proposals. We impose on UK group companies various requirements to review the pricing of transactions that take place between them. There is no tax at stake if company A sells something to company B for £100, then has to work out whether the price ought to have been £95 or £105. The only result is that one entity ends up with a slightly reduced profit, and the other with a slightly higher one. Both pay the same rate of tax, so the present arrangements simply result in a paper chase that creates compliance headaches for business and the Revenue alike. All such transactional requirements between group companies would disappear if they were allowed to file one tax return. If I were working in the Revenue, I would be keen to get a consolidation from large groups of what their affairs in the UK actually looked like. In that way, I would be able to see what return they were making and whether it looked a little low or whether there were any strange entries that seemed to be reducing profits. At the moment, a group filing 65 tax returns could have all manner of strange things going on, and it could be hard to see both sides of the matter. Something could be shown in one entity, and it would be necessary to hunt for the opposite entry somewhere else. Those arrangements create scope for tax avoidance. The Minister will be aware of the reforms that he has to introduce to tackle these complex, one-sided instances in which a tax deduction appears for a payment in one group company and the income elsewhere in the group is somehow characterised as something different that is not taxable. If we got this reform right, we could make this kind of tax abuse a lot harder to carry out. That would also remove the need to introduce more and more complexity into the tax system, year on year, to tackle all these abuses. Simplifying the tax system will reduce costs, encourage the investment that we want and tackle tax avoidance by taking away the present complexities and loopholes. I suspect that simpler taxes are more likely to be complied with. If I have not convinced the Minister so far, let me return to the question of capital allowances. At the moment, we give pretty much no relief when a business invests in a new factory. We no longer give any relief for the building, but if we want people to invest in large-scale manufacturing plants, that is not a wise position to take. I understand why we give no relief for land or for office blocks, but the situation for factories is a strange one. It forces a business to separate out anything that it has put into the factory that could be regarded as plant and equipment. For example, it could separate out air conditioning or mezzanine floors, or anything else remotely specialist, in order to claim tax relief on it. This creates a huge amount of work for businesses and tax advisers. In fact, a consultation is taking place at the moment on reforming the rules for businesses that are trying to track assets such as those. We get annoyed with businesses for entering into expensive and complex leases in order to get a tax deduction for their property costs when their income perhaps appears offshore and is not taxed in the UK. Might there not be a better way? My proposal would remove some of the incentive to do that, and allow businesses to get proper relief on their capital investment instead of forcing them down ever more complex, artificial and expensive routes whereby those with well-paid tax advisers can get themselves into the best tax situation. My proposal would help the innocent companies that just want to get on with running their business but instead get mired down in the complexities. I commend both my new clauses to the Government.