---

Finance (No. 3) Bill

My Lords, as noble Lords are aware, this Government have taken difficult decisions in our two Budgets to tackle an unenviable inheritance—the largest peacetime deficit on record and an economy struggling to recover from the financial crisis. We have taken the necessary decisions to eliminate our structural current deficit over the coming four years and stimulate a private sector recovery. One is the vital precondition of the other, and our approach has been endorsed by the IMF, the OECD, the European Commission, credit-rating agencies and businesses across the UK. This Government have set the agenda on using the tax system to encourage growth. The Plan for Growth, published in March, set out a range of supply-side reforms to improve the UK business environment. At the heart of that plan is an ambition to create the most competitive tax system in the G20 through our corporate tax reductions, reform of controlled foreign company rules and simplification of the tax system. We want to make the UK the best place in Europe to start, finance and grow a business by reducing the regulatory burden on business and ensuring that credit flows to businesses. We want to encourage investment and export as a route to a more balanced economy by investing £200 billion over the next five years in UK infrastructure, setting up 21 new enterprise zones and entrenching a green recovery. We also want to create a more educated workforce that is the most flexible in Europe by providing 50,000 additional apprenticeships, an additional 80,000 work experience placements and expanding the university technical colleges from 12 to at least 24 new colleges by 2014. The Bill boosts our international competitiveness by reducing corporation tax by a further 1 per cent this year and to 25 per cent next year, towards a rate of 23 per cent by 2013—the lowest rate in the G7 and the 5th lowest in the G20. It encourages growth by doubling entrepreneurs’ relief to £10 million, increasing R&D tax credits for SMEs to 200 per cent and cutting the small profits rate to 20 per cent. The Bill also ensures fairness for all by increasing personal allowances by £1,000. Together with the increase to £8,105 announced at the Budget, this will remove 1.1 million people from income tax altogether. The Bill also introduces a supplementary charge on profits from oil and gas exploration in the North Sea, which allowed us to cut fuel duty by a penny on Budget day, and introduces a bank levy to discourage risky behaviour by banks, the proceeds of which will fund the £250 million investment in the Firstbuy scheme for new homes. I turn now to the Economic Affairs Committee’s report into the 2011 Finance Bill. First, I thank the committee for its comments in recognising the substantive changes that we have made to the way that tax policy is developed, communicated and legislated. The committee considered the Government’s new approach to tax policy-making, which sets out the principles that the tax system will be more predictable, more stable and simpler to understand. Last autumn, we published the majority of the Finance Bill legislation to provide the opportunity to develop and refine our proposals. We received over 200 responses to the consultation and many of the clauses were changed as a result. This is just the first year of this new approach, as the Committee noted. Many interested parties have expressed their pleasure with an approach that puts emphasis on consultation and this process has worked extremely well, as in the cases of corporate tax reform and pensions tax relief changes. Indeed, these specific examples were noted by members of the committee. Of course, we will continue to learn lessons and make improvements for the future and, in doing so, HMRC and the Treasury will take into account the recommendations of the committee. We have also taken steps to address the web of tax reliefs and exemptions that complicate our tax system. The Office of Tax Simplification, set up last summer, has already provided its first series of recommendations and this Bill takes the first steps towards simplification by removing seven tax reliefs from the system. We will be bringing forward further abolitions next year after a period of consultation. The Government are committed to greater consultation on tax policy changes. However, it will not always be appropriate or proportionate to consult at all five stages for each tax policy change, as set out in the tax consultation framework. The Government will always need to retain some flexibility on tax policy. Generally speaking, the Government cannot and will not consult on rate changes or where consultation would otherwise present a risk to the Exchequer. Your Lordships’ committee, as well as witnesses and other interested parties, has taken particular interest in the disguised remuneration legislation. I remind noble Lords that this legislation tackles the practice whereby well-paid individuals disguise their remuneration as loans which are never repaid, resulting in a loss to the Exchequer. This is a significant measure, raising over £700 million a year, and was the first substantial piece of anti-avoidance legislation introduced under the new approach to tax policy- making. There are valuable lessons to learn from the experience. The committee has asked HMRC to look at alternatives to the disguised remuneration legislation. HMRC has already carried out a review of alternative approaches as part of the policy-making process, which concluded that the approach taken is the most effective in the long run. HMRC will, however, continue to review the effectiveness of this legislation as is normal procedure in maintaining tax policy. It should also be noted that HMRC’s new anti-avoidance strategy, which was published alongside the Budget, sets out how the department will prioritise and allocate resource to make the right decisions about how to respond to avoidance risk. In its report, the committee has also highlighted tax evasion. HMRC recognises the significant risk to the Exchequer of tax lost through evasion and already has in place a business strategy allowing it to develop a thorough understanding of its customers. This approach helps HMRC ensure that compliance efforts and interventions are focused where they will have the greatest effect. The Government have underlined their commitment to tackling tax avoidance and evasion with a £900 million reinvestment in HMRC over the spending review period. This will transform HMRC compliance activities and bring in additional revenues of £7 billion a year by 2014-15, on top of the £13 billion additional revenues to which HMRC was already committed. The third area that the committee considered was the approach to corporate tax reform. As I have already said, a competitive tax system is at the very core of our plan for growth. Last year we published our corporate tax road map, setting out our plans for reform over the next five years and the principles underlying them. This gives businesses the certainty they need and the confidence to invest. This Bill takes the first steps on this road by introducing changes to foreign branches and controlled foreign companies rules. Corporate tax reforms will reduce the cost of new investment and incentivise activity across the economy. I welcome the committee’s comments on the corporate tax road map, which noted: "““It should promote the stability, consistency and certainty which many of our witnesses saw as so important””." The committee also expressed some concern around the timing of reviews of tax reforms. I assure the House that we recognise the value of monitoring and evaluating tax policy. HMRC and the Treasury are currently looking at ways in which evaluation can be better embedded in the policy-making cycle. Regarding policy development within the Treasury and HMRC, we have noted the committee’s comments about the policy partnership. I can tell the House that the Treasury and HMRC continue to look at all aspects of their work. It is vital that both departments consider how they engage with taxpayers and how their partnership can be strengthened to achieve better engagement. There is a senior governance group in place between the departments to oversee and monitor allocation of resources to policy work in the partnership. This new governance group is also looking at how best to raise the level and effective use of skills and experience across the partnership, another area that was of particular interest to the committee. We fully recognise the importance of incentivising and retaining the best talents in the tax policy field. The establishment of a new tax academy in HMRC will improve the focus on raising skills standards. That academy will engage with stakeholders to identify shortcomings and put in place measures to address them. It will use and build on the existing range of tax training available to improve skills across the board. This Bill sets out changes to improve our competitiveness, encourage investment and support our businesses through the recovery. Of course, we have always said that recovery would be choppy, but the last year has given us cause for cautious optimism. Output is growing and half a million new private sector jobs have been created, the second-highest rate of net job creation in the entire G7. However, there is no room for complacency, and our plans necessarily incorporate a degree of flexibility. On this point, I would like to confirm that this flexibility refers to the automatic stabilisers that allow government spending to move up and down with the economic cycle. I apologise to the noble Lord, Lord Barnett, for the confusion that arose on this point in response to his Question on 6 July. I can confirm that he correctly quoted my right honourable friend the Chancellor of the Exchequer on this issue. To conclude, this Bill builds on the progress that the Government have made to date to help families, help business and support economic growth. I look forward to hearing this evening’s speeches, particularly the maiden speech of my noble friend Lord Magan of Castletown, and I commend this Bill to the House.