New Clause 17 — Report on proposed tax changes
Orders of the Day
12:31 pm

Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede and Weybridge, Conservative)

I beg to move, That the clause be read a Second time.

Michael Martin (Speaker)

With this it will be convenient to discuss new clause 18— Tax simplification—

'(1) The Treasury shall publish each year, not later than the Pre-Budget Report, its proposals for the simplification of the tax code of the United Kingdom.

(2) A copy of the proposals must be laid before the House of Commons.

(3) Standing orders may make provision for the scrutiny of the proposals.'.

Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede and Weybridge, Conservative)

New clauses 17 and 18 are what I might describe as specimen clauses, and deal with simplification and transparency in the tax system. Our intention is to have a debate and to get a response from those on the Treasury Bench on the crucial issues of simplicity and transparency in our tax system. New clauses 17 and 18 allow us to do that, by focusing on two aspects of that wider agenda.

It is perhaps worth noting—I am sure that Government Members will have spotted this already—that new clause 17 replicates proposal 37 of the report of the tax reform commission, which was set up my hon. Friend the shadow Chancellor and is ably chaired by the noble Lord Forsyth.

Jeremy Browne (Shadow Chief Secretary To the Treasury, Treasury; Taunton, Liberal Democrat)

Will the hon. Gentleman update the House on the intention of his Front-Bench team to adopt all the proposals put forward by Lord Forsyth's commission? I remember that Lord Forsyth recently described the Conservatives' current tax proposals as "mad". A gap appears to have opened up between the hon. Gentleman's position and that of the chairman of the commission.

Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede and Weybridge, Conservative)

If I were to choose a word to describe the report produced by my noble Friend, it would not be "mad". I would describe it as "extremely interesting and very helpful". Some of the proposals are clearly ones that we will wish to adopt. Others might fall into the category of things that we would love to adopt while recognising that we would be unable to do so because of the mess that the public finances are in and the chaos that we are likely to inherit. It is also fair to say that other proposals do not resonate with my colleagues on the Front Bench.

We do not need to be coy about this. The job of a party in opposition aspiring to government is to do the work. That involves asking people—including experts and outsiders—to look at issues and to report on them. If we were to create an environment in which, every time the Government or the Opposition asked a third-party organisation or outside body to look at an issue and put forward proposals, our political opponents were able to present those proposals as though they were adopted policy, we would simply shut down the debate. I urge the hon. Gentleman not to go down that route.

Jeremy Browne (Shadow Chief Secretary To the Treasury, Treasury; Taunton, Liberal Democrat)

I strongly agree with the point that the hon. Gentleman has just made; such an approach would discredit the wider political process. I remember, however, on that same line of inquiry, that the shadow Chancellor said that he would support a flat-rate tax. In fact, he cited examples in eastern Europe that we should learn from. I presume that that is the kind of imaginative thinking that the hon. Gentleman is talking about. Can he tell us what progress has been made in that regard?

Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede and Weybridge, Conservative)

If the hon. Gentleman looks carefully at what my hon. Friend the shadow Chancellor has said, he will see that my hon. Friend supported a flatter and simpler tax system. He has always recognised—as, I think, do all hon. Members on both sides of the House—that a flat-tax system that might be attractive in an economy that is in the early stages of development and that has, in particular, an undeveloped system of tax collection, would not be appropriate in a mature tax jurisdiction such as ours. It is important that we look at all these issues, however, and that we are able to do so with no holds barred.

Many people to whom we speak, including those with an intimate knowledge of how government works, and including some who were sitting on the Treasury Bench only a couple of years ago—[ Interruption.] No, I said a couple of years ago, not a decade ago. Those people tell us repeatedly that there is little opportunity for strategic thinking in government. That strategic thinking needs to be done while in opposition, and a party needs to come to government with a clear idea of where it is going. If we are fortunate enough to be elected to government, we certainly intend not to repeat the mistakes of Mr. Anthony Blair, who knew a lot about getting elected, but not a lot about what he wanted to do when he got there.

Mr. Speaker, I am sure that you would like me to return to the subject of the debate. The commission looked at many aspects of our tax system, including matters of process. In scrutinising the Bill so far, our attention has rightly been focused primarily on the substance of the individual measures in it. Now, however, it is appropriate to pause to consider the processes by which we make and manage our tax law.

There is a long-term driver and a short-term driver to this agenda. Over the past decade, the tax system has—partly by design—been made much more complicated. In our submission, it is now in urgent need of simplification. Public confidence in it has been undermined by the endless stream of stealth taxes, which began with the great pensions raid at the beginning of this Labour Government, when none of us knew about stealth taxes. We had not heard the term before; indeed, it had not even been coined. It was some time before people understood the fiscal implications of what was being done. This has continued right up to the proposals announced in this year's Budget for a retrospective increase in taxation on cars purchased before 2006, about which we will hear more—perhaps a great deal more—later this afternoon.

Over the same period, it has become clear that the vast weight of new tax legislation has simply overwhelmed the capacity of Parliament effectively to scrutinise it. That is the long-term driver. The more immediate driver and what has focused our attention rather urgently on this issue is the fiasco of last year's pre-Budget report and the elements of Budget 2007 that are enacted in the current Finance Bill.

The Chancellor's proposals—when I refer to his "proposals", I do so in the loosest sense to mean what he stood up and announced in the pre-Budget report—on the taxation of non-domiciled residents and on the abolition of taper relief provoked a furious reaction from the business community. I am sure that all hon. Members will remember the fierceness of the response and the unity of purpose across a group of business organisations that, quite frankly, do not often sing from the same hymn sheet. On this issue, they were united, partly on the substance of the proposals, but significantly on the manner of their introduction on account of the total absence of advanced signalling and of consultation with interested parties.

Jeremy Browne (Shadow Chief Secretary To the Treasury, Treasury; Taunton, Liberal Democrat)

Does the hon. Gentleman agree that his case, which I agree with, is further strengthened by noting the number of Government amendments to their own legislation that are to be debated later? They follow dozens of amendments on the same section of the Bill. Would it not have been better if the Government had engaged in processes of thought and deliberation before making their announcements rather than during the legislative process?

Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede and Weybridge, Conservative)

The hon. Gentleman is right. He is making a slightly different point about a different part of the tax legislation process, which I will also address in due course.

The Chancellor was eventually forced into humiliating climbdowns on both issues, as well as subsequently having to kick his ill-thought-out, unworkable and highly damaging proposals on the taxation of foreign profits and on income splitting into the long grass—and, presumably, the grass must be long enough to get him to the other side of a general election. All those issues affect businesses. The saga of the 10p tax rate does not affect businesses directly, but is yet another example of poor scrutiny and poor process. I am sure that Government Members would say amen to that. They must realise more than most how desperately important it is not to repeat the type of mistakes made with the abolition of the starting rate of tax. It was not only a bad measure in principle, as it was badly explained, poorly understood, deferred in implementation for all the wrong reasons and then reversed—or at least mitigated—in a way that has further undermined confidence in the stability and structure of our tax legislation system.

Although the measure was announced in 2007 and immediately identified as a potential problem, it was the failure to grasp the scale of the problem among those who later became concerned about it that has been so highly damaging to the Government. Although it is not my job to worry about the damage that the Government seek to inflict on themselves, it is instructive to note that this not particularly complex piece of tax legislation impacted negatively on 5.3 million ordinary people—whom we often think of as voters—rather than businesses, yet it still took the best part of a year before the debate on the issues really got going. I am trying to make a serious point, as this indicates the failure of the House's mechanisms for scrutinising tax legislation. We need to ensure that such legislation is understood, if not by every hon. Member, but by a wide enough audience so that any serious political problems can be identified at the earliest possible stage.

To return to the issues of non-doms and capital gains tax changes announced in the pre-Budget report, the Chancellor's U-turns, which I have already mentioned, were not very neatly executed. Immediately after the pre-Budget report, No. 10 began briefing that there might be concessions on capital gains tax. What happened is that the Prime Minister was taken aback by the scale and ferocity of the business response and saw his laboriously constructed base of business support—not to mention business donors—evaporating overnight. He responded accordingly by kicking the man next door. The concessions dribbled out over the following weeks and months, but in a way that meant businesses, and particularly those entrepreneurs considering a sale of a business in the near term, did not know where they stood until as recently as early March.

I remember meeting groups of entrepreneurs and small business owners back in late October or November after the announcement had been made. There seemed to be an even split between, on the one hand, those who felt that the only safe route was to gain the benefit of the taper relief by cutting and running and trying to sell their businesses even as the economy was slowing down against the backdrop of the credit crunch, which made the financing of business acquisitions quite challenging, and, on the other, those who put their faith in the trickle of news from sources in the Treasury indicating that concessions would be made. It was a very destabilising situation.

Stewart Hosie (Spokesperson (Economy; Home Affairs; Treasury; Women); Dundee East, Scottish National Party)

The hon. Gentleman mentioned that there was clarity by March, but any such clarity over capital gains tax applied only to the easy things, like selling a business that one might have sold anyway. He will be aware—I suspect that this is part of the reason for his new clause 17—that it emerged in Committee that share option schemes, approved or otherwise, in respect of the CGT changes looked like treacle and there was no clarity at all. Will he turn his mind back to the share option debate we had upstairs in Committee as an exemplar of why we need new clause 17 or something similar to it?

Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede and Weybridge, Conservative)

The hon. Gentleman is exactly right, but I do not want to pre-empt our debate on the next group of amendments.

I do not deny that I have made some partisan points so far, but I hope that everyone will recognise that there is a genuine problem. I shall address it in more detail in a few moments, but the real problem is our capacity as parliamentarians to deal with vast volumes of complex and technical legislation. Of crucial importance is the Government's capacity, against what is a pretty tightly constrained timetable in respect of the Finance Bill, to deal with the many technical issues that need to be clarified between the headline announcements in a Budget speech and the passage of the legislation on to the statute book. It goes beyond that because, in addition to the capital gains tax changes, a raft of guidance has to be published, understood and commented on. As we shall see when we debate the next group of amendments, the guidance can sometimes be critical in debating the detail of legislation. Clearly, we need a new and more effective mechanism for the scrutiny of our tax legislation.

As with CGT, the Government's original proposals for non-doms soon disintegrated as item after item on the Revenue's shopping list was scrapped as the political masters of the process finally grasped the scale of the damage that risked being inflicted and the extent to which they had lost control of the process to their own bureaucrats. I do not expect the Economic Secretary to answer this point, but it is pretty clear to us that the problem with the non-dom legislation was due to what is known in this place as gold-plating.

The usual example is the European Union handing down a directive. In this instance, the Chancellor made a decision on the taxation of non-doms, and then handed it to British civil servants whose natural instinct is to reach for the nearest kitchen sink and try to bolt it on to the original decision. I have an image of officials of Her Majesty's Revenue and Customs going to filing cabinets that may have been left untouched for years, dusting off packets of documents containing various wish lists of ideas for taxing non-domiciled residents, and bolting them on to the original idea that the Chancellor and his team presented, in a way that not only made the legislation complex but—and I suspect that this is something that a politician might see more readily than a civil servant—caused it to send a very negative set of signals that would be extremely damaging.

Again, the process was messy, with individual concessions painfully extracted and gracelessly awarded over a fairly long period. As Mr. Browne has said, many technical but important issues were introduced only during the Committee stage. Indeed, the residence and domicile provisions, arguably the most complex, had to be timetabled for the very end of the Committee's deliberations to give the Government more time in which to work out the detailed provisions.

Even today, as the hon. Gentleman said, we have before us a raft of new Government amendments to the clauses on residence and domicile. They will be debated today, and Opposition points about them will be put today to Ministers who cannot realistically be expected to consider them, digest the arguments, evaluate them and respond to them in the course of the debate. Unfortunately, however, there can be no further scrutiny of a Finance Bill with no stages in the House of Lords. This is the path to bad legislation. I predict, with no fear of contradiction, that next year's Finance Bill will contain provisions correcting, amending and clarifying the residence and domicile clauses in this Bill, precisely because many of the details have been introduced only at the very last moment.

The reaction of those affected has been predictable. Many have prepared to leave the United Kingdom, and some have already done so, but all of them, whether they have left or stayed, have had their confidence in the transparency and predictability of the United Kingdom tax regime shattered, and that will have significant long-term consequences for the United Kingdom's attractiveness as a place in which to do business. The same applies to capital gains tax. Some businesses were sold prematurely, and some, as I am sure the Economic Secretary knows, were transferred through artificial transactions designed to salvage the benefit of taper relief. But far more businesses were not sold, and the entrepreneurs who run them have lost their faith in the tax system on which they had relied in calculating the returns that they would earn.

That is serious not only because it reduces the attractiveness of the UK as a mature and stable place in which to do business, but because every time the Government undermine the incentive that they have given in earlier legislation, they significantly reduce the behaviour-influencing power of the Treasury. We all know that in all fields, including that of environmental taxation, the Treasury focuses, quite properly, on the ability to influence behaviour through the fiscal system.

Taper relief was hailed by the Prime Minister, then the Chancellor, as one of the prime examples of Labour's commitments to business and enterprise. He said:

"I will introduce a new structure of capital gains tax which will explicitly reward long-term investment, and which is based on a downward taper and lower tax rates. It will encourage people to hold on to assets in the long term."

There is no doubt in my mind that the taper relief regime did underpin the creation of many new businesses, and did inspire the effort and sacrifice required to grow many others. Many businesses are built by people who have made a conscious decision to forgo the relative comfort of a highly paid job in a large corporation for the rather rockier path of building up their own smaller businesses, with all the risks that that implies, and all the pressures on their personal lives that anyone who has ever been in that position will understand only too well. The fact that many entrepreneurs who engaged in that process have been now been left stranded without the benefits that they had calculated has left a bitter taste in their mouths, and will make the next set of incentive proposals from Government significantly less effective in driving their behaviour.

Business hates nothing more than uncertainty. Uncertainty adds to the cost of doing business: it requires a risk premium to be factored into business return calculations. An unstable and unpredictable tax regime makes the UK less competitive, and clearly that is partly connected with the nature and instincts of the Government of the day. New Labour has demonstrated more clearly to business in its actions over the past eight months than any number of words could ever demonstrate that it does not understand how business works, that it does not understand the mentality of enterprise, and that it is no friend of business and cannot be trusted with Britain's business economy. But it is not only about political leadership. This is not only a party-political issue. The whole fiasco of the past eight months also says something about our process of tax law making.

Good government can be delivered by the happy chance of good governors operating in a chaotic system. However, business, and even citizens, would prefer not to rely on chance to deliver them good government through good politicians, but rather to institutionalise good government through structures and processes that ensure that even when they are afflicted by bad politicians who fail to appreciate the significance and, sometimes, the unintended consequences of their actions, those politicians will be constrained to behave in a way that minimises the damage. It is not only about putting better politicians in place, although we are very keen to do that; it is also about ensuring that the institutions and the structures are right.

So what have we learned from all this—the non-dom and CGT fiascos, and the disintegration of the pre-Budget report and the 2008 Budget? First, let me again quote the Treasury Committee. Surprise announcements designed to

"pull a political rabbit from a hat"

are simply not appropriate or responsible, certainly in the case of business taxation but also, I would argue, more generally in the case of taxation announcements. Businesses and investors will punish not Governments—and that is the problem: if they had a vote and punished Governments, it would be fine—but nations that allow their Governments to deliver unsatisfactory tax surprises in this way.

Secondly, we have learned that tone is very important. Much of the reaction over residence and domicile was fuelled less by the substance than by the hostile tone of the announcement, and the failure of the politicians in charge of it to appreciate the damaging message that HMRC was sending. Ironically, it was left largely to Opposition politicians to run around the City trying to soothe nerves as we sought to persuade the Government of the need for change, and to persuade those who, in many cases, are critical to the wealth and prosperity of our economy that they should just sit on their hands a little longer while we saw what could be achieved in terms of getting the Government to change their mind.

Thirdly, the finality of the proposals at the time when they were announced took business aback and shocked it. All complicated issues of this nature should be published in draft for proper consideration and consultation, for the avoidance of political embarrassment—as I hope the Economic Secretary will now clearly recognise—as well as for better management of the economy.

What we have seen over the past eight months is no way to go about tax reform. The succession of hastily cobbled together announcements, climbdowns, confrontations and U-turns deliver the very opposite of the stable environment that businesses and individuals need so that they can understand the tax implications of their decisions and plan accordingly.

Lest it appear that I am having a go at the current Chancellor, let me be clear that the puppet master behind him is the real target of my comments. This climate of chaos, confusion and policy reversal was not developed only in the past nine months. For years, Finance Bills have contained measures closing loopholes or reversing incentives created by their predecessors. In March 2004, the then Chancellor closed a tax loophole for the self-employed that he had created only two years previously. He introduced the zero rate of corporation tax for small companies and then changed that virtually every year before he eventually abolished it. In 2003, he announced that residential property would be permitted in self-invested personal pension plans. The industry spent millions of pounds gearing up for the change, and many individuals set about rearranging their retirement plans. The Government robustly rejected advice that came from all parts of the House, including their own Back Benches, that the proposals to include residential property in SIPPs would lead to a disaster, yet at the eleventh hour the decision was reversed, leaving tens of thousands of businesses and taxpayers out of pocket, having to pick up a bill for the Government's incompetence. The capital gains tax taper relief regime has fared only slightly better, lasting nine years before being consigned to the scrapheap, having only months before been held up as the symbol of the Government's supposedly business-friendly agenda.

The lack of direction, the dithering over policy and the meddling in successive Budgets in an attempt to correct defective earlier legislation, smacks of political and fiscal opportunism, and points to the absence of a coherent underlying philosophy for our tax system—or, if there is such a coherent underlying philosophy, a failure to communicate it to the people who invest in the British economy. British taxpayers and the investors who pour billions of pounds into our economy deserve better. We must never forget—I hope the Economic Secretary never does forget this—that in the globalising economy of the 21st century, businesses, and, increasingly, skilled individuals, have a choice about where to locate, and also about where they choose to pay their taxes.

It is clear that Britain cannot win this global contest by offering the lowest rates of tax, as it is faced with competition from emerging economies with a far less developed social and physical infrastructure. To try to do so would put at risk the high-quality public services to which the British people are rightly and understandably attached. However, we must recognise the competitive threat. Traditionally, the advantage to the taxpayer of a higher tax and more mature jurisdiction has been greater certainty, stability and transparency in the taxation system as well as a generally stronger social and physical infrastructure. If Britain is to remain in the competition to attract businesses and high earners while operating a higher cost tax regime than many emerging economies in competing locations, we must at the very minimum offer the stability and certainty that is so valuable to such organisations and people, and for which we are, effectively, with our higher tax rates, asking them to pay. We must be under no illusion that a combination of higher tax levels and the kind of capricious decision making that we have seen over the past eight months will quickly relegate UK plc to the sidelines of this global competition.

John Baron (Whip, Whips; Billericay, Conservative)

May I suggest to my hon. Friend that the threat in respect of corporate tax rates comes not only from emerging markets? British companies are moving to other European Union countries—Shire Pharmaceuticals is one such suggested company—with lower tax thresholds. That directly threatens job prospects in this country. The threat, therefore, comes not only from emerging markets because tax base comparisons across the EU are also relevant.

Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede and Weybridge, Conservative)

My hon. Friend is absolutely right. He may have been involved in similar discussions to those that I have with many FTSE 500 companies. Most of them have not taken the decision to relocate their tax domicile, but many—perhaps most—of them feel that they are obliged, in the interests of their shareholders, to investigate the options available to them. Just a few months ago I was told by one of the leading firms of accountants that without exception every one of its FTSE 100 clients had asked it for a report on the alternative tax domicile options available to them, because they are conscious that while managements might have preferences—management may prefer to live in leafy parts of the home counties, or play golf on certain courses, or enjoy the cultural attractions of London—increasingly investors, who are global institutions, are asserting their right to have their interests held paramount in the decisions that corporations make. We have to be conscious of that. I hope—in fact I am sure—that the Economic Secretary is conscious every waking hour that corporations, driven by global investors who have no sentiment whatever about domicile, look at these issues in a cold, hard light, and look to locate to the place that offers them the lowest tax rates and the greatest overall advantages.

After a decade of Labour government, Britain is a less attractive place to do business than it was, because business taxes are too high and our tax system is too complicated. Thanks to this Government, we now have the longest tax code of any major economy—we overtook India with the Finance Act 2007—and it is expanding the fastest, with the Government, increasingly buffeted by events, endlessly changing and complicating the system in response to short-term political events and budgetary pressures. Unfortunately, the objective of a simpler, fairer, more competitive tax system has been sacrificed to the Treasury's insatiable hunger for cash and unquenchable instinct to micro-manage. Announcement after announcement has been billed as a simplification or as being in the interests of fairness, but turn out to be nothing more than a crude tax grab. Time after time, the rhetoric of the Budget speech is at odds with the reality revealed by even a cursory analysis of the small print of the Budget documentation. We have had many examples of tax initiatives that start life under the green banner—they are introduced under the pretence of being green taxes—but which on closer inspection are simply revenue-raising measures. They discredit taxpayers' notion of green taxes. On top of all that, there is also, of course, the endless stream of stealth taxes. That phrase did not exist 11 years ago, but it has now passed into everyday language and can be found printed almost every day of the week in one newspaper or another.

There is no sense of strategy or direction. The long-term objective to introduce a 10p starting rate of tax was abandoned for short-term political advantage. Sending a clear signal to business that enterprise will be rewarded through a dedicated lower rate of capital gains tax was also dumped. Both were scrapped without a word of explanation or advance warning. After five or six years of dithering on non-doms, with the problem conveniently lobbed into the long grass, and uncertainty pervading, there was a bungled legislative proposal. Now, there is more uncertainty on income splitting and foreign profits as the Government duck those difficult decisions.

Uncertainty and complexity both impose a burden on business just as surely as do taxes themselves, but at least taxes benefit the Treasury. Uncertainty and complexity reduce UK competitiveness, increase the costs of managing the tax system and offer absolutely no offsetting benefits at all, unless we consider the employment of accountants to be an offsetting benefit.

So what is to be done? To help us to answer that question, the shadow Chancellor set up a tax reform commission, which reported at the end of 2006. Following on from that work, he established a working party, led by Lord Howe of Aberavon, a former distinguished Chancellor of the Exchequer, to take forward the tax recommendations that the commission made in the narrow area of reform of the making of tax law. There are five key issues. First, we need to improve the clarity and transparency of the process of tax law making. Secondly, we need to introduce clear advance signposting of the direction of future changes, especially in business taxation, so that businesses can prepare and the behaviour-influencing capacity of the tax system is maximised.

Thirdly, we need to restore proper parliamentary scrutiny of tax legislation proposals. Fourthly, we need to institutionalise a simplification agenda, to try to ensure that the process of reducing the complexity and length of Britain's tax code is not dependent on the whim of individual incumbents of the Treasury Bench, but is built into the system. I am not talking about rewriting law just to make it read more easily or to improve the cross-referencing, but about a substantive simplification. Finally, we need to focus on certainty, because that is the No. 1, No. 2 and No. 3 demand of business. Of course businesses would like tax to be lower, regulation to be lessened and the system to be simplified, but anyone who has ever talked to them about the issue will know that above all they want a system that is stable and predictable. They might like to see significant changes to make the system simpler, but I am sure that they would prefer a guarantee that there will be no changes to the system to make it predictable, because that is their No. 1 demand.

New clause 17 addresses the issue of transparency of process, which is so important to delivering this agenda. Britain is fortunate in that it already has a two-stage budgeting process, which, if it were used sensibly, would offer the opportunity to bring a degree of stability and certainty into the tax law-making system. The pre-Budget report can be used to signal the intentions for the following Budget and new clause 17 would require that all technical changes to tax legislation were published at the time of the pre-Budget report. It would also make provision for Standing Orders to deal with the question of how such technical changes should be scrutinised ahead of the Budget.

The Chairman of the Treasury Committee, during the course of yesterday's debate, made an impassioned plea to the Financial Secretary for discipline in the way that the pre-Budget report and Budget statements are used. It was a plea for a reversion to the proper purpose of those two reports—and incidentally an implicit plea to the Government not to be tempted down the road of ad hoc tax changes outside the proper structures, as they have been in the face of political pressure and under the weight of their own errors in the abolition of the 10p tax band this year. We on the Conservative Benches endorse that call by the Chairman and, when Lord Howe's report is published tomorrow, he will go further in setting out his views on how to improve the presentation, scrutiny and delivery of our tax law.

We also need clarity of future intentions. Business decisions are made not so much on current tax rates, but on the basis of known future tax rates. Investment returns depend on the tax regime that an investment will face at the point when it matures and begins to produce profits. Clear signalling can be a positive support for investment and a major influence on behaviour, not only removing the negative of uncertainty, but introducing an advance awareness of intended business-favourable changes, thus stimulating the very supply-side response that such changes are almost always designed to achieve.

The third aspect is scrutiny. Nobody who has ever sat on a Finance Bill Committee, or wandered inadvertently into a Finance Bill Report stage debate, will doubt that the mechanism we have for detailed scrutiny of what is often highly complex and technical legislation is inadequate. To be blunt—and I hope that the Financial Secretary will not mind if I say this—Ministers, who are not tax experts or even accountants, stand in front of a Committee and read out a brief whose technical implications they may not fully understand. Members of the Committee ask questions —often fed in by experts—of which, to be honest, they may have only a limited understanding.

Jeremy Browne (Shadow Chief Secretary To the Treasury, Treasury; Taunton, Liberal Democrat)

rose—

Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede and Weybridge, Conservative)

I hope that the hon. Gentleman does not intend to make some petty party political point.

Jeremy Browne (Shadow Chief Secretary To the Treasury, Treasury; Taunton, Liberal Democrat)

I never make petty party political points—only wise observations. I agree with the hon. Gentleman's observations, but I would caution against saying that only education experts know about education legislation, or only health experts know about health legislation, or only military experts know enough about defence legislation. That would mean that politicians were redundant, but we have an important role in deciding priorities and making real choices. The issue is not only expertise, because there is a political aspect to the process.

Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede and Weybridge, Conservative)

The hon. Gentleman makes a good point and he prompts me to draw that distinction. I did say earlier in my speech that I thought that what had gone wrong with the non-doms legislation was that the basic idea from the politicians had been hijacked by the civil servants and burdened with various bolt-on goodies to the extent that political common sense then told the politicians that it would not fly. We need to have a sensible and serious debate that distinguishes between the strategic policy decisions that have to be made and the scrutiny of detailed, technical legislation. For example, the hon. Member for Aberdeen—

Stewart Hosie (Spokesperson (Economy; Home Affairs; Treasury; Women); Dundee East, Scottish National Party)

Dundee, East.

Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede and Weybridge, Conservative)

They are quite close—[ Interruption.] They are on the same side of the country at least. The hon. Gentleman and I had a discussion earlier about employee share incentives. The principle is clear, and it is eminently capable of being debated and decided by politicians, but if anybody thought that the resulting legislation was clear, they need only look at schedule 3. The technical wording needed to achieve what the politicians decree is immensely complex. We need to draw a distinction between the policy principles that politicians can—and must in a democratically accountable society—make, and the technical implementation of those principles, which is the stuff of experts.

Stewart Hosie (Spokesperson (Economy; Home Affairs; Treasury; Women); Dundee East, Scottish National Party)

May I give the hon. Gentleman a better example? The 10p tax change may have implications for the 10p tax on savings income, and for the 10p rate on dividend income, which goes up to the basic allowance threshold. That appears in two or three tiny bullet points in an obscure table in the Budget book and does not even form part of the detailed Bill that we are scrutinising. That makes it all the more difficult to understand the implications for savings tax and dividend tax of the 10p tax change.

Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede and Weybridge, Conservative)

The hon. Gentleman is right. I am sure that we could find hundreds, if not thousands, more examples in the Bill.

I do not intend to criticise anyone, and I should place on record that the Treasury Ministers who took part in Committee did an excellent job. They were well briefed and they answered questions as helpfully as they were able. I am sure, in the spirit of candour, that they would equally want to acknowledge that, in Committee, if I pulled from my pocket a question from a senior tax partner in a large firm of accountants, it occasionally caught them on the hop. I ask myself whether that is the most constructive way in which to scrutinise tax legislation.

We are not experts in this place—we cannot be. People out there spend their entire lives dealing with tax, and not only that—they may spend their entire lives dealing with one tax, such as capital gains tax or the taxation of overseas domiciled residents. Sometimes, they deal with just a subsection of that subject. If we are to maximise the advantage that we can get from their embedded knowledge, we must, of course, try to involve them in the scrutiny process.

At the moment, the scrutiny of tax legislation operates in a bit of a fantasy world. The debate is conducted in Committee between politicians who are essentially lay people, in tax terms, as a proxy for a real but unseen debate between the experts at HMRC and the tax professionals. To some extent, that is a pragmatic arrangement. While the Bill was in Committee, HMRC held an away-day for tax experts. A number of questions were posed and some answers were given. The questions and the answers then found their way to members of the Committee. It is a kind of shadow process.

We ought to ask ourselves whether being a little more candid about our limitations would lead us to consider different scrutiny arrangements that could bring out of the shadows some of those people who contribute so much to the process but are unable to play a full part in it, whether they are independent experts or expert officials in HMRC. The Treasury Committee, of course, does an excellent job through its ability to call witnesses but there needs to be a legislative scrutiny arrangement as well as the oversight role that that Select Committee performs. I do not think that Parliament should be at all ashamed of the difficulty that even highly intelligent and very diligent lay people might have in dealing with some complex technical legislative changes. Instead of trying to conceal the scrutiny deficit, we should acknowledge it and try to put in place the mechanisms to deal with it.

My noble Friend Lord Howe will tomorrow set out his ideas for addressing those concerns. I invite anyone who doubts the need to address them to look at the subject matter of the next group of amendments and to spend a little time reading schedule 3. I recommend inserted sections 169K and 169P as a starter—they are just a taster of the almost absurdly complex nature of tax legislation.

We need to create the necessary arrangements to institutionalise the drive towards the simplification of our tax system. As a first step, new clause 18 would require the Treasury each year to publish specific proposals for the simplification of the UK tax code. It would not require a mere rewriting to tidy up the language and the cross-referencing, but a substantive simplification of the system. New clause 18 would also provide for Standing Orders to make arrangements for the effective scrutiny of proposals brought forward by the Treasury in the report that is called for.

If we do not do that, our tax code will continue to grow exponentially, notwithstanding that it is already the longest in the world. It is now reaching the point where it is becoming self-defeating and self-perpetuating. Each new complex raft of legislation creates so many potential loopholes, avoidance mechanisms and technical difficulties that its intention is regularly undermined and often requires further rafts of legislation to plug the gaps, further lengthening and adding to the complexity of the tax code.

My noble Friend's report will set out his proposals for institutionalising the drive for simplification of our tax system, not as a one-off exercise, but as a continuing embedded process. I am delighted to have had the opportunity to notify Parliament first of my noble Friend's initiative, which he will announce tomorrow, and I hope that the Government might take note of that and follow its precedent in giving Parliament a bit of warning of some of the announcements that are coming up.

Finally, in order to deliver certainty to the system, we also need to address the growing discretion that is being given to HMRC officials in the interpretation of the law—that feature was particularly evident in the Bill. We need to create mechanisms that will allow taxpayers to obtain certainty about their tax position. Many other jurisdictions allow less discretion for officials but provide a clearer and more accessible pre-clearance regime that allows taxpayers to ascertain their tax position precisely. I am afraid that we are going in the wrong direction, with a limited pre-clearance regime and the exercise of an increasing amount of official discretion.

Right now, Britain faces an economic downturn and considerable uncertainty about our economic future. However, alongside a response to the short-term challenge—we need such a response from the Government—we need to think about the long-term competitiveness of the UK as a place to do business. As we come out of this economic slow-down and investment starts to multiply again in the global economy, investors who are casting their eye around the world to decide where to make their marginal investment should see the UK as an attractive, stable predictable environment in which to deliver that investment. There is scope for a significant improvement to the UK tax environment without any tax cost to the Exchequer.

Clear and open processes, with proper engagement and consultation at every stage; a grown-up approach to tax law, including the abandonment of the fascination for rabbits being pulled out of hats in the penultimate paragraphs of Budget speeches; politicians recognising the limits of their technical capabilities and restructuring the scrutiny process accordingly; a serious institutionalised drive towards simplification of the system; and clear rules, with limited official discretion to give taxpayers certainty of their position—those are the key issues that we need to address if we are to maintain Britain's competitive place in the global trading world.

In the short term, the scope for reductions in the overall burden of business taxation is likely to be limited due to the state of the public finances, so, when the economic recovery begins, we must seek other routes to improve Britain's competitiveness and attractiveness as an investment and business expansion location. The agenda will send a signal to business that UK plc wants to begin the long process of rebuilding its reputation as a mature, stable and attractive location for business—a reputation that, I am afraid, the Government rather casually placed in jeopardy in their darkest hour last November— [ Interruption. ] The hon. Member for Taunton thinks that that was not their darkest hour; perhaps the darkest hour is yet to come.

The message must be that our tax system is too important for the stability and prosperity of our country to be used as a platform for political posturing. There must be no more short-term stunts to wrong-foot political opponents and no more un-signalled changes. Stable—I might dare to say boring—is good when it comes to business taxation. We are clear where we stand on the issue. We have a long-term commitment to transparency, scrutiny, simplification and certainty in our tax system.

New clauses 17 and 18 will make a start. Tomorrow, my noble Friend Lord Howe will offer detailed suggestions of his own as to how we might achieve some of the other objectives that I have mentioned. We will scrutinise his report carefully, and although it is a report to the Conservative party, we will be publishing it, so I invite the Government to scrutinise it as well. My noble Friend is an extremely experienced politician who has huge experience of simplifying and rationalising the UK tax system from when he inherited a top marginal tax rate of 98 per cent. from the Labour Government in 1979.

I hope that the Government will take note of our initiative. They must surely have understood by now the risks of playing games with the tax system and the damage, including self-inflicted damage, that it can do. If they do not take up our agenda, the country, and especially the business community, will know that the next Conservative Government will do so. A reputation for fiscal stability and business-friendliness is hard-won over a long period, as I think even the Prime Minister will remember, but it can be blown away in the space of a few months, as we have seen since the pre-Budget report.

Britain faces the challenges of a global economic slow-down, and in the longer term, perhaps even more challengingly, a shift in the balance of economic power from the established industrial nations to the emerging economies of the world. That shift is already under way, and I suggest that it is irreversible. We in Britain can ill afford such profligacy with our pro-business credentials if we wish to preserve the prosperity of our citizens and protect our tax base so that we can continue to enjoy high-quality public services.

The process of rebuilding confidence in the UK's fiscal process will be slow and painful. It had better start now. I commend new clauses 17 and 18 to the House.

Jeremy Browne (Shadow Chief Secretary To the Treasury, Treasury; Taunton, Liberal Democrat)

It is a privilege to follow what felt like a Reithian lecture, certainly in its length and to some extent in its content. I agreed with large parts of what Mr. Hammond said, some of which was not particularly partisan and may even assist the House in its future deliberations. There were other parts about which I had some reservations, but should the Conservatives choose to press either new clause 17 or new clause 18 to a Division, my party will support them. The former would require the Government to report annually on the technical tax content of each Finance Bill, and the latter would require annual reporting on how the Government intended to simplify taxation.

We have already had quite a lengthy debate, if I can call it that, and I shall not speak for long because I know that others wish to dwell on other matters later. I wish to make a couple of brief points to follow those made by the hon. Gentleman. First, there is virtue in simplification. A lot of people are intimidated by the tax system—certainly if they are trying to file their own tax return, but even if they are using accountants to help them. There is merit in simplicity, and one of the problems has been that when the Government have tried to target tax breaks on different sections of the economy or categories of individual, they have introduced excessive complexity. Even when they have made a virtue of simplification, as they have sought to do in recent Budget statements, they have then had to unpick that simplification to rectify political controversies. Nevertheless, there is virtue in pursuing simplification as an objective.

The hon. Gentleman accused the Government of introducing stealth taxes, which is of course true. He talked about the discrediting of environmental taxation, and we will come to that subject this afternoon when we discuss the retrospective introduction of vehicle excise duty increases. It is only fair to say in passing that Chancellors of all political persuasions have sought to place the tax burden in areas where they thought the public would notice its effects least. It is an irony of sorts that Lord Howe of Aberavon is being asked to report to the Conservative party. People will remember him for many reasons, one of which is that he was the Chancellor who increased VAT from 9 to 15 per cent.

One of Lord Howe's successors, Lord Lamont, who taught the current leader of the Conservative party all that he knows about the matter, further increased VAT from 15 to 17.5 per cent. He made that tax-neutral change to VAT so that he could reduce the newly introduced council tax. I think it is fair to say—everybody accepted it at the time—that he calculated that people would be grateful for the cut in their council tax more than they would notice the increase in their VAT, which after all is not normally itemised with each purchase. It was a straightforward calculation by the then Conservative Chancellor that he could introduce revenue-neutral proposals that would bring greater stealth to the system.

Of course, there are now people across the country who pay more as a result. It is very noticeable when one buys something expensive such as a new car. The difference between the VAT rate of 9 per cent. when the Conservatives came into government and the rate of 17.5 per cent.—almost double—when they left government means that a hefty amount is added to the overall bill.

Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede and Weybridge, Conservative)

I must defend my noble Friend Lord Howe. I do not know how old the hon. Gentleman was back in 1979, but I suspect that he was not much focused on VAT. There was a deliberate and conscious shift from direct to indirect taxes, but that had to be done because the top marginal rate of direct income tax was 98 per cent. It was not done in a stealthy way, and I assure the hon. Gentleman that it was not unnoticed by the population.

Jeremy Browne (Shadow Chief Secretary To the Treasury, Treasury; Taunton, Liberal Democrat)

I take the hon. Gentleman's point, and I was not preoccupied with VAT in 1979, mercifully. Oddly, here we are 29 years later and I am still paying the VAT that the Conservatives introduced every time I buy something that is not exempt from it. To be fair, the hon. Gentleman might have been talking to one of his hon. Friends when I said that Lord Lamont used an increase in VAT to fund a reduction in council tax. It is fair to say, and everyone will acknowledge, that he was trying to reduce an unpopular tax by increasing one that was less visible to the public. I am not making a particularly major point, just saying in passing that the desire to tax people in the way that they are least likely to notice is not unique to Labour Governments. It has been a feature of Governments of all parties.

The hon. Gentleman made some interesting comments about the process of scrutiny of Finance Bills. It is certainly true—any Member who does not acknowledge this is either a tax expert or not being entirely frank—that some of the deliberations that we are asked to undertake would more appropriately be resolved by people with expertise in the matter. A greater role can definitely be played by people beyond this Chamber who can add their expertise. My only cautionary note, as I said in an intervention on him, is that I am always guarded about people thinking that all tax matters can be resolved by "experts". I know that he acknowledged that point. One tends to find that experts come up with all kinds of solutions, but often their cumulative solutions do not add up to an overall solution that the public find as agreeable as they would expect if they asked the experts to usurp the role of the politicians, about whom they are less confident but who can weigh up the solutions.

Anyone who has led a council will know that some officials are adept at proposing strings of savings and economies to keep down council tax, but that a politician's eye is needed to spot which recommendations are likely to be popular and which will cause a party to lose control of the authority. The same is true of national Government: there will always be a political aspect to the process, regardless of how many experts are deployed.

Given the length of the speech made by the hon. Member for Runnymede and Weybridge, it was unlikely that he would not touch on my final point, but it has become especially topical in the past day—or even year—or two. The Treasury Select Committee has said that the current Prime Minister liked to pull rabbits out of the hat when he was Chancellor. No one is going to accuse the present Chancellor of displaying similar showman-like qualities, but his predecessor was keen to do so in his Budgets.

When the PBR was introduced as part of the annual set of major Government announcements in this House, we assumed that its purpose was to inform the main Budget. Instead, it has become a sort of secondary, lower-status Budget in its own right. It can be used to introduce tax changes, but the element of consultation is far less of a feature than many wanted it to be.

Ironically, the consequences have been bad for the Government. The current Prime Minister introduced the PBR, but he has been the one most damaged by his tactics in the House. The abolition of the 10p tax rate is one example, but others include the inheritance tax scheme—and there are not many hon. Members who do not think that was rushed through for party political reasons, with inadequate deliberation—and the proposals for non-doms and capital gains tax. Later this afternoon, we will talk about the retrospective element of vehicle excise duty, which is yet another policy of whose dangers the Government and Labour Back Benchers seem to have become aware only after it was announced. It would have been in their interests to consider all those matters in greater detail beforehand.

For all those reasons, new clauses 17 and 18 have merit. This discussion has been interesting and wide ranging, and we look forward to hearing the Minister's response.

Kitty Ussher (Economic Secretary, HM Treasury; Burnley, Labour)

This has been a wide-ranging and useful debate. I congratulate Mr. Hammond on speaking for exactly an hour, although my experience in the Finance Bill Committee tells me that he has managed the feat before. My congratulations also go to Mr. Browne, on not matching that record.

In the interests of making progress, I shall not touch on all the topics that have been raised, my excuse being that some will be discussed in connection with later groups of amendments. New clauses 17 and 18 propose that the Treasury publish each year, not later than the PBR, a report containing information about the technical content of any tax changes, aside from rate changes, that it proposes to include in the following year's Finance Bill, as well as its proposals for the simplification of the UK's tax code.

The Government use the PBR and the Budget to set out decisions on the tax system. We are committed to a fair and efficient tax system that supports business, individuals and sound public finances. We are also clear about the process: in the Finance Act 1998, we set it out in the code for fiscal stability that the PBR should be consultative in nature and include, so far as reasonably practicable, proposals for any significant changes in fiscal policy under consideration for introduction in the Budget.

We made it clear that the PBR was not to be taken as an indication of all tax policy areas in which the Government might choose to act. The policy has been supported by the conclusions of a recent investigation by the Treasury Committee, and it was not opposed by Opposition parties when voted on during deliberations on the 1998 Act.

Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede and Weybridge, Conservative)

The theory sounds credible, but the announcement about non-doms, for example, was made as a set of final policy proposals in the PBR, and the lack of detail invited people to speculate about how the policy would impact on them. This Chamber is not always the best place for a constructive debate, given the party political sensitivities involved, but many of the concerns that most upset the people who would be affected turned out to be less serious than was at first thought. The lack of technical detail caused people to speculate, and in many cases they assumed the worst. That was how the damage was done.

Kitty Ussher (Economic Secretary, HM Treasury; Burnley, Labour)

We shall deal with the non-doms issue later, and my right hon. Friend the Financial Secretary to the Treasury will no doubt comment in detail on the entire process, but it was precisely by introducing our proposals in the PBR that we allowed time for work with stakeholders to make sure that we got the matter right.

The code also sets out that publication or consultation on all tax changes—background tax issues as well as rates—before their introduction carries significant risks. The Opposition accepted that when the matter was debated in the House, and those risks include the possibility of significant forestalling activity by existing or prospective taxpayers that could result in a damaging impact on public finances. That activity could also lead to significant temporary disruptions to the behaviour of taxpayers and markets, and to wider disruption in financial markets.

The publication of a report containing information about the technical content of any non-rate tax changes proposed for inclusion in the following year's Finance Bill would have significant risks, as I have just mentioned. It would also prevent the Government from taking action to address any avoidance or evasion activity arising between the PBR and the Budget that could have further significant ramifications for tax revenue and therefore a negative impact on public finances. The general point—that the Government should consult through the PBR, where possible, and then implement proposals in the Budget—is correct, but new clause 17 would be unduly restrictive and against the national interest.

That is not to say that we do not want to consult at all. Quite the opposite: we currently have 29 consultative tax groups routinely working through HMRC. We are consulting far more than in previous years, and I hope that Opposition Members agree that that is a good thing. We had 38 formal consultations last year, and 80 per cent. were for the full 12 weeks. Consultation is definitely a good thing, and we want to do as much as possible, but new clause 17 would constrain us in a damaging way.

I turn now to new clause 18. Simplification is of course a stated priority when designing and reviewing tax policy, alongside having sound public finances and fairness. After work with business and tax professionals, there is already a significant rolling programme of tax simplification in place, and the Government continue to use PBRs and Budgets to simplify the tax system wherever they can.

The hon. Member for Runnymede and Weybridge is quite wrong to say that the length of the tax guide indicates how complicated the tax system is. We want to ensure that our legislation is accessible and simple to users, which can involve increasing its length. [ Interruption. ] I will give Mr. Redwood a specific example: the tax law rewrite project, which is a good example of a consultative, collaborative project and has been widely welcomed by industry, has increased the physical length of legislation but successfully simplified it and improved its clarity for legislators, tax professionals and the public. For example, 150 pages of this year's Finance Bill will simplify and modernise the tax system. So the hon. Member for Runnymede and Weybridge makes a slightly incongruous point.

The Government already make advance announcements of many proposed simplifications to the tax system. I shall give a few quick examples. We launched three tax simplification reviews last autumn, with the Treasury and the HMRC working in partnership with business and tax professionals, to evaluate how a range of tax policies can be simplified. We received 600 representations. The initial outputs of those reviews were announced in the 2008 Budget, with further updates to follow this autumn. A further review to consider how corporation tax calculations and returns can be simplified was also announced in this year's Budget and is being progressed.

This open approach provides the opportunities for the users of the tax system to have genuine input, through consultation, in the shape of those changes and/or the way they are implemented. Taken together with other announcements already made in earlier PBRs and Budgets, there is a far more extensive rolling forward programme of tax simplification in the public arena than ever before, including under previous Governments, and there is greater opportunity than ever for business and others to become involved in shaping the tax system of the future.

We believe that these new clauses are unnecessary. They would add little to an extremely extensive process of tax simplification. They would carry significant risks, associated with an absolute, definite requirement to publish or consult on every tax change before its introduction. I therefore ask the hon. Member for Runnymede and Weybridge to withdraw the motion.

Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede and Weybridge, Conservative)

I have listened to the Economic Secretary, and I am afraid that I will disappoint her. She says that the Government have 29 consultative tax groups and that they have had 38 formal consultations. One is tempted to wonder how they got it all so wrong if they have so much consultation going on and so many experts apparently at their disposal. The experts whom we talked to knew that it would all go wrong. They knew about the non-doms thing and that the capital gains tax regime needed to be amended. They saw the problems with the 10p tax changes. They understood that the proposed income-splitting rules were unworkable and that the foreign profits consultation could have led to something that was disastrous for Britain. Indeed, we have already begun to see the early effects, with the exit of one or two key companies from this country, as mentioned by my hon. Friend Mr. Baron.

The Economic Secretary said that simplification was a priority for the Government and that a significant rolling programme of simplification was in place. We understand how easy it is for Ministers to be briefed by civil servants and to read out what they are told, but as we now have the longest tax code in the world, and given the complexity of our tax code, does she really believe that an effective simplification programme is in place? She says that longer means simpler and easier to access. I wonder whether the Treasury has bought a share stake in Tolley's tax guide; I can think of no other reason for her to believe that statement. I urge my right hon. and hon. Friends and right-thinking Members in all parts of the House to vote in favour of new clause 17.

Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede and Weybridge, Conservative)

I beg to move amendment No. 89, in schedule 3, page 127, line 5, leave out 'B,'.

Michael Lord (Deputy Speaker)

With this it will be convenient to discuss the following amendments: No. 90, in schedule 3, page 127, leave out lines 12 to 16.

No. 91, page 127, leave out lines 23 to 25.

No. 93, page 128, line 1, at beginning insert

'In respect of qualifying business disposals within section 169H(2)(a) and (b),'.

No. 92, page 130, leave out lines 31 to 36 and insert—

'(a) that during the period of ownership of the individual or from 6 April 2008 if later—

(i) the assets which (or interests in which) are disposed of have not been in use for the purposes of the business throughout that entire period, and

(ii) only part of the assets which (or interest in which) are disposed of are in use for the purposes of the business,'.

No. 88, page 133, line 21, at end insert—

'4A For paragraph 15 of Schedule 7D (taper relief on disposal of qualifying shares) substitute—

"15 For the purposes of claiming entrepreneurs' relief on a disposal of qualifying shares, in applying sections 169I and 169S(3) the shares are treated as if they had been acquired when the original option was granted."'.

Government amendment No. 29

Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede and Weybridge, Conservative)

This is a technical but important group of amendments relating to the detail of entrepreneurs' relief. The abolition of taper relief in the capital gains tax changes that were announced in the pre-Budget report sent a very negative signal to business and, as I said in the previous debate, provoked a ferocious response from business organisations. Indeed, it created what I think is a unique coalition of all the business organisations: the CBI, the EEF, the British Chambers of Commerce and the Federation of Small Businesses. I apologise to any others that I have missed, but they all coalesced in an unusual way—perhaps not surprisingly, given that they represent disparate types of business. Faced with that wall of opposition, the Government's tactics were, to put it bluntly, opportunistic. They decided to try to buy off the most numerous but least expensive group of opponents. I am thinking of very small businesses, which are largely represented by the Federation of Small Businesses.

Let me be unambiguous: small businesses play a crucial role in our economy. Businesses that employ no one other than the principals or one or two people deliver a major part of the economic activity in our economy. Beyond that, small businesses play a crucial part in the social fabric of our society, and we support them entirely. However, the great majority of them are not going to—indeed, have no aspiration to—grow into large businesses. Many people establish small businesses as an alternative to other employment; running a small business gives them a different lifestyle and working style and the opportunity to succeed in a way that suits them.

Some people, of course, want their businesses to become the next Microsoft, but many do not want that. For the economic future of the country, we do not need only small businesses, which provide the bedrock of our economy; we also need to foster small but scaleable businesses—those that have aspirations to grow, create substantial employment and raise ever larger amounts of capital. We need to be concerned about those businesses because of their importance in creating jobs and prosperity and because the entrepreneurs who establish them—such businesses are often in high-tech industries—tend to be more mobile, so the option of relocating overseas tends to be more realistic for them.

When this debate first broke, I met a group of serial entrepreneurs. They had established successive businesses, built them up, sold them on and then started again. Some of them were quite young—in their 30s or early 40s—but already had a chain of business successes behind them. We have to encourage such people if we are to have a future in the globalising economy.

I cannot remember the precise statistic, but a staggering proportion of our largest companies—40 per cent. of the top 100, I think, although one of my hon. Friends may correct me—were not among the top 100 companies 30-odd years ago. There is a high degree of churn and innovation in the economy and we need those new businesses, which aim to grow and are constantly nurtured, to come through.

The entrepreneurs' relief—the Government's solution for buying off the protests of small businesses, the most numerous group—will offer nothing of any significance to the entrepreneurs whom I have mentioned. Clearly, a serial entrepreneur who founds and sells business after business will not find the opportunity of a tax refund on the first £1 million of gain to be a significant incentive. The relief will, however, provide a break for those selling small businesses worth up to £1 million, and that is a welcome concession and U-turn by the Government.

I shall not focus any more on the loss of taper relief, although we could debate its implications. I shall restrict myself instead to the restrictions that the Government have imposed on the entrepreneurs' relief that they offered in order to buy off opposition among small businesses to the abolition of taper relief. In Committee, concern was expressed by professional bodies and by people who run small businesses and who are likely to be affected. They said that, under the restrictions as they were drafted, some people, who on any equitable analysis looked as if they should get the relief, would be denied it. We had visions of all sorts of apparently perverse outcomes that would bring the measure into disrepute and create significant confusion.

I therefore welcome Government amendment No. 29. I am sorry that the Financial Secretary is not here, but I offer my compliments to the Economic Secretary, who is here in her stead. In Committee, the Financial Secretary pledged to look again at the restriction that would have meant that if rent had been received at any time in respect of any asset that was the subject of an associated disposal, that asset would be ineligible for entrepreneurs' relief. An associated disposal is the disposal of an asset that is used in conjunction with a business, but is not owned by the business. To take a common model as an example, if a business owner who personally owns the factory building from which his business operates had at any time received rent from his own business for the occupation of that factory, it would not have been eligible for entrepreneurs' relief when an associated disposal took place alongside the disposal of the underlying business.

In the case of many small businesses, the majority of the value of the global activity may well be in the associated asset, rather than in the business itself. That can be for all sorts of reasons—from security to the need to use mechanisms to raise finance. It is quite common for an asset, particularly a building, to be held in separate ownership. The measure would have been especially harsh for old, established businesses, for which any period of rent payment for such an asset at any time in the past would have led to disqualification of the asset. The measure was likely to have been particularly unfair to businesses such as farming, in which a separation structure is widely used; the people who own the land are often different from those engaged in the business of farming it.

I am glad to say that the Government have taken our suggestion on board and disregarded all periods of ownership before April 2008 during which rent was received. They have therefore removed a potential anomaly that would have given rise to considerable unfairness. I am grateful to the Financial Secretary and the Economic Secretary for listening to the arguments and reconsidering on this occasion.

However, we now have to address other issues. I hope that the Ministers have considered the arguments on those as well; they have not responded in the same way. The Opposition amendments in this group are aimed specifically at achieving clarification from Ministers on these issues, and we hope that we will hear a concise argument on why they are not prepared to accept the amendments. There are no politics in this. It is fair to say that, by and large, this schedule is as dull as ditchwater, but technical clarification is essential. Amendments Nos. 89 to 91 involve a housekeeping exercise that is of wider importance and touches on the debate that we have just had about how we make our tax law. I shall go into more detail on that in a few moments.

The exception to the "dull as ditchwater" label is amendment No. 88, which deals with the treatment of share options under the enterprise management initiative. That initiative was set up by the Government to encourage people working in a business to own shares in it. It was aimed at helping high-tech start-up businesses—as I say, that is exactly the kind of business that we need to foster—in order to attract the kind of people that they need if they are to grow. Those people might come from the academic sector or another business, but typically they could command high salaries and comfortable packages working in other sectors. The scheme was seen as a way of offering them a real financial incentive to take the risk of working in a far less certain and predictable environment.

Under the taper relief regime, which has now been abolished, gains on disposal of enterprise management initiative shares were treated as if the acquisition of the shares had occurred on the date of grant of the underlying options. That favourable treatment was unique to EMI shares. It was designed to promote the EMI, because the Government had identified it as a beneficial measure to promote the growth of high-tech start-up businesses.

Under the entrepreneurs' relief scheme, favourable treatment is no longer available, so a key benefit of the EMI scheme is removed. There is real concern that that treatment represents an abandonment of the Government's commitment to the EMI and, even worse, of their commitment to employee share ownership. The Economic Secretary will have the opportunity, when she stands at the Dispatch Box to reply, to be clear and unambiguous about the Government's commitment to the EMI and to employee share ownership more generally. If she asserts that the commitment will continue, she might explain why she has removed the key advantageous tax treatment that the taper relief delivered, and say why she thinks that potential employees would be tempted by EMI share options, given the lack of any favourable tax treatment.

Amendment No. 88 was tabled more in hope than expectation. It would make EMI shares subject to the same treatment as pertained under taper relief. Its fiscal impact is likely to be very limited, because one of the criteria for receiving the entrepreneurs' relief is that a person must own 5 per cent. of the business in question. It would be very unusual for an individual to own 5 per cent. of the shares in an EMI company. It can and does happen, but we are by no means talking about hundreds of thousands of people. The Economic Secretary has the opportunity to send a strong signal about the value that the Government place on high-tech start-up businesses, and about the Government's commitment to the EMI scheme and employee share ownership in general. Concerns about that commitment are more salient than the concern about the treatment of EMI shares under the entrepreneurs' relief.

Amendments Nos. 89 to 91 deal with associated disposals, as does Government amendment No. 29. The issue relates to the conditions that must be met if a disposal is to qualify as

"a disposal associated with a relevant material disposal".

As I said, the stuff that we are dealing with is complicated. A relevant material disposal is a disposal of an interest in a business. A disposal associated with a relevant material disposal is the disposal of an asset that is used in conjunction with the business, but is not owned by the business. Before the disposal of that asset can be treated as a disposal associated with a relevant material disposal, three conditions have to be satisfied. They are set out in proposed new section 169K of the Taxation of Chargeable Gains Act 1992, which is inserted by schedule 3 to the Bill.

To paraphrase, condition A is that there is a material disposal. Condition B is that the disposal is made as part of the

"withdrawal of the individual from participation in the business".

Condition C is that the associated asset has been in use for the purposes of the business. There is no problem with conditions A or C; they are fine. The amendments would delete reference to condition B, so that any disposal of an asset—typically a building or land, but possibly also intellectual property—owned separately by an individual but used in connection with the business would be an associated disposal.

The definition of

"withdrawal...from participation in the business"

gave us cause for concern in Committee. It is a bit of a woolly concept, and we foresaw that the provision would give rise to uncertainty, and ongoing problems as taxpayers struggled to understand whether they would be entitled to relief. However, the situation changed somewhat when draft guidance was published, and I am grateful to the Financial Secretary for circulating it. It helpfully defines what

"withdrawal...from participation in the business"

means. It says:

"A withdrawal from participation in the business concerned relates to the 'material disposal of business assets' which qualifies for Entrepreneurs' Relief...That is, it takes place when the individual reduces his or her interest in the assets of the partnership, or their holding in the company, as the case may be. It is not necessary for the individual to actually reduce the amount of work which they may do for the business."

It goes on to give examples, which I will not read out. Withdrawal from the business is defined as occurring when an individual reduces his interest in the assets of a partnership, or his holding of shares in a trading company. In other words, if condition A is met—if there is a material disposal of business assets—condition B, which is that the individual makes such a disposal as part of a withdrawal from the business, will always be met. Condition B becomes tautologous as a result of the definition of the term

"withdrawal...from participation in the business"

in the guidance notes.

Before we had the benefit of the guidance, we thought that condition B was offensive, but we now see that it is merely otiose. It adds nothing to the provisions of proposed new section 169K. We arrive at that understanding not through the mechanism of amending primary legislation, which is what the group of amendments would do, but by relying on non-statutory guidance. I suggest to the Economic Secretary and the House that that is not a satisfactory way to proceed. I offer her the opportunity to tidy up by using amendments Nos. 89 to 91 to put in the Bill what she is saying through guidance. If she is good enough to confirm that my interpretation, and the interpretation of others who have looked at the guidance, is correct, and that condition B will always be satisfied when condition A is satisfied, she must come to the conclusion that condition B is redundant and completely unnecessary. I suggest to her that the position should be made clear not through a non-statutory definition of

"withdrawal...from participation in the business",

but by deleting condition B. The Government addressed the substantive concern about condition B, but they did so in the wrong way. Making a condition self-fulfilling is not a satisfactory way to legislate. I am keen to hear the Economic Secretary's response on that point.

Amendments Nos. 92 and 93 relate to restrictions on relief for associated disposals. The Government have dealt with the restriction where rent is payable in Government amendment No. 29. Other restrictions arise where the asset is in use for business for only part of the period of ownership, where only part of an asset is so used, or where the individual has owned the asset for only part of the period of business use. Again, guidance has been issued—CG64145—and that clarifies the point. It indicates that HMRC officials will be encouraged to take a common-sense approach to the application of those restrictions and that in terms of interpreting what is a just and reasonable apportionment—the test in the Bill—they are being encouraged to make the apportionment on the basis that any reasonable person would think appropriate.

My remarks on amendments Nos. 89 to 91 apply to some extent to this group of amendments as well. It is better that we have clarification in the guidance than not at all, but it would have been better still if it were in the Bill. However, in this case, the guidance does not render what is in the Bill meaningless or unnecessary, so the Minister can make her case for doing it in guidance if that is what she prefers.

Amendments Nos. 92 and 93 have been largely answered by the delivery of the draft guidance note. I wait to hear what the Minister has to say about amendments Nos. 89 to 91 and also wait for reassurances in respect of amendment No. 88 and the Government's commitment to EMI schemes.

John Redwood (Wokingham, Conservative)

I remind the House that I have included in the Register of Members' Interests the fact that I am a director and a shareholder in a small company, but I do not wish to draw on that experience for the purpose of these remarks.

I support what my hon. Friend Mr. Hammond said about the need for the Government to listen carefully to those who say that the new capital gains tax regime is not as supportive of employee shareholding as it could be. I fully accept that the Government were well intentioned in wishing to get the main headline rate of capital gains tax down. I think that everyone in the House, with perhaps a few exceptions, is in agreement that that was a good thing to do. We were becoming very uncompetitive with the headline rate that we had, and it is good that the general rate is being reduced.

However, it is most unfortunate, rather like the unfortunate idea of abolishing the 10p tax band to pay for the welcome lower rate of standard income tax, that in tidying up to try to pay for this measure, some of the rather good reliefs and opportunities that had been offered to entrepreneurs and to employee shareholders by the Government in previous Budgets were swept away, making the regime far less attractive.

If I may draw on a personal experience from my past, I was involved in chairing a company that was financed by private equity where the incentive packages to individuals in the company were most important in driving recovery, profit and success for that investment. My experiences of that model and of talking to others who had been involved in private equity, including constituents of mine, persuaded me that there is a definite correlation between the success of British enterprise and the ability to reward and encourage people at all levels of an organisation with employee shareholdings so that they can participate in that success.

I am therefore pleased that my hon. Friend tabled amendment No. 88, which would adapt schedule 7D so that some of the less generous terms that appear to be reflected in the reform of capital gains tax could be removed. Like him, I think that EMI is a good scheme, and I look forward to hearing the Minister explain how it might rest if his amendment, or something like it, were not introduced during the remaining proceedings on the Bill.

Hon. Members on both sides of the House have come to understand how important small businesses, and smaller businesses led by people who wish them to grow rapidly, are to a successful enterprise economy. The Government's introduction of the taper relief and the 10 per cent. rate for enterprise undoubtedly gave a considerable fillip to enterprise and meant that a bigger population of smaller companies were able to grow more rapidly with people getting that direct incentive, which was then not going to be taxed at nearly such a penal rate as if the capital gains tax regime had remained unamended.

I hope that the Minister will take some pride in what the previous Chancellor did for enterprise and venturing in that earlier regime, which was one of the best things that he ever did. I hope that she will accept my compliments in the spirit in which they are intended. It would be a tragedy if a subsequent Budget started to demolish some of that good work, perhaps inadvertently or because of cheese-paring. I will be interested to hear what the Treasury arithmetic is on all this. The first-round consequence of reducing a rate of tax may well be to reduce the amount of tax collected, but the second or third-round consequence of a more favourable capital gains tax regime may well be to generate more revenue. That would have been my conclusion had the then Chancellor reduced the overall rate, leaving in place the more favourable rates for enterprise. However, there is a danger that the disincentive effect of the cheese-paring with the smaller enterprise rates will offset the possible good effects of the lower overall rate, so that the estimates that we might otherwise have had of rising revenue from greater success will be nipped in the bud or we will find ourselves short-changed.

I hope that in responding the Minister will understand that we are, as the Government were prior to this reform, very keen on these promotional measures, particularly for employee shares, which can be extremely important. I would like her to share some of the thinking about the arithmetic behind these measures. There is always the danger that a crude concentration on first-round effects to try to offset revenue loss will do much more damage in the medium to long term because it will limit growth in the British economy and limit the growth of any smaller companies, and we will end up with less revenue.

Kitty Ussher (Economic Secretary, HM Treasury; Burnley, Labour)

I am grateful to hon. Members for tabling amendments in these technically complicated areas. It is important to use this stage of the Bill's passage to ensure that the meaning is entirely clear. I am sure that my right hon. Friend the Financial Secretary would want me to put on record her gratitude for the conversation in Committee that led to our tabling Government amendment No. 29. That was a useful exchange, and we are pleased about that.

Let me run through the amendments in order and give the Government's response. Amendments Nos. 89 to 91 would make it easier for people to qualify for entrepreneurs' relief under the rules for so-called associated disposals, which are, as Mr. Hammond said, disposals of assets which individuals owned personally but which were used in a business that the individual carried on either in partnership or through their personal trading company. As he said, to qualify as an associated disposal three conditions have to be met. The amendments would remove entirely the condition that the disposal of the associated asset must take place as part and parcel of the individual's withdrawal from the wider business.

I suspect that that was not sufficiently clear in the guidance, so I will take the opportunity to clarify it now. It is of course draft guidance, so we can revisit it. The disposal mentioned in the guidance is the disposal of the associated assets rather than the withdrawing from the general business. Entrepreneurs' relief is targeted at disposals of businesses and it is right that there must be a clear link between the individual's disposal of his interest in the business per se and any disposal of an associated asset that he let the business use. The first condition for relief on an associated disposal is, therefore, that the individual makes a disposal of his interest in the business. The second condition follows naturally from the first condition, and it is that the disposal of the interest in the business and the associated disposal of the asset are exactly that—associated.

The hon. Gentleman says that the second condition is not clear. I do not agree, but it is a useful conversation to have. The condition sets out the factual test that must be satisfied. There must be a link—an association between the withdrawal from the business and the associated disposal of the asset. The House will want to know that the same condition existed in the rules for retirement relief and it did not cause any difficulty in that case.

The hon. Gentleman said that condition B is always satisfied when condition A is satisfied. That is not the case, and perhaps he has misunderstood the guidance in this technical area. Condition B is not otiose. The disposal it refers to is the associated disposal, as I have said, so it is needed to establish the connection between the two disposals. That was the case for the old rules for retirement relief.

Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede and Weybridge, Conservative)

The Economic Secretary said that the guidance might be unclear. The guidance is very clear. I wonder whether she means that the wording of the Bill is unclear. The wording of paragraph 3 of proposed new section 169K states:

"Condition B is that the individual makes the disposal as part of the withdrawal of the individual from participation in the business".

That may be where the ambiguity has crept in. The guidance note, however, is very clear:

"A withdrawal from participation in the business concerned relates to the 'material disposal of business assets'...That is, it takes place when the individual reduces his or her interest in the assets of the partnership, or their holding in the company".

Where individuals make a material disposal in the assets of the partnership or the holding of the company, they will be withdrawing from participation in the business by definition.

Kitty Ussher (Economic Secretary, HM Treasury; Burnley, Labour)

The disposal referred to in the Bill is the associated disposal, and the definition that the hon. Gentleman read out from the guidance is the definition of the wider withdrawal from the overall business. I think it best that if we need to alter the draft guidance following this discussion, we do so, but I hope that when he has had an opportunity to reflect on this exchange, he will understand our point.

I am grateful to the hon. Gentleman for saying that amendments Nos. 93 and 92 have been dealt with by the Government amendments, so perhaps I can move on to amendment No. 88. This amendment seeks to extend entrepreneurs' relief to individuals who dispose of shares acquired under enterprise management incentive options before they have held the requisite proportion of shares, and voting rights in the company for shares, for the qualifying period of 12 months.

I was asked whether the Government would take the opportunity to reaffirm our commitment to the enterprise management incentive and to employee share options and share ownership more generally. I would like to take the opportunity to do so 100 per cent. It is often extremely useful to align incentives for the work force with those of the overall organisation, and we have always sought to support that process.

The crucial point is the difference between having the option to acquire a share and the owning of the share itself. Perhaps that will tease out the issue under debate. One of the conditions for entrepreneurs' relief to be available on a disposal of shares is that the company should have been the individual's "personal company" for a period of 12 months. A company is an individual's personal company if that individual holds at least 5 per cent. of the ordinary share capital of the company, and by virtue of that holding can exercise at least 5 per cent. of the voting rights in the company. Amendment No. 88 would make a company an individual's personal company at the time when he holds EMI options that would entitle him to 5 per cent. of the ordinary share capital, by treating the shares as acquired when he has acquired only the option.

Entrepreneurs' relief is intended for individuals who have an active stake in the company by owning, throughout a qualifying period of a year, at least 5 per cent. of the ordinary shares, and by being able to exercise at least 5 per cent. of the voting power. Obviously, an option does not require voting power. I think that that is where the difference lies. Someone who holds only an option to acquire shares does not have the sort of stake in the company that should qualify that person for entrepreneurs' relief. The option does not confer the rights and liabilities of a shareholder, or voting rights, as I have said.

Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede and Weybridge, Conservative)

We have heard the Economic Secretary reaffirm the Government's 100 per cent. commitment to the enterprise management initiative, while stripping away the principal tax advantage of it. What is the incentive for individuals thinking of taking employment with EMI qualifying companies to take up share options? Where is the benefit?

Kitty Ussher (Economic Secretary, HM Treasury; Burnley, Labour)

There are wider benefits than simply being able to have a different capital gains tax requirement, such as the way in which the company might be able to develop in future and the simple value of that asset, so that is quite clear. If someone acquires shares by exercising an EMI option and as a result the company becomes his personal company, a gain on a disposal of the shares will of course qualify for entrepreneurs' relief after he has held them for at least one year, assuming that the other conditions are satisfied. That is the same as for any other shareholder.

People acquiring shares by way of EMI options continue to benefit from generous income tax and national insurance reliefs, which also answers the hon. Gentleman's point, and we increased the individual limit to £120,000 for EMI options from 6 April this year. There is also a technical defect in the amendment, but I have made my main point, and I urge that the amendment is not pressed to a Division. If so, it should be resisted.

I have alluded to Government amendment No. 29. It relates to the capital gains tax and entrepreneurs' relief rules for associated disposals. The disposal of an asset may qualify as an "associated disposal" if the asset were in business use and disposed of alongside someone's withdrawal from a business. In the Public Bill Committee, my right hon. Friend the Financial Secretary, who has joined me on the Front Bench, explained that eligibility for entrepreneurs' relief may be restricted if the asset was only partly deployed for business use, or if the asset or individual was involved in the business for only part of the period in which the asset was used by the business. Relief may also be restricted if an individual received rent for the use of the asset by the business.

That is a sensible way to focus the relief, as in these circumstances the asset is more akin to an arm's length investment. The Bill takes all payments of rent into account, even when rent was paid before the new rules were introduced on 6 April. When this particular point was touched on in the Public Bill Committee, my right hon. Friend said that she would consider the case for disregarding rent received before April 2008. We are now persuaded that that is the right approach to adopt, and having examined the matter, we have concluded that it is right to disregard rent paid before entrepreneurs' relief was introduced, in order to smooth the transition to the new regime. Amendment 29 delivers that change. I would like to move that it be part of the Bill, and I urge colleagues to resist the other amendments if they are pressed to a vote.

Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede and Weybridge, Conservative)

I am afraid that the Economic Secretary has not dealt with the issues that amendments Nos. 89, 90 and 91 raise. It may surprise her to know that I did not dream up the problem all on my own. If I doubted my ability to analyse the complex provision, I do not doubt that of others who have pressed the point. I have read and re-read the Bill in the light of the Government's comments. It states:

"Condition A is that an individual makes a material disposal of business assets"

and

"Condition B is that the individual makes the disposal"—

which the Economic Secretary has clarified as the associated disposal—

"as part of the withdrawal of the individual from participation in the business".

The guidance notes make it clear that the satisfaction of condition A—that a material disposal of business assets has been made—constitutes a withdrawal of the individual from participation in the business because it necessarily involves the individual reducing his or her interests in the assets of the partnership or their holding in the company. Condition B will therefore be satisfied.

I do not believe that the Economic Secretary has made the case so I wish to place on record our concern that the matter could leave this place unclarified, and there is no other stage of the Bill's passage when it could be tackled. I therefore urge my hon. Friends to support the amendment.