Mr Oliver Letwin (West Dorset, Conservative)

I welcome schedule 24 as it offers the clearest possible exposition of averaging. It is a great improvement on the previous incomprehensible palimpsest, and I congratulate the people who drafted it.

I wish to raise three brief points with the Paymaster General. The first of them is a minor point. Paragraph 6(3) retains the taper for variations in annual profits of between 70 and 75 per cent. In the context of what is now a rational exposition of averaging, why is it necessary to distinguish that particular case? I have no preference between the two cut off levels: either 70 per cent. or 75 per cent. would satisfy me, if simple averaging were applied. The Chartered Institute of Taxation has made a similar point, and I can see no abiding reason for that sole remaining complexity. I do not intend to go to the stake about the matter, but I hope that the Paymaster General will consider dispensing with paragraph 6(3).

I hope that my second point is in order, Dr. Clark. Although the schedule is admirable, it relates exclusively to artists. Some of my constituents are artists but, as the Paymaster General will be aware, many more of them are farmers, who are also subject to averaging. That is a good thing—and, this year, averaging is, of course, especially important to them. However, averaging is not applied to their income in a way that an ordinary human being can understand, as their affairs are still mired in the old text. I do not claim that, if the new text were to apply to them, all my farmers would immediately sit down and read schedule 24, but at least their accountants would understand what was going on, which would be a major advance. It would be nice to have an assurance that in due course, they will be included.

Prospective averaging applies to the professions covered by the provision. I draw the Paymaster General's attention to paragraph 4(3), in lines 1 and 2 of page 213, which contains a provision for averaging years 1 and 2, and years 2 and 3. With a simple arithmetic example, I can determine that it is perfectly drafted, as it achieves exactly the right effect. However, some people—in this case, artists working on a commission that they know will be complete not next year but the year after, or farmers who know that there is nothing that they can sell in the coming year—have reason to know that their profits will be much affected in a coming year. Such people could fairly easily establish that with the Inland Revenue, and subsequent averaging would catch up with the fact in any event. In such circumstances, it would make sense to provide for prospective averaging.

I have previously asked the Paymaster General whether, specifically in relation to farmers, the Inland Revenue will now take a relaxed and generous attitude to provisional, or prospective, averaging. No provision is made for that. Have inspectors been given by the policy divisions of the Inland Revenue any guidance that would lead them to be generous in allowing provisional averaging? I cannot envisage how, in the case of artists, to which the schedule specifically relates, someone could go to the stake on the issue, but for farmers, as the Paymaster General knows, it is a live issue; indeed, for some of them it is, economically, a matter of life or death.

I hope that the Paymaster General will reassure us on the questions of the application of the much clearer format to farming in due course and of provisional and prospective claims for averaging. Having said that, if all our tax legislation were as beautifully clear as the schedule, we would be in a much better position.

Mr John Burnett (Torridge & West Devon, Liberal Democrat)

Averaging for farmers has a long and, as I am sure Labour Members will agree, distinguished origin. It was introduced by the 1978 Labour Government, at the behest of Lord Jim Callaghan. I hope, therefore, that my words will find sympathy with Labour Members, as I believe that they will Conservative Members and my own hon. Friends.

I join the hon. Member for— [Interruption.]

Mr Oliver Letwin (West Dorset, Conservative)

West Dorset.

Mr John Burnett (Torridge & West Devon, Liberal Democrat)

I join the hon. Member for West Dorset (Mr. Letwin) in a plea for simplicity—

Mr Oliver Letwin (West Dorset, Conservative)

I apologise for being slow to respond. I was merely amused by the hon. Gentleman's reference to his hon. Friends, as the Liberal Democrat Benches are currently empty. Does he agree that averaging is an interesting case of a good measure that received cross-party support when it was proposed?

Mr John Burnett (Torridge & West Devon, Liberal Democrat)

Absolutely. I believe that the proposal had support from the then Liberal party as well as from the Conservative and Labour parties. Unfortunately, it had been complicated—not, I suspect, at the behest of this House, although it obviously got through.

My plea is for simplicity. Inland Revenue press release BM 12 refers to matching this relief to that for farmers, so it is not entirely irrelevant to consider what has happened to farming over the years. Let us have a simpler system.

I would like to drop a hint to Treasury Ministers. Not many farmers have made a profit over the past five years, so the relief for them is not exactly substantial, especially in the light of that collapse of farm incomes and profit. I hope that Treasury Ministers will consider a one-off right to average over the past six years for agriculture in its present parlous condition, given the huge burdens being suffered.

Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

I shall deal first with the style of the rewrite of section 96 of the Income and Corporation Taxes Act 1988. Hon. Members referred to the scheme that operates for farmers. Schedule 24 is written in the tax law rewrite style because it introduces the new scheme for creative artists, which has been widely welcomed by the Committee and by representative bodies. The rewrite arose out of the need to deal specifically with creative artists. The scheme that it succeeds was not well used, no doubt because of its complexity.

I hear what the hon. Member for West Dorset (Mr. Letwin) says when he asks why we did not rewrite the provisions for farmers, and the tax law rewrite project is examining that. However, we are simply replacing one scheme with another as opposed to an update—it would merely be a rewrite of what is working well for farmers. None the less, I am sure that we would all agree that the tax law rewrite style is vastly superior. I take the point about rewriting the scheme for farmers. We did not do that on this occasion, as will be appreciated by the hon. Members for West Dorset and for Torridge and West Devon (Mr. Burnett)—I can get the county, but I always hesitate over whether or not it is west, for which I apologise. We have been focusing on other issues; especially with regard to the difficulties farmers are experiencing with foot and mouth disease. This part of the Bill is not the place to deal with farmers' difficulties. I have listened carefully to the points made by hon. Members about what measures are necessary to assist farmers and I will certainly examine them.

The tapering is quite straightforward. The Chartered Institute of Taxation made a similar point—without the tapering a cliff-edge would be created between those entitled to averaging and those who are not. The same tapering rules are in use for farmers and have been used without difficulty, notwithstanding the points that the hon. Gentleman made about other difficulties that farmers are experiencing. Again, the Government are always prepared to examine arguments, but we were not persuaded on this occasion. None the less, I shall bear in mind the points made by the hon. Gentlemen.

On provisional claims, the hon. Gentlemen answered their points themselves, because averaging is a composite claim affecting two years, not just one. Therefore, to adjust liabilities on the second year on expectation—before the tax year was completed—would bring complications, if not unfair treatment, compared with other methods. The averaging principle, which we all agree is good, is therefore the right one to operate. The provision has been widely welcomed. It is narrow and specific in its application to creative artists, but, none the less, I shall consider again the points made by the hon. Gentlemen. On previous Finance Bill Committees on which I have served, Dr. Clark, you have that seen that I keep my word. When I promise to consider something again, I do so, and the Government would, of course, make the necessary judgments.

Mr John Burnett (Torridge & West Devon, Liberal Democrat)

I am extremely grateful to the Paymaster General for the points that she has made. I merely want to remind her that expectation of profits and losses is part and parcel of the self-assessment system.

Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

I take the hon. Gentleman's point. I am trying to take a short cut through a debate on which we do not disagree. As I said, I shall look at some of the points made, but I must consider the balance across the tax system in terms of how other taxpayers are treated. Even though slightly different methods are used in different circumstances, it has the same result for all taxpayers. I acknowledge that the hon. Gentleman has made interesting and fair points, but I think that he will appreciate that they are not part of our current discussion. In good faith, I have taken his points on board.

Mr Oliver Letwin (West Dorset, Conservative)

I am grateful to the Paymaster General for those comments. I know from experience that she means what she says in that regard.

First, I want to put on record a point about the taper. Although I do not regard it as deeply significant, perhaps the Paymaster General will reflect on it. It is perfectly true that the absence of a taper will create a cliff edge—that is evident to anybody. The general principle behind the Government's attitudes to a large number of tax and quasi-benefit tax credit issues is that they would like to avoid cliff edges. The Government, and, indeed, the Chancellor, are keen on relatively slow tapers. However, every taper has two features, and one appears here, alone, which is rather complicated. I do not want to over-stress the point with hyperbole—it is not the end of the world, and it is not that complicated—but it complicates a schedule that is otherwise blissfully simple. In the case of tax credits, the complexity multiplies manifold.

Secondly, by avoiding a cliff edge, tapers cause prolonged but reduced agony. I hope that the Government will reflect on the proposition that it is often better to have simplicity allied to a sudden 100 per cent. marginal rate applying over a tiny patch of terrain than, for example, the prolonged 55 per cent. withdrawal rate in relation to the working families tax credit, which stretches over a large terrain. That is a tiny example of the general phenomenon, and I do not want to claim, as it would be untrue, that artists are facing a massive disincentive in relation to this. However, the complexity is introduced even here. There is a general Inland Revenue or Treasury predisposition to avoid cliff edges. Somewhere in a permanent secretary's training book, it says, ``Avoid cliff edges''.

Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

Fall off and be hurt.

Mr Oliver Letwin (West Dorset, Conservative)

Yes. The manual should be rewritten to read, ``Seek cliff edges to avoid prolonged and complex tapers.''

Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

The debate is extremely interesting. It concerns the hon. Gentleman's wider point, which is to ensure that balance, complicity and equity are proportionate. Some taxpayers may be sacrificed by ignoring the cliff edge on the basis that they make up a small number. That is interesting in terms of how a Government would approach the simplification of tax and it tends to cause tension in any debate about tax changes. I fully appreciate that it is the job of the Opposition to raise such points, however small the group that may be disadvantaged and we shall refer to that in later clauses.

I am looking forward to how the Opposition will approach the debate on equity and simplicity. None the less, the hon. Gentleman is not making a huge point. He does not want to go to the stake on the issue, and nor do I. I am grateful for his comments and I shall consider the matter again. He is right to say that we want to avoid cliff edges, when possible, but we must decide the point at which we say that, unfortunately, some people are subject to the best result, but that this is the best that we can come up with. That will vary in different debates, but the hon. Gentleman's general point is fair and I note what he said.

Question put and agreed to.

Schedule 24 agreed to.

Clauses 72 to 75 ordered to stand part of the Bill.

Clause 104 ordered to stand part of the Bill.