When I put the Question prior to the appointment of the Tellers, the Ayes were not challenged. Therefore, no Tellers were appointed and I decided the Question on taking the voices. It is as simple as that.
Order. The long-established practice of the House is that, after two minutes have elapsed, the occupant of the Chair puts the Question again and calls for Ayes and Noes. I called for Noes, there was silence. Therefore, the matter was decided in the affirmative.
Order. The hon. Gentleman should be extremely careful about challenging the Chair. These matters are governed by the Clerks of the House, using a precise timing mechanism. That is what guides the Chair.
Further to the point of order raised by the hon. Member for Croydon, South (Mr. Ottaway), Mr. Deputy Speaker. The Division was called and I went into the Lobby. In the confusion, I was not here when the debate began, so the Government Whip moved Second Reading formally. I would be happy to speak now—or I could allow the hon. Member for Croydon, South to speak now and I could speak during the debate. Unfortunately, what happened was caused by the incompetence with which the Opposition called the Division.
Order. In the confused circumstances that have arisen, the Bill has been moved formally and the hon. Member for Croydon, South (Mr. Ottaway) has begun his speech. It might make for better order if he were allowed to continue and the Minister's speech were to follow his.
Further to that point of order, Mr. Deputy Speaker. May I help the House? As I understand it, the hon. Gentleman offered to resume his seat and allow me to speak at this stage. I think that, if it would be in order, it would help the House to proceed through the debate—but I need to be guided by you.
If there is general agreement in the House to that somewhat unusual procedure—I understand that there is—I shall call the Minister. It is to be hoped that the House will give its consent to the hon. Member for Croydon, South when he attempts to address it a second time.
I am pleased to be opening, in a somewhat unconventional way, the Second Reading debate on the Bill, which rewrites our current legislation on capital allowances. This is the first Bill to be produced by the Inland Revenue tax law rewrite project—a long-term undertaking to modernise our direct tax legislation and make it clearer and easier to use.
As this is such a significant milestone in the work of the project, perhaps I may be permitted to say a few introductory words about it, before dealing with the Bill itself.
The tax law rewrite project was set up in 1996 to rewrite all, or most, of the UK direct tax code—more than 6,000 pages of legislation, enacted over the past 200 years. That is no small task. Following extensive consultation by the Inland Revenue, the right hon. and learned Member for Rushcliffe (Mr. Clarke), in what proved to be his final Budget statement, announced that the project would proceed. Commending the undertaking to the House, he said:
The project will bring the benefits of clarity and certainty to businesses and ordinary taxpayers. It has been widely welcomed and deserves the continuing support it has enjoyed in all parts of the House.—[Official Report, 26 November 1996; Vol. 286, c. 170.]
I give all due credit to the right hon. and learned Gentleman for the vision and foresight that he showed in authorising the project—no doubt the right hon. Member for Fylde (Mr. Jack) also played his part in the Treasury ministerial team of the day. The project commanded our full support at the time, and now that we are responsible for its continuing progress, I am happy to confirm that we remain as fully committed to its success as they were.
The right hon. and learned Member for Rushcliffe showed rather less foresight in his prediction that the first rewrite Bill would be ready to enact in the 1997–98 Session. The task has proved even more difficult and complex than was predicted when it began. It is sufficient testimony to the importance that people everywhere attach to the project that, although its progress has been slower than was hoped, there is still widespread support for it, both in Parliament and throughout the UK tax community. This is because everyone recognises that it is vital that the work is done properly rather than quickly. Much has changed in the past four years, but the support for the tax law rewrite is a constant.
The main feature of the project can be summarised as follows: its aim is to restructure the existing legislation into a more logical order for its present purpose. It is not simply, as has sometimes been claimed, a plain English makeover. The restructuring is probably the main benefit of the rewrite process, and it is the main reason why the work is taking so long. However, the results of this painstaking process are enormously appreciated by tax professionals. As one leading figure in the tax world has commented:
I need to be able to find the legislation that is applicable, understand how it operates and advise my clients accordingly. For me, the Capital Allowances Bill represents a revolution in accessibility. It has a logical structure and for the first time in my experience it has actually been designed to help the user.
That is no mean praise.
Other features of the rewrite process include shorter sentences, modern language, clearer signposts related to provision, more constant definitions, greater use of reader aids and helpful methods of showing the statements that are made in the Bill.
I have said this before, but I think that it is important to emphasise again that the remit of the project precludes any changes in the main tax policies. That issue has engaged the House's attention in the debates on the two preceding motions today. All members of the Joint Committee will surely be there to ensure that the rewrite does exactly that, and does not change main tax policies or question policy.
There is general agreement among those who have been involved in the extensive consultation on this work that some minor changes in detail might be proposed where those will further improve the legislation. Examples of such changes are new provisions to fill in the gaps in the existing legislation, abolition of obsolete material, correction of minor anomalies and, as I mentioned in the previous debates, the inclusion of extra statutory concessions into the legislation.
Major changes to the body of our tax law will always be matters for the Finance Bill. However, there is a general consensus that such minor housekeeping matters as I have described can be proposed for these Bills, always provided that they are flagged up clearly in the consultation process so that people can consider them properly.
Could the Paymaster General define a little more clearly what constitutes a minor change in her view? Is it a change that affects only a few people or one that affects people only up to a certain quantum in their potential tax liability? Can she quantify how many people or what quantum of tax change might constitute "minor"?
This question came up in a previous debate this afternoon when the right hon. Gentleman was unable to be present. Ultimately, it is for the House to decide, in tidying up the legislation, whether an issue is minor. As has been pointed out by right hon. and hon. Members in the previous debates, what is considered minor by one person may not be considered so by another. However, the tax low rewrite project was asked to concentrate only on issues to remove legislation that was obsolete, to tidy up legislation where the use of slightly different language did not change the meaning but made it more accessible in terms of understanding and to deal with the extra statutory concessions that I have just mentioned.
Regardless of whether members of the Committee are Treasury Ministers, such as myself, or Back-Bench Members, they will need to ensure that the tax law rewrite simplifies the structure without removing or changing the underlying policy of the tax unless the House is satisfied, by a vote, when the report comes back from the Committee, that the changes are minor and assist the flow and understanding of the legislation but make no huge difference.
As a Minister, I take the view that it is for Finance Bills and Treasury Ministers to consider the underlying changes in policy and for debates to be held in the House; it is not for tax law rewrite committees to do that. Today's debates have shown clearly that every Member of the House also understands that point. Although the right hon. Member for Hitchin and Harpenden (Mr. Lilley) is not one of the House of Commons members of the Joint Committee, I am sure that, when the Bill comes back, he will cast his experienced and beady eye over the detail of those matters in which he considers there is some vulnerability so as to ensure that the House discusses them properly.
May I direct the hon. Gentleman to the explanatory notes that accompany the Bill? Annex 1 of the second volume lists the 66 changes that are considered minor; they either remove anomalies or tidy up the measure. The clause, line and, I think, the page numbers are given, so any Member—whether or not a member of the Committee—can address those issues. Certainly, when the Committee reports back, hon. Members will be able to make points on those changes.
It is most unusual for there to be two volumes of explanatory notes. They give an excellent history of capital allowances, and explain their purpose and structure, who benefits from them and their current intent. There is also a clause-by-clause explanation. The document identifies the 66 incidents of change, followed by a number of further helpful notes and explanations. It gives a thorough and clear explanation of the Bill that will go to the Joint Committee and then return to this place for consideration by hon. Members.
I cannot give the hon. Gentleman that assurance, as I do not know whether every extra-statutory concession was added to the Capital Allowances Bill. I do not have that information to hand. A rule was not set that all extra-statutory concessions should be combined; the rule was that, if a concession fitted easily into the legislation, that was the best place for it. As the hon. Gentleman may be aware, all Governments—including the Labour Government and the previous Conservative Government—consider the role of extra-statutory concessions and whether they should be moved in primary legislation. As the hon. Gentleman is particularly interested in that point, I shall ensure that I give him exactly the right answer. If I am unable to do so before the end of the debate, I undertake to write to him to explain which concessions have been included.
From the outset, the project team was committed to a full process of consultation with the UK tax community and other interested parties. That is a hallmark of the tax law rewrite. I refer hon. Members to the first volume of the explanatory notes. It lists not only those Members who were on the tax law rewrite steering committee, but the members of the consultative committee and their expertise. It goes on to list the people who have been consulted at each stage, with the proviso that only those who did not ask for their responses to be treated in confidence were included. Some people asked for that confidence and we could not, therefore, include that information.
The project's work has been overseen by a high-level steering committee, appointed by my right hon. Friend the Chancellor of the Exchequer. The right hon. Member for Fylde (Mr. Jack) sits on it and it is chaired by Lord Howe of Aberavon, whose interest in, and enthusiasm for, the process is now legendary. Other members are drawn from both Houses of Parliament, the judiciary, the legal and accountancy professions and business and consumer interests. There is also a consultative committee, the members of which are drawn from the main representative bodies of the tax world in business and consumer affairs. For wider consultation, the project publishes periodic exposure drafts that contain blocks of rewritten legislation, with commentaries.
I pay tribute to the invaluable contribution that all those involved in the consultation process have made, and continue to make, to the success of rewrite project. I greatly value their commitment to helping the project team ensure that the work is accurate and of high quality. I also recognise the time that they have devoted to the process. That should be commended.
With regard to the Bill, the House might find it helpful if I say something about the capital allowances legislation to give a flavour of the subject, which may be unfamiliar to some hon. Members. Capital allowances are relevant to everyone who is involved in business, from the largest multinational enterprise to the single trader. They broadly take the place of depreciation charges in commercial accounts for business, with some additional incentives, such as 100 per cent. first-year allowances for information and communication technology, and research and development.
Capital allowances are needed because, in general, taxpayers cannot deduct capital expenditure on investment in their businesses when arriving at their income or profits. Depreciation in commercial accounts is not allowed as a deduction for tax purposes. The estimated value to business of that regime is about £18.8 billion in 2000–01. It is therefore very important to those businesses.
Capital allowances give relief for certain types of expenditure, and the Bill deals with who gets the relief for what expenditure, when and how. The tax law rewriters addressed that and it is clearly laid out in the explanatory notes. There are different allowances for plant and machinery, industrial and agricultural buildings, research and development and various expenditure. The Government are committed to encouraging enterprise and innovation. It is, perhaps, appropriate that the subject matter of this first rewrite Bill should be directed towards that aim.
The Bill will make it easier for businesses, or the people who advise those businesses, to understand their rights and obligations in terms of capital allowances under our tax system. It brings together 300 pages of legislation. The main legislation with which it deals is the Capital Allowances Act 1990, which itself was a consolidation Act that brought together earlier legislation, much of which dated back to 1945. The House will not be surprised to learn that that has been amended every year in the 10 years since it was enacted. Other provisions, such as those dealing with patents and know-how, are included in the Income and Corporation Taxes Act 1988. Finally, other provisions are scattered throughout several Finance Acts.
I have already mentioned in general terms the extensive consultation process that is the hallmark of the rewrite project's work. For this Bill, there have been successive rounds of consultation on four separate exposure drafts, published at relatively early stages between October 1998 and February 2000. Most recently, a final round of consultation on a draft Bill was published in August 2000.
Not only does this Bill represent a worthwhile project, which will modernise our current direct tax system, making it clearer and easier to use, but it is the first Bill to mark a milestone in the work of the project. Although much difficult work remains, the Bill shows that improvements are possible. It makes minor amendments to make the language and structure more accessible, to give extra statutory concessions and to remove legislation that is obsolete and therefore no longer required. The House must satisfy itself that, in suggesting those changes, the rewrite project has not questioned or changed the underlying policy decided by Finance Acts and by the House. On that basis, I commend the Bill to the House and look forward to the debate.
Any proposal that simplifies the law will always be welcomed by the House. In 1986, Philip Hardman, the well known campaigner for tax law reform, said:
Some of the finest brains in the country are trying to understand tax law when they would be better employed producing wealth.
That says it all. Anybody who had the dubious privilege of sitting through the Committee proceedings on the previous Finance Bill, now the Finance Act 2000, will be in no doubt about what he meant and of the need to simplify tax law.
Does the hon. Gentleman accept that although the finest brains might not be producing much wealth for the country, they certainly get quite a lot of wealth for themselves, and perhaps that is the object?
From what I heard from the Labour Members on the Committee considering the Finance Bill, I am not sure that there is a paucity of wealth, and some people may be playing poverty. None the less, I am endeavouring to make a moderately non-political speech, so I shall leave that point before I am tempted away from that aim.
In the 1998–99 Session, I led for the Opposition on the Greater London Authority Bill, which at 473 pages then set the record for the longest Bill ever. Little did I know that just 12 months later, that record would fall and yet again I would be involved. I do not know what I have done to deserve being involved in the Committee proceedings on the two longest Bills in the history of Parliament, but in the previous Session I found myself exiled to the Committee Corridor for the Finance Bill, which set records in length and complexity. Leaving aside the politics of the Finance Act 2000, at 613 pages, it represents a challenge to all involved, whether they be professional advisers, the judiciary, civil servants or politicians—not to mention taxpayers, both personal and from the business community.
As a member of the Opposition team, with just a handful of advisers and limited resources, one does one's best to test the Treasury's vast resources. However, while one can pick up a few salient political points and make the best of them, the state of the Bill is the Government's
responsibility. I shall give just one small example of a provision from the Finance Act 2000. Schedule 14, on enterprise, says:
Paragraphs 10(7) and (8) (determination of value of shares) applies for the purposes of paragraph 47(1)(g) as they apply for the purposes of paragraph 10.
If anyone can understand that, they are a better man than I.
I take a quote of a schedule of the Finance Act 1986 that deals with capital allowances:
If, in a case where sub-paragraph (1) of paragraph 10 above applies, neither sub-paragraph (1) nor sub-paragraph (2) above has effect in relation to the expenditure referred to in sub-paragraph (1)(a) of that paragraph, then for the chargeable period related to the disposal or cessation referred to in sub-paragraph (1)(b) of that paragraph, any allowance in respect of that expenditure shall be a balancing allowance.
I am sure that everyone gets the point that I am making.
During consideration of the Finance Bill 2000, I led for the Opposition on the subject of tonnage tax. That part of the Bill was written very much with the rewrite principles in mind. I flip to a sentence, which states:
If the cost of providing a ship exceeds £80 million, the lessor is not entitled to capital allowance in respect of the excess.
That is clear, precise, to the point and understood— certainly by myself and, I felt, the rest of the Committee. That makes the point.
Much of our tax legislation is incomprehensible, indecipherable and virtually incapable of analysis, and under this Government, spreading like the plague. So, it is with pleasure that I give a warm welcome to a Bill that has been well received by experts and those in the industry. It has clearly achieved its aim of making tax law easier to understand.
The tax faculty of the Institute of Chartered Accountants said:
The draft Bill is an impressive achievement by the Tax Law Re-write Team and we congratulate everyone involved. The Capital Allowances Act 2001 will demonstrate clearly the value of the Tax Law re-write process in improving the intelligibility of the tax legislation.
Mr. Maurice Parry-Winfield, a consultant for the institute, writing in The Tax Journal said:
What stood out, however, was the professionalism of the job the re-write team had done and the light it shone on the notoriously opaque areas of the Tax Law.
Peter Bickly, the tax manager of the institute's tax faculty, said:
Although the project has taken a good deal longer than the original estimate of five years—
to which I shall return
the quality of the draft reflects the enormous amount of work undertaken by the revenue in consultation with organisations such as ours. It is a high quality product. It is simpler and therefore easier to understand.
Those are all powerful tributes in which I join.
Is my hon. Friend concerned that the regulatory impact assessment states that it has not been possible to establish with any certainty whether the cost to businesses will reduce as a result of this enormous Bill?
I will come to that point, although there is a difference between simplification and simplification of the law. My hon Friend is referring to simplification of the law rather than simplification and clarity of the language, which is all that the tax law rewrite project attempts to achieve.
I should like to go back a few years to look at the origins of the tax rewrite project. It is with great pride that I say that it was very much a baby of the previous Conservative Government. The report on tax simplification was introduced in 1996 by my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke), then Chancellor of the Exchequer. However, in my opinion, the unsung hero of the entire project is Mr. Tim Smith, Member for Beaconsfield until 1997. Although my noble Friend Lord Howe of Aberavon was making noises about the need for tax simplification in his maiden speech in 1964, Tim Smith kick-started the project.
Does my hon. Friend anticipate any similar independence of mind being shown by the members of the Committee appointed to serve on the examination of the Capital Allowances Bill?
It was made crystal clear earlier today that all members of the Select Committee will be free to express their views as they wish.
Let me return to the role of Tim Smith in this important project. He had been irritated by a 1994 Finance Bill that was 463 pages long and a 1995 one that was 380 pages long—I am not sure how he would feel about the length of legislation today. He tabled the motion, it was carried and the pressure was on. As a result of his initiative, in December 1995, the Revenue published a report on tax simplification which set the whole process in motion.
It is important to pay tribute to Tim Smith today. Most of us will recall the trauma of his withdrawal from politics during the 1997 election campaign. Despite intense media intrusion, he accomplished that with dignity having recognised the difficult position in which he was putting his party. I am sure that all his friends and those who respect his work in the House, particularly on tax law reform, will be pleased to hear that he and his family are rebuilding their lives in the west country. I am sure that everyone will join me in wishing them well.
Prior to the publication of the report, in his November 1995 Budget speech, my right hon. and learned Friend the Member for Rushcliffe said
We shall propose that the Revenue tax code is rewritten in plain English—a major task. The House has a duty to set out clear legislation, which in that area we have not done. We in the House will need to look at our procedures to see how that tax rewrite can be sensibly handled.—[Official Report, 28 November 1995; Vol. 267, c. 1066.]
The report was published in 1996. It concluded that
The language of existing tax law can be simplified, that the benefit should substantially outweigh the costs; and that a rewrite of most of the existing code could be accomplished over a period of about five years.
The report was welcomed by my right hon. Friend the Member for Fylde (Mr. Jack), then Financial Secretary to the Treasury. He pointed out that it supported the Government's deregulation initiative—a point made by my hon. Friend the Member for Christchurch (Mr. Chope)—and confirmed that the Chancellor had asked the Inland Revenue to proceed with the preparatory work. Those early stages were driven by my right hon. Friend the Member for Fylde and I take this opportunity to pay tribute to his work on this major project and to his current work on the rewrite steering committee.
At the time, it was envisaged that the rewrite would take about five years. It would use a variety of techniques, all of which have been incorporated in the Bill. First, there would be a new, more logical structure; secondly, there would be shorter sentences and better use of definitions; thirdly, modern language would be used, as long as it was possible to do so without changing the law or making its effects less certain; fourthly, there would be better signposts and similar rules would be grouped together to make the rules easier to find; and, fifthly, a new format and layout would be used to make the legislation easier to read. All of those features are embodied in the Bill.
Having arrived at this point, it is important to recognise the role played by Geoffrey Howe, now Lord Howe of Aberavon, who between 1979 and 1990 served first as Chancellor of the Exchequer, then as Foreign Secretary and then as Leader of the House. He initially became president of the tax law review committee set up by the Institute for Fiscal Studies in autumn 1994. Its purpose was independently and objectively to ask fundamental questions about whether the tax system was working as intended. The committee concluded that it was not. Fortunately, as the committee published its final report, the Treasury reached a similar conclusion about the need for reform and Lord Howe was appointed chairman of the rewrite committee. In both capacities, his contribution has been immense.
In the Hardman memorial lecture, when defending himself against the charge of having done nothing about the need for reform when he was Chancellor of the Exchequer, Lord Howe gave a reply that graphically illustrated why busy Ministers find it hard to address such issues when they have so many other pressing matters on their mind. He quite candidly said:
I was too busy doing other important things. I was struggling to manage public expenditure, Civil Service pay, the nationalised industries, the International Monetary Fund, the European Community budget—not to mention the Prime Minister.
Lord Howe's second defence was to point to the huge forces, powerful institutions and time-hallowed processes, the weight of which is all stacked against reform of any kind. He quoted Douglas Hurd's memorable words:
Inertia can develop its own momentum.
The role that Geoffrey Howe has played in the reversal of the momentum of inertia has been of great significance, and I am sure that the whole House pays tribute to him today.
That illustrates the need for a separate body, detached from Government, such as we now have, that can carry out that important, independent process. One has to turn to Adam Broke's 1999 Hardman lecture to fully understand the challenge that faces the tax law rewrite project in reversing the general perception that the tax system is too complex. He said that there are four components that make up the complexity of tax law: diversity, volume, drafting and language.
First, diversity. There are about a dozen principal taxes. The main direct taxes include income tax, corporation tax, capital gains tax and inheritance tax. The indirect taxes include value added tax, excise duties and a number of smaller taxes. Then there is stamp duty and payroll taxes in the form of national insurance contributions. The first problem is that it is now impossible for any one individual to advise across the range of taxes, which is far too broad.
Turning to volume, there is a perpetual incoming tide of tax law. We have a Finance Act every year because of the historical oddity that income tax is an annual tax that needs to be re-enacted every year. The result is a complete industry or what my hon. Friend the Member for Chichester (Mr. Tyrie) once described as "an unstoppable juggernaut". Many people feel that that aspect needs to be reviewed.
On drafting, not for one second do I seek to criticise parliamentary counsel, who do a fantastic job in difficult situations. I have never met one, but I am sure that one of them has a slogan over his desk saying, "Overworked and underpaid". At very short notice, they are asked to draft amendments, clauses and new clauses of intense complexity. Those provisions are complex yet, as Adam Broke pointed out, one of the most successful pieces of legislation is the Partnership Act 1890, which, as a lawyer, I frequently had to consult. Its statement of short, clear principles have long stood the test of time and effectiveness.
Adam Broke's final point concerned language. To convey a point, in the past, draftsmen have often used language of a higher plane or language that is not in common use. However, it is fair to point out that, as far back as 1853, Gladstone complained in the House:
The nature of property in this country, and its very complicated forms, render it almost impossible to deal with for the purpose of Income Tax in a very simple manner.
Although it has taken 150 years, we are about to prove Mr. Gladstone wrong. For all those reasons, which cover the points made by Adam Broke, it is perfectly clear that complexity is a problem and that it matters.
Of course, we should not ignore the question of compliance costs. As I said at the outset, such is the complexity of tax legislation, it is estimated that compliance costs amount to 1.5 per cent. of gross domestic product—which is £12 billion a year, with more than 25,000 people employed full-time in the private sector tax industry alone. For that reason, this has to be a project worth undertaking for the gain to the British economy.
Looking back, taxation in the 18th century was simply to pay for the armed forces. Taxes were simple. Land taxes, poll taxes and excise duties formed the bulk of tax gathering, but, irresistibly, social engineering—using the tax system to affect behaviour—was not far away. For those of us who complain that the Chancellor cannot stop tinkering with the tax system for social purposes, it is worth noting that in 1796, Pitt, then Chancellor of the Exchequer, increased excise duty on spirits, arguing:
Consumption is so pernicious with respect to spirits that no man could wish there should be any limit to the duty so far as is consistent with the means of safely collecting it…
Duty free would not have lasted long in his day.
From then on, the situation declined with the relentless growth of the Government's instinct to tax and spend. The instinct to simplify is an old one. Lord Callaghan argued that the reform of corporation tax in his 1965 Budget would so simplify the system that it would put accountants out of business. That was not the first time that he was wrong.
That comment fires a salutary warning shot to us all: we should not get too excited about the whole project, the history of which was dealt with at length by the Paymaster General. Therefore, I shall not detain the House on that aspect save to make two further points. First, as I said to my hon. Friend the Member for Christchurch (Mr. Chope), simplification has two meanings. The Bill seeks to address one —rewriting the law in a way that makes it easier to understand. The second is to simplify the policy of taxation. To give but a small example, many think that the capital gains tax system—while seeking to provide a fairer base and, particularly, to assist those in the business sector—has resulted in a complex set of laws. The task of the next Conservative Government will be to simplify those laws. Although that may be a legitimate political objective, it is different from the task that we have set out to achieve through the Bill. Were we to add to the tax simplification procedures that we shall test for the first time today and in the coming weeks and were we to superimpose all the political debate on the changes to tax law, I strongly suspect that the tax law rewrite project would founder. Although I look forward to challenging the Government in the forthcoming Budget debate, the Bill should not be the vehicle for the inevitable exchanges of views that will take place.
My second point is on the direction of the rewrite project. The Finance Act 2000 is 613 pages long—nearly twice as long as the rewrite project's first production after four years' work. As Geoffrey Howe pointed out in his Hardman lecture:
It is like trying to repaint Brighton Pier at a time when its owners are trying to extend it to the French Coast…
There is no doubt that resources will have to be increased if the initial enthusiasm of the rewrite project is to be sustained. Compared with the high compliance costs in the tax industry, to which I referred earlier, the modest investment by the Government must be worth it and I urge them to reconsider the point. It is essential that those involved remain independent of the Government and, as far as possible, remain able to focus exclusively on the project without being removed to assist in Budgets and other Treasury matters. Unless all Finance Bills are drafted within the rewrite principles, we shall always take one step forward and two backwards.
On preliminary analysis, the Bill's 340 pages—which, rather amusingly, are supported by explanatory notes of 380 pages—no doubt represent a clearer document and are easier to understand. We add our congratulations to all those involved in the drafting. However, sight has not been lost of the dictum of Jean-Baptiste Collhert, the French Finance Minister, who remarked:
The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the smallest amount of hissing…
Although it is hard to evaluate whether the cost of claiming capital allowances will reduce as a result of rewriting the legislation, there is no doubt that it should
be easier to establish the true position. However, there will still be many feathers flying and much hissing, as I suspect that there will be in the coming election.
I hope that in the drafting of legislation the tax law rewrite team will have learned from its experiences and will be able to draw on them for the future benefit of all those involved. The Opposition congratulate the team on its efforts and will give the Bill a fair wind.
Order. It may help if I remind the House that the Bill, as its long title says, is a measure
To restate, with minor changes, certain enactments relating to capital allowances.
I hope that hon. Members who are called to speak will bear that limited purpose in mind and will not seek to broaden the debate to cover general issues of taxation or budgetary policy.
Before coming to the Chamber to debate the Bill, I had a very quick look again at the Capital Allowances Act 1990. I do not pretend to find the Bill a particularly relaxing or amusing read, but it is certainly far better than the obscure and arcane provisions that it will replace. I also wish to pay tribute to Lord Howe of Aberavon, his steering committee, the consultative committee and all the individuals who have contributed to bringing the Bill forward, now or in the past.
The Bill's layout makes the difficult subject of capital allowances more easy to follow. The contents section is useful and intelligible and acts almost as an index to the Bill.
The initial clauses provide a useful introduction to what the Bill proposes to cover and include helpful and general points leading into the specific allowances for specific items of expenditure. The headings on each page are also helpful. The accompanying notes are detailed and intelligible and provide a good guide to the Bill's provisions.
Before I raise some policy issues in relation to capital allowances, I shall make a general point about the drafting of the Bill. I am sure that members of the steering and consultative committees would agree that deeming provisions should be avoided at all costs. However, these provisions continue to creep into the Bill. I refer the Paymaster General to clause 297(2), for example, which relates to industrial buildings allowances. The subsection begins:
This Part has effect in relation to the person to whom the relevant interest is sold as if…
I am sure that the steering committee would agree that such clauses should deal with charging and the actual event that occurs: they should not pretend what has happened and provide for the consequences.
In response to an intervention by the hon. Member for Christchurch (Mr. Chope), the Paymaster General said that she would write listing the omitted extra-statutory concessions—in other words, the concessions that will remain that will not be incorporated into the Bill. I hope that she will send me a copy of that letter.
My explanation was correct in that if the extra-statutory concession could go into the Bill to improve the legislation and was clear, it went in. I can give the hon. Gentleman the lists: on clause 23, extra-statutory concession B50; on clause 29, extra-statutory concession B16; also roads on industrial estates, extra-statutory concession B3. Those were incorporated. There are remaining extra-statutory concessions: these are B1, part of extra-statutory concession B16, and extra-statutory concession B49. Those were not incorporated either because they would have made the legislation more complex, would have removed flexibility or because we felt that other changes would be more appropriate. I have placed my understanding on the record. I am grateful to the hon. Gentleman for allowing me to do so.
I am grateful to the Paymaster General for responding in her usual courteous and prompt manner. However, we believe that it would be beneficial to deal with tax legislation in primary or sometimes, necessarily, in secondary legislation.
As the hon. Lady knows, the concessions to which she refers and which are not included and also statements of practice impact upon capital allowances. Concessions that are not included and statements of practice do not have legislative force, but they are frequently relied on by taxpayers and their advisers. It is time that we as the legislature ensured that those important concessions—that is, those that have been omitted—and statements of practice were debated and given the force of law. At least that would provide certainty for taxpayers.
Although the Bill will be given detailed scrutiny in Committee, I shall raise two matters of principle in relation to the capital allowances legislation, and I ask the Paymaster General to consider them between now and the Committee stage. My first and main point relates to balancing charges, particularly as they impact on the small business sector.
As the House knows, for plant and machinery generally, if the asset is a short-life asset, the allowance will be 25 per cent. on a reducing balance basis. At present there is a first-year allowance of 40 per cent. Long-life assets have a 6 per cent. per annum capital allowance, again on a reducing balance basis.
I hope that we shall get some certainty about the rates of capital allowances and the law. Since they were elected, the Government have chopped and changed on those allowances, which causes confusion for the business sector and taxpayers generally, and makes business planning and development difficult.
The Bill defines small companies and small businesses. I refer the House to clauses 47 and 48. The problem for the small business sector is that the balancing charge comes in one hit. All the disposal proceeds from the sale of the relevant asset are brought into account in the year of receipt. I hoped that the Government would consider for small businesses and small companies the introduction of a balancing charge on a reducing balance basis. In other words—
Order. I am sorry to interrupt the hon. Gentleman. He may not have appreciated the full import of the ruling that I gave earlier—that it is not permissible in this debate, on this Bill, to move into areas of policy or to put forward suggestions about changes of policy in respect of capital allowances.
I am grateful to you, Mr. Deputy Speaker, and I take your point. I wanted to give the Paymaster General an indication of some of the topics that might be mentioned in Committee. I hope that in due course we will have a more benign system in relation to balancing charges for small businesses and small companies.
The second point, which I have previously raised on the Floor of the House and which I will not labour further, is the matter of capital allowances for sea-going vessels that are not ships—that is, floating production and storage offshore vessels and drill ships. They should be brought into the short-life asset regime, as are ships, to assist our British shipyards.
Thank you, Mr. Deputy Speaker.
I seek a further assurance from the Paymaster General. Capital allowances legislation will probably change with every Finance Bill. It has done so in the past 10 years, and I dare say that it will continue to do so. Will the hon. Lady assure us that in any future changes, drafting techniques similar to those in the Bill will be used, and any changes to capital allowances legislation will be incorporated into the Bill? We do not want to go back to the position of taxpayers and practitioners having to hunt around numerous Finance Acts to get to the law on capital allowances. Simplification should continue.
The Bill is welcome. Nevertheless, the policy remains complex, so the Bill remains complex. It is up to the Government to simplify, not complicate, tax policy. For many, tax simplification is a contradiction in terms, but the Bill simplifies the law on capital allowances, includes some welcome policy simplification, and is far more comprehensible than the existing law.
I congratulate Lord Howe, the steering committee, the consultative committee and all those who contributed to the Bill. We shall support it.
I welcome the introduction of the Bill as one of the first fruits of the labours of those who established the tax law rewrite process and the process of simplification. I declare various interests in the Bill. All Members of Parliament have an interest because the Bill contains provisions dealing with capital allowances and MPs' accommodation. I have declared business interests, and those businesses would also be of interest under the Bill.
I congratulate the Paymaster General and my hon. Friend the Member for Croydon, South (Mr. Ottaway) on the way in which they eventually introduced the debate on this measure. Tonight is an unusual event in the consideration of any legislation on taxation and finance by the House. We are discussing the whole of the tax legislation on capital allowances at the same time, whereas Finance Bill debates usually consider only small parts of it. It is an education in itself to be able to see the tax code in its entirety, and to appreciate the interaction of one part with another. When Finance Bills are drawn up and enacted, we are usually concerned only with the part of the Bill that affects the law on capital allowances.
Part of the problem that the rewrite exercise has had to cope with and which the Bill seeks to address is the almost Topsy-like way in which our law is modified over time, but we are never able to stand back and see the total effect.
In her opening remarks, the Paymaster General said that this exercise was not simply about rewriting a plain English version of the tax on capital allowances. I have always likened it to the equivalent of the plain English version of the Bible, because the drafters of that had the same problem of making the message more accessible and understandable without changing the fundamentals. In drafting the new English version of the Bible, they referred to many orginal texts as well as to the King James version, and in even more difficult circumstances they faced the problem of ensuring that the basic message was not altered. It is right to pay tribute to the rewrite exercise, because it has not fundamentally changed the law on capital allowances.
Much has already been said about the complexity of our tax law, and that is replicated and underscored by the provisions of the Bill. As tax practitioners know, we live in a complicated world, and tax has had to adapt to that. That is why such complexities are incorporated, albeit in clearer terms, in this new legislation.
My hon. Friend the Member for Croydon, South said that this Chancellor enjoyed fiddling with the tax system, sometimes with the aim of achieving questionable results. Even in its redrafted form, the capital allowances legislation replicates some of the inevitable fiddling that has taken place over time. Again, it is worth considering the consequences of that approach in a little more detail.
One aspect emerges with remarkable clarity in the new Bill. I refer to the number of clauses dealing with anti-avoidance legislation. Much of the difficulty of any part of our tax code reflects the fact that, over time—and again in a piecemeal fashion—the legislation that the Bill seeks to replace has had to cope with people's efforts not to pay their taxes, or, in this instance, to adapt an allowance for greater advantage. Any such activity is usually detrimental to the generality of taxpayers, in that costs rise and, somewhere in the tax firmament, someone must pay.
Let me make a general observation. If we are to proceed with the exercise of clarification, the accounting profession, the business profession and indeed the Inland Revenue will have to revisit the difficult territory of tax avoidance. I know that the Government have already shied away from general avoidance legislation, and I think they were wise to do so at this juncture, because it is difficult territory; but much of the complexity of this Bill and others reflects the problem of protecting revenue, and preventing abuse in the tax system.
I want to concentrate on three subjects: the tax law rewrite exercise itself, the contents of the Bill arid the implications of the first two issues for the future of tax law reform. Any analysis of the Bill raises interesting questions about what could happen, and what would be the next stages. There may be opportunities for Ministers to consider changing or enlarging the remit of the rewrite exercise to incorporate what—as I have seen, as a member of the steering committee—is already emerging as a series of good ideas, in tie first instance to make the existing tax code better. A second agenda addresses the more complex, and perhaps sexier, more exciting areas of tax debate, relating to how we should simplify our tax system. But if, as I said at the beginning, the world is complicated and tax law affects that, the holy grail of real simplification—which means, perhaps, less tax law—is still some way off. I think that the Bill underscores the difficulty in that respect.
I too pay tribute to my noble Friend Lord Howe for the tenacious and assiduous way in which—ever since his involvement with the Institute for Fiscal Studies' work in this area—he has pursued the starting and continuity of this rewrite exercise. As we know, he is a man of dogged determination, and at times has wrought remarkable changes with his words. I consider this exercise to be one of the lasting testaments to his determination in terms of the parliamentary process.
I agree with what my hon. Friend the Member for Croydon, South said about my former parliamentary colleague Tim Smith. I had to deal with him during discussion of various Finance Bills, and I know how tenacious he too was in ensuring that the exercise not only went beyond what was in the Finance Bill 1995, but saw the light of day in the report on tax simplification that was produced during my time at the Treasury.
I shall never forget the then vice-chairman of the Inland Revenue, Mr. Steve Mattison, coming into my office at the Treasury with the tax code as it had been in 1950—half a dozen thin volumes. He contrasted that with the 6,000 pages of legislation of which this Bill still forms a part. He made the point about the way in which our tax system has developed over time. Anyone looking through the Bill will see how measure upon measure has been added, not just in the capital allowances sector but across the piece, to reflect the growing complexities of the world in which we live and some of the challenges to the tax system itself.
I was glad when the Budget of my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) enabled the exercise to go forward, although, like others who have spoken, I concur with him that his thoughts about how long the exercise would take were heroic. Instead of five years, we could be looking at anywhere between 10 and 15 fully to rewrite all parts of the tax code. As the Paymaster General indicated, with experience the process may speed up, but the first process has been wise to take a measured approach to the system of exposure drafts, consultation and final review to ensure that a quality item has resulted.
The new Bill is without doubt a good example of how to reorder tax legislation with advantage. Lord Howe reflected on the matter at the press conference effectively to launch the process. He commented on the state of tax law now:
The endless elaboration of existing rules to deal with changes in the outside world has fed upon itself. Even a simple change may interact with a mass of existing provisions. So getting that change to fit in properly will extend the jungle, and make it even more impenetrable.
He elegantly summed up the challenge that the tax law rewrite exercise had to tackle. The new simpler Bill at least makes it easier to see how the interactions take place. When my hon. Friend the Member for Croydon, South referred to a piece of impenetrable tax law, we could see how difficult that was in reality. The praise that practitioners have heaped on the outcome of the rewrite exercise reflects the greater access to the understanding of tax law that comes from the exercise.
It is perhaps worth reflecting briefly on those who need access to the understanding of tax law, even in the context of self-assessment. Only about a third of taxpayers fill in the form. For two thirds, the tax system is on auto-pilot. For them, many of the complexities, at the moment at least, do not entertain their thoughts.
I am delighted that the exercise has done as well as it has. I pay particular tribute to one or two people whom the Paymaster General, for understandable reasons, might not have been able to pick out. I am glad that the documents that accompany the Bill list the people who gave their time, particularly on the consultative committee. Those people are tax practitioners. As my hon. Friend the Member for Bury St. Edmunds (Mr. Ruffley) pointed out, they make an hourly charge in the commercial context. They have given their time to the exercise free of charge. By and large, they have been the ones who have ensured a good quality of drafting in the exposure drafts. They deserve parliamentarians' undying thanks for the assiduous way in which they have conducted their exercise.
Less onerous, but nevertheless burdensome has been the work of the steering committee, of which I have been a member. I pay tribute to my predecessors, my hon. Friend the Member for Bognor Regis and Littlehampton (Mr. Gibb) and the hon. Member for Wrexham (Dr. Marek), who have stuck to the task in making certain that Parliament was represented on the steering committee. I also pay tribute to Neil Munro of the Inland Revenue, who has given dynamic leadership to the tax law rewrite exercise. Without that, there would not have been the progress to date.
Mention has also been made of parliamentary counsel, who are often the unseen and unsung heroes of our proceedings. It is right, particularly in relation to this Bill—if it is not invidious to do so—to highlight the work of Heather Cauldwell. She has worked 70, 80 and sometimes even 90 hours a week to ensure that the law is properly drafted. That is no mean feat, and she and the other parliamentary counsel who have been working on the Bill should be thanked for all their efforts. Although those on the Treasury Bench have occasionally been a little naughty by hijacking parliamentary counsel for pressing work on the Finance Bill itself, I think that the message of permanency has been made clear in the Bill's drafting.
As I said, one of the results of the exercise is the identification of the need to go further. In his 1998 stocktake report, my right hon. and noble Friend Lord Howe, commenting to the Chancellor, said:
Many people would like the project to go further towards simplification of the underlying tax policy. The process of rewriting the legislation is highlighting many archaic or cumbersome aspects of the tax code which they believe could be improved.
Sadly, as the Paymaster General said, the exercise in which we are now engaged—to approve the Bill's Second Reading—prevents us from addressing some of those issues. However, perhaps the greater transparency and clarity emerging from the exercise will trigger a future debate.
The exercise has also been very educational even for people in the Revenue. As I said, it is not often that they have the opportunity of such an overview of legislation and to consider the interactions that that legislation involves. I very much hope that the good ideas resulting from the exercise will find their way into legislation.
In fairness, the Paymaster General may not have had time to mention that the previous Finance Bill made it possible to incorporate into this Bill a change in the law to revise the legislation on car-pooling arrangements. I congratulate the Treasury on using the Finance Bill in that way. I encourage the Treasury, when there are good ideas, to work with the rewrite committee in using future Finance Bills—perhaps creatively—to enhance further the operation of our tax law. Whatever our views on the freestanding tonnage tax—which is not dealt with in this Bill—it demonstrates that lessons learned in drafting can be applied to forthcoming legislation. Clearly, the Inland Revenue and the Treasury are learning a great deal from the exercise.
I draw the House's attention to some very interesting and sage words in the minute of the 25th steering committee of the tax law rewrite exercise. Although the comment was on an employment income exposure draft, it very clearly demonstrates the challenge that the exercise has had to face and will have to face. The minute states:
The team had found the legislation particularly difficult to rewrite because of its complexity. There were many issues to unravel, many connections between provisions to untangle and a number of fictions and hypotheses to sort out. A good example was section 198, which seems relatively uncomplicated in itself but is used by other provisions in a variety of ways. Sections 156(8), 193(3), 193(7) and 200A all latch on to the rules in section 198 in different ways.
It goes on to say:
What works well in one respect does not work well in another. But the current arrangement is seen as the best compromise.
I am sure that the same analysis occurred to those who wrote the Bill. It demonstrates the sheer complexity of the exercise.
Much mention has been made of the explanatory notes. I congratulate those who wrote them. Even though the new legislation is drafted in plain English, it is useful to have such an overview, which might be called the Ordnance Survey equivalent of tax law. However, I ask hon. Members to scan page 7 of the notes and to consider the variety of matters with which capital allowances must deal: plant and machinery, industrial buildings, agricultural buildings, mineral extraction, research and development, know-how, patents, dredging, assured tenancy and contributions. There are also supplementary provisions. At some stage, it must have been argued that the inclusion of each of those items in capital allowances legislation is vital, even though each is highly complex.
One of my wishes on the explanatory notes would be to include in the Bill the excellent summary diagram on pools on page 18, which provides for the first time a visual means of exploring the meaning of a Bill. I think that Revenue officials must have remembered from my time in the Treasury my Roland Emmett-type diagrams, which tried to follow the flow of money as it was influenced and affected by different elements of legislation. The table on page 18 of the explanatory notes, which is delineated as figure 1, has remarkable clarity and much greater understanding. It is an excellent means of providing an overview of how something works. One of the great advantages of the Bill as redrafted is the elegant explanations at the start of clauses, which say in plain terms to whom they apply. If illustrations such as the diagram on page 18 could also be included in legislation, we would go a long way towards further improving clarity and understanding in these matters.
As my hon. Friend the Member for Croydon, South said, the list of chapters almost resembles an index to the Bill. I refer anybody who wants to understand the Bill's full import to the arrangement of chapter headings in the Capital Allowances Act 1990, which it replaces. Part I of the Bill has an introduction and a logical exposition of its contents that leaves one in no doubt of what is involved. However, the existing legislation is arranged in a topsy-turvy way, with no logic whatever. That element of clarity in the Bill is much to be commended.
I undertook to compare and contrast the new with the old. [Interruption.] The Paymaster General laughs, probably because six has tried the same exercise.
I apologise for laughing. The right hon. Gentleman's remarks reminded me of the large number of Finance Bill Standing Committees on which we have served together. In those Committees, he usually began his sentences with the words "compare and contrast".
I am delighted that my words have seared their way into the Paymaster General's mind. I hope that my proposals about lessons arising from the exercise will have a similar effect.
Interestingly, section 23 of the Capital Allowances Act 1990 bears the title "Information relating to first-year allowances". The fin t thing that one reads about first-year allowances is the following statement:
A claim … for a first year allowance in respect of expenditure to which 22(4)(c) applies … shall be accompanied by a certificate …
I shall not bore the House by reading out the rest of that opaque legislation paragraph by paragraph, but I cite it to contrast it with the start of first-year allowances in the Bill, in which clause 52 states, straightforwardly:
A person is entitled to a first-year allowance in respect of first-year qualifying expenditure: …
and goes on to give details of the circumstances in which the allowances are applicable. Then, for the first time that I can remember, there follows a clear table laying out the types of expenditure and the allowances for which they qualify. The introductory section then provides an example of the signpost that the hon. Lady mentioned that points people to other parts of the Bill in which further information can be found. This is a remarkable change.
This is the only part of the Bill that I could find in which one could try to contrast the new with the old, but I would commend that exercise as a way of reassuring my right hon. and hon. Friends who have expressed concern about, for example, the nature of what constitutes a minor change, and about what the Bill seeks to do. Once one has looked at the before-and-after effect, one understands that minor changes have had to be made to enable this clearer exposition of the existing fundamental tax code to take place. If one overlays that with the appropriate incorporation of the extra statutory concessions, one begins to understand what the exercise is about.
It is also worth looking at the second document that the Paymaster General mentioned: the explanatory note annexes. She prayed in aid the document to illustrate where definitional changes had been made. I would like to look at one or two of those definitional changes, as they illustrate some of the problems with which the Bill has had to grapple.
When I was in the Treasury, I had a big argument with the Inland Revenue over a provision about capital allowances on caravans. One would not have believed the number of definitions in law of a caravan. You and I, Mr. Speaker, would know what a caravan was if we were sitting behind one in a traffic queue. However, a separate piece of law that exists for council tax purposes defines a caravan, and there are two definitions of them in the tax code: caravans on touring caravan sites, and caravans of a more fixed nature. In terms of capital allowance legislation, those definitions had different effects until I managed to persuade officials that they described one and the same thing.
The new definition on page 3 of the explanatory notes annexes states:
The main significance of the extended definition in the present context is that it includes structures that can be moved only by being put on trailers.
That is a great breakthrough in the definition of a caravan, but it also illustrates the problem of tax law having to cater for special circumstances, which someone, at some time, thought was a good idea in terms of protecting tax expenditure or revenue in the context of capital allowances. This exercise, as illustrated by the Bill, will highlight the anomalies, and the need to do something about them will present considerable challenges to the Government.
Annexe 2 on page 73 of the same document highlights one of the challenges that has had to be met in terms of the language of the Bill. As the Paymaster General mentioned, clause 3(1) provides that
No allowance is to be made under this Act unless a claim for it is made.
It is intriguing to think about the legal cases that lie behind the decisions about the terms on which capital allowances can be claimed. The explanatory notes say:
It was argued by the Inland Revenue that, because trading expenses are automatically deductible in computing trading profits, the effect of making a capital allowance a trading expense was to obviate the need for the allowance to be claimed and to make it automatically deductible.
Somebody, in the case of Elliss v. BP Oil Northern Ireland Refinery Ltd., had wanted to determine in law when a claim could be made. That is one of the real difficulties of our tax code, and although the Bill writes the tax law in clearer language, it will not stop people questioning exactly what the words mean.
In tax law we are dealing not with precise scientific formulae but with words capable of interpretation. Page 75 of the explanatory notes, which is about clause 5, gives us another example on the same theme of the ownership of an asset. Obviously, the determination of when a capital allowance can be claimed is related to when someone acquired the asset—and again, there is some interesting case law that determines when ownership occurs. Ownership could begin on the day when someone bought an asset at auction, or it could begin when it was delivered to his premises. I shall not detain the House with a detailed exposition—
No, I shall resist my hon. Friend's encouragement.
I put those two examples on the record because they illustrate some of the real problems that arise when people say that we should have less complex tax law. Such people will criticise the Bill and say, "It doesn't look any less complex to me; it's simply that now I can understand the complexity better." However, when we realise that people go to law over questions of precise timing, and exactly when an asset becomes owned, we understand why our tax law is complex. As the Paymaster General said, £18.8 billion in tax is forgone as a result of the allowances that are at stake, so it is not surprising that it is necessary to ensure that the law is tightly drafted.
I have one or two criticisms of the layout of the Bill. I have talked to tax practitioners, and I know that there was real disappointment that three-part numbering could not have been incorporated. When the legislation was launched, especially in its exposure draft stage, all the practitioners commented on how much clearer things were with three-part numbering. In fairness to the Paymaster General, she supported that proposal—I hope that I have not embarrassed her by revealing that in public.
Sadly, upon immediate inspection, the present version of the Bill looks exactly like any other piece of legislation. Three-part numbering, which would have enabled practitioners more readily to identify its component parts, was denied the light of day because, we were told, the law had to be written so as to be compliant with everything else, not with the new form of numbering. A real opportunity has been missed to add to the clarity of the exercise.
I have already mentioned the idea of incorporating a table, and that leads me to make the point that, in commenting on its overall layout, some practitioners have said that the Bill should have had better spacing and a more modern look. That would have been an advantage, especially bearing in mind the unique nature of what we are doing here. Perhaps, in time, it will be possible for us to consider that proposal. I hope that the layout will be reconsidered, which would not detract from the content of the Bill.
Your predecessor in the Chair, Mr. Speaker, gave us proper counsel about not straying too far into policy issues. I shall respect his ruling entirely—save to say that I have been thinking about some of the individual capital allowances mentioned in the Bill, and the Institute for Fiscal Studies has produced some interesting analysis that makes us question the real-world effectiveness of some of the measures, however transparently they are drafted. Therefore, I—