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Orders of the Day — Finance Bill

Part of the debate – in the House of Commons at 2:56 pm on 20th April 2004.

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Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury 2:56 pm, 20th April 2004

I thank my right hon. Friend for making that point, which is particularly relevant in the face of the problems that many have experienced. There is the wider economic point that when an economy is at full capacity and when interest rates are rising, with the threats that that can bring to the economy, one of the things that can prevent that from boiling over into economic problems is boosting the savings rate. A wise Chancellor would try to get the savings rate up at this moment in the economic cycle, as any economist would tell him. The truth, however, is that the Government's savings policy is a mess and has virtually disappeared off the Chancellor's radar screen, just as he has dropped any reference to the equally important need to improve productivity growth.

There are some measures in this leviathan Finance Bill that Conservative Members support. The rebating of all VAT on church repairs is long overdue, particularly given that charities are collectively paying nearly twice as much tax as under the last Conservative Government following the loss of advance corporation tax. We welcome the delivery of the promised extra relief for community amateur sports clubs and the child care voucher proposals. However, too much of the Bill is about leeching the tax system and will fall particularly hard on small businesses and on ordinary citizens.

The Chancellor's biggest sting was fixed last year with the freezing of tax thresholds and allowances. As hon. Members will realise, a fiscal drag serves to pull large numbers of additional people into the higher income tax rates. In his Budget speech, the Chancellor failed to mention the tax rise from £110 to £600 a year for drivers who use company vehicles for private use. Nor did he mention the imposition of an income tax charge, retrospectively, on those who have made perfectly legal arrangements in the past to enable them to pass on their houses to their children while occupying them until their death. The cause of the problem there is that, as a result of the Government's policies, house prices have risen by much more than the inheritance tax threshold. The Chief Secretary referred to the natural obligations that one generation feels towards the next, but the Government seem not to understand that it is very natural for parents to want to hand their houses on to their children. There is nothing immoral or wicked about that—virtually everybody has that sort of generation-to-generation motivation. The Chancellor should not underestimate the resentment about the provision that will be felt by the middle class voters whom the Prime Minister is so keen to retain. I believe that the Government should have tightened the gift of reservation laws for inheritance tax purposes. Instead, the new income tax charge in the Bill adds yet further complication to personal taxation for tens of thousands of people and threatens the future of many of our historic homes.

As we stressed in Committee on the Finance Act 2002, the introduction of the zero corporation tax rate introduced a fiscal distortion that favoured incorporation for small businesses, as opposed to remaining sole traders. As we warned, that led to a massive shift to incorporation, which the Government estimate would cost £420 million in lost tax this year alone. The Government have chosen to tax the distributed profits of small companies, which would otherwise fall within the zero band, at 19 per cent., to deal with that. Again, that will create significant compliance and legislative burdens for small businesses, with complications relating to undistributed prior year profits carried forward, and hit especially the smallest companies, which often find it difficult to retain profits.

The Law Society commented that the extent and complexity of the provisions are disproportionate to the amount of tax involved. The Treasury Committee stated that it is puzzled about why, unlike other commentators, neither the tax authorities nor the Treasury appear to have anticipated the inevitable incentive to incorporation for small businesses.

The Paymaster General will remember that she pointed out in Committee that small businesses would not look a gift horse in the mouth. She clearly expected the provisions to encourage small businesses to incorporate, but now we are told that it was not a gift horse after all. Consequently, small businesses now end up with a complex tax charge.

On another subject relevant to owner-managed businesses, clause 86 seeks to remove the ability of small owner-managed businesses to be held jointly, and the husband and wife to remain taxed on a 50:50 basis. That flies in the face of the provisions that were specifically made in 1990, when independent taxation was introduced. Outside the Finance Bill, aggressive new interpretation of section 660A, universally criticised by the accounting profession, seeks to introduce another stealth tax, to tax as the husband's income dividends from the proportion of owner-managed companies that were historically owned by the spouse. The parliamentary debates and Budget press release relating to the Finance Act 1989 made it clear there was no such intention thus to interpret section 660A.

What is fundamentally wrong with these initiatives, essentially designed to extract more taxation from small, owner-managed businesses, is that they impose complicated rules on small businesses, which are costly to administer, potentially penal, and will possibly lead to mistakes. At the end of the day, the earnings are not large. As a constituent wrote to one of my colleagues:

"I am sick of this Government messing up so many areas of my life. I am fed up with their taxes, anti-family stances and sheer arrogance. They meddle in so many areas where they just do not see the ramifications."

I am surprised that the Inland Revenue has not previously attacked artificial tax avoidance schemes, which have been widely marketed, well before they have become widely used, and I understand the Government's objectives in the Bill. However, I ask the Chief Secretary to make a commitment that the Government will now publish the prescribed Treasury regulations, mentioned in clause 290, which will define "notifiable arrangements". Without that, we cannot know whether, as the Treasury Committee warned, the arrangements will create undue compliance burdens for taxpayers and their advisers, or undue administrative burdens for the tax authorities. As the national head of Ernst and Young commented, his concerns are that UK businesses should not be put at a competitive disadvantage. I am sure that the Government share that objective.

I also warn the Government of the dangers of confusing tax evasion and tax avoidance. In those European Union economies where that happens, the outcome has been to make tax evasion socially acceptable. Ultimately, there also needs to be a degree of consent on the part of those asked to pay the taxes levied on them. As the senior partner of Grant Thornton pointed out, many of the Government's problems in their attempts to tackle tax avoidance are of their own making. Moreover, to avoid the new rules imposing excessive and uneconomic burdens on business, they also need to draw a clear line between "offensive" tax avoidance schemes and normal corporate tax planning; otherwise, provisions could have the effect of requiring any transaction on employment or a financial instrument that could have been accomplished in a less tax-efficient manner to be reported. That would impose wasteful time and cost burdens both on business and on the Inland Revenue.

Clause 298 lacks adequate clarity about when lawyers are bound by their duties of confidentiality to a client and when they will be obliged to report under the new rules.

It is also notable that, although the Bill contains major anti-avoidance measures, there is a marked absence of Government initiatives to tackle tax evasion and the growing black economy, or for that matter, the £7 billion incorrectly paid out in state benefits as the result of one in five Department for Work and Pensions decisions being wrong, as recently reported by the Public Accounts Committee. Moreover, in the Chancellor's drive to leech the tax system, he might apply his ingenuity to improving the collection of £14 billion of uncollected tax last year, as the recent National Audit Office figures revealed. That partly reflects the growing unwillingness of the rising generation to be bothered with the demands of ever more time consuming, bureaucratic compliance in their private lives.

Much the most serious challenges to the UK tax base, however, have come from recent European Court of Justice decisions founded on the principle of freedom of establishment in the EU. The Government have no clear view about what the corporation tax system will look like once all the existing and prospective EJC cases have been decided. The recent ECJ decision in the Delasteyre case applies to British companies and allows UK companies to move abroad without incurring a tax liability.

Until now, a UK company would be deemed to have made a disposal of assets if it moved to a low corporation tax rate country, such as Ireland, where that represented a major capital gains tax bill deterrent. The Delasteyre case removes this barrier and renders unlawful the new migration charge under clause 48 and schedule 8 , thus opening the doors to a Dutch auction of corporation tax rates across the EU. I fear that the Government have done no more than react, with delay and without any overall strategy, to each ECJ decision. We understand the Government's objectives with the UK transfer pricing and UK thin capitalisation proposals in the Bill, but we suggest that the Chancellor note the concerns of the Confederation of British Industry about the huge compliance burden placed on UK businesses and the possible impact of the provisions on competitiveness. The Government should tackle the problem head on in Europe, where it should not be within the jurisdiction of the ECJ to rule on tax issues.

A full digestion of the 158 pages setting out the new regime for pension savings will have to await the Committee stage. As the Chief Secretary commented, the changes were supposed to reduce the pension system from eight regimes to one, but they create six new systems. Most of the proposals appear generally welcome, but in a long-term territory such as pension saving it is all the more important, in principle and in practice, for changes not to be retrospectively damaging to individuals. When the Conservative Government first introduced the pension cap in 1989, the principle was clearly established that individuals' pension contributions, where they were already members of pension schemes, were grandfathered for as long as they remained in that scheme and employment, or its successor scheme and company. So we believe that it is an important point of principle that such individuals should not be unfairly disadvantaged under the highly complex transitional arrangements that are proposed.

We also question the Government's apparent reversal of their own measure introduced three years ago to enable women who take a career break to keep up their pension contributions for five years, based on the amounts that they had been earning at the time they stopped work, rather than restricting them to the stakeholder limit—[Interruption.] The Financial Secretary says that that is covered, and I am glad to hear it, but the industry does not feel that that is the case.

We also have concerns that the 1:20 ratio regime provides substantial tax advantages to members of final salary schemes, while those with money purchase pensions are materially disadvantaged. As we have already pointed out, there is no need in principle for a cap if all employees have to be members of the same company scheme, and if annual contributions and tax-free lump sum withdrawals are subject to reasonable limits. We also wonder whether the new arrangements will provide larger incentives for tax leakage, up to the £1.5 million limit than the Government have anticipated.

While welcoming in principle effective measures to tackle VAT avoidance, we are worried that clause 20, which tightens up on VAT group relief, will act as a major incentive to banks and other large financial services organisations to sub-contract their back-office functions overseas. Here again, the Government would have done better to tackle the EU VAT problem in this territory head on.

We understand that the property VAT anti-avoidance measures to outlaw schemes such as those under which the Labour party saved £1 million on the purchase of its new offices in Old Queen street, by treating the acquisition as a business rather than a property, are being discreetly addressed outside the Bill by a separate statutory instrument. However, I am glad to see that the Labour party knows so much about this kind of tax avoidance.

Next week, we will be addressing more fully the specific Budget resolutions that we voted against, on the Floor of the House. It is extraordinary that the Government should be introducing the costly and complex strip-stamping regime for spirits when, only two years ago, the Chancellor's Budget day press release commented:

"It was clear from this consultation process that the introduction of tax stamps would have a severe impact on the productivity and compliance costs of the spirits industry . . . The Government does not consider those costs as proportionate to the benefits of tax stamps."

We shall look forward to hearing what has changed to make the Government do a volte face, because as far as we can see, nothing has changed.

The Bill contains a further 51 pages on stamp duty land tax, but fails to address the major distortions now being caused in the residential property market as a result of the Government's stamp duty slab regime. There is a total of six other stealth taxes in the Bill, but after the Chancellor's massive engineered increases in council tax, stamp duty is his second largest stealth tax—[Interruption]. Labour Members might be surprised to learn that stamp duty revenues have risen from £2.5 billion in 1997 to a forecast £9.4 billion this year, and they are forecast to be up another £2 billion on last year. I must point out to the Chief Secretary that those middle class voters whom the Prime Minister is so keen to retain are not happy about what is happening to them on this front, especially first-time buyers who are going to have to find about another £2 billion over the next year in stamp duty.

The Chancellor's boastful budgetary oratory sits ill with the dreary realities of the Bill and the issues facing the British economy. The once prudent Chancellor has been imprudently profligate in running a structural deficit which might prove to be as high as £50 billion, when there is no slack in the economy. The relative success of the British economy in recent years has been at the price of unsustainable increases in personal and mortgage borrowing, which threatens stability, now that interest rates are rising. The deterioration in Britain's public finances in the last three years has also been the worst in the EU, and taxes in Britain have increased as a proportion of gross domestic product by more than in any other EU country over the past six years.

In the forthcoming spending review, the Chancellor will not tell us that he will be seeking desperately to put the brakes on out-of-control public spending; nor will he tell us by how much he will be putting up taxation if Labour wins another election. He will not be telling us, either, of his wish for a general election as early as possible, before the risk increases of the economic wheels coming off. Like last year, the reality of this Labour Government is more taxes, more spending, even more borrowing and continuing failure to deliver. The Chancellor's policies are taking Britain back to old Labour tax and spend failure. He has already lost the confidence of much of the business community, and he is well on the way to alienating a majority of British citizens.