Order for Second Reading read.

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

At the time of the pre-Budget report on 2 December 2004, I made a statement to the House that outlined how, despite the best efforts of successive Governments since 1994, we continued to be presented with ever more complex and contrived arrangements designed to avoid income tax and national insurance on the rewards from employment. I made it clear that we intended to close down such activity permanently.

In my statement, I recalled that earlier attempts at such avoidance took the form of paying bonuses and salaries in gold bullion, diamonds and fine wine. When those routes were closed, employers started to pay bonuses through ever more sophisticated financial instruments and securities to reduce the amount of national insurance that they had to pay, to avoid their obligation to operate pay-as-you-earn and to reduce employees' tax Bills.

The tax avoidance disclosure rules that were introduced in the Finance Act 2004 brought to light many—more than 100—examples of such schemes that had been devised or marketed by promoters. That showed that a significant minority of employers and their advisers were continuing to devise, operate and market ever more contrived avoidance schemes to disguise what is, in effect, remuneration. Without prompt and decisive action, there was a genuine possibility of tax and national insurance contributions avoidance schemes continuing, to the detriment of the Exchequer and the many employers and employees—the Majority—who pay their fair share of tax and national insurance.

I gave notice of our intention to deal with any similar arrangements that emerged in future that were designed to frustrate our intention that employers and employees should pay their fair share of tax and national insurance on the rewards from employment. When we become aware of arrangements that attempt to frustrate that intention, we will introduce legislation to close them down and, when necessary, with effect from 2 December 2004.

Does the Paymaster General accept that one of the problems is the complication of the tax system since 1997? It means that it is inevitably in the interests of employers and some employees that income should not be regarded as such but regarded as capital for lower taxation. How many of the 100 schemes that she mentioned are straightforwardly designed to turn what might be described as income, and therefore in a somewhat grey area, into capital that is thus subject to a capital gains tax levy, which is generated at a lower level?

The hon. Gentleman may know the answer from discussions during the proceedings on the Finance Act 2005. However, let me provide a short list of the sort of schemes that have been operating in relation to bonuses that are payment for employment. In 1991, such schemes used unit trusts to shield bonuses and the previous Government closed them down. In 1993, gold bullion and tradeable commodities were used and subsequently closed down. However, the schemes returned in 1994, using diamonds and fine wine. They were closed down but another type of scheme returned again in 1995 with grants of options in third-party companies. In 1996, own-company share awards and options were offered.

All those schemes reveal a systematic and continued attempt to use contrived schemes for payment for employment, which should come within the PAYE system. The issue is whether tax and national insurance are paid on the relevant forms of income. The Bill tries to provide for that. I hope that, as I go through the provisions, the hon. Gentleman will be satisfied that the measure is specifically targeted and that it includes the necessary safeguards to ensure that. I hope that he will agree that the Bill is a proportionate and relevant way to tackle the problem.

The Paymaster General has made a good case for dealing with some contrived schemes that operated for over a decade, but I suspect that the previous Government closed them all down. However, given the complexity of the tax system, which creates an obvious incentive in a grey area to characterise what might have been described as income in the past as capital because of the lower tax rates, how many of the 100 schemes that were being marketed on 2 December 2004 are straightforward rather than the extreme contrivances that we all agree should have been closed down?

My advice is that they are all contrived schemes of the same convoluted nature as their predecessors. The hon. Gentleman spoke of complexity, and overcoming that has been a frustrating problem for hon. Members, especially those of us who serve on Finance Bill Committees, and for those who have to implement the legislation. To close down a complex and sophisticated scheme, we need a sophisticated and complex measure. Our measures make a clear and unambiguous statement: do not undertake contrived schemes. They will be closed down whenever they are identified. Closure could be backdated to the December 2004 statement.

Am I right that we are not discussing peanuts? Without the Bill, the schemes would cost Her Majesty's Revenue and Customs approximately £240 million. That is not small beer.

Indeed, it is not an insignificant amount of money and it should have been paid. The vast Majority of taxpayers pay, but non-payment has direct effects not only on the tax collected but on the money that goes into the national insurance fund.

In 2004, I gave notice of our intention to deal with any future arrangements that were designed to frustrate our intention that employers and employees should pay their fair share of tax and national insurance on their rewards for employment. When we become aware of such arrangements, we will introduce legislation to close them down and, I repeat, when necessary, with effect from 2 December 2004.

If some people think that the Government's resolve has weakened, my statement stands today as strongly as it did on 2 December 2004. We are closely examining what has happened since that date. I want employers and their advisers to be in no doubt. If they continue to avoid their responsibilities, or are thinking of doing so in future, we will not hesitate to introduce further legislation to close down their schemes.

As a first step towards demonstrating our commitment to taking action, schedule 2 to the Finance (No. 2) Act 2005 was introduced to strengthen the income tax rules dealing with employment-related securities back to 2 December 2004. The Government had already published a draft technical note alongside the pre-Budget report last year, explaining our proposals, followed by draft legislation in February 2005. Interested parties have therefore had an extensive period in which to scrutinise and comment on the detail of the provisions, which were then fully debated during the Committee stage of that Act.

The Bill before us is the second legislative step that demonstrates our commitment to taking action against avoidance. It is key to achieving the Government's objectives of fairness and opportunity by ensuring that all pay their fair share of tax and national insurance. It is also an essential element in building a serious and credible deterrent against future avoidance.

As the tax disclosure provisions have demonstrated, and as we and the previous Conservative Government have discovered, it is not always possible to anticipate the range and complexity of those extremely contrived arrangements. The Government intend to close down such avoidance schemes permanently. The Bill will ensure that the Government can deal with any arrangements designed to frustrate their intentions. That will ensure that the tax and national insurance that should rightly be paid on rewards for employment are paid. There is no annual equivalent of the Finance Bill for national insurance, so the Bill provides the necessary powers to apply national insurance to payments from such schemes.

When the Government become aware of arrangements that attempt to avoid national insurance contributions as well as tax, we will introduce regulations to close them down, where necessary from 2 December 2004. This action will not affect the vast majority of employers and employees, who organise their affairs in a straightforward and transparent way. In particular, genuine employee share schemes and share option plans will not be affected.

The Bill provides for a power to make regulations in respect of national insurance that reflect backdated tax changes that take effect on or after 2 December 2004 and which may be outside the scope of existing national insurance legislation. The power will allow for national insurance liability to be charged starting from 2 December 2004, if necessary.

The Bill is needed to extend existing regulation-making powers and to make it possible to impose a national insurance charge on disguised remuneration that is capable of taking effect from 2 December 2004, where necessary. Currently, a national insurance liability can usually be charged only from the date on which the national insurance regulations are made, except in limited circumstances in which the regulations can be backdated to the beginning of the tax year in which the regulations are made. This is in contrast to tax, where liability can, if the legislation so provides, be applied retrospectively to the date of an announcement made before the legislation receives Royal Assent.

Provisions in the Bill also allow for consequential changes for the purposes of contributions, contributory benefits and statutory payments where appropriate. For instance, a national insurance charge might be levied back to 2 December 2004 to align with the start date of anti-avoidance tax measures. In such a case, the provisions of the Bill, and the regulations made under the powers in the Bill, would ensure that those contributions would count for the purposes of contributory benefit and statutory payments.

The Bill also provides a power to extend the avoidance arrangement disclosure rules to national insurance that currently apply to income tax. Finally, it provides a power to prevent the use of national insurance contribution elections and agreements over shares and securities that have been targeted by backdated national insurance regulations made under the Bill. This will mean that employers cannot pass on to their employees their own national insurance liabilities that they have tried to avoid.

Significantly, the Government have ensured that the Bill contains important safeguards to ensure that regulations made under it take full account of human rights considerations. This is in addition to the Government's existing duty to make regulations that are compatible with the European convention on human rights. Furthermore, the power to make regulations altering liability is restricted to reflect, so far as is possible, employment remuneration measures in tax legislation—normally Finance Acts—and is intended to be used only to reflect tax anti-avoidance measures. So when such regulations are made, the House will already have had the chance to consider any relevant human rights issues on backdated tax legislation during the passage of the relevant Finance Bill or other legislation.

The Bill also includes a specific provision to ensure that when, for instance, as part of a package of anti-avoidance measures there is exceptionally a reduction of national insurance liability for past periods, any existing or future benefit entitlement will not be affected.

We will publish the draft regulations a minimum of 12 weeks before they are made, so that employers and their representatives will have an opportunity to comment on the technical content of any proposed national insurance changes. Once the Bill has received Royal Assent, any national insurance legislation will have to be laid within 12 months of the corresponding retrospective tax legislation. Furthermore, to ensure that there is adequate parliamentary scrutiny when regulations are made, such regulations will be subject to the affirmative resolution procedure.

The powers in the Bill will be used, in the first instance, to make regulations to reflect the employment-related securities anti-avoidance provisions included in schedule 2 to the Finance (No. 2) Act 2005, which received Royal Assent in July 2005, but which took effect from 2 December 2004.

In conclusion, the Bill is important and necessary to ensure fairness. It will not affect the vast majority of employers, who do not seek to avoid their tax and national insurance liabilities through avoidance schemes. However, I have explained how, unfortunately, a small minority continue to try to avoid their obligations, at substantial cost to all other taxpayers. The Bill is therefore an appropriate, proportionate and effective response to national insurance avoidance, and I commend it to the House.

It is self-evident that there are few subjects of debate more likely to empty the Chamber than national insurance contributions.

In an age in which consecutive Finance Acts create and then abolish new-fangled tax instruments, national insurance contributions have proved remarkably resilient. We are now in the 58th year since their coming into force as part of the welfare state establishment that followed world war two. Back in 1948, all those at work except married women paid the princely weekly sum of 4s 11d—that is 24.5p for all those Members of the House younger than me—in a flat-rate compulsory contribution. How times have changed! The only thing that is flat about national insurance today is the spin in which the Government find themselves when trying to raise as much money as possible in their frantic attempt to balance their books. I said in Committee in June during the passage of the Finance Bill in June that,

"for our part, it is difficult to avoid the conclusion that many of the anti-avoidance proposals are driven by an increasingly desperate Treasury desire to fill its revenue black hole without regard to the damaging effect that it will have on the development of start-up ventures, and, indeed, some bona fide remuneration schemes."—[Official Report, Standing Committee B, 21 June 2005; c. 43.]

The Finance (No. 2) Act 2005 made a number of amendments to the Income Tax (Earnings and Pensions) Act 2003, with the aim of closing down schemes to avoid income tax using employment-related securities. Those amendments have retrospective effect, as the Paymaster General rightly pointed out, going back to 2 December 2004. It is not currently possible to extend retrospective income tax provisions to national insurance contributions, because liability for NICs can be charged, as the Paymaster General mentioned, only from the date on which NICs regulations are made, except in limited circumstances in which the regulations can be backdated to the beginning of the tax year.

The Bill's stated purpose is to align national insurance legislation with income tax legislation, which will allow tax liability to be applied back to the date of the announcement. As the Paymaster General pointed out, the Bill also contains provisions to restrict employers' ability to pass on any secondary NICs liability to employees and extends the existing tax disclosure rules to NICs. I shall come to aspects of that in a moment, if I may.

There is, however, a good reason for existing NICs legislation not allowing regulations to take such retrospective effect. In my view, only in the rarest of circumstances should the Government contemplate either retroactive or retrospective legislation. I fear that the Bill's effect will be to institutionalise retrospection. We shall certainly need to explore that in far greater detail in Committee.

The substantive clauses will put in place the intention of the Paymaster General's statement of 2 December 2004. Recognising the difficulty of anticipating the ingenuity and inventiveness of the avoidance industry, she gave notice of the Government's intention to deal with any arrangements that emerge that are

"designed to frustrate our intention that employers and employees should pay the proper amount of tax and NICs on the rewards of employment."

She continued:

"Where we become aware of arrangements which attempt to frustrate this intention we will introduce legislation to close them down, where necessary from today."

As we gathered from the previous exchanges, it is clear that there may be 100 such contrivance schemes. We need to understand whether some of those are in many ways bone fide remuneration schemes, and indeed whether their closure might be detrimental to the very start-up operations that I think all of us in the House agree are the lifeblood of the economy.

The key issue, however, is whether the importance of protecting tax revenues outweighs the need for certainty in commercial forward planning, because the threat of retrospection came as a great surprise to many tax professionals, as it falls foul of one of the great canons of taxation—that of certainty.

Arguably, retrospection is also unconstitutional, and if not it should be regarded as acceptable only when couched in unambiguous terms. The Government's admirably comprehensive explanatory notes make much of what they regard as the position under the Human Rights Act 1998. In spite of the characteristically robust protestations of human rights compatibility from the Chancellor of the exchequer, his is a position of an interested party, for the reasons I have set out. These measures will obviously bring in more money—perhaps as much as £240 million during this year and years to come.

The Chancellor and the Treasury need that money to keep flowing in, and it strikes me that several experts in this novel but complex field of human rights take a different view on compatibility. No one disputes that it is the Government's duty and responsibility to devise policy, but equally Parliament must retain effective control over how that policy is implemented by legislation.

In spite of the Paymaster General's suggestion that this power is relatively limited—the words of comfort about the affirmative procedure were positive—Parliament will undertake only cursory scrutiny, because the Bill is designed to enable Her Majesty's Revenue and Customs to backdate to December 2004 all those NICs to which the Finance (No. 2) Act 2005 changes apply.

We must consider some of the practical effect—my hon. Friend Mr. Spring, the Shadow Paymaster General, will mention some such examples later—and remember that NICs come from both the employer and employee. Are the Government seriously suggesting that erstwhile employers of someone who has died after December 2004, or perhaps of a former employee who has been fired in acrimonious circumstances, should have disputed NICs clawed back? This has all the makings of another farce on the lines—although, I accept, not to the same degree—of the tax credits fiasco. How much contingency has the Paymaster General made for writing off sums that can neither be claimed nor easily traced?

It gets worse, because by the time the Bill has made it through Parliament, no doubt the new year—2006—will be upon us. Unravelling NICs arrangements, which by then would already be over a year old, will also most likely have knock-on implications for the disclosed employer company profits in previous tax years. That may have a crucial impact, especially if the tax avoidance in question is considered widespread within a particular industry sector.

First, does the hon. Gentleman agree that if the legislation's effect is to deter people from even bothering to devise schemes that seek not to pay the tax and national insurance that should have been paid—I sincerely hope it is—it will have done precisely what it aims to do, and all the things he is talking about, which no doubt we will explore in Committee, will not happen?

Secondly, does the hon. Gentleman think that the general taxpayer, and the Government representing the general taxpayer, are also entitled to certainty about revenues? This is employment pay, so it should be subject to pay-as-you-earn and national insurance.

Let me answer the second point first, if I may. On the certainty issue, in any one year we do not know how many people will be in the employment market, as we have gathered from the constantly changing growth figures that have been published since the autumn review last year. For that reason, there will never be complete certainty for any Government at any time. What we are looking for here is commercial certainty. Surely it is the entitlement of individuals and companies to have that level of certainty. After all, tax is not a voluntary regime; it is imposed by a Government on their people. Such an imposition gives any Government of any day great power. The certainty that is therefore required is commercial certainty for those who could suffer from a tax.

On the Paymaster General's first point, our concern is the law of unintended consequences. We never quite know how things will unravel. I am not looking necessarily to stand up for those tax advisers and employee benefits remuneration people whose ingenuity allows new schemes to be developed at any one time; but equally, it is not the duty either of an employee or an employer, or of a company, to maximise the tax paid. They are quite entitled, where they can, to find what might be regarded as loopholes. It is obviously the Treasury's job, where there are unintended loopholes, to close those for the future.

I am grateful to the hon. Gentleman for giving way again. To pick him up on maximising the tax paid, it is the job of the House and the Government to ensure that legislation that the House has passed on tax and national insurance being paid on certain types of income at a certain rate actually happens. That is the issue here, not whether people are entitled to plan for tax. How does the House ensure that the legislation already passed is honoured? That is a fair point.

I am intrigued by the tense the Paymaster General uses. She refers to legislation that the House "has passed". Our concern is not with legislation where there is a clear intention from the Government. The issue here is retrospection. That is our great anxiety. Where legislation has been passed, and there is clarity and certainty, that is fine, but the point of the Bill is to sweep back as far as 2 December 2004.

I am following the hon. Gentleman's remarks closely. First, perhaps he can explain how the retrospection for NICs will be different from that which we already have for tax. Secondly, may I point out to him that not many people on minimum wage in my Constituency have been getting paid in platinum sponges or any such device? I would expect most people, if not all, who will be caught by this legislation to have had specialist tax advice, quite possibly through their employer. That specialist tax adviser should have told them that anything after 2 December 2004 is at risk. If the tax adviser failed to do so, he or she is at risk in respect of negligence.

Unfortunately, my Constituency contains the City of London, where gold bullion, fine wine and all these contrivance schemes possibly began. It might be different in Wolverhampton. I look forward to visiting the hon. Gentleman's constituency at some point—perhaps in the near future on a ministerial visit, I hope, when Conservative Members are on the other side of the House.—[Laughter.] That might take a little time.

On the hon. Gentleman's serious point, we are concerned about retrospection, particularly in relation to national insurance, because of the potential double whammy for many employers. While one can entirely understand the protection given to employees, which we will discuss later or in Committee, one of the great differences between the national insurance contributions regime and the regime under the Finance Act for income tax is that employers run the risk of not only paying their own 12.8 per cent. but their employees' national insurance part. They might be able to go back and sue their tax adviser, but that might not be a practical solution. While we still have grave concerns about retrospection, which were articulated in the Finance Bill Committee, equally we want to articulate those now and consider the other ways in which the legislation applies.

Let me continue on the path towards the end of this Second Reading. As I mentioned a moment or two ago, the tax avoidance in question might be widespread in particular industry sectors. What would happen if the company concerned has been sold in the meantime, benefiting from what it will eventually become clear are vastly inflated profits?

The sheer uncertainty and potential for unfairness outweigh the benefits of this innovative attempt to deal with the avoidance problem that the Treasury understandably seeks to tackle. Given the Paymaster General's broad-brush assertion in her statement of 2 December, how can we be sure that the scope of these retrospective powers will only be used sparingly? Ultimately, the crux of the question is: who judges whether something is to be regarded as unacceptable avoidance?

Most of the Bill's provisions have retrospective effect. The Government are becoming increasingly open about passing such provisions. Previously, such provisions were only described as retroactive, whereas now the word "retrospective" is openly used in the Bill. While most of the Bill's provisions cannot take effect before 2 December 2004, the effect of sections 5 and 6 is potentially unlimited, as any past agreements and joint elections to transfer secondary liability to national insurance contributions to employees can be disapplied. Under those elections, employees were able to pass the national insurance cost risk to employees without limit as to when the election was entered into.

The Bill's retrospective effect necessarily causes uncertainty for UK business. Businesses must be able to plan their activities and cost base in a stable framework. That will be difficult if the Treasury has the power to pass new tax provisions with the retrospective effect to which we have referred. The Government justify their approach by pointing out that the new provisions will not affect the

"overwhelming Majority of employers and employees" who

"pay their fair share of tax and NICs".

Only a small minority, however, have unreasonably

"sought to use sophisticated and complex tax avoidance schemes to pass more of a burden onto the rest of us".

Businesses that have attempted to reduce their liability to pay national insurance contributions in accordance with existing legislation are therefore being vilified as antisocial.

Ideally, we need Her Majesty's Revenue and Customs to set out its thinking on the principles guiding its intended implementation of this policy announcement. During consideration of the Finance (No.2) Act 2005, we called repeatedly for more attention to be paid to the pre-clearance procedure. The spectre of retrospection, and with it uncertainty, makes a pre-clearance process ever more important; otherwise, the Treasury seems to be relying on making any such schemes of arrangement so commercially unattractive that the need for retrospective legislation will be rendered redundant. That is more or less the nub of what the Paymaster General said in our exchanges a few minutes or go.

That is not a sensible way to run commercial business. We need to encourage dynamism, flair and innovation. Sometimes, such innovation will get it wrong, but closing down these schemes will apply to flair and innovation throughout our commercial world. A heavily regulated economy in every way will not be good news for this country. Flair and innovation are qualities not just of our tax advisers but of many inventors and people throughout industry. That has been one of the great strengths of this country over the past 300 or 400 years, and is one of the reasons why we are such an important trading nation. The worry with this sort of proposal is that it stifles those two important facets.

We understand that the first use of powers in this area will be to amend the national insurance contributions regulations in parallel with the changes imposed in the employee securities element of the Finance Act 2005. That is unobjectionable, but there is a more fundamental question: now that national insurance involves only a notional contributory element, is it not time that the rules surrounding NICs are changed entirely to work alongside those of income tax?

The Bill highlights once again the problem of having two taxes that basically cover earnings. Let us face it: the only reason for having NICs and income tax is to uphold the fiction that the basic rate of tax is 22 per cent., when it is really 33 per cent. That is an expensive fiction that costs businesses millions of pounds in administration each and every year. Perhaps things have now got to the point where it is necessary to consider a single stand-alone income tax with a basic rate of 33 per cent. and an employers' portion of 12.8 per cent.

Again, I am following the hon. Gentleman's comments closely. He was taking about the risk of stifling innovation. Is he really suggesting that the self-employed, who currently pay, I think, £2.10 per week in class 2 contributions, would be rolled into a kind of super-income tax along with everybody else if his proposal to get rid of NICs were introduced? That might well stifle innovation in our economy, which has been a strength for 400 years.

It is a good attempt from Wolverhampton, but I was simply putting forward a broad idea that we need to give some thought to simplifying our taxation system. The contributory element of national insurance is fairly meaningless to a large extent.

Will my hon. Friend also recognise that NICs are not paid by those who are over retirement age? His proposal would increase the taxation of those who had income in retirement.

If I am not incorrect, my hon. Friend is some 63 years old. I was his Whip at one time. I suspect that his observation might contain the smallest element of self-interest. I take on board his points, although given the great hopes for the Turner review, if the retirement age increases he might be chasing a particular dragon while he is still below that age. I will certainly have him in mind when it comes to the national insurance aspects of the question.

My hon. Friend must also recognise that I represent a rather large number of pensioners in Bournemouth, West.

I have little doubt that my hon. Friend is younger than the average age of most of his constituents.

To reinforce the point, the House might want to know that my grandmother lives in Bournemouth. I have a serious point, however. How does the hon. Gentleman square the proposal that he has just made on the nature of taxation with the fact that his party has just established a commission, under the chairmanship of Lord Forsyth, with a very clear remit to explore the barmy possibility of a flat tax?

The Economic Secretary knows that it is not a specific proposal. I was floating an idea, which is part and parcel of exactly what we are trying to achieve with the flat tax commission: simplifying the whole taxation system, which is a long overdue goal. In many ways, Clause 1 seems to be worded with that sort of change in mind. In summing up, I hope that the Economic Secretary can confirm the Treasury's intention and indicate how such a process might be managed.

I want to touch on three other aspects. First, there is the regulatory impact assessment in which the Government attempted to assess the Bill's potential impact. They concluded that the combined impact of the measures

"will not affect small businesses disproportionately."

However, it should be remembered that small businesses are most dependent on attracting quality personnel, and therefore need to be able to offer tax-efficient employee incentive schemes. As the Government have already announced, the powers in the new Bill will be used first and foremost to tackle NIC avoidance through employment-related schemes. It is suggested that that will disproportionately affect businesses that the Government originally intended to promote by introducing tax-efficient employee incentive schemes. The position is made worse by the fact that employers cannot share any new unexpected liability to NICs with their employees.

Secondly, there is the issue of disclosure, which the Paymaster General mentioned. Clause 7 suggests that the regime for NICs and income tax will be similar. It would be useful to hear from the Treasury how it will work alongside taxation specialists to ensure a smoothly operating system. Twelve weeks seems a relatively short period, given the importance of the work that must be done, and the differences between this regime and the income tax regime introduced in the Finance (No. 2) Act 2005. Naturally all sides would like as long a lead-in time frame as is practical.

Much hinges in the future implementation of the intentions set out in this enabling legislation on regulation-making powers. The Bill brings NICs into the world of tax avoidance disclosure, and opens the way to retrospection. However, its operation, achieved by specific regulations that are highly technical and complex, will not be subject to full parliamentary scrutiny. Let us be honest: without significant outside expert help, there is little headway that any Opposition spokesman can forge even in Second Reading debates such as this. However, if such technical legislation with its retrospective element is brought in only via regulation, even when it is approved by statutory instrument, we run a real risk of adding to the statute book a series of poorly thought-through Laws. My biggest worry is that that will result in employers and employees alike running the risk of being deprived of their property in an arbitrary manner.

We are debating what could be described as one side of the Treasury coin, the other side being the Finance Act.

I am not sure whether this is an ironic coincidence, but in the early 1990s I worked for a major firm of accountants. One of the directors had a particular claim to fame: within two hours of the Budget statement, he had worked out how to get around the proposed anti-avoidance measures. That scenario has continued for at least 15 years.

I realise that the hon. Member for Cities of London and Westminster (Mr. Field) has a particular Constituency angle to take, but why should hard-working lower-paid people in my constituency and other constituencies in north Staffordshire have to pay their tax and national insurance while those who can afford extremely competent tax specialists to advise them get around the legislation? Where is the fairness in that?

Does my hon. Friend agree that while the Bill is commendable in seeking to reduce avoidance, it is odd that the Government should at the same time be introducing self-invested pension plans that give huge concessions to very rich people, which people in north Staffordshire and north-west Leicestershire can only dream about?

That is a good point, but what we are talking about is legislation that some members of the wider community can get around, while others are caught by it. We may be seeking fairness and equity, but where would be the fairness if people working at Michelin in my Constituency were offered payment in the form of animal skins? Where is the fairness in the old system of payment in hay for someone working at a pub such as the Potters Bar in my constituency?

In the last seven or eight years, there has been a huge increase in the number of people at the lower end being sucked into taxation. The way to deal with the problem that the hon. Gentleman describes is to remove them from taxation, and that is exactly what the commission will deal with.

In the 1980s, a huge number of my constituents were no longer required to pay tax or national insurance when the mines were closed, Shelton Bar steelworks was closed, and the pottery industry was hammered time and again.

The aim of the Bill is to get rid of schemes involving gold bullion and so forth. Might not such schemes be encapsulated in the phrase "fur coats and no NICs"?

I shall stop smiling at that one now. There was a scheme involving fur coats, and another involving oriental carpets. What would the reaction be if one of the Longton fire crews were offered payment in the form of oriental carpets? It is ridiculous. There must have been huge warehouses attached to Schipol airport in Amsterdam, given the amount of goods apparently sitting there waiting for an employee to pop across to collect and bring back to the United Kingdom.

I would be somewhat concerned if one of the highly skilled, innovative and creative people working at Wedgwood in my Constituency were offered payment in platinum sponge. Platinum sponge is not some nice little object that might be put on the mantelpiece; it is a highly volatile, unstable form of platinum. I would certainly not want to put that on my mantelpiece, and then take it down to the local market and trade it in.

We have heard allusions to creativity and innovation, but what that really means is making sure that certain individuals can get out of paying what most of us have to pay in tax and national insurance. I have encountered arrangements in the past involving a room full of people and a pile of documents, each document carefully numbered and laid out because it is crucial for them all to be signed in the right order if the scheme is to work. Is that what is meant by the certainty to which Opposition Members refer?

There is a fair amount of understanding among Opposition Members, however. I recall that in April 1995 a Conservative Minister—I forget which one—introduced measures to stop what he described as a national insurance dodge using tradeable assets. The issue has been recognised for a long time. Obviously, paying someone in coffee beans to try to avoid national insurance is an appalling thing to do.

In the past, certainly for the past 15 years or so, we have seen a cat-and-mouse game. A scheme, or anti-avoidance legislation, is introduced; tax advisers sit down and work out a way around it; the next Finance Bill tries to tackle it; someone works out a way around that; another Finance Bill is produced; and then we reach the position we are in now. North Staffordshire chamber of commerce, for example, says it wants much simpler, more straightforward Finance Acts. Time and again, however, recent Finance Acts have tackled avoidance schemes, which is why they have been so lengthy.

This Bill is long overdue and would have been a very welcome legislative addition back in the early 1990s. Some £240 million a year is at stake, and north Staffordshire would certainly welcome the 10,000 new teachers that that money would fund. This money is owed to the Exchequer, and it is simply the use of creative schemes that has led to its not being paid. My constituents, who pay their national insurance and their tax, would welcome that money coming in to the Revenue to provide police officers, teachers and the like in our constituencies.

As Mr. Field acknowledged, we are dealing with rather recondite material and, unfortunately, I drew the short straw among my colleagues in deciding who would speak about it. But in terms of general principles, I broadly endorse what the Government are trying to achieve through the Bill. My colleagues and I voted for higher national insurance contributions to fund the health service, so it follows that we want such revenue to be realised. There are two broad objectives: to ensure revenue integrity, and to reduce the cynicism that inevitably arises when some people pay their taxes but others manage to get round doing so. I understand the Government's broad strategic objectives, which seem perfectly sensible.

The problem is that in talking generally about tax avoidance it is very easy to get into a moralistic mindset—a mindset that crept a little into the Paymaster General's speech. Frankly, this area is an ethical quagmire. The Government were helped by a question posed by the Chairman of the Treasury Select Committee a few months ago. He asked what the difference was between legitimate and illegitimate tax avoidance, and the Paymaster General produced a reply that is well worth quoting because it provides a framework for this discussion. She said:

"The Government take steps to close down tax avoidance schemes as they become aware of them, particularly where they create economic distortions, provide commercial advantages over compliant taxpayers, redistribute tax revenues in an unfair and arbitrary manner, or represent an abuse that conflicts with or defeats the will of Parliament."—[Hansard, 1 April 2004; Vol. 419, c. 1697W.]

That seems a good working definition of the distinction between legitimate and illegitimate tax avoidance and, so far as it goes, perfectly sensible.

However, on reflecting a little more, I concluded that what we are dealing with is not a simple, stark, clear-cut Division between legitimacy and illegitimacy. There is a continuity or spectrum of behaviour, and at one extreme there are cynical and manipulative schemes. But at the other end of the spectrum, there are forms of tax avoidance that we all regard as perfectly legitimate and, indeed, that the Government encourage. As I understand it, part of the Financial Secretary's job is to encourage tax avoidance. He introduces environmental taxes that, if successful, stop people doing certain things and therefore reduce Government revenue. That is the will of Parliament and it is sensible, good economics and good for the environment; but it is promoting tax avoidance.

At the other end of the spectrum are these fancy avoidance schemes, but somewhere in the middle is the kind of behaviour that we all get up to in our private lives as we try to organise our affairs in such a way that we pay as little tax as possible, within the law. A few weeks ago, I was talking to my grown-up children, who live in London and are having horrendous problems dealing with their mortgages. I am considering making a gift from my modest savings in order to help them, and it occurred to me—it certainly occurred to them—that if I manage to organise my affairs in such a way that I do not die in the next seven years, I will help them to avoid paying inheritance tax. That is tax avoidance. Of course, it does not fall within the Paymaster General's definition of illegitimacy because it does not constitute an organised scheme. But if instead of simply doing a back-of-the-envelope exercise, I did things properly and went to a financial adviser, an accountant or a solicitor, such a course of action would, I think, be illegitimate under the terms of the definition given. Certainly, the definition is hazy, so it is probably useful to approach it not in a moralistic way but in a practical way.

The practical issue is how the Government can reduce tax avoidance. We are dealing with a very big area: in respect of this source of leakage, the figure of £300 million has been quoted. The Inland Revenue has estimated that it suffers itself from tax avoidance losses of some £2.5 billion to £3 billion in VAT, and probably £10 billion in direct taxation, so the Bill deals with only one corner of a much bigger problem.

I turn to an interesting and important aspect of the Bill that is at the heart of some of the criticisms offered by the hon. Member for Cities of London and Westminster. The point was summed up by the Chairman of the Treasury Select Committee, when he said:

"What is new is the declaration that future schemes, not yet devised or which have not yet come to the Inland Revenue's attention, may be stopped as from 2 December 2004. This amounts to a general anti-avoidance rule in this area of taxation of income and rewards".

That is not necessarily good or bad, but it does break important new ground by embedding in the legislation the principle of retrospective action. As the hon. Member for Cities of London and Westminster suggested, that could create problems in respect of one of the basic principles of taxation: certainty.

In Committee, we shall doubtless confront a question that will be at the heart of public debate on this issue: whether the principle that the Government are introducing conflicts with fundamental principles in law as we understand them. The Institute of Chartered Accountants, which has looked at this Bill in some detail, questions whether this new principle is compatible with European law. I do not know—I am not a lawyer and certainly not a constitutional lawyer—but I draw the House's attention to a very important legal ruling that dates from April, through which the European Court of Justice is trying to tackle head-on the question of whether a measure such as the one before us is legitimate in terms of European law principles.

One paragraph of that ruling appears to suggest that what the Government are doing is not compatible with European law principles, but another paragraph appears to constitute the Government's defence. It is worth quoting both, because they will prove central as this legislation proceeds. The first paragraph states:

"The principles of the protection of legitimate expectation and legal certainty form a part of the Community legal order. They must accordingly be observed . . . by the Member States".

If it is correct that this legislation diminishes legal certainty, it may well violate European justice as it applies to tax law. The following paragraph, however, is more qualified. It states:

"Although in general the principle of legal certainty precludes a Community measure from taking effect from a point in time before its publication"— in other words, retrospectively—

"it may exceptionally be otherwise where the purpose to be achieved so demands and where the legitimate expectations of those concerned arc duly respected".

A key issue will be whether the legitimate expectations of those introducing such schemes have been respected. It is a fairly narrow point and it is not clear to me who is right and who is wrong, but as the Bill proceeds we will need proper clarification of whether its legal basis has been thought through in terms of those wider principles.

There are two other practical problems that the ICA and others have thought through, and on which the hon. Member for Cities of London and Westminster touched. The first concerns a legislative principle and the way in which this House proceeds. As I understand it, one consequence of the manner of the Bill's introduction is that secondary legislation will be introduced at the same time as primary legislation, so there will not be the traditional opportunity for a 12-month period of consultation of those affected by such legislation. I am not sure that I fully understand the problem here, but it has been highlighted by the practitioners and it would be useful if the Government commented on it.

The other practical problem, which the hon. Member for Cities of London and Westminster also mentioned, is the question of what happens to those employers who, although they are clearly party to such schemes, may not have prompted them. What happens if such an employer finds that, because the legislation is invoked retrospectively, in practice they cannot claw back concessions already made to the employee? Such an employer is the piggy in the middle who has been stuck with the liability. What is their position?

In conclusion, I would like to summarise my argument by making two wider points. First, although it is right and I fully support the idea of pursuing anti-avoidance as far as is possible and practical within the law, it is not always clear that the Treasury's emphasis should be on anti-avoidance. It should reflect further on the problems created by over-complexity. One of the leading authorities on British tax law—Edward Troup, who happens to be one of my constituents and who frequently appears before the Treasury Committee—summarised the problem elegantly:

"The aim of Government should be to . . . do its best to ensure that the 'return' from tax planning is as low as possible . . . a simpler tax system with fewer reliefs, exemptions and discontinuities would, in the long term, frustrate most of the tax evaders' ploys . . . Management has to decide between whether £10,000 of tax planners' fees is likely to give a better post-tax return than the amount spent on, say, advertising. This judgement is not immoral, it is inevitable".

That is why I and my colleagues, as well as the Conservatives, are looking further into the whole principle of tax simplification. Our commission got going a little quicker than theirs, but whether it will end up recommending some version of a flat tax, I do not know. I have an open mind on that matter. The underlying principle of pursuing simplicity is clearly very desirable.

Finally, it is not a question of simplification alone. We also need to focus more on the question of tax administration and the competence of the tax administration authorities. I do not have many people in Twickenham running around with gold bullion, but I have do have many people who work in the computer industry. They often send me e-mails from their occasional employer, the Inland Revenue, with positively hair-raising tales of computer breakdowns involving something called ERIC and management failures in the Revenue that are costing billions as a result of weak, unsatisfactory and badly managed revenue-collection systems. I do not know the truth in that matter: I am not part of it, but I see the fragments shown to me by people who are witness to it.

I believe that more revenue could be realised by the Treasury through better tax administration and tax simplification than through the pursuit of anti-avoidance measures. As far as the Bill goes, the principles behind what the Government are seeking to achieve seem sensible, subject to the various specific legal and practical steps that we shall pursue in Committee.

I begin by declaring an interest: I am a chartered accountant and before my time in the House I was employed by one of the big four accountancy firms. I worked in the noble art of corporate governance and risk management, rather than the possibly shady dealings of tax avoidance.

I welcome the Bill enormously and sincerely hope that Conservative Members will not divide the House on it. It continues the theme introduced by previous Governments of clamping down on tax-avoidance schemes, and it is right and proper that Governments of all political persuasions work to ensure that all businesses and employees pay the correct amount of tax and national insurance contributions at the appropriate time.

As my right hon. Friend the Paymaster General said in her opening remarks, the Bill advances the work that was started by the Conservative Administration. Mr. Lilley, who is not in his place, looked into the problem when he was Secretary of State for Social Security in the John Major Administration. As my hon. Friend Mr. Flello mentioned, the right hon. Gentleman announced in 1995 measures designed to stop a national insurance dodge of paying employees in tradable assets. In the following year, he announced further powers to stop the latest dodge of avoiding national insurance when employees were paid in their company's own shares. The Labour Government have continued—and, indeed, accelerated—the trend, with measures such as bringing under PAYE assets readily convertible into cash in 1998, and dealing with employment-related shares in 2003.

I therefore believe that there is a political consensus on this matter, and rightly so. However, over the past 20 years the fight against avoidance has been undertaken in an environment in which the schemes, or scams, have become ever more ingenious and imaginative. The Government have been sharp in closing loopholes, but rather like a fairground game where little squirrel heads pop up at random and have to be hit with a hammer, the Government spot one scam and then another pops up somewhere else.

It is extremely lucrative for tax advisers to come up with ever-more imaginative schemes to avoid tax and national insurance, largely because the benefits—the tax and NICs saved through avoidance—far outweigh the potential risks of fines and possibly having to pay interest on the tax. Some of the inventive scams to avoid NICs are far-fetched to the point of being comical. My hon. Friend the Member for Stoke-on-Trent, South mentioned oriental carpets, and when I was researching for my speech, I discovered a City worker who had been paid a bonus of oriental carpets worth about £100,000. The carpets were held in storage and then seemed to become magical, as they never materialised and were never seen in the home.

Platinum sponges are another example. I have not done as much research on them as my hon. Friend the Member for Stoke-on-Trent, South, so I do not have a clue what they are. I do know three things, though: platinum sponges are not platinum jewellery; they are not sponges for washing; and, most importantly, they are in reality a scam to avoid paying rightful levels of national insurance contributions.

It seems to me that an enormous amount of energy and resources from the Government are devoted towards ensuring that a small Majority of highly paid earners pay the proper amount of tax and national insurance like the rest of us. Those resources could be redeployed towards services that are of real benefit to the country, such as improving public services and tackling family poverty. That is why I welcome the moves that the Labour Government have made—further than any other Administration, in my view—in combating tax-avoidance schemes. The need for promoters of schemes to notify Her Majesty's Revenue and Customs of them is extremely welcome and long overdue. Rather than playing the squirrel game, the squirrels now have to tell the Government where and when their heads will be appearing. That may be less fun, but it is certainly a lot fairer.

Yet this Bill goes one step further. I think that its best feature is the power to close down and backdate avoidance arrangements, where necessary, to 2 December 2004. I strongly believe that advisers, companies and workers were given adequate notice of the Government's intentions in the 2004 pre-Budget report. Reviews in the press this week seem to suggest that the Government's objective will be achieved. Mike Warburton, senior tax partner at Grant Thornton, was quoted this week in Accountancy Age as saying that the Bill

"makes it very debatable whether it's worth anybody's while doing things that are seen as aggressive by HMRC".

Quite right.

I want to end on the central theme of why I welcome the Bill most of all. Much as I love technical accountancy jargon, the Bill is not purely about rectifying technical inconsistencies and loopholes in the tax regime. First and foremost, it is all about fairness—fairness for all those who pay income tax and national insurance contributions. Why should a privileged few—mostly in the City of London—be allowed to cheat the vast majority of hard-working taxpayers and users of public services by not paying the rightful amount? It borders on the immoral. Why should hard-working families in Hartlepool, who pay tax and national insurance contributions through the PAYE system and have no control over the manner in which they are paid, subsidise the avoidance efforts of a wealthy elite?

I hold weekly surgeries and I have to confess that no constituent has ever expressed concern that we are restricting the use of platinum sponges as a means of rewarding employment. That is what this Bill is about—fairness for all taxpayers, not favouritism for a few.

This is not a Bill that takes the food out of the mouths of hard-working families who are struggling to make ends meet. I have no doubt that the people whom the Bill will affect most are hard working, but they are, after all, paid handsomely for what they do and their remuneration is getting better. Only this week in the Financial Times, in an article entitled "Bank staff do best as City pay increases", I was informed that, before the payment of winter bonuses, directors, senior analysts, corporate financiers and fund managers have seen their basic pay rise by 9.2 per cent. since this time last year, to an average basic salary of £76,950—and bonuses are expected to be larger than last year, too, after a buoyant summer with lots of mergers and acquisitions. The media also reported this week that as many as 3,000 bankers and brokers will earn about £1 million each in bonuses alone after the best City performance for years.

Those figures are hardly typical of a financial sector on the bones of its backside. I do not begrudge those bonuses at all, although I should like some of the City pension fund managers who might receive them to have a word with my constituents in the Expomet and Roxby companies who face missing out on the final salary schemes that they have paid into for years. It is only right that the very small number of taxpayers involved should pay the correct amount of tax and national insurance.

I hope that I have made it clear that I strongly believe that the Bill is all about fairness. I fully support its objective, and urge the House to give it a Second Reading.

Mr. Wright said that he did not begrudge the fantastic bonuses earned by people in the City of London, but he seemed unhappy at the City's success in promoting income for the UK. I find it hard to understand what he meant.

It is fair to say that for a long time there has been a great deal of invention when it comes to payment. The practice started in the late 1980s and early 1990s with the use for payment purposes of gold bars or red wine. That was an extreme attempt to abuse the tax system, and the Paymaster General has said that the Bill is designed to deter such behaviour. It may be inevitable that such deterrence must be continually reinforced when a tax system is complicated and encourages the former colleagues of the hon. Member for Hartlepool to indulge in yet more invention.

I listened carefully to Mr. Flello, who said that he had colleagues who could find a way around any proposal within two hours of its announcement in a Budget speech. Although I approve of the Bill's proposals to bring NICs into line with the income tax avoidance regime, it is a pity that the House should have to devote so much effort to simplifying the tax system.

The complication of the tax system has been compounded by the imposition of many regulations since 1997, which has served to fuel the further growth of the tax avoidance industry. The implementation of a general anti-avoidance rule in a one-sided, broad-brush attempt to simplify matters for the Treasury is unreasonable, given that it maintains a web of bureaucracy for business.

I also listened carefully to Dr. Cable, who asked whether the aim should be to have a correct level of taxation—as the hon. Member for Hartlepool maintained—or a fair one. I, too, shall quote Edmund Troup of Simmons and Simmons, who said:

"Faith in general anti-avoidance provision is based on a lack of understanding of the real nature of tax avoidance. The popular idea is too often confused with the claim that 'tax avoiders are paying less than they should', even though there is no objective way of determining how much they 'should' be paying."

The balanced way to reduce tax avoidance is to simplify the system and cut down the number of limits and exemptions. As has been noted, the Shadow Chancellor's tax reform commission is a step in the right direction. A flat taxation system would be likely to promote the payment of more tax, rather than less, and would certainly discourage avoidance.

The Paymaster General has said:

"The Exchequer is entitled to certainty on behalf of the taxpayer—certainty that taxpayers will pay their fair share—and, similarly, that taxpayers who contribute their fair share have a right to expect others to do so."—[Official Report, Standing Committee B, 21 June 2005; c. 57.]

That is reasonable, but any assessment of what constitutes a fair share must be subjective when it is made in the context of a tax structure as complicated as ours. Simplifying the system would remove the motivation for tax avoidance. As my hon. Friend Mr. Field said, it is important that we promote the role of wealth creators rather than wealth protectors.

The question of retrospection is the most important element of the Bill. It is something that the UK has always steered away from instinctively. Yet, for all the Paymaster General's reassurances, not only does the Bill allow for retrospective action, it also moves the decision away from primary legislation to regulation. In Opposition, the Paymaster General said of value-added tax:

"In such a case, the retrospective nature of the law is in principle objectionable. It means that the VAT liability of supply can be changed by an event occurring after the supply is made. There may be arguments that the principle is contrary both to United Kingdom principle and to EC law."—[Hansard, 3 April 1995; Vol. 257, c. 1412.]

Yet a decade later—

Will the hon. Gentleman give way?

Certainly, if the Paymaster General wants to correct me.

The hon. Gentleman should also quote the Minister who responded to me at that time with an explanation of why the Government's action then was justified.

I understand why the Paymaster General makes that point, but institutionalising retrospection and raising the possibility that a business or person might have to make retrospective payments to HMRC—only for more legislation to be introduced when it is decided that the rules must be changed—is most regrettable.

The most important thing is certainty. The problem with the Bill is that it will not bring certainty to the tax regime.

I share the concerns about the Bill expressed by my hon. Friends the Members for Croydon, Central (Mr. Pelling) and for Cities of London and Westminster (Mr. Field), especially about the Bill's retrospective nature.

I understand the desire expressed by the Chancellor, the Paymaster General and other Opposition Members to minimise the scope for remuneration contrivances to escape the tax and national insurance net. Indeed, I have considerable sympathy with the objective of dealing with the imaginative but essentially contrived schemes about which we have heard. I confess that the use of platinum sponge is a new one on me, too.

However, my concerns go beyond the specific provisions of the Bill. This country has rightly earned great respect in the international business community for the probity of our Laws and customs. Indeed, even the HMRC has commanded respect—if little love—for the certainty, if not always the clarity, of its decisions. As we have heard, companies, individuals and their advisers have long enjoyed the ability to base their commercial decisions on a principle of certainty in respect of the tax laws at the time those decisions were made. The law has always been open to interpretation, which has enabled the entire tax advice industry to flourish, but commercial decisions could be made according to the law prevailing at the time.

Unfortunately, the Bill reinforces a very unwelcome principle that has been introduced into our tax law—the ability to change the rules as the Government choose. The Institute of Chartered Accountants has expressed concern about that, as Dr. Cable noted. In its briefing paper, the ICA said:

"Retrospective legislation is not a satisfactory solution: not only does it make for uncertainty for employers but there is a real probability that it is ultra vires European Law".

My views on Europe may not be well known in this House, but they are to my constituents and it is extremely rare for me to find comfort in pronouncements from Europe. However, as we have heard from the Liberal Democrat spokesman, there is some case law that needs to be explored in Committee, not least because the Institute of Chartered Accountants states:

"We do not think that anyone reading the Paymaster General's 2 December 2004 statement could have expected the content of this Bill."

Labour Members have focused much of their enthusiasm for the Bill on the impact it may have on fat cats in the City, and reference has been made to the large sums that many people earn there. The issue is not confined to the City of London, however. In my Constituency, there is an individual who sells millions of pounds-worth of perfume to the far east, on which he earns substantial commission. That gentleman could take his business anywhere in the world, and I should like to focus on that point.

The Prime Minister appears to have woken up only relatively recently to the challenges of globalisation, but the economy has been at the forefront of global trade for centuries. Since 1979, as economic liberalisation has been successively introduced, mostly under the previous Conservative Government, increased inward investment to the UK has provided a major boost to economic growth and productivity. The scale of that investment is well illustrated. The Paymaster General has unfortunately left the Chamber so we cannot confirm whether her regular morning reading includes The Daily Telegraph, but I shall quote a brief extract to illustrate my point:

"Overseas investors own more than a third of the 100 blue chip companies listed on the London Stock Exchange, 10 of those aren't even British, 250 of the 1,066 top flight directors are foreigners and some of our most important industries—such as energy and banking—are largely controlled by European and US companies."

We can thus see that a significant proportion of senior executives in leading companies across industrial sectors, as well as many of those sustaining the City of London's global position in financial services, are foreign nationals, often working for foreign firms. I speak with some authority as a few years ago, before I came to this place, I worked for a foreign-owned bank.

The relevance of those points to the debate is twofold. First, from an individual point of view, a large number of highly skilled and highly rewarded individuals currently choose to work in the UK in roles that they could also undertake overseas. It is not beyond their wit to try to weight their remuneration away from the higher tax jurisdiction. With modern technology and working practices, especially in the service sector, there is a real risk that by introducing retrospection to our tax system for individuals, doubt will be cast over our personal taxation system, which will encourage income to be earned overseas and, perversely, may reduce rather than increase the return to HMRC.

Secondly, from a corporate perspective, the more worrying implication is the doubt that retrospective tax legislation introduces in the fairness of the tax system operating in this country. In a global market, companies can choose where to operate. Businesses are highly flexible and many can move their operations to jurisdictions where they perceive commercial advantage. We are increasingly used to the advantages of China and India, about which we hear so much from the Chancellor, in relation to labour-intensive activities, but the capital-intensive sector, where many of these proposals are directed, is highly mobile. A good example is reinsurance, a completely mobile activity, much of which has moved to Bermuda over the last 10 years. Such sectors often remunerate their employees very well.

My concern is that when HMRC is both judge and jury and tax legislation is introduced with retrospective effect, it could seriously erode confidence in the fairness of our tax system. The Government need to take great care. I am not sure whether the Economic Secretary is aware that the last time retrospective tax measures were introduced was under the last Labour Chancellor, Chancellor Healey, and look what happened to him. The serious point is that if companies lose confidence in the tax system, those that are not in this country will think carefully before they choose whether to come to the UK or locate elsewhere. Those already in this country, especially if the breach in the dyke were to be widened with further retrospective proposals, might eventually consider moving away. That would damage the economy, damage confidence in our tax system and damage the Government's tax revenues.

First, I declare an interest. I was one of the gentlemen who worked in the City, although I assure Mr. Wright that I have neither a magic carpet nor a cellar full of wine.

What about a platinum sponge?

I have washed this morning, but not with platinum.

The Paymaster General left us in no doubt that the Bill was designed to stop evasion of national insurance contributions by introducing powers that enable the Treasury to make regulations to prohibit the use of avoidance schemes with retrospective effect from 2 December 2004. When the Economic Secretary winds up the debate, I am sure that he will make the valid point that such an intention was set out by the Paymaster General on 2 December 2004 and that the Bill merely brings the national insurance regime into line with what the Government enacted in the Finance Bill this year, so I understand the right hon. Lady's comment that she regards the legislation as non-controversial.

There are four aspects of the measure that we need to consider, however. Much has already been made of the retrospective nature of the Bill, but we should also consider possible use of the powers beyond that for which they were intended; the whole issue of avoidance, evasion and tax-planning; the introduction of an anti-avoidance rule, to which the Liberal Democrat spokesman referred; and the potential cost to business. I want briefly to examine those issues.

I had the privilege to speak on Second Reading of the Finance Bill and served on its Committee, where luckily Rob Marris helped us through the explanatory notes. I congratulate the Paymaster General and the Economic Secretary on this Bill, which is to be applauded for its brevity, clarity and its helpful explanatory notes—quite a contrast to the Finance Bill.

The hon. Member for Hartlepool seemed to question the position of Conservative Members. My hon. Friend Mr. Field has made it clear, not only today but in previous debates in the House, that we do not support anyone who does not want to comply with their tax obligations. That is our position and it extends to national insurance contributions as well.

The Bill, as I understand it, contains three measures: the power to make regulations to create a retrospective liability for national insurance contributions; to allow the disclosure of national insurance contribution avoidance schemes and arrangements; and the voiding of those arrangements and elections. Much has been made of retrospection by my hon. Friends. Any legislation that introduces retrospective powers must be regarded with caution. Understandably, taxpayers are instinctively nervous, for with the prospect of retrospection they also face the prospect of uncertainty and unfairness. Furthermore, and more important, it creates uncertainty for business and especially for business investment. Certainty is a key component in the environment for business investment and one criterion on which business undoubtedly bases its decisions is the existing tax and national insurance burden it is likely to face, or the likely burden when a decision is made. If the Government constantly introduce legislation with retrospective effect, it will undoubtedly create uncertainty for business and will affect business investment. An inevitable consequence of the Bill will be some undermining of business investment.

The power to create regulations for retrospective liability is enacted in clauses 1 to 4 and although those clauses confer that power on the Treasury, the Bill also supposedly constrains the power to the extent that such regulations can be made only to reflect in national insurance regulations previous retrospective changes to the income tax Acts, only where the Treasury considers it expedient for national insurance contribution regulations to have that retrospective effect, and only back to 2 December. However, in all those cases the Treasury is acting as its own constraint, so we need reassurance from the Treasury about the scope of the powers, the exact nature of the constraints and the way in which they will be used. The explanatory notes state that the powers will be used only in anti-avoidance measures. That is not helpful, reassuring or terribly explanatory. The Government will want to reassure the House that those powers will be proportionate to the mischief that they aim to tackle, and that they are sufficient only to catch tax avoidance schemes. They should not be so wide that they are disproportionate, and taxpayers' legitimate expectations to be taxed in accordance with the law when the transaction is carried out should not be abused.

Clauses 1 to 4 will be used to bring national insurance contributions regulations in line with regulations imposed by schedule 2 of the Finance Act 2005, especially in relation to employee securities for taxation purposes. If I understand Clause 1 correctly, the powers will be used to ensure that, where possible, NIC and income tax PAYE legislation are changed in parallel. If that is the Treasury's intention, it would be useful to know that the process will be managed. It is desirable that NIC and income tax disclosure rules be made in parallel. Clauses 1 to 7 suggest that that is the intention behind the Bill, but I should be grateful if the Economic Secretary answered some practical concerns. If the rules are included in regulations as secondary powers, as the Bill suggests, when will the draft regulations be available? Will the Economic Secretary confirm that they will be subject to proper scrutiny and that the disclosure rules for national insurance and income tax will be similar?

The Government's attitude to tax planning, as opposed to tax avoidance, has been subject to a great deal of criticism, and the issue was raised several times in the Finance Bill Committee. It bears repetition that planning tax liabilities is entirely lawful, but in the Bill the Government appear to maintain their stance that any tax planning is avoidance. Taxpayers have the right to organise their affairs in accordance with the law—that is tax planning. If the Government deem that law inappropriate, that is not the taxpayer's fault. Tax planning should not be confused with tax avoidance.

The Government are pursuing something that began in the Paymaster General's statement on 2 December 2004 and, indeed, the Finance Act 2005. The Bill is widely drawn and tax authorities are given wide discretionary powers, so the Government are effectively introducing the general anti-avoidance rule that they first sought to introduce in 1997. In 1997, the Chancellor asked the Inland Revenue to investigate the impact of a general anti-avoidance rule, but, following objections, the Government pursued the disclosure regime route. However, if disclosure legislation is too widely drawn its powers extend beyond those of anti-avoidance or appropriate disclosure regimes, as wide-ranging and arbitrary powers are introduced for tax authorities that go well beyond the mischief that they are intended to address.

In a statement on the pre-Budget report in December 2004, the Paymaster General stated:

"The disclosure rules in the Finance Act 2004 have revealed that avoidance is still rife."

She went on to say that

"experience has taught us that we are not always able to anticipate the ingenuity and inventiveness of the avoidance industry. Nor should we have to."

She concluded that

"the time has come to close down this activity permanently."

The Select Committee on Treasury has no doubt that the Government moved from a disclosure regime to a regime of general anti-avoidance rules. Its Chairman, Mr. McFall, stated:

"What is new is the declaration that future schemes, not yet devised or which have not yet come to the Inland Revenue's attention, may be stopped as from 2 December 2004. This amounts to a general anti-avoidance rule".

The Government must address certain issues if they wish to move from a disclosure regime to a regime for the taxation of rewards and national insurance. If a general anti-avoidance regime is deemed necessary because avoidance is supposedly rife the Government may fall into the trap of creating more tax legislation of increasing complexity and thus an increasing number of opportunities for the clever gentlemen described by the hon. Members for Stoke-on-Trent, South (Mr. Flello) and for Hartlepool to devise tax avoidance and evasion schemes. It is therefore disappointing that the legislation has been introduced, because it highlights the need for a simpler tax system with fewer reliefs, exemptions and discontinuities to thwart most tax avoidance

The hon. Gentleman has put the cart before the horse. We have complex tax legislation because there are anti-avoidance schemes. We do not have anti-avoidance schemes because of complex tax legislation. If one looks at the history one can see which came first and thus which is the cause and which the effect.

I beg to differ—it is the hon. Gentleman who has put the cart before the horse. There are more members of the tax planning community because the Government are creating more complex legislation, in which tax planners seek to pick holes.

Tax practitioners acknowledge that measures in the Bill will act as a deterrent impact, but Joy Svasti-Salee of KPMG says that

"they create uncertainty which is not good".

It is not clear which schemes will be allowed and which prohibited when they are left unspecified by a general catch-all. By contrast, specific Laws would aim to define abuse and avoidance. Discretion has been granted to the authorities over NICs and income tax but, as my hon. Friend the Member for Cities of London and Westminster said, that should go hand in hand with binding tax and NIC clearance granted by the HMRC when its opinion or advice is sought about a tax scheme by a taxpayer prior to making certain decisions about the structure of their financial affairs.

HMRC has resisted that proposal, and undoubtedly the Paymaster-General will repeat that it is not in the business of giving free tax advice. That argument falls, because she has changed the rules, and if a specific proposal is taken to HMRC on a matter of tax or NIC policy in which the authority has acknowledged and increased discretion, it is wholly appropriate that it should have a duty to give a ruling about how it will exercise those powers prior to the implementation of a scheme.

The hon. Gentleman's argument is based on a fundamental misunderstanding. The Bill does not give discretion to HMRC. The House will decide whether avoidance schemes are to be closed down as a result of the proposal in both the Finance Bill, which introduces primary legislation on income tax, and in national insurance regulations, which are subject to the affirmative procedure. It is the House that takes the decision and no one else.

None the less, if discretionary powers are to be increased overall—[Interruption.] There is obviously a dispute about whether the Government are increasing discretionary powers. It is clear, however, that the Bill fails to introduce a corresponding binding clearance regime, even though that would be desirable.

Finally, what are cost implications of the Bill for business? The regulatory appraisal says that employers who have engaged in avoidance must submit supplementary end-of-year returns for NICs. According to the explanatory notes, that will affect only 500 employers and will not cost more than £3,000 per employer. Does the fact that the number of affected employers is small show that the previous regime was working? Who calculated the £3,000 cost? The regulatory appraisal says that 21,000 small businesses and a further 90,000 self-employed people will incur small familiarisation costs, which is a big extra burden on business. Who made that estimate and who judged the costs to be negligible? The explanatory notes say that the measure will generate an additional £95 million in NICs in 2004–05, and £240 million per annum thereafter. The HMRC website, however, states that the Bill will secure tax and NIC yields of £200 million in 2004–05 and £500 million thereafter. It will be interesting for the House to know which of those is correct.

There are elements of the Bill that may be regarded as non-controversial, but we need to explore the possible use of the powers beyond the purpose for which they are intended, the avoidance v. tax planning issue, the introduction by the Government of a general anti-avoidance rule, and the potential cost/benefit of the measure for business.

Nobody could dispute the important principle that illegitimate tax avoidance must be dealt with, but as we heard in our debate today, there are issues concerning certainty, which means that we must consider legislation such as the Bill with great care and sensitivity.

I have two general points to make. First, simplifying the tax system as a whole would, over time, reduce the desire to avoid tax by complicated schemes, NIC schemes or other forms of avoidance. However, as emerged clearly today, retrospection should be used very sparingly indeed. I fear we risk moving away from that principle as the Government desperately try to fill their black hole. Secondly, the increasing burden on small businesses from filling in extra forms and providing even more information to the Treasury as a result of the Bill must be considered in the context of the ever increasing weight of bureaucracy.

I thank all those who spoke in the debate. I was particularly pleased that we had a contribution from Mr. Flello, because I see that before he came to the House he was a tax consultant and worked for the Inland Revenue, so I am sure he will make worthwhile contributions to discussions on these matters in future. He spoke about gold, mink coats, coffee beans and other esoteric items. I worked in the financial services industry until 1992, but none of these was on offer, as I recall, though apparently that did happen.

Dr. Cable was right to say that it is difficult to brand something as wholly legitimate or wholly illegitimate. There is indeed a spectrum, and in the present context situations are not always clear cut. I agree that we are discussing a practical issue. He spoke, for example, about the clawing back of concessions already made to employees, again taking up the powerful point about the over-complexity of regulations and the tax system. I hope Ministers will recognise that.

Mr. Wright declared how virtuous he had been in his previous life. I say to him as gently as possible that the words "virtue" and "Hartlepool" are not automatically associated in people's minds in the House. I feel sure that he will overcome that in due course. He spoke about NIC scams, the issue of retrospection, and very high salaries in the private sector. However, high salaries are not confined to the private sector. He will know what goes on in local government and the sort of salaries paid to people in primary care trusts and the NHS.

My hon. Friend Mr. Pelling rightly pointed out that complexity encourages avoidance. That is the theme that has run through the debate. Simplifying the system would increase revenue and promote certainty. My hon. Friend spoke of wealth creation and the important role of wealth creators in our society. My hon. Friend Mr. Dunne spoke about uncertainty and the fact that the Bill reinforces the principle of retrospection. He was right to say that there was always the risk that people coming to work in the United Kingdom from abroad had arrangements for a proportion of their remuneration to be made elsewhere. He noted that we were in a globally competitive marketplace for good people. The City of London is hugely important to our financial and economic well-being, and he was right to highlight the re-insurance market.

In a thoughtful contribution, my hon. Friend Stephen Hammond emphasised the need for great caution with regard to retrospection. He spoke of the importance of certainty for business investment purposes, the threat of investment being undermined by the lack of certainty, the importance of defining constraints and the movement towards a more general anti-avoidance culture, with all that flows from it.

Many experts have commented that we need more assurances on the scope of the proposed powers and the way in which they will be used. It is not sufficient that the explanatory notes state that the retrospective powers will be used only in anti-avoidance situations—a point made tellingly by my hon. Friend Mr. Field. Who will judge what constitutes unacceptable avoidance? We need to treat retrospection with great care.

Many firms will be setting out their tax plans and accounts for the forthcoming year and will already have done so for the previous year. In its 2004 pre-Budget report, the Treasury Committee stated in respect of retrospection:

"The Inland Revenue should, without jeopardising their position, publish a paper setting out their thinking on the principles which will guide the way they implement this announcement".

The explanatory notes, though welcome and clear, are not a full and satisfactory substitute for such a paper. At least businesses will then have additional certainty about how the law will apply to them.

Clause 1 seems to indicate that the powers will be used in such a way as to ensure that as far as possible NICs, income tax and PAYE are changed in parallel. Although we welcome the assurance from the Paymaster General that businesses would be given time, a coherent approach is necessary and we would welcome the Government's assurance that that is their intention and details of how it is to be orchestrated.

After reading the explanatory notes, outside observers were struck by the fact that the overview of statutory payments in annexe B is an illustration of how much work has to be done by employers on behalf of the Government in handing out the benefits. In the regulatory impact assessment, the Government attempted to assess the Bill's potential impact and came to the conclusion that the combined impact of the measures included in the Bill

"will not impose significant additional burdens or costs on employers unless they engage in contrived schemes to avoid income tax and NICs on remuneration paid to their employees."

They further state that the NIC avoidance measures are not aimed at businesses of any particular size and will not affect small businesses disproportionately. However, it should be remembered that small businesses may find it more difficult to attract quality personnel, and therefore need to be able to offer tax-efficient employee incentive schemes.

As the Government have already announced, the powers in the Bill will first be used to tackle NIC avoidance through employment-related securities. It has been suggested that that will disproportionately affect the businesses that the Government originally intended to promote by introducing tax-efficient employee incentive schemes such as the enterprise management incentive scheme. That requires clarification. I do not expect the Minister to comment specifically on the scheme this afternoon, but it would be useful if he could write to me explaining how such a scheme is likely to operate in future.

The enterprise management incentive scheme was introduced in the Finance Act 2000 and it neatly demonstrates the conflicting and contradictory aims that may be the result of complicating the tax system and over-regulating the business community. The scheme was designed to help small, growing companies to recruit and retain high-calibre individuals who would otherwise be attracted by more established businesses offering better salaries. A qualifying company is allowed to grant share options worth up to £3 million to any number of its employees. No tax or NICs are payable on the grant of the share options, provided that they are capable of being exercised—and are exercised—within 10 years. If, on the exercise of the share option, the price at which the employee can exercise the option is at least equal to the market value of the shares when the option was granted, no tax or NICs are charged.

While such schemes are welcome for trying to help smaller, entrepreneurial companies to attract and recruit high-quality individuals, the Bill might disproportionately affect the very companies that the Government are trying to help to implement similar schemes, for similar purposes, by mitigating the amount of NICs that they pay. I am thus citing a practical example of what we are talking about, so I would like the Minister to shine some light on how the system is likely to work in practice.

We have seen huge growth in the size of the Red Book over the past few years, and our tax system is now very complex. A frenetic game of cat and mouse has been played on tax avoidance, primarily regarding NICs, between the Treasury and the Revenue, and the tax advisory sector, which devotes ever-increasing amounts of time and effort to exploiting legal loopholes in legislation to minimise NIC liability or other forms of taxation. The whole tax advisory business has blossomed under this obsessively bureaucratic Government.

The need for Government revenue and the complexity of the tax system provoke and increase attempts at avoidance because they cause too many loopholes to be exposed. If the Government are intent on continuing to deal with the symptoms rather than the cause, the patient will continue to get sicker. Meanwhile, an annual dose of alternative medicine in each Finance Act will simply not give us a long-term cure.

It has been estimated that 21,000 small businesses, and perhaps a further 90,000 self-employed persons, will incur learning and familiarisation costs as a result of the Bill. Ministers must realise that regulations do not exist in a vacuum. Once they leave Whitehall they do not simply float away. Regulations have had a significant and direct effect on businesses that have to devote time and resources away from increasing production so that they can focus on compliance with Government regulations.

The British Chambers of Commerce says that the total cost of regulation to British business is now running at many billions of pounds—it has increased dramatically. The Government have introduced over 27,000 regulations since coming to office, which is an average of nearly 4,000 each year, or 15 new regulations every working day. They have hugely increased the burden of regulation since they came to office.

The hon. Gentleman referred to HMRC estimates that 21,000 small businesses and perhaps 90,000 self-employed persons could incur learning and familiarisation costs. Those businesses and individuals specialise in accountancy and tax. Is he saying that a reason not to have anti-avoidance legislation is the fact that accountants would have to read a bit more?

I always love the hon. Gentleman's interventions as he is defending and promoting the interests and growth of the tax advisory sector—they are magnificent. There is no one who does not get his valued attention, and I hope that he will serve on the Bill's Committee to add to the enjoyment of Ministers.

Does such a form of government by regulation help to explain why our competitiveness has been shrinking, which is a problem that we will increasingly face in years to come? Does the Chancellor believe that our businesses should be tied up by spending more money not on investment and development, but rather on complying with copious Government regulations?

Of course illegitimate tax avoidance is unacceptable and should be dealt with, but the context in which many Government regulations are promulgated is making Britain a less attractive place to do business. If business investors are intimidated about setting up business here—due to lack of certainty, or a perception that retrospection will become an increasing part of the culture of doing business in this country—we will ultimately be the losers, so the matter must be treated with more sensitivity for the future economic growth and performance of this country.

This has undoubtedly been an interesting debate about an important Bill that is absolutely central to the Government's aim of deterring tax and NICs avoidance. Before I address some of the specific points raised during the debate in a little detail, I shall reiterate the Bill's purpose.

The Bill demonstrates our continuing commitment to take action against avoidance. It is key to achieving the Treasury and Government's objectives of fairness and opportunity by ensuring that all pay the correct amount of tax and national insurance. It is an essential element in building a serious and credible deterrent against future avoidance activity, and is needed to secure a total tax and national insurance yield of £200 million in 2004–05 and £500 million a year thereafter. As the income tax disclosure provisions have demonstrated, it is not possible to anticipate the range and complexity of such extremely contrived arrangements. The Government intend to close down such activity permanently. The Bill will ensure that the Government can deal with any arrangements that emerge in future that are designed to frustrate their intention that employers and employees should pay the proper amount of national insurance on the rewards of employment.

I now come to specific points raised during the debate. Mr. Field made a typically reasoned and fair speech. Indeed, it was based in the real world to a large extent, but when he talked about sitting on this side of the House and visiting the Constituency of my hon. Friend Rob Marris one day, it began to reach the realms of fantasy.

The hon. Gentleman seemed to advocate the virtues of a flat tax. I tell him that we will make it absolutely clear to the British people at every opportunity that if the Conservative party were ever to govern this country, it would impose on the people a flat tax that would be both unfair and impractical. The people of this country will make judgments about the nature of such policies when the time comes.

The hon. Gentleman used the phrase "desperate Treasury" and that sentiment was echoed by several Conservative Members. That desperate Treasury has delivered to this country low inflation, low interest rates, 2 million new jobs and the lowest unemployment in living memory. Let us be clear what the business community asks of any Government—that they deliver stability. If a Government deliver economic stability, businesses will grow and prosper. No Government since the war in this country have delivered such macro-economic stability as ours, so let us stop the nonsense of labelling the Treasury as desperate, or of saying that measures such as the Bill somehow undermine business competitiveness.

The hon. Gentleman talked about bona fide avoidance schemes, although I am sure that he did not mean to do so. There is no such thing as a bona fide avoidance scheme, although his comment colours several contributions made by Conservative Members. Avoiding taxation is not a demonstration of flair and innovation. If we gave people the impression that we will incentivise, reward and encourage flair and innovation in the context of avoiding tax responsibilities, what kind of message would we be sending to the private sector in this country?

I think that the Economic Secretary will find that the record shows that I referred to bona fide remuneration schemes earlier on.

The hon. Gentleman makes an important point about flair and innovation. I tried to make as balanced a point as possible about that in my speech. Flair and innovation mean not just the flair and innovation of the brightest tax and employment benefit remuneration scheme advisers, who try to find small differences between their schemes and those proposed by the Government so that they can avoid taxes. Flair and innovation have a far more important part to play. My hon. Friend Mr. Dunne and I made it clear that flair and innovation have made this country a great trading nation over many centuries. We play around with those facets at our peril.

I agree entirely with the hon. Gentleman. I shall read out the recent result of a survey. It reads:

"London has been named the best European city in which to locate a business for the 16th year in succession."

That is according to an annual survey.

"The United Kingdom capital has also increased its lead over second place Paris and third place Frankfurt."

That is what the latest European Cities Monitor shows. London came top in five of the 12 categories questioned in the survey, including the quality of staff. Any suggestion that there is any undermining of flair and innovation by the Government's policies, economic or social, is arrant nonsense.

I will not take any personal credit for London's great name in this regard. There is an important point in relation to flair and innovation, in that we are talking of a global market. We are quite happy with and proud of our record against other European countries, but we are inward looking if we believe that our success against Paris, Hamburg or Munich is enough. There are 23 cities with a population of 2 million or more. Cities are fast growing In China. There are cities growing up from Delhi to Bangalore. There are other such cities in India. We exist in a global market and it shows a paucity of aspiration simply to make reference to our success in competitiveness, flair and innovation by comparison with our European neighbours.

By any international comparison this country is doing well economically. Having said that, we have a long way to go. There are many other countries that would die to have low inflation, low interest rates and the levels of unemployment that this country has, as well as, alongside that, our level of investment in the public good and in public services. There are so many countries that would aspire to achieve the combination of economic stability and economic success alongside social justice, which arguably has been uniquely the success of this Government. That is in the context of the global challenges that lie ahead.

We are not complacent. We recognise that the challenges that will come at us in future from India and China require us to raise our national game even further in skills, innovation, long-term planning and in sensible and active regional policy. We recognise also that there is a constant need for the Government to be encouraging the country to be dynamic and to be accelerating the pace of change. It is necessary to recognise the real challenges that come as a consequence of globalisation.

It would be churlish of any Opposition Member to start lecturing the Labour party on economic policy or economic performance. The worst thing that business could face would be a return to boom-and-bust economics. That was the legacy that the Government sought to tackle, and we have done so incredibly successfully.

My hon. Friend Mr. Flello made an excellent contribution to the debate. He hit the nail on the head when he said that the issue here is the importance of fairness and equity and the idea that all taxpayers should fulfil their proper responsibilities as equal citizens of this country, wherever they live, whatever their income levels and whatever sector they work in. I agree entirely with my hon. Friend.

I am pleased that Dr. Cable said up front that he supports the objectives that are set out in the Bill. He was right to talk about a spectrum of behaviour. However, I challenge the hon. Gentleman on one of his points. He said that this is not a moralistic issue, but entirely a practical one. I believe that people paying proper and fair levels of taxation is a moral issue in terms of the sort of society and economy that we want to be encouraging. The hon. Gentleman is right in saying that we cannot just have a moral approach. I accept that we must be very careful about the practical consequences. However, it is my view that we are dealing with a moral issue.

The hon. Gentleman and others spoke about the retrospective nature of the proposed measures. Probably the best justification for retrospection is for me quickly to remind the House of what has happened year after year. In 1991, we had unit trusts. In 1993, there were gold bullion and tradable commodities. In 1994, there were diamonds and fine wine. In 1995, we had grants of options in third party companies. In 1996, there were own company share awards and options. In 1997, we had trade debt and restricted covenants. In 1998, there were conditional shares. In 1998 there were also readily convertible assets. In 1999, we had the exercise of options. In 2003, there were employee benefit trusts. There were also adjustable options. Also in 2003 there was national insurance contributions alignment to schedule 22 to the Finance Act 2003. In 2004 there was national insurance contributions alignment to sections 86 to 95 of the Finance Act 2004.

All those examples reinforce the need to move in the direction in which the Bill takes us. Anyone considering these matters objectively, while understandably raising some concerns, would have to agree that on balance—the balance of judgment—this is the right thing to do.

We have just heard for the second time from Ministers a list of the previous mischievous attempts to get around the tax and national insurance regime. However, that fails to deal with the issue of retrospection, about which my hon. Friends and I were arguing. We are talking about retrospective action from the point when the Bill becomes an Act, compared with the point when an announcement is made in the House. That is the period where there is difficulty.

My right hon. Friend the Paymaster General made a clear statement in December 2004. It seems to me that these measures should take effect from the moment when that statement was made on the basis that anybody who behaves in a particular way is aware of the consequences. The statement was absolutely clear. I believe that it is right, therefore, that the measures should take effect from the making of the statement.

The Minister is slightly missing the point. Of course he can make his point in defence of the remarks made by the Paymaster General. He has cited a string of efforts to clamp down on illegitimate tax activity, but he has not dealt with the question of retrospection. He is seeking to align the two. We are in new territory in the way in which things are being done. That is why care and sensitivity have to be extremely carefully defined.

The hon. Gentleman can always rely on me to be caring and sensitive, particularly when responding to his points.

It is a question of judgment. We are in new territory, and we have made the decision that that is where we should be in terms of the taxpayers and what the Government are entitled to expect in respect of our own certainty. We have heard a great deal today about certainty for others. It seems to me that the taxpayer, the Revenue and the Government are entitled to stability. We should never get ourselves into a situation in the House where we say that we all agree that avoidance is unacceptable and then spend most of a debate trying to legitimise avoidance by saying that in some circumstances it may be acceptable. That cannot be appropriate.

My hon. Friend Mr. Wright made an excellent contribution, as ever. He made the point that this is not a party political issue at all. Previous Governments have moved repeatedly to close down loopholes. Mr. Lilley—a former Secretary of State in the previous Government—made several such decisions. My hon. Friend also underlined that this is about fairness. We must assure all our constituents—whatever their income or background, or wherever they live—that this country's tax system will treat them equally under the law. He was right to make that point.

Mr. Pelling accused my hon. Friend the Member for Hartlepool of begrudging the City of London its success. My hon. Friend did not say that, but let us be clear that avoiding tax has nothing to do with the City of London's excellent reputation, of which every hon. Member should be proud. In fact, linking tax avoidance to the people who function in the City damages its reputation and is unfair to the vast Majority of people who work to create wealth successfully there.

The hon. Gentleman and many other hon. Members referred to the complex nature of the tax system. Much of the complexity in our tax system is a consequence of avoidance. We should be telling those who avoid tax as a matter of course that they need to change their behaviour and that they cause much of the complexity, although I am shocked that he could think that PAYE is complicated.

Mr. Dunne—in a usual, very cheap shot—said that the Prime Minister had woken up to globalisation recently. That is an astonishing claim because, as I have said, the Government's whole economic framework is designed to put this country in the best possible position to respond to the perpetual challenges that globalisation throws at it. Our Prime Minister and our Chancellor have been leading the debate in the European Union and the international community about the need to be outward looking and to consider what is happening in India, China and the rest of the world, but the Conservative party has the cheek to suggest that, somehow, we have only recently woken up to those challenges.

The Prime Minister says all the right, warm words. Indeed, I very much agree with what he and the Chancellor have said in the past two years. I wish that the Conservative party had made more of China, India and the importance of global competitiveness in our election campaign only in May. However, all this is, as ever, about implementation. Any of those in business in China's large cities will say that Germany is the main European player in that market. The Germans have made significant headway in investing in joint ventures there. We need to put the money where our mouth is. In particular, I make a plea to the Foreign Office. A number of Foreign Office trade missions have been closed not just in Asia, but in Africa. I hope that there will be some reversal of that to ensure that such ideals are put in place.

We politicians have just watched from a distance the political crisis in Germany, much of which is connected to the fundamental weaknesses and difficulties in the German economy. The German people and political classes would be delighted to have the economic framework that the Government have created in this country since 1997. Arguably, Germany has experienced some of those difficulties, yes, because of unification—we must be fair about that, and a lot of people are unfair when they forget to mention the unification of Germany—but also because it has been slow in some ways to face up to the realities of global economic change, and our economic policies have been based entirely on facing up to them.

Stephen Hammond expressed sadness that my hon. Friend the Member for Wolverhampton, South-West had not spoken in the debate. That sadness is shared by those of us on the front bench, and we look forward to his taking a similar role in Committee. The hon. Gentleman wants an assurance that our approach to the tackling of avoidance will be proportionate—I can give him that assurance—but he talked about the cost implications for business. The message is simple: if business does not avoid tax, these anti-avoidance schemes have no cost implications.

Mr. Spring asked in his contribution whose judgment would be in play in these issues. It will be the House's judgment. Direct taxation is dealt with in the Finance Bill. National insurance issues are dealt with by affirmative resolution in both Houses. So the Government are certainly happy to take responsibility for those questions of judgment. He also asked me—I am a bit puzzled by this—to write to him about a specific scheme that he referred to so that I can tell him what he is talking about. I should be delighted to tell him what he was talking about, and I will write to him about that specific scheme, although I do not recall its name.

This has been a good quality debate on the whole and a good natured debate. There is consensus on both sides of the House about our responsibility and duty to have a fair taxation system and to tackle tax avoidance effectively. Clearly, we must debate a number of points in Committee, and I look forward to those debates. I commend the Bill to the House.

Question put and agreed to.

Bill accordingly read a Second time.