New Clause 2 — Principles of good practice for retrospective taxation legislation

Orders of the Day – in the House of Commons at 4:45 pm on 25th June 2007.

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'(1) A Minister in charge of a Bill must, before Second Reading of the Bill—

(a) make a statement to the effect that, in his view, any retrospective taxation provisions of the Bill are compatible with either of the relevant principles of good practice ("a statement of compatibility"); or

(b) make a statement to the effect that, although he is unable to make a statement of compatibility, the government nonetheless wishes the House to proceed with the Bill.

(2) A statement under subsection (1) must be in writing and be published in such a manner as the Minister making it considers appropriate.

(3) In this section, "retrospective taxation provisions" means provisions which—

(i) introduce any new tax, levy, impost or duty, or increase the rate or extend the incidence of any existing tax, levy, impost or duty; and

(ii) take effect on a date earlier than the date on which the relevant enactment enters into force.

(4) For the purpose of subsection (3) it is immaterial whether a Minister gives notice, whether in Parliament or otherwise, of his intention to introduce a retrospective taxation provision which takes effect on a date after the giving of that notice.

(5) In subsection (3)(i) "extend the incidence of any existing tax, levy, impost or duty" includes the removal or attenuation of any relevant relief or drawback.

(6) In subsection (3)(ii) "take effect" includes the creation of a liability or obligation to account for any increased charge to tax resulting from a provision of the kind mentioned in subsection (3)(i), whether or not the date on which the increased charge falls due for payment precedes the date on which the relevant enactment is expressed to enter into force; and in this subsection "account for" includes any decision by a company or business undertaking to absorb or pass on in the form of higher customer prices or charges the additional costs to that company or business undertaking arising from the increased charge to tax.

(7) "The relevant principles of good practice" mentioned in subsection (1) are—

(i) that it appears, whether as a result of a judgment given by a court or otherwise, that some part of the law relating to taxation no longer conforms to the reasonable expectations about its effect previously held by taxation practitioners and that it is necessary to restore the position retrospectively in order to protect the interests of the general body of taxpayers;

(ii) that HMRC becomes aware of a new tax avoidance scheme and it is necessary, in order to prevent a significant loss of tax revenue, to amend the law retrospectively.

(8) In subsection (7) "taxation practitioners" includes the Treasury, HMRC, the accountancy profession, professional tax advisers and groups representing the interests of taxpayers; and "tax avoidance scheme" has the meaning given in the Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2004 or the Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2006.

(9) A taxation provision introduced under the Provisional Collection of Taxes Act 1968 is not to be treated as having retrospective effect for the purposes of this section unless the date on which the relevant resolution of the House of Commons under either section 1 or section 5 of that Act is expressed to take effect is a date earlier than the date on which the resolution under section 1 or, as the case may be, section 5 is passed.— [Mr. Goodman.]

Brought up, and read the First time.

Photo of Paul Goodman Paul Goodman Shadow Minister (Childcare), Treasury

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

Photo of Sylvia Heal Sylvia Heal Deputy Speaker

With this it will be convenient to discuss the following: Amendment No. (a), line 2, leave out '(a)'.

Amendment No. (b), in paragraph (a), leave out 'either of'.

Amendment No. (c), in paragraph (a), leave out from 'compatibility' to end of paragraph (b).

New clause 7— Limitation on use of retrospective taxation legislation

'(1) It is the duty of a Minister of the Crown to refrain from bringing retrospective taxation legislation before Parliament unless one of the conditions mentioned in subsection (2) is satisfied.

(2) The conditions mentioned in subsection (1) are—

(i) that it appears, whether as a result of a judgement given by a court or otherwise, that some part of the law relating to taxation no longer conforms to the reasonable expectations about its effect previously held by taxation practitioners and that it is necessary to restore the position retrospectively in order to protect the interests of the general body of taxpayers;

(ii) that HMRC becomes aware of a new tax avoidance scheme and it is necessary, in order to prevent a significant loss of tax revenue, to amend the law retrospectively.

(3) In subsection (2) "taxation practitioners" includes the Treasury, HMRC, the accountancy profession, professional tax advisers and groups representing the interests of taxpayers; and "tax avoidance scheme" has the meaning given in the Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2004 or the Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2006.

(4) In this section "retrospective taxation legislation" means legislation which—

(i) introduces any new tax, impost or duty, or increases the rate or extends the incidence of any existing tax, levy, impost, or duty; and

(ii) takes effect on a date earlier than the date on which the relevant enactment enters into force.

(5) For the purposes of subsection (4) it is immaterial whether a Minister gives notice, whether in Parliament or otherwise, of his intention to introduce a retrospective taxation provision which takes effect on a date after the giving of that notice.

(6) In subsection (4)(i) "extends the incidence of any existing tax, levy, impost or duty" includes the removal or attenuation of any relevant relief or drawback.

(7) In subsection (4)(ii) "takes effect" includes the creation of a liability or obligation to account for any increased charge to tax resulting from a provision of the kind mentioned in subsection (4)(i), whether or not the date on which the increased charge falls due for payment precedes the date on which the relevant enactment is expressed to enter into force; and in this subsection "account for" includes any decision by a company or business undertaking to absorb or pass on in the form of higher customer prices or charges the additional costs to that company or business undertaking arising from the increased charge to tax.

(8) A taxation provision introduced under the Provisional Collection of Taxes Act 1968 is not to be treated as having retrospective effect for the purposes of this section unless the date on which the relevant resolution of the House of Commons under either section 1 or section 5 of that Act is expressed to take effect is a date earlier than the date on which the resolution under section 1 or, as the case may be, section 5 is passed.'.

Photo of Paul Goodman Paul Goodman Shadow Minister (Childcare), Treasury

We have been proceeding so far on the amiable basis of consensus. I hope that we can go further and hear shortly that the Financial Secretary accepts the new clause. It aims to forestall and prevent creeping retrospection from polluting the Government's finance legislation. I intend to speak to it, as well as to the amendments tabled by my hon. Friend Mr. Chope and others, and to his new clause 7.

New clause 2 arises directly from the debate in the Committee of the whole House about air passenger duty in relation to clause 12. I do not intend to repeat the debate that we had on 1 May, but as the new clause deals with retrospection and as retrospection was present in clause 12, I must necessarily set the context that gives rise to the amendment. The definitive statement on retrospection in relation to clause 12 was made by the Treasury Committee as follows:

"The first element of retrospection is that airlines will be liable to pay the tax for departures on or after 1 February 2007 regardless of whether tickets were purchased before the new rules were announced. The second element of retrospection is that the liability to pay air passenger duty at the new higher rates will effectively be incurred before the House of Commons has authorised the increase; such authorisation will take place only after the Budget."

It is worth noting that two separate though related ideas of retrospection are described by the Select Committee in that context. It concluded:

"As a general rule we consider that, where increases in rates of duties or taxes are proposed in the pre-Budget report, those increases should not come into force until after the House of Commons has had an opportunity to come to a formal decision on the proposed increase following the Budget. We draw the attention of the House of Commons to the unusual timing of the implementation of the increases in air passenger duty, for which the Treasury has not cited any relevant precedents."

The Financial Secretary subsequently offered two precedents—the supplementary charge on North sea oil announced in the 2005 pre-Budget report, which was introduced with effect for accounting periods from 1 January 2006, and the increase in fuel duty announced in the 2006 pre-Budget report and implemented from midnight. However, the House of Commons Library said that

"it is arguable that these examples do not provide a precedent that captures all the aspects of the rise in APD rates".

In the debate on 1 May, I set out why that is so.

During that debate and in a previous letter to the shadow Chief Secretary the Financial Secretary set out a series of further claimed precedents—the 2002 Budget decisions in relation to income tax rates, and another similar change made to the taxation of North sea oil, the petroleum revenue changes made in 1978 and confirmed in 1979. He was unable to explain why all these claimed precedents were not originally given to the Select Committee. He was also unable to explain why they were being dribbled out in this gradual way, rather than being offered all at once in a coherent whole.

I suspect that the explanation is that the Treasury has been forced to scrape the bottom of the barrel for these precedents, and my suspicion is given at least some backing by the Library, which is no more impressed by the new set of precedents than it was by the old ones. Having been consulted, it repeats:

"It remains the case that none of these examples provide a precedent that appears to capture all the aspects of the rise in APD rates".

The readiness to reach for retrospection in relation to APD, the failure to offer precedents to the Select Committee and then to discover them afterwards, and the insubstantial nature of the precedents, all considered together, send a dangerous signal to taxpayers, consumers, businesses and tax practitioners. If the Government are prepared to legislate retrospectively and unprecedentedly once, and in doing so, drawing a rebuke from the Select Committee, what is to prevent them from using this unprecedented APD rise as a further precedent in the future? It is in order to prevent them from doing so again that we have tabled the new clause. In the Committee of the whole House, I said:

"We intend to table a new clause at a later stage which will prevent the Chancellor's successor from behaving in the same way in relation to APD".—[ Hansard, 1 May 2007; Vol. 459, c. 1435.]

I believe that the new clause would indeed prevent the next Chancellor from behaving in the same way again.

The amendments tabled by my hon. Friend the Member for Christchurch, together with his new clause 7, seek to remove any remaining element of doubt. I shall explain to him shortly why we look sympathetically at his proposed amendments (a) and (c) to new clause 2 and at new clause 7. I shall also explain shortly why we have some reservations about his amendment (b).

Before I do so, however, let me explain the basis of new clause 2. In drawing it up, we have attempted to find a basis for legislating in relation to retrospection that will command a consensus in the House. Let me make it clear that we are not against retrospective taxation per se on all occasions. It is reasonable to tax retrospectively in order to tackle a new tax avoidance scheme that threatens a significant loss of tax revenue, for example, or to restore the law in relation to some particular aspect of taxation to what it was believed to be until a court decided otherwise.

That view was set out by my right hon. Friend Mr. Dorrell as a Minister in the last Conservative Government. He said:

"Where it is discovered that the tax law does not have the effect that the Government and taxpayers generally thought it had, there are circumstances in which it is right to introduce legislation to restore the position retrospectively to what it was thought to be. This is done only in exceptional circumstances and where the Government consider such action is necessary to protect the interests of the general body of taxpayers."—[ Hansard, 29 June 1992; Vol. 210, c. 378-79W.]

The conventions that govern the use of retrospection in relation to tax avoidance were set out in the so-called Rees rules, named after our former colleague Peter Rees, now Baron Rees of Goytre—I hope that I am pronouncing that correctly—in 1978. In 2004, the Paymaster General made a statement of the Government's view that is broadly similar to what I shall name, after my right hon. Friend the Member for Charnwood, the Dorrell doctrine. At present, the Government are entitled to collect new taxes prior to receiving full legislative authority from the passage of a Finance Act under the Provisional Collection of Taxes Act 1968. The trigger, so to speak, for the retrospective APD rise—the cause of this debate—was the passing of the Budget resolutions announced on Budget day.

Under new clause 2, any Minister introducing a Bill that contains retrospective taxation, such as the Finance Bill before us, would be obliged by law to state that such retrospective taxation was, in effect, consistent with the Dorrell doctrine set out under the previous Conservative Government and echoed in the Paymaster General's 2004 statement. If the new clause were on the statute book now, the Financial Secretary would have been compelled during the debate on 1 May to concede that the retrospective elements of the APD rise contained in this year's Finance Bill were utterly inconsistent with the Dorrell doctrine and bad practice, since even the Government have not attempted to claim that the APD rise was necessary to prevent tax avoidance by passengers or airlines or to restore the law to what it was previously believed to be. I believe that the Financial Secretary would not have endured the embarrassment and difficulty of so doing, and that the new clause is a strong deterrent to bad retrospective legislation.

As I said, the amendments tabled by my hon. Friend the Member for Christchurch and his new clause 7 seek to remove all possible doubt. His amendments would bar Ministers from proceeding with retrospective tax rises that they declare inconsistent with the Dorrell doctrine. As my hon. Friend knows, we considered tabling a new clause identical to new clause 7 that would have had the same broad effect as his amendments. We decided not to do so for a single reason: the Financial Secretary should have the opportunity this afternoon, we hope in the course of accepting the new clause, to persuade the House that there are some categories of retrospective legislation that are incompatible with the Dorrell doctrine, but that it would none the less be right for the House to be able to consider in the future. My hon. Friend's amendments and new clause would have the effect of barring the House from considering any such retrospective legislation in future. However, I have to say to him and to the House that I very much doubt whether such categories exist and whether the Minister can make such a case. As I have said, that is why we are sympathetic towards amendments (a) and (c) and new clause 7. If new clause 2 is passed, we will accept amendments (a) and (c), unless the Financial Secretary can persuade us otherwise. If, having accepted amendments (a) and (c), new clause 2 is none the less unsuccessful when put to a vote, I will advise my right hon. and hon. Friends to vote for new clause 7.

We have some reservations about amendment (b). New clause 2(1)(b) would permit a Minister to introduce a retrospective tax measure as good practice that would either close a significant new tax-avoidance loophole or restore the law to what it was previously believed to be. New clause 7 maintains that either/or principle. However, amendment (b) takes a different view. Taken with the other amendments, it would permit a Minister to introduce a retrospective tax measure only if it both closed a significant new tax-avoidance loophole and restored the law to what it was previously believed to be. In other words, a Minister would not be able to introduce a retrospective tax measure to close a significant new tax loophole unless they were also restoring the law to what it was previously believed to be and vice versa. According to the Library, the last Conservative Government legislated retrospectively to restore the law to what it was previously believed to be in two cases—section 62 of the Finance Act 1987 and section 116 of the Finance Act 1989. I have been advised that had amendment (b) been in force, the last Conservative Government might not have been able to act in that way.

In conclusion, it seems reasonable for the Government to retain the power to close significant new tax-avoidance schemes immediately, subject to the Rees rules, but I will listen closely to my hon. Friend the Member for Christchurch.

Photo of Helen Goodman Helen Goodman PPS (Rt Hon Harriet Harman QC, Minister of State), Ministry of Justice 5:00 pm, 25th June 2007

I am particularly pleased to discuss new clause 2, because I spoke in the debate about air passenger duty on 1 May. Unfortunately, I was not a member of the Committee that considered this year's Finance Bill—I do not know whether I should call it a Public Bill Committee or a Standing Committee.

Mr. Goodman has made a speech that is characteristic of his virtues— he displayed diligence, thoroughness, hard work, persistence and civility—but he is absolutely wrong for all the reasons that my hon. Friend the Financial Secretary will explain shortly.

Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

I was expecting more, but the consensus appears to have broken down at an early stage in the afternoon.

I am sympathetic to the principle behind new clause 2. It is important to have openness and honesty about retrospective taxation and, in fact, any changes in the tax system. I was reassured by the comment of Mr. Goodman that the objective of the new clause is not to remove at a stroke all retrospective taxes, but to state as a principle that there should be an effort to ensure that such taxes are introduced for all the right reasons.

I am sure that Helen Goodman remembers that both this year and last year the Finance Bill included some retrospective taxes, which it was necessary to introduce without consultation because of significant abuses of the taxation system and loopholes that needed to be closed. On that basis, such measures are entirely necessary. However, there are examples—air passenger duty is not the only one—where it is not clear whether a loophole needed to be closed or that avoidance was taking place. On air passenger duty, people who paid for their tickets before the changes were introduced found out that there was an additional charge only when they arrived to catch their flights. It would have made much more sense to examine whether the measure fulfilled the criteria before its implementation.

Retrospection might cause problems for taxpayers in two other areas, which might need to be looked at more widely, and where greater openness might be preferable. The first concerns the agricultural buildings allowance, which was dealt with in this year's Finance Bill, changes to which will have an impact on investment decisions that were made anything up to 24 years previously. In theory that affects only taxation going forward, but it will have an effect on decisions that people made many years previously with regard to buildings that it is not easy to dispose of if the tax liability represents a significant problem to the businesses involved. I hope that the Minister will be able to assure us that there is at least agreement in principle that clarity on such issues would be welcome.

The second area where there are concerns about people being caught by changes to the taxation system as a result of a lack of awareness arises from changes in last year's Finance Bill to the inheritance tax treatment of trusts to which people had signed up. To this day, many people may not realise that they have been caught by some of those changes.

Those are our broad areas of concern and we are sympathetic to the point made by the hon. Member for Wycombe.

Photo of Christopher Chope Christopher Chope Conservative, Christchurch

I thank my hon. Friend Mr. Goodman for his open and transparent discussion of these issues with me over many weeks. When I first raised the matter in the Budget debate I found myself in a minority of Conservative Members voting against air passenger duty. However, I overheard one of my colleagues saying, "Since when has it been Conservative party policy not to vote against retrospective legislation?" That voice, which seemed at one stage to be unheeded, has now been heeded, and I am grateful to my hon. Friends on the Front Bench for making that clear by moving new clause 2.

My amendments to new clause 2 and my new clause 7 go a little further, but the effect is that my hon. Friend and I have launched a pincer-movement on the Government. If the Minister can come up with some categories that are not consistent with the Dorrell doctrine beyond those set out in subsection (7) (i) and (ii), he will be able to use that argument against supporting my new clause, but if he does not do so, the way will be open for the House to support new clause 7.

I put my amendments and new clause in an alternative form, and I am sorry that my hon. Friend has a little trouble with my amendment (b). I thought that if the word "either" was removed and we could then get rid of the word "or", it would be better English. However, I take my hon. Friend's point that by removing the word "of" as well from line three, that would have the effect of suggesting that both the relevant principles would have to be satisfied rather than just one.

The only point that I can make to counter that is to say that if at some stage in the future the Government came up with extra relevant principles of good practice, it would be possible to amend subsection (7) by adding extra relevant principles, but it would not be so easy to do that if we had the words "either of", because that suggests that there can only ever be two principles. However, I do not want to go to the wall on that, and I am happy to accept what my hon. Friend says on amendments (a) and (c) and on new clause 7.

This episode has caused an enormous amount of angst among the travelling public and among well-established and successful businesses. For the sake of just over £100 million, the Government were prepared to tear up the conventions relating to retrospective taxation and to introduce a retrospective increase in air passenger duty that has caused an administrative nightmare and that was wrong in principle. Many passengers felt aggrieved that, although they had paid their fees to the airline, when they got to the airport, or perhaps before that, they had to pay an extra tax, because the tax had been increased between their making their booking and taking their flight.

Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

Does the hon. Gentleman agree that it is particularly unfortunate that this whole problem has flared up over a green tax? The public are naturally cynical about the Chancellor's motives, and they wonder whether the revenue will be used to fund cuts in taxation elsewhere or whether this is just a cynical ploy to raise more revenue for the Treasury.

Photo of Christopher Chope Christopher Chope Conservative, Christchurch

The hon. Lady is absolutely right. No one is more cynical about green taxes than I am. Even if we accept the argument in favour of green taxation, I have yet to be convinced that air passenger duty is an effective green tax.

Photo of James Duddridge James Duddridge Conservative, Rochford and Southend East

My hon. Friend knows that we have slightly different views on environmental taxes, but has he noted that the Financial Secretary told the Treasury Select Committee that the principal purpose of the air passenger duty was to increase revenue? This has never been about green taxation.

Photo of Christopher Chope Christopher Chope Conservative, Christchurch

I accept that the Government made that admission. It was a candid admission, and my right hon. and learned Friend Mr. Clarke made the same admission when he first introduced air passenger duty. He said, "We're short of money in the Exchequer. We need to find some new taxes." The Government of whom he was Chancellor of the Exchequer were famed for introducing new taxes. In the end, that resulted in the problems that our party encountered when it had to face the people in the 1997 general election. That is part of history, but my right hon. and learned Friend was certainly candid about air passenger duty being a revenue-raising tax, and I believe that the Financial Secretary has accepted as much. It has been suggested that it is not a revenue-raising tax but a tax designed to alter behaviour, but how can we alter behaviour when that behaviour has already occurred? It is nonsense to make a green tax retrospective, because the behaviour has already occurred. Unless people withdrew their decision to take a holiday with their children or to embark on a flight for some other reason, the retrospective element of the environmental tax would mean that it had no impact whatever.

Helen Goodman made a short but pithy contribution. It was one of the most effective bids that I have ever heard for preferment in a forthcoming reshuffle. When I had a junior ministerial role, there was nothing that the Prime Minister and other Cabinet Ministers wanted more than a Minister who would accept that what they said was absolutely the bee's knees and that there was no reason to argue with it. If the hon. Lady does not gain a ministerial post straight off, perhaps she will be given a position in the Whips' Office. She would be well—

Photo of Sylvia Heal Sylvia Heal Deputy Speaker

Order. I have allowed the hon. Gentleman some latitude, but I must now advise him to concentrate his remarks on the new clauses and amendments.

Photo of Christopher Chope Christopher Chope Conservative, Christchurch

The point of introducing the hon. Lady's argument was that I have heard the Minister speak on this subject many times in the past, and I have yet to be convinced by what he has said. The hon. Lady has obviously read the different speech that he is going to make in response to this debate.

In essence, we have caught the Minister in a pincer movement. If he accepts that principles should be attached to retrospective legislation, and that those should be enacted in statute for the protection of the public and to introduce certainty, the two categories set out in the new clause tabled by my hon. Friend the Member for Wycombe make that clear. If the Minister thinks that an extra category should be included, let him say so. The problem with new clause 2 is that it is only declaratory—it would be possible for the Minister to make a certificate that a piece of legislation would be retrospective, notwithstanding those two principles. My alternative new clause would prohibit the introduction of retrospective legislation that did not comply with those two principles.

Whichever way the Minister argues, we will get him. I am grateful to my hon. Friend the Member for Wycombe—the work that we have done together augurs well for the work that we will continue to do together when we get into government.

Photo of John Redwood John Redwood Conservative, Wokingham 5:15 pm, 25th June 2007

I am a company director and have listed my interests in the Register of Members' Interests.

For my hon. Friend Mr. Chope, the debate arose out of the extraordinary decisions on air passenger duty, on which retrospection was clear, flagrant and undesirable. The new clause, however, relates more widely to the whole gamut of the Government's tax activities. Among my constituents, especially those who are in businesses, who run their own businesses or who have some savings and investment income, there is a growing feeling that things are no longer fair and sensibly run, as they were a few years ago. I am not making a party political point—people felt that things were fairly administered during the first five years of this Government, as they did under the previous Government. I therefore welcome the new clause of my hon. Friend Mr. Goodman, and the amendments to it from my hon. Friend the Member for Christchurch, as they could go a little way to reassuring my constituents.

The problem is now considerable. My many law-abiding constituents with business interests or savings activities know that they should make an honest declaration of what they are earning or of their savings in the required form, and they accept that they should pay tax. They also believe that they have every right to make intelligent use of fiscal incentives from tax breaks, and some of those offered by the Government in previous Finance Acts have been very attractive, such as the decision to allow more favourable tax status to small business incorporation. Having made intelligent use of those things, they fear that the Government will come down on them like a ton of bricks, saying, "We didn't really mean it. Oh, goodness me, the fiscal incentive was too successful," and will find a way of clawing it back and blaming them for having responded rationally to the signals sent out in tax legislation a few weeks, months or years previously.

The Minister must agree that the Government are happy for people to take advantage of tax breaks and fiscal incentives. A series of radio advertisements are currently running on various channels about National Savings and Investments. The whole point of the adverts is that people can be protected from the rather high rate of inflation now prevailing under this Government, and from their tax demands, by buying index-linked National Savings bonds, which, miraculously, are protected from both the ravages of inflation and the depredations of the taxman. That is a perfectly good selling point. I am not here to advertise those bonds today, but it shows that the Government recognise the importance of fiscal incentive in selling savings products and are happy to use it. Having taken advantage of some other fiscal incentive, my constituents therefore feel that it is unfair of the Government to turn round, decide that it is a loophole that is allowing too much revenue to be lost, and try to change things retrospectively.

It was right to mention trusts, because last year's Finance Act contained a good deal of retrospection in relation to people who had taken good accountancy and legal advice, set up trusts and then discovered that the Government were no longer prepared to live with that, and effectively wanted to unpick it retrospectively. In support of my hon. Friends the Members for Wycombe and for Christchurch, anything that can be done to make the tax system a little fairer and predictable for the many law-abiding, decent citizens trying to live under it would be welcome.

If I have a worry, it is that there are still big loopholes for the Government in the generous drafting that the Conservative Front Bench has come up with, but I am happy to support the new clause because the statement of intent is clear and it is a move in the right direction. However, I hope that this group of Ministers, or their soon-to-be-announced successors, will understand that there is a growing feeling of displeasure about the unreasonable behaviour of the Revenue. People who honestly want to pay their taxes, but who want to take advantage of sensible fiscal incentives, no longer feel that they will be able to do that, or they feel that they will be penalised retrospectively.

Photo of John Bercow John Bercow Conservative, Buckingham

May I put the proposition to my right hon. Friend that it is not only true that there is considerable and widespread misgiving on this score, but that that misgiving is especially acute in the small business sector, which tends to be characterised, by definition, by having a much smaller resource available to fight the matter through the courts or through the consultation of expensive lawyers?

Photo of John Redwood John Redwood Conservative, Wokingham

My hon. Friend is right and makes an important part of my case. The people I have in mind cannot hire expensive accountants or lawyers for either their personal or their small business affairs. It gives them a greater feeling of injustice because they think that there is law and justice for the very large companies. Those can take the best legal and accountancy advice, and may succeed in winning the case or may have enough cases going forward so that, on the law of averages, they come out of it all right. Law-abiding decent people who run small businesses or who try to put together their savings for retirement do not have that option. Only one case may matter to them, and they will probably lose it. There is the feeling that the Revenue is out to grab as much money as it can from any law-abiding person who advises it that he has a bit of money, rather than the Revenue sensibly following the rules laid down by Ministers and not going in for retrospective changes.

Photo of Robert Smith Robert Smith Liberal Democrat, West Aberdeenshire and Kincardine

I support new clause 2 because the principle that it espouses of not having retrospective taxation is important for the confidence of investors, consumers and taxpayers, so that they know where they stand when making decisions. The whole point of taxation, especially taxation that is tinged with the idea of green taxation, is that it must be trusted by people if it is going to affect behaviour and influence their decisions. When it comes to investment, people must have the confidence that they understand the fiscal climate in which they are making those decisions. There is enough uncertainty in the business and trading worlds in trying to guess markets. To have the Government throwing in more uncertainty is clearly damaging to long-term decision making and to the wealth of the economy. If it is damaging to the wealth of the economy, it is damaging to the long-term tax take for the Chancellor.

I congratulate Mr. Chope on having the courage to follow us into the Lobby to oppose that in practice as well as in theory. It is disappointing that it has taken until now for Conservative Front Benchers to come to the point at which we can vote against retrospective taxation together. A few of his colleagues wondered why they were not following us into the Lobby. It seemed to be a matter of presentation rather than the substance of the issue.

Photo of Christopher Chope Christopher Chope Conservative, Christchurch

My recollection is that the Liberal Democrats followed a group of Conservatives, led by me, into the Lobby.

Photo of Robert Smith Robert Smith Liberal Democrat, West Aberdeenshire and Kincardine

At least we were in the same Lobby.

The hon. Gentleman was perhaps too generous to the Government. He said that there might be an element of green taxation if someone decided to cancel their trip in the light of the tax change, but if the plane still flies, the environmental damage is still done. What is fundamentally disappointing about the tax is that it taxes the individual and not the actual polluter, which is the aircraft. That tax needs to be reformed anyway.

For the Chancellor to change a tax system retrospectively while we are still in the financial year, albeit towards the end of it, is extremely damaging to confidence, and confidence is what encourages long-term investment, which encourages the wealth creation from which this country will benefit in the long term.

Photo of Stewart Hosie Stewart Hosie Shadow Spokesperson (Women), Shadow Spokesperson (Home Affairs), Shadow Spokesperson (Treasury)

Mr. Goodman made the case that the precedents published by the Treasury may not cover all the eventualities in terms of retrospective taxation or all the possible justifications for it in the future. He is probably right. Nor do the precedents allay any of the real concerns felt by the general public that they may be taxed retrospectively for things that they did that were legal at the time or, in terms of savings and investments, things that were not deemed to be avoidance schemes at the time at which they invested in them, but are now thus deemed because of misuse by others.

Concerns about retrospective changes include the possibility that they may lead to double taxation of money that has already been taxed in another way. The amendments suggest that the Minister issues a written statement and I am quite taken with that suggestion. Hon. Members will remember last year's Finance Bill, when the Paymaster General gave a long and detailed exposition on the abuse of family trusts, to the extent that control could be maintained as the assets went through many generations in a family. Were such a detailed exposition to be presented for a specific problem that required to be taxed retrospectively, I suspect that it would allay the genuine concerns of the public and explain why the Government were seeking to make the proposed changes. It might also temper how those genuine concerns are reflected by hon. Members, and that would be a positive outcome.

On the basis that subsection (9) of new clause 2 excludes it from the Provisional Collection of Taxes Act 1968, I await with interest to learn why the Minister opposes it. It seems a sensible measure that will inform the debate on retrospective taxation in this House and, more importantly, allay the very real concerns of the general public, especially investors.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree

I wish to speak briefly in support of the principle of good practice for retrospective taxation enshrined in new clause 2. I draw Members' attention to my entry in the Register of Members' Interests.

Debating the principles of retrospective taxation reminds me of the heady days of Standing Committee D considering the National Insurance Contributions Bill. The debate revolved to a large extent around this principle and its boundaries, although, as we found out, the principle was being made up on the hoof and the boundaries were anyone's guess. Fine wines and platinum sponges featured strongly, and they certainly made for hedonistic debate, although since the latter have a more prosaic function in catalytic converters, it is perhaps appropriate that the catalyst for new clause 2 was the introduction of retrospective environmental taxation.

I spoke then about the dangerous precedent of backdating tax changes to coincide with an expressed intention to legislate. We should not be encouraging a state of play whereby tax changes are effectively implemented by ministerial statement and then rubber-stamped by legislation at a later date. Worse still, we should not require sections of the financial services industry routinely to thumb through Hansard to check whether the Paymaster General has said anything threatening—which I know is not her usual practice, but which has occurred from time to time.

I am pleased that subsection (4) addresses specifically the practice of announcing things to Parliament and using them as the peg on which to hang retrospective taxation. It might make for convenient government, but it sends all the wrong signals.

Photo of John Bercow John Bercow Conservative, Buckingham

I accept the thrust of my hon. Friend's remarks, but does he agree that notwithstanding the joys of new clause 2, it is of doubtful value to afford to the Government discretion as to the manner of the publication of their future intentions? That leaves open the possibility that lots of people who will be affected will not get to know.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree 5:30 pm, 25th June 2007

My hon. Friend makes a valid point, and it follows on from the excellent one made earlier about small businesses that do not have on their payroll the sort of people who can do the Government's dirty work for them and identify such problems coming down the track.

I also welcome the two principles set out in new clause 2(7), which propose that the Government keep their powder dry on retrospective taxation unless it is needed to address a conflict that has arisen with "reasonable expectations", or to guard against a new tax avoidance scheme that would lead to a loss of revenue. The Government should look again at whether it might not be timely, after 22 years of the Ramsay case, to review the distinction between legitimate tax planning and illegitimate tax avoidance.

While I do not wish to wander too far from the new clause, I hope that the Government will take this opportunity to reaffirm a commitment to certainty in the tax system. Adam Smith, the second most famous economist to come out of Kirkcaldy, wrote in his "The Wealth of Nations" that

"the tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, and the quantity to be paid ought to be clear and plain to the contributor and to every other person."

That is a fine statement of principle, although it is perhaps a little too well written ever to make it on to the face of a Finance Bill.

It is a pity that none of the events that the Chancellor has sponsored at No. 11 Downing street over the years took its cue from the Adam Smith Institute, but I hope that the Government will see fit to endorse the principle underlying new clause 2.

Photo of John Healey John Healey The Financial Secretary to the Treasury

This has been a useful debate. Mr. Goodman opened it and made several references to our earlier debates on this matter in relation to air passenger duty. He also quoted from House of Commons Library briefings about precedents for the proposals. In general, such briefings are very accurate, useful and reliable, but in this case I take issue with the quote that he used, although he may have done so selectively. I have given a number of precedents to explain the proposals and to demonstrate that there is nothing novel about the decisions on air passenger duty taken in the pre-Budget report. Those precedents match precisely what has happened with that duty: in each case, measures were introduced that had an effect on duty tax points before they were considered by Parliament—but after the Government had made a clear announcement to Parliament of their intention to introduce them.

I am glad that the hon. Member for Wycombe said that he was not against retrospection per se, but I remind him that the decision on air passenger duty that we announced in December's pre-Budget report was not retrospective. It was pre-announced: the pre-Budget report documents made it clear that the new rates would apply to passengers travelling on or after 1 February. It was a departures tax, not a ticket tax or a booking tax. Of course, questions arose in respect of flights booked before 6 December, when my right hon. Friend the Chancellor made his announcements, but airlines had two months' notice before the new tax rates came into force. The airlines have been liable for the air passenger duty since 1993. They are responsible for its payment and free to choose—as they did in February—whether and how to pass their costs on to passengers.

Photo of Paul Goodman Paul Goodman Shadow Minister (Childcare), Treasury

The Financial Secretary cannot argue that a tax is not retrospective just because it was pre-announced. The rise was voted on as part of the Budget resolutions, and will be voted on again during the course of this Finance Bill, but it is backdated to February.

Photo of John Healey John Healey The Financial Secretary to the Treasury

The provision was not retrospective, but it is true that it applied to tickets booked before as well as after the announcement on 6 December, just as air passenger duty applied when it was first introduced in 1993, as did the changes made to the duty in 1996 and 2000.

My hon. Friend Helen Goodman did not look too disappointed when I broke the news that she was not to be a member of the Finance Committee this year. However, we missed her during the six weeks we spent scrutinising the Bill and discussing it in detail.

I respect the way in which Mr. Chope again raised the retrospective taxation issue. He is absolutely assiduous in doing so, and not just in the Chamber; he and I have debated the issue in Westminster Hall, too. His arguments seem to be making more headway on his Front Bench than on the Treasury Bench, although he and his Front-Bench colleagues obviously do not entirely see eye to eye on green taxes and environmental policy in general. The hon. Gentleman is right: his Front-Bench colleagues did not support him when he moved a similar proposition on air passenger duty in the Committee of the whole House. However, they seem to be lining up to support him on this occasion. Perhaps we should not be surprised—we are getting used to rapid and dramatic shifts of policy position on the Opposition Front Bench.

Julia Goldsworthy referred to agricultural buildings allowance and the trust legislation—concerns that were also mentioned by Stewart Hosie. I encourage the hon. Lady to consider that there could be no legitimate expectation that the law relating either to agricultural buildings allowance or to the taxation of trusts would remain unaltered indefinitely. Mr. Redwood touched on whether the trusts legislation was retrospective. The tax changes on the treatment of trusts were not retrospective; they may, and do, apply to trusts that have been previously established, but only for future years. That is not retrospection in any serious sense of the word.

New clauses 2 and 7 would restrict the use of retrospective tax law far beyond existing domestic and European Court of Human Rights precedents and would have effect in respect of a wider range of tax provisions than Members might realise. New clause 7 in particular would severely restrict the Government's ability to react to changing circumstances to protect the Exchequer.

Let me stress that the Government take the use of any retrospective tax law extremely seriously. Before introducing the Finance Bill to the House of Commons, the Chancellor is required to certify that it is compatible with the European convention on human rights, which he does only after he has sought advice from Her Majesty's Revenue and Customs and other departmental lawyers. That ensures that every provision in the Bill is scrutinised carefully and an assessment is made as to whether it complies with the rights conferred by the convention.

As Members will be aware, the main constitutional conventions on retrospective tax law are known as the Rees rules, which require a Minister to make a full announcement to the House when introducing fiscal changes that have effect on a date before the enabling legislation will be enacted. Over the past 10 years, the Government have used and followed those rules, just as previous Governments did on many occasions.

The hon. Member for Wycombe referred to the statement made by my right hon. Friend the Paymaster General in 2004 when she set out an approach to tax avoidance schemes—tough but necessary arrangements—that were subsequently supported on both sides of the House. I think that all hon. Members might concede that tax decisions often have to recognise a wide range of economic, social or environmental factors, and sometimes we face factors that change rapidly and constantly. Of course, those factors have to be balanced with the need for certainty and the need to respect the rights of taxpayers to understand their position—including compliance with the provisions of the Human Rights Act 1998. We are satisfied that the balance that we have built into the current parliamentary framework is sufficient to deal with the situations we face.

As the hon. Member for Wycombe explained to the House, new clause 2 seeks to enshrine in legislation elements of existing convention and best practice. New clause 7 seeks to go further than new clause 2 and rows back from existing convention and best practice. Together, they would restrict the ability of the tax system to respond to changing circumstances and, on occasions, to avoidance threats. New clause 7 seeks to impose wholly impractical restrictions by making it a duty of Treasury Ministers not to bring before Parliament retrospective tax provisions, whether in the Finance Bill or otherwise, that do not comply with certain conditions set out in the clause.

Photo of John Redwood John Redwood Conservative, Wokingham

How can the Minister say that the provisions would cause problems with tax avoidance when new clause 2 specifically allows the Treasury still to take action to deal with tax avoidance?

Photo of John Healey John Healey The Financial Secretary to the Treasury

If the right hon. Gentleman will bear with me, I will come on to the sort of problems that would be caused by the flawed way in which the provisions in new clauses 2 and 7 are framed.

There are many precedents, going back many years, for Acts of Parliament and resolutions that take effect from dates before the date on which they are debated and voted on by the House. Subsections (7) and (8) of new clause 2 set out conditions under which retrospective tax law would be compatible with subsection (1). Subsections (2) and (3) of new clause 7 set out the same conditions under which retrospective tax law could be introduced in accordance with subsection (1). The first condition is that some event—most likely a court judgment—has changed the interpretation of the law contrary to "the reasonable expectations" of "tax practitioners". That phrase is defined in new clause 2(8) and new clause 7(3). A moment's thought would encourage one to conclude that it would be extremely difficult to determine what the reasonable expectations of such a diverse body as tax practitioners would be.

The second condition in both new clauses is that a scheme has been disclosed to Her Majesty's Revenue and Customs. I think that this is the point that the right hon. Member for Wokingham was making. However, although the term "tax avoidance scheme" appears in the titles of the legislation referred to in the new clauses, it is not defined anywhere in UK legislation. The descriptions used in primary legislation—principally in part 7 of the Finance Act 2004—and in regulations are targeted at avoidance, but they do not define it. In effect, they are proxies for new and innovative schemes, as these often carry the highest risk of avoidance. But not every scheme that is notifiable is avoidance and, equally, since the descriptions must strike a balance between countering avoidance and imposing unnecessary or burdensome responsibilities on business, they will not capture every avoidance scheme.

New clause 2(6) and new clause 7(7) would further give the provisions effect in situations where the tax change may affect a pricing decision that has already been made by a company, even when the measure applied only to tax points that occurred after the measure had been passed by the House. It cannot be the case—although it appears to be from the way in which the provisions are framed—that hon. Members seriously propose that the House should be alerted in any case in which a change to tax rates has an impact on a commercial decision or arrangement that has already been entered into. Again, a moment's thought would lead one to suggest that that might apply to virtually any tax change. In general, any tax change has the potential to have an impact on such decisions.

It is difficult to envisage why the provisions are necessary. The Chancellor must certify that any retrospective measure is human rights-compatible. Parliament has the ability to consider all the factors raised in the new clauses when debating such a measure. The drafting of the new clauses is fundamentally flawed. The measures would have far wider consequences than even the hon. Member for Christchurch might intend. Following the reassurances that I have given, I hope that neither of the new clauses will be pressed to a Division. If they are, I shall have to ask my hon. Friends to resist them.

Photo of Paul Goodman Paul Goodman Shadow Minister (Childcare), Treasury 5:45 pm, 25th June 2007

The debate has demonstrated the widespread concern throughout the House about creeping retrospection, as was evident from the comments made by my right hon. Friend Mr. Redwood and my hon. Friend Mr. Newmark. Julia Goldsworthy reminded the House of a point that I omitted to make: the issue of retrospection was very live when we considered trusts during our proceedings on last year's Finance Bill. Sir Robert Smith also made that point. Stewart Hosie was sympathetic to new clause 2. To borrow a phrase from my hon. Friend Mr. Chope, we are seeing a large pincer movement on the Government.

I pay tribute to my hon. Friend the Member for Christchurch, who strongly opposes the rise in air passenger duty. He is also concerned about retrospection and I am grateful to him for pressing the issue in such a way.

My hon. Friend was right about the pincer movement on the Government because Helen Goodman said shortly after I finished my speech that she opposed new clause 2, but that her opposition would be justified retrospectively. That set the tone for the debate. She has been joined on the Labour Benches by Rob Marris. He is in the Chamber retrospectively, given that he was here in spirit right from the start of the debate.

The Financial Secretary, like the hon. Member for Bishop Auckland, produced a scant argument. He says that the considerations already apply and that new clause 2 is badly drafted, but subsection (1)(b) of the new clause would allow him to introduce any measure and simply claim that it would be justified, despite being retrospective, for the reasons that he wished to set out to the House. However, he did not address that point at all.

Having heard the Financial Secretary's argument, if new clause 2 were agreed to, I would be happy to accept amendments (a) and (c) to it, which were tabled by my hon. Friend the Member for Christchurch. I would look sympathetically on new clause 7, which he also tabled. We will press new clause 2 to a Division.

Question put, That the clause be read a Second time:—

The House divided: Ayes 209, Noes 281.

Division number 149

See full list of votes (From The Public Whip)

Question accordingly negatived.