It is a pleasure to serve under your chairmanship, Mr Sheridan.
Following the announcement in the 2011 autumn statement, clause 34 freezes the capital gains annual exempt amount—the AEA—at £10,600 for 2012-13, the same as for 2011-12. The AEA, similar to the personal allowance in the income tax system, is the amount of capital gain an individual can make before they have to pay capital gains tax. Clause 34 also requires that AEA rises in line with the consumer prices index, the CPI, instead of the retail prices index, from 2013-14 onwards. That was announced by the Government in the 2011 Budget.
According to the tax information and impact note published at the time of the 2011 autumn statement, the measure is expected to yield £25 million in 2012-13, 2013-14, 2015-16 and £30 million in 2016-17. I want to address the issue of the move to the consumer prices index. The Government state that the CPI is the most appropriate measure of the general level of prices. However, the net effect of the Government’s decision to shift the indexation from RPI to CPI is essentially a stealth tax increase for millions of taxpayers. Is the Minister satisfied that the public are adequately aware of the changes? Does he accept that an element of stealth could be perceived in the way in which the measure has been introduced? Seemingly small changes—the freezing of the AEA and linking increases to CPI rather than RPI—will have a bigger impact over time. With no indexation in the capital gains system now, a high inflationary environment could boost tax receipts simply through fiscal drag, where taxation increases automatically as taxpayers move into higher brackets due to inflation.
Has the Minister undertaken an assessment of how many more people will be brought into capital gains tax because of the freeze and the slower growth in the AEA? Does the measure mean that more people will be brought into the self-assessment system and has the additional burden on HMRC been taken into account? If so, has the Minister assessed the cost of that? Does the Minister accept that, taken in isolation, these measures create fiscal drag and are therefore regressive?
Our amendment asks the Chancellor to review the impact of this proposal on the number of taxpayers brought into capital gains tax and for a report of the review to be placed in the Library, and, therefore, I urge hon. Members to support it.
I cite the arguments on fiscal drag put in the 1970s by Milton Friedman, Friedrich Hayek and Sir Keith Joseph. At the time they were quite successful in persuading the then leader of the Conservative party, one Margaret Hilda Thatcher, that fiscal drag was a particular problem. They put great effort and academic research into demonstrating that fiscal drag was one of the more dangerous tools of Government policy. Of course, they made the accusation against the then Chancellor Denis Healey and the previous one, James Callaghan.
I have an open mind on those criticisms, but there seems to be some validity in suggesting that fiscal drag is a rather dishonourable form of Government policy, because the public cannot see it. Has it now become part of official economic policy of the Conservative party? Is it something that the Liberals have managed to negotiate into the coalition through their key impetus in Treasury matters—the Chief Secretary to the Treasury, the right hon. Member for Inverness, Nairn, Badenoch and Strathspey (Danny Alexander)? He may well be the person responsible for this. It would be useful to know.
This is the last time today I will ask whether the European Union is restricting our rights to set taxation. It would be useful for the Government to put a box alongside each clause in the Bill that outlines where the EU is restricting our powers and when that was voted through Parliament. That would help clarify things, not least because a photo emerged yesterday of Margaret Hilda Thatcher campaigning for a yes vote in a rather natty blouse that comprised of the flags of all EU member states to be.
So, obviously this obsession with handing taxation powers to Europe is deep-rooted, beyond merely Edward Heath who initiated it. Perhaps the Minister could assist us, to save us asking the same question on each clause, because we all need to know whether Europe is restricting our powers, although I am more interested in his analysis of his new policy of fiscal drag and what Sir Keith Joseph would think of it.
It is a pleasure to serve under your chairmanship, Mr Sheridan. It is also a pleasure to follow a fellow son of Leeds in speaking in this debate.
I want to make a small input on the use of CPI and RPI. Those of us who have to defend our Government to our constituents do so with a certain amount of passion, obviously, when we need to do, but our efforts are stretched in this area because of the lack of consistency. The only thing that seems consistent is that we seem to apply CPI to everything that costs the Government money and RPI to everything where the opposite is the case. If members of the Committee do not believe me, they only need to look at annex A, “Indexation in the public finance forecast baseline”. One can see support for what I am saying in that list, with a huge range of things now having CPI applied, but the last 12 items on it still have RPI applied, including landfill tax, climate change levy, air passenger duty, tobacco duties, fuel duties, business rates, gaming duty and so on. Will the Minister give us a coherent statement on the use of inflation in public finances so that we can justify what the Government are doing and, in particular, try to kill the idea that fiscal drag, with CPI applied to items that cost money and RPI applied to items that bring in money, is a hidden policy underneath what we are doing?
Clause 34, as we have heard, makes changes to the procedure of indexing the capital gains tax annual exempt amount from the retail prices index to the consumer prices index from 6 April 2013. It also sets the annual exempt amount for 2012-13 at £10,600, keeping it at the same level as for 2011-12.
The annual exempt amount, which sets the amount of capital gains an individual can make each year tax-free, is automatically indexed every year, unless Parliament sets a different figure. At Budget 2011, we announced that the CPI would be used as the default indexation assumption for the capital gains tax annual exempt amount in order more accurately to reflect the rate of inflation. That change reflects the Government’s intention to move the underlying indexation assumption for direct taxes from RPI to CPI in order to have a consistent measure of inflation across all policy areas.
In autumn, we announced that the annual exempt amount would be set at £10,600 for 2012-13, the same level as for 2011-12. I understand that this change will affect some people near the threshold, but the reality is that tough decisions need to be taken on both tax and spending to tackle the budget deficit and ensure that everyone is paying their fair share of tax. The annual exempt amount, along with private residence relief, which exempts main homes from CGT, will continue to keep the vast majority of people from paying CGT altogether.
I should also point out that the one-year freeze in the AEA enables us to afford the one-year CGT holiday for capital gains invested through the new seed enterprise investment scheme. SEIS opened for business in April and will encourage investment in new start-ups, which are a vital source of future growth. The scheme offers income tax relief of 50% to investors on amounts invested up to £100,000, and includes a capital gains tax holiday for 12 months. Each eligible company will be able to receive an investment of up to £150,000. The scheme has been available since April 2012.
In amendment 42, the Opposition ask for yet another report to be laid in the House of Commons Library, this time on the impact of setting the AEA at £10,600 in 2012-13. Information about the measure’s impact on the number of taxpayers brought into CGT has been published on the HMRC website in a tax information and impact note, to which the hon. Member for Newcastle upon Tyne North referred. HMRC will also be monitoring the impact of the measure, using information collected from annual tax returns.
Only a relatively small number of individuals who have capital gains tax liability slightly above the AEA threshold will be directly affected. The Government believe that freezing the AEA is the right thing to do at a time of fiscal constraint. As I have said, keeping the AEA at this level means that the majority of people do not have any CGT to pay, while ensuring that substantial gains are taxed.
The hon. Lady raised the issue of administrative burdens that may exist as a consequence. The AEA being lower than it would have been without a freeze could lead to around 60,000 more individual tax returns with a CGT liability being submitted between 2012-13 and 2015-16. However, the number of individuals affected is likely to be lower, as some individuals will have a CGT liability in more than one of those years, and some taxpayers will arrange their affairs so that the gains made in any one year will remain below the AEA. Administrative burdens on individuals are therefore likely to be small, and the impact will be further limited, given that a significant proportion of individuals affected are likely to be within the self-assessment system. The process of notifying capital gains using self-assessment is relatively straightforward, and HMRC has the necessary resources in place to provide guidance to those who need it.
My hon. Friend the Member for Redcar mentioned CPI and RPI. We believe that CPI is the most effective measure for the impact of inflation. As my hon. Friend is aware, we inherited proposals relating to uprating of particular taxes that were based on RPI. We are in very difficult fiscal circumstances, as we all know, and a choice to depart from uprating by RPI would have a significant cost, which would have to be found from elsewhere. None the less, the move towards using CPI uprating for direct taxes is sensible.
Another point, very much in the context of fiscal drag, is that perhaps the most significant threshold in the tax system is the size of the personal allowance, which we are increasing well above either CPI or RPI. The Government’s progress in the past two years on that front is one that hon. Members will welcome.
I thank the Minister for his answer, and I do welcome the big uprating in the personal allowance. Will his Department give particular consideration to the uprating of business rates? All Members of the House have had a lot of pressure from businesses about the recent business rates increase, and a move from RPI to CPI on business rates would be highly welcomed across the business community.
I hear my hon. Friend’s point, and he is right to say that we have all received such representations. Moving from RPI to CPI would have a significant cost, and one also must look at the overall support that the Government provide to businesses in terms of, for example, the reductions in corporation tax and some of the other measures we have debated, such as the patent box and the fact that we have not increased employers’ national insurance contributions in the way that the Labour party had planned. We have done what we can to support businesses and will continue to do so. Decisions on business rates have to be looked at in that context.
As far as whether such information is sufficiently available to the public or whether it is being concealed, it is perfectly clear that we have been straightforward in our announcements. It has not been hidden in the small print. We have been clear that we have moved from RPI to CPI. The fiscal implications of that have been clear on every scorecard produced at relevant fiscal events, so we have been clear on that. I repeat the point that we are in difficult financial circumstances and putting our public finances on a sustainable footing is a priority. In any event, we believe that CPI is a more accurate reflection of the rate of inflation.
I thank the Minister for his comments in response to the contributions of hon. Members this morning, and he has provided an element of clarity for some of those specific queries. However, I noted the weariness with which he referred to yet another request for a report to be laid in the House of Commons Library. Once again, that raises some concerns about the level of transparency around these Government tax reforms. We have discussed the fiscal drag that will result from the uprating, the freezing and the change from RPI to CPI, and there is an element of stealth in that taxation that the public have a right to understand. While it may not be hidden in the small print, it is not necessarily evident at this stage exactly how many people will be affected. The Minister gave a rough estimate of 60,000 additional people falling within the capital gains assessment system. However, the figures given this morning do not give absolute clarity, and neither do they give clarity on the cost implications for HMRC.
We accept that we face a serious issue with the economy in the current economic climate, but one of the biggest challenges is demand in the economy. Therefore, any increase in the uprating of the personal allowance, which has been discussed this morning, has unfortunately been completely undermined by the removal of tax credit support for working families and by the increase in VAT, which has taken money out of people’s pockets and demand out of the economy. For that reason, there needs to be transparency on the impact of these tax changes on households and personal incomes, and I urge hon. Members to support the amendment.