The Finance Bill
July 6, 2005
Mr. Mark Field (Cities of London and Westminster) (Con): I beg to move, That the clause be read a Second time.
As Paul McCartney and John Lennon might have said, we are now reaching the end of the long and winding road of this second Finance Bill of the year.
The Financial Secretary to the Treasury (John Healey): When was it No. 1?
Mr. Field: The song was No. 1 in the US in 1970, but that is another matter.
This complex and highly technical Bill is once more before the whole House, but the sparsely occupied Chamber means that it would be stretching credulity to suggest that Parliament is actively considering each and every aspect of the Bill. That is not to say that there has not already been careful consideration during the lengthyish Committee sittings. Our debate was sometimes heated, and on occasions that had little to do with the generally clement summer weather.
Her Majesty’s Opposition have benefited from comprehensive briefings from an array of interested parties, including the Law Society, the Association of British Insurers and the Chartered Institute of Taxation. They have all provided us with useful ammunition with which to put forward our case as gamely as possible, given the circumstances.
As I said, we are considering the second Finance Bill to come before Parliament this year. The intervening general election provided us all with a welcome respite from endless Committee sittings and gave the Government an opportunity?a relatively small one, admittedly?to make minor amendments to their original proposals. I understand that tax practitioners have breathed a collective sigh of relief, not because of the apparently mouth-watering prospect of a second Finance Bill in a year, but because of their satisfaction that this year the Chancellor of the Exchequer has spared the tax practitioner fraternity from a Finance Bill such as that of 2004, which weighed in at a record-breaking 637 pages.
New clause 4 stems from concerns that have been widely expressed about the growing complexity of our tax laws. The amount of legislation grows greater and faster and let us be in no doubt that that is true of not only primary legislation, but the plethora of statutory instruments that appear with breathtaking frequency throughout the year. We hope to establish a tax law commission that would mirror the Law Commission and review and modernise UK tax legislation.
As the Minister will be aware, I am a relative newcomer to Front-Bench Treasury affairs and I have had something of a baptism of fire. This highly technical Finance Bill and the Regulation of Financial Services (Land Transactions) Bill have certainly kept me busy over the past month. I have no complaints about that, but in addition to grinding through legislation line by line, I have seen an ever-greater amount of guidance material, such as statements of practice, tax bulletins, concessions and frequently asked questions.
It is perhaps ironic that, in moving new clause 4, I need first and foremost to acknowledge the tremendous assistance that I have received from the indefatigable John Whiting, the tax partner with PricewaterhouseCoopers and past president of the Chartered Institute of Taxation. Without his help, I fear that even this new clause might never have seen the light of day. Although I do not detect too many tears at that prospect from either the Government Front Bench or, dare I say, their nearest and dearest in the civil service, it is important to put many concerns on the record during the course of what I suspect will be a brief debate.
A great deal of the seemingly exponential growth of the raw material that makes up our tax laws is clearly due to the increasing complexity of life and business. However, at the same time the tax authorities doubtless argue that they need continually to endeavour to plug what would otherwise be loopholes that could be exploited by tax planners and avoiders alike. A commission for taxation along the lines that we have set out would solve four main problems.
First, the commission would address complexity. UK taxation is meant to work along fairly simple principles: all employment income is subject to pay-as-you-earn and national insurance contributions; companies are taxed on their accounting profits at 30 per cent. after certain adjustments, or less if they have profits of less than £1.5 million in any year; stamp duty land tax is at 4 per cent. on property sales; and VAT on the supply of goods and services is generally levied at 17.5 per cent. How difficult should it be to enact tax law on the basis of those straightforward and simple principles? One needs only to witness the flat tax regimes of most Baltic states to realise that it should be relatively straightforward.
Ed Balls (Normanton) (Lab): Was the hon. Gentleman on the trip?
Mr. Field: I hasten to add that I was not on the trip, although I am sure that one could be arranged at some time in the future. I am glad that the Chancellor is not in the Chamber to hear me say that.
The UK Government have created a great collection of legislation that makes this country’s tax regime one of the most cumbersome in the world.
Stephen Hesford : Subsection (2) of new clause 4 outlines the purpose of the putative tax law commission, but I cannot see anything about tax avoidance. Does the hon. Gentleman think that any review of the tax laws should take account of tax avoidance?
Mr. Field: I was rather hoping that the hon. Gentleman might have been the chairman of the all-party group on Estonia or something. Let me answer his point seriously. There is little doubt that much of what has been discussed during the consideration of the Bill?and previous Finance Bills, I suspect?has related to tax avoidance and ways in which we can try to find a balance between legitimate tax planning and contrived tax avoidance. The new clause would create an independent tax commission?that is important?and tax avoidance would be dealt with head on by the Treasury.
Ed Balls: I hesitate to ask whether the new clause is an excuse for further trips to Estonia to build broader support for possible flat tax proposals. However, putting that to one side, do we not already have a tax law rewrite project? My memory is that that project, chaired by Lord Howe of Aberavon, would regularly send voluminous reports to the Government for consideration and that many of them would be taken into account when drawing up Finance Bills. Is the hon. Gentleman saying that the current tax law rewrite project is not doing a satisfactory job, or that he would like his commission to go beyond the remit of that project and start making policy, rather than just trying to simplify tax legislation and make it more effective?
Mr. Field: The hon. Gentleman makes an entirely legitimate point. I shall address specific aspects of the tax law rewrite project later because it has not achieved quite as much as we might have hoped.
Someone needs to stand back and realise that when UK legislation on direct tax is bursting out of some four volumes of statute, something must be inherently wrong with the approach on writing and reforming tax legislation. It is worth noting several facts, such as the sheer number of personal tax returns that are filed incorrectly or late. A National Audit Office report last year said that such returns accounted for some 29 per cent. of all PAYE codings. The last consolidation Act on tax goes back 17 years to 1988. Government Members make a meagre contribution to Committee debates on Finance Bills, which makes it difficult to suggest that there has been full consultation on such matters.
Since 1997, the Government have introduced major new taxation policies on intangibles, share schemes and other employee-owned securities?they have done that several times?stamp duty land tax, the climate change levy, tonnage tax, IR35, transfer pricing, windfall taxes, derivatives, VAT grouping, international financial reporting standards, double tax relief, general insurance and substantial shareholdings. They have changed the date of payment of tax and introduced new policies on the taxation of pensions and enterprise investment
schemes. Therefore, complexity is key to our concern and we hope that a tax law commission would rectify that.
Secondly, the constant change has led to a lack of certainty. It is hard for business to plan when the UK insists on a near constant rewriting of its tax law. We should also note that the UK is in almost isolation from other highly developed economies in not have a binding advanced clearance regime. That was discussed in detail in Committee and I do not wish to reopen the debate, but it is a concern.
Without necessarily opening the door for contrived tax avoidance schemes, the element of certainty that comes with an advanced clearance scheme should be reimposed in tax legislation. That would enable the tax treatment of, for example, an innovative new banking product to be pre-determined, not just to give customers certainty, but to ensure that customers?whether they are smaller individuals or large institutions?have confidence. It would enable us to ensure that the two major financial centres in the UK?the City of London and Edinburgh?do not lose business in what is an increasingly globalised financial world.
I also hope that the scheme would enable groups to confirm the tax treatment for transaction planning and the treatment of debt borrowing, for example. Despite having a mountain of tax legislation, there is no procedure to get pre-transaction rulings. That often means that UK businesses and customers are encumbered with a tax risk in their balance sheet and in their operations that their overseas competitors do not have.
Thirdly, there is the relative ease of unintended tax planning opportunities, which Ministers might simply regard as the creation of contrived tax avoidance schemes. A simpler system makes it harder to avoid tax. The Government’s insistence?some of this is a carry-through from tax law passed by the last Conservative Administration, notably the financial instruments and loan relationship legislation?on writing complex prescriptive legislation has meant that they have been an effective creator of tax loopholes.
Let us take the stamp duty land tax. Schedule 10 deals with legislation that was introduced as recently as 2003. Much of the Finance Act 2002 of only three years was dedicated to removing tax planning that followed on from the problem of too many specific rules in loan relationship and derivative legislation. I accept that much of that is highly complex, but by the same token that complexity has to a large extent opened the door to more tax planning opportunities. Intangibles legislation has been changed twice since 2002, following the clampdown on avoidance. Insurance company rules written as recently as 2003 were changed in 2004?as Ministers will know, because I mentioned it in Committee only last week?to deal with avoidance-related matters.
Fourthly, there is the lack of transparency. Transparency is of key importance in any taxation system. A complex system inevitably becomes an opaque system for anyone other than those who are experts in the field. How can taxpayers predict and financially plan how much tax they pay when much of it is hidden and the system is in a constant state of flux?
While the basic corporation tax rate is 30 per cent., our corporation tax yield is comparatively high. As a result, the Institute for Fiscal Studies feels the need to publish journal articles entitled "Why has UK corporation tax raised so much revenue?" As Ministers will be aware, this year alone we are expecting a substantial increase of 28 per cent. in corporation tax additional receipts. Much of that relates to a widened tax base, accelerating the time when the tax gets paid, which acts almost as a windfall tax in the year of change, and also to the long time over which UK companies get tax deductions for capital expenditure on plant and machinery as well as intangibles.
There is also considerable confusion, which is increased by schedule 2, about what is a securities issue by way of salary taxable at up to 40 per cent. We had long debates about employment securities matters in Committee. We have to ask, what are the securities owned by an employee in its employer by way of investment that will be taxable at as little as 10 per cent.? The Government have rightly been proud of some of their changes to encourage entrepreneurism, such as the idea that capital gains tax can be as little as 10 per cent. once various considerations are taken into account. I applaud them for those sensible changes. However, they give with one hand and take with the other. Many changes have not worked as well. There is a tendency to define a large amount of capital gains as income so that it qualifies for higher tax rates.
We lack a mechanism for taking stock of our tax code?for testing rigorously whether it is ready and fit for purpose. There is no attempt to modernise or to get rid of the unnecessary, thereby showing that some parts could be dealt with more simply and might even be more effective. Although I accept that the Government took on board some of our concerns and those of the insurance industry, we rarely have sunset clauses to lay down either an expiry date for a new rule or at least a time when the usefulness, or otherwise, of the rule would have to be reviewed.
Regulatory impact assessments can be supplied with clauses, but when are they reviewed to see if their estimates hold true? That is partly down to the Opposition’s scrutiny?I accept some blame?but we all have busy lives and the world and the tax bandwagon move on. We need to determine whether any new law represents value for administrative money. One of the ideas is that a tax law commission would alert itself to many of those concerns.
As the hon. Member for Normanton (Ed Balls) said, there is the tax law rewrite project. It is doing some good work, but it is purely a rewriting of the law rather than an assessment at the outset of whether a particular type of legislation will best achieve an intended result. It does not attempt to change the rules in any way. If odd points that seem otiose are found, or pointers suggest that things could be improved, they are logged, but they must be dealt with through the general Finance Bill process.
The Law Commission has as its aim, in simple terms, the review and modernisation of the general law of the UK. It does not believe that its writ runs to tax law. We should at least ascertain what benefits would accrue by having such a body to deal with tax law, and that is the underlying aim of the new clause. It would not impose a tax law commission, suggest ways in which such a body should be set up and run, or set out in detail its remit. All that would be premature. The aim is to review whether such a body would be advantageous. If the report established by the new clause suggested that it would be, Parliament would commission the next steps, which would presumably include how it might be staffed and controlled and its constitutional position. We have a template of the Law Commission, and I assume that the new body would be of a similar nature.
It is worth noting that the tax law review committee published a report in March 2003, with the exciting title of "Making Tax Law". The working party, under the chairmanship of Sir Alan Budd, examined the parliamentary process for the enactment of tax legislation.
Mark Tami (Alyn and Deeside) (Lab): It passes the simplicity test.
Mr. Field: Yes, the title passes the simplicity and certainty test. Of that there can be no doubt.
The working party’s report would be germane to the report mentioned in the new clause. Also, the Chartered Institute of Taxation has proposed the idea of a tax practice committee, which would, in concept, have three main functions: first, the oversight of the consultative process for new tax laws to ensure that new laws are properly consulted on, subject to anti-avoidance constraints; secondly, the proposing of sections of existing tax law in need of review; and thirdly, oversight of the tax law rewrite project.
The tax practice committee is envisaged as being a group that is drawn from all those involved with the taxation process?the professions, business, tax authorities and, hopefully, academia. As part of the review, commentators have called for the House of Lords to be given a greater role in the scrutiny of Finance Bills. I appreciate that that is a controversial idea?it was last tried 95 years ago?but it is an interesting proposal. For historical reasons, the House of Commons has had sole charge of money Bills since the Budget of 1909?10, but a second revising Chamber would have a part to play in improving the way in which tax law is maintained. We hope that that change could take place during the course of this Parliament.
It would be wrong to ignore the role that the other place could play. It has plenty of expertise, which would be useful in the consideration of tax changes, as one or two Ministers have realised in previous debates. The Lords cannot currently alter a money Bill and I am not seeking to go down that path. It was intriguing, however, to see the establishment last year of a Sub-Committee to look at administrative aspects of the Finance Bill. Its remit may be narrow, but we may wish to build on that. I accept the sovereignty of the Commons in matters of taxation. [Interruption.] I do not have much choice, I am afraid. It is time, however, to look again at the way in which tax law is put together and how we operate under the paramount rule of the Commons in this area.
Ed Balls : I am trying to understand the nature of the hon. Gentleman’s proposal. In the case of Bank of England, we decided that independence was the right thing. In the end, with the support of Opposition Members?it took a little time?we decided that it was right to hand over the power to take month-by-month interest rate decisions to a group of independent experts. There is a material difference, however, between making monetary policy decisions with a single instrument and a single target and tax policy decisions. The hon. Gentleman is proposing to move tax policy decision making away from the House of Commons and elected Members of Parliament and instead asking independent experts to make policy decisions about tax. Is he proposing that Parliament should give up power in that way, not merely to unelected Members of the other place but to entirely unelected individuals?
Mr. Field: The hon. Gentleman has misunderstood what we are trying to achieve. We think that establishing such a commission is a sensible way forward, given the sheer amount of taxation legislation and the fact that little of it is regularly reviewed. That does not mean that policy matters would be in the hands of that body. Its remit would be determined once it has been set up. No one would suggest that law policy should be made by the Law Commission. It makes recommendations about changes in the law and assists the Commons and another place to initiate debates. The Law Commission influences the agenda on an independent basis, and I envisage a tax law commission operating in the same way. However, there is a great distance between that proposition and the proposition that policy decisions should be made by such a commission.
I understand the concerns that have been set out, but I hope that the broad proposals that I have tried to set out will lead to a debate on the matter. Whatever route is eventually taken, the new clause aims to highlight the need for a mechanism for a proper review of our tax law.