Consideration of Bill, not amended in the Committee, and as amended in the Public Bill Committee
New Clause 8
Transfers of trade to obtain terminal loss relief
‘(1) In section 393A of ICTA (set off of losses against profits of same or earlier accounting period), after subsection (2D) insert—
“(2E) But subsection (2A) above does not apply by reason of a company ceasing to carry on a trade if—
(a) on the company ceasing to carry on the trade, any of the activities of the trade begin to be carried on by a person who is not (or by persons any or all of whom are not) within the charge to corporation tax, and
(b) the company’s ceasing to carry on the trade is part of a scheme or arrangement the main purpose, or one of the main purposes, of which is to secure that subsection (2A) above applies to a loss by reason of the cessation.”
(2) The amendment made by subsection (1) has effect in relation to cessations of a trade on or after 21 May 2009.’. —(Mr. Timms.)
Brought up, and read the First time.
I beg to move, That the clause be read a Second time.
With this it will be convenient to discuss the following: new clause 5—Pre-commencement notification
‘(1) Part 7 of FA 2004 (disclosure of tax avoidance schemes) is amended as follows.
(2) In section 308 (duties of promoter) after subsection (5) insert—
“(5A) A person who is a promoter in relation to a notifiable proposal may seek pre-commencement approval from HMRC as to whether the proposal is in accordance with current legislation.
(5B) HMRC shall respond within a reasonable period of time to any request for pre-commencement approval under subsection (5A).’.’.
Government amendments 41 and 42
Amendment 34, in schedule 17, page 202, line 19, at end insert
‘or part of a transaction of a value exceeding £100 million’.
Amendment 35, page 203, leave out line 10.
The amendments and new clauses in this group all concern tax avoidance. For the tax system to be effective everyone needs to pay their fair share. Tax avoidance damages the ability of the tax system to deliver its objectives, imposes big costs on society and shifts a greater burden of tax on to taxpayers who do comply with the rules. So the Government are committed to continuing to move quickly and effectively to tackle tax avoidance in all its forms.
What I shall do, if I may, Mr. Speaker, is speak to the Government new clause and amendments in this group and seek to catch your eye later to respond to comments made by others when they discuss the other new clause and amendments.
New clause 8 counters an avoidance scheme that has been notified to Her Majesty’s Revenue and Customs. The scheme exploits corporation tax terminal loss relief rules that allow losses arising in a trade in the 12 months prior to cessation to be carried back and set off against profits made in the previous three years. The scheme works by artificially engineering a deemed cessation of trading, which allows the company to access the relief in circumstances not intended by Parliament, and it could be used by a large number of companies and it poses a risk of significant loss of revenue. In order to stop companies exploiting the scheme and, thus, to protect the Exchequer, I made a written ministerial statement on 21 May announcing our intention to introduce this legislation.
The new clause addresses situations in which there has not been, in any real sense, a cessation of the trade, but where it is claimed that the cessation occurs as a result of the trade being transferred to a person outside the scope of corporation tax. The new clause is targeted only at avoidance and applies only where it can be established that the reorganisation concerned is part of a scheme or arrangement, one of the main purposes of which is to access terminal loss relief. In such circumstances, terminal loss relief will not be available to the transferring entity. The new clause provides vital protection to the Exchequer from wholly artificial avoidance schemes and does so in a targeted and proportionate manner. I therefore ask hon. Members to ensure that the new clause stands part of the Bill.
Government amendments 41 and 42 seek to ensure that clause 59, which contains a provision to counter an avoidance scheme that abuses the double taxation relief rules, does not hit any unintended targets. Following representations, Government amendments were tabled in Committee that were intended to ensure that the clause would not have an unintended effect in normal commercial situations. The amendments would have provided that the clause applied only to payments made under the laws of a territory outside the UK. These amendments reflected agreement that HMRC reached with industry legal experts and had the advantage of following existing legal precedent that applies for the purposes of controlled foreign company legislation.
The Government amendments would have covered the overwhelming majority of cases in which refund of foreign tax might arise from commercial contracts. However, after those Government amendments were tabled, further representations were received which showed that they may not go far enough to ensure that the clause does not hit any unintended targets. Although these are unusual circumstances, I said during the course of our debate on this clause in Committee that it is right that we should take account of them and that I would return to this matter with further Government amendments on Report—and I have done so.
During the Committee debate, I made it clear that I accepted the principle of the similar Opposition amendments, but that I wanted to reflect further on the issue to ensure that any amendments were technically correct. The new Government amendments contain one minor adjustment, compared with the Opposition amendments in Committee, in that they refer to a “tax authority” rather than a “taxing authority”. This is because a taxing authority might be seen as the legislative body which imposes the charge to tax, rather than the authority that assesses and collects the tax, and makes any necessary payments or repayments—a small but necessary change. The amendment has also been duplicated to cover the situation where the taxpayer is seeking a deduction for foreign tax, as well as where double tax credit relief is sought.
I hope that my hon. Friend will not feel discouraged from intervening later in the debate.
The amendments will ensure that this clause will not affect normal commercial arrangements, and I ask the House to support them. I will seek to catch your eye later, Mr. Speaker, to respond to points made by others about this group.
I rise to speak in favour of new clause 5. I originally had no intention of tabling such a new clause until we had the debate upstairs on clauses 66 and, more importantly, 67. Both of those clauses rightly seek to outlaw the highly contrived tax avoidance schemes that the Minister described in some detail at the time. That was the right thing to do.
Interestingly, the debate on clause 67 almost completely ignored its content and revolved around the issue of principle of retrospective legislation. In general terms, I oppose retrospective legislation, especially when it comes to the tax code, because it delivers uncertainty, but I do recognise that from time to time it might be necessary. One of the reasons why retrospective legislation is necessary when it comes to clamping down on contrived tax avoidance schemes did not become clear until after the debate in Committee.
Let me explain. The process that is followed in such schemes is that tax avoidance schemes are developed by promoters, they commence operating and only then, post-commencement, are they notified to the HMRC, which can—and sometimes does—outlaw the practices and introduce retrospective changes to the law to facilitate that. In the case of clause 66, the scheme was effectively outlawed within a week or so of the Revenue’s being notified of it. The Government can act very quickly, but not always, and it can take some time—perhaps a year—to introduce the necessary retrospective legislation. That is precisely what happened in the instances that we discussed in Committee.
It struck me as somewhat peculiar that such schemes were not checked by the Revenue in advance of their commencement to allow the commissioners to rule on their legality or otherwise or even to suggest, even if they were legal, that they were likely to be outlawed quickly because they were simply going to be tax avoidance schemes. I was very pleased, when we probed the Minister, to get his reply. I asked whether he could
“confirm that promoters are able to seek confirmation of the schemes in advance”
and the answer was:
“Promoters can seek that clearance as well. They are required to disclose, but they can seek clearance if they wish.”––[Official Report, Finance Public Bill Committee, 16 June 2009; c. 431.]
However, it was not until two days later that the Minister rather graciously corrected what he had said. His letter said:
“In both cases, the correct answer should have been”—
I shall read out both paragraphs for the avoidance of any doubt. They read:
“HMRC offers a clearance service to businesses covering the tax implications of commercial transactions”—
I do think that there should have been more commas in this sentence—
“where there is material uncertainty as to the tax outcome and the issue is of commercial significance to the business. Under the clearance regime HMRC will not give advice, or comment on, tax avoidance schemes.
In addition to the clearance service for business, HMRC offers a written…service to personal tax customers covering completed transactions where the correct tax treatment is in doubt or where guidance is needed on HMRC’s interpretation of recently passed law or its application to a specific proposed transaction, where there is genuine uncertainty. This written advice service does not cover arrangements where tax avoidance is an issue. The scope and terms on which this service is offered is set out in Code of Practice 10.”
That is extremely clear, but the implication of that answer is that the Finance Bill, unamended, would perpetuate the status quo, which is that schemes can be developed, promoted and commenced, people can buy into them or use them and they are then notified to the HMRC, outlawed and made subject to retrospective changes. That all risks uncertainty in the tax code, which none of us wants to see, and a potential loss of revenue yield, I am certain. Most importantly, it risks individuals taking tax or financial planning advice or action, thinking that they are doing the right thing and that they are behaving wholly within the law, and finding that they are then subject to retrospective changes to a law that they had no intention of breaking.
It would be much simpler to allow promoters to clear schemes in advance to ensure that if they were illegal, or likely to be outlawed, they simply would not be promoted. That would give us certainty in the tax code and protect those individuals who think they are doing the right thing and end up being subject to retrospective legislation.
I fully agree with the thrust of the hon. Gentleman’s argument, but he might be aware that the Select Committee on the Treasury received certain information from Barclays bank about its tax avoidance schemes. The schemes that it developed are extremely complex, and it took them to HMRC and got the staff there to look at them and basically approve them, because it did not have the resources and everything else to go through it all, whopped it back to its clients and said, “We put this to HMRC, they think it’s okay and now we have all sorts of ways of trying to alleviate that”—
The hon. Member for South-East Cornwall (Mr. Breed) makes an important point about the complexity of some schemes, but it is the very complexity of the tax code that allows highly complex and contrived schemes to operate. There is an argument for simplifying the tax code as a whole, but today’s debate is not about that. I want to ensure simplicity, help people avoid illegality and protect tax yields. That seems sensible, and I hope that it is uncontentious—unless there is a hidden argument or a problem in the Revenue that the Minister will tell us about in a few minutes.
Most Opposition amendments are moved to claw back powers from HMRC, or to stop officialdom interfering in people’s lives or businesses. Almost uniquely for me, I have moved the new clause because I want to give the tax commissioners more powers and responsibility. It makes absolute sense for them to be able to validate schemes in advance and declare them either legal or illegal. More importantly, even if a scheme is legal, the commissioners should be able to tell its promoters, “Yes, it’s legal today, but I suspect that the Minister will come down on it like a ton of bricks in two weeks’ time, so it’s probably better not to promote it.” That would create certainty in the tax code and protect people looking for tax and financial planning.
I look forward to what the Minister has to say. I want to offer more powers to the Revenue, in the hope that we can get certainty and protect people from the dangers of retrospective legislation.
I want to make one very brief central point, and it relates to what the hon. Member for Dundee, East (Stewart Hosie) has just been saying. My right hon. Friend the Financial Secretary has explained that new clause 8 is necessary to block yet another loophole that would open up yet another lucrative tax avoidance mechanism, and I am absolutely sure that he is right. What is significant is that the Government have found it necessary to table the new clause now, and that is because the latest tax avoidance scam surfaced only after the Finance Bill was published.
Similar scams are being invented all the time, by extremely highly paid City accountants and lawyers. As a result, the Treasury has to scurry around trying to block them up as quickly as they are created.
I do not disagree that it is perfectly within the rights of any Government to have a rigorous anti-avoidance regime along the lines that the right hon. Gentleman clearly supports, but does he accept that, commensurate with that, there also needs to be a full and open clearance process? Such a process would help prevent scams being created, and the need to deploy anti-avoidance measures.
The question is what particular transparent and open system the hon. Gentleman would recommend, but I am in favour of something like what the hon. Member for Dundee, East has proposed. As I shall explain in a moment, we need a general provision of the sort that would avoid the House of Commons continually spending its time trying to block one scam after another. I agree that that is not the most efficient way of dealing with the problem.
I was coming to that. The hon. Gentleman and I have had some conversations on this subject, and I entirely agree with him. My question to the Minister has to do with whether the Government are engaged in a labour of Sisyphus. Why do they not seek to break the cycle of endless tax avoidance scams—because, being clearly designed to get round paying tax, that is what they are—by introducing a general anti-tax avoidance principle into the UK tax system? I can think of two or three previous Treasury Ministers who were very much in favour of that course.
I tabled a proposal along these lines two months ago, and I am glad to see that the hon. Member for Southport (Dr. Pugh) has retabled it as new clause 2. I realise that it has not been selected for debate, presumably because it would increase taxes. Of course, that is exactly what the new clause is designed to do, where appropriate, but under our rules only the Government have that prerogative. But I want to ask my right hon. Friend the Financial Secretary why we continually spend our time scrabbling around in the bulrushes trying to block off every new tributary of tax avoidance, when we could seize the high ground and block this ever-flowing antisocial river altogether at one go. There are good precedents for this—
Does the right hon. Gentleman accept that one of the prices of liberty is eternal vigilance, and that one has to be very careful about trying to claim that people are guilty unless proved innocent? That is precisely the reason that we do what we do. It is extremely dangerous to start off a taxation system on the basis that people must not be allowed to do anything lest they avoid tax.
I do not often disagree with the right hon. Gentleman, but here I take a rather different line. Of course there must be transparency, as the hon. Member for Cities of London and Westminster (Mr. Field) said, and of course we do not hold people guilty until proved innocent. What I am recommending—the hon. Member for Dundee, East said the same—is that there should be a general principle which makes it clear that if the purpose of the device is solely to evade or avoid tax and it has no sensible, practical, obvious economic purpose, it should be ruled out in terms of what the mechanism is designed to do.
I would add that there should be some penalty to discourage such action in future. That is not unfair. It is a way of avoiding an artificial, deliberate and proliferating attempt to avoid tax, which means that the rest of us who are not super-rich and not big corporations have to pay. I do not think that is a very good idea.
I am grateful—it is Report stage. I have been racking my brains, going back a long time. I think my right hon. Friend will find that there is a Court of Appeal case to the effect that he seeks to push for this afternoon. It is a case about artificial transactions from, I believe, 1985, the Ramsay and Cook case, which does much of what my right hon. Friend wants.
My hon. Friend has the advantage over me because I have not looked at that, but I find it difficult to believe that it achieves what I am seeking to achieve. If that is so, I am surprised that such schemes continue to roll on and on.
To conclude the speech, which I am finding difficult, there are good precedents for such a principle—it is not a novel idea—particularly the Australian one and, interestingly, in Jersey, both of which seem to be working perfectly well and have been accepted by all parties in those Parliaments. Will my right hon. Friend the Minister please explain the Government’s thinking and when we might expect such a provision to be brought forward? It is sorely needed when the deficit in the public accounts this year is of the order of £175 billion.
I shall speak to amendments 34 and 35 and broadly in support of new clause 5. I do not doubt the Minister’s or the Treasury’s sincerity and determination in wishing to prevent tax avoidance, I do not doubt the skill and intelligence that they have put to the task and I do not doubt the expertise and knowledge that underlie the Government proposals. I need to be convinced that all this is enough to frustrate a huge, massively rewarded and well financed avoidance industry at the heart of modern commerce.
The right hon. Member for Oldham, West and Royton (Mr. Meacher) outlined the Government’s approach. They seem to advocate general principles and then track and box off avoidance schemes while encouraging notification, but they do not want to introduce a general anti-avoidance law. None the less, the Bill withdraws an important general control—section 765 of the Income and Corporation Taxes Act 1988. Albeit an anachronistic one, it is a general control. Pleasing though it might be to the City, this approach has failed to convince many people far more knowledgeable in this field than I. My amendments seek to toughen up this approach.
My preference, like that of the right hon. Member for Oldham, West and Royton, is for the introduction of a general anti-avoidance provision. It is in new clause 2, an unselected amendment in my name. A general anti-avoidance provision would reduce tax complexity straight off: complex avoidance schemes father complex tax law. The provision works elsewhere in the world, such as in Australia, Canada and all sorts of places; and with proper Revenue and Customs advisory services available to business, it would not need to gum up business.
That is a fair point, but I was going to say that the Treasury at one stage, in the halcyon days of new Labour, began a consultation on the phenomenon of the desirability of a general anti-avoidance rule, or GAAR. Interestingly, it said:
“The United Kingdom is unusual”—
“among developed countries in having neither a statute nor an established legal principle to counter tax avoidance in general. Many other countries in the developed world have found such a rule or principle to be a very useful remedy for countering tax avoidance, although not a universal cure.”
Before the hon. Gentleman moves on, may I just check something? There are concerns that, if we have specific anti-avoidance rules, having an overriding anti-avoidance rule, too, might be a stage too far. If he were to get what he wanted with a general anti-avoidance rule, would he want to see the removal of the specific rules, too?
We need a belt and braces rule—a specific provision that is assisted by a general rule. Again, the Government’s consultation stated:
“A GAAR, applying at first only to the corporate sector,”—
this was 1998 or thereabouts—
“would aim to put a stop to many of the complex avoidance schemes which currently cost the Exchequer large sums. In addition, it would be expected to discourage people from devising contrived avoidance schemes in the future.”
That was the Treasury, not the Opposition or the right hon. Member for Oldham, West and Royton.
Now we have the repeal of the time-served section, section 765 of the 1988 Act, which ensures that when funds leave the country the Treasury is notified of any detriment to it. It is an old rule to do with the flight of sterling and so on, but it does—or did—a good job. We have the replacement of a clearance and pre-disclosure scheme with a light-touch reporting regime, coupled with a series of attempts to outlaw specific dodges and scams.
However, if we read the legislation, we find that only transactions above £100 million will need to be reported, and not even then if they are said to be
“in the ordinary course of trade”—
hence my amendment. If, after six months, there is no report on a £100 million transaction, there will be a ludicrous fine of £300, which I remember made the hon. Member for Northampton, South (Mr. Binley) incandescent in Committee. It is a ludicrous penalty to enforce on a £100 million transaction.
The hon. Gentleman is a man of most moderate temperament, and I should not wish to malign him.
In the game of chess being played out between Treasury officials and City tax lawyers, the Treasury is agreeing to play blindfolded, and there can be only one winner. What is there to stop a transaction being broken down into segments of less than £100 million to avoid reporting requirements—just wrapping up the transaction differently? What stops a firm declaring any transaction to be in “the ordinary course of trade”—a phrase that, incidentally, has created legal problems in countries where a general anti-avoidance provision is in place?
The Liberal Democrat amendments are simple attempts, like new clause 5, to strengthen the Treasury’s arm and powers of intervention—to make exemptions less open to abuse and less user-friendly. The principal argument for user-friendly exemption is the old chestnut, beloved of the CBI, about the anti-competitive dangers of slowing up commerce. At first, I took that argument seriously; I thought it a sound, decent argument. It is the argument against section 765 and the long-standing argument for its withdrawal. Indeed, I thought that it was a serious, solid argument, despite the claims made only four years ago by the then Paymaster General in its favour, saying that it saved
“a great deal of revenue”––[Official Report, Finance Public Bill Committee, 30 June 2005; c. 319.]
However, I had the good fortune recently to speak to a man who actually administers the provision. He told me that it still protects a great deal of revenue, that clearance procedures in the modern Revenue and Customs are very rapid, and that adequate advice is freely and readily available—in hours not days—provided HMRC has the staff to provide it. Understandably, I asked the Government—the Financial Secretary, actually—how many staff at HMRC administered the provisions of anti-tax-avoidance legislation. The answer that I received reads as follows:
“HM Revenue and Customs (HMRC) staff use whatever parts of the tax code are relevant to help people and businesses pay the right amount of tax and, where necessary, to tackle tax avoidance, evasion and fraud.”
“HMRC is unable to provide information regarding the specific number of resources deployed on the separate elements of that work.”—[Official Report, 22 June 2009; Vol. 494, c. 670W.]
The Government simply cannot tell us how many people are involved in counteracting tax avoidance.
In summary, I am not confident about the Government’s approach, the reporting regime, the exemption or the penalties, which border on the pathetic. I am aware of the dilemma that the Government face: business legitimately needs clarity and speed, and the Treasury needs transparency, fairness and accuracy. However, there is an overwhelming case that a general anti-avoidance provision, coupled with revenue efficiency, can cover most of that. Loose reporting, pathetic penalties and a tangle of tax regulations, however, are unlikely to.
My hon. Friend the Member for Cities of London and Westminster (Mr. Field) made an important point: sometimes the complexity of the tax system itself gives rise to opportunities for tax avoidance schemes. When relief is given, tax advisers and planners look to how they can maximise it to reduce their clients’ tax bills. From Finance Bill to Finance Bill, we have seen new loopholes being created and closed down—there have been significant revisions to the legislation on film tax relief in the past 10 years, for example.
There is a momentum within tax law itself that creates the loopholes that can be exploited; the loopholes are then closed, creating more complexity. We need to get that rolling process under control. New clause 8 represents an example of when the relief available on the termination of a business has been used to create a new opportunity for tax planning.
I know that the hon. Gentleman has only just begun, but before he finishes I hope that he will comment on the measures advocated by my right hon. Friend the Member for Oldham, West and Royton (Mr. Meacher), which aim to stop the poison from coming into the system in the first place. What the right hon. Member for Suffolk, Coastal (Mr. Gummer) said almost takes us back to last century’s debates on vaccination—did we want people to stop becoming ill in the first place, or were we to deal with the illness only once they became ill? That example has similarities with the issue of tax avoidance, as distinct from tax evasion.
If I got dragged down that line of argument, Mr. Speaker, I would be trespassing into a new clause that was not selected, so I shall be careful about what I say about that general principle.
New clause 8 responds to a specific anti-avoidance scheme. In Committee, we discussed clause 23, which allowed losses to be relieved and extended the carry-back period for losses. During that debate, the Financial Secretary commented on the generous nature of the terminal loss relief, particularly for businesses that had closed down for reasons of economic viability. The scheme sought artificially to use the losses by trying to transfer a business to an entity outside the scope of corporation tax—for example, a partnership in respect of which an individual had a small share of the profits but the original company was entitled to the majority of the profits. That meant that the company was then able to claim terminal loss relief and carry back trading over possibly three years even though trade had continued. The conditions in the clause prevent the artificial abuse of the availability of that loss relief, and we welcome the step that the Government have taken.
New clause 5, tabled by the hon. Member for Dundee, East (Stewart Hosie), has its origins, as he said, in a debate on new clause 67 that we had in Committee, several of whose members had been lobbied by a company called NT Advisors, which had devised a scheme that was at the core of the provisions in the clause. The new clause has some appeal in proposing a pre-clearance device for such schemes, but I add a note of caution about this sort of mechanism. I understand that tax advisers spend a great deal of money on their clients’ behalf in trying to devise these schemes, which are potentially quite lucrative, as the numbers in clause 67 suggested. Clearly, they do not want to clock up fees with no chance of the scheme being viable, so I can see the attraction for them in having a pre-clearance device, which would save them a great deal of time and money. It would also put the onus on HMRC to act as almost a subcontracted or out-sourced arm of the tax adviser in looking at the fine detail of such schemes to see whether they worked. The advisers themselves should bear the principal responsibility of getting schemes right; otherwise, there is a risk of HMRC being inundated with speculative, half-thought-through schemes under which the advisers are looking to HMRC to tie up the fine detail.
The hon. Gentleman’s argument is absolutely right. However, advisers and promoters are coming up with schemes right now, and there is a real risk of loss of revenue yield and of individuals so engaged finding themselves subject to retrospective legislation. I am trying to work out where the balance should lie between the Revenue saying, “No, you can’t do it—we’re about to outlaw it”, and allowing people to continue to develop these schemes and then finding that they are subject to retrospective legislation.
Indeed, balance is a difficult issue to get to the bottom of. No one in this House likes to see retrospective legislation, and there are rules that constrain its use. In the debate on clause 67, we discussed the Rees rules and the doctrine put forward by my right hon. Friend the Member for Charnwood (Mr. Dorrell) when he was a Treasury Minister; we even referred to some principles established by the previous Paymaster General. However, I am worried that we may end up in a situation where HMRC is used as a clearing house for tax advisers and has the responsibility for checking whether the schemes work. The law should be clear enough for advisers to work out whether schemes are legal, and they should not be subcontracting their work to HMRC. Moreover, people who buy into these schemes will need to think carefully about the advice that they have been given and what happens if it turns out to be wrong. I suspect that in some cases, if the scheme does not quite work according to plan, advisers may make some clawback and try to cover their own backs by avoiding having to repay losses to their clients.
I am a little anxious about where new clause 5 would take us. In other areas, it is right that pre-clearance arrangements are in place and discussions can be had with the Revenue, but that arrangement causes me concern in this context. What would happen if HMRC did not reply within a reasonable period of time? Would it be assumed that the scheme has been passed as fine to be sold to a wider public? I am a little sceptical about the new clause, because I do not think it would have the effect that the hon. Member for Dundee, East desires it to have. It could have the consequence of adding burdens to HMRC by getting it to test out the legal aspects of these schemes and checking their detail, thereby adding costs to the taxpayer when we want HMRC to work on supporting the taxpayer.
On the onerous nature of introducing anti-avoidance procedures, I was not entirely persuaded by the arguments made by the hon. Member for Southport (Dr. Pugh) on amendments 34 and 35. My reading of schedule 17 suggests that it already contains the power to tackle some of the abuses that might arise through the more streamlined nature of the reporting rules, and there is provision for secondary legislation to address certain issues, including about the valuation of a transaction or event. We need to get the balance right between promoting compliance through reporting and ensuring that the rules are right in the first place.
On Government amendments 41 and 42, we are delighted to see that the Government have recognised the wisdom of my hon. Friend the Member for Hammersmith and Fulham (Mr. Hands). In introducing them, the Financial Secretary gave the sense that it was almost to be expected that they would be tabled on Report, and that we should not be surprised to see them on the Order Paper. In Committee, he gave a slightly different interpretation, saying:
“The Opposition amendment is broader in scope but has some technical difficulties. The reference to a taxing authority would be novel in tax law and its effect is not altogether clear.”––[Official Report, Finance Public Bill Committee, 16 June 2009; c. 393.]
Clearly between 16 June and the day when the amendments were tabled, the Government recognised the wisdom of my hon. Friend’s remarks, and I am pleased to see them form part of the Bill.
We have had an interesting discussion about new clause 5, on pre-commencement notification. The hon. Member for Dundee, East (Stewart Hosie) raised the matter in Committee, and I subsequently wrote to him to clarify the position.
HMRC already operates a clearance regime under code of practice 10, to which the hon. Gentleman referred, in cases in which the application of recent legislation to planned transactions is uncertain. As we can all see, when legislation is new there could well be uncertainty about exactly what it means. In that situation, a clearance regime is appropriate so that people can discuss with HMRC whether the transactions described will work in the way that is intended, particularly in the case of larger businesses. Such businesses have access to a clearance system in wider circumstances, following the implementation of Sir David Varney’s recommendations on HMRC’s links with them.
However, as the hon. Gentleman rightly said, HMRC will not entertain requests for clearance if it is obvious that the motive behind the application is to avoid tax. That policy is understood and accepted by the various professional bodies, and it is well established. I suggest to him that there is no good reason to change the policy on a situation in which disclosure will, by definition, involve arrangements that are intended to obtain a tax advantage as a key benefit.
I agree with the hon. Member for Fareham (Mr. Hoban) that the problem is that if such a facility were offered in practice, scheme promoters would take advantage of it by continually devising variations on schemes and making more changes to them until they eventually found one that worked. We would all agree that avoidance is not acceptable behaviour, and that we should not effectively ask HMRC to become complicit in avoidance by offering its promoters such a refinement service, which I fear is what would happen.
I understand the arguments that the Financial Secretary and the hon. Member for Fareham (Mr. Hoban) are making, but is the point not that promoters are already finding schemes that work, and that the Government, the House and the Revenue are having to find and fix retrospectively, rather than saying in advance, “Yes, this may well work, but we’re going to outlaw it, and perhaps it would be better if you didn’t promote it in the first place”?
The problem is that new clause 5 would help the promoters of avoidance. It would give them advice and help them clarify whether their avoidance product would work. I am sure that the hon. Gentleman accepts that HMRC should not provide such help. However, I am not averse to proposals to tighten up the way in which we tackle tax avoidance. As I shall explain shortly, we have done a great deal on that, much of which has been effective. I am certainly not saying that there is nothing further to do—there may well be—but new clause 5 would have an undesirable impact.
How do Ministers satisfy themselves about the tax affairs of the banks that they own on behalf of the taxpayer? How can they be sure that those large losses are entirely justified on trading and other grounds? Are they sure that the banks need not pay any tax in the current situation?
That is a matter for HMRC, but I am sure that the right hon. Gentleman has seen the code of conduct for bank tax, which we published recently for consultation. Undoubtedly, some of the activities of banks in the UK have involved avoidance—in some cases, significant avoidance. Banks are in a strong position to indulge in that sort of behaviour because they can do it for their own part and then advise their clients on similar approaches. I agree with the right hon. Gentleman that it is right to be vigilant about banks’ tax submissions, but if he takes the opportunity to read the code of conduct that we have published for consultation, he will see the steps that we are taking to make progress on that.
Information provided by a promoter is often insufficient to tell HMRC whether the scheme will work. In some cases, the scheme will turn on a novel interpretation of the law and, in the end, that can be tested only in the courts. It is not enough in some circumstances for HMRC to examine the scheme and decide whether it will work. Ultimately, it will require a decision by a court. In other cases, a scheme’s effectiveness will depend on the specific facts to which it is applied. In those circumstances, HMRC could be in a position to say whether the scheme works only when it features in a tax return. Providing the clearance under new clause 5 could therefore prove difficult.
I have much sympathy with new clause 5. However, as constituency Members, many of us are faced with the problem of planning applications, whereby a planning application is made to the local council, it gets turned down, for which reasons are given, but goes back in a month later, after it has been tweaked. There is wave after wave of planning applications until one gets through. At least the local authority can charge for that. Does not new clause 5 run the risk of causing similar problems for HMRC?
My hon. Friend is right. That is precisely the danger to which new clause 5 could give rise, with the difference that building something or progressing with a development is, in principle, good and laudable, whereas avoiding tax is not. There is therefore an even stronger reason not to follow that route.
New clause 5 states that HMRC will have a “reasonable” amount of time to comply with the clearance request. Again, I agree with the hon. Member for Fareham. What constitutes “reasonable” in that context? It can take a considerable time before HMRC is in a position to make such a judgment and it could easily be impossible to do that in a time frame that might be considered reasonable by the taxpayer. I therefore question the usefulness of that sort of clearance to those who are genuinely trying to pay the right amount of tax at the right time, and I strongly argue against adopting the new clause because it would help those whose purpose is purely and clearly to avoid tax. As I said earlier, however, that is not to say that I want to close the door on tightening the disclosure arrangements. Indeed, there may be opportunities for us to do that.
My understanding is that when HMRC is involved in anything like that, as it is on occasion, it does not charge people. However, if new clause 5 were to be accepted, we could see not only wave after wave of applications made, as I said earlier, but tax-avoiding accountancy firms, as it were, apparently getting free accounting advice from HMRC, a point to which the hon. Member for Fareham (Mr. Hoban) adverted earlier.
I share my hon. Friend’s concern about what we might find ourselves getting into. On the other hand, however, I suppose that one could argue that charging for the service might add a further degree of legitimacy to activity whose illegitimacy one would otherwise want to underline throughout. However, we should not be giving that kind of advice at all, so for now we can perhaps leave the question of whether it ought to be charged for.
Let me respond to another point that the hon. Member for Dundee, East made. HMRC receives a significant number of disclosures every year, but only a proportion of those lead to legislative measures. He raised the issue of promoters selling abusive tax-avoidance schemes. As he will know, we have announced that HMRC will take forward discussions to improve the avoidance disclosure regime. There may well be things that we can do, and HMRC is consulting on working with tax agents.
That brings me to the points made in this debate, not least by my right hon. Friend the Member for Oldham, West and Royton (Mr. Meacher), about having a general anti-avoidance rule. Let me say to my right hon. Friend and the House that we want to keep that question under review. It was consulted on in 1998, as was said by the hon. Member for Stockport—
I beg the hon. Gentleman’s pardon—I have made that mistake before.
When we consulted on the idea there were a lot of objections, and they were by no means all from tax avoiders. Those who have pointed out that other countries have such a rule are right in terms of a number of counties, although interestingly, the United States does not have a rule of that kind. Some people have argued that if we introduced a general anti-avoidance rule, we would have to have what is suggested in new clause 5, which stands in the name of the hon. Member for Dundee, East, namely a fairly comprehensive clearance system, which would potentially be costly to provide. Another downside would be the uncertainty that such a rule could generate.
We have, of course, introduced a number of effective targeted anti-avoidance rules, and we will continue to evaluate the benefits of going further and specifically consider the possibility of a general rule. However, I want to underline the fact that, in recent years, we have done a great deal to tackle avoidance. We have a strong strategy and a good track record on tackling tax avoidance in all its forms. We reckon that the steps taken as a direct result of the disclosure regime, which has been in place for five years, are so far responsible for closing £11 billion of avoidance opportunities.
We have led internationally on increasing transparency through the G20 and the growing number of tax information exchange agreements, and I have already mentioned the innovative code of conduct for banks that we published for consultation recently. We have also led on modern legislative approaches, such as the new principles-based legislation, of which there are examples in the Bill, in clauses 48 and 49, which give new opportunities for transparency. Also, through the targeted anti-avoidance rules, we are ensuring that businesses and individuals pay their fair share.
My right hon. Friend mentions the code of conduct that has just been published. Does he really believe that a voluntary code of conduct is going to be adequate to deal with the shark pool that is involved in City tax avoidance? Has he looked at the Australian anti-avoidance principle, which has worked for years? I am not aware that it has any significant disadvantages but, if it has, will he tell us what they are?
My right hon. Friend asks whether I think that a voluntary code of conduct for banks will be effective. Yes, I do. I have spoken to some very hard-headed individuals who have looked at these matters, and they also think that it will be effective. Once a bank has publicly committed to the code, it will have certain obligations. Its auditors, for example, will want to take a view on whether it has correctly implemented the terms to which it has signed up. Part of the code that we have been consulting on involves determining what sanctions would be appropriate if deliberate non-compliance were to be found. We have suggested in the consultation document that if, for example, we identified an individual in a bank who was responsible for deliberate non-compliance, we would make a report to that individual’s professional body. My right hon. Friend ought not to be misled by the proposal for a voluntary code into believing that it will not be effective. Based on the way in which we have drawn it up, I believe that it will be. We are consulting on this at the moment and we want to listen to the views of everyone who is in a position to comment on our proposals.
We are aware of the Australian rule, and we keep a close eye on developments elsewhere around the world. I am not in a position at the Dispatch Box this afternoon to set out a detailed analysis of the effects of the introduction of that rule, but I underline that we want to keep under review the question whether it would be appropriate to go down the road that new clause 2 would lead us.
The Minister has stated a preference for targeted measures, and I understand the strategy that is being followed. However, there comes a point at which, when we look at all the targeted measures, we find that there are certain principles underlying them. Does not that make a case for some sort of cull—a statement of general principle or general anti-avoidance rules?
We had a discussion in Committee about principles-based legislation, and we have some examples of it in clauses 48 and 49 of the Bill. This is novel; these matters have not been legislated for in this way before. I believe that, as a result of adopting and making acceptable this new approach to legislating, some new opportunities might well arise that could shift the argument somewhat on whether a general anti-avoidance rule would be appropriate. As I have said, this matter is something that we want to keep firmly in our sights.
I do not want to leave the House with any sense of complacency about this. The changes that we are debating in the Bill will raise more than £1 billion in tax, through blocking avoidance, and protect revenues of a further £3 billion by 2010-11. We are looking at further ways of extending and improving the disclosure regime, and we are considering the application of the principles-based approach to other matters.
My right hon. Friend made a point about people devising schemes just after publication of the Finance Bill, and he is absolutely right: there will never be a shortage of inventiveness and energy in terms of avoidance. The Government need to be extremely vigilant in response. However, we can do as we did in this case, which was quickly to announce to the House that we were going to close a particular avoidance opportunity. It might take a while to implement the required legislation, but we can implement it with effect from the date of the announcement made in the ministerial statement. We would not have to wait for the legislation in order for the closure to take effect.
Will the Minister say a little about the Ramsay case—I think it is the Ramsay case—to which I have already referred, which relates to a Court of Appeal decision of, I believe, 1985? It deals with artificial economic arrangements developed solely for the purposes of tax avoidance. As I understand it—this is dragging my memory back more than 25 years—such arrangements were banned by the Court of Appeal.
I must say that, as so often, I am very impressed by my hon. Friend’s expertise and memory. Sadly, I am not in a position to present the House with details of that particular case. I certainly think that he is right that decisions like that one have constrained some of the activity that certain companies have wanted to indulge in. Sadly, however, there is still quite a lot of latitude available, which is why we have had to take steps such as those outlined in new clause 8. I will refresh my memory on that particular case; perhaps my hon. Friend and I can discuss it separately.
If we were to go down the road of issuing a general rule or principle, we would have to consider a range of factors: the impact on certainty for people and companies, the issue of whether a clearance system would be needed, the effect on the rest of the tax code and whether we would need to repeal parts of that code. Countries such as Australia that have general anti-avoidance rules often find that they still need some specific rules in addition to support the overall scheme, so we would also need to reflect on that. We would certainly need a full consultation before we opted for such an arrangement. I am nevertheless grateful to those who have raised this important topic—one that we must keep within our sights.
No, I am not saying that. The hon. Gentleman will know from the context of discussions about the asset purchase scheme that that matter has been debated and arrangements have been made for those two banks that are, in fact, rather different.
The hon. Member for Southport (Dr. Pugh) suggested that HMRC was playing blindfolded, but I do not think that that is right. As I have said, the anti-avoidance steps that we have taken have been pretty effective. The 2004 disclosure regime has been successful—it was pretty controversial at the time and was certainly innovative—in protecting more than £11 billion. HMRC anti-avoidance teams use the information provided to combat avoidance schemes every day.
Amendments 34 and 35 would both widen the scope of the new reporting rules introduced in schedule 17, which we debated in Committee. The schedule repeals existing rules and introduces a new post-transaction reporting requirement for corporation tax targeted at transactions posing a significant risk of tax avoidance. This requirement applies to certain transactions involving foreign investments whose value is in excess of £100 million. Targeting the reporting requirement in this way removes the need for businesses to report comparatively low-value transactions that are unlikely to give rise to tax avoidance, so significantly reducing the administrative burden compared with the current Treasury consent rules. As we discussed in Committee, those rules are rather elderly and in some respects not wholly appropriate to how businesses now operate.
Amendment 34 would make any transaction reportable where it is part of a transaction exceeding £100 million. I well understand the concern expressed by the hon. Member for Southport about the possible use of fragmentation of transactions as a means of getting round the new arrangements. I suggest, however, that that problem has already been effectively dealt with by the regulations introduced by schedule 17, drafts of which I supplied to members of the Public Bill Committee. Those regulations provide that, for the purposes of the £100 million threshold, “transaction” is defined broadly and includes a series of transactions entered into in pursuance of the same arrangement. That means that the valuation of a transaction must take into account a linked series of transactions, although they may be strictly separate. I hope that, on that basis, the hon. Gentleman will accept that his amendment—which addresses a perfectly proper concern—is unnecessary.
Amendment 35 would widen the scope of the reporting requirement by removing the exclusion for trading transactions. Trading transactions have been deliberately excluded because the new reporting requirement, like the previous rules, is targeted at changes to the capital structure of multinational groups, which, by their nature, will not generate transactions of the type that the amendment addresses. The reporting requirement is only one tool available to help HMRC to combat tax avoidance. The removal of the exclusion for trading transactions would be very likely to generate a great many unnecessary reports. I hope the hon. Gentleman will accept that the reporting requirement introduced by schedule 17 strikes the right balance between Exchequer protection and administrative burdens on business.
The hon. Gentleman mentioned that, in 2005, my right hon. Friend the Member for Bristol, South (Dawn Primarolo), the former Paymaster General, had said that the Treasury consents regime ought not to be repealed because it protected a great deal of revenue. Removing the need for companies to apply to the Treasury for consent before entering into transactions allows businesses to enter into commercial transactions in a way that they see fit, in line with modern business practice. By targeting the new reporting rules at transactions that pose the highest risk of avoidance, we are ensuring that tax revenue is still sufficiently protected. The de minimis limit reducing the amount of information that is reportable will significantly reduce the administrative burden of complying with the rules.
I think that we have got the balance right, but I am grateful to Members who have raised important issues. I hope that the House will agree to the Government new clause and amendments, and that the other new clause and amendments will not be pressed to a Division.
Question put and agreed to.
New clause 8 accordingly read a Second time, and added to the Bill.
New Clause 1
Implementation of section 1
‘(1) The rates charged by virtue of section 1 shall not have effect until such date as may be appointed by order made by the Treasury.
(2) No such order may be made until the Chancellor of the Exchequer lays before Parliament a statement that, in his opinion, measures have been taken to ensure that no person is worse off by reason of the person’s income not being sufficient to secure that the effect of the abolition of the 10p starting rate has been entirely offset by the reduction of the basic rate, which took effect in the tax year 2008-09.
(3) The power to make an order under subsection (1) shall be exercisable by statutory instrument which shall be subject to annulment in pursuance of a resolution of the House of Commons.’.—(Mr. Frank Field.)
Brought up, and read the First time.
With this it will be convenient to discuss the following:
Amendment 2, in clause 1, page 1, line 8, at end insert—
‘(3) This section is subject to section [Implementation of section 1].’.
Amendment 37, in clause 3, page 2, line 10, leave out ‘£6,475’ and insert ‘£10,000’.
Amendment 40, in clause 6, page 3, line 7, at end insert—
‘(3A) At the end of section 646(8) of ITTOIA 2005 (adjustments between settlor and trustees etc.), insert—
“(9) A settlor of a settlement in respect of which he is liable to pay income tax under section 624 or 629 is entitled to receive credit for any income tax paid by the trustees of such a settlement in calculating his income tax liability and to be repaid any excess of that credit over that liability.
(10) A settlor who receives a credit under subsection (9) above is to that extent not entitled to recover any tax from the trustees under subsection (1) above.”
(3B) The amendment made by subsection (3A) shall be deemed to have effect from 6 April 2006.’.
I have been in the House for 30 years, and have moved many motions on new clauses and many amendments. I have always taken real pleasure in doing so, but I cannot say that I take much pleasure in moving this new clause, or from the feeling that we are somehow on course for a collision with the Government over the treatment of many people in our society who earn low wages.
Political parties, whatever part of the House they occupy, are broad coalitions, containing people of diverse views, but they also have core values which keep them together. There is clearly a huge divergence of views on the Labour Benches among Members who have been in the House for some time and those who have arrived more recently, and among those who think of themselves as traditional or old Labour, those who think of themselves as new Labour, and those who simply think of themselves as Labour. However, the golden thread that links us is that, when push comes to shove, we are all on the side of the poor.
The Government have taken a number of measures of which Labour Members, and, I hope, those in other parties, can be proud. They have tried to move life chances towards those who generally have least, and, if need be, away from those who find it easiest to make it to the top. Therefore, there was in the beginning puzzlement, which turned to anger, that in the 2007 Budget the Government announced the abolition of the 10p starting rate of tax accompanied by a 2p reduction in the standard rate of tax. Since coming to this House I have been an advocate for cutting taxation and particularly the direct rate of tax, the headline rate with which the people whom I represent are massively concerned. It determines whether they take a job, whether they work longer hours and so on.
I was staggered, as were other hon. Members, that that 2p reduction in the standard rate of tax was largely—although not totally—paid for by the abolition of the 10p starting rate. The cost of the 2p reduction was about £9.5 billion; the extra revenue from abolishing the 10p starting rate was about £8.5 billion. We found ourselves for the first time that I can recall advocating a measure that increased the tax burden on the lower paid and made it easier for people such as me, other Members and millions of people outside the House of Commons. It flew in the face of our understanding of what Labour is about: being on the side of the poor.
It is true that it took a little time for Treasury Ministers to recognise that there was not just an issue here, but that it was something that cut to the quick most of us who have devoted our lives to public service. We were anxious to see measures that would offset, as far as humanly possible, the additional tax burden that we had placed on the people taking home the smallest wage packets. The Government, to their credit, have introduced a number of such measures. They have changed benefit rates and protected those over retirement age who would have lost out by increasing the tax allowances, so that the sums they would lose would be met. I note that others may wish to raise the fact that those who retired before 65 would not receive the same protection as older people, such as me.
Is my right hon. Friend certain about what he is saying about pensioners? I think there is a popular misconception along the lines he is describing. My understanding from pensioner constituents is that a pensioner must have an income of over £22,000 to gain from the measure and that anyone with an income below that amount will be worse off.
They certainly have. I repeat that I hope my hon. Friend the Member for Stoke-on-Trent, Central (Mark Fisher) catches your eye, Mr. Deputy Speaker, to develop his point.
There have been benefit changes on top of tax allowance changes for us pensioners. There have been two welcome and major initiatives in the Budget, presented to us as mitigating the effects of the abolition of the 10p rate.
The first major point is that since the announcement of the abolition of the 10p rate, there have not been specific tax changes relating solely to those who have lost out from the abolition. In the initial statement the new Chancellor announced a £2.7 billion package which increased tax allowances by about £600. That applied to all of us, however. We in this House benefited from that; we benefited from the 2p increase as did those on the 10p rate, and there was also a more recent increase in tax allowances across the board, which we again benefited from, as well as the people who lost the 10p rate. Therefore, the relative tax burden that the abolition of the 10p rate placed on the poorest earners in our country has not been rectified.
My hon. Friend the Member for Hyndburn (Mr. Pope) and I wrote to the Chancellor three months ago to say that that is still a big issue. We did so not simply for our consciences’ sake, as conscience is magnified because by next May or June we will have to face the electorate, and there are quite a lot of low-paid workers out there who might not be writing us letters any longer—they may have given up on that effort—but who still feel aggrieved that we made the move in the first place, and some of whom also know that they remain worse off in money terms compared with 2007 despite the increases in personal tax allowances.
So although I welcome all the moves that the Government have made, I am also puzzled. Labour Members’ grievance with the Government was that, with the new disadvantages we had placed on the poorest earners in our society, there were no specific measures aimed at rectifying this change that we had brought about. This was not an act of nature; we did it. I cannot be the only MP who has received letters from constituents saying, “Please persevere. I understand why the Government are finding billions and billions of pounds to bail out the banks. I accept that it may well be necessary to do that, but we have needs as well.” Their grievance is that although we could find all that money for the banking system, it appears that in this Budget and previous Budgets we have found general changes that benefit all of us but we have not specifically managed to rectify the increase in the tax burden that our Government have brought about for those who earn the lowest wages in our society.
When my hon. Friend the Member for Hyndburn and I first went to see the Chancellor days after he was appointed to that office, he was as courteous as ever and asked, “Well, how would you solve the issue?” This was before the Government found £2.7 billion to make the general increase of £600 in tax allowances. We suggested that the best move would be to increase tax allowances across the board to ensure as far as humanly possible that there were no losers, but that that increase should then be clawed back from all of us who had been the gainers from the 2p rate by increasing national insurance. My hon. Friend and I left that proposal with the Chancellor.
The next part of this saga took place on the morning that the Government announced they would increase tax allowances for all of us. The Chancellor phoned me and said, “There will be a statement this afternoon. I can’t tell you what’s in it, but I hope you will like it”. As I am on the same political side, when I came to the House I wanted to say as much as possible in favour of the measure, but I cannot describe the depth of my despair as I heard the Chancellor saying there was going to be a universal increase but there would be no clawback. It is true that I welcomed that package. Who was I to stand up when the Chancellor had found £2.6 billion and spit on his feast and say this is not what is actually required, especially as I hoped that we might at a later stage get him to tailor that measure to help the lowest paid and claw the necessary sums back off the rest of us, and in so doing help to balance the books?
Was not one of the strange features of the Chancellor’s compensation package that, although it had the advantage of simplicity, the majority of the £2.7 billion was given to taxpayers who had not lost as a result of the doubling of the 10p rate?
My earnings are those of a Member of Parliament. To be fair to the Government, I understood that the threshold was adjusted when people went to the top rate, so basic rate taxpayers, including some people on good salaries, did benefit substantially but anybody who earned over the higher rate threshold did not benefit, because the two measures cancelled each other out.
The hon. Gentleman is perfectly right, and the figures, if they are to be trusted, show that 2 per cent. of people did not benefit in this way. When I said “we”, I was trying, perhaps too crudely, to identify us with our constituents for once, given the yawning gap that has become apparent in the recent past.
The substantive point remains that although moves have been made to compensate those whose tax burden increased—that was not the rich or the very rich, but the poor; it was those who earn least in our society yet still turn out to work—the Government prefer to add in all the changes that they make in order to work out who still has not been compensated fully for the abolition of the 10p rate.
So let us assume, for the moment, that we have given up trying to obtain a targeted package to meet the increase in the tax burden of those with the smallest wage packets and we have gone down the Government line of, “Well, it was to help them as well, and in these difficult times we are not that interested in maintaining tax equity. People got more money.” Let us examine what the figures show.
Were the increases in the tax allowances—the £600 and then the £130—really meant to help those who lost out in the abolition of the 10p rate? The following figures come from the Treasury. By 2010-11—not today, but then; these figures presumably take into account some other changes that might be made—500,000 households will still be losers from this abolition, within those households there will be about 1.3 million individual losers, and the average sum that they will lose will be between £2 and £3 a week. I hope that most of us would think that £2 or £3 a week is a substantial sum for us, but it is huge for people whose earnings are low. I am humbled when constituents come to my surgery to tell me that they are on £11,000 a year, they have two children they are bringing up brilliantly and they are being messed around by tax credits, yet they still survive. If this House ever wants to know how to manage the national accounts, it could look to Birkenhead, where quite a few people could teach us a thing or two.
Those Treasury figures on the losers still assume a 100 per cent. take-up rate for tax credits. Fortunately, because many of the losers who have children are so desperate, they will have claimed tax credits—whether or not they wish to do so and whether or not they think that to do so is noble—because that extra money to balance the books is jolly helpful. Many of the losers in those figures will thus be people who do not have children, and we know that the take-up rate among that group is about 20 per cent. The Government’s calculation assumes that the take-up rate is 100 per cent., but even with such a rate 500,000 households will still be losing out in the financial year 2011-12, those households will contain about 1.3 million individuals who are losing out and, on average, those individuals will, even years ahead, still be losing between £2 and £3 a week.
I thoroughly endorse what the right hon. Gentleman says, for all the reasons that he has given. He mentions the year ahead. Does he agree that if we take into account the real figure for public net debt, which is now £3 trillion—not the £1 trillion the Government say—the increases in taxation that are due as a result, together with the necessary reductions in public expenditure, will have a devastating impact on the less well-off and will make their situation intolerable? In other words, we really will have two nations.
I am listening with great interest to my right hon. Friend, and I wish to take issue later with some of his figures. He mentioned 1.3 million individuals —is that an estimate of the number of people in the 500,000 households that the Government have confirmed will remain losers from the effects of these various changes?
I confess that I do not know the answer. I am merely reciting the IFS figures. Today it said that 500,000 households would lose, and 1.3 million individuals. I assume that most of those individuals will be in those households. If our constituents were asked whether they believed the Treasury or the IFS, they would probably side with the IFS.
Actually, we had a call from the IFS to ask us where the 1.3 million figure came from, so this may be a circular argument. It may be that 1.3 million is an estimate of the number of individuals in the 500,000 households. There is no dispute that 500,000 households will be—modestly, I would argue—less well-off as a result of the series of changes that have been made over the last couple of years. I was not sure where the 1.3 million figure came from, and my right hon. Friend appears to be saying that he is not sure either.
Does the right hon. Gentleman accept that these relatively small amounts of money are in fact large amounts of money, not only in the areas where deprivation is traditionally widespread but in constituencies such as mine? Rural areas can have large numbers of very poorly paid people with large families, to whom these are significant sums. I agree with him that there is nothing as humbling as meeting at one’s surgery people who make do with very small amounts of money and have come to talk to their Member of Parliament about £1, £2 or £3 less a week in circumstances that should never have arisen.
I am sure that those sentiments are reflected on both sides of the House. The disappointment that I feel can be summed up as follows. I am not trying to decry the moves that the Government have made to try to rectify the unnecessary burden that we have placed on some of the poorest households in this country—a burden that would be unforgivable if it were a Tory Government doing it, and is even worse because it is our Government. Of course there are real problems now with the Government finances. I am even more of a hawk on this issue than those on the Treasury Bench, because I think there will be real problems in the short term in trying to float the gilts that we will need to float to reach the medium term, unless both Front-Bench teams show far greater resolution about the need to bring public expenditure into line with tax revenue. I want us to lead that debate because the sorts of reforms that I wanted to see and that we did not see in the last 12 years or so, when we had huge amounts of money to spend, might well be brought about when we have to think about what the Government’s priorities are and how we can ensure that our resources are concentrated on them.
I am not trying to downplay the real difficulty that the Government have in balancing the books and getting us to the medium term so that some of these changes in public expenditure and taxation can come into effect. The sums that we talking about to bring justice to the group of people who earn the least are modest compared with the size of the deficit that has been revised, in a major way, three times since last November. I cannot believe that there would be any risk to the currency or any risk of encouraging a gilts strike if the Government were to make modest new claims on debt to meet the honour that we owe this group of our constituents.
I said at the beginning of my speech that for 30 years I have spoken always with pleasure, jumping up to make a suggestion and thinking that it would somehow be accepted. I know, however, from the conversations that other Members have had with the Government that the Government have dug in on this point. They are playing for very high stakes tonight. I hope that when those on the Treasury Bench contribute to the debate they will say more than we have heard from the unofficial sources during the day. If all we are offered, yet again, is warm words, my thinking is that we should press the new clause to a Division.
I want to hear those redistributive noises from those on the Front Bench, and I am looking forward to hearing what they have to say. My right hon. Friend knows that the only caveat to my support for his new clause is that the 10p rate had a secondary redistributive effect on the number of people post-60 who chose to redistribute their leisure for their working time. How would he answer the allegation that that was a downside of the 10p rate, notwithstanding those that it was there to help?
I have been bending over backwards not to suggest this is a very easy thing that fits into nice little boxes. There are clearly what my grandmother would have called swings and roundabouts, and I accept my hon. Friend’s point, but I nevertheless believe that the main thrust of the argument that Labour Members have made remains.
If we win the Division on the new clause, we can proceed to approve the rest of the Budget but before the tax changes come in the Government have to give us more than warm words—they have to give us some reassurances about the moves that they intend to make. Some of us have been told that that is pushing the nuclear button, and that if we win the Government will not be able to raise revenue after 6 o’clock tonight and that tomorrow morning the currency will collapse—with all the horrors that would stem from that. It would be ludicrously irresponsible if the Government did not have a plan 2 ready. If the new clause is carried tonight, surely they will jump up and say, “Clause 1 and the tax-raising powers in the Budget are a matter of confidence and we are going to make you pass it this evening. We will not go into the night leaving this on the statute book.” Of course, they would get it more easily if they showed a little more humility than has perhaps been shown so far, by saying that they will also make moves to rectify the injustice of the 10p changes. There are those of us who feel in our bones that we have caused this injustice, that it is up to us to put it right, and that this is our last opportunity to do so before we face the electorate, and the Government underestimate our resolve if they think we should just let it go.
We all act for a multiplicity of reasons. Dr. Johnson said that the realisation that one is to be hanged in the morning “concentrates the mind wonderfully”, and we know that, come next May, we will have to face our executioners. They will decide whether we come freely back to this House, and that should concentrate minds of those on the Treasury Bench about our resolve.
I talked earlier about the golden thread that knits together all Labour Members—new, old or ordinary. That thread is the belief that we come to this place to protect and advance the interests of those who get least from life. The 10p proposal is a denial of all that we came into public life to achieve, and this is our last chance to rectify the situation before the general election.
It is a pleasure to follow the right hon. Member for Birkenhead (Mr. Field), who spoke in his typically understated fashion but with great passion and strength of conviction. Everyone in the House will have listened to him very carefully.
Before I talk about new clause 1, I want to make brief mention of two other amendments in the group. Amendment 40 in my name is a fairly technical proposal about settlor-interested trusts, and I shall not detain the House long with it. The nature of the trust and the interest that the settlor has in it mean that both the trust and the settlor are liable to pay income tax on the trust’s income. The trust pays the tax at the higher rate, which is currently 40 per cent. but which will rise to 50 per cent. if the Government’s plans go through. In contrast, the settlor pays at his highest marginal rate—that is, the 20 or 40 per cent. that obtains at the moment, or the 50 per cent. that the Government propose.
However, the problem is that there appears to be double taxation of that income. HMRC provides a credit to the settlor for the total tax paid by the trustees. That offsets exactly the tax due for higher rate taxpayers but, where the offset is not exact because the settlor is a basic rate taxpayer or has unused allowance, the settlor is obliged to pay any excess over to the trust.
Before the trust regime was changed in 2006, the credit that I have described was provided as of right. Following the Finance Act 2006, it is now a concession and there is no obligation on HMRC to continue to provide it in the future. Therefore, the relief could be withdrawn at any time, and the first part of amendment 40 would ensure that it remained available. I do not think that the Government ever intended to create this uncertainty in the first place and the first part of the amendment would put the legislation on a proper footing by making sure that the concession had the force of statute.
The second part of amendment 40 clarifies that, if a credit is given, a settlor cannot also claim tax liability from the trustees. At present, that can happen when trustees have still to pay the income tax due on trust income when the settlor files an income tax return. In those circumstances, there is nothing to credit from, so the settlor has to pay up and then claim back the sum directly back from the trust. It is difficult to explain how the trust eventually resolves its liabilities and I shall not go into fine detail now, but I believe that the amendment would solve that problem too.
Although amendment 40 addresses a gap in the trust law that is three-years-old, the changes proposed in clause 6 to the trust’s rate of tax have made the issue more pressing. The trust rate paid by the trustees and the marginal rate paid by the settlor are likely to differ when the Bill comes into effect next year. Most settlors will not earn enough income to pay income tax at the additional rate, so the onus will be on the trustees to make the settlor repay the difference under the current legislation. It is therefore all the more important to ensure that a settlor can rely upon HMRC’s concession in order to meet these payments. That is best achieved by providing a statutory basis for the concession.
I am not sure that I or the right hon. Member for Birkenhead (Mr. Field) know, or that the Treasury could tell us. Perhaps in his usual perceptive way the hon. Member for Wolverhampton, South-West (Rob Marris) is making a point about the incongruity of the amendment being tabled in this group. That is down to the selection made by Mr. Speaker, not by me. I am not totally unaware of the incongruity of the selection.
The right hon. Gentleman has not only tabled the new clause, but has managed to bring the weather on tap at the right time to provide a backdrop to the debate.
Amendment 37 raises the personal allowance to £10,000. I understand the attraction of that. It would take more people out of taxation. We are not averse to that concept. Indeed, our proposals earlier this year to increase the age-related allowance for pensioners by £2,000 demonstrates an interest in this area, but I am concerned about the potential cost, which I am sure the hon. Member for Taunton (Mr. Browne) will discuss at length. It sounds a potentially expensive way of providing relief to taxpayers.
The people who would benefit most from the hon. Gentleman’s amendment are those who pay the highest rate of tax, not those who pay the lowest rate. People at the highest rate of tax, who pay 40 per cent. at present, will benefit significantly. If the Government introduce their planned 50 per cent. tax rate, those 50 per cent. taxpayers will receive the most benefit. I look forward to the hon. Gentleman’s arguments in support of the amendment.
New clause 1 is the most important clause that we will discuss on Report. The genesis of today’s debate lies in the 2007 Budget, where the cut in the basic rate of tax from 22p to 20p was funded through the abolition of the 10p rate. It is worth remembering the words of the then Chancellor, which explain why it took so long for people to recognise the issue to which that gave rise. In the Budget speech he said:
“Having put in place more focused ways of incentivising work and directly supporting children and pensioners at a cost of £3 billion a year, I can now return income tax to just two rates by removing the 10p band on non-savings income.”—[Official Report, 21 March 2007; Vol. 458, c. 826.]
I suspect that when that was greeted with cheers from the Labour Benches, people assumed that, in effect, the zero per cent. rate would be extended up to the threshold for the 20p rate, rather than the tax being doubled from 10p to 20p. That is why many people were uncertain what the change meant in practice. In the Treasury Committee’s inquiry on the 2007 Budget, the Treasury official responsible for this area of policy was pressed and said that from the Treasury’s own statistics 5.3 million households would have lost out from the changes made in the 2007 Budget. However, the Prime Minister, when he was Chancellor, was quizzed by the Treasury Committee and denied that there would be any losers from the change.
Does my hon. Friend think that one of the things that people find very difficult to understand is how the Government can find so much money to subsidise banks to pay colossal salaries to the people at the top of those loss-making publicly owned banks, but cannot find the money to compensate people on very low incomes?
Many people ask themselves that question. We have provided significant taxpayer subsidies to those banks, but people then see another situation, such as the one under discussion, whereby the Government refuse to move and pay compensation to people who have lost out as a consequence of the 10p rate. That juxtaposition is very telling and forms part of the continuing anger about the 10p rate.
Does the hon. Gentleman share the puzzlement of many of us, whereby one reason given for the abolition of the 10p rate was simplification of the tax system—the move to the two rates? He just quoted the then Chancellor on that point, but in that very Budget a 10 per cent. rate was retained for certain low savings income, and in this year’s Finance Bill there is incredible complexity in terms of higher rate taxpayers. So, we now have—off the top of my head—about six rates of income tax, not the supposedly simple two rates.
The hon. Gentleman makes an important point. Part of the challenge was for the Government to justify why they moved from the previous three-rate income tax system to the two-rate system, and simplification seemed a convenient explanation at the time. [Interruption.] The hon. Member for Taunton asks, “Who spotted this?” May I remind him not only that his party identified it, but that we did? In a press release on Budget day 2007, we said:
the then Chancellor’s—
“stealthiest taxes yet, he has paid for his 2p cut in income tax by abolishing the 10p rate”.
I therefore want to lay that myth to rest for the hon. Gentleman and save him having to repeat it again during his remarks.
Let me remind the House of the losers from the 2007 Budget. There were some 2.2 million single, childless working people who did not get the working tax credit because they earned more than £12,500 a year but less than £18,000, or because they worked fewer than 30 hours a week or because they were too young. They lost on average £125 a year per family. There were 1.2 million two-earner, childless couples who might not have qualified for working tax credits, who failed to take it up or who lost out from the Budget’s other changes. Their maximum loss was £464 a year.
There were 7.7 million two-earner couples with children, and they lost twice through the income tax and national insurance charges but gained only once from the child tax credit and working tax credit reforms. There were people who did not work and lost out because of tax on their benefits. There were 4 million one-earner, childless couples, earning in a range of £17,000 to £18,500, who lost out because they were not compensated.
There were, as the hon. Member for Stoke-on-Trent, Central (Mark Fisher) said, 300,000 women, aged between 60 and 64 years old, who did not get tax credits but were too young to be compensated by the rise in the pensioner tax allowance. Indeed, in the days after the 2007 Budget, the first letter that I received from a constituent complaining about the measure was written by a lady who fell into that category. She clearly had read well the small print of the Budget and identified that she was in the group that would lose out.
The average loss per family is about £145. They can be characterised as families who are on low incomes but who fall outside the tax credits safety net; as early retirees; and as people on incapacity benefit. They were caught out by the complexity of a tax and benefit system that the Government created; they were people who lost out from the measure; and they were some of the most vulnerable in society. It was, to reverse a phrase so beloved of the Prime Minister, a tax rise for the many and not the few.
Despite the warnings on Budget day, and despite the evidence that was given to the Treasury Committee at the time, it is fair to say that the issue was a slow-burner. The scale of the losses came into focus only as the implementation date got closer, and, understandably and rightly, people were angry that the Government had not been clear about the scale. That triggered a significant wave of anger across the country that was reflected in the views expressed on both sides of the House. That is why the Chancellor came to the House on 13 May, part of the way through the Crewe and Nantwich by-election, to announce measures that would offer compensation to some of those affected by the abolition of the 10p rate. In his statement, the Chancellor said that the changes
“will mean that 22 million people on low and middle incomes will gain an additional £120 this year. It will mean that 4.2 million households will receive as much, or more than, they originally lost. The remaining 1.1 million households will see their loss at least halved. In other words, 80 per cent. of households are fully compensated, with the remaining 20 per cent. compensated by at least half.”—[Official Report, 13 May 2008; Vol. 475, c. 1202.]
The hon. Gentleman is giving us an interesting historical discourse on the events of the past couple of years. However, the House is interested to know about the measures that his party favours to raise the incomes of the 500,000 households that we are discussing.
That obligation rests with the Minister— he is in government—not the Opposition. We look to him to bring forward proposals to deal with the issue. The Government created the problem, and they need to solve it. They need to live up to the promise that they made in the House.
Let me move on—
I do not need to move on quickly, because the onus lies with the Government, not the Opposition, to solve the problem now. The Government have had plenty of time to think about the issue, and they should not be looking to us for ideas to get them out of their hole.
The issue is not about finding the money to pay for the compensation, but about finding a way to compensate people who have lost out as a consequence of what has happened.
After the Chancellor’s statement, a number of people were still losing out as a result of the measure. In its report on the 10p rate, the Treasury Committee said:
“There is a pressing need for the Government to seriously examine ways in which these remaining households can be compensated…The Government should set out proposals to achieve this by the time of the 2008 Pre-Budget Report.”
The fact that that group of people were still not fully compensated caused continued anxiety across the House about how the issue was to be resolved.
Does the hon. Gentleman share my view that one of the things making it impossible for the Government to find a solution is the fact that they are in denial? They do not recognise that they have caused a problem and say that they cannot identify the people who are losing out. I look forward to hearing from Treasury Ministers; I hope that we hear them say this evening, “Yes, we admit that there is a problem and that there are losers. These are the people, and this is how we will solve the situation.”
The challenge is that the Government already recognise that there is a problem. I noticed earlier that the right hon. Member for Liverpool, Wavertree (Jane Kennedy) was in her seat. Let me remind the House about what she said last year, when she was the Financial Secretary, in response to an intervention from the right hon. Member for Birkenhead; She recognised that there was a continuing problem and said:
“I want to reassure him that we will return to this issue in the pre-Budget report, as the Chancellor has said, not only in front of the Select Committee but elsewhere. He will bring forward concrete proposals, and they will be implementable as soon as possible.”—[Official Report, 1 July 2008; Vol. 478, c. 741.]
I thought that a very clear commitment, and I think that the right hon. Gentleman and a number of other Labour Members did too. It was on the basis of the right hon. Lady’s reassurance that the hon. Member for North-West Leicestershire (David Taylor) withdrew his new clause at the time.
So a year ago, a clear commitment was given by the then Financial Secretary—and by the Chancellor elsewhere—to compensate the 1.1 million households that had not been fully compensated. The clear message was that that would happen in the pre-Budget report. The pre-Budget report, of course, has come and gone without the package having been put in place, and that is why we are debating it today. There was an exchange of views between the Financial Secretary and the right hon. Member for Birkenhead about the number of people who had lost out through the scrapping of the 10p rate. The IFS estimates that 0.9 million people are still worse off by more than £1 a week as a consequence.
We are here to press the Government to come forward with proposals that will compensate those who were not fully compensated as a result of the proposals announced in May last year. The Government cannot cast aside lightly, and without any consequence, the commitments made in last year’s debate and by the Chancellor. Having started this process in 2007, having denied that there were losers despite the evidence, having made a concession under pressure last year, and having defused a revolt on Report of the Finance Bill in 2008 by committing to act in the pre-Budget report and yet failing to do so, it is time for the Government to be held to account by Parliament.
This is not a partisan issue—it is about the House asserting itself and forcing the Executive to live up to the promises that they made to this legislature last year. It is time for the Government to redeem the promise that they made. They have had time to reflect on how to compensate the people who were not fully compensated last year, and to bring forward measures to help those people; in failing to do so, they have broken their promise to the House. We now have the chance, by supporting new clause 1, to force the Government to keep to their promise not only to Members of this House but to the people who have lost out as a consequence of the scrapping of the 10p rate.
It is a pleasure to follow the hon. Member for Fareham (Mr. Hoban). I, too, want to concentrate my remarks on new clause 1.
The problem has been well described by my right hon. Friend the Member for Birkenhead (Mr. Field). Members in all parts of the House regardless of party, and, more particularly, the millions of people who have been disadvantaged by these changes, owe a great debt to my right hon. Friend. Together, he and my hon. Friend the Member for Hyndburn (Mr. Pope) identified the problem initially, persuaded us very early on that it existed, and have campaigned on it consistently over the past two years. Everybody who cares about this issue is greatly in their debt. I hope that that view is shared even on the Treasury Bench, as well as across the House.
This debate goes right to the heart of what Parliament is about. The essence of what we do is to raise grievances and, in return for the right to do so, vote supply to the Government. I think that not only Labour Members but Members in all parts of the House want the Bill to go through: the Budget has many good things in it, and we want to vote supply to the Government. However, we want to raise what is a serious grievance for many of the poorest people in our society.
It is right that my right hon. Friend has identified that grievance and articulated it so well. The people who are most disadvantaged by these changes are, as he said, people on the most modest incomes. They come to all our surgeries and talk about it—sometimes not even in terms of pounds, almost pennies, but those sums make the difference between a dignified life and a life that lacks dignity because they cannot participate in society. They are not glamorous sums, which is possibly why the press and other media have been less interested in this grievance than in many others. These changes do not catch the headlines, but they mean a great deal to people who come to our surgeries £50, £100 or £120 a year worse off as a result.
It is right that this grievance should not only be identified but put right tonight. We will want to vote supply to the Government, but we want them to recognise that grievance, and to recognise that they have caused the problem and it is up to them to put it right. As my right hon. Friend said, doing so would not involve a huge sum; it is perfectly within the grasp of the Government to rectify their mistake.
Why has there not been a greater outcry? Possibly because, as I said, the losses for any one individual are very small. Ironically, that makes it even more important that they should be addressed. It is also because many people, particularly pensioners, have difficulty in working out exactly how their pension works and what their financial position is. Many of my constituents have said, “I sense that I am worse off under this. I am told that I will be, and I have been to the citizens advice bureau and they have identified that fact, but I do not fully understand it.”
As my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) said, the tax system is so complicated at various times and in various ways that, as we all recognise, the people who come to our advice surgeries do not fully understand the minutiae of it. They do not realise that they are worse off, or exactly what is causing it. That is why we are particularly in debt to my right hon. Friend the Member for Birkenhead and my hon. Friend the Member for Hyndburn. They have identified the problem, with the help of the IFS, and articulated it.
This debate is about poverty. That is not a fashionable subject, and I regret that the Government whom I have been proud to support over the past 12 years have not often talked about poverty. They have talked about the future, entrepreneurship and the great expansion of our economy, but there are still large pockets of poverty in all our constituencies, in rural areas and in city areas such as mine. That poverty is made worse by the 10p change, and it has been intensified.
I think it is unfair to say that the Government have not talked about poverty, but by and large it has been about child poverty or pensioner poverty. They have fallen down in not talking about people who do not fall into either of those categories because they do not have a family and are not pensioners. Those people are the worst off because they do not have extra benefits, and they will be particularly hard-hit by the measure in question.
I take my hon. Friend’s admonition. Of course Ministers have discussed poverty, but when the story of this Government comes to be written, I do not believe it will say that they have crusaded and pioneered to eliminate poverty generally in our society. Some 12 years on, we still have a residue of poverty.
Pursuant to the remark by my hon. Friend the Member for Birmingham, Selly Oak (Lynne Jones), one thing that causes me great concern is the difficulty of separating out low-earning adult poverty from child or pensioner poverty. Many low-earning adults live in families that have children, and indeed there is evidence that one driver of child poverty is there being adults in the house who are very low earners. Although progress may have been made on specific aspects of poverty, it is critical that we tackle it across the board, including for single earners, as we are seeking to do today.
I entirely agree with my hon. Friend, and of course I would want to make the exception, which was implicit in her remarks, that those who earn low wages and are in poverty have been helped remarkably well by this Government. The Prime Minister, when he was Chancellor, introduced tax credits and transformed the lives of many of my constituents who were on poverty wages. It gave them a decent lifestyle. When the people on the end of poor administration of tax credits are examined, the system gets a bad reputation, but it has been a life-changing and life-improving experience for the vast majority of those who receive tax credits. It has tackled implicit poverty among many of our constituents.
Poverty does exist. It is a low-level condition but a very painful one, and it is Parliament’s responsibility to try to put it right, not to make it worse. The 10p change undoubtedly made it worse for many people. Tonight is the time when the Government have to face up to that and recognise that they have got this slightly wrong and can put it right. We owe it to the people affected to correct it, and we owe it to my right hon. Friend the Member for Birkenhead, for his crusade, to put it right tonight. I hope that we will.
I want to limit my comments to new clause 1, which the right hon. Member for Birkenhead (Mr. Field) tabled, and amendment 37, which I tabled. The common theme that links them is the desire of my party and others to help people on low incomes have a higher standard of living and be more self-reliant and less dependent on the state.
Let me begin with the 10p rate. Members who have perhaps followed matters in less detail than those of us who served on the Committee must cast their minds back to 21 March 2007—nearly two and a half years ago—when the Prime Minister delivered his final Budget speech as Chancellor of the Exchequer. I remember it well because he stood at the Dispatch Box and announced, with great fanfare, the change that we are still discussing more than two years later. I remember Labour Members celebrating with abandon, waving their Order Papers and regarding the speech as a triumph. They left the Chamber in one big phalanx to go to the Tea Room, or wherever they took themselves. They did not want to listen to the comments of politicians from other parties and were confident that the soon-to-be Prime Minister had devised a master plan, which would improve the lives of their constituents. I suspect that the perception that it might ensure a fourth consecutive general election victory for the Labour party also contributed to their misplaced euphoria.
May I point out that some of us were less ecstatic than the hon. Gentleman suggests? I well remember making a speech on that day, pointing out that the measure disadvantaged the poorest. I was not particularly in favour of introducing the 10p tax band; I wanted to raise the threshold, which would have been a much better way of helping the poorest people.
I am grateful for that intervention for two reasons. First, amendment 37 does precisely what the hon. Lady said, so I look forward to her supporting it. Secondly, she leads me neatly on to the comments of the leader of the Conservative party. In response to the rabbit that the then Chancellor pulled out of a hat, he said:
“Well, the Chancellor has finally given us a tax cut.”—[Official Report, 21 March 2007; Vol. 458, c.829.]
Sadly, perhaps not for the first time, he was mistaken. We had not the abolition of the 10p rate—the term often used to describe the change—but the doubling of it. That left more than 5 million people worse off than they were before the change was made.
It was argued at the time that simplification was the motive for the change, but as the hon. Member for Wolverhampton, South-West (Rob Marris) rightly pointed out, the system has not become simpler. Indeed, since that Budget, the income tax system has become, if anything, more complicated.
What happened after that Budget? We finally got the now Prime Minister to accept that there were more than 5 million losers as a result of the change. Initially, he refused to accept that there were losers, and when we got beyond that stage, there was willingness to acknowledge that there were losers but unwillingness to consider compensating them. It seems extraordinary now, but we were told that the size of the budget deficit made it impossible to afford to compensate them. I think it was probably a combination of not wanting to spend the extra money and stubbornness—an unwillingness to believe that the Government had been caught out in an error of such magnitude.
The decision was then taken in an emergency Budget—that is what it was, in all but name—to borrow some additional money to try to buy off the right hon. Member for Birkenhead and other Labour Members who had suddenly realised, to their horror, that far from being a masterstroke, the measure not only further impoverished some of the poorest in their constituencies, but was likely to be electorally disastrous. This afternoon, we are joined by the hon. Member for Crewe and Nantwich (Mr. Timpson), who offered a vivid illustration of the perils that the Labour party faced if it pretended that the measure was anything other than unpopular.
I slightly disagree with the hon. Member for Stoke-on-Trent, Central (Mark Fisher), when he asked whether people were always aware of the impact of such changes on their income. I was struck by the fact that members of the London-based media, for want of a better expression, were slow to pick up on how damaging the change was, probably because they are invariably paid far more than those in the losing category. However, my constituents were alert to the downsides. I have been stopped in the supermarkets and in the street more about that issue than about any other in the four and a bit years that I have been a Member of Parliament. They said, “I hope when you’re up in the House of Commons you’re holding the Government to account on doubling the 10p rate because I’m losing out as a consequence.”
It is also inaccurate to suggest that the measure damages only those on low incomes. Sometimes debate in the House is caricatured as being about us, on our MP incomes, benevolently trying to help people in circumstances of extreme poverty. Some people on very low incomes lost out as a result of the Government’s doubling the 10p rate, but many of my constituents, who are on incomes of £13,000, £14,000, £15,000 and £16,000—regarded not as low, but as typical wages for people who work in agriculture, catering or hospitality in Somerset—were also losing out, even when the effect of reducing the basic rate by 2p was taken into account.
Does the hon. Gentleman recall that at the time, the effect of abolishing the 10p tax rate on some of the poorest members of our society could be seen most graphically in the payslips that they brought to show us, on which they could see that £2 or £3 was being taken from them every week? They were fully aware of the impact, and that made it even more extraordinary that the Government did not realise that there were many losers as a result of the measure.
That is true. Of course, the measure was not implemented straight away—it was a ticking time bomb, which the then Chancellor oddly chose to put under his own premiership, waiting to blow up when he assumed the post of Prime Minister. Nevertheless, the hon. Gentleman is right that people noticed. It is also interesting to note that the different categories of people who lost out noticed. I, too, received many letters from women aged between 60 and 64, who identified themselves as losing out as a result of the change. Members of another category wrote in smaller numbers. People under 25 on low incomes with no children also lost out. Some brought it to my attention because they had noticed the difference in their payslips. There was generally a keen awareness of the change.
The Labour party does not do well in my constituency. No one would say that it was an area with a strong Labour tradition, but many people approached me who had not voted Labour, and perhaps would never consider doing that, but were still shocked that a Labour Government had chosen to implement a policy that seemed so precisely to target and disadvantage those on the lowest incomes. They thought, as the right hon. Member for Birkenhead said, that the sole purpose of the Labour party was to help people in those circumstances. They wondered, if it did not do that, what the point of it was.
Does the hon. Gentleman agree that there was a keen awareness on the part of not only our constituents, but the Government? Sir Nick Macpherson, the permanent secretary at the Treasury, gave evidence to the Public Accounts Committee at the time, in which he clearly said that a thorough and detailed distributional analysis was done. They knew exactly what the effects would be.
I do not doubt that. There are serious questions about the Prime Minister’s judgment, but none about his ability to add up. I think that a cold political calculation was made: people on low incomes have a lower propensity to vote and, if they do, a high propensity to vote Labour, so there was no need to give them any incentives. The now Prime Minister was concerned about people in so-called middle England. He feared that Tony Blair’s appeal to those people was greater than his, as Prime Minister-in-waiting.
The change from a 22p basic rate to a 20p basic rate was therefore meant to send a clear signal to the media and others that the then Chancellor could connect with middle England and, what is more, that he could continue to outflank the Conservative party on the right by achieving a 20p basic rate, which had been an aspiration of Lady Thatcher and others, but which had not been achieved when the Conservatives were in government. He was going to deliver that, even though the collateral damage was inflicted on people on low incomes. Because their votes were taken for granted by the Labour party, however, there was no need to worry about them.
I am grateful to the hon. Gentleman, who is making a remarkably balanced speech and making a lot of sense. Will he share with the House his party’s view of increasing personal allowances, but balancing that by increasing the higher rates of tax, so that we properly target the vulnerable and poorer people in society, which is the right thing to do?
I am grateful to the hon. Gentleman as well. I am building up an unlikely coalition behind amendment 37, which is precisely what I seek to achieve. I will get to that very amendment in a moment and speak to it in slightly greater detail. The situation that I have outlined was the one that the Government faced, and the calculation made was essentially a political calculation.
I am listening to the hon. Gentleman with great interest. I agree with a lot of what he is saying, but I do not believe for one moment that, in celebrating the cut down to 20p, any Labour Member thought that the poorest in society would be worse off. However, I have not been able to decide whether the move was a Government cock-up or a Government policy. What are the hon. Gentleman’s views on that?
My view, for what it is worth, is that the Treasury and Treasury Ministers knew perfectly well and were quite cynical in their calculations, for the reasons that I have just given. However, I think that quite a lot of Labour MPs suspended their judgment and only later came to realise the full and awful consequences of what the then Chancellor had announced. Those consequences were awful for two reasons: first, they fundamentally undermined what those hon. Members had come into politics for, which was to try to help people on lower earnings; and secondly, those hon. Members realised that it would be devastating for them electorally when the electorate woke up to those consequences.
Would there not also be support for that view if one took into account the parallel occasion, when the then Chancellor spoke to the CBI and announced the removal of one of the most important green proposals—the proposal to insist that people report on their carbon reductions—in order to send out a signal that he was on the side of business? This is all part of a sad pattern of attempts to get headlines in the Daily Mail.
That is an interesting point. I will not be tempted too far off the beaten track, Mr. Deputy Speaker, but when people come—very soon—to write the history of new Labour, the 10p tax rate will be the watershed moment, when the Labour party tried to triangulate its way to the right of the Conservative party, in an attempt to crowd it out and leave it no room to have any electoral appeal. However, that was dependent on the left, as it were, not minding about all the efforts to woo middle England, which sometimes meant neglecting Labour’s core vote, and on other occasions meant actually punishing it. The 10p tax rate was the moment when the elastic stretched too far. The interesting point about that decision was that it was announced in the final Budget speech by the then Chancellor. That speech was meant to set up his premiership and begin a new era of new Labour, but as we now realise, it did precisely the opposite: it signalled the end of new Labour and the start of the desperate circumstances that the party of government has been in ever since.
The new Chancellor of the Exchequer was left in a difficult situation. We all have sympathy for him, just as we have sympathy for the team of Ministers who have to stand up in this debate and justify the position in which the Prime Minister has put them, because it is hard to unravel the proposal without just reverting to the previous situation. Indeed, with the Prime Minister having announced that the 10p rate was an interim proposal and is now in the distant past, the Government are unable to move back to the situation that existed before. What they have tried to do, therefore, is address the concerns raised by the right hon. Member for Birkenhead and others by spending a lot of public money—more public money, interestingly, than it would have cost to revert to the previous situation—targeting those who were losers as a result of the 10p rate.
However, the problem is that it is hard to do that precisely. What the Government came up with, in their emergency mini-Budget, was a £2.7 billion package, which, extraordinarily, gave money to people earning £20,000, £25,000 or £30,000 a year. Indeed, somebody earning £35,000 a year would have gained from the emergency proposals, whereas somebody on a much lower income would still have been a net loser as a result of those changes. The Government found that £2.7 billion out of nowhere and then blew the vast majority of it on people who were not net losers as a result of the change from 22p to 20p in the basic rate, coupled with the doubling of the 10p rate. That was the most extraordinary act of extravagance, but it was very badly targeted. The proposal was simple to implement, which was its one merit, but it otherwise failed in its objectives.
Where does that leave us now? It leaves us in an interesting position, questioning the Prime Minister’s judgment and the party of government’s overall strategy and direction; it also leaves us doubting Labour’s ability or desire to help the poorest in our society. Indeed, one interesting thread that runs right through the Bill is the number of measures that it contains that are disadvantageous to people who, in other circumstances, might have thought that the Labour party was on their side. It is interesting, for example, that the group targeted for gambling taxes are the people who play bingo, that there is extra duty on a pint of beer and that people at the lowest end of the income scale have not been compensated for the changes that we are discussing in relation to new clause 1. It is hardly surprising, when one looks at those measures, that so many people across the country are concluding that the Labour party, despite its historical record of commitment to them, no longer appears to be particularly interested in helping them in future.
That brings me neatly on to amendment 37, which is the sort of enlightened, progressive measure that people may have thought the Labour party would have championed in the past, but which they have long since given up hoping it will support in future. However, amendment 37 has been put forward by the progressive voice of British politics, which is me and the Liberal Democrats. It is a straightforward measure of the kind that would find favour with the right hon. Member for Birkenhead, who spoke about the need to cut taxes for people on low earnings, which is precisely what we seek to do.
Amendment 37 would raise the personal allowance—the segment of one’s income on which one pays no income tax at all—from the current figure of £6,475 in a financial year to £10,000. That would effectively implement a cut in income tax of £705 for anybody earning more than £10,000 a year, but it would also take out of tax altogether 4 million people whose income is above the current threshold but below £10,000. I do not pretend that amendment 37 is a cheap measure. It would cost billions of pounds to implement, which is why my party has identified a range of different ways of funding it. I could go into those at length, but as I talked about them in Committee, perhaps I will not detain the House today.
Before I conclude, however, let me talk about the motive, which is the important feature. In supporting new clause 1 and tabling amendment 37, my party is trying to do two things. The first is to help people on low incomes to stand on their own feet and be less reliant on the state. We realise that everyone needs assistance, and that people on low incomes need it most, but it is perverse to take money away from people in taxes and then reimburse them through some complicated mechanism elsewhere in the system. Our desire is for people to have an incentive to work because they get to keep more of their income, and to be more self-reliant than they would otherwise have been. We feel that that goes with the grain of human nature and that it is good for people in those circumstances. In the present recessionary environment, it is particularly desirable for people to have greater incentives to work and for those at the bottom end of the income scale to be able to keep a bigger share of their earnings.
Is there not a problem with the new proposal, in that it would not reimburse the people who lost out as a result of the abolition of the 10p tax rate, because it is not targeted in that way? The only way to reimburse those people is to reinstate the 10p tax rate. An advantage of the 10p rate was that people would go from paying no tax to paying 10p in the pound to paying 20p in the pound. The problem with this proposal is that they would go from paying no tax to paying 20p on the marginal rate.
The hon. Gentleman is right to say that, under my proposal, people would go from paying no income tax at all to paying a marginal rate of 20p in one leap. However, he is wrong to say that the people who lost out as a result of the doubling of the 10p rate would still lose out under my proposal. That is because the threshold that I am suggesting is higher than the top of the threshold for the 10p rate would have been. Of course, there would be extra costs involved, because many other people would benefit from my proposal. I went through the funding implications at some length in Committee.
The measure that I am proposing in amendment 37 is strongly compatible with new clause 1, and it has a similar objective. I said earlier that there were two aspects to our objective. The first is to incentivise people to work and to be self-reliant. The second is to create a fairer society. At the moment, many people on low incomes pay a very large proportion of their income in tax, partly because some of their consumer preferences are highly taxed. However, it is undesirable to levy income tax on people who are earning less than the minimum wage, only to try to reimburse them through an elaborate system of compensation. That is inefficient, and it reduces their ability to be self-reliant and their incentive to work. For all those reasons, we are keen to support new clause 1 and I urge hon. Members to support amendment 37.
I strongly support new clause 1 because it deals with an issue about which I have been concerned. I want to make some remarks about a particular group of people—namely, women between the ages of 60 and 64. I very much welcomed the introduction of the 10p starting rate of tax because it seemed an extremely progressive move. It represented a good stepping-stone on the way to paying the full rate of tax, and provided a welcome tax reduction for a large number of people on low incomes. It also seemed to provide a real incentive for people to go out to work, because they would not lose all their money to tax. Given that it was so successful, it is a great shame it was not retained as a proper part of the tax system.
The decision to scrap the 10p rate did two things. First, it caused real practical difficulties, because people’s tax went up. For people in a certain band, it doubled. Secondly, for the group of women I have mentioned, it produced a massive grievance. It is that second point that I want to deal with. The sense of grievance is as much a problem for them as the practical one of paying more tax, and it has persisted even though the Government have taken steps to deal with some of the practical issues.
I had exactly the same experience as the hon. Member for Fareham (Mr. Hoban), in that women came to see me with letters telling them that their tax was going to double. In some cases, their husbands came to see me and said that their wives were worried because their tax was going to double. They asked me whether I could look into the matter. Those women had worked hard all their working lives, sometimes starting out paying the married women’s stamp. They had brought up their children and they had done everything right. Their real grievance was that, having retired, they found that part of what they thought was going to be their retirement income was going to be eaten up by the extra tax.
I recognise that single working people on low incomes also have a problem, but it is much harder for people on fixed incomes. People who have been retired for a while, or who are about to retire and are trying to plan for the rest of their lives, do not have so many options. It is hard for them to come out of retirement and go back to work. They do not have the same options for increasing their income. It is also harder now because work is harder to find. If people see that their family income is going to go down, they will try to increase their work by taking on extra shifts or doing something else to get the family income up to the level they need. However, that is obviously much harder for those who are retired and on a fixed income.
A figure of 300,000 has been cited as the number of women in that position. I am sure that it would have been much higher, but women have had a real problem getting any substantial income in retirement at all. That has been well documented by Lord Turner and others. For women in this position, the problem is, in a sense, a result of their success. They have worked hard to make the necessary provisions and arrangements, and now find they are being hit precisely because they have been careful to ensure that they have an adequate income in their retirement, which is liable for income tax.
I do not know whether the hon. Member for Fareham wrote to the Chancellor, but I did. I have to say that the consequences of my doing so were even worse than the problem I had in the first place. The letter that came back said, in terms, “Yes, we recognise that the tax will double. However, please tell your women pensioners that they don’t have to worry, because their husbands will get an increased allowance.” That is because their husbands are mostly older than they are, and they will get a higher personal tax allowance once they reach 65.
That response intensified the sense of grievance. If there is one thing worse than telling a woman she is being discriminated against because she is a woman, it is telling her that everything will be all right because she will be able to depend on her husband to look after her in her old age. That was about the worst idea the Chancellor ever had. I cannot even remember whether I sent those letters out—I was so appalled at the idea of having to tell my women constituents that they were going to have to depend on their husbands in their retirement. That was not a sensible thing to say at all. Those women are very independent-minded. They have spent all their working lives working and providing for themselves and their families, and they often took life much more seriously than their husbands did.
I fully recognise that real progress has been made on a practical front. I also strongly suspect that, while a lot of thought was given to tackling poverty, the impact of the abolition of the 10p rate on women pensioners simply was not properly thought through. The House has spent a long time arguing for the position of women pensioners. A number of women Labour Members have argued that the position of women pensioners must be properly respected and that some thought should be given to ensuring that proper arrangements are in place for women to have a reasonable income in their retirement. I suspect that the matter was not thought through too carefully. None the less, while some of the practical issues have been resolved for this group of women, the sense of grievance is still there.
Although I have a great deal of sympathy with and am grateful to my right hon. Friend the Member for Birkenhead (Mr. Field) for introducing the new clause, I will not vote for it tonight. I wanted to raise this issue and discuss it because it has not been properly debated so far. Furthermore, I do not think that my constituents would thank me for the unforeseen difficulties that the Budget would face if the new clause were passed. We have to look at the practical side, as well as at the issue of what happens to women pensioners.
I hope that Treasury Ministers will look again at this issue; we are talking about only a small group of people, although I wish it were bigger. Given how much women work and provide for their retirement, more of them should have a pension income sufficient to be liable for tax. It is only because of the position women have faced—earning part-time wages, lack of access to occupational pensions and difficulties in securing private pensions—that more of them are not in that category.
No, which is exactly why I have explained my position on this amending provision and pressed Treasury Ministers on the issue of women. I have also explained why, if I am asked whether my constituents would thank me for causing the problems that would occur if the Budget did not go through, I do not think they would. [Interruption.] No, it is not unbelievable. As the hon. Member for Wellingborough (Mr. Bone) knows perfectly well, Members frequently table probing amendments so that they can flag issues up and get them debated. Plenty of Members do that. I am standing here to explain why I signed up to the new clause and why I am going to vote in the way I have indicated.
I have listened to what my hon. Friend has said. Will she explain what she thinks would happen if the new clause were accepted this evening?
I am very clear that if we start delaying the arrangements for tax and other payments, the consequences could well be problematic. If I asked my constituents whether they wanted the country run properly or not, I suspect that they would side with what I am doing.
A number of Members, including my hon. Friend the Member for Birmingham, Selly Oak (Lynne Jones), have said that this is all about poverty. For some, that is absolutely true—it is about the poorest in our society—but the people who have lobbied me most on this issue, particularly the women in the age category I mentioned, suggest that it is not just about the depth of poverty. A number of those women were not in the poorest groups; they were on modest and reasonable incomes. I am thinking in particular of a woman whose door I knocked on some time ago. What grieved her most was that although she could afford to pay tax, she had worked really hard all her life and budgeted for a certain income in her retirement, yet suddenly saw it being hit. She will be hit because although the tax threshold has been raised, she has not been fully compensated.
Will the hon. Lady write to that very constituent to tell her that she had an opportunity to right that wrong this evening but decided not to, or will she send her a copy of the new clause signed by herself and say that the constituent can be reassured that the issue was raised through her MP in the House of Commons?
I will be completely honest and send her a copy of what I have said, so she can see for herself. If she disagrees with my judgment, that is fine; it is her decision. The hon. Gentleman is completely wrong if he thinks that simply voting for the new clause and seeing it through would produce all the consequences he has talked about. There are ways of dealing with the problems of the group I am most concerned about—looking at differences in tax rates for income from pensions, for example—and other ways of ensuring that retired women pensioners on fixed incomes get the same tax advantages as their husbands, who might be older and also retired. We do not want this false position whereby women retire earlier, only to find that they are clobbered at a time when they cannot vary their earnings and are stuck with it.
What most concerned my constituent was the fact that she was being discriminated against because she was a woman pensioner and had to pay an increased tax rate, even though she had retired at the proper age. I ask my right hon. Friends on the Treasury Bench to deal with that point. My right hon. Friend the Member for Birkenhead has spoken about the generality, and many Members have spoken about different groups in poverty. Will Ministers focus on women aged 60 to 64 who have retired, striven hard to provide a pension and made arrangements to secure a decent income, only to find that they are affected by the higher tax rate? As I have said, they have a profound and abiding sense of grievance at being hit by that tax increase in their retirement.
It is said, “For whom the bell tolls”—well, there is no question but that the bell tolls for new Labour on this proposal. The Government have turned the values of new Labour and old Labour upside down by what they have done. To those who think that the vote by the Conservative party has an element of cynicism about it—[Interruption.] No, not at all. To those people I say that one of our greatest Prime Ministers, Disraeli, wrote a tale of two nations in the book “Sybil”, which set out for its time the way in which Governments, as in our own time, create divisions in society by arrangements of this kind. The Government’s proposals are totally unacceptable.
Many people in our constituencies are deeply affected by those proposals. People in rural areas, for example, suffer from increasing poverty; dairy farmers in my constituency are similarly affected. Small businesses and individuals are going bankrupt under the burdens they are suffering under the present economic recession. It has been suggested today that the number of unemployed might be as many as 3.2 million next year. That is the reality of the direction in which the economy is going, as taken by this Government.
While the Government bail out the bankers, the poor are battered by the proposals on the Government’s agenda. There are broken promises, and it is down to Parliament to deal with them.
The hon. Member for Stoke-on-Trent, Central (Mark Fisher) said that it was time to put Parliament first. Let me add to what he said: it is time to put people and Parliament first. That is what we must do, and that is what the proposal from our Conservative side of the debating Chamber must deliver tonight. The good and honest Members on the Labour Benches have evaluated the meaning of Labour for their own people, and we will do the same for our people. We have constituents who are equally poor and who need to be protected, and I believe profoundly that we have a duty to support them tonight.
In an intervention earlier, I referred to the big landscape against the background of the actual figures of debt. The Government continually insist on a figure of £1 trillion, but according to the Office for National Statistics, and as I have said since 7 October last year—ably supported by other Conservative Members who insisted that the Government’s figure was a complete fabrication—it is £3 trillion. The impact on the economy will be huge, and hence the impact on the very people whom we are trying to protect tonight will be all the greater, given bankruptcies, increased unemployment, greater rural poverty, and greater problems for the elderly. We must give help to those people, in conjunction with the help that can be provided by credit unions and the like, which I hope to encourage in my constituency. It is no good bailing out the banks when the people at the lower end of the scale will be worse off.
It is essential that we vote tonight, and show the less well-off in our constituencies that we are prepared to protect them. The other day, my right hon. Friend the Leader of the Opposition talked about the potential for riots. When the scale of a problem presented by proposals such as this causes such a reaction among the people who will be affected, we can be in no doubt that there will be serious trouble by the middle of next year. It is therefore essential for us to introduce remedial measures to ensure that the poor are not affected by the Government’s proposals.
The landscape of the total debt figure is so huge, and the impact that it will have on the man in the street at the lower end of the income scale is such, that we must do all in our power to ensure that we protect people. By voting as we will this evening, we will guarantee that protection.
I support new clause 1, which bears my name. If my right hon. Friend the Member for Birkenhead (Mr. Field) presses his motion to a vote, I will support it, because I believe that this is our last opportunity to say clearly to the Government that what they did initially was wrong. We then thought that they had accepted that it was wrong, because they made some changes which we welcomed. However, 1.3 million people—according to figures from the Library and the Institute for Fiscal Studies, which I believe to be correct—are still waiting for help. If the new clause is not accepted tonight, there is no chance that anything will be done to help them before either the next Budget or the next general election.
Given that we have a Treasury team and many civil servants and highly paid officials and consultants working on Treasury matters, it is sad that during the period between the previous changes and the current Budget, they could not come up with a solution to compensate 1.3 million people for their loss. Admittedly that number is very small as a proportion of the overall population, but it nevertheless represents some—although not all, as my right hon. Friend said—of the poorest paid people in the country. We would have loved to table an amendment or new clause tonight that did come up with a solution, but the nature of debates such as this makes that impossible.
Notices have been delivered, and the Government Whips have told us how terrible it would be if the new clause happened to be passed. I find that strange. We have been told that the new clause is dangerous: that it would restrict the Government from collecting any income tax for 2009-10, with an estimated cost of £140 billion. We have been told that the services on which the public depend will be put at risk. Do we really believe that if this measure were passed, the Government could not go off and do what they did when the banks were collapsing? The Chancellor was up all night—all weekend—sorting things out and finding a solution. Are we really saying that that could not be done if this measure were passed this evening?
There was such a situation in the United Kingdom earlier this year, when a budget was not passed in the Scottish Parliament. The Opposition worked out quickly what needed to be done, and a week later the budget was passed unanimously with, I believe, one exception. Of course action can be taken to cause a budget to be passed in exactly the way in which the hon. Lady has described.
The hon. Gentleman is right. The problem is that whenever we say that we want something to be changed and we know that that is the right thing to do, a reason is given for it not to be done which makes many of those who have supported the measure in question change their minds and decide not to vote for it. They can all examine their consciences, and it is perfectly right for them to do so.
I accept that the position could possibly be put right within 24 hours, but will my hon. Friend accept just for one moment that, if the Government are right, within those 24 hours an enormous amount of damage could be done to the economy and, consequently, an inordinate amount of damage could be done to the very people whom she and I seek to protect?
I am not an economist, and I am sometimes quite glad that I am not, but I see things in a common-sense way. I find it incredible that we should not pass a measure asking the Government to find a solution to the problems of the 1.3 million people who have been so badly hit. The Government have had months and months in which to sort those problems out. It is not up to the official Opposition, the Liberal Democrats, the Scottish National party or my right hon. Friend the Member for Birkenhead to come up with a solution. The Government could have come up with a solution, but they chose not to. They thought that the problem had gone away, but the fact that we are not all still receiving hundreds of letters about the issue does not mean that it has gone away. Most of my constituents who have suffered have almost given up, believing that the Government will not listen.
A woman wrote to me saying:
“I am 58, female, single and childless. I am currently on a low income and, sadly, may remain in this situation—employment possibilities for people of my age being what they are… I do not wish to be well-off but aspire to living independently and with dignity, which will mean continuing to earn whatever I can for as long as I possibly can. Believing in personal responsibility, I have managed to save some money to provide a meagre supplement to what will be an insufficient pension… I am one of those who will fall foul of this iniquitous new measure”
on the 10 per cent. tax band.
“I cannot believe that this has been brought in by a Labour government and particularly by our current PM. For the whole of my life I have voted Labour… I am so astonished at this measure … I cannot express strongly enough my outrage towards my Labour government that such an attack should be made on low earners like me, young or old.”
I have received a number of similar letters, and I am sure that all Members were being visited by their constituents months ago. However, people have become fed up with going on and on about the issue, because they feel that the Government are not listening. Tonight’s debate gives us all an opportunity to say that the problem must be solved, and could be solved.
I hope that if my right hon. Friend the Member for Birkenhead presses his motion to a Division and the new clause is accepted, the Government will sit up all night and, indeed, for the next 24 hours. We have until 5 August in any event, and there is no huge impetus for the problem to be solved in the next 24 hours, but it could be none the less. Let us sort the problem out. Let us show that we realise that the poorest people in our country are being hit and that that was a mistake, or, if not a mistake, the wrong decision. Let us show that we want to change it—and the only time when we can change it is tonight.
I can say little more than my right hon. Friend the Member for Birkenhead (Mr. Field) or my hon. Friend the Member for Vauxhall (Kate Hoey). I rise with considerable sadness and with a quizzical outlook. I want to hear some answers from Treasury Ministers to some fairly obvious questions. Two and a half years ago, the 2p reduction was made to the basic rate, and the 10p rate was removed as a means of funding that.
I do not understand why it is so difficult to track down the real losers. If there are 1.3 million losers, I would have thought that the finest minds in the Treasury working night and day would have been able to identify who they were and what the impact on them has been. What numbers have been crunched and what decisions have been made to try to do what the Government set out to do when they realised their mistake? Why did they not go further on earlier occasions to deal with a running sore, something from which we cannot hide? We have made some of the poorest people poorer. That is unacceptable, but it is something that we can rectify even at this late stage.
I intervened on the hon. Member for Fareham (Mr. Hoban) to say that if only we had spent more hours dealing with tax avoidance and fewer hours making the poorest poorer, some Labour Members would feel that our time here had been well spent. Even at this late stage Ministers must realise that they must do something. They face the possibility of a large rebellion tonight; that has been coming for the last two and a half years. There have been various skirmishes but tonight it is for real. It is a question of poverty and of trying to make the case for those who have been made worse off by a change that was not thought through.
At the time some of us thought that it was a pure gimmick. There was a debate to be had about whether the 10p rate was the most appropriate way to try to help the very poorest in our society. Part of the problem that I have is that we do not know who these 1.3 million people are. They are not a group; they are individuals—I will not go into the question of there being no such thing as society. However, this is not one homogenous group. There is a need for measures to deal with these different people even at this late stage. I am looking for Ministers to come clean on this. What measures have they explored to try to help those who have been hit? Those people have written to all of us, which makes it so much more difficult. We cannot say it is those who are 16 to 18, or 18 to 21, or single pensioners—women largely—aged from 60 to 65. Many of those are in that group but they are not the totality. There are others. My hon. Friend the Member for Birmingham, Selly Oak (Lynne Jones) mentioned couples with no children who are in this group and feel particularly hard done by because they have struggled to stay in work and to earn a decent living. They saw the 10p rate as a good way of rewarding them.
Does my hon. Friend agree that there has been some talk in the past 48 hours that if this new clause is passed tonight, the following morning the Government will not be able to collect taxes, the markets will crash and government will grind to a halt? Does he not agree that these are tales to frighten children and that people should decide to vote tonight on the merits of the arguments and not on implicit threats from Treasury Ministers?
I always think it is better to win the debate through argument than through other ways—for example, people instructing us it is better to vote one way rather than another. I am looking to Ministers to go through the arguments presented by my right hon. Friend the Member for Birkenhead and to say that the situation is not as he described it. So far that has not happened. There has not been a willingness to engage and to find an alternative way we could take this forward, other than some of the measures introduced in both the pre-Budget report and the previous Budget.
We are at a difficult stage now. We need to recognise that the hurt among core Labour supporters remains. Some of us will find it very difficult not to want to go back to where we were, which was to recognise that these are the people whom we cannot afford to be made worse off. That is what Ministers need to do and that is what I look to my right hon. Friend the Financial Secretary to do now.
We have had a very good debate. At Budget 2007, the Government announced the abolition of the 10p rate and changes to personal tax and tax credits. Most households were compensated by other parts of the package, but my right hon. Friend the Member for Birkenhead (Mr. Field) and others argued forcefully and successfully that more needed to be done. The Government accepted that and on 13 May last year my right hon. Friend the Chancellor announced an increase in the personal allowance. Most people began to benefit from that from last September by a total of £2.7 billion. Some 22 million people on low and middle incomes saw their tax reduced by £120 in 2008-09 and 4.2 million of the original 5.3 million households who lost out from the abolition of the 10p rate received as much or more than they originally lost, but not higher rate taxpayers. I was glad that the hon. Member for Taunton (Mr. Browne) intervened to make that point.
On Report of last year’s Finance Bill, which made the changes that were announced, my predecessor, my right hon. Friend the Member for Liverpool, Wavertree (Jane Kennedy), was asked by our right hon. Friend the Member for Birkenhead and others about further commitments. She argued that we had substantially reduced the number of losing households but she acknowledged that there were still, at that time, just over 1 million households losing out, and that we needed to do more to help. The hon. Member for Fareham (Mr. Hoban) suggested that we then did nothing. That is simply untrue.
In the PBR, the Government announced further support. We rolled forward the increase to the personal allowance announced in May, increasing it by a further £130 above inflation. Those changes now fully compensate over 90 per cent. of the 5.3 million households who would otherwise have been paying more, reducing the number to around 500,000 households in 2011-12. The maximum individual loss is now £92 a year, or £1.77 per week, if there is no offsetting tax credit gain. The average loss for a household is now less than £1 a week. I agree with those who have said that even a loss of that size is significant for some of the people we are talking about, but it is important to make it clear that we are not talking about average losses of £2 or £3 as has been suggested. [Interruption.] May I make some progress because I know that the House is anxious to conclude the debate?
It is not the case that all these losing households are low-income households. Relatively few are in the lowest income decile, because many in that group do not pay income tax, and we have taken an additional 800,000 people out of income tax altogether through the steps we have taken. Of the 500,000 households that remain, some 100,000 are in the highest income decile. For example, if a household comprises a City banker and a second earner who lost out from the abolition of the 10p rate, that household is included in the 500,000. There are 100,000 of the 500,000 in that category. The new clause would prevent the Government from collecting any income tax until well-off households like that were made even better off. I cannot believe that that is the intention, but that would be the effect of the new clause. At the 2008 PBR, we acknowledged that, although the number of losing households had been reduced by 90 per cent., there would still be some who lost out. Although public concern has not been completely eradicated, it has certainly been substantially allayed by the changes we have made.
There has been some discussion of the impact of the new clause, and I want to comment on that. Income tax is an annual tax that needs to confirmed annually in each Finance Bill. If the new clause were carried, without some rather desperate measures we would be unable to collect income tax this year, and income tax already collected would have to be repaid. The chaos does not bear thinking about.
Let me comment on the position of the Conservative party. The Conservatives did not object to the abolition of the 10p rate, and the 10p rate has not been mentioned in any Conservative amendment to the Bill. They have not previously supported amendments on this topic moved by my right hon. Friend the Member for Birkenhead—presumably, in the past, because of concerns in respect of fiscal responsibility. They have not today suggested any mechanism for compensating losing households, despite my giving the hon. Member for Fareham the opportunity to do so. Yet now they are set to abandon fiscal responsibility and follow their leader, who signed the amendment, through the Division Lobby to block the collection of income tax. Lest anyone thought the Conservative Opposition were fit to form a Government, their disgraceful position today shows that they are not.
I want to make a little progress for now, and say the following to my right hon. Friend the Member for Birkenhead, for whom I have great respect. I agree with my hon. Friend the Member for Stoke-on-Trent, Central (Mark Fisher) that my right hon. Friend and those who have worked with him have achieved a very substantial amount through their pursuit of this matter over the past couple of years. The terms of this new clause are, however, impossible for the Government to comply with. We could only do so by announcing large sums of extra spending—£2.6 billion this year if this was to be done by increasing the personal allowance further—and the imperative of fiscal consolidation rules that out. Alternatively, we could come up with some very complex means-testing arrangement, which would reduce the cost somewhat but also introduce unmanageable new processes. With the best will in the world, that would take a considerable period of time, and in the meantime we would be unable to collect income tax.
That is not to say that there is nothing we can do. I and my colleagues would be very happy to discuss any ideas my right hon. Friend or others might want us to consider before the pre-Budget report, and to see if we can help further. My hon. Friend the Member for Northampton, North (Ms Keeble) and others highlighted concerns about women who retired at 60 after a lifetime of work and who will now pay more tax than they had expected until the age of 65, and there are also other concerns about the particular circumstances that some people face. We will be happy to look at those, too.
Will my right hon. Friend not only look at the practical consequences to do with the money these women have lost and the fact that that comes out of pension income and not earned income, but address these women’s real sense of grievance that they were discriminated against and told, “Not to worry, dear; your husband’s got a higher tax allowance”?
Well, the power to collect income tax ahead of Royal Assent is founded on the Provisional Collection of Taxes Act 1968, section 1 of which provides that a resolution under the Act has statutory effect for a specified period. One of the things that brings that specified period to an end is rejection of the provisions of the Bill reflected in the resolution, so we would not have until 5 August to carry on collecting income tax. As I have said, there would have to be some rather novel legislative interventions rather quickly.
I moved a not dissimilar measure in the equivalent debate in July 2008, and I offered a formula to the Minister at the time. I did not press it to a Division because I was assured that strenuous efforts would be made to remedy the remaining problems. There appear to be 500,000 families and an average of £50 each, which amounts to £25 million. Can the finest minds in the Treasury not fashion a method of compensating for that £25 million that does not involve a factor of hundreds of millions of pounds in excess? I cannot believe that that can be true.
Actually, it is true, and we have taken strenuous measures. I think my hon. Friend is suggesting some very complicated means-testing system that would require, for example, a very large number of people to fill in self-assessment forms who do not currently have to do so, and who would not know until the end of the year what their income tax was. I want to underline the fact that I am very happy to look at suggestions that Members and others may want to raise between now and the PBR. Blocking income tax is not the answer, however, and I ask my right hon. Friend the Member for Birkenhead to withdraw the new clause.
The hon. Member for Taunton described amendment 37 as progressive. He also had the good grace to acknowledge that it would cost a fair amount of money: £18.5 billion actually, so it is completely unaffordable. I do not think the House will be attracted to it, despite the oratory that he employed to urge his move upon us.
Amendment 40 provides for the adjustments that have to be made between settlors and trustees of a trust. It seeks to set out a mechanism for payment of tax by settlors, and addresses settlor-interested trusts and certain trust income of children that is treated as income of the settlor of the trust. I say to the hon. Member for Fareham that these changes are not necessary, however, as what they seek to achieve is already allowed by the rules. If he needs me to provide any further detail on that, I will be very happy to do so.
New clause 1 and amendment 37 challenge the Government’s response to helping families now and to compensating those who lost out from the abolition of the 10p income tax rate. I pay tribute to my right hon. Friend for leading a lengthy campaign on this issue, which has been effective and successful. He was right to raise it, and he has brought about significant changes. My case is that our response has been fair, straightforward and effective, and that it substantially deals with the concern raised. I understand that there are continuing concerns, and we are happy to continue to look at them, but halting the collection of income tax is not the answer.
There is clearly something wrong with our procedures when Members who wish to reform a Budget constructively have to resort to tabling a new clause that, according to my right hon. Friend, will blow the House and everything else asunder if we press it to a vote. It is very significant, however, that he did not say in response to the intervention of my hon. Friend the Member for Birmingham, Sparkbrook and Small Heath (Mr. Godsiff) what would happen if we passed the new clause. We all know perfectly well that we are not rejecting the Budget. We are not rejecting these powers; we are putting a temporary hold on them. Let us suppose, however, that my right hon. Friend is right about the outcome. We know perfectly well what any rational, sensible Government with a real wish to live would do. They would immediately come back and say that they would have a vote of confidence now and insist that it is passed, and one would hope that, with a little humility, they might come back with the measures we are all asking for.
This debate has been quite a simple one, although it has taken a long time. When I opened it, I said that although there were different views among those on this side of the House—those of old Labour, new Labour and just Labour—the great golden thread that linked us all and sent us here in public life was the desire to protect the poorest. We might have disagreed about everything else, but that was sacred to us. This 10p measure that the Government introduced has tried to break that golden thread.
Of course, the Government have taken some measures, but they have not taken a single measure that specifically helped those who lost out by the abolition of the 10p rate. The Government have taken other measures that have benefited taxpayers generally, including those who were losers from the abolition of the 10p rate, but they have taken no specific tax measure to compensate that group. Tonight is our last opportunity to say to the Government that they need to renew their faith and our faith in the tradition that sent us here, so that when we go into that general election—
I am trying to decide how to vote should my right hon. Friend press this matter to a Division. The only practical way of dealing with this situation is by a general increase in the threshold above which people pay tax—that would, however, also help other people—because targeting those losers specifically would be enormously complex, and I am not in favour of such complexity. In such an approach, the money could then be clawed back at the higher level. Is that what he is proposing? We need to have a practical measure to deal with this problem that will not cost billions.
I am grateful for that intervention, because it allows me to point out that the Minister keeps saying that the Government are open to suggestions, but we have been making suggestions ever since they got us into this mess by abolishing the 10p rate. The most obvious way to bring justice without having to eat humble pie and reintroduce the 10p rate would be to raise tax allowances by the amount that made sure that there were no losers earning less than £18,000 and claw back that increase from the rest of us by adjusting national insurance. Such a measure would be targeted and effective, and it could be done this year. The trouble is that when such suggestions are made, they are not ones that the Government favour and so they reject them. That is fair enough, but they cannot then keep saying that they are open to suggestions.
As I have been explaining, I cannot do that. The House of Commons has this absurd procedure whereby either we let things through or we table proposals such as this just to hold the Government back for a moment, so that they have to think again. We are then accused of trying to press the nuclear button. The constructive thing that we cannot do in Budget debates is propose how the Government might get out of the big hole that they have dug and fallen into. As we now have a reforming Speaker, I hope that that is one of the areas in which we will bring about change, but that is for the future. Today’s debate is about whether we demand additional measures to help those who earn the smallest wage packets in our country; it is about whether we rectify the attack that the abolition of the 10p rate made on their standard of living. The Minister has mustered all his skill from the Front Bench. He has given us reassurance, but he has not given us any actual proposals. As a result, I shall press new clause 1 to a Division.
Question put, That the clause be read a Second time.
New Clause 3
Office of Tax Simplification
‘(1) The Treasury shall establish an Office of Tax Simplification.
(2) Its mandate shall be to—
(a) review tax law
(b) make proposals on tax law reform and simplification.
(3) Regulations shall specify the governance arrangements of the Office of Tax Simplification.
(4) Regulations made under this section may not be made unless they have been laid before, and approved by a resolution of, the House of Commons.’.—(Mr. Gauke.)
Brought up, and read the First time.
With this it will be convenient to discuss the following: new clause 4 —Holiday accommodation report
‘(1) The Chancellor of the Exchequer shall, before the publication of the 2009 Pre-Budget Report, have compiled and laid before the House of Commons a report containing an assessment of the impact of—
(a) section 503 of ICTA, and
(b) Chapter 6 of Part 3 of ITTOIA 2005,
on the liability to tax of commercially let furnished holiday accommodation.
(2) Any such report shall address the impact on the UK tourism industry.
(3) A Minister of the Crown must, not later than one month after the report has been laid before the House of Commons, make a motion in that House in relation to the report.’.
New clause 6—Competitiveness of the tax system
‘Prior to the first reading of a Finance Bill, the Treasury will lay before Parliament a report on the impact on the competitiveness of UK economy of—
(a) the measures set out in that Finance Bill,
(b) the rates of—
(i) corporation tax,
(ii) income tax,
(iii) national insurance,
(iv) capital gains tax,
(v) excise duties, and
(vi) vehicle excise duties,
(c) the complexity of the tax system, and
(d) the relationship between the HMRC and the taxpayer.’.
Amendment 36, in clause 8, page 3, line 31, at end insert—
‘(2A) At the end of subsection 13(3) of ICTA 1988 (small companies’ relief), insert—
“(3A) Where in any accounting period the profits of a company do not exceed 1/12 of the lower relevant maximum amount, the company may claim a further reduction (to be known as the “very small companies’ relief”) on the amount of corporation tax payable under this section.
(3B) The Chancellor of the Exchequer shall, by regulations and within three months of Royal Assent, prescribe the level of the very small companies’ relief.
(3C) Regulations made under subsection (3B) may not be made unless a draft of the statutory instrument containing the regulations has been laid before, and approved by a resolution of, each House of parliament.”’.
Order. We have important business to continue with. Will Members please leave the Chamber quickly and quietly?
New clauses 3 and 6 specifically address and seek to improve the competitiveness and attractiveness of the UK taxation system. I hope that there is consensus in the House that it is important that the UK has a competitive taxation system. I hope that that is not in any way controversial, although it is perhaps worth reminding the House of the words of the right hon. Member for North Tyneside (Mr. Byers) on 27 April:
“The United Kingdom needs a tax regime that is not only fair, but internationally competitive and attractive.”
He made that point in the context of a debate on the Budget and, in particular, the proposal about the 50p higher rate income tax. He said that
“the measures in the Budget will make the United Kingdom less attractive.”
I am arguing for a competitive taxation system in the United Kingdom, and some would criticise that approach by attempting to suggest that it is somehow unfair or inherently against the arguments for social justice. Again, it is worth quoting the remarks of the right hon. Member for North Tyneside, who stated that
“wealth creation and social justice are two sides of the same coin. We need wealth to be created if we are to provide the money to finance our social programmes.” —[Official Report, 27 April 2009; Vol. 491, c. 616.]
It is in that context that we have tabled new clause 3 and new clause 6. It is important that the UK has a competitive tax system but the concerns about it are becoming stronger.
Does the hon. Gentleman share the concern held by me and the right hon. Member for Witney (Mr. Cameron) that there are far too many quangos in Britain and that the cost is prohibitive? Does he worry that this extra quango is a step in the wrong direction?
I am grateful to the hon. Gentleman. I shall turn in detail to the office of tax simplification, but I have to say that his intervention was as predictable as it was, perhaps, wrong-headed. Had he read the excellent speech that my right hon. Friend the Leader of the Opposition made yesterday, he would have seen that it set out the reasons why it is necessary and desirable to have some organisations that bring technical expertise to an area or provide a degree of transparency as to how matters are dealt with. Such matters are better dealt with outside government rather than inside government. I will make the case that the office of tax simplification meets all those criteria.
Is there not a flaw—perhaps two—in what the hon. Gentleman is saying? Competitive taxation is one of the concerns that are way down the list of those who are considering where to locate themselves as employees or the businesses that they may own or operate. Is it not the case that we must have a competitive corporate tax rate? How many countries would have the majority of their 100 largest companies, as we have in FTSE, paying no mainstream corporation tax? That suggests that we have a very competitive tax rate and tax regime, does it not?
I think I know where the hon. Gentleman got that statistic from, and I am not sure that it is actually right. Perhaps the Minister could respond to that point. That example is often quoted, but my understanding is that it is not necessarily the case. It is right that we should have a competitive taxation system, and I am very pleased that the hon. Gentleman supports that objective. However, the concerns about whether our tax system is competitive are very strong. For example, let me quote the CBI report that was published last year. It says:
“The competitiveness of British business is increasingly compromised by the UK corporate tax system. Only a few years ago the UK was perceived to be one of the most competitive places in the world to do business, underpinned by one of the most competitive corporate tax systems. Today this advantage has been significantly eroded.”
Richard Lambert, chief executive of the CBI, has also described our tax system as a
“ball and chain round the ankle”
of the UK economy.
I could even quote the former head of the Prime Minister’s business council, who warned the Government to be “extremely careful” on tax policy. It is pretty clear what he meant when he stated:
“The consistency and the nature of (the tax policy) has been hugely attractive to overseas people and to companies. We mustn’t lose that competitiveness. It would be very bad for the UK (and) it would be hugely damaging for business.”
That head of the Prime Minister’s business council is now Lord Davies of Abersoch, the Government’s Trade Minister.
A KPMG survey of 50 of Britain’s largest businesses published in January 2009 revealed that the percentage actively considering moving their tax residence out of the United Kingdom jumped from 6 per cent. in 2007 to 14 per cent. in 2008. In fact, one of those businesses had already left the UK by 2008 so perhaps we should say 16 per cent. We have seen a number of companies relocate their tax residence out of the UK—WPP Group, Shire, and United Business Media, to name but three. Those cases were specifically to do with fear of the regime on the taxation of foreign profits.
It would be fair to say that since the KPMG survey the Government have come forward with proposals that we debated at some length in Committee, and there is some support for those proposals. We raised a number of concerns and, despite the support for the proposals, the concerns remain. KPMG went back to those companies that were actively considering moving their tax residence after the Government had proposed their reforms on the taxation of foreign profits and the fact remained that all but one of them were continuing to consider actively moving their tax residence. One was waiting to see how things developed. It remains a problem, notwithstanding the announcements that the Government have made on the taxation of foreign profits.
It is worth highlighting the World Economic Forum survey on global competitiveness, which addresses a number of issues including tax competitiveness, where the UK’s position fell from fourth in 1998 to 15th in 2003. New clause 6 addresses a number of aspects of competitiveness, one of which is rates. Corporation tax rates have not risen but have, in relative terms, become less competitive. Our corporation tax was the third lowest in the EU15 in 1997 and the sixth highest last year. We have a higher rate than the OECD average, which was not the case in 1997. We can consider the rate of income tax. Of course, at the higher rate level of 50p, we will now have one of the highest rates of income tax in the world, not one of the lowest.
There is also the issue of tax complexity. Those who debate such matters will be familiar with the fact that the UK now has the longest tax code in the world and that we have overtaken India in that respect. It is common in such debates to quote the exponential increase in the number of pages involved in tax textbooks. These are real problems that are frequently highlighted by professional organisations and business groups. I shall touch on that point again in a moment or so.
There is also a lack of predictability that has affected the UK tax system, particularly in the past few years. In a run of Budgets and pre-Budget reports, announcements have been made that were not consulted on and poorly drafted legislation has been presented that has caused significant concern to business groups in the UK. The capital gains tax proposals in the 2007 PBR and the proposals on residence and domicile in last year’s Finance Bill are examples of that.
How do we address these fairly fundamental concerns? New clause 6 would require the Treasury to lay before Parliament an annual report on the impact on the competitiveness of the UK economy of measures in that year’s Finance Bill. It would also require tax rates, the complexity of the tax system and the relationship between HMRC and the taxpayer to be taken into consideration. The advantage is that that would force the Treasury to focus on the issue of tax competitiveness, and enable Parliament to assess the Treasury’s performance in that area. It would also send a strong signal to international investors and businesses about the importance that we as an institution attach to tax competitiveness. The proposal regarding the relationship between HMRC and the taxpayer would also be important in that regard, as it would mean that we all focused on ensuring that Revenue and Customs provided a service to taxpayers that worked to the UK’s advantage.
New clause 3 focuses more specifically on the proposal to establish an office of tax simplification. It is an attempt to address the problem of tax complexity, but it would also help with tax predictability. The OTS recommendation is one of three in the report published last year by Lord Howe, the second being a proposal to establish a Joint Select Committee on taxation that would make use of the expertise in this House and the other place to scrutinise Finance Bills and draft legislation. The third element of the Howe report is a proposal for a new convention to the effect that any change to the law with a technical content should be set out no later than the PBR before a Finance Bill is introduced.
The OTS would also report to the proposed Joint Select Committee on taxation, very much as the National Audit Office reports to the Public Accounts Committee. The Howe report proposes that the OTS would be overseen by a steering committee appointed by the Chancellor. Its staff, in some respects like that of the tax law rewrite project, would be made up of a combination of people from HMRC, academics and representatives from the professional organisations and major firms, perhaps on secondment for a year or two.
The OTS’s role would be to examine such areas of fiscal law as seem to it appropriate and to put forward proposals for tax law. It would not express a position on rates or yield or make decisions on tax law—it is absolutely right that this House does that—but it would make recommendations.
We have not made a decision about salary, and the hon. Gentleman would not expect us to have done so at this stage, but as I shall make clear in a moment, we believe that it would be an important role that would add considerably to the effectiveness and attractiveness of the UK tax system.
It might be worth making some comparisons with other organisations. I have referred already to the NAO, for whose work there is great respect across the House. The way that the NAO reports to the PAC is an example of the House of Commons working very effectively, and similarly Lord Howe proposes that the OTS would report to a further parliamentary Committee. Another comparison can be made with the tax law rewrite project which, as its name suggests, is an attempt to rewrite tax law in a way that is more accessible. We have debated it from time to time—I have debated it with the Financial Secretary—and there is widespread recognition of the professionalism with which the project has been undertaken. The OTS proposal is more ambitious and would require a different type of people but, like the tax law rewrite project, its staff would be made up of a combination of HMRC people, academics and professionals.
Another comparison could be drawn with the Law Commission, which plays a very useful role in making recommendations in technical areas and improving the quality of law as a whole. Indeed, it is worth pointing out that the Chartered Institute of Taxation has called for a long time for the establishment of a tax law commission, a body very similar to the OTS. Lord Howe did not go for that name but he could have done, as the commission would perform a similar role.
Setting up the OTS would have a number of advantages, the first and foremost of which is that it would be a force for making tax law simpler and less complex. An inevitable pressure is exerted by some Chancellors—let me put it that way—to complicate matters, to meddle and to tweak. I think that we can all think of a Chancellor or two who would fall into that category, but the proposed OTS would be a force against that.
The second advantage is that the OTS, in conjunction with the proposed Joint Select Committee, would involve more informed parliamentary scrutiny. Members of this House have to tackle highly technical matters, and the OTS would provide them with more information. It would also require a more deliberative process for making tax law: added to the work of the OTS, Lord Howe’s recommendation for a convention that technical matters are published in the PBR would mean that the process was more thorough. That would also provide greater predictability in our tax system, because likely reforms would be clearer at an earlier stage.
The next argument for the OTS is that it would allow the expertise that exists outside the HMRC and the Treasury to play a greater role. I do not mean to belittle the work that those bodies do, but there is an enormous amount of expertise in the professional organisations. Having served on the Committee of each of the last four Finance Bills, I am not convinced that the system gets the best out of that expertise. The proposal would involve more consultation and a greater opportunity for the input of that expertise at an earlier stage in the process, before it becomes a matter of Government climbdowns or political embarrassment for amendments to be accepted.
A related benefit would be a lowering of the barriers between HMRC and the professionals so that the system made it easier for people to spend time working for HMRC, time in private practice, then back to HMRC and so on. Closer co-operation between HMRC staff and those working for the major accounting firms would be welcomed.
The Howe report points in the direction of an improved method of making tax law, and consequently in the direction of improved tax law. At a time when there will be substantial pressures on the public purse and no scope for substantial tax cuts, to put it mildly, and at a time when the rhetoric that we hear from the Government about continuing investment suggests that there will be no cuts in public spending, as we sometimes hear from the Prime Minister, we will see substantial increases in taxes. If that is the case, the least we can do in the context of tax competitiveness is improve the way tax law is made. It is right that we as a party have taken that extremely seriously. We are grateful to Lord Howe for the efforts that he put into producing his report last year. We think the two new clauses are extremely valuable.
Can the hon. Gentleman say a little more about the philosophical underpinnings of tax simplification? It is all very well talking about getting rid of complexities through simplifications. When one does so, one gets rid of subtleties and discretion, so one is likely to end up with a system more akin to rough justice. Because of the complexities of people’s lives, particularly their tax lives, there is likely to be a backlash against that, as we have seen tonight on the 10p issue, which was supposedly designed to get rid of complexities.
The hon. Gentleman makes a good point in the context of the 10p rate. I fear that there are times when the argument for tax simplification has been damaged by that measure and the reforms to capital gains tax. If I were in a more partisan mood, which I rarely am with the hon. Gentleman, I would say that when the Government talk about tax simplification, the taxpayer should count the spoons. I recognise the hon. Gentleman’s point, and I recognise that simplicity in the tax system is one, but not the only, objective of an effective tax system. It is not the only thing that matters.
We have a real problem. The point is made by professional groups time and again, and it is one of the reasons why our proposals on the office of tax simplification have been so warmly welcomed by the Institute of Chartered Accountants, the Chartered Institute of Taxation, the Association of Chartered Certified Accountants, the CBI, the British Chambers of Commerce and the Institute of Directors. There is widespread support for the proposals because the balance has not been struck in the past few years.
I am listening to my hon. Friend’s comments with great interest and welcome the proposal. Does he recognise that for many small businesses, the whole complicated tax system falls proportionally much more heavily on them than on many larger businesses? Does he recognise that the simplification will be a great aid to many small and medium-sized enterprises that are struggling to survive, let alone progress and make massive profits?
Indeed. My hon. Friend is a strong and eloquent advocate of the interests of small businesses and I am grateful for his intervention. He is right that small businesses have greater difficulties with complexity when they cannot afford the infrastructure of tax advice. Small businesses also suffer most from difficulties with administration of the tax system. By and large, I tend to find that the smaller the business, the more concerns they have about the way in which HMRC works. Larger businesses tend to have more positive views about the way in which HMRC works with them than do smaller businesses.
Drawing together his response to my intervention and to that from the hon. Member for Northampton, South (Mr. Binley), do I take it that if it were pressed to a vote, the hon. Member for South-West Hertfordshire (Mr. Gauke) would vote against amendment 36, a tax measure proposed by the Liberal Democrats which would favour very small companies, but would lead to greater complexity in the tax system?
We look forward to hearing the arguments made in favour of that amendment by the hon. Member for Taunton (Mr. Browne). My concerns about it are more to do with affordability than complexity. There are better examples of complexity in the system that need to be addressed than whether or not there is an additional rate.
New clause 4 returns to a debate held at the very end of the Committee stage as a consequence of a new clause tabled by the hon. Member for Taunton. It was always our intention to raise this in the Committee of the whole House because it affects a number of constituencies. It relates to the taxation of furnished holiday lettings. Let me put that briefly in context. Until the late 1970s the provision of holiday accommodation was regarded rather informally by the Inland Revenue as a business activity for tax purposes. Consequently, there was favourable income tax and capital gains tax treatment of it.
The Inland Revenue changed this practice in the early 1980s and started to treat the activity as an investment, rather than a business. There was considerable disquiet, and in 1984 furnished holiday lettings were formally treated as a business activity for tax purposes. This year the beneficial treatment of furnished holiday lettings is being extended to properties in the European economic area, but it was announced in the Red Book that the Government intend to abolish the furnished holiday letting rules next year and owners will need to prove that they are running a trade in order for it to be treated as a business activity. We had only a brief opportunity to debate the matter in Committee, and I thought it might be helpful to return to it and perhaps press the Minister, who made some helpful and conciliatory remarks in the Committee of the whole House. I should like to take this opportunity to press him again.
The concern expressed to us is that a number of properties that are currently let out as furnished holiday lettings will be sold before April 2010 to benefit from the advantageous capital gains tax regime. Some may think that there are advantages in doing so, given that such properties tend to be located in attractive rural parts of the country where locals often find it difficult to secure affordable housing. However, we are hearing that many of those homes are likely to be sold to second-home owners, who will use the cottages only occasionally. As a consequence, the properties will not be in use as often; there will be fewer visitors to the countryside; and there is the potential for significant damage to the rural economy. The situation will become more difficult for those currently owning furnished holiday lettings and for holidaymakers wanting to rent out a holiday home in the UK. In rural areas that are popular with tourists, there is particular concern that the measure will have a major impact on their economy. I note that there is particular concern in Devon and Cornwall, where there are some 62,000 furnished holiday lets. They could be substantially affected.
The hon. Member for Taunton raised one point about which I, too, have heard. When the announcement was made in the Budget, there had been no consultation with the Department for Culture, Media and Sport, which has responsibility for tourism. I should be grateful if the Minister would confirm whether that is true, and explain why the Government have voluntarily declared that the existing furnished holiday letting rules are incompatible with EU law. The Government usually have to be dragged kicking and screaming before they ever concede one of those points, but on that issue they seemed rather to move ahead of any court judgment.
Why was there no consultation prior to the publication of the announcement? The Minister says that there will be consultation subsequently, but why has there been no attempt to look more imaginatively at whether there is a revenue-neutral approach that would still provide some protection or favourable treatment to those owning furnished holiday lettings, given the impact that the measure may have on the tourist industry and the unfortunate dynamic effects that may occur?
Before the hon. Gentleman concludes, will he acknowledge the point that I made in our debate, which was in Committee not Committee of the whole House, about European constraints on activity here? The arrangements simply support UK-based furnished holiday lets, not those elsewhere in the European Union, and there is an issue.
I do acknowledge that there is an issue, and extending the treatment to EEA properties clearly makes the concession—the favourable tax treatment—more expensive. I absolutely acknowledge that point. The point that I was seeking to draw out is that the Government’s usual approach is not to be so proactive in identifying areas of the UK tax system that appear to be in breach of EU law. There is a long list of cases on which the Government have fought long and hard before making the changes, yet on the issue before us they seem to have rushed rather quickly from identifying it to conceding the point that it is in breach of European law. The Government’s wording is that it may be in breach of European law, and I do not know whether that prevents them from running into retrospective difficulties, but I do not want to press the Minister on that. There seems to be some enthusiasm for creating the problem as a consequence of European law, and that is not always the case. If the Minister will respond to those points in his remarks, I shall be grateful.
In conclusion, and returning to the other new clauses in the group, we think that it is vital that everything be done to ensure that the UK has a competitive tax system. In the current fiscal climate, the priority has to be a predictable and workable tax system, and our proposals for an office of tax simplification go some way towards addressing that.
I want to make a few brief remarks about philosophy, to put it at its most general. Most of my first degree is in sociology, and one thing that I learned during my studies is that people are able to hold contradictory positions. So, for example, it is all the rage for politicians from all parts of the House to talk about decentralisation and local control. We see it most markedly with the national health service. People say, “Let local doctors make decisions, with the local distribution of resources to where health needs are locally determined to be greatest.” In the next breath, however, they say, “Oh! It’s a national health service and we don’t want a postcode lottery.” We saw it graphically 12 months ago when the Conservative party’s position was that the NHS should not be run from Whitehall and there should be local control. In the very same speech, however, its spokesperson called for a national moratorium on all hospital closures. Both positions may be desirable, but they are contradictory.
We have seen a certain contradictory nature tonight, and I probed it during my first intervention on the hon. Member for South-West Hertfordshire (Mr. Gauke). On the one hand, the argument runs that we have a tax system that is indeed complex, includes subtleties and allows a measure of discretion; and then in the new clause, we have a proposal for an office of tax simplification, which, were it to proceed not only to be an office but to have a remit for tax simplification, would undoubtedly lead us along the spectrum towards a much more rough and ready system of taxation administration, of decision making on the taxes that should be paid, and so on. That would be rough justice. If that is what the House and the Conservative party want, however, that is an honourable and coherent position.
The difficulty is when the position becomes contradictory and people start running away from its inevitable trajectory. We have seen it graphically tonight from the hon. Gentleman. The group of amendments before us includes amendment 36, which would set up very small companies’ relief and mean greater complexity within the tax system. The hon. Member for Taunton (Mr. Browne) will shortly tell us why the measure is desirable, but let us leave that aside and consider the philosophy. We have very small companies’ relief in one amendment and tax simplification as the highlight of another. When I probed the hon. Member for South-West Hertfordshire, he did not make it very clear which way his party would like to go on the very small companies’ relief proposal—a proposal of complexity.
Will the hon. Gentleman empathise with my frustration at another Opposition party saying one thing to one group and a completely contradictory thing to another, and seeming to be governed solely by a desire to have attractive headlines in by-election literature, rather than by a coherent alternative vision for government?
Indeed not; and the age of chutzpah is upon us.
I was discussing two of the new clauses in this group. In one, the Conservative party is pushing for tax simplification; that is understandable, coherent and logical, and in theory it might be desirable. At the first whiff of grapeshot, however, the party starts running in the opposite direction—it appears to be doing so on relief for very small companies, and it is certainly doing so on the furnished holiday lettings rules. Again, the rules might be desirable and it might be right for us to keep them; I am not getting into that. I merely give that new clause as an example, within a single group of amendments, of what I am saying.
The hon. Member for South-West Hertfordshire gives us a lot of stuff about simplification and its desirability. In new clause 4, however, he is saying that a problem exists with the abolition of the beneficial capital gains tax rules for furnished holiday lettings and that he is worried about that favourable treatment being done away with. Doing that, however, would be a simplification.
The hon. Gentleman is a clever man, and I have admired his comments again and again. However, is he saying that he does not agree with tax simplification? Britain’s tax code rivals India’s as the largest in the world. Is he saying that that does not harm small businesses?
What I am saying is that the issues are philosophically and politically much more difficult than is implied by simply standing up and wrapping oneself in the cloak of tax simplification. Life is more difficult than that, as we can see from the group of amendments. I gave those two examples. There are three new clauses and one amendment in the group. I leave aside new clause 6, which is about competitiveness. New clause 3 is about tax simplification. Amendment 36 would add complexity to the taxation of very small companies. In new clause 4, the abolition of a complexity is resisted by those who say that they pursue tax simplification.
I am simply saying to the hon. Gentleman that the issues are difficult and that I am not going to stand here and show what I regard as chutzpah, to say the least. I shall use a politer expression. I am not going to say, “Oh yes, tax simplification is wonderful,” and then put myself in a contradictory position, as the hon. Member for South-West Hertfordshire has done.
Within a group of three new clauses and an amendment, the hon. Gentleman has one in favour of simplification and two in which he apparently comes down on the side of complexity. These things are difficult. Simply grandstanding and saying, “I believe in tax simplification,” and asking me whether I do, does not help the political discourse of this country.
Perhaps the hon. Gentleman should accept some. An amendment in the group has been tabled by the Liberal Democrats, although it appears to have been associated with us. Yes, we have a new clause on furnished holiday lettings; in it, we attempt to probe the Government’s thinking, as an Opposition should. We want to press them on a concern about the impact of a tax change they have announced—rather unwillingly I think; they do not seem particularly enthusiastic about the change, although they feel they have to make it.
We are also setting out an argument for a structure that will move towards a simplified tax system. I do not accept that there is an inherent contradiction. The hon. Gentleman appears to be saying that an amendment tabled by the Liberal Democrats is inconsistent with a new clause tabled by the Conservatives, and that that suggests a contradiction.
Let us be clear. Let us leave aside Liberal Democrat amendment 36 for the moment; we will get on to that. New clause 4 was tabled by the hon. Gentleman, among others. That new clause is about the tax position of commercially let, furnished holiday accommodation. New clause 3, also tabled by the hon. Gentleman, among others, is to do with tax simplification. All I am pointing out is that the issues are difficult and that simplifying simplification, to coin a phrase, is not helpful. We see it, however, in the position of the hon. Gentleman. He wishes to do the best in respect of commercially let furnished holiday accommodation; I understand his position, although I am not certain that I agree with it. He is concerned about the beneficial capital gains tax regime for that sector of small business being done away with. He wants the favourable treatment, as he called it, to continue. That is counterposed with a demand for tax simplification. All I am saying is that, to me, that is contradictory and demonstrates the difficulties of achieving tax simplification.
It is difficult to follow that devastating dismantling of not only the new clauses put forward by the Conservative party, but the fitness to govern that the party professes to possess. I was impressed when I read in this morning’s edition of The Times that Conservative Front Benchers are taking guidance on budgetary affairs from the Liberal party of Canada, the sister party of the Liberal Democrats. The article says that when they met the Canadian Liberals,
“The Conservatives were impressed. Philip Hammond, the Shadow Chief Secretary to the Treasury, and Francis Maude, the Shadow Cabinet minister responsible for policy implementation, requested a private breakfast briefing with the Canadians.”
That is how impressed they were.
I am not surprised that the Conservative party is looking for guidance and leadership from Liberal parties around the world. I include the Liberal Democrats here in Britain; I say that because new clause 4 looked extremely familiar to me as I leafed through the Order Paper. I soon realised that that was because I tabled the same clause in Committee. I welcome the support from the Conservative party.
I gently point out to the hon. Gentleman the perils involved in some of these issues. Having carried out a devastating tax-cutting approach as a federal Government in Ottawa, the Liberals lost the general election. They formed a minority Government under Paul Martin, but they fell shortly thereafter.
I defer to the hon. Gentleman’s expertise about Canadian politics, although I observe a constant theme: if one wants tough decisions about the future of a country, and balanced budgets, one should look to a Liberal or Liberal Democrat party to make those decisions.
That gets me neatly to new clause 3, and the hon. Gentleman’s dismantling of the credibility of the Conservative party.
Let me talk for a moment about the difficulty that the hon. Gentleman will face when he makes his point. I very much support simplification. Don’t we all? Everybody would rather have a simple system than a complicated one. One of the difficulties faced by businesses and individuals is being confronted by a complex tax code and all kinds of micro-incentives that are meant to change behaviour but actually mean that accountants are needed to fill out relatively simple tax returns. That is to be regretted. The objective of a simpler system is shared by all parties; the question is whether new clause 3 is the right way to advance that objective.
My first concern is that I take seriously the speeches of the right hon. Member for Witney (Mr. Cameron); I have no reason to believe that he means to mislead anybody. He made a big speech to the think-tank Reform. I serve on its advisory board, so I had a direct interest in what he said. Yesterday, the right hon. Gentleman spoke about the great threat posed to the public finances of the plethora of quangos, which cost a huge amount to administer. When I heard that I thought, wow, here we have a substantial policy—something that I can really latch on to. I have always struggled to get a real feel for what the right hon. Gentleman believes, but yesterday I thought that, he had raised a tangible issue that meant something. I can tell that Conservative Front Benchers intend to follow that theme through in the House of Commons—lots of amendments and new clauses will be tabled to flesh out the agenda to remove the quango state.
Then the following day, and although I appreciate that all new clauses had to be tabled before the right hon. Gentleman made his speech, I find a Conservative new clause that proposes a new quango. I ask the hon. Member for South-West Hertfordshire (Mr. Gauke) this very simple question: how much would the head of the quango be paid? We could get into a bigger conversation about the overall cost, because I assume that it would need a secretariat, central London offices, and a new logo. The Conservatives would want its representatives at their party conference, so they would charge the quango lots of money to host fringe meetings there. It would have an entertainments budget—
I am grateful for that guidance, Madam Deputy Speaker, but this is directly central to the new clause. This proposed new quango appears to be uncosted. The going rate for chairing such organisations is not cheap, so I can imagine that the person who ran this one would require a big salary, expenses and everything else.
I think that I have made my point.
I am reluctant, in this time of difficult financial circumstances, to write a blank cheque to the Conservatives so that they can keep coming up with expensive quangos that I fear we cannot afford. The hon. Member for Wolverhampton, South-West (Rob Marris) has already mentioned the inconsistency in their argument. For example, we have just had a vote on a new clause tabled by the right hon. Member for Birkenhead (Mr. Field) that would have meant that we had to rejig thresholds, which would have been very hard to do and would have made the tax system more complicated, yet the Conservatives voted for that.
On the other hand, the shadow Chancellor has a history of being enthusiastic about flat-rate taxes. He came into office saying that he would consider their introduction, but it was only when he did so that he realised how foolish his initial proposal was. At one moment he seems to be in favour of an extreme form of simplification, but earlier this evening he seemed to be in favour of greater complexity.
Surely it is bogus to accuse the Conservative party of undermining the support we have always expressed for simplification just because, on occasion, we support a change in the law that might possibly add one further small complication to the tax system. That argument does not hold together intellectually. We can show general support for simplification while accepting that in certain instances a small degree of additional complication is desirable to achieve policy ends.
I think it is legitimate to explore the motives behind the new clause. My fear—I may be wrong—is that the Conservatives tell different audiences what those people want to hear, even if the messages are contradictory. For example, they tell people who are, rightly, concerned about the size of the budget deficit that the Conservatives are the party that will get to grips with it. Then I read today on the front page of The Daily Telegraph that they have a wish-list of extra, completely uncosted spending commitments aimed at pleasing people in rural communities. How that is compatible with getting to grips with the budget deficit is a mystery to me. They tell groups who complain that the tax system is insufficiently simple, “Don’t you worry—we’re bringing in new clause 3 to set up a quango to deal with that”, yet the day before they told another group concerned about the growth in the number of quangos that they intended to cut their number. To another interest group that wants great complexity in the system because that would change it to its advantage the Conservatives say that they too favour that greater complexity because they share that interest groups’ concerns.
Let me offer the Conservative party some advice. My party has been in opposition for decades, and my colleagues and I have come to the conclusion that the path that the Conservatives have decided to take is not the right one. It looks superficially attractive to a party that has been in opposition for a long time, as the Conservatives have been, because it seems that it can thereby appease all those different groups and that approach will cumulatively add up to something credible. However, the problem with that approach, as I fear that the Conservatives are increasingly discovering, is that those individual initiatives are less than the sum of their parts and do not add up to an alternative prospectus for government.
Is the crux of the matter not simplification but fairness? In an attempt to try to make things fairer for people, there are necessarily some complexities. I, for one, would much prefer to have a fairer tax system, even if that made it mildly more complex. When people look at their tax paperwork, they often compare what tax they are paying with that pai