My Lords, I beg to move that this Bill be now read a second time.

I am pleased to open the debate on the Finance Bill and, in particular, to address the key issues raised by the report of the Economic Affairs Committee on the Finance Bill 2007. As in previous years, this debate is the Government’s platform for responding to the report of the Finance Bill sub-committee on certain provisions of the Bill.

The Bill delivers real change, giving the UK a stronger and more competitive economy, and helping to shape a better and simpler tax system. The Bill sets out the first steps in a major package of reforms to the business tax system. This is, of course, an area identified by the Economic Affairs Committee as one where tax simplification should reduce costs and help promote economic growth. I intend to set out briefly why this is a simplifying package, and why it will promote growth by enhancing international competitiveness, encouraging investment and promoting innovation.

The 2007 Budget announced a cut in the main rate of corporation tax, to bring the cost of capital down and to make the United Kingdom more attractive to investors. We have simplified and modernised the capital allowance systems, to reduce administrative burdens and tax distortions, and to promote more efficient investment. There are a number of aspects to this. In terms of simplification, from 2008 expenditure on most plant and machinery will be handled in one of only two pools: 10 per cent and 20 per cent. We will phase out the industrial buildings allowances and agricultural buildings allowances. They had their place in helping the country to rebuild after 1945, but they seem somewhat anachronistic in this day and age and they have a distorting effect.

For small companies the rate of corporation tax will increase, but I remind the House that this is a small profit rate of corporation tax, with a quarter of large tax-paying companies paying tax at the small companies rate. Of the 4.2 million small businesses, more than three-quarters are not incorporated and are therefore not affected by this change. I give way to the noble Lord.

My Lords, perhaps the noble Lord will help me with a problem. How is it a simplification measure to increase the corporation tax paid by incorporated companies from 20 to 22 per cent, while in the same Budget reducing the rate of income tax from 22 per cent to 20 per cent, thus creating a mirror image of the position existing at the moment whereby companies, incorporated or unincorporated, pay tax at 22 per cent? Will not this change add to the burden on some companies and make it more complicated?

My Lords, my point about the simplification related to the broader range of business taxation. The noble Lord will accept that we are talking about a relatively small group of companies. I accept his point that the increase throws an extra burden on them. He also will recognise that we have a clear rationale for the basis on which we hope to encourage investment and that in general terms we have produced an internationally competitive corporation tax rate. I think that his party—in fact, the noble Lord may have had quite a strong part in this with his zealous and diligent work behind the scenes lobbying for a reduction in corporation tax—will see the merits in us having done so.

The Government have set out their rationale for refocusing incentives away from the small companies rate and on to businesses which really invest. Our prime concern is to ensure that investment takes place. The noble Lord and the House will recognise that it will reduce the differential between incorporated and unincorporated businesses. It will reduce the incidence of people incorporated for tax rather than commercial reasons and will make the system fairer. Although the noble Lord may quibble with me about the administrative dimension on this, the Government’s priority that we should be concerned that people should incorporate for commercial reasons rather than for tax is an advantage and reflects a strategic position. It is clear that tax should not drive the decision on incorporation. There are other good reasons why people might want to incorporate, but we maintain that tax should not be a driver. At the same time, small and medium-sized enterprises face very real challenges, which is why we have refocused tax incentives by bringing in a new £50,000 annual investment allowance targeted at helping all businesses to invest and grow and have increased the R&D tax credits for small and medium enterprises.

Let me turn now to the important subject of managed service companies, which was identified by your Lordships’ committee. A regrettably large number of people have chosen to incorporate for the wrong reasons. As things stood, the vast majority of people operating through an MSC were getting an unfair advantage over other workers and compliant businesses playing by the rules. This Bill therefore contains provisions to tackle managed service companies and to stop those using such schemes from undercutting compliant workers and businesses.

The committee chaired by the noble Lord, Lord Wakeham, described the Government’s measures as a “sticking plaster”, suggesting that the underlying structural issues need to be tackled. I understand the importance of that point, and the noble Lord in a short while will deploy his arguments, which the Government of course will take very seriously. Let me be clear: this legislation addresses the very specific issue of mass marketed schemes being used to disguise employment. Perhaps I may put it this way: it tackles a significant and growing compliance issue, not a structural problem. The company is being used to disguise the employer/employee relationship which exists.

It certainly is true that managed service companies make up a particularly tricky area to legislate for. In all fairness, the committee recognised how challenging the issue was and it is important that we should get it right. We consulted widely on this issue and are grateful to all who participated. Almost everyone we consulted agreed that the existing rules are not being applied by managed service companies and therefore that some action was necessary. We are grateful for the evidence that we are on the right track.

More importantly, we are grateful to those whom we consulted for providing us with practical, up-to-date insights into what we needed to do to deliver effective legislation. This Government have been willing to listen and to respond to what interested parties have told us about this issue in order to ensure that the legislation is accurately targeted to achieve objectives which I think others share with us. This collaborative approach is also reflected in the guidance that HMRC has recently published. I should like to thank your Lordships’ committee for welcoming HMRC’s efforts to consult business about these and other important issues.

Any kind of tax avoidance creates uncertainty and distorts the tax system. In making the system fairer, we are creating commercial certainty for companies that pay their fair share and we are removing unfair competitive advantages. There will always be people who want to challenge the tax system and seek to avoid paying their fair share but ordinary, honest taxpayers deserve a tax system that is clear and easy to comply with. It is the Government’s responsibility to protect compliant taxpayers both by making it as easy as possible for them to pay and by coming down hard on those who do not. We believe that we have a good record of achievement here. The Economic Affairs Committee noted that all its private sector witnesses were content with the progress of Revenue and Customs towards the implementation of its delivery plan for the recommendations in the Varney review on how the needs of large business could be satisfied in the administration of the tax system.

Let me now turn to the review of powers, deterrents and safeguards. Setting up Her Majesty’s Revenue and Customs out of the merger of the Inland Revenue and HM Customs and Excise has already helped to strengthen our system of tax administration. The merger made it possible to deliver more consistency and to reduce compliance costs for taxpayers. But merging two departments with two such distinct histories brings challenges as well as benefits. We must modernise the framework of law and practice that underpins our tax administration if we are to realise those benefits. HMRC’s review of powers, deterrents and safeguards was set up to respond to this challenge. The review seeks to provide modern tools for the department and corresponding safeguards for taxpayers.

As announced in the 2007 Budget, HMRC has delivered more than £300 million a year in savings on administrative burdens, which I know will be welcome to the whole House and in particular to members of the committee. The powers review demonstrates once again the value of consultation. Through the review’s consultative committee, HMRC has been able to draw on the considerable talents and experience of business representatives, QCs, tax lawyers and accountants. This has formed one part of a widespread consultation process and has helped to produce a package that is effective and balanced.

I should like to take the opportunity to speak briefly on the subject of online filing, on which the committee also commented. I have already made it clear that the Government are committed to reducing regulation and business costs and delivering a more efficient tax administration. I strongly believe that good e-government can and will play a key role in making this happen. In this I agree with my noble friend Lord Carter of Coles, who found in his independent review:

“Online services have the potential to offer significant benefits to businesses, citizens and government. For the customer, online services can provide greater certainty, integral validation and help faster completion of the filing task and faster repayments”.

I doubt whether anyone would disagree with my noble friend when he added:

“However, to maximise the benefits, the services need to be customer focused, designed to meet the needs of the users, and they need of course to be reliable”.

There is room for some measured confidence here. We have had two successful self-assessment filing deadlines, 31 January this year and 31 January last year, when the service withstood huge volumes and worked solidly. However, we cannot afford to be complacent.

Finally, let me put all these matters into context. As an economy, we are currently experiencing the longest combined period of sustained productivity and employment growth since records began. Today we have record levels of employment, low inflation, and the second highest GDP in the G7 as opposed to the lowest when we came into office. We also have unrivalled growth. Perhaps the best way of expressing the scale of the achievement is this: even in the hugely unlikely event that the UK economy were to stop growing tomorrow—I want to emphasise to the House that it will not—it would be at least nine years before any other major economy would be likely to overtake our record. This Bill and this Budget build on that record of achievement and strengthen it. The Bill will help our nation to continue to prosper in a rapidly changing and increasingly globalised world. I commend the Bill to the House.

Moved, That the Bill be now read a second time.—(Lord Davies of Oldham.)

My Lords, I am very pleased to introduce the report of the Economic Affairs Committee on the Finance Bill. It is the fifth annual report in what is already a well established series that confirms the role of this House in the parliamentary scrutiny of Finance Bills. In the past, critics of the Government have sometimes wrongly questioned this role. As I have explained in previous years, the House is entitled to debate supply Bills and to refer them to Select Committees for consideration and has been exercising with restraint those rights going back many years. Within that remit, the sub-committee on the Finance Bill offers taxpayers and advisers a forum to express their concerns, which our reports convey, together with our own views and recommendations, in order to inform the debate in Parliament. We do this in a pretty short time in order to publish our report before the Report stage in the House of Commons, which is the last opportunity to amend these Bills, and I think that that is appreciated by those who take part.

I thank my fellow members of the sub-committee for the knowledge and wisdom that they have brought to bear, for their non-partisan approach and for their speedy and intensive work. Looking across the Chamber, I see at least two who fit the bill fully and who have been in place for many years doing exactly that. I am also grateful to the witnesses, professional and official, whose input is essential to our report. This is an opportunity for experts to make a real contribution to our legislation before it is finally passed into law. I thank our long-serving specialist adviser, Leonard Beighton, and his new colleague, Trevor Evans, for their invaluable contribution, as well as the Clerk and the secretary-administrator of our committee.

With limited time and resources, the committee cannot sensibly look at the whole of the Finance Bill; it has to focus. This year it chose four topics: the business tax reform package; managed service companies; powers, deterrents and safeguards; and mandatory electronic filing and payment. First, however, I shall make two general points. There can be tensions over the desire for fairness without opening up the scope for avoidance, but this can be done if it is well researched and consulted on widely. That is important because we are deeply concerned in the committee with simplification. The present tax system is highly complex and simplification is essential. We saw only a very modest step this year, and the committee recommends a more determined and consistent approach to simplification over several years. Indeed, the Minister rather indicated that that is the way the Government see it as well.

Consultation is another of the committee’s major concerns, especially after last year’s shambles over IHT and trusts. The committee welcomes the increasing consultation on technical, legislative and administrative matters; indeed, consultation has continued apace even since we reported. But it can be more difficult where there are sectoral changes with winners and losers, as this year with the changes to capital allowances and, in particular, the phased withdrawal of the industrial and buildings allowances. The concerns expressed to us and echoed in the debates in the House of Commons show that, none the less, ways need to be found of building on the present consultative process and of consulting on policy issues. Lessons should be learnt from the progress on consultation and followed through in the simplification of personal taxation next year.

The business tax reform package comprises rate changes, capital allowance changes and increases in research and development tax credits. There were also two administrative changes. The package was said to have three main objectives: to enhance the international competitiveness of UK business; to encourage growth through investment and innovation; and to ensure fairness.

First, the setting up by the CBI of a task force to consider whether the tax system is fit for purpose is itself evidence of concerns about the decline in our tax competitiveness. The committee considers the reduction in the headline rate of corporation tax helpful, but other countries are also reducing theirs. The extent of the burden as a whole is also important and we recognise that there is very little change here.

Administrative measures are also important. As the Minister indicated, the committee welcomes the progress that HMRC has made on the Varney review of links with large businesses. HMRC told the committee that it regarded the recommendations as absolutely fundamental and it was confident that, despite the pressure on its skills and resources, it would deliver. Other countries provide greater certainty in their tax laws, so here again the recent consultative document on clearance procedures and advance rulings is particularly welcome. The committee recommends that this should have a high priority.

The committee also recommends that HMRC should press ahead vigorously with its programme of reductions in administrative burdens. Small companies, not just large ones, also need certainty and simplicity. They should be able to take decisions on commercial, and not tax, grounds. Frequent changes in the rate of corporation tax have not helped. The phased changes in the rate now proposed along with the simplification of personal taxation will narrow, but not close, the difference between tax on unincorporated and incorporated businesses. The changes being made or foreshadowed this year have caused a lot of concern. The committee recommends a review of the issue as a whole in consultation with the small business sector. The aim should be to reduce complexity and distortions caused by tax and to provide greater clarity and consistency. The committee also recommends that, despite the pressure on its resources, HMRC should have regard to the needs of small businesses and their advisers. I think that HMRC will know exactly what I am saying.

The second aim of the business tax reform package is growth through investment and innovation. The committee is doubtful whether the package will do much to encourage growth. Its overall impact is broadly revenue neutral. The annual investment allowance to come in next year is intended to provide some incentive, but we await the details. During the consultation on it, its impact across various types of businesses will need to be considered. Otherwise the changes in capital allowances are broadly designed to recognise economic depreciation and to remove any investment incentive. The R&D tax credits are being enhanced and the administration improved. It is too early to assess their effectiveness. The committee feels that, against the impact of the package as a whole, this year’s changes might not make a very positive impact overall. The third aim of the package is fairness. No one disagrees with that, but it is an elusive concept. There is a need to balance it with simplicity.

The Minister was kind enough to refer to the managed service companies. The Finance Bill 2007 is the latest round in attempts to prevent employment income from being dressed up in a different form, producing less tax and national insurance. HMRC considered this legislation necessary because it had found applying the existing IR35 legislation impractical. The Minister rightly spotted that the committee report considered much of this legislation to be in the nature of a sticking plaster, addressing a perceived wound in the short term but not tackling the underlying cause. To address the underlying cause, the committee recommended that the Government review the taxation of employees and small businesses operating in varying forms with a view to making structural changes to reduce the differences in tax outcomes and national insurance contributions payable whether an individual is self-employed, employed or operating through a company. Only when these differences are markedly reduced will the incentive to dress up employment income in a different form, and the need for this type of legislation, be reduced. The review proposed by the committee would need to overlap with the review of small businesses that I mentioned and should generally help to meet our recommendation on simplification.

Notwithstanding the firm recommendations on how to tackle this issue in the medium term, the committee was persuaded that the revenue lost from dressing up employment income had to be addressed in the short term. However, the committee was not as sure as the Treasury or HMRC that the new legislation would be effective. The committee therefore considered close scrutiny necessary, with a fallback plan involving the allocation of greater resources to applying the IR35 legislation should that be necessary.

The committee was also troubled by the number of concerns about the breadth and imprecision of the legislation in two areas: the targeting provision that defines an MSC, which is central to appropriate operation of the legislation, and the debt-transfer provisions, which allow a tax debt of an MSC to be transferred to third parties when the MSC does not pay. The debates at the Report stage in the House of Commons showed that there remained widespread concerns in the private sector about the breadth of the legislation, which the Government have failed to calm down. As foreshadowed by the committee’s report, we are now thrown back on to guidance to provide clarity on issues of concern. We know how unsatisfactory it is for legislation to be drafted widely and then cut down in guidance. Guidance can be altered, is generally of little assistance when a case comes before the courts and is not subject to parliamentary scrutiny.

A review of powers, deterrents and safeguards was announced in December 2004, on Second Reading of the Bill to provide the statutory framework for combining the Inland Revenue with Customs and Excise. The first results of the review are in this legislation, introducing new criminal investigation powers for the new department and new civil penalties for errors in tax returns. The committee was concerned that the new powers and penalties were being introduced before the safeguards. However, during our deliberations, the Government published a consultation document on safeguards—had they not done so, our report would have been expressed in considerably more forceful terms than it was. We strongly urge the adoption of appropriate safeguards, as quickly as possible.

There was much concern about the balance between what is in primary legislation and what is in supporting guidance, and we would like to see as much as possible in primary legislation. Making a practical suggestion, the committee felt that a way should be found of keeping current and easily accessible a record of the assurances that are given in Parliament or elsewhere in respect of the application of these important powers and penalties, because they are an important factor in the interpretation of the law, which needs to be understood.

The committee was reassured by the evidence of HMRC on how it intends to exercise the criminal investigation powers. The committee considers it very important that the assurances being given at the present time are adhered to in practice. Serious consideration should be given to providing an annual report to Parliament setting out the way in which the powers have been exercised in the previous year and how the assurances that have been given have been adhered to.

On the penalties for errors in tax returns, the committee felt that, if the new regime is to influence behaviour and encourage better compliance, there needs to be a common understanding of what type of behaviour falls into which degree of culpability. The committee was concerned that some of our witnesses felt that there was a lack of clarity on this aspect and recommended that particular thought and effort go into the drafting of the guidance on this. Again, we have guidance to back up legislation. It was a disappointment that no amendments were proposed on Report in the House of Commons to address the issue. The review of powers and deterrents continues and HMRC issued a further consultation document on the developing programme of work in respect of payments and debt.

The last issue that we discussed was online filing and electronic payment. The committee fully endorses the drive that HMRC is making to encourage online filing. There are significant benefits to be won by the department and by taxpayers, but we believe that this should be done by better marketing, by ensuring the reliability and robustness of the systems and by making the changes more attractive to those who are IT-illiterate. We recommend that online filing should not be mandatory for smaller businesses and employers. The proposals to make it compulsory for corporation tax, VAT, PAYE and NIC returns should be dropped. There may come a time when compulsion is possible, but it is not yet. As for electronic payment, we agree that there should be no cash-flow advantage for payment by cheque. We were reassured to learn that payment by cheque by the bank giro method will continue to be possible, but there may be some cases where even that is not practicable, so payment by post may still be needed.

The committee did a good job in considerable detail and I think that it is right for me to give a report of our work. We were not entirely critical of the Government. We recognise that they have some considerable problems to deal with and I hope that our contribution is helpful to them and to the Revenue in the work that has to be done in years to come.

My Lords, I congratulate the noble Lord, Lord Wakeham, on his admirable chairmanship of the committee in the preparation of its report on this year’s Finance Bill. I will restrict my remarks to business taxation and the business tax reform package. I declare an interest as a past president of the CBI and a current member of its President’s Committee, as well as a UK company director.

I begin with a word of encouragement to HM Revenue and Customs. As our report noted, on Budget day HMRC published its progress report on the Varney Review of Links with Large Businesses and its plans for the delivery of all of that review’s proposals. It is not often that the business community gives its almost unqualified approval to a Revenue and Customs initiative but in this case it has done so. It is seen as a major step forward in encouraging trust and dialogue between HMRC and large businesses, and provided that the ambitious implementation plan can be achieved in practice, it will set new standards for the relationship between the two parties. It shows what can be done if the traditional hatchets are buried and the focus shifts from areas of contention to those of common ground. Indeed, it represents something of a culture shift which could beneficially be applied in a wider context.

That wider context might be provided in the recent announcement by the CBI—to which the noble Lord, Lord Wakeham, alluded—that it has launched a tax taskforce to undertake a root-and-branch examination of whether the current UK corporate tax regime is fit for purpose over the longer term and to draw up proposals for how it might be adapted to ensure the continued competitiveness of UK-based companies. It aims to report early next year.

I am not associated with the taskforce but I believe that its establishment is timely. The world economy is clearly becoming increasingly international. Economic liberalisation, boosted by new technologies, is creating more integrated markets and increasing competition on a global scale. That is all common knowledge. What is less well recognised is that, as a result, the challenges facing business are changing and becoming far more complex. Companies have wider choices to make about where they invest their capital, site their operations and, indeed, domicile their tax affairs. Business taxation has become a strategic issue for company boards in a way that it would not have been 20 years ago. This is not just a phenomenon affecting UK companies—you can see it almost anywhere you care to look. But against that backdrop, rightly or wrongly, over the past few years the UK corporate taxation system is perceived to have become more complicated, hostile, unpredictable and burdensome, leading many companies to believe that they are now operating at a competitive disadvantage, and an increasing number to consider relocating to places with more friendly tax regimes. Incidentally, this perception of the UK regime is not restricted to companies located here but is shared by firms in neighbouring countries.

This is not just a problem for UK business. For government, too, problems will increasingly arise from the reduced ability to predict and collect a stable revenue stream and from increased administrative costs. There is more to this than just sabre-rattling. The forces of globalisation and market integration which I mentioned earlier are seismic changes that will sooner or later require a radical response on the business taxation front. Yet the overwhelming sense I have of the business tax reform package in the 2007 reform Bill is that it is incremental, not radical. The right buttons are pressed and all the right words are used—consultation, simplification, reduction of administrative costs, international competitiveness, encouragement of investment and innovation and so on—but the scale of the ambition of the package simply does not match its context. This is fine-tuning of an old model, not reform to match the needs of a new world.

I would be the first to recognise that radical reform is much easier said than done, and this is not just the fault of the Treasury and HMRC—business can be to blame as well. Take the key issue of simplification, upon which certainty, reduction in administrative costs and so on depend. It is very easy for business to plead for greater simplification, but ask business precisely what simplification it would like and that can be a different matter.

Let us take an example centred on what is now Liberal Democrat policy. A substantial contribution to simplification could be made by abolishing capital allowances altogether, not just industrial and agricultural buildings allowances. Businesses could then be taxed according to their financial accounts; there would be no requirement for separate computing systems for taxation purposes; there would be no problems in interpretation; administrative costs would tumble, and so forth. But the traditional business response to such a policy would tend to be negative, for two overt reasons. First, business believes that the total tax take would be greater if capital allowances were withdrawn. Secondly, simplification almost invariably results in winners and losers. The winners silently pocket the gains while the losers kick up an unwelcome fuss. Of course, neither reason is fundamentally compelling. Hold the tax-take constant and any disbenefits to business from dismantling the capital allowance regime could be recovered through, for example, a reduction in the headline corporation tax. Shocks to companies from the withdrawal of specific allowances could be mitigated by phasing out the changes over time.

There is, I suspect, a third and unspoken reason why both government and business appear reluctant to take a truly radical approach to simplification; that is, that the practitioners—whether company finance directors, tax consultants or civil servants in the Treasury or HMRC—all share an interest in complexity. The mastery of complexity lies at the heart of their mystique, expertise, value and, ultimately, livelihood.

Those forces of reaction are quite understandable but they need to be countered if we are not to end up with too little, too late. A shift in culture is required to wean the practitioners away from their great game of the past and to take a fresh look at the future. If the spirit behind HMRC’s enthusiastic pursuit of the Varney review recommendations could be extended to HM Treasury, I am encouraged to believe that the Government might just be up for it, just as I am encouraged to believe that, with the launch of the CBI’s tax taskforce, we can look forward to some fresh thinking that is aimed at promoting the UK’s international competitiveness in everyone’s interest. I hope that it is not too much to expect that the approach to business taxation in the 2008 Finance Bill can be shifted up a gear or two, from the predictably incremental to the refreshingly radical.

My Lords, I add my congratulations to the chairman of our sub-committee, the noble Lord, Lord Wakeham, who again has done an admirable job in chairing our committee and preparing our report. I have nothing to add to all that he said today; I am happy to leave that to him.

I want to say a word about simplification, about which the noble Lords, Lord Wakeham and Lord Vallance, spoke. The noble Lord, Lord Vallance, made the very strange point that it is Lib Dem policy to simplify taxation by abolishing capital allowances altogether. I am bound to say that depreciation is a genuine business expense; it is not exceptional. All companies have depreciation if they have any plant whatever. I thought that we were trying to encourage companies to invest in more new plant.

My Lords, to clarify my point for the noble Lord, Lord Barnett, I said that taxation could be on financial accounts, which would include depreciation as an expense.

My Lords, I shall think about that again later.

We said in the committee—I agreed with it, as I eventually went along with everything that the committee agreed on—that it “should be” possible to simplify the tax system. I agree that it should be possible but I am somewhat pessimistic that any Government ever will provide a simple tax system, for a variety of reasons, as we well know. For example, we have referred to the question of capital allowances; the Government have made changes which they and I hope will help, but I am a bit doubtful. Equally, there are all kinds of other allowances that could be abolished, increased, reduced or whatever. They include, for example, allowances for families with children, allowances for being married we are to get a new variable allowance for marriage, I gather, if ever the noble Lord, Lord Forsyth of Drumlean, runs the Treasury—no, he is shaking his head; I am glad to see that. We will also have lower rates, higher rates, we will encourage savings, we want to help pensioners, we want to help investment, we want fairness and we want to punish with so-called green taxes; all those things, I am afraid, will ensure that we never really get a simplified tax system. I see that our chairman, the noble Lord, Lord Wakeham, is, quite rightly, smiling; frankly, it would be almost impossible, as any of us who have been there know, to get a truly simple tax system to help, encourage or punish everyone.

I want to say a few words about the Finance Bill and the current headlines about billionaires paying less tax. I hasten to add that I am not a billionaire, so I have no interest to declare in that sense. I have spent most of my life as an accountant and in my personal affairs I have, perfectly legitimately, tried to pay less tax. I am not surprised that billionaires and their advisers have been successful in avoiding tax.

I refer again to private equity firms. One of the few journalists whom I admire in this area is Anatole Kaletsky, who is usually very sensible and very reliable, and, invariably, I agree with him. On tax and private equity he said that,

“on closer inspection, … criticisms of private equity companies as taxpayers applied to all private companies”.

I declare an interest, not in a private equity firm, but as a chairman and a major investor in a small AIM-listed company. If I ever sold the shares I would pay a very low level of capital gains tax—10 per cent. If I keep the shares and pass on to a better world, no one will pay any inheritance tax.

My noble friend Lord Davies said that he wants to see people invest in companies for the right reasons. The Government have rightly encouraged people to invest in AIM-listed companies for the reasons that I have indicated: one pays substantially less tax. I hope I am not encouraging the Government to change that situation, at least not for a while, because it is doing a lot of good. Small AIM-listed companies, in the main, do a great job investing in new plant and in new companies—mine is a recycling company—and that is very sensible. I admire them for doing so. I am sure that the noble Lord, Lord Jones of Birmingham, whom I am delighted to welcome to the Front Bench, will agree with me. He is nodding in agreement, so I hope the Government, of which he is an important part, will nod with him.

However, something can be done in the area of non-domiciled rules. I was interested to read something that the new Financial Secretary said on that subject at Question Time last Thursday in the other place. She said:

“Resident non-domiciled people remain a relatively small group who are liable to pay UK tax on their earnings”.—[Official Report, Commons, 12/7/07; col. 1605.]

They paid some £3 billion, but she did not say over how long a period. I am astonished that they paid £3 billion; one wonders how much they are not paying. I am concerned about the definition of “non-domiciled”.

We were also told by the Financial Secretary that the Government are mindful that any change to the current system would need to balance carefully the principle of ensuring fairness. She said that domicile rules are subject to an ongoing review. That started in 2002 so the ongoing review has lasted five years to date. I hope that my noble friend, or someone, will be able to tell me today, or in writing, what “ongoing” means. I am looking for a review on another matter, to which I shall briefly refer. I know “non-domiciled for tax purposes” is a complex area, but perhaps the Minister can give me a definition of the term and say why it has taken five years for an ongoing review to do nothing about it.

I will leave that to one side, but another aspect of Finance Bills and criticism is the tax credits system. I shall leave the unfair criticism of it to the noble Baroness, Lady Noakes, who I am sure will help the Government with some constructive criticism of the errors in the tax credits system. However, most of them are errors, not fraud. I note that this happens because the system works over 12 months. We all know that when people’s income changes during the course of a 12-month period, they do not always automatically notify the Revenue, sometimes for perfectly reasonable reasons. That inevitably means that there are many errors in the tax credits system.

For my part, I am happy to see the figures that the Government have announced for the amount of help being provided for poorer families by tax credits. I welcome that. I do not know whether the Government saw some words by Sam Brittan in the Financial Times about the US tax credit system. Both he and somebody who wrote in about it recently have indicated that they think that there are better ways. This is from somebody whom one normally regards with some respect, Rupert Darwall from the Centre for Policy Studies. He said:

“The incentives in America’s earned income tax credit are superior in every respect and show the way tax credits in Britain should go”.

Can my noble friend say whether the Government have looked at the American tax credits system to see whether it is indeed better and can offer us any hope of a better solution? My own view is that a committee like the House of Lords sub-committee would be a better committee to look at tax credits and many other parts of the tax system. Any of us who have been in the other place know that Oppositions pick the sexy bits of a Finance Bill and the rest through virtually goes on the nod. It happened to me when I was in opposition and to noble Lords opposite when they were in opposition. I well recall the first time, in 1975—a few years ago—when the noble Baroness, Lady Thatcher, was leading the Opposition. Again, they picked out tiny bits and the rest went through on the nod.

We in this House can do a much better job than the other place. I hope that this Chancellor will recognise that and agree and support our sub-committee in doing much more work to help him, the Treasury and the Revenue to provide a better system than we have now. We can do it, so I hope that we will get that kind of encouragement.

On the economy, the new Chancellor had a good economic inheritance. Again, I can rely on the noble Baroness, Lady Noakes, to tell us what a terrible 10 years we have gone through—the points of my noble friend Lord Davies were nonsense, of course: the economy was terrible for the past 10 years. But I leave that to one side. The new Chancellor has little room for manoeuvre. The Comprehensive Spending Review was virtually settled before he even took office. The possible taxation reductions in variable tax systems are difficult to achieve. The Liberal Democrats’ proposed 4p off the rate of income tax would perhaps simplify the tax system, although maybe my noble friend Lord Davies can tell us how on earth the green tax payers are going to pay the balance.

One or two changes could help. The Barnett formula could be changed, which would save quite a bit of money. My right honourable friend the new Chancellor is Scottish, so I know that he reads the Scottish papers. Tam Dalyell sends me them all, so I know that the formula is there almost every day. All I am asking for is a review, which would show that there is a case for substantial savings.

There is also the problem of borrowing. In my view—and I speak as a Mancunian—the Government were not wrong to think again about a super-casino for Manchester, but if that area is to be helped without a super-casino, it will need a lot more investment in housing in the kind of area we know. So where is that money going to come from?

The other point I wish to make to my noble friend is that he should ask the Chancellor to tell the Monetary Policy Committee of the Bank of England that its remit is not just inflation but is, in the famous three words, “subject to that” to look at the Government’s economic policy. I am assured by a former member of the MPC that it never looks at that. I ask the Chancellor to emphasise that it should look at it. In the past 10 years, the Bank of England has only once had to report inflation going over the 1 per cent margin, and that was no disaster. I hope the new Chancellor will look at that and also at the borrowing figure of 40 per cent of GDP. The trouble with that rule is that investment in current expenditure is sometimes better than investment in capital expenditure: better in the long term and better value for money. The rule needs to be rather more flexible than it is at the moment, and I hope he will consider that.

I look forward with great interest to hearing my noble friend’s answers to my specific questions because I know how knowledgeable he is on these matters, but if he does not have the details here and now, I am happy for him to write to me.

My Lords, it is like Gilbert and Sullivan when the Minister introduces a debate on the Finance Bill, which runs to 309 pages, by saying that it is a simplification of the tax system. Included in those 309 pages is Schedule 26, on “Meaning of ‘recognised stock exchange’”. I have do not have a clue what it means, but the noble Lord, Lord Barnett, will. On my reading of that section of the Bill, it appears to give HM Revenue and Customs the power to decide what is a recognised stock exchange, so the bad news for the noble Lord is that his AIM shares may very well no longer qualify under the powers contained in the Bill. He was clearly not aware of that; I became aware of it only because I happened to be looking at the index when he made the point about recognised stock exchanges.

The idea that the former Chancellor, now the Prime Minister, is some kind of high priest of simplification is a joke beyond measure. This Prime Minister, as Chancellor, doubled the size of the tax code, added hugely to the complexity of the tax system and, as the noble Lord, Lord Vallance, indicated, has taken us from having a comparative tax advantage into lagging behind our competitors, who learnt the lessons that Britain taught the rest of the world under the leadership of the noble Baroness, Lady Thatcher, and Sir John Major. At one time, we were well ahead of other countries in Europe and the OECD, but as they have cut their rates of tax and simplified their systems, they have made their economies more competitive than ours, as my noble friend Lord Wakeham stated in the introduction to his committee’s excellent report.

I am a bit disappointed that this debate is not better attended and that there are not more contributions to it, because the work done by my noble friend Lord Wakeham and his colleagues is of fundamental importance. Parliament is about voting means of supply. As the noble Lord, Lord Barnett, said, the involvement of Parliament in the control of those means of supply becomes less and less. I think it was the chairman of the Chartered Institute of Taxation, John Whiting, who worked out that every line of the average Finance Bill is considered for 10 seconds, taking into account moving, consideration, debate and voting, and, as the noble Lord indicated, what tends to happen in the other place is that focus is put on the politically contentious issues of the day, rather than the detail, which is not considered. As my noble friend Lord Wakeham pointed out, and as we saw, for example, on inheritance tax and the changes in the treatment of trusts, all kinds of avoidable difficulties are not avoided because there is no time for consultation or proper scrutiny.

I do not share the pessimism of the noble Lord, Lord Barnett, about the ability to remove complexity and bring simplicity to the tax system. I do not understand why it should be that, because he owns shares in an AIM-listed company, he is able to pass them on free of inheritance tax, whereas if he owned shares listed on the London Stock Exchange, that would not apply. It is deeply unfair because poorer people who do not have savings or shares, whose only asset is their home, have to pay inheritance tax at 40 per cent. That introduces complexity into the system because different classes of assets are or are not subject to capital gains depending on whether they are traded on a certain exchange, and if an AIM company changes to being quoted on the main exchange, there has to be a valuation, so there is further complexity in the system.

The answer to this is not to invent more rules but to deal with the fundamental problem, which is the burden of tax. The system has become increasingly complex because the previous Chancellor tried—and no doubt his successor will do so—to find ways of taking more in tax; clever accountants tried to find better ways of getting around that; and the Chancellor responded by bringing in more measures to deal with the loopholes created by the complexities that he introduced. And so we go on in a continuous cycle.

As the Economic Affairs Committee pointed out in its excellent report, this Finance Bill set out with a brief to improve competitiveness and to simplify. The proposal to reduce corporation tax by 2 per cent is welcome but, as has already been pointed out, the problem is that one man’s simplification is another man’s loss of privilege. Let us accept that there is no politically possible way to simplify the tax system on a revenue-neutral basis. If you are going to simplify the tax system, you need to reduce the overall burden so that you can compensate the losers and bring in a more effective system as a result.

Why do we have a Finance Bill every year? It is because Parliament is required to renew income tax on an annual basis. In the spirit of co-operation that was evidenced a few moments ago by someone on the government Benches who looked like a former leader of the CBI, in which apparently we all now believe the same things, I offer the new Chancellor of the Exchequer this idea: that we get rid of the notion that income tax has to be renewed annually. We would not then need an annual Finance Bill and the Finance Minister would not be tempted to tinker with the tax system every year. That might help to bring about a degree of stability. When the Prime Minister was Chancellor, the Finance Bill proved a tinkerer’s charter. He messed about with every aspect of our taxation system.

The noble Lord, Lord Barnett, mentioned the current row about private equity. It is a scandal that people who are paid the minimum wage and move from part-time to full-time work now pay an effective marginal rate of tax of 90 per cent, and 95 per cent if they are married. Someone who has perhaps made £100 million by buying a company one year and selling it two years later will pay an effective marginal rate of 10 per cent. That is a scandal; it is indefensible. How can you defend a tax system like that? Who is the author of this change? It is the former Chancellor of the Exchequer, now the Prime Minister, who introduced the 10 per cent taper relief on capital gains. He introduced the tax credit system which has created the effective high marginal rates of tax. These two initiatives undertaken by the Prime Minister have created this anomaly.

How much more sensible it would be to have a capital tax system, perhaps a short-term capital gains tax that tapered to zero, that applied to all capital gains; that does not distinguish between AIM shares, shares held by private equity companies, venture capital trusts or anything else on which anyone who makes a capital gain gets taxed. That kind of simplification would not only make it easier for people to understand our tax system but it would also remove the anomalies and unfairness which are created.

I have been critical of the noble Lord, Lord Barnett. I am a great admirer of his. Many people in Scotland would like to raise a statue to him in honour of the Barnett formula. He is a typically modest politician, and the only one I know who spends his life trying to get abolished something that was named after him. He shows clarity of thought. His comments on non-domiciled taxpayers are an example of anomalies in the system which creates complexity. I ask noble Lords, how can it be right that a young couple buying their first home in London, or in any other part of the country, have to pay stamp duty at 1 per cent while someone living in London as a non-domiciled taxpayer can buy a house for £20 million and pay no stamp duty at all? What kind of nonsense is that? Again, the Government have said that they will review the system for non-domiciled taxpayers, but nothing has happened to bring about equity in the tax system. There is too much tax law and too little scrutiny.

The work done by the Select Committee on Economic Affairs is excellent, but why can we not build on it? As the noble Lord, Lord Barnett, said, there is expertise here. I think that he did himself a great disservice. I was not in Parliament until 1983, but I have heard the tales that the Finance Committee used to sit until four o’clock in the morning with people of real substance arguing points of detail with knowledge and authority. That no longer takes place in the other place, much to the relief, no doubt, of the Members of Parliament. Perhaps there is a case for building on the excellent work done by the Economic Affairs Committee and creating a Joint Committee to look at Finance Bills.

I return to my idea of getting rid of the annual need to renew income tax. If that were done, a timetable requiring that means of supply be concluded by the summer after the Budget would disappear. We could have a more leisurely pace for considering tax matters. Indeed, you could have a rule that the Chancellor was required to publish in the Pre-Budget Report in November. He would be required to pre-announce before the Budget any major tax changes in law, so that there could be proper consultation, unless of course there were revenue implications or a matter of particular urgency. A Joint Committee could take evidence and build on the kind of good work which has been done by the Economic Affairs Committee operating in a compressed timetable.

I offer that idea to the Prime Minister because there is something very odd about a former Chancellor who on becoming Prime Minister immediately says, “I believe in more open, accountable, consultative government. Therefore, I am going to pre-announce the Queen’s Speech so that people can think about it”. Why did he not do that for the Finance Bill when he was Chancellor? If that treatment is good enough for the rest of the legislative programme now that he is Prime Minister, why is it not good enough for the Finance Bill? I know the answer. It is that it takes power away from the Treasury. It prevents the Treasury springing daft ideas on us, which we would have to spend time unscrambling in subsequent Bills. But it is an idea that would go a long way towards meeting the Government’s declared objective of having a fairer and simpler tax system.

I have spoken for longer than I expected. I make one other suggestion to the Government. We get Bills with vast numbers of clauses written in incomprehensible language referring to previous Bills, written in equally incomprehensible language. Would it not be possible to have an economic impact assessment of a new proposal? The Government declare that their proposals will improve competitiveness without a shred of work being done to show that that is the case, and without any attempt to give an indication of the cost and impact that it will have on business as a whole.

The noble Lord, Lord Vallance, rightly pointed to the importance of economic competitiveness and what had happened to our ability to attract companies from elsewhere. I never thought I would say it, but Ireland has become a beacon of what is achievable in increasing revenues, cutting taxes and simplifying the tax system. We can have fairer, flatter, simpler, lower taxes, prosperity and growth at the same time. That is the challenge. It is a challenge on which this Government have failed, and which I hope the next Government under David Cameron’s leadership will take up with gusto.

My Lords, I do not agree with many issues raised by the noble Lord, but he was right to say that the House of Commons spend their time on the Finance Bill dealing mainly with political issues. We have a much wider arrangement in this House so we can look at the whole matter of economic affairs and Finance Bill problems to a much wider degree.

I thank the noble Lord, Lord Wakeham, for chairing the Select Committee so very well. He produced a great deal of agreement throughout our debates.

The House of Lords very effectively scrutinises the Finance Bill. We look at the whole range of financial measures and the ones that are introduced. The membership of the committee is extremely good and includes a couple of former Chancellors of the Exchequer, a number of former Ministers and an ex-governor of the Bank of England. So we look at the Bill with a great deal of financial background, rather different from that which operates in the House of Commons.

In the past 10 years we have seen unrivalled growth. Nobody ever expected that growth to continue for so long and now nobody even questions that it will continue. That is one of the great achievements of this Government.

My noble friend Lord Barnett said that the move to simplification would be limited. I agree with him that we cannot produce the provisions in just a few pages; it always has to have the complications of legislation, but we should agree to move in that direction. He also mentioned scrutiny of the Finance Bill. The House of Lords scrutinises the Finance Bill more effectively than does the House of Commons. We have bipartisanship in a number of areas, which obviously is of great value in examining these matters.

First, I refer to the simplification issues. We have made many changes to create fairness and a greater degree of compliance. The problem is that these changes can lead to complications. As soon as you try to have simplification and to consider fairness you find that they are frequently opposite. The better balance has to be found, which is also very difficult.

I refer to the evidence given in answer to question 42 by Mr McCafferty, an economist at the Institute of Directors. He said:

“It is clear that the abolition of the agricultural buildings allowance and the industrial buildings allowance does offer some element of greater simplicity but in terms of the other allowance changes, the changes to plant and machinery, the simple change to the relative calculations rather than simplifying the nature of the allowances and introducing a new category, that of plant integral to a building, if anything they add a further modest complication or complexity to the system”.

That is undoubtedly true and is one problem. In our report we mention that at paragraph 21, where we state that it is understood that the present tax system is highly complex and that simplicity is essential if the United Kingdom is to be made more attractive to international businesses that can move in our direction. In paragraph 22, we state:

“We recommend that a more determined and consistent attempt at simplification be made. What we see in this Finance Bill is a very modest step and more could be done. This will necessarily take more than one year and will require a combination of administrative and legislative measures. There clearly may be a tension here with the desire for fairness: it will also be necessary not to open up scope for avoidance. But it should be possible to find a balance here if the work is well researched and subject to wide consultation”.

I agree entirely with that. We had a long discussion on those matters and came to general agreement on that.

I turn to mandatory online filing, which is the main thing that I want to deal with. I understand why there is a recommendation for online filing. Obviously, if all taxpayers had the ability to undertake online filing, compulsion would be acceptable. The problem is that, despite the efforts made by Her Majesty's Revenue and Customs, insufficient understanding has been given to the problems of those who are unable to meet the requirements. We refer to that in paragraph 265, where we state:

“The witnesses were unhappy however at any suggestion that electronic filing be made compulsory. They thought that there would be some people who would remain IT illiterate or who for whatever reason would be unable to use the service and there would be costs involved. They were also concerned at the possibility of systems breaking down, of which there was some experience”.

We must understand that some of people in this country are not as IT-literate as many of us. We go back to our rooms, switch on our computers and do all sorts of things, but many people cannot do that. To make it essential that they do that will lead to problems. As one witness said at paragraph 266,

“We are right behind the drive but it has to be business led. It … makes life easier for businesses and taxpayers and it reduces costs. But I do not think we are in that position at the moment ... We are a long way from having robust, reliable electronic systems … I am afraid we disagree. What we should be concentrating on is getting these systems right and then the natural move for businesses and taxpayers will be to use them. You may then have 90% and you will have to decide what to do with the ten per cent but we are not at that position at the moment”.

Theresa Middleton of HMRC said:

“we believe [compulsion] is essential to maximise the benefits for business”.

The problem is the timing. At present, there is a number of not very computer-literate people engaged in businesses. She believes that some employers should not be required to file on-line until 2010.

In answer to question 342, Mr Hartnett said:

“We are actually looking at what other countries are doing in relation to contingency. Generally the answer is to provide more time. The USA have just had to do it, but also a number of countries—and we will be part of this route as well—are looking at how we can build much more resilience into our systems than perhaps we have had in the past. There is a great pooling of work going on in the tax community around the world”.

Our report states:

“We remain concerned that the implications of making online filing mandatory for Corporation Tax and Value Added Tax have not been fully thought through. We understand why HMRC has taken the line which it has and certainly it has taken many steps to encourage on-line filing: it should continue to do so by every means. But the range of issues raised by our private sector witnesses need further consideration. There should be further concentration on ensuring the robustness and reliability of the systems and on making the change more attractive for those who are IT illiterate. We do not think that the efficiency savings to HMRC justify compulsion ... we recommend that the present proposals for requiring online filing by smaller businesses be dropped: better marketing by HMRC of the benefits of e-filing would be a better approach. There may come a time when e-filing could be made compulsory, but we think it premature at present,”.

We all know a number of people in that position who are just not able to do that kind of thing. To make it compulsory is likely to lead to some serious problems.

My Lords, once again it is time to examine the Finance Bill. We are also grateful for the report produced by my noble friend Lord Wakeham. As usual, his committee has produced a thorough and professional document, to which I shall return shortly.

First, I want to make some comments about the economic background to the Budget. Then I want to look at the area of simplifying tax. Then I shall look at the Budget in a bit more detail. Finally, I will look at some other areas of my noble friend Lord Wakeham’s report.

First, I shall look at the economic background to the Budget. The Minister is right to emphasise the record of economic growth and the noble Lords, Lord Barnett and Lord Sheldon, the inflation record so far—although there might be a case for being more cautious now. The Chancellor claimed that,

“our fiscal discipline is the foundation of the strength of Britain's finances”.

If the story were that simple, he would have had the cash to cut taxes uniformly, rather than reducing the burden on some taxpayers while raising it for others. Nor would he be planning a squeeze on taxation and public expenditure over the next three years that will raise the tax burden to levels last seen at the start of the 1980s.

Let us look back at the Chancellor's record on public finances since Labour first came to power. Between 1997 and 2001, the public finances improved sharply as the result of extremely tight controls on public expenditure and unexpectedly rapid growth in tax revenues. Then the Chancellor started spending and a black hole of lost revenues emerged. The Treasury's forecasts moved from persistently pessimistic to overly optimistic. The cyclically adjusted current budget surplus fell into deficit and, at its worst, was 1.5 per cent of GDP in 2004-05. The Chancellor has been clawing back that deficit ever since, first with upfront and stealthy tax increases raising tax rates and revenues as a share of GDP, then by planning much tighter public spending control in the years ahead.

Every year since 2001—for seven Budgets in a row—the Treasury public sector net borrowing forecasts have been too optimistic. Analysis of the Budget figures shows a current budget deficit that is £3 billion higher than the Chancellor's December forecast in 2007-08 and £1 billion worse in every subsequent year.

The problems have come from forecasting taxes and public expenditure. Tax revenue predictions have again been too optimistic and the Treasury has had difficulty in living within its current generous spending totals. Compared with last year’s Budget, tax revenues are now projected to be £2.1 billion lower in 2007-08. Corporate tax revenue is the villain of the piece, with North Sea oil revenue falling far short of expectation. The Chancellor blamed a lower oil price, lower production, higher investment and a stronger pound for reducing sterling profits in the North Sea. I would argue that the tax increases in 2002 and 2005 have been a big hindrance. In addition, the Chancellor has extraordinarily excluded oil companies from the corporation tax cut, which I shall come to later. Can the Minister say why they have been excluded?

On public expenditure, the Treasury was also unable to keep within spending plans for day-to-day bills, overshooting by £1 billion this year and £2 billion subsequently. “So what”, you might say. Persistent forecasting errors delay the point at which the Government can stop squeezing the public with a higher tax burden and slower spending growth.

I turn to my noble friend Lord Wakeham’s report. One of the three key topics covered by the report is the simplification of business tax. I agree with my noble friend’s conclusion that more needs to be done in this area, and would extend that observation to personal tax. As the noble Lord, Lord Forsyth, said, since 1997 Tolley’s Tax Guide, which is usually referred to as the accountant’s bible, has doubled in length to 9,841 pages. Prior to the 2006 Budget, a Pricewaterhouse and World Bank survey stated that the length of our tax code was second only to India: 8,300 pages of primary legislation compared with India’s 9,000 pages. The 2006 and 2007 Bills have probably made the UK’s tax code of primary legislation the longest in the world.

According to the Financial Times of 22 March, in private briefings to a financially aware audience after the Budget, the Chancellor made a virtue of his reforming Budget. He claimed that it would secure his legacy as a tax simplifier, trumping even that of the noble Lord, Lord Lawson, between 1983 and 1989. But is this portrait of Mr Brown as a tax simplifier convincing? Did he not introduce many of the measures abolished yesterday? And will the personal and corporate tax system really be less complicated in future than it was, say, a decade ago? The Institute of Chartered Accountants described the Budget as,

“a piecemeal budget which tinkers with the system rather than starting the comprehensive reform which is so overdue”.

While the Chancellor’s proposals reduce the number of tax and national insurance rates from five to three by April 2009, the story does not end there because many people will have to claim tax credits if they are to be winners from the personal tax changes. If tax credits are included, there are still myriad rates of tax. According to the Financial Times of 22 March, a lone parent with two children faces a 70 per cent tax rate until earning more than £25,000 a year. It states that more than 1.7 million people face these extremely high marginal tax rates, as my noble friend Lord Forsyth said, and have to deal with a tax system so complicated that a Revenue and Customs official admitted just before the Budget that she did not expect ordinary people to understand their tax credit awards. Since the personal tax reforms include another expansion of tax credits, the Financial Times believes that,

“it would take a bold chancellor to describe them as simpler than the current system”.

Turning to the detail of the Finance Bill itself, as usual, I will give praise where it is due. I can applaud increased investment in science and technology innovation with support for research and development in the area of fuel efficiency. I can also respect some of the raft of environmental proposals, such as grants for home insulation and heating for pensioners. I can also applaud reduced VAT on energy efficiency in the home. In the area of savings, it is good that there has been an increase, albeit small, in the overall ISA limit from £7,000 to £7,200. On the Chancellor’s tax measures overall, however, they can be summed up in one sentence: what the Chancellor gave on the one hand, he took away with the other. For example, with regard to personal tax, the 2p cut in income tax was funded by the abolition of the lower 10p rate and an increase in the upper limit on national insurance contributions, moves which mean that few people will pay less tax and lower income households with no children will be worse off. It was curious though, that the Chancellor chose not to abolish the 10p band on certain interest income, prompting Mike Brewer of the Institute for Fiscal Studies to say that,

“if the budget was genuinely about simplification the chancellor would have gone the extra step and abolished this anomaly”.

Likewise, on the corporation-tax front, the 2p cut will be funded by the clawback from raising the small business corporation tax rate and the overhaul of capital reliefs. Essentially, that means that while long-life assets are written off quicker, the vast majority of assets now take a further two years before 90 per cent of their value is written off. Many commentators were unhappy with the sudden scrapping of industrial building allowances and agricultural building allowances—which amounted in effect to retrospective taxation. In my view it would have been fairer if allowances for existing buildings had been kept. Also, the Chancellor is poised to recoup nearly £1 billion a year by clamping down on corporation tax relief for empty industrial buildings.

Smaller and medium-sized companies were particularly badly hit by the Budget. They will see their tax rate rise by 1 per cent per annum to 22 per cent by 2009. While the Chancellor has put in place a 100 per cent investment allowance for the first £50,000 of capital spending, details of which were not in the Finance Bill, this will not help service companies. Smaller companies are now paying more tax than in 1997, according to Roy Maugham, a tax practitioner at the accountancy firm UHY Hacker Young. Does the Minister think that that sends the wrong signal if the Chancellor is trying to create an entrepreneurial environment?

Another area that I wish to focus on, which may appear rather technical but I think goes clearly against the former Chancellor’s expressed wish for simplicity in taxation, is the so-called targeted anti-avoidance rule—TAAR—for capital losses. I am indebted to Simon Mabey, tax partner at Smith and Williamson, for alerting me to this. I am referring to the general CGT anti-avoidance rule in Clause 27 of the current Finance Bill. HMRC has issued guidance to the clause in a separate document completely outside the Bill. The Chartered Institute of Taxation, in its submission of 1 June, makes the following statement:

“The proposed guidance is likely to be ineffective as we believe it is (improperly) attempting to concede by concession relief from losses which Clause 27 has granted”.

So we have the curious situation where, as Mr Mabey believes, HMRC is taxing by legislation and un-taxing by guidance.

Taxpayers should also worry about the Wilkinson judgment which said inter alia:

“HMRC’s powers ... could not be construed so widely to enable the commissioners to concede, by extra statutory concession, an allowance which parliament could have granted but had not granted”.

In another place, Mr Ed Balls defended the Government’s approach, saying that experience with the company TAAR had been good and he could not understand why the Chartered Institute of Taxation and the Institute of Chartered Accountants were concerned about Clause 27. That missed the point that companies are rather different from individuals and do not have spouses or trusts. The Chartered Institute of Taxation is considering judicial review of the guidance rules, and I would be grateful for the Minister’s up-to-date view on this area.

The report of my noble friend Lord Wakeham and his committee’s views on managed service companies are full of good sense. The verdict in paragraph 305 is clear that,

“the Government should review the taxation of employees and small businesses operating in various forms with a view to making structural changes to reduce the differences in outcome in terms of tax and NICs payable”.

The third topic covered by the report was the Finance Bill and the review of powers, deterrents and safeguards. I particularly support the sentiments of paragraph 320, which says:

“We see it as particularly important that where serious matters such as powers and penalties are under consideration, as much as possible is written into primary legislation”.

This re-echoes my concern, which I have already stated, about Clause 27. I also like the idea expressed in paragraph 327 that serious consideration should be given to setting out the way these powers have been exercised in the previous year and how the assurances that have been given at the present time are being adhered to.

The report’s section on online filing and electronic payment recommends in paragraph 336 that present proposals for requiring online filing by smaller businesses should be dropped because it is premature. I agree. However, I am surprised that the report makes no mention of the accelerated date of 31 October for income tax self-assessment returns from the tax year 2007-08 onwards that are filed manually. Will the Minister say why this date has been brought forward from 31 January, as it may well make it difficult for some taxpayers to provide the information in time?

In summary, the Budget fails to simplify the tax system—a simplification that is desperately required. I like my noble friend Lord Forsyth’s idea of an economic impact assessment on any future tax changes.

My Lords, like other noble Lords, I begin by congratulating the noble Lord, Lord Wakeham, and his colleagues on producing such a thorough and sensible report in such a very tight timetable. I join the noble Lord, Lord Barnett, in expressing the hope that this Chancellor will see this committee as having a major and positive part to play in developing public policy on taxation, unlike the current Prime Minister, who saw it in some way as a threat to the constitutional settlement that has been in place for about 100 years.

I agree with the noble Lord, Lord Forsyth, that Parliament could do more to improve the way in which taxation is considered. I think that our colleagues in another place would find revolutionary his proposal for a Joint Committee of both Houses on taxation. Much as I am in favour of radical and revolutionary change in some things, I simply do not believe that that is within the bounds of possibility, although perhaps we could consider it in a review on the powers and operating structures of your Lordships’ House. However, I am not overly optimistic. We on these Benches have for a long time been in favour of a slightly different way of getting around this, although it may be no more realistic—a tax administration Act that would deal not with tax rates but with all tax administration issues. Such an Act could logically be subject to scrutiny in both places. We have advocated it for a long time, but I fear that we have made no more progress than the noble Lord, Lord Forsyth, in advocating a Joint Committee. We all agree, however, that the current scrutiny of tax legislation is inadequate, not least given its length and complexity. Although I congratulated the sub-committee—I have served on it and know how hard it works—I fear that it does not have the impact that its work really justifies.

The part of the sub-committee report that has taken the most time to debate this evening and that is arguably the most important relates to tax simplification, particularly for businesses. I agree with the noble Lord, Lord Forsyth, that the noble Lord, Lord Barnett, was too pessimistic when he suggested that nothing can be done to simplify tax. The choice is not between the tax system that we have today and a simple tax system, which probably is a chimera, but between the tax system that we have today and a simpler tax system, which is possible. Incidentally, a simpler system is possible without being as generous as the noble Lord, Lord Forsyth, suggested when he said that the system can be simplified only within the context of reducing the overall tax burden. I do not see why one cannot have a simplification in which there are losers as well as winners, as we have seen with this Budget.

I float two suggestions this evening. The first, made by my noble friend Lord Vallance, would be to abolish capital allowances and to replace them using tax-deductible depreciation as the basis of corporate taxation. That would be a simplification. For all the Government’s trumpeting of their simplification in this Budget in this area, they did not simplify it at all, as the noble Lord, Lord Sheldon, pointed out. In some respects, they have made things more difficult. The second simplification would be the introduction of a general anti-avoidance rule, which we believe would remove a minimum of 500 pages of tax legislation. That would undoubtedly be a simplification. We would need a sensible pre-clearance system, as this simplification would not be straightforward, but if we want to simplify the tax code, that is one way of doing it. It is by no means impossible to do.

As the noble Lord, Lord Northbrook, said, the Budget was a sort of “now you see it, now you don’t” Budget. On the one hand, there were tax cuts such as the cut in the main rate of corporation tax. In the small print, however, the rate for small companies went up and the capital allowance changes meant that more revenue was coming in, so the overall effect was neutral. Equally, the two income tax changes more or less cancelled each other out. The one unambiguously tax-raising measure, which we debated a couple of weeks ago, related to empty property relief. I will not repeat those arguments again, except to say that the way of introducing this so-called rationalisation—a marvellous phrase in the Red Book to describe a major tax increase—and the economic costs that it will incur in areas of low demand and high unemployment mean that its net economic benefits are likely to be modest at best.

Looking forward, reports in the press in recent days have said that the Chancellor is planning to announce the Comprehensive Spending Review and the Pre-Budget Report together. In many ways, this is a sensible approach. In our own lives, we tend to have to worry about expenditure and income together, but will the Minister confirm that this is going to happen this year? If it is, will he also confirm that it will happen on 17 October?

What are the key challenges for the Chancellor? The main challenge for the macro-economy appears to relate to the consequences of higher interest rates and continuing higher inflationary pressures. These challenges are most likely to be seen when those who have incurred high levels of personal debt find that they can no longer cope as interest rates remain high. I fear that we will return to this issue a number of times in the months ahead. The second challenge relates to the public finances and the squeeze on public expenditure, particularly public sector salaries, which has been heralded in recent times. The Chancellor, now the Prime Minister, was planning and continues to plan on the basis of a rise in public sector pay of 1.9 per cent—a real-terms wage cut. The imposition of such a cut makes one wonder whether the Government are signalling that they believe that public sector workers have been paid too much in recent times, or is the real reason that, having increased public expenditure at unprecedented rates in recent years, public sector pay is the easiest element of expenditure to reign in? Either way, it seems to us that a period of rapidly rising public sector pay, followed by one in which there will be real wage cuts for the public sector, is not a wise way to manage employees or the public sector as a whole.

The third challenge is almost new; it is an issue that, until recent months, has not reared its head much. It has to do with fairness and inequality. Today a number of noble Lords have discussed elements of the tax system which are now seen as encouraging inequality. There is evidence that inequality is rising, and stands at its highest level in more than 40 years, according to the report of the Joseph Rowntree Foundation. We know that the bottom 20 per cent of households pay a higher proportion of their income in taxes than the top 20 per cent of households. In this afternoon’s discussion we have heard that inequalities are rising, in part because the super rich are able to pay lower taxes at the margin than those on low incomes.

When we last debated this issue, last week, it was suggested by a number of noble Lords that it did not matter that private equity millionaires paid tax at a lower rate than their cleaners, because in aggregate they paid a lot more. That does not sound fair or acceptable, but for many it is even worse than that. John Moulton, head of Alchemy Partners, recently stated that a large chunk of private equity players pay no tax at all. The debate about the tax treatment of the very wealthy, whether private equity magnates or the growing number of non-doms, is very important not only for tax receipts, but for the kind of society we want to live in. I accept that we should not impose a punitive tax regime that punishes effort and risk-taking, but paying a level of tax that broadly equates with the rest of the population is not an unduly harsh principle to apply to the very rich.

The galling aspect of this is that, in part, at least, the problems we now see with the very rich and their ability to avoid tax, stem from changes that this Chancellor has made to the tax system itself. First, I refer to capital gains tax taper relief, which other noble Lords have discussed. The relief was originally designed to encourage enterprise but at its extreme it now accrues to second-home owners and those sophisticated financiers who are able to roll up interest on debt into capital. It now costs the Exchequer more than £6 billion per annum.

Another issue, which has not really been discussed this afternoon but is an unacceptable anomaly, is the way that inheritance tax is now, for the very rich, in effect, a voluntary tax. However, for the affluent middle classes, it is a tax that bears increasingly heavily. Since 2000, the number of estates charged inheritance tax and valued at more than £2 million has fallen by 8 per cent, which is clearly crazy, given the vast increase in the number of such estates. The number of estates valued at between £300,000 and £500,000 and covered by inheritance tax has increased by 20 per cent.

By transferring ownership of property to an offshore trust or company, the stamp duty bill on high-value property can be reduced from 4 per cent to a mere 0.5 per cent, which equates to £175,000 on a £5 million house. These are changes which have occurred because of changes to the tax system. The good news is that having changed them in one direction, it is equally possible to change them back. I have three or four suggestions for the Chancellor to consider over the summer.

First, he can abolish capital gains tax taper relief altogether. That was the system before it was introduced by this Government; it can revert to the previous system. Secondly, he can make non-doms pay capital gains tax on the property they buy and sell in the UK by simply changing the rules that apply. Thirdly, he can close the loophole that allows individuals, in effect, to move their houses offshore. Fourthly, he could change the inheritance tax rules by extending the seven-year rule on gifts to 15 years, and using the proceeds to lift the threshold towards £500,000. These are simple changes which the Chancellor could make in the next Budget. They would begin to address some of the major issues of fairness and inequality discussed by noble Lords this afternoon.

As ever, this debate has taken place at the end of a Session. When we next debate these issues, it will be unusually close to the beginning of the next Session. We hope that Treasury Ministers have a productive summer, considering the ideas noble Lords have given them this afternoon, but I doubt that they will.

My Lords, I thank the Minister for introducing the Finance Bill and I congratulate my noble friend Lord Wakeham on yet another significant report on the Bill from his economic affairs sub-committee.

At 309 pages, this year’s Finance Bill is long but relatively modest compared with those of recent years. Nevertheless, it helps the UK to retain its title of the longest tax code in the world, having overtaken India a couple of months ago. My noble friend Lord Northbrook referred to this. Our tax code is not only long but it is so complex that the World Bank has said that it now threatens our international competitiveness. The committee chaired by my noble friend Lord Wakeham specifically looked at the extent to which this Finance Bill created any move towards simplification and concluded, rightly, that it did not do so. What little simplification there was in the Bill was outweighed by yet more complexity. I simply do not recognise the Minister’s description in his opening remarks of the Bill as “a simplifying package.”

The Treasury’s usual mantra is that complexity is necessary in order to combat tax avoidance and thereby achieve fairness. The Treasury does not grasp that simplification requires a radically new approach to tax legislation, which does not rely on micromanagement by way of reliefs and allowances, in turn buttressed by reams of anti-avoidance legislation. I share the approach of my noble friend Lord Forsyth to simplification: it can be achieved if there is the will.

The Treasury’s approach to simplification is much the same as its approach to lower rates of tax. I am pleased that my noble friend Lord Forsyth spoke today about the example of Ireland. His tax commission report last year was a valuable analysis of the benefits of both lower rates of tax and simplification. The Treasury really does not believe in either of those things. As has been pointed out, the Budget this year had some lower rates of tax, both corporate and personal, but it was not a Budget that reduced taxes. At best it merely redistributed them, but there were some significant categories of loser. Most of the media spotted that it was, to use the phrase coined by my honourable friend George Osborne, a “tax con budget.”

This Finance Bill is the only opportunity your Lordships’ House has to debate the Budget from which it derives, since we do not customarily ask for the Chancellor’s Budget Statement to be repeated in your Lordships’ House. We may well wish to revisit this in future because it is not satisfactory that your Lordships’ House has no timely opportunity to debate the economic and fiscal judgments in the Budget.

The Budget was the last to be delivered before the Chancellor finally succeeded in his takeover bid for Number 10. It is right that we pause to examine his 10 years of economic stewardship. The noble Lord, Lord Barnett, loves to predict what I am going to say in my speeches; I am not going to disappoint him. But let me disappoint him in another regard: I am not going to talk about either tax credits or the Barnett formula.

The good thing about the Chancellor’s stewardship is that he has continued the period of unbroken growth which we started in 1992. I say to the noble Lord, Lord Sheldon, that it started in 1992 and not in 1997. But the UK’s growth rate is now among the worst in the EU and there are other downsides. In 1997, RPI inflation was 3.1 per cent. This morning’s news had it at 4.4 per cent. Since 1997, the trade deficit in manufactured goods has increased more than eightfold to £59 billion and industrial production has stagnated. In 1997, the savings ratio was around 10 per cent. In the first quarter of this year, it had collapsed to 2.1 per cent. If one strips out the effect of employer pension contributions, the savings ratio is currently negative. In 1997, the Government inherited one of the best occupational pension schemes in the world. It is now one of the worst. That is not my judgment, but that of Mr Frank Field. The ACT raid was a big part of that. Unemployment overall may not be that bad, but the number of young people not in employment, education or training—the so-called NEET—has risen by 27 per cent in 10 years, which is not satisfactory.

The past 10 years have been characterised by a combination of rising taxes and borrowing. Taxes as a percentage of GDP are now at levels not seen since the early 1980s. Borrowing is perilously close to the Chancellor’s 40 per cent rule. We and the British public might not have minded all the extra tax and borrowing if our money had been spent wisely, but public expenditure has been accompanied by no public service reform and no amount of statistical ingenuity can mask the fact that for the past eight years public sector efficiency has been negative.

The Budget also announced corporation tax and income tax changes that will be included in next year’s Finance Bill. The Prime Minister has left his successor in the Treasury with very little room for manoeuvre on the tax front in the next couple of years, a point to which the noble Lord, Lord Barnett, has already referred. In turn, this will no doubt give the new Chancellor a problem on spending when he announces his Comprehensive Spending Review. So I join the noble Lord, Lord Newby, in asking the Minister to confirm that 17 October will be the date for the announcement of the CSR. I also ask the Minister to say whether that CSR statement will be combined with the Pre-Budget Report, as has been suggested in some parts of the media.

The noble Lord, Lord Newby, has already referred to the swingeing increase in business taxes from the removal of empty property relief from business rates, which will cost the business sector another £1 billion or so each year. We have already debated that Bill, which I regret to say recently completed its passage through your Lordships' House without amendment. Like the Finance Bill, it was a money Bill and, hence, unamendable in your Lordships' House. I rather hope that the constitutional settlement referred to by the noble Lord, Lord Newby, will be revised, because this House has a lot to offer on tax legislation, as the committee chaired by my noble friend Lord Wakeham amply demonstrates each year.

The corporation tax changes were presented as largely neutral, but, of course, life is not that simple and there certainly will be winners and losers. This timid reduction in the headline rate to 28 per cent hardly affects our position in the international tax league tables, to which the noble Lord, Lord Vallance, referred. The report from my noble friend Lord Wakeham showed that our tax competitiveness remains a very serious concern. As has been said, small companies are hit even harder with their headline rate rising to 22 per cent. This, too, is presented as revenue neutral due to new investment allowances, but not all small companies will invest enough to trigger the allowances; and who can blame them with interest rates now rising to the highest level for eight years?

I can remember when the previous Paymaster General explicitly encouraged small businesses to incorporate. She actively sold the lower tax regime that applied to small companies. But the past few years have seen a progressive reversal of the advantages because the Government decided that when small businesses took advantage of them, as they were encouraged to do, it amounted to tax avoidance.

The Government have a new seek-and-exterminate weapon in the managed service company provisions in this year’s Finance Bill. We are concerned that the new provisions will affect more companies than might reasonably be targeted and that there will be unintended consequences for the labour market. More importantly, my noble friend Lord Wakeham’s committee has highlighted that this is yet another piecemeal alteration to a system that has structural faults. I hope that the Minister will respond clearly to the recommendation made in the report that the issues of tax between the employed, the self-employed and those operating through a company need an overhaul. In his introductory remarks he referred to the recommendation but did not give a clear, unambiguous response to it.

The Finance Bill includes a significant increase in HMRC’s powers, which we predicted when the Commissioners for Revenue and Customs Bill was debated in your Lordships' House. We completely support HMRC having the necessary powers to combat tax avoidance, but we fear that, armed with its new police-type powers, the culture of HMRC could change towards the vast majority of taxpayers who are compliant.

One of the worst bits of the new powers—using the term “HMRC think”—was modified in the other place, but we remain concerned about how this and the other powers will be used. I join my noble friend Lord Northbrook in supporting the recommendation of my noble friend Lord Wakeham’s committee that public reporting and parliamentary monitoring should focus on the use of these powers.

Clause 98 contains a modest provision aimed at combating missing intra-Community trader fraud. Last year’s Finance Act contained the more substantial reverse-charge provisions, but these were not implemented until last month because we had to wait to get permission from the EU, which resulted in a considerable watering-down of our proposals. Noble Lords might find it extraordinary that we had to go cap in hand to Brussels in order to fight VAT fraudsters. They will doubtless find it even more extraordinary that we have had to concede another £7.2 billion of our rebate in the process. Will the Minister update the House on the net impact on the UK economy of the diminished reverse charge provisions less the cost of the rebate given away? Is there now any net benefit to the United Kingdom?

There is much more in this Bill which is unattractive. There is a continuing attack on private pensions in the provisions on alternatively secured pensions and pension term assurance. The sideways loss relief provisions in Schedule 4 and the capital loss provisions of Clause 26 are so widely drawn that they require heavy intervention by HMRC to make the provisions half-way decent. The so-called environmental provisions are primarily a vehicle for raising taxes via air passenger duty.

The Minister was loyal in his introduction of the Bill, but I do not believe that he can take pride in it. We have no option but to let the Bill pass, but we take no pride in so doing.

My Lords, I am grateful to all noble Lords who have spoken in this debate, particularly the noble Lord, Lord Wakeham, for introducing his important Select Committee report and for highlighting the points that the committee identified.

I emphasise the fact that about 60 per cent of the Budget represents the result of extensive consultation with all those affected, which is why we have, in crucial areas, an element of consensus on the changes. I understand what the noble Baroness, Lady Noakes, and the noble Lord, Lord Newby, have said about the general issues with regard to the Budget and the management of the economy, but they will not be surprised that I disagree with their analysis.

As I said in my opening remarks, when I tried to presage the Government’s response to the important aspects of the report, we take the report very seriously indeed. As the report recognises, the issue of managed service companies is complex, but we are resolved on tackling it and we will engage in further consultation. We need to produce legislation that balances clarity and certainty and is robust against abuse. An important technical area to which we need to address more thought in the light of the report is the growth of these companies and the problem of the issue of taxation with regard to employment, or other returns as far as taxation is concerned. That is the most important aspect of the report and the Government will pay serious attention to it.

I want to reassure the noble Lord, Lord Wakeham, who mentioned online taxation, and my noble friend Lord Sheldon, who devoted the bulk of his speech to the issue. I agree with both of them. Progress in this area is a reflection of the increasing capacity of business to cope with online demands, which will improve relationships between the tax-gathering authorities and business and the taxpayer. My noble friend is right; we must not run before we can walk. We must bear in mind the fact that not everyone is totally familiar with IT capabilities. We could not possibly make it mandatory which compliance could not be met by those who were incapable. We have to approach this with some care, but as my noble friend will recognise, because he played his part in the committee, and as the noble Lord, Lord Wakeham, identified, this is an area where, certainly as far as business is concerned, we are getting an increasingly voluntary approach to online compliance, which we expect to grow. Percentages are increasing right across business. I am not just talking about the big corporations; small businesses, too, are showing increasing capacity to comply. We will therefore seek to extend against the capacity of taxpayers to respond while recognising that reserve point of my noble friend Lord Sheldon that we would not dare to make it mandatory in law in circumstances where people were just not able to comply. So we will make progress on those issues.

My noble friend Lord Barnett raised a wide range of issues. He is not going to get an answer from me on the Barnett formula today. He asked a direct question only a week ago and I thought that I gave him a perfectly satisfactory answer—he totally disagreed with it, of course, as he said to me outside the Chamber afterwards. I have no doubt that he is going to sustain the pressure, but I have nothing more to add such a short time after I last tried to give him satisfaction on the matter. He will have to rest content with the Government’s position for the time being.

I heard what my noble friend said about the tax credit system; he said that he thought that the American system was better. I am not in a position to comment. I have enough trouble keeping up with British systems of taxation and support without trying to verse myself deeply in American systems, so I cannot be authoritative in my response about the comparison with the American system. Despite the difficulties, we all recognise that the tax credit system, as we seek to make it work effectively for everyone who is entitled to it, still provides 20 million people, including 6 million families and 10 million children, with support. The take-up is a significant success. The latest figures show that the take-up rose from 79 per cent to 82 per cent in 2004-05. There is no doubt that it has decreased the level of poverty among many of the people whom we always had difficulty reaching with any other form of support in terms of benefits. Therefore, the Government, as my noble friend knows only too well, will seek to improve the system while defending the concept behind it.

Where I did enjoy my noble friend’s contribution was when he referred to the extent to which any proposals from the Lib Dems on the reduction and even the abolition of income tax in favour of massive increases in green taxation would be a very heavy burden. The noble Lord, Lord Vallance, also gave voice to certain aspects of possible reductions in taxation. Unless the proposal is to significantly reduce resources to the Exchequer, noble Lords on those Benches will have to address themselves to where the costs would lie. Of course, they may be able to convince the electorate that very heavy emphasis on green taxes will produce these resources.

My Lords, it would probably be too much to expect the Minister to have actually looked at the costings that we produced earlier this week for our tax package, but I can reassure him at least to the extent that the environmental component of it is only approximately a third. One of the major components, as I indicated earlier, would be the abolition of capital gains tax taper relief.

My Lords, I shall come on to the noble Lord’s speech in a moment, but he will recognise that a third represents an extensive increase in taxation directed towards his objectives. He will know how difficult it is to persuade the electorate of the enormous virtues to be seen in a massive increase in air passenger duty or in a tax on fuel, or in other areas that I have no doubt his party will need to canvass if it is to make its figures add up on the overall position.

My noble friend Lord Barnett also questioned me on another area that we have debated in the House quite recently—non-domiciled status. He indicated that he thought that the time for us to reach our conclusions was overdue. However, the review has been thorough and considered over a period of time. He will recognise that we have to balance the effects on the economy of tax returns with concerns among the public about the unfairness that certain aspects of non-domiciled status convey. I say to him that, when he is pressing the Government in this respect, he is joining a large number of representations. The Government are not mindless—or do not fail to be mindful, I should say more accurately—of the importance of fairness with regard to taxation and we intend to produce conclusions on this in due course. What he cannot expect me to do—although I do not think that he expects it in his wildest dreams—is to speak about the Finance Bill and produce fresh taxation proposals at this very late stage. I am not going to do it. He is going to have to put up with the Bill that we have before us, which I will defend rigorously.

My Lords, none of us expects the Minister to produce new tax proposals, but could he help us by saying why the Government are happy with non-domiciled taxpayers, perhaps billionaires, paying no stamp duty on very expensive properties in London while those paying tax at 40 per cent or less as domestic taxpayers are expected to pay 2, 3 and 4 per cent? What is the logic of this? What is it that the Government need to think about here? Can the noble Lord tell us what the Government think makes this a justifiable system?

My Lords, the noble Lord should not presume that these are straightforward and easy issues. The issue with regard to non-domiciles is obvious: we have to balance the tax loss of not taxing them as fully domestic residents against the obvious mobility of that community and the possibility that their investments might be taken elsewhere. That is a proper equation for the Government to worry about.

I know that it is a long time since the noble Lord was in government, but he will remember that his colleagues struggled with these kinds of issues when preparing Budgets. The noble Lord shakes his head, which may suggest that the Conservative Government never had the slightest problem with rates of taxation in terms of both their effectiveness and fairness. All I can say to that is that they made a sorry mess of 18 years in power given that they found managing the economy so extraordinarily facile and straightforward. I think that the noble Lord will have to give credit to the Chancellor for having to wrestle with some fairly complex issues in areas where changes to rates of taxation have to be measured against what the yield might be. In another context, the noble Lord would be the first to acknowledge the fact that, if you increase the taxation for a particular group, the yield may not necessarily be greater. I hope that he will recognise the importance of my point.

My Lords, that simply will not do as an argument. If Russian billionaires are paying almost no stamp duty on houses in London costing £20 million, making them pay will not reduce the yield. What it might do is have an impact on the house price boom in central London, where domestic people, paying their taxes, cannot afford to pay the prices.

My Lords, that is to presume that, if such individuals then made up their minds that living in London was no longer an option that they wanted to exercise, there would be a straight gain for the Exchequer. All I would say is that I do not think that it is as cut and dried as he suggests. However, we shall continue with that argument later.

My noble friend Lord Sheldon said that the value of the committee lay in the strength of its bipartisan approach to these matters. However, I have to say that in certain representations made in this debate I am not convinced that bipartisanship has been the order of the day. The noble Lord, Lord Wakeham, set a magnificent example, but I am not sure that he has been totally successful in influencing the overall debate. Certainly the noble Lord, Lord Forsyth, has engaged in this debate in similar terms to those that he used so ably when he was in another place. Of course the Government take the views of this House on the Finance Bill seriously. The Government are also aware of the ability of the Economic Affairs Sub-Committee to produce a report, which is a great advantage to us.

However, we should not live in the land of delusion, which I think has attended some contributions to the debate. Some noble Lords have suggested that it will not be long before the House matches the Commons in its responsibilities for the Finance Bill. Some disparaging remarks were made about the conduct of the other place. If it is said about the other end of the building that people there over-engage in politics, it must be observed that the Budget and Budget decisions are made at the highest level of politics and of course are prioritised by all Oppositions. If the fault lies anywhere at this time, it lies on the Conservative Benches, but it is the same fault that we enjoyed when we were in opposition. However, this House is a revising Chamber and its responsibility for finance is bound to be more limited, so I do not think that it is suitable for us to suggest that we should take an equal position with the other place regarding this Bill. What we can do is bring informed comments and considered thoughts to the matter, and the debate has strongly reflected that.

I shall come on to the more general points made by the noble Lord, Lord Northbrook, in a moment, but I say to him that we do not think that the issue of managed service companies is about structural change; it is one of compliance and how we might succeed in getting the yield to which the Exchequer is entitled, rather than anything more fundamental, as the noble Lord suggested.

I am afraid that I have the most negative response for the noble Lord, Lord Newby, to his most straightforward question, and I apologise to the noble Baroness, Lady Noakes, for the same response. They asked me to confirm that 17 October would be the date of the pre-Budget review. At the moment I am unable to confirm that. It will not have escaped the attention of noble Lords that there have been one or two minor transitions in the Government in recent weeks, which may occasion a slight change in the dates. I apologise to the noble Lord and the noble Baroness for not being able to assure them on that point.

On the overall position as presented, the noble Lord, Lord Newby, and to a more moderate degree the noble Baroness, Lady Noakes, identified failures of the Government as represented in this Finance Bill and in the way in which we have conducted the economy over the past few years. I have to say that the House needs to recognise the confidence with which the Government approach these issues. I heard the noble Baroness bemoan the fact that interest rates are rising. Interest rates have risen to 5.75 per cent at the present time. That must be measured against the record of the previous Administration, which never managed to get them down into single figures. That is the difference.

My Lords, I cannot remember the exact figures, but I think that I would like the noble Lord to withdraw the statement that we never had interest rates in single figures, because it is simply not true.

My Lords, I shall certainly withdraw it if the noble Baroness challenges me, because I am sure that she is quite accurate. Let me say that average interest rates over that period were in double figures; that I will assert. If the noble Baroness presses me and I am wrong, I will certainly write to her.

My Lords, can the noble Lord justify in his terms over what period, and then we will deal with this outside the Chamber?

My Lords, through the majority of the years during which the Conservatives were in power, average interest rates were in double figures. That is the clearest definition that I can give. If I have made a slip, I shall certainly write to the noble Baroness and apologise.

While the noble Baroness deplored the fact that growth rates in the economy have declined over the past year, she will appreciate that over the 10 years that we have been in power we have achieved growth rates that have guaranteed for average families an increase in living standards that are far above those that obtained under the previous Administration. Moreover, if the growth rates seen under that Administration had continued to obtain, average families would now be immeasurably worse off.

I thank all noble Lords who have participated in the debate. The report of the sub-committee is important and identifies in several areas clear points about which the Government have to think very seriously on issues where further work needs to be done and for which there are no immediate and easy solutions. On the general issues, the Finance Bill continues a pattern of successful management of the economy that is there for all to see. I therefore take great pleasure in commending the Bill.

On Question, Bill read a second time; Committee negatived.

Then, Standing Order 46 having been dispensed with, Bill read a third time, and passed.