§ 3.11 p.m.
§ Lord Howe of Aberavon rose to call attention to the case for simplifying the tax system; and to move for Papers.
The noble and learned Lord said: My Lords, the House will recognise that in raising the subject of taxation one is dealing with an anxiety as old as taxation itself, and one which is world-wide. As long ago as 1977, I had the honour of speaking about this problem to the Addington Society—a society devoted, curiously, to taxation. I described our tax system, even in those remote days, as,
incomprehensible, unrespected, unenforceable—and spinning like a top".
Looking around the world, one discovers that we are by no means alone. Perhaps I may quote a comment from the United States, extracted from the San Diego Law Review:
If taxes had existed in the Garden of Eden, the Serpent wouldn't have needed an apple; the promise of a simpler tax system alone would have seduced Eve".
One is indebted for that quotation to Professor Alice Abreu.
The last thing I want to do in raising this topic is to be unfair to the present Chancellor of the Exchequer. Chancellors—if not a breed in danger of extinction—have to be treated with some care. However, he certainly cannot be said to have improved matters during his tenure of office.
Perhaps I may quote from two newspaper cuttings. One is from the Financial Times published on 26th October 2000. The director-general of the British Chambers of Commerce, Mr Chris Humphries, said:
The Chancellor has failed to heed warnings from business that too much tinkering with the tax system can distort behaviour and raise compliance costs".
On 6th December last year, under the headline,
Tax system's credibility continues to decline",
Mr Robert Bruce, the well-respected former accountancy correspondent of The Times, wrote:
Anyone with an interest in tax simplification might just as well fold up their tents and melt away"—
a curiously mixed metaphor. He attributed to the chairman of the Inland Revenue the following sentiment:
The Chancellor has made it clear that in this administration the priority is social change rather than simplification".
So we can certainly invite the Chancellor to think again about some aspects of the matter.
Perhaps I may summarise the problems as I see them. The first relates to the substance of the tax system, its quality, its simplicity, and the intelligibility of its structure. I refer not merely to the language or the law, but to policy, and not merely to existing tax policy and tax legislation but to newly emerging tax policy and legislation.
Alongside that, I am anxious—as I am sure others are—about the sheer volume of tax legislation, both of existing material and that which continues to emerge, and particularly about the volume and frequency of change in the system. Hence one has to be concerned also with the process of preparing, consulting on, and enacting tax legislation and tax policy, existing and new. That is a matter for both Houses of Parliament, for government, and for people outside.
First, the volume of tax legislation that comes forward and the way in which it is handled is not unrelated to the need that we have imposed on ourselves to enact such legislation through a very truncated parliamentary process, a limited window of time. That is for two reasons. First, the Parliament Act decrees in effect that there can be no consideration of fiscal legislation by this House; and consideration by the other place is very limited in quality, if not always in time. There is a growing volume of people saying that the performance of the financial Standing Committee in the other place has become, to quote Andrew Tyrie MP, "a pointless ritual", which achieves very little.
The second inhibition on our timetable is the Provisional Collection of Taxes Act 1913. In the past, I have attributed responsibility for that to my 1469 countryman, the late David Lloyd George. That turns out to be a mistake. It was in fact due to the litigious activities of Mr Thomas Gibson Bowles against the Bank of England. I make that correction simply for the sake of history.
The practical effect of the Provisional Collection of Taxes Act is that a finance Bill—all of it. however long it may be—which is normally published in April, must be on the statute book, complete and as it was then, by 5th August. So there is a very narrow window of time. We have allowed ourselves to operate under a "self-imposed and automatic guillotine". The extent to which finance Bills have grown in length, as Andrew Tyrie has said, has turned them into an "unstoppable juggernaut". This huge legislative vehicle churns through the other place in a very narrow time-scale, effectively without our even having a chance to salute it.
The result has been an almost endless explosion in the volume of legislation passed. The present Chancellor, Gordon Brown—who is anything but a sloth—in five Budgets, has put on the statute book 1,796 pages—five Finance Acts. His peak achievement was 613 pages in the year 2000.
I have to confess that during my own tenure at the Treasury I was not, by the then standards, particularly idle. I added some 766 pages to the statute book, with a peak achievement of 256. But I make a plea in mitigation. Mine were printed on Royal Octavo pages, which are much smaller than the A4 pages used by the Chancellor. There is a dispute about what it ought to be, but the conversion factor seems to be about 1.3. So the Chancellor's 1,796 pages turn out at 2,334 of mine. Comparing like with like, he has an annual average output of 467 pages, compared with my much more modest achievement of 153.
I acknowledged one reason for that in my Hardman Lecture, which is published in the British Tax Review 2001; namely:
inspirational input from Chancellors who retain the misguided (and conceited) belief that tax changes can dramatically transform human behaviour".
I have certainly learnt that that does not always happen. Some noble Lords will remember the business start-up scheme announced in one of my Budgets, and the business expansion scheme announced in the following year. They are now regarded as ineffective for their purpose and as rather unattractive beasts. Without being unduly critical of the Chancellor, I make the point that he has succumbed to this inspirational virus five times more frequently than I managed to do. This is a serious point. I cannot repeat too often the proposition that the sheer quantity of fiscal legislation is at least as important as the need For higher quality.
What shall we do about it? Many people with whom I have been fortunate to have the privilege of working over some years have been—and still are—thinkinghard about it. I pay tribute to all those involved in two particular fields. First, I pay tribute to those from the Institute for Fiscal Studies, in which I confess an interest as president of its Tax Law Review 1470 Committee. It has now established a working party, under the chairmanship of Sir Alan Budd, the successor as chief economic adviser to the Treasury of the noble Lord, Lord Burns. The membership of that working party includes my noble friend Lord Norton of Louth—I am sad that he is not here today—and the noble Lords, Lord Barnett and Lord Tomlinson.
Secondly, I also pay tribute to those at the Inland Revenue—yes indeed, they are entitled to be praised—and at the Parliamentary Counsel Office, as well as all those from the private sector involved in the Tax Law Rewrite Project, the steering committee which I have the honour and burden of chairing. I also pay tribute to my colleagues on that committee and to all those on the consultative committee.
I shall say no more about that now except that our progress, our plans and our method are well described in our annual reports. The fifth was produced in May last year and the next is due out later this spring. The first monument to our work is the Capital Allowances Act 2001. It will be the first of many.
I have some lessons to draw from our experience. My central conclusion is that there is no chance of a knock-out success against tax complexity. There can be no big bang approach. Instead, we need to identify, define and establish not an event, but a process—a comprehensive mechanism through which the problems can be addressed and managed tenaciously over the years. It is a long-haul business. The continuing insistence of the process on simplicity must be as irremovable and as constantly present as the voice of the tax-raising departments and as the politically restless, impatient input of successive Chancellors of the Exchequer.
My second proposition is that the Tax Law. Rewrite Project is and must remain an important part of that process and a possible pointer to the future. It is worth noting three features of the project. First, although our work is proceeding more slowly than foreseen, it is widely regarded as successful and worth while. The distinguished vice-chairman of the consultative committee said:
the Capital Allowances Bill represents a revolution in accessibility. It has a logical structure and for the first time in my experience it has actually been designed to help the user".
More importantly, perhaps, the Chancellor of the Exchequer has written more than one letter commending our work. His support for the project has been a huge encouragement, particularly as the project was launched by my learned—if I may so call him in this House—friend, Kenneth Clarke, during his time as Chancellor. It is great to be able to build on the foundations that he laid with the concurrence of all parties.
I emphasise the narrow scope of the Tax Law Rewrite Project. Its remit is limited to improving the structure, intelligibility and user-friendliness of the existing law and to reproducing the existing code with only minor policy change. It does not consider further improvements. However, it is identifying and highlighting important areas in which a review of policy beyond our power seems necessary. We have 1471 identified three dozen topics in four of our response documents, some of which have already been taken up, such as the need to rewrite the PAYE regulations, which are wildly unintelligible. That is now taking place.
My central proposal is that we should go beyond the Tax Law Rewrite Project and seek to establish alongside it a tax structure review programme based on the following features of the rewrite. We need to ensure that the neglected constituency of stability, as well as simplicity, is effectively represented at every level and every stage of the tax-making system. The Tax Law Rewrite Project is a purpose-built process, established with all-party support and committed to the completion of a clearly defined task. Its basic work is carried out not by a free-standing commission, detached from current policy developments, but by a dedicated team serviced by the Inland Revenue and thus, most usefully, plugged into the system. That team includes a changing cast of professionals from outside the Revenue. There is a comprehensive process of consultation drawn together through a widely representative consultative committee. The whole is overseen by the steering committee, which I chair and which includes senior figures from the judiciary, the tax professions, the business community and the other place.
I close with three questions. First, is there broad support—as I very much hope—for something along the lines of the tax structure review project that I have described? Secondly, if there is—this is unexplored territory to a large extent—how should both Houses of Parliament be engaged at each stage of that process? Thirdly—a question for this House in particular to consider—do we see a role in that process for Members of this House, remembering that we already play a part in the enactment of tax law rewrite measures in a Joint Committee of both Houses and that, I venture to suggest, there is a body of expertise in this House, at least as it is at present constituted, whose talent is not drawn on for the scrutiny of tax legislation? The other place will be sensitive about that, but in an age when we are thinking the unthinkable it is worth thinking about that as well.
I look forward in particular to the conclusions of the Budd working party and, of course, to the observations and advice that colleagues will offer this afternoon. I beg to move for Papers.
§ 3.26 p.m.
§ Lord Barnett
My Lords, I am delighted to have the opportunity to congratulate the noble and learned Lord, Lord Howe of Aberavon, not only on securing this debate and on his excellent speech, but on taking an interest in the detail of taxation and finance Bills. That is very rare in Chancellors, before, during or after they hold that post. I am bound to congratulate him again on that, because I know how much work he is doing on trying to simplify the tax system.
I have read the noble and learned Lord's Hardman Memorial Lecture before and I looked it up again in preparation for the debate. His words are worth 1472 repeating. It is unclear whether he was referring to an American tax law professor or himself—although it does not matter, because his sentiments are the same—when he said:Tax simplification is a hugely seductive subject. And headline-seductive as well".He could then have added that, having said that, nobody takes the blindest bit of notice. He went on:Those words, from your latest Tax Manifesto, closely echo an earlier verdict: 'Incomprehensible, unrespected, unenforceable—He continued later:we are facing a problem not just of complexity but of volume too—of legislative overkill: too much law, too much change, and all too quickly".The noble and learned Lord referred to some aspects of that.
The noble and learned Lord also spoke in that lecture not just of simplicity, but of simplicity and stability. I am not sure how both can be achieved. However, having quoted that particular tax lawyer, I am bound to say that the noble and learned Lord went on to ask whose fault it was that we have all this terrible stuff. He gave two reasons. First, he said, "I wasn't there, Guv!". Those were the words that he used. Secondly, he said that there were huge forces and powerful institutions all stacked against reform. He quoted the interesting comment, made in another context, by the noble Lord, Lord Hurd:Inertia can develop its own momentum".That certainly applies to taxation.
What now? The noble and learned Lord has referred to what he has done. He has already done so much on the Tax Law Rewrite Project and the Tax Law Reform Committee. I know that he is doing a very good job on that. I suppose that I should declare an interest as a member of a special working group chaired by Sir Alan Budd, as the noble and learned Lord told us. That group is composed of a lot of very good people—not including myself, I hasten to add.
I suppose that I should also declare an interest in the field of taxation—which I did not do initially—as an accountant. However, as my noble friend Lord Peston always tells us that he is an emeritus professor of economics, knowing that that means that he is retired, perhaps I can say that I am an emeritus accountant.
What will happen now? I am sure that there will be some excellent reports from the committees that the noble and learned Lord, Lord Howe, and Sir Alan Budd chair. The pressure for action has been tremendous. In his lecture, the noble and learned Lord referred to comments on our national culture made by the then Maurice Saatchi, the now noble Lord, Lord Saatchi. The noble Lord said that that culture,stops political leaders taking the required action".Moreover, we cannot,achieve true simplification with the political process as it stands; put bleakly, it carries no votes".From my experience some time ago of knocking on doors, I am sure that that is true. I do not recall anyone saying that what we desperately need and what will win votes is a reduction and simplification of tax law so 1473 that it is easier to understand. That is not what people were talking about at all. Nevertheless, it is important to understand from where the pressure for action, or inaction, is coming. Does it come from the government? As I said, most Chancellors are not madly concerned about simplicity—they are more concerned with raising taxation in myriad ways. However, I am sure that, even in those days, the noble and learned Lord, Lord Howe, would have addressed the issue very differently. I see him nodding.
Does the pressure come from taxpayers? It is important to recall that only one-third of taxpayers fill in a tax return; the money is just taken from them. So those taxpayers are not very interested in the subject. As for those who do fill in forms, they use accountants and tax lawyers. I have already declared an interest on that subject. I should make it clear that, apart from the special members of the group set up by the noble and learned Lord, a majority of accountants and lawyers can and do understand the current laws, as complex as they are, sufficiently for them to simplify it in terms of the total tax that their clients pay. I am not sure that they are madly in a hurry to change the tax system too much, or to simplify it as we are discussing now. Nevertheless, it is important for us to understand that existing tax law creates a heavy compliance cost and a burden on the economy. That is undoubtedly true.
So what then is the solution? Most major solutions are very party political in a whole variety of ways. A very simple way of simplifying the tax system would be to abolish income tax entirely, as has been suggested, and to use all indirect taxes. Most of us would disagree—certainly I would—with such a proposition as being grossly unfair. Equally, the noble Lord, Lord Saatchi, has suggested a flat tax. Equally, however, a flat tax is grossly unfair. That is certainly my view, although others—perhaps including the noble—Lord will disagree. However, as I have privately told the noble Lord, the political and party political approach to simplification is disastrous and will achieve nothing whatever. The only way in which we shall achieve simplification of the tax system is if all sides can agree on the proposition. That is what the reform committees established by the noble and learned Lord, Lord Howe, are seeking to do in a non-party political way.
Ultimately, the only way in which there will be serious change is through Parliament itself. A man called Robert Maas has said that "Parliament is the key", and I am sure that that is true. However, if we are to have objective good sense in a parliamentary committee, whether it be a Select Committee or a Standing Committee, I hope that it will take advantage of the very great value that is available to it in the form of Members of your Lordships' House. In my experience on Select Committees, Members of this House tend to be much more objective in their examination of the issues—in a non-party political manner—than ever occurs in another place. One has only to look at the Select Committees that come out of another place to see their party political nature. That is inevitable as it is a party political House.
1474 If we are to have a true opportunity to amend and simplify the tax system, this House should be able to provide an input to some form of pre-legislative committee, without giving this House powers—which are not available to it now, and I am not suggesting that it should have them—to change the level of taxation. We are not talking about that, I hope, but discussing simplification of the system.
Sadly, the party political problems to which I have referred affect all governments, not only the current one. All governments have had the same problem. The noble and learned Lord, Lord Howe, mentioned the size of Finance Bills. I have pleaded guilty in your Lordships' House before to having been responsible for putting many hundreds of pages of Finance Bills on the statute book. Regrettably, they were never properly scrutinised. When I was Chief Secretary, I had for a time a quite important Opposition Chief Secretary who is now the noble Baroness, Lady Thatcher. She and I never had debates on the detail of the Finance Bill; we discussed the major party political points. That happens all the time. The vast majority of Finance Bills are passed almost entirely unscrutinised.
Consequently, the noble and learned Lord, Lord Howe, has referred to the size of Finance Bills. One of the reasons why Finance Bills are so big is that everyone is amending the previous Finance Bill and the Finance Bills before that. That is why they are so large. In his lecture, the noble and learned Lord claimed credit for something that he and the noble Lord, Lord Lawson, had done to remove some of the taxes that I helped to put on the statute hook. He also said, however, that the number of pages removed from the statute book barely made a dent in it. He is quite right; that is what happens.
Moreover, as the noble and learned Lord said, there are always Chancellors who want an opportunity to "play God", as he put it, by helping all kinds of individuals or businesses. He said that, in 1982, he put the business expansion scheme on to the statute book. He also said that he did so against advice, and that he has subsequently regretted it very much indeed. I can understand that, although certainly the desire was right and acceptance was good. He was trying to do something to help. In yesterday's Financial Times, someone suggested that we must have further help and tax concessions for childcare. Although we could all think of any number of possible tax concessions, very few of them will help to simplify the tax system.
We can choose to help in many other ways. However, what are the prospects for the Tax Law Review Committee and the tax law rewrite committee to which the noble and learned Lord has referred and which he has done so much to establish? I have no doubt whatever that they will produce excellent reports. However, even if Parliament, as I hope—under our current leadership in your Lordships' House and in another place—changes some of the methods by which we consider Finance Bills, the fact remains that only modest changes will be made to future Finance Bills.
1475 I return to the comment made by the noble and learned Lord, Lord Howe, on simplicity and stability. As I said, I strongly support what he is trying to achieve. I am bound to say, however, that I remain sadly pessimistic that politics and the momentum of inertia, to paraphrase the noble Lord, Lord Hurd, will combine to prevent substantial improvement in simplifying our tax system.
§ 3.40 p.m.
§ Lord Goodhart
My Lords, I am pleased to be able to speak in this debate. I am a member of the Joint Select Committee on Tax Simplification, chaired by the noble and learned Lord, Lord Howe of Aberavon. It is an excellent Select Committee, particularly because it only meets at intervals of around two years when we have a new re-write Bill to consider. I am also a member of the Tax Law Review Committee, set up by the Institute of Fiscal Studies, to which the noble and learned Lord referred. That committee originally proposed the tax re-write project of which the noble and learned Lord is president.
The re-write project resulted in the major re-write of legislation on capital allowances. The Capital Allowances Act 2001 improved drafting and put provisions into a more logical order. I look forward to the next stages of the re-write project. However, it is unrealistic to expect that we will ever get tax laws which are easily comprehensible to ordinary people. Our present laws are only comprehensible to the most highly specialised professionals and, frankly, not always to them. We need laws that can be understood at least by the smaller law and accountancy firms who do not charge their clients the kind of prices charged by City accountancy firms and specialised tax lawyers.
The problem with tax is not just that it is expressed in complicated language, but also that it is often too complicated in concept. It is also complicated because it is too often used for purposes which are sometimes misguided or trivial, or which can be better achieved by other means. An example is the continuing effort to encourage enterprise by means of tax relief. The noble and learned Lord referred to the Business Expansion Scheme (BES. which I sometimes get muddled about and think of as the BSE scheme). He accepted some blame for that.
The trouble with the scheme was that, within a couple of years, we ended up either with people throwing money at unviable schemes for the sake of the tax benefits they hoped to obtain, or they were using the scheme as a tax loophole by investing in things like property companies where no real element of risk was involved. Another example of something which became a tax loophole within a short period of time was the profit-related pay scheme.
BES and profit-related pay have gone, and we have a change of government. But the present Government are still trying to create enterprise incentives through tax reliefs. Some tax reliefs, of course, are justified. But any proposal for tax relief needs to be looked at extremely cautiously. Tax reliefs complicate the tax 1476 system; they can often be abused; and they can redirect resources from more economically desirable purposes. That is something which has all too frequently happened. The aim overall should be a broad tax base and low rates of tax rather than high rates of tax alleviated by reliefs, which narrow the tax base.
The present Government have made the complication of tax law, frankly, much worse. I should like to expand a little on what the noble and learned Lord said about the record of the present Chancellor of the Exchequer and the Government. The present Government have produced five Finance Acts which have achieved very little at enormous length. During this period there have been no changes of fundamental importance; for example, there has been nothing comparable to corporation tax and capital gains tax introduced by the Finance Act 1965; nothing comparable to the introduction of capital transfer tax in the Finance Act 1975; and nothing comparable to the introduction of self-assessment in the Finance Act 1994.
I have been through the Finance Acts since 1997. We start with the Finance (No. 2) Act 1997, which was introduced shortly after the 1997 general election. Not surprisingly there is relatively little in it—a mere 53 sections, eight schedules and 109 pages in the Queen's printer's copy. By contrast, the 1998 Finance Act was a giant. It contained 166 sections, 27 schedules and 430 pages. Changes to enterprise investment schemes and venture capital trusts took up five sections and 34 pages of schedules.
The 1998 Act also converted capital gains tax from a relatively simple and comprehensible concept—that of treating capital gains as income—into a completely incomprehensible and illogical system. In the Finance Act 1999 the Chancellor of the Exchequer paused to draw breath. That merely contained 140 sections, 20 schedules and 204 pages. We had only five sections and two brief schedules on enterprise incentives.
Having drawn breath, in 2000 the Chancellor introduced an absolute monster containing 157 sections, 40 schedules and 613 pages. Enterprise incentives took up six sections and 94 pages of schedules. Among other things, that Act gave us the tonnage tax, something I had never come across before, which was introduced by a 50-page schedule.
The Finance Act 2001 was still massive. It contained 111 sections, 33 schedules and 331 pages. Changes to rules on enterprise incentives, including some rules which had been introduced only the previous year, took up three sections and 30 pages of schedules. The aggregates levy, a new tax, took up 34 sections and seven schedules.
There have been no fundamental changes of tax law during this period and, frankly, many changes were for the worse—for example, the revision of capital gains tax and, though this is less clear, the abolition of advanced corporation tax with the consequences that that had for pension funds.
Also, of course, to some extent tax law expands because of anti-avoidance measures. Each loophole, under our normal scheme of tax law, is blocked up by 1477 subsequent specific anti-avoidance legislation. The result is tax legislation which is completely meaningless unless one understands the schemes which the provisions were intended to stop. I should like to see general anti-avoidance provisions incorporated into our tax law. I was unable to persuade the Tax Law Review Committee to recommend such a provision. The opposition mainly came from the accountants on the committee, the reason being (an understandable reason) that accountants and tax lawyers like to be able to give a definite answer when asked by their clients what the tax consequences are of any transaction or group of transactions which the clients wish to undertake. A general anti-avoidance provision creates a penumbra of uncertainty because it is bound to be in broad and general terms. I am all in favour of a degree of creative uncertainty when one is entering into arrangements to reduce tax.
The Ramsey decision in the Appellate Committee of your Lordships' House in 1981—I will not go into what that decision meant but I can see a number of noble and learned Lords present who will be familiar with it—killed off the market for artificial avoidance schemes by creating a significant degree of uncertainty as to whether or not they would work. However, to some extent the Ramsey decision acts like an antibiotic. To start with it kills off almost all avoidance schemes; but a resistance develops. The Ramsey principle has been restricted by some subsequent decisions of the Appellate Committee with which I disagree. I have seen a powerful article written by the noble and learned Lord, Lord Templeman, attacking the way in which the Ramsey principle was weakened by subsequent decisions. It is now time for a new antibiotic, either in the form of a revival of the original Ramsey principles or, perhaps more realistically, by general anti-avoidance provisions.
The law can and should be simplified. It needs to be simplified by drafting in plain language; by simplification of the concepts; by being very cautious about introducing tax reliefs; and by introducing general anti-avoidance provisions rather than blocking specific schemes with specific legislation. Unless we take steps to simplify our tax system, we will not end up with the status quo, but with tax law which gets ever more complex and much worse than it is now.
§ 3.49 p.m.
§ Lord MacGregor of Pulham Market
My Lords, I am delighted to speak briefly in the debate and to support most warmly all that my noble and learned friend Lord Howe said. I congratulate him on all that he is doing in this area. I also support all the comments bar two that have been made by the preceding speakers.
Like two other noble Lords speaking in the debate I am a former Minister in the Treasury responsible for taking Finance Bills through the other place. I sat on the opposite side of the House to the noble Lord, Lord Barnett. We had many sometimes fruitful but certainly interesting exchanges as members of the Standing Committees on Finance Bills over many years.
1478 I do not want to repeat everything that has been said as I agree with so much of it. However, I slightly differ on two points made by the noble Lord, Lord Barnett. First, he was somewhat cynical about the possibilities of progress in this area. He may he being realistic, but I hope that that is not the case. I believe that all of us who feel strongly about the matter at least continue with our efforts in that regard. Secondly, he said that in his experience as a Member of the other place when he knocked on doors his constituents were not much concerned about the matter we are discussing. However, my experience as a Member of Parliament was rather different. Many of my constituents complained about the complexity of the tax system and about the burdens of tax. In the business world that was often one of the main topics of conversation when people realised that one was involved in these matters in the House of Commons. There is an important point here; namely, that the complexity of our present tax system constitutes a huge cost to the country and, I believe, to business.
Of course, I well recognise that lawyers, both solicitors and barristers, and accountants are well remunerated as a result of the complexity of the system and the work they undertake advising clients on it. I sometimes used to think during debates in another place on these matters that it was somewhat ironic that we were involved in trying to make modest changes in the tax laws—the changes we recommended having gone through a long process and perhaps even through the courts at vast cost to everyone concerned—yet we were not so well remunerated for trying to make those changes.
However, there is no doubt that there is a huge cost to business, and it is getting much worse. Like the preceding speakers, I am aware from my own experience of many of the reasons why that has come about. The two I single out in particular have already been mentioned. First, most Chancellors—here I disagree with the noble Lord, Lord Barnett—certainly on the Conservative side, have had the intention of simplifying the tax system and have perhaps started along those lines. However, the temptation to introduce new schemes to respond to particular pressures from pressure groups and to get an accolade for having tackled a particular political issue through the tax system is so great that inevitably they end up complicating the tax system further and probably doing more in that direction than in the direction of the simplification upon which they embarked in the first place. Secondly, all of us who have been involved in these matters know that even the tiniest tax recommendation has attached to it a huge bundle of papers from the Inland Revenue which analyse just about every aspect of the proposal: the cost, who will benefit and who will not, hut, above all, the anti-avoidance measures. As the noble Lord, Lord Goodhart, said, I have no doubt that that is one of the main reasons why the tax system is so complicated
I pick up one of the examples given by the noble Lord, Lord Goodhart; namely, the aggregates levy in the Finance Bill 2000. When it was originally discussed, that seemed a fairly simple proposal put 1479 forward on environmental grounds and backed up by a number of lobbies. However, I was astonished to discover that that simple tax proposal occupied 74 pages of the Finance Bill 2000. That is an indication of the complexity of even a small proposal.
I turn to the three main points I wish to make. First, I refer to the tax law rewrite and the Joint Committee on Tax Simplification. My noble and learned friend referred to that as fairly narrow in scope, but I believe that it is vitally important. He quoted the words of a tax specialist. Indeed, the Paymaster General on the Second Reading of the Capital Allowances Bill quoted at rather greater length the words of one of the leading figures in the tax world. I refer to the sentence the Paymaster General quoted, which my noble and learned friend did not, when she said:I need to be able to find the legislation that is applicable, understand how it operates and advise my clients accordingly".—[Official Report, Commons, 15/1/01; col. 103.]Given the complexity the business world is now faced with on a wide range of issues, I believe that the work that was done on the Capital Allowances Bill, and which will be done on future Bills, is extremely important in that regard. When that Bill was debated in the other place—the setting up of the Joint Committee was debated on the same day—criticisms and concerns were raised and, indeed, some Members of Parliament voted against the measure on two grounds. First, they were concerned that it would be used as a method to introduce major changes in the tax system, for example, major changes in capital allowances. I believe that sufficient assurances were given at that time and were also built into the process to prevent that happening. Secondly, they were concerned that the measure looked like the first chink in breaking down the sole prerogative of the Commons as regards the tax system. On that point, I very much agree with my noble and learned friend. All of us who have experienced over the years the increasing pressures on Members of Parliament know well that there are few who can now take part in Finance Bill processes, partly because they do not have the expertise and partly simply because they do not have the time. Therefore, many of the vast clauses in Finance Bills do not receive the expert scrutiny that they should.
Therefore, I believe that Members of this House have a role to play in these matters. Of course, we debated the roles and functions of this House only the other week when we debated the White Paper on House of Lords reform. As I say, I believe that those in this House with the relevant expertise have a role to play in these matters. Sometimes noble Lords can devote more time than MPs to the work of the Joint Committee on Tax Simplification and to the Bills I have mentioned.
That brings me to my procedural point. I entirely agree with everything that my noble and learned friend Lord Howe said about the defects of the process of considering potential tax legislation. For the reason I have just given in relation to consolidation tax Bills, I believe that Members of this House should play a part 1480 in pre-legislative scrutiny. I believe that that would result in improved, better drafted legislation that is more user friendly, if I may put it that way. That is simply not the case at the moment with regard to the processes that we use for Finance Bills. I do not see how that would undermine the fundamental prerogative of the other place on tax measures as the actual policy would be voted upon and decided there.
I take up the theme mentioned by the noble Lord, Lord Goodhart. Of course we must find ways to simplify existing tax legislation. That, for me, was always one of the attractions of tapering the capital gains tax system as that constituted a simple system that was easy to understand and operate. Of course, the Inland Revenue had many objections to that and we now have extremely complex, double banked capital gains tax legislation. The attempt to simplify it if anything, made it worse. There always ought to be an imperative to simplify.
Perhaps the most important point is the one that both my noble and learned friend Lord Howe and the noble Lord, Lord Barnett, mentioned: that is, to avoid, wherever possible—this is where the political difficulty arises—the imposition of new taxes. I believe that schemes such as the working families' tax credit and the pension tax credit will hugely complicate the tax system and possibly not result in any great benefit. I do not want to make any party political point about that; I simply refer to the increasing complexity of the system.
Many of the changes introduced by the present Chancellor, which appear small in themselves, have hugely added to the complexity of the tax system. Therefore, if we are to have a tax system that is simpler and more easily operated and understood, we must avoid—I know how difficult that is for political parties—the temptation constantly to tinker with the tax system in response to particular pressures. That brings me to the matter of self-assessment, which I have always strongly supported as a principle. I considered that as I supported it as a principle I ought to do my own self-assessment rather than use tax advisers. In any case there is a financial benefit in doing that, but it also enables me to understand the process. It strikes me that the self-assessment process has become much more complicated. It is rather like a crossword puzzle. I am not a crossword puzzle fiend myself but I understand that if one knows who has compiled the crossword, one arrives quicker at the correct answers. If one understands at the outset what the person drafting the tax guides is about, one begins to understand that the arrangements are not quite as complicated as they look. However, one has to know what the complexity of the tax was in the first place to understand why one went through a maze of different processes to get to the final page.
This year—I give credit to the Inland Revenue for this—the straightforward tax calculation guide is much simpler and easier. However, the comprehensive tax calculation guide, in relation to which complexities arise, is just as complex as ever. The problem is that the more that one adds new changes to the tax system, the 1481 more complicated it becomes to operate the self-assessment system. Every little change seems to add another three pages to the calculation that one has to go through.
Unless governments exercise self-restraint, I fear that the noble and learned Lord will be right and his cynicism will be realistic. However, I hope that, somehow or other, some of the processes that we are discussing today will help us to avoid that.
§ 4.1 p.m.
§ Lord Selsdon
My Lords, I hope that noble Lords will recognise how difficult it is for me, as a complete amateur in this subject, to follow a Chancellor—my noble and learned friend Lord Howe, who I greatly respect—two Chief Secretaries to the Treasury and the noble Lord, Lord Goodhart, who managed to confuse me even more with his references to confusing legislation.
In my view, taxation is the most distorted instrument that man could have invented. Its original purpose, I understand, was to pay for wars. The Napoleonic Wars had a lot to do with it. The emotive words that are associated with taxation—subterfuge, camouflage and sabotage—were compounded by the word "confusion". I shall try to speak as a simpleton in a simplistic manner, by taking the matter back to the taxpayer, who needs some respect.
For a period we felt that we were an overtaxed nation. As Professor Laffer used to point out, a nation that is totally taxed has no productivity and one with zero taxation suffers a breakdown in law and order. Somewhere between those two posts is the right amount of tax: the correct amount and the perceived amount.
For whatever reason and however it was arrived at, we are, as a nation, fairly taxed. The problem is that we do not know how much we are taxed. Maybe people would be prepared to pay more tax. I begin by asking: what is the purpose of taxation? I understand that we are now in a service industry economy and that the Government are rapidly becoming a service industry that provides services to people, for which they pay by tax—if they pay tax.
I wish to ask the Minister a few simple questions. There was a move by previous governments to create a friendly image for the inspector of taxes. He was depicted wearing a bowler hat and as a round, chubby character—he was probably derived from many of my former colleagues in Midland Bank. Now he—or she—has changed to a hermaphrodite green leprechaun figure who exhorts you in a strange voice to do things that you cannot understand. Many of us want to know whether the figure on television is played by an actor or an actress. It is, I gather, one of the most admired and hated advertisements of our time.
The sort of question that people ask is, "Why do I have to pay income tax? Why can't I be paid a net amount?". For many years on the Continent of Europe, people would be able to tell you what their take-home pay was; that was their salary. They knew that tax was deducted. However, because we felt that 1482 we needed to be promoted a little more, we talked about our gross income, as if that, compared with our net income, made us far more important. The noble Lord, Lord Barnett, referred to the fact that one-third of people do not have to worry about completing tax forms because their tax is deducted at source. The more tax that can be deducted at source—the more that people can be given a net income—the better.
There are three areas about which people wish to know. What proportion of their income tax goes on services? Those services can be counted on one hand, and the first is the health of the nation. Could the Minister give me some idea of what proportion of the cost of the health service will in future he met through tax and what proportion will be met through what one might call a strange form of off-balance-sheet funding, such as PFI, PPP or private-sector money? I ask the same question in relation to transport and possibly also education. We accept that law and order is a matter for government, as are foreign affairs and defence.
I turn to the distortions to which the noble Lord, Lord Goodhart, referred, including that which involves giving money back and taking it away and giving it back again. When I was a full-time banker, we determined one day that two-thirds of all expenditure in the world was spent by governments and that we should therefore specialise in trying to get money back from governments. Governments were extremely willing in that regard because when things did not happen, they used to suggest throwing money back—they would create enterprise zones, give tax allowances and establish tax-based leasing operations for aircraft. Those highly complicated issues had the objective of stimulating the economy. Other countries did not do that to the same extent because it is "distortive" and causes problems in the medium to long term. I shall give noble Lords one or two examples involving relocation.
If one gives people tax allowances and grants for relocating to a poor area, for a brief period there is regeneration and profitability but after that the distance from centres fails to enable one to attract the right labour force. Gradually, the area returns to being uncompetitive and there is decline.
One of the worst things in this context occurs when governments introduce a new tax in good faith but fail adequately to collect the revenue. I come to our favourite subject these days—the European Union, the euro and the harmonisation of tax. We live in a common market in which there is the most extraordinarily uncommon method of taxation. There is an incredible amount of smuggling and arbitrage across frontiers as price differentials grow hour by hour and day by day.
I turn to transport. As we know, we have the worst transport system in the EU and the most expensive cost per mile, and we are still loading on more taxes. The French suddenly decided not to have any more road tax—there is no road tax on vehicles. They worked out that whereas there was a differential tax—the higher the cubic capacity of an engine, the higher 1483 the consumption—they got as much money from petroleum tax as from car tax, which therefore disappeared.
On the purchase of motor cars, it is impossible to understand why an Italian car could be cheaper in Spain or a Spanish car could be cheaper in France, or why all those instruments of transport are so differentially priced. Some people explain that by referring to taxation but others do so by referring to irresponsible profit.
The most exciting tax of all, which created such emotion in earlier Budgets, was the penny on the price of the pint. The figures are amazing: 1 million pints every day cross the Channel into England from the Continent. That is equivalent to the total consumption of 6,000 rural pubs or £11,500 a year for every pub in the country. In 2000, the loss on alcohol tax was approximately £254 million through smuggling and £370 million through genuine purchases. It seems idiotic that the cost of a pack of beer in Calais is exactly the same as the alcohol tax and VAT applied in England. That form of trade will therefore continue.
I shall not discuss cigarettes. In view of the other matters with which Customs and Excise has to deal, there is no revenue for government in grants, but there is much genuine revenue from alcohol. However, with binge drinking, the Government are caught between a rock and a hard place.
On taxes that cause confusion, I turn to those involving VAT. I now have great admiration for VAT inspectors—they have been helpful and friendly but the difficulty is to contact them. As I have previously said in your Lordships' House, when one rings them, one has to press a number of buttons once one has got through. I was kindly told that they were in Newry and that if one does not press a button, one gets to speak to someone. Once one is able to speak to a person in the Inland Revenue or anywhere else—accountants advise that one never should—then one receives tremendous help and support. The information available from them is considerable.
Let us turn to the attempts by government to generate new house construction and matters of that kind. A listed building in London in zero-rated. A new build—so long as two walls have been knocked down—is also zero-rated. However, if one puts one building together with another, the new building immediately becomes a listed building. Then, if one wishes to extend one's own house, one finds that the VAT rate is only 5 per cent. That causes tremendous complications. The application of the differential rates of VAT costs an enormous amount of money through seeking professional advice, and so on, and people ignore them. That same level of complication leads to many among our skilled labour force deciding that they no longer wish to run a business; they simply want their wages at the end of each week because the complications of administration start to bite and they lose business and opportunities.
We could go on and on about all the differentials. With regard to certain taxes, if we were to ask the question, "What would happen if they went?", I 1484 believe that the answer would be most intriguing. If capital gains were to go, I do not believe that there would be any material loss. If stamp duty were to go, I do not believe that there would be any material loss in the long term. Perhaps the application of VAT should be standardised across Europe.
In relation to the revenue of taxes applied to imports, in general we used to say that only 5 per cent of British imports were taxed. But it seems strange that we should have all these differentials. They are impossible to determine and one needs more and more advice on them.
Speaking as a simple person, it would be so nice if there were a simple tax. In my view, the only way to achieve that is probably by tearing up all the pieces of paper that my noble friends and others have been talking about and, with a clean sheet of paper, asking, "What tax would you apply?". We would then debate it. The people of this nation are confused. They are willing to pay tax but they wish to know what they pay tax for. I believe that in general they feel that the overall level of tax in this country, if they could understand it, is fair.
§ 4.12 p.m.
§ Lord Peston
My Lords, I shall concentrate on the subject of income tax, although I say at the outset that, if I had my way, I would remove the VAT anomalies which exempt food, hooks, periodicals and children's clothes from tax. They are classic examples of political expediency taking precedence over rational policy-making. But they also remind us why sensible change in the tax field is so difficult and why we may well be wasting our time today. However, I echo the noble Lord, Lord MacGregor: the fact that we may well be wasting our time certainly will not stop us all carrying on in this field. I have spent my whole life advocating policies to no good effect whatever, but I still believe naively that one day something sensible that I suggest will happen.
All Chancellors, and, a fortiori, shadow Chancellors, advocate tax reform and tax simplification. But inevitably they plead pressure of work and end up doing little or nothing. Perhaps I may remind your Lordships that nearly 20 years ago President Reagan introduced tax proposals in which the word "simplification" appeared in the title of the legislation. He enacted that legislation and it ended up as law. However, from all the studies that have been carried out since his efforts, it appears that the outcome is that the American tax system has not become any simpler or easier to understand. The most that one can say—although there is little evidence of it—is that without President Reagan's intervention the system might have become more complicated still. But even that is virtually impossible to substantiate.
What are the criteria that we should use in looking at the tax system? In my judgment, the first and most obvious is equity. We need vertical equity; namely, it should be the case—I say with some regret that it no longer seems to be so strong in this country—that the richer one is, the more tax one should pay, and, in my 1485 view, disproportionately more tax. Equally—this is even more upsetting—we should have horizontal equity; namely, similar families with similar incomes should pay the same tax. In my judgment, nothing is more damaging both to the tax system and to our democracy than to read about immensely rich people who end up, one way or another, paying no tax whatever while the rest of us seem to pay maximum tax at all times.
There is also the efficiency question, which has two parts. One is that we should not, unless we are forced to, use the tax system to distort the price mechanism. Occasionally there are good reasons why we should intervene, but those reasons must be set out. However, in my experience, most of them are unconvincing. The second aspect of the efficiency question is that we should go for taxes that are cheap to collect.
That leads us to the simplicity question—what the Americans call "compliance costs". Those should be as low as possible and should certainly be weighed in the balance by Chancellors who seek to introduce new taxes. The first and obvious point has already been made. With regard to personal taxation, as few people as possible should have to fill out tax forms, and the Inland Revenue should calculate people's tax liability on the basis of reported information that it receives.
Secondly, the compliance costs of those of us who do fill out the forms—I am one—should be as low as possible. Thirdly, I raise a point simply in order to echo what others have said. Everyone should be able to understand why his or her tax bill is what it is. With regard to business taxation, again, compliance costs should be low. Even though small businesses may have to use accountants on occasion, those accountants should not represent a significant part of their costs.
With regard to compliance costs, I have seen figures indicating that 5 to 10 per cent of tax revenue relates to the cost of collecting the tax. That includes all the time and effort of individual taxpayers who have to fill out the forms. I have heard it said that compliance costs for businesses account for twice that amount. If true, that is an enormous sum.
Of course, many of the compliance costs incurred by businesses arise because those businesses try to make use of all the tax avoidance measures introduced by well-meaning Chancellors. Those compliance costs could be avoided if Chancellors did not introduce such measures in the first place, even though, as noble Lords have pointed out, they were introduced for very good reasons. However, perhaps I may reiterate: are there not weighed in the balance the questions of complication arising from compliance and lack of simplicity? The fact that people are anxious to avoid paying more tax than they should leads, in many cases, to the question of whether far too many accountants are employed in this area. That is a subject to which I shall return.
I believe that for the ordinary taxpayer the self-assessment form is, for the most part, not too difficult. Here, again, I believe that I agree with the noble Lord, Lord MacGregor. It is certainly not too difficult if a person has only one source of income. However, I am 1486 not sure—I have been trying to find out—what level of intelligence is required in order to fill out the form and whether that corresponds to average intelligence; that is, people with an IQ of 100, which seems to be the correct criterion.
Wearing another of my hats—namely, my interest in education—I should certainly include the self-assessment form in the national curriculum I believe that that would be far more valuable than many of the other things that go on in the national curriculum. It would be a test of both literacy and numeracy. However, less cynically, it brings out the point that, given what we know about the scale of illiteracy and innumeracy in our country, many of our fellow citizens could not conceivably fill out the form. It is worth reflecting on that matter.
The main point is that if one has several sources of income or if one is entering the self-employment business, the form becomes more and more complicated, as the noble Lord, Lord MacGregor, pointed out. Perhaps I may give a personal example. My method of completing my tax form is always to keep the previous year's form. Nothing much changes in my life, and in the current year I simply fill out the form in exactly the same way as I did in the previous year. The only difference is that the numbers change, but all the boxes are filled in.
However, this year I had the most horrifying experience. I received a letter from the tax man saying that my form had been rejected. That came as close to giving me a heart attack as any experience I have ever had in my life. I telephoned the department and asked, "What is going on here? Am I in serious trouble?". "No", they said, "there are several boxes you've left empty where you should have put in your net taxable income". I replied, "I have never put it in in previous years. Just the one box was enough". They said, "Things have changed. We now like it to be included in five other boxes". I said, "Don't you think that at least you might have told me?".
That leads me to say that I consider the Inland Revenue to be outstanding in its willingness to help when one telephones its staff. But, of course, one has to telephone them; they do not reach out to you and say, "Can we tell you that nowadays the form has to be filled out slightly differently from how it was done before". It does not bother me because I can cope with these strains, but I imagine that for many of our citizens that would not be the case on receiving a letter from the Inland Revenue saying that their tax form was not acceptable.
I revert to something I have just said. My main test of the tax system is precisely that it should not be a job creation mechanism for accountants. Given the Enron debacle, my view is—following the leader in the Financial Times and the very interesting article in today's Evening Standard—that accountants ought to concentrate on actual serious accounting. They ought to put their house in order. otherwise I believe that the days of self-regulation for them are over. Of course, that is not central to our debate today.
1487 I turn finally to the role of Parliament. It is naïve to assume or expect that the Finance Bill is or could be properly scrutinised by the other place. It lacks the will, the time and certainly the expertise. At best, I find it very worrying from a democratic point of view that the contribution of Members on the Finance Bill relies heavily on inputs from a variety of interested parties and pressure groups. That is not the way to run the financial system of our country.
In my judgment, as other noble Lords have said, your Lordships could do the job of scrutiny without in any way infringing the Parliament Act. But we are still not allowed to do so. If we are ever to have serious reform of your Lordships' House, certainly with a large number of elected or even 100 per cent elected Peers, our powers would have to be increased. All those who believe that one can achieve reform along those lines and not strengthen this House simply do not know what they are talking about. Indeed, I do not see the point of reform unless we give this House more power.
Central to those powers is the right to scrutinise the Finance Bill and to ask for a rethink on certain parts which do not make sense and which are completely incomprehensible. That is not the same as saying that we would overturn the other place; quite the contrary. I regard it as fundamental that it should have the last say. But the fact that we do not have any practical say at all is both an inefficient and an absurd state of affairs.
Therefore, to revert to my opening remarks and my own naivety, I hope that one day we shall have a bigger role to play ourselves and that we could and would use that role to achieve simplification.
§ 4.23 p.m.
§ Lord Brooke of Sutton Mandeville
My Lords, I am put to shame by my noble friend Lord MacGregor of Pulham Market and now by the noble Lord, Peston, in having to confess that I am a bear of very little brain who requires professional assistance in filling out my tax return.
I join other noble Lords in paying tribute to my noble and learned friend Lord Howe of Aberavon for providing the opportunity to discuss the case for simplifying the tax system. One of the images that has lived in my mind over the past 20 years or so was the comment made by the Economist on my noble and learned friend's first budget in 1979. It described it as the opening stage of the ascent of a sheer cliff face. It likened itself, its readers and the nation at large, to skiers resting in the sunshine outside a restaurant in the Alps, drinking glühwein or hot chocolate and said that occasionally one of us would raise our binoculars to the summit high above us, wait for the clouds to clear, and then for a moment espy the lonely and tiny figure of my noble and learned friend inching himself with awesome slowness up the sheer cliff face. On a day when in the Abbey we commemorate Lord Hailsham, himself an enthusiastic mountaineer, it is particularly good that long after darkness fell upon us in the 1488 Economist's imagined valley, my noble and learned friend, in the latest instance of his steadfast ascent, should still be clawing himself upwards on behalf of all of us and not least through the tax rewrite project.
For 16 years, during which I spent more than three years abroad in the United States and Belgium before I entered the Commons in 1977, I was continuously responsible in my firm for meeting both payroll and profit targets. For two years between the by-election in the Two Cities when my noble friend Lord Tugendhat went to Brussels, I was both a Back-Bencher in the Commons and remained a part-time chairman and chief executive of my old firm, which by then operated in a dozen countries in Europe, the United States, Latin America and in the Pacific.
During this latter phase, I well remember arguing, as a smallish businessman on the Commons Finance Bill committee in 1987, that we had to get away from a business climate where too many decisions were made for tax reasons to one where they were made predominantly for business and economic reasons. The noble Lord, Lord Barnett—it was a pleasure to listen to him today—and the noble Lord, Lord Sheldon, on behalf of the then government, will recall listening to such speeches long into summer nights that summer.
I am genuinely proud of what, in the ensuing decade between 1979 and 1989 under my noble and learned friend Lord Howe and my noble friend Lord Lawson, we were able, despite occasional hiccups, to achieve in that regard. It must say something for our discharge of the Treasury in that decade that, besides my two noble friends the Chancellors, five of their Chief Secretaries and at least half-a-dozen of their junior Ministers, of whom I was lucky to be one, are now serving in this place. My only qualification, as I implied in my maiden speech, for serving in the Treasury was that among my seven Treasury colleagues overall, I was the only one who had never worked in the City. I am delighted that my noble friend Lord MacGregor of Pulham Market, whom I served during those years, contributed the speech that he did during the course of this debate.
When my noble and learned friend Lord Howe was Chancellor, our noble friend Lord Cockfield made an excellent start in these matters on our behalf. There is a passage in a book about the teaching of classical languages where the author says—it echoes the Economist's metaphor—that the approach roads to the foothills of Parnassus are clogged up with the impedimenta of the Grammarian's Funeral. But my noble friend Lord Lawson was able to quicken the pace in the second half of the decade and that was in no small way due to the clearance by my noble friend Lord Cockfield of the impedimenta during the first half and the outcome was a significantly simplified system.
I was away in Northern Ireland between 1989 and 1992 and I acknowledge that the landslide—to continue the language of the hills—back into tax complication did begin in those years and after when public expenditure pressures exercised themselves on successive and successor Chancellors and Chief 1489 Secretaries. I acknowledge, too, that however well the economy was doing in 1997, the public expenditure pressures had not yet fully eased. The new and present Chancellor had some alibi for having to follow his predecessors into raising taxes wherever he could. But urgent priorities of this sort, unless sensibly planned, have the hazard of "re-complicating" any tax regime because it is potentially and essentially haphazard.
I suppose that the present Chancellor might defend his raid on ACT as a tax simplification, although I must remark on the wry irony that it continues to be defended as a way of discouraging dividends and encouraging investment, while the Government have not hesitated to continue to take notional dividends out of Consignia when the latter is crying out for investment. Much less defensible, however, is the plethora of penny packet incentive schemes in the great sweep of Treasury figures which the Chancellor tends to, under the equivalent of horticultural cloches. Knowing the Treasury, I am sure that it conducts audits of these schemes for their effectiveness. but they are classic examples of returning to the bad old days when businessmen took decisions first and foremost for tax reasons and they had the effect of overburdening the fiscal Christmas tree with excessive decoration.
We know, of course, of the business experience of the former Paymaster General, Geoffrey Robinson MP, but the absence of others with business experience in the Treasury ministerial team since 1997 brings home another irony, that a Chancellor who, to his credit, is obsessive about the nation's productivity, himself erects road blocks to increased productivity both among businessmen and the professions by the multiplicity of schemes which also involve the Treasury in considerable micro-management. Ironically, this may even erode productivity within the Treasury itself. In the case of tax credits there is the further fear of what medical sources would call adverse side-effects in behaviour.
In 12 minutes one cannot do justice to the totality of the subject. I acknowledge that the world is a complicated place and that in consequence taxation cannot avoid being complicated. Also the world is infinitely more global than when I gave up running my former firm in 1979. Indeed, now my old firm is a great deal more global than it was then.
I further acknowledge that both globally and domestically the shadow of avoidance can stand over any tax system and oblige defensive counter-attack. But the benefits of tax rewrite can also be read across into examining basic concepts underlying large and familiar fiscal landmarks and territories. One of the few virtues of the appalling events of 11th September is to cause us to re-examine where we are. I may be being fanciful in calling in evidence and in aid Mr Kissinger's book on the Congress of Vienna, which was written while he was still an academic. In it he explains how Napoleon tore up the 18th century rulebook of Europe's ancien régime in diplomacy, in warfare and in statecraft, and then how, after Napoleon had been defeated, the Congress of Vienna, under Metternich as the strategic planner and Castlereagh as the political executant, gave stability hack to Europe for almost the 1490 next 100 years. Incidentally, I commend the alliance between the strategist and the executant which might also be extended to an alliance between the two Houses of this Parliament.
The analogy of Vienna may belong more to 11th September than to the tax system, but not the least virtue of this debate, stimulated and led by my noble and learned friend Lord Howe, has been to raise the question of whether a return to re-examining basic fiscal concepts is profoundly desirable in this increasingly global world. However, I agree that that is a larger subject than a two-and-a-half hour debate can resolve.
§ 4.32 p.m.
§ Lord Hodgson of Astley Abbotts
My Lords, I join with other noble Lords who have congratulated my noble and learned friend Lord Howe for initiating a debate on this important issue. My noble friend has given us an expert filleting of the strategic problem and some prescriptions for improvement. I do not propose to follow him down that route; it is territory that should be trodden only by former Chancellors of the Exchequer and former Treasury Ministers.
I want to concentrate on the impact the tax system has on the practical, coalface end of our country and to consider the complexities, distortions and the administrative nightmare that the tax collection system now represents. I have gathered examples from my professional life around the country to give a worm's-eye view.
On complexities, I am told that there are now 27 different rates at which income tax can be assessed. I cannot believe that the fiscal stability of the nation requires that many.
On the PAYE system and the regulations referred to by my noble friend Lord Howe, each year employers have to purchase increasingly expensive software to administer their payrolls. In effect, as they point out, that is so that they can carry out the work of the Inland Revenue for the Inland Revenue. The burden falls heavily on small and medium-sized companies. The working families' tax credit, the children's tax credit and the student loan repayment programme are no doubt all worthy objectives in themselves but they are extremely complicated to administer.
On my next point I follow my noble friend Lord MacGregor. Where the tax system interfaces—I use the word "interfaces" advisedly as the tax system is not integrated but interfaced—with the social security system, the complexities are compounded. I invite those noble Lords who fear that I may be exaggerating to join me tomorrow afternoon for the Committee stage of the State Pension Credit Bill Your Lordships will find it an exhilarating and an exciting occasion, but I would advise them to bring a cold towel.
On the transfer of companies, there is a further difficulty. For a number of months after the transfer of an undertaking, incorrect amounts are deducted or paid by the new employer because of delays in acquiring the appropriate reference numbers. The noble Lord, Lord Barnett, said that that was not an 1491 issue that much affected people in the street. When people find that wrong deductions are made, they become pretty excited. Those are some of the complexities.
On distortions, on capital taxes we have already heard reference to the effects of taper relief. But the result has been to ensure that enormously wealthy people pay capital gains tax at the rate of 10 per cent, while ordinary individuals who have scrimped and saved during their working lives and who have built up a modest portfolio of direct investments in, say, Marks & Spencer, Unilever or GlaxoSmithKline have to pay capital gains tax at 40 per cent. As the noble Lord, Lord Peston, pointed out, where is the equity in that?
Another point on structure is that the continued imposition of stamp duty on the purchase and sale of shares has caused the emergence of a whole new industry within the City, that of "contracts for difference", the operation of which avoids the payment of stamp duty. Now it accounts for about 20 per cent of the exchange of shares in the United Kingdom and is accounting for a rapidly rising proportion. If, in reply to the debate, the Minister says that such a tax is important and that the yield of £3 million to £4 million cannot be put aside, perhaps he will reassure the House that he has checked with his officials that there is not a falling yield as "contracts for difference" begin to have a more important impact. During this period, while the City struggles to maintain its supremacy and take the leadership of the European common financial market, that tax creates a severe competitive disadvantage.
Lastly, I refer to the administrative problems of self-assessment. It has become extremely complicated. The noble Lord, Lord Goodhart, said that ordinary people could not hope to understand the tax law. If we are to have self-assessment, people must be able to understand it. Otherwise, why have self-assessment?
I supported the original ambitions for the self-assessment scheme which were a bargain—a bargain between the Government and the taxpayers that there should be a simple system that would save hours of time for taxpayers and for the Inland Revenue and that would improve the Government's cashflow by setting deadlines for tax payments. However, the Government have progressively reneged on their side of the bargain by allowing or encouraging creeping complexity. Interestingly, the Inland Revenue website says that most of the forms are not suitable for download—I shall let that pass. The personal tax return is eight pages of closely-packed type, which is probably fair enough as a personal tax return. But the tax calculation guide has 15 pages, with 134 boxes that have to be filled in. The noble Lord, Lord Peston, referred to that form. I invite him to consider page 15 in the student loan repayment section; it is very complicated indeed. At the front of the form one sees that if one has any of the following kinds of income,scrip dividends … gains on UK life policies … share schemes … partnership, foreign, trusts … capital gains",that form is not good enough and one has to fill in another form.
1492 In the past noble Lords opposite have tried to explain that away by saying that self-assessment was the idea of a Conservative government. I am prepared to own up to that. It is a splendid idea. It is the implementation that is faulty, not the original principle. It is also argued that the Inland Revenue will fill in the form if it is sent in by 30th September. Some people cannot send in their forms by that date, particularly if they have foreign income. But why do we have a self-assessment system if it is so complicated that one has to send in the forms to the Inland Revenue to be filled in? On both those grounds, I believe that we need to find a new way of dealing with this section of the tax code.
As the Inland Revenue would say, the result is that each year self-assessment forms are being sent in later and later as individual taxpayers, for perfectly obvious reasons, face the hassle of filling them in.
I believe that everyone in the country—voter, humble taxpayer, or complex taxpayer—would agree that the time has come to call a halt. The tax system is arbitrary, inequitable and unfair. It is complex beyond the comprehension of the layman. As the noble Lord, Lord Barnett, pointed out, it is a huge waste of public and private resource. In my view, it is corrosive of public trust and confidence. My noble and learned friend has performed a great service by arranging today's debate. I hope that the Government will at last take notice and act on his proposals.
§ 4.41 p.m.
§ Lord Brightman
My Lords, with your Lordships' permission, I should like to say just a few words during the gap. The case for simplifying the tax system is not new. In the course of researches, which I recently made in another area, I came across a pearl that I felt might be appropriate to the present occasion. The year was 1928; the case was Sutcliffe v Commissioners of Inland Revenue; and the judge was Mr Justice Rowlatt who, when referring to the Finance Act 1927, said:Section 21 … is made perfectly unintelligible to any layman or any lawyer who has not made a prolonged study with all his law books at his elbow … it is a crying scandal that legislation by which the subject is taxed should appear in the Statute Book in that utterly unintelligible form. I am told, and rightly told, by the Attorney-General—he understands it as much as anybody—that it is only in this form that legislation can be carried through at all. Then all I have to say is that the price of getting this legislation through is that the people of this country are taxed by laws which they cannot possibly understand".
§ 4.42 p.m.
§ Lord Newby
My Lords, I join other noble Lords in thanking the noble and learned Lord, Lord Howe of Aberavon, for introducing this debate. I believe that there is a considerable degree of agreement among all those who have spoken today. Among other things, everyone agrees that the tax system is increasingly complex and everyone agrees that tax legislation is extremely voluminous.
Most people seem to agree that there has been too much change, but why is this the case? A number of arguments have been put forward to explain why this happens both in this country and elsewhere. One 1493 explanation that has strength in my view is simply the annual Finance Bill conveyor belt. Every year, this juggernaut—if you can have a conveyor belt that is a juggernaut—within the Revenue departments and the Treasury starts the minute that the Finance Bill of the previous year passes into law.
I cannot claim to have had the same effect on the tax system as either the noble and learned Lord, Lord Howe of Aberavon, or the noble Lord, Lord Lawson, who I see is now in his place. However, in the summer of 1980 when working as a junior tax official in Customs and Excise, we were asked to put forward what were known as "minor starters" for the Finance Bill of the following year. In order to prove that I had not gone to sleep, I suggested that, by extending car tax to motorbikes, it would be possible at one and the same time to increase revenue marginally and hit a product that was almost exclusively imported, thereby benefiting the balance of payments. Such was the strength and energy that I put into the proposal that it was in fact incorporated into the following year's Finance Bill. It was a minor addition and complexity to the tax system; and, like many of the other broader additions and complexities to the tax system that have been discussed this afternoon, I suspect that it brought forward no benefit.
A second argument and reason for the tax system becoming more complicated was the one referred to by the noble and learned Lord, Lord Howe; namely, the way in which Chancellors of the Exchequer, especially this Chancellor, have seen taxation as the means of social change. I do not mean the old-fashioned use of taxation as a way of social change by redistributing tax in a relatively simplistic way by having income tax as one of the main sources of tax, but a whole raft of extremely complicated, theoretically targeted measures that affect small groups of society—or sometimes large groups—and which, if effected, would bring about some degree of social change. However, there is a problem with that approach. As a number of noble Lords have said, when one makes that kind of change it does not often have the desired effect.
When dealing with the business side, the noble and learned Lord, Lord Howe of Aberavon, referred to the Business Expansion Scheme and the fact that it did not achieve the desired aim. Even if it had been successful in that respect, it would still have been unsuccessful in that it generated a whole new industry of tax avoidance. The noble Lord, Lord Hodgson, and my noble friend Lord Goodhart also referred to the complexities of the tax system, which have either been counter-productive or have imposed unnecessary and unacceptable burdens on people. Moreover, not only do many of these tax changes not work, they also impose major costs. As taxes are being collected at present, there is no measure as to what the cost is likely to be compared to the benefit gained.
Should we despair of ever making any significant inroad into the tax system and its complexity? The most important comment here beyond that made by the noble and learned Lord, Lord Howe, in describing his work, was made by the noble Lord, Lord Brooke. He outlined how the noble Lords, Lord Cockfield and 1494 Lord Lawson, were able to make substantial inroads into the complexity of the tax system by having the political will and determination to do so. Therefore, I am inclined to believe that we should go forward on the basis that change can be made—simplification can take place—but that, equally, as a number of speakers have said, it is a process not a big bang.
I should like to devote the rest of my speech to two of the questions raised by the noble and learned Lord, Lord Howe. First, how should both Houses of Parliament be involved? Secondly, what, in particular, should be the role of this House? There are two issues that we must consider. To begin with, we should seek to stop further unnecessary complication of the tax system, and then we should consider how we might simplify what already exists. Complication occurs almost effortlessly because there is no proper scrutiny by Parliament of the detail of many tax changes. Therefore, we must look to see how Parliament can stop that from occurring, and do so to a greater extent than is the case at present.
There are a number of ways that we might consider, many of which would require the involvement of this House in some measure. I agree with the noble Lord, Lord Peston. If we do move to the next stage of reform of this House, many of the arguments of another place about whether it is legitimate for people here even to look at tax legislation will diminish. As long as people accept that there is no fundamental challenge to the Commons in terms of tax rates and structures, there can be no argument in principle as to why this place cannot play a bigger role in such matters. But how should this House do so?
First, pre-legislative scrutiny of new taxation proposals is an extremely good way of beginning to tease out the problems that might occur. Let us take, for example, the Business Expansion Scheme. If that had been subject to pre-legislative scrutiny, the problems that have been flagged up by Inland Revenue officials would have become clearer at an earlier stage and that might have persuaded even the noble and learned Lord, Lord Howe, to think again; or, indeed, to bring it forward in a different way. Secondly, I strongly believe that we should split the Finance Bill into a "proper" Finance Bill, as it were, and a lax management Bill. The tax management Bill should be considered as every other Bill is—by this House as well as by the Commons.
There are a number of arguments as to why that may not be a good idea. But, having looked at them, they can be answered. The principal one, which is a kind of clerks' and officials' argument, is that it simply cannot be done and that every tax measure—every clause in every Finance Bill—affects the rate of taxation and its incidence in some way or other.
However, having looked at this year's Finance Bill, and in particular at the aggregate tax which has been referred to by a number of noble Lords, I believe that in many cases it would be possible to split—particularly with new taxes—those clauses which relate to the level and incidence from those which relate to the way that the tax provisions will work. For 1495 example, on the aggregate tax, there are 34 sections in the Act, only two of which relate to the level and to the incidence of tax. The rest is all detailed stuff. That could go into a Taxes Management Bill. This House could look at it, and, in doing so, we would improve the quality of the new tax legislation coming forward.
I also think that with every new tax there should be a compliance cost report, so that at least someone will look at the likely cost of enforcing it. It does not mean that that will rule out the tax change, but at least it would force everyone to accept that if a tax brings in £X million, and it costs a tenth of X to collect it, perhaps we should look again at the matter. So, in terms of new taxes, a number of relatively straightforward measures can he taken.
In relation to simplifying the existing system, the Tax Law Rewrite Project does one job extremely well; it takes this whole—I was going to say "amorphous", but it is not that—impenetrable mass and simplifies it to the extent of making it understandable. It does not simplify the content in any substantial way. That is not its role. It has a hugely important job, but by itself it will not lead to simpler taxation.
The noble and learned Lord, Lord Howe, referred to the tax structure review programme being, as it were, almost an extension of the remit of the Tax Law Rewrite Project to take in more of the substance as well as the form of taxation. That has attractions but it will go only so far. For example, I do not believe that the tax structure review programme will be able to do very much about the business expansion scheme, except to make suggestions at the margin if the view is that the scheme has in some sense failed or has produced a counterproductive effect. What will be required is a strong political will by the Chancellor to remove it and so simplify the tax system. I have some questions in my mind about how far the tax structure review process will be able to do substantial simplification work.
Taken all in all, I am a qualified optimist. I believe that it is possible to simplify the tax system. I do not believe, however, that we will go as far as we could without some changes in the way that taxation is considered by Parliament. I have described some changes that might be made. They will undoubtedly need cross-party support. Today's debate has demonstrated that a considerable degree of cross-party support already exists. We should now work hard, not least with and on our colleagues in another place, to bring about these changes.
§ 4.54 p.m.
§ Lord Saatchi
My Lords, I join other noble Lords in congratulating my noble and learned friend Lord Howe on his impeccable timing in bringing forward this debate to coincide exactly with the return of our self-assessment forms. No one could have asked for a simpler explanation of the need for tax simplification than the one we received in his characteristically crisp and clear opening speech.
I echo the sentiments of my noble friend Lord Brooke and many other noble Lords who have paid tribute to my noble and learned friend and to the 1496 Inland Revenue's tax law rewrite team in improving the intelligibility of tax legislation, and for the light that they try to shine on notoriously opaque aspects of tax law. I look forward particularly, as I am sure your Lordships do, to the re-written Bills on income tax which we can expect later this year.
The undoubted hero of the entire simplification project is indeed my noble and learned friend Lord Howe. He began a lifelong campaign for tax simplification in his maiden speech in 1964. Why is it that—as he and many of your Lordships have said—his lifelong effort to simplify taxation has proved such a struggle? It is worth remembering what my noble friend said about simplification having two meanings. The re-write process seeks to re-write the law in a way that makes it easier to understand. That is one aspect. The second, which perhaps my noble and learned friend's tax structure review committee will address—this is what I think the noble Lord, Lord Newby, was looking for—is to simplify the actual mechanics and administration of taxation. It is on that second aspect that I want to concentrate my remarks.
The noble Lords, Lord Goodhart and Lord Newby, pointed to the tendency—my noble and learned friend said that it was a "virus"—to use the tax system for social change, or, as my noble and learned friend said, to "alter human behaviour"; in other words, to discourage an activity by taxing it or to encourage something by giving it a relief. After that one has to decide which class of person or entity should qualify for the tax or relief and in what amount. It is that which has created the present tax structure.
Today, most people believe that the tax system takes around 39 per cent of GDP. But that is just the end result of the merry-go-round system which my noble friends Lord Selsdon and Lord Hodgson described. In fact, the total system collects a staggering 53 per cent of GDP. The citizen is then obliged to claim back 14 per cent of GDP—£143 billion—by navigating a mass of over 250 complex tax allowances, reliefs, exemptions, credits, tapers, indexations, disregards and so on.
What this tangled web amounts to, as the noble Lords, Lord Peston and Lord Newby, said, is that the cost of collection increases. So today almost half of the increase in the Government's entire administration costs is allocated to the collection of tax or the distribution of benefits. It is an extra £1.8 billion in the Red Book. Yet—perhaps the most serious difficulty of all—billions of pounds a year of benefits and tax credits go unclaimed by millions of citizens who cannot fathom out how to claim them. For example, this year, following the introduction of the children's tax credit and the pensions credit, it is estimated that £2.6 billion of budgeted expenditure in the Red Book will go unclaimed.
Perchance that brings us to the heart of the matter. I hope noble Lords will not think me too cynical. This is not supposed to be a party point. Possibly the result of all this complexity is lack of transparency, and perhaps that is the whole point of it. The charm of such a complicated tax system from the Government's
1497 point of view is the scope that it allows for hidden tax increases via reduced allowances. Under our structure the Chancellor can increase the tax burden without ever announcing a tax rise. People just wake up one day and find that they are in a higher tax bracket.
No citizen, however intelligent, can match the massed ranks of No. 10, No. 11, the Treasury and Millbank—one man against the legions of Rome. So someone has to hold a torch for simplicity in the tax system and for my noble and learned friend's crusade. He certainly cannot do it on his own, however powerful a figure he is. It should, as many noble Lords have said, be Parliament. "Parliament is the key", said the noble Lord, Lord Barnett. I am afraid that the Institute of Chartered Accountants recently warned us that the tax system was now so complicated that it had,spun out of democratic control".The noble Lord, Lord Newby, followed the views of the Treasury Select Committee in another place when he objected that the passage of Finance Bills through Parliament afforded insufficient opportunities for scrutiny of complex measures. The noble Lord, Lord Barnett, himself told the Commons committee that the way in which Finance Bills are examined by Parliament is totally inadequate. He told us the same today. The Institute of Chartered Accountants agrees with him. It states of our parliamentary procedure on Finance Bills:Many of the provisions become law without either a thorough review or the time for second thoughts or worthwhile amendments".I shall offer your Lordships two suggestions that may help. I hope that they conform with the wish of the noble Lords, Lord Barnett and Lord Newby for a fully cross-party approach to the problem. First, I suggest that a new, simple measure of the ways in which governments raise tax revenue is needed to focus public attention on the true level of tax that people pay.
At one time the public could look to the standard rate of income tax as the yardstick of whether their taxes were going up or down. But that was before the Treasury perfected its skill in cutting visible taxes on voters while raising invisible taxes elsewhere. That has rendered obsolete the old-fashioned measure of taxation. That is why the public are not this minute falling at the Government's feet in gratitude—this is my only political point, I promise—over their pledge not to increase income tax or VAT. The public know that that still leaves the Government with 248 other ways to raise tax.
In response to all that, the Government's preferred replacement for the standard rate of income tax as the measure is what they like to call the "official tax burden" by which they like to define net taxes and social security contributions as a percentage of GDP. That is incomprehensible to most people. It is also, as my noble friend Lord McGregor said, distorted by the introduction of tax credits. So a different measure is required to assess the real level of taxation in the modern age. I hope that your Lordships' House can consider that in future.
1498 Secondly, it is now high time to end the antiquated and irrelevant ban on your Lordships' consideration of Finance Bills by a 100 year-old Act, the Parliament Act 1911. I am deeply cheered today to hear such distinguished voices as those of my noble and learned friend Lord Howe, my noble friend Lord MacGregor and the noble Lords, Lord Barnett, Lord Peston, and Lord Newby, raise that issue again. There is no doubt from reading the Hansard of the time that that iconic Act came into being to disqualify the then hereditary House of Lords from discussing money matters. That House of Lords no longer exists. We are about to be joined by elected peers. The grounds for the exclusion of your Lordships' House have disappeared.
As my right honourable friend, Iain Duncan Smith, along with so many of your Lordships today has said, the new, reformed House of Lords should be able to assist another place in scrutiny of the financial affairs of the nation. We hope that a Joint Committee on reform of your Lordships' House, which we are confident that the Government will want to consult, will consider that recommendation positively.
I hope that the Minister is not about to give us the same dusty answer as did the noble and learned Lord the Leader of the House, who, sincere radical though he is, still clings to the 1911 Act to maintain the status quo. The noble and learned Lord says that no matter what the change in the composition of your Lordships' House, the primary legislative powers of the House as circumscribed by the Parliament Acts should remain unchanged, because,Essentially nothing has changed that requires any modification of the Parliament Acts".—[Official Report, 24/01/01; col. 299.]He is saying that, whatever changes are made to your Lordships' House, money Bills should continue to be X-rated material for your Lordships. We can look but we cannot touch.
The Government's bad luck is that their immobilist approach on the matter has been struck what I think they like to call a double whammy. First, the elected House of Lords will inevitably have more legitimacy, which will inevitably lead to more powers, as the noble Lord, Lord Peston, said. Secondly, in the meantime—as many speakers said during our debate on reform last week—the scrutinising reputation of another place is beginning to wear thin.
We can make a House of Parliament more legitimate and give it more power, or we can make a House less legitimate and give it less power. But what we surely cannot do is make a House more legitimate and simultaneously reduce its power, which is what the Government propose.
In those two ways, first, by a simpler definition of the overall tax burden that people can actually understand, and, secondly, by the greater contribution of the experts in your Lordships' House, so many of whom are here today, governments would he more obliged to display greater transparency in their tax policies. Full disclosure would mean that governments could not hide from the political consequences of their tax actions. The scope for invisible tax could he 1499 reduced. The hidden effects of fiscal drag could be neutralised. I am hopeful, as is the noble Lord, Lord Newby, that the system can be revitalised and restructured for everyone's benefit.
§ 5.5 p.m.
§ Lord McIntosh of Haringey
My Lords, when I first ventured into politics as a junior member of a London borough council nearly 40 years ago, I joined the roads committee, the works committee, or whatever it was called, and I learnt a lesson that has still not left me. I had always thought that when people complained about the noise of vehicles on road surfaces, they had a legitimate complaint that could be dealt with by making the road surfaces smoother. I had always thought that when people complained about road surfaces being slippery and dangerous, they had a legitimate complaint that could be dealt with—presumably by making them less smooth.
I had never put the two together. It was not until I put the two together that I realised that there was such a thing that I knew in business and economics as trade-off. In other words, there is no good answer to many such problems. We must make a judgment; we must consider the competing priorities. I am afraid that that is still true of tax simplification.
I yield to no one in my admiration for the noble and learned Lord, Lord Howe of Aberavon, and the work that he has been doing not just in the tax law rewrite project but throughout his life in politics. As has been said, his maiden speech was on this subject. He recognises that there is no single objective of tax simplification that does not entail costs in its achievement. His excellent Hardman lecture, which I had the opportunity to re-read, was entitled not "Simplification" but "Simplification and Stability". Of course, stability must be taken into account. I give sincere and profound praise to the work of the Tax Law Rewrite Project and to the lifelong commitment of the noble and learned Lord to that cause.
I am less confident about the timing of this debate. I think that it was the noble Lord, Lord Saatchi, who told us that its timing was good because there are eight days left in which to hand in self-assessment forms. I must disabuse him: self-assessment forms had to be in by 30th September for the Revenue to do the calculation; any form must be in by 31st January and the assessment must be done by the taxpayer. Perhaps this is an opportunity to encourage that.
The noble Lord, Lord Selsdon, made an interesting contrast between Hector, the old inspector with the bowler hat, and Mrs Doyle, whom he described as a leprechaun. He described that advertising figure as hated and admired. I hope that as a professional, the noble Lord, Lord Saatchi, will agree that that is rather a good thing for an advertising concept. At least the noble Lord, Lord Selsdon, remembered it, so perhaps it is doing some good.
Of course we maintain our commitment to tax simplification. I shall describe how we are seeking to further that commitment, but I must say that 1500 simplification alone is not what most people want. I think that that is generally recognised. Of course, simplification is not itself a simple subject. However, it will be generally recognised that simplification alone is not what most people want. It is not itself a simple subject. What most people want is a tax system that is simple but is also certain and efficient. As my noble friend Lord Peston said, being cheap to collect is one of the considerations. It must also be competitive and, above all, fair. My noble friend Lord Peston and the noble Lord, Lord Barnett, made that point with reference to horizontal equity. To be fair, I must say that the more considered comments on the tax system, including those made this afternoon, recognise that the tax system must achieve a balance of all those things.
Where specific changes are proposed, the Inland Revenue, the Treasury and Customs and Excise take account of them. Suggestions have been made this afternoon that will be fed into the decision-making process. However, those who argue for simplification usually find it easier to argue for improvements in the process of tax legislation, rather than arguing about specifics. They do not tell us what reliefs they would repeal, what avoidance they would allow to go unchecked, where they would replace specific legislation with something more broad-brush and how they would ensure that the revenue needed for public services will not be lost. Instead—this has been true of this afternoon's debate—there is plenty of emphasis on procedures, additional committees or review programmes.
I read with great care what the noble and learned Lord, Lord Howe of Aberavon, said in the Hardman lecture about the tax structure review programme. It is certainly an attractive proposition, but, as I understand it, one of the elements in it was that, first, the programme should make proposals for tax reform. There is a plethora of bodies making proposals for tax reform, not just your Lordships. Apart from anything else, what is the Better Regulation Task Force for? Secondly, the noble and learned Lord, Lord Howe of Aberavon, acknowledged that the word "guaranteed" was his and was not in the original Adam Broke formulation. He spoke of a guaranteed ability to get Ministers to promote changes. There are few people in public life who think that they could provide that guarantee.
I recognise the passion behind the noble and learned Lord's condemnation of some of the existing procedures. I recognise the complaints about the time taken and the lack of time available for the Finance Bill. That is, to some extent, in conflict with his criticism of the PCTA, the objective of which has to be not just the continuation of taxes imposed annually—the part that he would retain—but the implementation of changes. Those changes can be reductions or increases. If they are reductions in either direction and if they are to be delayed because of the limitations on the PCTA, those in a position to take advantage of the delay will gain from it, and those who are not will not. That seems to help the rich—or those with better advice and more resources—at the expense of other people.
1501 We must ask why taxation is so complicated. Simplification is about transparency and clarity, and that is what the Tax Law Rewrite Project is working on and achieving. I look forward to the two income tax Bills that will appear this year and next year. Our approach—I had hoped that it would achieve some recognition in this afternoon's debate—was the code for fiscal stability, which is very much a Howe objective. It recognises that the conduct of fiscal policy has a critical influence on economic stability. The code has improved the conduct of fiscal policy by specifying the principles that guide the formulation and implementation of fiscal policy. Those principles are transparency, stability, responsibility, fairness and efficiency.
It is not just a matter of having a code. What have we done? The most important thing that we have done in line with the code is the Pre-Budget Report. It is consultative in nature and includes, as far as is reasonably practicable, proposals for significant changes under consideration for introduction in the Budget. The noble Lord, Lord MacGregor of Pulham Market, referred to that. It is exactly the kind of thing for which he should argue and which he should recognise as being provided in practice by the Pre-Budget Report, which includes draft clauses, all of which are available for scrutiny.
When we debated the Private Member's Bill introduced by the noble Lord, Lord Saatchi, last March, I resisted—and continue to resist—the proposals in that Bill. However, I said that the Government could see no reason why there should not be a Select Committee of' the House to consider the Pre-Budget Report proposals—and any others—in advance of the Budget and contribute to the process by providing a report. I still hold that view. That is more practical than the challenge to the Parliament Act 1911 and the House of Commons resolutions of 1671 and 1678 to which the noble Lord, Lord Saatchi, appears still to be devoted.
In the Pre-Budget Report and in the consultation process that follows, we provide greater transparency and clarity to help ensure a stable economic environment. I say particularly to the noble Lord, Lord Newby—although others made the point—that we have extended the amount of draft legislation in this area. There has been legislation on welfare reform, limited liability partnerships and, above all, financial services and markets, which, difficult though it was in practice, would have been unachievable without the pre-legislative scrutiny and the Joint Committee.
Why is there so much complexity? It is, as the noble Lord, Lord Brooke of Sutton Mandeville, recognised, the complexity of the modern world. That complexity is reflected in the fact that several lawyers and accountants have spoken this afternoon. Many lawyers and accountants are better paid than those available to the Government. They seek to find ways round the tax system, and we must keep up. We must keep up with the way in which commerce and industry are conducted. If that means detail, it would be unfair if we were to abandon certainty to rely on court 1502 judgments on what we meant that might take years of waiting for. The search for simplicity should not be carried out at the expense of certainty.
Complexity arises because we need to target tax measures on where help is needed. No one has argued that a rough and ready tax system is a price worth paying for a simpler system. Such an argument would not be tenable. Of course, we must report the cost of changes in our tax system. The noble Lord, Lord Newby, referred to that matter. We do so—rightly—in the Budget documentation.
I referred to the need to counter abuse, avoidance and evasion. That need will not go away. I also referred to the issue of consultation and pre-legislative scrutiny. Most recently, the research and development tax credit for large companies and the new regime for intellectual property have been the subject of considerable scrutiny.
I have here a much scribbled-over page about specific taxes to which noble Lords referred and which they criticised. Capital gains tax was criticised by the noble Lords, Lord MacGregor of Pulham Market and Lord Selsdon. The noble Lord, Lord Brooke of Sutton Mandeville, spoke about penny-packet incentive schemes. The noble Lord, Lord MacGregor of Pulham Market, referred to the complexity of the aggregates levy; in fact, that is an environmental measure. The noble Lord, Lord Goodhart, referred to the tonnage tax, although that tax was widely welcomed, and the wording of it is modelled on that in the Capital Allowances Act.
Therefore, I do not think that it is open to me in the time that I have available to answer all the points about specific taxes, except in so far as they affect the simplification issue that is before us today.
However, I would like to give one example of how complexity enters taxation because we are trying to do the right thing. I refer to the special 100 per cent first year capital allowances to encourage small businesses to invest in information technology to which the noble Lord, Lord Goodhart, referred. I believe that others did as well.
The legislation introduced in the Finance Act 2000 has to define specifically which businesses can qualify, which assets can qualify and which expenditure can qualify. If that is not done it would not be comprehensible and there would be incessant law suits on the subject.
The incentive has been welcomed by business. It represents a departure from the business accounts and from the general scheme of capital allowances for plant and machinery. It has been welcomed, in particular, by those who commented on a recent Inland Revenue technical note that looked at the case for more closely aligning profits for tax with the profits shown in a company's accounts.
Another example that I constantly give when the issue arises is business assets. I was one who did not benefit from special treatment for business assets when I sold my business more than 10 years ago. Now that is available. The capital gains tax relief for entrepreneurs 1503 who sell majority shareholdings, or in some cases minority shareholdings, of their business, at any age, is available.
The complexity of tax legislation is increased, but the relief is there because it is called for and because the need to encourage entrepreneurial activity is, frankly, more important than the number of pages in a Finance Act.
Taxation is not to keep the Inland Revenue and the Customs and Excise amused and occupied. There are objectives that are set for our tax system—the objectives of ensuring economic stability; of raising productivity; of increasing employment opportunities and work incentives for everybody; of promoting savings and long-term investment; of tackling child poverty; and of ensuring a fair tax system that benefits the many and not the few.
Therefore, we have to look at what we are doing in that sense. A number of noble Lords have rightly referred to the interaction of the tax and benefits system. One cannot look at the achievement of those objectives without bringing into account not just the tax system, but also the benefits system.
The working families' tax credit helps over 1 million working families with children. Furthermore, 2.5 million children in this country benefit from working families' tax credit—an average of £35 per week per household better off. The noble Lord, Lord Brooke, said that it was not succeeding. I call it a profound and important success.
The noble Lord, Lord Saatchi, makes the point regarding under-claiming and I do not deny that there is under-claiming of many of these benefits. However, we have to look at the net effect on child poverty and family poverty in this country to make a judgment about whether we are doing the right thing.
Even in this regard simplification comes in because from April 2003 working families' tax credit, disabled persons' tax credit and children's credit will be replaced with two credits—a working tax credit and a child tax credit—which will continue to refine the integration of the tax and benefits systems. I know that some people object to those credits being paid through the wage packet but that has proved to be the most direct, available and improved way of tackling poverty—in other words, by making work pay.
I now have a short time to turn to the ways in which we do seek to help taxpayers. I want to emphasise that for the vast majority of individuals who pay PAYE and do not submit tax returns, the simplification of the tax system is not a problem. It happens without their noticing. They do, indeed, think of their income as being their take-home income rather than their gross income. And why not? It is a perfectly reasonable way to run a family budget.
For most people this is not actually an issue, but for those for whom it is an issue I was grateful to hear the noble Lord, Lord MacGregor, say that the system is easier. As I said earlier, for those who make their 1504 returns before 30th September—and I really cannot see that there can be more than a few thousand who cannot—the calculation will be done for them.
I believe that the self-assessment programme has been a substantial success and if anything arises when I read the debate on the subject I will certainly respond to it. However, I do not believe that there has been any effective criticism of the way in which it has been progressing.
Of course, business compliance costs are of enormous importance. Without admitting that compliance costs have gone up, I invite noble Lords who make that allegation to contrast it with lower corporation tax levels, the abolition of advance corporation tax, changes made to simplify the national insurance system, help with information technology and the review of payroll services by Patrick Carter.
It is certainly true that change has been and will be needed. The business environment and the economy as a whole are changing rapidly. E-commerce brings challenges, not least the speed at which decisions can be taken and the location of companies. It is important that new developments do not bypass tax systems.
Tax systems should not seek to frustrate, undermine or shackle that dynamism and development. I am sure that it is right, as has been said, that a business decision should be taken for business reasons rather than for tax reasons.
We will continue to consult on change. All legislation has been, and will continue to be, subject to the scrutiny of agreement of Parliament. We will continue to be accountable to Parliament and to the electorate for our proposals. We will continue to inform people of their rights and obligations, to help those who want to comply and to tackle those who do not want to comply.
Tax simplification is a worthy cause but it is not the only criterion for government, for Parliament, or for the citizens of this country.
§ 5.28 p.m.
§ Lord Howe of Aberavon
My Lords, in closing the debate I should like to thank all those colleagues who have been kind enough to pay tribute to me. Perhaps I may say a special word of thanks to my noble friend Lord Brooke, because he is a rather remarkable creature in more than one respect.
Both his parents were life Peers and Members of this House. His father was the first Chief Secretary, an office which my noble friend also held. So he deserves to be acknowledged and congratulated as the first hereditary life Peer and the first hereditary Chief Secretary. I particularly appreciate his kindness.
I believe that the debate has provided strong support for the case for simplification, rather than dealing with how it should be achieved. By the end, I was encouraged at the extent to which the understandable scepticism of the noble Lord, Lord Barnett, was being matched by contributions from my noble friend Lord Saatchi and the noble Lord, Lord Newby.
1505 I am slightly dismayed by the less than encouraging note struck at some points by the ever competent, ubiquitous, alibi witness for the Government, the noble Lord, Lord McIntosh. However, I am encouraged by his commendation and blessing of the tax rewrite scheme and his promise to do better in the future.
Therefore, I thank your Lordships and beg leave to withdraw the Motion.
Motion for Papers, by leave, withdrawn.