Tax System (Hansard, 7 March 1990)

§ Mr. Tim Smith (Beaconsfield)

I am grateful for the opportunity to raise the subject of the administration of the tax system. There can be no doubt that in many, perhaps most, respects, the administration of the tax system has improved out of all recognition since 1979.

First, and most important, income tax rates have been cut at all levels, while the yield has risen. In 1979, the standard rate of income tax was 33 per cent.; today it is 25 per cent. While the rate has been cut by nearly a quarter, the yield has risen by nearly 10 per cent.

When the top rates of tax were 83 per cent. and 98 per cent. on earned and unearned income respectively, the incentive to avoid tax could hardly have been greater. A great deal of time and energy was spent by some bright people in the late 1970s devising tax avoidance schemes. Rossminster, although best known for such schemes, was only the tip of a large iceberg.

Secondly, income tax has been further simplified by the introduction of relief at source for mortgage interest, and by the extension of tax deduction at source to bank as well as building society interest. That means that millions of PAYE taxpayers have a tax coding that consists solely of a personal allowance, and do not need to complete a tax return each year.

Furthermore, as well as the welcome reduction in tax rates, allowances for alimony, forestry and deeds of covenants to individuals have largely been abolished, resulting in simplification in those areas.

Thirdly, Inland Revenue staff numbers have fallen. In 1978, there were 85,000 staff. In 1989, there were 68,000. It is worth noting, however, that in 1960, there were only 56,000 and in 1950, 50,000.

Fourthly, receipts per Inland Revenue employee have increased considerably in the past 10 years from about £1.1 million in 1980 to about £1.6 million in 1989. Those changes have occurred at a time when the number of schedule E taxpayers has grown substantially to nearly 30 million in the current year and when the number of self-employed has grown even more rapidly to more than 2.5 million.

As a member of the Public Accounts Committee, I am well aware of and welcome the improved efficiency of the Inland Revenue. The Revenue probably publishes more information about its management planning, its budgetary and management information systems, its application of information technology and its work measurement than any other Government Department.

The most recent annual report of the Revenue contains five paragraphs entitled, "Reducing the Burden on Business". It explains that the best administrative procedures simplify the job for everyone—for taxpayers, businesses and the Department. It says that proposals for new legislation or changes to existing policies are all assessed for their likely compliance costs for business. The aim is to assess and where possible to quantify the effect on compliance costs for businesses and other taxpayers whenever the Revenue advises Ministers on policy issues. The report also refers to the annual programme of reviews 978 of existing regulations introduced in 1988 to complement the systematic compliance cost assessments for new proposals.

As part of that programme, the Inland Revenue undertook a review of PAYE communications with employers. Other recommendations from efficiency scrutinies deal with the construction industry tax deduction scheme and schedule D procedures. All those improvements in the administration of the tax system are most welcome.

However, I believe that the time has come for a much wider review. It should start with the aims and objectives of the Inland Revenue. The 1986 public expenditure White Paper listed 10 factors that are considered when proposals for changes in direct taxation are being evaluated. The sixth was the effect of the proposals on increasing or reducing the complexity of the tax system. The eighth was the compliance burden on employers, businesses and other taxpayers.

In the 1990 White Paper, those 10 factors are reduced to five. There is no reference to the effect of proposals on the complexity of the tax system, but the fact is that the tax system is becoming more and more complex each year. The volume of tax legislation is growing at an alarming rate.

In the 10 years from 1980 to 1989, there have been 12 Finance Acts. Between them they contained 1,335 sections and 200 schedules, and they took up 2,185 pages. The Finance Act 1989 was the largest in history. It has 188 sections and 16 schedules and it runs to 275 pages.

There are two reasons why that volume of legislation is unacceptably high. The first relates to the costs that it inevitably imposes on the Inland Revenue and on taxpayers. The second relates to the burden that it places on the House of Commons. I want to deal with each of those reasons in turn.

There is now an overwhelming acceptance within the business community and, I am sure, the Inland Revenue, that our tax system is needlessly diverting an increasing number of highly trained personnel within the accountancy and legal professions, not to mention people building up and running businesses of all kinds, from work of far more importance to the nation. The complexity of tax legislation is undoubtedly one of the main reasons why the Inland Revenue is continually losing expensively trained staff to the private sector. I am convinced that the resources of the Revenue could be used far more effectively—for example, in pursuit of the black economy and in the development of various specialist units.

A further result of fiscal complexity is that many statutory provisions and judicial dicta are in practice overlooked because of the sheer impossibility of tax practitioners and the Inland Revenue being aware of everything in the statutes, statutory instruments, statements of practice, extra-statutory concessions and other Revenue pronouncements.

So the complexity of our tax legislation ties up a lot of talented people who could be put to more productive use, and it brings the law into disrepute, since it cannot be fully enforced. For those reasons, I believe that simplification should be given much greater political priority. I am sorry that it has been dropped as a consideration from the 1990 public expenditure White Paper, and I hope that it will be reinstated. Of course, I understand that Ministers have other important priorities when considering the contents of a Finance Bill, but I firmly believe that simplification 979 should be moved up the agenda. Last year's Finance Bill was the largest and probably the most complex in history. I hope that this year's Bill, which will follow my right hon. Friend the Chancellor's Budget on Tuesday week, will not set a new record.

I recognise that if simplification is to be given greater emphasis, the case must first be made that the present system is damaging. As I have said, it creates inefficiencies, and results in the misallocation of scarce and highly trained resources. We now need a full inquiry into the matter. I hesitate to recommend a royal commission as I know that that would not find favour: I simply point out that it is nearly 40 years since the last full inquiry, which was a royal commission, into our system of taxation.

It may be that such an inquiry would conclude that the only realistic way in which we can simplify tax legislation is by abolishing taxes. The abolition of capital gains tax would certainly be most effective in that respect. The inquiry should examine all the options, but it should have relatively narrow terms of reference. It should not be asked to conduct a comprehensive review of United Kingdom taxation, but should be invited to focus on the volume and complexity of tax legislation, and to assess the cost to the Inland Revenue and compliance costs to taxpayers. It should be asked to examine the growth of tax advice as a source of business for accountants and solicitors and to estimate the cost to the nation of that waste of talented resources. It should take into account the cost to the taxpayer of the constant poaching of Inland Revenue staff and should look at all the options for simplifying tax legislation and make recommendations. The Inland Revenue, taxpayers and their advisers should be represented on such an inquiry and it should have an independent chairman.

Secondly, I shall deal with House of Commons procedure and consider briefly the burden that a Finance Bill of the size and complexity of that produced last year places on hon. Members. This is, of course, an old chestnut. As long ago as 1978, when he was shadow Chancellor of the Exchequer, my right hon. and learned Friend, now the Leader of the House, argued in his Addington speech for the introduction of a technical tax Bill.

I am sure that my hon. Friend the Minister is familiar with the argument. It is that most of the clauses in the annual Finance Bill are wholly technical. Those that are political—for example, changes in tax rates and allowances and the introduction of new tax reliefs—are relatively few. Lumping them all into a Bill which is not published until five months of the parliamentary year have already elapsed, means that parliamentary scrutiny is inevitably rushed and inevitably focused on the political elements.

I do not seek to denigrate the efforts of those who serve on the Standing Committee. They do the best they can in the circumstances, but I was responsible when I worked for the Institute of Chartered Accountants in England and Wales for the preparation of our annual submission on the Finance Bill. It was always the most unbelievable rush. We had to allow each of our 90,000 members the opportunity to comment, but we had to finalise our submission within two or three weeks of publication of the Bill if it was to have any influence at all either on Treasury Ministers or on members of the Committee.

It is true that in recent years the Treasury has done more to consult interested parties about prospective tax 980 changes. That is obviously a most welcome development. How much better it would be if a technical Finance Bill could be published at the beginning of each Session. Ample time could then be given for representations to be made and for proper consideration in Committee.

I appreciate that Treasury Ministers dislike the prospect of two Finance Bills every year, and that they like to save everything up and put it in the Budget. But the Budget is about fiscal policy, that is to say, total tax revenue and total borrowing or debt repayment, not about the minutiae of taxation. Many of the matters that take tip most room in the subsequent Finance Bill do not even rate a mention in the Budget Statement. I am sorry, therefore, that my right hon. and learned Friend dropped the idea of a technical tax Bill as soon as he became Chancellor. No doubt the Inland Revenue persuaded him of its impracticability, but one way or another we have to try to avoid the situation that arose last year.

Philip Hardman, senior tax partner of Grant Thornton, to whom I pay tribute for the tenacity with which he has pursued the cause of tax simplification, has written about last year's Finance Bill: Certain battles need not have been fought. If the Government had sought the views of experienced tax practitioners beforehand, we would not have seen the close investment company legislation crawling out of the ashes of the apportionment legislation only to be squashed to death by the tanks of the accountancy and legal professions. I am sure that when my hon. Friend the Minister replies he will refer to the abolition of development land tax arid investment income surcharge and to other improvements. I went out of my way at the beginning of my speech to acknowledge the many changes for the better that have been introduced since 1979. The fact remains, however, that Finance Bills have been getting bigger and bigger arid more and more complex. Philip Hardman tells me that parts of our tax legislation are ignored—by accident, not design—as they are too complex. This is a serious situation, which merits urgent consideration. I hope that my hon. Friend will agree to set up the inquiry that I have suggested.

§ The Financial Secretary to the Treasury (Mr. Peter Lilley)

I pay tribute to my hon. Friend the Member for Beaconsfield (Mr. Smith) for his success in securing this debate and for the unparalleled expertise that he brings to this subject; it is unrivalled among Members of this House. I share his worry about the length and complexity of tax legislation. I suppose that I should declare an interest in this subject. No one has a greater interest than I have in ensuring that legislation is kept as simple as possible so that my little brain can understand it, and as brief as possible so that my time on the Finance Bill is minimised.

Inevitably it is something of a perplexity to a party whose members are of our disposition to understand how a Government committed to the minimum of laws find themselves, none the less, producing a great number of taxation laws. I have looked into the matter, and I can tell the House that there is a number of reasons for this. Undoubtedly they do not explain everything, but I think that they should be borne in mind when this problem is being considered.

Even simplification takes Finance Bill space. In the last Finance Bill—my hon. Friend will understand why I take the last one rather than the forthcoming one—we introduced a measure to simplify schedule E receipts. It 981 took 11 pages, but we now have a simpler law. Even abolition takes Finance Bill space. As my hon. Friend mentioned, we abolished much of the legislation affecting close companies. There were 20 pages on the statute book. It took eight pages to repeal and, in so far as it was necessary, replace that legislation.

Another of our objectives is to make legislation more user-friendly. This results in its being longer. For example, in simplifying the schedule E matters to which I have referred, we have used the modern and, I hope, more user-friendly approach. The draftsmen deliberately sought to help practitioners and others who need to refer to the legislation by making it self-contained. Legislation by reference would have been shorter, but it would also have been less convenient for those who have to understand and apply the new rules. That is why we had to go to 11 pages. I hope that in doing so we simplified the legislation in a way that practitioners welcome.

The structural reform to which my hon. Friend paid tribute is essentially a process of reducing rates and reducing the number of allowances and reliefs so that the tax burden is spread more widely. Inevitably that has involved some major tax reforms over our period in office—sometimes comprehensively replacing a whole mass of legislation by a new structure which it is felt is less onerous but which requires a great deal of legislation. In the last Finance Bill, for instance, we carried out the major part of the reform of life assurance taxation, reducing the rate and spreading it over a wider tax base. That itself took quite a sizeable chunk of space—10 pages, plus a couple of schedules, with more to come.

Inevitably, if one is reducing the rate and spreading it more widely, one wants also to stop tax avoidance. If some people avoid paying tax, others have to pay more. Therefore, there is a dollop of tax avoidance measures to try to keep up with the amazing ingenuity and fertility of mind of those in the profession who perhaps are over-assiduous in seeking to minimise the tax burden on their clients. In the last Finance Bill, 28 pages fell roughly under that heading.

If we are to keep the tax system up to date and in a form which is usable and relevant to practitioners and the ultimate clients of practitioners, we must modernise constantly to take into account the changing and increasingly sophisticated environment in which we live. There were about 18 pages in the previous Finance Bill on adapting the tax system to deal with deep discount bonds. They were welcomed largely by the practitioners in the City because they met a more complex situation which did not exist before those financial vehicles had been invented and developed.

My hon. Friend the Member for Beaconsfield mentioned the possibility of a major inquiry into various aspects of the tax system which concern him. I understand his concern, and I shall think deeply about it as I study what he said this evening. I remind him, however, that we had a major inquiry under Lord Keith into compliance with taxation. We consulted extensively and major parts of the report have already been implemented. About 30 pages of the previous Finance Bill—it was probably the largest single item in the Bill—were used to implement some of the recommendations 982 resulting from the Keith commission. There has been a major investigation resulting in major legislative reforms. Perhaps the reforms need time to bed down before we take up those matters again.

I am sure that my hon. Friend the Member for Beaconsfield is aware of a non-governmental inquiry into the tax system that has been carried out by Professor Sandford of Bath university, with the help and active co-operation of both Customs and Excise and the Revenue. A measure has been attempted of the burdens of compliance on industry and business, and there is no escaping the fact that they are onerous. Professor Sandford pays tribute, however, to the United Kingdom and its tax authorities. In his opinion, they are clearly ahead of the rest of the world in taking into account the compliance burdens—on this account, my hon. Friend paid tribute to the tax authorities—that tax law inevitably imposes.

We can see how far we are ahead of some countries when we compare our legislation—it embraces direct taxes and secondary legislation and has reached the giddy heights of 3,700 pages—with that of the United States, which extends to nearly 10,000 pages of direct legislation and regulation. We can claim that we have kept our legislation more continent than that of some of our competitors internationally.

My hon. Friend the Member for Beaconsfield mentioned the possibility of a technical Finance Bill which would break the present Finance Bill into two parts and, he argued, permit more consultation. We consult, and we are in the habit increasingly of publishing draft clauses. Last year we published draft clauses in respect of the European Court of Justice ruling on VAT on property, which I proudly referred to as my green budget—no one took the blindest bit of notice—in February 1989. It is quite common for us to consult in depth with the active participants of industries which are organised enough to participate. That is the case when we are involved in reforms such as those of life assurance and those affecting the oil industry.

Two Bills might well conflict with the desire for less legislation rather than more. I know that that is not the intention of my hon. Friend the Member for Beaconsfield, but such is the nature of this place that if we had two Bills passing through the House I cannot believe that it would result in less than half as many pages in each measure. Each would tend to be an opportunity for insiders and outsiders to add to the initiatives which we already had.

Although the organisations of accountants and so on share my hon. Friend's concern about the burden of taxation, they are not slow to come forward with suggestions. For the coming Budget we have had from the Institute of Chartered Accountants in England and Wales 12 proposals, from the Institute of Chartered Accountants of Scotland 24 proposals, from the Chartered Association of Certified Accountants 76 proposals, from the Law Society of England and Wales 30 proposals, from the Law Society of Scotland 33 proposals and from the Law Society of Northern Ireland, commendably, a modest one. If they were given two bites at the cherry annually, those numbers would be unlikely to diminish. Although we do not satisfy them all, inevitably they put ideas in our mind.

My hon. Friend has highlighted a serious matter, to which the Government attach the highest importance.

983 They will constantly strive to simplify and lighten the burden which the tax system imposes on practitioners and on industry. I shall consider my hon. Friend's proposal for an inquiry or commission to study the 984 matter. Obviously, if that idea bears fruit, he will hear more about it in due course. I am grateful to him for bringing the subject to the attention of the House.