HC Deb 29 April 1998 vol 311 cc343-89
Mr. Peter Lilley (Hitchin and Harpenden)

I beg to move amendment No. 16, in page 109, line 18, column 2, leave out '25' and insert 'nil'.

The First Deputy Chairman

With this, it will be convenient to discuss amendment No. 17, in page 109, line 18, column 4, leave out '60' and insert 'nil'.

Mr. Lilley

The existing system of capital gains tax is horrendously complex, which, above all, is because of the indexing procedures, which protect investors from the consequences of inflation. The tax can also freeze capital that has been held long term and has made a large gain, which people are reluctant to realise. There was considerable attraction in scrapping indexation and replacing it with tapered taxes. I have floated such a scheme, subject to certain conditions, and the Confederation of British Industry and the Institute of Directors expressed interest in principle in the idea.

The Government's proposals, however, are running into increasing flak now that they have been published in the Bill. Hon. Members will receive representations from several sources attacking those proposals for a variety of reasons. Why has that happened? I believe that it is because the wrong sort of consultation was carried out on reform of capital gains tax. The Government asked for ideas, but people were not given a specific proposal to focus on or to get their teeth into.

I received a letter from a constituent who is a distinguished accountant, who writes:

The capital gains tax changes show the difficulty of moving directly from a very wide-ranging consultation exercise, for which the Government set no parameters, to an announcement of legislation with immediate effect. It is extraordinary that the Government kept their basic proposals secret throughout the consultation and sprang them on us fully fledged—deus ex machina—in the Bill. We cannot give them the sort of consideration that a proper consultation would have allowed.

The proposals are a dog's breakfast, partly because the Paymaster General has, as usual, played a major part in preparing tax reform, which is his responsibility. He is not familiar with capital gains tax because most of his holdings, such as TransTec and so on, are in the Channel Islands and escape it. He can be excused; his vast business experience has given him first-hand experience of other taxes, but not of that one, so he is perhaps the wrong person to hold such responsibility.

A few weeks before the Budget, I tentatively suggested that a tapered system might be considered and that the key condition must be that the tax rate on assets held for a period, up to 10 years, for example, should come down to zero. Without that, capital gains tax would become a tax on inflation and on the rise in the value of assets, which merely reflected the deterioration in the value of money—in effect, a wealth tax.

That is what the Government put forward. Their proposal means that a person who held assets for 10 years would be liable to pay tax on 60 per cent. of the gain, even if inflation remained at the target rate of 2.5 per cent. He would pay about 0.6 per cent. per annum of his wealth to the Government in wealth tax. The proposal is of similar magnitude to the previous Labour Government's wealth tax proposals, which the hon. Member for Dudley, North (Mr. Cranston) is about to defend.

Mr. Ross Cranston (Dudley, North)

When the right hon. Gentleman floated his idea, the press reported that City institutions were taken aback by the fact that he had reversed his previous stance. The press also expressed surprise about where he was going on capital gains tax generally, because he also floated the idea of abolishing capital gains tax. Will he tell us his policy on that?

Mr. Lilley

I saw no such reports. Many people welcomed my proposal, particularly at the prestigious financial gathering to which I addressed it. Some leading firms of accountants also welcomed it. They welcome it all the more, now that they have seen the Government's failure to take into account the conditions that I specified and which the Government ignored.

Our amendments propose that the tax should come down to a zero rate for long-term gains. That is a reasonable proposition. I believe that several countries have zero rates for long-term gains. Such rates come in considerably earlier than would be the case if the phasing that the Government are proposing were to be implemented. They cannot suggest that this is unfeasible or impractical. Abolition would be a step in the right direction, because the one area where our taxes are if anything more onerous than they are abroad is taxes on capital. We should be moving in the direction of alleviating that burden, not adding to it. I fear that the Government's proposals will add to the burden of capital gains tax. I shall return to that shortly.

There is another bizarre consequence of the spectrum of rates that the Government have proposed. The total number of rates of tax that can apply over a 10-year period is measured in the low dozens as a result of the basic and upper rates of tax. For the first time, there are separate rates for business and private assets, and rates will vary from year to year. The consequence is that, over the medium term, the rate of tax that people pay on real gains could work out substantially higher than the current 40 per cent. Even in the longer term, that could happen if inflation is high or money gains are low.

If inflation remains at only 2.5 per cent. a year, people's private assets will have to increase by 5.2 per cent. a year for 10 years to have a lower tax rate than 40 per cent. on the real gain being made. If they make less of a money gain than 5.2 per cent. per annum over that period, they will pay a higher rate of capital gains tax than under the present system.

The system is worse still in the interim. When the assets have been held for only three or four years, people could pay a real rate of tax of 60 per cent. or more. Is that the Government's intention? Do they want to penalise people who realise gains in the medium term if those gains are comparatively modest? If so, why? I do not know whether the Financial Secretary or the Economic Secretary will reply.

Dawn Primarolo

indicated assent.

Mr. Lilley

I am glad that the hon. Lady is noting down that question, and I look forward to her explanation of why this rather bizarre pattern has been incorporated in the Bill.

With the changes goes the abolition of retirement relief, which exempts entrepreneurs who have built up their businesses and sell them when they are over 50. That sensible reward for entrepreneurship is being entirely withdrawn. The result will be that people who make a real gain on businesses that they have built up and who otherwise fulfil the conditions for the relief will be worse off under the Government's proposals if the gain is £500,000 or less.

However, as the Forum of Private Business points out, at the other end of the spectrum, a business owner who makes a gain of £2 million on selling an enterprise will be £350,000 better off than under the present arrangements. The Forum of Private Business rather tartly comments:

That is not the sort of redistribution of wealth that one might have expected from a Labour Government. Again, we should like an explanation from the Financial Secretary.

Did the Government intend, or was it an accident, that their changes to retirement relief should result in a system whereby those who make small or modest gains in their business life have to pay more tax and those who make rather larger gains have to pay less tax? The Institute of Directors points out that it would be perfectly possible to vitiate that effect by changing the present structure of rules on the size of reliefs and the points at which they come in, from £250,000 and £750,000 slices to £100,000 and £300,000. Are the Government deliberately failing to do that, or did they just make another mistake of the sort with which we are becoming familiar?

There is a special transitional problem. Retirement relief is being phased out over the years 1999 to 2003, but the gain on a business asset cannot fall to 25 per cent. of the full gain until 2007 at the earliest. Therefore, there is a period between 2003 and 2007 in which one relief has gone, but its replacement—such as it is—has not fully arrived. That is an urgent problem for entrepreneurs who have planned to retire in that period. It should be solved by phasing out retirement relief—or preferably phasing it down to a new reduced level—over the period to 2007 and not to 2003.

That is the suggestion of the Institute of Directors, and I commend it to the Government for their consideration. I look forward to hearing Labour Back Benchers support the perversity of the changes, which clearly hit small business harder than bigger business and which have a redistributive effect that is the exact opposite of that for which we were led to believe Labour—at least, old Labour—stood.

The 30-day rule clearly was not thought through. It was designed to put an end to bed-and-breakfast transactions, whereby people sell shares and buy them back overnight in order to realise their gains and make use of their personal reliefs. The Government did not think it through and, within hours of the announcement, the City had come up with devices involving futures transactions that enabled those who are sufficiently well off to use such devices to circumvent the rule. Not everybody can do that, so it would be better not to have the rule, in the interest of fairness.

Not to have the rule would also be in the interest of operational feasibility. One of the principal companies involved in providing financial software—a company called Financial Software Ltd.—has pointed out that it is almost impossible to revise existing programming systems to cope with the new 30-day identification rule. The company states:

From a technical perspective, the Inland Revenue seems not to have considered the effects of any corporate reorganisation within this new 30-day period identification rule. The implications are that large chargeable gains or allowable losses can be immediately crystallised and these effects are hidden to the extent that investment managers can find themselves caught out by such changes unexpectedly happening in a 30-day period when they are selling and intending to buy back shares.

The Government appear to have created a system that cannot properly operate. My hon. Friend the Member for Sevenoaks (Mr. Fallon), the shadow Financial Secretary, wrote to the Paymaster General about that and other measures, and received a letter in reply that referred to the implications for married couples. The Paymaster General said that the 30-day rule will effectively not bite on married couples; if one of the individuals sells shares and the spouse buys them back within that 30-day period, they will not be caught.

It is heartening, to some of us who thought that the Labour Government were in the business of removing every recognition of the married state from the tax system, that bed and breakfast will be allowed to continue as long as it is in the marital bed, but it is odd, and we should like clarification from the Government as to whether that is intended and whether it will persist.

Mr. Tim Loughton (East Worthing and Shoreham)

Does my right hon. Friend agree that the ending of bed and breakfast mitigates most harshly against smaller investors, for whom the capital gains tax allowance of £6,800 is all the more important, and that, effectively, if they are locked into a successful investment that they do not want to sell, they will lose their £6,800 CGT allowance? Should not the Government come clean and abolish the allowance altogether if that is what they intend, and appear to be trying to do through the back door?

Mr. Lilley

My hon. Friend is absolutely right about the unfairness and the increasingly apparent, almost characteristically perverse, redistributive effect of Government measures, such as the capital gains tax relief changes and the changes connected with the introduction of ISAs, which penalise smaller investors and smaller savers while relieving larger and top-rate savers. However, I regret the fact that my hon. Friend suggested that the logic of the Government's position is to eliminate capital gains tax relief entirely, because I fear that, once it is lodged in their head, the Government might find the idea irresistible.

Taken as a whole, the proposal is a dog's breakfast. It is a wealth tax by the back door, a tax on inflation and, almost certainly, yet another tax-raising measure. The Red Book shows a loss of some £25 million of revenue followed by an increase of some £25 million of revenue in the subsequent year, but there is no sign in the Red Book, or in the accompanying press release, of the long-term impact on capital gains tax revenues that is expected to result from the change.

Mr. Cranston

Has the right hon. Gentleman made any calculation of the revenue effect of his amendment?

4.30 pm
Mr. Lilley

One of the conditions that I specified in my original proposals, which effectively contained the amendment, was that there should be an attempt to introduce them in a manner that was revenue-neutral, if possible. I believe that that is possible, because a tapered system will encourage more transactions when the rate reduces to a more reasonable level, so revenues would rise, not fall. That is the sort of Laffer effect that one would anticipate in these circumstances.

However, we cannot make such calculations if the Government will not give us figures for the long-term consequences of their proposals. How can we calculate the revenue effect of the amendment, when it would amend something the consequences of which the Government have kept secret?

I want the Minister to tell us the long-term implications of the measure. I am not the only one who believes that it will be a revenue-increasing measure and a further tax burden; most accountants and experts to whom I have spoken arrive at the same conclusion, from their own estimates. However, we would welcome any clarification from the Government as to whether they have made any estimates of the long-term consequences of the changes; if so, we should like to know what they are.

Later we shall ask the Committee to vote on amendment No. 17, which effectively eliminates the wealth tax effect of the measure, by reducing the long-term capital gains tax rate to zero. I hope that, when the opportunity comes, hon. Members will join us in that vote.

Mr. Douglas Hogg (Sleaford and North Hykeham)

I shall briefly support what my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley) said, on the basis that I regard capital gains tax shorn of indexation as unjust and wrong in principle. In that regard, I differ slightly from my right hon. Friend.

I cast my mind back to Finance Bills in the early 1980s, when, for a short time, I was parliamentary private secretary to Sir Leon Brittan. At that stage, the pressure for indexation from throughout the House was intense. This was in a period of high inflation, and people objected intensely to paying tax on paper gains. I believe that that view permeated all parties in the House. I served on the Finance Bill Committees of the early 1980s, and I seem to recall that the Labour party strongly supported the proposal for indexation. Indeed, the criticism levelled at the Government of the day was that we did not backdate indexation further than we did.

I strongly disapprove of taxation on paper gains because it is unjust in principle; and anything that dilutes that principle is highly objectionable to me. [Interruption.]

The First Deputy Chairman

Order. I know that there are difficulties with these electronic pagers, but this is the second time that one has sounded off. Will whoever owns the pager take it and throw it outside the Chamber?

Mr. Hogg

I was about to say that there is a fundamental difference between the taper being argued for by my right hon. Friend the Member for Hitchin and Harpenden and the one being argued for by the Government. The taper argued for by my right hon. Friend has a nil rate for long-term holdings. That is a distinction not just of degree but of kind, because it obviates the charge of a wealth tax. If my right hon. Friend were ever in a position to abolish indexation—I hope that he would not—I welcome the fact that he would ensure a nil rate on the taper for long-term gains.

Mr. Barry Gardiner (Brent, North)

Does the right hon. and learned Gentleman accept that doing away with the tax, as he advocates, would erode the revenue base because it would spark a flight from income into capital, which in turn would have a deleterious effect on Government revenues?

Mr. Hogg

The hon. Gentleman overlooks the fact that we have had indexation of the kind for which I am arguing since the early 1980s. It is the Government who are seeking to change it. Left to my own devices, I would make no change whatever—with the possible substitution of a taper, but only in the event of indexation remaining.

My strong desire is to retain indexation. It is no answer to aver that we live in a time of low inflation. So we do, and a jolly good thing it is—it is the legacy of a Conservative Government—but we may not always live in times of low inflation. Inflation may rise. At that point, if these proposals are carried, people will have to pay tax on paper gains.

There are also a number of practical disadvantages. If a tax system is introduced which many people find intrinsically unjust, as they do when it comes to paying tax on paper gains, they will distort their investment decisions. I am against artificial investment decisions. There is also a great danger that people will enter into certain contrivances to avoid what they regard as an unjust tax. That will reduce the revenue yield, and it would probably be unlawful. For that reason, too, I oppose the idea.

Like many hon. Members, from time to time I have had to calculate capital gains with regard to the indexation tables. There is nothing unduly complicated about that. I am not a man for figures—in fact I am rather bad at them—but even I, armed with a calculator and the weekly schedule set out in the financial pages, have no difficulty calculating capital gains. But the taper calculation looks extraordinarily difficult. The consequence will be that people who would not otherwise be so driven will be driven into the arms of accountants—I did not know that that was part of the Labour party's policy—and that they will find extreme difficulty with the self-assessment that is now part of the tax regime.

I am therefore strongly against the payment of tax on paper gains. I believe strongly in indexation. It was introduced in the early 1980s to redress a real sense of injustice that was felt throughout the House. I have heard no argument in this place for changing the regime that we put in place in response to widespread public demand.

As my right hon. Friend said, the proposal will result in higher tax burdens for some people, probably—perversely—those with more modest holdings. It will drive people into the hands of professionals, whereas we would commend to the Treasury an approach simplifying the tax policies that we pursue. I hope that the Government will reflect further on their approach, and I should like to think that the proposal will be withdrawn.

Mr. John MacGregor (South Norfolk)

I strongly support the amendment. I shall be able to do so briefly, as my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley) has accurately presented all the arguments.

I say to my right hon. and learned Friend the Member for Sleaford and North Hykeham (Mr. Hogg) that I have always been in favour of tapering rather than indexation as a system for dealing with capital gains tax. I agree with him that there was a strong feeling, which I shared, about the fact that before indexation, we had tax on paper gains, particularly during the period of very high inflation under the previous Labour Government. I welcomed the introduction of indexation, but I thought that it was a complex system, and that, if the Government wanted to encourage investment for the longer term, as well as to simplify the system, tapering offered superior advantages.

The tapering system that I had in mind was rather different from the one proposed. However, ever since I left the Government in 1994, I have been arguing in Budget debates for tapering for capital gains, so I gave an immediate welcome to the Chancellor's comment on indexation when he announced it in his Budget. I thought that it would simplify the system. Also, the Chancellor said in his Budget speech, I think, and it was stated on the front of the Inland Revenue press release, that the reform would help investment through the encouragement of the longer-term holding of assets, by reducing the effective rate of capital gains tax on longer-held assets.

That is precisely what I had hoped for, but I was deeply disappointed when I read on in the Inland Revenue press release and discovered that the proposed system was nothing like the system that I had in mind. That, I can tell my right hon. and learned Friend the Member for Sleaford and North Hykeham, would have been much simpler, and rather similar to the tapering system on inheritance tax.

For reasons of simplification and taking into account the need for indexation, the system would perhaps have taxed at the going rate of tax—40 per cent. for the higher-rate taxpayer—for, say, the first four years that the asset was held, then at 30 per cent. and the equivalent of basic rate for a couple more years, and it would gradually have been phased out after the asset had been held for seven or 10 years. Such a system would have been simple to operate on both sides.

I discovered that the Chancellor was proposing an entirely different system. First, it has not simplified the system. My right hon. and learned Friend is right: we now have 18 different tax rates instead of the system that we had before. I agree that it will be extremely complicated to work out where one stands on self-assessment.

The proposal does not encourage the holding of long-term assets, which was the objective set out at the beginning of the press release and in the Chancellor's statement. In many cases, particularly for gains on non-business assets, the new system will be less effective than indexation. In the first 10 years, when there is the tapering of the percentage of the gain chargeable, it will entirely depend on the rate of inflation and the growth in assets whether the tax works out to be heavier than it would have been with indexation.

The press release points out that the taper compensates for the loss of indexation only when there is real asset growth of 3 per cent. and inflation of 2.5 per cent., after six and a half years for business assets and 10 years for non-business assets. If inflation returns to above 2.5 per cent.—I sincerely hope that it does not, but it must be a possibility, as that has been the case historically—the period will be longer. During that time, those who are making capital gains will pay more capital gains tax and they will not be fully indexed compared with the system that the measure replaces. I suspect that, in many cases, it will not do what indexation does. 4.45 pm

Secondly, the proposal will not provide an incentive to those who seek longer-term asset holdings. After 10 years, the equivalent of indexation that is intended in the tapering disappears altogether. Therefore, after an asset is held for 10 years, there will be no compensation for inflation—whatever the rate—and no indexation. I regret that this is an opportunity missed. The Government could have simplified the system and encouraged longer-term holdings, but they have not done so. Therefore, I asked myself why the Government have missed that opportunity. I found the answer in paragraph 4 of the annexe, which states:

Various forms of taper were suggested to reduce the taxable gain over time, with many wanting it to operate over a short period and to reduce the gain to zero. After 10 years, I think that it would make perfect sense to reduce the gain to zero. If we are to provide encouragement to longer-term holdings, we must provide some gain over and above inflation. It is perfectly reasonable to reduce the taxable gain to zero after 10 years. Why did the Government not do that? The next sentence gives the game away. It states:

These suggestions did not, however, consider the effects that such a taper would have on the yield from capital gains tax. That yield will be realised 10 years from now, and not in the next few years. Surely there could be a small reduction in the yield 10 years from now in order to encourage longer-term investment and to achieve the benefits that I envisaged from the tapering system.

Treasury officials have said, "Chancellor, we cannot allow any reduction in the yield from capital gains tax, so we must have a system that prevents that from happening." That is exactly what has happened, and it is a great pity. The Government have missed the opportunity to simplify the system and to encourage the genuine longer-term holding of assets. At least the amendments of my right hon. Friend the Member for Hitchin and Harpenden deal with the situation beyond 10 years, and thus they should be strongly supported.

Mr. Quentin Davies (Grantham and Stamford)

I shall start by declaring a negative financial interest. As you know, Mr. Martin, I am, and have been for several years, the adviser to the Chartered Institute of Taxation, which comprises distinguished accountants and lawyers who specialise in tax matters. The Government's proposals in the Bill will undoubtedly greatly increase the demand for their services, and thus will be a positive move for members of the Chartered Institute of Taxation.

Were I to feel some conviction to speak in favour of the proposals, I should probably be prevented from doing so by the advocacy rules of Parliament. However, I have read the Government's proposals for changing capital gains tax, and I feel that I must speak strongly against them. That puts me in a negative advocacy position, and I hope that you will not rule that that disbars me from speaking, Mr. Martin. It may mean that, by the end of the week, I am no longer adviser to the Chartered Institute of Taxation—but I am sure that that will not trouble you unduly.

Like my right hon. Friend the Member for Hitchin and Harpenden, I have always supported the introduction of a taper—but on the principle that it will result in a lesser burden of capital gains tax than occurs under the present indexation regime. The one way of ensuring that that is the case is to determine that, after a certain period, there is a zero rate of capital gains tax. In other words, the taper goes down from something—presumably the appropriate marginal income tax rate of the taxpayer, and the same would apply if corporation tax were included in the proposal—to nothing.

Instead, the Government have brought forward a set of proposals under which we cannot know for certain whether the net burden on business, industry, investors, those who are trading as principals with business assets and those who have portfolio holdings of assets, will be lighter or greater than it is at present. That is because the proposed structure represents a gamble on the rate of inflation and on the real rate of return.

Sadly, we have come to the end of 18 years of Conservative government. We have become used to low inflation and high real returns on assets. That is a splendid thing for the economy. It is splendid also for those who have not yet come to own any assets that are likely to be the result of capital gains.

We must remember what happened when there was a Labour Government in the 1970s. We had extremely high rates of inflation, and for a number of years we had negative returns on several classes of assets as a result. The gamble that the Government propose to introduce into the tax system represents a pro-cyclical risk for the system. In other words, if things get bad—if they go from bad to worse, as they no doubt will do under a Labour Government—and real returns fall and inflation rates rise, asset prices will be eroded. There will be a reduced return on capital and a reduced incentive to invest.

The reduction in the value of assets will be further increased because of the application of this form of capital gains tax. That does not seem to be a sensible move to make. It is certainly not a reassuring move. The Government are putting forward to the House of Commons a tax regime that will make the country suffer even more from any mishandling of the economy by themselves than it otherwise would.

The new Labour Government lost the plot. Correctly, they picked up from various people, from the work being done in the academic world on the subject, opinion in the City and opinion in business, which we know that new Labour is so keen to conciliate. Not least, they picked up from the statements made by my right hon. Friend the Member for Hitchin and Harpenden and by others of us. When considering previous Finance Bills in Committee, as you will recall, Mr. Martin, I have supported the replacement of indexation by a tapering system. However, the Government have not realised that that makes sense only if the taper goes down to zero, and, strikingly, they have failed to do that.

The Government have not done their homework in many other respects. That is not surprising, because, as my right hon. Friend the Member for Hitchin and Harpenden has said, although this is a new Labour Government supposedly committed to open government and to consultation, they have not gone in for consultation. Of course they said, "Let us know what you think about capital gains tax." That is an open invitation. No doubt, there are people writing in to the Government constantly telling them what they should be doing about the regime for motor cycles, fast food, BSE or anything else. However, that is not consultation. Consultation is when the Government, before bringing forward a proposal to the House of Commons, publish their proposal in draft to ascertain what those people who are likely to be affected by it, or others who take an interest in it—for example, the academic world, think tanks, the City and analysts—think of it. Thus, there is the opportunity for comment. The Government can then modify proposed legislation in response to the consultation exercise before bringing it forward to the House of Commons. That is how a sophisticated modern Government should operate, and that is certainly how to get better legislation than we have been receiving recently from the Government.

Mr. Cranston

I thank the hon. Gentleman for giving way, especially as I shall be a recipient of the Chartered Institute of Taxation's hospitality in the near future. 1 always hate to interrupt him in full flight and am always apprehensive about the sky falling in, because he gives so many reasons why it is about to do so.

Will the hon. Gentleman return to the point about calculating the precise effect? Is it not true to say that precise calculations can never be made because of the change in asset prices? Did not the right hon. Member for South Norfolk (Mr. MacGregor) rightly say that consultation had revealed a momentum in favour of the tapering proposal?

Mr. MacGregor

No, absolutely not—not in favour of this proposal.

Mr. Davies

My right hon. Friend tells me from a sedentary position that he strenuously denies that allegation, so I need say no more on the subject.

The hon. Gentleman does not understand the importance of incentives and risk in investment. That is a key issue. If people are to invest, they must feel that they will receive a rate of return that is commensurate with the risk. Anything that increases the risk of not receiving such a rate of return—that increases the risk of the return being negative, as the Bill does—is clearly a reason not to invest. To that extent, less investment will take place, resulting in less output and less prosperity in the future. That is not the new Labour Government's explicit objective, although it may be the indirect consequence to which some of their policies unfortunately lead.

If the Government do not listen properly to people, they will not fully understand the proposals that they receive. It is clear from the introduction of this taper that they have not understood them. When a Government decide on a proposal, they should put it out to consultation to see whether there are any shortcomings that they had not anticipated; otherwise, they will make avoidable mistakes. The Bill shows that the Government have made some extraordinary and blatant mistakes. Let me deal with one or two—or perhaps four or five—of them.

First, there appears to be a mismatch between the introduction of the taper and the withdrawal of indexation. Under the Bill, indexation will be withdrawn with effect from April this year, but the taper will not start to have an effect for another two years. The Financial Secretary is shaking her head. I shall give way to her with pleasure if she wants to intervene. From my reading of the Bill, it appears to me that, during the intervening two years, there will be no relief in the form of either the taper or indexation. That is extremely anomalous.

The Government say—we must believe in their sincerity—that they want to reduce the burden of capital gains tax. I have explained why they will not do so over time and why, in the immediate two-year period, they will increase the burden of capital gains tax. Those assets will not be reduced by the taper and the assets will not be eligible for indexation—[Interruption.] Does the Minister want me to give way? I was not sure about the hand signals that I was receiving. I was hoping that I had got it wrong and that she might have some good news for the country.

Mr. Douglas Hogg (Sleaford and North Hykeham)

I think that it was a plea for help.

Mr. Davies

Perhaps my right hon. and learned Friend can rise to assist the Minister, who is leafing through her Red Book.

Dawn Primarolo

Get on with it.

Mr. Davies

I do not wish to try the Minister's patience, but she was shaking her head and implying that I had got it wrong. When I offered to give way to her, she did not want to intervene. I must therefore conclude that the anomaly to which I have drawn the Committee's attention exists and I have not misread the Bill. The Bill is so complex that I could easily have misread it.

The First Deputy Chairman

Order. I am sure that the hon. Gentleman does not want to try my patience, but he will if he talks about the Bill in its entirety, because the amendment is narrow and relates only to the tapering of capital gains tax.

5 pm

Mr. Davies

The margin for the debate that you allowed us yesterday, Mr. Martin, enabled us to cover the ground well and to have only one debate and one vote on the issue, which might not otherwise have been the case. I should be perfectly happy to speak in the clause stand part debate, but the amendment focuses on whether the taper should be reduced to zero. That is the heart of the issue, and I hope that any remarks relating directly to the taper will be regarded as within the amendment's scope, but I must be guided by you.

The essence of the issue is whether the taper replaces the existing regime and, if not, to what extent there is a mismatch between the two regimes. I have already said that there is a significant mismatch between the withdrawal of indexation and the introduction of the taper.

There is also a mismatch between the introduction of the taper and the withdrawal of retirement relief. The taper is being introduced over 10 years, but retirement relief is being withdrawn over five years. That produces the kind of anomaly to which my right hon. Friend the Member for Hitchin and Harpenden referred. Business assets that, under the present regime, benefit from business retirement relief would be subject to a higher burden of capital gains tax in the intervening period than larger capital gains that do not benefit from such relief. That is anomalous.

Someone who sells business assets for £250,000 or £500,000 at present pays no capital gains tax if the assets are eligible for retirement relief. By 2003–04, when business retirement relief will have been phased out, the effective rate of capital gains tax will rise to over 20 per cent.—a considerable burden—before falling back to 10 per cent., which is the Bill's target for the long-term capital gains tax rate for business assets. Where is the rhyme or reason in that?

The Government announced that the measure is good news for business, but it is not, and in the short term it is very bad news for many businesses. It will have a distorting effect because no one in his right mind will sell business assets during the next few years if he can possibly avoid doing so. It is extremely dangerous to introduce such distorting incentives into the tax system. I shall not digress on the damage that they can do to the economy. Clearly, in this case, people may hold on to business assets longer than is rational. Will the Financial Secretary tell the Committee whether that is an intended consequence of the Bill and, if so, what the rationale is for that? If it is not an intended consequence, what does she intend to do about it?

There is another mismatch between the introduction of the taper and roll-over relief, which the Bill apparently leaves unchanged. Proposed new section 2A(8), which defines the holding period, makes no reference to roll-over relief. I shall happily give way to the Financial Secretary if she wants to intervene to deal with this point now, but, if not, I hope that she will respond to it at the end of the debate.

Let us assume that someone has a business asset that he or she has held for, say, 10 years, and then sells a building used for business purposes. Let us say that that person rolls that capital gain over, under a roll-over relief regime, into the purchase of a new building, to be used for business purposes, and then sells that building after six months or two years—possibly involuntarily as a result of a compulsory purchase order by a local council, although that is not material to my question. In that case, would capital gains tax be charged at the full rate, without roll-over relief?

There is no reference in clause 119(8) to provision for roll-over relief, yet the purpose of such relief is that the new asset into which the gain has been rolled over should be treated as if there had been no change. It is sometimes necessary for businesses to dispose of certain assets and to buy others. They should not be inhibited by an enormous tax burden from making a sound business decision, or be penalised for taking such a decision. I see that the Financial Secretary does not want to intervene, but I hope that she will deal with that point.

Let me return to my introductory remarks. The Government have said several times that they are committed to simplifying tax; however, many opportunities to do so have not been taken. One would have hoped that getting rid of indexation and phasing out retirement relief would result in a reduction in the enormous complexity of Finance Bills, but I see no opportunity being taken to simplify the Taxes Acts, and that is regrettable.

Meanwhile, one opportunity is being taken greatly to increase the complexity of the Taxes Acts. Schedule 20, which is governed by clause 119, contains a definition of business assets that runs to more than four pages. Why did not the hon. Lady use the perfectly good definition of business assets in section 165 of the Taxation of Chargeable Gains Act 1992? Why did she have the parliamentary draftsmen write four new pages of complexity? That is, of course, splendid for the members of the Chartered Institute of Taxation, who will be paid large, and no doubt totally deserved, amounts of money for re-interpreting to its clients the hon. Lady's four new pages of definition, but why reinvent the wheel?

The administrative costs of taxation are another important, and related, point. I hope that the hon. Lady is aware of some of the economic costs of taxation. I hope that the new Labour Government are committed—at least in principle, even if they are too incompetent to do anything about it in practice—to trying to reduce the economic costs of taxation and its administration to the greatest possible extent. Again, some obvious opportunities to reduce the administrative burden of taxation have been missed; indeed—sadly—the opportunity has been taken to increase the burden.

Taxpayers are going to have to maintain indexation records for their assets, which have to go back to 1982 if they are to claim indexation relief up to April 1998. They will then have to work out the taper from then on. My right hon. and learned Friend the Member for Sleaford and North Hykeham said that he found his indexation calculations quite easy; I admire that, but I have always admired Queen's counsel and luminaries of the bench, who no doubt have abilities not granted to lesser mortals. I must say that I find my indexation calculations a little more difficult.

The taper calculation looks like being even more complex, as there is no provision for pooling. One will have to keep an exact record of the date on which one bought each share. There is no system for averaging out. The worst thing of all is that one must now do both indexation up to April 1998 and a taper calculation on an individual security, or purchase and sale, basis from that time on. The hon. Lady has succeeded in doubling, or trebling, the administrative burden at a stroke.

That is, again, wonderful news for the Chartered Institute of Taxation. However—although I may not be forgiven in certain quarters for saying so—I cannot believe that that is a good thing for the taxpayer, the economy or the country as a whole. It is extraordinary.

I have a suggestion for the Minister which she may already have considered, in which case I should like to know why it was rejected. Why did she not use the opportunity of the Bill to re-base asset prices, ideally on this month? If that did not suit, she could have brought them forward from 1982 to 1992. Perhaps she will say that the cost to the Revenue of doing that would have been great, but I would find that difficult to accept in view of the relatively low yield of the tax.

What would have been the Revenue cost of adopting my suggestion? Her officials who made the calculations and offered her advice were not doing a proper job if they did not make that calculation. People ought to know the cost of re-basing asset prices at April 1998. Against that, we shall judge whether it was reasonable not to re-base because such a move would greatly lighten the administrative burden on the taxpayer.

The Government have made brave declarations. They have said that they want to help business, to have open government, to consult and to reform capital gains tax. Those are splendid aims, and I am not the only Conservative to urge a reform of capital gains tax. Therefore, it would be wrong not to welcome that basic intention. However, in carrying out the reform, the Government have made endless mistakes and created perversities, and the result is that things are worse than when they started. That is worrying, and I shall draw attention to such matters throughout the Bill. I shall not mention them now because I do not wish to fall foul of the reasonable regime that has been established for the debate. Sadly, the theme cannot be avoided in the Bill, and it vitiates the whole of this far too long, complex and fundamentally inept measure.

Mr. Loughton

I support the amendment. As my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley) has said, the changes that are proposed for capital gains tax are the biggest dog's dinner in the Bill. Although the amendment is not the ideal solution, it is the only obvious way to pull something from the fire.

When the Paymaster General introduced ISAs last year, he said that they were a test for financial products and financial innovation. He said that they should adhere to simplicity, flexibility, accessibility and fairness. I shall show that the taper relief proposals fail dismally on all those counts.

As my hon. Friend the Member for Grantham and Stamford (Mr. Davies) has told the Committee, the Financial Secretary has said that the Budget changes in capital gains tax will lead to eventual simplification of the current system. She did not qualify what she meant by eventual, but the changes are certainly far from simple. Capital gains tax clogs up the capital markets because it disadvantages the switching of capital to investments in which it can be used most effectively. That was one of the reasons for gilts being exempted from capital gains tax in 1969. If, as the Government constantly say, they are intent on promoting savings through new products, manipulating capital gains tax in the way that they propose will not achieve thatf—ar from it.

5.15 pm

Capital gains tax is not only inefficient, but one of the most expensive taxes to collect. Last year, it raised about £1.4 billion, inheritance tax brought in about £1.7 billion, VAT £51 billion and corporation tax £31 billion. The cost of collecting capital gains tax was more than 4 per cent. of the revenue that it raised, compared with a charge of 0.7 per cent. for inheritance tax and 2.1 per cent. for income tax. It is an inefficient and expensive tax for the Revenue to raise, and it is expensive for people to work out. It will cost people even more to work it out in future.

My first concern is that the proposals are unduly complicated. Currently, capital gains tax is charged at three different rates. As we have heard, the new taper will effectively introduce 18 different levels for a personal capital gain on which the three rates will be levied. That will require much more complex record-keeping and careful identification of when purchases are made, where equity shares have come from, and when rights issues and scrip dividends were taken up. There will be much more complex treatment for brought-forward losses.

As the Association of Private Client Investment Managers and Stockbrokers has said:

Now disposals after 5 April 1998 will be identified with acquisitions in the following order: same-day acquisitions; acquisitions within the following 30 days; previous acquisitions after 5 April 1998, latest first; shares in the pool at 5 April 1998; shares held at 5 April 1982; shares acquired before 6 April 1965. The system is exceedingly complicated, and, it will be expensive for private client investors to work out. As my hon. Friend the Member for Grantham and Stamford has said, it will be welcomed only by the accountancy profession and the designers of computer software.

However, a conference of software manufacturers in the finance industry and tax specialists that was held last week, and which was reported in the Financial Times of 22 April, admitted defeat. There are so many "what ifs" in the proposals that it will be impossible in the foreseeable future to produce software programmes to make the calculations. They will have to be made manually by costly professional advisers at a time when private investors have the added complication of self-assessment.

The proposals are not fair. The new taper rates do not compensate for the abolition of indexation. For example, £1,000 that is invested now for the next 10 years will be worth £1,248 on the basis of the Chancellor's 2.5 per cent. inflation target over that time. Currently, no capital gains tax would be payable, ignoring the allowances. Under the new proposals, indexation will no longer apply, the 24 per cent. rating will come in for higher rate taxpayers, and a tax bill of £59 will be payable. That is tax not on a gain, but purely on inflation, if it adheres to the Government's target.

Over the past 10 years, indexation has been about 0.541, which is more than double the Government's annual retail prices index target. Scottish Widows has calculated that, on an investment of £100,000 with inflation at just over 5 per cent., which is reasonable over the past 10 years, and growth of about 8 per cent., which is not unreasonable in the light of what has been happening in the markets over the past few years, the tax charge would be £9,100 higher after year seven, or £6,600 higher after year 10, ignoring the annual exemptions, under the new proposals. The proposals will result in a serious hike in tax liability for many investors.

Mr. Gardiner

The hon. Gentleman makes much of the fact that the proposed system will be much more complex. Has he made similar calculations about the complexity that would be left in place by the amendment?

Mr. Loughton

I do not agree, for two reasons. First, the incentive provided by the tapering of the capital gains tax down to zero would more than outweigh the additional work that would be necessary in calculating the taper rates—that would be a big advantage. Secondly, like my hon. Friends, 1 want a far simpler system. The amendment was tabled because the proposals are a dog's dinner. We want capital gains tax eventually to be phased out, as we believe that it penalises long-term entrepreneurialism and long-term investment. The amendment would make the proposals eminently fairer, and we hope that the Government will accept it.

The proposals are also highly unfair because the brought-forward losses will now be matched against the most recently acquired stocks—in other words, those with the smallest taper rate. The investor will lose yet again. The thrust of the changes is to impose a straitjacket on investment—even more than previously, the tax tail will wag the investment dog. There will be a severe straitjacket on prudent investment—we heard that phrase no less than 17 times during the Chancellor's Budget statement—and severe extra costs will be imposed on investors, especially on smaller ones.

There seems to be a new attitude that tax reliefs generally, such as the CGT allowance, constitute tax avoidance. We should not forget that, by abolishing indexation, the Government are devaluing the CGT allowance. That is also the implication behind the abolition of bed-and-breakfasting and retirement relief. Like the original ISA proposals to abolish PEPs, the changes are an insidious version of retrospective taxation. The harshest terms will fall on those coming up to retirement, who are least able to re-orient their finances to provide for later life as they have fewer earning years left.

What is wrong, for example, with a private investor buying shares in British Petroleum, which is a blue-chip United Kingdom company, holding on to them for two years, 11 months and 30 days, and then reinvesting the proceeds—presumably, the original book costs plus some profit—into another blue-chip company, such as Glaxo, or a unit trust, for seven years and one day after that? Why is that any worse than an investor buying BP shares on day one and locking them away in a cupboard for the entire 10 years? I hope that the Financial Secretary will answer that. We want flexibility in investment, but the proposal militates against that by imposing taxation constraints on sound, prudent investment judgment.

Mr. Quentin Davies

My hon. Friend asks an extremely pertinent question, to which I hope the Financial Secretary will give a clear answer. Does he agree not only that it is perverse to penalise the investor who—I use my hon. Friend's example—is in BP for two years and then moves into Glaxo, rather than someone who stays in Glaxo or BP for the whole time, but that the proposals are unfair to those who believed that their assets would be subject to an indexation regime, but find that, in the next two years, they can benefit from neither past indexation relief nor future taper relief? As well as being perverse, unfair and economically irrational, is not that retrospective taxation?

Mr. Loughton

My hon. Friend is absolutely right—the next two years will be a no-man's land for many investors. The changes would have had a shred of credibility if the Government had backdated the tapering relief to take account of more of the 10 years, and not applied it to day zero or to a two-year period, when the first 5 per cent. taper kicks in.

Mr. Gardiner

I appreciate the hon. Gentleman's giving way for a second time. In response to his challenge about an investment that is held for two years, 11 months and 30 days and then rolled over into a further investment for the rest of the 10 years, may I ask him whether it has escaped his notice that the amendment would provide a bigger incentive to maintain the same investment for the full 10 years than is proposed in the Bill?

Mr. Loughton

The hon. Gentleman has missed the point, as there would be a zero capital gain at the end of the taper. Moreover, we do not want to abolish bed and breakfasting. The amendment would allow people to maintain the same good investment by using a perfectly legitimate taxation tool. It would also allow everyone to take advantage of the CGT allowance that the Government are retaining. The hon. Gentleman has the wrong end of the stick.

As the Association of Private Client Investment Managers and Stockbrokers said, the CGT changes will merely replace one complicated issue with another. It is difficult to find any of the simplification that individuals want and that the Financial Secretary seemed earlier to promise—the 18 new rates of capital gains tax do not represent simplicity.

Moreover, the innovation will be costly. From April 1999, there will be five levels of income tax—20 per cent., 23 per cent. and 40 per cent., as well as 10 per cent. and 32.5 per cent. on dividends. The Government want to attract millions of virgin investors into savings, but the plethora of extra record keeping that will be required hardly represents an incentive. The changes are not fair, as indexation abolition is not being compensated for by the use of tapers.

Mr. Geoffrey Clifton-Brown (Cotswold)

I apologise if this point has been made—I was not here during the opening speeches, as I was upstairs in Committee—but does my hon. Friend agree that, as people are being encouraged to complete self-assessment tax forms, they will be driven by the changes into taking professional advice? The new rules will be outwith their capability.

Mr. Loughton

My hon. Friend is absolutely right. I fear that the implication is that people will be deterred from making individual investments, as they will either have to cough up for professional advice, or make a mess of it—that is most unfair.

Mr. Cranston

Will the hon. Gentleman give way?

Mr. Loughton

I shall in a moment, as it is always a pleasure to give way to the hon. Gentleman, but I want to make a few final points.

The use of losses will be less attractive in the future, but it is also highly unfair that the details of the Bill were not published until after the end of the financial year. Many practices were abolished on Budget day, so that investors had no opportunity to re-orient their investments. It is unfair that future investors should be penalised for an inflation rate over which the Government have no control—they have given it up to the Bank of England committee to determine as a target, and if the committee is wrong, the investor loses twice.

Mr. Cranston

Is it not also possible that investors will move into collective investment schemes, which not only would avoid some of the problems that the hon. Gentleman mentions, but could be advantageous for other reasons? Perhaps his background and the people with whom he associates distort his view of the ordinary investor, many of whom may indeed invest in collective schemes. While I am on my feet, may I also ask him whether he believes in capital gains tax at all?

Mr. Loughton

That was the most bizarre jumble of accusations. I worked in the City for 14 years, and dealt with private investors ranging from the very poorest to the better-off—[Interruption.] Our doors are open to everyone—to people who save as little as £25 a month and to those who save a lot more. I have had experience of running not only individual equity investments, but pooled funds, which stand to gain from the complication that is being imposed on individual equity investment, so perhaps I have a more broad-based view and more expertise than the hon. Gentleman, who has been locked in the ivory towers of more legal academia, and perhaps has not got his hands dirty in the matter of making money, making people more wealthy, and contributing to the wealth of the nation and to future savings.

As I said plainly, capital gains tax is a penalty on enterprise, risk taking and long-term investment. Ideally, as we said clearly before the election, we would like CGT to be phased out eventually, but we realise how complicated and complex that would be. The Government did not realise that, and have fallen entirely into the trap of making an already complicated system far more complicated and costly to manage.

The Government's proposals fail on those counts. They are not at all flexible and accessible. They severely curtail the powers of the private investor to choose investments that are in his or her best interests. It is not in the best interests of a saver effectively to lock away an investment in a cupboard for 10 years and to forget about it. The proposals militate against prudent long-term investment, which I thought this Government were all about. I therefore support the amendment. It is one way out of a complete and utter dog's dinner.

5.30 pm
Mr. Howard Flight (Arundel and South Downs)

I also support amendments Nos. 16 and 17, as they would at least prevent the Government's proposals from amounting to a wealth tax, and would bring some justice and fairness to them. Before the election, I lost count of the number of times that I heard the present Chancellor of the Exchequer stress that he wanted fairness in his tax proposals, but, like others, my biggest objection to the clause is that it is extraordinarily unfair in the way in which it will bite, as well as extraordinarily complicated.

What is the objective of the changes? Are they a back-door way in which to bring in a form of wealth tax? If the objective is to simplify the capital gains tax regime, what is coming seems murderously complicated. Have the Government misunderstood quite a lot of the thinking that is going on? It would have been much fairer and less complicated if things had been left as they were. The changes will replace one reasonably complicated system with one that is even more complicated.

I will pick up on a few specific points that seem unsatisfactory and unfair. What is the logic of introducing such a disadvantage to investors who hold investments for up to three years? Why is it that they used to enjoy indexation relief and now will receive no relief whatever for three years? What is the logic of the three-year period before the taper starts?

What is the logic of last in, first out for the purposes of the calculation of gains? That can turn out to be extremely unfair, particularly for staff working for companies, where they do not qualify for business assets arrangements as they do not have anything like the 5 per cent. of ownership for directors. However, where people add to shares, it is often in the context of the companies for which they work.

I echo the, if you like, reverse or negative advocacy point that was made by my hon. Friend the Member for Grantham and Stamford (Mr. Davies). As someone who remains a director of a business that runs collective investment schemes, I believe that the proposals are a godsend to the industry. They virtually force ordinary investors to use collective investment schemes. I think of retired people who get some enjoyment out of managing their capital after they have retired. Why should a gun be held to their heads by saying, "You have to use a collective investment scheme or you are going to have to deal with a murderously complex and unfair regime"?

The point has been made that the transition arrangements are grossly unfair, as is the principle of abolishing retirement relief. If we want a vibrant economy, we should encourage entrepreneurs. I mourn the number who have already left these shores since the Government came into power—there are echoes of the previous Labour Government's term of office in many British entrepreneurs' reactions to many of Labour's tax changes.

The crucial question has been asked: what happens if inflation rises? There is no guarantee that inflation will stay at 2.5 per cent. per annum. What is the logic of the arrangements for qualifying for business assets? We shall increasingly have a society in which many people own shares in the businesses for which they work. There is the requirement that a director should own 5 per cent., which is focused at the upper end of society. The business asset rules are not going to be of any benefit to the great and growing number of ordinary employees who we all want to see owning more shares in the businesses for which they work.

My vision overall of capital gains tax is that it should apply only when capital gains fall into consumption. When assets are swapped from one investment to another for perfectly good reasons, whether by businesses or by individuals, those people do not in any way realise and enjoy a gain. A route to cast capital gains tax in this direction and to stop people converting income into capital gains, which is the objection to its abolition, should be the goal for everyone, but what we have here seems far away from such a goal. There is a hidden agenda for a substantial wealth tax, which will cost individuals and the Revenue a fortune to calculate.

Another hon. Member has suggested that, if we are going to have a change of regime, at the least, there should be a case for rebasing, as in 1982 when indexation was introduced. We could go forward from there, but we should not have two different bases to calculate capital gains tax. There are not only 18 rates, but two completely different sets of calculations for everyone to have to carry out.

Like others, I believe that, at the least, the proposals would be much fairer and have much greater logic if they followed all the suggestions of those who advocate tapering, the point being to bring the taper down to zero. Then, to some extent, no matter what happened, there would be potential fairness and benefit, even though many of the disadvantages would still be left on board.

I do not see what the Government's objective is. They are introducing a system that, for everyone involved, is infinitely more complex and random than that which they seek to replace. It leaves investors, whether they are companies or individuals, with greater uncertainty and greater penalties against managing their investments. It is an unnecessary gift to the providers and forces individuals to use collective investment schemes. Why should the Government want to achieve those objectives?

Mr. Nick St. Aubyn (Guildford)

Like many Conservative Members, I find these new Government proposals confusing. Although I should perhaps declare an interest, since clause 119 could affect certain assets that I own, I am not at all clear whether it will be to my benefit or to my detriment. I am sure that many investors will be in the same situation. Sadly, however, some groups of investors will almost certainly be worse off. That is the main reason why I support the amendment.

Earlier in the debate, hon. Members were asked whether capital gains tax was itself wrong. The question is very easy to answer: yes, of course capital gains tax is wrong. It is wrong in principle because it is a form of double taxation. It is taxation either of inflationary, paper gains or of real gains—which represent an expectation that an asset that has gained in value will in future yield a higher income. As long as there is corporation tax and income tax, that higher income will be taxed regardless of a capital gains tax. Capital gains tax seeks simply to tax that income even before it has arrived. It is therefore also a speculative tax.

Although some form of capital gains tax has proved to be necessary in modern economies, in most economies it is levied at a lower rate than in the United Kingdom, and with rules which are easier to understand and more flexible, and which do not deter or pervert normal business decisions. In the United Kingdom, capital gains tax distorts normal business decisions, and that distortion will increase greatly as a result of the Government's proposals in clause 119.

Avoiding such distortion is the justification for exempting gilt investments from capital gains tax, although the principle applies equally to almost all classes of investment.

An array of anomalies is generated by introducing a taxation system that is fundamentally flawed—as the clause certainly is. As Conservative Members have said, it would be anomalous for an investor's losses to be set against total gains made in the same year by disposing of another asset, and for the tapering provisions to apply only if there is a residual gain. The provision will greatly limit investors' ability to offset losses against gains, and perhaps reflects the fact that the Government have not thought their policies through. Amendment No. 16 would mitigate the problems, and would rightly—at least in the long term—reduce capital gains to a zero rate.

In the absence of the amendments, the Government's pooling proposals would provide a real incentive to those who accumulate a holding in a specific asset class or company's shares and who have decided to dispose of some of that holding to dispose of it all; in that way, investors would receive the full benefit of tapering relief and would not suffer from the discrepancies of the last-in, first-out rules that the Government propose. Far from encouraging people to hold assets for the long term, the Government are encouraging people to make a quick sale when they decide to sell any of their investment.

We have already heard about the redefinition of business assets—a severe restriction and tightening of the previous definition. The definition will also become more complicated. Far from being members of a Government who are in favour of helping small business, Ministers are yet again hitting small businesses, by introducing new rules that remove exemptions that many small business people might have expected to continue enjoying.

Phasing out retirement relief is another aspect of the Government's proposals. Another perverse consequence of those proposals is that someone who qualifies for any form of retirement relief would be well advised to dispose of their entire business this year rather than holding on to it for another few years. In any of the subsequent 10 years—arguably, even at the end of those 10 years—such business people will be penalised unless our amendments are accepted.

The Government's proposals contain other anomalies. Anyone looking for what might be regarded as a safe asset who invests in a high income-producing asset that manages only to track inflation in the long term will know that, at the end 10 years, they will suffer tax at a rate of between 10 per cent. and 24 per cent. on any paper gain made on that investment. Such taxation is confiscatory, recalling the old Labour system and the very worst aspects of capital gains tax, and poses the question why the Government have not followed the example of their Conservative predecessors.

When the previous Government introduced indexation relief, we realised that some individuals with long-term holdings and assets might be adversely affected by the new rules. We therefore made it possible for them, if they preferred to do so, to use the old tapering rules, which were introduced in 1965, in calculating their capital gain.

Since the Government have made the system so complicated, why have they not at least given investors the option, when disposing of an asset, of continuing with annually upgraded indexation relief or of switching to the tapering relief system? If they did so—thereby mildly increasing the complication of an already very complicated system—investors would know that the 1998 tapering provisions would be beneficial, and would not penalise their safe and prudent investment policies.

5.45 pm

I think particularly of those in the farming community. The Government have in so many ways attacked those living in rural areas. Only yesterday, in their vicious increase in petrol duty, we saw another example of that attack. Without the benefit of the amendments, anyone who owns a farm in a rural area will find that the new tapering rules do severe damage to the long-term value of their holding.

When those who have farmed all their life dispose of a farm holding to retire, they will be faced—thanks to the Labour Government—with a tax bill, even though in the past 15 years, much farm land has under-performed the inflation rate. Under the old rules, they would not have faced any capital taxation on retirement.

Formerly, it was said in the farming community that farmers hope to live under a Labour Government but die under a Conservative one. Now they cannot even afford to retire under a Labour Government. I think that the farming vote is already waking up to the dangers of the Government, and will be even more alive to the effects of the Government's actions.

Another anomaly of the Government's proposals that has already been mentioned is that, whereas someone investing in and holding a unit trust for 10 years will enjoy the benefits of tapering relief, someone owning individual shares will not enjoy that benefit to the same extent. There is therefore a missing component in the Government's proposals. Although our amendments go some way towards supplying that missing component, we will not create a fairer capital gains system—if we are to have one at all—until we establish a general principle of roll-over relief for those investing in a share portfolio.

If Ministers are not prepared to accept amendment No. 16, they should seriously consider providing general rollover relief for those with share portfolios, so that those who, as my hon. Friend the Member for Arundel and South Downs (Mr. Flight) said, enjoy managing their own share investments will enjoy the same tax regime as those investing in unit trusts. A greater element of fairness in the matter is demanded, but clause 119 does not provide it.

Mr. Gibb

I support amendments Nos. 16 and 17.

The press release heralding the capital gains tax reforms announced in the Budget was quite ironic—indeed, it would have been funny had it not been dealing with such a serious matter. It stated that the reforms will stimulate interim entrepreneurial activity by rewarding long-term investment in business. What many people missed in March when listening to the Chancellor make his Budget statement was the fact that coupled with the introduction of tapering relief was an announcement that retirement relief would be phased out over the following five years and abolished entirely.

People retiring today with a £250,000 gain would be exempt from tax, but when the new system is fully operational they will pay tax at 10 per cent., so they will have a bill for £25,000. How does that help entrepreneurial activity? The charge will rise to 22 per cent. in 2004, when retirement relief will be fully phased out, but when the tapering will not be fully effective, having had only five years to elapse.

The provisions seem to penalise the smaller investor, who will have put all his resources into his business and probably will not have any spare cash for a pension fund: it will be ploughed into building up the business, which he will then be expected to sell on retirement to provide the capital sum out of which he can purchase annuities to secure an income in retirement.

Mr. John Hayes (South Holland and The Deepings)

With typical generosity, my hon. Friend sounded a note of surprise when he said that the provisions "seem" to do that. Is there not a consistent theme in the Government's two Budgets of attacking savings, and the small investor in particular?

Mr. Gibb

I am grateful for that wise intervention. It is true: the first Budget abolished the repayment of tax credits, thereby confiscating the capital value of pensions, and the second contains this confiscatory measure, which will attack the capital that people are relying on for their retirement.

The Government are doing that not only from vindictiveness but because they regard those capital sums as easy pickings to be spent when the spending moratorium ends and they can try to win the next general election with a large spate of spending.

The measures will amount to retrospective taxation on the entrepreneur who sells his business on retirement. His pension fund, which he hoped to be able to rely on and had assumed would be tax free, will be taxed and reduce in value. It is ironic that the proposals penalise the smaller entrepreneur much more than the large entrepreneur.

Mr. Cranston

Is not the logic of the hon. Gentleman's position that such a person, if he retires at 65, has become an entrepreneur only at 55, because the whole thrust of the proposal is to give the full relief after 10 years?

Mr. Gibb

I do not follow what the hon. Gentleman is saying. The provisions announced by the Government do not give anyone full relief. The tax reduces no further than 10 per cent. The amendment is designed to redress the errors created by the Government and give people full relief after 10 years, so that the damage caused by abolishing retirement relief and introducing the tapers can be undone to some extent.

Mr. St. Aubyn

Has my hon. Friend noticed that, with the 10 per cent. factor, someone would have to realise a gain of more than £1 million to be even slightly better off as a result of the change? It is another Bernie.

Mr. Gibb

Indeed. My hon. Friend has anticipated, in his usual witty way, the point that I was about to make. Someone with a gain of £250,000 will be much worse off under the new regime, but the person who makes £500,000 will be better off in 10 years' time, although he will be penalised in the transition period. Those with a gain of £1.3 million will be better off throughout.

The measure will not boost or help entrepreneurship or long-term investment, as suggested in the press release. As always, it will do enormous damage to the small entrepreneur trying to make a living in a difficult and competitive world.

The press release made another ironic statement. It said:

The changes will lead to simplification of the CGT system. If that is the case, why, as my hon. Friend the Member for East Worthing and Shoreham (Mr. Loughton) said, did the Financial Times report on 22 April that the Bill makes capital gains tax so complicated that software houses cannot write the software to calculate the tax liability. Software houses have access to all the expertise and can pay all the fees to accountancy and law firms to get the right advice, so if even they cannot calculate the liabilities, what hope is there for the ordinary taxpayer trying to fill in his self-assessment tax return?

In evidence to the Treasury Committee, Andrew Dilnot said:

My specific concern is capital gains tax where I am almost lost for words. He went on to say:

The capital gains tax reform does not, it seems to me, make the system more straightforward. It introduces a whole series of new barriers within the tax system, distortions. How does that sit with the statement in the press release that the changes would lead to a simplification of the CGT system? The Select Committee, which is an all-party body dominated by Labour Members, reserved its most scathing criticism for the measures on capital gains tax. Paragraph 43 of the conclusions of its report on the Budget says:

Our experts were critical of the changes made. Mr Troup could see little to justify why a gain made after ten years should be treated differently from two gains made over five years each, one after the other. As he put it, 'The incentives which the taper will create are very unclear'. He was concerned that the failure to deal with companies' capital gains at the same time 'leaves further distortions and anomalies now, with more to arise in the future'. Mr John Hills of the Centre for Analysis of Social Exclusion foresaw the growth 'a new tax avoidance industry,' with conversion of income into capital gains. The Select Committee—in bold type—concluded:

We regret that the capital gains tax proposals were not included in the Pre-Budget Report; we recommend that the Treasury should give urgent attention to reducing the complexity of the new system of tapers. How can the Government claim that the CGT reform is simple, when it applies to individuals, partnerships and trusts but not to companies, which will continue to use the old rules; when it has 14 different tapering percentages of gain to be applied across at least five rates of tax; and when it introduces the new concept of business or non-business assets, with all the complexities that such definitions bring?

As my hon. Friend the Member for Grantham and Stamford (Mr. Davies) said, why did the Government introduce a whole new set of definitions, taking up four pages of a schedule, when they could have used other definitions that have been in the tax system for many years?

How can a system be described as simple when it keeps the old system not only for disposals made before Budget day but for those made after that day but relating to assets held before April this year? Indexation allowance continues to be available for gains made up to April 1998, but from that date only the tapering rules apply. There are new rules on pooling. The system is so horribly complicated that no one subject to self-assessment should even consider preparing a capital gains tax calculation without taking professional advice. How can that be right? How can a tax system be run in that way? How can it be a simplification?

As my hon. Friend the Member for Guildford (Mr. St. Aubyn) said, the new regime penalises those who invest in safe and low-yielding assets, to the advantage of those who make rapid and large gains. Without indexation allowance, someone investing in safe assets that increase in value only slightly would have paid virtually no CGT under the current regime, but will now have to pay 10 per cent. or 24 per cent. on a gain resulting solely from inflation. By contrast, a rapidly appreciating asset is likely to result in a much lower tax than under the current regime.

The Government are coy about whether the reforms are tax-yielding or tax-revenue-neutral. The press release states that the reforms are expected to have a negligible cost in 1998–99; to cost £25 million in 1999–2000; and to yield £25 million to the Exchequer in 2000–01, but for later years

the Exchequer effects will depend to a considerable extent upon movements in future asset prices, any behavioural changes by investors and other factors. 'Twas ever thus. That caveat could be applied to all yield estimates arising from changes to taxation. These reforms are no different, except that most commentators believe that they will raise money for the Exchequer in the medium term. This complicated reform of the CGT system is yet another of the Government's stealth taxes.

6 pm

The consultation process, to which my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley) referred, should involve not only the inviting suggestions for reform—I understand that the Government received 171—but a discussion of the proposals. The press release states:

"Various forms of taper were suggested to the Government to reduce the taxable gain over time, with many wanting it to operate over a short period and to reduce the gain to zero."
Mr. Loughton

Is my hon. Friend aware that the Government have published the results of the consultation and put them in the Library—which they promised, but have so far signally failed to do, with the consultation on PEPs and ISAs? Is it fair for Ministers constantly to refer to consultation responses without those responses being available to hon. Members?

Mr. Gibb

My hon. Friend makes a worthwhile point. I hope that the Financial Secretary will reply to it, because it would be useful to know what people are saying about the reform of the capital gains tax system. According to the press release, a number of representations suggested a tapering system that reduced the rate to zero, as the amendment proposes. It would be interesting to discover how many of them support the amendment.

The press release says that the representations

did not, however, consider the effect that such a taper"— down to zero—

would have on the yield. The reforms are clearly not about simplifying the tax system, because they will complicate it hugely. Nor are they about encouraging entrepreneurs and long-term investments; they are yet another tax and yet another method of increasing the yield for the Exchequer.

The final paragraph of the press release is even more revealing:

Some representative bodies found it hard to comment in detail and asked for further consultation as proposals developed. The Government agrees that more detailed consultation may be appropriate on certain issues, but felt that it was not needed for the structural changes that are proposed in this Budget to encourage enterprise and long-term investment by individuals. Why is that? The contrary is proving to be the case. Why did the Government think that it was not necessary to subject such major changes to the capital gains tax system to consultation?

The reforms have not been warmly received and would have benefited enormously from further consultation. For example, there is huge confusion about the use of brought-forward losses. I hope that the Financial Secretary will help taxpayers by clearing it up. Clause 119 says that the taper will be applied to the net gains that are chargeable after deduction of any losses in the same year or losses brought forward from prior years. The notes on clauses state:

It will not be necessary to use the losses brought forward or carried back to the extent that these would reduce the net untapered gains below the level of the annual exempt amount. The Financial Times reported what it thought was the good news that the Bill would not implement the provisions that appeared to have been mentioned in the Budget press releases which would have forced investors to set off previous years' capital losses against gains, rather than letting them choose to carry them over into the next tax year. If it had been implemented, that proposal would have forced investors to use up carried-over losses rather than using their annual allowance, effectively boosting revenue for the Exchequer.

The euphoria of the Investors' Chronicle and the Financial Times was not correct. The Institute of Directors has said that the amendment of section 3 of the Taxation of Chargeable Gains Act 1992 by the Bill will mean that the taxpayer must use losses brought forward, even if the tapered gains would be covered by the annual exemption. Those with capital losses on other assets or capital losses brought forward will not be able to benefit from the value of their annual allowance, but will have to use up valuable capital losses instead.

The Country Landowners Association raised that issue in a letter to the Investors' Chronicle. Adrian Baird, the CLA's chief taxation adviser, points out that, where untapered gains exceed losses, the application of losses brought forward from earlier years has to be used against those gains before the annual exemption is applied against the tapered gains. As he says, "This is clearly unfair."

The Government should table amendments to put right drafting errors before the detail of schedule 21 is debated in Committee—then the rhetoric of the announcement would for once match the reality of the legislation. I hope that the Financial Secretary accepts that there has been an error in the drafting of the provisions dealing with the way in which brought-forward losses interact with the annual exemption.

Mr. Clifton-Brown

We are discussing relatively modest savers. Does my hon. Friend agree that Governments of all colours have accepted the principle that losses can be used to mitigate gains in a chosen year, although the Government are going against it?

Mr. Gibb

My hon. Friend makes a valid point. I believe that the Government did not intend to move away from that long-established principle, but there has been a drafting error, which the Government may put right this evening or in Standing Committee.

The amendment would do much to remove from the Government's proposals the anomalies, the unfairness, the complexities and the disincentives to entrepreneurs. I urge the Committee to accept it.

Dawn Primarolo

We have had a detailed debate. I want first to outline the Government's objectives; secondly, to respond to the amendment; and, thirdly, to respond to the detailed questions asked by Conservative Members, many of which are relevant regardless of whether the amendment is accepted.

First, I shall deal briefly with consultation, which several hon. Members mentioned. There was extensive consultation to invite views on possible changes to the CGT system. That was announced in the Revenue press release of 29 July 1997. The Government took the views into account in developing the reform package. Many hon. Members quoted from the summary of the consultation exercise that was published with the Budget papers. It was not practical to consult on the details, because of the risk that some investors would change behaviour to reduce their tax bills, and so erode the tax base and disrupt markets. That must be obvious to Conservative Members.

I realise that some hon. Members favour the taper and some do not, but the fact is that we could not, for example, have consulted on the head start in the reform. We could not have consulted on how far the indexation freeze would be retrospective, on retirement relief or on the bed-and-breakfast changes. Many Conservative Members made thoughtful contributions on the taper, and understand those points well. I understand that they must make those points, but they know full well that such problems arise.

Mr. Gibb

I cannot understand why the Minister feels that taxpayers will want to mitigate the consequences of the reforms if their purpose is to simplify the CGT system and encourage enterprise and long-term investment. That implies that the reforms are benign. She now admits that they are not benign, and that people will want to mitigate their effects. Why does she believe that taxpayers will not think that the changes are benign and would have sought to undo their effects if they had had prior notice through the consultation process?

Dawn Primarolo

As the hon. Gentleman knows full well, the Government sought to ensure that there were minimal opportunities to exploit by avoidance mechanisms the true intention of our reforms. That is what I wanted to deal with next, before responding to the amendment.

The Budget was designed to secure economic stability, encourage work, promote enterprise and create a fairer society. To those ends, the Government are committed to improving the performance of all UK business. Business needs a fair tax system that rewards long-term investment and entrepreneurship. Again, Conservative Members repeatedly highlighted the problems in the current system, while engaging in a wide-ranging debate. The CGT reforms are designed to promote enterprise, reward risk taking and encourage long-term investment in place of a culture of short-termism and expediency.

The introduction of the taper is central to the reforms. It reduces the percentage of chargeable gain on long-term assets that are held. That will encourage taxpayers to take the long-term view when they invest.

Mr. Quentin Davies


Mr. Hogg


Dawn Primarolo

I shall give way to the hon. Gentleman first.

Mr. Davies


Dawn Primarolo

indicated dissent.

Mr. Davies

Does the hon. Lady believe that short-term capital gains are less valuable to the economy than long-term capital gains, and if so, why?

The Chairman of Ways and Means (Sir Alan Haselhurst)

Order. The hon. Lady will have to distinguish between her honourable and her right honourable Gentlemen.

6.15 pm
Dawn Primarolo

I am grateful for that guidance, Sir Alan.

The aims of the Government's policy are clearly to encourage long-term investment and discourage short-termism. I now give way to the right hon. and learned Gentleman.

Mr. Hogg

The hon. Lady says that her intention is to encourage long-term investment. I think that she would accept that her proposals, given an increase in the rate of inflation, could mean that people pay capital gains tax on paper gains. How can that be said to encourage long-term investment?

Dawn Primarolo

The policies are designed to encourage long-termism. That is set within the Government's policy of stability and low inflation. That is the point of the reforms.

The introduction of the taper relief will make it possible progressively to withdraw the complicating features, to which Conservative Members have repeatedly referred, from the CGT system. Chief among those is the indexation allowance.

Mr. Gardiner

Did my hon. Friend see the report in the Financial Times on this point the day after the Budget? It mentioned that one of the effects of the change in the CGT regime would be to bring more into play the Greenbury committee's recommendation that there should be a minimum of three years—which quickly became a maximum of three years—before the options on boardroom shares and incentive schemes were exercised? One of the finest impacts of the Government's scheme will be to ensure that such options will be held long-term, and to create a real incentive for loyalty and commitment to companies.

Dawn Primarolo

That is exactly the direction in which we are moving, to put long-termism in place of the culture of short-termism and expediency.

The complexities that indexation introduces into the system are much complained of, and have been complained of this evening. The taper that will take over is intuitively simpler, and will progressively lead to a simpler system as indexation relief ceases to complicate CGT computations. The hon. Member for Cotswold (Mr. Clifton-Brown) mentioned completion of self-assessment returns. Anyone with a gain who has to calculate indexation currently would be well advised to have professional advice. His point applies to the present system.

Mr. Clifton-Brown


Mr. St. Aubyn


Dawn Primarolo

I shall give way first to the hon. Member for Guildford (Mr. St. Aubyn), and then to the hon. Member for Cotswold.

Mr. St. Aubyn

Does the Financial Secretary accept that simplifying a system may produce cases of rough justice? If so, why have the Government removed from the taxpayer the option of the indexation system and whatever complications might be involved in calculating the indexation gain, and simply insisted that everyone has to go over the tapering relief system?

Dawn Primarolo

With respect, what the hon. Gentleman suggests is far too complicated. The Government are striking a balance on the question of fairness in a period of transition from one regime to another—from indexation to the taper regime. That is precisely why the Government have established these mechanisms.

Mr. Clifton-Brown

The Financial Secretary says that introducing the new deemed holding period with the taper makes the computations simpler for the taxpayer, but those taxpayers who have held assets from before 17 March will have to deal with both systems. Far from being simpler, the new system is twice as complicated.

Dawn Primarolo

I have tried to explain to the hon. Members for Guildford and for Cotswold that, in a transitional period, the issues of simplicity and fairness must be balanced, which is what the Government have sought to do. As I said, the taper system will be a simpler system after the period of transition has passed.

The introduction of a more generous taper also removes the need for a separate exemption of a slice of business gains, which retirement relief currently provides for the over-50s. We have taken the opportunity to remove from the system a complex relief that has given rise to high compliance costs and much litigation. The relief will be phased out over a five-year period as the benefit of the taper builds up.

The withdrawal of that relief is also part of a move toward a fairer tax system, in which everyone who realises a substantial gain will pay some tax at the reduced level under the taper. That is crucial to the Government's reforms.

Mr. Quentin Davies

The Financial Secretary may have regarded that last passage as an answer to my specific question about the mismatch between the withdrawal of retirement relief and the introduction of a taper, but it was not a satisfactory answer.

Why did the Government decide to produce additional transitional problems and the anomaly to which I drew attention, whereby, in the interim, business assets will suffer a higher rate—more than 20 per cent.—of capital gains tax? Why will the Government not phase out business retirement relief over the same 10 years over which the taper is being phased in? That was a choice open to the Government, so why did they not take it?

Dawn Primarolo

The answer to the hon. Gentleman's question, which that passage was not, is that it is the Government's opinion that the proposed period is a fair period for the phasing out of the relief. The encouragement to continue to invest and receive the long-term gain is clearly there.

We are also making several changes that will lead to a fairer system: the rules to counter the wholly tax-driven activity of bed-and-breakfasting shares; the taxing of all gains of trusts at the uniform rate of 34 per cent.; and the tightening of the rules on temporary residence, so that people cannot avoid a UK charge simply by going abroad for a limited period.

Mr. Hogg

Will the Financial Secretary give way?

Dawn Primarolo

If the right hon. and learned Gentleman first lets me make a little progress, I shall give way to him. There are many questions I have to answer from hon. Members.

That is not all. We are introducing changes to stimulate greater provision of equity capital for smaller, higher-risk trading companies; and changes to target the available finance in the most effective way. That will be achieved under a new enterprise investment scheme, which combines the existing EIS and CGT reinvestment relief so as to provide a unified, better-focused scheme, while preserving the best parts of the previous system. We shall have an opportunity in Standing Committee to debate the detail of those measures, together with the taper, which is included in schedules 20 and 21.

The amendments proposed by the right hon. Member for Hitchin and Harpenden (Mr. Lilley) deal with the basic structure of the taper proposed in clause 119.

Mr. Hogg

Would this be a good moment to intervene?

Dawn Primarolo

I fear it is.

Mr. Hogg

I should like to take the Financial Secretary back to the subject of bed-and-breakfasting. She has supported the retention of the capital gains tax exemption—as do we—and she would also argue the case for long-termism; but to deprive small investors of the opportunity to take advantage of the capital gains tax exemption in any one year so as to rebase capital values is to damage the position of small investors, so that they are effectively deprived of the capital gain exemption.

Dawn Primarolo

As the right hon. and learned Gentleman will know, bed-and-breakfasting is a wholly tax-driven activity, and the Government have made clear their view. My right hon. Friend the Chancellor sent out a clear message that the practice of bed-and-breakfasting is objectionable, and the Government will watch carefully for any attempt to get around the provisions.

Mr. St. Aubyn

Will the Financial Secretary explain why it is objectionable for a small investor to sell shares in, say, Glaxo and buy them again the next day, but it is not socially objectionable for that small investor to sell shares in Glaxo and, on the same day, to buy shares in, say, SmithKline Beecham?

Dawn Primarolo

The issue is one of investment versus a wholly tax-driven activity. I should have thought that Conservative Members would understand that.

Let me now turn to the amendments and the Government's response. Taper reliefs reduce the amount of gain chargeable on the disposal of an asset. The amount of the reduction depends on the use to which the asset has been put—that is, whether or not it is a business asset—and the length of time it has been held. If the asset has not been a business asset, the taper reduces the gain by 5 per cent. for each year it has been held after three years; the maximum reduction is reached when assets have been held for 10 years or more, when 60 per cent. of the gain remains chargeable.

If the asset is a business asset, the taper reduces the amount of the gain by 7.5 per cent. for each year after the first year; the maximum reduction is reached when the asset has been held for 10 years or more, when only 25 per cent. of the gain remains chargeable.

Business assets are those that have been used in a trade and holdings in a trading company in which the investor has a substantial interest. The taper runs for periods after 5 April 1998, which ties in with the freezing of indexation relief for assets held at April 1998. Indexation will be available to that month, and the taper relief from then on. Assets held on Budget day will qualify for a one-year head start down the taper.

Mr. Bermingham

I am sorry to interrupt my hon. Friend, but I should like her to answer one question. Where the owner of a small business uses personal assets—for example, a cottage or house that is not his residence, or shares in some other holding—will those assets qualify for the exemption under the taper if they have been used to support the development of the business?

Dawn Primarolo

I think my hon. Friend was not present when I said that the intention behind the reforms was to promote enterprise, reward risk taking and encourage long-termism. He asked a specific question on a detailed point, on which I would prefer to come back to him later.

Mr. Gibb

Will the hon. Lady give way?

Dawn Primarolo


Hon. Members


Dawn Primarolo

Sir Alan, I have been very generous, and I would—

The Chairman

Order. I am sorry to interrupt the hon. Lady. The Committee should know that it is entirely up to the Minister whether she gives way, and that background noise is not acceptable.

Mr. Hogg

On a point of order, Sir Alan. Would you just remind me—although I think it is right—that, as the House is in Committee, hon. Members may make further speeches after the Minister has completed hers?

The Chairman

The right hon. and learned Gentleman is perfectly correct to say that hon. Members are not confined to one speech in Committee, but it is still entirely up to the person who holds the Floor how they conduct their speech, and how they maintain the flow of that speech.

6.30 pm
Dawn Primarolo

Thank you, Sir Alan. I wanted to make some progress in my remarks, especially to answer the detailed questions that have been asked. When I have made progress, I should be happy to give way again. I believe that I have already done so generously. Obviously, the purpose of amendments Nos. 16 and 17 is to ensure that people who have held an asset for 10 years or more pay no tax on their gains. We do not think that it is necessary to reduce the tax to zero to meet the objectives of the capital gains tax reform, nor do we think it a right or fair thing to do. The purpose of the taper is to encourage people to take a long-term view when they invest, and to reward those who do so, especially the entrepreneur. We believe that the taper, as drafted, will achieve that.

We believe that charging 25 per cent. of the gains on assets held for 10 years—producing an equivalent tax rate for the higher rate taxpayer of only 10 per cent.—will provide a very real incentive in future for entrepreneurs to set up and expand their businesses. Similarly, charging 60 per cent. of the gains of non-business assets—producing an equivalent tax rate of less than 14 per cent. for the basic rate taxpayer, and only 24 per cent. for the higher rate taxpayer—will provide a real incentive for the ordinary investor to invest for the long term.

Obviously, it is a matter of judgment how generous the reduction should be to produce the desired incentive, and that question provoked much discussion in the debate. However, we believe that the taper in the form set out in clause 119 is sufficient to meet our objectives. To go further and reduce the tax to zero would be not only unnecessary and costly, but unfair to the general body of taxpayers, who do not have capital gains. In our view, those with substantial gains should pay some tax on those gains, which is why we have set the taper in the way we have.

We estimate that, if the taper reduced the charge to zero in the way suggested by amendments Nos. 16 and 17, the annual yield from CGT would be reduced by more than half when the new regime was fully effective. Reducing the tax to zero would also be likely to add to the tax unwelcome complexities—the very thing that Conservative Members wish to avoid.

The taper has been structured in such a way as to make the tax work more simply than it does with indexation. A raft of new rules would probably be needed to counter the additional incentive that a zero-rate tax would provide for converting short-term gains into long-term gains, and income into gains. That could also have much wider implications for the tax system and the yields.

Mr. Quentin Davies

Will the Financial Secretary give way?

Dawn Primarolo

I have said that I am not giving way at the moment. Conservative Members have asked many questions, and I should make progress in answering some of them before more are asked. If Conservative Members were a little more patient in the debate, we could make progress.

In his speech to the British Dyslexia Association just before the Budget, the shadow Chancellor spoke in favour of a taper reducing the CGT charge to zero after the asset had been held for 10 years, but he qualified his remarks as follows:

Inevitably"— I hope that I am not misquoting—

I put this forward tentatively because only with the information available within the Revenue could a scheme be devised which minimised traditional complexities, was not vulnerable to avoidance through use of derivatives and did not reduce overall tax revenues. Well, we have the advantage of access to the Revenue, because of the general election in May 1997. I understand that the results of a poll published today show that our majority would be even larger if a general election were held now, such is the public's satisfaction with the Government's performance.

Now that he has the information with which I have provided him, the right hon. Member for Hitchin and Harpenden should realise why his amendments are unacceptable. We believe that the proposed taper achieves a balance in all the matters that he identified. It will encourage investment for the long term, especially investment in business assets, and reward those who take more than a short-term view.

I now consider some of the specific points that have been made. Various hon. Members said that software houses would be unable to introduce new systems in time to account for the reform package. The Revenue are in discussions with software houses to resolve the problems that have been identified. There is no evidence that it will be difficult to accommodate the taper—the software houses are talented, and already design extremely complex programmes—or to freeze indexation at the April 1998 point. In any event, the 1997–98 tax returns have only just been issued, so another year is available.

The right hon. Member for Hitchin and Harpenden asked why we were phasing the changes over five years. I believe that I have touched on this point, but, to develop it, phasing the current system out over five years will allow those affected to plan and adapt to the revised circumstances. Also, with the one-year addition for assets held at Budget day, the taper will already provide a substantial reduction in a gain chargeable if the sale takes place around the year 2003—the time when retirement relief will be phased out. There is a need to move to the new regime within a reasonable period; in the Government's opinion, five years is a reasonable period to choose to balance equity with complexity.

The right hon. Member for Hitchin and Harpenden asked for details of the Exchequer effect of the taper. Other hon. Members who knew the answer to that question then tried to say that my answer was not an answer after all, but I repeat it. To evaluate the Exchequer effect of the taper separately from the other changes would be a meaningless exercise.

Overall, the CGT reforms are broadly revenue-neutral in the medium term. The cost to the Exchequer will be negligible in 1998–99, and £25 million in 1999–2000. In 2000–01, there will be a yield of £25 million. For later years, the Exchequer effect will, of course, depend to a considerable extent on movements in future asset prices, on behavioural changes by investors, and on other factors.

I am glad that the right hon. Member for Hitchin and Harpenden acknowledged that the current rate of CGT was unreasonable, and that reforms should be undertaken. He then posed the question—

Mr. St. Aubyn

Will the Financial Secretary give way?

Dawn Primarolo

I will not give way. The right hon. Member for Hitchin and Harpenden drew attention to the higher effective rate of tax for assets held for a short time—the taper not providing a reduction in that regard. He said, correctly, that the taper did not bring about a reduction below the current effective rates until the longer holding periods cut in. That is indeed what happens; it is the objective of the reforms. We want to shift the CGT burden away from long-term investors and towards short-term investors, to encourage a longer-term view.

The penultimate point concerned small businesses. The small business asset taper can substantially reduce the tax payable by all businesses, but we believe it right that everyone should pay some tax on large gains above the annual exempt amount; so a continuing exemption has no place in such a scheme, as I have repeatedly made clear.

Finally, many Conservative Members asked why we were phasing out retirement relief. The Government's objective—I cannot remember how often I have said this—is to encourage long-term investment, especially of the entrepreneurial type. It is therefore right to target reliefs on long-term business investment, which is what the generous business asset taper does.

The hon. Member for Grantham and Stamford (Mr. Davies), in his statutory 20-minute contribution, asked a number of questions, but included a disclaimer about what the Institute of Chartered Taxation might say about his representations. He asked what work had been done on assessing compliance costs.

The Revenue published a regulatory appraisal on 5 April demonstrating the long-term compliance benefits of the reform, and appraising the short-term increase in compliance costs. That short-term increase is a result of the transition from the current to the new system in a way that will be acceptable to the broad majority of CGT payers. As indexation and retirement relief work their way out of the system, the compliance benefits will become increasingly evident.

The hon. Gentleman also asked about the four-page definition of business assets, as opposed to the current definition used for gift reliefs under section 165, I think he said. No doubt he will explore these questions further in Standing Committee. That definition is not one that we wanted to use for the reform. The purpose of the taper definition is, as I keep saying, to encourage entrepreneurial activity. We have therefore used a definition appropriate to that purpose. It is quite simple in most practical circumstances.

The hon. Gentleman asked about rebasing asset values at 1998 levels. That would produce huge windfall gains for some people. Rebasing was therefore rejected. It would also create the expectation that we might rebase regularly, so people would hold off transactions in that expectation.

Mr. Quentin Davies

How in the name of heaven could such a move produce expectations that the Government would rebase again? This would clearly be the last rebasing, because indexation would be abolished. Why not take the opportunity to remove the complexities of the co-existence of indexation and tapering for many years to come? Why not reduce those complexities and administrative costs by getting rid of indexation? if that is done, there can be, by definition, no expectation of rebasing again. The hon. Lady's answer does not make sense.

Dawn Primarolo

I disagree. The Government have to decide what is fair. In determining that, we took into account the substantial windfall gains for some individuals. The Government's proposals are the fairest way of effecting the transition from one system to another.

The hon. Member for East Worthing and Shoreham (Mr. Loughton) said that he was in favour of the amendment, but then spoke against even the principle of the tax, let alone the taper. If all that he said was true, why, for 18 years, did the Conservative Government leave in place a system that he believes penalises entrepreneurial activity?

The hon. Gentleman also asked why only holding periods after 5 April 1998 should be counted for taper purposes. The point of the taper is to influence future behaviour. That is achieved by reducing the gain for holding periods after 5 April. Backdating the taper, which the hon. Gentleman also recommended, would confer windfall gains. In the interests of equity and simplicity, that would simply not do.

6.45 pm

The hon. Member for Arundel and South Downs (Mr. Flight) asked about first in, first out. Although that would mean more taper relief for earlier sales and less for later ones, it would also be more likely to produce larger gains for earlier sales and smaller gains for later ones. It is a case of swings and roundabouts.

The hon. Member for Guildford asked why we do not taper losses in the same way as gains. Tapering losses before offsetting them against tapered gains would introduce a distorting incentive to realise short-term losses and then set them against long-term gains.

I have sought to show why the amendments would not achieve the objectives set out by the right hon. Member for Hitchin and Harpenden, and I have answered the questions asked about details of the CGT reform. I have explained the Government's objectives, which are to balance complexity and equity during the transition from one tax to another. I ask the Committee to reject the amendment, and support the Government.

Mr. Lilley

This has been a very good debate, with extremely high-calibre speeches from everyone—not excluding the Minister, who was her characteristically charming and punchy self. She had to respond to an array of talent among my hon. Friends, all of whose speeches merit re-reading—and all of whom supported the amendment.

The other distinguishing characteristic of the debate has been the fact that no Labour or Liberal Member has risen to my challenge to defend the perverse consequences of this measure. I asked them whether they felt that they had been elected to introduce legislation that increased the tax on small business people and reduced it on the rich. I asked whether they supported measures designed to ensure that those who made modest gains paid more tax than those who made large gains. None of them rose to support that aspect of the Bill. We look forward with confidence, therefore, to their joining us in the Lobbies to support the amendment, which would largely eliminate the perverse consequences of the legislation. The issue of consultation, and the inadequate way in which it was carried out, has been raised. The Financial Secretary could not answer the question from my hon. Friend the Member for Bognor Regis and Littlehampton (Mr. Gibb), who said that, if the reforms that the Government wanted to announce and consult about would make life easier for people by reducing the burden of tax and by reducing the burden of compliance with that tax by simplifying it, why should anyone want to pre-empt the introduction of that regime and escape from it? She could not answer, because the question does not permit of an answer that would justify the Government's lack of consultation.

The Government could have presented their proposals and allowed people to comment on them without provoking great pre-emptive action by taxpayers. The legislation would have been all the better if they had proceeded in that way, rather than asking people to write in with abstract essays giving their own ideas about capital gains tax, which would be largely ignored.

The hon. Lady did not respond adequately to our argument that this was in essence a wealth tax. The abolition of indexation and the retention of a positive rate of CGT even after 10 years mean that anyone who has gains that purely reflect the decline in the value of money will henceforward have to pay tax on that, and will in effect be paying a wealth tax. Previous Labour Governments tried to introduce such a tax, and this Government will do so.

The hon. Lady said that a zero rate would be unfair to those who had no capital gains. However, those who have only inflationary gains have no real capital gain. Nothing is more unfair than taxing people on an inflationary gain. The only way to avoid that is by going down to a zero rate.

On simplification, the hon. Lady reminded the Committee that my hon. Friend the Member for Cotswold (Mr. Clifton-Brown) raised the fact that people already faced the problem of dealing with self-assessment. They will now have the added problem of dealing with tapering as well as indexation. The Financial Secretary said that taxpayers should be taking professional advice to deal with indexation, so it will not be difficult for them to take additional professional advice to deal with tapering.

My right hon. and learned Friend the Member for Sleaford and North Hykeham (Mr. Hogg), who is talented and numerate, could probably do those calculations in his head, with his eyes closed. He does not need professional advice, but he admits that he would need such advice to deal with tapering. Why should we create a system that will line the pockets of accountants by making indexation and tapering run side by side for anyone who has assets acquired before 17 March?

As I understand it—perhaps the Financial Secretary will intervene if I am wrong—indexation will not cease in 10 years. It will run alongside tapering for ever in respect of assets acquired before 17 March 1998, so knowledge of the two systems will be necessary.

Mr. Gardiner

The right hon. Gentleman considers it complicated that the two systems should run alongside each other in perpetuity, but his hon. Friend the Member for Guildford (Mr. St. Aubyn) suggested that there should be an option to choose between the two systems. Would that not create even more of a headache?

Mr. Lilley

It would not create more of a headache for those who did not want to take the option. If people wanted to take it up, fair enough. Such systems have existed in the past, but we would prefer not to need the option, by phasing out indexation more satisfactorily and backdating tapering to compensate for it, if that can be done effectively.

The hon. Lady was blasé about the problems raised by the software houses with regard to coping with the complexities of the tax. The software houses do not lightly say that the problems cannot be dealt with by existing software packages, because those do not contain the necessary information and because much of the information about how the tax will operate is not being made available to the general public. I hope that she will look carefully at the problems and do something about them.

Retirement relief is one of the most important issues. The Financial Secretary failed to answer the question about the perverse effect. Suppose someone makes a profit of less than £500,000—say, £350,000—perhaps by selling a business which he has run, effectively, to provide him with a pension. We know that £350,000 will buy a pension much the same as the hon. Member for Bolsover (Mr. Skinner) will get when he retires. That person, however, will have to pay more tax. By contrast, someone who sells a business for £2 million will get an extra £350,000, more than he would get under the present tax regime, so he will be able to buy a second Bolsover pension for himself.

Is that sensible? Were Labour Members elected to bring about a change that will make the rich richer and the less rich less well off? To those that have shall be given, and from those that have not shall be taken away—that seems to be the motto of those on the Front Bench, which is calmly accepted by Back-Bench Labour Members.

After much effort, the hon. Lady said that she now believes that, in the long run, her tax changes will be fairly neutral. I do not know anyone outside the Committee in the expert community who believes that that is so. Almost all of them think that the changes will enhance Government revenues. They would be equally doubtful about her suggestion that moving to a zero rate would have an impact on the yield as substantial as she suggests. I would welcome the publication by the Government of the way in which they have made their calculations in this respect.

Most surprising of the Financial Secretary's replies to the questions raised was her statement that the perverse interim consequences of the transitional arrangements were deliberate. A person who in three or four years sells an asset that has risen at about 5 per cent. in money terms, assuming that inflation stays at its present level, will pay a 60 per cent. rate of tax on his real gain.

The hon. Lady says that that pattern of rates on gains made in the interim is intentional, and that it is designed to encourage people to hold on to their assets even longer. Why does she not make the rate 100 per cent., and make people pay massive rates unless they keep their assets for a very long time? It is extraordinary to increase the effective rate of tax on real gains where those gains are modest. It is way above the present 40 per cent. rate. I am surprised about that.

On the 30-day rule, the Financial Secretary had no answer to the pertinent question why it was good for someone to be able to sell Glaxo and the next day to buy Beechams, but wrong for that person to be able to sell Glaxo and buy Glaxo back the next day, and make use of his capital gains tax allowance. Until we get an answer to that question, we will be puzzled why this strange dog's dinner—or dog's breakfast—of a measure had been introduced.

We will urge the Committee to vote in favour of the amendments, confident that the silence of Labour Members signifies consent on the perverse consequences of the Government's proposals, and that we will have a large measure of support from Labour Members.

Mr. Clifton-Brown

If, as the Government believe and the Financial Secretary made clear, these complex changes are revenue-neutral in the medium term, what on earth is the point of introducing them, when the compliance cost will be hugely increased?

Mr. Lilley

That is a very good question. A system that does not achieve the simplification that might have been possible if indexation had been replaced by indexation leading to a zero rate is probably not worth having. If the measure does not raise extra revenue, it is hard to justify. However, one suspects that it will—like almost every other tax measure that the Government have introduced. It is another tax-raising measure, from a tax-raising socialist Government. We urge the Committee to support us in this amendment.

Question put, That the amendment be made:—

The Committee divided: Ayes 149, Noes 251.

Division No. 261] [6.59 pm
Ainsworth, Peter (E Surrey) Chope, Christopher
Allan, Richard Clappison, James
Amess, David Clark, Rt Hon Alan (Kensington)
Ancram, Rt Hon Michael Clark, Dr Michael (Rayleigh)
Arbuthnot, James Clifton—Brown, Geoffrey
Ashdown, Rt Hon Paddy Collins, Tim
Atkinson, David (Bour'mth E) Colvin, Michael
Atkinson, Peter (Hexham) Cormack, Sir Patrick
Baker, Norman Cotter, Brian
Ballard, Mrs Jackie Cran, James
Beith, Rt Hon A J Curry, Rt Hon David
Bell, Martin (Tatton) Davey, Edward (Kingston)
Bercow, John Davies, Quentin (Grantham)
Body, Sir Richard Davis, Rt Hon David (Haltemprice)
Bottomley, Peter (Worthing W) Day, Stephen
Bottomley, Rt Hon Mrs Virginia Donaldson, Jeffrey
Brady, Graham Dorrell, Rt Hon Stephen
Brake, Tom Duncan, Alan
Brazier, Julian Emery, Rt Hon Sir Peter
Breed, Colin Evans, Nigel
Browning, Mrs. Angela Faber, David
Bruce, Malcolm (Gordon) Fabricant, Michael
Burns, Simon Fallon, Michael
Cable, Dr Vincent Flight, Howard
Campbell, Menzies (NE Fife) Forth, Rt Hon Eric
Cash, William Fowler, Rt Hon Sir Norman
Chapman, Sir Sydney Fox, Dr Liam
(Chipping Barnet) Fraser, Christopher
Chidgey, David Garnier, Edward
Gibb, Nick Paterson, Owen
Gill, Christopher Pickles, Eric
Gillan, Mrs Cheryl Prior, David
Gorman, Mrs Teresa Randall, John
Green, Damian Redwood, Rt Hon John
Greenway, John Robathan, Andrew
Grieve, Dominic Robertson, Laurence (Tewk'b'ry)
Hamilton, Rt Hon Sir Archie Roe, Mrs Marion (Broxbourne)
Hammond, Philip Ruffley, David
Hancock, Mike Russell, Bob (Colchester)
Harvey, Nick St Aubyn, Nick
Hawkins, Nick Sanders, Adrian
Heald, Oliver Shepherd, Richard
Heath, David (Somerton & Frome) Simpson, Keith (Mid-Norfolk)
Heathcoat-Amory, Rt Hon David Smith, Sir Robert (W Ab'd'ns)
Hogg, Rt Hon Douglas Smyth, Rev Martin (Belfast S)
Hughes, Simon (Southwark N) Spelman, Mrs Caroline
Hunter, Andrew Spicer, Sir Michael
Jackson, Robert (Wantage) Stanley, Rt Hon Sir John
Jenkin, Bernard Steen, Anthony
Johnson Smith, Stunell, Andrew
Rt Hon Sir Geoffrey Swayne, Desmond
Kennedy, Charles (Ross Skye) Syms, Robert
Key, Robert Tapsell, Sir Peter
Kirkbride, Miss Julie Taylor, John M (Solihull)
Kirkwood, Archy Taylor, Sir Teddy
Laing, Mrs Eleanor Tonge, Dr Jenny
Lait, Mrs Jacqui Townend, John
Letwin, Oliver Tyler, Paul
Lidington, David Tyrie, Andrew
Lilley, Rt Hon Peter Wallace, James
Livsey, Richard Walter, Robert
Lloyd, Rt Hon Sir Peter (Fareham) Wardle, Charles
Loughton, Tim Waterson, Nigel
Luff, Peter Webb, Steve
Lyell, Rt Hon Sir Nicholas Whitney, Sir Raymond
MacGregor, Rt Hon John Widdecombe, Rt Hon Miss Ann
MacKay, Andrew Willetts, David
Maclean, Rt Hon David Willis, Phil
McLoughlin, Patrick Wilshire, David
Maples, John Winterton, Mrs Ann (Congleton)
May, Mrs Theresa Winterton, Nicholas (Macclesfield)
Michie, Mrs Ray (Argyll & Bute) Woodward, Shaun
Moore, Michael Yeo, Tim
Moss, Malcolm Young, Rt Hon Sir George
Nicholls, Patrick
Norman, Archie Tellers for the Ayes:
Page, Richard Mr. John Whittingdale and
Paice, James Sir David Madel
Abbott, Ms Diane Bradshaw, Ben
Adams, Mrs Irene (Paisley N) Brinton, Mrs Helen
Ainger, Nick Brown, Rt Hon Nick (Newcastle E)
Ainsworth, Robert (Cov'try NE) Browne, Desmond
Alexander, Douglas Burden, Richard
Allen, Graham Burgon, Colin
Anderson, Janet (Rossendale) Byers, Stephen
Armstrong, Ms Hilary Caborn, Richard
Ashton, Joe Campbell, Alan (Tynemouth)
Atherton, Ms Candy Campbell, Ronnie (Blyth V)
Atkins, Charlotte Campbelk—Savours, Dale
Barnes, Harry Canavan, Dennis
Battle, John Cann, Jamie
Bayley, Hugh Casale, Roger
Begg, Miss Anne Caton, Martin
Bell, Stuart (Middlesbrough) Chapman, Ben (Wirral S)
Benn, Rt Hon Tony Chaytor, David
Bennett, Andrew F Chisholm, Malcolm
Bermingham, Gerald Clark, Dr Lynda
Best, Harold (Edinburgh Pentlands)
Betts, Clive Clarke, Charles (Norwich S)
Blizzard, Bob Clarke, Eric (Midlothian)
Borrow, David Clarke, Tony (Northampton S)
Bradley, Keith (Withington) Clelland, David
Bradley, Peter (The Wrekin) Clwyd, Ann
Coaker, Vernon Jones, Ms Jenny
Coffey, Ms Ann (Wolverh'ton SW)
Coleman, Iain Jones, Martyn (Clwyd S)
Cook, Frank (Stockton N) Kaufman, Rt Hon Gerald
Cooper, Yvette Keeble, Ms Sally
Cousins, Jim Kennedy, Jane (Wavertree)
Cox, Tom Kidney, David
Cranston, Ross Kilfoyle, Peter
Cryer, Mrs Ann (Keighley) Kingham, Ms Tess
Cummings, John Kumar, Dr Ashok
Cunliffe, Lawrence Lawrence, Ms Jackie
Cunningham, Jim (Cov'try S) Lepper, David
Dalyell, Tam Leslie, Christopher
Darling, Rt Hon Alistair Levitt, Tom
Davidson, Ian Lewis, Ivan (Bury S)
Davies, Rt Hon Denzil (Llanelli) Liddell, Mrs Helen
Davies, Geraint (Croydon C) Livingstone, Ken
Dean, Mrs Janet Lloyd, Tony (Manchester C)
Denham, John Llwyd, Elfyn
Dobbin, Jim Lock, David
Dobson, Rt Hon Frank Love, Andrew
Dowd, Jim McAllion, John
Drown, Ms Julia McAvoy, Thomas
Eagle, Angela (Wallasey) McCabe, Steve
Eagle, Maria (L'pool Garston) McCafferty, Ms Chris
Edwards, Huw McDonnell, John
Ellman, Mrs Louise McFall, John
Etherington, Bill McGuire, Mrs Anne
Ewing, Mrs Margaret McKenna, Mrs Rosemary
Field, Rt Hon Frank Mackinlay, Andrew
Fisher, Mark McNamara, Kevin
Flynn, Paul McNulty, Tony
Follett, Barbara McWalter, Tony
Foster, Rt Hon Derek Mallaber, Judy
Foster, Michael J (Worcester) Marsden, Gordon (Blackpool S)
Foulkes, George Marshall, David (Shettleston)
Fyfe, Maria Marshall, Jim (Leicester S)
Galloway, George Marshall-Andrews, Robert
Gardiner, Barry Maxton, John
George, Bruce (Walsall S) Michie, Bill (Shef'ld Heeley)
Gerrard, Neil Milburn, Alan
Gibson, Dr Ian Mitchell, Austin
Gilroy, Mrs Linda Moffatt, Laura
Godman, Dr Norman A Moonie, Dr Lewis
Godsiff, Roger Moran, Ms Margaret
Goggins, Paul Morgan, Alasdair (Galloway)
Golding, Mrs Llin Morgan, Rhodri (Cardiff W)
Griffiths, Jane (Reading E) Morris, Ms Estelle (B'ham Yardley)
Gunnell, John Mudie, George
Hall, Mike (Weaver Vale) Mullin, Chris
Hall, Patrick (Bedford) Murphy, Denis (Wansbeck)
Hanson, David O'Brien, Bill (Normanton)
Heal, Mrs Sylvia O'Brien, Mike (N Warks)
Healey, John O'Neill, Martin
Henderson, Doug (Newcastle N) Organ, Mrs Diana
Hesford, Stephen Osborne, Ms Sandra
Hinchliffe, David Palmer, Dr Nick
Home Robertson, John Pearson, Ian
Hoon, Geoffrey Pickthall, Colin
Hope, Phil Pike, Peter L
Hopkins, Kelvin Plaskitt, James
Howarth, George (Knowsley N) Pope, Greg
Humble, Mrs Joan Pound, Stephen
Hurst, Alan Powell, Sir Raymond
Hutton, John Prentice, Gordon (Pendle)
Iddon, Dr Brian Primarolo, Dawn
Jackson, Helen (Hillsborough) Prosser, Gwyn
Jamieson, David Purchase, Ken
Jenkins, Brian Quinn, Lawrie
Johnson, Alan (Hull W & Hessle) Remmell, Bill
Johnson, Miss Melanie Rapson, Syd
(Welwyn Hatfield Raynsford, Nick
Jones, Barry (Alyn & Deeside Reed, Andrew (Loughborough)
Jones, Helen (Warrington N) Reid, Dr John (Hamilton)
Jones, leuan Wyn (Ynys Môn) Robinson, Geoffrey (Cov'try NW)
Roche, Mrs Barbara
Rogers, Allan Stuart, Ms Gisela
Rooker, Jeff Swinney, John
Ross, Ernie (Dundee W) Taylor, Rt Hon Mrs Ann
Rowlands, Ted (Dewsbury)
Roy, Frank Taylor, Ms Dari (Stockton S)
Ruane, Chris Thomas, Gareth (Clwyd W)
Ruddock, Ms Joan Thomas, Gareth R (Harrow W)
Salter, Martin Timms, Stephen
Savidge, Malcolm Tipping, Paddy
Sawford, Phil Touhig, Don
Shaw, Jonathan Trickett, Jon
Sheerman, Barry Truswell, Paul
Sheldon, Rt Hon Robert Turner, Dennis (Wolverh'ton SE)
Short, Rt Hon Clare Turner, Dr Desmond (Kemptown)
Simpson, Alan (Nottingham S) Turner, Dr George (NW Norfolk)
Singh, Marsha Twigg, Derek (Halton)
Skinner, Dennis Watts, David
Smith, Rt Hon Andrew (Oxford E) Wicks, Malcolm
Smith, Miss Geraldine Williams, Rt Hon Alan
(Morecambe & Lunesdale) (Swansea W)
Smith, John (Glamorgan) Williams, Alan W (E Carmarthen)
Smith, Llew (Blaenau Gwent) Wills, Michael
Spellar, John Winnick, David
Squire, Ms Rachel Wise, Audrey
Steinberg, Gerry Wood, Mike
Stevenson, George Wray, James
Stewart, David (Inverness E)
Stott, Roger Tellers for the Noes:
Strang, Rt Hon Dr Gavin Mr. Jon Owen Jones and
Stringer, Graham Ms Bridget Prentice.

Question accordingly negatived.

Dr. Vincent Cable (Twickenham)

I beg to move amendment No. 27, in page 110, line 9, leave out '1998–99' and insert '1999–2000'.

The bad news for those who are not aficionados of capital gains taxation is that the subject is not entirely exhausted. Enough has been said in previous debates to tell us that there is considerable disquiet about the way in which important reform is being introduced. The previous amendment, tabled and moved by the official Opposition, was largely designed, I suspect, to cover the embarrassment of their official spokesman, who had committed himself to a particular form of reform. With amendment No. 27 we are making a more wide-ranging request that the Government should consult and report back to Parliament on questions of simplicity and economic efficiency.

A regrettable feature of the previous debate was its presentation, which was more partisan than was necessary. When we dealt with the issue on Second Reading, it was fairly clear that there was disquiet on both sides of the Chamber. The hon. Member for Stafford (Mr. Kidney) made an especially good contribution. In common with many of us, he had encountered some of the difficulties that practitioners will experience with the reform. The hon. Gentleman asked the Government to consider the matter afresh. We approach the reform very much in that spirit.

In many other respects, the Government have shown a commendable willingness to consult. The result of that consultation on individual savings accounts was political credit for the Government and improved legislation. On gaming legislation, the Government showed last night that they were willing to listen to criticism and to respond. The amendment is moved in the hope that the Government will react to some of the things that have been said today, many of which my colleagues and I support. We hope that the Government will respond constructively to them in due course.

The key point is simplicity. I do not pretend to be a practitioner, and I can claim honestly never intentionally to have made a capital gain sufficiently large to trouble the taxman. I suspect that many of us in the Chamber are in that position. We are reliant for advice on practitioners, and they are telling us—even those who have no ideological axe to grind—that there are horrendous practical problems associated with the proposed changes.

Mr. Bermingham

I listened only to the end of the previous debate, because I had to be elsewhere. However, it is clear to me that the debate is between those who want to benefit from short-term speculation, which was the previous Government's policy, and those who want to invest in and encourage long-term investment. The Bill is drafted in a way that makes it clear that policy must be directed towards long-term investment, thereby encouraging people to invest in their own businesses, for example, leading to their retirement, when they will incur almost a minimal notional tax burden.

7.15 pm
Dr. Cable

I am happy to deal with the short-term, long-term issue. In many ways, the hon. Gentleman is using old-fashioned jargon and concepts that are no longer relevant to the way in which international business operates.

Perhaps the key point is simplicity. We are faced with complexity when it comes to tapering, in respect of which loss provisions are to be taken into account, and the overlap with indexation. Those factors will present serious problems to those who have to operate the system. The Financial Secretary has told us that there are no problems for software houses. However, I have been approached by several accountants, who expressed great apprehension about the information technology implications of the proposed change, which is coming not in isolation but in addition to other demands on the industry—for example, the year 2000, possibly the Dow 10.000 index problem and certainly the economic and monetary union conversion problem. A set of difficulties confront the industry, and I have outlined one more that will have to be faced by tax accountants and by others in the City. It is a genuine difficulty.

The short-term, long-term issue underlies the proposed change. I understand the theory and it is superficially plausible. It is an idea that has had a long period of gestation. I remember that Lord Kaldor was in many ways the genesis of the proposed legislation in the context of short-term capital gains tax in the 1960s. It was he who introduced the idea.

It has never been entirely clear to me that there is a fundamental short-termism problem. I operated in a company that made respectable returns, yet made 50-year investments. It operated in international capital markets, which were well attuned to long-term decisions. However, it has never been especially clear, particularly in the modern world in which we operate, where increasingly global markets meet both long-term and short-term needs, that there is a fundamental structural deficiency.

The proposed legislation will have some disadvantageous consequences. For example, many economically beneficial capital gains, by their very nature, are short term. The venture capital business is designed, very often, to produce high-risk, short-term returns. That is the nature of the business. It is efficient, but that is the way in which it operates. Equally, there is nothing inherently beneficial in long-term investments, especially long-term, non-business investments. There is no particular advantage in locking away an investment for 20 years merely because of tax advantages. That does not encourage the right sort of entrepreneurial activity.

One of the perverse and unintended consequences of the proposed changes is that individuals will be encouraged to invest less on a private basis and more on an institutional basis through investment trusts and unit trusts, where the churning of rapid investment will take place without encountering capital gains difficulties. The Government should have a period of consultation, considering the simplicity issues and the complexity problems, including economic efficiency. Having done so, they should report back to the House of Commons.

Opposition Members raised a set of practical problems. Some of those problems have been answered and others not. The speed of tapering seems to be a problem for non-business investment. How are losses to be taken into account? Retrospectivity is a real problem, because the tapering system will not take effect for two years from now. A particular problem is associated with the restrictions that divide business and non-business investment. For example, someone with less than 25 per cent. ownership in a company will not benefit from the more generous treatment accorded to business capital gains.

All those are legitimate issues. There may be adequate answers, but we want a period of further consultation, so that the Government can meet the criticisms that have been made and approach the House with better legislation than currently exists.

Dawn Primarolo

I listened carefully to the hon. Member for Twickenham (Dr. Cable), who was repeating points that were made in the previous debate. He seemed to be arguing against the clause, whereas the amendment accepts the clause but merely delays its implementation for a year. Does he support the clause or want its implementation delayed?

I dealt in the previous debate with consultation. It is not only the Government who think that the reforms are good and will promote the long-termism that we seek to encourage. The hon. Gentleman need not rely on my word for that; the CBI, the Federation of Small Businesses and the British Venture Capital Association have all welcomed the change, because it provides a big boost to long-term investment.

In addition, the clause heralds the progressive withdrawal of indexation from the capital gains tax system and the phasing out of retirement relief. Both those features of the present system have been much complained about, not only in Committee today but repeatedly outside the House. Their replacement by a system that provides relief solely on the basis of the length of time over which the gain has been accrued is both simple to understand and easy to operate.

We therefore reject the amendment and the proposition that we should delay the reform by a year. I have already dealt with the questions of complexity and equity, and how the tax will be managed. I shall try to help the hon. Gentleman and his party, by advising them to make up their minds whether they agree with the taper. If they agree with it, they should vote for the clause, which I hope they will. If they do not, they should know that any delay is unacceptable to the Government, so we reject their proposition.

Dr. Cable

We have no fundamental objection to the clause. After further consideration, it might perfectly acceptable. It is difficult to understand why the Government are so resistant to consultation. They have adopted that principle in many aspects of their policy and have benefited from doing so.

There are clearly many objections to the clause. They are motivated not by party political concerns but by genuine technical and procedural problems which could, with further consultation, be addressed. That is why we argue for a year's delay in the introduction of the legislation.

In another context, for example, when my colleagues and I urge a more rapid accession to EMU, Ministers often say that it is better to be right than to be quick. That is an admirable principle to apply in this extremely complex area of legislation.

Question put, That the amendment be made:—

The Committee divided: Ayes 34, Noes 240.

Division No. 262] [7.24 pm
Allan, Richard Kennedy, Charles (Ross Skye)
Baker, Norman Kirkwood, Archy
Ballard, Mrs Jackie Livsey, Richard
Beith, Rt Hon A J Michie, Mrs Ray (Argyll & Bute)
Bell, Martin (Tatton) Moore, Michael
Brake, Tom Morgan, Alasdair (Galloway)
Breed, Colin Russell, Bob (Colchester)
Bruce, Malcolm (Gordon) Sanders, Adrian
Cable, Dr Vincent Stunell, Andrew
Campbell, Menzies (NE Fife) Swinney, John
Chidgey, David Tonge, Dr Jenny
Cotter, Brian Tyler, Paul
Ewing, Mrs Margaret Wallace, James
Hancock, Mike Webb, Steve
Harris, Dr Evan Willis, Phil
Harvey, Nick
Heath, David (Somerton & Frome) Tellers for the Ayes:
Jones, Ieuan Wyn (Ynys Môn) Mr. Edward Davey and
Keetch, Paul Sir Robert Smith.
Abbott, Ms Diane Bermingham, Gerald
Adams, Mrs Irene (Paisley N) Betts, Clive
Ainger, Nick Blizzard, Bob
Ainsworth, Robert (Cov'try NE) Borrow, David
Alexander, Douglas Bradley, Keith (Withington)
Allen, Graham Bradley, Peter (The Wrekin)
Anderson, Janet (Rossendale) Bradshaw, Ben
Armstrong, Ms Hilary Brinton, Mrs Helen
Ashton, Joe Brown, Rt Hon Nick (Newcastle E)
Atherton, Ms Candy Brown, Russell (Dumfries)
Atkins, Charlotte Browne, Desmond
Barnes, Harry Burden, Richard
Battle, John Burgon, Colin
Bayley, Hugh Byers, Stephen
Begg, Miss Anne Caborn, Richard
Bell, Stuart (Middlesbrough) Campbell, Alan (Tynemouth)
Benn, Rt Hon Tony Campbell, Mrs Anne (C'bridge)
Bennett, Andrew F Campbell, Ronnie (Blyth V)
Campbell-Savours, Dale Jamieson, David
Canavan, Dennis Jenkins, Brian
Casale, Roger Johnson, Alan (Hull W & Hessle)
Caton, Martin Johnson, Miss Melanie
Chapman, Ben (Wirral S) (Welwyn Hatfield)
Chaytor, David Jones, Barry (Alyn & Deeside)
Chisholm, Malcolm Jones, Helen (Warrington N)
Clark, Dr Lynda Jones, Ms Jenny
(Edinburgh Pentlands) (Wolverh'ton SW)
Clarke, Charles (Norwich S) Jones, Marlyn (Clwyd S)
Clarke, Eric (Midlothian) Kaufman, Rt Hon Gerald
Clarke, Tony (Northampton S) Keeble, Ms Sally
Clelland, David Kennedy, Jane (Wavertree)
Clwyd, Ann Kidney, David
Coaker, Vernon Kilfoyle, Peter
Coffey, Ms Ann Kingham, Ms Tess
Cook, Frank (Stockton N) Kumar, Dr Ashok
Cooper, Yvette Lawrence, Ms Jackie
Cousins, Jim Lepper, David
Cox, Tom Leslie, Christopher
Cranston, Ross Levitt, Tom
Cryer, Mrs Ann (Keighley) Lewis, Ivan (Bury S)
Cummings, John Liddell, Mrs Helen
Cunliffe, Lawrence Livingstone, Ken
Cunningham, Jim (Cov'try S) Lloyd, Tony (Manchester C)
Dalyell, Tam Lock, David
Darling, Rt Hon Alistair Love, Andrew
Davidson, Ian McAllion, John
Davies, Rt Hon Denzil (Llanelli) McAvoy, Thomas
Davies, Geraint (Croydon C) McCabe, Steve
Dean, Mrs Janet McCafferty, Ms Chris
Dobbin, Jim McDonnell, John
Dobson, Rt Hon Frank McFall, John
Dowd, Jim McGuire, Mrs Anne
Drown, Ms Julia McKenna, Mrs Rosemary
Eagle, Angela (Wallasey) Mackinlay, Andrew
Eagle, Maria (L'pool Garston) McNamara, Kevin
Edwards, Huw McNulty, Tony
Ellman, Mrs Louise McWalter, Tony
Etherington, Bill Mallaber, Judy
Field, Rt Hon Frank Marsden, Gordon (Blackpool S)
Fisher, Mark Marshall, David (Shettleston)
Flynn, Paul Marshall, Jim (Leicester S)
Foster, Rt Hon Derek Marshall-Andrews, Robert
Foster, Michael J (Worcester) Maxton, John
Fyfe, Maria Michie, Bill (Shef'ld Heeley)
Galloway, George Milburn, Alan
Gardiner, Barry Mitchell, Austin
George, Bruce (Walsall S) Moffatt, Laura
Gerrard, Neil Moonie, Dr Lewis
Gibson, Dr Ian Moran, Ms Margaret
Gilroy, Mrs Linda Morgan, Rhodri (Cardiff W)
Godman, Dr Norman A Mudie, George
Godsiff, Roger Mullin, Chris
Goggins, Paul Murphy, Denis (Wansbeck)
Golding, Mrs Llin O'Brien, Bill (Normanton)
Griffiths, Jane (Reading E) O'Brien, Mike (N Warks)
Grocott, Bruce O'Neill, Martin
Gunnell, John Organ, Mrs Diana
Hall, Mike (Weaver Vale) Osborne, Ms Sandra
Hall, Patrick (Bedford) Palmer, Dr Nick
Hanson, David Pearson, Ian
Heal, Mrs Sylvia Pickthall, Colin
Healey, John Pike, Peter L
Henderson, Doug (Newcastle N) Plaskitt, James
Hesford, Stephen Pope, Greg
Hinchliffe, David Powell, Sir Raymond
Home Robertson, John Prentice, Gordon (Pendle)
Hoon, Geoffrey Primarolo, Dawn
Hopkins, Kelvin Prosser, Gwyn
Howarth, George (Knowsley N) Purchase, Ken
Humble, Mrs Joan Quinn, Lawrie
Hurst, Alan Rammell, Bill
Hutton, John Rapson, Syd
Iddon, Dr Brian Raynsford, Nick
Jackson, Helen (Hillsborough) Reed, Andrew (Loughborough)
Reid, Dr John (Hamilton N) Stringer, Graham
Robinson, Geoffrey (Cov'try NW) Stuart, Ms Gisela
Roche, Mrs Barbara Taylor, Rt Hon Mrs Ann
Rogers, Allan (Dewsbury)
Rooker, Jeff Taylor, Ms Dari(Stockton S)
Ross, Ernie (Dundee W) Taylor, Rt Hon John D (Strangford)
Rowlands, Ted Thomas, Gareth (Clwyd W)
Roy, Frank Thomas, Gareth R (Harrow W)
Ruane, Chris Timms, Stephen
Ruddock, Ms Joan Tipping, Paddy
Savidge, Malcolm Touhig, Don
Sawford, Phil Trickett, Jon
Shaw, Jonathan Truswell, Paul
Sheerman, Barry Turner, Dennis (Wolverh'ton SE)
Sheldon, Rt Hon Robert Turner, Dr Desmond (Kemptown)
Short, Rt Hon Clare Turner, Dr George (NW Norfolk)
Simpson, Alan (Nottingham S) Twigg, Derek (Halton)
Singh, Marsha Watts, David
Skinner, Dennis Wicks, Malcolm
Smith, Rt Hon Andrew (Oxford E) Williams, Rt Hon Alan
Smith, Miss Geraldine (Swansea W)
(Morecambe & Lunesdale) Williams, Alan W (E Carmarthen)
Smith, John (Glamorgan) Wills, Michael
Smith, Llew (Blaenau Gwent) Winnick, David
Spellar, John Wise, Audrey
Squire, Ms Rachel Wood, Mike
Steinberg, Gerry Wray, James
Stevenson, George
Stewart, David (Inverness E) Tellers for the Noes:
Stott, Roger Ms Bridget Prentice and
Strang, Rt Hon Dr Gavin Mr. Jon Owen Jones.

Question accordingly negatived.

Clause 119 ordered to stand part of the Bill.

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