§ 'The annual Financial Statement and Budget Report shall include an analysis of the effect of the Budget measures on the administrative efficiency of the tax system, including the following matters:
- (a) the change in the number of taxes, tax rates, tax allowances and reliefs;
- (b) the estimated change in annual tax compliance costs for the private, public and voluntary sectors; and
- (c) progress on the simplification of tax administration for all taxpayers.'.—[Mr. Edward Davey.]
§ Brought up, and read the First time.782
§ Mr. Edward Davey
I beg to move, That the clause be read a Second time.
It may strike hon. Members as odd that, at this late hour, we are debating a new clause on tax administration, but, as we pass the Finance Bill, we should spend some time debating the matter. In 1986-87, the Tax Law Review Committee estimated that the tax administration industry, in both the public and private sectors, accounted for 1.5 per cent. of national income. At current prices, that means that the administration industry is worth more than £12 billion—as much as the agriculture, fisheries and forestry industries. The way in which we regulate that significant industry and the policies that we give it to administer affect many people and involve a lot of money. It is incumbent on us to look at the serious issues involved.
To their credit, the Government have introduced new measures in clauses 123 and 124 dealing with electronic documentation to assist the administration of the tax system. That is welcome, but we need to approach the issue with humility. Having considered all the factors that make the tax system so complicated, tax expert Robin Godman wrote in Taxation Practitioner in July last year:In fact, the Budget and the Finance Bill cycle are very significant factors in the causes of complexity".What we are doing today—what some of us have been doing for many months—adds to that complexity. We need to look at the process and try to find ways to reform matters and make them simpler—perhaps even to reduce the size of the industry. After all, it does not really help our balance of payments.
That has been a recurrent theme over the years. Many committees have been set up. The Institute for Fiscal Studies was set up more than 30 years ago. The Meade committee report in 1978 influenced the Conservative Government. Recently, we have seen some major new studies on the tax system. The Bath report, published last year—its full title is "The Tax Compliance Costs for Employers of PAYE and the National Insurance System"—has become a seminal work on how we should look at the issues. The Government sponsored the study via the Inland Revenue and the Department of Social Security. It had some hard-hitting conclusions on compliance costs that should make us sit back and think.
The Select Committee on the Treasury has looked at the Inland Revenue and spent some time analysing the report from Bath university. Its findings were published at the end of May this year. This is a live subject and it deserves our attention.
What are the root causes of complexity? The foremost are the taxation policies of any Government. The Government have introduced a significant shift in the direction of taxation policy. We have seen some good signs, particularly in the Taylor report's comments on working towards the integration of the national insurance system with the income tax system. The Government have taken on board some of those important proposals, but they need to go further. The Government's proposals to merge the Inland Revenue with the Contributions Agency are progressive, and will help to reduce administration costs. There are other measures in the Bill that will also reduce complexity, including the abolition of mortgage interest tax relief and the married couples allowance. Those measures are going in the right direction for simplicity.
783 That is on the positive side of the ledger. Unfortunately, there are too many items on the negative side in this Bill and previous ones. The 10p tax rate that we debated earlier this evening has introduced a great deal of complexity for the personal and commercial sectors. Last year's Finance Act introduced the capital gains tax taper relief, causing huge complexities for many people operating the tax system. The system of tax credits, including the working families tax credit, the child care tax credit and now the children's tax credit, is an innovation in tax administration that I fear will increase compliance costs substantially for the private sector. Those policy changes impact significantly, and the net effect of all the tax changes has been to increase substantially the number of tax rates facing the taxpayer.
For ordinary taxpayers, there are three rates on earned income—10, 23 and 40 per cent. For dividend tax, we have 10 and 32.5 per cent. For capital and savings, we have 20 and 40 per cent. For trust income, we have 20, 23 and 34 per cent. For those receiving children's tax credit in the years to come, there will be a tapered tax rate and, at some stage, people will be paying a tax rate of 46.7 per cent. That is before we get to the many rates that have been introduced with the CGT taper relief. The number of rates has gone up, and that is why we propose that the Government say, when they introduce their Budget report, how many allowances, rates and reliefs there are as a result of the Budget.
Complexity comes not only from policy changes, but from the administrative detail, regulations and rules that come from the tax authorities, be it the Inland Revenue or Customs and Excise. Those are the root of the compliance costs for business. A business man—even someone employing only one or two people—must read all the information and regulations to ensure that he complies. Also, he must understand them—and that can take some doing. This is not just a one-off exercise. Employers must keep up to date because the tax law is forever changing.
For small businesses, huge compliance costs are involved. They must come to terms with the coding for the UK's cumulative tax system. They must operate two forms of direct taxation—income tax and national insurance. Anyone who has had to deal with the complexities of class 2 national insurance for the self-employed will know how taxes that raise only small amounts of revenue can involve huge complexity, and can cause great concern for small businesses.
The Bath report showed the extent of compliance costs and how they unfairly affect small businesses. The report showed that compliance costs per employee for the smallest employers—those employing one to four people—were £288 per annum. For the largest employers—firms employing 5,000 employees or more—the compliance costs were just £5 per annum. The relativities are even worse, and small businesses are even more badly affected. The gains that large employers get from the cash flow benefits of collecting the money from their employees before passing it on to the Inland Revenue are far larger than those for smaller employers.
The Bath study showed that the gains that large employers get from that float income outweigh the costs of administering the pay roll. Large employers do very 784 well from the current tax system, and small employers do not. That is a serious issue when one looks to the long term. The UK's cumulative tax system was designed for a static labour market, when people stayed in their jobs for many years, when there were low staff turnovers and when we had many more larger employers. However, we do not have that sort of labour market now, and that will be the case increasingly in the future. We will have a much more dynamic labour market, with people changing jobs several times during their career. We will have a greater number of smaller companies. That crucial finding of the Bath report was not picked up in the previous studies of tax administration.
The study showed that many of the compliance costs come when one takes on a new employee and a new coding has to be found. In theory, the P45 system should reduce those costs, but the study showed that it does not tend to work. That cannot be good for job creation.
The Treasury Select Committee report said that the Bath study pointed the way forward. It said:We recommend that the Inland Revenue be given a target to reduce compliance costs.That is absolutely right. The new clause would bring that about because it would force the Government to provide the information according to which targets could be set and progress measured
The report focused on the compliance costs for small businesses. If a similar study were done on the costs for the personal taxpayer and the voluntary sector, it would also show significant compliance costs, increasing over the past few years with the introduction of self-assessment and the working families tax credit. If such studies were available to the House—perhaps the Government should sponsor them—many more hon. Members would be concerned about the matter and urge the Government to review it for the next Finance Bill.
The complexity is not only in administrative detail but in the overall philosophy and culture of the Inland Revenue, which does not seem to emphasise the need for simplicity, which should be an objective of tax policy. With a simple tax system taxpayers—citizens—can more easily understand what is being raised in their name, and how. That will increase accountability and compliance, because, if people understand the system, they will be more willing to pay.
The Government said that they were in favour of simplifying the tax system. That was almost a manifesto pledge. The Chancellor has certainly said that he is pro-simplification. If he is to achieve that goal, he should consider the approach embodied in the new clause.
The new clause would build on initiatives set in train by previous Chancellors. Lord Howe was a great promoter of the tax law rewrite project, which was designed to try to simplify the wording of tax legislation. It is a signally good project, with support from hon. Members of all parties. Labour Members do not seem very interested, but they should be concerned about the regulatory burden that the tax system imposes on small businesses.
The project does not shorten the legislation but it makes it easier to understand, so that one does not have to read it several times to find out what on earth the legislators were on about and what tax laws we were trying to create. It is very important for simplification.
The people involved in the project have often argued for a technical finance Bill, to ensure that we get it right in the first place rather than pushing through imperfect 785 tax legislation and having to amend it the next year. That is certainly one way forward that I would urge the Government to consider.
I also urge the Government to examine the recommendations of the Select Committee on the Treasury in its report on the Inland Revenue. The Committee considered three options. The first was a royal commission on tax simplification: I think that that goes a little far, but it is a possibility the Government might want to consider. The second was a White Paper to be published by the Government at the start of each Parliament, in which they set out their direction for tax policy, so as to give tax practitioners and taxpayers an idea of where it was heading and encourage a little more coherence in the Government's tax thinking. That might be another way forward. However, the most impressive aspect of the Select Committee's analysis of the evidence that it heard was its emphasis of the need for longer-term planning of tax policy. That points toward the idea of a technical Finance Bill, so that there is greater consultation on tax measures to ensure that we get them right.
New clause 11 makes a more modest proposal: it simply asks that the Government provide information, so that we can see how their agenda for tax simplification is progressing. The new clause is based on paragraph 91 of the report of the Select Committee on the Treasury, recommendation (u), which states:We recommend that in its response the Government gives its considered view on the options for simplifying the tax system we have discussed in this Report and sets out its own proposals for a systematic programme of simplification with a view to reducing compliance costs.If the Government accept our new clause tonight, they will have gone a long way toward implementing that recommendation.
§ Mr. Flight
I welcome the Liberals' conversion to simpler and, by implication, lower taxes, given that one of the major causes of tax complexity is the overall rate of tax. I hope that they will not mind my saying that they are stealing our line. Earlier this evening, we heard a spirited speech from my hon. Friend the Member for Grantham and Stamford (Mr. Davies), who focused on the enormous complexity that has been introduced into our income tax system. The new clause would monitor that complexity and the cost to the private and public system, which is currently estimated to be £12 billion per annum. It would be useful if some specific measurement of the efficiency of specific taxes were included in the new clause—for example, ratios of collection costs to amount raised.
The Government's stance—that they are keen to simplify tax and have taken initiatives to do so—does not bear the light of day. Over the past two years, the Chancellor has introduced a substantial degree of complication into the tax system. Much of that has been done for headline spin, some has arisen from the mantra of more means testing, and some has been the result of the traditional and continuing Labour prejudice against people with capital, especially small capital. We have ended up with six different tax rates: the gimmick 10 per cent. rate, which does not apply to one's little bit of investment income; a 20 per cent. rate; a 23 per cent. rate; a 32.5 per 786 cent. top rate on dividend income for top-rate payers; a 40 per cent. rate; and a 44 per cent. rate for those who will be paying tax on the new child credit.
As has been said, there is a separate rate of taxation for trusts. The capital gains tax system is an absolute nightmare that needs to be reformed. There is very little chance that any individual will have the records necessary to calculate the old indexation and the new tapering rates. The Government seem to want ordinary individuals to have to employ accountants to keep and monitor those records. The present capital gains tax regime is unworkable.
The working families tax credit will cost employers a fortune to administer. On pension contributions, I wonder whether Labour Members realise that there are six different proportions of income that are allowable against tax as contributions for two different scales and different types of pension arrangements, depending on age. I do not blame the Government for that situation because it existed when they came to power, but if any Government were to consider reforming pensions, simplifying the tax rules for pensions would be the most important starting point.
There is an element in the tax system of losing touch with ordinary citizens. It is not surprising that elderly people whose means are small complain of being harassed when they are sent tax forms that they do not understand. More and more people are being dragged into the detailed self-assessment tax net and have to deal with concepts and calculations that they simply do not understand. Their returns will be wrong; the fines will go up, and the Government will find that the quite unnecessary complications in the personal tax system become enormously unpopular.
Citizens want tax rules that they can understand and remember. They want to be able to work out, almost on the back of an envelope, what their tax liabilities will be. There is no reason why tax rules for the average citizen should not be that simple—they were that simple not long ago.
The hon. Member for Kingston and Surbiton (Mr. Davey) pointed out that small business, which is the great creator of new employment in our society, is also particularly hard-hit by the growing web of tax complications, as the Bath report has shown.
To return to my starting point, one of the big background problems for all Governments is the fact that tax avoidance measures inevitably complicate the tax system. This country should never forget the major difference between tax avoidance and tax evasion. In Germany, there is no legal difference between the two concepts. A central part of culture in the Anglo-Saxon world is the distinction between that which is within the law and that which is without the law. Naturally, all Governments want to stop tax avoidance. I might add that most citizens naturally do not want to pay any more tax than they are obliged to. However, I suggest that there is growing Government paranoia about tax avoidance, which is nowhere better illustrated than in the recent IR35 proposals, which are not in the Finance Bill but will be implemented in April 2000.
There are, no doubt, people who use companies to reduce their income tax and national insurance charges. However, as much of the evidence demonstrates, most of 787 those cases occur in genuine entrepreneurial situations. People set up a business to hire out their services, particularly in the software industry, and they do so through a company. If the Government's proposals remain as they are, they will be a major disincentive to individual entrepreneurship in the service sector. People will not be able to offset their costs; there will be huge hassle in qualifying as an exempt company; and the money that they are paid will have full tax and national insurance stopped out of it.
The proposals will cause huge problems for professional firms. Professional lawyers who second their staff to organisations such as the Financial Services Authority, which will not be able to function without those staff, will face problems. Those proposals emanate purely from the Government's understandable but narrow focus on tax avoidance and their lack of thought about the knock-on effects and injustice caused by many of the proposals.
The best antidote to tax avoidance must be a lower tax regime. In the low tax regimes of the world, it is not worth the possible legal costs to try to make clever cuts or avoid taxation. We on the Opposition Benches have not changed our clothes: we stand for simpler and lower taxation. We very much share the spirit of the Liberal Democrats' new clause, delighted that they are obviously looking to make friends with us, having perhaps been a little rebuffed by Labour. What the amendment recommends is absolutely in the spirit of what we as a party stand for and always have stood for.
§ Mr. Page
It is not often that I welcome a Liberal Democrat amendment. I believe that it is the first time in 23 years; I do not rush these things. I congratulate the hon. Member for Kingston and Surbiton (Mr. Davey) on the new clause. It flags up problems that face any Government and the Inland Revenue. The point has been made—although obliquely, and perhaps not as intended. I am sorry that it is late and that it cannot be fully debated and allowed the gallop around the field that it deserves.
As matters of increasing complexity emerge in our taxation system, and as the Inland Revenue increasingly twists and turns and adds regulation on regulation to avoid the inevitable, the effect on small businesses will become intolerable. The hon. Member for Kingston and Surbiton mentioned the pressures on small businesses and the Bath report. Compliance costs are rising day by day, and small businesses are finding them an increasing burden to bear. I can quote some examples.
I know of a company that employs just over 100 people. It received a form from the Department of Trade and Industry the other day, which took the senior finance man four clear days to complete. If the company had not completed it, the panoply of law, pressure and fines would have descended on it. There must always be the temptation for those in small businesses to fill in any figure and send off the form, and then say, if ever checked, that they must have made a mistake. The person to whom I have referred was most conscientious; he did everything properly and filled the form in fully.
A company of more than 100 people can withstand such demands, but what is it like for a smaller firm, in which the finance man is required for the day-to-day handling of the company accounts? As time goes by, pressure on such smaller businesses will grow and grow.
788 It is no secret that I was hoping that new clauses 2 and 12, which deal with the IR35 question, would be selected for debate. My hon. Friend the Member for Grantham and Stamford (Mr. Davies) has touched on some of the problems that will result from that measure. Again, it will mean pressure on small businesses. Indeed, avoidance and perhaps even evasion may be brought about by the Inland Revenue's actions.
As night follows day, Inland Revenue solutions to tax avoidance often tend to throw the baby out with the bath water. I always find it sad that the Government, who are no doubt driven by their masters in the Inland Revenue, look more to traditional methods for the solution than to the future. I say that because I believe that we are on the edge of a trading revolution, at which new clause 11 hints. There will be huge consequences for tax raising, which may be somewhat similar to the way in which Gutenberg's invention of movable printing broke the vast powers of the Church some five centuries ago.
As hon. Members—I can see them looking at me—have instantly grasped, I am referring to the growth of internet trading. It would not surprise me to find that history repeats itself, with the Revenue trying to block certain internet activities, just as the Church tried to block the printing revolution that swept through Europe in the 15th century. You would correctly rule me out of order, Mr. Deputy Speaker, if I moved into the detail of how the Church's hold was greatly loosened—if not broken—at that time, although it would be fascinating and I know that Labour Members would love to hear it. However, it would be wrong for me to take that course. I merely point out that another major effect of the move away from handwriting to printing and publishing in quantity was to contribute to breaking the hold of Latin as a common language at that time. The IT revolution that is introducing the internet will be the reverse of that because it brings with it a common language—English, or perhaps I should say American.
The new clause provides for an analysis of the Budget which will mean an annual reassessment of everything included under the new clause—the costs of compliance and of tax raising and collection will have to be reviewed constantly. Such matters will not be dealt with once and then forgotten for five or 10 years; their consideration will have to be on-going.
The Government seem unaware of the tide of change that is sweeping towards traditional trading patterns. If they are aware of it, they will realise at the same time that their powers are strictly limited. Politicians want to police the internet—perhaps to stop pornography. However, the majority of those politicians do not realise that that is the least of the threats to the established order. The new clause focuses on the accelerating trend of change. Internet users can, and will, use encryptions to transmit electronic data that will be impossible for tax inspectors to read. At least, data will be readable only at vast expense by using an extremely large computer to crack some of those encryption codes. As such codes use large prime numbers, a vast amount of computer time will be needed to break down a relatively short message. That will be impractical for the state to do.
The new clause hints at an erosion of the tax base which will have severe consequences for Government revenues. To remove such controls from the Government will mean a move away from central provision to a situation in which individuals—not politicians—decide on 789 the state that they want. Individuals will make decisions in many spheres of activity by paying for those activities themselves rather than relying on their provision by the state. That will result in a marked reduction in what Harold Wilson called the social wage. Such a tendency will be driven by the erosion of tax bases caused by the encryption of trading on the internet.
If anyone thinks that I am dreaming, or that this is pie in the sky, I tell them that the process has already started. It applies easily to goods for which information can be encrypted and made immune from tax inspection—films, music, airline and theatre tickets, advice of any kind, books, magazines, holidays and even, perhaps, the activities of personal service companies. The IR35 changes may well help to drive companies towards exactly what I have described. If we add to that the mobility of companies—the ability to trade elsewhere in the world—then it will require a Government who are fleet of foot and of mind to stay on top of that pile. The provisions of the new clause point in that direction.
Nothing proves a point better than the practical example that people will migrate—physically or electronically—to the most favourable tax regime. The last part of the new clause makes exactly that point. It says that the Budget report should include an analysis of the effect of the Budget measures onprogress on the simplification of tax administration for all taxpayers.If that progress is not made, the taxpayer will migrate.
I have the privilege to be joint chairman of one of the most important all-party groups in the House—the all-party racing and bloodstock industries group. The Government have already been forced to cut VAT on training fees because of action by the Irish Government in reducing theirs, and to stem what was threatening to be a flood of horse migration. We have a much reduced stallion base in this country at the moment. Why? Because the Irish have a better tax regime on stallion allowances, so more and more people are sending their mares to Ireland. That is the physical movement towards a lower tax regime.
To take a current example of the way in which electronic means are enabling companies to avoid tax, a well-known bookmaker has set up its operation in Gibraltar, letting its clients off the requirement to pay betting tax of some 6 per cent. on winnings—a loss to Government revenues. The age of digital cash is before us; we ignore it at our peril.
It is late at night—[Horn. MEMBERS: "Hear, hear."] I take those cheers as encouragement to develop my argument, but I feel that I should draw my remarks to a close.
New clause 11 peels back the first corner in drawing attention to the huge changes that are upon us. I hope that the Financial Secretary—who rescued small businesses in her first year as a Minister and has inflicted the might of the Treasury in her second—will grasp the point that is being made tonight.
§ Sir Robert Smith
The hon. Member for South-West Hertfordshire (Mr. Page) mentioned the problem that 790 conscientious people face when the tax system is complex. The Government need to bear that in mind when considering new clause 11. The more complex one makes the tax system, the harder it is for the conscientious, but one does not necessarily catch those who are fleet of foot or less conscientious, who can evade or accidentally avoid the system. New clause 11 is partly designed to tackle the burden and stress placed on the conscientious.
I agree with the hon. Member for Arundel and South Downs (Mr. Flight) that new clause 11 would deter the Government from making a mess of IR35. I have with me a letter from the Institute of Chartered Accountants of Scotland, expressing great concern that IR35, as currently proposed and currently out for consultation, might do immense damage through its compliance costs.
The IT industry was mentioned. Worry has also been expressed in the media industry. However, as a result of where I come from, my postbag is obviously most heavily influenced by those who work in the oil industry, providing their services as single-person companies. There is concern about the extra burdens placed on the industries for which those people work, which must meet the costs of trying to police the system. Those who work in the industry have already experienced cuts in their income because contracting fees have been reduced, and further cuts are likely in order to pick up the extra costs of taking on board pay-as-you-earn and national insurance.
I hope that, when the Government consider IR35, they will show some of the flexibility and understanding that they eventually did when they considered roll-over relief for capital gains tax. I hope that they will enter into effective consultation with the industry to work out where the real concerns are on tax avoidance. In that way they will avoid using a sledgehammer to crack a nut, which appears to be their approach at the moment.
I urge the Government to accept new clause 11 because it is in their own interests to have it sitting there, waiting for them every year, to remind them not to put their foot in it, not to make mistakes, not to damage industry, and to think carefully before introducing any new tax system.
§ Mrs. Roche
The debate has been interesting, but new clause 11 is completely unnecessary; I shall say why.
First, the material published on Budget day contains comprehensive details of any changes in the number of taxes, tax rates, allowances and reliefs. Secondly, the Government also publish regulatory impact assessments for those measures included in the Budget that have compliance implications for businesses. Thirdly, the Government are committed to simplifying the administration of the tax system wherever possible. We are also looking to improve the administration of taxes and to restrict compliance burdens—for example, by introducing the new Small Business Service.
Including the new clause in the Bill would therefore add nothing. Indeed, it would be unnecessary regulation. The Treasury has already set out a transparent framework within which it will work in the code for fiscal stability. That outlines the Government's commonsense approach 791 to managing fiscal policy in the long-term interests of the country. I therefore urge the House to reject the new clause.
§ Mr. Edward Davey
I take it from the number of hon. Members who are in their places tonight that the theme that is expressed in the new clause has caught the attention of the House. It is a compelling new clause and there is interest in it. There are more hon. Members in their places for this debate than there were for almost all of the previous debates during today's sitting. I am rather pleased that we have been forced to debate the new clause tonight because there have been enough Members present to listen to the serious arguments that have been advanced.
I am delighted that we have won the support of the hon. Members for Arundel and South Downs (Mr. Flight) and for South-West Hertfordshire (Mr. Page). I am grateful for their kind words. However, they should not be as surprised as they seem to be that the Liberal Democrats propose such reforms. We and our predecessor parties have a long tradition of trying to simplify the tax system and reduce bureaucracy. For example, there are also proposals to integrate income tax and national insurance contributions.
In the Minister's admirably short reply she was rather dismissive, and unnecessarily so. She said that the new clause and the proposals set out in it were unnecessary. When referring to paragraph (c), she said that the Government are committed to simplification. If they accepted the new clause, they could give some solemnity to that commitment and take on the requirement that they should report to the House on every Budget day about progress towards simplification. That is not a hugely onerous regulation. The Minister seemed to suggest that the new clause represented unnecessary regulation. The Treasury does not appear to like regulation of itself but often it likes regulation of the private sector. We are proposing a sensible regulation.
Given the lateness of the hour, however, and given the Minister's assurances that the Government will move the agenda on—I hope that that comes to fruition in next year's Budget statement—I beg to ask leave to withdraw the motion.
§ Motion and clause, by leave, withdrawn.
§ Further consideration adjourned.—[Mr. Jamieson.]
§ Bill, not amended in the Committee, and as amended in the Standing Committee, to be further considered tomorrow.