FINANCE BILL (Hansard, 19 July 1978)

§ The SOLICITOR-GENERAL for SCOTLAND (Lord McCluskey)
My Lords, I beg to move that this Bill be now read a second time. As my noble friend Lord Jacques said in making a similar motion two years ago on the 1976 Finance Bill: The practice of the House in relation to the Finance Bill varies from year to year. More often, we take it formally and we have a Motion on the Order Paper which gives rise to a wide-ranging debate on economic affairs".—[Official Report, 27/7/76, col. 1182.] This year we have no such Motion nor does the Bill propose fundamental changes in the basis of taxation. Accordingly, I propose to follow the precedent of last year and move the Second Reading formally. I understand that others, notably the noble and learned Lord, Lord Rawlinson of Ewell, and the noble Baroness, Lady Seear, may wish to ventilate particular matters arising from the Bill, and if in the light of the interventions I feel that I can assist the House or the House feels that I can assist the House I shall endeavour to do so by way of reply. I beg to move.

§ Lord RAWLINSON of EWELL
My Lords, I appreciate what the noble and learned Lord the Solicitor-General for Scotland has had to say, but in my view there is a matter in this Finance Bill which is worthy of the consideration of this House. I appreciate that only recently your Lordships debated full economic matters, but there is a characteristic in this particular Finance Bill which I think we should bring to the attention of this House. Indeed, it will be useful if the noble and learned Lord the Solicitor-General for Scotland can give us the benefit of the view of a Law Officer of the Crown on the particular matter which I wish to raise. Hitherto it has been dealt with only by economic financial Ministers, but a Law Officer of the Crown, as the noble and learned Lord well appreciates, is in a very particular position. When I first became a Law Officer I was told that my duty was first to the Crown, secondly to Parliament, and only lastly to the Administration to which I belonged. I am sure that the House will be very interested to hear what the noble and learned Lord has to say about this particular item in this particular Finance Bill.
I do not propose to deal with the Finance Bill generally. There are many matters in it which may be of interest to many noble Lords. I trust, however, that it will be the last Finance Bill of a dying Government, introduced by a Chancellor who fought the last election claiming that the inflation rate was 8 per cent. and whose income tax machine now embraces a record 26 million people and operates at higher rates and on lower incomes than anywhere else in the civilised world. I leave that apart, because what I want to deal with is this matter of the retrospection which occurs in Section 31 of the Bill which we are now discussing.
The principle of retrospection is a matter which concerns every person who plays any part in any legislative process. Recently there has been debate—initiated by my noble and learned friend Lord Hailsham of Saint Marylebone and illumined by his speeches and by his books—on the powers of a Parliament unfettered by any written Constitution. Where Parliament is supreme there have arisen necessarily, for the protection of the subject, constitutional conventions and self-imposed restraints, and they are conventions and self-imposed restraints to avoid 323 the omnipotent Legislature's offending the basic rights of subjects. One is a convention that Parliament shall not engage in retrospective legislation unless it be to effect an act of mercy or to legitimise some previous conduct. It is, of course, used and has been used—and I see the noble Lord, Lord Fletcher, here who has written of this matter authoritatively, though many years ago—in respect of certain fiscal matters.
But what Parliament must not do is to make unlawful what was lawful and it must not subsequently punish conduct which at the material time was not punishable. Parliament forebears from such conduct, however ill the mischief which has been perpetrated, however evil the person who perpetrates that mischief, because such back-dating of the law obviously offends every concept of justice. The application of justice and the principle of the rule of law is supreme, and the nature of a person's conduct and the character of that person is only secondary.
I take an example from the criminal law. The representation of justice which noble Lords have often seen is a blindfold holding the scales. That represents the horror of the crime which is alleged or that the character of the accused must be ignored in the trial. It is the matter of principle which must govern the application and the administration of justice. It is, and obviously would be to every person who plays any part in a legislative process, or to any subject, repulsive beyond contemplation that a sovereign Parliament, though enjoying the power to do so, should make conduct a crime which when perpetrated was no crime, however evil, offensive and objectionable that conduct may have been and however injurious to the public interest. That is a matter of making what was not a crime into a crime.
In fiscal matters, certainly matters of lesser degree and lesser kind than criminal matters, the imposition of fiscal burdens and the removal of fiscal allowances has been tolerated by Parliament retrospectively only if certain conditions have been carried out. It has long been the accepted convention that fiscal provisions removing relief which were in existence at a particular time previously can be back-dated, 324 but only to the time when the announcement was made that such reliefs were going to be removed. It has never been, as I understand it—and perhaps the noble and learned Lord will be able to help us on this matter—back-dated to a time prior to the announcement of the intention to legislate. And the reason is the matter of principle. It has been accepted that where a Government announces that it intends to legislate to provide that certain reliefs should be removed, then when that legislation finally reaches the Statute Book it is dated back to the time the date and even the hour, when the Minister made that announcement.
But, for the first time in the Finance Bill before your Lordships, in Clauses 31 and 32, this Finance Bill introduces what the colleague of the noble and learned Lord, the Solicitor—General for Scotland—the Chief Secretary—admitted in another place was a novel procedure. It back-dates the removal of allowances to some 18 months prior to the announcement of the intention to legislate. The announcement was made in November 1977, but the relief is removed with effect from April 1976. The excuse that is given—and I say "excuse", because in my view it is an excuse—is that the device, the mischief, against which the clause is directed, is so artificial and is so obviously merely a set-up to avoid tax that it can be given no consideration. I would suggest that however reprehensible in general terms is conduct designed to avoid tax in certain circumstances, this principle cannot be acceptable; and hard cases make bad law. Here it would make a very bad precedent and perhaps a very dangerous one.
I make clear to your Lordships that there is no merit in the device which the clauses are designed to punish. There is no merit in the device of tax avoidance in any shape or form, and in no way do I or my colleagues seek to support, or approve of, such a device; and any attempt to assert it, which I am sure would not be done, would be totally malicious. The device concerns dealings in commodity futures. The scheme which has been designed, and which has apparently been operated by ingenious persons, is for an individual to join a partnership in one or more commodity dealing companies. As an individual the partner and the company share 90 per cent., but the main source of finance comes from a bank which is 325 controlled by the devisers of the scheme. The only source of funds from the individual is a fee which he pays to his adviser, and by a series of straddles in commodity futures at different times and at different prices a loss is arranged first, followed by a gain.
However, in advance of the process a contract is entered into whereby the individual leaves the partnership when the loss has been made, but before there is any gain. This enables the individual to make such specific loss as he requires for other tax purposes. He leaves when the straddle has been made before there is any profit. I emphasise that this is an ingenious scheme, and the sole object is to arrange an appropriate loss for a particular individual. He does it only for tax considerations. There is no commerciality in the scheme. There is no real financial loss to meet the tax, and the only loss he sustains is in fact the fee he pays.
So it is not genuine trading. It is an artificial method to minimise the incidence of tax for that particular person; to avoid paying the tax which he would otherwise pay had he not engaged in the scheme. I accept that it involves a considerable loss to the revenue. It is wholly objectionable, and I accept that it ought to be stopped. I understand that the Government believe that the scheme itself is not a legitimate scheme, but they do not test it, or challenge it, in the courts. They seek to stop it by the removal of those allowances which at the material time the individual was entitled to; and they want to remove them by backdating not to the time of the announcement but to a further two years. That is the novel character in the proposed legislation, and it is a breach of the hitherto accepted convention.
In my view, the Government are answering a very objectionable device with a very objectionable remedy. It is made worse because of the Government's attitude towards the court. In another place the Chief Secretary admitted that these schemes may be found by the courts to be legitimate. But to avoid the delay, and to avoid the risk of going before the courts, he is now to intervene with retrospective legislation of this novel character. Your Lordships may think that the dilemma in which a Government, 326 or your Lordships, or all the Members of another place, are put is that here is an artificial scheme that is designed to avoid tax, which ought to be stopped, and which will create substantial loss to the revenue, but can it be dealt with by breaching principle and creating a precedent? I believe that it is the duty of Parliament to enact law, and it is the duty of the subject to obey the law. But where there is a very complex tax system, and where the present Administration insist on grossly high levels of taxation—which cannot be truly justified in tax raising terms, but only on political philosophy—it is inevitable that there will always be individuals who will strain every effort of ingenuity to discover lawful means (I emphasise the word "lawful") to diminish the amount of tax that they ought to pay.
The Chancellor of the Exchequer has declared his objective by the proposals in this Part of the Bill to destroy the tax avoidance industry, to ensure that no schemes of a similar nature can be marketed in future. That is certainly a very desirable objective, but it should not be carried out by distorting the use of the law and by the breaching of principle. Of course the most effective method would be to reduce the levels of taxation. We must maintain upon the legislature the discipline of effective law making. It is not acceptable to use retrospection on this scale to close loopholes which have been made because the legislative process has not provided to deal with this particular scheme. It is too dangerous a weapon to give to a too powerful Parliament dominated by the Executive. The Government's attitude is that they do not like the scheme, but they will not test it in the courts, and they will merely pass blanket retrospective legislation. I do not believe that that is acceptable, nor is it proper for a legislature to accept.
I accept that retrospection in fiscal legislation is permissible, but only to the date of the announcement that legislation will be enacted to deal with a particular problem. That warning must be precise. The problem in question must be referred to a committee of the Inland Revenue and the accountancy and legal professions, and the appropriate legislative clauses must then be published, and without fail that clause must be introduced into the next Finance Bill following the warning.
327 Those are the guidelines which I and my noble friends, and a Conservative Government, would follow, and they would be in accordance with both precedent and fairness.
I cannot emphasise too strongly the artificiality or the ingeniousness of the device, and I do not resile from my assessment of the mischief of dealing in such commodity futures; nor do I consider it at all wrong for the Government to try to seek to deal with the problem. Perhaps the ingenious conceivers of such schemes will think out other schemes. That is something we must accept, because it is our duty to see that law is made to deal with the problem; and persons are entitled to act within the law. We must accept that, unless we want to distort the principles under which we enact law. I as a lawyer, and I should have thought the noble and learned Lord the Solicitor-General for Scotland, would recoil from what appears to be an arbitrary, authoritarian method which has been chosen. The Government, faced with what they may regard as two evils, faced with a problem of this kind, should select the view of enacting law and ensuring that the law does the task which the legislature has set out to do. It is for those reasons that I have spoken on the Second Reading of the Bill. I await with anxiety to hear what the noble and learned Lord the Solicitor-General will have to say, because he will bring to the deliberations on the Bill the authority and the independence, I trust, of a law officer of the Crown.

§ Baroness SEEAR
My Lords, we on these Benches wish to observe the convention of being very brief when dealing with the Finance Bill in this House. However, I should like to refer shortly to one or two changes in direction in fiscal policy which we very greatly welcome. We are glad to see in this Finance Bill that there is a slight (in our view, all too slight) shift from direct taxation to indirect taxation. We consider that this move should have gone further, and that it will have to go further in the near future. We wish that the Government had done more about it on this occasion, but we are glad that they have at least taken a few faltering steps in the right direction. We are also glad to see that 328 there has been some relief of capital transfer tax benefiting the smaller business. It does very little more than index the previous position, but it is part of a much needed move to make the position of the small business easier than it has been—a a position which, in previous years, under this Administration, has been very seriously harmed to the detriment not only of the small business but of the economy, which is very dependent on a thriving small business sector.
Perhaps above all we are glad to see (albeit, as we all well know, under very considerbale pressure) that the Government have moved in the direction of encouraging share ownership through the profit-sharing section of the Finance Bill. This is a path along which, again, it is clear that future Governments will have to go very much further. However, it is a very welcome beginning. It means that it becomes possible for a far greater number of people to have some benefit, directly and personally, out of the success of the enterprises in which they work. It also means that people can in fact improve their standard of living, not solely through increases in pay, with the inflationary risks which that course so often involves, but by sharing in the genuine prosperity and genuine success of the enterprises which they have themselves contributed towards building. I think it would be appropriate on this occasion to point out that in the case of all these three innovations, these three improvements which have been made to the Finance Bill, a very great deal is due to the pressure exerted in another place by my colleagues in the Liberal Party. I believe that without their pressure none of these three improvements would have found its place in the Finance Bill.
Having said that, I should like very strongly to confirm what has been said, and indeed to go even further, on the point of retrospection. To us, retrospection, be it in civil or in criminal matters, is totally abhorrent. We do not even accept the limitation which the noble and learned Lord, Lord Rawlinson, submitted—retrospection to the point at which it was announced that action was going to be taken. I do not for one moment defend the practices that this clause in the Finance Bill is intended to eliminate—that goes without saying—but any citizen 329 should be confident that when he takes an action, if he is on the right side of the law in so doing, that action cannot then be made illegal. This is, in the last resort, the only real defence that the citizen has—that he abides by the law, and that he is safe if he abides by the law. It is the citizen's defence against the overween power of the Executive and of an overstrong Parliament. It is so easy, when there is an evil case against which you are taking action, to justify evil means. We do not accept this, and we do not accept that it should be the date of an announcement which would justify it. It must be the proper law of the land, properly confirmed by Parliament, so that all citizens know fully where they stand. I cannot believe that the very distinguished lawyer who is speaking for the Government on this occasion is happy at this encroachment on the rule of law.