FINANCE BILL

HL Deb 19 July 1978 vol 395 cc338-52

Second Reading debate resumed.

3.59 p.m.

Lord PLANT

My Lords, we are now resuming our debate on the Finance Bill. I should like to take the opportunity of saying something about the hard-worked staff in the Inland Revenue. We grumble when the size of the Civil Service is increased but of course it is our actions, by the work that we put on to the staff, which has something to do with the increase. This Finance Bill has been a "political football" as a prelude to the election.

During May the Healey uplift with the threshold was completed and effected by the Revenue staffs and will take place in the middle of July. The Revenue staffs are now starting re-coding, following the Opposition's amendment which raised the upper threshold to £8,000 and the reduction in the basic rate to 33 per cent. That work all has to be done twice and, in many areas, in fact three times. It is this which gives some irritation to the staff because it means that files have to be turned over three times because of what has happened during the passage of the Finance Bill. The tax tables giving effect to the figure of 33 per cent. instead of 34 per cent. cannot be printed until the Bill has received Royal Assent, and these tax tables will not be distributed and put into effect until November. £700 million will be pumped into the economy, and so far there has been this delay in starting the re-assessing. Last year the Revenue staffs did 2½ million hours of overtime and on this year's Finance Bill they are doing 700,000 hours of overtime. The staff efforts during the last two or three years, because of the complexity of taxation, have been extraordinary and I hope that this House will place on record its thanks to the staff for the work they have done.

I was a little dismayed at the intervention by the noble Lord, Lord Rawlinson of Ewell, in relation to retrospective treatment, but I was more dismayed that the Liberals should also suggest that there should not he this retrospective treatment. The way in which the Government are endeavouring to prevent tax avoidance should be retrospective and I think it is unfortunate that this last-minute cry is coming again for retrospection not to he applied in order that tax avoidance in that field can continue.

Lord WAKEFIELD of KENDAL

My Lords, I shall not detain your Lordships for more than a moment or two, but in the light of what has just been said I think that perhaps personal experience of retrospective legislation might be of interest to your Lordships' House. In the 1940 Finance Bill, at the time of Dunkirk, there was a retrospective clause which said that when a life interest had been purchased it should be considered as if that transaction had not taken place. I remember very well that the late Lord Spens (then Sir Patrick Spens, M.P.) said to me that to have retrospective legislation of that kind was quite wrong. But, of course, the nation was fighting for survival at the time of Dunkirk, and that went through.

It so happened that two years previously I had purchased the life interests of my father and my uncle in certain estates. My uncle had died in the following year. That transaction, which at the time was perfectly proper, perfectly legal, perfectly correct and perfectly right, was then considered to be all wrong and, indeed, illegal. Not only that, but the money paid—although by law the transaction had not taken place—we were told, could not be deducted at all so it became all one-sided. And so, my Lords, this small, one might almost describe it as insignificant, personal experience could be multiplied thousands and thousands of times. I should like to suggest to your Lordships that something which is perfectly right, perfectly legal and perfectly proper when it is done should not, at a later stage, suddenly be made illegal. This is the principle which I suggest should be upheld by whatever Government is in power.

4.4 p.m.

Lord HA RMAR-NICHOLLS

My Lords, the noble Baroness, Lady Seear, said that, according to convention on a Finance Bill, she was going to be very brief. The noble and learned Lord, in moving this Second Reading, said that i is often just a formality as far as the Finance Bill and your Lordships' House are concerned. I rather detected that my noble and learned friend, in raising the very important point that he did, which is of special significance, had a sort of air of apology about having raised it at all.

I should like to try to kill the idea that the Finance Bill has nothing to do with your Lordships' House. The Finance Bill has everything to do with Parliament, and your Lordships' House is part of Parliament. The object of the Houses of Parliament is to watch the Executive, and wherever any experience or knowledge is possessed by a Member of one of the Houses of Parliament, there ought to be no apology for wanting to examine what without any doubt is the most important and significant Bill as regards its effects on the citizens of this country—which the Finance Bill always is. So I think we ought to try to shed the idea that the Finance Bill is nothing to do with your Lordships' House.

It is perfectly true that we cannot amend it, but we have the power not to pass it: we have the power to do something about it in that extremity if we wanted. I should like to encourage the interest of your Lordships' House in the future in the Finance Bill because I believe that your Lordships have a very special contribution to make. Indeed, we have, with my noble friend sitting here, an ex-Prime Minister, an ex-First Lord of the Treasury; we have an ex-Chancellor of the Exchequer; we have people who have been heads of spending Departments in the past and who have special knowledge; we have ex-senior civil servants who have all the inside knowledge as to how these things work. And if the object of making those noble Lords part of Parliament is not to encourage them to make use of their experience in their various fields, then I do not see the point of having them in Parliament. Therefore I hope that this suggestion that the Finance Bill is a mere formality as far as your Lordships are concerned will not be allowed to become an established fact or allowed to take that sort of form in the future.

I have vivid remembrances of the last Finance Bill but one, when I wanted your Lordships not to pass it because the Government had, as I claimed, tacked on to the Bill a matter interfering with the individual's liberty which ought not to have been in the Finance Bill at all and which was very much a matter that your Lordships ought to examine. One sensed that the two Front-Benches—indeed the three Front Benches—had almost accepted the fact that the Finance Bill was nothing to do with us. Before we know where we are the Government will not even send it to your Lordships' House to be looked at.

My main personal criticism on the Finance Bill and with Budgets generally—this is not a criticism of the noble and learned Lord who is representing the Government in this House at this minute, but it is a criticism of the Prime Minister and the Chancellor of the Exchequer—as one who has something to do with business and who is not inexperienced in political day-to-day matters, is that I deplore the way that prior to Budget day and to the tabling of the Finance Bill use is made of the Treasury's power for pure propaganda purposes. During the whole of last year we had the Prime Minister and the Chancellor of the Exchequer forecasting drastic reductions in taxation. In speech after speech, both inside the House and in the country, they proved that there ought to be a substantial reduction in taxation. They, the Prime Minister and the Chancellor of the Exchequer, gave evidence, with all the authority of their offices, to show that the level of taxation and the way it was being levied were interfering with investment in industry and with the general output that the country produced; and they were giving every indication that when the Budget formally came there would be drastic reductions which would meet the very grave defects they themselves had been pointing out.

We had the Budget but, as this Finance Bill shows, it reflects none of that urgency and none of the things that they had forecast they would do. That is not just a matter of creating a propaganda atmosphere at the time. I talk, again, as a small businessman and one who has some sort of contact in a more indirect way with some of the bigger businesses. The uncertainty that is created is damaging to the country. If, before Budget day, the indications from authoritative sources, such as the Prime Minister and the Chancellor, are that certain things will happen which affect the way in which future development and investment is planned and those indications come to naught, then it can only cause confusion and disillusionment about the objectivity of the Prime Minister and the Chancellor, which is not good for either Government or industry. That kind of misuse is something that ought to be highlighted, and a debate on the Finance Bill in your Lordships' House is the right place and the right time to do it.

I do it because precisely the same thing has happened again. Only last week we had the Prime Minister and the Chancellor of the Exchequer saying what great reductions there will be in the Budget of April next year. They are already building up all the hopes. But as a consequence of the disillusionment caused by their non-compliance last time, misunderstanding and disturbance is created in the minds of people which ought not to be there.

So I hope that your Lordships in your capacity as watch-dogs, who, if we are to be here at all, have a duty to look after the interests of the people of this country on so important a matter as the Finance Bill, will not accept the convention that it has nothing to do with your Lordships and that, as so often happens, it is to be taken as a mere formality. That is a dangerous attitude to adopt, and the sooner all of the Benches recognise that, the better.

I am disappointed with my noble friends. I am disappointed with the organisation of the Party whose Whip I accept in your Lordships' House. I should have thought that the Second Reading of the Finance Bill would be built up by them into a debate of the kind of significance which the importance of the things that flow from it truly demand. I am sorry to appear pompous in telling Parliament and your Lordships what ought to be done, but it would be wrong to ignore the message that came from all three Front Benches, that having anything to say on the Finance Bill is almost something for which we have to apologise.

The one point which my noble and learned friend raised as an ex-Law Minister is confirmation of that. He was an expert on that matter, and I hope that he will have a reply from another noble and learned Lord who can talk with equal strength. But I should have liked to hear some of the industrialists who sit in your Lordships' House. I applaud the noble and learned Lord who has just spoken, in reflecting the point of view of the people who have to work out these matters. We have an abundance of knowledge in this House, and on matters of this kind that knowledge ought to be used in the interests of the nation, and not hidden away because of what is supposed to he a convention or a formality, which prevents us from doing our duty.

Lord SPENS

My Lords, I do not presume to take on the mantle of my father, who was so generously mentioned just now by the noble Lord opposite. But I believe that he would have risen in my place to point out to the noble Lord who spoke earlier that tax avoidance is a perfectly legitimate operation. What I think he was talking about was tax evasion.

4.14 p.m.

Lord McCLUSKEY

My Lords, may I just, in relation to what the noble Lord, Lord Harmar-Nicholls, has said, express the view that that was a somewhat extraordinary speech. If the noble Lord felt deeply about it, I am astonished that he did not put his name down as one who wished to speak. Having looked at what happened in 1976, I am also aware of the fact that the debate which took place on that occasion occurred because the noble Lord, Lord Harmar-Nicholls, put down a Motion in his name on the Order Paper. I have not said today, and I do not say, that the debate on the Finance Bill is, or should be, a mere formality. What I said—and it was perfectly accurate—was that the practice of the House in relation to the Finance Bill varies from year to year. Indeed, in making that statement I am quoting my noble friend Lord Jacques. If noble Lords want to debate the Finance Bill, then of course they may do so. But the normal way of bringing to the attention of the House a matter of the kind that the noble Lord, Lord Harmar-Nicholls, had in mind in 1976 is to put down some kind of Motion—that is all. I do not suggest for one moment that the House is disbarred from saying what it likes about a Finance Bill. Of course, there are conventions about amendment, but that is an entirely different matter. I do not want to go any further than that.

I should also like to say at the beginning that I can echo what my noble friend Lord Plant said about the quality and dedication of the staff who have so much to do in connection with the preparation of the Finance Bill each year. May I also welcome the remarks that came from the noble Baroness, Lady Seear. Perhaps she will recognise that if the Liberal Party had had the wisdom to continue the pact, we might have moved next year towards further and better changes. But it appears that we may have to do that on our own, in the course of the next Finance Bill.

Baroness SEEAR

My Lords, if we had been given the kind of changes we wanted, the pact might have continued.

Lord McCLUSKEY

My Lords, the main matter which has been raised, and to which it is my duty to reply, is that raised by Clauses 31 and 32. The first point I want to make is that in relation, to Clause 31, the situation is different from that relating to Clause 32. I do not think that, on reflection, the noble and learned Lord, Lord Rawlinson of Ewell, will take exception to Clause 32, because the date mentioned in that clause is, in fact, the date of the ministerial announcement. I think he will find that there is that difference.

Before I say anything further, the noble and learned Lord, speaking as a former Law Officer, referred to the fact that I am a Law Officer in the Government and sought to put me in a special position. Of course, I acknowledge that a Law Officer is in a special position in relation to certain matters, but when I speak on the Finance Bill in this House, I speak as a Minister of the Government and a spokesman for the Government. I do not suggest for one second that, individually, I disagreed with the view of the Government on this matter. From time to time, Law Officers, including the noble and learned Lord who asked me these questions, have had to consider retrospective legislation. He will recall that when he was Attorney-General, in an entirely different situation but one which might have had the effect of putting people in prison—I am, of course, speaking of the Immigration Act 1971—he was, and remained, a Law Officer when the Government of which he was then a member introduced that Bill which went on to the Statute Book. The effect of that Act was that people who had come into this country, and had earned the right to stay, were so affected by, f think, the Second Schedule to that Act that they lost their right to stay. They could be taken and put into prison and deported. That was retrospective legislation in an entirely different situation.

Lord RAWLINSON of EWELL

My Lords, with respect to the noble and learned Lord, will he look at it again? It was correcting the position of those persons who came and remained here illegally. Where people had obtained legality through an illegality, it removed that legality because they had obtained it illegally.

Lord McCLUSKEY

My Lords, I fully understand and I do not seek to obfuscate that fact. As I understand it, people had come here illegally, but after being here for six months they acquired the right to remain; they could not be deported on the ground of illegal entry. It was that right which they had acquired—some of them for some considerable time—which was removed. It is necessary therefore, from time to time, for Law Officers to consider the justice of the case, and certainly for the Government to consider the justice of the case, as well as what might be referred to as the strict letter of the law.

It is some time since the noble and learned Lord spoke, and I hope that I shall be forgiven for reminding your Lordships briefly what we are talking about here. Clause 31 concerns a highly artificial tax avoidance scheme involving dealings in commodity futures, and the clause applies retrospectively back to 6th April 1976. I should like to give a description, which is very similar to that which the noble and learned Lord fairly gave, but it perhaps more clearly brings out the character of the scheme. The person who wishes to avoid paying tax becomes a partner of a commodity-dealing company. That need not be and, indeed, usually is not his ordinary trade. He enters that partnership purely for the purpose of this scheme. His share in the partnership is 90 per cent., but most of the finance required for the dealings of that enterprise is borrowed from a bank. The dealing company and the bank are creatures of the persons who have devised and are in effect selling the scheme to the person who wishes to avoid paying tax.

Once these arrangements have been made, a series of future contracts are entered into—contracts both to buy and to sell—and, as the noble and learned Lord pointed out, they are known as "straddles". When prices move, inevitably one series will show a profit and the other will show a loss. The loss making series is closed out as soon as the loss is big enough to offset the avoider's expected income from his normal sources of income. When that point is reached, the avoider immediately leaves the partnership in accordance with, as the noble and learned Lord pointed out, the pre-arrangement which has been made. So he leaves before the profit making series is closed out. He enters this partnership, therefore, and the scheme solely and simply in order to cream off this accounting loss. He contributes nothing except a payment, which is a large fee, to those who have devised the scheme for the purpose of enabling this loss to be created. In other words, to put it shortly, he buys for a fee a paper or accounting loss, artificially created, with the sole purpose of claiming a relief later.

I mention the point of relief because it is not unimportant. When the noble and learned Lord began, he spoke of what was permissible in the field of retrospection and what was not, and said that we must not make unlawful what was lawful; we must not punish what was previously unpunishable. We are not in the field of punishment and crime. We are not making such schemes unlawful. What we are doing—noble Lords can see it from Clause 31—is to deny to these people the right to claim relief upon a basis which they have artificially and quite improperly constructed.

I mention those words because when the noble Lord, Lord Wakefield, spoke he said that that which was perfectly legal, perfectly right and prefectly proper should not subsequently be made illegal. Who in this House will stand up and say that the scheme which I have described is perfectly legal, perfectly right and perfectly proper? The loss to the Revenue which has been mentioned is said to be substantial; it may run into hundreds of millions of pounds. What is perfectly right, perfectly legal and perfectly proper and what, indeed, is just about allowing such schemes to continue? What will be the attitude of hundreds of thousands of taxpayers in the country, many of them on PAYE and who have no option but to pay the tax when it falls due, to a tax system which permits people to enter into such schemes, to create such schemes, sell them for handsome fees and thus create artificial losses?

It is very important to notice that the kind of scheme which is referred to in this clause is one of a series of contrived arrangements having the sole object of creating tax relief to offset a person's ordinary tax liability. There is no underlying financial cost to the tax avoider, except the fee which I have described which he pays to those who devise and sell these schemes. Previous schemes have been countered in the 1976 and 1977 Finance Acts and a third is sought to be blocked by Clause 32; that is, the land sale and the right to repurchase, which is referred to in Clause 32.

What is important, as the noble and learned Lord made clear in his description, but I want to emphasise it, is that discovery of these schemes is extremely difficult. The schemes are sold in and are subject to unusual conditions of secrecy, and every delay and obstruction is used to prevent the details from becoming known. One thing will be plain from the description which both the noble and learned Lord and I have offered to the House: that the paper loss, the accounting loss, the loss upon which relief is sought to be claimed, is incurred before the existence of the scheme is known. In fact, it is only when the claim for relief is made that the existence of the scheme comes to be known. Therefore, as soon as the use of one scheme is stopped by legislation, or by a ministerial announcement promising legislation, another is immediately sold and put into use. In this way, avoidance attempts continue—and successfully—from year to year.

I have said that large sums are at stake, and I certainly did not exaggerate when I gave figures to the House. In the Government's view, the only way to stop this repeated kind of attack not just upon the Chancellor of the Exchequer but upon all taxpayers who pay their taxes is to show that further schemes of this kind will fail of their intended effect of milking the Exchequer. Both the noble and learned Lord and the noble Baroness have said that they deplore this kind of scheme. They have said that they do not approve of it, but they are doing nothing about it. I cannot see t scheme. They have said that they do not approve of it, but they are doing nothing about it. I cannot see the justice of that.

Lord RAWLINSON of EWELL

My Lords, when did I say that?

Lord McCLUSKEY

My Lords, the official Opposition take the point that they are not in Government, but if they were they say that they would not backdate a scheme beyond the date of an announcement, or in the case of the spokesman for the Liberal Party, beyond the date of the introduction of the Finance Act. Neither of these things would succeed in stopping these schemes from depriving the Chancellor of revenue and taxpayers of a reduction in the burden of taxation upon them.

In this particular instance, I should make it clear to the House that both the noble and learned Lord and the Government are agreed that there must be an element of retrospection. On a pure view, I think that the Liberals do not agree that there should be any retrospection. The difference between the noble and learned Lord and myself lies in how far back one should go. The noble and learned Lord fastens upon certain rules which he has set out quite clearly.

One has to look at the merits and the demerits—the benefits of each particular scheme. One has to look at the justice of the whole cause. When one does so and sees the nature of these schemes and that persons enter into them deliberately, secretly and with the kind of intention which I have described, one realises that this is the quite exceptional case where retrospection of the kind covered by Clause 31 is inevitable. It is inevitable because it is the only way to counter this improper type of tax avoidance. Some countries have a general anti-avoidance provision. Indeed, that was something which it was suggested should be introduced here when the matter was discussed in another place. However, it has not worked very well when it has been tried in other countries, and there is very little, if any, support for it in this country.

Let me make it quite clear that Clause 31 does not render unlawful a scheme which is now lawful. It disqualifies a claim for relief. It does not impose a penalty retrospectively. It simply withdraws the right to claim a tax relief which was not intended to be given in the circumstances which I have described. It is impossible, by making an announcement, to stop this kind of tax avoidance, because by the time the announcement is made the damage is already done. The matter can be put to the courts but, as noble Lords know, the courts do not decide matters of this kind overnight; they may take years to decide that one particular scheme is illegal. The ingenuity of the people who created that one scheme is such that they could produce another scheme every day of the week. Therefore, the wound can go on bleeding for ever and ever.

In these circumstances, I feel that I do not need to go any further. In my submission, this matter is entirely justified. I reject the criticisms made of it by noble Lords opposite.

4.29 p.m.

Lord WIGG

My Lords, this is an instance, without any shadow of doubt, when a quantitative difference makes a qualitative difference. I must congratulate my noble and learned friend the Solicitor-General for Scotland on the clarity with which he has enlightened me about this matter. He says that the sums involved amount to hundreds of millions of pounds. One must be perfectly fair about this so far as the noble and learned Lord, Lord Rawlinson, is concerned and ask him whether he can answer this question, although he will obviously please himself whether he does so. May I ask the noble and learned Lord whether, when he spoke this afternoon, he was aware that the benefit to those who had devised these schemes could run into hundreds of millions of pounds?

Lord RAWLINSON of EWELL

My Lords, of course I was, and I have argued this case as a matter of principle: not emotion, not of loss to the revenue but as a matter of principle and precedent, and sometimes I believe that precedent and principle matter even more than money.

Lord WIGG

My Lords, that is a very fair answer and it is an answer I would respect from the noble and learned Lord. Certainly I respect him for his work both in the other place and here. But he and I are politicians and therefore we have to judge; and after all this afternoon in another capacity he gave evidence of this ability when he mentioned the White Papers that would come like snowflakes in relation to a certain event which he contemplates may happen in October. In other words, I do not think I am being particularly unfair if I say that, while he has spoken this afternoon as a lawyer on a matter of principle, it was not completely removed from his mind that this debate might have political overtones. Anyway I assume that that is so, and I am going to put to the Minister, not in his legal capacity but in his capacity as the Minister concerned, as the White Paper on Security says, that people must be concerned about the working of Government because without it they cannot call their representatives to account and make informed use of their rights as citizens and electors.

If the Opposition this afternoon, with the support of everyone who has spoken, deplores the action of Government in terms exclusively of principle, and they are prepared to leave those who have devised this ingenious scheme to benefit to the extent of hundreds of millions of pounds which the electors will be called upon to pay, then if they do not pay it, it is a political factor of the first magnitude that the Tory Party is so concerned with principle that it is oblivious to the political consequences of its adherence to that principle. I am prepared to accept the honesty with which that statement is made. The ordinary man and woman who are concerned with the everyday affairs of life are perhaps a little more concerned with the practicality of life and less concerned with principle, and that is an issue on which they will have to make up their minds at the time of an election.

I hope very much that the noble and learned Lord the Solicitor-General for Scotland will go back to his colleagues and suggest, perhaps, that instead of handing over a political broadcast to the youth of the Party, the 10 minutes might be given over to spelling out the fact that here was a group of gentlemen who have used their ingenuity to devise schemes which would cost taxpayers hundreds of millions of pounds, yet the Tory Party, by its unanimous voice this afternoon, deplores the principle, but is prepared to leave the hundreds of millions of pounds in the pockets of those who unscrupulously and nefariously seek to profit from their ill-gotten gains. That is a political factor, and I hope very much that the Minister will be able to give the House an assurance that in his political capacity—not in his legal capacity—he will say that this fact should be set out on every hoarding and every platform throughout the event which I hope is coming in October and which, on the merits of the debate this afternoon, can only have one result, the overwhelming return of a Labour Government.

On Question, Bill Read 2^a; Committee negatived.