Lords Sitting of 3 November 1999

Preamble
The House met at half-past two of the clock: The LORD CHANCELLOR on the Woolsack.
Prayers—Read by the Lord Bishop of Bradford.

Baroness Whitaker
Janet Alison Whitaker, having been created Baroness Whitaker, of Beeston in the County of Nottinghamshire, for life—Was, in her robes, introduced between the Baroness Blackstone and the Baroness Amos, and made the solemn Affirmation.
Lord Foster of Thames Bank
Sir Norman Robert Foster, Knight, OM, having been created Baron Foster of Thames Bank, of Reddish in the County of Greater Manchester, for life—Was, in his robes, introduced between the Lord Weidenfeld and the Lord Sainsbury of Turville.

Meat Hygiene Service: Contractors' Practices
2.49 p.m.
The Countess of Marasked Her Majesty's Government:
Whether it is their policy to consider the employment policies of the companies to which they award contracts for the provision of veterinary services to the Meat Hygiene Service.
The Minister of State, Ministry of Agriculture, Fisheries and Food (Baroness Hayman): Yes, my Lords. The Government expect all contractors fully to comply with the legal obligations placed on them as employers. In awarding contracts for the provision of veterinary services, the Meat Hygiene Service follows government best procurement practice and complies with all relevant statutory provisions.
The Countess of Mar: My Lords, I thank the noble Baroness for that reply. Is she aware that some anomalies seem to be creeping into the terms and conditions for the employment of official veterinary surgeons, particularly those from other European countries? I shall not tire the House with details, some of which have been reported in the press. Will the noble Baroness kindly agree to meet, with me, one or two of the veterinary surgeons concerned, so that we can be absolutely clear as to what is fact and what is fiction in an attempt to resolve these matters?
Baroness Hayman: Yes, my Lords. I am grateful for the way in which the noble Countess phrased her request. She was kind enough to alert me to her concerns, which, as she says, have been reported in the
872
press. They are of such a serious nature that I asked Meat Hygiene Service auditors to visit one company yesterday and to hold extensive discussions with the directors and some of the staff involved. They were given full access to company records. Of course, if concerns remain or if individuals have concerns, I am happy to investigate those and to meet the noble Countess. I am also happy to facilitate her meeting with the Meat Hygiene Service or the companies concerned if that seems sensible.
Lord Luke: My Lords, Regulation 8(1) of the Fresh Meat (Hygiene and Inspection) Regulations 1995 states that an official veterinary surgeon can be appointed only by the Minister. If that is not the case, who is running the Meat Hygiene Service? Is it not time that the Government took a proper grip on the business aspects of all these contracts?
Baroness Hayman: My Lords, I made it clear in my initial Answer that the Government do take a proper grip on the business aspects of the contracts. The contract referred to was awarded in line with government best procurement practice. I can reassure the noble Lord that contract OVSs are designated by the Minister as official veterinary surgeons, and hold warrants of authorisation issued by the Minister appointing them to act as authorised officers of the Minister in licensed premises. Whether on a contract or directly employed, an OVS must operate according to the operations manual of the Meat Hygiene Service.
Lord Willoughby de Broke: My Lords, why do the Government or the Meat Hygiene Service feel it necessary to employ fully qualified veterinary surgeons for meat inspection tasks, when none of our European Union competitors does the same and there are derogations under the relevant directive to allow a lower-cost inspection regime?
Baroness Hayman: My Lords, I query the correctness of the noble Lord's comment. Other European countries have exactly the same problems in providing appropriate levels of veterinary supervision. I understand that the Dutch are recruiting extensively in Germany, as the noble Lord is well aware because of his keen interest in these areas. We have looked carefully at whether veterinary surgeons have to be employed to carry out supervision, and the advice we have received is that they do.
Lord Hylton: My Lords, when considering these employment matters will the Government bear in mind the national interest in having the widest possible range of small and local abattoirs?
Baroness Hayman: Yes, my Lords. We have listened to the concerns of the industry about the future of small abattoirs which often provide an important service to local communities and, for example, to organic farming. My right honourable friend the Minister of Agriculture announced in September a series of measures to help the industry, including

873
clarification from the EU that low-throughput slaughterhouses would not be required to have full-time supervision by a veterinary surgeon during post-mortem inspections.
Viscount Thurso: My Lords, the noble Baroness referred to "best procurement practice". Can she assure the House that that does not simply mean "cheapest" but "best value", which should include those who are properly fitted for the task, including knowledge of the language and even culture?
Baroness Hayman: Yes, my Lords. This issue has been raised particularly in the context of overseas veterinary surgeons. We have taken steps to ensure that they have adequate training and a grasp of the English language in order to be able to carry out their duties. The Meat Hygiene Service is also undertaking a programme of continued professional development to ensure that the people who are employed are able to fulfil those tasks.

European Union Institutions: Budgets
2.55 p.m.
Lord Bruce of Doningtonasked Her Majesty's Government:
When and under what circumstances a "gentleman's agreement" was reached between the Council of Ministers and the European Parliament by virtue of which the Council does not present the draft budget relating to the expenditure of the latter, and whether Her Majesty's then government agreed or did not oppose this arrangement.
Lord McIntosh of Haringey: My Lords, the Council of Ministers agreed to a declaration on 22nd April 1970 that committed it not to modify the administrative budget for the European Parliament during the annual budgetary process in so far as it did not infringe Community legislation. This agreement was made before United Kingdom accession to the European Economic Community.
Lord Bruce of Donington: My Lords, I am most grateful to the noble Lord for that reply, in which he disclaimed any responsibility on the part of Her Majesty's Government and their immediate predecessors for this arrangement. Is my noble friend aware that guarantees between two institutions within the Community run oddly with the Community's manifest desire to distribute cascades of written documents and agreements among everybody else? Is it not a little odd that in a specific segment of the Community's affairs it should not issue documents that can be checked in the normal way rather than have understandings with one each other? Is my noble
874
friend aware that this operates not only between the Council and the European Parliament but between the Commission and the European Parliament whereby, in return for treating the Commission's staff requirements somewhat indulgently for next year, the Commission for its part has agreed not to examine too closely the expenses and salaries of Members of the European Parliament and the expenditure on buildings, which more recently has been without any legal authority whatever? Can my noble friend give an assurance that Her Majesty's Government will now treat these matters very seriously and follow the edict of our own National Audit Board in reviewing the accounts; namely, that all fiddles ultimately lead to fraud?
Lord McIntosh of Haringey: My Lords, it was my noble friend who used the phrase "gentleman's agreement". I made reference to a declaration, and there is nothing secret about that. My noble friend is quite right that all of the five administrative budgets within the European Union are non-compulsory and are under the control of the Government, which is why the various institutions of the Union have made these agreements. My noble friend is the most conspicuous and devoted consumer of these cascades of paper, not only in this House but probably anywhere in Europe. There must be control over the expenditure of the European Parliament and European institutions as a whole, and the Prime Minister has supported root and branch investigation of expenditure, particularly mismanagement and fraud. We have every confidence in Neil Kinnock as Vice-President for Administration Reform who is responsible for this work.
Lord Saatchi: My Lords, as this gentleman's agreement, or whatever it is called, was entered into almost 30 years ago before the UK joined the EEC, is it not time for the Government to call for a review of the procedure? Has that not become urgent in the light of the Minister's Written Answer of 22nd July in which he disclosed that the European Parliament cost the UK double the cost of your Lordships' House and yet sat for only one third the number of days? In the light of the astonishing changes in the EU over the past 30 years, is it not now time for an open, transparent and accountable system so that the European Parliament is able to scrutinise the spending of the Council of Ministers, and vice versa?
Lord McIntosh of Haringey: My Lords, I am grateful to the noble Lord for drawing attention to the answer which I gave in July. I find his comments about investigation and transparency a little odd in the light of the failure of Conservative MEPs to vote for the application of the new anti-fraud commission, OLAF, to the European Parliament. Labour MEPs voted for that; Conservative MEPs failed to vote and failed to have it approved.
Lord Stoddart of Swindon: My Lords, will my noble friend correct the statement made by the noble Lord, Lord Saatchi, that the European Parliament costs just double that of the House of Lords? I believe that the figure should be 20 times as much.
Lord McIntosh of Haringey: My Lords, there is an honest confusion. The noble Lord, Lord Saatchi, was referring to the total cost. My noble friend is referring to the cost per Member of the European Parliament.

London Underground: Restructuring
3.1 p.m.
Lord Ezraasked Her Majesty's Government:
What progress has been made in the restructuring of the London Underground.
The Minister of State, Department of the Environment, Transport and the Regions (Lord Macdonald of Tradeston): My Lords, good progress has been made. London Underground has been reorganised into a structure which foreshadows that of the proposed public private partnership. The pre-qualification process for those competing to run the infrastructure companies is now complete and invitations to tender for the two deep Tube PPPs were issued on 19th October. Discussions between Railtrack and London Transport on the possibilities for integration between the sub-surface lines and the national network are also making good progress.
Lord Ezra: My Lords, I thank the Minister for that information. In the light of the recent Paddington rail crash, are the Government still convinced that the proper solution for the Underground is to separate responsibility for train and track operations? In those unfortunate circumstances, and in order to avoid any replication of them anywhere in the rail network—whether above or below ground—are the Government considering alternative possibilities, in particular the continued integrated operation of the Underground network and the possibility of providing the Underground with the facility for raising the financial resources it requires by public bond issues, which is a widespread practice on the Continent? I am sure that there would be great public understanding and support if the Government were now to reconsider the whole situation.
Lord Macdonald of Tradeston: My Lords, the Government have made clear that the safety of passengers and staff is paramount on the Underground, as on the national railway, and the safe operability of any integration scheme will always be the prerequisite for proceeding.
We believe that the approach to integration and train control will need to take account of many of the findings of the investigations into the recent Paddington tragedy. We also believe that the structures we are putting together will leave London
876
Underground at the apex of the safety regime. Indeed, it will be the single controlling entity in that safety regime.
We also believe that the PPP we are putting together will prove better value than bond financing. If the bids showed otherwise, we would not go through with that PPP, which will be measured against a public sector comparator. We believe that it would be difficult, if not impossible, for London Underground to finance its own investment if it could issue bonds. The comparison with New York is often made. There, less than one third of the bonds are repaid from revenues. The rest are paid directly by the taxpayers.
Lord Brabazon of Tara: My Lords, the Government have often said that they want to learn lessons from rail privatisation. However, does the Minister agree that, since rail privatisation, there have been record levels of investment, more new trains, more passengers and more freight? Yet even after two and a half years of a Labour Government, nothing much has happened to the Underground, except that fares have risen, the number of delays and disruptions have risen and core investment has fallen. When will Londoners see improvements on the Underground, or must we wait for my noble friend Lord Archer to be elected mayor, when we shall have someone with the energy to do something about it?
Lord Macdonald of Tradeston: My Lords, one of the cardinal purposes of the PPP is to make up for 18 years of underinvestment. We are putting together a financial structure which will encourage the investment of £7 billion in the first 15 years of the contracts.
In reply to the implication of underinvestment on our part, £1.6 billion in investment will go into the London Underground this year and next. During the summer, the Government invested an extra £500 million, which means that the grant going into London Underground will be £1.1 billion this year and next. That is far more than in the final years of the previous Administration.
Lord Clement-Jones: My Lords, in view of the delay in the contracts for the Underground, what assurances can the Minister give that it will receive adequate funding before the PPP contracts are concluded?
Lord Macdonald of Tradeston: My Lords, I can only repeat that this summer we invested an extra £500 million in the funding of London Underground, which brings the grant to £1.1 billion over this year and next. It is our belief that the present timetable will bring in bids from the five consortia which have expressed an interest in the two deep tube franchises by March. We also believe that we shall receive a price bid from Railtrack at the same time. We would aim for early 2001 as the time when the new contracts would come into force in the deep tubes.
Earl Ferrers: My Lords, in order to help some of your Lordships who are less knowledgeable about these matters, will the Minister when answering Questions be kind enough to avoid the Civil Service habit of talking in acronyms? Most people, when they think of PPP, think of Private Patients Plan. What does the noble Lord mean when he talks about PPP?
Lord Macdonald of Tradeston: My Lords, I mean public private partnership. I accept the reprimand and will try to do better in future.
Lord Geddes: My Lords, as we are on a general subject, may I ask the noble Lord how goes the Jubilee Line?
Lord Macdonald of Tradeston: My Lords, at the risk of boring noble Lords who were present yesterday when that question was answered, the Jubilee Line is already in operation from Stratford to Waterloo and from Green Park to Stanmore. However, we are looking for through running to be achieved in the next few weeks and for the opening of Southwark station, too. I am told that it is a jewel of design and architecture, as indeed is much of the line. During the next two weeks, we shall have every occasion to celebrate one of the great engineering and aesthetic achievements in the capital in recent decades.
Viscount Eccles: My Lords, will the Minister agree that passenger comfort is an important consideration? Will he also agree that in summer the temperature in London Underground's carriages rises to an unacceptable high? Therefore, in any restructuring, will the Government ensure that the train operators commit themselves to the introduction of climate control on a phased basis?
Lord Macdonald of Tradeston: My Lords, as a traveller on the Underground, I accept that it can be uncomfortable during the height of summer, particularly in temperatures that we experienced this year. We believe that the public private partnership that we are putting in place will allow an investment of £7 billion in areas of infrastructure, which will considerably advance the conditions and resources available to the Underground.
I cannot give an assurance that that investment will stretch to the kind of temperature control across the Underground system which the noble Viscount requests, but as a passenger on the Underground I believe that such an achievement would be excellent. However, it might be difficult to do in terms of expense.
Lord Marsh: My Lords, will the Minister comment on the suggestion that the overrun on the Jubilee Line is probably in excess of £2 billion rather than£1 billion?
Lord Macdonald of Tradeston: My Lords, the last public figure put forward on the cost of the Jubilee Line was £3.2 billion. There have been suggestions that it has gone up a little since then. I do not have the final figures, but I believe that the noble Lord may be right in saying that the overrun was closer to £2 billion than £1 billion.
Lord Acton: My Lords, to echo the immortal question of the noble Lord, Lord Allen of Abbeydale, will the Minister say whether some of the billions of pounds he mentioned could be used to employ someone who knows how to mend escalators?
Lord Macdonald of Tradeston: My Lords, I take the noble Lord's point. On the other hand, we should be aware that any faults with escalators can be extremely dangerous. Few minds in this House will stretch back to the early 1940s, but there was a tragedy in Bethnal Green caused by a faulty escalator. Indeed, when problems were discovered with an escalator recently, I am delighted to say that the rail inspectorate and London Underground acted with great expedition in ensuring that all the escalators were inspected. A number were found to be defective and were taken out of service, but normal service was resumed as soon as possible. Certainly we could not tolerate the risk involved by not acting decisively.
The Lord Bishop of Bradford: My Lords, does the Minister agree that, however comprehensive the restructuring of London Underground, a major step forward in safety might be achieved by a simple change in attitude of mind, by accepting that red means "stop" and that green, and only green, means "go"? Does he further agree that that might have safety implications for the railways as well?
Lord Macdonald of Tradeston: Indeed, my Lords, we have made it clear that, in appointing Lord Cullen to conduct a public inquiry into rail safety, the question of a safety culture—I apologise to the noble Earl if that sounds like a bit of jargon—in this case means a dedication to safety that runs from the top to the bottom of every organisation. We know that safety is paramount on London Underground. The lessons of the King's Cross disaster were well learnt and the way in which the trains operate on the Underground differs from the way in which they operate on the national network. They travel at a lower speed, and we understand that the number of incidents of signals passed at danger—SPADs—which have been recently reported are being worked on so that they might be reduced. They do not carry the same serious implications as they would on the railways, but safety is paramount.

Chief Inspector of Prisons: Bulger Case Comments
3.12 p.m.
The Earl of Longfordasked Her Majesty's Government:
What is their response to the recommendation of the Chief Inspector of Prisons regarding the two boys convicted of the murder of James Bulger.
The Parliamentary Under-Secretary of State, Home Office (Lord Bassam of Brighton): My Lords, none. As your Lordships will know, Her Majesty's Chief Inspector of Prisons has apologised unreservedly for speaking publicly on matters which were outside his responsibilities and specifically in relation to cases in which the Home Secretary acts in a quasi-judicial role. I remind noble Lords that there has been an injunction in force since 1993 which imposes stringent reporting restrictions on this particular case. Noble Lords will therefore understand why I cannot be drawn on the details of the case. My right honourable friend the Home Secretary proposes to consider the question of the boys' tariffs when he has reflected on the forthcoming judgment of the European Court of Human Rights in this case and other relevant information.
The Earl of Longford: My Lords, I wonder if I may be allowed to welcome the new Minister to his difficult task. I hope that he will never have a more difficult case to defend than this one. Is the Minister aware that the Chief Inspector's report—I admire the Home Secretary and the Chief Inspector; indeed, I admire all concerned, leaving out the personalities—is in line with the original recommendations of the trial judge? Is he further aware that the Home Secretary, no doubt on false information, increased the tariff from eight to 15 years, and that his decision was duly found unlawful by the House of Lords?
Lord Bassam of Brighton: My Lords, before I respond to the Question, I should perhaps congratulate the noble Earl. I understand that it is his 68th wedding anniversary. He and his wife are to be congratulated on that long sentence of achievement.
Noble Lords: Hear, hear!
Lord Bassam of Brighton: My Lords, the issue of tariffs is entirely a matter for my right honourable friend the Home Secretary, who will reflect on it carefully after he has considered the judgment of the European Court of Human Rights, which, I understand, is to be delivered in the next two to three months.
Lord Laming: My Lords, does the Minister agree that the recent publicity given to the matter has been extremely damaging for all concerned, including the
880
parents of James Bulger? Does the Minister further agree that the matter should now be left to the proper authorities?
Lord Bassam of Brighton: My Lords, I entirely agree with the noble Lord. I believe that it is absolutely a matter which should be left to the proper authorities. I do indeed believe that the resultant publicity has been most unfortunate.
Lord Hooson: My Lords, does the Minister agree that whether or not the Chief Inspector of Prisons went beyond his remit in giving an off-the-cuff opinion—as he appears to have done—he nevertheless raised an important question? That is whether it is in the public interest as well as in the interest of these boys that they should be committed later to prison, which, as many of us know, is the university of crime. Is it not right for that question to have been raised in that way so that the Home Secretary will have to consider it regardless of the opinion of the European Court of Human Rights?
Lord Bassam of Brighton: My Lords, I have already made the point about the question of tariff. It would be wrong if I commented on that matter today. I shall simply state that Her Majesty's Chief Inspector of Prisons has been reminded that he needs to keep strictly within the remit of his job. I believe that all Members of the House will welcome the fact that the Home Secretary reminded him firmly of that yesterday.
Lord Merlyn-Rees: My Lords, I do not wish to become involved in a debate of the problem of the tariffs and the quasi-judicial functions of the Home Secretary. However, the implications of the Chief Inspector of Prisons becoming involved in this case go rather wider. He implies that the conditions in young offenders' prisons are poor, not only for these young men, but for others. What is the Home Office now going to do about picking up the Chief Inspector's words and considering carefully the young offenders' prisons, some of which are in an extremely poor state?
Lord Bassam of Brighton: My Lords, I quite understand and appreciate the noble Lord's comments and observations. He is very experienced in these matters. However, we have the utmost confidence in our young offender institutions. We believe that they are models and centres of excellence. That is not a matter on which Her Majesty's Chief Inspector of Prisons has a remit to comment. That is a matter for other bodies to determine.
Lord Northbourne: My Lords, does the Minster agree that, in a case such as this, the guiding

881
consideration should not be retribution but the safety of the public and the rehabilitation of the young people concerned?
Lord Bassam of Brighton: My Lords, I believe that incarceration perhaps covers all three of those matters. Rehabilitation is desirable, but I believe that the public expect a degree of retribution also.
Lord Cope of Berkeley: My Lords, the Minister's response to the noble Lord, Lord Merlyn-Rees, was that it was entirely inappropriate for the Chief Inspector to make the comments that appeared in the New Statesman. Does he not agree that it is entirely appropriate, however, for the Chief Inspector to comment on young offender institutions and on the state of such institutions?
Lord Bassam of Brighton: My Lords, the Chief Inspector is entitled to do so—that is exactly the case. We read his reports with great care and great interest, as I am sure do most Members of your Lordships' House.
Lord McNally: My Lords, is the Minister aware that another aspect which arose at the time of the Mary Bell case is the irresponsibility of the British media in handling such matters? This recent example, in both the New Statesman and the Sunday Mirror, shows that the press have learned no lessons from that case and that we cannot expect any greater sense of responsibility from them unless the Government make a strong stand. I see the noble and learned Lord the Attorney-General whispering in the Minister's ear. He knows well how irresponsible the press were, and how irresponsible they will be in the future unless we get in first and stop them.
Lord Bassam of Brighton: My Lords, I believe that the noble Lord makes an important and telling point and observation. It is for that reason that my right honourable friend the Home Secretary and I believe that in this instance the comments of the Chief Inspector of Prisons were highly inappropriate and misdirected. There is no point in giving the media extra fuel to add to that particular fire.

Introductions
3.20 p.m.
The Attorney-General (Lord Williams of Mostyn): My Lords, I beg to move the Motion standing in the name of my noble friend the Leader of the House.
As I am sure your Lordships are aware, it was announced yesterday that a number of distinguished Members of your Lordships' House are to receive life peerages so that they may continue as Members of this House after the end of this Session.
The purpose of this Motion is to allow any existing hereditary Peer who receives a life peerage to continue to sit in the House by virtue of that life peerage without
882
a ceremonial introduction. Any such Peer would be required to take the Oath and sign the Roll under his or her new title, but the Letters Patent of Creation would not be read in the House and no robes would be worn. That change has the approval of Her Majesty the Queen. I believe that it will meet the wishes of those hereditary Peers who receive life peerages and is also in the best interests of the House as a whole. I am sure your Lordships would not wish to require well-known, well-recognisable Members of this House to be formally introduced.
Moved to resolve, That notwithstanding the practice of the House on Introductions, a Peer who has sat by virtue of a hereditary peerage may sit by virtue of a life peerage without introduction.—(Lord Williams of Mostyn.)
On Question, Motion agreed to.

Food Standards Bill
3.21 p.m.
Read a third time.
Lord Rea Lord Rea moved Amendment No. 1:
Page 2, line 9, after ("food") insert ("standards, food").
The noble Lord said: My Lords, in moving Amendment No. 1, I wish to speak also to Amendments Nos. 3, 4, 6, 7 and 12, which also stand in my name.
My noble friend knows that I do not intend to press these amendments although, if she were able to accept them, I should of course be delighted. My purpose in moving them is to provide a peg which will allow me to ask my noble friend to amplify the information that she has given us so far on the objectives and activities of the food standards agency in its role in the field of nutritional policy, rather than its role as a watchdog over the microbiological safety of food.
The original purposes of the food standards agency as described in the White Paper, A Force for Change, will be emphasised by adding "food standards" to "food safety" each time those words appear in the Bill. As it stands, the Bill reads as though it is mainly concerned with food safety. Of course that is important, but its other equally or— possibly in the long term—more important role is covered only in rather vague phrases, such as "otherwise to protect" in Clause 1, or,
"matters connected with … other interests of consumers",
in relation to food in Clauses 2, 6, 7, 8, 9 and 22.
At previous stages of the Bill my noble friend explained why the Government do not believe it necessary to use the word "nutrition" or "nutrient" on the face of the Bill. Many people working in the field of public health, both practitioners and academics—including the original author of the proposal for a food standards agency, Professor Philip James—do not accept the Government's reasoning on this.
My noble friend gave us reassurances at each stage of the Bill that nutritional policy and the nation's diet will definitely form part of the agency's role. Those reassurances are recorded in the Official Report. I thank her for that. I hope that this afternoon she will be able to say that the Government endorse the outline of or general objectives for the agency which have been suggested by the National Heart Forum and the "Sustain" group of food experts that I spoke about on Report.
I shall not take up the time of the House by spelling out those objectives in full. In any case, my noble friend has a copy. However, in summary, they cover many of the aspects of nutritional policy which we discussed during earlier stages of the Bill. One group of objectives relates to food labelling, nutrition and health claims, and covers, in those areas, general policy, research, legislation, codes of practice and public information.
The other group, which I read out at Report stage, relates to the nutrient content of foods and the diet as a whole, including monitoring and surveillance, securing expert scientific advice, defining a healthy and balanced diet and the provision of practical guidance on nutritional aspects of the food chain. I am aware that the food standards agency will delegate some of those activities to the Department of Health. However, it would be interesting if my noble friend could say how far the objectives for the food standards agency, which is what the Government have in mind, tally with this list. In many aspects the list is identical to the objectives for nutrition which are given in Chapter 5.11 of the White Paper, which we discussed on the first day of the Grand Committee.
Finally, I take this opportunity to ask my noble friend to describe in a little more detail the explanatory papers on the role of the food standards agency, which she told us will be issued with the Bill when it becomes law, or so I understood. I ask her also to describe the make-up and remit of the various concordats which will be formed to assist the smooth-working of the agency. For example, will there be an opportunity for consultation before those concordats are finalised? I beg to move.
Baroness Hayman: My Lords, I am grateful to my noble friend for raising these issues about which, rightly, he has been tenacious in our debates so far. I am also grateful to him for making clear that his amendments have been tabled as probing amendments should the Government not feel able to accept them. I believe my noble friend may have read the same newspaper as I did, which told me that today is stress-awareness day. He is obviously doing his bit to lower my stress levels by assuring me that he will not press amendments which we cannot accept.
Although I understand very well my noble friend's reasons for wishing to insert the phrase "food standards" and adding it to the phrase,
"food safety or other interests of consumers in relation to food",
I hope he will agree that the Short Title of the Bill makes it abundantly clear that the Bill relates to food standards.
884
The serious issue raised by my noble friend is the scope of the agency's activities and the concern expressed by him and by many others outside the House that the food standards agency should not only take action in matters which relate purely to food safety or the microbiological safety of food.
I note my noble friend's concern that the current wording appears to give food safety greater emphasis and that other interests of consumers may seem to be of secondary importance. We have discussed the reasons behind the drafting at some length and I can assure him that that is not the case.
Noble Lords who have taken part in the debates on the Bill will not be surprised to hear me reiterate that the phrase,
"food safety or other interests of consumers in relation to food'',
covers all those interests of consumers, including labelling—an issue that we shall turn to later—nutrition and so on. At other stages of the Bill we have had detailed discussions about how to make that more explicit. I was grateful to the noble Viscount, Lord Thurso, for pointing us in the direction of a statement of objectives and practices as an appropriate place to make the remit of the agency clearer and to elaborate on its objectives. I have indicated that we intend to do that with respect to nutrition as well as other matters.
Today my noble friend mentioned the ideas put forward by the National Heart Forum. As he said, he has kindly sent me a copy of the note that that organisation has prepared of possible objectives for the agency. That is a positive contribution which, as he pointed out, I may well use, as much of it accords exactly with proposals in the White Paper.
The statement of objectives and practices will be a matter for the agency itself. I hope that it will reassure my noble friend to know that we shall consult in more detail on that statement. It would be helpful to have discussions with the National Heart Forum on those matters. If the forum wishes, I shall ensure that such a meeting takes place.
My noble friend asked about the explanatory material to be published. That is the statement of objectives and practices which will be produced by the agency within three months of the first meeting. I do not expect that to be an ex cathedra pronouncement. I expect the statement of objectives and practices to give bodies such as the National Heart Forum an opportunity to contribute.
The concordats will be working documentation between the agency and the department and cannot be finalised until the agency comes into being next spring. However, we shall have discussions on the general principles that should be in those internal documents. I have made it clear that I believe that the specific issue of the division of responsibility for matters relating to nutrition should be addressed in those concordats. On that basis, I hope that my noble friend will feel reassured that we are not narrowly defining the remit of the new agency, that it will be concerned with

885
standards as well as safety and that the issues relating to nutrition, which are important, will be covered adequately.
Lord Rea: My Lords, my noble friend has come up trumps with more or less the words that I had hoped that she would utter. I shall read exactly what she said in Hansard before giving it 100 per cent approval. My colleagues in the National Heart Forum will be pleased to know that they still may have a role to play in the future design of the food standards agency. At this stage I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Baroness Byford Baroness Byford moved Amendment No. 2:
Before Clause 6, insert the following new clause—

LABELLING
(" . The Agency has a duty to require that all food products are accurately labelled with a complete list of ingredients, whether they are genetically modified, the country of origin and system of production of each major ingredient.").
The noble Baroness said: My Lords, I beg to move Amendment No. 2. I shall also speak to Amendment No. 5 in my name and refer to government Amendment No. 16. I believe that it is in order for me to do that.
The issue of labelling is confusing. In my store cupboard all the wines carry labels showing the country of origin. Most of the bottles indicate the types of grapes and the region in which they were grown. The more expensive wines have labels that tell me precisely where the wine was bottled, while others state for whom it was bottled and in which country. I find that labels on cheeses may or may not tell me from where they come, although Cheddar appears to be predominantly from England, Ireland or New Zealand. Meat is often British, but occasionally English, Scottish or New Zealand. Meat in tins tends to come from York or Argentina.
To some extent I cannot understand what the fuss is all about. If so many people can show me where their products have been produced and what they contain, why cannot everybody? At the Report stage the noble Lord, Lord Rotherwick, explained the origin rules for organic produce. On 27th October Nick Brown issued another consultation document on the proposed new guidelines on the labelling of the origin of food. Why do we still have to consult? British farmers know that their products are good, safe and clean, and they would like the country of origin on labels to be compulsory. Consumers appear to be convinced that British food is the best and many of them would buy more of it if it were identifiable. It is true that some food manufacturers or large retailers find it easier to be without such rules.
On Monday I returned from the poultry industry conference, where I was delighted to learn that the campaign to label British eggs with the lion brand has been highly successful. Eighty per cent of British consumers know what the lion brand means and
886
choose eggs stamped with the little lion in preference to others. Indeed, the lion has recently been awarded the International Golden Egg.
European labelling harmonisatison is supposed to sort out the muddle, but in another place Jeff Rooker stated that the country of origin labelling of beef is expected to become compulsory from the year 2000. If that is true of beef, why not of pork, lamb, poultry and other foods? Why not this year, rather than next year?
It appears to us that the Bill lays a duty on the agency to move forward the whole question of standardisation of labels and to include a requirement for the universal country of origin. No one in Europe has grounds for complaint.
Since our debate at Report stage much has been said in the news. I have here three MAFF news releases which underline my argument on the need for my amendments to be considered seriously. The first was issued on 25th October and stated that consumers need to be aware of welfare standards. "Hooray", say I. I shall not read what Joyce Quin said, but she referred to British pig production.
The second news release, dated 27th October, dealt with the proposed new guidelines on labelling the origin of foods. It states that at the Great British Food Conference Nick Brown announced that he had three objectives. He said:
"I am determined to tackle the issue of misleading labels. I have three objectives:
To promote informed consumer choice by encouraging clearer origin information on food labels about the real place of origin—not just the place of processing or place of slicing but also, where it would be valuable, the origin of ingredients.
To clamp down on misleading place of origin descriptions.
In the longer term, to press for changes to international rules to ensure that consumers are given accurate and unambiguous information about the true origin of the foods they are buying".
The third news release, published on 28th October, states that Joyce Quin welcomed the £5 million to help farmers and growers to improve their marketing and competitiveness.
During the passage of the Bill through the House, noble Lords have had four debates on labelling. The Minister and other noble Lords will be thankful that I shall not repeat all that I have said on those past four occasions. However, it would be wrong of me not to stress again the importance of labelling. My two amendments—I know that the Minister may not be able to accept them—highlight the problems that the consumers face. We feel strongly that they should be on the face of the Bill.
Having said that, I thank the Minister for replying to me following our Report stage, and for proposing her own Amendment No. 16, although I have to say that it does not go as far as I would have liked. Nevertheless, the Government have recognised the immense pressure that has been brought from all sides of the House, and from consumers outside this Chamber, on the need to have labelling on the face of the Bill. I am therefore very grateful to the Minister for agreeing that labelling is a matter of much importance to consumers. I have made a strong case for this to be

887
reflected in the Bill. I am indeed grateful to her for tabling her amendment, although we feel strongly that her amendments perhaps do not go far enough. However, at this stage I will wait to hear her reply.
Baroness Oppenheim-Barnes: My Lords, because the Minister has made a concession, for which we are grateful, I would like to help her with a problem that she is likely to face. It would be quite inappropriate for me to say that I do not want to teach my grandmother to suck eggs—it would be more appropriate to say that I do not want to teach my granddaughter to suck eggs —but I have sucked those eggs myself.
In about 1982, we were determined to introduce country-of-origin marking across a whole range of goods. We had tremendous opposition from our partners in the then Community, who said that they would be non-tariff barriers. I consulted very widely with the National Association of Townswomen's Guilds, which also consulted their members widely, and it appeared that they definitely wanted to know the country of origin, not as a non-trade barrier but so that they could recognise certain countries that had a very good reputation for certain goods and not for others. It was very difficult, but we finally did it under the Trades Descriptions Act. It was not quite ultra vires but it was a little shaky in that department.
I subsequently retired from the department happy with the thought that we had got it through. Sadly, at a later date after my departure, our own and other MEPs within the Community decided that they could not continue with it because of the objections.
Having issued those warnings, my final point on this subject relates to the question asked by my noble friend Baroness Byford, "Why only beef?" I can tell her why. It is because other countries are using it as a non-tariff barrier. They believe that if they label it "British beef", nobody will want to buy it. That is the sad truth. We should be able to put it on any of our food goods, not just to blow our own trumpet but because consumers will obviously want to know, for many reasons, the point of origin.
Lord Monson: My Lords, Amendment No. 5 is probably unacceptable for the reasons advanced at Report stage by my noble friend Lady Mar. If I remember correctly, she pointed out that it would mean that every single apple, pear, cauliflower or potato would have to be separately labelled with its ingredients, which is a rather curious way of doing things, and its country or origin, and that would clearly be impossible.
I am not quite so sure about Amendment No. 2. What exactly is a food product? Is an untreated potato or apple a food product? I would have thought not. I would have thought that it was a food pure and simple and that only if it had been converted or treated in some way, such as having been turned into tinned, stewed apple or frozen chips, would it become a food product. Perhaps the noble Baroness would be kind enough to let us have her views about this when she winds up.
3.45 p.m.
Viscount Thurso: My Lords, the noble Baroness, Lady Byford, has pursued the question of labelling with passion and commitment from Second Reading, when she raised it at col. 1790, as indeed did my noble friend Lord Clement-Jones in his intervention; and we both used roughly the same line of attack at Committee stage. However, I felt that we began to part company at Report stage, and my noble friend explained why we felt that the amendments being put forward by the noble Baroness were over-prescriptive. However, that does not detract from the importance of labelling and the requirement that labelling should be on the face of the Bill. It is for that reason that I have put my name to Amendment No. 16. I feel that it has gone a very long way, if not the whole way, towards achieving our aim of having labelling on the face of the Bill.
As the noble Baroness said, labelling is an extremely confusing matter, even before we start to legislate on it. It is my experience that once one starts to legislate, matters often become more confusing rather than less confusing; one legislates in haste and repents at leisure. I therefore prefer the approach of not attempting to be too prescriptive at this final stage of the Bill, but, rather wish to ensure that the agency will be fully aware of its duties in regard to labelling and will take them seriously. I therefore suggest that we should wait for the agency to devise, through proper consultation, a proper regime.
I am grateful to the Minister for having listened to the concerns from both our Benches and for having responded so graciously. I express the hope that the noble Baroness, Lady Byford, will accept that this is as far as we can go at this stage.
The Countess of Mar: My Lords, I congratulate the noble Baroness, Lady Byford, on her tenacity, if nothing else. Noble Lords will know that I do not entirely agree. I thank the noble Viscount, Lord Thurso, for his exposition of his and the noble Baroness's amendment, to the extent that consultation will be involved. This is absolutely essential. I have pointed out some of the problems which might arise. If consultation can bring about a certain flexibility in the labelling requirements, that is what we need.
Lord Rowallan: My Lords, I too congratulate my noble friend Lady Byford on her tenacity in this particular department during the course of the Bill. I believe that we have achieved a very good compromise in Amendment No. 16. I am delighted that the "noble" democrat party has, at long last, found itself again in bed with the Government on this particular amendment. At the end of the day, it produces a very sensible compromise. I strongly commend the amendment to the House.
Lord Hardy of Wath: My Lords, I congratulate my noble friend on this amendment. Do the Government

889
accept that the agency would assume that this amendment applies to livestock feed as well as to food designed for direct human consumption?
Baroness Hayman: My Lords, I am grateful for the debate that we have had. In the previous debate on nutrition and in our discussion about labelling, once again two of the major areas of concern that have been emphasised throughout the passage of the Bill through your Lordships' House have been raised.
I have considered very carefully how we can meet some of the very justified concerns on both issues. We have just spoken about the way in which we can make clear the agency's role on nutrition. I said in earlier debates that labelling was a rather different matter. It is already explicitly covered by the legislative framework in the Food Safety Act 1990, as well as being subject to existing EU rules, which gives rise to some of the complications to which the noble Baroness, Lady Oppenheim-Barnes, referred.
My earlier argument was that because explicit mention is made of this point in the Food Safety Act and because the agency would be responsible for its administration, it is not necessary in this legislation to make explicit the responsibilities in regard to labelling.
The word "tenacious" has been applied to the noble Baroness, Lady Byford, by several other Members of your Lordships' House, and I reiterate that. The noble Baroness said with some passion at Report stage that she could not find the word "labelling" on the face of this Bill and that reference back to another piece of legislation was not sufficiently explicit to reassure people, given the concerns and the need to improve labelling in a variety of areas. We have talked today about country of origin labelling, but there are concerns about claims made on labels—the issues of low fat and fat-free have been raised—and the need to be explicit and not to use defensive labelling, for example, when we look at matters involving allergies.
I undertook at Report stage to examine whether there was a way in which we could make clear that the agency's remit covered labelling. My amendment will meet that point. It would add to the interpretation clause—Clause 36—a gloss on the phrase,
"interests of consumers in relation to food",
which is used at several places in the Bill, to make clear that it includes labelling and related matters covered by the regulated provisions of the Food Safety Act.
I explained at Report stage that there are always risks in singling out one specific item from a general definition. It might have the effect of giving pre-eminent importance to one issue while excluding other issues. That is one of the problems with the amendments tabled by the noble Baroness, Lady Byford. They leave some doubt as to how widely the agency's functions in Clauses 6 and 7 should be interpreted in relation to matters other than labelling. Our amendment is drafted in such a way that it does not have to have a restrictive or exclusive effect.
890
However, I hope that it makes crystal clear to anyone reading this piece of legislation that we are concerned with labelling.
There are other important reasons why we cannot support Amendment No. 5. The amendment suggests that the legislative competence is more simple than it is. We have EU competencies in this area, and the reason the noble Baroness's wine is labelled so explicitly in relation to country of origin is because wine is subject to separate labelling rules under the EU common organisation of the market for wine. We therefore encounter those sorts of difficulties.
As the noble Lord, Lord Monson, pointed out, there are also difficulties with the phraseology in respect of food products. The amendment was presumably intended to cover manufactured or processed food, but the noble Baroness, Lady Byford, talked of a topical concern in relation to the labelling of meat, which is not a processed product. We have to work within the labelling regime laid down in EC legislation; we cannot act unilaterally; nor would it necessarily be in the interests of United Kingdom consumers or of our food industry if we had different labelling rules from those that apply in the EU.
As I have made clear, this is wider than a European issue; we must look at the international dimension. That is not to say that we are in any way complacent that the present situation, particularly in relation to country of origin labelling, is satisfactory. That is why we have taken action—the noble Baroness, Lady Byford, was kind enough to outline that action—to ensure, for example, that there is no misleading country of origin information given, particularly on pig products, but also other products sold in this country.
I must take issue with the noble Baroness, Lady Byford, as by implication did the noble Countess, Lady Mar, as to why we have to consult. In your Lordships' House we would be in a great deal of trouble if we did not consult on these issues. For example, producers might well wish to put forward the impracticality of listing every ingredient and the country of origin on a label.
We are trying to tackle, through my amendment, the legislative position so that it is explicit on the face of the Bill that labelling comes within the remit of the agency. But noble Lords will agree that the proof of the pudding will be in the eating; that is, what the agency actually does in this sphere. The Bill provides the framework of powers and duties within which it will act. It will be for the agency to set out a strategy as to how it will take that forward; it will neglect labelling at its peril. As noble Lords have pointed out, consumers want better labelling. They may well also need the methods to deconstruct labeling—an issue raised by the noble Baroness, Lady Oppenheim-Barnes, when referring to the American document that helps consumers to understand labelling.
I believe that we have shown the way forward by the steps we are currently taking on country of origin labelling and the steps we are taking in the EU in relation to GM labelling and GM in animal foods.

891
That is a separate issue but equally important and one on which we want to make progress. Again, the agency will have a responsibility but will have to operate within a legislative framework that is not necessarily merely domestic. That will be a fruitful area for an early initiative by the agency. We are looking carefully at what preparatory work can be done to get such an initiative off the ground. Two open meetings on labelling are being held by the Food Advisory Committee, which will be a useful input into the matter.
In the light of everything that is in the Bill and the amendment brought forward today, together with the commitments we have given, I have no doubt that the agency will work to deliver a real increase in consumer information and choice through improvements in labelling and advice. I pay tribute to the strong case put by the noble Baroness, Lady Byford, to see labelling mentioned on the face of the Bill. We responded to that. We are also taking action within a European and international context to take forward, in particular, improvements in labelling on country of origin. On that basis I hope that the noble Baroness will feel able to withdraw her amendment and support our amendment, also supported by the noble Viscount, Lord Thurso, for which I am grateful.
Baroness Byford: My Lords, I thank the Minister for her full response to my two amendments. Perhaps I can pick up on a couple of points, in all humility. I was not saying that consultation should not take place. I was trying to suggest that we have been consulting and consulting and not moving forward. I would hate anyone to think I do not believe in consultation; obviously I do. But there comes a time when one must move forward. I am aware of the meetings the Food Advisory Committee has in hand at the moment and I welcome them.
The noble Baroness spoke of labelling and touched on the GM situation in response to her noble friend Lord Hardy. In fact, on the organic side one does not label country of origin. Because of the nature of the way the organic system is operated, we can trace where the product has come from. Perhaps I can hand that issue back to the Government for their consideration. I do not want us to end up with lots of different systems, which is another worry.
The Minister also said that she was referring to "meat" particularly as meat. Obviously meat coming to this country is as of a piece of meat, but it is processed here. Therefore, after being processed, some of that food will still carry the British label. That is the one aspect which greatly concerns many people both inside and outside the Chamber.
However, I do not want to nit-pick today because this is not the moment so to do. I am extremely grateful to the noble Baroness for having met us to discuss these matters, and to other noble Lords for being so generous in their comments. I am trying to find the right words to say; indeed, I am slightly embarrassed. This is a very serious issue. That is why I have been so "tenacious", to use the Minister's expression, in trying to get something on the face of the Bill.
892
I am immensely grateful to the Minister. Perhaps I may also express my thanks to her for tabling her amendment, which we on these Benches are very happy to support. I wish the House to know that my difficulty was that I did not have sight of the amendment until it was too late to attach my name to it. However, at this stage, I beg leave to withdraw my amendment.
Amendment, by leave, withdrawn.
Clause 6 [Development of food policy and provision of advice, etc. to public authorities]:
[Amendment No. 3 not moved.]
Clause 7 [Provision of advice, information and assistance to other persons]:
[Amendments Nos. 4 and 5 not moved.]
Clause 8 [Acquisition and review of information]:
[Amendment No. 6 not moved.]
Clause 9 [General functions in relation to animal feedingstuffs]:
[Amendment No. 7 not moved.]
4 p.m.
Clause 11 [Power of entry for persons carrying out observations]:
The Earl of Radnor The Earl of Radnor moved Amendment No. 8:
Page 5, line 11, at end insert ("(including conditions relating to hygiene precautions to be taken while exercising powers in pursuance of the authorisation)").
The noble Earl said: My Lords, perhaps I may take this amendment and Amendment No. 9 together, although I shall move the second one separately. I do so simply because they are absolutely identical in their wording. They stem from my fear that although these authorised people with written permission, and so on, who will make such visits—first, to observe and, secondly, to monitor and, if necessary, take action—will be subject to fairly stringent rules, such rules are very unspecific. Having a small knowledge of the matter, my fear is that they might offend against the rules of hygiene which apply in some of the plants they visit.
I do not think anyone would dream of breaking the law, or anything of that sort. Indeed, there are many inspectorates in our country; they are all probably extremely good and well behaved. However, the point I made in earlier debates was that the law is not necessarily the final consideration in a plant where one might be making pork pies—or, in my case, processing fish. We all have to keep to the law, but it is important to obey the rules that are so often laid down by the purchasers. Very often these days the purchasers are the supermarkets, which, I believe, sell something like 70 per cent of our food. Their rules tend to be very stringent. Moreover, if an operator breaks those rules, they soon find out, or soon might find out. As I have said many times, a business can be seriously harmed by the withdrawal of custom from one of these big organisations or perhaps from a series of smaller ones.
The wording of the amendments is perfectly simple. I was grateful to be invited by the noble Baroness and the noble Lord, Lord Hunt, to discuss this matter to see whether we could find a sensible meeting point. I believe that we have done so by way of the wording of the amendments which refers to,
"conditions relating to hygiene precautions to be taken while exercising powers in pursuance of the authorisation".
I believe that wording to be permissive, not mandatory. When I took the matter away and thought about it, I could see all sorts of difficulties in a mandatory situation. I was very grateful to receive help in drafting the amendments. I think that I may have been driving the Public Bill Office fairly mad by drafting a series of amendments myself. That pleased me but it was not achieving the meeting point that we were seeking.
I believe that in this important matter we have struck the right note with the amendments. I hope that they will be looked upon favourably by the noble Baroness and the noble Lord, Lord Hunt. I beg to move.
Viscount Thurso: My Lords, it is my understanding that these amendments are acceptable to the Government. If they had to have a label as to area of origin, it would not be surprising if they were acceptable to the Government. I congratulate the noble Earl on having been so tenacious right from the very first informal meeting we had. Indeed, through every stage he has stuck to his guns; and very good guns they were. Having told the noble Earl that I could not support him if he divided the House on Report, I am extremely glad that he has achieved a compromise that is satisfactory in his eyes. We on these Benches offer him our full support.
Baroness Byford: My Lords, I express my support for my noble friend Lord Radnor. As has been said, he has raised this issue at every stage of the Bill's proceedings. Indeed, both he and I gave exact examples of where businesses could find themselves in very difficult circumstances if basic hygiene rules which applied to their operations were not observed by persons who might visit their property. I am extremely delighted to think that the Minister may be able to accept this compromise. I, too, congratulate my noble friend on his persistence in getting what is a very important provision on the face of the Bill.
The Parliamentary Under-Secretary of State, Department of Health (Lord Hunt of Kings Heath): My Lords, perhaps I may join the noble Viscount, Lord Thurso, and the noble Baroness, Lady Byford, in expressing my gratitude to the noble Earl, Lord Radnor, for bringing forward these two amendments. We discussed the matter in some detail on Report, especially the need to ensure that authorised persons, and those accompanying them, take proper hygiene precautions before exercising the powers of entry.
894
As I said on Report, this is a very important issue. We agree that it would be completely unacceptable for any officer of the agency to put a business at risk by behaving unreasonably or carelessly or by failing to take the proper hygiene precautions. However, at that time, we had some difficulty with the way that the noble Earl had drafted his amendment. I am glad to say that my noble friend and I subsequently had a very helpful discussion with the noble Earl. In the light of that discussion, I am happy to say that the Government entirely support the useful amendments he has now brought forward. They have the effect of ensuring that any authorisation given to use the powers of entry may include a requirement to follow particular conditions to ensure that the necessary hygiene precautions are taken.
I know that the noble Earl wishes to have some certainty that appropriate hygiene rules will be followed. I want to give him an assurance that any authorisations issued by the agency under these provisions will include conditions that ensure authorised officers follow the precautions already laid down for enforcement officers in Code of Practice 9, which I mentioned on Report. That code requires officers to observe,
"any reasonable food safety precautions which are required by the company or organisation under inspection".
I am happy to give the noble Earl that commitment.
This means that the authorisation itself, which the authorised officer has to show on request, will indicate that he should follow any reasonable rules which are in place. I believe that that will give the noble Earl the kind of reassurance that he seeks. I can also assure him that the agency will ensure that any accompanying person—another matter raised on Report—will also follow the same rules. As I mentioned previously, the accompanying person is likely to be a food hygiene official of the European Commission's food and veterinary office, who would be accompanying the agency's official in order to audit the UK's compliance with EU directives. I believe that such an official would have a particular interest in making sure that proper hygiene practices were followed, even if those were stricter than the requirements of the law.
When we discussed this matter previously we talked mainly about the powers of entry in Clause 14, which refers to the monitoring enforcement action of enforcement authorities. However, as the noble Earl's amendments make clear, there are similar powers in relation to the powers to carry out observations in Clause 11 and we agree it is sensible that the same provision should be made in both places. This has been an extremely useful debate through all stages of the Bill. I commend the noble Earl's amendments to the House.
On Question, amendment agreed to.
Clause 14 [Power of entry for monitoring enforcement action]:
The Earl of Radnor The Earl of Radnor moved Amendment No. 9:
Page 7, line 14, at end insert ("(including conditions relating to hygiene precautions to be taken while exercising powers in pursuance of the authorisation)").
On Question, amendment agreed to.
The Countess of Mar The Countess of Mar moved Amendment No. 10:
After Clause 16, insert the following new clause—

APPEAL TO A TRIBUNAL
(" . The Secretary of State shall provide for an appeal to a tribunal against any decision of an enforcement authority, or of an authorised officer of such an authority, pursuant to sections 26(2)(e) and (f) of the Food Safety Act 1990.").
The noble Countess said: My Lords, in tabling this amendment I am aware that the Food Safety Act 1990, at Sections 26(2)(e) and (f), makes provision by regulations for,
"an appeal to a magistrates' court or, in Scotland, to the sheriff, or to a tribunal constituted in accordance with the regulations, against any decision of an enforcement authority, or of an authorised officer of such an authority; and … as respects any appeal to such a tribunal, for the procedure on the appeal (including costs) and for any appeal against the tribunal's decision".
In fact, no tribunal has ever been constituted under the Act. There are a number of reasons why I believe that it would be helpful to have this amendment on the face of the Bill.
First, in the case of the Meat Hygiene Service, it has become clear that the current appeal mechanism is totally unsatisfactory. A complaint by an abattoir or cutting plant owner or manager about the actions of an official veterinary surgeon goes initially to the appropriate regional director of the Meat Hygiene Service. He then refers it to the principal official veterinary surgeon who then consults the official veterinary surgeon against whom the complaint is made.
If the complainant is unsatisfied with the outcome, he must then complain to the operations director and, if still not satisfied, to the chief executive. As noble Lords will see, the system comprises a closed loop. Each "investigator" is part of the line management and it would hardly be surprising if at least some of the investigations did not result in a partial determination. Clearly, there is need for an independent and, I stress, impartial, appeals mechanism. I understand that the Meat Hygiene Service is currently addressing the matter and that at a recent meeting of a working group of the Meat Industry Forum there was unanimous agreement that such a tribunal is needed. The head of Meat Division 1 and the chief executive of the Meat Hygiene Service agreed to formulate some proposals. I would be grateful if the Minister can arrange for me to have the promised copy of the minutes of the meeting and perhaps advise me of progress.
My other example is what has become known as the Duckett's cheese case. Noble Lords may recall that in April 1998 a young boy was infected by E.coli 0157. This was traced to a batch of cheeses produced by Mr Duckett in Somerset. To cut what has become a saga short, a Section 13 order under the 1990 Food Safety Act was placed on all the cheeses produced by Mr Duckett. This involved a considerable quantity of cheese held for maturing by a Mr Aldridge in Surrey. Despite extensive testing no contamination was ever found in Mr Aldridge's cheeses. Under a Section 13
896
order there is no provision for compensation. The only course open to Mr Aldridge was to apply for judicial review. This procedure was expensive, time consuming and unsatisfactory as far as Mr Aldridge was concerned simply because the court could only determine whether the Minister made the correct decision on the basis of the information she was given.
Mr Aldridge lost his case on appeal by the Department of Health. The department has agreed to pay most of the costs. It is Mr Aldridge's contention that it was the information given to the Minister which was flawed. There is no mechanism available to him to have the adequacy of the system under which the officials operated reviewed, despite the provisions in the 1990 Act for a tribunal. The result has been a huge expenditure of public money—I wonder how many hip operations could have been covered by it—the loss of most of his business and his health to Mr Aldridge, and a suspicion that there has been a miscarriage of justice.
The most common cause of complaint is that officials have made unfair decisions or unreasonable demands. Many of these complaints could be settled cheaply and rapidly if there was an independent and impartial tribunal to hear the cases. As tribunal case law built up, both officials and producers would recognise the boundaries and the services of the tribunal would be needed less and less frequently. Therefore it is unlikely to be a significant drain on the public purse. On the contrary I believe that such a system would show considerable savings.
If the Minister is unable to accept my amendment, I hope that she will be able to give me a firm assurance that the Government will use the provisions already in the 1990 Act to set up a single system for appeals when the Bill becomes law. There is already a model upon which any appeal system can be based in the Meat Hygiene Appeals Tribunal that deals with revocations of, and refusals to, grant licences. Perhaps the Minister will consider broadening the current review of that tribunal. I beg to move.
4.15 p.m.
Baroness Byford: My Lords, my Amendments Nos. 11 and 15 are grouped with Amendment No. 10, which the noble Countess, Lady Mar, has just moved. I wish to support that amendment strongly. At earlier stages of the Bill we discussed the appeals system at great length. The Minister kindly sent me—and I suspect others—a full letter on the various aspects of appeals. That makes one realise how complicated some aspects of the matter are. I believe that a single system for appeals would assist greatly.
As regards appeals and the Meat Hygiene Service, I agree with the noble Countess, Lady Mar, that the current position is most unsatisfactory. I also support her desire to create an independent and impartial tribunal. We on these Benches support that strongly. At earlier stages of the Bill we discussed at length the Duckett's cheese case. I shall not do so again except to say that I think all of us in the Chamber believe that

897
the outcome is not the one that we would have wished. However, that outcome arose because of the way the system is constructed.
Having shown our support for the noble Countess's amendment, I speak now to Amendments Nos. 11 and 15 standing in my name and that of the noble Lord, Lord Luke. I shall speak to the two amendments together as they are simply an attempt to find a route which is acceptable to the Government. In Committee the Minister told us that the agency would establish an internal complaints procedure. She also told us that there are various complaints channels already established by the Acts to which this Bill relates. We accept that all of this is so; but we do not agree with it. We do not wish to see the establishment of a much needed food standards agency whose modus operandi results in extra cost for those whom it controls any time they want to complain about those workings. We do not want to see the passing of an Act which turns out to be a "legal eagle's" meal ticket, as indeed the Duckett's case perhaps was.
We do not wish to imply simply that we expect the agency to be wrong in its dealings. We are, however, only too well aware of some of the moves towards a European food safety Act and the fact that some countries—for example, France—already have legislation that they claim parallels this. We anticipate that there will be difficulties over the interpretation of the law, the establishment of methods of working and the rights of the agency in areas such as observation, required periods of notice prior to visiting and such like.
The situation will become even more muddled if there are different routes deemed appropriate to different problems. It is the responsibility of the agency to handle complaints speedily and effectively. Such responsibilities should be on the face of the Bill. By these amendments we are suggesting to the Minister that there should be either an appeals procedure set up and run by the agency, or a complaints procedure instituted by the Secretary of State.
Lord Monson: My Lords, the House will be aware that over the years my noble friend Lady Mar has done a tremendous amount of meticulous research into the way in which so many small producers have, unhappily, been unjustly treated by authority—however one may define "authority" at any given moment. I hope that your Lordships will support her amendment or, failing that, support one of the two opposition amendments, which may be the next best thing.
Lord Clement-Jones: My Lords, like the noble Lord, Lord Monson, I pay tribute to the expertise in this area of the noble Countess, Lady Mar. We on these Benches support her aim of seeking assurances from the Minister with regard to the setting up of the tribunal under Section 26(2)(e) and (f) of the Food Safety Act 1990, which is how we read the speech made by the noble Countess in moving her amendment.
898
Your Lordships will know that in Committee and on Report I mentioned the Duckett's cheese case as a prime example of where the mechanisms must be improved if small producers are not to be prejudiced by the power of the enforcement authorities. We support the noble Countess's call for assurances in that respect while perhaps not going so far as to support the totality of the amendment.
Turning to Amendments Nos. 11 and 15, we have considerable doubts about whether a single, "one size fits all" appeal system will be preferential for those affected by decisions of the food standards agency. The noble Baroness, Lady Byford, mentioned the letter that the Minister was kind enough to send to us. It may have been sent to the Front Benches only; I do not know. The letter makes very clear, in considerable detail, the sheer quantity of powers to be exercised by the Food Standards Agency. It contains something like eight different forms of appeal—in magistrates' courts, before tribunals, in terms of judicial review, and so on.
Those forms of appeal have different contexts, different fora and different purposes. Simply to take one kind of appeal—which, in other cases, normally would be decided under powers taken by a local authority—and translate that into a different form of appeal applicable to the Food Standards Agency, may lead to an injustice. For instance, the rules of procedure in a magistrates' court may be more beneficial to an individual affected by a particular case. I am not saying that is necessarily the case, but to have a blanket form of appeal in those circumstances could be very dangerous.
We have had some assurances about the complaints system. Perhaps the Minister can be more specific about the requirement for the agency to establish a complaints system. The procedure would fall short of a legal appeals process but it would enable individuals to air their complaints and may give them an opportunity for compensation. We need to know more from the Minister about the kind of requirement which will be imposed on the agency in those circumstances. We need to know what kind of complaints system is envisaged and the time-scale within which it will be put into place.
It would be very helpful if the Minister could give us an idea of the time-scale—after Third Reading and the Bill has passed through both Houses—in which the mechanisms will be put in place and when the agency will be fully up and running. That would reassure some of us about how the whole process will work.
Lord Rowallan: My Lords, I congratulate the Government. In the last two amendments we have had some very good ideas from them by way of compromise. They make the whole of the Bill more palatable.
We have discussed at length the labelling and hygiene problems. However, the other rumble—which has been obvious to those of us who have attended all stages of the Bill's passage through the House—

899
concerns the matter of appeals. We are all very concerned about the draconian powers contained within the Bill.
We must have an appeals procedure. I disagree quite strongly with the noble Lord, Lord, Clement-Jones. He said that it might be dangerous if there were a blanket form of appeal. I think it will be much better if there is one. In that way we would not have the diversity of opinions which come from different parts of the country and from different magistrates' courts, as we all too often see at present when magistrates' courts deal with other matters. We need some conformity in the whole situation. We would be much better off if we had an appeal structure within the agency.
I strongly support the amendment moved by the noble Countess, Lady Mar, and the amendments spoken to by my noble friend Lady Byford. I do not mind which system we go for, but we must have some kind of appeal structure within the Bill. Having listened so kindly and persuasively to the issues of labelling and hygiene, I hope that the Government will take cognisance of the genuine concerns within the House about the appeals situation.
I was not privy to the letter which was sent to the Front Benches but I am very concerned that we should be seen as being fair to everybody. As to cheese manufacturers, the Lanark Blue situation—which took place a few years ago in Scotland—caused enormous concern. It involved enormous costs for the people who made the cheese and very nearly put them out of business. It all turned out to be a bit of nonsense; it took too long to roll through the courts, and so on. If we had a procedure within the agency we would be much better off.
Lord Glentoran: My Lords, I wish to add yet another voice in support of these amendments. When I was sitting, temporarily, on the Front Bench in the absence of my noble friend Lord Luke, from Second Reading onwards this issue was one of the parts of the Bill which concerned me most.
I am sure that the Minister and the Government are aware of the huge powers which the agency will be given under the Bill. They will be aware of the possible impact that its various arms could have all over the kingdom; of the complexities within it and the different disciplines it will cover—which will be added to by devolution and the different laws for Scotland, Wales, and, one hopes, Northern Ireland, and so on.
From the very beginning of the passage of the Bill through the House we all said that, for the agency to get off to a good start and to succeed, it is most important that it wins confidence quickly—not only the confidence of the general public but of the industry. To quote the Minister, the industry goes from the plough to the platter. It covers all manufacturing, all supply and all transportation—everything. It is huge. The decisions of the agency will impact very heavily on all parts of that industry. At the moment it is in a fairly weak state, particularly the farming sector.
900
Our discussions this afternoon have demonstrated how unsure, uncertain and unclear the appeals situation is as regards decisions which could impact adversely on businesses, on lives and on jobs. I urge the Government to do their best to clarify the appeals procedure. Whether that procedure should be a single appeal or as the noble Baroness has outlined in her letter—which I have not seen but which I understand—I do not know. But it is very important that the appeals process should be clear and easily understood, both by those implementing the work of the agency and by those who will be working within its remit.
4.30 p.m.
Lord Lucas: My Lords, I rise to support Amendments Nos. 10 and 15, at least in their spirit. Over the years we have seen the trouble caused when enforcement authorities choose to exercise their powers too liberally and irrationally. Concentrating best practice and building up a body of expertise through a tribunal, as has already been provided for in the 1990 Act, seems an excellent complement to the agency being created by the Bill. That would facilitate the whole process of securing understanding and agreement of what the rules and regulations mean. Furthermore, a consensus could be established across the country without the occasional blow-ups that we have seen in the past.
As to the two amendments in the name of my noble friend Lady Byford, I favour Amendment No. 15. I do not believe that it would be helpful to have an appeals procedure—singular—set up for the agency. Appeals would involve questioning the decisions of the agency and bringing them into legal doubt. That should be thought about carefully and controls can best be implemented by existing procedures. However, for the agency to command public respect, there must be a way for those aggrieved by the agency's decisions to challenge those decisions and to have an open assessment made. That may well be the complaints procedure and I do not mind whether it is set up by the agency or the Secretary of State. However, I would welcome a clear statement from the Government that that is their intention.
Baroness Hayman: My Lords, I can respond positively to the request of the noble Lord, Lord Lucas, and, I hope, as I have been urged to do by the noble Lord, Lord Rowallan, respond positively in this area. I hope to be positive and to be clear, but I am not sure whether my response will be simple. Several noble Lords have pointed out that we are dealing with a complex area. That complexity is well illustrated in the first amendment in the name of the noble Countess. Lady Mar. She is right to point out the enabling powers on appeals that are already provided for in the Food Safety Act 1990.
Those powers have been used to set up the tribunal to consider appeals on decisions concerning the licensing of fresh meat plants. That is an interesting example of the value of having an appeals tribunal that builds up a level of expertise and knowledge so that it

901
can give reassurance to those operating in that particular area. That responds to the request for a mechanism to provide an independent element when assessing appeals made against the agency. However, I part company with the request for a unified appeals procedure. That is because I question whether the same body looking at appeals concerning the licensing of fresh meat should also look at appeals across the whole range of the food standards agency's remit.
In my letter to noble Lords who have raised the issue—I apologise that it was not more widely circulated—I set out the range of powers and activities and the range of legislation with which the agency will deal. The challenge will be to ensure that for all those activities there will be an appropriate appeals mechanism. However, that appeals mechanism will not necessarily be the same in every case. For some it will take the form of a tribunal because that will be the appropriate way forward. In other areas—for example, those covered by the Food Safety Act 1990—a method of appeal through the judicial system in the magistrates' courts is provided for. That applies to appeals against local authority enforcement decisions on improvement notices. That method has operated for nearly a decade. Different methods apply to different sections of the Food Safety Act. In a moment, I shall say something on the circumstances surrounding Duckett's cheese and the use of emergency powers, which is an area of particular difficulty. However, I should be reluctant to remove from those who wish to appeal against a decision made under the provisions of the Food Safety Act their ability to go to law under the existing judicial arrangements.
As I have said, there are a number of different matters against which people may wish to appeal. For example, appeals against a decision by the agency to publish confidential information of a personal nature would come within the scope of the Data Protection Act. If the agency were so challenged by an individual or a body, that individual or body could appeal to the Data Protection Registrar. Again, it is very questionable whether the tribunal covering disputes on meat hygiene regulations should be the same body as looks at data protection issues.
There is a range of complex issues here. We must ensure that, through such a complex mesh, two objectives pertain. First, each exercise of power must be adequately covered by an appeals mechanism that is appropriate to the task. Secondly, the mechanism must be made accessible to those individuals who want to use it. I must tell the House that I do not think we can get away from the complexity inherent in the variety of appeals mechanisms, but we must try to make the system easily accessible. I shall look to the chair and chief executive of the new agency to embrace as an early task the drawing up of explanatory material on the different appeals mechanisms for those who wish to put forward a complaint.
I shall move from the appeals mechanism to the complaints mechanism. In earlier debates I made it clear that we have in mind a single complaints
902
mechanism. That is important, because the complaints mechanism may point people in the direction of a speedy resolution by approaching a senior officer or the chair of the agency to resolve a straightforward matter where someone has made a mistake and an apology is sought. Equally, it may be that someone wishes not only to complain, but to undertake an appeal. The complaints mechanism should be the one-stop agency that ensures that the person is directed to the appropriate appeals mechanism. In some cases that mechanism might be the courts; in some it might be a specialist panel; for others the most relevant course might be an administrative review. The right route of appeal should be sought according to the particular circumstances of the case. As has already been pointed out, to lay down only one procedure would be likely to disadvantage people. However, there is a great advantage to be had from a single administrative procedure to deal with complaints, in that the complainant can be guided quickly to the appropriate route of appeal.
In this area the amendment of the noble Baroness, Lady Byford, is defective because it refers to a single mechanism. We believe it is necessary to put in place a single procedure that directs people to the right mechanism through which to pursue their appeals. Furthermore, potential complainants should as far as possible make use of existing routes of appeal rather than creating within the agency a new avenue that duplicates those routes or, indeed, that tries to deal with a wide variety of different circumstances.
I believe that the assurances the Government have so far given make clear that there is no possibility of the agency being set up without an appropriate complaints procedure. In any case, under "Service First" and better regulation principles the agency will be obliged to have such a complaints procedure in place. It will need to be well publicised, accessible, fair and efficient. Everyone should be able to find out quickly how to make a complaint and what will be the appropriate channel for them to pursue their case.
The noble Lord, Lord Clement-Jones, asked about the timetable. As soon as the agency is set up it will need to have a complaints procedure. I would expect the chairman to take personal responsibility for seeing that that was in place. I hope it will be possible to consult a little in the early months and to refine how the complaints procedure works out. The agency should not be set up without a complaints procedure because it will be a public body. It will come under the "Service First" principles and the principles of better regulation and will need to have such a complaints procedure. In that way we can cover the need and timescale for putting in place a complaints procedure and ensure that that puts people in touch with the appropriate route of appeal.
The noble Countess rightly pointed out that there may be areas where the coverage is not currently adequate. She referred in particular to the Meat Hygiene Service. I shall certainly ensure that the minutes of the meeting to which she referred are sent to her. I can reassure her that the Government agree that the current internal Meat Hygiene Service

903
arrangements for looking at appeals need an independent element injected into them. We need to look at appropriate expertise and put in place the appropriate complains procedure. We are committed to an element of independence in that.
It may be that the work of the Meat Hygiene Appeals Tribunal should be expanded to cover these complaints and not simply licensing complaints. However, it may be that another form with an element of independence separate from the licensing tribunal is more appropriate. We have not yet come to the point of deciding which is the appropriate mechanism with an element of independence in it, but we will do so. I can give the noble Countess an assurance on that point. I hope that she and others will continue to be involved in the debate and so ensure that that is done.
Finally, perhaps I may deal with the issue of the lack of an immediate avenue of appeal in cases where emergency legislation has been made. I refer to the Duckett's cheese case. This is a difficult matter. The powers in Section 26(2)(e)of the Food Safety Act 1990 would not provide for an enforcement tribunal to consider appeals on the use of emergency powers, wide-ranging as they are. This matter was debated at some length and is in contradistinction to the non-emergency use of powers under the Food Safety Act. Emergency powers are by nature designed for use in the rare cases where rapid and decisive action is needed to protect public health. Providing for appeals against the provisions of emergency legislation raises the risk of holding up urgent action to protect public health while a grievance is considered. There are other routes by which grievances can be pursued in these circumstances, including judicial review. However, I know the noble Countess feels that that is not adequate in this area.
I would suggest to her that there are complicated issues here concerning the decision as to which powers it is appropriate to use in such circumstances.
4.45 p.m.
The Countess of Mar: My Lords, perhaps I may help the noble Baroness. I accept that in the Duckett's cheese case the Minister made the decision to place the Section 13 order on the basis of the information that she had. She was right to do so. The problem is that the information she had may well have been flawed. Once a Section 13 order is in place, nothing can be done about it. However, the individual concerned should be able to say to an appeal tribunal, "Look, this is the information as it was; this is the information which was given to the Minister. Therefore, the decision to place that order was flawed and I should have compensation." That is what this is about. We believe that the Section 13 order was placed to avoid compensation. Does the noble Baroness understand?
Baroness Hayman: My Lords, I do understand, although I have to say that during the debates on the Food Safety Bill the issue of compensation was carefully considered. It was felt inappropriate that considerations about compensation should enter into
904
Ministers' minds when making decisions about emergency action on grounds of food safety. There was considerable debate on the issue.
I understand what the noble Countess is saying. However, I must point out to the House that the Duckett's cheese case was, albeit under judicial review, considered twice by courts of law which upheld government action. This is a specific and difficult area and one in which a balance of considerations should be taken into account, including those of access to compensation, when invoking emergency powers. There is a heavy onus on Ministers to ensure that the case for emergency action has been clearly made before the relevant powers are invoked and that the powers will be used in a reasonable way that can be upheld in a court of law. That test is a sound and reasonable one and it is appropriate to the special circumstances in which these kinds of measures are taken.
I understand the concerns that were raised over the Duckett's cheese case and everyone involved in it has reflected on those circumstances. But I have to say to the noble Countess that I do not believe that that case is either so clear cut or so generally applicable as to send us down the route, which her amendment would do, of creating a single appeals mechanism for a very complicated case like that and all the other issues with which the food standards agency will have to deal. I hope the House will accept from me the argument that the necessity is to cover appropriately all areas of appeal. I trust I have illustrated that the powers are there so to do if we discover a lacuna in the appeals mechanism such as the need for independence regarding the Meat Hygiene Service. The Government recognise that because the appeals procedures are complex and are different in different circumstances, they should be clearly articulated to those who need to use them. Equally, the Government will take steps to ensure that the agency institutes a one-stop complaints procedure, part of which will deal with run-of-the-mill complaints—if I may put it that way—and part of which will give people access to the appropriate appeals mechanism. We shall be charging the agency on its inception with setting up such an appeals procedure.
We have talked about the use of the annual report. It would be helpful if each year in the annual report to Parliament the agency reported back both on complaints and on the use of the appeals procedures. I should like to take that forward.
I hope the House will agree that, although the amendments are appealing at first glance—they have the appeal of simplicity—sometimes as legislators we cannot respond to that siren call. However, the principles that underlie them are covered both in the Act and in the additional mechanisms that I have outlined.
Lord Rowallan: My Lords, before the Minister sits down, can she say for the avoidance of doubt in which Act or other legislation the one-stop body is set out?
Baroness Hayman: My Lords, the complaints procedure will be part of the work of the food

905
standards agency. It is not explicit in the Bill because it is governed by the guiding principles under which the agency will work—namely, transparency, accessibility and accountability—and because the agency is obliged under the "Service First" principles and the principles of better regulation to have such a complaints procedure. Equally, I have given assurances at every stage of the Bill that such a complaints procedure will be set up. Were the agency to default on that, the courts would be able to look at Hansard and see that those undertakings had been given at the Dispatch Box.
Baroness Byford: My Lords, before the Minister sits down, I understand that she believes that my Amendment No. 11, dealing with appeals, is totally unsatisfactory. Having listened to her words carefully, and bearing in mind that today is the last chance we shall have to make clear what we are doing, perhaps I may clarify this point with her. I understand from the Minister's response to my Amendment No. 15 that the only point in the amendment about which she is unhappy is the reference to "a single mechanism" rather than "a single procedure". If that is so, will the Government consider accepting the amendment? I do not quite know what the position is, and I realise that this is my last chance to raise this matter. I give way to the Minister.
Baroness Hayman: My Lords, I am sorry not to be of help to the noble Baroness. If she looks closely at her Amendment No. 15, she will see that it confuses two things. It seeks to set up a complaints procedure, but then states that that procedure shall,
"provide those aggrieved by any decisions or actions taken by the Agency with a single mechanism for challenging those decisions or actions".
When we come to "challenging", we are talking about appeals procedures, and, as I have stated, the appeals procedures have to be differentiated.
I hope that the noble Baroness and other noble Lords will accept that there is no doubt that the agency will have a complaints procedure. I have explained the various reasons and mechanisms under which it will have such a procedure. It will be a single route in order to put people in touch with the appropriate appeals mechanism.
Lord Clement-Jones: My Lords, before the Minister sits down, will the complaints system, as mooted, allow the agency to consider the question of compensation or will there purely be other forms of redress?
Baroness Hayman: My Lords, I speak off the cuff. Most government departments are able to make exgratia payments in response to complaints if they believe that that is appropriate. Without prior notice, I should not like to suggest and pre-judge the exact terminology of the complaints procedure. However, I
906
am willing to take up that point, examine it in some detail and write to the noble Lord if that would be helpful.
The Countess of Mar: My Lords, I am grateful to the Minister for her full reply. Perhaps I may make two points absolutely clear from the beginning. I intended no inference whatever that the Minister was ever involved in thinking about money in relation to the Section 13 order. However, I do believe that that was in the minds of the officials. That is a different matter. That would have clouded the advice that they gave her. Secondly, the judge in the judicial review found for Mr Duckett. He said that the department had used measures that it should not have used as an expedient.
There also seems to be a slight confusion between complaints and appeals. Many complaints arise in conjunction with appeals, because of the way in which enforcement matters have been handled. Those are the matters about which I am concerned. If the food standards agency fails to publish a leaflet, or uses the wrong words in a leaflet, that is a totally different matter. That would give rise to what I would call a straightforward complaint, almost a moan. But when there are serious complaints that need to be addressed—for example, the manner in which officials operate within the system—serious consideration should be given to a tribunal.
The Minister has talked about the complexity of the food standards agency. I do not know whether she is aware that I sit on the Immigration Appeals Tribunal—and there is nothing more complex than that. However, we do our job successfully. I am a lay member; I have no legal qualifications. Perhaps I may suggest that, when the Government are considering how the body will be set up, they examine the possibility of having one legal chairman and two lay members who are able to receive both written and oral information, interpret it, and arrive at well-balanced decisions. That might well be worth looking at. In the meantime, I thank the Minister and beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 11 not moved.]
Clause 22 [Statement of general objectives and practices]:
[Amendment No. 12 not moved.]
Clause 23 [Consideration of objectives, risks, costs and benefits, etc.]:
Baroness Byford Baroness Byford moved Amendment No. 13:
Page 12, line 29, at end insert ("; and

(d) the need for transparency, reasonableness and proportionality in the conduct of its activities").

The noble Baroness said: My Lords, in moving this amendment, I shall speak also to my Amendment No. 14.
The aim of these two amendments is to ensure that the regulatory burden on businesses is not increased unnecessarily. The Government's Better Regulation Task Force stated in its report on the principles of

907
good regulation that governments should be satisfied that regulations are necessary, fair, effective and balanced, and must enjoy a broad degree of public confidence. The report prescribes five principles against which regulations and their enforcement should be measured: transparency, accountability, targeting, consistency, and proportionality. The first amendment would require the agency to take account of those principles in deciding whether and how to exercise its powers.
When I spoke to the second of these amendments in Grand Committee, I said:
"We believe it is both possible and reasonable for the agency to have continuous regard to the control of costs without jeopardising the successful pursuit of food standards".—[Official Report, 13/10/99; col CWH 28]
I have received backing from many, including the CLA.
The Bill stipulates that the agency, in deciding whether or not to exercise its powers, must take account of the nature and magnitude of the risk. The agency might well include in its deliberations the risk to business, but an explicit direction in the Bill as provided by these two amendments to be mindful of the regulatory burden and to consider how it might be reduced would go further and would reassure businesses that might be affected. I beg to move.
Lord Hunt of Kings Heath: My Lords, as the noble Baroness has said, these two amendments revisit points that we debated at length both in Grand Committee and on Report.
First, we firmly endorse the need for the agency to observe the principles of better regulation—namely, the principles that she read out, of transparency, accountability, targeting, consistency and proportionality—in carrying out its functions. As I said in Grand Committee, the agency, as a public authority, will be under an automatic duty to observe the general principles of public law under which it must act reasonably. It will also have the express duties set out in Clause 22.
We have also stated—and I reiterate the point—that the principles of better regulation will be included in the statement of objectives and practices. Many noble Lords will welcome that. Similarly, the requirement in Clause 22 that the agency should make public the basis for its decisions and the power to publish any information in its possession are intended to ensure openness and transparency. The whole issue of openness was debated extensively on Report when my noble friend gave commitments about the way in which the agency would operate. I believe that the points she made then amply meet the concerns that the noble Baroness raises now.
The amendment also refers to reasonableness. We agree that the agency should in every case act in a reasonable and proportionate manner. It must have proper regard for the needs of businesses as well as consumers and not make unreasonable demands. The concept of reasonableness is already addressed in the Bill. Clause 23 requires the agency to take account of
908
a range of factors when considering how to exercise its powers and to ensure that its actions are reasonable. The agency will also elaborate in its own statement of objectives on how the principles of reasonableness and proportionality that are already reflected in the Bill will be applied to the specific area of surveillance. We have already made clear that the agency will prepare guidance to its authorised officers on the proper use of these powers.
I turn to the second amendment. I agree with the noble Baroness that the agency should take full account of the possible cost burdens on those who are potentially affected by its activities. I believe, however, that that is already provided for. As the noble Baroness herself pointed out, the agency will be obliged by Clause 23 to assess the effect of any regulation, its method of enforcement and its costs and benefits. Therefore, the agency will be well placed to consider whether changes to either are appropriate, taking into account the purpose of regulation, its effects on businesses, the best use of resources available for enforcement and the overarching aim to protect public health.
The drafting of this amendment is unclear. As someone who has happily been a bureaucrat for many years before coming to your Lordships' House, one person's bureaucracy can be another's sensible regulation. We must not forget that the agency's main aim is the protection of public health. This amendment might lead one to assume that the agency is there to protect business first and foremost. The amendment is also unclear in that it refers to "the burden or cost" and uses the word "elsewhere". One would be concerned about the inclusion of a technically defective amendment at this stage. I hope the noble Baroness accepts that the strength of the Bill's provisions meets the important points that she raised.
5 p.m.
Baroness Byford: My Lords, I thank the Minister for his response. I am somewhat disappointed that he is unable to accept my amendment. In both Committee and later stages we debated at great length the cost not just to businesses but to the taxpayer. One is not concerned simply with bureaucracy at one end but with government costs as well. In Committee I argued that the Bill should include the ability to reduce costs if at all possible, and that is the particular aim of Amendment No. 14. On the one hand, the noble Lord accepts my argument but, on the other hand, he does not believe that it is necessary to reflect it in the Bill. I believe that that accentuates my point that it should be in the Bill.
Lord Hunt of Kings Heath: My Lords, I believe that there is sufficient in the Bill to cover the points that the noble Baroness makes. I do not argue with the noble Baroness about the importance of the matters to which she refers.
Baroness Byford: My Lords, I accept that. We have had debates about openness, reasonableness, proportionality and many other matters over the past

909
few days. I suspect that this is not a battle that I shall win. At this stage, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 14 and 15 not moved.]
Clause 36 [Interpretation]:
Baroness Hayman Baroness Hayman moved Amendment No. 16:
Page 20, line 28, at end insert—
("(2A) In this Act the expression "interests of consumers in relation to food" includes (without prejudice to the generality of that expression) interests in relation to the labelling, marking, presenting or advertising of food, and the descriptions which may be applied to food.").
On Question, amendment agreed to.
Schedule 3 [The Agency's functions under other enactments]:
Baroness Byford Baroness Byford moved Amendment No. 17:
Page 29, line 6, at end insert—
("(2) Such an order shall expire after twelve months; and any subsequent order to renew this power shall be limited to twelve months.").
The noble Baroness said: My Lords, Amendment No. 17 seeks to insert the words,
"Such an order shall expire after twelve months".
Instead of leaving the matter open-ended, the amendment seeks to impose a time limit. I am aware that the Bill amends Section 42 of the Food Safety Act 1990 and empowers the Secretary of State to direct the agency to carry out the enforcement functions of an authority that has failed to meet its obligations. This amendment would limit the duration of such an order to 12 months. In Committee the debate was whether the period should be three months, six months or whatever. We on these Benches feel strongly that the Secretary of State should be required to make another order that might be limited to 12 months after the expiry of the period.
Our lives are constantly ruled by laws and statutory instruments, many of which originated before the second world war and some in the previous century. It may be that this Bill will still be on the statute book in 2025 or 2050. I should hate to think that the food standards agency would then have responsibility for a finite but larger number of local authority enforcement roles. We do not believe that it is the intention of the Government to place such a burden on the agency; nor do we believe that a local authority which fails to carry out its duty will not pretty quickly put its house in order. A 12-month review would, surely, encourage such a process. I beg to move.
The Countess of Mar: My Lords, I support this amendment. In view of the "no stress" day, perhaps I should inform the Minister that at this stage I shall not move the amendments standing in my name. There is a feeling afoot that perhaps the food standards agency will gradually gobble up all the local authority enforcement powers in order to amass more power to itself. I understand that that is not the Government's
910
intention, but it may be the intention of a future one. We have already had this debate. I give the noble Baroness, Lady Byford, my full support.
Baroness Hayman: My Lords, I recognise the concerns that the default provisions in Section 42 of the Food Safety Act may be used in ways that are not now envisaged or in circumstances that have not yet arisen because the powers have not been used at all in the past 10 years. The House may be reassured if I reiterate the position. Perhaps noble Lords will forgive me for going over arguments debated in Grand Committee. These powers are available only for use in the last resort and only where other channels of action have failed. We do not expect the Secretary of State to make an order to empower the agency to act in default of a failing authority except on very rare occasions where a serious failure has occurred over a period of time which it has not been possible to rectify through the agency's normal powers of standard-setting, monitoring, audit and advice.
I agree that, if it is necessary for the agency to be directed to take over the work of a failing local authority, it should do so for no longer than necessary. That is the concern which underlies her amendment. That also lies at the root of our approach to general food law enforcement. Local authorities will retain primary operational responsibility and their independence of action will, as far as possible, be respected. However, we are not convinced as to the practicality of setting a maximum time limit of 12 months to any order or renewal order. We are talking here about exceptional and rare events and need to ensure that Ministers have flexibility in the way that they may use these powers.
The powers in the 1990 Act enable Ministers to place limits on an order if they wish. The relevant period could be less than 12 months, if appropriate. There is a very simple remedy if the powers are no longer needed or if the agency were thought not to be using them effectively, which is that the Secretary of State could himself just revoke the order. We do not believe it would be helpful to limit room for manoeuvre by specifying a time limit on the face of the Bill.
I have to say equally to noble Lords that the amendment is technically defective. While normally I do not like to use that as an argument in early stages of the Bill, the fact that it would be necessary to amend the Food Safety Act through Schedule 5 as well as Schedule 3 does mean that this amendment is defective. I believe that we have done a good job in your Lordships' House in improving the legislation and not sending deficiently drafted legislation to another place on an issue on which I believe there is no need to take action because there are safeguards and certainly no evidence of abuse. I hope that in any case I have been able to give some reassurance to your Lordships as to the limitations that are already inherent in this power.
Baroness Byford: My Lords, I thank the Minister for her response. I am sorry that at this late stage I have managed to come up with an amendment that is

911
technically defective. I think I am at the end of the plank and walking into the sea because there is no recourse for me at this stage. Much as I would like to say "boo", I fear I am stuck there without a canoe as well.
I only hope that the Government will bear in mind the debate that we have had on this defective amendment. It is important that this issue should not be overlooked. I hope that our desire that there should not be long periods of unlimited approval and that an order should be sought will be borne strongly in mind by Ministers when they refer to Hansard. I am anxious, as other Lords have mentioned in earlier debates on the Bill, because this Bill contains huge powers. I feel that this amendment would have been a sensible move and I am only sorry that I have been proved totally inadequate at this stage. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 18 not moved.]
Baroness Byford Baroness Byford moved Amendment No. 19:
Page 30, line 9, leave out sub-paragraph (2).
The noble Baroness said: My Lords, I rise to move Amendment No. 19, to which I spoke at Committee stage. The Medicines Act 1968 provides for Ministers to consult,
"such organisations as the Ministers concerned consider appropriate"
before setting up the Veterinary Products Committee, and states that the Ministers
"shall appoint the members of the committee".
For the past 30-plus years, this has been done with great store set by the independence of those very members. Indeed, that freedom from party or factional allegiance has been much envied internationally.
Coming up to date, I draw the attention of your Lordships to the words of the noble Lord, Lord Sainsbury, on 19th May this year when he summarised the guidance on the use of scientific advice in policy making as governed by the overriding principle of selection based on merit. An appointment made by a Minister on the say-so of the foods standards agency is not necessarily going to be meritorious.
In the context of food safety and in the light of the European Scientific Committee's ruling in favour of British beef, it would be appalling if any such appointment were felt to be factional or partisan. It would be even worse if it were to be judged that, under European law, such an appointee should be disbarred from speaking or voting on food safety matters, especially as I understand that almost half of all the existing licensed animal medicines are for pet use and have nothing to do with food or the remit of the food standards agency.
The food standards agency should emulate the Health and Safety Executive and the Environment Agency and send an observer to the meetings of the Veterinary Products Committee. Any conflicts or
912
problems that arose should then be dealt with through the system of published protocols that we have been promised. I beg to move.
5.15 pm
Lord Hunt of Kings Heath: My Lords, I understand this amendment has been prompted by the concerns of the noble Baroness about the future independence and integrity of the Veterinary Products Committee to which, like her, I am happy to pay tribute for many years of effective work. However, the effect of the amendment of the noble Baroness would be to remove the requirement that the agency should nominate, and I stress the word "nominate", a member of that committee. I believe that her concerns are unfounded and that limiting the agency in this way would be an unjustifiable restriction on the agency's input into matters relating to veterinary medicines which, your Lordships will recall, and indeed as the noble Baroness mentioned, we debated extensively at an early stage in the passage of this Bill.
I think the mood of the House at that stage was very much that it was right that the agency should play a part in matters relating to veterinary medicines. Throughout the development of our proposals for the food standards agency we have kept its proposed remit across the entire food chain firmly in mind. I believe that if we are firmly to restore the lost consumer confidence in food controls it is essential that we establish a body that is kept informed of relevant developments, is able to make its views known and, where necessary, able to take effective action on matters concerning food at any point in the chain from production to consumption.
We explained previously that the Government had taken the view that it was right for the regulation of veterinary medicines to remain a matter for the Veterinary Medicines Directorate but equally it was right that the agency should be involved in the work of that directorate in various ways, including through nominating a member to serve on the Veterinary Products Committee. We believe that, through that ability to nominate a member of the committee, the agency will be at the heart of the procedure for examining veterinary medicines, able to make its views known and play an active and constructive role.
We need only recall comments made here and in the other place over recent weeks about concerns over the possible effects of antibiotic use in food producing animals and about the use of hormones to realise the interest taken in the use of veterinary medicines and the concerns that many have, rightly or wrongly. about the implications for food. I think the agency's nominee must be able to speak authoritatively on food safety matters and work collectively with other members of the committee in making decisions. They will offer their expertise on any potential public health implications of the authorisation of veterinary medicinal products relating to food safety and I believe that this process of nomination will in fact aid the work of the Veterinary Medicines Directorate as well as the agency itself.

913
In conclusion, the noble Baroness expressed her concern about an appointment of a member to the directorate being on the say-so of the food standards agency. I believe that nomination means just that and not appointment. It is for the Ministers to make the appointment and if they are not satisfied with the person or persons put forward by the agency for potential nomination they are very much at liberty to ask the agency to think again and put forward further names. I hope that on that basis the noble Baroness will be reassured and will withdraw the amendment.
Baroness Byford: My Lords, before the noble Lord sits down, perhaps I may clarify one point. I think I am right—I need a little clarification on this—that previously perhaps 10 names were put forward for consideration. From reading the Bill, I had understood that the agency would nominate only one person and that that person would be appointed under the procedures that have existed hitherto.
Lord Hunt of Kings Heath: My Lords, there are two points to be made here. First, I would expect that the procedure under which a person is nominated and appointed would come under the general procedures for public appointments which cover many of the aspects she raises. However, I reiterate the point that, even if the agency were to nominate one person, it would still be very much in the hands of Ministers to decide whether they thought that that nomination were acceptable. Alternatively, they could ask the agency to submit more names. Ultimately, it would be in the hands of the appointing Ministers and not the agency.
Baroness Byford: My Lords, the Bill is confusing and I thank the Minister for his explanation. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Schedule 5 [Minor and consequential amendments]:
[Amendments Nos. 20 and 21 not moved.]
Baroness Hayman: My Lords, I beg to move that the Bill do now pass.
Moved, That the Bill do now pass.—(Baroness Hayman.)
Baroness Byford: My Lords, I shall speak briefly because I realise that time has marched on. I thank all noble Lords on all sides of the House who have taken part in our debates. The Bill went to a Grand Committee which many noble Lords might think is not the most ideal way to hold a Committee stage, but we battled very well. I sincerely thank Ministers who responded to our amendments for the way in which they approached the discussions. We hope that this Bill leaves our House in a better state.
The Earl of Radnor: My Lords, I offer my grateful thanks for all the assurances that were given by the noble Baroness, Lady Hayman, and the noble Lord, Lord Hunt.
The Countess of Mar: My Lords, I endorse the words of the noble Baroness, Lady Byford. This is an extremely important Bill. It was overwhelmingly pleasant to deal with all the amendments without any nastiness or unpleasantness and to arrive at this stage with a consensus and agreement that perhaps we have done the right thing.
Viscount Thurso: My Lords, it gives me great pleasure to echo the sentiments of the noble Countess, Lady Mar. I believe that we have covered all the stages of the Bill without a single vote. That is testimony not only to the tenacity the noble Baroness, Lady Byford, and the noble Earl, Lord Radnor, for tabling their amendments, but to the generous spirit in which the Government Front Bench received our representations and accepted our points. I thank them for that. I also thank the officials who have been most co-operative and helpful in making our job easier.
I conclude on another note. About two weeks ago when speaking on a tourism issue, I observed that it would be the last time I would speak in your Lordships' House on that subject. However, another tourism Question is tabled for tomorrow and I have had to arrange to go to Scotland to make that prophesy come true. Now I can clearly state that this is the last time I shall take part in a Bill in your Lordships' House, and what a pleasure it has been.
Baroness Hayman: My Lords, I shall respond to the noble Viscount by saying what a sadness it will be for all of us not to have him participating in debates. His contributions to debates on the Bill have ranged from the emollient to the sharp, but they have always been constructive, as has been his contribution in the House generally. We shall all miss him as a contributor.
I should not like to destroy the consensus of opinion in the contributions just made. Our debates have been positive and from those who have sought to improve the Bill we have seen a balance of tenacity and flexibility. I much prefer to conduct business in such a pleasant atmosphere when we get results. It is an important piece of legislation, but it is better for its passage through this House.
I thank not only those noble Lords who have contributed to and enlivened the debates in your Lordships' House and in Grand Committee, but the officials who have worked on the Bill. They have been most helpful to me and, as has been stated, to everyone throughout the House. That has appeared in the quality of the scrutiny and so my final thanks go to them.
On Question, Bill passed, and returned to the Commons with amendments.

Taxes in the EU:ECC Report
5.25 p.m.
Lord Grenfell Lord Grenfell rose to move, That this House take note of the Report of the European Communities Committee on Taxes in the EU: can co-ordination and competition co-exist? (15th Report, HL Paper 92).
The noble Lord said: My Lords, in rising to move the Motion standing in my name, perhaps I may say how delighted I am that my noble friend Lord Lea of Crondall has chosen this debate in which to make his maiden speech. We very much look forward to hearing it.
With the leave of the House, I begin by paying some well earned tributes. I want to thank, first and very warmly, my fellow members of Sub-Committee A whose names are listed in Appendix 1 of the report before the House. They worked very hard from mid-March to early July of this year in order to produce what the Paymaster General has been generous enough to describe in the Government's official response as:
"one of the most comprehensive examinations of taxation in the EU so far undertaken".
I thank her for that recognition of our efforts. If your Lordships agree that we have dealt with the important and complex subject in a clear and instructive way, much of the credit must go to our clerk, Dr Elizabeth Hopkins, who worked tirelessly to draw together into readable and persuasive drafts the mass of testimony gathered from witnesses and the fruits of our own extensive deliberations. She did a truly splendid job. I am also very grateful to Professor Stephen Smith, our specialist adviser, who drew on his considerable knowledge of the issues to point us in the right direction and to keep us on track during the long weeks of our work.
Let me say a word about the genesis of the report. In the summer of 1997, the committee conducted an inquiry into tax and competition policy in the single market, based on a recent Commission communication on harmful tax competition and an action plan for the Single Market. That inquiry yielded some valuable evidence from witnesses, but was shortly thereafter overtaken by events when the Commission produced a number of specific proposals in the field of taxation.
By early 1999, there was a widespread concern, much fuelled by certain sections of the media, that the European Union was planning some sort of a tax takeover. The committee decided that this called for a major new inquiry into both the formal proposals already on the table for co-ordination of direct and indirect taxes and some broader informal ideas which had been floated far the future. Sub-Committee A began its work in March this year.
We took evidence from a wide range of interested parties, including the European Commission in the person of Mario Monti, major business organisations such as the CBI and the Institute of Directors, the Bank of England, the private banking community, the
916
financial markets, the City of London, the Treasuries of France, Germany and Ireland as well as our own in the persons of the Paymaster General and senior Treasury and Inland Revenue officials, and from individual experts from academia and the legal profession. We really covered the field.
The resulting report, which is prefaced with a summary of the committee's opinion, considers first some of the fundamental underlying questions on. EU taxation. It then looks at the detailed proposals which have now been brought forward by the Commission, and next considers the ideas for further tax co-ordination which have been floated within the European Union, but which are not yet the subject of firm proposals. This is followed by our concluding comments.
I confess that I am somewhat disappointed that Her Majesty's Government, in their response to the report, decline to comment on our quite lengthy discussion in Part 5 of these informal ideas for further tax coordination in the future, but I must assume that that is because they have either not yet formulated views on them, or that they have but prefer at this juncture to keep them to themselves since the ideas are not yet formal proposals. But we hope that the Government will in due course consider seriously the points we have made in the report.
Some of your Lordships may find it surprising that this report is unanimous. I assure your Lordships that there was no dodging of divisive issues. In a few areas members expressed differing views, which are given due place in the text. We were nonetheless able to reach agreement on the recording of the committee's opinion and conclusions, as there was a strong shared interest in shedding light on the often complex issues and the arguments surrounding them, and a strong collective will to demythologise the whole question of EU taxation, which those with a less objective agenda had sought to invest with truly nightmarish characteristics.
As we recorded in our concluding comments at paragraph 249, we were persuaded that,
"recent scare headlines about a European Union tax takeover were unjustified, and ill served a British public insufficiently informed of the facts to judge the validity of the reporting".
The three principal conclusions that we reached are set out in paragraph 49 and repeated in paragraph 250. They are summed up in a final single sentence:
"Within these parameters we believe that pragmatic tax coordination and fair competition can not only co-exist but complement each other, to the greater benefit of taxpayers within the European Union".
We found it rather disappointing that the Government, in their written response to us, confined their comments on paragraph 49 to a mere 85 words. I feel somehow that we have not been engaged in as profound an exchange of views on our conclusions as we should have wished. We note at the outset of the report that there are of course many more pressing issues facing the EU at this time, such as enlargement

917
and the reform of its institutions. Nevertheless, EU taxation proposals are still a major issue and will become more so in the years ahead.
It is not easy to summarise our findings in a short speech, but I shall do my best. The first and crucial point is that it is no longer practicable for the member states of the European Union to establish some elements of their tax regimes in isolation without recognising their interdependence with other member states. To accept this is to accept an approach which we believe is more accurately termed "co-ordination" than "harmonisation". Since tax co-ordination does not by definition exclude tax competition, we were faced with the question: when is tax competition fair, and when is it harmful? Most of our witnesses found "harmful tax competition" quite difficult to define precisely, but on the evidence we concluded that while tax competition can be healthy, there were measures that were preferential or discriminatory, which we termed "predatory tax measures", which were plainly harmful. That question is discussed at some length in paragraphs 57 to 61.
We further wondered whether progress in the single market for financial services would call for more tax co-ordination, and we concluded in paragraph 73 that, while it would tend to lead towards some convergence of tax rates, there could also be pressures to introduce selective tax inducements, which might call for some positive co-ordination between member states. In paragraphs 78 to 83, we asked the same question about EMU and came up with two views. One was that monetary union increased the pressure for tax coordination, since monetary and tax policies can be properly managed only if both are under the same political control.
The other view, which seemed to be rather more broadly held, was that the Eurozone made it more, rather than less necessary for individual states to be able to adjust their own tax rates, since they could no longer manage their economies through monetary adjustments.
We looked at the interesting question of whether, in an era of increasing globalisation and electronic commerce, tax co-ordination limited to the EU member states made any sense at all. We concluded, after exchanges with Commissioner Monti, the CBI, the OECD and others, that co-ordination measures could be genuinely effective only if they applied in third countries as well as in the EU member states. But we could not see what incentive there was for third countries to fall in line quickly with EU measures against harmful tax competition.
We insist, however, that that should not be used as an excuse for doing nothing within the EU in the meantime. With others playing by different rules, we have to watch very carefully the effect on the EU's competitive position on the global playing field.
Commissioner Monti was adamant that one of the fundamental principles of tax co-ordination was that it must not lead to higher taxes. The German Treasury witness and the OECD, among others, shared with the
918
commissioner the view that, to the extent that coordination implied a broader tax base through the elimination of tax breaks, it would lead to reduced tax rates. Others, like the CBI, were not so sure, and Graham Mather of the European Policy Forum was convinced that harmonisation, as he put it, would remove the competitive stimulus, leaving governments with a free hand to raise taxes.
As we saw it, much would depend on the effect of the actual measures adopted on tax rates and bases. We found reasonable Commissioner Monti's argument that the elimination of tax breaks opened the way to lower tax rates. But, as we record in paragraph 92, the stronger argument was for us that as long as tax rate decisions remained with the member states, as they should, the wish of politicians to be re-elected would act as a mighty restraint. Only if tax decisions were handed over to a supranational body unaccountable to electorates would there be a real danger of unchecked upward alignments.
We then considered the view of the Commission that increasing taxes on capital income could help to reduce unemployment. The theory is that harmful tax competition has been steadily reducing the tax burden on capital, and that in order to generate the required amount of revenue, member states have had to raise tax levels elsewhere, in particular on labour, thus causing unemployment levels to rise. We heard many witnesses on that subject, and we came to share the view of, among others, the Treasury, the Corporation of London, and the Bank of England, that there was insufficient firm evidence to support a causal connection between an increase in taxes on capital income and a fall in unemployment. Indeed, when the German Government blame their high rate of unemployment on high labour taxes, we suspect that the real causes might rather be restrictive labour legislation and lack of labour market flexibility.
The last of the fundamental issues on EU taxes which we tackled was whether tax changes could be imposed on the United Kingdom. Of course, with tax bases as highly mobile as they are today, the concept of national sovereignty in tax matters feels pressure from the markets, and governments may be unable to set tax rates, particularly on the income from savings, that differ much from rates ruling elsewhere. In practice, that is a reduction in fiscal sovereignty, but we suggest that international co-ordination may be the way for EU states to regain collectively some of that fiscal sovereignty surrendered as a result of market integration.
Although some of our witnesses saw the unanimity principle leading to unwieldy compromises giving undue weight to purely national concerns, we saw, as recorded in paragraph 114, no case for a departure from it unless openly and explicitly made through a treaty change which would itself require unanimous approval. That could arise at the next intergovernmental conference, and we assume that the Government will stick to unanimity for major issues. But—and it is a big but—as the EU enlarges, we see it

919
as neither necessary nor practical to apply unanimity to all minor administrative measures merely because they relate to taxes.
Our report then turns, in Part 4, to the package of direct taxation proposals currently on the table on harmful tax competition, which received political approval at ECOFIN on December 1st 1997. We examined each of the package's three elements in turn. The first is the code of conduct on business taxation concerning those measures which affect, or may affect, in a significant way, the location of business activity in the European Union. Measures are regarded as "potentially harmful" if they provide for a significantly lower effective level of taxation than that which generally applies in the member state in question.
Under the code, member states commit themselves not to introduce such potentially harmful measures and to eliminate them quickly where they exist. The code of conduct group, which is chaired by our own Paymaster General, Dawn Primarolo, is charged with selecting and reviewing the tax measures under assessment and forwarding its findings to ECOFIN, which may or may not publish them.
We have a number of concerns about the code of conduct and about the proceedings of the group. However often the Government repeat that the code of conduct is not legally binding, it seems to us that agreeing to it has created at least a moral obligation to roll back tax measures ultimately deemed harmful, and not to introduce any similar new ones. That could oblige us, in practice if not in law, to adopt tax measures damaging to our legitimate interests. That would matter less if all other member states took the same view as to how binding the code was, but, although they have all signed up to it, we doubt that that is the case. So, can such a code work, and work equitably in such a diverse union of states?
We believe that Parliament deserves a clearer explanation of how the system is supposed to work than it has so far received. Perhaps the Minister will give us an assurance on that point this evening. Furthermore, we are unhappy that we simply do not know how the code of conduct group goes about its business. We cannot directly blame the group's chair, Dawn Primarolo, for the serious lack of transparency imposed by ECOEN, but the Government must bear shared responsibility for that. No wonder that the code of conduct is left open to charges of being some kind of obnoxious Star Chamber inflicting secret taxation when that is not in reality the case. It is difficult to change the rules of a game already in progress. But if this perceived stigma is to be lifted, the Government must urge other member states to agree to publish the group's reports to ECOFIN and make them subject to parliamentary scrutiny in the normal way.
The second item in the direct tax package is the draft directive on the taxation of interest and royalty payments between associated companies of different member states. It does not solve the problems of large multinational corporations operating in a number of member states. However, it is a step in the right
920
direction and we believe that the Government are right not to stand on the letter of subsidiarity when Britain's business interests can be furthered by it, as the Government readily acknowledge.
It is the third and last element of the package—the so-called withholding tax proposal for a minimum effective taxation of savings income within the Community—which, not surprisingly, caused us the most difficulty. In view of the strength of the opposition to the proposal, we looked very carefully at why it had caused so much controversy, taking extensive written and oral evidence from City representatives and others.
The new draft directive, which relates only to the taxation of interest paid in one member state to individuals who are resident in another, was clearly introduced as a measure to combat tax evasion. It was not a new tax, insisted Commissioner Monti; it was simply a mechanism to ensure that a tax which in principle has to be paid will be paid in practice.
We agree that payments of this kind, which are not reported to tax authorities, obviously offer scope for tax avoidance or evasion. When this happens between EU member states, it affects the pattern of capital flows, not to mention the fact that it puts a higher tax burden on those who are unable or unwilling to place their savings abroad.
However, the withholding tax proposed is perceived as posing particular problems for the Eurobond market. Maybe as few as 10 per cent of such bonds are held by individuals who would be liable to the tax. But because of "grossing up" technicalities, described in paragraph 170 of our report, the imposition of the tax could result in some investors suffering capital losses. More seriously, it is claimed that the introduction of the tax in its present form would be likely to give a major incentive to the Eurobond market to move out of the European Union so that investors could continue to receive interest payments gross. As the City of London is recognised as the main Eurobond market and a major source of income for the UK, both City and Government would be expected to object, and indeed they have.
The directive proposes a so-called "co-existence model" whereby member states can choose either to impose a 20 per cent withholding tax at source or provide the member state, where the recipient is resident for tax purposes, with enough information to ensure that the payments are duly taxed in that state. We doubt that that co-existence model can work well, with some countries choosing the tax option and others the reporting option, as long as the practice of banking secrecy is maintained in some EU countries, thus forcing the withholding option on states which may prefer the reporting option. We agree with the Government that a properly adjusted reporting option on an EU-wide basis would provide the better solution. But that, of course, depends on an agreement to abandon banking secrecy, not only in EU countries but also in important third countries. That may well prove an insurmountable hurdle.
We looked at possible compromises. The case for exempting Eurobonds altogether was championed by City witnesses, as we would have expected, as a second best to what we call the "nuclear option" of vetoing the entire directive. A less radical option was the short-term exemption of Eurobonds; in other words, "grandfathering"—allowing interest on existing bonds to continue to be paid gross. Grandfathering had a certain appeal for us, but even that would not solve the perceived longer-term problems of business moving outside the EU.
The problem for your Lordships' committee was that, despite claims and counterclaims, we were left with no firm evidence about the likely effect of a withholding tax on the City of London. The Corporation of London told us that if the whole bond market moved out of the EU to, say, the US or Switzerland, the loss could be of the order of 3 trillion dollars in capital and more than 100,000 jobs. Deutsche Bank told us that it doubted that the impact would be as significant as claimed. They referred us to a study by the Centre for European Policy Studies which states bluntly that there is no basis for the assumption that the London market would be severely damaged. Of course, we accept that there would be damage as a result of any outflow of business, but such figures as were presented to us were insufficiently substantiated and too disparate to be convincing. Thus we could not reach a conclusion on the likely scale of the effect. We hoped that the long-awaited paper which the Government were producing in conjunction with the City would shed further light on the matter while our inquiry was in progress. However, to our frustration, the report was much overdue and did not appear until September.
That paper proposes—and I am sure that the Minister will expand on this—two possible approaches, the details of which I shall not go into now because of the shortage of time. The question is: what are the chances now of an agreement being reached by the deadline of Helsinki's December summit? Precious few, I should guess. Grandfathering seems to have support, but it would seem that the rest of the package has had a decidedly mixed reception, and there was little progress towards agreement at the informal ECOFIN meeting held on 29th October. Therefore, we are far from the end of the story of the withholding tax directive. I can only wish the Government well at the next ECOFIN meeting.
Lastly, I say a brief word on proposals on indirect taxation currently on the table. In 1996 the Commission announced that it would bring forward plans for a new and simplified VAT system. However, no radical proposals have so far been made. Some minor ones on the rates and scope of VAT and on administrative simplification have appeared. We examine those in our report in paragraphs 202 to 212. We have no objections to proposals for tidying up VAT arrangements provided that there are no significant new burdens. Nor would we be concerned if proposals relating purely to the administration of
922
VAT were adopted by qualified majority voting or provided for subsequent decisions to be taken by that system.
As I mentioned at the outset, we are disappointed that, in their written response, the Government declined to comment on our quite extensive review of ideas for the long term, mooted in the Commission and elsewhere, in particular on corporate taxation. In view of the increasing integration of business within the EU and increasing globalisation, there are attractions for both companies and tax authorities in the idea of some kind of a co-ordinated framework for corporate taxation. Several witnesses told us how the current diversity of corporate tax systems is an obstacle to cross-border integration, and that the cost to business of complying with 15 different tax regimes was escalating. The Commission has been asked to bring forward a mandate for a study on this issue. I hope that the Government will play a constructive role in the discussions. Failing a comprehensive solution, we see a case for considering an optional single European corporation tax along the lines suggested by the CBI.
I commend this report to your Lordships' House. The committee and the Government do not see eye to eye on a number of matters. But that is evidence that we have raised some real issues. On the whole, there is much more in the report on which we do agree. Therefore, I hope that this report will be an encouragement to Her Majesty's Government to pursue European tax issues with vigour and imagination in the European Council and ECOFIN.
Personally, my fondest hope is that the committee's efforts have gone some way to demystifying and demythologising the issue of European Union taxation proposals. If we all want Britain to play a competitive role in a globally competitive European Union, as we surely do, we must encourage a pragmatic, not dogmatic, approach to European tax issues. We believe that this report supports and justifies that approach. I beg to move.
Moved, That this House take note of the Report of the European Communities Committee on Taxes in the EU: can co-ordination and competition co-exist? (15th Report, HL Paper 92).—(Lord Grenfell.)
5.47 p.m.
Lord Saatchi: My Lords, we welcome this report, not only because of the importance and topicality of its subject matter, but also because the noble Lord, Lord Grenfell, and his whole committee have earned the gratitude of the House for producing such an illuminating and informative document.
I hope that I do not exaggerate, nor in any way embarrass, when I say that, on these Benches, the noble Lord is held in admiration and affection. Indeed, I should like to place on record our very great regret that, at the end of this Session at the insistence of the Government, his talent and expertise will no longer be available to your Lordships' House.
There are three vexed issues upon which the report concentrates. They are, first, the slender nuances between harmonisation and co-ordination; secondly,

923
the work of the code of conduct group on business taxation; and, thirdly, as the noble Lord has just said, the on-going saga of the withholding tax, which the Government refrain from vetoing.
First, none of us should be misled into assuming that the distinction between co-ordination and harmonisation is merely a matter of semantics. The report rightly states that the term "co-ordination" implies,
"fewer connotations of compulsion and imposition from above",
and,
"leaves more room for variations as between member states".
In all logic that must mean that co-ordination includes some elements of compulsion and imposition but that those elements are less visible than they would be if the process were called "harmonisation". If any of your Lordships doubt this analysis, they need look no further than the furore which erupted following the former German Finance Minister's pronouncements on tax harmonisation. As he expressed so bluntly:
"It is necessary to harmonise tax policy. The unified currency area needs a fair and equal tax framework".
That is the perspective from which to view the German Government's position, as quoted in the report.
Germany's government say:
"Direct taxes should be co-ordinated, but in no circumstances harmonised".
They say they want,
"to concentrate on how best to avoid ruinous tax competition in the field of business taxation",
yet they are quick to assert that there is no proposal for a uniform European corporate tax system.
The German Government explain that a,
"totally different social security system in Germany … makes a need for a higher tax burden".
It emerges that the German Government appear to be opposed to harmonisation because it might mean the harmonisation of European taxes at a level lower than their own. But they are in favour of co-ordination because that offers the delightful prospect of raising the burden of European countries' tax to their own level.
We heard much the same from our Government only last week in a European committee of another place in a debate cm energy tax harmonisation. The Financial Secretary to the Treasury asserted:
"We see no case for general harmonisation of direct taxes, and no such formal proposals are on the table",
but a few moments later he extolled the virtue of tax harmonisation saying:
"If there were to be progress on raising the levels of duty on road fuels across Europe … it would be a welcome development".
Is not the use of the word "co-ordination" just a presentational attempt to pour oil on potentially very troubled waters because there is a wide consensus of opinion in Europe, both at academic and political levels, that the single currency, which this Government intend to join, inevitably requires tax harmonisation?
924
Let us take, for example, an article in the EC Tax Review by the respected former Finance Minister, the Dutchman Onno Ruding. In answer to his question, which forms the title of his article,
"After the Euro, corporation tax harmonisation?",
he argues:
"A successful EMU requires a high degree of policy co-ordination, on economic as well as political matters, and will unavoidably reduce remaining national autonomy, including on tax policies".
Because the British public are deeply opposed to the higher taxes harmonisation would bring, the Government, who have the unenviable task of somehow selling the single currency to the British people, have decided to use soothing words to airbrush out the less appealing aspects of economic and monetary union.
An article in the Sunday Times earlier this year reinforced such concerns. It stated—and I am sure that the Minister will wish to comment on this—that the Government had sent out a list of forbidden terms which should not be used in the context of discussions on the European issue. Lo and behold, one of them is "harmonisation". Surely, as long as the difference in the tax burden between the UK and our European partners remains as great as it is today, the issue will continue to generate deep anxiety which no amount of carefully chosen words from Ministers will dispel.
Secondly, I turn to the code of conduct group. I do not know how familiar your Lordships are with that body. The Minister is certainly about to tell your Lordships that there is nothing to worry about in the work of the code of conduct group; that the decisions at which it arrives are not legally binding; and that there is no treaty obligation on us to accept greater EU control of our direct taxes. Yesterday, I had the pleasure of being at lunch with one of our most senior judges, who said that when a man comes before him who says that there is nothing to worry about, "I always have a good look at him." Well, my Lords, we shall want to have a good look at the Minister when he says, as he is going to, "Don't worry".
Until the Government drop the secrecy in which that code of conduct group operates, it will continue to worry people because they cannot understand what the group is doing. What is its agenda? What is the Government's position on the work of a body which is chaired by one of their own Ministers? Perhaps the Minister will take the opportunity to explain to the House how it was that while our Government refused to divulge the working of the code of conduct group, the proposals it had made were easily to be found on the Dutch Finance Ministry's website.
Why is there that need for secrecy from a Government pledged in their manifesto to ensure,
"greater openness and democracy in EU institutions with open voting in the Council of Ministers and more effective scrutiny of the Commission by the European Parliament"?.
I am sure that the Minister recognises, as the report certainly does, that the reason the issue of tax harmonisation causes such angst is precisely because of the cloak-and-dagger approach which the

925
Government have adopted. If there is nothing to hide, why do not the Government tell us what is going on in that group? There are many who find it difficult to understand why conventional channels were not sufficient to deal with harmful tax competition which that code of conduct group is understood to be addressing. This may provide the answer:
"If the rule of unanimity should block progress on tax decisions in the EU for many years to come, the question arises as to whether member states might prefer to take steps towards tax harmonisation among a smaller group of members only, either the participants in the EMU or members who agree on a specific measure. This approach can only be accomplished outside the EU treaties".
In other words, the code of conduct group provides a fast-track route to the type of harmonisation which it would be impossible to push through under the unanimity required in the Council of Ministers. The Minister will, of course, again remind the House that EU treaties contain no requirement for direct tax harmonisation. However, it is precisely because the code of conduct group works in the grey area outside the remit of the treaties, but under the auspices of the Council of Finance Ministers, that it is able to press on with an agenda not contained in the treaty.
Let us look at the precise wording of the rubric introducing the code. It says that it is the,
"resolution of the Council and the representatives of the governments of the member states, meeting within the Council".

"Within" is the crucial word. That half-in, half-out position allows the Paymaster General to say that the work of the group is "not legally binding" on the one hand when it is quite clear that the code of conduct group has the political momentum generated by its small but high-level membership to drive forward the harmonisation programme.
It allows any member state to call an investigation into another's system on the grounds that it is harmful. Under that understanding of avoidance, tax revenue paid to one country is essentially tax lost to another EU member. I suppose that is what prompted the former German Finance Minister, Theo Waigel, to describe London as a tax haven because he observed German bankers coming to work in Britain to avoid higher German rates of personal tax. That is an extraordinary observation.
We can perhaps see why the British Government are so anxious to remain silent about the group. Why else, in answer to repeated requests by the shadow Chancellor in another place for the Government to publish the agenda, minutes and conclusions of EU tax Ministers, do we repeatedly hear the opaque reply that the Council,
"agrees that the work of the code of conduct group shall be confidential"?.
The reason is that the work of the code of conduct group reveals the extent to which the Government are involving other countries in our own tax decisions. After all, when we briefly caught a fleeting glimpse of the work of the group, we discovered that it dealt with UK measures to help the film and shipping industries, designed to enhance UK business and create UK jobs
926
to which the other countries had taken exception. Therefore, I ask the Minister to update the House on the future of those incentives so that companies which may wish to invest in UK films or shipping know exactly where they stand.
Is it surprising that the Select Committee states:
"We remain unclear about the implications for the United Kingdom of having agreed to this code"?.
Will the Minister tell us whether the group will be disbanded when it has dealt with its current agenda, whatever that might be, or will it find further work? And will he tell us whether the UK Government will accede to legislative proposals from that group in the future.
Finally, I turn to a crucial matter in the report, mentioned by the noble Lord, Lord Grenfell, which is deeply significant for the future of the City of London; namely, the withholding tax on interest. That is no stranger to this side of the House. When it was introduced in 1988, the Conservative government vetoed it without any fuss or bother. Nor was there any lasting ill will. I am told that that swift action saved the City much concern and prevented investors from becoming alarmed. Let us compare that with the painfully lethargic manoeuvring of the Government today, which does such damage to the confidence of business and investors in the City. The impression created is that the Government are unwilling to defend Britain's flourishing financial services industry. Meanwhile, I am told that competitors are licking their lips at the thought of what that piece of legislation can do for them. Perhaps the Minister will tell us the latest instalment of an epic battle which the Government have created for themselves. I believe that his answer will reveal the huge gulf in philosophy between his side of the House and ours.
Our approach is to cut taxes to stimulate growth and investment and to allow European countries to compete with us to find a natural convergence at a lower level, an attitude totally at odds with the concept of tax harmonisation. This week William Hague told the CBI:
"In the next millennium, nations will fight each other not for territory but for business and their weapons will not be guns but tax rates".
So our view is to look at these matters in the context of a highly competitive global economy, not to hope that huddling together through legislation will insulate us from countries which are hungry for our business. We believe ours is a realistic view of the world and we believe that the Government's view is profoundly backward looking. I have yet to hear of a single government in the world beyond the EU that is signing up to a text which promises to erode its competitiveness rather than enhance it.
We greatly welcome publication of this report and the scrutiny of it by your Lordships' House because the report reflects the widespread concerns about this Government's attitude to an area of policy that is fundamental to the wealth and prosperity of our country.
6.1 p.m.
Baroness Sharp of Guildford: My Lords, as a member of the EC Committee, I pay tribute to our chairman, the noble Lord, Lord Grenfell, to our specialist adviser, Professor Stephen Smith, and to our Clerk, Dr Elizabeth Hopkins, for helping us to produce a coherent and lucid report on such a complex and detailed subject. I look forward to the maiden speech of the noble Lord, Lord Lea, whom I knew 20 years ago when I worked in the National Economic Development Council—Neddy as it was known.
Our chairman has given the House an excellent summary of the report. I shall not spend time going over the details but shall concentrate my remarks on three areas; first, the general issue of the European Union and tax harmonisation; secondly, the question of tax competition and what is and what is not harmful in terms of tax competition; and, thirdly, the longer run issues in relation to corporate taxation.
I shall not discuss the issue of the withholding tax other than to say that I fully concur with the conclusion that we reached in the report. Surely the best solution all round is one based on an exchange of information. It is absurd that we should have imposed upon us an unsatisfactory, second-best solution just because some member states are faced by bank secrecy laws that they feel they cannot challenge.
I turn to the more general issue of the European Union and tax harmonisation. When discussions began in the spring of 1999 we were faced by alarmist newspaper headlines suggesting that the European Union agenda was a wholesale take-over of our tax system, with Oscar Lafontaine held up as the bogey-man who would take our money away from us. When the committee looked at that matter the actual proposals on the table were only three: first, the withholding tax issue—a big issue for the City but pretty irrelevant to the average man or woman on the street, or even to the Deputy Prime Minister, if I may say so; secondly, proposals for a common system of taxation for interest and royalties paid between branches of a multi-national company with branches located in different European Union countries, a proposal that, while it had its downsides, was generally endorsed by all concerned; and, finally, the code of conduct on business taxation in which negotiations were led by a British Minister.
In addition to those three clear proposals, there were vaguer proposals being discussed about the possibility of a maximum as well as a minimum level range of VAT and about closer co-ordination of excise taxes and earlier there had been proposals on energy taxation. There were even vaguer discussions going on about the longer-term development of both VAT and corporation tax. Only one of that range of proposals—the withholding tax—was really contentious. As we made clear in the report, as long as the Government maintain their insistence on the unanimity rule in relation to taxation, that can pose little or no threat to UK interests.
928
As to other issues, let me reiterate the conclusions of our report:
"there are certain areas where some sensible, well-justified co-ordination—in particular to reduce fraudulent tax evasion and to help create conditions in which tax competition can be pursued harmlessly—could serve both United Kingdom and EU-wide interests, and ought therefore to be pursued in a spirit of pragmatism rather than being dismissed out of hand on purely dogmatic grounds".
In other words, the fuss about the EU's tax plans has been grossly exaggerated.
I turn now to the issue of tax competition and the concept of harmful tax competition. I suspect like many noble Lords, I have spent some time living in the United States. I lived in Washington DC. I discovered in that country that there is considerable variation in tax rates between the states and the localities which leads to some cross-border trafficking. Those from Maryland and Virginia came into Washington DC to buy wine and spirits and those from Washington DC crossed into Maryland and Virginia to buy clothes and consumer durables because sales taxes were lower in those states. Movements were relatively marginal. How far will one drive to get something 10 dollars cheaper.
That situation is important because it creates pressures for convergence. As we know from the problems we are now experiencing in relation to beer, wine, spirits and tobacco trafficking across the Channel, where rates of tax—mostly excise taxes—are vastly different from one country to another, such cross-border trades can become substantial, with both traders and the Exchequer feeling the pinch. The pressures are now on the Chancellor to bring down British excise taxes closer to levels on the Continent. In other words, competition in tax rates has brought about a natural process of convergence.
Within the next 10 years two developments will add considerably to these pressures. First, e-commerce will make cross-border trading much easier, especially in areas like financial services where there are no postal or delivery charges. Variations in VAT and other sales taxes will become more significant. Secondly, those variations will become even more apparent once we begin to use the euro. Even if Britain remains outside the euro, we shall find many prices in this country quoted in euros, and price differentials, at present obscured by the different currencies, will become all too transparent. All that suggests that in the next decade competition will bring increasing pressures for a natural convergence of tax rates within the EU.
What is harmful tax competition? I quote from Jeffrey Owens, Head of Fiscal Affairs at OECD, with whom the committee spoke during our discussions. He was at pains to set the issue within its global context and argued that:
"Increased liberalisation of financial markets has improved the international allocation of savings and capital and reduced the cost of capital to enterprises. But it has also:
widened the scope for international tax planning;
increased opportunities for tax evasion and avoidance by making tax havens more accessible to taxpayers;
reduced the feasibility of taxing capital income; and

929
contributed to the erosion of the tax base in many countries.
… Harmful tax competition is triggered as governments, in an attempt to outbid their neighbours, seek to develop increasingly advantageous tax niches".
The great danger, of course, is that in seeking to meet this competition from these increasingly advantageous tax niches—tax havens, as we call them—we find ourselves dragged into a race to the bottom, each country seeking to outbid the other in an attempt to attract mobile financial capital. One possibility is that we just accept as a fact of life that capital and savings are mobile and that we should give up trying to tax them. But this has implications for the taxpayers. It means shifting the burden of tax increasingly on to the immobile factors of production, especially labour, and it has implications for equity. Is it right that those whose incomes are largely unearned should go untaxed?.
Jeffrey Owen said that he had pointed us in the right direction. He said:
"Governments do have a choice other than letting the erosion process dictate their tax and spend decisions: greater international co-operation".
This is what the OECD is now trying to put in place—an accepted network of bilateral tax treaties which not only avoids double taxation but also contains provisions to counter international tax evasion.
By working internationally to identify the harmful regimes and to put pressure on them to reform their ways or face international ostracism, some progress is being made. However, as a committee, we were wary as to how far this route could eliminate the problem. Nevertheless, what is clear is that only by working with others at the international level do we stand a chance of cracking it.
It is within the context of co-operation that we should see the EU's own committee working on the code of conduct for business taxation which was established after the ECOFIN summit of December 1997. It is being run in close conjunction with the OECD initiative and, as far as we can tell, because its proceedings are confidential, it is going well. What is clear is that many of the issues being discussed there relate to specific tax breaks for specific industries or sectors—for example, preferential treatment for small firms—and that its agenda is being driven as much by the single market initiative, the need to create a level playing field for business, as by considerations of tax structure or tax equity.
I turn now to my final point about the long run issue of corporate tax. At present, any company that has dealings with the EU faces having to cope with up to 15 different tax regimes. Two interesting features emerged from our investigations. First, although nominal corporate tax rates vary a great deal from country to country, "effective" tax rates—that is, the actual tax paid after all allowances are taken into account—vary very little from one country to another. Most, including the UK's, are in the region of about 10 per cent. Secondly, we also learned that many multinationals, having to deal with all these different tax regimes and different sets of paperwork, would prefer
930
to pay what in effect would be a very similar rate of tax and were in favour of moving towards a single tax regime.
Michael Gammie, one of the experts who gave evidence to us and who had spent some time investigating company views on this issue, told us that what businesses wanted was,
"a coherent proposal that resolves these issues".
By contrast, the Paymaster General, Dawn Primarola, made it clear that the Government were firmly set against any such proposal. She said:
"We argue actively against the harmonisation of corporate tax rates. We do not believe that this is the way forward".
She was joined in this not only by many of our own witnesses from industry, but also by the views we heard from Germany and France. In other words, there is presently very little enthusiasm anywhere in the EU for the idea of a single, corporate rate of tax.
Nevertheless, the CBI, while opposing the idea, pointed out that the majority of its members did not do business in more than one or two member states and that many small companies did not export at all. They suggested that there could be trials of an optional, parallel system for companies doing business in several states which could choose to be taxed at a Community level on a single consolidated result. I suggest that there is a precedent for such a trial.
In the pharmaceutical field, in which companies were similarly faced a decade ago with having to run the gamut of many different national regulations in relation to launching a new drug, a fast track procedure was established at Community level which was introduced only for the new, biotechnology-based drugs. Companies could, if they wished, opt for this fast-track procedure. As more drugs came on to the market, companies gradually switched over to the new procedures. Indeed, in due course they provided the core procedures for a new and highly successful European Medicines Evaluation Agency, which is located here in London. This example shows that it is possible to have two regimes, one run by member states and the other by the Community, working side by side and effectively. I therefore agree with the committee's conclusion that the CBI's suggestion is worth exploring. I hope that we may hear further on this from the Minister.
The concepts of competition and co-operation lie at the heart of Liberal democracy. I have been at pains to suggest that on many occasions competition between countries, states or even regions in the taxes that they charge may indeed be good for us, and that this competition will in itself bring about a natural process of convergence. There are, however, times when competition does not work, when it destroys itself in the race to the bottom. It is on these occasions that cooperation is required.
The final conclusion of our report is,
"that pragmatic tax co-ordination and fair competition can not only co-exist but complement each other, to the greater benefit of taxpayers within the European Union".
I wholly endorse that conclusion and commend the report to the House.
6.16 p.m.
Lord Lea of Crondall: My Lords, perhaps I may first say how much I have appreciated the courtesy which has been shown to me on all sides of the House and by the Officers of the blouse since my introduction.
I feel very privileged to be the fifth member of the TUC secretariat to come here, following in the distinguished footsteps of Walter Citrine, Victor Feather, my noble friend Lord Murray of Epping Forest—for whom I worked for 20 years and who I am very glad to see in the Chamber this evening—and my noble friend Lord Whitty, who, before becoming General Secretary of the Labour Party, worked for me in the early 1970s and not only survived the experience but seems now to have comfortably inherited the mantle of "Lord High Everything Else". For one moment the other day, I thought that he was running for Lord Mayor of London!
My submission today, I trust without being at all controversial, is that in some fields we need more tax co-ordination in Europe rather than less. I have taken some interest in this area in my work at the TUC, but I have been particularly involved through the European TUC, in the 1980s as Chair of their Economic Committee and subsequently as its Vice-President.
I can confirm that the House of Lords Select Committee on the European Communities has a very high reputation in Brussels. It was Jacques Delors himself who said that the work of this committee was outstanding among all the national parliaments. I have often given evidence to the Select Committee, and I look forward to following its work closely in the future. One of the reasons for the committee's reputation is its pragmatism. This properly underpins the very timely report that we are considering today.
I thank the noble Baroness, Lady Sharp of Guildford, for her kind remarks. I congratulate my noble friend Lord Grenfell on his excellent exposition, and I extend to him every good wish for the future.
Pragmatism has also been the watchword of the European Commission and the Council of Ministers, and they are inching the debate forward. For example, something akin to a minimum withholding tax must be right at some stage if we are to protect an equitable tax base in Europe, albeit safeguarding the legitimate interests of London and, indeed, Luxembourg.
I want to take as my main illustration a rather different area of fiscal policy—the question of energy taxation—which the sub-committee recognised as important but decided not to consider at this stage in any detail. I wish to refer in particular to the announcement by the Chancellor in this year's Budget that, arising from our European and international commitments agreed at Kyoto two years ago on greenhouse gases, he will introduce into next year's Budget and operate from the year 2001 a climate change levy to raise of the order of £1.75 billion per annum, offset by reductions in employers' national insurance contributions across business generally. Side by side with that there are currently negotiations
932
led by the DETR on rebates based on energy-saving schemes. No doubt we will hear more of that in the Chancellor's Green Budget next week.
It has been clear since the Rio Summit in 1992, when I had the honour to be a member of the British Government delegation, that the OECD countries had to give a lead if the Rio aspirations were to be seriously addressed. Since then, very important work has been done both by the previous government, but most notably by the present Government and by the Deputy Prime Minister in particular.
As the House will be aware, the EU group negotiates as a team, and it was and is as an EU group that the commitments to the necessary fiscal changes were entered into. The UK levy is a major step towards closing the gap in delivering the deal done in Kyoto, our part of the EU commitment being to reduce our output of greenhouse gases by 12.5 per cent by 2010 as compared with 1990.
So far so good. But then we meet the difficulty. There are now growls of dismay coming from many of our industries and trade unions precisely because, although there is a common goal in Europe, we have at present no common fiscal method of implementing the agreement. And this is no academic debating point. The tax in Britain will be charged per unit of energy, and the cost of energy is a factor which of course varies enormously, as a share of value-added, between industries.
As currently designed, the levy will potentially have a major impact on costs and jobs in such industries as chemicals, steel, cement, paper making, glass and aluminium. But given that, there is no intention to impose any discriminatory impact on our industry relative to that of our EU partners. Then industry naturally looks at the on-costs and compares them with what is happening in Germany, France, Italy, Holland and so on, all of which in different ways seem to be applying the policy differently—and, it would appear, less onerously in relation to their heavy industries.
The question I want to put, therefore, is as follows. Would it not have been far better if the European level agreement had gone on to specify some degree of coordination of methods of implementation? I know how I would answer that question, but can anyone in this Chamber challenge the affirmative conclusion.
Throughout British industry it is being said—we saw it at the CBI Conference in Birmingham only this week—that we want a level European playing field. Indeed, the point is obvious and self-evident. But what is a "level European playing field"? First and foremost it begins with a recognition that if the EU has entered into an international obligation we should all be in the same boat and do the job together according to the same rules. That means that the fiscal regime—the framework conditions as they are sometimes called—should apply across the EU (I would say QED).
Before concluding, perhaps I may dispose of one red herring which is often dragged across this trail. In a perfect world we would get the Americans on board as

933
well. But on the whole matter of global warming and the international protocols arising from that, the Americans unfortunately have had to be dragged kicking and screaming into the 21st century. The US has operated for many years on an energy price which is less than half ours, and Europe has had to give a lead to the world. Notwithstanding that, if people raise the spectre of Kyoto losing us in European competitiveness, let us keep some sense of perspective. Who is it that has a 200 billion dollar balance of payments deficit? It is the Americans. And who has the substantial surplus? It is the Europeans.
In any event, though there is a global market and a global benchmark price, geography and transport costs are two of the several reasons why Europe must have its own common fiscal regime in responding to Kyoto.
In conclusion, I suggest that Sub-Committee A might like to turn its attention in the coming Session to precisely this common framework. It is certainly an issue which will not go away and I believe that, just as we in Britain took the lead in the climate change negotiations, we could give a lead as to what that common fiscal regime should be.
6.25 p.m.
Lord St John of Bletso: My Lords, it gives me great pleasure to congratulate the noble Lord, Lord Lea of Crondall, on his outstanding maiden speech. The noble Lord comes to this House with an extremely distinguished background and will be a classic all-rounder. Not only was the noble Lord assistant General Secretary to the TUC from 1977, but he has also been secretary to the TUC Committee on European Strategy since 1989 and a member of the EU Steering Committee on Social Dialogue since 1992. He is therefore ideally qualified to speak in this debate and is also an ideal choice for the noble Lord, Lord Grenfell—who I hope will continue to be the chairman of the sub-committee—to be a member of Sub-Committee A. Not only does the noble Lord come here with his distinguished background but also, with his enormous experience in environmental issues, he will be a perfect candidate for Sub-Committee E.
While some of the noble Lord's remarks on energy taxation were somewhat wide of the core inquiry of this report, they certainly raised the spectre of whether there ought to be a level playing field on taxation in Europe. I hope that we shall hear a lot more from the noble Lord in years to come, whether or not I survive the "cull".
I have been enormously privileged to have been a member of this sub-committee for the past four years, and particularly to have been part of this intensive inquiry, ably chaired by the noble Lord, Lord Grenfell, into the controversial issue of proposed future tax co-ordination within the European Union. Like all other members of the sub-committee, I extend my thanks to our clerk, Dr. Elizabeth Hopkins, for her tremendous help and support, as well as to our specialist adviser, Professor Stephen Smith.
934
Paragraph 48 of the report aptly sets the scene when it says:
"Taxation, whether direct or indirect, is a highly sensitive issue, and there is a clear need to ensure that proposals on tax matters emanating from the institutions of the European Union are properly publicised and accurately reported".
Other speakers touched on that. Without regurgitating the many recommendations of our report, my basic premise is that tax competition between European countries should not be impeded. Obviously, however, there needs to be some level of co-ordination so as to prevent harmful tax competition. But I entirely concur with the sentiments of the outgoing German Bundesbank president, Hans Tietmeyer, that tax competition is essential to creating strong economies and a strong monetary union.
I was going to draw a parallel between tax competition on alcohol in the European Union and what happens in the United States, but I am delighted that the noble Baroness, Lady Sharp of Guildford, touched on that issue. I sincerely hope that the Chancellor takes cognisance of her recommendation that duties do not rise in the future but hopefully fall—not that I have an excessive amount of alcohol.
I must declare an interest as a consultant to Merrill Lynch, as well as being a consultant to Overseas Companies Registration Agents, even though I have no involvement with the fixed income market. Like all those who have spoken on the issue, I am obviously alarmed about the potential consequences for the eurobond market, particularly for the City of London, should the proposed savings directives be introduced without a carve- out provision.
I was encouraged to read in the Treasury's recent report on international bonds that the Government are of the firm view that the approach of the current draft savings directive will not effectively tackle tax evasion but will have the unintended side effect of seriously damaging EU financial markets. Its conclusion was that this would, in turn, jeopardise the EU's programme of economic reform. I obviously hope that the Government wil be successful through the options set out in this report in securing an exemption from the directive for eurobonds and other similar instruments, so as to preserve the competitiveness of EU financial markets.
I agree with the Treasury's view that the single most effective means of tackling tax evasion is through an exchange of information on as wide an international basis as possible. Obviously, this touches on the thorny issue of banking secrecy, which the British Government believe should be addressed more widely both within the European Union and the OECD. It was encouraging to hear in the evidence we received from the Paymaster General, Dawn Primarolo, that the German Government, who have for many years maintained bank secrecy, now accept that the exchange of information is the best way forward.
I share the vision of the Cardiff European Council that one of the priorities in the European Union is to promote growth, prosperity, jobs and social inclusion. However, I reiterate my concern that this should in no way stifle fair competition within the EU. With the free

935
movement of capital flows, should the savings directive as currently drafted be introduced, there is no doubt that this would in all likelihood result in the relocation of the eurobond market from the City of London and the European Union to non-EU centres, which do not have these directives. That would obviously have totally the converse effect of impeding growth with the possible loss of many thousands of jobs.
Although the noble Lord, Lord Saatchi, has already covered this point extensively, I also want to touch briefly on the issue of the code of conduct. One of the justified concerns in our report was the lack of transparency—or I could almost refer to it as the lack of accountability—in the agreement between the Council of Ministers and Her Majesty's Government on the code of conduct. While I accept that the code of conduct is not legally binding, the secrecy with which it was negotiated can only heighten public suspicion of secret, undesirable tax measures being introduced through the back-door.
I entirely endorse the recommendation in paragraph 20 of the report that the Government should seek agreement from other member states that the progress reports which the code of conduct group makes to ECOFIN should be published and subject to parliamentary scrutiny in the normal way. Certainly—and here I refer to paragraph 128 of the report—Parliament deserves a much clearer explanation of how the system is supposed to work than the Government have so far provided. I am baffled as to why ECOFIN decided that the work of the code of conduct group should be confidential.
I am pleased that the Government have reiterated their commitment to retaining the unanimity rule for decisions on taxation. Can the Minister give us assurances that this will not be watered down in the future.
In conclusion, whether the reference be made to tax co-ordination or tax harmonisation, there is a strong case in certain areas for sensible, well-justified coordination, particularly to reduce tax evasion. However, the key question will be how much coordination is necessary to allow the EU's single market to function at an acceptably high level of efficiency. Clearly, the politics of Europe suggest that tax systems mean different things to different people.
Although I can see no compelling argument for broad tax harmonisation in the EU, I agree that a moderate level of co-ordination and fair competition can co-exist to the greater benefit of taxpayers within the European Union. To that end, I recommend the report to your Lordships' House.
6.34 p.m.
Lord Currie of Marylebone: My Lords, perhaps I may join other noble Lords in congratulating my noble friend Lord Grenfell and his committee on an excellent report. Indeed, I should also like to congratulate my noble friend on his very insightful introductory speech to today's debate. I believe that the report sheds a great
936
deal of light on an issue which is often exaggerated or demonised, and where the discussion is over-simplified and misleading.
The report comes to some pragmatic and commonsense conclusions; for example, that tax competition is not always harmful, nor is it never so. I think the last point that tax competition can be harmful was amply dealt with in the excellent maiden speech of my noble friend Lord Lea of Crondall. There is also the conclusion that some taxes do require coordination, while others do not, and that therefore tax co-ordination and competition can co-exist, and that where co-ordination is required it does not require greater centralisation in Europe. It is something that can happen through co-operation between national governments agreeing between themselves. I believe that those conclusions need to be broadcast much more widely because the debate on this question in the country is wildly misleading.
It is worth recalling that the setting up of the European Community was based on a very fundamental act of tax convergence; namely, the agreement to replace the widely different sales tax systems across Europe with a single value added tax system. Without that act of tax convergence, the single market, which I am sure almost all of your Lordships would support—there may be one or two who dissent—could not have happened. It is possible that we may need to go further in similar convergence in the corporate tax area to deal with some of the issues which arise from disparities there.
I believe that this illustrates the nature of what we are talking about—co-operation on tax, agreed by member states on a unanimous basis and allowing some disparity in tax rates and in the precise definition of the tax base for VAT. Yet without that fundamental act of bringing in VAT as a common system which we, as a country, also bought in when we acceded to the common market, the single market would not have been possible and European consumers and companies would have been the losers.
It is an example of a more general point that has already been made; namely, that the impetus for tax convergence and tax co-operation comes from the process of integration in the single market itself. A number of commentators relate it to the euro but this is somewhat misleading. The relationship to the euro—the need for tax harmonisation as a consequence of the euro—is, to a large extent, incidental. The euro is only relevant in so far as it accelerates the process of economic integration in the European market by introducing price transparency, by eliminating exchange risk and by introducing a much more effective market for corporate control. Those changes will accelerate integration and, as a consequence, may require a further move towards tax convergence.
However, it is the consequence of integration rather than the introduction of the euro that is the key point. If the UK were to stand aside, with a view to avoiding that tax convergence, we would be the losers because

937
we would be missing the efficiency gains and the benefits that come from the introduction of the euro because of those developments.
There are two broad arguments for tax convergence of this kind, one at the macro-economic level and one at the micro-economic level. At the macro-economic level, there is a case for a degree of fiscal co-ordination, largely of deficits and debt policies, with a view to maintaining an appropriate balance in monetary and fiscal policy in the eurozone and concerning the value of the euro against the dollar or the yen.
It seems to me that there is a case for some coordination in that area but, again, it does not require a European-wide tax system; rather, simply cooperation between nation states. The European budget is far too small to be used for those macroeconomic purposes. The developed national governments have large budgets which, in an integrated Europe, need to be co-ordinated in a sensible way.
However, I think that the real pressures for convergence, where they come, will be more at the micro-economic level. The case for a European corporate tax system—although not necessarily a common tax rate—is strong. Comparisons of corporate tax rates across Europe are often rather misleading. Tax rates vary widely, but if one looks at tax revenues—the tax take—one finds that they vary much less. High corporate tax rates go together with a narrow corporate tax base. We in the UK have a wide tax base and a low corporation tax. It is not the case that the burden of corporation tax is significantly lower here than elsewhere. It is somewhat lower but not much lower, but is not reflected in the differences in tax rates.
The consequence of those differences is not only that it is inconvenient for companies operating across Europe, which it is, but it is also an opportunity for them—almost all problems for businesses also create opportunities—in that it creates a real opportunity for companies operating across Europe to manipulate their books to minimise tax take to the detriment of the taxpayer in Europe. There is therefore a good case for co-ordinating the corporate tax system in Europe to avoid both the costs that the differences impose on companies, but also to remove those tax avoidance elements.
Similarly in other areas, predatory tax policies and excessive tax competition are surely self-defeating. The widespread practice of undue tax holidays in Europe is a game that all countries can play—and all countries do to some extent play that game—but it is essentially self-defeating when all countries play it. There is a great deal to be said for all countries in Europe agreeing unanimously to a self-denying ordinance on such practices. The argument that my noble friend Lord Lea of Crondall has put forward for cooperation in the area of environmental taxes is similarly strong. One cannot introduce environmental taxes to deal with the problems of global warming and the like through tax competition, which simply does not work in this area. There are major benefits for
938
Europe and the international economy in moving in that direction. One requires co-operation and a common approach to such taxes to secure the environmental benefits we need.
Finally, there may be some areas where factors are so mobile—capital is one of them—that increasingly we shall find the need to eliminate tax disparities. Again that is an area where I believe that what is called for is co-operation between national governments rather than the central laying down of policy. But the areas of tax this applies to are really not that large. We are talking about a relatively small proportion of the taxes of national governments.
None of these forms of co-operation on tax policy represents anything like a move towards a form of federalism that many people fear. They rely on the traditional mechanisms of the European Union; those of intergovernmental co-operation motivated by enlightened self-interest. They do not entail the creation of a pan-European system of taxation but rather the gradual and co-operative evolution of national tax systems. They do not involve the move to wholesale decision making on the basis of qualified majority voting; co-operation is feasible without the abandonment of the principle of unanimity.
There will be those in Europe who will not be satisfied by this gradualist approach to tax cooperation. There will always be those who argue for much greater tax centralisation and they will indeed be quoted by those who wish to demonise Europe on this issue. I think that we have heard one or two examples of that already in this debate. Those voices will be heard but they will not, I believe, prevail, for there will be equally strong opposition to centralisation from a number of member states in Europe, not just the UK. The UK will not be isolated in its opposition unless we play our negotiating hand lamentably, and of that I think there is little sign.
6.45 p.m.
Lord Boardman: My Lords, as the first speaker on this side of the House after the excellent maiden speech of the noble Lord, Lord Lea of Crondall, I congratulate him and I look forward to hearing him speak on many occasions in future. I recall that he gave evidence once to a Select Committee of which I was a member. He did that with skill and conciseness, although not necessarily with my wholehearted agreement! I hope that we may look forward to that pattern often in the future.
I also congratulate our chairman, the noble Lord, Lord Grenfell, whose wide experience and ability and wide international knowledge were a tremendous asset to all the members of the committee, to whom he showed such considerate leadership. We were most fortunate to be served by the noble Lord and the clerk of the committee, Dr Elizabeth Hopkins, in getting this long and complex report put together. That was done to remarkably good effect.
It is inevitably difficult to judge the effect of any change in taxation on various parts of the country. In a limited area such as the UK a change in the Budget

939
can have a quite different effect in the north of England as compared with the south of England, and so on. Those effects are multiplied as regards the 15 member states in Europe. Let us imagine the complexities that would arise in trying to apply any form of unitary taxation or in centralising taxes in many respects with regard to those different countries. To some changes in taxation may constitute friendly competition—perhaps I should have said friendly co-operation; to others they will constitute hostile competition.
I refer to those nation states which are members of EMU. I believe that ceding control of their taxes to some central European body would result in their losing both fiscal and monetary control. I believe that that must inevitably lead to surrender or ceding of political control. It must be a step towards a federal Europe that some of us—myself in particular—dread. On listening to the comments of the noble Baroness, Lady Sharp of Guildford, and indeed those of the noble Lord, Lord Currie, I had the impression—perhaps I did not understand the speeches sufficiently—that the harmonisation of taxation, together with the harmonisation of monetary control, was a useful and positive lead towards the kind of state that I am worried about. Fortunately that question does not arise at this stage. As our report makes clear, the Government have firmly stated that they have no intention of ceding control of taxes without treaty changes. However, the report refers to the real dangers that could arise should the Government weaken at all in this area.
My noble friend Lord Saatchi has told us not to worry. Perhaps I ought not to worry yet, but I am just a little nervous, and the report makes it clear why there is that anxiety. There is obviously a feeling of frustration where co-ordination which is agreed among member states cannot be effected on those outside that immediate net—the European Union—who understandably wish to go their own way and secure the advantages that follow from that.
It is absolutely ridiculous to imagine that we can secure co-ordination of what we might like to have in Europe among all the OECD countries, the United States of America, Switzerland, the Cayman Islands, and so on. Apparently it is the ambition of the OECD to try to persuade us that, if we will agree to certain things, it is confident that it can get all these other nations to agree. I doubt that is possible. It is most unlikely to be achievable.
The noble Baroness, Lady Sharp of Guildford, was more optimistic about this than I can possibly be. For example, I refer to the withholding tax. I will say more about it in a moment but, quite clearly, what might be quite acceptable to some nations will be competitively and in every other way hostile to others.
Let me turn now to the withholding tax. The purpose of the withholding tax is to enable those member states which are unable to collect tax to collect tax revenue from their own citizens. Germany is perhaps one of the principal complainants because it cannot collect the tax from its own citizens. The effect of the draft directive is that we should suffer the
940
disasters to which the noble Lord, Lord Grenfell, referred—in London, on employees and on businesses—in order that Germany and the like can collect tax from their citizens who are defrauding them of tax. Although the numbers are somewhat speculative at the moment, very serious losses will be suffered. I find it very difficult to get enthusiastic a bout this situation.
One of the consequences would concern the issue of bonds. The issuer of the bonds—which normally stand at a substantial premium because interest rates have fallen—would be able under the terms of the issue to redeem those bonds at par. That would represent an enormous bonus to the issuer of the bonds and an enormous loss to the holders of the bonds, many of which are large insurance companies. That would be one of the consequences of the directive.
This is all because the Germans and others do not pay their taxes; or because they have banking secrecy laws which help them to cover up so much of the revenue that should be disclosed and taxed. I find it difficult to understand why we should impose upon ourselves serious penalties in order to help them out of their problems.
If we must do something—I do not see why we should—perhaps the reporting option to which the noble Lord, Lord Grenfell, referred may be the preferable choice. "Grandfathering" is suggested by the Government. That is a possibility but, at the end of the day, it is for each country to collect its revenue and taxes from its own citizens.
The Government's response to the report was rather disappointing. It did not cover many of the rather important points which are raised in the report. They agreed with the report's conclusion about the scare headlines and the public not being sufficiently informed. The scare headlines and the rumours which were spread around as regards what was happening were caused largely by the code of conduct. The code of conduct was kept confidential and rumours were spreading far and wide around London that the code of conduct was arranging taxing of this, that and the other in a way which was extremely damaging. The code of conduct has been the cause of much complaint. When the Paymaster General gave evidence it was stressed of course that whatever happened was confidential.
The members of the committee received a report as at 11th December 1998. So it is hardly up to date. We were not sent annexes setting out the recommendations in regard to tax. Perhaps I may quote from the annex sent by the Paymaster General of the first progress report presented on 11th December 1998. It states:
"It was also emphasised that the Code is a political commitment and does not affect the Member States' rights and obligations".
It goes on to say:
"In the Code Member States commit themselves not to introduce new tax measures which are harmful within the meaning of the Code. Also Member States commit themselves to amend existing laws and established practices as necessary".
I emphasise "Member states commit themselves". It is true that the covering letter stated that the conditions of the code of conduct have no legal effect,

941
but what would happen if a Minister, on behalf of the Government, committed them to a certain course; and then the Government find that they do not like it and rat on it? I find this issue extremely difficult. I hope that the Minister will be able to answer that question.
Further on in the report it states:
"Also, Member States with dependent or associated territories or territories in respect of which they have special responsibilities or taxation prerogatives committed themselves, within the framework of their constitutional arrangements, to ensuring that the principle of the Code are applied in those territories. The Group will examine the tax measures in Member States' territories to assess whether they are consistent with the principles of the Code".
Did the dependencies or associated territories give their approval to this combing over of their accounts and taxing? Did they agree to be pressurised to alter their taxing to conform with whatever the Paymaster General believed was necessary in order that she could enter wholeheartedly into the code of conduct? I hope that the Minister will be able to reply to those questions.
The report covers a wide field. The noble Lord, Lord Grenfell, explained it very fully and very well in his opening speech. It raises very important questions which I hope the Government will consider. I hope that they will answer them more fully than they have done so far. I hope that they will digest the points made. The report makes clear the Government's attitude that no taxation is to be imposed at the request of Europe; that that will not be acceded to; that the Government will not agree to that. Anything which is not acceptable to the Houses of Parliament will not be accepted unless there are treaty changes.
The report was excellent. We had a lot of assistance and lot of good evidence. I hope that the Government will read it carefully and pursue it to the right end.
6.58 p.m.
Lord Rathcavan: My Lords, the noble Lord, Lord Grenfell, introduced this debate with his usual ability and clarity. I am sure that the House will miss him when he goes off to pursue his next career of writing novels in Paris. I do not think the report will provide him with much of a plot, but one never knows.
I was rather fearful when I found myself on the list between the formidable economic brains and reputations of the noble Lords, Lord Boardman and Lord Desai. I will confine my remarks to the simple issue of corporate tax competition across the European land border in Ireland.
As noble Lords may know, the nominal rate of corporation tax in the Republic of Ireland is shown as 30 per cent. However, in practice, the majority of companies pay a rate of 10 per cent, allowed for all manufacturing and for the international financial services industry, which has been such a success, largely because of this profit-related concession. In their written evidence to the committee's report I noted that the Irish authorities were quick to record their agreement with the Commission under the code of conduct to phase out the 10 per cent rate between
942
2003 and 2010, to be replaced by a new rate of only 12.5 per cent, which will apply to all businesses. That still leaves a huge margin on corporation tax between the Republic of Ireland, Northern Ireland and the UK, even allowing for the tax concessions on capital allowances unique to Northern Ireland within the UK. Like other noble Lords, I wonder what the code of conduct is all about.
The land border highlights this disparity, which is also an obstacle to cross-border co-operation. There are many Northern Ireland companies which, quite legally, have been able to organise their affairs to maximise their corporate tax liability at the lower rate across the land border. Even more significant is the fact that the Republic of Ireland—the Celtic Tiger economy—has been the most successful of any region in these islands, and probably in the European Union, in terms of attracting inward investment. It is a formidable competitor in that field of inward investment because of the incentives of a uniquely low rate of corporation tax which is a key driver on the choice of location.
As Northern Ireland emerges from a long period of political instability which has seriously constrained its economic development, it must seek every opportunity to attract inward investment and new employment, which is so important to the peace process. This cross-border inequity in corporate tax is uncoordinated and unfair competition which cannot co-exist, to misquote the title of this report. Now that the Republic of Ireland has the blessing of the code of conduct for its low rates of corporation tax, we will have to look to our own side for some kind of convergence.
The existing concessions on capital allowances have reflected the willingness of our Government to consider special tax arrangements for corporate sectors in less favoured regions. I am greatly encouraged by the recent economic report, Strategy 2010, facilitated by the Department of Economic Development as one of the commitments in the Good Friday agreement. The report urges the new Economy Minister in a new devolved assembly—which, pray God, we will have before long in some form—to seek other profit-related, even if time-limited, corporate tax concessions, at least for new inward investment. That would level the competition and stimulate economic growth and employment in the deprived border areas.
I know that the Minister will not give me much of a response, but I am taking the opportunity to mark up this issue again. I hope that he will refer it to his Treasury colleagues with the passion it deserves.
I wish to make one other brief observation on the report. I know that its remit was constrained to taxation in the European Union, but I am surprised that it did not make more reference to examples of the American tax culture and tax structure.
It is said that in the US 15 per cent of all Americans with jobs are working in businesses which did not exist five years ago. Why have we failed to support to the same extent innovative industries that have become such big employers and wealth creators in America,

943
despite the fact that in Cambridge we now have one of the world's greatest centres of brains, research and innovation?.
One problem may be that the investment capital to support innovation and start up companies is controlled by a small number of huge institutions. I have seen an estimate that only 20 institutions now control 85 per cent of pension funds. Noble Lords will know that big fund managers like to invest in big stocks and big amounts, not start-ups and small innovative companies, even if managers in their personal capacity do just that.
I have seen another estimate that only 15 per cent of quoted UK shares are now owned by individuals, compared to 40 per cent in America. The reason for that is the tax culture. American tax breaks are more available directly to individuals who have greater choice and control over their savings and pension funds. They like to support smaller, innovative companies, maybe with only an average 5 per cent of their funds, but it aggregates to very large amounts.
There was a lot of talk and debate this week at the CBI conference about a new enterprise and innovative investment culture, not only by business but also by the Government. In Europe, let alone the UK, to achieve that culture we need more of the personal tax breaks that have encouraged the American economy to remain so strong and successful. This report gives us a good background and I found it of great interest. However, I hope that a further report by the committee will look at comparisons and lessons to be learnt between the American and European tax systems.
7.6 p.m.
Lord Desai: My Lords, I join other noble Lords in congratulating my noble friend Lord Grenfell, and our clerk, Dr Hopkins, on their excellent steering and quick production of this rather complex report. One of the tasks that perhaps we should perform more than we do is that of education. It is a great pity that many of the reports of House of Lords committees are not more widely available. The European reports should be published in paperback form. I have had the privilege of taking part in the production of a number of reports—on enlargement, on financing the EU and on tax co-ordination. If such reports were to be published in a more attractive way, I believe that we would contribute a good deal to education. I wish to concentrate on educating the public and the media on problems of taxation.
First, I should like to congratulate my noble friend Lord Lea of Crondall on his excellent maiden speech. He solved an outstanding problem for those who have to make their maiden speeches. What should one speak on? Most noble Lords cast around for a suitable subject. My noble friend has been most innovative by stating that, whatever the subject, he would make his speech. That is an example that all noble Lords should follow. My noble friend made an excellent speech on energy taxation and I look forward to hearing more from him.
944
The noble Lord, Lord Saatchi, recently gave a lecture in which he said something along the lines of, "Happiness cannot buy you money". All I can say in reply to that is that the promise of tax cuts cannot buy you votes either. The noble Lord tried to raise the spectres of tax harmonisation, federalism and so forth. However, what emerges from the report is the surprising fact that despite differences in corporation tax rates, as several other noble Lords have pointed out, when we examine tax take, which is the effective tax rate, there is a remarkable uniformity in corporation tax rates. Clearly there is a process of response by the private sector to the different and somewhat complex regimes that operate. By some form of competition and response, the outcome is that of ex post convergence, although ex ante the rates are different.
For that reason, one of the most important points that we should bear in mind is that when tax is debated at the political and economic level, we must be careful to identify exactly what it is that we are worried about. Even with the mainly large cross-border ex ante tax rate differences—the noble Lord, Lord Rathcavan, gave us an illustration of that fact—that does not mean that businessmen move from one end of the continent to another because businesses have many other factors to take into consideration.
The effects of tax rate calculations are important. When NAFTA was being debated, I recall Ross Perot saying, "If we sign this, all American jobs will go 'whoosh' across the border". Nothing of the kind happened. The number of Americans in employment is now higher than it was before NAFTA. It is rather paradoxical. Economists teach in textbooks that for small price differences there will be large responses. Only politicians take it seriously. Economists do not take it seriously. We know that it may be good for textbooks, but there are other considerations which we hold constant when we know that they are not constant at all.
That is what brings me to the complex problem of withholding tax. As the noble Baroness, Lady Sharp, pointed out in an excellent speech, in this area one has to rely on co-operation. In a global economy, if one wants to have some fiscal autonomy left—one needs some fiscal autonomy—one cannot go on taxing the immobile factors of production all the time. One needs some kind of co-ordination. I have problems with a withholding tax. It is tax evasion by the German taxpayers. They happen to be rather rich people and I do not have much sympathy for the tax problems of rich people. To what extent should we connive in tax evasion by rich people? While I am quite willing not to work too hard on behalf of the German Government, or any other government, I am worried that if we begin to build industries which are tax evasion-related industries that will be a fragile basis for prosperity.
The City argued this Ross Perot "whoosh" theorem—if anyone touched the tiniest withholding tax, entire industries would disappear. I was shocked and rather sad that the City did not come up with a

945
better argument. It was basically scaremongering. As we remarked in the report, there was no real detailed calculation of—
Lord Taverne: My Lords, I thank the noble Lord for giving way. It is perfectly true that the City did not give a great many details. But is there not the rather uncomfortable and worrying precedent of the American interest equalisation tax, which again dealt with evasion by very rich people but whose final result was very damaging to the United States?
Lord Desai: My Lords, I think America has survived. It did not suffer too much. Some industries have gone down but other industries have grown up. I would have bought the City's argument if someone had produced for me a calculation of the size of the market. What is the size of the market in which very small eurobond buyers have an involvement relative to the whole eurobond market? A withholding tax will affect only personal taxpayers.
I just wish that the technical level of the response to us of people who fear a withholding tax had been better. Having said that, I agree that the committee's conclusions are the correct ones. Therefore, for the time being, it is not persuaded of the arguments and would prefer information co-ordination to a withholding tax regime. However, if I were sitting in judgment I would not be very impressed by the scaremongering stories. I was certainly not impressed by them.
I also felt the same about the code of conduct. I quite agree that transparency is required and that it should not happen in secret. However, when listening to the Paymaster General, I felt that what she was describing was more like an idle seminar than a serious administrative arrangement. We are talking about various taxes across various countries. As soon as people start talking about taxes, they feel that they have to be secretive about it. Since the conclusions of the code are not to be binding and since no conclusions have been come to so far as I can see—people are discussing only various tax concessions which they could or could not find distortionary—I am not worried except that it is a PR disaster of first order. This Government, of all governments, should have tried to do something better.
I shall stop at this point because other noble Lords have said what I could have said. But I want to add my sentiment to that expressed by other noble Lords. I shall miss the noble Lord, Lord Grenfell.
7.5 p.m.
Lord Shaw of Northstead: My Lords, I should like to add my congratulations to the noble Lord, Lord Grenfell, on his chairmanship of the committee. Under his gentle and wise leadership, he never disguised his knowledge and experience of this whole subject. That was of tremendous help to us. He had working with him, in the shape of Dr Elizabeth Hopkins and her colleagues, a team that seemed to me never to work in less than overdrive. The speed with which the results
946
were produced was impressive and incredibly helpful. Her work was added to by the work of Professor Stephen Smith.
The subject of our debate today has to be of the utmost importance considering the future development of the European Union. That there should be some co-ordination is generally agreed. But how much? That is very much open to argument. Behind all the discussions that are taking place lie several fundamental questions: how far should the "same for all" principle apply; how far should centralisation in Brussels be taken; what value should be placed on subsidiarity; and how far should the discipline of competition be allowed to bring about a natural process of co-ordination? And over all there rests the basic question as to whether the future of the EU lies in movements towards a single federal state or whether we are to aim at a developing community of European nations. Noble Lords will hardly be surprised that I approach this subject firmly from the latter point of view. I hope that our report will help to open up and stimulate a better informed debate.
At the outset I welcome the clear statement by the Treasury official, Mr Colin Mowl. On voting, he said that,
"the maintenance of unanimity on tax matters is a Government commitment set out in its election manifesto … To change that would require a Treaty change which itself would require unanimity and the United Kingdom would not agree to such a change".
The reaffirmation of the Government's position is particularly reassuring, in view of the warning words of Commissioner Monti that,
"a few Member States have already pronounced in favour of shifting … from the unanimity rule to the qualified majority rule".
One has heard that kind of view put by others as well.
So far as concerns tax co-ordination, we believe that some may be necessary. But we believe also that tax decisions must primarily belong to individual member states. It is clear that the membership of the single market itself will in any case bring about a measure of convergence, although we must also remember that tax competition can help to keep down rates of taxation, which in itself is always a desirable objective.

It has been suggested that joining EMU will make tax co-ordination inevitable, since, it is said, the successful management of monetary and tax policies can be achieved only if both are under the same political control. Personally, I strongly support the contrary argument; namely, that,
"since national governments can no longer have recourse to monetary policy they have an even greater need to use tax policy to manage their economies in pursuit of legitimate national objectives".
In any case, I firmly believe that all authorities, national or local, which have responsibility for spending money should also have responsibility for raising that money. Otherwise, the old maxim will apply: "He who pays the piper calls the tune". For that reason, we must maintain firm control of our own taxes.

947
I should like to say one final word on the argued need for co-ordination of taxation to help reduce unemployment. It is argued that there has been a shift from taxation of capital to taxation of labour, with a consequent increase in unemployment. We found no firm evidence for that view. Indeed, we found significant instances where it just was not true. So we state in the report that,
"we do not agree with the Commission that employment promotion is an argument which can be used to support the proposed tax co-ordination measures".
Perhaps I may add my comments to those that have already been made on the code of conduct. One of our principal subjects of concern has been the code of conduct group—or perhaps I should say the code of conduct of the code of conduct group. Our concern has been that there are consequences that will flow from the decision taken by the group.
The Paymaster General has told us that the code of conduct is not legally binding on member states. Yet Colin Mowl, the UK representative on the group, has said,
"Although [the Code] is not legally binding, the Government has entered into an international commitment which it expects to honour and expects other people to honour".
Incidentally, since our own representative chairs that committee, our commitment must be the greater.
Were we wise to agree to join such a group under such conditions of secrecy, since while we accept that its decisions are not legally binding, on the other hand Ulrich Wolff of the German Ministry of Finance tells us that,
"there is no big difference between legally binding instruments and politically binding instruments in the area of international conventions".
The suspicion voiced by witnesses is surely justified; namely, that this device could be used to side-step the unanimity rule.
It is, therefore, even more important that the secrecy that surrounds the group's proceedings should be lifted. This Government are pledged to "open government". Yet they are now engaged in discussions which, on the one hand, could be on matters of minor importance yet on the other could be of major concern to business and the taxpayer alike. The facts should be known. Harmful rumours arising out of ignorance should be squashed.
In their reply, the Government state—completely inadequately—that they,
"will make available to Parliament any reports from the Group to the Council which the Council agrees should be published".
No great deal is being promised; the information will be with us in any case.
I now turn to mutual assistance in debt recovery, which is taken up in paragraph 210. We were told by HM Customs and Excise that it placed a great of emphasis on mutual assistance by revenue authorities. The report states that,
"Existing Directive; provide for limited mutual assistance between Member States in the recovery of tax debts. There is a proposal currently or the table, which would modernise and extend the provisions in relation to both indirect and direct taxes".
948
We have expressed surprise that the Government have felt obliged to block that proposal. In their response, the Government, in turn, express their surprise at our surprise. Whereas it seemed to us a useful administrative measure, the Government point out that,
"As well as having a direct impact on taxpayers, this would affect the levels of tax recovered and thus the revenues of member states".
While I do not want to question that opinion—indeed, I confess that I think it is right—I believe that this important matter should not be left undecided. Therefore, will the Government confirm that they are in favour of the proposal in principle, and that the only objection is that it should be passed under Article 94, and not Article 95EC? If so, and as everyone is then in favour of the proposals, one's instinctive reaction is to say, "Splendid. Let's get on with it, no matter which article may be involved". But, alas, we all know that that is not possible.
But it would also be wrong not to pass this unanimously approved proposal. Common sense tells us that it must be enacted. If agreement cannot be reached on the use of Article 94, is it too much to hope that common sense can find a procedure for its acceptance without the creation of an unacceptable precedent for the future.
7.26 p.m.
Lord Shore of Stepney: My Lords, there are a number of fundamental questions, raised by the noble Lord, Lord Shaw, that need answering. They arise to some extent within the context of the report, careful as it is. Indeed, it includes above all the question of questions: are we en route for the creation of a state in Europe; or are we still somehow clutching onto the remnants of our national sovereignty and our democracy here at Westminster? I fear that the matter is already largely decided in favour of the former rather than the latter. The report has some bearing on the matter, which I shall touch upon shortly.
First, I should like to thank my noble friend Lord Grenfell for presiding over the report. I know his feelings on these matters. He belongs to what may be described as the Europhile camp. Because of his own feelings, and those of a substantial number of members of the committee—a clear majority—it is all the more creditable that my noble friend feels the necessity to probe and to come up with honest questions, to make sure that people do not get away with the kind of general statements that are designed, frankly, to confuse rather than enlighten. I genuinely congratulate my noble friend on his role in this.
I should like also to congratulate my noble friend Lord Lea on his maiden speech. It was an extraordinarily good one. I hope that we shall hear more from the noble Lord in the future. He speaks with considerable authority and experience, not least in the questions that we are now deciding. What he has not learnt, as a serious Europhile, is how unwise it is to be too open in an assembly such as this. It is quite clear to me—and my noble friend hardly restrained himself from saying it—that he would like harmonisation.

949
He gave a good example of where it might be to our benefit. It is very healthy for those who hold that view to be a little more forthcoming and not quite so constrained as regards their genuine ambitions in that area. Therefore, we welcome my noble friend Lord Lea and hope to hear from him again.
There is no question of the importance of tax harmonisation or tax co-ordination—whatever the difference may be—for several reasons. Incidentally, the reason that it is particularly sensitive to us should be plain to everyone. In terms of a number of direct and indirect taxes we have a considerable advantage compared with the generality of our colleagues in the European Union. They have a very good reason for saying that it is good to have co-ordination and harmonisation of taxes even if exactly the same rates cannot be achieved across Europe, including Britain. But if they can get rid of at least some of our advantages in terms of tax allowances and other matters, what a benefit that would be. Yes, they would benefit and we would lose.
Although Luxembourg has an interest in the proposed withholding tax, that is almost uniquely a British asset. What could be better, frankly, than to see that asset shared—if it could be—more generally with the other countries in the Union? Naturally, they have brought to bear strong pressures and want the withholding tax to be the subject of a directive which would seriously disadvantage us. Those seem to me to be two obvious reasons why we should take tax matters very seriously.
There is a third reason. In December 1997 the Commission put onto the agenda of European Union discussions not just one tax but a battery of them, including the establishment of a code of conduct committee with a vast remit—to which I shall turn in a moment—including a withholding tax, which I have just mentioned, and a tax that would affect the tax arrangements of companies with subsidiaries in different parts of the European Union, which I do not believe is particularly worrying. A good number of other members also have reasons for wanting harmonisation on VAT. There was also an energy tax. That is a formidable agenda.
How do my noble friends respond to it when people like myself bring it to their attention? They say that we are being hysterical, as though we have imagined that this agenda comprising tax measures exists. They say that we are paranoid about it. They also say that we have nothing to worry about because of the various safeguards to which they point and which they believe give us a strong defensive position against any possible attack.
As to the study on the code of conduct, according to the Commission it is about,
"those harmful tax measures that may affect in a significant way the location of business activity in the Community".
That is a very serious matter. If tax differences—or lack of tax harmonisation—can allow one state to enjoy a significant advantage in attracting investment to its territory, we should be concerned as good
950
Europeans and seek a code of conduct, or harmonisation, that removes this obvious British advantage. However, that is not on the face of the report, although it may be in the hearts and minds of one or two of those who helped to write it. I put that on one side and turn to the attitude of the Government and the assurances that they have given.
At a fairly early stage the Paymaster General, Dawn Primarolo, told the other place:
"All EC proposals on tax require unanimity before they can be adopted. We will not accept any proposals which are not in the national interest".—[Official Report, Commons, 22/6/99; col. WA 325.]
My noble friend, who is to reply this evening—I informed him that I would raise this matter—gave assurances in the most extravagant terms. He said it was inconceivable that we were under threat. On 20th January he quoted, with approval, Mr Kenneth Clarke, whose opinion was that,
"'In reality there is at present no serious or credible euro threat to Britain".
My noble friend continued:
"If we think it is unfair we shall veto it and it will not happen. It is as simple as that. The failsafe position is on my side of the argument and not on my noble friend's side".—[Official Report, 20/1/99; col. 662.]
He was referring to me at that time. That is an important guarantee.
On 28th January, again in reply to me, my noble friend said that the difference between harmful and non-harmful matters could be well explained and properly discussed, and finished with the following splendid quotation:
"We shall engage constructively with our European partners but shall not accept a proposal if it is not in the national interest. We shall ensure that tax decisions continue to be taken unanimously".—[Official Report, 28/1/99; col. 1209.]
I do not believe that he could have been stronger and more affirmative.
We then had a farce. I am sorry that my noble friend should have been ambushed in this way. One of the five measures in the Chancellor's 1998–99 Budget was the Northern Ireland 100 per cent capital allowances for small and medium size firms. That was mentioned by both my noble friend here and his ministerial colleague in the other place when those guarantees were given. That was suddenly struck down on 9th July when the wretched Minister in the Commons had to move a new clause to delete the old one which had given 100 per cent capital allowances and put in its place something of far more modest proportions.
I raised this matter with my noble friend, as I was almost bound to do, when we last debated these matters just before the Summer Recess. He said that it was all quite clear, that there was no real problem and it simply fell under the heading of state aids. State aids are not just direct payments, subsidies and the like; they are also tax allowances. Incredibly, without a protest or challenge my honourable friends in the other place and my noble friends here swallowed that.
That leads on to some interesting fundamental questions which relate mainly to the code of conduct. The first one follows naturally from what I have just

951
said. How many other tax allowances and measures—we know of four others: shipbuilding, films and so on—can also be considered under the heading of state aids rather than taxation? As to state aids, there is no question of a veto; it is for the Commission to decide. The Commission has decided the matter—and against our interest. So all those promises of, "We will not allow anyone to affect our interests if we judge it not to be acceptable" fall. They are exposed at once to a major gap in their credibility.
That is the first question that I want to put. What other of our tax measures are to be judged as state aids and therefore totally unprotected by our British law? Secondly, I want to ask the question that the noble Lord before me also raised, which is the very important question: is the code of conduct binding or is it voluntary and can it be rejected if we do not like it or do not like the effect? On this, like others, I am baffled indeed. We have had the junior Minister in the Commons before the committee and before that House affirming strongly that it is entirely up to the Government to accept whether recommendations made in the code of conduct are implemented. There is no legislative compulsion, as it were.
I have here an agreed document, the progress report of the ECOFIN Council to the European Council at the end of last year. The code has already been adopted, although what measures are to be covered by the code are still at large though they hope to finish this by November this year. This is their first report in which they say:
"In the Code Member States commit themselves not to introduce new tax measures which are harmful within the meaning of the Code. Also, Member States commit themselves to amend existing laws and established practices as necessary…".
That is from Brussels, the great source of authority, not just from the lips of a junior Minister in the House of Commons. I think we are entitled to be worried because of that as well.
I finish with the last point that worries me, and no doubt my noble friend will say that I invented all these things or he will give me some promise and repeat what he has said on other occasions. However, the question of whether the next IGC will come up with a proposal to institute qualified majority voting in the area of taxation will arise. When, as my right honourable friend in the Commons, Robin Cook, says, as he did yesterday when asked whether we would veto anything, "Yes, no question; we would not allow that", I have a very serious doubt and I will tell noble Lords why. First, they do not like to be isolated as they could well be in Europe; secondly because the Commission and the major partners, France and Germany, have already indicated that they would be in favour; and, thirdly—and let us grow up and be sensible—it is a bargain and, if we do not accept a majority view and qualified majority voting over taxation, we will have in effect to veto the extension of the European Union to embrace the countries of eastern Europe. That IGC is about clearing the way for them to join and making institutional changes that are deemed to be necessary. When the British Foreign Minister and Prime Minister are faced with the
952
bargain, either accept QMV or be seen to be the nation that stopped the expansion of the European Union into eastern and central Europe, I could not be at all sure what the Government will do.
7.45 p.m.
Lord Hussey of North Bradley: My Lords, the control of taxation is at the heart of every country's economic and political governance. It is also at the heart of most of us unfortunates who have to pay the taxes. Any proposal therefore that might appear to give the European Community the right or the potential right to adjudicate on the justice, injustice, relevance or legality of any tax proposal is likely to invite considerable hostility. This is accepted by the Community in the unanimity rule under which any Community decision must be unanimous. This gives the opportunity for any country to exercise the veto on tax measures which would affects its citizens.
The point is properly and clearly made in our report:
"So long as the Government maintains its insistence on the unanimity rule in decision making and on the principle shared by all member states that national taxes raising revenue from domestic taxpayers are a strictly national matter, current proposals pose little or no threats to the interests of the United Kingdom".
Adding, for good measure, that the Government must remain permanently vigilant to ensure that undesirable tax measures are not smuggled in through the back door.
That said, clearly in an association of 15 countries, shortly perhaps 20 or 21 countries, with more to follow, there has to be a certain give and take on these issues, a certain freedom of action for member states—what is described as subsidiarity. This report on whether co-ordination and competition on taxes can co-exist is an extremely complicated one, raising several vital principles of importance to every state and its electorate.
As our discussion developed, I felt we were sailing through iceberg-infested waters, catching sight of the peaks jutting above the waves but realising the dangers lurking beneath them. For instance, should taxes be either co-ordinated or harmonised? Would either lead to higher or lower taxes? Could taxes be imposed on the United Kingdom? Should all tax proposals remain subject to veto or should some of them be decided by QMV? What about the taxation of royalties or withholding tax, about which feelings run so strongly.
On our voyage, we were lucky to have an excellent and experienced captain in the noble Lord, Lord Grenfell, and a skilled and equally experienced pilot in our clerk, Dr Elizabeth Hopkins. With their advice, we were able to circumvent most of these icebergs and not hit any of them, gliding elegantly past two noticeably dangerous and controversial ones: excise duty and energy taxation.
If I may add a personal interest, as someone with a house in Somerset and a disability, energy taxation is certainly worth looking at, but not in this context. For that reason, I welcome the excellent speech by the noble Lord, Lord Lea of Crondall.

953
So what conclusions did we reach? Most important of all, we have to face the fact that as members of the fast-expanding European union, it is no longer possible, practical or wise for member states to carry out their own tax regimes without reference to their fellow members. Tax competition can have advantages if an individual country like Eire, for instance, knows how to work the system and does so with enthusiasm. Equally, there are occasions on which tax competition could be harmful. It is not an open and shut case.
There is very little about these issues which could possibly be described as open and shut. Individual states must have the right to run their own economies to achieve their national objectives. Equally, they cannot totally disregard the other members of the club. We came to the conclusion that tax co-ordination was preferable to harmonisation.
It is a somewhat esoteric point but, to us at least, harmonisation carried an unsavoury whiff of compulsion and seemed likely, or possibly likely, to lead to higher taxation as tax reliefs or low rates are queried and perhaps removed under the excuse of unfair tax competition.
Co-ordination, on the other hand, carries a cosier feeling of mutual discussion and agreement. Although decisions on taxation can be a direct matter for individual states, they cannot always be taken in isolation and can lead to some degree of convergence: the trade-off of limitations of national freedom against the potential gains from co-ordination. For instance, there is some sense in the argument for the convergence of corporation tax throughout the Community.
That is where qualified majority voting comes in. Within a relatively restricted context, it is clearly a valuable principle, but only on the less important issues. The business of raising funds for the Community must go on, so there has to be a certain give and take. I do not doubt that there will be both when these issues are judged by QMV.
It reminds me of my newspaper days when I chaired the Newspaper Publishers Association, a motley collection of highly competitive and tough newspaper barons. We had to seek compromises, which were usually weak and invariably broken. But of course I accept that, happily, there is no similarity between the negotiations among the newspaper proprietors and those of the European Council. However, I did learn one thing of importance which I have never forgotten—the larger the group, the longer it takes to reach a decision and the less likely it is to be strictly effected.
The issue that has produced the most steam is the withholding tax. We found it difficult to reach any final conclusion about this. The evidence is conflicting and anyway hypothetical, except that Germany introduced it and shortly afterwards abandoned it. The German problem was not the same as ours. London is the centre of the eurobond market, so we have considerable financial and employment risks at stake. We were told that Switzerland would welcome
954
with open arms a European Union withholding tax and the capital it might receive as a result. There might be a drift of capital also to the United States. A severe loss of jobs is possible. Unfortunately, the figures were unquantifiable.
The Government promised a paper several months ago, but did not produce it until last month. So we did not have enough evidence to reach a view. It is for the Government, and the Government only, to decide whether a veto is appropriate.
There was one issue which our report did not hesitate to condemn, and I hesitate to raise it in front of your Lordships. It is the manner in which the group devising the code of conduct for business taxation is going about its business without any reference to Parliament. It has pledged not to accept new taxes that are harmful. But who judges what taxes are harmful.
Ever since I had the privilege to serve on the committee—and it is a great privilege to serve on the committee—the senior members of the Commission, from Herr Duisenberg to Signor Monti and Monsieur Trichet, have emphasised the need for absolute transparency in the European Community's conduct of affairs.
As someone who has spent many years in the media, I am, of course, strongly in favour of absolute transparency, although I have to confess that these days what some would regard as reasonable transparency others might regard as a gross infringement of privacy—but not our code of conduct committee, which at the moment appears to answer to nobody.
Our report makes plain that we are left in total ignorance about the way the group is operating. We do not know whether it could turn out to be an obnoxious method of inflicting secret taxation or an innocuous discussion group. I very much hope that the Minister will be able to clarify that.
For my part, the greatest concern I have about the relationship between tax co-ordination and competition—each in its own way conceivably meaning different things to different countries—is that in the end, although my colleagues do not entirely agree, I do not see how it can work effectively without some central political and monetary control, probably exercised by a non-elected body; the European Commission.
That brings me back to where I started: each member state must have the right to exercise control over its own domestic taxation, achieving its own national goals, but must equally accept that we live in a global economy and in an expanding club which must accept a flexible fiscal regime to allow for the stress involved in satisfactorily and profitably aligning different economies.
Above all—and it is the most important aspect—the citizens of the European Union must have total confidence that the decisions about their taxes will be fairly and honourably reached. Our report underwrites this. It is, I believe, a highly important one on a highly important issue. I wholeheartedly commend it to your Lordships.
7.55 p.m.
Lord Inglewood: My Lords, like every other speaker in the debate, I begin by congratulating the committee of the noble Lord, Lord Grenfell, on its report on taxation in the European Union. The topic goes to the heart of the very nature of Europe.
On previous occasions, I have explained to your Lordships that I believed that the political arrangements known as the European Union are not an alternative to the traditional nation state. Rather, they are the framework within which the member states are evolving and the system through which they work with each other.
One of my reasons for that belief is that the EU is not a revenue raising entity to any significant extent and I do not believe that it should become such. That is significant because, contrary to much popular perception, the EU is not and should not principally be concerned about raising and spending money.
Of course, there are provisions in the treaty which relate to tax and there has been a great deal of discussion about them tonight. However, they are also tied to the unanimity rule, which is important, as a member state cannot participate without actively agreeing to do so. Indeed, it has the legal freedom of manoeuvre, which is no different from that which it enjoys in an intergovernmental context.
Taxation is not merely a question of raising and spending money. I believe that whether it is appropriate for the European Union to lay down a legal framework within which member states should exercise their own revenue raising and spending powers is an important question to pose.
As a Conservative, I am an advocate for lower rather than high taxation. Within the single market, tax competition is not merely acceptable; it is desirable. In a world where tax competition is good, can there be unfair and hence unjust tax competition within it? At the beginning of the debate, the noble Baroness, Lady Sharp, asked: what exactly is unfair tax competition?
As a number of your Lordships have said tonight, the Government have signed a non-legally binding code of conduct in respect of business tax to which they have appended their political authority. But as we have all heard tonight, it is surrounded by a penumbra of uncertainty and vagueness. I join other speakers in the belief that the Government should explain and define that concept and tell us what are the exact parameters to the project to which they have signed up.
On a number of occasions, Commissioner Monti, who was the commissioner with responsibility for tax matters until earlier this year, has explained his view. In his evidence to the committee he said:
"Member States, for example, should not set up special schemes which significantly influence the location of business activity within the Union, particularly where they involve lower levels of taxation than the one generally applied in the Member States in question".
But how wide is that proposition? Does it cover all forms of taxation, and, if not, which and why? I suspect that Commissioner Monti would say that his
956
definition covered merely business taxation. But is it really possible in economic terms satisfactorily to distinguish between classes of taxation in this way? After all, it seems to me that what really matters is the purpose and the effect of taxation. That point was made rather well by my noble friend Lord Saatchi when he quoted Theo Waigel's comment that Britain was becoming a tax haven on account of the low levels of income tax.
We have at European Union level—we all know it, and it is a policy which I support—a policy about state aids which relates to financial inducements to encourage businesses to locate in particular places. Equally, as the noble Lord, Lord Shore, pointed out, that policy specifically includes—again it is spelt out in the treaty—a provision for tax provisions intended to achieve the same purpose within its scope.
If the extent of European state aid policy stretches that wide, do the Government believe that possible Community rules of unfair tax competition would go further than state aid rules, or is it merely duplicating the rules which already exist in relation to state aids? If so, then is the whole matter not something of a paper tiger? I should be interested to know the Government's views.
It slightly surprises me that no reference has yet been made to a recently published document from the Commission dated 28th September, entitled Communication from the Commission to the European Parliament and the Council—The Strategy for Europe's Internal Market, which, as chance has it, is being debated I believe at this very moment in the European Parliament in Brussels. Under the heading of the section concerned with what it calls improving the business environment, there is a subsection concerned with eliminating tax barriers to the internal market and unfair tax competition.
Perhaps your Lordships will allow me to quote from the document. Of course, one must remember that it is written in that form of English prevalent in Brussels, which is spoken nowhere in the world by someone whose first language it might be. The document states:
"The impact of different forms of taxation on the operation of the Internal Market is one of the main determinants of Community taxation policy. Some degree of tax harmonisation is indispensable to the proper functioning of the Internal Market. Harmonisation is not required in all areas and where it is required, the extent of harmonisation will vary".
It continues:
"Indirect taxes are a more conspicuous impediment to intra-Community trade than direct taxes".
It then goes on to say:
"There are however aspects of the tax systems of Member States which will not require any co-ordination or harmonisation. Personal income tax requires no action other than the elimination of double taxation which may impede citizens exercising their rights of free movement. There is, however, an intermediate zone of direct taxation on highly mobile tax bases, in particular the taxation of companies and the taxation of capital. Here Member States agree that a certain degree of co-ordination is required to prevent both the erosion of tax bases and double taxation".
I should be interested to know whether the Government agree with that point of view expressed by the Commission, and if not, what their view on these matters is.

957
I believe that there is a tendency to view some of these issues as abstractions, or perhaps intellectual conundra, somehow set apart from the day to day issues of daily political life. However, it was only last week that I read in a newspaper that England's nine development agencies had put proposals to the Government to help "rebalance" our country's local economies. One of the key proposals is to shift away from down payments of regional aid from central government to a system of rewarding companies through the corporate tax system.
Even though the code of conduct recognises the appropriateness of incentives for regional development so long as they are proportional to the end target, it very much seems to me that this approach looks a prime candidate to fall foul of either state aids policy, or possible rules on unfair tax competition, or both. I conclude by asking for the Government's views on that comment.
8.4 p.m.
Lord Randall of St Budeaux: My Lords, it gives me great pleasure to tell the House that I was on the committee which produced this report. It is an excellent piece of work—it is extraordinary really. Like others, I, too, thank my noble friend Lord Grenfell for the tremendous leadership that he showed. I regret very much that he will be leaving the House. That is a tragedy in my view. I repeat also what a number of other noble Lords have said about Dr Elizabeth Hopkins, our clerk, who has worked at a great pace, producing a good deal of high quality work.
I should also like to take this opportunity to congratulate my noble friend Lord Lea of Crondall. I wish him the very best for the future and I know that he will make an enormous contribution to the working of this House.
Taxation can be extremely boring for some people. Therefore, in my short contribution I should like to limit myself to discussing those parts of the report which bear directly on the globalisation process taking place in the world and, in particular, the impact that it will have inside the European Union. This relates to e-commerce, or, more significantly at this point in time, to e-business, where the rates of change are so phenomenal that I believe we need to take into account the speed with which we develop and sort out our taxation in the European Union so that there will not be distortions or a loss of opportunity in exploiting e-commerce.
Furthermore, I believe that if Britain maintains its present stance—it is doing extremely well in the areas of e-commerce and e-business—it will become a much richer place. I emphasise that the timescales we are discussing here are incredibly short. I should like to illustrate that point. The opportunity is here and the question is: how do we respond? First, there is the obvious point that SMEs (small and medium-sized enterprises) and big companies need to become involved in education and in training people so that
958
they understand what e-commerce and e-business are all about. As I said, e-business is business-to-business on-line. The key area in which they are currently involved—there is a revolution taking place—relates to procurement around the world.
Secondly, we must ensure that our tax structures do not distort and weaken the markets. We do not want to have a bottleneck in the way of developing and improving the European single market. The market at present in the European Union is substantial and the majority of our trade is done there. Therefore, it is in Britain's interest to ensure that there is a full commitment to developing that market.
Perhaps I may give one or two facts and figures relating to e-commerce. Two years ago, in the United States, business-to-business sales were 19 billion dollars. In three years, that figure has gone up to 251 billion dollars, and will grow to 1.4 trillion dollars in a further three years' time. To take the comparable European figures, two years ago the amount of e-commerce was negligible. It is now up to 17 billion euros, which is about £11 billion, and will grow to 340 billion euros in three years' time. We are talking about incredible timescales. I can think of nothing as revolutionary in our lives.
A new EU directive is coming from the European Union. We must ensure that British SMEs can compete and do well. Government plans in the Queen's Speech will have a theme of enterprise and fairness. There will also be an e-commerce Bill to help IT businesses. Later this month in his pre-Budget report the Chancellor of the Exchequer will emphasise productivity and enterprise. We must decide how we are going to increase productivity. The Government are spending £600 million on 1,000 new IT centres. How shall we exploit that for e-commerce education? Internet traffic in general—we all know that it is fantastically large—is doubling every 100 days. In all of these matters, we are talking about extraordinary change.
In addition to the exploitation of e-commerce that I have just touched on, what other tax matters need to be considered in order to open up this single market in an optimal fashion? First, as regards tax policy, I believe it is important to recognise that in the single market there is inevitably interdependence between member states. I believe it is absurd to argue that certain member states would or could create their tax regimes in complete isolation from other member states. It is not possible to return to the situation which we had in 1986 when we voted for the single market. We cannot return to those days; it has all gone far too far. Therefore, we need efficient exploitation of the European single market. That means that there is a need for co-ordination of tax regimes in a way that eliminates distortions in the markets.
It does not make sense—I give a specific example—that a trading company in one member state should win a contract at the expense of a company in another member state entirely because its prices are lower because it is favoured by its own domestic tax regime. That is the kind of distortion that we need to eliminate. It is absurd and crazy.

959
It can be argued—and this point has been raised this evening—that we can let tax competition prevail instead of co-ordinating tax regimes across the EU. The problem with that argument is that we can never be sure when competition will create distortions which will give one member state advantages over another in a way that will be harmful. There are times when competition is desirable. However, in this case the committee stated that it believed that,
"pragmatic tax co-ordination and fair competition can not only co-exist but complement each other, to the greater benefit of taxpayers within the European Union".
The Government's response to that part of the report was that the European Council in Vienna last December concluded that tax policy co-operation was not inconsistent with fair tax competition.
An important question arises; that is, to what extent should there be more co-ordination of taxes in order that the single market works effectively? The committee felt that that was difficult to answer because the powers to make tax decisions exist at individual member state level. Nevertheless, co-ordination may be necessary to prevent selective tax inducements by certain member states.
Reference has been made to the decision of ECOFIN in December 1997 to adopt a code of conduct as part of a package to tackle harmful tax competition. That code of conduct is aimed particularly at dealing with potentially harmful tax measures which could result in companies relocating to another EU member state. My own view is that in principle the code of conduct technique has many advantages. I know that so far everyone has criticised this, but I believe that if we could do something to reduce the number of treaty changes, that would be very helpful. However, I admit that there are problems of enforcement because of the nature of the agreement between member states.
Another question that arose in the committee was the extent to which tax co-ordination should be limited to within the EU. Unquestionably, with the growth of e-business throughout the world to which I have referred, the pattern and extent of trade is bound to change in the short term. The OECD is attempting to introduce measures that will encourage third world countries to trade with the EU. So far, it has been unsuccessful. I feel that it will only be a matter of time before the forces of globalisation change that.
I end by saying that the committee pointed out—I believe, quite rightly—that in introducing tax co-ordination measures, careful consideration should be given by the EU to the possible impact which such measures might have on future trading opportunities with countries outside the EU. In the end, it is in the interests of the EU that third countries follow the EU steps of preventing harmful tax competition.
8.16 p.m.
Lord Birdwood: My Lords, I have tried, I have really tried, to squeeze out of this magisterial Select Committee report a conclusion simple enough for me to absorb and articulate. Yet it asks such a simple
960
question in its title. Can co-ordination and competition co-exist? Under interrogation, how would I answer, based on the recommendations in the report? "Yes, easily"? "No, absolutely not"? "Yes, but"? "No, sort of"? "Don't know"? "Don't want to know"? After struggling through some of the evidence, I know that years ago I was right to put a life of service in the Inland Revenue very low on my list of career choices.
As I skimmed the pages, I started to feel an increasing separation from the real world. The intellectual density of the evidence is overwhelming. The quality of the questioning from the committee members was of the highest calibre. One would expect nothing else. Although the temptation to stray must have always been there, the committee admirably stayed within its brief. However, an irreverent observation from years back kept intruding: you could make a duck into an economist by teaching it the meaning of the words "supply" and "demand".
There seemed to me a detachment from the lives of ordinary human beings which brought a dream-like quality to those deliberations. I suppose that it is up to the social engineers in the nation, rather than its financial managers, to reconcile those arid concepts with the lives of its citizens.
Tax touches everyone. On page 56 of the report, leading into the concluding comments, we read the words:
"Taxation, whether direct or indirect, is a highly sensitive issue, and there is a clear need to ensure that proposals on tax matters emanating from the institutions of the European Union are properly publicised and accurately reported".
Boy, you can say that again. Tax is not just a game for clever folk to play. It is in the fabric of the idea of citizenship, defining relationships one with another. It defines the relationship of the individual to the state. It is the stuff of defining even ourselves to ourselves—fear and greed, honour and virtue, sacrifice and self-reliance. Of course, those were way outside the remit of the committee yet were the ghosts which hovered just at the edge of all the committee's fine conclusions.
Since the Treaty of Rome, three strands of understanding have been followed, pretty much unbroken. The first is that indirect taxes have always been candidates for harmonisation. The second is that it has always been quite off the agenda for other taxes to be harmonised. The third is that the European Union strategists have always been hoping to encroach on the second.
So the sense of relief in recent weeks has been almost tangible at the offerings from the incoming Commissioner, Mr Frits Bolkestein. At his confirmation hearing he said:
"It is difficult to see how even in the long term you could harmonise income taxes; nor do I see any pressing need for that, since different rates of income tax do not distort the market".
So that is all right then. However, I wish to make a point to your Lordships about our own reaction to those emollient words. Thinking clearly about it, I do not know which I find more distasteful: the programme of naked intervention on tax sovereignty which was ascribed to Mr Mario Monti, the previous

961
Commissioner; or the new, soothing tones of Mr Bolkestein. I mean, we are talking a classic hard-cop/soft-cop routine here. In either case, individuals of awesome power are making pronouncements which remove money from British citizens.
It is like apologies from two different kinds of pickpocket: one, charming and consensual; the other rather more explicit. In either case, the victim did not exactly exercise much choice. And one notices that reassurances about income tax were comfortably aired but other categories received a more guarded treatment.
It is appropriate to touch on our own Government's less than transparent programme of tax reconciliation with our European neighbours. Earlier, my noble friend exposed that superbly.
I make a point in passing. When comparing one country's taxes with another, the only form of impartial tax is zero. Once there is tax at source, it is automatically partial. Let us consider this. The overall tax burden in the UK hovers at about 40 per cent while in the rest of Europe it is about 50 per cent. Do we seriously believe that harmonisation will bring down the percentage of the others? The real-life outcome must be that our tax burden will drift upwards and by a number not far short of 25 per cent.
At rock bottom, governments must always tax things which do not move. Largely, the citizens of a particular country fall into that category, as do assets based on property. In the United States, a model has evolved where certain taxes are perceived as the costs of citizenship. It may be if the European ideal of psychological unity drew close—and I do not wish that it should do so—then that acceptable entry ticket feeling could spread.
At this time, I believe that we are in a socially dynamic model with no predestined outcome to its development. There is the potential for increasing resentment of a tax regime with not so much as a democratic deficit but rather a democratic total vacuum. And we have the reality of an economic landscape on a world scale in which Europe looks increasingly like a city under siege. So far, political stability has been highly appealing to the inward flow and retention of capital. Long may it be so.
But two things are happening from which there is no turning back. The first is that capital is loose upon the world in quantities and with an emotional volatility which gives it the characteristics of a life form—predatory, wary and utterly unaware of man-made boundaries. Capital is feral and trying to tame it with the whip of tax will not have predictable outcomes.
The second is that the very foundations of economics have shifted to give dominance to information-based paradigms. A country can tax its loyal people some but not very much more. It has a much more difficult job pursuing the labours of those same people into cyberspace. And it has a near impossible job if it wants to couple up those people to tax regimes imposed from the ambitions and whims of our own fractious version of Olympus in Brussels.
962
My fear is that even with stability and a competent regulatory framework, there will come a time when Europe will be increasingly toxic to development capital. The world owes Europe no financial favours; neither do our European neighbours feel they owe us. I am trying to put myself into the mind of a Treasury official in the present day. Do we have a catalogue of tax categories in other European countries which we should wish to "harmonise" with our own—categories which we should wish to see being matched by being brought down? If there is such a list, I should be extremely interested to see it. It may be an illusion but it feels as though everyone else is free to suggest to us that we should introduce this or that tax but we are constrained to keep our own suggestions secret. Why? I thought that the EU was one big family now with a culture of unity and no financial secrets between member nations. I suppose that the real world intrudes again.
This is neither the place nor hour to blunder around in the detail of the Select Committee report. It is sufficient to say that I share the expert anxieties about the withholding tax. That is as nasty a bit of precedent that one could fear to see. I hope that this Government will honour pledge after pledge to use what treaty instruments they can to protect the interests of their own countrymen and enterprises. But, I suppose, if we cave in on this, as so much else, we shall see our old friend, the strategic communications unit, being wheeled out to present our pusillanimous acquiescence as another triumph of negotiation.
8.28 p.m.
Lord Ashburton: My Lords, I add my thanks to those which have already been expressed to our chairman. He made our work a pleasure and ensured that the ground was covered without unduly fettering the members of the committee in the way they asked questions of witnesses. I add my thanks also to Dr Hopkins. She did not do miracles; she very nearly moved mountains in getting some of the work done and to us.
I am very sorry to hear reports about our chairman's political demise, which I hope are exaggerated. I feel that if I went out to Ladbroke's to try to get a price, I should find that he had not yet been written out of this House.
I also much enjoyed being present for the maiden speech of the noble Lord, Lord Lea of Crondall, to whose trenchant style I became accustomed during the years when I was chairman of the NEDO committee on finance for industry. I have little doubt that he will not be totally silent.
At this low place in the batting order, which I asked for but never attained before, I feel no inclination to dwell on the detail of the debate or the report which has been commented on already by a number of speakers. Therefore, I hope to be relatively brief.
Despite its undoubted importance and the fact that it provides considerable dissatisfaction, taxation is not a subject that appeals to a large number of people. The technical details can be difficult for a lay person to get

963
their mind around, and indeed it would not be unfair to say that many people's reactions are of the, "I know what sort of tax system I want; don't bother me with the detail", kind. Unfortunately, in an area where avoidance, not to say evasion, is attractive, the detail is absolutely vital. Loopholes are immediately exploited.
The committee took a considerable amount of evidence on the more detailed side of taxation issues, but in many ways I. believe that the most important conclusions to come out of the committee's work were of a more general nature. I shall return to that at the end of my remarks.
The evidence that we gathered usually pointed to there being at least two sides to most of the arguments, sometimes to the extent that we found, as in the case of ideas for a fundamental reform of the VAT system, that it was difficult to be convinced that the case for the advantages of change had been convincingly made out. There are few changes that can be made to fiscal arrangements that do not entail heavy costs which have to be weighed against gains.
However, the committee concluded pretty clearly that we could not agree with the Commission's contention that employment promotion is an argument that can be used to support proposed tax co-ordination measures. There was little solid evidence that lower taxation on income from capital had led so far to higher taxation on labour, nor that rises in the former would lead to reductions in the latter, and even if it did, that that would lead to a reduction in unemployment. Nor were we convinced that a Community-wide withholding tax on savings income was necessary to deal with what appeared to be, at least in the first place, an acute attack of tax evasion by German nationals.
It cannot be denied that the single market, which I personally regard, as do many noble Lords, as extremely precious, will lead to a degree of co-ordination, although not necessarily to complete harmonisation of tax rates. At first sight those would appear to be more in the area of indirect taxation. But it has to be recognised that there is no impenetrable screen between indirect and direct taxation. Low effective rates of direct tax, for example, must have some influence on the location of new enterprise. Direct tax is certainly one of the areas where the reservation of competence to individual states and the maintenance of unanimity are most necessary if a tendency towards centrally imposed taxation is to be avoided.

I conclude by saying that, although at present there are more obviously large issues concerning the European Union, including notably enlargement, the CAP and the attempt to make realistic progress on defence and foreign policy issues, I believe that taxation issues are vitally important. This area is not easily susceptible to popular debate or understanding. I heartily endorse the remarks of the noble Lord, Lord Desai, about the educational potential of reports such as this. They deserve the maximum exposure so that relevant public opinion is better informed.
964
I commend to your Lordships the concluding comments in paragraphs 250 and 261 of the report. It could be all too easy, as the noble Lord. Lord Shore of Stepney, has pointed out, to sacrifice the UK's interests and the unanimity principle as part of a bargaining process over other issues, and we have to be aware constantly that by no means all the arguments put forward by other members of the European Union are inspired purely by high-minded, communautaire altruism. National interest is alive and well in the European Union and no one who has had the good fortune to serve on Sub-Committee A can fail to be aware of how often that became obvious during the collecting of evidence.
I count myself a europhile and do not find myself totally aligned with the noble Lord, Lord Shore of Stepney. Nevertheless, from time to time I find myself wishing that some of my europhile friends did not appear to have put their critical faculties in mothballs. I look forward to hearing the response of the noble Lord, Lord McIntosh.
8.35 p.m.
Lord Phillips of Sudbury: My Lords, I am grateful for the opportunity to speak in the four-minute slot. I have one point to make, but, first, I commend the reference made by the noble Lords, Lord Desai, Lord Birdwood and Lord Ashburton, to the importance of public education on this matter. I do not understand why reports of this nature should not have, as a compulsory component, an abbreviated, plain English form capable of being understood and read by any ordinary mortal. That would do wonders for the public awareness of the work of this House; it would do justice to reports of the eminence and utility of this one; and, above all, it would start to narrow the widening gap that I believe exists between this place, Parliament, and the people at large.
I want to speak about charities in relation to European taxation. It is easy to forget that the charity sector in this country is bigger than the automobile sector and bigger than the agriculture sector. It is easy to forget that Jacques Delors decided, for reasons that there is no time to delve into, to bring the voluntary sectors of Europe into the EU competence through the Maastricht Treaty.
It is also easy to be too complacent about the prospect of making tendencies uniform, vis-à-vis charity or voluntary sector taxation. Already there are moves in that direction. Although the noble Lord, Lord Currie, said earlier that one should not worry about such matters, I am not so sure. I have been in the charity sector for 25 years. Wherever there is a cross-national organisation it will tend, necessarily, inevitably, and without any malice, to start thinking up reasons for building on its own power-base and extending its own competence and influence. I see those tendencies evident in the charity sector now.
The charity sector in this country is enormous; it is vital; it has its own legal structure and its own regulatory structure. It is quite different from the rest of the European sector. In addition, the tax

965
concessions for our charities are vastly more generous than those of any other member state of the European Union. In this country charities and those who give to them have total exemption from income taxes, corporation taxes, capital taxes and inheritance taxes. I am afraid that there is competition even within the wonderful world of the voluntary sector—a competition that can exist between governments and between charities. There are already charities champing at the bit to have a uniform structure of charity taxation so that they can make appeals across the frontiers of Europe without any let or hindrance.
My point is simple. In my view the voluntary sector should be absolutely free of any attempt at uniformity or harmonisation, or whatever euphemism one wants to use. If one likes, the voluntary sector is the cottage garden of our country where individuality, diversity, eccentricity, indeed anarchy, flourish and should flourish. God bless it. Please, Minister, assure us that temptations or tendencies that work in the direction of harmonisation, vis-à-vis the voluntary sector, will be utterly resisted.
8.40 p.m.
Lord Taverne: My Lords, what struck me most about this report was the obvious common sense and the hard-headedness of it. As everyone has agreed, it is an excellent report. Indeed, one would not expect anything less from a report whose author was the noble Lord. He is, on all sides of the House, one of its most highly regarded Members.
Unfortunately, as many noble Lords have said, it is not likely to have much of an impact in the United Kingdom. It is not likely to lead to headlines in the Daily Mail stating, "We were wrong". On the other hand, it is likely to have a considerable impact in Brussels, as the noble Lord, Lord Lea of Crondall, pointed out. May I say what a pleasure it is to find him now a member of this House. We first met a long time ago, during the first Wilson government. With no disrespect to his colleagues in the TUC, I always regarded him as one of the most likeable and sensible members of the TUC in the days when he worked there.
I would like to make a few detailed points and one general one. I shall try not to repeat points already made. First, I refer to the thesis which Signor Monti produced. Signor Monti is someone for whom I have always had a very high regard. He has been very helpful to this country in general. However, I believe that there is a fundamental fallacy, as a number of noble Lords have pointed out, in his thesis that lower capital and corporation taxes have been the cause of higher taxes on labour.
It is quite clear why taxes on labour in the European Union have risen. It is because of the demands of social security, and in particular because of the European pension system. The fact that their pensions are pay-as-you-go pensions has meant that a smaller workforce has had to support, with the demographic changes, a higher number of pensioners, and social
966
security costs have, of course, inexorably risen. That is why the German Government, at the cost of considerable unpopularity, are now trying to reverse the process and limit the cost to the state pensions. It has nothing to do with taxation on capital or taxation on companies.
With regard to taxation on companies, I agree with what the noble Lord, Lord Currie, said. It would make sense to have a greater degree of co-ordination of corporate taxation. However, I am very pessimistic. I believe that there is not a cat in hell's chance that we shall see it in the near future. One has only to look at the attempts that were made by the Ruding Committee to arrive at some sort of basis of harmonisation of corporate taxes. The Ruding Committee report has sunk without trace. The problem is that the bases for taxation are very different.
It was mentioned that there is no point in harmonising rates. I refer to a small contribution that I made to this question in Tax and the Euro, in which I drew up a table of taxation as a percentage of GDP. One then found that, despite the fact that German taxes are much higher in terms of rates than our corporate taxes, the yield as a percentage of GDP of German corporate taxes was 1.7 per cent, and the yield of UK corporate taxes, with much higher rates, was 3.6 per cent—twice as high. Those figures are not be taken at complete face value, because certain German corporate taxes are paid as income tax. But there is no doubt that we have a much higher yield from corporate taxes despite much lower rates.
Let me say something about the code of conduct. I agree with the remarks that have been made on all sides of the House about transparency. I agree very much with what the noble Lord, Lord Saatchi, said about transparency. However, I do not agree with his view that we cannot have other people interfering with our taxes at all—of course, there is a measure of independence—and particularly in some of the issues which are part of the inquiry under the code of conduct committee. It is true that one cannot regard state aid as exactly equivalent to tax concessions, but sometimes they have an absolutely identical effect. You can help a company by lowering its taxes or you can help a company by giving it money. We have a very strong national interest in ensuring that the competition in giving different forms of state subsidies is controlled by the Commission. We have a similar interest in ensuring that there are no unfair ways of helping particular companies which could be exactly similar to a form of state aid. We are inter-dependent.
On the question of the withholding tax, with respect, I do not agree entirely with the noble Lord, Lord Lea of Crondall, that there is a case for a minimum withholding tax. In principle, a withholding tax seems quite sensible. However, there are several objections. First, there are the objections, formidably put in the Government's paper on international bonds and the draft directives on the taxation of savings; I say no more about that. However, I would go further and say that, in my opinion, the whole idea of a withholding

967
tax is a mistake. If it was entirely a question of greater disclosure of information, that would do no harm at all.
The case against the withholding tax is not just that it would lead to the taxation of international bonds. The history of it is very unfortunate. When the Germans introduced it for the first time, they lost billions because savings were moved to Luxembourg. They tried it again, because of the ruling of the Frankfurt court, their Karlsruhe court, and again they lost a great deal of money, which is why they are very keen to see it on a European scale. But why should it work on a European scale.
In fact, the most effective criticism of the withholding tax was made by a French institute, the highly regarded French think tank, the Prométhée Institute, which gave a number of reasons why, in its view, the withholding tax would be a mistake. First, there would be formidable complexities and bureaucracy. Paying agents, having to keep elaborate records, may not always find it easy to identify the place of residence of beneficiaries. Life would be much easier for paying agents outside the European Union and many of them would go out. Secondly, the tax only applies to interest payments, a valid point that others have made. But what interest payments? Interest-paying unit trusts may escape the withholding tax because they can amalgamate with non-interest paying unit trusts. In addition, what would be the position about zero coupons? There are a lot of complexities.
The biggest problem about the withholding tax is that, just as German savings went to Luxembourg when it was imposed in Germany only, so European savings will go outside the European Union if it is imposed in the European Union only. They can go to Switzerland and a number of other places.
The problem is that those in the Commission have looked at the matter very much as an internal problem. I do not believe that they have taken a broad enough view of the future of the euro as a global currency. If they had looked at it as a global currency and considered its future as such, they would not be concerned with rather narrow questions of tax avoidance. The United States was very much concerned about the narrow question of tax avoidance when in 1963 it imposed the interest equalisation tax. The result was that an enormous new development was entirely lost to the United States and came to Britain—very favourable to us, very bad for them.
Finally, I make one general point. The report disproves the scare stories. It will not, of course, stop Mr Portillo saying that the euro is going to bring much higher taxes in the United Kingdom and it will not stop those who say that tax is yet another example of the inevitable drive towards a European super state. The belief that the European Union is hell-bent on creating a European super state is almost an article of religious faith which cannot be contradicted by any evidence.
When the noble Lord, Lord Shore, speaks on the subject, he speaks with the passion of an Old Testament prophet. I greatly admire his eloquence. He
968
is a pleasure to listen to, although I sometimes wish that he did not speak at least twice as long as anyone else. In fact, this report, and the tax experience more generally, proves the opposite. You cannot have a European super state unless you have substantial central resources. Many speeches are made about the European super state. But what do the countries actually do? They have all agreed that they are not going to give any more resources to the centre. You cannot have a European super state if the central tax resources are limited to 1.27 per cent of the GDP of the European Union.
Germany, whose leaders often make federal speeches, is in the lead in opposing any further sums to the centre. When one looks at trends in the European Union, they contradict the drive towards a federal super state. The European Union has both federal and "confederal" characteristics. The federal characteristics tend to be concerned with the areas in which the Commission is involved—the matters of the single market; competition policy—where certain executive decisions can be taken by the central body, the Commission. But in the past decades power has been moving towards the more "confederal" body, the Council of Ministers. That is where the two new pillars were created after Maastricht.
One finds, therefore, that the whole trend is not towards this federal super state; it is much more to something which is a mixture of the two with a strong confederal element. Indeed, one of the matters which is preventing the creation of a single super state is the limit on the central resources; and tax is the proof that that is in fact not going to be increased.
8.50 p.m.
Lord Kingsland: My Lords, first, from the Benches of Her Majesty's Loyal Opposition, I want to say how much we all enjoyed the maiden speech of the noble Lord, Lord Lea of Crondall. Not for the noble Lord the niche topic. Both in his choice of subject and mode of exposition, the noble Lord was bold. I think we would all agree that, both from the sincerity of the message and the directness of the exposition, we not only derived great pleasure from his speech but also experienced a great sense of anticipation. We look forward to the next instalment. I thank the noble Lord for his contribution this afternoon.
I should also like to congratulate the noble Lord, Lord Grenfell, on his report. As a skilful exponent of the art of popular fiction, the noble Lord must have found the subject matter of the report somewhat intractable. But his unique blend of intelligence and lightness of touch produced an end product which I know your Lordships will agree is both readable and perspicacious. I have known the noble Lord, Lord Grenfell, for more years than I care to admit, and I would have expected nothing less.
One of the most interesting themes of the report concerns the contrast between harmonisation and co-ordination. It is quite clear what we all mean by "harmonisation" in the European Community. The Commission makes a proposal; the Parliament is

969
consulted; the Council deliberates and a directive or a regulation is made which is justiciable in the European Court. We should make no bones about it: this is, in effect, a judicial federation. And in circumstances where the laws are made by qualified majority rather than unanimity, it also has the character of a legislative federation. These are arrangements into which successive British governments have entered over a number of decades.
By contrast, "co-ordination" can mean a number of things. For example, it can mean what the noble Lord, Lord Hussey of North Bradley, referred to when he discussed the arrangements entered into by the press barons—arrangements which he said were painfully reached and almost invariably broken. Equally, at the other end of the scale, co-ordination can involve contractual arrangements which are regarded by those who participate in them as legally binding.
As I understand it, the position of the Government on the Code of Conduct Group, to which most notably the noble Lords, Lord Shore and Lord Boardman, spoke, is that it does not breach the principle of unanimity and its decisions are not legally binding. I have been looking at a section of the report which deals with the evidence of Mr. Cohn Mowl, one of the United Kingdom's representatives on the group. At paragraph 124 of the report we find Mr. Mowl quoted as saying:
"Although [the Code] is not legally binding the Government has entered into an international commitment which it expects to honour and expects other people to honour".
The report continues:
"Asked what might happen in relation to particular United Kingdom measures being examined by the Group, he said that if they were found to be harmful 'the terms of the Code would come into effect. There is a commitment in there that Member States will roll back according to certain timescales … any actually harmful measures.".
If that is not, in contractual terms, legally binding, I do not know what is. The only thing which distinguishes its legal quality from that of the harmonised system, which I sought to explain to your Lordships earlier, is that in the harmonised situation there is a recognised way of drawing in the Court of Justice when there is a dispute about what a regulation, directive or other measure means. In this case, there is no system for dispute resolution; but that does not mean that this undertaking is not legally binding.
I turn now to the question of unanimity. Somewhat further down in paragraph 124 we find Mr. Mowl quoted again. He says:
"If some Member State disagrees with some aspects of the conclusions then its view is put forward in the report of the Group. To some extent this is unchartered territory, but there will then be a collective discussion in ECOFIN no doubt, but because this process reflects national competence any action taken is for individual Member States to take. It is not as though you need unanimity formally".
Again the report continued:
"The Paymaster General confirmed that the Code of Conduct Group itself did not take votes, but was 'charged to reflect the views expressed in the discussion of the subject'".
970
It is quite clear that once the Code of Conduct Group has come to a certain view collectively, the individual member state that is the subject of that discussion is obliged to act, if necessary by rolling back, in conformity with a specific timescale, the criticised tax. In my submission that is a clear breach of the principle of unanimity.
I wish to draw attention to two other matters concerning the group. The first is that, as many noble Lords have said, the activities of this group are carried out entirely in secret—your Lordships are not allowed to see the agendas; your Lordships are not allowed to see the minutes; your Lordships are not allowed to see the progress reports.
Many people in the United Kingdom believe that a viable alternative to the classical harmonisation approach is the approach of intergovernmentalism. They believe that because intergovernmentalism, in principle, allows national parliaments to retain control of political debate and decision-making. We have here a very important intergovernmental mechanism to control a matter which a vital part of this nation's sovereignty. What role does our national Parliament have in that intergovernmental mechanism? The answer is none. If we are to manage the decision-making processes of the European Community in future on an intergovernmental basis, we simply cannot allow deliberations of this importance to take place in secrecy.
The second point, which arises out of my suggestion to your Lordships that the work of this Code of Conduct Group is both legally binding and not unanimous, concerns the relationship of the Code of Conduct Group to the state aid rules in the treaty. Those rules are directly binding on the government of each member state and, in circumstances where a member state breaches one of them, that member state is open to infraction proceedings by the European Commission. There is a clear procedure laid down transparently in the treaty.
As I understand it, every single item on the agenda of the Code of Conduct Group qualifies as a potential illegal state aid. Why has the Community chosen not to deal with these issues by the mechanisms laid down in the treaty? Why has it chosen to invent instead a completely new mechanism which duplicates exactly an existing mechanism? I leave it to your Lordships to speculate. Could it have something to do with the wider issue of transparency, or is there some other motive of which we know nothing.
Indeed, in the light of the fact that the Code of Conduct Group is exactly mirroring a procedure which is already set out in the treaty, I would go as far as to ask: is it legal? Is what is being done by the Code of the Conduct Group contrary to the treaty on the grounds that the latter already has a mechanism to deal with these matters and the group is seeking to evade it? I simply pose the question and wait with interest to hear what the Government will have to say in response.
I have just two final reflections to make on the report. The first concerns the desirability of tax harmonisation in a continent where 11 member states

971
are already part of European monetary union. Becoming a member of the European monetary union and embracing the single currency means that one of the two major instruments of economic policy is now lost to the nation state, leaving only fiscal policy. Far from those member states who are members of economic and monetary union harmonising taxes, I have always believed that their interests were in exactly the opposite direction. If you no longer have the capacity to adjust your interest rates and your money supply, it is even more desirable to have complete freedom of manoeuvre when you are dealing with fiscal policy.
Over the past 20 years, the Dutch and the Germans have had, in effect, a single currency. The reason why they have been able to keep their rates of exchange exactly fixed between each other is that they have followed widely divergent fiscal policies. If they had had to follow a uniform fiscal policy, I think it highly unlikely that their currency policy would have been as successful as they believe it has been.
For many centuries now there has been a debate about the extent to which politics should interfere with monetary policy. In the late 19th century not only was the Bank of England completely independent of political control, but our currency was also attached to the gold standard. Therefore, in a sense, not only did Parliament lose control of issues concerned with money supply but the nation also lost control for a period of 40 years.
I believe that the debate about the desirability or the degree of political interference in monetary matters is genuinely still out to the jury. But there can be no debate about the crucial importance of national parliamentary control of fiscal matters. In my submission, that is absolutely central to the notion of democracy in a modern nation state.
In the area of VAT and in the area of excise duty the United Kingdom Government have, by unanimous decision, decided to cede certain powers to the European Community, rightly or wrongly. However, what we are seeing here is the Parliament of a nation state attempting to cede further taxation powers to the European Community by majority voting, uncontrolled by the national Parliament. That must be unacceptable to the United Kingdom.
9.5 p.m.
Lord McIntosh of Haringey: My Lords, I share the tributes that have been paid by all noble Lords who have taken part in this debate to the work of the committee and its staff and, in particular, to my noble friend Lord Grenfell. I am gutted by any suggestion that he might choose to be no longer with us. The noble Lord, Lord Shaw of Northstead, said that the tribute to this report was that it would stimulate better, informed debate. Indeed, it has. If I may say so, it has stimulated a very much better informed debate both this afternoon and this evening than we had on 18th June when we discussed the Private Member's Bill introduced by the noble Lord, Lord Waddington.
972
It is because we have had the detailed and careful considerations and analysis of the committee's report before us, together with the benefit of the very expert evidence that witnesses gave, that we have been able to have a debate of such excellence. I believe I can reveal—at least, I think I can because no one has told me that I cannot—that Commissioner Monti remarked privately to the Government on the outstanding quality of the report. He is not someone who is known for paying excessive tributes.
As well as considering current issues, the committee commented on some ideas on the future of European Union taxation. I very much enjoyed that part of the report and it makes some interesting points. Despite my noble friend Lord Grenfell saying that he wished that we would comment on it, I think he will understand that we do not want to commit the Government in public on those points today. I think that it is best for me to restrict myself to the current issues in this report which are of great importance.
Let me say straight away that the Government welcome the report and the conclusions of the committee. The noble Lord, Lord Grenfell, said that it is very much in line with the Government's position and we agree with that. The report confirms what I have said to this House time and time again; namely, that the United Kingdom has nothing to lose and everything to gain from engaging in constructive dialogue with our European partners on tax issues.
As the report states—and as we agree—
"we believe that pragmatic tax co-ordination and fair competition cannot only co-exist but complement each other, to the greater benefit of taxpayers within the European Union".
That has been confirmed by a number of noble Lords who have spoken today, notably my noble friend Lord Currie. This statement entirely reflects the opinion of the present Government. I take the opportunity to respond to the points raised by noble Lords during the course of the debate and to expand on the Government's response to the committee's report.
In the past, British businesses, operating in a relatively neutral tax system, may have had to compete in Europe with companies which enjoyed the benefits of a tax system weighted in their favour. As Europe moves towards a single market, this is recognised as being no longer acceptable. Now the Government are working with other member states to create a more level playing field for business across Europe. I recognise the force of what the noble Lord, Lord Rathcavan, said about our only land border with another member state being in the island of Ireland. I am always careful to try to avoid politically incorrect descriptions as regards Ireland, but I know that I shall get it wrong. The island of Ireland has a land border within it and it is quite clear that that causes great problems. I am sure that the Treasury will pay great attention to what the noble Lord has said.
But do not misunderstand me. The measures under consideration do not purport to create a unified tax system. This is not the way forward for Europe. For the benefit of those who have not fully understood that, I shall happily repeat what I have said before. My

973
noble friend Lord Shore says that I do so in extravagant terms, but as I have to do it so often I must be forgiven for a little bit of "embroidery" each time, although fundamentally I am saying the same thing. The priority for Europe is the promotion of employment, economic reforms and competitive markets, not tax harmonisation.
As we have been talking about the difference between tax harmonisation and tax policy co-operation, I think that it is better if we define our terms, certainly as regards tax co-ordination. Tax policy co-ordination in the progress reports from ECOFIN to the European Council is defined on the principles of national competence: that is, policies wholly a matter for individual member states if the Community does not have competence under the treaty; subsidiarity: that is, action at Community level only where accepted objectives cannot be achieved by countries acting alone; and unanimity—each member state has a veto. That is its definition of tax policy co-operation and the Government believe that that is the way it should stay.
Lord Shore of Stepney: My Lords, I hope that I may interrupt my noble friend on that very point. After what he has heard during the debate today, does he still affirm in unqualified terms that we have a veto over all tax measures as it were emanating from Brussels? Has he not recognised that in certain ways he has misled us?—I do not say deliberately; quite the contrary. But from the beginning of this year onwards on about eight occasions the House was given absolute assurances that the veto would apply on all matters dealing with taxation. Now we know that a great part of it is classified as state aids and has therefore no veto attached. What has my noble friend to say about that?
Lord McIntosh of Haringey: My Lords, my noble friend described his speech today as an ambush. It is a funny kind of ambush when he made exactly the same speech on 23rd July and I replied to it in terms at that time. I shall reply to his points when I come to deal with his intervention. I have not forgotten what he said.
During the debate in the House in June this year I reminded the House of the conclusions of the Council of Ministers which confirmed again this basic truth I have mentioned. I hope that I shall not have to mention it again. The noble Lord, Lord Inglewood, challenged me on a Commission communication on the strategy for the single market. This is a consultative communication by the Commission. It has not been agreed to by the Council. The Commission's views are well known and are not new. Commissioner Bolkestein said roughly the same thing in his evidence to the European Parliament. We do not agree that harmonisation of corporate tax is necessary and there are no proposals of this kind on the table.
I am happy to acknowledge that the Committee recognises that,
"recent scare headlines about a European Union tax take-over were unjustified and ill-served the British public".
974
The noble Baroness, Lady Sharp, confirmed that. I was sorry to hear the noble Lord, Lord Saatchi, and my noble friend Lord Shore again raising the spectre of a federal Europe. They were well answered by my noble friend Lord Desai and by the noble Lord, Lord Taverne.
It does not help to have this continuous repetition of quotations from former German Ministers, like Herr Lafontaine and Herr Waigel. I would remind the House about the recent joint statement issued by Mr Blair and Mr Schröder—which I suggest has much more validity—which underlines this sentiment running through Europe. They stated:
"We do not favour a unified European system of corporate taxation. We agree that further consideration could be given to how harmful tax competition in the area of corporate taxation might best be avoided. But we will not support measures leading to a higher tax burden and jeopardising competitiveness and jobs in the European Union".
If those are extravagant terms, there is something wrong with the way in which people who hold that view have formed their views. They are utterly unequivocal. They are in the names of the leaders of this country and of the Federal Republic of Germany. We should take that statement seriously and cease these unjustified accusations and continual harping on about a creeping advance—or retreat—towards a federal Europe. The statement is a very clear indication that all energies in Europe are focused on working together to stimulate investment and create jobs within the European Union. Eliminating harmful tax competition and fighting tax abuse and evasion are a means by which to achieve these goals. Tax harmonisation is not.
The Government are pragmatically pursuing all avenues available to promote UK interests in Europe. As the report suggests, we will not dismiss any opportunities for promoting UK interests on dogmatic grounds. Of course we will not agree to measures which threaten British interests. The Government have made it clear that they will not accept any measures which will jeopardise British business. If all other alternatives available to the United Kingdom fail, the Government will not hesitate to use their veto.
The Government firmly believe—as do many other member states; we are not alone in this—that tax policy is ultimately a matter for member states to decide. The Government have no intention of abandoning the veto on tax matters. The Prime Minister confirmed this in the House of Commons in November last year when he said that we shall not agree to any lifting of the veto in areas such as tax, defence or our border controls.
Lord Shore of Stepney: My Lords, does my noble friend accept, and should he not say so, except when the commission rules that it is a state aid?
Lord McIntosh of Haringey: My Lords, I will reply to my noble friend at an appropriate time in my speech. I am developing my argument. I shall respond to my noble friend and to all the other noble Lords who have taken part in the debate.

975
I turn now to the committee's comments on the code of conduct. The Code of Conduct Group was established to examine potentially harmful tax measures in European Union member states. While welcoming the aims of the group, the committee worries that the code may have implications for national sovereignty and the principle of unanimity in tax matters. The noble Lord, Lord Saatchi, knew that I would confirm that these fears are completely unfounded.
The code is not a legislative process; it is not legally binding; it is a political agreement between member states to investigate and consider harmful tax competition and the damage that does to the competitiveness of the European economy. It is about jobs and growth. All the code does is to provide a forum in which member states can discuss these issues. At the end of the process there will be no compulsion; there are no votes in the process of the committee, either on individual issues or on collective issues.
All this will become clear very soon indeed. The group has been asked to report before the Helsinki European Council, which takes place on 10th and 11th November of this year. That means that the final report is likely to be considered by ECOFIN on 29th November—this month. Surely we can contain our patience for a little bit longer in order that we may debate the issue on a basis of knowledge rather than on a basis of speculation.
I do not underestimate the sincerity of noble Lords who say that there should be transparency and accountability to Parliament. That is a respectable view and I understand it. However, ECOFIN decided, when it established the group, that publicising the group's ongoing work would be prejudicial to the proper consideration of these sensitive issues. It would make it much more difficult to achieve a successful outcome. The key was to foster frank discussion within the group with all parties. That said, we will consider pressing in the Council for the final report of the Code of Conduct Group to be published in full.
The noble Lord, Lord Saatchi, asked whether the group will be disbanded. The answer to that question is that I do not know. That is not only because I do not know, but because nobody knows. No decision has been taken on that. However, publication of the group's findings certainly is a matter for ECOFIN to decide. Furthermore, it is for ECOFIN to decide how to respond to this report in all its aspects. We are confident that none of the UK measures which were reported to the group as potentially harmful will be adjudged to be harmful when finally the group produces its report.
The noble Lord, Lord Kingsland, adduced legal arguments about the role and scope of the decisions and procedures of the group. He suggested that the consensus process is in effect legally binding. I must disagree with that comment. The fact that the Code of Conduct Group may have come to a view on any tax
976
measure is persuasive, but it is not legally binding. It is wholly a matter for member states as to any future action they take.
I shall turn to savings. We were disappointed to note that the committee could not reach an agreement on the way forward on the savings directive. Indeed, I had hoped that there would be a magic solution provided by the committee for the Government that we could have adopted with gratitude. However, it has not done that, perhaps because debates on this proposal too often generate more heat than light. The UK has now produced its paper on the effects of the directive on the international bond market. I am sorry that it was not available when the committee was sitting, but copies are now available and have been referred to. The paper reiterates the Government's support of the general aims of the directive, but it also emphasises the UK view that the approach of the directive will not effectively tackle tax evasion. Exchange of information on a global basis is in principle the best approach. I believe that a number of noble Lords have agreed with that point of view.
My noble friend Lord Desai thought that the committee was scaremongering about some of the potential effects on the international bond market. He called into evidence the fears of Ross Perot about NAFTA. I believe that the noble Lord, Lord Taverne, had a reasonable answer to that point. The Interest Equalisation Act—which I thought was introduced in 1973 rather than 1963, but I may be wrong—did certainly drive out that kind of financial activity from the United States. We do take the view that the more we can extend the exchange of information, the more likely we are to achieve a better result than by withholding tax, for the reasons that have been widely adduced tonight. It is the continued insistence on outdated arguments for banking secrecy in some member states—although the debate has made it clear that that does not now include Germany—and important third countries which is preventing a solution to evasion on these lines. We are grateful for the support here from the noble Lord, Lord St John of Bletso.
The draft directive, aimed at individuals, would also have the unintended side effect of seriously damaging European Union financial markets. We believe that there is evidence that the imposition of withholding tax on international bonds would have a profound impact on the international bond market currently based in the City of London, costing UK jobs and investment. Accordingly, the UK paper on international bonds puts forward two proposals including, but not restricted to, "grandfathering", which has been referred to in the debate. That was in fact proposed by the City of London. These are proposals for excluding international bonds from the scope of the directive in order to safeguard the competitiveness of financial markets. Both approaches secure an effective

977
exclusion from the directive for eurobonds and other similar instruments, something for which the UK has argued from the outset. It makes clear that the exchange of information on as wide an international basis as possible is the most effective means of tackling tax evasion.
I appreciate, as my noble friend Lord Grenfell reminded us, that there are doubts about the co-existence model. That is why I emphasise the importance of a wide basis for exchange of information. But it should be remembered that the danger presented to the international bond market is only one of the areas of the directive which requires review. Several other issues also need to be resolved before the UK will agree to the draft directive.
We have made clear time and again, both to our European partners and to Parliament, that the Government will not accept the draft directive in its present form. We have determined from discussions at Council working groups that our paper has been taken very seriously indeed by other member states. It is now clear that they fully understand the UK position.
Perhaps I may now refer to some specific points raised in the debate. I shall do so as rapidly as I can. The noble Lord, Lord Saatchi, talked as though an early veto of these proposals would have been a good negotiating stance. Our view is that one does not start a negotiation from vetoes when some of the objectives of the group are shared by this country. Incidentally, the noble Lord is wrong about a veto in 1988 by the then Conservative government. The directive to which he referred was still on the stocks when we came to office in May 1997.
In an excellent maiden speech my noble friend Lord Lea of Crondall referred to energy taxes which are outside the scope of the committee's report. However, he made valuable comments on those which have certainly been noted.
The noble Lord, Lord Saatchi, talked about evidence from the Financial Secretary to the Treasury in favour of higher minimum excise rates on alcohol, tobacco and fuel. Indeed, we want to see higher minimum excise rates in other countries. Does the noble Lord disagree with that? There has never been any secret about it being government policy and I have never heard the Opposition say that they disagreed. But, explicitly, the Financial Secretary said that we would not be supporting the harmonisation of corporate taxes or of the tax base.
The noble Lord, Lord Boardman, referred to issues outside Europe and the views of the OECD. Perhaps I may refer him to paragraph 10 of the report. The committee said that, although it agreed that these are important issues, that is not an excuse for doing nothing within the European Union. He also referred to UK dependencies. I remind him that everything that we say about the UK dependencies will be,
"within constitutional arrangements; that is, existing constitutional arrangements".
978
But it is clearly in the interests of UK dependencies that they should match up to the highest international standards and they share an interest in the health of the European economy.
The noble Lord, Lord Shaw of Northstead, referred to MARD. I say it as an acronym because I cannot remember what it stands for. In Tampere last month the Prime Minister, although he repeated that we would require unanimity on all European Union tax measures, did not suggest that we would be blocking the MARD. We welcome the principle of it but we think that more work is required on the detail.
I turn now to my noble friend Lord Shore of Stepney and his ambush. When he raised exactly the same point in a speech on the Finance Bill on 23rd July I made exactly the same reply as I propose to give now. This was one and only one of the items which were reported to the code of conduct group which has been adjudged by the European Commission to be state aid. State aid is clearly complementary, but is not the same as tax measures in the ordinary sense. We took the Commission's view on state aid and made the necessary amendments to the Finance Bill to modify the conditions of aid for 100 per cent capital allowances for small and medium-sized enterprises in Northern Ireland.
It has been the case ever since Britain became a member of the European Community and the European Union that this country, above all countries, has been opposed to unjustified state aids by member states. Governments of both parties in this country have always been opposed to discriminatory state aids which distort competition. Is it suggested that we should be the ones to decide what a state aid is? To take an example, if Monaco were to be a member of the European Union, should it have the freedom to decide what is a state aid? Clearly not. It must be a decision for the Commission. Otherwise, there would be no effective intervention against state aid. I thought that the noble Lord, Lord Inglewood, recognised that point in his speech. I hope that he did.
Lord Kingsland: My Lords, I thank the noble Lord for giving way. He drew the House's attention to the question of state aids and the crucial role that the Commission plays in policing that system. What then is the point of the code of conduct?
Lord McIntosh of Haringey: My Lords, the code of conduct system is concerned with tax measures which are not adjudged to be state aids by the European Commission. These are complementary sets of measures. State aids are very largely financial subsidies, although, as the noble Lord, Lord Inglewood, recognised, they can on occasion be tax concessions. I repeat: the undertakings I have given about unanimity and the use of the veto for tax concessions which are not state aids still apply. I do not withdraw from that in any respect.
Lord Shore of Stepney: My Lords, will my noble friend explain why that particular aid to Northern Ireland was considered to be a state aid other than a

979
regional tax allowance incentive to help that troubled Province? What criteria can he offer and lay down that would give us some sense of security that other British tax allowance measures will not be similarly judged by the Commission, not by the British Government?
Lord McIntosh of Haringey: My Lords, I do not think that the House would appreciate it if this debate turned into a duel between myself and my noble friend. I have given assurances about the veto and about unanimity. I have explained that one of the eight measures that we have reported to the Code of Conduct Group has been adjudged by the European Commission to be state aid. I shall not set out on behalf of the Commission its reasons for that decision. However, I affirm that we are confident that the other items that are being considered by the Code of Conduct Group are not only not state aid but will be found in due course not to be harmful tax competition.
I commend the committee on its report. I am pleased that the Government can agree with so much of it. Again, I express my appreciation to all who have taken part in the preparation of the report and in this debate.
9.33 p.m.
Lord Grenfell: My Lords, the hour is late, and it is later for some than for others. I simply want to thank all noble Lords who have participated in the debate. It has been a first-class debate, with many thought-provoking contributions. I should particularly like to thank my noble friend Lord Lea of Crondall for an excellent maiden speech. That was what we expected from him, and we got it. I want also to thank all the members of Sub-Committee A who participated in the debate. It has been a privilege to work with such a high-quality group of people. I shall miss that association. I also thank the noble Lord, Lord Saatchi, for his kind remarks and for the comments directed to me by noble Lords who spoke after him.
The debate on the question of co-ordination and harmonisation will long continue. I doubt that the noble Lord, Lord Saatchi, and I will ever agree on that matter. I am more likely to find myself on common ground with Mario Monti than the noble Lord. I remember with some amusement that the noble Lord, Lord Rathcavan, thought that perhaps I would find the subject for a novel in this report. I do not believe that it would be Booker Prize material. However, I might try my hand at a play about tax evasion and give it the title "The Importance of Being Honest". Finally, I thank the Minister warmly for his, as always, thoughtful, authoritative and courteous responses to a long and often complex debate. He does us a great service with the excellence of his responses.
The time has now come to close. I remind noble Lords who are members of Sub-Committee A that it meets again tomorrow at 10.30 a.m. to put the finishing touches to yet another report. I am sure that all Members of the House, particularly members of the sub-committee, now want a short lie down before breakfast.
On Question, Motion agreed to.

Kent County Council Bill [H.L.]
Reported from the Unopposed Bill Committee with amendments.
Medway Council Bill [H.L.]
Reported from the Unopposed Bill Committee with amendments.
City of Newcastle upon Tyne Bill [H.L.]
Reported from the Unopposed Bill Committee with amendments.

City of London (Ward Elections) Bill
A message was brought from the Commons, that they have made the following orders to which they desire the concurrence of this House:
That the Promoters of the City of London (Ward Elections) Bill shall have leave to suspend proceedings thereon in order to proceed with the Bill in the next Session of Parliament, provided that the Agents for the Bill give notice to the Clerks in the Private Bill Office not later than the day before the close of the present Session of their intention to suspend further proceedings and that all Fees due on the Bill up to that date be paid;
That on the fifth day on which the House sits in the next Session the Bill shall be presented to the House;
That there shall be deposited with the Bill a declaration signed by the Agents for the Bill, stating that the Bill is the same, in every respect, as the Bill presented in the House in the present Session;
That as soon as a certificate by one of the Clerks in the Private Bill Office, that such a declaration has been so deposited, has been laid upon the Table of the House, the Bill shall be read the first and second time and committed (and shall be recorded in the Journal of this House as having been so read and committed) and shall be committed to the Chairman of Ways and Means;
That the Chairman of Ways and Means shall make such Amendments thereto as have been made by the committee in the present Session, and shall report the Bill as amended to the House forthwith, and the Bill, so amended, shall be ordered to be considered;
That no further Fees shall be charged in respect of any proceedings on the Bill in respect of which Fees have already been incurred during the present Session;That these Orders be Standing Orders of the House.
House adjourned at twenty-three minutes before ten o'clock.