§ 7.33 p.m.
§ Lord McIntosh of HaringeyMy Lords, I beg to move that this Bill be now read a second time. The Bill rewrites, with minor changes, the tax legislation for employment income, pension income and taxable social security income. The aim is to make that legislation clearer and easier to understand. The Bill marks a major milestone on the way to making tax legislation as a whole more user-friendly. It is the first Bill from the Inland Revenue's Tax Law Rewrite Project to venture into the realms of income tax.
It may be helpful if I say a few words about the Tax Law Rewrite Project before going on to talk about the Bill. The project was set up in 1996 to rewrite most of the UK's direct tax code—currently running to more than 7,000 pages of legislation—enacted over the past 200 years. The key aim of the project is to produce rewritten legislation that is accepted by all the main users as clearer and easier to apply. Perhaps I may say straight away that, looking at the length of the Bill, which is in two volumes of text and one volume of sources with a two-volume series of Explanatory Notes, it is not simply a matter of length of legislation. The point is not how long it is but how long it takes to read and understand.
The project uses various techniques in order to achieve the aim of making the legislation clearer and easier to apply. The first and most notable is the reorganisation of the legislation into a coherent structure. Existing tax law has grown organically over the years, resulting in a rather haphazard structure. The Tax Law Rewrite Project takes apart that structure and reorders it in a sensible, logical manner.
Within that structure, the individual provisions are rewritten using shorter sentences, modern language, more consistent definitions and reader aids such as formulae and tables. Navigation around the legislation is 195 then made easier by the inclusion of scene-setting chapters at the beginning of each topic and plenty of signposts to other relevant material.
However, while making the legislation more accessible, the project takes great care to preserve the effect of the present legislation, apart from minor agreed changes. It would be beyond the remit of the project to make any change in the main tax policies. Proposals for changing tax policy will continue to be dealt with in the usual way—most often in a Finance Bill. But, as was agreed at the inception of the project, the work of the rewrite can encompass minor changes in detail where they will further improve the legislation. Examples of such changes are: new provisions to fill in gaps in the existing legislation; the incorporation of extra statutory concessions; the abolition of obsolete material; and the correction of minor anomalies, and so on.
It is perhaps worth pointing out that the project does not rely only on its own judgment as to whether it is delivering on its objectives; the project's work is overseen by a steering committee chaired by the noble and learned Lord, Lord Howe of Aberavon, who I am delighted to see in his place, with members drawn from both Houses of Parliament, the legal and tax professions, and business and consumer interests. There is also a standing consultative committee, drawn from the main representative bodies for tax, business and consumer affairs.
The project also relies heavily on public consultation. It publishes draft legislation, with commentaries, for wider consultation. For example, in the run-up to this Bill, three exposure drafts and a draft Bill were all published for formal public consultation. There have also been meetings with representative bodies and informal contact by electronic means with various interested parties.
This is the second Bill to rewrite tax law. I was privileged to take the first, which concerned capital allowances, through this House almost exactly two years ago. The Capital Allowances Act 2001 was warmly welcomed by tax professionals and other users.
I now propose to say a few words about the Bill itself. The charge to income tax is currently broken down into a number of schedules. Schedule E is mainly concerned with income from employment, but it also includes some charges in pension income and social security benefits where those are taxable benefits. About 25 million people are taxable under Schedule E, giving rise to over 90 per cent of total income tax collected.
The Bill rewrites the whole of Schedule E, doing away with that uninformative label in the process. It also includes certain types of pension currently taxable under Schedule D, so that all the rules for taxing pension income can be found in one place, and the primary legislation for pay-as-you-earn.
The structural innovations in the Bill include a "benefits code" containing all the provisions dealing with the taxation of benefits in kind. And, for the first 196 time, the Bill brings together all the legislation for share-related remuneration, as well as the various types of share schemes, share option plans and so on. As is now becoming the established rewrite style, the Bill includes navigational aids to the reader, such as introductory scene-setting chapters and signposts to other relevant provisions. They are all designed to help readers to find their way through this large body of legislation.
As to the provisions themselves, they have been redrafted using shorter sentences, modern language, more consistent definitions, and greater use of reader aids where helpful. All that represents a new style of tax law that is more accessible, easier on the eye, and altogether more user-friendly. Public reaction to the Bill confirms that; for example, last summer when the Bill was published in draft, the CBI described it as,
a very great improvement on the existing legislation".And the Institute of Chartered Accountants in England and Wales said that:it is another major step forward in improving the intelligibility of UK tax legislation in areas of the law that affect the majority of taxpayers".In line with the established parliamentary procedure for rewrite Bills, this Bill comes to us after scrutiny by a Joint Committee of the two Houses. That Committee concluded in its report:The Bill is a welcome clarification of the existing law and will be easier to use and more accessible to Parliament, the judiciary, informed professionals and business people and other users of the legislation".There has been well deserved recognition of the work of those involved in producing this first income tax rewrite Bill: the noble and learned Lord, Lord Howe of Aberavon, who has been a stalwart champion of the rewrite from the outset; other members of the project committees; the many bodies and individuals who supported their work by taking the time to comment on the draft legislation; the project team itself and the project team at the Inland Revenue. I have pleasure in commending the Bill to the House.
§ Moved, That the Bill be now read a second time.—(Lord McIntosh of Haringey.)
§ 7.41 p.m.
§ Lord SaatchiMy Lords, this is a truly unusual parliamentary occasion because I can find nothing in the speech of the Minister with which I could possibly disagree. I would have been happy to have delivered the speech myself.
I begin by echoing the Minister's sentiments about the value of the rewrite process in improving the intelligibility of tax legislation and I join him in his praise for the light that it shines on notoriously opaque areas of tax law. As he has said, we have already seen the new Capital Allowances Act, and I look forward to rewritten Bills on corporation tax, capital gains tax and inheritance tax in the future, as well as the second income tax Bill on PAYE, which should appear this year.
197 Great credit is reflected on those involved in the process. The Inland Revenue team, the parliamentary draftsmen and not least the Government themselves all deserve to be congratulated. I say "not least the Government" because they have continued to provide resources for this worthwhile work.
As the Minister has said, undoubtedly the hero of the entire project is my noble and learned friend Lord Howe, who began making noises about the need for simplification in his maiden speech in another place in 1964. My noble friend shares with Einstein the understanding that simplicity is the outcome of technical subtlety. That is why it takes longer; it is the goal, not the starting point. When lecturing at Princeton, Einstein said,
The laws of physics should be simple".One of his students shouted:And what if they are not?",to which Einstein replied:Then I would not be interested in them".I believe that the same test should apply to the laws of' finances. As ironically our party was the original inventor of income tax, the "certain duties upon income" of the 1799 Act that paid for the Napoleonic war, it is only fitting that the two best descriptions of this income tax Bill should have come from our Benches: the father of the process, my right honourable friend Ken Clarke, and my noble and learned friend Lord Howe, its mentor and guide. The then Chancellor, Mr Clarke, summed up the ambition of the project in his Budget speech. He famously said that it would be,like translating the whole of War and Peace into lucid Swahili".My noble and learned friend Lord Howe added that it was,like trying to repaint Brighton pier at a time when its owners are trying to extend it to the French coast".Their shared aim was to achieve what the Minister said was a less haphazard and more logical structure in all the ways that the Minister described and to do so without altering the substance. We have accepted, as the Paymaster General said in another place and the Minister repeated today, that the changes that have been made, although 183 in number, are clearly set out in the Bill and the sources of all the written clauses are clearly set out in the table of origins that accompanies the Bill. None of that is in any doubt to those on these Benches.Why do we need this process? As the Minister said, we need it because the present income tax system is an object designed by a committee which has been in standing session for 200 years. Here is an example of the problem, a still current provision of the 1986 Finance Act which states:
If, in a case where sub-paragraph (1) of Paragraph 10 above applies, neither sub-paragraph (1) nor sub-paragraph (2) above has effect in relation to the expenditure referred to in sub-paragraph (1)(a) of that paragraph, then for the chargeable period related to the disposal or cessation referred to in sub-paragraph ( 1)(6) of that paragraph, any allowance in respect of that expenditure shall be a balancing allowance".198 Or try a provision related to electricity rebates from the 83 pages of Schedule 6 to the Finance Act which enacted the climate change levy, which states:They are to be calculated by treatment of supply as a reduced rate supply to the extent, if any, that the exempt renewable supplies made by the supplier in the averaging period would have been reduced rated supplies if they had not been made on the basis that they were exempt".In an attempt to simplify all that, it is worth remembering that simplification has two meanings. The rewrite process seeks to address one: rewriting the law in a way that makes it easier to understand. The second is to simplify the actual mechanics and administration of taxation. The Joint Committee on tax simplification drew the distinction clearly when it recommended to the procedure committees of both houses that it should be renamed the Joint Committee on tax law rewrite Bills.As the Minister said, even this rewritten income tax Bill runs to 563 pages, and continues to make what the R IA for the Bill calls "elaborate" distinctions between different forms of income: trading, investment, property, employment, savings and so on and all the other complicated paraphernalia that Chancellors down the ages have decided are essential to the proper workings of the income tax system. Even the very helpful flow chart in the note on Clause 176, which pictorially depicts the flow of money, cannot disguise the difficulty.
It is the tendency to discourage something by taxing it, to encourage something by giving it a relief, then to decide which class of person or entity should qualify for the tax or the relief and in what amount, that creates the complexity. That is why I would particularly recommend to your Lordships the Bill's simplification of Schedule E, which, as the Minister said, touches the lives of 25 million people.
The main sources for the rewritten material in the Bill are those parts of the Income and Corporation Taxes Act 1988 that related to taxation of income under Schedule E. The division of income into five schedules, A to E, is 200 years old. It was the creation of Addington's 1803 Act; and the relentless tinkering with them is the reason why the present Chancellor has won gold, silver and bronze for lifting the three weightiest finance Bills of all time. No wonder that almost half of the £4 billion a year increase in government administration costs (up from £13 billion in 1998 to £17 billion in 2003) is allocated to the collection of tax or the distribution of benefits—now renamed credits.
The charm of such a complicated tax system from the Government's point of view is the scope it allows for hidden tax increases via reduced allowances. Under that structure the Chancellor can raise tax without ever announcing a tax rise. People just wake up one day and find that they are in a higher tax bracket, with the result that tax as a percentage of national income creeps up invisibly. I am told that economists call that "fiscal drag", and it is the reason why, in the last three years, the Government's tax revenues have risen three times faster than average earnings.
199 It is also the reason why the Institute of Chartered Accountants recently warned that the tax system was so complicated that it had,
spun out of democratic control".No citizen, however intelligent, can match the massed ranks of No. 10, No. 11, the Treasury and Millbank—one man against the legions of Rome. So someone has to hold a torch for simplicity in the tax system, and that is why this Bill and this process are so important.Perhaps I may close with a suggestion. It follows from the analogy made by my noble and learned friend Lord Howe; that of Brighton Pier being extended to the French coast. Could not the principles of the rewrite process inform legislation as it is being framed during its passage through Parliament? Perhaps this is naive, but rather than enact complicated legislation and then ask my noble and learned friend and his Inland Revenue team to rewrite it in plain English, why not write it in English in the first place?
What I seek is for the input of the tax law rewrite team to be brought to bear on financial legislation as it is happening—before the event and not after. How could that be done? For example, a permanent representative of the tax law rewrite team could be put on the Standing Committees of another place which examine financial Bills. Presently, these committees, being programmed, have neither the time nor the capacity for that task. Similarly, if your Lordships' House would agree, we could have a representative of the Tax Law Rewrite Project team as a permanent member of our new Economic Affairs Committee that is to look at finance Bills. If it was up to me, I would follow the practice of the UN Security Council—I would give that member a veto.
The Bill has been welcomed by all those with an interest in tax simplification. It follows an exemplary process of consultation, as my right honourable friend Ken Clarke said in another place. This support is well deserved, and long may it last. The Opposition Benches in your Lordships' House congratulate all the members of the revenue team on their efforts and give the Bill our full support.
Winston Churchill always admired Mark Twain's opening of a letter to a friend. It began:
I wanted to write you a short letter but I didn't have time".Let us give them the time and the tools to finish the job.
§ 7.51 p.m.
§ Lord Simon of GlaisdaleMy Lords, I fear that the pressure of time on this debate will make our expressions of gratitude to the noble and learned Lord, Lord Howe, and all those who have been associated with him in this project seem somewhat perfunctory. That is not so. The whole nation is deeply grateful for what has been done. So I hope that it will not be misunderstood if I say that what we are doing here is cosmetic. I do not decry cosmetics at all. But, as the noble Lord, Lord McIntosh, said in his admirable opening of this debate, the project committee cannot 200 touch, interfere or recommend alterations in the substantive law. What it does in effect is to translate fiscalise into English. That is no mean task but it leaves underneath all the obscurities and anomalies of the substantive law. Will the Government consider extending the terms of reference so that as the admirably qualified committee goes through the law it can recommend alterations of substance as well as of language?
I venture to deal with one aspect only of the fiscal law, but it is one where the provisions give rise to peculiar difficulties and obscurities; that is, tax avoidance. It is understandable because the draftsman will endeavour to impose the fiscal burden in such a way that it is not easily evaded. The wealthy man, seeking to evade the burden, will employ ingenious lawyers and accountants to work out ways around the complicated scheme which imposes the burden.
When the Revenue in turn deals with that situation, of course the complication is compounded. It is a tradition of our fiscal law, unlike some others, to promote absolute fiscal equality and integrity. It is never a double-charged attack, however inadvertent. But, in following through the complicated and clever tax avoidance provisions in such a way as not to impose a second charged attack, the result becomes virtually incomprehensible even when rewritten.
That is not necessarily so because a way of avoiding that has been found. It is the general anti-avoidance rule—GAAR. It exists in the United States and in Australia. Broadly speaking, it stipulates that any transaction, the paramount object of which is the avoidance of tax, shall be void for that purpose although valid for any other. As I say, that has been found to work in other comparable jurisdictions. It is not merely a flight of fiscal fancy.
As a result, the then government—I think it was under the Chancellorship of Mr Clarke—set up a body in the Revenue to examine the potentiality of a general anti-avoidance rule. If it was the noble and learned Lord himself I apologise, but it was during that administration. Having looked at the matter, they put out a consultation paper in October 1998. There were 106 responses to it. Then, suddenly, peremptorily and extraordinarily, the whole issue was abrogated and the committee was dissolved. So far as I know, that action is almost unparalleled. I cannot think of any direct parallel.
I am antipathetic to conspiracy theories. But what happened was so extraordinary that one cannot cast aside suspicions. First, the general anti-avoidance rule leads to great simplification of the fiscal law. Secondly, it is the most effective counter to avoidance and evasion of tax. Thirdly, it has proved itself in the United States and Australia. Fourthly, there are a number of wealthy people who were very close to the incoming government at that time. Persons whose treasure was safely secreted in tax havens abroad and, as we know, where one's treasure is, therefore one's heart is also. Fifthly, one of those was actually a Treasury Minister at the time, the Paymaster General. 201 Sixthly, 15 or 16 of the individual replies to the consultation paper were conditional on their not being identified.
As I said, it is difficult entirely to cast aside suspicion. I said that that was almost unparalleled. The nearest parallel that I can draw is the Watergate investigation. When Professor Cox, a former Solicitor-General of the United States, the chief inquirer and senior counsel, was getting too close to the Oval office, he was suddenly dismissed in the same way as the GAAR committee was dissolved.
These are muddy waters, and one does not want to paddle in them more than necessary. We trust that the Government share our view that our fiscal law should be fair, effective and clear. All that we are asking for—apart from the enlargement of the steering committee's terms of reference— that the Inland Revenue investigation into GAAR should be resumed.
§ 8.1 p.m.
§ Lord FreemanMy Lords, I declare an interest as a former partner of, and now a consultant to, PricewaterhouseCoopers, a firm that has been strongly supportive of the tax rewrite project. Your Lordships would wish to note that the tax rewrite team is now of not inconsiderable size. Tributes should be extended not only to the tax inspectors who work on that team but the parliamentary draftsmen and those from professional life who are on secondment to the team. Draft No. 12, the precursor to the Bill, was excellent. I feel sure that your Lordships would want everyone to be congratulated on an excellent Bill.
I agree with the first point made by the noble and learned Lord, Lord Simon of Glaisdale. As the Minister pointed out, this is a clarification Bill, not a simplification Bill; and the two are very different. I therefore agree with the noble and learned Lord, Lord Simon, that in the years ahead the initiative—introduced, from memory, in 1996—of a tax rewrite project to consider clarification should be extended to consider the law and rely on professionals—both within and outside the Civil Service—making recommendations to the Treasury on simplification of tax law. Therein lie tremendous savings in terms of both understanding and effectiveness, as the noble and learned Lord, Lord Simon, pointed out.
While I am on the subject of progenitors of the tax rewrite initiative, if my noble and learned friend Lord Howe was its grandfather and Ken Clarke was, I suppose, its father, we should record that a friendly uncle in the process was my former colleague Tim Smith, whose amendment, I think to the 1995 Finance Bill, initiated the exercise.
I shall briefly raise only a few points on behalf of the Low Income Tax Working Group, which has been generously supported by the Chartered Institute of Taxation and chaired by a former partner of mine, John Andrews. The group has for several years been considering tax law as it affects those who pay little or no tax. It made representations to the rewrite team hut, sadly, the proposals—I shall briefly deal with three of them—were deemed to fall outside the team's remit and were therefore not included in the Bill.
202 I must mention that 183 minor changes to tax law are incorporated in the Bill, and I should have thought that some charity and generosity might have been in order. But perhaps it is more useful if I simply put down markers. I do not expect an answer from the Minister tonight, but perhaps in due course he would be so kind as to acknowledge that, either for future tax rewrite Bills, for rewrite regulations or, more straightforwardly, for Finance Bills, these three specific points have been taken on board.
The first issue is important for those in receipt of state and occupational pensions. As the Minister will know, tax is assessed on an accruals basis, not a receipts basis, unlike many social security benefits. That can give rise to anomalies and relative hardship for those who pay little or no tax. The anomaly could be simply removed if we moved straightforwardly to a receipts basis for all pensions and social security receipts. That proposal may well be a candidate for the 2003 Finance Bill or, if that has already been drafted, that for 2004.
Secondly, I turn to annuities. Annuities are not within the pay-as-you-earn system, which is probably a result of the fact that computerisation of our retirement annuity systems was not general practice 20 years ago. At present, the standard rate is deducted from annuity payments, which can result in hardship for those who pay less than the standard rate. The Green Paper on pensions, which we are to debate on 5th March, indicates that the Government may introduce changes—possibly, as I understand it, in the Finance Bill for 2004, backdated to April 2004. I hope that it is not too late to consider the issue, already foreshadowed in the Green Paper, for inclusion in the 2003 Finance Bill.
Finally, the state retirement pension should be within the PAYE system, so that tax can be deducted to offset minor tax liabilities for those on low incomes, where income is received gross. The Department for Work and Pensions should operate the PAYE system for the state retirement pension. It is already able to do so for jobseeker's allowance and incapacity benefit. My understanding is that, sometimes, the PAYE system is applied to incapacity benefit, but only when the claimants have that incapacity benefit as their only or main source of income and there is no employer. In the debate in another place this month, the Paymaster General indicated that the PAYE re-write regulations should be published in the spring. I hope that that timetable will be adhered to, and I look forward to the inclusion of this minor amendment in the regulations.
I commend the Bill, and I join my noble friend Lord Saatchi in congratulating all those involved. I just hope that, in future, the remit for examining tax legislation will, as the noble and learned Lord, Lord Simon of Glaisdale, said, extend to matters of substance—albeit minor substance—and not just writing tax law in the Queen's English.
§ 8.9 p.m.
§ Lord NorthbrookMy Lords, this important Bill carries forward the aspirations of the Tax Law Rewrite Project, set up by the then Chancellor of the Exchequer, Kenneth Clarke, in November 1996. The project deserves praise and has received it from all political parties. Its ambitious remit, covering capital allowances, income tax, corporation tax, capital gains tax, stamp duty, inheritance tax and taxes management, is welcome. Particular praise is due to the noble and learned Lord, Lord Howe of Aberavon, the first chairman of the steering committee, for his diligence on the project.
The steering committee will have its work cut out if it is ever to complete its task. The most recent Finance Bill had 140 clauses and 39 schedules and did not even include some of the most significant legislation, such as the rise in national insurance contributions and tax credits for families and workers on low income. The Bill took nine pages to set out the reduced rate of duty for small brewers, six pages to set out the breaks for community and amateur sports clubs, and 14 pages—no less—to set out the tax relief for vaccines research. It included five clauses of revision of the new aggregates levy, which had come into effect only at the start of the same month.
Apart from the 2002 Finance Bill, the two largest Bills were those of 1998 and 2000. Commenting on the 2000 Finance Bill, John Whiting, vice-president of the Chartered Institute of Taxation, said:
The whole of the personal tax area is ripe for simplification".On the same Bill, Frank Askew, an executive of the Chartered Institute of Taxation, commented:This is out of proportion to anything we have seen before. The volume of tax law has doubled since the 1980s. I do not know how ordinary people have a hope of understanding their tax affairs. Even accountants are struggling".The trend of ever more complex and lengthy tax law is illustrated by the growing size of tax manuals. Tolley's standard tax manuals on VAT, income tax and corporation tax found it necessary, even by 2001, to add an extra 855 pages to explain the increased tax legislation since 1997. The three guides are now longer than London's residential and business telephone directories put together. Tolley's has even had to reduce the print size to cram in more.As can be seen, one of the major problems faced by the Tax Law Rewrite Project is not of its own making. New tax laws are coming in at such a rate that it is difficult to combine them with any rewrite that may be occurring. My noble and learned friend Lord Howe of Aberavon said of the 2000 Finance Bill that it was,
almost twice as long as our only Rewrite project so far—after four years work—the Capital Allowances Bill".I repeat the quotation that my noble friend Lord Saatchi used:As I said last summer, it is like trying to repaint Brighton Pier at a time when its owners are trying to extend it to the French coast".Another of my concerns for the success of the project relates to resources. The Inland Revenue set out the problem clearly. As noble Lords will know, it 204 publishes an annual plan, reviewing progress to date. The 2002–03 report says:We have always stressed that progress on the rewrite project must, of course, crucially depend on the availability of resources, in particular the availability of experienced Parliamentary drafters. We cannot emphasise too strongly the continuing importance of this point. Moreover, the current volume of new legislation annually on direct tax means that the project is now operating in a very different environment from that in which it was conceived. This has made it all the harder to find and maintain resources for our work, which in response to representations, additionally includes the rewrite of the PAYE Regulations".So how can the Brighton pier syndrome be avoided? First, income tax and national insurance should be combined for those under the PAYE system. That would simplify the regime for employers and employees alike. An employee could be given a notice of coding based on both taxes without the Treasury losing out.Secondly, my noble friend Lord Saatchi and Peter Warburton, in their series of research papers entitled The War of Independence, have suggested that by raising the personal income tax allowance to 10,000,8 million people earning less than £10,000 will stop paying income tax altogether. The authors' audited calculations show how the cancellation of the bizarre overlap between tax and benefits can be fiscally neutral for the Exchequer.
Thirdly, capital gains tax needs reforming, particularly the treatment of non-business assets held prior to 1998. In my view there is an entirely unnecessary complication of the interaction between indexation and taper relief. It is no use saying—as the Minister said to me several years ago—that this problem will disappear in time. Clearly, that is not the case for shares and property held for a long time. I suggest scrapping taper relief and reindexing the 1982 base up to, say, 1998 values and moving the threshold on every five years.
Finally, I ask the Minister, first, what resources by way of parliamentary draftsmen are assigned on a full time basis to the project? My noble and learned friend Lord Howe of Aberavon may like to comment on that.
Secondly, can the Minister influence the Chancellor materially to reduce the size of Finance Bills? Thirdly, can the Minister persuade the Chancellor to simplify the tax regime, especially in the area of capital gains tax? Like my noble friend Lord Saatchi and others, overall I commend the Bill and the project generally for the future.
§ 8.16 p.m.
§ Lord Howe of AberavonMy Lords, first, I thank the Minister for his lucid, compact and helpful introduction to the Bill. I thank also all those who contributed to the debate, not least for the undeserved tributes to myself, which I nevertheless appreciate very much. I should like to extend thanks to Members of both Houses who sat on the Joint Committee and to the chairman of the Joint Committee who was the father of the project, now emerging in a godfather-like role in that particular position—the right honourable Kenneth Clarke.
205 A particular word of thanks, too, to a colleague who is not here tonight because he has a previous engagement—the noble and learned Lord, Lord Brightman—who has been a hero in shaping this project from the outset and has assiduously played a part in both sessions of the Joint Committee. And I join my noble friend in paying tribute to Tim Smith, one of the pioneers in this long-running exercise.
As my noble friend Lord Saatchi explained, I am glad that there is now complete appreciation of the distinction between the Tax Law Rewrite Project and the tax simplification project. The change of name recommended by the last Joint Committee was entirely right.
The noble and learned Lord, Lord Simon of Glaisdale, and I belong to a distinguished club as we are both former Solicitors-General. He was citing yet another Solicitor-General, Mr Ross of the United States. We former Solicitors-General are a great group. I noticed particularly his call, echoed by many others, for the project to be extended—in his words—to embrace changes in tax policy and tax structure.
Nobody could have been involved in this exercise as much as I have without becoming acutely aware of the scale of growth and the multiplication of complexity in every way. I am sure that it would not be right to try to encourage the Tax Law Rewrite Project to supplement or extend its role into that area. This is a subject which has been addressed in a series of lectures given at the Institute of Chartered Accountants. Mr Adam Broke gave the first Hardman Memorial Lecture on this theme some three or four years ago. I had the privilege of following him a year later and seeing my lecture published in a publication produced by my noble friend Lord Saatchi. We were all saying that we need a separate exercise to address policy problems. They do not go unnoticed. My noble friend has suggested additional policy problems to be examined from now on.
The truth is that in our tax law rewrite documents, as we study the law, we identify the policy proposals that come to us. In the course of the exercise on this Bill alone, no fewer than 84 separate policy shortcomings are listed in the appendix to our final response document to representations on the draft Bill.
So there is a huge and growing problem. For that purpose, I am sure that the prescription put forward by Mr Adam Broke and which I proposed in my Hardman Lecture is right. We need to begin to create a separate, independent Tax Structure Review Body and system. As my noble friend Lord Saatchi pointed out, it should have the objective of ensuring that the champion of tax simplification has as prominent and continuing a role in the formulation of tax legislation as the Chancellor himself. That is not to say that one person should do it, but the principle here is that there should he a watchdog always asking, "Where is all this going to end up?".
I am happy to say that the topic will be addressed yet again within a few weeks. The Institute of Fiscal Studies has been tenacious in pursuing this. Its Tax Law Review Committee has appointed a working party under the chairmanship of Sir Alan Budd, the 206 former Chief Economic Adviser to the Treasury. It will produce on 20th March a report crafted to a large extent by that other tenacious tax Stakhanovite, Mr Malcolm Gammie, under the title, "Making Tax Law", readdressing all the issues and incidentally identifying the possible role that could be played by this House in the process. I think it right that the Economic Affairs Committee under the chairmanship of the noble Lord, Lord Peston, is about to generate a tax sub-committee to begin addressing the problem and thus employing the expertise available in this House.
I listened with interest to the commendation made by the noble and learned Lord, Lord Simon, of a general anti-avoidance provision, a GAA R. I confess that it is a subject from which I have steered pretty well clear. It is one of huge complexity and much fascination for those who like to burrow around in it, but I have always refrained from that activity.
Perhaps I may say a few words about the future plans for the project as they develop. In the course of rewriting Schedule E and the PAYE legislation, it became quite clear that it could not sensibly be done without tackling the regulations as well. Popular demand dictated that we must rewrite these regulations, many of which were written in great haste under wartime conditions. I believe that many of them may have been drafted by my noble friend Lord Cockfield in one of his previous existences.
Therefore we have set in hand the rewriting of those regulations. This spring we shall publish for formal consultation a complete rewrite of the PAYE regulations. They were not within our original remit and thus represent some diversion of our resources, but when the consultation process is completed, they will be laid before Parliament later this year and will come into force in April 2004. That is an important addition to our work.
Meanwhile work is continuing on our third Bill, which will be the second Bill on income tax. That is to be published in draft during the first half of next year. We seem to have established a kind of biennial rhythm. It will cover property income, foreign income, trading income and savings and investment incomes, but it will not finish the task of dealing with income tax. Our aim is to conclude the rewrite of the entire income tax code in our fourth Bill due in 2006–07. One or two noble Lords may still be around to handle that exciting piece of legislation.
It is worth reflecting that it is exactly 200 years since Lord Addington introduced the schedule system, having repealed the William Pitt legislation of 1802. In 1803 he introduced the celebrated schedules. Having lasted for 200 years, the system is a formidable monument to Lord Addington. At the time he was Prime Minister, but he went on to become Home Secretary for 10 years. In that role he sent a vote of thanks to the magistrates and soldiers who were responsible for the Peterloo massacre. In 1832 his last act in this House was to vote against the great Reform Bill. His creation of the system of schedules was probably one of his more memorable activities.
207 I should like to close my remarks by referring to a point made by several noble Lords. My noble friend Lord Northbrook was the last to emphasise the consequences of the legislative lust with which all Chancellors become obsessed. It is extremely difficult to refuse recommendations for new projects from business, which wishes to be liberated by new incentives, and new projects from the Revenue, which often appears to want the opposite. It is very hard indeed to restrain that tendency, which creates a mounting agenda for us.
It is quite right that Brighton pier is not doing too well. If one looks at the two previous Finance Bills, one finds that for 2001 there was a quite modest volume of 331 pages, but the volume for 2002 went back up to 494 pages. So in those two years the Chancellor generated 825 pages of new legislation. On our two statutes together, we have generated 894 pages of re-written legislation. We have established a fairly narrow lead but I am worried as to where we will end up.
It is right that we have been under pressure, as my noble friend Lord Northbrook pointed out, because of the extension of our activities to the regulations and because of the sheer volume of work. We have been lucky to have a team of more than 40 people, including people from the private sector, and to have been, so far, sufficiently staffed with people from the Office of Parliamentary Counsel. The words from our plans which were cited by my noble friend were written by myself and underline the importance of ensuring that the resources needed are available.
The noble Lord, Lord McIntosh, will know that the Office of Parliamentary Counsel is probably under more pressure than any other department in Whitehall. It is extremely difficult to attract people of sufficient assiduity, talent and brilliance and to pay them enough to recruit them from the more lucrative private sector. I have campaigned since the 1970s, when I was concerned with the Industrial Relations Bill, for a multiplication of parliamentary draftsmen. The need is still there.
Our project has been protected from any erosion of our resources and I am grateful to the Chancellor for achieving that. I am grateful to the people from the private sector who have been able to work with the Revenue in that role; and I am very grateful indeed to the dedicated group of people from the Revenue itself. Noble Lords who saw those people giving evidence to the Joint Committee a few weeks ago witnessed a mastery of detail. It is an illusion to believe that the Steering Committee understood any of it, but it does underline the brilliance and assiduity of those doing the work.
I am extremely grateful to them, to the Office of Parliamentary Counsel, to the Chancellor and to the many people outside who have played such a crucial part in our consultative process. It must be dismal indeed to contemplate, night after night, the draft documents we generate. It is not an exciting task but it is very important. I am grateful to the House and to all those who have participated in it for understanding its importance and for continuing to support it.
§ 8.28 p.m.
§ Lord NewbyMy Lords, it is a great pity that my noble friend Lord Addington is not in his place because I am not sure that he is completely aware of the extent of the trouble caused by his noble forebear in establishing the schedules which we are now, some 204 years later, attempting to simplify.
I congratulate all those involved in the project—the civil servants, the people in industry and the Members of the Joint Committee. As the noble and learned Lord, Lord Howe, said, a huge amount of unglamorous work has to be undertaken to get to this point, and all those who were involved in it deserve our thanks.
One of the more impressive features of the exercise is the degree of consultation. The noble Lord, Lord McIntosh, explained that there were three exposure drafts before the final draft was issued. There were meetings and a great exchange of e-mails. It is unfortunate that such a huge amount of consultation was undertaken in this relatively minor area of legislation and yet, when it comes to new legislation, very little consultation is undertaken in many cases. It would be a great service to the statute book if there could be a better balance and if, as it came forward, tax legislation could be subjected, wherever possible, to a greater degree of consultation than is normally the case.
I very much agree with those noble Lords who have spoken about the need for greater simplicity in the tax system and not just clarification. The noble Lord, Lord Saatchi, cited Einstein, and in a way he exemplified one of the problems with which we are faced. While Einstein may have found the concepts of the laws of physics simple, I fear that lesser minds probably struggled with them and found them extremely difficult. When I started my career as a junior official in Customs and Excise, the Permanent Secretary at the time, who had just introduced VAT, was adamant that it was a simple tax. To him, it was; to the rest of the world it was fiendishly complicated. Therein, I suspect, lies the problem of tax simplification.
On what may be a note of optimism to inject into the debate, there has been much discussion of the state of Brighton Pier. My understanding is that one of the two piers has collapsed and the other recently caught fire. Perhaps we might have a bonfire of the regulations to accompany those omens or auguries from Brighton.
I do not want to detain your Lordships by listing a whole raft of tax simplification measures that might be desirable. I simply ask the Chancellor not to introduce wheezes that are unlikely to work. One of the main reasons why the last three Budgets and, indeed, the last three Finance Bills have been so long is that they were stuffed full of minor measures that may be attractive to only a very small category of taxpayers. As we have already heard, some of them take up a significant amount of legislation. In most cases, they have no effect or are counter-productive. A degree of self-restraint on the part of the Chancellor in this respect would be welcome.
209 On reading the debates on the Bill in the House of Commons, I was interested to see that when the Paymaster General was pressed on why recent Finance Bills have been so long, she said that one of the main reasons was the complexity of anti-avoidance measures. Although it may be a difficult and arcane area, the suggestion of the noble and learned Lord, Lord Simon of Glaisdale, that a general anti-avoidance rule might be considered has much merit, and I commend it to the Government.
The noble and learned Lord, Lord Howe of Aberavon, mentioned that the Economic Affairs Committee will be looking at the Finance Bill when it comes before Parliament later in the year. However, given that we will be considering the Bill in parallel with its Commons Committee stage, I fear that our ability to look at more than a few aspects will be severely constrained. Therefore, while I hope that we can make some contribution, not least in ensuring that measures are not unduly complicated, one should not put too much weight on our ability to have a major and sustained impact on tax simplification.
Finally, I would like to take up the point made by the noble Lord, Lord Northbrook, and, to a certain extent, by the noble and learned Lord, Lord Howe, about momentum and resources. In one sense, it is admirable that there will be a Bill every two years—that may be as quickly as it can reasonably be done. None the less, even at that pace it will be many years before the entire 7,000 pages have been simplified. I join other noble Lords in asking that the noble Lord, Lord McIntosh, go back to the Treasury and the Revenue and express the strength of feeling in this House that the resources devoted to this project should be strengthened rather than weakened, because it is a valuable project, and we are all happy to support it.
§ 8.35 p.m.
§ Baroness WilcoxMy Lords, it gives me great pleasure to join my noble friend Lord Saatchi in welcoming the Bill and thanking the Minister for his clear explanation of it. As we have heard, the Bill rewrites income tax rules on employment income, pensions and taxable social security benefits. This is a welcome clarification of the existing law, making it easier to use and more accessible to Parliament, the judiciary, informed professionals, business people and other users of the legislation—and even, dare I say, the overtaxed, overburdened sole trader, the ordinary taxpaying citizens of our country and the non-governmental organisations that try to represent them, such as the citizens' advice bureaux and the Money Management Council.
In the early 1990s, I was pleased to be asked to join the then new Tax Law Review Committee of the Institute for Fiscal Studies. The noble and learned Lord, Lord Howe, had been invited to be the president of the committee. I served on it for three years. My job was to highlight the predicament of the sole trader and the citizen consumer, matched against the mighty power of No. 10 and No. 11 Downing Street and the 210 Treasury, and to insist on plain English, not some of the gobbledegook that my noble friend Lord Saatchi has already ably illustrated this evening.
It quickly became clear to us that, so complicated and multi-layered were some of the tax laws that those who evaded tax were being aided by the ambiguities of the laws. Those who would avoid tax were uncertain of their ground and often fell prey to poor advice. Those who had, maybe unwittingly, stumbled and fallen foul of the tax law were often as confused and confounded as their lawyers—and sometimes, dare I say, as the judge presiding.
It was a great encouragement when, in another place, the then Chancellor of the Exchequer, Kenneth Clarke, enacted the tax law rewrite concept, and an even greater relief when the succeeding Chancellor of the Exchequer, Gordon Brown, decided to continue the sterling work of the established steering committee, chaired by my noble and learned friend Lord Howe of Aberavon.
Ten years on from those early thoughts of the IFS Tax Law Review Committee, I am honoured to be in your Lordships' House to see the Bill arrive and to congratulate my noble and learned friend Lord Howe and his team on having got us thus far. I understand that the whole project has cost only £7.6 million—a very low cost to our nation for the wonderful benefits that it will bring.
It is a great satisfaction to see that those three years of mine were not wasted. This Bill and those that follow will be able to clarify the tax system and make it much more accessible. I understand that we are about to end the antiquated and irrelevant ban on your Lordships' House considering Finance Bills. What excellent timing, in view of Bills such as this. This House will bring a level of scrutiny that has been sorely missing in another place. We can put to an end the game of tug of war that I had to engage in to get a speakers' list put up for the Bill. If I had not done that, maybe we would not have had the benefit of hearing the noble and learned Lord, Lord Simon of Glaisdale, speaking tonight on the general anti-avoidance rule. Maybe we would not have heard from the noble Lord, Lord Freeman, who congratulated the team on its work so far and talked further about the simplification of tax law and about his work with low income taxpayers and receivers of benefit. Maybe we would not even have heard from the noble Lord, Lord Northbrook, on the length of tax manuals and the worries about the amount of work ahead of the committee and the drafting resources available. I am sure we would have heard from the noble and learned Lord, Lord Howe, because he is this Bill. It was wonderful to hear him going back and telling us some of the things that he is still worried about. I hope that he will go forward with all those issues and may even be able to promote the separate exercise suggested by my noble friend Lord Saatchi and others, on the need for a separate independent tax rewrite group.
It is time to move on. The Bill, which is welcomed by all those with an interest in tax clarification, is a great place to start. Like all those on these Benches, I wish the Bill well.
§ 8.39 p.m.
§ Lord McIntosh of HaringeyMy Lords, I am grateful to everyone who has expressed their support for the Bill, which has received a unanimous welcome. I must correct the noble Lord, Lord Saatchi, to some extent. He described this as an unprecedented occasion. He is well known for finding awkward quotes in my past speeches, but I should remind him that two years ago, in the debate on the Capital Allowances Bill, he said:
It is one of the rare occasions in your Lordships' House when all the parties are in agreement".—[Official Report, 26/2/01; col. 1029.]Yes, it may be rare, but it is not unprecedented. With that minor lapsus, we have a considerable degree of agreement, and I am appreciative of it.The Explanatory Notes do, it is true, set out elaborate distinctions between different types of income, but they are there because they have to be. The noble Lord, Lord Newby, referred to the Budget containing detailed expositions of minor measures. The noble Lord, Lord Northbrook, made the same point. They may be minor measures to those who are not involved, but they are very important to those who are involved. We set ourselves a high objective of preventing avoidance of taxation, while avoiding double taxation, and we set ourselves the high standard that that should be explicit rather than included in general rules. Therefore, it is inevitable that there should be a substantial degree of complexity.
The noble Lord, Lord Saatchi, said that we had permitted ourselves to raise taxes by reducing allowances. We cannot change allowances, any more than we can change taxes, without parliamentary approval. That is not what "fiscal drag" means—it means that tax revenues rise because, for example, more people are in work and earning more. It is not because of any sleight of hand by the Government to find ways in which to raise money without parliamentary approval.
The noble Lord made a perfectly legitimate point about why the simplification of language, which is a feature of this Bill, should be applied to the Finance Bill. It will be, and it is being already. Some parts of the Finance Act 2000 were drafted in that way, such as the tonnage tax provisions in Schedule 22. However, if we are going to do that, provisions must be drafted as a separate, self-contained block of new legislation, and the new policy should be settled well in advance and should not be subject to change afterwards. It is the nature of the beast that such conditions would be difficult to apply to the annual Finance Bill. However, in future, when legislation has been rewritten and enacted, amending legislation will be easier to draft and to understand. That is the case in the Finance Act 2002, in which Schedule 21 amends the provisions of the last rewrite Bill, the Capital Allowances Act 2001.
The noble and learned Lord, Lord Simon, was slightly ungenerous in using the word "cosmetic" about the Bill. He wanted to extend its terms of 212 reference so that alterations of substance were possible. He gave good examples of that. However, the Bill's virtue is that it has been subject to unprecedented consultation and consideration by those who are expert in these matters. The consideration in your Lordships' House is limited to not much more than an hour. Consideration in the House of Commons was limited by the fact that it is a Money Bill and the subject of a ways and means resolution. I do not think that the noble Lord would wish alterations of substance to be made other than in the course of political cut and thrust and political debate. I think that I heard the noble and learned Lord, Lord Howe, agree—implicitly at any rate—that this is rightly a rewrite Bill rather than another way of enacting taxation legislation.
The noble and learned Lord, Lord Simon, raised again an issue that he has raised with me before about a general anti-avoidance rule. That certainly would be a significant policy change, but it is beyond the remit of the Bill. We have given consideration to it. We announced our intention to consider a general anti-avoidance rule for corporation tax in the 1998 Budget. The Inland Revenue consulted on that, but the outcome of the consultation was that a general anti-avoidance rule would be ineffective in countering tax avoidance, although it would increase the compliance cost to businesses. It would be a major change to the UK tax system.
As we were committed to consultation and took account of the results of consultation, we announced in the 1999 Budget that we would not take forward a general anti-avoidance rule, but we would tackle avoidance by more targeted legislation. That does not mean to say that it is off the agenda for ever. If it can be shown as an option and replacement of, or an addition to, targeted legislation, we might well do that. However, the consultation that we took in that year was certainly not encouraging for a general anti-avoidance rule.
The noble and learned Lord, Lord Simon, asked whether the rewrite project seeks to make the legislation fairer. I think that the noble and learned Lord, Lord Howe, answered that point. More radical changes should be made in the Finance Bill, as I said, as the correct parliamentary vehicle to deliver changes in the way everyone is taxed.
The noble Lord, Lord Freeman, having to some extent supported the noble and learned Lord, Lord Simon, raised three points. The first was on taxing the state retirement pension and taxable state benefits on the amount received in the tax year rather than the amount accrued. Our current basis of assessment was introduced in the Finance Act 1989. This is another longstanding issue. A change might materially alter tax liabilities and could complicate the coding of pension income for PAYE purposes. It would have significant operational implications. Although it was considered when the Bill was being produced, it was decided that that was not a suitable subject for revision.
213 The noble Lord's second point was on retirement annuity contracts. We are consulting on the simplification of the taxation of pensions. We issued a consultation paper in December 2002, and the consultation period closes on 11th April. We intend that, as for all other pensions in payment, pensions paid from retirement annuity contracts should be taxed as income under Schedule E. So PAYE would have to be operated. The practical issues are being considered in the consultation process. We are proposing further consultation this year and legislation next year.
The noble Lord's third point was on the operation of PAYE on the state pension. The Department for Work and Pensions and the Inland Revenue are aware of that issue, and we accept that it could be seen as an improvement in service by pensioners. However, there are operational difficulties in operating PAYE on state pensions. The difficulties would have to be overcome before the improved service could be implemented.
The noble Lord, Lord Northbrook, discussed a matter mentioned by a number of other speakers; that is, the length of the Finance Act. The noble Lord, Lord Newby, said that there was little consultation on new tax legislation. On the contrary, the Pre-Budget Report, which is published six months before the Budget, constitutes the beginning of consultation on matters in the Budget. Some 60 per cent of last year's Budget—that is 300 pages—was published after extensive consultation. As I said in my opening remarks, I simply do not accept that the number of pages is the significant consideration. It is the time it takes to understand the legislation and act on it that is really important.
The noble Lord and a number of other speakers asked about the resources available for the project. He specifically asked about parliamentary draftsmen. There is a senior draftsman with two assistants attached to the project on a rotational basis. Three or four external draftsmen with experience of the Office of Parliamentary Counsel work with them. That is a substantial commitment which has not been reduced. We have continued the commitment that was made in the past. I believe that the noble and learned Lord, Lord Howe, recognised that.
The noble Lord, Lord Newby, wanted the resources to be strengthened rather than weakened. That is the case. There is general agreement that the rewriting of tax law is worth doing and worth the continuing resources. The Chancellor stated in a letter in February 1999 to the noble and learned Lord, Lord Howe:
It is a massive exercise but one which we are committed to doing well".That commitment remains.As regards the future programme, I can confirm—as the noble and learned Lord, Lord Howe, said—that early next year we shall produce a draft on foreign income trading, income, property income and savings and investment income. The noble Lord, Lord Saatchi, said that we would produce a Bill on PAYE. We shall not produce a Bill, but rather regulations. The noble and learned Lord, Lord Howe, referred to that. It will be put in train later this year.
214 Clearly, the resources that are necessary are being made available. The terms of reference of the tax rewrite project have received universal support in this House despite the understandable wish for them to be extended. I believe that I have explained the reasons why it would not be possible or desirable to extend the terms of reference any further than they have been. Meanwhile, the fact that the Bill has been received with such universal approbation enables me to commend it to the House.
On Question, Bill read a second time; Committee negatived.
Then, Standing Order 47 having been dispensed with (pursuant to Resolution of 19th February), Bill read a third time, and passed.