Finance Bill

HL Deb 20 July 2004 vol 664 cc170-212

7.30 p.m.

The Parliamentary Under-Secretary of State, Department for Culture, Media and Sport (Lord McIntosh of Haringey)

My Lords, I beg to move that this Bill be now read a second time.

I shall also be addressing the issues raised by the report of the Economic Affairs Committee on the Finance Bill 2004 and of course I shall respond to any points made on those issues in any concluding remarks.

Since 1997, Britain has sustained growth through two economic cycles. In addition, this period of sustained growth has been combined with low inflation, low interest rates and the lowest levels of unemployment for a generation. Over 1.8 million jobs have been created, while claimant count unemployment has fallen by more than 800,000, remaining consistently below 1 million since February 2001.

In his Budget speech in March the Chancellor of the Exchequer renewed the Government's commitment to monetary and fiscal discipline and economic stability. The Government remain on track to meet their fiscal rules over the next five years.

The Government are also making savings on debt interest and unemployment, helping us to meet our fiscal rules, keep taxes low and spend more on vital services. These strengths mean that the Government are in a position to invest more—not less—in public services that matter most to the people of this country. Those areas will enable the United Kingdom to grow and prosper in the global economy of the future. The Finance Bill builds on our successes, it strengthens and modernises the economy and helps to prepare the United Kingdom for the challenges of the future.

The Government are committed to delivering world-class public services, offering opportunity for all. We will drive forward with investment in essential public services, while continuing to strengthen the United Kingdom economy, to support a fairer society with stronger communities and to promote stability and prosperity around the world.

Last week the Chancellor of the Exchequer announced that current spending will rise by an average of 2.5 per cent in real terms across 2006–07 and 2007–08. In this spending round, three-quarters of spending will go to vital front-line services. So while overall spending rises by just 2.8 per cent, departmental spending—spending on vital services—will have a real terms rise of 4.2 per cent over the next three years. UK education spending will rise to 5.6 per cent of GDP by 2007–08 from 5.4 per cent in 2004–05. We will invest more in our children to build on our improvements to the United Kingdom's education system, including a new determination to make pre-school provision for the under-fives as well as childcare available to all.

The five-year settlement announced in the 2002 Budget for health and the increased resources announced in the spending review this year mean that overall health spending will grow to £92 billion in 2007–08, compared with £33 billion in 1996–97. We will also continue our long-term investment in our infrastructure, particularly in transport and housing. The housing budget in England will rise from £5.9 billion this year to £7.2 billion by 2007–08, a 4.1 per cent annual real terms rise. That will fund a major programme of investment in affordable and social housing in order to tackle the long-term under-investment and neglect of housing. That is vital to economic prosperity and our quality of life.

Spending on transport will grow on average by 4.5 per cent in real terms over the three-year period from 2005–06 to 2007–08. This is an ambitious programme of investment and reform that will deliver greater opportunities, expand choice and help reverse the legacy of under-investment in public services.

The Government's spending plans will help to equip Britain to meet the global challenges of the future. Productivity is the key to delivering sustained and balanced growth across the United Kingdom. In order to raise productivity levels, the Government will continue to promote competition within the economy, to support business and entrepreneurship and to raise the United Kingdom levels of skills and training.

Alongside the spending review the Government also published a 10-year investment framework for science and innovation, with the aim of making Britain the best location for science and innovation in the world. So we will not cut the science budget but increase it in average annual real terms by 5.8 per cent, a doubling of cash spending on science since 1997. We have set ourselves the ambitious target to raise overall research and development spending in both the private and public sectors from 1.9 per cent of national income to 2.5 per cent by 2014.

The Finance Bill builds on our successes in supporting economic stability and sustained economic growth. It introduces a number of new measures to support entrepreneurship and businesses. Clauses 38 to 46 will continue the Government's reform of corporation tax, extending corporation tax relief for the expenses of managing investments to companies with investment business, providing greater certainty for companies in relation to their expenditure.

Clauses 93 and 94 introduce further improvements to the enterprise investment scheme and the venture capital trust scheme. Clause 141 will strengthen the research and development tax credit, widening the definition of "qualifying costs" to include costs of computer software, water, fuel and power directly employed in research and development. Clause 142 will encourage investment by small businesses by increasing the rate for first-year capital allowances for small businesses' spending on plant and machinery from 40 per cent to 50 per cent for one year.

An important part of creating a fair society is to have a fair taxation system. The Government are determined to close down the opportunities for tax evasion and to ensure that everyone pays his fair share. The Finance Bill includes a number of measures to deliver that objective. Clauses 306 to 319 provide new disclosure obligations on promoters who market certain tax schemes, ensuring greater transparency in the tax system and reducing the number of contrived tax schemes used to avoid tax. Clause 19 introduces a parallel disclosure measure to help counter the avoidance of indirect taxes.

In order to discourage the self-employed from incorporating solely for tax advantages, Clause 28 introduces the non-corporate distribution rate of corporation tax, ensuring that when profits are distributed to non-company shareholders, some or all of the company's profits are charged at a minimum rate of 19 per cent, thereby protecting low rates of tax for those companies that are investing in growth.

As a part of an enhanced strategy to combat spirits fraud, in Clause 4 the Government introduce duty stamps for spirits from 2006. Clause 84 introduces an income tax charge on previously owned assets in order to reduce unfair tax avoidance through the use of trusts.

There has been some criticism of the length of this year's Finance Bill. Yet the Government's pension simplification proposals, which make up some 170 pages of the Bill, actually remove over 350 pages of complex legislation and sweep away nearly 1,000 pages of guidance. Clauses 149 to 284 constitute a radical simplification to one of the most complex areas of the tax system. They introduce a single set of rules for all tax privilege pension schemes; they streamline the registration process for new pension schemes; and they allow for greater flexibility for around 15 million pension savers.

This is a modern and progressive Finance Bill. It is realistic about the challenges this country faces in competing with the world economy. The measures to create fairness in the tax system and in the wider economy will ensure that more people will be able to benefit from our economic strengths. The Bill maintains the principles of stability and economic growth which underpin an enterprise economy that supports fairness and opportunity for all to enjoy increasing prosperity. I commend the Bill to the House.

Moved, that the Bill be now read a second time.— (Lord McIntosh of Haringey.)

7.40 p.m.

Baroness Noakes

My Lords, I start by thanking the Minister for introducing the Bill. We welcome the opportunity to debate the Finance Bill and the report of the sub-committee of the Economic Affairs Committee, which considered the Bill. I pay tribute to those noble Lords on the sub-committee who produced a valuable report in the necessarily short timescale.

The fact that your Lordships' powers are limited on money matters will not diminish the relevance of our debate. We can demonstrate, as the sub-committee has demonstrated, that we have relevant expertise to contribute. I particularly look forward to the contributions of my noble and learned friend Lord Howe and my noble friends Lord Wakeham and Lord Northbrook, not to mention that of my noble friend Lady Wilcox, who will be winding up for these Benches. I also look forward to the three maiden speeches. We are indeed fortunate in having the noble Lords, Lord Bhattacharyya, Lord Giddens and Lord McKenzie of Luton. I know they will agree with me in a couple of hours' time that it really was not too difficult after all.

There is a lot to debate on the Finance Bill, and I will start with the Budget from which the Finance Bill derives and the Chancellor's economic management. Last week, when we debated the spending review, I was somewhat taken aback by the criticism of the noble Lord, Lord McIntosh, that the noble Lord, Lord Newby, and I had been, scratching around at the margins rather than even attempting to attack the Chancellor's record".—[Official Report, 12/7/04; col. 1040.] I do not know whether the Liberal Democrats deserve that, but I put on record again our view of the Chancellor's performance. This applies to the Budget, the spending review, the Finance Bill and every interference in the economy that emanates from the Chancellor's office.

The proportion of GDP taken by public spending has been rising fast and is set to exceed 42 per cent in 2007–08. Big government is not in dispute, but this Government have gone beyond big; they are fat, and that is not healthy. Last week's spending review was an admission of inefficient spending. We applaud the belated attempt at efficiency outlined in last week's statement, but we have no confidence that the head count savings will be realised, because the Chancellor has absolutely no track record in delivering any of the many reductions in civil servants that he has promised in previous years. He does have a track record of presiding over public services, which have demonstrated massive reductions in efficiency according to all studies to date, including those of No. 10 Downing Street and the Office for National Statistics. If the subjective judgments apparently favoured by this week's Atkinson report are ever allowed to gain currency, that may well allow the Government to paint a different picture in future, but we do not believe that any rational assessment of quality gains could outweigh the truly massive decline in measured efficiency over the past seven years.

I could talk about the loss of the savings culture; the regulatory burdens on business; competitiveness; the fall in productivity growth and so on. I do not have time this evening to lay out the full charge sheet, but I do not want the Minister to be under any illusions about our view of the Chancellor's stewardship.

Last week, the Minister ducked two of the questions that I put to him on the Budget and the effect of the spending review, so I will put them to him again. First, I ask again whether the golden rule will be met over the current cycle, which runs to 2005–06. The Minister replied last week on the Chancellor's sustainable investment rule, but I hope that he will be able to reply on the golden rule tonight. I hope that he will also deal with whether the golden rule will be affected by Network Rail coming on to the Government's balance sheet, as well as the effect on tax receipts of the extra pension contributions that have recently been reported.

Secondly, I ask again: Will the Minister assure the House that these spending plans will be delivered without the Chancellor raising taxes or national insurance over the whole period to 2007–08".—[Official Report, 12/7/04; col. 1038.] Our analysis is that he will find it difficult, if not impossible, to do so. The Minister replied last week in terms of assumptions about tax rises, but that is not what I asked. I asked for an assurance. My question has even more relevance given the refusal by the Paymaster General last week to give my right honourable friend Oliver Letwin that assurance.

These matters of the economy and the dangers that lie within it are of greater significance than the contents of a single Finance Bill. I cannot remember ever seeing a three-volume Finance Bill. There are 637 pages—328 sections and 42 schedules. A massive amount of secondary legislation is necessary to put the Bill into effect. The Minister might doubt that it is three volumes, but I have it here. That is probably a record, although I do not intend that as praise.

I have been trying to reflect on why the Chancellor has produced these massive Finance Bills year after year. It seems to be symptomatic of a Government whose first instinct seems to be to get themselves involved in the minutiae of life in this country. This is a Government who do not content themselves with principles; they try to micromanage everything, which is why the public services have been weighed down with instructions and targets, and it is why businesses are regulated to distraction. It is why Finance Bills find more and more areas in which to intrude, and in so doing create yet more complexity and more regulatory burdens. Those are all signs of fat government.

Our feelings about the Finance Bill are not those of anger; although I know many who are affected by the Bill feel that way. Rather, we feel the greatest sorrow that so much should be inflicted on individuals who should be left to get on with their lives, and on businesses that should be left to get on with wealth creation. My noble friend Lady Wilcox will be talking about the Government's attacks on small businesses and on the spirits industry. I shall confine my remarks to a few other areas of the Finance Bill.

The Finance Bill sets up massive anti-avoidance reporting requirements. Of course, they were not worked out in advance, which is why the first set of draft regulations produced universal condemnation from the practitioners who must deal with those regulations at the sharp end. We have no time for those who abuse our tax system, but these new laws run the risk of making ordinary commercial life uncertain, and compliance will be burdensome. I hope that the Government will at least take on board the entirely sensible recommendations of the Economic Affairs Committee in this regard.

The so-called simplification of the pension provisions is far from simple and was not consulted on in advance. In response to industry concerns, the Government modified some of the worst aspects during the passage of the Bill in another place, but it is undeniable that the provisions are complex, particularly in transition. The new pension rules have some undesirable features, and I shall single out one, which is the technical rules for valuing final salary scheme pensions, which will be treated much more favourably than those for money purchase schemes. This benefits public servants in particular, and will accentuate a "them and us" divide, given that the effect of the Government's general policies towards pensions is to drive private sector employers into defined contribution schemes. As the CBI's pension strategy group reported earlier this week, the gap between public sector pensions, which taxpayers pay for, and other pension arrangements is causing growing resentment. The Government will come to regret that.

The 70-odd pages of the Bill devoted to stamp duty land lax tell us several things. First, they tell us that the Government introduced this new tax last year before they had worked it out properly. Secondly, they tell us that this tax will continue to be administratively burdensome and costly in compliance terms. Thirdly, they tell us that the law of unintended consequences is alive and well, and this tax has already distorted pricing in the housing market around various trigger points.

My right honourable friends in another place fought valiantly, but unsuccessfully, to improve the Bill in various ways, including modifying the worst aspects of the pre-owned assets and trusts rules. They tried and failed to get some certainty about fuel duty in an era of volatile prices, although I note that today the Chancellor has at least conceded that the autumn hike will not be implemented. They sought, to no avail, to restore some credibility to savings by reinstating tax credits for ISAs.

The Finance Bill before us is a monument to the intruder state and produces no net benefit for the life of the country.

Finally, perhaps I may say a few words about the role of your Lordships' House in scrutinising the Finance Bill. We strongly supported this innovation—and I have already paid tribute to noble Lords who worked on the sub-committee—but there was one very black spot: namely, the lack of full co-operation by the Treasury, which is well covered in the sub-committee's report.

It is well known that the Chancellor does not want our House to go anywhere near his Finance Bill. It is clear that civil servants in the Treasury effectively withdrew the usual full co-operation that your Lordships' House expects. It is not clear whether the Chancellor encouraged or merely allowed his civil servants to behave in this way. Either way, it is a matter of the gravest concern and really has to be sorted out.

Related to this is the Government's response to the report. I searched through the report of the Finance Bill proceedings in another place to find what the Government had to say about the sub-committee's report. I found nothing, though Members on the Benches of Her Majesty's Opposition and those of the Liberal Democrats clearly found the analysis and evidence useful. Of course we have not had a formal Government response to the sub-committee's report to consider today, and so we cannot debate it in those terms.

I believe that these issues must be addressed when your Lordships' House comes to decide whether to make this new sub-committee a permanent part of our universe.

7.52 p.m.

Lord Peston

My Lords, I thank my noble friend for introducing the debate. It is a trifle bizarre because the relevant document shows that he will introduce the debate and then, on the following line, it states that I am to introduce it. I am not going to behave as if I am introducing it. I can tell noble Lords—all of whom, I assume, are like me and want to go home—that I have no intention of speaking a second time at the end of the debate.

Perhaps I may follow my noble friend and begin by saying a few words about the economy. In my judgment, the economy is in better shape now than I have known it in the 50-plus years that I have been a professional economist. This is a source of concern because there then follows the sad possibility that the result may well be large-scale unemployment of economists.

But—and this is not for the faint hearted—it is a dangerous thing to say because the record of economists when they are optimistic is pretty poor, to the point of being disastrous. Just before the stock market collapse of 1929, one of the world's greatest economists predicted that the great crash would definitely not happen. I can give many other examples. My own favourite is that, one or two days before the 1967 devaluation, I said on the BBC that the value of the pound would definitely be maintained. So, in saying that things are good, I appreciate that this might be the end for our economy.

In saying that the economy is in good shape, I am not remotely saying that there is no room for controversy. Speaking personally, I would favour a degree of fiscal tightening coupled with a modicum of monetary easing. But that is a technical point. I think that most economists would agree that the Chancellor's position, the position that I have just mentioned and that of several other economists are all within what we might call the compass of reasonable discourse. I think that is a fair way of putting it.

Turning now to the report of the sub-committee on the Finance Bill, I can reassure your Lordships that we have done exactly what we were required to do. We have stayed within our terms of reference; we have not strayed into any party political wrangling; and we have impressed all interested parties but one—the Treasury. Given that we have got "As" for everything that we have done and a "C" from only one body, I prefer to concentrate on all the "As".

Certainly all the experts agree that our dispassionate approach, based throughout on evidence, is precisely the right way for the Finance Bill to be scrutinised. Many of them have said to me—and I agree with them—that it would be a welcome development if the other place adopted our approach. It might also please the Chancellor because, apart from anything else, if it did adopt our approach, our contribution might become irrelevant. But I am absolutely certain in my own mind that what we did, and what your Lordships asked us to do, is the correct way to move this subject forward.

I shall say a few words on the report itself even though, as always—naively and pathetically—I assume that all noble Lords who are taking part in the debate have read every word our report and the three volumes of the Finance Bill itself.

Before I do so, however, I greatly welcome the fact that three maiden speeches are to be made in this debate. It is an honour for me to have chaired a committee which has attracted three such major figures to address your Lordships on the topic before us. Certainly this is the last time that I shall be addressing your Lordships as the chairman of the Finance Bill Sub-Committee, and it may well be the last time that I shall be addressing your Lordships as the chairman of the Economic Affairs Committee—it depends on the timing of our next debate. I very much look forward to the three maiden speeches.

Turning to the report, I must, as always, thank our clerk, Robert Preston, and our two specialist advisers, Mr Leonard Beighton and Mr Brian Sheppard, who are retired senior officials of the Inland Revenue, for all their work. As opposed to the Economic Affairs Committee and other committees of your Lordships' House, when we are carrying out this kind of scrutiny we rely enormously on the expertise of our advisers, as well as on external people. It is not something I feel enormously confident about without proper back-up. On the assumption that we do go ahead and make this a permanent part of our proceedings, we must find the funds to have the scale of expertise that we had this time.

Given the compressed amount of time we had available—and I thank all noble Lords who took part—it became a full-time job. Even then, we could look at only five topics. Last year we looked at three or four. I cannot remember why we chose the five topics; it may have been the chairman's whim. We looked at the tax and VAT avoidance schemes, about which I shall say something in a moment; and we looked at pension schemes. I was a little puzzled by the intervention of the noble Baroness, Lady Noakes, on this issue. I know that she will have read our evidence, and overwhelmingly all the outsiders said that they thought the simplification was a simplification and that they totally approved. So I am slightly surprised at her intervention suggesting that it was not and that people did not approve; they certainly did.

We considered the issue of small business taxation. I think the noble Baroness is right that the law of unintended consequences is working there and it was interesting to see how the relevant matters emerged. We considered stamp duty and land tax, to which I shall return; and then we came—this was definitely the chairman's whim—to the duty stamps for spirits, and I shall say a word on that in a moment.

If I were asked why we chose those topics and whether there were rational grounds for doing so, I suppose I could say that two or three of them were very important and the others were at least interesting. That is not bad.

Let me take a little time on the issue of tax avoidance schemes. I knew very little about the subject beforehand. I knew there were such things, but I had no idea of their scale and the appalling behaviour of major firms in our country in devising these purely artificial schemes, which bear no resemblance to the businesses concerned and what they are about. This is not a party political point, but the one thing I am absolutely certain about is that any government would wish to remove that artificiality from our tax system, if for no other reason than that the ordinary people in this country—I include myself in that—pay the full tax on everything they earn. To discover, as we did only the other day, that leading professional footballers of a club I support were actually paying less tax than the average wage-earner on their so-called outside earnings simply will not do. For the tax system to work, it requires the support of the general public.

We raised the point that in trying to deal with the reporting, you could end up, in the early stages, with over-reporting. We have no doubt about that. As at least one former Chancellor will be addressing us, perhaps I may say that what tends to happen is that, on the whole, you go in blind and for a bit of overkill. I know that we are not in this business to be loved, but what struck me is that no one ever says how right we were and that they will now do as we say. Despite the fact that the Treasury will swear blind that it has not read a word of what we have said, it responds to matters of that kind. I am at least confident that although in the early stages there will be over-reporting of the registry, the system will enter an equilibrium that will work. I think that genuine people, who simply want to make sure that the system works properly in their ordinary businesses, will be reassured. So I am not worried about that, apart from in the very early stages, when there will be difficulties.

I am certain that the Chancellor needs to go beyond just recording these artificial schemes; something needs to be done about stopping them. I think that some of my noble friends will have something to say about that.

There are two other topics on which I want to speak briefly. I did not realise before we started that one of the problems with the stamp duty land tax was, again, tax avoidance. Partnerships were being artificially created in order to avoid paying stamp duty land tax. It is a very good example of how the bad drives out the good. Legitimate partnerships are, quite rightly, concerned that they should be correctly treated but, if people are inventing artificial partnerships as a tax avoidance device, it is not in the least surprising when the Treasury reacts by saying, "We are not going to have it". There are ways in which one can distinguish the genuine from the fictitious. It is a good example of why we were right to look at this issue; most of us knew nothing about it until we did.

On the point about spirits, my noble friend Lord Moser, who is a great figure in the field of statistics, impressed on us the total inability to reach any agreement on the scale of the problem. We were all quite shocked by the fact that the range was not between one number and plus or minus 10 per cent— we had a range of several hundred per cent between the least and the most. That is also illustrative of why this is worth doing. As I understand it, from what we have been told recently—perhaps my noble friend the Minister will tell us more about this when he replies—the Government have approached the industry and are considering a rather different way of getting into the same area without quite going down the road of enormous compliance costs. If that is happening—I know that the Government would not dream of saying they were making any changes because of us—that reassures me to some extent.

I have gone slightly over time. I reiterate that I think we have done a useful job; and if we can find 12 good men and women and true for next year to put in this much effort, I very much hope that we will continue to do it. I look forward next year to sitting on the Back Benches and contributing to such a debate again.

8.4 p.m.

Lord Bhattacharyya

My Lords, it is a great honour to address the House for the first time. When I was a small boy, I visited the House with my father. I wandered around in wide-eyed amazement at the splendour of the place. I never dreamt that one day I would be a Member. One did not see a non-white face. Today, I feel much more comfortable. A confident nation has nothing to fear from being inclusive.

I must thank noble Lords from all parts of the House and the officers of the House for the warmth of the welcome I have received. My supporters—my noble friends Lady Dean and Lord Corbett—and my mentor, my noble friend Lord Haskel, have been especially welcoming. With support like this, the errors from now on can only be mine.

Over the past few weeks, the debates in the House have impressed me with their breadth and incisiveness. The report before us is a good example. I commend my noble friend Lord Peston and the Peers on the Select Committee for the diligent work that has gone into producing it. I thank him for it, and for the opportunity to make my maiden speech on such an important topic. But first, I would like to introduce myself.

I am a Bengali, born in Dacca to a liberal Hindu family, in what was then part of an undivided India. At partition, my family became refugees. We made a new home in Bangalore. My father was a scientist, and he became a professor of chemistry at India's first research institute.

Industrialisation meant that engineering was vital to the new nation and, like many youngsters, I wanted to be an engineer. To gain experience, I was sent to England, to Joseph Lucas, one of the world's greatest centres of electrical engineering, to do my graduate apprenticeship. On completion, I was fortunate to be awarded a Lucas fellowship at Birmingham University, completing a Masters and a doctorate.

I agree with what the Prime Minister said yesterday in all but one thing: the 1960s were a great time to be a student. As the saying goes, it was a time when sex was safe and flying was dangerous. The original intention was for me to be trained in England and to return to India to run one of our major family organisations. England, however, was far too much fun—a time of flower power, social innovation, Mini cars and miniskirts. Life was so exciting. It was great at Birmingham to play cricket all day and then do my research on the night shift. I suspect that my cricketing days are the reason my knees are not quite as good today as they should be.

Watching the game was not always quite such fun. I went to Lords to see England play India. I am afraid that I failed the test named after the noble Lord, Lord Tebbit. Before I could open my hamper, Typhoon Tyson and Freddie Truman had put India to the sword. The scoreboard, at one time, read nought for five. Yes—five wickets down for no runs scored.

I have lived very happily in Moseley in Birmingham for more years than I lived in India, with my wife and three daughters. I am still enjoying life in England, and still learning.

Entering the 1970s, I felt that large sections of our industry lacked the intellectual horsepower needed for success. That was underlined by Monty Finneston producing a devastating report on the engineering sector. He identified the polarisation between industry and the universities. Universities were in splendid isolation, arrogantly labouring with an antiquated curriculum. Industry did not comprehend the intellectual rigour that was needed to propel it into the new age.

I had been giving a great deal of thought to how to develop manufacturing as an academic subject. To understand what was happening in global manufacturing, I studied the performance of manufacturing in Japan, the US and mainland Europe, and I continue to do so. Success in manufacturing involved a complex interplay of economic, technological and political factors, which were in a constant state of flux.

Over at Warwick University there was a vice chancellor with very innovative ideas. Jack Butterworth—later to become Lord Butterworth, an eminent member of the Conservative Benches—was a real visionary. He knew that Warwick could be established as a leading player only by doing something different, and he invited me to join him. I had the opportunity to create a new type of centre, bringing together the best of industry and academia on a greenfield site. I was the director and the first professor of manufacturing in Britain when the Warwick Manufacturing Group was established in 1980. Looking back, that was one of the triggers that propelled Warwick University to the top level of universities.

In fact, 1980 was not a good time to be starting a manufacturing group of any kind. British industry was in the pits. It was tough. I had very few resources and the whole idea of a university working that closely with industry was against the grain.

Meanwhile, the first Thatcher administration grasped the nettle of tackling our industrial relations problems. Legislation quickly followed that led to the deregulation of our markets. In many parts of the country, market reform was very painful, but it was an essential precursor to enhancing the competitiveness of our firms. Those changes improved the environment in which companies operated, but they exposed the failings within companies. Managers had no hiding place and no more excuses about poor industrial relations. Their products had to stand or fall in the open market.

The product of the Warwick Manufacturing Group was in great demand. We were in the thick of the reform process, working with firms big and small to improve their management and their technology. We learned about how to turn around and restructure businesses successfully, and how to raise the skill level of existing staff and create an environment where they could exploit bright young graduates.

The first stage was to keep the firms alive. The next challenge was to make them sustainable. Sustainable success means that companies need to be open to new ideas and to generate a constant flow of new products. That requires research and development. The flow of in-company research and development had dried up, jettisoned in the struggle to survive. We realised that to restart in-company research and development, firms needed a helping hand. We created a demonstrator for the automotive sector. That gave students access to industrially relevant research and state of the art equipment and it gave firms access to a constant stream of new ideas.

When the Prime Minister opened the Advanced Technology Centre at Warwick in January 1990, it was the first of a kind—a new type of research-driven partnership between a university and industry. Today, the Warwick Manufacturing Group, which I lead, is among the largest of its kind in the world. We are proud to work with numerous firms and governments in Asia, Africa, North America and mainland Europe.

At home, the structure of the economy has changed over the past 25 years. Today, small firms play an increasingly important role. The report that we have before us makes some very important points about the burden of tax collection on small companies. I share the views of the Select Committee when it identifies, in Chapter 4 of the report, the issues that face small firms.

Successive Finance Bills have grown increasingly complex. Unlike individual taxpayers, small firms do not have the option of the Inland Revenue doing the calculation for them. They have to self-assess. The Inland Revenue should have a set of simple regulations, which would, of course, be had news for accountants. I am in complete agreement with the Select Committee when it states: Finance Bills need to strike an acceptable balance between the protection of revenues and the imposition of compliance costs on the taxpayer". Gordon Brown has done many things on the fiscal front, and not just for small businesses, to make Britain an even better place to do business. Those improvements have now developed a momentum of their own. For example, my home town of Birmingham has changed beyond recognition in the past few years. Today, the city is a place of which we are all proud. I still cannot forget seeing the President of the United States walking along Gas Street Basin to have a pint in a canal-side pub. At one time, a canal-side walk would have revealed nothing more than an old pram and a rusty bike.

As a past board member of the regional development agency, I have seen how regeneration lifts up areas such as the Black Country, enabling them to share in our economic success. In Coventry and Warwick shire, where Warwick University is located, we have effectively full employment for the first time in a generation.

We do not live in a totally free-market society. In a mixed economy, improvements in education and training, science, health and infrastructure obviously require government action. We all know about the huge investments in education and health, but extra spending on science and technology, coupled with tax credits for corporate research and development, is now starting to have a major impact. I was pleased to see that commitment maintained in the Chancellor's spending review.

Governments will always claim kudos for improvements in the economy, but it is important, too, that we have a growing sense of self-confidence and pride in our nation. We should not want to be a nation that wins a cup every now and then: we should aspire to be good at everything that we do. That must include test match cricket and, in that sport with a larger ball, taking penalties.

Finally, I concur with noble Lords who have undertaken scrutiny of the Finance Bill. Their work has great value, and serious consideration should be given to placing the sub-committee on a permanent footing. I know that maiden speeches are meant to be non-controversial, but I think that the Government should want the House to debate and scrutinise important parts of their programme, and would help to make such a process possible. There is nothing wrong in the Treasury having that confidence.

I commend the report to the House and look forward to participating in the important work and debates of this Chamber.

8.14 p.m.

Lord Howe of Aberavon

My Lords, it is a great pleasure to be able to congratulate the noble Lord, Lord Bhattacharyya, on an outstanding maiden speech. I do so with the knowledge that too, have migrated to Warwickshire, but only from Aberavon which is not quite as far as his own migration, originally from Bengal.

There are many other reasons why I welcome his speech. He is a distinguished academic and entrepreneur, who did not disclose all the aspects of his skill as a cricketer. He is certainly a very enthusiastic cricketer. On one occasion he had the privilege of playing against Don Bradman's team in Calcutta, when they were on their way back from the United Kingdom to Australia. That is an additional, formidable achievement.

More seriously, there is his reputation for the achievements of the Warwick Manufacturing Group. I have been told that he had a desk, a chair and a secretary—and nothing more than that—when he started his academic career there. He has now transformed it into a business with an annual turnover of some £80 million. The university owes him a great debt for that.

Finally, I do not think that he disclosed his Brahmin origins. Brahmins are said to turn into either teachers or preachers. He seems to me to have had a marvellous blend of success in both respects. So we salute a Brahmin who is now a Brummie, who played against Bradman—that is a remarkable feat. We very much look forward to hearing from him again in debates of this kind, and others, in the House.

I have intervened, again, on a Finance Bill with some hesitation, because it is now 21 years since I have brandished a Budget box with authority and my knowledge is getting pretty rusty. I do so particularly, to follow the example of my noble friend Lady Noakes, to welcome emphatically the report that is before us from the economics committee. It is a most important contribution to the work of the House. I like to think that, had I been in the Treasury, I should have been rather more welcoming of it than appears to be the case now. I look back with some guilt on the lack of enthusiasm that I displayed towards the Treasury and Civil Service Select Committee of the other place, which was invented at about the time I went to the Treasury. So we have to have some sympathy with the Chancellor, but he will get used to this committee. I certainly hope that we shall renew it when this one finishes its term, particularly because the style, which the noble Lord, Lord Peston, commended, is exactly the kind of style with which Parliament of both Houses should be considering legislation of this kind and, indeed, many other issues. I admire the extent to which my right honourable friend in the other place, Oliver Letwin, manages to achieve that style.

We live in a society where there is now a very large degree of common ground between the parties. Many of the reforms enacted by the Thatcher government which were denounced at the time have been accepted as the foundation for the work of this Government. There is a great deal of common ground, and one of the oddities is that, as a response, the major parties have indulged in excessive product differentiation of a striking kind. That is not the right way in which to consider the sort of issues that we are considering today.

I am glad, therefore, that the Chancellor has done so much to build on the foundations which we laid, but am worried at the extent to which he seeks to erode them. I must list some shortcomings about his performance to which one must draw attention. My noble friend Lady Noakes spoke of the "fat government". That is carrying the metaphor a shade further than "big government". The Chancellor undoubtedly demonstrates a tendency towards obesity, both of paper consumed and language deployed. I am struck by the fact that my first Financial Statement and Budget Report—the Red Book, as it was then known—contained only 33 pages, was for sale at the cost of £1.25, and weighed only 68 grams. However, the latest Financial Statement and Budget Report costs £45, contains 296 pages and weights 1.12 kilos. That is obesity on a substantial scale in terms of paper generated. The public spending review has been transformed in a similar way.

I turn to the scale of Finance Bills—the noble Lord, Lord McIntosh, will have heard this argument previously. I pleaded guilty to an average of 98 sections and 15 schedules and my pages were on average just short of 100. However, the Chancellor's average is 141 sections but he has far exceeded that this time. His average is 30 schedules but this time he has 42 schedules. His obesity tendencies are expansive and continuing.

The Minister succeeded in giving the Chancellor a legitimate alibi in relation to pension simplifications. One must acknowledge that that is a step in the right direction, although there is no doubt that it is less than perfect. I also acknowledge that there is a real need to continue to tackle the problem of tax evasion, which is the most elusive topic. He was right to try to tackle that, although I shall return to it in a moment.

One final mitigation is that when we were in the Treasury, we succeeded in repealing certain taxes, such as capital transfer tax, development land tax, investment income surcharge and national income surcharge. We are well rid of those taxes.

Another demonstration of obesity is the hugely self-praising style of the language in all that the Treasury produces. The chapter headings of the spending review are all written in the most self-congratulatory fashion: "Stability, security and opportunity for all", "Efficiency", "Better public services", "A stronger, more productive economy", "A fairer society with stronger communities", and "Global security and prosperity". Heaven on Earth! The final capping for the dossier—inevitable these days—is an immensely fulsome foreword by the Prime Minister, which really should be avoided. The language and style are much too full of such self-congratulatory content.

To become rather more serious—these are serious points—the Chancellor no doubt will have noted in the magazine Prospect that he was selected as one of the 100 most intellectual people in this country. I hope that he will also have noticed the comments by one of his colleagues in that league, Samuel Brittan, who said in the Financial Times last week that the Chancellor's insights were, delivered in an unappetising mixture of Labour-speak and management consultant jargon. They have no grace or magnanimity towards predecessors, but assume that the world began in 1997. Then there is the continuing misuse of the word 'investment' to describe", any form of public expenditure. He continues: I wish somebody would tell the chancellor … that self-praise has a bad odour". That is a fair judgment on the style with which the Chancellor has approached many of these matters.

Apart from the volume of legislation, I commend the move towards simplification in the pensions field. That is in line with the task that I have been carrying on, thanks to the Chancellor; that is, the tax law rewrite project. I very much welcome his continued commitment to that. I am, however, sad that he is not prepared to take it further by responding more positively to the proposals of the Budd committee of the Institute for Fiscal Studies last year to establish a tax structure review project directed to examine the shape of taxation, quite apart from the language of it. That is the kind of work that could be carried forward successfully if we were allowed to maintain our economics committee in this House. Better still, that committee could work in partnership with the comparable committee in another place.

I draw attention to one aspect of the Bill on which the committee focused; namely, Clause 28 and Schedule 3, which involve the corporation tax zero rate. The Chancellor has allowed that to survive for only 12 months. A large amount of the material is there directed to try to repeal that mistaken attempt to shape the economy with the encouragement of smaller corporations. If the Chancellor is to produce proposals of that kind, it surely makes more sense to consult about them more fully, otherwise to resist the temptation. The committee quite rightly concluded that, the government, by its rhetoric, (including the reference to incorporation being undertaken 'often as a result of marketed tax avoidance schemes') presented the proposals as a part of the anti-avoidance strategy. The committee goes on to say, We understood the argument of the private sector that the mischief to which the measure was directed was actually no more than a natural reaction to a tax incentive, which had been deliberately introduced. That is illustrative of the kind of mistake that can follow from over enthusiasm.

I hope to summarise my message to the Chancellor from now on. It will be the same as my message to both major political parties and indeed to the Liberal Democrat Party. It is a six-word election manifesto which I would like to see us all fighting in the next election: For God's sake leave us alone!

8.26 p.m.

Lord Giddens

My Lords, let me begin by expressing my profound sense of privilege on becoming a Member of this House. I am very conscious of the wealth of knowledge and expertise that exists in the Chamber. It is indeed a somewhat daunting environment in which to speak, yet it is also a most friendly and welcoming one. I should like to express my thanks for the helpful and courteous attitude everyone here has displayed towards me.

It is very fitting that I should begin my contributions here by commenting on a report from a committee chaired by my noble friend Lord Peston. He and I share a similar academic background. I am by training a sociologist and political scientist. I was for some years a member of the Faculty of Economics at the University of Cambridge. If I wanted to be a bit mischievous I could say that Cambridge is our leading provincial university.

Subsequently I became director of the London School of Economics for a period of some seven years. My noble friend Lord Peston taught at the LSE during the early part of his career and he had a remarkable track record there.

It has been said that the haggis and tax law have much in common: they both involve bloody processes, the end results are a mystery and those of squeamish disposition should not get caught up in the making of either. I am pleased that my noble friend and his colleagues have proved themselves to be unsqueamish, at least as far as tax regulation is concerned. I should like to congratulate them on their report, which contains a great deal of value.

As they point out, this is only the second time that a House of Lords Select Committee has looked in depth at a Finance Bill. I echo its hope that consideration might be given to establishing such a procedure and the sub-committee itself on a more permanent basis.

Nothing divides political opinion more than the level of taxation appropriate to a society. However, the passions roused by this issue could direct attention away from other aspects of taxation which are just as significant. Indeed, I would make the case that a new approach to taxation, or, more accurately, to its implications for behaviour, is one of the distinguishing features of the progressive approach to politics that I represent and to which I have tried to contribute. Unlike the traditional Left, a modern, progressive approach—the third way, if you like—is concerned in a central fashion with economic dynamism and job creation.

Unlike the traditional Left, such an approach emphasises the fostering of an enterprise culture, entrepreneurism and risk-taking. We need risk-takers not only among those who run businesses, but also in the labour force because of the need to respond to high levels of technological change. Unlike the Right, however, a progressive approach regards social protection and social justice as not only compatible with these emphases, but as inherent in them.

When appropriately structured, taxation plays a key role in pursuing such objectives. Taxation and different tax regimes can have a crucial impact on economic dynamism and on social citizenship. We should always be seeking to structure the tax system in such a way as to maximise wider economic and social benefits.

In recent years, we have seen how successful such an approach can be. For instance, tax credits such as the working families' tax credit have simultaneously helped to promote entry to jobs and to alleviate poverty. Micro-credit has been deployed with great success, to allow people without financial resources to start their own businesses. Fiscal incentives have been used in conjunction with venture capital to encourage small-business start-ups in poor areas. As a consequence, as my noble friend remarked, we have an economy that is strong and stable, yet in which there is increasing investment in public services, along with reductions in levels of poverty.

Enterprise must go along with citizenship, however. The report has an important section on tax avoidance, especially the problem of dealing with what are called, sophisticated and aggressive tax avoidance schemes". Abusive tax avoidance is an issue of core importance today, on a national as well as an international level. Tax-avoidance schemes currently cost the Treasury £13 billion a year in lost income, money that could and should be spent for public purposes. It is good to see new steps being introduced to counter the effects of the tax-avoidance industry. Many of those in that industry, in reacting to the Bill, claim that proposals for the prior disclosure of tax-avoidance schemes add to an already demanding framework of legislation. Parallel legislation in place in the US, however, has already led to the closing of 29 types of abusive tax shelter.

Of course there will always be tussles between the promoters of tax planning and the revenue services, but we should not accept the idea that individuals or companies will seek by hook or by crook to escape paying as much tax as they can. We want more entrepreneurs, yet we should expect and ensure that they behave as responsible citizens. Aggressive tax-avoidance schemes are of a piece with a decline in ethical standards that has afflicted major areas of business in recent years, with results about which we all know. Enron had 881 offshore subsidiaries and paid no taxes at all in the US during four of its last five years. Anyone who paid one dollar of taxation in that time was paying more than a corporation ranked high in the Fortune 500.

Abusive tax avoidance is by definition not illegal, but its consequences for public life and business ethics are as far-reaching as practices that are. Franklin Roosevelt's economic adviser, Henry Morgenthau, once pointed out that if taxes are the hallmark of a civilised society, as I believe that they are, too many citizens want civilisation at a discount". Such a comment applies with even more force today than when it was originally made.

8.33 p.m.

Lord Sheldon

My Lords, it is a privilege to follow the noble Lord, Lord Giddens, and to congratulate him on his maiden speech. A speech of any kind in new territory is always a bit of an ordeal, but he can be assured that we listened to him with interest and approval. As the director of the London School of Economics, he has obviously been at the very forefront of our national life. That in itself makes him one who will always be listened to with interest whenever he makes a contribution in this House. However, among the many notable things that he has done is to be a Reith lecturer, which is an indication that he has been able to contribute to our understanding of the world as it is, as well as the world as it ought to be. It was a distinguished maiden speech, and we look forward to hearing from the noble Lord on many future occasions.

The noble Lord, Lord Peston, is standing down as the chairman of the Economic Affairs Committee, which we of course regret. We have benefited greatly from his chairmanship but, fortunately, we know of his continuing interest in economic affairs, so he will remain an undiminished intruder in such debates. We welcome that.

What we have seen in the past few years is the surprising economic stability of this Government. That has had a particular effect on house prices. For the first time ever in our memory, people assume that stability will continue for ever. Once people make that kind of assumption, which is a novel one that has never been made before, they feel secure. Even if their income varies a bit, they feel that there will be stability every year.

Turning to the work of the Select Committee, last year a committee of the House of the Lords reported on the Finance Bill for the first time, and we carried out a similar task this year. We had to consider the technical aspects of tax—clarification and administration—but not of course the rates or instance of taxation, which are matters for the House of Commons. We understand that. Our particular advantage has been that we have Members with considerable experience and expertise. They have occupied positions of relevance and so they have a sense of perspective. That is what gives them something extra compared with the House of Commons.

This means that the House of Lords can make a useful contribution to the debate. That is shown by the unanimity of the committee, which extended to all its decisions. We do not have the same responsibility as the House of Commons, but the views of our committee should be of some use. The House of Commons finally decides the matters in the Bill, but some input from here can be welcomed. Now that the hereditary Peers have been reduced in number, the House of Lords cannot be assumed to be just another interest group. Our work has been to examine whether the legislation can be as effective as one would wish, not to pursue any particular aims of our own.

The House and the committee will be sorry that my noble friend Lord Barnett is not here to take part in this debate. He is making slow progress in recovering from his fall nine weeks ago in this Chamber, and I am sure that the House will wish him an early recovery. His contribution to the work of the committee has been valuable.

The task of the committee was to ensure that the Finance Bill measures prove workable and effective when implemented. We sought to answer the question, "Will they protect revenues without imposing disproportionate compliance costs on taxpayers and their advisers?". Once again, we had to be selective as to the topics that we chose. We examined them and decided to focus our efforts on a few areas which we thought were causing particular concern and where we thought our efforts might be most valuable. We had limited time in which to make such decisions, because they can come only after the publication of the Finance Bill.

The areas that we dealt with included countering tax avoidance, simplification of the taxation of pensions, small business taxation, stamp duty, land tax and duty stamps for spirits. Concerning the disclosure of tax avoidance schemes, we noted the view of many of our private sector witnesses that the definitions of tax planning arrangements are so wide as to require the disclosure of normal tax planning as well as of the sophisticated and aggressive avoidance schemes to which my noble friend Lord Peston rightly referred.

Those schemes have expanded and they must be dealt with. It is becoming increasingly difficult to deal with the machinations of people who get substantial sums of money out of their efforts in this area. The way that the Bill targets such measures can lead to a significant risk of over-reporting, with a need for updated draft regulations to be introduced as the schemes develop. We trust that the concerns that we expressed in our report will be taken into account.

The problem of over-reporting arises when people feel that to be on the safe side they had better report almost everything. Were they to do so, it would place an enormous burden on the Revenue, which could not cope with that amount of information. We wanted the adoption of a de minimis rule in the direct tax provisions on broadly similar lines to those in the draft VAT regulations and comparable United States tax law. We took evidence from the United States Internal Revenue Service, which was helpful.

We also considered that there were good grounds for looking again at the appropriateness of the five-day time limit for filing details of certain notifiable tax arrangements. Five days is not enough; the advisers need more time than that. We suggested an extension to 30 days. Preparing a case of such importance demands a longer period than was envisaged. We recommended that the draft regulations relating to the disclosure of direct tax avoidance arrangements should, in line with the regulations for VAT avoidance schemes, be made subject to the affirmative resolution procedure.

The spirits industry particularly interested me. The Treasury concern about fraud in the spirits industry is a matter of obvious interest. The solution set out is for duty stamps for spirits to be introduced in 2006. There was a need for considerable consultation on the matter. That is something that rather saddens me about the whole Finance Bill: there should be wider consultation. I understand that there are certain areas in which it is not possible to have consultation because people will take avoidance measures, but there are areas where we can. Where we can, we must—that is the message that we should send out.

The problem was the cost of compliance with the measure which represented—and still represents—a considerable burden. Whether the cost of compliance is reasonable depends on the extent of the fraud. If the fraud is greater, compliance costs can be expected to increase.

In that context, we were particularly disturbed at the statistical range in the Government's figures. What kind of value was set on the fraud that we were trying to deal with? Customs and Excise estimated the fraud at £600 million a year and on an upward trend. The National Audit Office examined the figures given by Customs and Excise and suggested that the amount should be expressed as ranging between £330 million and £1,060 million. The Joint Alcohol and Tobacco Consultation Group widened the range to between £10 million and £1,060 million. We cannot deal with taxation if we have figures as wide apart as that. If the agencies cannot get the figures, they must consult more and investigate more. On the other hand, we could have such a minimal tax that it would not make too much difference and then increase it as we became more aware of the amount of fraud involved.

Whatever the estimates, one cannot engage in anything other than minimal compliance costs without a more definite assessment of the amount of fraud. It will be essential to narrow the differences between those estimates. The outcome should be reflected in the continuing discussions with the industry on the implementation of the provisions. I do not know why the consultation could not go on until a solution is reached that could be put before us.

We hoped that the consultations would result in an outcome that properly reflected the interests of the smaller producers and importers, particularly as it is they who would suffer most. They have real concerns that their livelihood could be put at risk. In such matters, legislation should be in draft, and a two-way dialogue with those involved should be arranged at the outset.

We have had two years of making a contribution to work on the Finance Bill. Obviously, we respect the position of the House of Commons on taxation. We do not go beyond our remit, but we feel that through the efforts of the committee we can be of help in achieving a better Finance Bill.

8.44 p.m.

Lord Northbrook

My Lords, first, I congratulate the two maiden speakers who we have heard so far on their excellent contributions. I look forward to hearing them speak in future on financial matters. I also look forward to hearing the third maiden speaker, the noble Lord, Lord McKenzie of Luton, in due course. I declare an interest as director of a fund management company set up in 1996.

Once again, we are grateful to the noble Lord, Lord Peston, and his committee for the splendid, detailed work that they have done in producing their report on this year's Finance Bill. How well they made use of the little more time available this year.

I would like to endorse in particular three of their comments in the abstract at the front of the report. The first, which I have made frequently in the past and which was made by my noble friend Lady Noakes and my noble and learned friend Lord Howe, was about the length of the three-volume Finance Bill. In the committee's words, We noted the length of the Finance Bill and the increase in complexity and compliance costs for taxpayers and their advisers inherent in many of its provisions. One means by which a balance between the protection of revenues and the imposition of compliance costs may be found is, wherever possible, by exposing legislation in draft and encouraging a two way dialogue with those involved". I agree entirely.

The second comment that I endorse, also discussed by my noble friend Lady Noakes, is the committee's reservation about the lack of assistance from the Treasury. When it wished to see the Treasury a second time to give officials the opportunity to respond to the points put to them after their initial explanations, the Treasury would respond only in writing. According to the report they did not give substantive answers to several questions.

Will the Minister use his best endeavours to persuade the Treasury in future to give a second face-to-face meeting that might even save it time in responding to the committee?

Thirdly, along with other noble Lords I endorse the recommendation in the final paragraph of the abstract that the sub-committee should be made permanent, although, sadly, if agreed it would no longer be chaired by the noble Lord, Lord, Peston. I speak for all noble Lords interested in financial matters when I thank him for all his work in chairing the committee.

I wish to focus on two areas of detail in the Bill. One is covered in detail in the Select Committee's report and the other is not. The Minister will not be surprised to hear that I am focusing on small business taxation, as I have raised the topic before in the House. For those unfamiliar with the topic, the story goes as follows: since 1997 the Chancellor has encouraged the incorporation of businesses through lowering the rate of small companies' tax from 23 per cent to 20 per cent, in 1999 creating a starting rate of 10 per cent.

Edward Troup, tax adviser at Simmons & Simmons, told the Treasury Select Committee in April 1999 that if we offered a tax rate of 10 per cent, every self-employed person would think seriously about whether he would be better off incorporated to save tax. The tax system is moving in a significant skew towards incorporation. In 2002, the starting rate was lowered to zero. John Whiting of the accountants PwC said in April 2002 that incorporation was something that taxpayers should have been thinking about, but the Budget had given it an extra spin down the income scale. That point has been proved by the figures for new incorporations. In 2002–03, 322,000 new incorporations took place; an increase of 43 per cent over 2001–02.

The next stage in the saga was the Pre-Budget Report in December 2003 which surprisingly recorded the Government's concern that, the longstanding differences in tax treatment between earned income and dividend income should not distort business strategies, or enable reductions by tax planning of individuals' tax liability, and that support should continue to be focussed on growth". They therefore announced proposals for action in the Budget of 2004, to ensure that the right amount of tax is paid by owner managers of small incorporated businesses on the profits extracted from their company". This statement has come to be known as IR591.

One of the most interesting statements on this volte-face came from Malcolm Gunn, the editor of the independent journal, Taxation, who argued in a letter to the Chancellor in January 2004 that the comments in paragraph 5.91 had been met with some astonishment and that the very corporate tax regime which the Chancellor carefully constructed was now described in the pre-Budget review as one which distorts business strategies and enables reductions by tax planning of individuals' tax liability.

I can only echo the words of the shadow Chief Secretary in another place, who said: The Government failed to heed warnings given at the time by everyone, including the official Opposition, that they were distorting the tax system in favour of incorporation. Unsurprisingly, the tax loss when thousands of sole traders incorporated has turned out to be far too great, so a piece of tax complexity is required to negate that".—[Official Report, Commons, 7/7/04; col. 862.] Or let us take the words of the Select Committee chaired by the noble Lord, Lord Peston, which, in paragraph 154, said: We have to say that we understood the argument of the private sector that, in a sense, the mischief to which the measure was directed was actually no more than a natural reaction to a tax incentive which had been deliberately introduced: and that on the spectrum of tax planning it tended towards the 'normal' end, albeit because of the multiplier effect, expensive in terms of revenue foregone". In addition, the committee has serious concerns about the application of the new measure. In paragraph 144 the report said, We are disturbed that, so far, the Revenue have been unable to persuade the experts who gave evidence to us that applying the new measure will be as straightforward as they have confidently asserted". The paragraph goes on to state that in one of the issues the Revenue's reply, underestimates the extent of the anxiety caused to affected taxpayers and to their professional advisers during the weeks of uncertainty that followed publication of paragraph 5.91". My final comment on this subject is well summarised in paragraph 153 of the committee's report. Private witnesses perceived this provision as an administrative measure on which they would have had much to contribute had it been thrown open to a two-way dialogue rather than a one-way listening exercise by the Revenue. On the other hand, by their rhetoric, which included the reference to incorporation being undertaken often as a result of "marketed tax avoidance schemes", the Government presented the proposals as part of the avoidance strategy at the heart of this year's Finance Bill.

The other area upon which I wish to focus is the individual savings account. The Government introduced ISAs in April 1999 to increase the number of people with savings. Yet the limit they allowed of £7,000 per year was more than 35 per cent lower than in the previous administration. By 1997 savers were able to take out general and single company PEPs amounting to £9,000 each year and a TESSA of effectively £1,800 per year. The ISA allowance was also made more complex with maxi and mini ISAs being introduced. However, overall it was more than could have been expected from previous Labour Governments.

Two measures have been announced to restrict the benefits of ISAs. First, for the equity ISA since 6 April this year investment managers may no longer reclaim the 10 per cent tax credit on dividend income. This acts to reduce the attractiveness of equity investments within ISAs to basic rate taxpayers. As the shadow Paymaster General at the time said: The equity ISA tax credit does benefit the many not the few which is the point of the argument about seeking to retain the 10 per cent".—[Official Report, Commons, 1/7/03; col. 212.] In addition the Chancellor has confirmed that the annual limit for ISAs will be reduced by another 20 per cent to £5,000 with effect from April 2006.

The Government have urged people to save and to make adequate provision for their retirement, admitting that the basic pension is not enough. ISAs should be at the centre of their strategy to encourage long-term savings. This is not the time to undermine them. Pensioners have already been hit by the ACT abolition, which has deprived pension funds of £5 billion a year. Now the Government will take in an extra £250 million per year by getting rid of the tax credits. How much of a tax break will be saved by cutting the ISA limit from £7,000 to £5,000?

The Government are not sending a good signal about encouraging savings by those two measures. That is reflected in the decline in the savings ratio since 1997. In the years from 1998 to 2003 the household savings ratio has never been higher than 6.7 per cent. In the previous six years to 1997 it was never lower than 9.3 per cent. In March, the shadow Chancellor said: If the Government do not do something to improve incentives to save, the stability of the economy will be threatened by excessive debt". In summary, I believe that those two areas of the Budget send out the wrong message to small businesses and savers respectively, both of which are important for the economic health of the country in their different ways.

8.56 p.m.

Lord Haskel

My Lords, I, too, express my strong support for the work of the Economic Affairs Committee. I congratulate the members and the staff on their work, and I congratulate my noble friend Lord Peston, who has been a driving force behind it. As the noble and learned Lord, Lord Howe, said, he set the right style. I also hope that the sub-committee on the Finance Bill will become permanent after the two-year trial period which is shortly to end.

It is a pity that your Lordships' House is inhibited from debating and scrutinising the nation's finances. In recent years your Lordships have been able to be complimentary about the work of the Treasury, my right honourable friend the Chancellor of the Exchequer and the Treasury team. As my noble friend Lord McIntosh reminds us whenever he has the opportunity, inflation is low, interest rates are low, and we are spending far less money on debt interest and unemployment pay. He reminded us about that again this evening.

I understand that the Parliament Act restrains us from amending the Finance Bill, but it does not preclude us from scrutinising it. I am well aware that there is a difference of opinion between the Treasury and your Lordships' House about where the line is drawn. I was interested to learn that the Select Committee had decided to look at tax avoidance as part of its scrutiny of the Finance Bill—and quite rightly. The committee looked at the mechanics of tax avoidance, not at the tax rates.

I noted that the Revenue has accepted some of the Select Committee's recommendations. Those are recommendations that would save the Inland Revenue from being swamped with useless information. The Revenue would thereby get better-focused information about those various schemes. Unlike the noble Baroness, Lady Noakes, I found myself in almost entire agreement with Ministers and with the committee in their determination to protect the vast majority of compliant taxpayers and the integrity of the system by supporting the Government's efforts to stop avoidance and evasion.

I agree with my noble friends Lord Peston and Lord Giddens that for taxpayers to be compliant they have to perceive the system as fair. As the Minister explained, part of that requires providers of artificial tax planning schemes to report them to the Treasury. I welcome a disclosure regime that requires accountants, bankers and lawyers to provide details to the Government of tax avoidance schemes that they sell to clients. The committee spent some time differentiating between ordinary tax planning and artificial schemes. So it must have been with some disappointment that they learned last week that a scheme—the relevant discount securities scheme—which the Revenue shut down a year ago as artificial, was allowed by the special commissioners. The noble Baroness, Lady Noakes, spoke of the practitioners being taken by surprise by the regulations. I imagine that they were taken even more by surprise by this allowance by the special commissioners.

I realise that the Minister cannot comment on that, as there could be an appeal, but it indicates how difficult it is to legislate against tax avoidance. As I understand it, a scheme such as this one uses artificial contrivances, to use the Minister's words, within the United Kingdom. Other schemes contrive to use our globalised economy to avoid tax, even though there is no commercial loss. In addition, there is the whole issue of using domicile to avoid paying tax. The possibilities are worldwide, way beyond the resources of the Inland Revenue alone to regulate, to manage and to control in a proportionate way.

In view of that and the expansion about which my noble friend Lord Sheldon spoke, it occurs to me that perhaps the Select Committee should have considered other measures; for example, a cultural change as well as a regulatory change. Before your Lordships dismiss that, with a world-weary sigh, perhaps I can remind your Lordships that cultural changes are taking place before our very eyes—in government, in the Treasury and in business. Take charitable giving. The Inland Revenue and the Treasury are encouraging a cultural change. They are encouraging the giving campaign. They are offering more tax breaks to encourage charitable donations and setting higher targets for aid to the third world. If that is not an effort to encourage a cultural change in charitable giving, what is it?

What about the cultural change taking place within business itself? Not a week passes without some encouragement to business to become more socially responsible. I am sure that noble Lords' mailbags are full of invitations to conferences, meetings, discussions and seminars about corporate social responsibility. Mine is. I am aware that many think that that is just another soft issue that gets in the way of increasing shareholder value—it is a nuisance. But possibly an equal number now think that that is central to the confidence and trust that people have in a company's products, services or brand.

The recent corporate scandals in Europe and the United States have encouraged that cultural change. Several surveys show that most managers feel that corporate ethics is an important or an emerging issue for their businesses. Indeed, there are now several awards for the integrity of social and environmental reporting. In May 2003 the Department of Trade and Industry's Forum for the Future, reported that a business with strong social responsibility will often be more successful in generating economic value added for reasons rooted in business strategy. Is that not the Government encouraging cultural change? Business leaders themselves are calling for that. Last week, in an article in the Guardian, entitled "Capitalism is a danger to itself", Sir Evelyn de Rothschild called for a new emphasis on ethics from inside corporate boardrooms as an alternative to more public oversight, which he found less desirable. He said that that was especially so in the financial services sector.

I think that all those matters are signals of cultural change in business and in government and a cultural change that does not question the legality but questions the ethics of business activities. My question is whether the Treasury and your Lordships' committee would consider tax avoidance as socially irresponsible when the culture is moving strongly towards social responsibility in business. After all, what could be more socially responsible than paying one's taxes in a fair way?

Perhaps the scene is already being set. The Inland Revenue itself is becoming much more open about tax. The Government have quite rightly introduced the pre-Budget report so that the Chancellor can flag up tax changes so that they can be discussed. The Treasury trusts the public not to take undue advantage of that opportunity for consultation and discussion so that there is every opportunity to get the practical issues ironed out. Indeed, your Lordships' Select Committee drew attention to this in its report about small companies and dividends.

So, where do we go from here? Many of these tax avoidance schemes, for small companies, for large companies, for personal tax, for VAT and for income tax are marketed by what are called "business service companies". Tax advice is a growth business. However, most of these companies also offer advice and consultancy to the public and private sectors on corporate social responsibility—on business in the community. They advise on preparing a social set of accounts as well as financial accounts.

Of course, however widely one interprets the purpose of business, the making of money has to be there somewhere. But these business services companies are in a privileged position. They can afford to be a little more forceful about the ethical responsibility that goes with the privilege. A cultural change here would certainly assist with protecting the integrity of our tax system. So I ask the Minister: why not have a go?

Lord Sheppard of Didgemere

My Lords, perhaps I may interrupt for one second. It may give reassurance that in fact David Varney, who was appointed on 1 October as the new head of the integrated Customs and Excise and Inland Revenue, is currently chairman of Business in the Community.

Lord Haskel

My Lords, I thank the noble Lord for that. Before I sit down, I add my congratulations for my noble friends who have made their maiden speeches and who are about to make maiden speeches. Their knowledge and experience of manufacturing, economics and industry will be of great value to your Lordships' Houses, and they are most welcome.

9.6 p.m.

Lord McKenzie of Luton

My Lords, in making my first contribution in your Lordships' House, I too would start by taking the opportunity to thank noble Lords for the kind welcome they have given me to this wonderful place. I should also like to place on record my thanks to all the staff and officials for their courtesy and assistance in helping me to understand the procedures and facilities of this House. I am grateful for the professional and gentle way they have already redirected me on a number of occasions to where I should have been heading, with a quiet reassurance that I will get the hang of things soon.

The opportunity to serve in your Lordships' House is an immense privilege. I was particularly pleased also to be able to take the title "of Luton". Luton has been my home for 32 years. It was there that I first became actively involved in politics and a councillor and, for a time, leader of the council. Living in Luton has given me the opportunity to engage with and learn from a host of individuals from our diverse communities, sharing friendships and obtaining insights into a range of aspirations, fears and cultures in a way which has enhanced my life immeasurably.

My professional life, mostly spent with Price Waterhouse, has given me the opportunity to live and work in several different countries, from one of the richest, the US, to perhaps one of the poorest, Vietnam; from a highly sophisticated market-driven economy to an emerging market economy with still a very rudimentary legal and commercial infrastructure. But each in its way facing the challenges of operating—for them—appropriate tax regimes and safeguarding the revenues they determine should be collected.

Hence I turn to the matter before this House. I would like to speak on the provisions in the Finance Bill requiring disclosure of tax avoidance schemes, especially those relating to direct taxes. As other noble Lords have indicated, this was clearly one of the key topics examined by the Select Committee on Economic Affairs. That the Bill includes such provisions is something I welcome.

While the Select Committee was properly concerned with seeking to be satisfied that the primary legislation and related regulations were workable and effective, its unequivocal endorsement of the disclosure approach is to be commended. The regulations in their final form are a sensible advance on the original drafts and validate the process of dialogue.

If anyone has any doubts about the appropriateness of this legislation, they need do no more than read the evidence given by the deputy chairman of the Inland Revenue, to which my noble friend Lord Peston referred earlier. The deputy chairman described the proposals as "proportionate". That is certainly not an overstatement of the case. Examples were provided of the kind of artificial, aggressive, tax avoidance schemes that these disclosure requirements would help to counter. For just two schemes, the "gilt strip" and the so-called "tax efficient off-market swap", he estimated that as much as £1.2 billion could have been lost to the Exchequer.

Of course, the disclosure requirements do not of themselves make anything taxable. They give the Revenue authorities early warning and fair notice of what might otherwise be marketed in secrecy, and what might otherwise take years for them to discover and seek to counter. It will also deter some from buying into these schemes. The disclosure requirements, however modest, represent an additional weapon in the armoury of the Revenue authorities and will help, at least to an extent, to adjust what is undoubtedly not a level playing field.

That is not because of some intellectual deficit on behalf of the Revenue; it is just that some taxpayers and their advisers are able to marshal a range of resources and expertise, which is difficult for any taxing authority to replicate. This situation is not unique to the UK. The major accounting and legal practices—big firms certainly, although I am not sure whether they would like to be described as fat—have at their disposal individuals with expert knowledge of all the world's major tax and legal systems. They can call on industry knowledge in all key sectors. They can access specialist knowledge on sophisticated financial instruments and have developed a significant capacity to unbundle and recast those to obtain tax advantages.

I was interested to read the reference in the Revenue evidence to the proposed avoidance intelligence group, which will, I hope, act as some counterweight to all of this. The challenge that it faces is formidable; I wish it well.

The Select Committee report distinguished between the contrived artificial tax avoidance schemes, which it recognised as being the extreme of the spectrum of tax planning, and ordinary tax planning arrangements. That raises the question of where the ordinary stops and the extraordinary begins. Where should that line be drawn? That is a conundrum with which I have wrestled from time to time. It would not be unreasonable for the line to be where those in another place with responsibility to determine these matters would have intended it to rest, had they had the opportunity of reviewing the full combination of circumstances and arrangements that might have been entered into.

But for so long as the UK tax system remains largely, if not exclusively, based on form over substance, that alignment of what the law actually provides with what was intended will continue to take place generally in retrospect by way of detailed anti-avoidance legislation, with consequent losses to the Exchequer in the interim. These disclosure requirements will provide some opportunity to make this alignment sooner and more precisely than might have otherwise been the case. It is important that the opportunity leads to action. In this regard, and in the absence of a general anti-avoidance provision, it is a necessary measure. It remains to be seen whether it is ultimately a sufficient measure.

I am aware that matters of supply are dealt with in another place, but as these disclosure measures will help to protect revenues, perhaps I might take the opportunity to express the hope that we will continue to see in Luton the significant levels of investment in our schools, health facilities and the regeneration of our town, including its transport infrastructure, from which we have benefited since 1997.

Finally, perhaps I may say that I have enjoyed every moment of my time here so far. If our deliberations touch the lives of people in a positive way, this is an endeavour of which I am happy to be part.

9.15 p.m.

Lord Wakeham

My Lords, when I came to the debate this evening I thought that probably the pleasures of my day were more or less over. I have spent the past two days congratulating graduating students at Brunel University and I have shaken more than 2,000 hands; there are another 1,000 to go tomorrow. However, I was wrong; this has been an excellent debate. Any debate which the noble Lord, Lord McIntosh, opens and closes will be, by definition, a quality debate.

We have heard three outstanding maiden speeches, which we have all enjoyed. As a former chairman of the Royal Commission on the reform of this House, I cannot imagine another legislature in the world that could produce new members of the quality of the three new Members we have heard this evening. It is something that those who may be taking up the issue in the years to come will perhaps think about.

This House produces first-rate speeches and it is my particular pleasure, of course, to congratulate the noble Lord, Lord McKenzie of Luton, on his excellent maiden speech. I have no doubt that he will speak on many subjects. If he continues to speak with the clarity, the sincerity and the obvious knowledge that he has, he will be a welcome addition to your Lordships' House. He has a lot going for him. He is a chartered accountant—that cannot be too bad to start off with—and he is from Luton. I have a kind of connection with Luton in the sense that my father was the last general manager of Vauxhall Motors before it was owned by General Motors. We have to go back a long way—it was not too long after the First World War that that happened—and I remember in 1939 going back to Luton when my father was recalled to the army as a former territorial, the war starting and my father taking the salute. He did not have a uniform even, and he was there raising his flat cap as the troops marched past. I was a small boy standing nearby. So I have the greatest affection for anyone who comes from Luton. Of course, the radio doctor, who was a distinguished member of our party, was the Member for Luton at one time, but that is also a long time ago.

I also know—I shall not pursue this further—that the noble Lord worked in Vietnam in his youth. I have also worked in Vietnam. I suggest that perhaps we ought to reminisce over a drink in the bar rather than mention it here today.

I am a Member of the sub-committee of the Economic Affairs Select Committee and I wish to concentrate on our report. A number of noble Lords have already said that they think the experiment was a success; that we have done a good job; that we have not conflicted with our terms of reference and so on. They have also said—which I was certainly going to say—that a great deal of that credit is due to the noble Lord, Lord Peston. He has been an outstandingly good chairman. If I may say so, he has a rather individual style of chairing a Select Committee, but he has a very successful way of getting the best out of everyone on the committee. I have enjoyed being with him. The only time when he is not very convincing is when he says that he does not know anything about the subject. He did not fool most Members of the committee with those kind of remarks. Nevertheless, it was a great pleasure to serve on the committee with him.

If there was any cause for our success in writing the report, other than the noble Lord, Lord Peston, next on the list would be the quality of the evidence given to us. I thought that the government officials who gave us evidence were absolutely first class. They made a powerful case for the changes, but also showed the depth of study that had gone into the subject before they had given the advice to Ministers which had resulted in the changes we were considering. Knowing that was a comfort to all of us.

It reminded me of when I was a junior Minister in the Treasury, under my noble and learned friend Lord Howe, who has already spoken. We were very concerned at the inward-looking nature of the Inland Revenue in those days, and we tried to get a non-executive element into it so that it would grow up a bit more aware of what was going on rather than being so concentrated. I think that the changes that have occurred in the past 20 years or so have resulted in a stronger, better and more knowledgeable Inland Revenue. I am saying that because not everything I say about it will be nice.

The outside witnesses were also very expert and excellent. If I had a criticism, it was that I sometimes felt that some of the witnesses understood the problem that the Government had but were unwilling to accept the remedies that they were proposing or to offer any alternatives. However, mostly they were excellent.

I think that our work was valuable—we worked jolly hard to complete our report before the Finance Bill left the Commons. I confirm what has already been said—at no time in our work did party politics play a part. If anybody had tried to make party political points in the committee, he would have had short shrift from his colleagues. Nor did we stray from our terms of reference, steering clear of rates of tax or their incidence.

Four of the five clauses that we examined were designed to protect the Revenue, and the fifth was designed to simplify the tax position of pensions. We had no difficulty with any of the Government's objectives, and we believe that they deserve credit for tackling them.

However, all those clauses raised a fundamental question that goes right to the heart of taxation policy in this country. The noble Lord, Lord McKenzie, touched on this in his speech, and so did one or two others. How complicated do we make our tax laws to make sure that we catch every last penny of every bit of tax from everybody who might be tempted to take some sort of unfair advantage at the expense of putting the rest of the taxpayers under an intolerable burden of complication? Getting that balance right is at the heart of what officials have to advise and what Ministers have to do.

My experience, over many years, has been that the tendency in the Inland Revenue has been to want to get the tax system absolutely fair. As a result, it has at times been more complicated than perhaps it needed to be because of this desperate concern, which I admire, to get taxation.

We were impressed with the evidence on the Government's improvements to the taxation of pensions. We felt that the clauses on tax avoidance were very important, but said that we thought that some of it was too complicated and led to a lot of uncertainty for taxpayers' advisers. The Inland Revenue's revised regulations came out just before our report; it knew perfectly well what we would say in our report, and I think that we are entitled to take some credit for the fact that our discussions with it might have had a little influence in that direction.

I do not think that I need to go on. The tax measures for small companies were a good example of where the Government should have said, "Look, we got it wrong. We're just going to put it right". The complications that they have brought in to justify carrying on are a good example of additional complication which is really not necessary and which does not make that much difference.

However, by and large, I hope that we were fair and reasonable about the proposals. We supported what the Government were trying to do and I hope that our contribution to the debate was useful to those who have to make the final decisions.

9.25 p.m.

Lord Newby

My Lords, it is a more than usual pleasure to speak in this debate. We always have these debates at the end of the Session, and I think it is fair to say that the participants increasingly fall into the category of "the usual suspects". It is therefore a great delight to have not one but a hat-trick of maidens—to mix my cricketing metaphors—this evening. We have greatly enjoyed them all.

I endorse the comments of the noble Lord, Lord Bhattacharyya, about the regeneration of Birmingham. In a previous existence, I was involved in the early stages of the redevelopment of what is now Brindley Place. The change in central Birmingham in the past 20 years has been phenomenal. It has been a classic example of a public and private sector joint initiative in its various ways. I suppose that it is an early example of the third way, which I hope will please the noble Lord, Lord Giddens.

All three maiden speeches were exceptionally erudite. It is slightly unusual, however, for Members of your Lordships' House to use their maiden speeches effectively as auditions for their membership of the Economic Affairs Select Committee or its subcommittee on the Finance Bill, but we will let them off this time.

I neither propose nor have time to make a speech on the general economic situation. I shall deal mainly with the report of the sub-committee. We on these Benches have major questions about the Government's ability to meet their efficiency targets. I am just glad that I am not in the shoes of Mr Oughton, who has the terrible responsibility of carrying them forward.

The work of the sub-committee this year, like last year, has been concentrated, hard and detailed. We received a large number of expert submissions. We spoke to a number of expert witnesses, all of whom had devoted a considerable amount of time and effort to producing their evidence. The committee was absolutely in their debt, because it was dealing with very detailed matters, on which it is fair to say that none of us have great or immediate expertise. Our witnesses guided us through it and we felt that we ended up with a reasonable understanding of the issues. We are grateful to them, as we are to our advisers, our Clerks and our Chairman, who has taken us through the remarkably difficult business of getting the sub-committee working. It was a difficulty not of his making, but one through which he guided us with his usual charm and persistence.

I shall mention a number of issues that demonstrate some of our specific and more generic concerns about the measures and processes of the Finance Bill. On the disclosure of tax avoidance schemes, all members of the committee agreed that those provisions were sound in principle. The problems with which we and the experts were grappling were problems of definition. There was a lack of clarity about exactly what was going to be covered, or what the Inland Revenue wanted covered, by the disclosure provisions. Although achieving that clarity was going to be difficult, we felt that it was not impossible. Indeed, it will have to be achieved at some point. We felt that more work should have been done before the legislation was set in stone.

There is a danger of over-reporting with the current provisions, but I agree with the noble Lord, Lord Peston, that it may be a temporary problem. It is a real concern, however, in the short term. Some of the detailed provisions—for example, the five-day reporting period—were simply silly. They should have been changed and, with more time, I think they would have been. The key question for this series of provisions is how effective they will prove to be, but only time will tell. We certainly wish them well.

The non-corporate distribution of profits was a textbook case of the unintended consequences of a tax change undertaken for perfectly understandable and good reasons. However, having got it wrong, we feel that the simpler thing might have been simply to reverse it, rather than to end up with this rather complicated scheme under which a certain proportion of profits, if undistributed, are not taxable. We had great fun thinking about the owner of the milk float or the taxi who would save his profits to invest in this new piece of capital equipment. At the end of the day, the argument that capital allowances might be a more effective way of dealing with that won out. The general principle demonstrated was an unwillingness on the part of the Treasury to admit, except through the most gritted of teeth, that it had made a mistake, to own up to it and reverse it.

The final specific issues to which I should like to refer both demonstrate the case for taking a bit more time. On stamp duty and land tax, we asked people, having looked at them, how they had fared over the winter when they were introduced. The general impression was that they had just about muddled through. However, there should have been no need just to muddle through, if a bit more time and care had been taken. The strain that muddling through put on both business and the Revenue was, in my view, unacceptable.

As a number of noble Lords have already explained, the starting point of the issue of duty stamps for sprits—namely, the scale of tax evasion that the measure was seeking to counter—was completely in dispute. The answer to the question of whether this was a proportionate measure for dealing with the issue depended on whether you were looking at the bottom end or top end of the estimate scale. If the problem was at the bottom end of the scale, the measure was clearly disproportionate as it could cost the industry more per annum than the Revenue saved. My own guess—for what it is worth, from causal observation and knowing a bit about the structure of the industry—is that the reality is at the bottom end of the estimates. That makes me doubly sceptical about the measure.

We were particularly concerned that the proposals that the Government had brought forward would hit smaller businesses in this sector particularly hard. We were also concerned that there appeared to have been little or no high-level consultation between Customs and Excise and the DTI.

Finally, I was completely unimpressed by the argument that the industry was going to benefit by freezing the duty. Certainly since the days when I was a Customs and Excise official in the mid-1970s, there were arguments about the elasticity of demand for spirits. From time to time, there was a decision by the Chancellor to freeze duty on spirits, purely because the advice he received was that an increase in duty at that point would be counter-productive. I suspect that that is the advice that the Chancellor is getting now. Therefore, it is unsustainable to argue that this freeze is to help them deal with the problem.

The Finance Bill failed the length and complexity test: it was too long and complicated. I absolutely agree with the noble Lord, Lord Sheldon, that there needs to be more exposure of drafts and a greater dialogue with all those concerned. I also agree with the noble and learned Lord, Lord Howe, in his description of the deterioration of the Financial Statement and Budget Report from a short, clear, precise and purely factual document into a flaccid spun document that makes it very difficult to get to the reality of what is happening.

Finally, there is the question of the role and attitude of the Treasury and the way in which it dealt with our queries. The report is, as always, very mild mannered and gentlemanly, as one would expect. By refusing to answer our questions fully, far less to come back to the committee, the Treasury showed a pig-headed and pathetic attitude. What is it scared of? What does it think the committee was going to do, other than to improve the quality of the legislation? That flows from a basic lack of understanding about the way in which the House of Lords and our committee work. As other noble Lords have said, we work in a non-partisan and meticulous way. That is the way in which the House of Lords works when it is at its best. A failure to understand what we are trying to do—to improve the quality of legislation—lies at the heart of the Treasury's difficulty.

I hope that our work on the report has had some effect. For the first time our colleagues in the other place have referred to it, which suggests that at least somebody has read it. There is even a slight glimmer that one or two people in the Treasury may have noticed and responded to it. I therefore hope that the sub-committee is put on a permanent basis and that the House has a continuing role in improving the quality and effectiveness of our taxation legislation.

9.36 p.m.

Baroness Wilcox

My Lords, I am pleased to have this opportunity to wind up for these Benches. Like my noble friend Lady Noakes and others, I thank the noble Lord, Lord Peston, for introducing the report of the sub-committee of the Economic Affairs Committee, and I pay tribute to noble Lords who worked on and produced this valuable report in the short timescale that was allowed. We have heard from many of those noble Lords tonight.

To use a cricketing metaphor, three maidens bowled us over, as they say. It was marvellous to hear three maiden speeches this evening. It was particularly good to hear the noble Lord, Lord Bhattacharyya, with whom I worked previously when I was chairman of the National Consumer Council. He condescended to come and join us and then beat us all to death for being so slow and lackadaisical. He was absolutely marvellous to work with. I am sure that if he continues as he started tonight in this House, he and the other noble Lords who spoke this evening will be a wonderful asset.

Indeed, it is very nice for us to discuss a Finance Bill in this House and to have so many noble Lords speaking from the Labour Benches. We have sometimes had the Minister here all on his own. It is very nice indeed to have him here tonight with a bit of company.

While your Lordships' House is unable to scrutinise the legislative aspects of this Bill in its normal fashion, that does not prohibit noble Lords from passing on their expert thoughts and comments on its bulky content. As my noble friend Lady Noakes said, the sheer size and length of this year's Finance Bill will have had the alarm bells ringing throughout the land, from small businesses to the private investor—individuals who are simply trying to earn a living in our already overburdened and overregulated business and corporate environment.

I turn to some of the finer detail of the Bill. It does nothing but increase the complexity of compliance costs for taxpayers and their advisers. I am sure that we all agree that Finance Bills must strike an acceptable balance between the protection of revenue and the imposition of compliance costs on the taxpayer. Sadly, the Bill fails to achieve that.

Virtually all experts agree that the background to the Finance Bill is the Chancellor's need to raise taxation sooner or later in the face of a current structural deficit of some £35 billion. In addition, there is a black hole of an estimated £13 billion arising largely from what the Institute for Fiscal Studies assesses as over-optimistic projections for corporate tax revenues.

The tax take is going up by nearly 8 per cent this year to £31 billion, after a 6 per cent increase last year and before a further 8 per cent increase next year. Our country's people and businesses face major tax increases now and if Labour were to win the next election, who knows how much more they will face afterwards? All this is before the detail of the Bill is unleashed on the unsuspecting taxpayer. Our taxes have been rising steadily under Labour even before this Bill. The net effect of the previous seven Budgets and Finance Bills equates to an extra £5,000 per household per year. I wonder how many people believe that they would have got better value for money if they had kept that £5,000 under their own control to spend on their families as they saw fit in the light of their own circumstances rather than having it forced on them by Nanny Brown Knows Best with 60 silent tax rises in seven Budgets and this year slipping in six more.

In this Bill there is a new tax on small companies, a tax on UK businesses for transfer pricing, a tax rise on red diesel, a tax hike on other road fuels, a new tax on trusts, a tax on the whisky industry and a sixfold tax rise on company vans. Is that what the Chancellor has in mind when he talks about creating an enterprise economy?

In this evening's debate there has been a number of powerful and constructive contributions. My noble and learned friend Lord Howe welcomed the simplification in the pension field, although regretted so far the lack of a tax structure review project. The noble Lord, Lord Sheldon, was looking for wider consultation on the Finance Bill particularly as regards the whisky strip stamps on which I shall comment in a moment. My noble friend Lord Northbrook spoke about small business taxation incorporation. The noble Lord, Lord Haskel, spoke about something rather revolutionary—cultural change rather than so much regulatory change. I am with him on that. Corporate and social responsibility is very close to my heart. I set up and chaired the Corporate and Social Responsibility Committee for Cadbury-Schweppes plc. We believe that it has not done anything to hurt our profits so far. We are very pleased at how it is performing. I would certainly encourage the Government to listen to the noble Lord and to encourage that in the future.

The noble Lord, Lord Wakeham, spoke about a better and more knowledgeable Inland Revenue. My noble friend Lady Noakes and I were very pleased with that and had a little smile. It was not so many years ago that she and I were both co-opted on to the Inland Revenue with the new idea of non-executives to shake them up. So we were very delighted to hear that our noble friend believed that things had gone well. The noble Lord, Lord Newby, was concerned at the Government's ability to meet their efficiency targets. He spoke of tax avoidance and definition, undistributed profits and the mistake of the Inland Revenue. He commented on the whisky strip stamps.

I shall quickly comment on those two areas myself, small business taxation and whisky strip stamps. The Government have introduced a 19 per cent minimum rate of corporation tax on distributed profits. In summary, the measure effectively withdraws the benefit of the zero-rate band from those small companies that pay all their profits to their shareholders. That typically includes the large population of owner-managed companies where the owner is the sole shareholder and needs to withdraw most or all of the profit from the company in order to meet living expenses. This step will obviously be felt most keenly by small businesses who in many cases have to make do without expert tax assistance.

Indeed, there is significant concern among the business community about the complexity of the new rules for the calculation of corporation tax. Estimates based on Inland Revenue data suggest that 40 per cent of small companies might be affected by this measure in any one year. That could equate to about 332,000 owner-managed companies who simply do not have the time or the resources to be able to manage with such added complexity.

We have already referred to the whisky strip stamps. I fear that the idea that the introduction of pre-paid strip stamps on bottles of whisky is the most effective step in combating fraud is misguided, as the noble Lords, Lord Sheldon and Lord Newby, argued. To base a decision on the significantly conflicting evidence on the extent of the problem is a grave and worrying development. Her Majesty's Customs and Excise put the figure of fraud at £600 million in 2001–02 and on an upward trend; the industry itself believes that the figure is between £160 million and £200 million with a downward trend. Noble Lords will be aware that the House of Commons Scottish Affairs Committee published a report on its own inquiry into this proposal. The report said: The differences in the estimates of spirits fraud are so fundamental—the estimates do not overlap even marginally at any point in their ranges—that the Government cannot logically make such an important decision as the introduction of strip stamps based on figures which may be flawed … the Government appears to be reacting in response to what is an unconfirmed level of fraud, with the possibility of major implications for the industry". That is a serious concern, and your Lordships will agree that there is no basis for making substantive policy decisions.

Furthermore, how do we know whether that rather antiquated system—or, as the Scottish Affairs Committee called it, a 19th century solution to a 21st century problem"— will actually work to combat fraud? I would have thought it a relatively easy operation to produce counterfeit stamps. Indeed, I hazard a guess that some ingenious person is more than likely working on it already.

It has been a good debate. Unfortunately, we do not have time to explore many of the key aspects of the Bill. My noble friend Lady Noakes and I have tried briefly to highlight our remaining concerns. Much of what the Bill introduces will add more bureaucracy and complexity to a financial and business environment already groaning under this Chancellor's fixation with micro-management and regulation. Where the Government had a real opportunity to simplify, they have increased complexity; where they had a real opportunity to alleviate, they have burdened. That is a great failure of the Bill. As my noble friend Lady Noakes said, the Bill is a monument to the intruder state and sadly produces no net benefit to the life of this country and the life of our people.

I end by agreeing with the Labour Peer, the noble Lord, Lord Peston—an economist and the distinguished chairman of the Economic Affairs Committee's sub-committee on the Bill—who said that he feared that this might be the end. I fear he could very well be right.

9.47 p.m.

Lord McIntosh of Haringey

My Lords, I always enjoy these debates, but I enjoy them particularly when there is an opportunity for us to listen to three such distinguished maiden speakers as we have heard tonight. When the Prime Minister made his modest attempt to raise the proportion of Peers supporting the Government from 29 per cent to, I think, 31 per cent, there were the usual cries about stuffing the House of Lords with "Tony's cronies". However, I hope that everyone here will agree that, in addition to the quantity, which we certainly needed, we have the highest quality that could conceivably be imagined. I am enormously grateful to all three noble Lords.

The noble Lord, Lord Bhattacharyya, not only made a nonsense of the Tebbit rule on cricket, but brought expertise in manufacturing, as both a teacher and a practitioner. That will be of huge value to the House. The noble Lord, Lord Giddens, brought us a rational approach to taxation that I found very refreshing. He rejected the dogmatism of the Left in favour of economic taxation designed to support economic dynamism and risk-taking. He rejected the dogmatism of the Right in defending the role of taxation for social protection and, above all, he offered us a moral basis for taxation and equated it with a civilised society. I agree very much with that, and am grateful to him for what he said. I do not know Luton as well as some people, but the noble Lord, Lord McKenzie of Luton, has distinction in local government and in accountancy. His contribution made the best of both those distinctions.

In one way, however, I am disappointed in the debate, because, in past years when I have occupied this position, I have had an opportunity to discuss wider issues in Finance Bills and in the economy. However, this year and last, it was decided by the usual channels that the Finance Bill would be debated together with the report of the sub-committee of the Economic Affairs Committee of this House. I am not one to attack that decision, but the result has been that some pages of outline that I prepared for what I was going to say have been left blank. There has been no debate about public services this evening, and no debate about productivity or enterprise. I can simply remove those pages, put them away and save your Lordships' time. However, I would like to have discussed those matters, because some things need to be said in more detail than I used in my opening speech.

Even on the basic issue of the state of the economy—of macroeconomics as opposed to taxation policy—very little was said. The noble Baroness, Lady Noakes, made a valiant attempt to attack the Government on their economic policy, but not by going so far as to say that it was not working. Instead she said that perhaps at some time in the future it might not work. That is a somewhat defensive position for her to take. I remember her making it clear to me that she was not criticising the economy in the short term but in the medium term. I have listened to these debates for seven years now. Rather than saying that there is no jam today people always say that there will be disaster tomorrow. It never happens. Let us see.

On the golden rule, the economy and the Chancellor are on track for both of the fiscal rules. The Budget calculations show an £11 billion margin and there is a £53 billion margin before we reach the 51 per cent under the sustainable investment rule. The noble Baroness, Lady Wilcox, said that there were over-optimistic projections of tax revenue. As is well known, the National Audit Office has audited the assumptions behind the Budget, which are reflected in last week's spending review statement, and it has approved them. Certainly, on any estimate from independent economists the projections are on the cautious side rather than in the other direction.

The noble Baronesses, Lady Noakes and Lady Wilcox, both talked about the risk of tax rises in the future. The spending plans announced last week reflect the 2004 Budget public finance projections and they have been audited as being fully affordable.

The noble Lord, Lord Northbrook, who also contributed to some extent to the debate on macroeconomic issues, talked about the decline in the savings ratio. I think that I have said this to him before, but I must point out that savings ratios are high at times of insecurity and high interest rates. The savings ratio has gone down because of low interest rates and a greater degree of security, but at the same time net assets have risen and household net worth has increased by 50 per cent since 1997. In terms of economic stability, that is an important point.

Points were made from the Opposition Front Bench about tax ratios—what they call the tax burden. The tax ratio was lower in 2003 than it was in 1997–98. It is expected to rise as the economy recovers from the recent global downturn, but it will still be lower than the heights reached in the early 1980s. It was 38.9 per cent, for example, in 1984–85. This is a relatively lightly taxed economy. Our overall tax ratio is well below the average both for the EU 15 and for the EU 25.

I turn now, since there is no further criticism on macroeconomic policy to defend, to the issues in the Finance Bill to which the committee referred. I must say before I go any further that the noble Lord, Lord Peston, has achieved something in that every speaker who has referred to it has asked for the continuation of the committee that he chaired in future years. I think that he is well aware that the Treasury would not welcome that. It must be observed in fairness that he has secured the confidence of those who have spoken in the House.

The first and most important issue is tax avoidance. That issue is one of those on which noble Lords—I cannot remember which exactly—said that they agreed with the Treasury's objectives on all of the five issues that the committee considered. Certainly, my noble friend Lord Peston referred to the size of the problem of tax avoidance. In fact, my noble friend Lord McKenzie of Luton beat me. I wrote down "gilt strip" and "off-market swap", which are tax avoidance measures that I had never heard of. Clearly, we are learning something tonight.

It is an enormous problem, and it needed to be tackled. We recognise that there is a risk of over-reporting, a point made by my noble friends Lord Peston and Lord Sheldon and by the noble Lord, Lord Newby. That is why we are working with business on the regulations and guidance that will give effect to the provisions in the Finance Bill on tax avoidance.

My noble friend Lord Sheldon thought that there was something wrong with the five-day notification period. It is a notification period for products that are already on the market or are available to be sold or marketed. There is no reason why they should not be available for reporting within one day—let alone five days—of going on to the market. He criticised the lack of the affirmative resolution procedure for the prescribed descriptions orders. The prescribed descriptions order reduces the tests. In other words, it is limiting, whereas the VAT order, which is subject to the affirmative resolution procedure, imposes additional requirements. That seems to be a reasonable balance.

The noble Baroness, Lady Wilcox, puzzled me by talking about a new tax on trusts. There is no new tax on trusts. The changes in trust legislation are designed to help small trusts; they are not an additional tax.

On the issue of non-corporate distribution, my noble friend Lord Bhattacharyya went so far as to depart from the principle of non-contentiousness—very, very marginally—by saying that there was a degree of uncertainty about the Government's policy on the matter. I think that it is recognised that there has not, in fact, been a policy change. The noble and learned Lord, Lord Howe of Aberavon, and the noble Lord, Lord Northbrook, described it as a mistaken attempt, resulting from over-enthusiasm. The noble Lord, Lord Newby, went so far as to say that we should reverse the zero and 10 per cent starting rates. The zero and 10 per cent starting rates work. They have worked for a larger number of people than are affected by the 19 per cent charge on non-corporate distribution. The introduction of those starting rates was followed by Internet-based, mass-marketed incorporation schemes that were designed only for tax saving. It is those schemes that will be eliminated by the Finance Bill.

Several noble Lords referred to the stamp duty land tax. Even the noble Baroness, Lady Noakes, in what was only a glancing reference, neglected to mention the fact that it has worked well since December 2003. I think that the noble Lord, Lord Newby, used the words "muddling through", but there has not been any evidence of distortion in conveyancing markets. The vast majority of transactions have been unaffected by the changes. I agree with my noble friend Lord Peston that this is another example of outrageous tax avoidance via partnerships. I notice that the defence of the noble Baroness, Lady Noakes, was not very robust.

The noble Lord, Lord Northbrook, raised the issue of payable tax credits on ISAs. It was never intended that ISAs or their predecessors—PEPs and TESSAs—were going to continue for ever. There has been a reduction from £7,000 to £5,000, but it will take place in 2006 not in 2000 as originally intended. In any case there are so many additional offers, including child trust funds, stakeholder products and the advantages of pension simplification, that that criticism does not hold water.

The references to spirit duty stamps puzzled me. My puzzlement is because I am also a statistician of a sort: a practical statistician rather than an academic statistician. The scale of evasion—in other words of illegality, of fraud—is by definition what we call an unknowable statistic. The calculations made are based on a comparison of the answers to the question in the general household survey, "How much do you drink?", with the amount of spirits on which duty is paid. If we search our consciences, whether we are talking to a doctor or to an interviewer, any of us will tend to underestimate rather than overestimate the amount we drink and therefore the estimates of fraud are likely to be too low rather than too high. I am insulting noble Lords; I can see that everyone is very shocked.

My noble friend Lord Sheldon and the noble Lord, Lord Newby, suggested that there had not been consultation on compliance costs. Consultation started in 2001 and took place on the options again in 2003; and a third set of consultations took place between last year's Pre-Budget Report and the Budget. With a central estimate of fraud at £600 million and the highest estimate of compliance costs at £50 million this strikes me as rather a good deal.

Lord Sheppard of Didgemere

My Lords, the Minister has either answered or dismissed many of the questions that we asked the Treasury. Does that make it doubly sad that the Treasury could not give us the answers if they were so simple?

Lord McIntosh of Haringey

My Lords, I followed my noble friend Lord Peston, who refrained from the kind of debate we had last year about the Treasury's attitude towards the Select Committee. I thought that it would be an advantage to your Lordships if I did not enter that debate. I could say many things on the subject, going back to the Commons' resolutions of 1671 and 1678, but if the noble Lord, Lord Sheppard, will forgive me, I am not going to do that this evening.

I accept that the committee reported and that it is proper for me to respond to what it said, which is what I have been doing tonight. It would be better for all of us if we left it at that.

I turn to pensions. What the noble Baroness, Lady Noakes, called so-called simplification did not meet with the agreement of other speakers. If 170 pages of text replace 350 pages of primary legislation and also replace many thousands of pages of guidance, that cannot be called so-called simplification; it is real simplification.

The noble and learned Lord, Lord Howe, described that as a legitimate alibi for a part—I accept that it is only a part—of the length of the Finance Bill. I rest my case on his remarks. The noble Baroness, Lady Noakes, said that we were favouring public sector final salary pensions. I thought that the consensus was that the 20:1 factor had been accepted as being broadly accurate for both final salaries and defined contribution schemes and that any alternative put forward—and there were alternatives put forward—had been resisted as excessively complicated.

The National Association of Pension Funds said that there had been a good consultation with the Revenue and the Association of British Insurers described it as a very thorough and constructive consultation process.

So, on nearly all of the issues we have some worthwhile contributions from the committee, to which I have attempted to respond. I have discovered that it was the noble Lord, Lord Wakeham, who said that he had no difficulty with the objectives of the five topics that were covered. Of course, legitimate points were made by those who gave evidence to the committee.

I shall finish with a word about Finance Bills, particularly in response to the noble and learned Lord, Lord Howe, to whom we all defer, because of his experience in the Treasury and as Chancellor and because of his sterling work on the revision of tax legislation. Yes, of course there has been an increase in the sheer volume of the Finance Bill. We can see it there on the Table. Yes, there has been an increase in the length of the Red Book. The noble and learned Lord, Lord Howe, objected to what he called the self-congratulatory wording of the Red Book. I shall not attempt to give an aesthetic criticism of it, but I notice that the noble and learned Lord and other noble Lords have talked about the wording of it rather than attempting to rebut the facts in the Red Book.

When this party was in opposition, the noble Lord, Lord Eatwell, from the Opposition Front Bench used to take the Red Book every year and he would tear it apart. He would take it line by line, page by page, table by table until the Treasury spokesman for the Conservative government could hardly bear it. When we have an Opposition who are able to do that, when we have a Treasury which makes it possible by the degree of inaccuracy and over-optimism that was at times expressed in Red Books under the previous administration, then my task will be a good deal more difficult than it has been.

However, this evening it has been my privilege to listen to and congratulate three excellent maiden speakers. It has been my privilege and my pleasure to be able to respond, as far as I can within reasonable time limits, to the concerns of the Select Committee and it has been my privilege to present a Budget which is a tribute to the guardianship of our economy of the Chancellor of the Exchequer over a period of seven years.

On Question, Bill read a second time; Committee negatived.

Lord McIntosh of Haringey

My Lords, I have it in command from Her Majesty the Queen and His Royal Highness the Prince of Wales to acquaint the House that they, having been informed of the purport of the Finance Bill, have consented to place their prerogative and interest, so far as they are affected by the Bill, at the disposal of Parliament for the purposes of the Bill.

Then, Standing Order 47 having been dispensed with, Bill read a third time, and passed.