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Borough Freedom (Family Succession) Bill [HL]
Lord Graham of Edmonton: My Lords, I understand that no amendments have been set down to this Bill and that no noble Lord has indicated a wish to move a manuscript amendment or to speak in Committee. Unless, therefore, any noble Lord objects, I beg to move that the order of commitment be discharged.
Moved, That the order of commitment be discharged.—(Lord Graham of Edmonton.)
On Question, Motion agreed to.
Consolidated Fund (Appropriation) Bill
Lord McKenzie of Luton: My Lords, I beg to move that this Bill be now read a second time.
Moved, That the Bill be now read a second time.—(Lord McKenzie of Luton.)
On Question, Bill read a second time; Committee negatived.
Then, Standing Order 47 having been dispensed with, Bill read a third time, and passed.
Finance Bill
Lord McKenzie of Luton: My Lords, I beg to move that the Bill be now read a second time.
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In moving Second Reading, I shall be covering the substance and main clauses in the Bill. It is also my intention to address some of the issues raised by the report of the Economic Affairs Committee on the Finance Bill 2005.
As my right honourable friend the Chancellor outlined in the Budget in March, the Government's economic objective is to build a strong economy and fair society, where there is opportunity and security for all. The Government are committed to locking in stability and investing in the UK's future, enabling it to meet the challenges and to take full advantage of the opportunities presented by a rapidly evolving global economy.
The long-term decisions that the Government have taken—such as giving independence to the Bank of England, new fiscal rules and debt reductions—have helped shape economic stability. It is that stability that provides the platform for building prosperity, achieving social justice with security and opportunity for all, and maintaining investment in public services. Stability will allow business, individuals and the Government to plan more effectively for the long term, improving the quantity and quality of investment and helping to raise productivity.
Through the 1980s and 1990s inflation was as high as 20 per cent and 10 per cent respectively, compared with 3 per cent or less in every one of the past eight years. Indeed, with Bank of England independence and sustained wage discipline, inflation today is at 1.6 per cent. That makes our economy the least volatile and most stable of all the major industrialised economies as we continue to meet our inflation targets.
In addition, the UK economy is estimated to have grown by 3.2 per cent in 2004, in line with government forecasts. That constitutes growth in 50 consecutive quarters, and the forecast is continued growth through quarters 51 to 54. Over the past eight years, Britain and North America have grown at twice the rate of our G7 competitors while our living standards have also risen twice as fast.
Since 1997 Britain has 150,000 more self-employed, 300,000 more businesses and 1.5 million more homeowners. There has been a 50 per cent increase in personal wealth and a doubling in the numbers of those earning more than £30,000, £50,000 and £100,000 a year, while 2 million children and almost 2 million pensioners are no longer trapped in absolute poverty. In the 18 years from 1979 to 1997, interest rates averaged 10.4 per cent. In the past eight years, they have averaged 5.3 per cent—half as much—while official figures show that since 1997 we have created 2.1 million jobs.
This Finance Bill reintroduces legislation announced in Budget 2005 that was not enacted by the Finance Act 2005. It introduces important measures to promote fairness and tackle tax avoidance while keeping pace with the challenges and opportunities presented by the rapidly evolving global economy. The Government have responded to representations received since 24 March by making some changes to the legislation originally
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published in March, and by issuing enhanced guidance to allay fears such as, for example, that innocent corporate structures not set up for the purposes of tax avoidance would be affected by measures to tackle avoidance involving financial arrangements.
A modern and fair tax system encourages work and savings, keeps pace with business practices and the global economy and provides a foundation on which to build world-class public services. For our tax system to work effectively, everyone needs to pay his fair share of tax and receive the tax reliefs to which he may be entitled. Tax avoidance and tax fraud seriously undermine the ability of the tax system to deliver its objectives, and imposes significant and potentially damaging costs on society.
The Government are committed to combating all forms of tax avoidance, including VAT. Measures in the Bill which help combat VAT avoidance include legislation that enables HMRC to combat avoidance schemes that abuse UK Customs warehousing rules and an extension of the unjust enrichment provisions so that no business can unfairly benefit from charging too much VAT.
The disclosure rules announced in Budget 2004 require promoters and users of certain tax avoidance schemes and arrangements to provide information to the Revenue departments. As announced in Budget 2005, Clause 6 and Schedule 1 extend the definition of tax advantage to include circumstances where a scheme is intended to reduce irrecoverable VAT and to simplify requirements for disclosure of a newly listed scheme if it has already been disclosed as a hallmark scheme.
I welcome the positive comments about the disclosure rules made by the Economic Affairs Committee in its report. The rules are a key part of the Government's strategy for tackling avoidance and ensuring fairness. They target the secrecy and concealment on which avoidance thrives and will make it difficult for HMRC to identify quickly avoidance schemes and those using them.
The committee did however comment that the industry wanted more feedback on VAT consultation. The VAT disclosure rules are aimed at users, whereas direct tax rules are aimed primarily at promoters. Inevitably there will be greater dialogue with tax practitioners on the direct tax side. However, I assure the committee that HMRC is fully committed to maintaining ongoing dialogue about both sets of disclosure rules. A single point in HMRC anti-avoidance group is responsible for both.
I turn to measures affecting personal taxation. The Government want people to be able to make informed choices about how and when to save and on how long to work, so that they get the income they expect in retirement. From 6 April 2005, pensioners delaying claiming their state pension for a while will be able to take a one-off taxable lump-sum payment when they finally claim. Clauses 7 to 10 make changes to ensure that pensioners are not put into a higher tax bracket or that they do not lose any of their age-related income tax allowances as a direct result of taking the lump sum.
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Recent events have demonstrated the generosity of the British public in donating in times of need, and the use of Gift Aid by charities and donors has grown considerably. For example, £586 million of tax was repaid to charities on Gift Aid donations in 2003–04. That is why we have included Clause 11, which will amend existing Gift Aid legislation on admissions. That will clarify the circumstances in which Gift Aid will apply where free admission is given in return for a donation.
Crucially, this amendment upholds the core principle of Gift Aid in generating new and additional giving, and it broadens the types of charities that can benefit. Clause 12 and Schedule 2 act permanently to close down contrived attempts to avoid or reduce tax and NICs, protecting a possible £500 million of revenue each year. I was encouraged by the recognition of the Economic Affairs Committee of the magnitude of the avoidance of income tax and NICs through employee securities and the committee's favourable view of the steps taken by HM Revenue and Customs to prevent that.
I should like to take this opportunity also to respond to a point raised in the Economic Affairs Committee report—that Clause 12 and Schedule 2 create a risk of double taxation and that
"a tax payer who received convertible securities could ultimately be taxed on a greater value than the true value of the convertible security".
The Government believe that it is fair that tax and national insurance contributions should be paid at the same rates on earnings, whether those are paid using cash or employment-related securities. On double taxation, promoters of schemes must warn their clients if, by entering into a complex arrangement involving the use of unusual forms of payment in an attempt to avoid paying tax, the person then becomes liable to additional tax consequences elsewhere.
The Economic Affairs Committee reports further comments that those rules may create uncertainty for businesses and tax planners. The statement made by my right honourable friend the Paymaster General on 2 December put our position beyond doubt: should any other schemes arise that attempt to avoid or reduce income tax and NICs, they will be closed down with effect from that date. I am sure that all noble Lords will agree that that increases certainty by making clear that the Government will not tolerate contrived arrangements intended to reduce the tax and NICs to be paid on rewards for employment.
Since 1997, the Government have taken steps to reform the business tax system to reward entrepreneurship, including cuts in corporation tax and the introduction of targeted measures such as R&D tax credits and measures to reduce the administrative burdens of VAT. To help foster the wider economic benefits that scientific research organisations can provide to UK business, Clauses 13 to 15 update the existing tax exemption for SROs by allowing them to widen their activities and undertake a broader range of R&D and also remove an annual reporting requirement from SROs.
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I am sure that the House will be happy to join me in recognising the essential role played by the City and the financial services sector across Britain in driving our economy forward.
Professionally managed, well-communicated and diverse financial services support our economic growth and are key to our continued prosperity. That is why the Government have been keen to tackle issues from improved financial inclusion to the workings of the investment chain. As part of the package of reforms to the tax regime for authorised investment funds, this Finance Bill includes powers to rationalise the existing legislation that applies to those funds.
Clause 16 specifies a reduced rate of corporation tax of 20 per cent that will apply to open-ended investment companies, ensuring they are subject to the same treatment as authorised unit trusts. In addition, Clauses 17 to 19 will introduce powers to change regulations that are designed to facilitate a more flexible approach to investment strategies.
This Government have always made clear our determination to ensure that the tax system is fair and is seen to be fair. We have also taken a series of concrete steps to prevent abuse of the tax system, and we will continue to close tax avoidance schemes as we become aware of them. Such avoidance schemes create economic distortions, provide commercial advantages over compliant taxpayers and redistribute tax revenues in an unfair and arbitrary manner. So in addition to the VAT measures and extension of the disclosure rule I mentioned earlier, this Finance Bill also includes legislation to counter various forms of tax exploitation.
That includes Clauses 24 to 31 and Schedule 3, which will close down schemes where companies seek to gain a UK tax advantage by exploiting differences within and between tax codes. The Bill also incorporates Clauses 32 to 34 and Schedule 4, which will prevent arrangements that enable individuals and trustees to avoid tax on capital gains.
Clause 39 and Schedule 7 will prevent avoidance by companies and individuals using financial product based schemes. The measures tackle a wide range of financial product avoidance schemes disclosed under the rules. The tax at risk from these schemes is estimated to run into several hundreds of millions of pounds. Clause 39 and Schedule 7 were also subject to the scrutiny of the Economic Affairs Committee. The committee was positive in its support for the steps the Government are taking to tackle avoidance. However, some concern was raised over a perceived lack of consultation with industry, citing concerns raised by the sector which had not been taken on board by HMRC.
Responding to this point, I draw the attention of noble Lords to the press notice issued on the publication of the third Finance Bill on 26 May which detailed a number of changes to the legislation as originally published as a result of representations from and discussions held with industry. The clause and schedule in question were amended to ensure that they do not affect routine arrangements concerning preference shares and other common corporate structures not set up for the purpose
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of tax avoidance. The regulation-making power was also amended so that it can only be exercised prospectively. This demonstrates that the Government have and do consult with and listen to the private sector and have responded to their concerns.
Clause 40 and Schedule 8 update the transfer pricing rules introduced by the Finance Act 1998 to prevent parties which have a control relationship over a company entering into transactions on a non arm's-length basis to obtain a tax advantage. A further change ensures that the rules cannot be avoided by putting financial arrangements in place up to six months before a control relationship exists.
Clause 42 and Schedule 9 contain a range of measures dealing with the taxation of life insurance companies which can be divided into four broad categories: measures that follow from changes to the regulatory rules for financial institutions regulations for which the FSA is responsible; measures to improve the way income and gains of a life insurance company are allocated between categories of business that are taxed in different ways or at different rates of tax—these rules are known as the "apportionment" rules; measures to stop avoidance, particularly in the course of transfers of business from one life insurance company to another; and minor measures to correct small defects in existing legislation.
To counter a number of stamp duty land tax avoidance schemes, Clause 49 and Schedule 10 close known loopholes including, among others: limiting artificial group relationships which have been set up purely to avoid the claw-back of group relief; and restricting the definition of "undertaking" in relation to acquisition relief to trades other than property trading, so that only genuine businesses can benefit.
Concluding my brief run through the significant clauses of the Bill, I draw the attention of noble Lords to Clauses 51 to 65 which together make up a package of measures designed to enable UK companies to form a new corporate structure known as a European Company without suffering a tax disadvantage.
So, in summary, what we can see here is that the Government are striking a balance between encouraging enterprise yet discouraging avoidance, between building a favourable climate for business, yet ensuring that the tax system is fair and seen to be fair. The Bill demonstrates the Government's commitment to the continuing development of a modern and fair tax system, and I commend it to the House.
Moved, That the Bill be now read a second time.—(Lord McKenzie of Luton.)
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