Brooks Newmark on Finance Bill: Rate
Brooks Newmark calls on the Chancellor to decide which road he wants to follow: targeted incentives to encourage specific policy objectives, or a simpler, flatter tax.
Mr. Newmark: Clause 6 sets the stage for the first of this year's U-turns from the Chancellor and I hope that we will have a little clarity from the Financial Secretary about the Government's motivations. "Start as you mean to go on" is probably not a maxim on which the Chancellor should rely, as he and the Prime Minister continue to lurch seamlessly from credit crunch to credibility crunch. The Chancellor's last few months in the Treasury would have done the three stooges proud, although I do have some sympathy for the fact that he seems to have become the Prime Minister's one and only stooge when it comes to taking the consequences of unpopular taxation.
Nevertheless, by 24 January, the Chancellor had already confirmed his first U-turn of the year in an attempt to water down the impact of an 80 per cent. tax rise on small business at a time of increasing economic uncertainty. We are still in the dark about why the Government should have set about, apparently deliberately, undermining their own much vaunted objective for increasing long-term investment in business. The only explanation is a bad one: that it is a knee-jerk reaction against a very small number of individuals in the private equity industry who were making use of taper relief to reduce the capital gains tax charge on their carried interest.
To give credit where it is due-and notwithstanding the comments made by the hon. Member for Taunton (Mr. Browne)-Ministers were always adamant in their public statements that there was no special loophole in the taxation of the private equity industry, and that was indeed the case. But faced with pressure to close a loophole that did not exist, the Chancellor did the next best thing and threw the baby out with the bathwater by abolishing taper relief altogether.
We are en titled to ask about the principles underlying the change as much as about the impact of the change itself. Was it simply designed to target a small number of individuals-with the damage to businesses and angel investors viewed as the necessary price to be paid-or was there a genuine principle and strategy involved? What, indeed, is the Government's current direction of travel on the taxation of business, the stability and predictability of that taxation and the encouragement of long-term investment? Those are legitimate questions that still need to be answered.
What we do know is that clause 6 represents a tax hike of some £700 million, even with the last-minute concessions subsequently offered by the Government. But the potential cost to the economy of the proposed changes dwarfs the money that the Treasury hopes to raise through them. Capital gains tax has never been a big revenue raiser and the tax base has never been very wide, raising just £3.8 billion from 266,000 individuals in 2006-07, rising to £4.8 billion on the original forecast of the pre-Budget report. Nevertheless, it has significant potential as a disincentive to long-term investment-the point made by my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond).
The only benefit to the economy presented by the Chancellor's erratic driving on capital gains tax reform has been the thousands upon thousands of hours of overtime worked by lawyers, accountants and financial advisers up and down the land as they struggled amidst a dearth of information in order to give their clients reliable advice in advance of 6 April. That is quite some contribution, although it is presumably not the outcome for which the Treasury planned.
Weighed in the balance against these detriments are two attempted defences from the Chancellor-consultation and simplification. Announcing the entrepreneurs' relief on 24 January the Chancellor was the model of calm reassurance:
"Of course we will listen to what businesses-small and large alike-have to say. It is important that we introduce the right tax regime."
That is what he said as he frantically back-pedalled away from the tax regime that he had announced just months before. But he only cocked his ear to listen to the business community after he had announced his proposed change in the pre-Budget report and discovered that those in the business community felt that he was cocking his leg at them instead.
I am intrigued by some of the rationale that was deployed to explain away the lack of consultation. The Treasury claimed, for instance, that there had been no consultation because the change to CGT was a simple rate change and not a reform. In an amusing contrast, the explanatory notes for the draft legislation were subsequently headed "Capital Gains Tax Reform". Leaving aside the fact that the rate change was some 80 per cent., does the Treasury still believe that clause 6 is a simple rate change and not a reform?
I do not wish to stray wide of what we are discussing today, particularly as much of the detail which appears in schedule 2 and the proposed entrepreneurs' relief in clause 7 will be discussed in more detail upstairs, but it is nonsense to suggest that it was proper that such a radical increase in the burden of taxation should have been proposed entirely without consultation with the business community.
Sir Robert Smith (West Aberdeenshire and Kincardine) (LD): The Chancellor used the pre-Budget report to launch his bombshell, when the whole point of the pre-Budget report is to lay out proposals for consultation. The whole idea was that the Budget process should become more transparent and more of a two-way process for those affected, so that we would not have all these U-turns and problems halfway through the financial year.
Mr. Newmark: The hon. Gentleman makes an excellent point that supports my argument.
The second canard in play here is that clause 6 represents the best intentions of good government in implementing a desirable tax simplification. This figment also crept bashfully onto the record on 24 January when the Chancellor announced:
"I am trying to simplify the tax system, which is something that people in the House and outside have asked successive Chancellors to do."-[ Official Report, 24 January 2008; Vol. 470, c. 1635-6.]
The Chancellor has apparently convinced himself that he was merely being responsible and responsive to the House, or perhaps the new clutch of special advisers from next door in No. 10 have convinced him. Indeed, the Chancellor is setting new records in responsiveness to the House, given the sheer number of times that he has had to come to the Dispatch box to apologise, explain and dilute.
What the Chancellor is not doing, and what the Government have so signally failed to do while in office, is simplify our tax law. I need point no further than the 1,148 pages of explanatory notes, in four volumes, that accompany this year's two volume Finance Bill. Perhaps the Government should look at offsetting the carbon cost of printing it. But only a Labour tax simplification could introduce new complexity, as we saw last week with the other major "simplification" in the Bill that has gone a little awry.
In the spirit of both those supposed simplifications, it might be worth dwelling a little on the question of winners and losers. Richard Mannion, writing in the journal of the Chartered Institute of Taxation, put the point quite simply:
"While any significant regime change like this would be likely to result in both winners and losers, the main losers on this occasion were business owners and entrepreneurs, the very people that the previous chancellor had set out to encourage with the effective CGT rate of 10 per cent. on business assets."
Once again, it is not so much question of whether there are losers but of who the losers are.
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The Government's erosion of competence has been matched by the erosion of confidence in their handling of business taxation. As John Wright, chairman of the Federation of Small Businesses, has said, the botched CGT changes have
"seriously eroded small businesses' trust in the government."
So, if, "Start as you mean to go on" is not exactly a guiding light for the Chancellor, perhaps he should stick with, "If it ain't broke, don't fix it."
The UK is in the throes of a liquidity crisis in the wholesale markets, which is severe enough to warrant billions of pounds of taxpayer-backed intervention from the Bank of England. One of the side effects of the liquidity crisis is the potential impact on retail investor confidence as investors fall back on safer, more liquid investments. In the middle of that turmoil, the Government are doing away with a tax relief that was designed to encourage people to invest over the long term in relatively illiquid asset classes, such as unquoted shares, family businesses or venture capital enterprises.
We should not forget that the Prime Minister's introduction of taper relief was couched in uncompromising terms. He said:
"We must do more to increase the quantity and quality of long-term investment. The capital gains tax regime that we inherited rewards the short-term speculator as much as the committed long-term investor."-[ Official Report, 17 March 1998; Vol. 308, c. 1101.]
Yet at the very time that the Government ought to be looking at whether it would be appropriate to offer additional inducements to long-term investors, they are moving in the opposite direction.
The Chancellor's January statement also put a great deal of store in the capital gains personal allowance. He mentioned it several times, as if to suggest that its continued existence compensated in some way for the 80 per cent. tax hike. However, a personal allowance does nothing to encourage an investor to hold illiquid assets when gains cannot easily be crystallised and netted annually. It was soon clear that the personal allowances alone were totally inadequate when it came to the expectations of the business community, so another fudge was cooked up.
How are we to greet the compromise? Richard Lambert, the CBI's director general, is quite clear about the merits of a change that is
"superficially quite clever and on the surface might seem like a relief"
but that results in even the smallest business owner being worse off than before. However, I prefer to look directly at one of the architects of the scheme. Edward Troup, who is now director of business and indirect tax at the Treasury, wrote witheringly in the Financial Times in January 2002 complaining that the Prime Minister's original introduction of taper relief had pandered to political lobbying and had
"created further distortions and directionless complexity."
He continued:
"Pragmatism has been replaced by opportunism masquerading as principle. The clock should be rolled back. A single rate of, say, 20 per cent applied across the board would stop the worst excesses of avoidance without creating undue distortion."
Mr. Troup might have got his single rate but he also got more than he bargained for in the way of "directionless complexity" from his political masters.
It has become easy in recent weeks to poke fun at a Government who are at war with themselves. It is perhaps more worrying that Treasury officials do not seem to be on the same page as Treasury Ministers. Officials seem to like the idea of brutal simplicity, even when the burdens fall disproportionately. Ministers, on the other hand, do a good line in opportunism masquerading as principle. Members of the Committee will know of my background in the venture capital industry and I want to conclude my remarks by focusing on the support available to serial angel investors.
The Chancellor has proposed a complex package that includes a lifetime capital gains tax allowance for capital gains arising from the sale of business assets. I have no doubt that after months of confusion the scheme is of some comfort to small business men who have a lifetime of work invested in their family businesses. It does absolutely nothing for the committed business angel who shoulders the burden of risk, time and again, to help with the process of genuine wealth creation in this country.
There is little sense of continuity in the Government's thinking on that point. It is only necessary to look back to the Standing Committee debates on the Finance Act 2002, when the qualifying period for taper relief was shortened. My hon. Friend the Member for Fareham (Mr. Hoban) hit the nail on the head when he asked the then Economic Secretary a simple question:
"If long-term investment is good and short-term bad, why are the Government shortening the taper?"
The answer he got was very clear, if a little short-tempered. The then Economic Secretary said
"venture capitalists and other early-stage investors frequently invest with a view to realising their capital in less than two years, so we have designed the taper specifically to take into account the natural mode of operation and interests of venture capitalists, and their investments in start-up businesses."-[ Official Report, Standing Committee F, 21 May 2002; c. 170.]
In other words, the relief had been retooled to benefit the very group that seems to have sparked off the latest ill-considered reform of CGT, which is the group that will now see little benefit from a lifetime capital gains tax allowance.
When Mark Neale, managing director of budget, tax and welfare at the Treasury, gave evidence to the Treasury Committee following the pre-Budget Report, he took pains to emphasise how "carefully" the Treasury had considered the Chancellor's original announcement. His reasoning-that taper relief was a successful short-term incentive which had outlived its usefulness because it attracted tax avoidance-was something of a new departure for the Treasury and broke with years of momentum.
Mr. Philip Hammond: Does my hon. Friend agree that even if taper relief had outlived its usefulness-I do not believe that for a moment-it is imperative that the Government signal an intended change of direction well in advance and consult widely on it, otherwise, the impression is created that policy is being made on the hoof? Frankly, that invites investors in this country to apply the same kind of risk premiums for lack of certainty in policy that they might more typically apply in less developed economies.
Mr. Newmark: As always, my hon. Friend makes an excellent point. We made that point in the debate on the previous clause. It shows the lack of predictability, consistency, planning and consultation in the Government. We need planning. We need to consult thoroughly with businesses so that they can plan in the long term, not the short term.
Mr. Neale's justification for the change of direction was that the Treasury was
"taking this step both to simplify the tax and to put it on a long-term basis."
That statement was made on 17 October. On 24 January, the Chancellor changed his mind again. Not only do the proposals fail to provide simplification, but the Treasury's view of long-term tax planning appears to have shrunk to a window of a little over three months.
In January, the Chancellor also seemed keen to emphasise that there were many alternatives for helping small businesses such as venture capital trusts and the enterprise investment scheme. However, venture capital trusts have been endlessly tinkered with by the Government. I remember the Committee's discussions on the second Finance Act of 2006, when the gross asset value for VCT investments was lowered to focus investment on small companies and, at the same time, the incentive for investors was cut by an increase in the tax they had to pay.
The VCT regime has been a story of fluctuation and indecision, year in, year out. It sits badly with a capital gains tax regime that fluctuates not only year by year but month by month, yet the VCT regime is one of the crutches that the Chancellor is using to prop up his latest ill-fated reform. The Chancellor must decide which road he wants to follow: targeted incentives to encourage specific policy objectives, or a simpler, flatter tax.
Mr. Philip Hammond: Does my hon. Friend agree that what we are discussing is a vital part of making, and keeping, Britain competitive as we move into much more uncertain times. Does he share my astonishment that there is not a single Government Member on the Government Benches apart from the Whip, the Minister and the Parliamentary Private Secretary? Does that not tell us something about the level of Labour's commitment to the businesses and the entrepreneurs of this country?
Mr. Newmark: I must agree with my hon. Friend-it shows almost the contempt in which the Government hold small businesses, which are the engine of the economy. I made the same point in our debate on the previous clause-there was not a single contribution from Labour Members to that debate.
Mr. Jeremy Browne: Will the hon. Gentleman briefly mention which of the three main UK-wide parties have the highest percentage of Members in the Chamber for the debate, and whether that reflects their interest in the topic?
The Second Deputy Chairman of Ways and Means (Sir Michael Lord): Order. I should be grateful if the hon. Member for Braintree (Mr. Newmark) confined his remarks to the amendment that we are discussing.
Mr. Newmark: A well-timed intervention.
As I was saying, the Chancellor must decide which road he wants to follow: targeted incentives to encourage specific policy objectives, or a simpler, flatter tax. He cannot have his cake and eat it, but that is what he is attempting to do in this year's Finance Bill.
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BROOKS' INTERVENTIONS DURING THE MINISTER'S REPLY
Mr. Newmark: I hear what the Financial Secretary has said about simplification. However, can she explain how four volumes-more than 1,000 pages-of explanatory notes simplify the tax system?
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Jane Kennedy: I have been interested to read the criticism that the tax code is getting ever longer. In truth, a lot of that has resulted from the tax law rewrite work, which has introduced simplification and clarity. It has also resulted in greater explanation within the code, which is therefore longer. The language is simpler, but reading it takes longer. The hon. Gentleman's criticisms are not worth taking seriously.
Mr. Newmark rose-
Jane Kennedy: I see that the hon. Gentleman does not accept that point, and is coming back.
Mr. Newmark: I cannot accept the Financial Secretary's premise when the evidence is clear: "Tolley's Tax Guide" has doubled in size to 10,000 pages or so in the past 10 years. How could that be the result of tax simplification?
Jane Kennedy: We will probably return to the issue several times in Committee. I do not accept what the hon. Gentleman is saying; we are introducing serious and welcome simplifications.