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The problem is now considerable. My many law-abiding constituents with business interests or savings activities know that they should make an honest declaration of what they are earning or of their savings in the required form, and they accept that they should pay tax. They also believe that they have every right to make intelligent use of fiscal incentives from tax breaks, and some of those offered by the Government in previous Finance Acts have been very attractive, such as the decision to allow more favourable tax status to small business incorporation. Having made intelligent use of those things, they fear that the Government will come down on them like a ton of bricks, saying, We didnt really mean it. Oh, goodness me, the fiscal incentive was too successful, and will
find a way of clawing it back and blaming them for having responded rationally to the signals sent out in tax legislation a few weeks, months or years previously.
The Minister must agree that the Government are happy for people to take advantage of tax breaks and fiscal incentives. A series of radio advertisements are currently running on various channels about National Savings and Investments. The whole point of the adverts is that people can be protected from the rather high rate of inflation now prevailing under this Government, and from their tax demands, by buying index-linked National Savings bonds, which, miraculously, are protected from both the ravages of inflation and the depredations of the taxman. That is a perfectly good selling point. I am not here to advertise those bonds today, but it shows that the Government recognise the importance of fiscal incentive in selling savings products and are happy to use it. Having taken advantage of some other fiscal incentive, my constituents therefore feel that it is unfair of the Government to turn round, decide that it is a loophole that is allowing too much revenue to be lost, and try to change things retrospectively.
It was right to mention trusts, because last years Finance Act contained a good deal of retrospection in relation to people who had taken good accountancy and legal advice, set up trusts and then discovered that the Government were no longer prepared to live with that, and effectively wanted to unpick it retrospectively. In support of my hon. Friends the Members for Wycombe and for Christchurch, anything that can be done to make the tax system a little fairer and predictable for the many law-abiding, decent citizens trying to live under it would be welcome.
If I have a worry, it is that there are still big loopholes for the Government in the generous drafting that the Conservative Front Bench has come up with, but I am happy to support the new clause because the statement of intent is clear and it is a move in the right direction. However, I hope that this group of Ministers, or their soon-to-be-announced successors, will understand that there is a growing feeling of displeasure about the unreasonable behaviour of the Revenue. People who honestly want to pay their taxes, but who want to take advantage of sensible fiscal incentives, no longer feel that they will be able to do that, or they feel that they will be penalised retrospectively.
John Bercow (Buckingham) (Con): May I put the proposition to my right hon. Friend that it is not only true that there is considerable and widespread misgiving on this score, but that that misgiving is especially acute in the small business sector, which tends to be characterised, by definition, by having a much smaller resource available to fight the matter through the courts or through the consultation of expensive lawyers?
My hon. Friend is right and makes an important part of my case. The people I have in mind cannot hire expensive accountants or lawyers for either their personal or their small business affairs. It gives them a greater feeling of injustice because they think that there is law and justice for the very large companies. Those can take the best legal and accountancy advice, and may succeed in winning the case or may have enough cases going forward so that, on the law of averages, they come out of it all right.
Law-abiding decent people who run small businesses or who try to put together their savings for retirement do not have that option. Only one case may matter to them, and they will probably lose it. There is the feeling that the Revenue is out to grab as much money as it can from any law-abiding person who advises it that he has a bit of money, rather than the Revenue sensibly following the rules laid down by Ministers and not going in for retrospective changes.
Sir Robert Smith (West Aberdeenshire and Kincardine) (LD): I support new clause 2 because the principle that it espouses of not having retrospective taxation is important for the confidence of investors, consumers and taxpayers, so that they know where they stand when making decisions. The whole point of taxation, especially taxation that is tinged with the idea of green taxation, is that it must be trusted by people if it is going to affect behaviour and influence their decisions. When it comes to investment, people must have the confidence that they understand the fiscal climate in which they are making those decisions. There is enough uncertainty in the business and trading worlds in trying to guess markets. To have the Government throwing in more uncertainty is clearly damaging to long-term decision making and to the wealth of the economy. If it is damaging to the wealth of the economy, it is damaging to the long-term tax take for the Chancellor.
I congratulate the hon. Member for Christchurch (Mr. Chope) on having the courage to follow us into the Lobby to oppose that in practice as well as in theory. It is disappointing that it has taken until now for Conservative Front Benchers to come to the point at which we can vote against retrospective taxation together. A few of his colleagues wondered why they were not following us into the Lobby. It seemed to be a matter of presentation rather than the substance of the issue.
The hon. Gentleman was perhaps too generous to the Government. He said that there might be an element of green taxation if someone decided to cancel their trip in the light of the tax change, but if the plane still flies, the environmental damage is still done. What is fundamentally disappointing about the tax is that it taxes the individual and not the actual polluter, which is the aircraft. That tax needs to be reformed anyway.
For the Chancellor to change a tax system retrospectively while we are still in the financial year, albeit towards the end of it, is extremely damaging to confidence, and confidence is what encourages long-term investment, which encourages the wealth creation from which this country will benefit in the long term.
Stewart Hosie (Dundee, East) (SNP):
The hon. Member for Wycombe (Mr. Goodman) made the case that the precedents published by the Treasury may not
cover all the eventualities in terms of retrospective taxation or all the possible justifications for it in the future. He is probably right. Nor do the precedents allay any of the real concerns felt by the general public that they may be taxed retrospectively for things that they did that were legal at the time or, in terms of savings and investments, things that were not deemed to be avoidance schemes at the time at which they invested in them, but are now thus deemed because of misuse by others.
Concerns about retrospective changes include the possibility that they may lead to double taxation of money that has already been taxed in another way. The amendments suggest that the Minister issues a written statement and I am quite taken with that suggestion. Hon. Members will remember last years Finance Bill, when the Paymaster General gave a long and detailed exposition on the abuse of family trusts, to the extent that control could be maintained as the assets went through many generations in a family. Were such a detailed exposition to be presented for a specific problem that required to be taxed retrospectively, I suspect that it would allay the genuine concerns of the public and explain why the Government were seeking to make the proposed changes. It might also temper how those genuine concerns are reflected by hon. Members, and that would be a positive outcome.
On the basis that subsection (9) of new clause 2 excludes it from the Provisional Collection of Taxes Act 1968, I await with interest to learn why the Minister opposes it. It seems a sensible measure that will inform the debate on retrospective taxation in this House and, more importantly, allay the very real concerns of the general public, especially investors.
Mr. Brooks Newmark (Braintree) (Con): I wish to speak briefly in support of the principle of good practice for retrospective taxation enshrined in new clause 2. I draw Members attention to my entry in the Register of Members Interests.
Debating the principles of retrospective taxation reminds me of the heady days of Standing Committee D considering the National Insurance Contributions Bill. The debate revolved to a large extent around this principle and its boundaries, although, as we found out, the principle was being made up on the hoof and the boundaries were anyones guess. Fine wines and platinum sponges featured strongly, and they certainly made for hedonistic debate, although since the latter have a more prosaic function in catalytic converters, it is perhaps appropriate that the catalyst for new clause 2 was the introduction of retrospective environmental taxation.
I spoke then about the dangerous precedent of backdating tax changes to coincide with an expressed intention to legislate. We should not be encouraging a state of play whereby tax changes are effectively implemented by ministerial statement and then rubber-stamped by legislation at a later date. Worse still, we should not require sections of the financial services industry routinely to thumb through Hansard to check whether the Paymaster General has said anything threateningwhich I know is not her usual practice, but which has occurred from time to time.
I am pleased that subsection (4) addresses specifically the practice of announcing things to Parliament and using them as the peg on which to hang
retrospective taxation. It might make for convenient government, but it sends all the wrong signals.
John Bercow: I accept the thrust of my hon. Friends remarks, but does he agree that notwithstanding the joys of new clause 2, it is of doubtful value to afford to the Government discretion as to the manner of the publication of their future intentions? That leaves open the possibility that lots of people who will be affected will not get to know.
Mr. Newmark: My hon. Friend makes a valid point, and it follows on from the excellent one made earlier about small businesses that do not have on their payroll the sort of people who can do the Governments dirty work for them and identify such problems coming down the track.
I also welcome the two principles set out in new clause 2(7), which propose that the Government keep their powder dry on retrospective taxation unless it is needed to address a conflict that has arisen with reasonable expectations, or to guard against a new tax avoidance scheme that would lead to a loss of revenue. The Government should look again at whether it might not be timely, after 22 years of the Ramsay case, to review the distinction between legitimate tax planning and illegitimate tax avoidance.
While I do not wish to wander too far from the new clause, I hope that the Government will take this opportunity to reaffirm a commitment to certainty in the tax system. Adam Smith, the second most famous economist to come out of Kirkcaldy, wrote in his The Wealth of Nations that
the tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, and the quantity to be paid ought to be clear and plain to the contributor and to every other person.
It is a pity that none of the events that the Chancellor has sponsored at No. 11 Downing street over the years took its cue from the Adam Smith Institute, but I hope that the Government will see fit to endorse the principle underlying new clause 2.
John Healey: This has been a useful debate. The hon. Member for Wycombe (Mr. Goodman) opened it and made several references to our earlier debates on this matter in relation to air passenger duty. He also quoted from House of Commons Library briefings about precedents for the proposals. In general, such briefings are very accurate, useful and reliable, but in this case I take issue with the quote that he used, although he may have done so selectively. I have given a number of precedents to explain the proposals and to demonstrate that there is nothing novel about the decisions on air passenger duty taken in the pre-Budget report. Those precedents match precisely what has happened with that duty: in each case, measures were introduced that had an effect on duty tax points before they were considered by Parliamentbut after the Government had made a clear announcement to Parliament of their intention to introduce them.
I am glad that the hon. Member for Wycombe said that he was not against retrospection per se, but I remind him that the decision on air passenger duty that we announced in Decembers pre-Budget report was not retrospective. It was pre-announced: the pre-Budget report documents made it clear that the new rates would apply to passengers travelling on or after 1 February. It was a departures tax, not a ticket tax or a booking tax. Of course, questions arose in respect of flights booked before 6 December, when my right hon. Friend the Chancellor made his announcements, but airlines had two months notice before the new tax rates came into force. The airlines have been liable for the air passenger duty since 1993. They are responsible for its payment and free to chooseas they did in Februarywhether and how to pass their costs on to passengers.
Mr. Paul Goodman: The Financial Secretary cannot argue that a tax is not retrospective just because it was pre-announced. The rise was voted on as part of the Budget resolutions, and will be voted on again during the course of this Finance Bill, but it is backdated to February.
John Healey: The provision was not retrospective, but it is true that it applied to tickets booked before as well as after the announcement on 6 December, just as air passenger duty applied when it was first introduced in 1993, as did the changes made to the duty in 1996 and 2000.
My hon. Friend the Member for Bishop Auckland (Helen Goodman) did not look too disappointed when I broke the news that she was not to be a member of the Finance Committee this year. However, we missed her during the six weeks we spent scrutinising the Bill and discussing it in detail.
I respect the way in which the hon. Member for Christchurch (Mr. Chope) again raised the retrospective taxation issue. He is absolutely assiduous in doing so, and not just in the Chamber; he and I have debated the issue in Westminster Hall, too. His arguments seem to be making more headway on his Front Bench than on the Treasury Bench, although he and his Front-Bench colleagues obviously do not entirely see eye to eye on green taxes and environmental policy in general. The hon. Gentleman is right: his Front-Bench colleagues did not support him when he moved a similar proposition on air passenger duty in the Committee of the whole House. However, they seem to be lining up to support him on this occasion. Perhaps we should not be surprisedwe are getting used to rapid and dramatic shifts of policy position on the Opposition Front Bench.
The hon. Member for Falmouth and Camborne (Julia Goldsworthy) referred to agricultural buildings allowance and the trust legislationconcerns that were also mentioned by the hon. Member for Dundee, East (Stewart Hosie). I encourage the hon. Lady to consider that there could be no legitimate expectation that the law relating either to agricultural buildings allowance or to the taxation of trusts would remain unaltered indefinitely. The right hon. Member for Wokingham (Mr. Redwood) touched on whether the trusts legislation was retrospective. The tax changes on the treatment of trusts were not retrospective; they may, and do, apply to trusts that have been previously
established, but only for future years. That is not retrospection in any serious sense of the word.
New clauses 2 and 7 would restrict the use of retrospective tax law far beyond existing domestic and European Court of Human Rights precedents and would have effect in respect of a wider range of tax provisions than Members might realise. New clause 7 in particular would severely restrict the Governments ability to react to changing circumstances to protect the Exchequer.
Let me stress that the Government take the use of any retrospective tax law extremely seriously. Before introducing the Finance Bill to the House of Commons, the Chancellor is required to certify that it is compatible with the European convention on human rights, which he does only after he has sought advice from Her Majestys Revenue and Customs and other departmental lawyers. That ensures that every provision in the Bill is scrutinised carefully and an assessment is made as to whether it complies with the rights conferred by the convention.
As Members will be aware, the main constitutional conventions on retrospective tax law are known as the Rees rules, which require a Minister to make a full announcement to the House when introducing fiscal changes that have effect on a date before the enabling legislation will be enacted. Over the past 10 years, the Government have used and followed those rules, just as previous Governments did on many occasions.
The hon. Member for Wycombe referred to the statement made by my right hon. Friend the Paymaster General in 2004 when she set out an approach to tax avoidance schemestough but necessary arrangementsthat were subsequently supported on both sides of the House. I think that all hon. Members might concede that tax decisions often have to recognise a wide range of economic, social or environmental factors, and sometimes we face factors that change rapidly and constantly. Of course, those factors have to be balanced with the need for certainty and the need to respect the rights of taxpayers to understand their positionincluding compliance with the provisions of the Human Rights Act 1998. We are satisfied that the balance that we have built into the current parliamentary framework is sufficient to deal with the situations we face.
As the hon. Member for Wycombe explained to the House, new clause 2 seeks to enshrine in legislation elements of existing convention and best practice. New clause 7 seeks to go further than new clause 2 and rows back from existing convention and best practice. Together, they would restrict the ability of the tax system to respond to changing circumstances and, on occasions, to avoidance threats. New clause 7 seeks to impose wholly impractical restrictions by making it a duty of Treasury Ministers not to bring before Parliament retrospective tax provisions, whether in the Finance Bill or otherwise, that do not comply with certain conditions set out in the clause.
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