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Lord Stoddart of Swindon: My Lords, I am most obliged to the noble Baroness. I did misunderstand her. I believed that she was promising a White Paper on the accession treaty.

Baroness Symons of Vernham Dean: My Lords, I wanted to clarify the point. The White Paper is not on this but on the IGC. However, on the question of the superstate, not only members of Her Majesty's Government but members of the French Government and the German Government have repeatedly said that some sort of federal superstate is certainly not in their vision of the way to carry forward the European Union.

I agree with what the noble Lord, Lord Dahrendorf, said. This Bill will change the face of Europe and the EU will indeed be very different. The Bill sets the scene for one of the greatest steps forward in European history. I was enormously grateful to him for his, as always, very thoughtful contribution.

We have spoken today about the historic nature of this enlargement, but I hope that we are now in a position to look forward. In Brussels the new member states are already making their presence felt as active participants in the Union's institutions. We are working with them on a variety of shared interests—of course on the common agricultural policy reform, on economic reform, and on institutional reform. Enlargement really is a success story for United Kingdom policy, but we do not always recognise that enough. The knowledge of enlargement remains low—yes, I think that it is too low—across the United Kingdom as a whole. I hope that we will be able to address those issues. The Government are committed to doing what we can to rectify that.

Enlargement offers new opportunities for all sections of our country—for businesses, for civil society and for our citizens alike. I should like to see this country seize those opportunities. I think that enlargement is good for Europe and that it is right for the United Kingdom. So I urge your Lordships to grant this Bill a Second Reading.

On Question, Bill read a second time, and committed to a Committee of the Whole House.

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Finance Bill

7.8 p.m.

Lord McIntosh of Haringey: My Lords, I beg to move that this Bill be now read a second time. I shall also be speaking to the Motion to approve Her Majesty's Government's assessment in the Budget 2003 for the purposes of the European Communities (Amendment) Act 1993, and of course the report of the Economic Affairs Committee on the Finance Bill 2003 is also being considered today. Noble Lords will know that the Government have not yet had the opportunity to respond to the report, and so I shall be constrained in anything I might say.

It is appropriate that these three measures are considered together. The information that the Government report each year to the Commission on our main economic policy measures is based on the Financial Statement and Budget Report, and the Finance Bill underwrites the Government's agenda, outlined by the Chancellor in his Budget Statement, of building a Britain of economic strength and social justice. The procedure is set out in Articles 99 and 104 of the European Communities treaty, which relates to the broad economic policy guidelines, convergence and stability programmes and the excessive deficits procedure. Section 5 of the European Communities (Amendment) Act 1993, usually known as the Maastricht Act, requires Parliament to approve the information sent by the Government to the Commission in order to ensure that member states' economic policies are consistent with the goals of the treaty. Sharing the information in the Budget with our European partners allows us to influence the development of the EU, bringing enhanced employment and growth to Britain and other member states. The information we are sharing confirms that we meet the Maastricht criteria for deficits and for gross debt.

As we set out clearly in Budget 2003, both the treaty reference values of 3 per cent of GDP for the deficit, and 60 per cent of GDP for gross debt, are achieved throughout the projection period.

It is thanks to the economic stewardship of the Chancellor of the Exchequer and because we as a Government have been resolute in our commitment to stability, that we are able to increase public expenditure on health, education and our anti-poverty programmes, while meeting our fiscal rules at every stage of the economic cycle, including in the cautious case.

We meet the golden rule over the cycle, not merely achieving a balance, but with an estimated surplus at 32 billion, showing that it is right and prudent to borrow at this time, the right stage in the economic cycle. Adjusted for the cycle we meet the golden rule this year and we meet it every year to 2008.

We also meet the sustainable investment rule that debt should remain below 40 per cent of national income, with debt set to stabilise at 34 per cent of GDP, the lowest in the G7, among the lowest in the EU and down from 44 per cent in 1996–97.

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The context for this Finance Bill has been the world economic downturn that in recent years has affected Europe, North America and Asia simultaneously. Now, with sound economic fundamentals and, above all, low inflation—unlike in the early 1980s and the early 1990s—it is right that this Finance Bill is targeted at promoting enterprise and productivity, helping UK businesses to succeed as the world economy returns to trend.

Over the past six years, we have reformed the tax system to create an environment friendly to enterprise and entrepreneurship, promoting investment, innovation and skills. The OECD has said that the UK is the best place to start out and succeed in business, and its latest figures show that our corporate income taxes plus employer social security contributions as a percentage of GDP in 2000 were the third lowest in the EU, lower than France, Germany and Italy.

Our changes have already helped small businesses to employ almost 400,000 more people than they did in 1997. But we are not complacent: the Government are working to make the process easier still, and we have identified more than 500 regulations introduced by previous governments for reform or abolition. This Finance Bill, building on the Budget that introduced it, marks the next stage of reform, to give greater flexibility in capital markets, product markets, housing, planning and the labour market.

Clause 136 provides support for those who regularly work at home under flexible working arrangements. Employers will be able to meet some or all of the incidental household costs incurred by employees who work home without it giving rise to a tax charge.

The Finance Bill contains measures to tackle abuses of the system by non-compliant employers who gain unfair competitive advantage through deliberate late payments. Mandatory electronic payment for large employers is consistent with the VAT system in which the largest traders are required to pay electronically. The surcharge for non-compliance has been modelled, in part, on the VAT default surcharge.

Clauses 158 to 161 simplify capital gains tax, including an extension of business assets taper relief to improve access to let property for unincorporated traders. This continues the Government's strong record of simplifying the tax system for compliant traders and individuals. Clause 164 extends the 100 per cent first year allowance available to small businesses for spending on information and communications technology for a further year to March 2004.

Clauses 138, 139 and 140 simplify and modernise employee share schemes to make them easier for companies to administer. They give employees in such schemes more flexibility, remove anomalies and provide a statutory corporation tax deduction for contributions to employee share schemes. The zero per cent starting rate for corporation tax means that 150,000 companies pay none. At 30 per cent, the main rate is lower than in any other major industrialised country. Clauses 132 to 134 freeze those rates.

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The Bill improves the way in which the research and development tax credit works, helping to take us towards the American spend on research and development—about 2.8 per cent of GDP. We will continue to consult business on improving the definition of research and development to make sure that it keeps up with technological developments and remains internationally competitive.

Economic dynamism and participation in enterprise is central to tackling social exclusion. To reduce the costs to business of locating and investing in disadvantaged areas and to support the regeneration of brownfield sites, we announced in the Budget the removal of stamp duty from all non-residential property transactions in the 2,000 disadvantaged areas. That measure, which is covered by Clause 57, is part of our package of measures to encourage business investment in our most disadvantaged communities. Such measures, supporting enterprise, underpin our priorities of creating full employment, tackling child and pensioner poverty and delivering high quality public services through investment and reform. Spending Review 2002 set out our plans for an extra 61 billion of spending on public services by 2005–06. Three-quarters of the additional spend will go on health, education, transport, housing and the fight against crime.

That unprecedented programme of investment depends on a tax system in which everyone pays their fair share. Taxpayers rightly expect the Government to close tax loopholes and tackle tax fraud, so that the burden is not unfairly placed on normal taxpayers because a minority abuse the system. This year's Budget included a compliance and enforcement package to enable the Inland Revenue to counter direct tax avoidance and contribute an additional 1.6 billion over three years. Measures in the Finance Bill tackle missing trader fraud, which cost the UK exchequer between 1.7 billion and 2.75 billion in 2001–02. The fraud is largely run by organised crime gangs that also traffic drugs, contraband and stolen goods. Customs has deployed around 400 staff to tackle such fraud, and a nationally co-ordinated strategy has stabilised it. The House may have heard that, yesterday, Customs arrested 39 people in connection with an alleged major missing trader fraud estimated at 120 million.

The measures in the Finance Bill complement the strategy by curtailing the activities of businesses that allow themselves to be sucked into fraudulent supply chains and are complicit in or turn a blind eye to such fraud. We do not take the powers lightly, and they are balanced by comprehensive and effective safeguards to protect the innocent. Through such compliance activity, Customs aims to reduce the fraud by at least 750 million by the end of the current financial year.

The Finance Bill also includes a wider package of measures to ensure that there is a level playing field for taxpayers who fulfil their obligations. There are measures to close down other schemes that a minority of businesses and individuals have used to avoid paying their fair share of tax. There is action to prevent tax avoidance through the manipulation of share

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schemes, coupled with support for companies that want to implement employee share schemes in line with the legislation, and there are clarifications that we have included because we listened to business.

There is action to counter capital gains tax avoidance through offshore trusts and second-hand life insurance policies and to close a loophole in the controlled foreign company rules, which allow some companies to escape UK tax on profits from extended warranties and credit protection insurance.

One of the most important elements of this year's Budget was the comprehensive modernisation of stamp duty to counter widespread tax avoidance, which distorts the commercial property market, distorts business decision making and has given rise to complex and artificial vehicles for transferring property. The reforms will create a level playing field, to the benefit of all taxpayers who cannot engage in highly complex artificial arrangements to avoid paying.

The Government have listened to the representations that were made to us and accepted a number of important amendments during the Bill's passage. On other areas, where the issues were more complex, we agreed to consider the further changes that were debated in the House of Commons. In particular, on the charge of sub-sales, we listened carefully to the concerns that were expressed and, as a result, made changes to ensure that intermediate contracting purchasers are chargeable to stamp duty land tax only if the contract between them and the vendor is substantially performed.

We also took note of the concerns that were expressed about those who enter into contracts before Royal Assent and have made changes to ensure that no one who sub-sells or subsequently performs a contract on or before Royal Assent will be subject to an SDLT charge. We also agreed with the concerns that were expressed that the relief for those who part-exchanged their houses with builders should be extended to those, especially elder people, who "trade down" to a house of lower market value.

Of course there were areas in which we were not convinced by the arguments offered. In particular, we believe that reliefs targeted to where there is most need are preferable to across-the-board increases in thresholds. We have debated those issues thoroughly. However, we recognise that consultation and discussion do not stop when a Finance Bill receives Royal Assent. Over the next few months, we shall be continuing to consult with interested parties to ensure a smooth implementation of stamp duty land tax on 1st December. That is backed up by a comprehensive education programme for solicitors, licensed conveyors and other interested professionals.

On the environment, the Finance Bill takes forward the agenda of using well-designed economic instruments to achieve environmental objectives. Clause 4 establishes a duty differential for sulphur-free fuels of 0.5 per cent per litre relative to ultra-low sulphur fuels from 1st September 2004. We have also announced that from 1st January 2005 bioethanol will be subject to a rate of duty 20 per cent lower than the

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prevailing rate for sulphur-free petrol. We must also correct for market failures that send the wrong signals on waste management. Clause 184 of the Finance Bill provides for an increase in the landfill tax rate of 1 per tonne for this year and next to provide business certainty. The Government have also now introduced changes to the landfill tax credit scheme so that spending on waste is managed through a new public spending programme. Transitional arrangements for ongoing waste projects from the previous scheme are in place.

The Government have demonstrated their commitment to supporting those in need at home and abroad. The Chancellor, backed by all the main parties, proposed an international finance facility of 50 billion dollars a year to fund primary education, healthcare and lifesaving drugs for HIV, malaria and TB. Clause 167 makes changes to vaccine research relief to encourage further research and development into vaccines and medicines for the prevention and treatment of the killer diseases of the developing world. The 10 per cent government supplement on gifts to charity through the payroll is extended for one further year to April 2004 in the Bill to encourage employees further to make donations to UK charities working at home and abroad and builds on the success of the scheme, which has seen payroll giving increase to more than 70 million a year.

We also recognise in the Bill the important role of those who provide care and support to vulnerable children and young people through fostering. Clause 175 introduces an income tax exemption for foster carers to support their recruitment and retention by ensuring that they are not unfairly taxed on the expenses that they incur in making their valuable contribution to society. Clause 174 takes action to ensure that payments made to adoptive families under the Adoption and Children Act 2002 will continue to be free of tax.

In conclusion, this Finance Bill meets our responsibilities. We remain steadfast for stability, enterprise and employment, while tackling inequality and renewing public services. That is the programme set out in the 2003 Budget and that, with the approval of the House, is the programme that we will send to the European Commission. We are fulfilling our commitment, under the Maastricht Act, to report on our main economic policy measures, and maintaining our position, developed by this Government, at the heart of the EU policy process. I commend the Bill to the House.

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

7.25 p.m.

Lord Peston: My Lords, I shall concentrate entirely on the report of your Lordships' Economic Affairs Committee. I am not proposing to make a second speech winding up at the end as a chairman often does.

I am puzzled by one matter. I thought I heard my noble friend say—presumably because of the shortage of time—that he could not reply to the specific report of the Economic Affairs Committee. Unless the rules

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of the House have changed in the past few minutes, I believe that my noble friend is absolutely obliged to reply. In so far as he has mentioned matters such as stamp duty land tax, VAT and many other things, I say in terms to him that he is absolutely obliged to respond to whatever noble Lords say about those matters and that it would be very serious if, for reasons about which I know nothing, he were to ignore all our remarks on those topics.

I remind noble Lords that what the committee did resulted from a decision of the Procedure Committee on 24th July last year. The recommendations of that committee were unanimously accepted by your Lordships' House. Unless something has happened in the past few minutes, all Ministers and members of the Government Front Bench are Members of your Lordships' House and therefore part of the "all" of "unanimous" and therefore they too are fully committed to what we have done on your Lordships' behalf.

I say that just to make very clear, leading up to the main point I wish to make, the complete legitimacy of what your Lordships' committee has done. We received advice at the highest level, and I underline those words. Everything we have done is within the Erskine May conditions that limit what noble Lords can do. Indeed, we were advised even more strongly that the specific remit we were given was narrower that we were entitled to have, according to Erskine May. I cannot emphasise strongly enough that as chairman at no point did I allow your Lordships' committee to drift away from the remit or to get into an area which might affect financial privilege. I am quite certain that I, others who take over this job and your Lordships' House will never move in the wrong direction in terms of offending another place. That is a matter of great importance.

If your Lordships' committee had not been set up there was nothing to stop your Lordships investigating these topics in, for example, the Economic Affairs Committee. To take a specific example in terms of the narrowness of the remit, I felt as chairman that although a stamp duty land tax is an enormously important new tax, which I support very strongly, believing that it is long overdue for reform, the one thing we could not look at was the economic effects because that carried us into the incidence question.

But if I, as chairman of the Economic Affairs Committee, had simply said to the committee that I would like to look at the economics of the stamp duty land tax, and it had agreed, there was absolutely nothing to stop us doing that. In other words, that brings out very clearly what we could have done, but for the sake of this year's good behaviour, we did not. I found that very frustrating because I believe that we would have shown many of the very good economic effects that would have followed, and will follow, from such a tax.

Again, to emphasise the point, it was my noble friend Lord McIntosh who introduced the topics of stamp duty land tax and all the other interesting topics in the Finance Bill. We can debate those topics at any

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length we like, although I hope not at great length, since I at least am rather tired. The difference, in so far as there might be controversy, is that we can do it ex post facto—in fact we have been doing it for years ex post facto when the Commons have already finished their deliberations.

What may have got up one or two people's noses is the suggestion that we might do it in time to make a useful contribution; namely, a contribution that the Commons could take into account. All that is by way of background to say that I think we did the job that your Lordships wanted us to do. We stayed totally within the rules and I remind your Lordships that it was a two-year experiment that will take place again next year. As always within the tradition of your Lordships' House, the committee operated in an entirely non-party political way. Other members of the committee will confirm that. We viewed the matter dispassionately and so long as I am chairman we will continue to do so.

We heard a great deal of extremely interesting evidence. We adopted our normal approach, which is that everything we say is evidence based. At no point did we simply say off the top of our heads, "We think this". That is very important. We had two excellent expert advisers in Leonard Beighton and Brian Shepherd, both senior Inland Revenue officials. So we were acting on the most informed basis possible. We are also enormously indebted to our Clerk, Gordon Baker, without whom I am certain the report would never have been written.

That is the background. There are three specific areas about which I want to speak. First, I think we would overwhelmingly agree that the Government are to be congratulated on the reform on stamp duty land tax. I started from a position of ignorance. I had no idea that the existing stamp duty was a purely optional tax. It was not optional for ordinary people such as many Members of your Lordships' House. When we buy a house we are told by our lawyers, "This is your stamp duty". It turns out that for many big businesses the idea that they might pay any stamp duty is inconceivable.

One point of the tax, which we strongly support—as your Lordships know, it is the oldest tax in our tax system and has not been consolidated for over 100 years—is that it a tax that bites and is fair. Speaking for myself—other noble Lords will say what they think—this is a tremendously good step forward. Our criticisms were not ones of fundamental principle. I understand—former Treasury Ministers will be speaking in a moment—that when Ministers decide they want to do something they want to get on with it. I am greatly in favour of that. Our main comment for those who read the report was to say, "Yes, we're sympathetic to that, but are you sure you want to get on with it at quite that rate, which means some errors might be made?".

Government did consult. My noble friend is right about consultation. But we received at least some evidence to suggest that they might have consulted more. I can see that the Government are always in

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difficulties on the issue. No matter how much one consults there is always someone who says, "Consult more". Sometimes their motives are not entirely because they want us to get it right; they have other reasons. None the less, we offer a word of warning that we should be absolutely sure before the tax gets going that it will work. Although all your Lordships are totally devoted to the interests of accountants and lawyers, in this case job and income creation for accountants and lawyers should not be uppermost in our minds.

Secondly, I turn to the subject of VAT abuse. Again, until I became involved in this matter, I had no idea of the scale of the problem. It is an absolutely fascinating fraud. Wearing my economics hat, I have always been interested in the economics of illegal behaviour and fraud. But this one is so clever that how several of us did not become involved in it ourselves and then retire overseas to a tax-free haven I do not know. But, again, we support the fact that the Government are trying very hard to sort out the problem once and for all. Noble Lords should have no doubt about that.

We are concerned with the detail of how one proceeds in dealing with such fraud. Our genuine question, which I put to my noble friend merely as a question, is whether at this stage we are offering enough protection to entirely innocent parties. I can see a problem of balance here. I do not argue that Customs and Excise will inevitably get that balance wrong. However, I believe that it is well within the remit of your Lordships, and very much in the tradition of your Lordships' House, to ask the Government at least to reassure people that this matter will be dealt with in an open and generous way and that an innocent party, who has behaved properly but is still innocent, will have some degree of protection. On the other hand, we want the bad boys and—as I am non-sexist—girls to be caught. Therefore, I do not believe that anything I say should be interpreted as suggesting that the Government should weaken in their determination to act in this area.

Thirdly, I turn to the subject of mandatory electronic payment. I have to tell your Lordships that this issue stayed on the agenda solely because of me. I am not sure that anyone else on the committee was very keen on it, but I am immensely keen on mandatory electronic payment. I believe I heard my noble friend say, more or less, that he is also keen on it and that, in particular, the Treasury will go ahead on the matter. I can say only that it will clearly not cause a problem for larger employers and, as a minimum, I believe that we should work the system so that smaller employers get into the habit of using electronic payment.

That covers most of the ground I had set myself. However, I should like to return to one point. We did the best we could in a very short period of time. At the beginning I was very doubtful that we could do anything useful, but I was wrong. I am convinced that we have done something very useful. But, again, speaking for myself and making the assumption that I

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shall be involved in part two of the experiment next year, I have to say that next year we cannot work under the kind of pressure that we have experienced this year.

Therefore, if I remain chairman of your Lordships' Economic Affairs Committee and chairman of the sub-committee, I propose to set up the sub-committee very early in the next Session so that we can work at a far more measured pace. Given that, in any event, the Government are rightly consulting on their tax reforms, we would become informed about that consultation process so that we, too, would know what was going on. Thus, having said that I thought we had done a good job, I believe that next year we could do a better job still and genuinely establish a role for your Lordships in this dispassionate, non-party but expert way of scrutinising the Bill.

Of course, I support my noble friend. Although I have not made a speech on the state of the economy, I do not disagree with one word he said. However, in particular, I want to commend the Economic Affairs Committee report to your Lordships.

7.38 p.m.

Lord Higgins: My Lords, it is a pleasure to follow the noble Lord, Lord Peston, and to congratulate him and the members of his committee and sub-committee on the report we are debating this evening. Certainly it was not only a very expert sub-committee but also a very distinguished one. I believe that the innovation which has been made as part of this experiment is important and particularly well timed, for reasons which I shall mention in a moment.

As the Minister pointed out, we are debating three things, which are related but separate. The first is the Finance Bill, and I want to say something about the question of scrutiny. The second is the Economic Affairs Committee report, and I want, in particular, to take up some points which the noble Lord has just made on value added tax. The third is the Motion relating to the European Union and the associated legislation, and I want to say a word or two about forecasting.

I believe that there is a growing concern in this House and, indeed, in Parliament generally at the way that the process of scrutiny in Parliament is being undermined. The process of so-called modernisation in another place, and the process of programming, is working in such a way that it is absolutely clear that on many Bills the House of Commons is not doing the job which traditionally it has done. This is crucial if it is to hold the Government to account. This is a matter of the gravest concern. Perhaps the worst case was the Pensions Credit Bill. It arrived in your Lordships' House in a totally unworkable state and had to be rewritten almost from beginning to end. One part of the Bill was unconnected with the other. There are many other examples, such as the question of the Speakership. The list is getting longer and longer. Perhaps one should put down a Question as to how many government amendments are put down in this place to clauses in Bills which have not been debated

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at all in another place. This is happening more and more. We really ought to be profoundly concerned about this.

This is an issue which it is right to raise, but it is of particular relevance as far as concerns the Finance Bill. This was spelt out very clearly in the Third Reading of the Finance Bill. The time available was restricted to a single day—nine hours. The Shadow Leader of the House—with whom I do not always agree; our views on the reform of your Lordships' House differ greatly—said this:

    "As we know, their Lordships do a wonderful job of scrutinising legislation. They sit for more hours and more days than we do, and they do the job that we should be doing".—[Official Report, Commons, 1/7/03; col. 179].

He then went on to point out that the problem with scrutiny of the Finance Bill in these circumstances is that there is no longstop. We do not have the opportunity to pick up the fact—except in the limited context of the Select Committee report, which I shall come to—that the House of Commons has not scrutinised the Finance Bill properly.

This is a long way from the experience of the noble Lord, Lord Sheldon. He, together with the noble Lord, Lord Barnett, sat on one side on Finance Bill committees. My noble friend Lord Jenkin of Roding and I were on the other. Sometimes we were on one side of the House and sometimes the other. Unlike the House of Commons now, the question was whether we stop at 7 o'clock in the morning rather than seven o'clock in the evening. One would go all night. We scrutinised every line, and that is a huge advantage to Ministers. It means that mistakes in legislation come out if the draftsman got it wrong. Nowadays that simply does not happen. That is a real problem as far as drafting is concerned. The report of the Select Committee has done something to pick up some of the points which have not been given as much attention as they warranted in another place. Obviously this is not an alternative to what ought to happen. We may be able to sort this out with a Joint Committee of both Houses to agree on how legislation should be handled. But it is a particular problem as far as Finance Bills are concerned.

This Finance Bill will be administered by the Treasury, the Inland Revenue and Customs and Excise. This again gives one cause for concern. Mistakes in legislation may not come out until years later when some case arises. But it is still an underlying problem. We cannot be sure it has been scrutinised properly. There are reports in the Financial Times today about:

"Taxing times for the 'serial bungler'"— I am not sure where the quotes come from—referring to the Inland Revenue. There is a suggestion that it and Customs and Excise might be amalgamated or taken over by the Treasury. Many of the problems we face—I shall not list the whole series of bungles the paper mentions—result from the present Chancellor's empire-building. He has certainly taken over large chunks of work and pensions.

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The Inland Revenue has been burdened with a huge amount of work in relation to tax credits. That is not just the Contributions Agency, but it is paying out tax credits, which is really part of the distribution of social security rather than otherwise. All that gives one cause for concern as to whether the complex measures in this particular piece of legislation we are debating today will operate properly.

I turn to the Select Committee report. It could not be more timely because it coincides with a situation where scrutiny otherwise is deteriorating. No doubt we should perhaps consider whether the historic division of powers, which goes back to the beginning of the last century, is right. I shall not suggest that your Lordships should examine Finance Bills in great detail. We have huge expertise, but I have some doubts as to whether we have the stamina.

The Select Committee concentrates in particular on the question of value added tax. Since I had the responsibility for steering that original legislation through the Commons, I was very annoyed by an article in The Times of 1st April. I do not think that it was intended as an April fool joke. It was an article by a Mr Waller, which said:

    "The House of Commons has seen some outrageous statements, but few can match the claim in 1973 by Anthony Barber . . . in that year's Budget statement: 'VAT will be a simple tax'".

It was then a simple tax. It was a standard rate of 1 per cent with a zero rating for essential items of expenditure. Once we had debated every conceivable borderline case it was simple. Since then—and I speak with some hesitation as there are various former Treasury Ministers sitting on the Benches—successive Chancellors have not simply upped the rate but have greatly complicated it.

The Select Committee report deals particularly with the question of fraud, which itself is vastly more complicated. It has taken them 30 years since the tax was introduced to work up a fraud which is this sophisticated. The committee is right to draw attention, as did the noble Lord, to the importance of balancing the powers of the Revenue and whether people who are not really guilty of any offence may be dealt with too harshly.

When I introduced the enforcement clauses in relation to Customs and Excise in the original Bill, I received a massive deputation from more senior colleagues in the House, saying, "You cannot possibly do that". All we had done was to re-enact powers which Customs had had since time immemorial. They are of course very great powers. But it is important, as the Select Committee, pointed out, that that balance should be achieved as far as concerns the Customs and Excise operation.

The hour is late and I do not want to go on for much longer. I am not entirely clear from what the Minister said exactly what is submitted for the purposes of the European legislation requirement. I presume that essentially it is table B.10 in what used to be the Red Book—it is no longer a Red Book but is largely a large chunk of propaganda—and perhaps the Minister will

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confirm whether that is so. If so, is it updated between the date it is produced at the time of the Budget and the date it is submitted to the European Community?

One should consider whether the vast mass of paper on the Chancellor's advice in relation to the euro will also be submitted. The noble Lord shakes his head. It seems a shame because some of it is extraordinarily good. I refer, for example, to an article by Mr Peter Kenen, professor at Princeton University, on optimum currency areas. I think that it would be wise if some of this documentation were sent to the other members of the European Community. They might realise not only why there is a very strong case—in my view—for not joining the euro, but also what the dangers might be to the stability of the euro-zone itself as there are already great strains on the "one size fits all" monetary and fiscal policy.

I shall not go into the detail of that article. One needs a blackboard and a great deal of algebra. None the less these documents that were produced in conjunction with the Budget and the Finance Bill are valuable, and I hope that we can give them further consideration. Those are the main points that cause me concern. They are serious, and we have to make sure that our parliamentary system is not undermined in the way that it is at the moment.

7.50 p.m.

Lord Oakeshott of Seagrove Bay: My Lords, if the House feels a little strange to some this evening, that is understandable. Like Snow White, we are waking from almost a century of slumber so far as concerns detailed discussion of the Finance Bill. As we rub the sleep from our eyes, perhaps even flex our muscles a little, let us resolve to make this a refreshing and a constructive process, not a destructive one. We do not seek, as the noble Lord, Lord Peston, said, to reopen the financial settlement between the Houses, dating from 1671 and 1678—that was sealed after this House's futile defiance of Lloyd George's great people's Budget of 1909.

The sub-committee's terms of reference are clearly limited to issues of administration, clarification and simplification. Heaven knows, there are plenty of those in this Finance Bill, rushed as it was through the other place with enough knives and guillotines to satisfy Robespierre, Danton and the tricoteuses all rolled into one. The new stamp duty land tax is one striking example. It was described to our sub-committee by the Institute of Chartered Accountants as,

    "the most significant new tax for 30 years".

Yet it received not a single minute of scrutiny or debate in Committee, and only two and a half hours on its final day in the Commons on Tuesday.

As the noble Lord, Lord Higgins, said—I was struck by the comments of his right honourable friend in the Commons—the Finance Bill is in a special category, because there is no safety net and no alternative to the scrutiny that the Commons can bring to bear. As the Liberal Democrat shadow Chief Secretary to the Treasury said:

    "This is the fourth longest Finance Bill on record".

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He was also concerned that the Commons was,

    "faced with an accelerated timetable in circumstances in which we cannot rely on the other place to mop up some of the aspects that we are unable to cover".—[Official Report, Commons, 1/7/03; col. 181.]

Frankly, that process is a denial of democracy. It is also a shame that the Minister feels constrained in replying tonight, because the Government have not yet responded to our sub-committee's report. The Government should have tried harder—we did. Can the Minister assure us that next year the Government's response will be ready in time for this debate?

As the sub-committee report states, there are substantial criticisms of the way the stamp duty land tax is being rushed through, and the "abrupt halt" in the consultation process. Our private sector witnesses believed that the tax would not be in a fit state to introduce on 1st December. We report a wide range of outstanding problems to be solved on the stamp duty land tax, covering property purchases and new leases, such as,

    "the lack of certainty over potential tax liability for commercial property transactions, lease duty provisions that are still to be decided, difficulties of fair assessment where lease revenues depend on turnover . . . potential inflexibility over reclaiming tax releases that are terminated",


    "apparent inconsistencies over the qualifications for disadvantaged area relief".

How much notice have the Government and the Inland Revenue taken of the criticisms that we made? They were based on a thorough examination of eminent expert witnesses, and of both the timing and the substance that we were criticising of the consultation process on stamp duty before the Budget. Not a lot. In passing, I declare my interest as an investment manager, responsible for the past 22 years for property investment for institutional investors, such as pension funds, investment trusts and charities. The property industry remains deeply critical of the consultation process on the new lease duty. At a meeting of the lease duty discussion group with the Inland Revenue on 19th June, the Inland Revenue said that interested parties must submit alternatives backed by numerical evidence by 5th July. That is the day after tomorrow. Industry bodies such as the British Property Federation believe that that is an impossibly tight deadline, given the lateness of the announcement and the work that needs to be done.

What is the rush? Surely, as our report states, it is more important to get the tax right and as fair and simple as possible than to meet an arbitrary target date. Otherwise, the so-called consultation process will appear more and more one-sided—or simply a sham.

I ask the Government to think again about two particular dangers in their proposed new lease duty that could distort competition and undermine the security of property as a long-term investment for pension funds and insurance companies. Perhaps I can clarify the issues for them.

First, on competition, stamp duty on new leases is to be increased substantially in three-quarters of the country and abolished in one quarter. The boundaries

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for that feast or famine are based on residential micro-statistics and completely ignore the wider catchment areas of commercial property. For example, lease duty will be abolished on Harvey Nichols in Leeds, on offices in Holborn, or, to take two vast regional shopping centres serving similar populations—Lakeside in south Essex and Bluewater on the other side of the Thames, in north Kent—one will pay stamp duty but the other will be exempt, giving Lakeside a considerable competitive advantage.

The second threat lies in the way that the new lease duty discriminates against long leases—especially those running for more than 15 years—which many retailers, hoteliers, nursing homes and leisure sector operators typically sign to secure the future of their business and justify the investment that they need in equipment, fixtures and fittings. In recent weeks, we have spoken a good deal about pub tenants. They especially need the security of a long lease and will be hit especially hard by the new duty.

To return to what the noble Lord, Lord Peston, said, I of course agree that the Government are fully entitled to raise more revenue in total from lease duty. It is not up to us to argue with that. But why the penal increases—typically more than 1,000 per cent for tenants taking 20 or 30-year leases? The Treasury seems to think that taking a lease on a property is a form of tax avoidance. It is not. It is merely the normal way in which most commercial occupiers pay each year for that space, which is just another factor of production, no different from labour or power supplies. Because leases in one quarter of the country will be exempt from duty, the rise in the rest of the United Kingdom will be one-third higher still.

Attacking long leases in particular could deal another hammer blow to the solvency of pension funds, which have increased their weighting in property to recoup the loss of income that they suffered from the withdrawal of dividend tax credits. Institutional investors set great store by what we call the "bond element" of rental income, which is a much better match for pension fund liabilities if it is secured for 20 or 30 years, rather than just for five or 10.

Anything, such as this biased lease duty, which undermines that key prop for pension fund property investment, could hardly be worse timed. The Government may raise the duty by all means, but fairly, across the board, on short leases as well as long and over the whole country. There is still just time for the Government to listen.

I end with a suggestion that would be especially helpful for us in our work next year. The second latest spring Budget for 20 years, which we received this year on 9th April, made the timetable for our work eye-wateringly tight. Perhaps next year, the Chancellor will give us and the Commons more time to read the small print, to help to improve the Bill. Dare I even suggest that it would be simpler for business and Parliament to plan the year ahead if we had a fixed annual date for the Budget—say the second Tuesday in March? Or is that a modernisation too far?

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7.59 p.m.

Lord Sheldon: My Lords, first I must express my appreciation for the work of my noble friend Lord Peston, who chaired the committee's investigation of certain aspects of the tax system that had not been examined for more than 90 years. We are setting quite a precedent—a useful one—and the way in which we limited our operations was valuable. Those matters were all within the limited powers of the House of Lords—we did not exceed them in any way.

As my noble friend mentioned, it is a two-year experiment. I hope that next year will be rather better, because we shall have more time. It was hurried; we met more frequently than almost any Select Committee meets, day after day, to ensure that we established a sensible and thorough examination of what we were investigating.

We have certain advantages over the House of Commons. Our committee is non-party political and there was no party political aspect to our aim of trying to improve the areas of the tax system we were able to examine. We know, as the noble Lord, Lord Higgins, knows, that the House of Commons does not proceed in this way: it is extremely party political and party politics are the main arguments made use of.

A different method of examination is used here compared to the House of Commons. That is necessary because, as the noble Lord, Lord Higgins, pointed out, the House of Commons is not doing its job. There was a time, as he and I recall, when we worked through the night on crucial matters, which were exhaustively examined. At that time nearly everyone who got into the Government and the Opposition at very senior levels was handpicked for the job. It was recognised as a very important job.

I do not see the same attitude today. Perhaps the noble Lord, Lord Higgins, and I do not have the same stamina today we possessed at that time, but at least we have the experience, which is valuable in looking at these matters in a slightly different way from the House of Commons.

In our examination of taxation we must accept that the House of Commons is not only predominant but exclusive in the matter of rates of tax and other matters. This is the first time that we have looked at these matters. We have to make sure that we get it right so that we can come back next year with a greater appreciation of what we have in this House—expertise and experience. I do not want to make too much of it, but it is a difference between ourselves and the House of Commons and making use of it is of great value.

We took evidence in a way that the House of Commons does not. We heard from very senior people who came to be questioned by us. They added to our knowledge, which, although largely based upon the past, is still of great relevance. We were only able in the time allowed to select a limited number of issues. I think the ones we selected were the right ones. We picked on three taxes: the new stamp duty land tax; the VAT provisions against evasion; and electronic payment of tax.

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I agreed with the need to bring in these three taxes. My concerns were whether they were being introduced sensibly, whether the right attitudes were prevalent and whether the detail was properly examined by the House of Commons. My remarks on these matters will be largely on the VAT proposals in the Bill.

The stamp duty land tax deals with the changes to the tax system. The noble Lord, Lord Oakeshott, mentioned some of them. Many witnesses said the tax would not be in a fit state to be introduced on 1st December 2003. That is despite the view of the Inland Revenue that the tax would be ready in time.

I am sorry that parts of the tax legislation went through in Committee in the House of Commons without being discussed or scrutinised: that could never have happened in the past. Minor matters of legislation one might concede—although not happily—but not on the Finance Bill where we deal with matters of great importance to certain individuals. If their tax matters are not properly discussed, that is quite wrong. We recommended that early in the autumn of 2003 the Government should review whether the tax could be put right in time. It is an important aspect that needs to be looked at.

My main contribution to the debate concerns VAT. Clauses 17 and 18 deal with the situation where a business receives a supply of specified goods or services in circumstances where the person had reasonable grounds to suspect that the VAT on those goods or services would go unpaid. The person would then be held liable for the tax due in the event of a default by the supplier.

Here we are dealing with very serious matters. I was surprised by the size of the Revenue losses. I had no idea that we would be dealing with losses of between 1.7 billion to 2.7 billion. Indeed, I wish that I could be convinced that those figures are correct; no doubt that will come out in due course. What is obvious is that the figures are extremely large and need to be dealt with properly.

The proposed legislation deals with the "missing trader problem" where a trader charges VAT to a customer but does not then pay that VAT over to Customs and Excise. We have seen that the estimates of the losses to the Revenue are extremely serious. At present it is by far the biggest single fraud confronting the tax authorities. So there is no question about the fact that it needs to be dealt with.

What we are dealing with here is a "simple acquisition" fraud where a trader imports goods free of VAT from another European Union state, sells them on in the United Kingdom, charging VAT, and then "goes missing" and does not account for the VAT charged. At a rate of 17.5 per cent, a large amount of money is involved. The new proposals will allow for a proportionate security requirement from each business that together would protect the total tax at risk in a VAT supply chain.

In evidence to us, high-level officials from the Treasury came willingly to give their views in a proper and sensible manner. We were most appreciative of

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that. They did not accept that volatility of prices meant that it was difficult for a trader to recognise when a deal offered to him was "absurdly good". They thought that traders would know that the market value of the goods they were buying was too low and that they should be suspicious. Their conclusion was that if a business had taken all reasonable steps, then they would accept that it was not involved in a fraud.

I have difficulty with that view. What is being asserted is that if a buyer is offered a certain batch of goods or services at a price much lower than normal, then that is an indication of fraud. I thought that that was a simplistic view. There are many articles which can command a wider range of price than Customs and Excise seem willing to accept. They may be surplus to requirements, in which case they have to be disposed of; there may be a weakness in demand, in which case again they have to be disposed of; or it may be felt that they have been superseded by more recent models. Occasions may arise where a seller has financial problems and would be willing to accept prices a little cheaper for a certain and speedy cash sale than that seller might otherwise have accepted.

Under the clause there is inadequate protection for the legitimate trader. One needs to understand the mentality of both buyer and seller over a whole range of different circumstances where the new arrangements might be unfair to the legitimate trader. We considered that part of the solution might lie in a suggestion from the Institute of Chartered Accountants: that before taking steps to require security, officers of Customs and Excise should be obliged to seek leave from a tribunal chairman. We recommended that consideration be given to creating statutory safeguards for legitimate traders which would ensure that the conclusions arrived at by the investigating officer would be reviewed at board level within the department and by an external judicial authority before the power to require security was exercised.

Before you can or should take action against a trader, you should seek leave from the chairman of the VAT and duties tribunal. Before giving leave, the tribunal chairman would have to be convinced by Customs and Excise of the case against the trader and that the business was involved or was complicit in the alleged fraud.

Our view was that the concerns expressed to us by witnesses about the creeping widening of the categories of goods or services would be much allayed if the system of enhanced safeguards for the legitimate trader which we commended for consideration were to be adopted.

We had very limited time in which to examine all of these matters, but the ones we did examine we examined adequately in the very short time we had. I look forward to being able next year to deal with one or two other matters, which I think will be of use to the Treasury, to Customs and Excise, to the Inland Revenue and to the Government as a whole.

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8.10 p.m.

Lord Howe of Aberavon: My Lords, I thank the Minister for his presentation of the Finance Bill. I offer him some sympathy because his noble friend Lord Peston has rather stolen the limelight for today's debate, and quite rightly so.

I intend to focus on exactly the same problem. The whole process of considering and enacting tax legislation still cries out for further examination, all the more so—as speakers on all sides of the House have said—as a result of the total disintegration of the House of Commons in this field. It is easy for us to stand like antique figures looking back nostalgically on those splendid nights, but, as the Shadow Leader of the other place, Mr Forth, said, and as another Member, Andrew Tyrie, said in this booklet about two years ago, the House of Commons has virtually abdicated from this field alongside a mounting clamour from the tax industry, from the lawyers and the accountants for the process to be improved. One message that must be driven home yet again to the Treasury—and above all to the Chancellor—is that this topic will require a huge, sustained, concentrated examination for a long time to come.

I am not going to say anything about policy simplification, about the volume of legislation, although that is equally daunting, or about the surging growth in the number of Inland Revenue officials. It is the procedure that needs to be examined. I welcome enormously the report prepared with such skill by the noble Lord's committee. It respects absolutely the boundary of propriety and indicates a huge field for further examination.

The report is one of two documents that have appeared within the past three or four months on this subject. The other report is from the Institute of Fiscal Studies working party under the chairmanship of Sir Alan Budd. It is entitled Making Tax Law and is closely related to the work of the committee of the House. Indeed, the noble Lord's committee examined as witnesses almost every member of the Budd working party and the ubiquitous noble Lord, Lord Barnett—who astonishingly is not in his place today—was a member of both committees.

This area requires a huge concentration of study. Both reports, this debate and the evidence given to the committee of the House should be required reading for the Chancellor and other Treasury Ministers.

My concern is about the process of making and shaping our new law. I start with an issue to which reference has already been made, the manifest failure of the process of consultation in relation to the Bill. Consultation is not something that the Revenue and the Treasury are entitled to expect. It is carried out through a huge effort of concentration by people doing work alongside their normal jobs. I was struck by the evidence from the representative of PriceWaterhouseCoopers, who said:

    "My feeling about the consultation process is a little bit coloured because it was abruptly cancelled in January by the Financial Secretary. It was done in a very peremptory fashion and

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    it did cause quite a lot of disenchantment amongst those professionals who had devoted considerable time and effort trying to assist the Revenue in getting matters right".

That is not something we notice en passant. It is something for which Mr David Hartnett, the vice-chairman of the Inland Revenue, and a member of the tax law steering committee, specifically apologised. It is not for an Inland Revenue official to apologise for something of that kind; it is something for which Ministers have to accept responsibility because it is at the heart of the tax-making process.

It is most important in this area to avoid focusing all—or, indeed, almost any—of the criticism on the Revenue. I have been working closely enough with them for the past several years on the rewrite project to be able to say that the last thing we should do is to shoot the pianist. He and they are working enormously hard and are trying their best.

Another piece of evidence given to the Select Committee came from Mr. Haskew from one of the other accountancy firms. He says on page 64:

    "I think we should say here and now that the Revenue have tried very hard in I would say the last four or five years to consult openly and fairly and the result of things like the stamp duty consultation is particularly disappointing because I think they have been trying very hard".

We have to make a success of that. The Law Society made very similar observations on page 120, which are worth quoting. It, too, pays tribute to valiant work done by the Inland Revenue but says that despite that,

    "there are significant areas that have not been properly thought through and that little more than lip service appears to be paid to the authority of Parliament".

I come to the other aspect which, perhaps understandably, concerns me even more—the extent to which this pattern of behaviour is challenging almost directly the work being produced by the Tax Law Rewrite Project. The repeal by Clause 139 of Schedule 22 of our second statute is astonishing. The Law Society says:

    "Clause 139 and Schedule 22 was introduced without any warning and inadequate explanation in the Budget Day Press Release. Over 80 pages of legislation completely re-write rules which have developed over the last 15 years and more. That legislation had been re-written in the 'tax law re- write' style (which we fully support) in the Income Tax (Earnings and Pensions) Act 2003, which came into force on 6 April 2003".

Yet within eight days, on 14th April, a press release comes along, rewriting 80 pages of it. As the Law Society says:

    "It is particularly unfortunate that that this Finance Bill replaces extensive tranches of that newly re-written legislation with some extremely opaque drafting, most of which is not in the new style".

It defeats the object of the exercise and is unforgivable. It is not the officials one should complain to in such a matter. What happened rightly caused huge dismay among those people from the Tax Law Rewrite Project, the Inland Revenue and the Parliamentary Counsel Office who had sweated their guts out to produce that material. The process of the tax law rewrite group is still developing. It is an extraordinarily sensitive, iterative process, in which draft succeeds draft.

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When I first encountered this at a meeting to consider it shortly after the Finance Bill was published, I wondered whether the Parliamentary Counsel Office had somehow reverted to an antique style out of tiresomeness or bloody-mindedness. Far from it. The very counsel who had been concerned at the coalface in helping us develop the new tax law rewrite style was grappling with this, doing what he could to put it into better form, but it simply could not be done.

This is what the chartered accountants have to say about it:

    "This poor redrafting of a large section of newly rewritten provisions is disappointing. We are concerned that our members will start to question our commitment of time and resources to the"—

Tax Law Rewrite Project—

    "if all that happens is that, within a few weeks of the legislation being enacted, the Government makes wholesale amendments to it with no consultation.

    The result is that the case for us continuing our involvement in the Rewrite of the UK tax rules is undermined. We would welcome clarification as to the Government's policy concerning the Tax Law Rewrite Project given the above comments".

Noble Lords may think, perhaps understandably, that I have become obsessed in a proprietorial sense with this tax law rewrite process. I have not. It is only part of the whole exercise of trying to raise the quality of the way in which our tax law is prepared. When we considered it in the Tax Law Rewrite Steering Committee only a few weeks ago, we were very emphatic that if this is not taken seriously, it will undermine the morale of people inside and outside the Revenue who are trying to get this right. But it is not just that. It is the fact that in the stamp duty land tax section, one of the other official organisations complains, a huge chunk of antique legislation is left unamended, when the opportunity could have been taken had more time been devoted to it for a proper rewrite of it in a proper fashion.

I return for a moment to the Tax Law Rewrite Project. Ever since that started, we have been functioning by reference to what are listed in Appendix A to our latest plans as factors critical to the success of the process. However, those factors have been there since we started. One factor states:

    "The lessons learned from the experience of successfully rewriting the legislation should be developed, in close consultation with the users, into new best practice for producing tax legislation in the future".

That is not being done in this case. The second factor, the important one, states:

    "The operational implications of the rewrite work for the Inland Revenue must be identified and properly addressed".

That is not being done.

One has to look to Ministers to take responsibility for this. We have an opportunity to enhance this House's contribution to the process, if the committee proceeds as the noble Lord, Lord Peston, has suggested. On that point above all I think they need to concentrate.

There is one other feature. Do we have to accept that the other place should, as it were, be allowed to abdicate from this process altogether? I think that it is

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being unfair to them to say that they are abdicating. The Public Administration Committee, for example, has looked very carefully and very critically at many of its own procedures. I think that we should at least look for an opportunity for both Houses, or committees of both Houses, to get together to see whether we cannot harness the talents in both Houses. That is another agenda item for the noble Lord's committee in the year ahead. I am delighted, of course, that he will be able to start his work on the volume of legislation that is already coming forward in so many different ways.

I close by repeating myself yet again. So many people have studied these mechanical processes with dismay and concern for so long, but it is an issue that has to be taken much more seriously by the Chancellor and his colleagues in government. We value the fact that we have been given the resources, and we are still getting the resources, to keep the tax law rewrite process going. But there is a huge challenge if we are to begin recovering this mountain of tax legislation into a form that can be understood and accepted by the people. Nothing, I think, could be more important than that. I am delighted that this House now has a committee that is able to work on it. I congratulate the noble Lord on the tact and skill with which he has got it under way. I am sure that we can look forward to even more exciting things in the future.

8.24 p.m.

Lord Jacobs: My Lords, being neither a former Treasury Minister nor a member of the current excellent sub-committee, I trust that your Lordships will forgive me if I deal with some, I hope, important or different issues. This is an account of how a Member of your Lordships' House discovered something seriously wrong and tried to have it corrected. It is, broadly speaking, a story of failure that may possibly have a happy ending. All the economists—I am sure that there are many here—will probably say that these are matters with which they are familiar. They may have recognised that there was a problem, but, if they did, they certainly did nothing about it.

The issue relates to the retail prices index, the RPI or, more precisely, the RPIX, which excludes mortgage interest. In 1995, a new component was added to the index—the depreciation of owner occupied houses. Your Lordships may say that surely house prices have not been depreciating since the war. Indeed, you would be right. The average rate of appreciation of houses is approximately 6 per cent a year, so why would it be necessary to charge depreciation as a cost in the retail prices index? This component was not in the index for 50 years—from 1945 to 1994—and we managed pretty well without it, so why would we need to include depreciation of one's home now?

First, let me explain—and I speak as an accountant—that depreciation effectively means setting aside a sum of money, in this case presumably weekly, in order to replace or reconstruct one's home within the next 100 years. If this is done properly, when one sells one's home, one would expect to hand over to the buyer a sum of money being the depreciated sum that one has reserved.

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I hope that your Lordships are following this and do not think we are in "Alice in Wonderland". Your Lordships may argue, "What is the harm in including this in the index?" Primarily, because it has the effect of increasing the rate of inflation. One of the main economic levers based on the rate of inflation is interest rates. First, the Bank of England and the Monetary Policy Committee set interest rates, taking the RPI into account. When I met the new Governor of the Bank of England, Mr Mervyn King, he assured me both at the meeting and subsequently in writing that the MPC would take note of the effect of this depreciation component.

I will give an example of how distorting the component can be. I have taken the figures that I quoted to all members of the MPC when I wrote to them in February. I took as an example the RPIX for November 2002. In that month, inflation was 2.8 per cent. But if the new component of depreciation of homes had been excluded as it had been for the previous 50 years, the RPIX would have been 2.1 per cent—no less than 25 per cent lower. In other words, inflation would be much lower without the component being added. While the MPC and the Governor of the Bank of England certainly understand the issue very clearly and can make allowances for it when setting interest rates, that surely does not apply to employers and employees when negotiating wage increases.

It has always seemed to me that the depreciation of homes should never have been added to the index. However, having added it, at least its weighting should be adjusted as it is having a very adverse effect on the rate of inflation. When I first raised the issue with the head of the Office for National Statistics, a meeting was arranged to discuss the issue at my request. That meeting was also attended by a Treasury Minister. It was explained that, although mortgage interest and home repairs were included in the index, nothing was provided for the replacement of homes which might occur between 50 and 100 years hence. It was also explained that the decision to put this item into the index occurred because a committee was appointed to study the issue and it was the committee's decision.

What was not mentioned, of course, was that the minority report of the commission, which was led by known none other than Sir Samuel Brittan, opposed the addition to the index and, indeed, thought that it was a great nonsense.

Your Lordships may recall that I said that the story might possibly have a happy ending. In the past few weeks, the Chancellor of the Exchequer has announced that he will meet the Governor of the Bank of England to discuss bringing in a new index to be known as the—wait for it—harmonised indices of consumer price indices, or HICPs for short. I hope that Europhobes will forgive me for saying something good about the European Union, but the fact is that the HICPs are calculated in each member state of the European Union for the purpose of European

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comparison as required by the Maastricht treaty. Noble Lords will not be surprised to learn that that does not include any depreciation in owner-occupied homes. I am not sure that the present Governor of the Bank of England would not believe that to be a serious omission.

The HICP index is to be brought in in November. Currently, it would show a rate of inflation in this country of about 1.2 per cent, compared with about 2.9 per cent under our present RPI. Perhaps that explains why today in the United States the federal fund rate is 1 per cent. The equivalent rate in Europe is 2 per cent, and Britain's base rate is 3.75 per cent. It is good to know that the financial authorities are content with our relatively high level of interest rates. Presumably, they believe the economy is growing at a satisfactory rate. Would the MPC feel so alarmed about further reducing interest rates, if the rate of inflation, as indicated by the HICP index, were less than 1.5 per cent?

Let us assume that the new index is brought in. Is there anything to worry about? There is just one issue. Will the Government continue to publish the present inflation index alongside the new one? I am not worried about the Bank of England or the MPC having a problem with that, but it is certain that, in every employer-union wage negotiation, people will argue intensely about which index to follow. The Government will no doubt deny that there is a problem, but I cannot believe that there is a union leader worth his salt who would not go to the negotiating table and base his negotiations on the present retail prices index. He would want nothing to do with the new-fangled HICP index, which has been imported from the Continent. That is a problem that the Government have yet to grasp. Lest I be unfair, I ask the Minister whether, if the HICP index is introduced in November, the Government intend to continue to publish the present retail prices index each month.

We all recognise that the level of interest rates is determined by the state of the economy and by the rate of inflation. We all agree that the economy at present is not in growth mode and that lower interest rates could be the appropriate incentive to move things forward. Europe has the equivalent base rate of 2 per cent, and the latest figure for the rate of inflation under the HICP index for Europe is 1.8 per cent. In France, it is 1.8 per cent, and, in Germany, it is 0.6 per cent. The latest figure for the HICP index in the UK is 1.2 per cent. That would surely justify a significant reduction in base rate from 3.75 per cent.

We have a lower rate of inflation than many of the countries in Europe, yet we are forced to have interest rates at nearly twice their level. The Governor of the Bank of England and members of the Monetary Policy Committee should actively consider not a 0.25 per cent reduction in rates, not a 0.5 per cent reduction in rates, but a full 1 per cent. Might it happen? Perhaps—but then pigs might fly.

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8.32 p.m.

Lord Freeman: My Lords, I declare an interest as an accountant and a consultant to PricewaterhouseCoopers. I shall concentrate my remarks on the report of the Select Committee on Economic Affairs, chaired by the noble Lord, Lord Peston. Because the hour is late, I intend to be brief. Much of what I was going to say has already been excellently and comprehensively said by my noble friend Lord Higgins and my noble and learned friend Lord Howe of Aberavon.

In the press release for the Select Committee's work, it was reported—correctly—that the report was timely and constructive. There are two reasons why your Lordships should agree. First, as my noble friend Lord Higgins explained, the Bill was timetabled in another place, which, incidentally, gave each line of the Finance Bill exactly 10 seconds of debate. That is a disgrace. It is difficult to argue that the provisions of 100 years ago relating to the powers of this House should continue, while debate in another place is curtailed. Those two things are mutually incompatible. The work of the Select Committee has been very valuable.

The second reason is that, if we read volume II—second volumes are not normally read—we must congratulate the committee on the number of witnesses and the quality of the evidence. The document produced by the Treasury Select Committee—chaired many years ago by my noble friend Lord Higgins—was not quite as thick as the volume produced by the committee chaired by the noble Lord, Lord Peston. I very much hope that this exercise will continue beyond the two-year experiment and that the Government will reply. We must admit that the Government do have a weapon in dealing with Select Committees: delay in response. It has always existed, continues to exist and probably will exist in future, but if a timely response from government is lacking, that does not help debate or help to reflect the value of reports such as this one. I suspect that Her Majesty's Treasury and Ministers in the Treasury have been slightly resistant to the whole notion of the committee of the noble Lord, Lord Peston. I hope that they will regret what appears to me to be a lack of co-operation with and response to the report.

I suggest with all due deference to the noble Lord, Lord Peston, that although he may be reluctant to take on the burden in future years, he should add one remit next year; that is, to look at the cost and effectiveness of implementing tax measures. I do not believe that that would be out of order and it would be very important. Someone must address the central issue: does the revenue raised justify the administrative burdens of specific taxes? Such issues are not regularly addressed—certainly not in another place—but the committee of the noble Lord, Lord Peston, is ideally suited to discharge that.

The noble Lord, Lord Peston, hinted at starting the sub-committee's work earlier, perhaps even at the commencement of a Session. That must be right because some tax legislation—perhaps not enough—is

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exposed for consultation and the issues, which are trailed sometimes by the Chancellor in the preceding Budget, bear analysis and examination at the commencement of the Session.

The committee's terms of reference included tax clarification and simplification. The two are very different; they are separate issues, as my noble and learned friend Lord Howe said. On the clarification of tax, the Tax Law Rewrite Project, under the eagle eye of my noble and learned friend Lord Howe of Aberavon, has done excellent work and made marvellous progress since the Finance Act 1995. I only add that we had enacted on 6th April the Income Tax (Earnings and Pensions) Act 2003 on clarification and rewrite. What happened? A matter of days later, we had 75 pages in the Finance Bill—Schedule 22— full of amendments to that very Act, although much work had gone into it in terms of clarifying tax law.

On simplification, which is a separate issue, I have another suggestion that the noble Lord, Lord Peston, might care to consider carefully. My suggestion reflects what the Tax Law Review Committee recommended; that is, that there should be a tax structure review project. That examines old legislation. Why should not a Select Committee of your Lordships' House perform that task? It would be all-party and I cannot see how Treasury Ministers could argue that in any way there was interference with tax policy. It is a very important area—granted, it is right on the cusp of tax policy as opposed to a legal clarification of the law. However, the Select Committee could and should take that on.

I turn to new legislation and the need to expose draft legislation properly to those involved in its implementation. There is a well established code of practice on consultation and, as other noble Lords have already pointed out, in relation to stamp duty land tax. I believe that my noble friend Lord Caithness, who will speak later, might dwell on that in view of his vast experience in that regard. As the noble Lord, Lord Oakeshott of Seagrove Bay, correctly asked, why the rush? The Select Committee stated in the executive summary:

    "we think it is more important to get the tax right, and as fair and simple as possible, than to meet an arbitrary target date".

It is clear what happened. The consultation process was halted in January doubtless because the Treasury thought that anti-avoidance measures were a central part of the new stamp duty proposals in the Budget and the Finance Bill. Now we have a promise to resume negotiations very shortly. Could the Minister kindly enlighten us as to whether those further consultations, which must be about the regulations in relation to stamp duty, will commence—perhaps they have already commenced—and will they be as fair and constructive as noble Lords would wish?

I end on perhaps a slightly discordant note by disagreeing with the Select Committee's observations on mandatory electronic payment of tax. I believe that the Select Committee came to a conclusion too quickly on that point. I object to the idea of compulsion. We already have compulsory filing for large companies and now we are moving to compulsory electronic

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payment of tax by large companies. I believe that the Inland Revenue should adopt a much more user-friendly approach: I regret the conclusions of the committee on this particular point. I congratulate the noble Lord, Lord Peston, and his committee. It is an excellent start and I hope that the committee continues its existence.

8.40 p.m.

Lord Northbrook: My Lords, I declare an interest as an investment fund manager. I shall concentrate more on the Finance Bill, but I will make a few remarks on the excellent Select Committee report and join other noble Lords in praising it.

This year I feel a little less lonely than last when I was the only Back-Bench speaker. Looking back at that speech I make no apologies for putting forward several of the same points again a year later. First, the length of the Bill: last year it was 500 pages; this time it is a mere 447 pages; 214 separate clauses and 43 schedules. The noble Lord, Lord Oakeshott of Seagrove Bay, said that it is the fourth longest Finance Bill, even though, as stated by the Financial Times,

    "the measures were seen as a non-event by many economists and tax experts".

Half the Bill by volume deals with just two areas. The first is a new stamp duty tax and the introduction of a lease duty which comprises 139 pages. The second is the issue of employee share schemes and the major changes to the law on employee share acquisition, which amounts to 91 pages. I shall come to the stamp duty area later. Overall it is again another very long Bill.

The Chancellor's economic forecast does not seem to have been covered very much by previous speakers. The Chancellor's prediction in last year's Budget was a growth rate of 2 per cent in 2002 and an increase in the expected growth rate from 3 per cent to 3.5 per cent in 2003 and to 2.5 per cent to 3 per cent in 2004. I was concerned about the optimism of those forecasts then; my concern was justified as the 2002 out-turn was 1.75 per cent. The 2003 forecast made this time last year has been downgraded for the second time since to the current range of 2 per cent to 2.5 per cent.

However, the first quarter revised GDP figures shows growth of only 0.1 per cent. The estimates now given for 2004 and 2005 of 3 per cent to 3.5 per cent make the celebrated Iraqi information minister appear a relative pessimist. The respected economic team at DKW Research are currently forecasting GDP growth of only 1.9 per cent in 2003 and 2.2 per cent in 2004, the latter in particular being well below the Chancellor's forecast. Indeed, the Treasury's own summary of independent forecasts made in March 2003 quotes an average of 1.9 per cent for 2003 and 2.3 per cent for 2004. Thus the Chancellor's forecast of 3 per cent to 3.5 per cent growth for 2004 is seen as optimistic by all bar six of the 35 independent forecasters surveyed by the Treasury in March.

The Chancellor has decided on another ruse to try to counter lower growth prospects, cloaking this as a measure to improve his European credentials. As the

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noble Lord, Lord Jacobs, said, he has decided to change the basis for his inflation target from RPIX to the HICP basis used in Europe. HICP, as I understand it, excludes housing costs and council tax. At the stroke of a pen that cuts the current inflation rate by about 1.5 per cent, bringing it down to 1.6 per cent—not 1.2 per cent as the noble Lord, Lord Jacobs, said—which is well below the Bank of England's new target, which could be set at about 2 per cent.

That will put pressure on the Monetary Policy Committee to cut interest rates further to try to stimulate growth in order to save face and make the Chancellor's growth forecasts more realistic. Furthermore, once council tax has been removed from the calculation of the inflation rate, that will enable the Chancellor to introduce yet another stealth tax. In my opinion, council tax is set to soar, not only in London—thanks to Mr Livingstone's efforts—but nationwide, due to the reduction I predicted in central government support as the PSBR inexorably increases.

Can the Minister possibly disagree with that view? Lower growth results in lower tax revenues and higher borrowing. The Chancellor has been forced to apply the revisions he made to growth forecasts also to public sector net borrowing forecasts. They have all been revised upwards since the Pre-Budget Reports for the years until 2006–07 by an overall 20 per cent. I ask the Minister whether health and education services have improved by the same amount.

If funds for the above two areas continue to be needed at such a rate, will they come from increased borrowing, or does the Minister agree with the Leader of the House of Commons that the top rate of tax must rise, and, if so, by how much? Or will national insurance rates be raised further?

I turn to the Budget details. Last year I welcomed the cuts in corporation tax and capital gains tax for business assets. This year there is no repeat, but I applaud the extension of the research and development tax credit scope, the extension of IT investment allowances for another year and the lower rate of vehicle excise duty for environmentally friendly cars. However, nothing has been done to help pension funds. Indeed, as the noble Lord, Lord Oakeshott, stated, stamp duty land tax would further damage them.

I turn to the Select Committee on Economic Affairs' most welcome report on the Finance Bill for a few cross-party observations. As many noble Lords have stated, the committee first focused on the stamp duty land tax. To repeat the words of other speakers:

    "The early stages of pre-legislative consultation were widely welcomed by the professional and trade sectors involved. But the process was abruptly halted leaving some of the main provisions and a great deal of important detail to be worked out and implemented by secondary legislation by December 1 this year".

The committee went on to criticise that haste. Its private sector witnesses generally argued that the timescale was much too short, and that they would prefer its introduction to be delayed until next year while the legislation is redrafted to take more account of market factors. The committee also rightly argued

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that far too much was being left to regulation-making powers without proper parliamentary scrutiny. It gave a detailed list of concerns about the measure, which the noble Lord, Lord Oakeshott, described clearly and with which I shall not detain your Lordships.

But I repeat that this part of the Finance Bill takes up 139 pages, which is over 30 per cent of the total. I agree with the committee's conclusion that the Government should carry out a review this autumn to assess whether there is sufficient time for the task to be completed properly by 1st December 2003.

The second area the committee concentrated on was the VAT anti-abuse provisions, which were well covered by the noble Lord, Lord Sheldon. I was surprised, as he said, that such abuse costs the Government between 1.7 billion and 2.5 billion in the UK alone. Like the committee I fully support the Government's effort to crack down on those abuses. But, as the committee states, a proper balance must be struck between those efforts and the need to safeguard the rights of legitimate traders. The committee's recommendation that enhanced safeguards should be considered to protect the interests of legitimate traders unwittingly caught up in an artificial supply chain without weakening the attack on fraud is most welcome.

With regard to the third area of examination—the mandatory electronic payment of PAYE—I am afraid that I disagree with my noble friend Lord Freeman. I believe it very sensible that large companies should operate on this basis.

I warmly welcome the conclusions in chapter 7 of the report—particularly paragraphs 7.7 and 7.8. I agree that the sub-committee should be set up as soon as is convenient in the new parliamentary Session to review the outcome, as it emerges, of the ongoing consultations on the present Finance Bill and the pre-legislative consultation leading to next year's Finance Bill as well as considering the Bill itself, once published. I also support the recommendation that the terms of reference of the sub-committee be broadened so as to increase the scope of potential inquiry open to it. I agree that no issue of financial privilege arises.

One Budget measure that members of the committee might have considered if they had had more time was the proposal for the new child trust fund and how it will be administered. Will it be possible for it to be merged with existing funds, particularly accumulation and maintenance settlements? That would save many administration costs. Will separate trustees be required? Will a trust form have to be submitted to the Inland Revenue? I ask the Minister what the cost and extent of the Revenue's extra work in overseeing the scheme will be. We know that it is at its limits already with the extra work of the tax credits regime.

Therefore, in summary, the Chancellor continues to gamble on a quick recovery for the economy this year. But if that does not happen, we could see a ballooning deficit in the coming years and not a sinking one. People are waking up to the stealth tax system that he has been using and they are becoming more aware of the risks that the Chancellor is taking. Last Friday, a

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YouGov survey showed that, for the first time since 1992, the Conservatives are ahead of Labour on the central issue of economic competence. Increasingly, public mistrust of Labour's economic policies may prove well founded.

8.52 p.m.

The Earl of Caithness: My Lords, I start by congratulating the noble Lord, Lord McIntosh of Haringey, on retaining his position as Treasury spokesman in the reshuffle. I am sure that, had he retained his position of Deputy Chief Whip, the Government would not have made such a mess of the timetable today as they have done. I believe that he would have guided them away from the pitfalls of trying to cram too much into a Thursday.

I declare an interest as a surveyor, and I want to concentrate my remarks on the stamp duty tax. The noble Lord, Lord Peston, in his excellent report, covered that subject fully, and he also explained to your Lordships why the committee could not look into the economic effects of the tax. I consider that to be a pity, but I thoroughly agree with him that it was correct that he did not do so. I believe that it would have helped his report but it would also have led to other huge problems.

I also agree with the noble Lord, Lord Peston, that stamp duty needed reform, but surely not in the way that is proposed. This tax is being presented as an updated and improved stamp duty, whereas I believe that it is really nothing of the kind. By taking land transactions out of the stamp duty regime, there is scope for completely different tax rates to be applied at some time in the future, with differentials between residential and commercial property or land. It will apply equally to agricultural land if the length of lease or the amount of rent brings it within the scope.

Should it be called "stamp duty land tax"? Perhaps a better name for it is "son of development land tax". Son of development land tax, like development land tax, is a tax based on land transactions. It replaces stamp duty on those transactions but otherwise has only a partial resemblance to it, principally in so far as concerns the presently proposed rates of tax. It is, however, a tax on transactions, not documents. It is less complicated than DLT because there is no attempt to strip out development value from other aspects of value. But like DLT, it treats capital value of the right to receive rent in lease transactions as taxable at the effective date. However, in the case of SDLT the taxpayer is the tenant or purchaser of any land transaction.

I, too, would like to comment on the size of the Bill—Clauses 42 to 124 and Schedules 3 to 18. On Page 11 of the Select Committee report Mr McKie states it is the most significant new tax for 30 years. Surely that warrants a separate Bill in its own right. I should like to ask the noble Lord, Lord McIntosh of Haringey, why it has not been given its own separate piece of legislation.

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I move to some of the detail. I particularly wish to concentrate on the consultation process. Before Christmas 2002, it was quite obvious that two major planks of the modernising stamp duty programme had not been resolved in consultation discussions. These included complex commercial structures and lease duty. On both these subjects those concerned submitted to the Government that they must consult further before drafting and introducing legislation. Not long after this, as many of your Lordships have commented, consultation in these areas was abruptly suspended with effect from 21st January on the initiative of Ministers. It was done not by telephone, not at a meeting but by e-mail.

One consultative committee was established to examine the highly complicated and controversial area of lease duty. The committee met on only three occasions. Tonight, the noble Lord, Lord Peston, very skilfully tore a strip off his Government for the lack of time for his committee to do its work. He did so very cleverly without appearing to be disloyal to his party. Like my noble and learned friend Lord Howe of Aberavon, I do not blame my old department, the Treasury. The fault is entirely at the hands of Ministers.

What about parliamentary scrutiny? Stamp duty was not discussed in the Commons at any length. When he introduced the Bill, the noble Lord, Lord McIntosh of Haringey, said that the Government were not convinced by arguments for change. I am not surprised. There was not time for any arguments, so how could they have been convinced? Worse is to come. There will be extensive use of regulatory powers. Finance Act orders are not laid before the House and therefore are not subject to our scrutiny. This is taxation by stealth and diktat—something which this Government promised they would not do but they have reneged on that promise. Any tax should be fair, transparent and easy to administer. SDLT, like DLT before it, is a complicated and sophisticated taxing mechanism and will undoubtedly involve a lot of extra fees and professional advice. It should also be a tax based on a proper valuation technique. This one is not.

I turn now to the system of lease duty reform proposed by the Chancellor. It has two main tenets. A new formula based on a net present rental value—NPRV—of the lease over the life of its term or duration charged at a flat rate of 1 per cent and an exemption from lease duty up to an NPRV of 150,000. The first significantly increases the cost of lease duty for businesses. The legislation also makes it clear that the duty will fall on the lessee or sub-tenant. The increase is equivalent to a tax hike of roughly five times the current lease duty levies on equivalent transactions, though that changes according to the exact term of the lease in question. Generally, the longer the lease length, the higher the lease duty imposed, as the noble Lord, Lord Oakeshott of Seagrove Bay, mentioned. Retailers will be particularly hard hit owing to the rental values of their market sector. Indeed, they have argued that the lease

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duty reform could cost up to 130 million per year for their sector alone. This at a time when consumer spending is falling.

The second tenet of the Chancellor's reform has been to exempt all commercial property transactions under consideration of 150,000, whether freehold or leasehold. Leases will be exempt if their NPRV is below 150,000. That is welcome but it is likely to apply only to those in small properties and on short tenancies. Again, even small retailers in premises of 100 square metres across London, Leeds and Glasgow are likely to be liable for increased lease duty under the system.

I give a couple more examples. B & Q has estimated that the new lease tax may cost it 5 million a year and may cause it to review its future business plans. Another example given to the RICS is based on a real office rent cost to a medium-sized company in the West End of London, which pays 142,000 per annum on a five-year lease. That shows an increase in liability of 450 per cent for lease duty charges from 1,420 to 6,411. Many relatively smaller businesses—for example, pub lessees—will pay above 18,000 a year in rent and the new lease duty will be a relatively significant new burden for them.

Leases will be assessed on the net present value of the rental stream over the length of the lease, using a Treasury fixed discount rate—3.5 per cent in the Bill—without regard to the market value of that stream. Therefore, an office in the City of London let to the Government is assessed on exactly the same basis as the lease of a factory in the provinces which is let to a highly risky covenant, if the rent and the length of the lease are the same.

Furthermore, if the tenant goes bust, there is no ability to recover any of the tax which has been levied on the assumption that rent would be paid throughout the lease. There is no provision for repayment if the lease is terminated earlier by the landlord exercising a break clause, the prospect of which would have been ignored when the tax was assessed. There is no provision for repayment if the rent is reviewed downwards. There are nasty traps in assignments where there is a value in that assignment.

Another practical difficulty of the lease duty charge is its application to turnover rent where the rent is linked to the business turnover. This has many merits for a business but makes the calculation of lease duty difficult. With lease duty having been of limited importance before the proposed reforms, which greatly extends the amount liable for occupiers, this was not of major concern. Under the new lease duty legislation a charge will be payable by an occupier, who will be obliged to make a reasonable estimate of the turnover his business is expected to achieve. The Bill views this as unascertainable rent. To a degree, that will of course be a highly subjective estimate and may result in either significant overpayment or underpayment.

The compliance legislation on "unascertained rent" goes even further. There will be a requirement on the taxpayer that whenever the taxpayer is made aware of

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an increase in liability he must notify the Inland Revenue. For retailers on turnover rent, that could mean returning lease duty on a monthly or quarterly basis, which is a significant and onerous burden for the taxpayer.

The RICS in particular believes that the Government are opening a Pandora's box in reforming lease duty in this fashion. It has concerns over the use of the Treasury Green Book to calculate the discount rate for NPRV of leases. Companies undertaking an NPV analysis of their rental show little consistency over the discount rate they apply, and private practice has tended to use the borrowing costs of capital as a benchmark. Viewed in that light, the rate of 3.5 per cent is therefore low, as interest rates are between 4.27 per cent and 4.65 per cent.

The Government are effectively penalising smaller companies for imposing the smaller discount rate rather than relating the discount rate to the actual interest rate a small business would pay when borrowing capital.

I move quickly to the private finance initiative: do the Government agree that private finance initiative contracts should be exempt from stamp duty land tax? We fear that the Bill as drafted may inadvertently catch certain PFI contracts for SDLT. There is no specific exemption for them, even though certain PFI contracts will require the provision of land to a contractor for the purpose of the service required by the public authority. There may have been an intention to exempt PFI contracts within the Bill, but it has not been sufficiently well drafted, even when one looks at the definitions in Clause 48(1)(b).

What is the cumulative effect of the son of development land tax? Lease duty in 2001–02 brought in 282 million for the Government. The Government expect this to increase by 190 million in 2003–04 as a result of the new charge. Based on an average increase of liability to tenants of four to five times the current lease duty take, the RICS believes that this sum of 190 million may seriously underestimate the cost to occupiers of a new lease duty charge.

In conclusion, the Budget notes said that the son of development land tax would close loopholes, remove distortions and enhance the sector's contribution to economic growth, development and regeneration. That is rubbish. It is pernicious, it is contrary to other government policies, it is distinctly anti-business, it will create a substantial increase in tax, it is ill-considered and unfortunately creates a lawyers' paradise as well as, in due deference to my noble friend Lord Freeman, an open season for tax advisers.

9.6 p.m.

Lord Wakeham: My Lords, I am the last member of the Select Committee to speak from the Back Benches, and I am encouraged by the reception that our report has received. Therefore, I do not have to put into my speech the putting right of any misapprehensions that there might have been. The Minister and others will be delighted that I shall be considerably more brief than I had anticipated. All members of the Select Committee

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who paid tribute to the noble Lord, Lord Peston, were right. He handled the committee with considerable skill, and got the best out of us all. It was a pleasure to serve on the committee with him.

I am also delighted to follow my noble friend Lord Caithness, because I have a debt that I have wished to repay him from about 10 years ago, when he held a position on the Front Bench when I was Leader of the House. He was making a speech on the Finance Bill and I was sitting next to him. He made a brilliant speech. Afterwards I saw the briefing that he had received from the Treasury on which to make the speech. I put the whole of the briefing in a brown paper bag and sent it to the Permanent Secretary at the Treasury, saying that I did not think that it was an adequate supply of information to enable a Minister to make a speech. My noble friend made an extremely good speech and the Permanent Secretary was gracious enough to apologise to him, and say, "I will see that we get better people on the job from now on." I think that that is now so. The noble Lord, Lord McIntosh, made an extremely comprehensive speech, even though I might not agree with him. I have always felt that the annunciators should say, "all Questions in this House are answered by Lord McIntosh, unless otherwise indicated". I hope that that little episode ten years ago helped to improve the respect in the Treasury for this House.

When I was chairman of the Royal Commission on reform of this House, the area in which people felt that we had expertise and value was that we were able to revise and to scrutinise legislation in a way that the House of Commons did not. That reputation has been built up over the years—almost entirely excluding Finance Bill matters. That is quite right. I believe that it is vital for our democracy that we do not try in any way to infringe that division of responsibility. But that Select Committee work is a start on improving the scrutiny of legislation by Parliament as a whole, because there are helpful things that we can do.

When I first entered the House of Commons about 30 years ago, the scrutiny of Finance Bills was just about adequate, but it has steadily worsened from that date. That has been well ventilated in the debate and I do not need to add more to it. However, there was always a second problem, which I am not sure has been as well dealt with as it ought, although I suspect that the tax law rewrite project of my noble and learned friend Lord Howe will help in this respect.

That problem is that there was never room in the Finance Bill to put right a whole range of relatively minor but nevertheless important tax changes, because the Bill got bigger and bigger. This Government have a little more nerve about the size of Finance Bills than we had, but, nevertheless, there is always a whole bunch of things that should be done but cannot. When I was a Treasury Minister under my noble and learned friend Lord Howe, with his agreement I tried to devise a way in which we could address that problem. We thought seriously about whether we could try to persuade our colleagues to have a second Finance Bill—a technical one—probably introduced in the autumn, which would include all such measures.

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The problem was that it was simply impossible—this is not a party point—for an opposition to go along with that project, because they had to agree that whatever happened in the world, whatever circumstances occurred, they could amend it in only a minor way on detailed matters and not introduce anything controversial, important or significant. If there had been a major change in the world currency markets, the reality of the House of Commons is that the Opposition would have wanted to have done so. There was simply no way to solve that. So there are still matters at which we must work to try to improve how we do business. But there is clear agreement that we need better scrutiny, and the Select Committee exists to provide that.

The issue with which we had continually to deal was the age-old problem of taxation in a civilised society: the balance between the 99 per cent of people who want to discharge their liabilities with the minimum of inconvenience and the 1 per cent who would like to find every wrinkle in and way round the tax system. Over the years, if there is a criticism of our tax system, it is that there has been a slight over-concentration on the 1 per cent at the expense of the 99 per cent. But that is a matter of balance and judgment.

As the noble Lord, Lord Peston, and others said, we discussed those matters totally impartially with no partisanship. My colleagues had no idea when we discussed stamp duty—when we all took the view that the Government were right to do what they proposed, with some criticism of how it was to be implemented—that when I was a Minister of State at the Treasury, I wrote a forward to an Inland Revenue discussion document on stamp duty in March 1983. I stated:

    "stamp duty is a bad tax which ought to be abolished, because it is a tax on change, and the Government seeks to promote change rather than discourage it".

However, I know that I was strongly advised to include, and there was no way that I would not, the words:

    "But it should be recognised that the loss of nearly 1,000 million of revenue will never be easy to bear".

I think that the revenue from stamp duty is now in excess of 4 billion a year, so whatever pious hopes I may have had of trying to persuade people that that is a bad tax are now part of history and unlikely to come to pass.

I need not detain the House any longer. I am very pleased with the response to our Select Committee Report. The committee has done a valuable job. The committee is only a small part of the improvement in the scrutiny of finance legislation and I hope nobody will be under any misapprehension that it should be considered as a rival to the work of the House of Commons. The committee has to be seen as an attempt by Parliament as a whole to try to improve the scrutiny of our financial legislation for the benefit of everybody.

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9.15 p.m.

Lord Newby: My Lords, at this late hour I would like to concentrate my remarks on the process of scrutiny of the Finance Bill and on the Government's economic assessment. I agree with the comments of my noble friend Lord Oakeshott on the substance of our report, not least on the issue of stamp duty.

The Economic Affairs Committee's detailed examination of a number of major issues about how tax is administered was the first time in over 90 years that your Lordships' House had had the opportunity to do anything more than nod the Finance Bill through.

There was some concern, not least on the committee itself, that our extremely tight timetable would mean that we had too little time to do anything useful. We were concerned that we would find it difficult to get to the bottom of extremely complicated issues about which none of us was the greatest expert at the beginning of the process.

We were very fortunate in receiving detailed and thoughtful evidence from a wide range of bodies who put a lot of work into producing evidence at extremely short notice. It is a measure of the attitude of professional bodies towards your Lordships' House that these bodies were prepared to put in this tremendous amount of detailed work to make our work possible. I thank them very much for that effort.

As a result of a combination of the excellent chairmanship of the noble Lord, Lord Peston, and the extremely assiduous work by our Clerk and our specialist advisers, we managed to make sense of the material and produce sensible and constructive proposals. I believe we achieved what we set out to do.

However, what we set out to do was very narrow, partly because of the time we had and partly because of the remit we were given. It was interesting to find that because the committee was making recommendations about what was in the Finance Bill rather than attempting to amend it the question of financial privilege did not arise. It would not arise for a wide range of other issues besides the narrow range we looked at. That being so, I strongly support the final conclusion in the report, which is that if a sub-committee is established next year to look at the Finance Bill its terms of reference should be broader than those under which we operated this year.

I agree strongly with noble Lords who have said that our role is not to usurp or challenge the role of the Commons. I do not think there would be any point in your Lordships' committee spending most of its time arguing about whether income tax should be increased or whether duty should go up and down. I believe there are broader issues within the Finance Bill which we could look at and I hope we might be able to do so next year. Obvious questions arise after undertaking such a very intensive piece of work. They are questions that often arise in your Lordships' House. Was it worth the effort? Is anybody listening? And will it have any consequences?

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There are four reasons why it was certainly worth the effort and, arguably, it has made a difference. The first reason stems from the point made by many noble Lords, not least by the noble and learned Lord, Lord Howe. The recent record of the Commons on the scrutiny of financial legislation is poor. Whole sections, such as those covering stamp duty, of this Bill went through the Committee stage undebated. To quote one of many external pieces of evidence in support of that comment, the Tax Law Review Committee, which has been prayed in aid on a number of occasions, recently set out the case most succinctly when it stated:

    "The truth of the matter is that the House of Commons has neither the time nor the expertise nor, apparently, the inclination to undertake any systematic or effective examination of whatever tax rules the government of the day places before it for its approval".

So undoubtedly there is a gap in the market.

Secondly, it may be hoped that, if we make recommendations, either the Government or, more likely, the opposition parties could then table amendments on Report in the Commons and debate what we have proposed. I was interested to hear the Minister say in his opening remarks that it was quite impossible to have expected the Government to respond to our report at such short notice; I parody him only slightly.

In effect Ministers have responded to a number of the principal proposals set out in our report because they have formed the basis of opposition or Conservative Party amendments to the Commons Report stage of the Finance Bill. Ministers then made detailed speeches on why they thought that reviews would not be possible within a certain timescale and on other matters. So I do not believe that that it is sufficient for the Minister to say that the Government could not have looked at our proposals by this stage.

The whole point of our undertaking this work was in order that both the Government and the opposition parties could consider it before the Commons Report stage and then, if they agreed with the proposals, put down amendments. If the Government do not agree, it would be helpful if they were to produce a quick response by Commons Report stage saying why our proposals are not matters they are prepared to take on board. I believe that it is valuable to bring to the attention of the Commons matters which they can look at again on Report. As we have seen already this year, amendments have been introduced based specifically on proposals made in our report. I found that extremely encouraging.

The third reason for hoping that this process will have a positive outcome is that while I have the highest regard for officials in the Revenue and in Customs and Excise, if they believe that what goes into the Bill is virtually unexamined and unamended in Parliament, then they know that they can take less care with the content of the legislation. They also know that, to the extent that they may be unhappy about what is set out in the legislation, they can deal with that by using what we discovered to be virtually catch-all clauses to the

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effect that—again, I parody only slightly—if the legislation proves to be practically unworkable it can be amended by statutory instrument.

That is a highly unsatisfactory method of producing legislation. More than almost anything else I learnt from our hearings that the growing practice of slipping in clauses that allow for huge rafts of secondary legislation is a most unsatisfactory way to proceed. If a Bill containing such clauses were anything other than a Finance Bill and so went before your Lordships' Select Committee on Delegated Powers and Regulatory Reform, the members of that committee would come down on it like a ton of bricks.

Finally, if officials and Ministers believed that the burgeoning annual taxation offering was likely to be critically scrutinised the Government might think twice about including some of the provisions at all. If the effect of a threat on the part of your Lordships' House to scrutinise legislation might be to reduce their willingness to put certain matters into Finance Bills, that in itself would justify our work.

I say that because tax legislation grows like Topsy. The noble Lord, Lord Higgins, remarked that when VAT was introduced, it was a simple tax. My first job in Customs and Excise was to file all the original documents on VAT. I joined in the autumn of 1994 when the note about VAT from the Chancellor to the chairman of Customs and Excise was contained literally on one side of a sheet of A4. Three years later I was private secretary to the chairman of Customs and Excise, Sir Ronald Radford, whose greatest claim in his official career was that he had introduced VAT. He was then the only person left standing saying that VAT was a simple tax because, even within that three-year period, there had been an accretion of further legislation, detailed rules and regulations and codes of practice which meant that it had ceased to be a simple tax.

Let me sum up on this section of my remarks. It would be sensible to establish the sub-committee as soon as conveniently possible after the House reconvenes to enable it to start its work in advance of the Finance Bill itself. I hope that the Liaison Committee will treat this proposal favourably.

As to the question of the economic assessment, I was relieved when the noble Lord, Lord Northbrook, raised the matter because, other than by the Minister, very briefly, the issue has not been discussed at all. The main thing one sees in looking again at the assessment—which is not very old—is that the growth forecasts look incredible. Growth in the first quarter was virtually nil and the growth forecast of 2 to 2.5 per cent for the year now looks unattainable. The forecast of 3 to 3.5 per cent for subsequent years also looks very unlikely.

The main consequence is that the Government's balance of expenditure is unlikely to be met and the Government will almost certainly borrow significantly higher sums than set out in the assessment. When Peter Hain suggests that there should be an intelligent debate on taxation, one knows that there will have to be one—it is to be hoped that it will be intelligent—

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before very long because the likelihood is that with lower growth rates either expenditure levels will have to be cut back or taxation increased.

The evidence about growth is mixed but, on balance, it is rather depressing. We have read today that HSBC has cut 1,400 jobs, as a result, in no small measure, of a reduction in activity among the manufacturing businesses that it serves. Therefore, manufacturing having contracted over a long period, we are now seeing the continuing knock-on effect in terms of job losses in the service industries that supply it.

I would like to have time to respond in some detail to the comments of my noble friend Lord Jacobs on the harmonised index of consumer prices. This was one of the big things that the Chancellor said when the economic assessments were announced, but, because it sounded very technical, everyone thought that it was a little matter. Introducing HICP within the course of this financial year will enable the Bank of England substantially to reduce interest rates in a way that would be completely impossible under the current target. I welcome that, but it has been a big change slipped through under the guise of a technical adjustment. No doubt we shall have plenty of opportunities to discuss that issue in future debates.

If I were in Brussels and receiving the Government's economic assessment, I would see it, metaphorically at least, as bearing a major health warning. But I suspect I would do the same with most other members of the EU.

9.29 p.m.

Lord Saatchi: My Lords, I congratulate the Minister on piloting no fewer than three Bills through your Lordships' House in a single day. It must be a record.

It was surely an act of disinterested statesmanship by the noble and learned Lord the Leader of the House to open doors that were closed for a century and, on behalf of the Government, to invite your Lordships' House to consider the Finance Bill at a much earlier stage. We now have our new committee and I am sure that everyone with an interest in the effective administration of the national finances will want to join me in thanking the noble Lord, Lord Peston, and all the members of his committee for what they have done, and the noble and learned Lord the Leader of the House for putting them in a position to do it.

With only two months from Budget day to complete their hearings of expert witnesses and to make recommendations, as the noble Lord, Lord Sheldon, said, they had to work hard; they had to concentrate on technical detail, as the noble Lord, Lord Newby, said; and they also had to focus, as they rightly did, on the new stamp duty land tax. On that, their wise advice, which I hope that the Minister will shortly heed, was to delay implementation to allow fuller consultation on a tax which the noble Lord, Lord Peston, called enormously important. It is also a very complicated tax which, as we heard from the noble Earl, Lord Caithness, and others, has caused uncertainty throughout the property and retail sectors.

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On the committee's work as a whole and its report, I do not think I can put it better than the noble Lord, Lord Oakeshott, who said:

    "We will not roar; we will not have teeth; but we will speak with authority . . . and we will be heard".—[Official Report, 4/7/02; col. 427.]

That, my Lords, should make us all very happy.

However, I fear that there may be one Member of your Lordships' House who is not so happy tonight—and that is the Minister. I think the noble Lord may need cheering up, and therefore we should share his pain. The Finance Bill arrives in your Lordships' House today just as the Government's reputation for economic competence has unfortunately disintegrated. As my noble friend Lord Northbrook told us, a 26-point lead on this matter at the last election has become a three-point deficit today. At that election, 60 per cent of the public said that the Government were honest. Now 60 per cent say they are not honest.

Doctors apparently say that depression can be lifted if the patient can be brought to understand how he got into a sorry state. Is the Minister sad because the Government's future borrowing forecast has gone from 34 billion 18 months ago to 118 billion today? Or is it because the Chancellor's future tax receipts forecast reveals a chronic misunderstanding of the elasticity of tax revenues, so that while tax receipts have been rising by only 1.5 per cent recently, it is incredible—I think that was the word used by the noble Lord, Lord Newby—that the Chancellor now forecasts tax receipts to rise by 7 per cent each year for the next three years? The reality is that the Government now have five times more money going out every month than they have coming in.

Or is the Minister glum because the Chancellor has had to issue three warnings of lower growth, yet is still, as my noble friend Lord Northbrook, said, too optimistic according to 20 of the 26 independent forecasts surveyed by the Treasury? As the noble Lord, Lord Newby, said, the latest quarter's GDP growth was the slowest for 10 years. Or is it simply this? The bottom line is that people are actually worse off than they were a year ago. There has been a 0.3 per cent fall in real terms in earnings in Britain over the past 12 months.

We all value the Minister's sunny and cheery disposition, and we must not let these things get him down. Fortunately, help is at hand, in the unlikely form of a Treasury document which unites the two aspects of today's debate—the Finance Bill and the EU. Before this document, any impertinent functionary in the Treasury who embarked on the route of justifying tax rises by the composition, perhaps, of a page of prose of engaging frankness, would have found that a thunderbolt struck the ballpoint from his hand. No longer, my Lords. I stress that the document I am describing is not produced by Mr Hain or what he called "a Cabinet full of Kinnockites". The Treasury issued this document—the Chancellor himself. It goes under the innocent name of Fiscal Stabilisation and EMU, and it reveals that the Government are considering using tax rises to

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manage the economy after they have stripped the Bank of England of its power to set interest rates on the basis of Britain's economic needs.

Here are some extracts, some titbits. On page 85, it states:

    "Investment in housing is relatively lightly taxed".

It continues:

    "One option would be to extend the regulator power to additional taxes, such as stamp duty".

Over the page, it goes on:

    "Tax instruments affecting the housing market have"—

chilling phrase, this—

    "some immediate appeal".

It goes on:

    "Stamp duty could be raised during a period of rapid house price increases".

The Treasury's fiscal stabilisation document proposes the most radical shake-up of tax policy in Britain for at least a generation. It warns us to be prepared for wholesale changes in the way that a huge range of taxes—from VAT to stamp duty to capital gains tax—are set. Changes in tax would have to be used to control the economy to compensate for the fact that interest rates, set by the ECB, would often be at inappropriate levels for Britain. So, yes, my Lords, you will be able to tune in to quarterly announcements from the Treasury such as, "VAT up to 22 per cent for three months. Stamp duty doubled for six months", and so on.

So, for example, the Government are planning to control the housing market with a tougher capital gains tax regime, or perhaps even the Danish-style property wealth tax system. Currently, any gains on one's principal private residence are tax free—an asset increasingly seen as a cashpoint machine from which people can borrow to fund their current spending.

To reduce lags in the system, both in the recognition of the need for tax rises and then in their implementation and taking effect, the document alarmingly suggests that taxes would have to be changed by the Chancellor reviving the long unused powers offered by "tax regulators", first introduced in 1961 to vary taxes overnight without recourse to Parliament. Chillingly, the document acknowledges that the scope for tax changes afforded by those regulators is only "quite large". So, it says:

    "These limits could potentially constrain the ability of the existing regulators to offset large shocks by themselves".

So what it proposes is, yes, "widening the limits". When the existing regulator powers allow the Chancellor to increase VAT to almost 22 per cent, raising just under 16 billion annually, we can only pray that the widening is not too great.

The history of this sort of fiscal fine-tuning is a dismal one. By the time the Treasury got round to pressing on the accelerator and the effects fed through to the economy, it was time to apply the brakes, and vice versa.

The Chancellor's solution to these problems is a quarterly report on the so-called "output gap". That puts at the heart of Britain's economic policy a

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concept, a phenomenon, which—unlike the rate of inflation—is unobservable and theoretical. That was the sort of reason for the failure of "stabilisation" policy in the 1950s, which in practice tended to exaggerate rather than smooth the economic cycle, with intervention tending to be both too late and too great. Harold Macmillan as Prime Minister famously complained in 1956 that, since the figures always came too late to be useful,

    "We are always, as it were, looking up a train in last year's Bradshaw".

The experience of economic upswings sharply cut off by credit squeezes and international borrowing came to be known as stop-go. By the early 1960s, stop-go had been identified as a significant constraint on economic growth and as a major failure of post-war economic policy. Yet, incredibly—again to take the word of the noble Lord, Lord Newby—apparently that is the model of inefficiency to which the Government plan to return.

We heard earlier about the lack of scrutiny of the Finance Bill and of the stamp duty land tax itself. We heard from my noble friends Lord Higgins, Lord Caithness and Lord Wakeham about their concerns, and from the noble Lords, Lord Oakeshott, Lord Sheldon and Lord Newby. My noble friend Lord Freeman actually described it as a disgrace. My noble and learned friend Lord Howe hoped that the Chancellor would read the excellent IFS/Budd report on how these procedures are failing. However, although the unanimous view of every noble Lord who spoke in this debate is that the scrutiny of finance matters is inadequate, today would seem a golden age of scrutiny and consultation compared with the massive extension in the Treasury's discretionary power and the massive reduction in parliamentary scrutiny which would result if the document I described were ever put into practice.

The Minister will shortly deny that Her Majesty's Government have any such tax plans. He will speak of Aunt Sally and straw men, but the Prime Minister does want to take us into the euro. He does say that it is our destiny. We must never forget that the Prime Minister's promises on tax have proved no guide to the actions of his Government. Before he was elected he declared—and we should all pause for a smile— "We have no plans to increase tax at all", but since then, as we know, he has raised tax not once but 60 times—10 times a year to be exact.

After the old Keynesian consensus broke down in the 1970s, monetary policy came to be accepted as the principal tool of macro-economic management, with fiscal policy aimed mostly at securing sustainable public finances and delivering the tax incentives and spending levels judged to be appropriate. Our political parties may have disagreed over the details, but not, for some time, over the objectives. That consensus, which has brought such benefits to Britain, would be the first casualty should the Government decide that taking us back 30 years to the failed and long-abandoned policies of the past is a price worth paying for their euro ambitions.

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9.41 p.m.

Lord McIntosh of Haringey: My Lords, this has been a very interesting debate. I came here prepared to defend the Government's economic policies and the Finance Bill and, in very large part, neither has been challenged. With the noble exceptions of noble Lords, Lord Northbrook and Lord Saatchi, and, to a lesser extent, the noble Lord, Lord Newby, we have had a series of speeches in praise of the Economic Affairs Committee and its work. Therefore, since my noble friend Lord Peston started a rather threatening part of his speech by reminding me of my obligation to reply to the debate, I will do just that.

I remind the House of what I said at the beginning. In my opening speech I said that the Government have not yet had the opportunity to respond to the report. What I can now say—and I hope that this will show that I am responding effectively to the debate—is that the Government will now have the benefit of today's proceedings in your Lordships' House in any response that they make. I hope that that satisfies the question asked by the noble Lord, Lord Newby, "Is anybody listening?"

I start with the most important part of the sub-committee's report, which is the issue of stamp duty land tax. The claim has been made by the noble Lords, Lord Peston, Lord Oakeshott of Seagrove Bay, Lord Freeman, and others that the reform has been rushed through. The reform in this Finance Bill follows a consultation document at the time of the 2002 Budget. Since that time, there have been extensive consultations from a wide range of representative bodies and professionals. At the time of the Pre-Budget Report in November 2002, a further consultation document was published exposing in draft form 62 clauses and four schedules. Many representations were received and they helped to improve the legislation.

As far as the Government are concerned—and we have not heard anything other than speculation to the contrary—the commencement of stamp duty land tax is on track for 1st December 2003. Powers have been taken in the Bill to allow changes after Royal Assent in the run up to implementation and we are consulting with representative bodies on the modifications that we need to find through the law. The main charge that is made in the committee's report does not actually stand up. On the charge that this is a stealth tax, I can assure the House that is not our intention to widen the charge before it has even been implemented. Any measures introduced as a result of consultation are likely to take the form of additional targeted reliefs. That is certainly not to be described as a stealth tax.

The Government will continue to listen. In direct answer to the noble Lord, Lord Freeman, I can say that we continue to listen. We have started consultation again. We have already had two meetings on lease duty and complex commercial transactions. Of course, we broke off consultation during the purdah period before the Budget; we always do that, when rates are in question. It has been an accepted procedure and not one, I venture to suggest, introduced for the first time by a Labour government.

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The noble Lord, Lord Oakeshott of Seagrove Bay, made a point about the definition of disadvantaged areas. He has made much of that point in the press in recent weeks, and I have had the advantage of reading it. He contradicted the noble Lord, Lord Saatchi, who claimed that there was an uncertainty about it. There is a certain amount of crudeness about it, and there are anomalies. However, those anomalies arise because we have been determined to have criteria that are clear to everybody and can be used.

The noble Lord, Lord Oakeshott of Seagrove Bay, and the noble Earl, Lord Caithness, said that the lease duty rates were too high. The new system removes the jumps in the rates of tax built into the existing system. It puts all leases on an economically level playing field. The length of commercial leases is distorted by the present rates structure, and the reform removes that distortion. Commercial leases with a net present value of less than 150,000 will escape tax, and many in disadvantaged areas will pay no tax.

The noble Earl, Lord Caithness, asked about turnover leases and how they would be taxed. We have had many representations from a small minority with commercial leases for which rent is calculated as a proportion of turnover. We have no intention of requiring businesses to submit monthly or even annual returns on changes in turnover. The policy intention is to minimise the compliance burden and provide certainty on the charge.

The noble Earl asked why net present value was lower than market interest rates. The net present value is set to exclude inflation; rent reviews in line with RPI are ignored in the net present value calculations. He asked why the net present value formula for leases did not take into account the circumstances of the tenant. The principle of taxation is that tax rates are always the same for all taxpayers.

The noble Earl asked about PFI. In fact, he slated us about PFI contracts and asked why they should be exempt from stamp duty land tax.

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