Finance Bill
Lord MacGregor of Pulham Market Excerpts(9 years, 10 months ago)
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Lord MacGregor of Pulham Market (Con)
My Lords, I rise to speak to the Motion standing in my name on the Order Paper. However, before I do so, I shall make two brief points on the Budget as a whole. The Minister outlined many of the measures. I entirely endorse them, and I wholly support the Chancellor’s overall economic strategy and, in particular, his and the Chief Secretary to the Treasury’s heroic efforts to reduce public sector net borrowing and to reach the target of moving the public finances into surplus, which the OBR forecasts will be achieved for the first time in 18 years by 2018-19. That is, of course, clearly dependent on the return of a Conservative Government at the next election or, very much second best, but recognising the role that the Liberal Democrats have played in the past few years, perhaps a coalition Government.
In the context of the Budget itself, I warmly welcome the various measures in the Finance Bill which the Minister outlined, in particular on ISAs and defined contribution pensions further to encourage savings. Pensioners particularly hard hit by the current very low interest rates on savings will be helped by the new pensioner bond to be introduced by National Savings & Investments in January next year. There are various measures for businesses, including those designed to encourage and assist investment and exports and those specifically for small businesses. When I first became a Member of the other place, one of my passions was for small businesses. I give them my total support.
I cannot resist saying that for all of us who support tax simplification and all that goes with it, the Finance Bill is not the best example. I understand the temptation of a whole lot of fiscal lollypops, but it has resulted in a monumental Bill, one of the largest I can remember. Similarly, the Explanatory Notes are among the largest I have seen in all my time as a Minister or a Back-Bencher in the Committee on the Finance Bill in the other place. I shudder at the thought of having been on that one.
I now turn to the report of the Economic Affairs Committee on the draft Finance Bill. First, as the retiring chairman, I shall give some reflections on the role and process. The committee’s task is limited as the elected House, quite rightly, has sole prerogative over supply and all the revenue raising that goes with it. That means that in nearly all my time in the other place this House had no role in the Finance Bill. But it was recognised that there was considerable professional, actuarial, legal and accounting expertise here which was not being tapped. In addition, because of all the pressures in the other place as Members of Parliament have to deal with so many other things, detailed technical and less partisan examination of various tax issues with expert witnesses from outside was recognised as being a useful addition to parliamentary scrutiny, and so it has proved. I pay tribute to my noble friend Lord Wakeham for the crucial part he played in initiating that.
We cannot amend the Finance Bill so the committee concentrates on selected aspects of tax simplification, clarification, administration and so on which may not be the first priority in the other place. If the committee has to be useful, not least in drawing the attention of the Commons and, indeed, the Government, to certain issues or concerns, it has to work fast and be selective. The timetable aspect has been greatly aided by the present Government’s welcome decision to publish draft Finance Bills, which made our task easier and enabled us to make our report well in advance of the Committee stage in the other place.
Does the process add value? I believe it has three merits. It uses the often considerable experience, knowledge and skills of appropriate Members of this House; it is considerably valued by the expert bodies and associations outside concerned with tax, accountancy, legal issues and business generally in giving them a forum to bring to parliamentary attention in a non-partisan ways their concerns, which are quite technical but important; and it provides the Committee in another place with an independent assessment in its scrutiny of the Bill. There were references to our report in the debates in the other place on Clause 68.
I now turn to our current report. The Minister has already given answers to some of our points, but I still want to persist with them because I want a more detailed explanation. The draft Finance Bill was published on 10 December 2013, and we began our inquiry in January 2014 and published our report on 10 March. I thank my fellow members of the sub-committee for their substantial contribution, their intense scrutiny and the speed at which they were willing to work. I am also most grateful to our specialist advisers Dr Trevor Evans and Mr Tony Orhnial and our committee clerk Bill Sinton and his team for their immaculate and professional support. We made 34 conclusions and recommendations. This is a very complex area and I will touch on some of the most important.
We decided to look at the measures which deal with the taxation of partnerships, now Clause 68 of and Schedule 13 to the Finance Bill, because preliminary evidence suggested that they would be some of the most controversial proposals—technically and professionally as distinct from politically—in this vast Bill, and so it turned out. We had a lot of evidence from expert witnesses. As my noble friend said, the draft Bill contained various measures to counter the abuse—I stress the word “abuse” —of the current rules governing the taxation of traditional partnerships and limited liability partnerships, commonly known as LLPs. Our committee wholly supported the objective of that legislation.
A feature of the original Limited Liability Partnerships Act 2000 is that for tax purposes, all members of an LLP are treated as self-employed partners, even if they would have been treated as employees in a traditional partnership. Most of our witnesses accepted that this provision was being abused in order to minimise the income tax and national insurance contributions paid by LLP members. So the need for action was accepted.
The draft Bill introduced three legislative tests to distinguish between LLP members who were genuine partners and those who were in effect employees. As my noble friend said, the aim of those tests was to put members of LLPs in broadly the same tax position as members of general partnerships. LLP members failing the tests would pay income tax and national insurance contributions on the same basis as employees, and the LLPs concerned would pay employers’ national insurance contributions. There were also other provisions, including special arrangements to accommodate alternative investment fund management partnerships that were obliged to defer bonuses to meet the requirements of an EU directive. I do not have time to go into detail on those today.
Our report recognised the need for the current rules to be reformed in order to stem tax losses. The large majority of our witnesses, however, were concerned that the legislative tests proposed for determining whether, for tax purposes, a member of an LLP was an employee or truly a partner were quite different from those consulted on before the draft Bill was published. I heard what my noble friend said, but that was very much the tenor of the evidence that we were given—and we agreed with it. So: consultation good, but subsequent follow-up not so good.
Moreover, nearly all the evidence we received argued that the tests were unlikely to achieve the aim of aligning the tax treatment of LLPs with that of general partnerships. The differences from the original consultation document were key points for us, so we recommended that the proposals be delayed until April 2015, to allow both the legislative approach and the drafting to be got right, and to give LLPs time to adapt to the revised rules.
There was an issue of yield forgone here. The Government estimate was for a total yield at that stage of £3.26 billion—certainly not a sum to be sneezed at. However, we thought that only a very small part of that yield would be lost by delaying the measures for a year. Our main concern was that, given the substantial difference between the original consultation proposals and the draft Bill, and the concern of the professional bodies that in some respects the legislation could be unworkable—coupled with the fact that we felt that in order to minimise compliance costs, the Government should consider applying the new rules from the start of an LLP’s accounting year rather than the start of the fiscal year—a one-year delay to get all this right would be justified.
Another concern was that in the process of our inquiry the anticipated yield from these measures was increased by nearly £2 billion—pretty well all, I think, emerging from more detailed analysis by HMRC of the alternative investment fund managers sector. This difference was never really explained to us.
Our report was well received by the main professional bodies concerned. They supported our main conclusions, and pointed to the practical problems, which we had identified, in sticking to the Government’s timetable. The Chartered Institute of Taxation stated that,
“it is disappointing that the House of Lords recommendations have been ignored and this has been pushed through so quickly”.
The Law Society of England and Wales commented in similar vein.
In fairness, I must add that the Bill as published improved the drafting of some of the provisions, and introduced some new flexibility around meeting one of the tests. The guidance, too, has been redrafted and improved substantially following the consultation. We welcome these changes, which are in line with our recommendations. But the Government stuck to the proposed tests for determining the employment status of LLP members and to making the start date April this year. As a result, I understand that there is a general feeling throughout the industry—if I may refer to it as such—that although it has learnt to live with this legislation, it has caused a lot of unnecessary work and cost, and taken up a lot of unnecessary time, for not much revenue to the Government. It would have been so much better to have got it right through further consultation on the revised proposals in the first place. Having said that, this is an unfortunate case, because as we said elsewhere in our report, in our analysis of the new approach to tax policy-making:
“We commend the Government, HMRC and HMT on the quality of the consultations conducted and the tax legislation produced since 2011 in these areas (the large majority) where the new approach to tax policy-making has been applied comprehensively”.
There is much else I could say, but at this hour it is necessary to conclude. I will finish by saying that the Financial Secretary to the Treasury responded to the debate on all these issues in the other place on 13 May. In considering the Financial Secretary’s response to the debate, we maintain that the points made in our report have not been dealt with. First, while it is reassuring that the figures for yield have the OBR’s approval, the detail of how the figures were arrived at needs to be understood. That is why our report made a number of detailed recommendations for greater openness from HMRC. Secondly, the process of arriving at the legislative tests flies in the face of nearly all the evidence submitted to the sub-committee by witnesses. Thirdly, the proposed deferral of the salaried members provisions would have allowed more time for the tests to achieve the intended result and an orderly transition to the new system could have been managed. In contrast to the Financial Secretary’s assurances, the Financial Times reported on 14 April that:
“Thousands of UK lawyers, accountants and property consultants are scrambling to inject equity into their firms”,
in order to avoid falling foul of the new rules. Finally, the rejection of our proposals for formal, published post-implementation reviews is fundamentally inconsistent with the Government’s “new approach to tax policy-making”, which advocates openness and consultation at all stages of the process of developing and implementing a policy change and should include post-implementation reviews. Overall, however, I warmly commend the new approach to consultation that the Government are taking. Our committee makes a considerable contribution in assessing the key measures that we undertake to look at in the Finance Bill. I commend our report to the House.
Tackling Corporate Tax Avoidance: EAC Report
Lord MacGregor of Pulham Market Excerpts(10 years, 7 months ago)
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Lord MacGregor of Pulham Market
That this House takes note of the Report of the Economic Affairs Committee on Tackling corporate tax avoidance in a global economy: is a new approach needed? (1st Report, HL Paper 48).
Lord MacGregor of Pulham Market (Con)
My Lords, I am pleased to introduce the report of the Economic Affairs Committee entitled Tackling Corporate Tax Avoidance in a Global Economy: Is a New Approach Needed? I declare my interests, although I think they are pretty remote for this inquiry, as chairman of the British Energy Pension Fund Trustees and of the Eggborough Power Ltd Pension Fund Trustees.
I begin by paying tribute to the Leader of the House and the business managers for giving us an early opportunity—and in prime time in the Chamber—to debate this Select Committee report. This is a welcome and swift response to criticisms by Select Committees that they have often had to wait a long time to get a debate and response from the Government, and then get one only in the Grand Committee Room.
I am grateful to all the witnesses who contributed oral and written evidence to the inquiry and to our specialist adviser Professor Michael Devereux, director of the Oxford University Centre for Business Taxation and associate dean of research at the Said Business School. Professor Devereux’s knowledge, expertise and advice made an essential contribution to our report. I am also very grateful to our committee clerk, Bill Sinton, and his staff for their first-class assistance.
We decided to undertake this inquiry because of the rising public, media and parliamentary concern that multinational companies are not paying their fair share of UK tax. We also decided to make it a relatively short one, over the spring and early summer, because, given the topicality and urgency, we did not think that we should carry on the hearings after the Summer Recess and into the winter. The Public Accounts Committee in the other place was concurrently holding its hearings and we had the benefit of having the chairman of the PAC as one of our witnesses.
Before and as we launched our inquiry, there was a steady stream of stories in the media about multinational companies that in practice pay little or no UK corporation tax, even when they are doing very good business here. Examples included Google, Amazon and Starbucks, as well as the British-based Vodafone, Thames Water and Cadbury before its takeover by Kraft. This practice undermines public trust in the fairness of the system, calls into question corporate sector responsibility, raises doubts over the effectiveness of HMRC in ensuring compliance with corporation tax, reduces the tax revenue to HMG that should legitimately be coming here, and can place UK-based firms at a competitive disadvantage if they operate mainly or solely in this country and pay their full taxes here. This can in particular affect small to medium-sized businesses that are attempting to compete and grow.
In some cases, UK corporation tax seems to a considerable extent to be a voluntary tax for multinationals. Starbucks’ volunteering of extra payments in the UK after bad publicity suggests that it recognises that. As the PAC noted, Google generated $16 billion revenue from the UK between 2006 and 2011 but paid just $16 million of UK corporation taxes in the same period. Even after accounting for all its expenditure, it is still a huge gap.
There is a serious issue of avoidance of corporation tax to be tackled. Part of the problem is the complexity of the UK’s tax system but the main scope for corporate avoidance arises from the international tax system, which allows multinational companies to shift profits between countries to lower-tax regimes and reduce their tax liabilities in the UK, even when they are doing good and substantial business here.
Our report, based on the evidence, fully recognised that the Government are giving priority to tackling these issues but, recognising the challenges and concerns, also made some further recommendations. I have to say that I find the Government’s response somewhat disappointing, defensive and perhaps slightly complacent. That may not have been the intention but the impression is given that it can be summarised as, “Of course there is a problem but we are doing all that is required to tackle it”, and they are dismissive of any other recommendations.
Two key points underlie our analysis. First, international companies, like all others, are entitled to frame their tax policies with a view to minimising tax within the rules, although multinational companies are diverting huge resources to exploiting to the maximum what the rules enable them to do. I will have something to say later about whether HMRC is sufficiently resourced to ensure that companies are paying their proper share. Secondly, we recognise that fundamentally this issue can be fully and properly tackled only at the international level because it is so often the difference between the tax regimes that makes the exploitation and ability to minimise the tax possible.
I will turn briefly to the areas in which we are in agreement with the Government’s response and where we actually said so very firmly in our report. We acknowledge that changes are being carried out throughout the corporate tax road map and steps are being taken to simplify the tax system and make UK corporation tax one of the most competitive in the world. We acknowledge all the efforts to tackle tax avoidance, in GAAR, DOTAS and so on. We acknowledge and support the increased resources and manpower for HMRC to tackle tax avoidance and evasion, and the successes it has achieved. Above all, we acknowledge the key importance of international action and the Government’s leading role in the OECD multilateral project on base erosion and profit-shifting. All this is agreed and supported by our committee.
However, three of our recommendations were not accepted. The first is our proposal for an urgent review, to be undertaken by the Treasury, of the UK corporation tax regime, which should report back with proposed changes to be made at home and pursued internationally. Our report lists six issues for this review, of varying importance. The one I would single out is a review of alternative tax structures, such as a destination-based cash-flow tax, which we analyse in some detail.
I will explain the reasoning for that recommendation. There is general agreement that the various individual countries’ tax regimes do not reflect the changing business models, the domination of multinational corporations and the challenges of the digital economy. This is well recognised in the G20 Leaders’ Declaration of September 2013. Their solution is the OECD’s action plan on base erosion and profit-shifting, to be completed in two years.
One attraction for doing the work into alternative tax structures that we are recommending is that there is no certainty, to put it mildly, of a successful outcome of the OECD’s BEPS—as it is known—action plan within two years. One needs to look only at the OECD’s plan of action, published in July, to see what a truly formidable range of work has to be undertaken, let alone agreed among so many Governments. There is a serious risk at international level that we are putting all our eggs in one basket and that three or four years on we would be no better off. The advantage of the destination-based cash-flow tax is that it could be introduced unilaterally.
Secondly, I note that the Government have by implication rejected our recommendation that HMRC should be better resourced, by outlining all that has already been done. I acknowledge that the evidence so far is that extra resource has been more than self-financing in the revenue it has produced. I have looked at this quite a few times in the past and our recommendation for more resources was designed to help and support HMRC in the good work that it has been doing. That is why I am disappointed that the Government have dismissed our recommendation. As a former Chief Secretary, I have to say that it is the kind of extra resource I would encourage. It is difficult to judge how much extra resource is needed but the evidence is that it would well justify itself.
Thirdly, I regret that our recommendation of a joint parliamentary committee, along the lines of the Intelligence and Security Committee, to oversee HMRC has been rejected on grounds of taxpayer confidentiality. The same argument about confidentiality could be used against the existing intelligence committee on grounds of national security, but there has never been a breach or leak. Meanwhile, Parliament has to take it on trust—relying on the National Audit Office, another body of officials—that all is well in HMRC with the resources that it has. I hope that this recommendation will be looked at again.
Finally, I have three specific questions for the Minister when he comes to wind up. Can he update us on progress since publication in July of the OECD Action Plan on Base Erosion and Profit Shifting? Is the way ahead any clearer? Can the Minister also update the House on progress on some of the Government’s other anti-avoidance initiatives, such as giving HMRC the ability to name high-risk promoters of tax avoidance schemes? I understand that consultation on this ended on 4 October. Can the Minister brief us on the current status of the Government’s proposals to exclude companies whose tax affairs are not in good standing from bidding for public procurement contracts? How would such measures be consistent with that respect for taxpayer confidentiality which the Government invoked against the idea of naming and shaming users of aggressive tax avoidance schemes, as well as their advisers?
I shall leave it to other noble Lords, who have practical experience of corporate issues, to focus on some of the matters I have not had time to deal with, such as debt equity finance. I look forward particularly to the maiden speech of my noble friend Lord Leigh of Hurley.
I conclude by saying that our committee is composed of many with great experience and knowledge in business, finance, tax and academia, and they have brought that business experience and wider knowledge to bear on this report. I am indebted to them all; it is a privilege to chair such a committee. I beg to move.
Lord MacGregor of Pulham Market
My Lords, for a potentially dry and technical subject, we have had a lively and well informed debate. Of course, it is not a dry subject; it is a crucial one that is fundamental to the well-being of our citizens and our businesses.
We have had many excellent contributions from noble Lords this evening and I thank them all. I particularly thank my noble friend Lord Lawson for his overgenerous remarks about me. It has been hugely rewarding for me to have had so many opportunities to work with him over the years. I congratulate my noble friend Lord Leigh of Hurley on his maiden speech. He was modest in the length of his speech and temperate in his comments. But even in the short time he spoke, he demonstrated that he has wide expertise and knowledge, from which we will all expect to benefit in future.
It is also clear that the Government and the officials who drafted the response to our report gave too little thought to it. The Government gave the impression of complacency—that they are doing all that is required and reject all other recommendations for action. That approach means that they have not perhaps obtained enough credit for what they have been doing. The Minister certainly endeavoured strenuously to put that right in his response tonight.
I share very much the view of the noble Lord, Lord Lipsey, on the Treasury. Based on my experience, I thought that his book on the Treasury, which I have read comparatively recently, was good and very revealing. I hope that this debate has demonstrated that the Treasury will need to give much more serious consideration to some of our recommendations than it has done so far. Symptomatic, I think, was the terse rejection on false grounds of our recommendation of a parliamentary committee to oversee HMRC. The participants in this debate have demonstrated the expertise in the financial and commercial world that would make such a committee highly relevant.
Ours was a swift but intensely considered report. The debate tonight and the inadequacy of the Government’s written response have convinced me that it is a subject to which we will have to return.
Finance Bill
Lord MacGregor of Pulham Market Excerpts(10 years, 10 months ago)
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Lord MacGregor of Pulham Market
My Lords, I am very pleased to introduce the report of the sub-committee of the Economic Affairs Committee on the draft Finance Bill 2013. In the time available, it is right that I should focus not on the Finance Bill as a whole, tempted though I am to do so, but on our report, much of which is technical but none the less important for that. Indeed, my noble friend has referred to the three measures already.
As always, we had to work at speed. I am grateful to our witnesses, professional and official, to Bill Sinton, our committee clerk, and his team, and to our special advisers Trevor Evans and Tony Orhnial, who served us well in previous years and have done so again, not least because of their expert knowledge and experience of HMRC and Finance Bills. I should also like to thank my fellow members of the sub-committee for their knowledge and wisdom, their objective approach and their speedy and intensive work.
I particularly want to emphasise an important and, as it turned out, for us valuable change this year, to which my noble friend has just referred. In December 2010, the Government introduced a new approach to tax policy-making which set out a number of stages at which consultation should be undertaken. It involved a draft of the Finance Bill being published in December, some three months before it was laid before Parliament. This was a very welcome change from many points of view, not least the work of the sub-committee. In previous years, we could start our work only after the Finance Bill had been published. Therefore, we had to work in great haste to have any influence at all on the debates in the other place. Inevitably it was always late in the day. However, outside commentators, including most chartered accountancy and taxation bodies and one former Treasury Minister, had frequently alluded to the expertise in our committee and the more useful role it could perform.
Consequent to this new approach, this House revised the terms of reference of the sub-committee so that it could start its work earlier in the year and examine the provisions of the draft Finance Bill. The draft Finance Bill was published in December 2012 and we began our inquiry in January 2013. Starting earlier provided us with the opportunity to influence the content of the Finance Bill as published, as well as the Committee stage debates in the House of Commons.
Not least because of the shortage of time, the sub-committee has to focus and this year it examined three topics concerned with the avoidance of tax: the general anti-abuse rule, or GAAR; the annual residential property tax, later renamed the annual tax on enveloped dwellings; and the cap on the availability of certain reliefs. I can touch on only some of the main points.
The sub-committee devoted the majority of its time to the general anti-abuse rule, which is a radical approach to countering the avoidance of tax. The GAAR is narrowly targeted at abusive transactions that fail a stringent “double reasonableness” test; the provisions also include the formation of an advisory panel to agree guidance and give its opinion on the application of the double reasonableness test to a given set of tax arrangements. It followed the recommendations of what became known as the Aaronson study.
Our report considered the narrow GAAR a “reasonable starting point” but recommended a wider post-implementation review after five years, which would look in particular at how the double reasonableness test had been applied in practice, and its deterrent effect. We thought it important that it be made clear to the press and the wider public that the GAAR would not apply to structural issues involving the taxation of multinational groups. These have to be dealt with by reviewing the international tax rules in fora such as the G8, the G20, the OECD and the EU. We argued that the Government need to communicate much more clearly what the GAAR can and cannot achieve.
Since we published our report in March, there has been a huge amount of publicity and debate in Parliament and the press about corporate tax avoidance among multinational companies, with the spotlight on Google, Starbucks and Amazon—not least from the Public Accounts Committee in the other place. Of course, we welcomed—and our report argued for—the lead given by the Prime Minister and the British Government at the recent G8 summit and the decisions taken there. It is important to recognise that the GAAR is only a small part of that and the two are in many ways separate.
I should add that having dealt with Scottish independence, in the spring our main committee embarked on a new topic: “Taxing Corporations in a Global Economy: Is a New Approach Needed?”. This does cover these wider issues and we hope to complete our report before the Summer Recess.
We agreed with our witnesses on the importance of guidance from HMRC and the advisory panel on how the GAAR would apply to particular transactions. We recognised that progress was being made in drafting this guidance but we remained concerned that our witnesses felt that it was far from acceptable as it stood at the time of our inquiry. We thought it important for the guidance to include as many examples as possible, illustrating up-to-date arrangements on both sides of the boundary between abusive and non-abusive.
We also thought it important for the advisory panel to have a balance of views and we recommended that the opinions of the panel on whether proposed tax planning schemes are caught by the GAAR should be publicised so that taxpayers can see how the GAAR is being applied. There were also concerns about the application of the GAAR to inheritance tax planning transactions, and a specific concern concerning the imposition of the charge where adjustments arose from the application of the GAAR.
The Finance Bill as published on 28 March was redrafted to deal with the point concerning the imposition of the charge and we were pleased to see this. The finalised guidance was published on 15 April and had been very substantially redrafted, consistent with the recommendations in our report. There was specific recognition that the GAAR could not apply to most structural international tax planning, and the number of examples had doubled, including an increase in the number of inheritance tax examples.
In the Commons debate on the GAAR, our report was quoted with approval. The Opposition had tabled an amendment to require a post-implementation review after two years. I have ploughed through all the Hansards of the Commons in relation to these issues and have noted the number of times that our report was commented on. The Government rejected the requirement to have a post-implementation review after two years, arguing that a two-year period was too short. We agree with this. However, while we welcome the Government’s acceptance that the operation of the GAAR will need to be monitored carefully, we continue to believe it necessary to set a timeframe for such a review, notwithstanding the difficulties that the Exchequer Secretary highlighted at Report stage in the Commons. Our report had suggested five years and we recommend that with a change as important as this the Government should commit themselves to a post-implementation review around the five-year point.
The application of the GAAR to the sorts of multinational company tax-planning issues to which I have referred was raised by several Members of Parliament. The tendency to promote the GAAR as a panacea for dealing with the problem of tax avoidance was deplored and we agree with that. “The valuable scrutiny” of the Bill provided by our report was commended. Building on this, the need for the taxation of multinational groups to be tackled in international fora was discussed in the debate on the GAAR and other clauses, including at Report stage. As we know, at the G8 summit the Prime Minister and other G8 leaders set the ball rolling by asking the OECD to draft a template for multinational companies to report the tax that they pay in each of the jurisdictions in which they operate.
It is important that this first step is treated as urgent and that the momentum achieved at the G8 is maintained. We argued for that in our report. The need for the advisory panel to have a wide balance of views was discussed in the Commons debates and the Exchequer Secretary assured the House that the panel would be broadly based and have commercial expertise to provide reassurance that the GAAR would not be abused, with too much power being placed in the hands of a part of the Executive. We welcome that too.
The annual tax on enveloped dwellings is part of a package of measures to address stamp duty land tax avoidance by using companies to buy expensive residential properties, a practice known as “enveloping”. We agreed with our witnesses that the Government’s proposals might have been more appropriately designed had they consulted interested parties at the outset, but we recognised that once consultation was under way, the Government responded to the need to exempt certain businesses and other organisations.
We remained concerned about the relief for farm houses and thought that this needed further work. We shared the concern of witnesses about the practical workability of this tax and encouraged HMRC to set out in detail how it would implement the provisions and we recommended a review of its operation after three years. We thought that further work was needed on the capital gains charges on de-enveloping properties. We agreed with a widespread concern about whether the problem that the legislation sought to address justified its length and complexity.
The Finance Bill as published responded to the need for further work on the relief for farm houses and the two clauses implementing this were substantially redrafted. Our concerns around the length and complexity of the legislation were not alleviated by what appeared in the Finance Bill as published. Much of Part 3 of the Bill is devoted to this particular tax. Some 107 pages involving 84 clauses and four schedules is hardly tax simplification.
Finally, on the cap on income tax reliefs, our report expressed concern about the potentially adverse effects of limiting relief for genuine trading losses and recommended a review of the potential impact of this measure in time to inform the Finance Bill debates in the House of Commons. It was disappointing that the Government did not respond to this recommendation. However, the measure’s impact on businesses, particularly smaller ones, was raised in the debates in the Commons. We continue to believe that it is important to monitor carefully the potential disadvantage to small businesses of restricting relief for genuine trading and other losses so that remedial steps can be taken if this proves to be a problem.
In conclusion, we were gratified by the extent to which the recommendations in our report were acted on by the Government and also informed the Finance Bill debates in the Commons. We continue to believe it important that the effect of these measures is assessed by way of systematic and independent post-implementation reviews. It is our view that a commitment to carry out post-implementation reviews is as important as the Government’s very welcome commitment in their new approach to tax policy-making to consult on the design and implementation of a measure.
To sum up, I believe that the new system overall has proved its worth and that it makes even more relevant the work of the sub-committee on Finance Bills of the Economic Affairs Committee in that it enables much wider debate and consultation with all the many relevant companies, private sector experts and tax and accountancy committees, not least through the medium of our committee, and it gives the House the opportunity to make recommendations to the other place in a timely manner, not, as in the past, rather late in the day. I commend our report to the House.
Queen’s Speech
Lord MacGregor of Pulham Market Excerpts(12 years ago)
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Lord MacGregor of Pulham Market
My Lords, it is a very great pleasure to follow the right reverend Prelate the Bishop of Durham. I believe he is extremely fortunate to be the Bishop of Durham Cathedral. In my youth, I remember travelling from Scotland to London and I was always astonished by that wonderful building. When one of my daughters went to Durham University, I was able to appreciate it even more. It is a most marvellous institution and how fortunate he is and how well in his speech he has represented the interests and aspirations of his community. As High Steward of Norwich Cathedral, I believe that Durham Cathedral is a very different rival but it is certainly an outstanding establishment.
In the list of his political interests, I was fascinated to see that the top two are finance and the economy, issues not always connected with right reverend Prelates. He has shown in his speech today just how much his interests lie in that area. At a time of very tough public expenditure decisions, I strongly agree with his point about targeted investment of public funds.
The right reverend Prelate has had a most distinguished career in the church, including being Dean of Liverpool. He speaks with great knowledge, giving a spiritual and ethical dimension to the issues that concern many of us, as the personal and ethical adviser to the UK Association of Corporate Treasurers and as chairman of an NHS trust. I hope that as we approach the issues of salaries, high rewards and so on we will hear him speak from his point of view.
In this debate, we have a limited amount of time so I do not want to make a general economic speech as that would take far too long and I would be repeating what many others will say. Therefore, I shall focus on particular points. I say to the noble Baroness on the Front Bench opposite that I believe that she failed to recognise the impact of the huge financial deficit that this Government inherited. I believe that it will take many years to put right. I was interested to see that many of her points would involve substantially higher public expenditure.
As we look at the problem of the huge deficits in many eurozone countries, we should be grateful for the resolute policies that this Government have pursued. Without them, I shudder to think what the costs of borrowing would be now. Here I follow what the noble Lord, Lord Razzall, said. I have been somewhat surprised by some of the comments about the Queen’s Speech not giving priority to the economy. Of course, the Queen’s Speech is mainly concerned with legislation but there are seven pieces of legislation that will have a major economic impact. In particular, the Queen’s Speech makes it clear that the priorities are growth, which involves many policies beyond legislation, reducing the deficit and restoring economic stability. The noble Lord, Lord Bilimoria, mentioned finance Bills, which inevitably are not in the Queen’s Speech, but successive finance Bills have been very helpful to industry and to business generally.
I will concentrate on two issues. The first is the banking Bill, following the report of the independent commission, widely known as the Vickers report. I fully support what the Government are doing on this front and I am delighted that they have acted so quickly and as promised, despite the complexities of the issues. We have yet to see the Bill and obviously there will be a lot of concentration in both Houses to ensure that some of the difficult details are well sorted out. However, I am strongly supportive of the importance of the Bill. The Economic Affairs Select Committee of your Lordships’ House, which I chair, had a long session with Sir John Vickers. Although we did not come to any conclusions—that was not our intention—it was clear from the flavour of all members of the committee that we strongly supported the thrust of the ICB report.
Representatives of the banks, too, appeared before us. They appeared a bit reluctant but confessed that it was a done deal. Their main concern was about costs, and their estimate of these is in our report. However, the estimate of costs for the banks is small compared with the cost to the taxpayers and the economy of the bailout of the banking system over the past three to four years. If we needed a reminder of the importance of separating retail and investment banking, what happened at JP Morgan in the past few days was clear evidence.
I will concentrate on one further issue which has not had enough airing in the House: the impact on pensions of quantitative easing. This will need a longer debate, and I can only sketch out some of the issues this afternoon. Pension schemes in the UK were originally one of the jewels in the crown of schemes in the developed world. We witnessed a very sad decline in recent years in their range and scope, starting with the attacks on ACT by the former Chancellor of the Exchequer, Gordon Brown, which had a big impact. Since then, there has been the impact of longevity, the complexity of accountancy rules, the necessary legislation to prevent fraud and the collapse of schemes, leading to pensions Acts, pension regulators and PPF. The measures were all necessary, but the decline in the number of defined benefit schemes offered to all employees, and the restrictions of schemes on new employees and greater emphasis on defined contributions all accelerated the decline of defined benefit schemes.
Now the impact of quantitative easing is very clear. It is in addition to all that I described. Ten years ago, 80% of defined benefit schemes were open to new members. Now the figure is 19%. That is a dramatic decline. The big trend of schemes being closed to future accrual, as well as other measures to reduce the costs of meeting the deficit, is also substantial. The number of schemes closing to those areas has risen by more than 20% in the past three to four years, and a number are closing altogether.
Much recent concern related to the impact of quantitative easing. The problem here is the way in which liabilities are defined in pension fund schemes. They are defined fundamentally in relation to gilt yields. Therefore, while assets have from time to time improved over the past few years, the problem facing pension fund trustees—I declare an interest as the chairman of three pension fund trusts—is that however well they do on the asset front, they cannot keep up with the increase in their liabilities because these are linked to gilts. In addition to the volatility that company directors and boards face in dealing with their pension schemes, there are big extra costs to meeting the deficit, which are increasingly being spread 10 to 15 years ahead.
At a recent Economic Affairs Committee meeting, I asked the Bank of England Governor what he was going to do about this. I got a string of points in reply about how, if pension schemes matched their assets to their liabilities, it would not be a problem—that is to condense his argument a bit. However, there are very few pension schemes that can do that. I believe that the Bank of England’s scheme is the only one that has matched its assets to its liabilities. The Governor’s case was that asset prices, especially gilts, rise when yields fall, and so in a sense solve the problem of matching assets to liabilities. That option is not available to any other pension fund scheme.
What we have seen on deficits is that the £200 billion of quantitative easing asset purchases pushed up the liabilities of pension funds by £180 billion. The second load of quantitative easing—the £125 billion of asset purchases—pushed up the liabilities by a further £125 billion. These are huge figures. What is happening is that pension schemes are now facing huge deficits as a result of how we define liabilities linked purely to gilts. The Pension Protection Fund estimated recently that the aggregate deficit for defined benefit schemes eligible for entry to the PPF according to its Section 179 liabilities—I apologise for the technicalities—has risen over the past month alone to £217 billion compared with £206 billion the year before.
I am not asking that the policy of QE introduced for completely other reasons—for the economy as a whole—should be changed to accommodate pensions. But what we are seeing is that for short-term reasons—for economic and monetary policy—there are huge long-term consequences for pension funds as a whole and for many individuals caught in a short-term trap if they are reaching retirement and seeking to move into annuities. For example, a pension pot of a 65 year-old was £7,800 pension per year in 2008. It has now fallen to £6,112; a drop of income of 20% driven largely by the fall in asset prices.
I am asking that the method of valuing liabilities should be reconsidered. Actuaries to whom I have talked have been considering alternatives and there are some highly technical areas that provide alternatives. I do not have time to go into those today. But the stumbling block for them and the trustees is that the Pensions Regulator’s way out is to allow longer recovery periods. That is all that they can do if they go by the Pensions Regulator’s advice at the moment. We are having recovery periods going way ahead to 15 years and beyond. But that means an additional burden on the company and another problem that finance directors and boards face.
What is happening is that in this tough economic climate, companies are being asked to make increasing contributions for recovery periods, therefore cutting back on their schemes, when we could find a different way of defining liabilities. What I ask, therefore, is that as the National Association of Pension Funds and others have been urging, the regulator and the Bank of England make a joint statement indicating their understanding of the situation and willingness to explore ways of approving other methods of valuing liabilities during this period of such low gilt yields. In doing so, I am following a recommendation of the Treasury Select Committee in the House of Commons, which asked for virtually the same thing.
I hope that we can return to this matter and debate it in greater detail before long. Meanwhile, I urge my right honourable friend to take up that recommendation in consultation with the others to see if there can be some way of overcoming the serious difficulties that pension funds now face.
Independent Commission on Banking
Lord MacGregor of Pulham Market Excerpts(12 years, 5 months ago)
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Lord Sassoon
First, I do not accept that the Government’s logic drives towards complete separation any more than the ICB itself argued for it. The ICB and the Government believe that there are efficiency and other benefits in allowing banks to keep the two parts of the business together under one holding company. However, the principal protection in the areas to which the noble Lord refers is that there will be limits on the exposures of the ring-fenced bank to other parts of the group. That is what, in particular, will deal with the noble Lord’s concerns.
Lord MacGregor of Pulham Market
My Lords, in the recent hearings of the Select Committee on Economic Affairs, the banks accepted that the Vickers report is more or less a done deal but argued that the costs would be considerably higher than those that Vickers calculated and the costs that the Government have estimated today. If in the forthcoming negotiations there is a major dispute about costs and their possible effect on customers, will the Government keep reminding the banks that there is still more to be done to contain costs on bonuses, salaries and other payments?
Lord Sassoon
I agree with my noble friend’s sentiments on costs and I have stressed in the Statement that the position of the Bank of England, at this time in particular, is that banks should be using profits they generate to rebuild their balance sheets rather than pay out bonuses. However, to differ a little from my noble friend, I do not see this as representing any negotiation with banks over the costs. The ICB carried out an analysis, and the Treasury made a separate analysis that has resulted in different figures. We have used the input of the banks and their modelling in order to arrive at those numbers. We have come up with numbers for the costs that were higher in some areas than those originally estimated by the ICB. They are very much based on a lot of numbers that the banks themselves have modelled. I do not see a negotiation to be had in that area.
Finance (No. 3) Bill
Lord MacGregor of Pulham Market Excerpts(12 years, 10 months ago)
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Lord MacGregor of Pulham Market
I am very tempted to range more widely, as the noble Lord, Lord Myners, and my noble friend Lord Newby, have done. However, I think it is my role to introduce and invite the House to take note of the report of the Finance Bill Sub-Committee of the Economic Affairs Committee, of which I am chairman. I think, for once, this is not a Back-Bench contribution. I am grateful to the Minister for already giving some comments on our report; I would like to put on record in Hansard some of our main points, and hope that I may tempt some other answers from him later.
The report of the Economic Affairs Committee on the Finance Bill 2011 is the eighth report in a series which has now become well established and confirms the role of this House in the parliamentary scrutiny of Finance Bills. The report contains 32 conclusions and 15 specific recommendations, so I must be selective. I believe that our sub-committee provides a forum for taxpayers, and many leading experts outside, to express their concerns to Parliament. This includes all the institutes of chartered accountants, the Hundred Group of finance directors, the Chartered Institute of Taxation, the Association of Taxation Technicians, the CBI, the Institute of Directors, the Engineering Employers Federation, and various small business organisations. We also had the valuable session with senior officials from the Treasury and HMRC, which enables them to respond before we draw up our report. I believe this is becoming an increasingly useful forum—more of that in a moment. It means we have to work at speed, as my noble friend Lord Newby recognised, because we cannot begin until the Finance Bill is published, and have to report before the Report stage in the other place.
I would like to thank my fellow members of the sub-committee for their knowledge and wisdom, and their speedy and intensive work. Some who have not been able to be here tonight send their apologies. I am also most grateful to our witnesses, professional and official, our specialist advisers, the clerk, and our secretary administrator.
Not least for reasons for reasons of speed, the sub-committee has to focus, and this year it examined three topics: the Government’s new approach to tax policy-making; anti-avoidance, with special reference to one of the measures in the Finance Bill—disguised remuneration—on which my noble friend has already commented; and the corporation tax reform package.
The first topic we chose to look at this year was the Government’s new approach to tax policy-making. The new approach commits the Government to full and open consultation at each stage in the tax policy development process, except in exceptional circumstances. It alters the policy-making cycle to allow for such consultation, by publishing most of the Finance Bill in draft form some three months before it is published formally. This reflects the recommendations in our earlier reports, for full and effective consultation in developing tax policy, so the sub-committee considered it particularly important to have an early look at this new approach, and how it had worked in its first cycle of operation leading to the present Finance Bill.
We concluded, as did nearly all of our witnesses, that the new approach was a very welcome development. Great credit is due to the Government. Inevitably it was not a perfect operation, and in one point I will refer to more specifically, it was far from perfect. However, a report concentrates on where there are still issues or where improvements can be made, and in so doing I take it as read that the Government have made significant and positive steps forward.
We thought that most of the measures in this Finance Bill had followed the new procedures. They had been consulted on from the outset, and draft legislation had been published in December. As a result, there was little controversy surrounding most measures. But there were exceptions. By far the most important was the consultation on the clauses to tackle disguised remuneration, which began far too late. There was no consultation of any kind before the increase in the supplementary charge on oil and gas profits was announced in the Budget.
As a former Treasury Minister and as Chief Secretary taking Finance Bills through the other place—and there is another former Chief Secretary about to speak in the debate—I recognise that there are exceptional circumstances where the Government cannot follow their new approach to the letter, as did our committee. We do not think either of these cases fit that Bill. Even where open consultation before the Budget was not possible, informal, confidential discussions would have helped reduce the risk of unintended consequences.
Before I come to specific measures, there was a general refrain from many of our witnesses, whom I would describe as old hands in the tax system. They were concerned about the quality of some of the teams working on tax policy in HM Treasury and HMRC, and my noble friend Lord Newby referred to this. They complained of frequent changes of personnel, a general lack of tax and business knowledge, especially in the Treasury, and the difficulties both departments had in attracting the best talents to tax policy work. We share these concerns. There appears to be a severe and worrying disconnect between the perceptions of HM Treasury and HMRC, and those of their customers, as to how well the policy partnership between the two departments is working.
Now, HMT and HMRC officials put up a spirited defence and I recognise the difficulties that they have. The culture in the Treasury of moving highflyers on from one department to another to give them much wider experience is very well understood and I am afraid that very often some of HMRC’s best tax experts are poached by the private sector. I noticed, when I raised this point with members of the Institute of Chartered Accountants who had raised the matter, that there was a wry smile on their faces. Nevertheless, for the new approach to work, it is vital to have tax policy teams that are knowledgeable, experienced and stable and that they operate effectively across departmental boundaries. That is why our report also recommends a comprehensive skills audit and the publication of the findings of a recent internal review.
There are two other points that are worth stressing. First, although we support the new approach to tax policy, we think it can be improved and strengthened. The track record of consultation with big business is commendable, but there is still a long way to go in building effective arrangements for consulting smaller businesses. As a former Minister for small businesses—or small business Minister, as I was sometimes described—I recognise the difficulties of communicating with small businesses. Many of them do not want to belong to big organisations. Their organisations are not as well manned, financed and established as, say, the CBI, but they are a very important part of the economy and much affected by tax legislation. I believe that more can be done to consult them. I welcome the fact that HMT and HMRC now recognise that.
We also think—here I have in mind a recent debate on the working practices report in this House when there was much emphasis on post-legislative scrutiny—that there should be more emphasis on reviewing and evaluating tax changes after they have been implemented to see how well they have achieved their objectives.
I now turn to a point which my noble friend Lord Newby raised, not for the Minister and not even for our sub-committee. Time and again we were struck by the fact that while all our witnesses welcomed the extra opportunities, time and information for scrutinising tax policy, most also thought that there was scope for more effective parliamentary scrutiny of tax legislation, in particular drawing on the experience and skills of Members of this House and the time that we can give to this onerous work. Indeed, I have noticed that others, like Kitty Ussher, a former Treasury Minister, recommended, in a recent pamphlet, exactly the same points and suggested that it was a role that the House of Lords could perform. One particular suggestion made to us was that the remit of our sub-committee should be adapted to allow it to examine tax proposals that were being consulted on during the autumn, as well as inquiring into the draft Finance Bill when published in December. A more modest suggestion would amend the remit to allow the sub-committee to examine the draft Bill only from December onwards. Of course, these are not matters for the Economic Affairs Committee, but for the whole House to consider. We refer to them in our report because the need for greater parliamentary scrutiny of tax legislation, particularly in advance, formed a consistent theme in the evidence that we received.
For our second topic, we looked at tackling avoidance of tax, both generally and in a specific Finance Bill provision which seeks to address avoidance by so-called disguised remuneration. We fully agree with the Government's strategic commitment to tackle avoidance early, which is particularly important when avoidance has the potential to mushroom and lead to a large tax loss. I was somewhat astonished when I saw the proposals in the Budget to discover that the loss of revenue from disguised remuneration was calculated at £750 million a year. Many of our witnesses thought that it was probably a good deal higher than that because disguised remuneration had become a very well marketed process which many were taking up. Clearly, that had been allowed to grow. We believe, in the light of that, that HMRC should review why action was not taken earlier and learn lessons for the future.
Even with subsequent amendments, including many during the Commons stages of the Bill, there remained a deep and widespread unhappiness with this legislation. I should have mentioned that when the disguised remuneration draft proposals were produced in December, I think there were something like 25 clauses but by the time it went through the process of consultation, the number grew to nearly 60 and then there were many subsequent amendments in the other place. Our firm view was that had there been consultation at an earlier stage, this complexity could have been addressed and the legislation would have been better targeted. The criticisms that we received of disguised remuneration were very striking indeed, including, for example, some who argued that this was the worst legislation that they had ever seen. So clearly, the new approach to tax policy-making fell down in this case. All our witnesses agreed that this avoidance had to be tackled, but their concerns were about the way in which the legislation to tackle it had been framed. It was not a good advertisement for improvement through consultation.
Our report recommends that HMRC should carry out an in-depth examination of the alternative approaches that the legislation could have taken which should enable lessons to be learnt and similar pitfalls to be avoided in future. I recognise that the new Government and the Treasury Ministers had been in place only for a short time, with many other crucial issues absorbing their attention. Therefore, I understand why this may have happened on this occasion. I am clear that in future it is going to be very important that a different approach is taken to some of this consultation.
One other point is that the disclosure rules have made a major difference. I am sure that the new disclosure rules led to much of the legislation in dealing with disguised remuneration and they should enable HMRC now to frame more precise legislation on other avoidance disclosures in the future.
The Minister mentioned evasion and the tax loss through evasion far exceeds that from avoidance. We recommend that the Government should publish an anti-evasion strategy to complement their anti-avoidance strategy. According to the HMRC figures, I understand that the tax loss from all forms of evasion is £22 billion compared with £7.5 billion for avoidance.
Finally, on CT reform, the last two Budgets and the CT road map, published last November, contained proposals for reform of the corporation tax regime. We welcome the CT road map which should help to promote the stability, consistency and certainty which many of our witnesses saw as so important. It is an excellent example of a strategy outline which we think would strengthen the new approach if adopted more widely. Indeed, the reforms should make the UK's corporate tax regime more competitive, as we concluded. However, some of our witnesses were concerned at the overall balance of the package and that it might disadvantage some sectors, particularly smaller businesses and manufacturing. We consider that post-implementation reviews of outcomes are particularly important so that early action could be taken if the reform package proves to disadvantage some businesses.
We thought that there was much to commend in the Finance Bill and the processes that led to it. Our report has concentrated on recommendations that are intended to be helpful in taking forward this new advance and we see the desire for greater parliamentary scrutiny as an important issue for this House. I commend our report to the House.
Private Finance Projects (EAC Report)
Lord MacGregor of Pulham Market Excerpts(13 years, 7 months ago)
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Lord MacGregor of Pulham Market
My Lords, this was a most interesting inquiry and I was very glad to be involved in it. PFI, or PPP, has come a long way since its initial steps, and it was an appropriate moment to judge its successes and failings and to highlight lessons for the future. It was the first parliamentary inquiry since 2000, and the first comprehensive study outside government. We received a massive amount of evidence and I hope that our report will be a valuable source of information on the issues for national and local government, practitioners and academics. I thank our chairman, my noble friend Lord Vallance, for the excellence with which he chaired some complex hearings. I thank also our excellent special adviser, Professor Paul Grout, our committee clerk and the team.
My noble friend Lord Vallance gave a very clear introduction to the background, and covered some of our main recommendations. I agree with almost everything he said and will try not to go over the same ground, except where I have a particular point to make.
The response of the then Government was somewhat cursory and dismissive in places, with very brief responses to some important recommendations. It bore all the marks of being got out in haste before the election. I admit that they did it pretty rapidly. As my noble friend Lord Vallance indicated, we produced our report on 10 March and they responded on 7 April, so it was perhaps understandable that the response was cursory in places. For example, at the outset they said that PFI remains a “small” but crucial part of government investment in UK infrastructure. It is hardly small, given that by 2009 there were approximately 800 PFI/PPP schemes with a capital value of approximately £64 billion. The then Economic Secretary to the Treasury told us that 70 per cent of hospital schemes and 60 per cent of new schools were being delivered through PFI. However, I concede that the response of the then Government accepted a number of our recommendations.
We now have a new Government and I hope that the debate is a timely opportunity to set out the Government's approach to these issues, particularly bearing in mind something that we were very much aware of in our hearings and that we acknowledged in our report. I refer to the fiscally constrained environment in which we now live, the pressures on public expenditure and the impact of the credit crunch on the willingness of the banks to finance PPP/PFI deals, 85 to 90 per cent of the costs of which are usually met by borrowing.
My early involvement with PFI came with the Dartford Crossing in the mid-1980s. I was then Chief Secretary to the Treasury. That was an early example of a private finance project—not a PFI in the current sense—in what would traditionally have been a purely public sector and taxpayer-financed infrastructure scheme. I recall there was some discussion of whether it breached the Ryrie rules that any privately financed solution must be shown to be more cost-effective than a publicly financed alternative. In my view, going ahead with it meant that it was clearly built earlier than it would have been had it taken its place in the priority pecking order in the traditional way, and that was a real benefit. Of course, it was different from subsequent PFIs in that it was financed by tolls not taxation, and it has been very successful.
Subsequently, as Secretary of State for Transport from 1992 to 1994, I was much struck when I first arrived in the department by the average cost overrun on all road schemes of 28 per cent on the original contract. We introduced design and build, which brought the contractor much more into the development, design and construction of the project and helped to bring those cost overruns down. Subsequently, there was design, build and operate and I would very much have liked to have gone further to design, build, finance and operate—finance not through taxation but in schemes that were for motorways or motorway expansion by motorway charging. That was then a step too far for some of my colleagues despite the fact that I produced what I thought was a very good Green Paper, which I still stand by, and I hope that some day it will be done, not least when the infrastructure need on the one hand and the public expenditure constraints on the other make it more desirable.
From the early days, I was a strong supporter of the PFI concept and the report shows that PFI has gone a long way to improving this overrun problem. However, inevitably with a major new innovation one learns lessons as one proceeds and some of the critics of the early PFI projects gave evidence to our committee. Broadly, I think that on the key points that they and others made, lessons have indeed been learnt and implemented and I illustrate this with three examples from our report.
The first is on refinancing. In the early days substantial gains were made by the financial partners by refinancing at lower costs once the building project had been completed and some of the attendant risks had been removed. We drew attention to this in paragraphs 84 and 85 of our report. The National Audit Office particularly criticised the Norfolk and Norwich Hospital project and its refinancing. That was one of the very early ones. Refinancing by PFI partners after the building had been completed resulted in the public sector securing about only 29 per cent of the refinancing gain while increasing the contract’s termination costs. In the report, we welcomed the Government’s action to secure for the public sector a substantial share of refinancing gains. We believe that that has now been recommended and recognised and accepted.
Secondly, there is the question of lack of skills in government departments—inevitably in project management and contract negotiations in the early stages. Again we made a recommendation on this. We recommended that public authorities should do more to maintain and improve commercial skills of staff dealing with private finance projects, with emphasis on long-term contract management as well as contract negotiation. Again, I think the Treasury has recognised and acted on the importance of this point.
Perhaps the third and most important of all the lessons is the failure of the London Underground Metronet PFP, which as we say in our report gave private finance projects in general a bad name. It was of course an exceptional project because of the huge debt guarantees the Government gave—95 per cent of the banks’ loans being guaranteed—which meant that the transfer of risk to the private sector did not happen and the loss to the taxpayer was estimated by the National Audit Office to be between £170 million and £410 million. Unfortunately, the government response does not really deal with our recommendation that PFP should not be used where the state is guaranteeing large amounts and a high proportion of debt as a means to make highly geared PFP happen. The then Government’s response simply noted our views. I hope that the Minister will look at this one again.
Before I turn to what I may describe as the big issue, there is one other detailed recommendation to which I wish to refer. In recommendation 145 we suggested, as Sir John Bourn told us, that the credit crunch, through its limitation on access to funds, thus making them more expensive and available for a shorter period, has tended to reduce competition. We drew attention to one of the problems about the lack of competition related to the high bidding expenses involved in bidding for PFIs. Of course, reducing the competition for private finance projects would increase the cost to taxpayers. We recommended that the Government should examine possible mechanisms for encouraging competition, such as returning an element of bid costs. The then Government in their reply said that the Treasury was reviewing that and that it would publish its findings shortly. I may have missed it, so I ask the Minister whether that has happened and, if so, could he comment on it?
I turn from the detailed recommendations to what I might describe as the big issue. I was an early supporter of PFI, not least for the better project management it involves and the effect it has on maintenance. Quite clearly, one of the other benefits of PFI is that maintenance is contracted for a long period ahead—and all of us who in the past have been involved in public expenditure issues know very well that if the pressures on public finance are very high, maintenance is often the thing that is cut. One of the benefits of PFI is, of course, to be able to do that.
I became somewhat alarmed at the scale and speed with which the Labour Government over the years embraced PFI and appeared to run away with it. It looked like a big wheeze, getting the credit for substantially increasing capital expenditure but without regard to the implications for many years ahead. Also, many witnesses told us that when they approached local authority projects and other projects, the Government implied that there was no game in town other than PFI. It looked like typical off-balance sheet financing, particularly when so little information was available about the level and future consequences of that PFI expenditure. Just as in the private sector, where off-balance sheet financing led to so many consequences for companies and banks, were we building up equal problems in the public sector? The problem was that, in the early stages, we could not get at the figures. Much progress in the accounting for PFI has now been made. In the earlier years, when many of us were in Opposition, we were already expressing concern about increasing public expenditure, and we knew at that stage that this did not even include all the off-balance sheet financing expenditure. At least we know about it now.
Is my noble friend confident that we now have a clear picture of current and future liabilities, and is he satisfied that the response of the previous Government to recommendations 59 and 60 on this matter have been sufficient? Above all, will he look again at our recommendation in paragraph 24? In that recommendation we draw attention to the problem of the build-up of contractual commitments over the years. We advocated that the Government should monitor and control, year by year, the impact of PFI commitments on the budgets of departments and public authorities with a view to ensuring that delivery of essential public services in future years is not unduly constrained or jeopardised by such commitments. As we move into a period of public expenditure constraint, which looks as though it will be here for some years ahead, that becomes more important. The then Government tended to respond by saying that everything was very satisfactory, that there has been full publication of all the details and, after all, that these annual payments under PFI unit charges make up a very small proportion. I do not think that is fully satisfactory. We need to know, and I hope that this Government will look again at our recommendation in paragraph 24. We need to be sure that the crowding-out effect of these future liabilities will not have a major impact on future public expenditure projects. The government response was that if a project had been financed in the traditional way, then of course there would be maintenance requirements in future years. These maintenance requirements were sometimes cut and they will not now be.
Finally, I have one last question on our recommendation on a national infrastructure bank. We recommended that the pros and cons should be kept under review and the previous Government agreed with our recommendation. Can I ask my noble friend to what extent the green investment bank, now proposed by the Government, will meet our recommendation?
In conclusion, there is no doubt that the PFI/PPP project and the whole concept has been a welcome and successful development for all the reasons our report outlines. It has been for many up to now a somewhat esoteric area, perhaps accountancy-led and with, as my noble friend Lord Vallance said, pretty turgid terminology, but it is critical. It needs greater public debate and I am glad that our report has contributed to that. I look forward to my noble friend’s speech, not only responding to some of the questions I have raised, but also giving us some idea of how our new Government see the scope and scale of PFI/PPP in future years.