Tax Credits Up-rating Regulations 2012
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Lord Sassoon
That the Grand Committee do report to the House that it has considered the Tax Credits Up-rating Regulations 2012.
Relevant document: 40th Report from the Joint Committee on Statutory Instruments.
Guardian’s Allowance Up-rating (Northern Ireland) Order 2012
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Lord Sassoon
That the Grand Committee do report to the House that it has considered the Guardian’s Allowance Up-rating (Northern Ireland) Order 2012.
Relevant document: 40th Report from the Joint Committee on Statutory Instruments.
Budget Deficit
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Lord Barnett
To ask Her Majesty’s Government what assumptions they are currently using about what the scale of the deficit will be on 31 March 2012, and how this compares to what had been predicted by the Office for Budget Responsibility at the time of the last budget.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, the Office for Budget Responsibility published its most recent forecast on 29 November 2011. Its forecast for public sector net borrowing in 2011-12 is £127 billion. This represented an increase of £5 billion since the forecast produced for Budget 2011. The OBR attributed the worse economic outlook to three factors: the sharp increase in global commodity prices over 2010 and 2011; the impact of the euro area crisis; and the ongoing structural impact of the financial crisis.
Lord Barnett
Actually, my Lords, I knew that. My Question was about assumptions in the Treasury; surely its officials cannot sit there twiddling their thumbs twice a year waiting for the OBR forecast. Is not the major problem that the Chancellor has concentrated to such a degree on the deficit that he has lost track of where that is taking him? The plain fact is that it is a lack of growth that is doing the damage. Now, as we know, the Chancellor has had to extend the balancing of the budget to 2017, and he may well have to extend that further. Many of the Chancellor’s friends who supported him, like the IMF and the OECD, are now saying that if the position deteriorates, as it is clearly doing, then he should be more flexible. Would he consider, for example, something that would help in the short term—namely, finding the odd few billion, which would not be very much in relation to the total deficit, in order to kick-start the privately funded infrastructure plans that he has spoken about previously? Would that not at least help to alleviate some of the problems?
Lord Sassoon
My Lords, I shall try to deal with at least some of the noble Lord’s supplementary questions. First, there is a process of exchanging and discussing numbers between the OBR and the Treasury under the memorandum of understanding. The details of all communications between the OBR and Ministers will be published in due course on the OBR’s website, as they were in the run-up to last year’s Budget.
Secondly, on the question of the deficit reduction plan, it is interesting to look at the recent IFS green budget, which does a comparison between the coalition plans and the relatively sober Alistair Darling plans rather than the Ed Balls plans. The comparison shows that up to 2016-17 the cumulative impact of Mr Darling’s policy would have been that debt under a Labour Government was £201 billion higher than it will be under the forecast for the coalition Government. As the markets have made clear this week, if we listened to suggestions about making increased spending commitments now, our interest rates would go sky high and our industry would be crippled. We are sticking to our plans, but the private sector will contribute to significant infrastructure investment of the sort that both the noble Lord, Lord Barnett, and I would welcome.
Lord Lawson of Blaby
My Lords, is it not the case that the noble Lord, Lord Barnett, despite his great experience, needs even at his age to learn a little patience? Is it not the case that if there were some short cut to resuming growth, the Government would take it?
Lord Sassoon
My Lords, it is indeed the case. If my noble friend had such a short cut, I am sure he would have told the House what it was.
Lord Soley
Is the Minister not missing the key answer, which he keeps ducking? The Chancellor has frequently said that the debt burden must be reduced and the Government will reduce it quickly. It is actually increasing. The economy contracted by 0.2 per cent in the previous quarter and will go on reducing for the foreseeable future. What has gone wrong? Never mind what other people say, what has gone wrong with the Government’s plans?
Lord Sassoon
My Lords, economic growth has been weaker for reasons that include, particularly at the moment, the ongoing eurozone crisis. Inflation has been high but is now coming down significantly from its peak last September. In those circumstances, the automatic stabilisers apply and expenditure goes up. However, we are getting two very different messages from the party opposite, one implicitly urging faster consolidation and the other asking for more expenditure. Which is it to be? This Government will get borrowing down by £147 billion a year by 2016-17. That is what is important.
Lord Newby
My Lords, on Monday, Moody’s said that the UK’s triple A rating could be downgraded by,
“reduced political commitment to fiscal consolidation, including discretionary fiscal loosening”.
Does the Minister have any idea what Moody’s might have had in mind?
Lord Sassoon
My noble friend probably thinks that Moody’s have in mind what I have in mind: the policies of Mr Ed Balls. However, the chances of those being implemented are, fortunately, small. Only yesterday, a respected City broker from BGC Partners said:
“Ed Balls can whinge all he likes but you only have to look at a compendium of 10 year bond yields to know that the UK Chancellor, George Osborne is on the right track. For the Chancellor to take his foot off the gas in terms of cutting the debt reduction would be insanity personified!”.
Lord Davies of Oldham
My Lords, when it comes to whingeing the Government take first prize. They spend their time blaming either the previous Government or external forces. When will they take responsibility for the fact that they promised to encourage growth and have failed to do so, and promised to reduce the deficit and are failing on that? How much must the British people suffer before the Government change their policy?
Lord Sassoon
My Lords, these are very difficult economic circumstances, in this country and globally. However, to give one example of where growth policies are coming through, there are 60,000 more people in employment than there were one quarter ago. That takes the total number in employment in this country to 29.13 million—a rise of more than 250,000 in the past 18 months. We must not play down the strength of the private sector in the UK economy.
Lord Forsyth of Drumlean
My Lords, will my noble friend confirm that the reason why we have a problem with growth is the huge level of public expenditure that the previous Government incurred at the height of the boom? Will he give the noble Lord a reality check and tell us how much more than our income we are spending this year, and by how much the debt will have increased by the end of this Parliament?
Lord Sassoon
I completely agree with my noble friend. The point is that we will balance the books only because doing so over the five-year period is a prudent way of doing it. By that point the debt will also have started to come down. That is the way that the Government will continue to do it.
Lord Peston
The noble Lord told us all to be patient. I remind him that the great economist Lord Keynes said:
“In the long run we are all dead”.
Is the Government’s problem not that, having created this air of disaster for the country, no one in the private sector believes that the economy will get going and, therefore, no one has any intention whatever of investing in new equipment while the Government’s policies are in place?
Lord Sassoon
No, my Lords, I do not accept that at all. The only disaster is the mountain of debt—the structural position—left by the previous Government. As I have explained, the signs from the private sector, whether rising exports or rising total employment in the economy, are very encouraging. It is very difficult but we have to do everything we can, including keeping interest rates low, to make business confident enough to invest for the future.
Revenue and Customs Appeals Order 2012
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Lord Sassoon
That the draft order laid before the House on 11 January be approved.
Relevant document: 38th Report from the Joint Committee on Statutory Instruments. Considered in Grand Committee on 6 February.
EU: Fiscal Compact Treaty
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Lord Dykes
To ask Her Majesty’s Government what progress they are making on discussions with European member states on the future legal basis for the European fiscal compact treaty.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, although the United Kingdom will not become a party to it, we have participated fully in discussions on the intergovernmental treaty on stability, co-ordination and governance in the economic and monetary union. The parties have set out their desire that its substance will be added to the EU treaties in the future. Any such addition to the EU treaties would need to have the agreement of all 27 members.
Lord Dykes
I thank my noble friend the Minister for the very substantial and indeed creative fence-mending by Her Majesty’s Government that has taken place since 9 December. Does he agree that although we are not yet members of the fiscal compact treaty, now that that has been successfully signed by all but two, it is our duty, as we stated before Christmas, to make sure that we help the eurozone authorities and the national leaders return the eurozone to its strength as a traditional international currency?
Lord Sassoon
My Lords, I am happy to confirm to my noble friend that of course this intergovernmental agreement, which goes to the heart of strengthening the fiscal arrangements within the eurozone, is a necessary but not sufficient part of what we hope to see with the eurozone returned to health. There are a number of other critical elements, including sorting out the immediate situation in Greece, getting the European banks’ capital positions where they need to be, and so on.
Lord Barnett
My Lords, will the noble Lord be advising the Government to be one of the 27 member states agreeing to a fiscal solution to the problem or will the Government take the view that, whatever happens in the short term, in the longer term it is perfectly impossible for a country like Greece in the state that it is in to be able to have the same exchange rate and interest rate as Germany? In those circumstances, will the Government be making arrangements and planning for something to happen that would not be helpful, because, as the Chancellor put it, it would be disastrous if the whole thing broke up? Is contagion a bigger problem than many of us expected it to be?
Lord Sassoon
My Lords, it continues to be the Government’s wish that the eurozone holds together and makes the arrangements, some of which I outlined in my previous answer. As I have said in answer to previous questions from the noble Lord, Lord Barnett, the Government take all precautionary measures and look at all scenarios that there may be as this still very severe situation continues to unfold.
Lord Hannay of Chiswick
Will the Minister have a shot at the question that I have given to two of his colleagues, which they have failed to answer so far, and state what objections the British Government have for the text of the intergovernmental agreement that will be signed at the end of this month?
Lord Sassoon
My Lords, I think that my noble friends Lord Howell and Lord Strathclyde have given very good answers to that question in the past and there is nothing I need to add.
Lord Howe of Aberavon
Will my noble friend take the opportunity of advising our right honourable friend the Prime Minister that in practical terms this is a setting in which the Prime Minister might be well judged to pay a little more respect to the advice of the Chancellor of the Exchequer than to that of the Foreign Secretary?
Lord Sassoon
My Lords, I do not think that it is for me to tell my right honourable friend the Prime Minister in any way where he should seek advice but I am sure that he seeks the advice of all his senior Cabinet colleagues.
Lord Liddle
My Lords, following on from the Question asked by the noble Lord, Lord Dykes, I recognise the concern of the Government that a caucus of eurozone member states should not compromise the integrity of the single market, but does the Minister agree that the best guardians of that integrity are the Commission and the Court? How does he expect them to act in that role if the Government keep saying that they are reserved about the position of the Commission and the Court in the treaties and there is a chorus of criticism from his own Back Benches in the House of Commons demanding that these institutions be kept out of any role?
Lord Sassoon
My Lords, the first thing is to be clear that the intergovernmental agreement is explicit that it cannot encroach on the competences of the EU and that the signatories to the intergovernmental agreement must not take measures that in any way undermine the single market. That is set out in the preliminary recitals and in Article 2 of the treaty. It is principally a matter for the signatories to the treaty. We have made it clear that the Government have a number of concerns about elements of this inter- governmental agreement, one of which is the use of EU institutions. Some of the proposed uses of EU institutions in this intergovernmental agreement are already in the EU treaties and others are not. The Government will watch very carefully how this develops.
Baroness Kramer
My Lords, in an earlier answer the Minister referred to the recapitalisation of the banks in the eurozone as a necessary step. What action does he think is available if those banks fall short of successful voluntary recapitalisation and is further action necessary at the EU level?
Lord Sassoon
My Lords, now that there is a realistic assessment of what capital is required, there is a clear agreement on the timetables and methods for doing that and it is well within the capacity of the eurozone to do it. I do not think we should speculate on what happens if they fail to do it. The eurozone, its Governments and the European Central Bank have all the firepower necessary.
Lord McFall of Alcluith
My Lords, Europe and the UK will be going nowhere unless competitiveness is restored to individual countries. Does the noble Lord agree that at the heart of any fiscal compact should be a policy of growth and investment? Even from our position in the wings of Europe, will the Government agree to ensure that such a policy is implemented, not least to help the many millions of young people who are now unemployed all over Europe?
Lord Sassoon
I very much agree with the sentiments of the noble Lord. The one part of them that I disagree with is that we are not sitting on the sidelines but are very much at the heart of the discussions about pro-growth policies and the completion of the single market.
Revenue and Customs Appeals Order 2012
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Lord Sassoon
That the Grand Committee do consider the draft Revenue and Customs Appeals Order 2012
Relevant documents: 38th Report from the Joint Committee on Statutory Instruments.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, the order before us today makes a small but important change to the Tax Credits Act 2002. It inserts a reference to the First-tier Tribunal in Great Britain into Sections 63(5) and 63(8) of the Tax Credits Act. This corrects an error in the Transfer of Tribunal Functions and Revenue and Customs Appeals Order 2009.
As the legislation currently stands, the settlement process at the review stage of the appeals process for tax credits applies only to appellants living in Northern Ireland. This order will update the legislation so that appellants in Great Britain are also covered, just as they were before the functions were transferred from the former appeals bodies to the new tribunals.
Let me provide further detail on the appeals review process. There has been an appeals review process in place since April 2003, when tax credits were first introduced. When a claimant lodges an appeal against a tax credit decision, the first step is for HMRC to confirm whether the information used to make the tax credit decision is correct. This is a substantial undertaking on the part of HMRC. In 2010-11, for example, HMRC had to deal with around 40,000 appeals against a tax credit decision. By actively seeking settlement, however, around 80 per cent of those cases have been revised and agreed at the settlement stage. Where HMRC’s review indicates that the original decision is incorrect, HMRC will revise it, but if the appellant does not agree to settle then the appeal will be sent to the tribunal to decide.
Once the tribunal receives the appeal request, it will contact all parties to arrange for the case to be heard and may require the appellant to present his case. Even at this stage, if the parties involved agree a settlement, then the case will not proceed to the tribunal and the appeal is withdrawn. Of the 20 per cent of cases that go to the tribunal, HMRC’s decision is upheld 87 per cent of the time.
This brings me to the need for this order today. According to the appeals process as it currently stands in legislation, all tax credit appeals in Great Britain should be sent directly to the First-tier Tribunal, without HMRC having the opportunity to review the case and offer the possibility of a settlement. As I am sure your Lordships will appreciate, the settlement process saves appellants from going through what can be an emotionally demanding and challenging process in the tribunal. I reassure the Committee that HMRC none the less has continued to review cases since 2003 and has aimed for settlement of appeals in the normal way.
The order before us today embeds that process in law for the whole of the United Kingdom, not just Northern Ireland. It ensures that the legislation is restored to the intended policy position in the whole of the UK, when the former appeals bodies in Great Britain were abolished and their functions transferred to the new First-tier Tribunal. This important reference to the First-tier Tribunal in Great Britain was inadvertently omitted when tax tribunal functions were transferred to a new tribunal system in 2009. The omission occurred when amendments were made to the Tax Credits Act 2002, and came to the department’s notice only early in 2011.
I therefore hope that noble Lords will recognise the need for this order so that individuals appealing tax credit decisions in Great Britain do not by law have to have their case heard by a tribunal. It ensures that we embed a fair, efficient and transparent system of tax credit appeals across the entire UK, and it avoids the unnecessary and burdensome process of taking tax credit appeals to tribunal, freeing HMRC time to focus on its core function of collecting tax revenue. I commend the order to the Committee.
Lord Eatwell
My Lords, I am most grateful to the Minister for introducing the order in such a thorough manner. Of course, no impact assessment was made in the explanatory information but there was a helpful reference to the impact assessment made at the time of the Transfer of Tribunal Functions and Revenue and Customs Appeal Order 2009. The questions that I wish to put to the Minister arise from assessing the arguments made in that impact assessment, or from attempting to project them on to this case.
First, the impact assessment made the point that the transfer to the new tribunal system would involve what it described as,
“a slight increase in administrative burdens on small businesses and individuals”.
Here, with respect to tax credits, we will be talking predominantly about individuals. The description of the regularisation of the process of tax credit appeals that the noble Lord has put forward will still contain the 20 per cent of appeals going on to the tribunal. Has there indeed been an increase in administrative burdens on tax credit appeals and, if so, how significant is that burden assessed to be? Moreover, since it is now nearly three years since the general transfer was made, I wonder whether the recognition that there has been an increase in administrative burden in general for income tax appeals was indeed forthcoming; and what the impact on appeals has been.
Secondly, at the time of the transfer, a strong case was made by many stakeholders that the transfer from the general commissioners of income tax to the tribunal system involved a significant increase in the burden on appellants, given that there was a reduction from 400 geographic divisions to just 130. Has this affected the appeals with respect to tax credits? If so, what is the assessment of the impact on appellants?
Thirdly, in the impact assessment there was some general assessment of the economic advantages of the new appeals system. It was argued that costs would be reduced from £3 million to £2.75 million per year. Has that cost saving been realised? It was also argued that the set-up costs would simply be £1.25 million. Was that the figure, or was it greater or lesser? What is the estimated cost, if any, of the introduction of this order?
Lord Sassoon
My Lords, I thank the noble Lord, Lord Eatwell, for his focused contribution, even if it sets me some challenging questions about the burdens involved.
The easy question to deal with is the one on burdens. There has been no increase in administrative burdens or in the burden and costs on appellants. That is key, I think, for the narrow discussion this afternoon—
Lord Eatwell
My Lords, can the noble Lord tell me how he can confidently assert that there has been no increase in burden on appellants? What evidence does the Treasury have?
Lord Sassoon
My Lords, these things are tracked by HMRC, which put together the underlying information in the original impact assessment.
In essence, I think that we need to look at two aspects of these questions. First, what continued to be done as a matter of administrative practice by HMRC was in line with what had happened before the new system came in and what was intended by the policy set out by the previous Government. In that sense, what we are doing this afternoon is neutral in terms of burdens and costs, as the noble Lord, Lord Eatwell, recognises—I see him nodding. I hope that he accepts that that is indeed the case. The assessment is that there has been no increase in burdens on appellants and no increase in costs.
On the question of the set-up costs and annual costs given in the original impact assessment, which is a perfectly fair and more broadly relevant question but does not, I suggest, touch on the narrow question of costs relating to sorting out the wording provided by the order this afternoon, if it would be acceptable to the noble Lord, I will see what other information is available at reasonable cost. I hope that he will understand that, on the narrow point, I have given him the assurance and, on the wider one, we will look at the matter and, if the information is available without inordinate cost, I will see what other information I can give him on the costs of the new regime.
The critical issue, which I come back to, is to reassure the Committee that no claimants have been affected by this missing reference in the Tax Credits Act. HMRC has continued to seek settlement for appeals in the normal manner in Great Britain as well as Northern Ireland. Where the appellant agrees with the settlement, the appellant is asked to withdraw the appeal; it is only in cases where the appellant does not wish to settle a case that it is passed to the tribunal to decide and, even then, there remains the option of reaching a settlement. So, in that sense, this is a neutral piece of tidying up. This order seeks legally to embed that process for the whole of the UK and to ensure that legislation is restored to the intended policy position for the whole of the UK. I commend the order to the Committee.
Individual Savings Accounts: AIM Shares
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Lord Northbrook
To ask Her Majesty’s Government whether they will reconsider their decision not to allow shares traded on the Alternative Investment Market to be eligible for Individual Savings Accounts.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, individual savings accounts, or ISAs, are the Government’s main tax incentive for non-pensions savings, and they offer a simple, straightforward and trusted brand. The Government believe it is important that ISAs continue to hold these characteristics. AIM shares tend to present a higher level of risk, and can be less liquid. For those reasons, the Government do not intend to make them an eligible investment for the ISA wrapper.
Lord Northbrook
My Lords, I thank the Minister for his Answer, which once again is disappointing. I thought that the policy of the coalition Government was to encourage personal choice and, indeed, investment in our smaller and growing companies. The arguments for including AIM stocks in ISAs are very strong. They are supported by the Stock Exchange and the Quoted Companies Alliance, as they were by noble Lords on all sides of the House when the question was raised a year ago. Their eligibility would widen the shareholder base, improve liquidity and facilitate fund-raising. What is the logic of AIM stocks being included in SIPPs but not in ISAs?
Lord Sassoon
My Lords, this is a Question that we come back to on a regular basis and my answers are going to sound boringly repetitive. I see the noble Lord, Lord Myners, in his place. He answered this Question in the dying days of the previous Government. The simple fact is that the ISA is a trusted brand in which more than 23 million adults—45 per cent of the adult population—hold shares, and we need to protect that trusted brand and the suite of products within it. On the other hand, the Government have taken a range of measures to support small businesses. In relation to SIPPs, the liquidity requirements of an ISA with a 30-day withdrawal period, in particular, are very different from what might be the case when locking up shares for the long term in a pension savings product.
Lord Peston
My Lords, I think that I understand the noble Lord’s answer but surely the main criterion that ought to be applied to ISAs is: do we have a system that maximises people’s propensity to save using ISAs? If it can be demonstrated that the Alternative Investment Market will do that, even if it is more risky—and, incidentally, people ought to know that all investments are risky—surely it still makes sense for the Government to widen the range of assets, assuming that that encourages people to save.
Lord Sassoon
My Lords, I am very happy to confirm that ISAs have indeed been a very successful product. As I said, 45 per cent of the population over the age of 16 hold them. On the latest numbers that I have seen, the total value of ISAs is £350 billion. It was a successful initiative of the previous Government. It is the main savings product of a large part of the population and we should not do anything to undermine the value of that brand.
Lord Lee of Trafford
Can my noble friend name any organisation, any professional body or any serious investment commentator that supports the Government’s policy?
Lord Sassoon
My Lords, it depends what question they are asked and what the considerations are. I can see that lots of people have an interest in wanting AIM shares to be eligible for ISAs. However, I suspect that if they were also asked whether they wished to see AIM shares lose some of the tax benefits that they have in the way of eligibility for enterprise investment schemes and venture capital trusts and particularly the inheritance tax advantage that comes with their status as business property relief, they might not be so keen on this change.
Lord Campbell-Savours
My Lords, would the Minister care to remind the House of the scale of the collapse of companies on the AIM market? Perhaps I may say that I support the Government’s position.
Lord Sassoon
My Lords, the AIM market has been very successful, and I do not want to say anything to suggest that it is not. However, it is true that the number of shares on that market has come down from a peak of about 1,700 to the current figure of about 1,140, and of course there has been a similar decline in the value of the market. Therefore, it is a successful market but one that has a range of much smaller shares within it.
Lord Forsyth of Drumlean
My Lords, I should declare my interest as a director of an AIM-listed company. Is not the cost the real reason that my noble friend is not prepared to agree to this proposal? How is that consistent with the Government’s declared policy of wanting to encourage investment in small businesses and start-up companies in order to get the growth in our economy which is desperately needed?
Lord Sassoon
My Lords, first, I explained the reasons why the Government decided—as the previous Government rightly did—not to make AIM shares eligible. On the other hand, I am happy to summarise some of the measures to support small businesses that the Government are taking—for instance, credit easing, with up to £20 billion of lower-cost lending; £1 billion through the business finance partnership for mid-sized companies through non-bank lending channels; greater tax relief for EIS and VCT schemes; more than £500 million going into venture capital funds, including through business angel co-investment funds; and the extension of the enterprise finance guarantee. I could go on.
Lord Eatwell
My Lords, the noble Lord referred to the problem of devaluing the brand by including riskier assets. To what degree was the brand devalued when ISAs were extended from cash ISAs to share ISAs?
Lord Sassoon
My Lords, it is entirely appropriate, because ISAs are the main savings vehicle for people in this country, that a range of products, both cash and equity and debt products, should be eligible for an ISA. As I explained, there is an appropriate line to be drawn, and it is where the previous Government and this Government drew it. This Government are fully continuing on AIM with the previous Government's policy.
Lord Barnett
My Lords, I declare an interest as a holder of ISAs who has no desire to invest in AIM. The noble Lord, Lord Forsyth, made a major point to which the Minister did not reply. It is totally inadequate to keep saying that the Government are not going to do it. Will the Minister not at least reconsider it?
Lord Sassoon
My Lords, there are no plans to reconsider it. My noble friend Lord Forsyth put up another possible reason why the Government might not want to make the change. I said that the Government were not making the change for the reasons that I first gave.
Taxation: Avoidance
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The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, I am grateful to my noble friend Lord Dykes for giving us an opportunity to discuss the important issue of tax avoidance and to remind the House of what the Government are doing to clamp down on it. However, we should put the whole subject into perspective. It is an important topic. There have been few speakers, but a considerable degree of heat has been thrown at the topic that may occasionally have obscured the light.
We must remember what we need to achieve in this area, particularly in the current economic situation, when we are faced with reducing the largest peacetime deficit on record. It is of course more important than ever and fair that everyone, whether businesses or individuals, pays their fair share of tax, but we have to remember that we must keep this country competitive. We are competing in a global economy, so we have to have a tax regime that is competitive for businesses, is fair for individuals and incentivises individuals to get off benefits and into work. Yes, the tax-avoidance question is critical, but we have to remember the wider context in which it operates.
A fair tax system means closing the tax gap and ensuring, as I have said, that businesses and individuals pay in full what they owe. My noble friend Lord Dykes asked questions about the size of the tax gap and whether we really understand its make-up. The figures for 2009-10 are that the tax gap was estimated at 7.9 per cent of liabilities, £35 billion in cash terms, which means that HMRC collects over 90 per cent of all the tax that is theoretically due. We have to do better. HMRC has to do better and it is working on that—I shall come on to that shortly—but, if someone heard this debate in isolation, they might think that the performance of HMRC was much worse. It collects over 90 per cent of all the tax that is theoretically due, or £468.9 billion in revenue in 2010-11. We should also remind ourselves that the latest figures show an overall decrease in the overall net tax gap of £7 billion from 2008-09 to 2009-10.
We should therefore be cautious about the methodology, but the 8 per cent tax gap in the UK compares well with other economies. For example, the USA’s tax gap is 14 per cent and, to take a country in Europe that is widely regarded as a model of fiscal rectitude, in Sweden the tax gap is 10 per cent.
The Government’s approach to tackling avoidance builds on HMRC’s anti-avoidance strategy. There are three core elements to that approach: prevention, detection and counteraction, with a clear focus on preventing avoidance before it can occur. I say “avoidance”; I do not of course share my noble friend Lord Phillips of Sudbury’s contention. I know that it is nothing new that he feels strongly that avoidance and evasion are the same thing.
Over the past 20 months we have demonstrated real progress. In answer to the challenge from the noble Lord, Lord Eatwell, about the concrete actions that we are taking, in the most recent Finance Act we closed down a range of avoidance schemes to bring in yields of around £1 billion a year over the course of this Parliament. Only this month, we acted quickly to stop a particularly significant avoidance scheme aimed at artificially exploiting an income tax relief. That scheme posed a significant risk to the Exchequer, and our quick action ensured that this risk did not materialise. That is the sort of concrete action that we will take.
In answer to the questions about whether HMRC has the capacity to deal with the threat of avoidance, the Government have underlined our commitment to tackling avoidance with the reinvestment in HMRC, which I am sure noble Lords are aware of, of over £900 million, which should bring in around £7 billion each year by 2014-15 in additional tax—again, concrete additional targeted action.
Lord Phillips of Sudbury
Can my noble friend then reassure the House on the figure about which I asked earlier and say that the reduction in staffing of 12,000 will not affect the front-line effort to reduce tax avoidance/evasion?
Lord Sassoon
My Lords, as I am sure my noble friend would recognise, all government departments are having to tighten their belts; otherwise, the deficit is not going to be tackled. I hope to reassure him by explaining where HMRC is focusing its efforts. The recruitment of over 1,200 staff in new posts to tackle non-compliance is significantly upping HMRC’s efforts in this area and will bring in significant additional revenue in each tax year, so the answer to his question is yes.
The customer relationship model that HMRC uses has considerably improved its ability to identify risk and to handle these issues. The report by the National Audit Office on HMRC’s 2010-11 accounts, which underlay one of the reports referred to by the noble Lord, Lord Eatwell, noted that HMRC’s high-risk corporate programme has brought in a yield of over £9 billion and that it contributed to reduced avoidance activity by major companies. The investment is there. On another point made by my noble friend Lord Dykes, we do not forget the cash economy in those efforts.
I am grateful to the noble Lord, Lord Eatwell, for drawing attention to the question of the general anti-avoidance rule, the GAAR. We are exploring that option to see whether such a rule could help to deter and counter tax avoidance in a fair way. Attention has been drawn to the work of Graham Aaronson and his colleagues and their report. We received the report in November last year. We will be considering it and are actively discussing its implications with businesses and tax professionals. We will respond to the report at the Budget and set out our plans if appropriate. We have said clearly that we would not introduce a GAAR without a further formal round of public consultation, so that is very much work in progress.
I am also grateful to the noble Lord, Lord Eatwell, for applauding the introduction and the work of the Office of Tax Simplification. The complexity of the tax system has been much remarked on, and I can echo many of the remarks made by noble Lords on that. The OTS has started its work and published recommendations on tax relief, avoidance legislation and IR35, as well as an interim report on small business tax. More is coming down the pipeline and this ongoing work will be an important part of what we all want to see: a simpler tax system that is easier for individuals to comply with. I may disagree with the emphasis of my noble friend Lord Phillips of Sudbury on some things, but I certainly agree that this is fundamentally about individuals doing what they are required by the law to do.
Another critical component of preventing avoidance is the way in which HMRC engages with the largest taxpayers proactively to identify and tackle avoidance. We do not have the time to go into the detail of this but, in response to some of the somewhat one-sided interpretation and selective quoting of the recent Public Accounts Committee report, I draw the attention of the House to HMRC’s detailed rebuttal on many factual points in the conclusion of that report. In brief, to be clear, this effort with large businesses is not in any way HMRC being soft on large business or on those with complex tax affairs. HMRC treats all taxpayers even-handedly and does not allow them to settle for anything less than the full amount due. It is through its engaged and intelligent approach to tax avoidance that the additional revenue to which I have already referred is coming in.
Lord Eatwell
The noble Lord referred to erroneous statements in the PAC report. Did they include the observation that senior HMRC officials had had lunch and dinner with the companies that then had a reduced tax burden?
Lord Sassoon
My Lords, the substance of the issues to which HMRC takes exception is to do with the size of unresolved tax bills and some of the details of cases in which errors were found that HMRC disputes. That is the substance, rather than the question of who met whom with what refreshments laid on. We should stick to the substance.
Other noble Lords have been scrupulous in keeping to their time. I am conscious that, with the interventions, I risk going over my time, so I will press on. I want to answer just one more question, raised by my noble friend Lord Dykes, about the tax treatment of overseas companies. I just confirm that we are reforming the controlled foreign company rules very much to protect against the artificial diversion of profits to low-tax jurisdictions, just as our general reforms are being made to make the UK a good place for global corporates to have their headquarters. Having said that this is a matter for individuals, I will not comment on the affairs of any individuals.
In conclusion, I have very briefly explained our strategy for tackling tax avoidance to ensure that everyone pays their fair share. This is an important topic and I am glad that we have had this debate. The Government are taking real, decisive, concrete action to close the tax gap. We are making good progress, but there is much more to do. We will ensure that every sector of society pulls in the same direction to tackle the deficit and the woeful economic legacy left to us by our predecessors.
Coins
Lord Sassoon Excerpts(14 years, 2 months ago)
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Baroness Smith of Basildon
To ask Her Majesty’s Government what estimate they have made of the costs to local government and business of preparing for the new coinage, in the light of reports that the new size cannot be used in existing parking meters and vending machines.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, the Treasury published a full impact assessment on this measure last February, which is available on the Treasury website. The impact assessment was compiled after consultation with representative industry groups and estimates the overall net benefit of the conversion of 5p and 10p coins to nickel-plated steel to be about £40 million. The Royal Mint has been working with the industry for more than two years in anticipation of this change.
Baroness Smith of Basildon
My Lords, I think the gap in the Minister’s Answer is that, although the Government will save money, there will be a cost to the industry in changing vending machines, payphones, parking meters, et cetera, because the new coins are marginally thicker. The cost to the vending industry will be about £25 million. The fear now is that if the £1 coin was changed, it would cost the vending industry more than £100 million to adapt. I seek assurances from the Minister that if any change is considered, there will be full consultation with industry, a two-year period in which the industry can make the changes needed and consideration of compensatory payments, given the very high cost involved to the industry.
Lord Sassoon
My Lords, first, on the implementation of the introduction of the new 5p and 10p pieces, the Government took the view, after consulting the industry, that there should be a delay of one year from the date of January 2011, when the previous Government had originally intended to introduce the coins. The noble Baroness refers to the Automatic Vending Association. When we announced the delay in the introduction, the association’s CEO said:
“This … is fantastic news for the vending and coin machine industries because it allows them more time to update coin mechanisms, providing a saving of £16.8 million to the vending industry—a real help in the current economic climate”.
So the introduction of the new coins has been done in full consultation.
When it comes to the £1 coin, the issue is rather different. It is one not of cost saving but of potential risk and a drop in confidence as a result of counterfeiting. The counterfeiting of £1 coins is estimated to account for almost 3 per cent of the stock, but the Royal Mint conducts regular public awareness surveys to ensure that public confidence in the pound is high, and the Government have no change to the £1 coin in mind.
Lord Naseby
My Lords, the consultation with business and industry and the saving are welcome, but after the new coins have been in circulation for a period, will it be obvious to the consumer which coins they have in their pocket when they arrive at a parking meter?
Lord Sassoon
Noble Lords may not be aware that they may have in their pocket two different sorts of 1p and 2p coins, because they were changed from cupronickel to copper-plated steel in 1992. When looking in my pocket this morning, first, I could not distinguish them and, secondly, I had not been aware of the distinction. This is well trodden territory as successive Governments have updated the coinage, and there should be no particular difficulty.
Lord Davies of Oldham
My Lords, the House will have derived some reassurance from the Minister's answers thus far, but given that in the not too distant future there are likely to be changes to the higher denomination coins, would it not be politic now to have a full-blown consultation on, or perhaps even a commission into, the coinage to look at the future, to give people the opportunity to make their views known and to prepare?
Lord Sassoon
My Lords, prepare for what? I have already said that there are no plans to change the £1 coin and I am happy to say that there are no plans to change any of the other denominations of coins. It is all rather hypothetical.
Lord Sewel
My Lords, I shall ask a Grocott-type question, if I may. Has the Treasury done any calculations or estimates of the cost of changing the coinage in the event of Scottish independence? Is this not another example of the folly of the independence line?
Lord Winston
My Lords, is the Minister aware that the change to copper-plated steel is very difficult when I am doing electrical experiments with my three and a half year-old grandchild?
Lord Sassoon
My Lords, I am not sure what we can do about that, but I can assure the noble Lord that, based on the experience with the 1p and 2p coins, there will be many cupronickel 5p and 10p coins still in existence for many years to come.
Lord Faulkner of Worcester
My Lords, I congratulate the Government on issuing a new set of coins to popularise the Olympic Games and the fact that a number of coins represent particular sports. Can I regret the fact that the new 50p coin, which defines the football off-side law, is incorrect?
Lord Sassoon
My Lords, I think that we are straying a bit from the Question. I must say that my knowledge of the twists and turns of the off-side law has never been completely up to date.
Aviation: Passenger Duty
Lord Sassoon Excerpts(14 years, 2 months ago)
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Baroness Benjamin
To ask Her Majesty’s Government what criteria they took into account when deciding to increase the rate of air passenger duty, in particular in respect of flights to the Caribbean.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, the new rates of air passenger duty, or APD, which take effect from 1 April 2012, were confirmed in the Autumn Statement following a freeze in APD rates in 2011-12. Over the two-year period 2011-12 to 2012-13 APD rates, including those for flights to the Caribbean, will rise in line with the retail prices index. This increase, which does no more than keep pace with inflation, is necessary if the Government are to meet their overall fiscal projections.
Baroness Benjamin
I thank my noble friend the Minister for that Answer, but he is aware that air passenger duty is less if you fly to Hawaii than to Barbados, even though that is nearly double the distance. However, the Caribbean is the most tourism-dependent region in the world and the distortions created by APD rates are damaging to Caribbean countries—loyal friends and supporters of Britain. Would the Government consider amending the rates of APD to the Caribbean islands if they nominated Bermuda, an associate member of CARICOM, as their capital, bringing their banding into line with the US, their major tourism competitor? If not, what plans do the Government have to provide economic support to the Caribbean now that its livelihood is threatened?
Lord Sassoon
My Lords, in the current economic climate, air passenger duty is clearly a burden on all businesses whether in the Caribbean, the UK, or wherever else they are based. That is why we had a one-year freeze, although it is right that aviation should make a fair contribution. However a banding structure works, it is bound to have anomalies. It is the case, as many noble Lords will know, that because the banding works in essence on where the capital city is, the anomalies are indeed there, as my noble friend says, but whenever there are bandings there will be anomalies. We listened to the case that was made very well by the Caribbean authorities, including the tourist organisation, during our full consultation last year. We have no plans to make any further changes, other than those set out in the response to the consultation, but I hear very clearly what my noble friend says about how challenging the situation remains.
Baroness Scotland of Asthal
My Lords, do the Government accept that the Caribbean now has a number of very fragile economies and that these duties will have a disproportionate, deleterious effect on their well-being, and therefore will in many ways affect the United Kingdom too, which benefits greatly from many of those who hail from that region?
Lord Sassoon
My Lords, although I do not underestimate for one moment the effect on the Caribbean, there will be very many businesses located there, here and in other places for which air passenger duty is a burden. The present system of four bands was introduced by the previous Government. We had a one-year freeze in order to recognise the difficult situation in which people were placed by this and we looked at it. However, the fact is that the APD raised approximately £2.5 billion in 2011-12 and is an important revenue-raising duty.
Lord Sassoon
That is a hypothetical question because there is no live question about there being a way to reclassify the Caribbean somehow from band C to band B. To illustrate the broader point, however, many of the respondents to the consultation suggested that we should move back from four bands to two, but that would have resulted in all those in short-haul bands A and B paying more, so it would have increased the air passenger duty for 91 per cent of all passengers paying it. There is no easy way of moving places from one band to another.
Lord Davies of Coity
My Lords, the Minister has referred to a number of anomalies. Does he accept that the anomalies display unfairness, and what are the Government going to do about them?
Lord Sassoon
As I have explained, the previous Government moved from a two-band system to a four-band one, which raised in the order of £300 million when they came into office and, by the time they left office, was raising in the order of £1 billion. These things are not easy. Where there are real difficulties, however, the Government recognise them. For example, special arrangements have been put in place for long-haul flights out of Northern Ireland to recognise its very special circumstances—its land border with a country that has no APD—and to preserve its flights to the United States. We have said that we will also look at the possible devolution of APD to Wales and Scotland.
Baroness Berridge
My Lords, one of the ways in which the system deals with anomalies is to divide large countries such as the Russian Federation into two APD bands. Why has it not been possible to have such a solution for the United States and Canada, which remain in one band and which creates the injustice that my noble friend Lady Benjamin referred to?
Lord Sassoon
My Lords, after reviewing this question at considerable length, a decision was taken to leave well alone on all this. As I have tried to explain, as soon as one moves one thing, that opens up the question of all sorts of other adjustments to maintain the revenue.