Councils: Funding

Lord Forsyth of Drumlean Excerpts

Thursday 4th July 2019 Lords Chamber

[Lord Young of Cookham]

The Government have not imposed mayors on parts of the country; they have elected to have mayors. There has been no imposition. In all the cases involving combined authorities and local mayors, local government has come to the Government and asked that these powers be given to them. I think the noble Lord will find that he is misinformed that we have imposed this structure on local government.

[Lord Forsyth of Drumlean (Con)]

My Lords, has my noble friend had an opportunity to read the report today on social care from the Economic Affairs Committee? Will he note that social care and local authorities have seen a real-terms cut in resources and that 1.4 million elderly people are not receiving the care they need? Does he not recognise that shifting the burden on to local government and relying on business rates results in postcode inequality, as different local authorities have different demands and different abilities to raise resources? Should this not be funded centrally, and done urgently?

[Lord Young of Cookham]

I took the precaution of getting a copy of my noble friend’s report, which was published this morning. For the last 30 or 40 years, Governments have been trying to bring together health and social care. If you are an elderly person in need, you are not interested in a bureaucratic argument as to whether yours is a health or a social care problem; you want the support that you need. The dilemma my noble friend’s report addresses is that health is provided by national government and is free at the point of use, while social care is provided by local government and is means-tested. He addresses that problem by suggesting that local government should provide social care but it should be free and be funded by central government—that is the nub of the report. It is a hard-hitting report that expresses noble Lords’ frustration at the delay to the publication of the social care Green Paper. I very much hope that his report will accelerate a solution to this long-standing problem.

Inflation

Lord Forsyth of Drumlean Excerpts

Monday 1st July 2019 Lords Chamber

Moved by

[Lord Forsyth of Drumlean]

That this House takes note of the Report from the Economic Affairs Committee Measuring Inflation (5th Report, HL Paper 246).

[Lord Forsyth of Drumlean (Con)]

My Lords, I can see by the size of the exodus from the Chamber that many may regard this as a dry, technical report, but it is in fact a revealing tale of how complacency on the part of the statistics authorities and opportunism on the part of Governments have led to the use of inflation statistics leaving many people worse off. I asked my noble friend the Minister about this at Question Time and he assured me that he would deal with it comprehensively. I look forward to hearing his response.

The committee’s attention was drawn to the problems with the calculation of the retail price index through a series of articles by Chris Giles in the Financial Times, a long-time campaigner on these issues. We asked the Governor of the Bank of England about these problems during his annual evidence session with the committee last year. He told us that the RPI had “known errors”, should not be further embedded in government contracts, and that if there was anything the committee could do to advance this process, we would be providing “a real service”. I hope that we have risen to the Governor’s challenge.

We began our inquiry a year ago in June 2018 and reported in January of this year. Before I discuss the findings, I would like to thank the committee staff who produced the report: Luke Hussey, Ben McNamee and Lucy Molloy. Ben McNamee is leaving the committee after five years to go to work for the National Infrastructure Commission, following our report on HS2. He is the original gamekeeper turned poacher, and we wish him well.

Chapter 1 of the report describes the history of consumer price inflation. There are two main measures of consumer price inflation in use in the United Kingdom: the retail price index, which was introduced in the 1950s, and the consumer price index, which was introduced in the 1990s following the Maastricht treaty. Both indices are based on the changes in price of a fixed basket of goods and services, but there are a number of differences between what the indices cover and how the price changes are calculated. One of the main differences is how the two indices calculate the average price change for unweighted items in the basket: that is, items on which a proportion of household spending is not available for the level at which prices are collected. It may help to give an example to illustrate this point.

The survey used to calculate the indices will reveal the proportion of household spending on potatoes as a class of goods, but it will not reveal the spending split between the different varieties of potatoes—say, King Edward or Maris Piper. This means that the price changes of different varieties of potato—the price of King Edwards may rise by more than Maris Pipers, for example—cannot be weighted according to household spending. A method is therefore required to calculate the average price change when expenditure weights are not available—I hope your Lordships are following me so far. The RPI does this for some items through the Carli formula, which uses the arithmetic mean. The CPI, however, largely relies on the Jevons formula, which uses the geometric mean. Statisticians have been debating which is the preferred formula since the 19th century. We set out the arguments in chapter 2 but decided, probably wisely, not to enter into that debate.

This difference in how to calculate price changes for unweighted items leads to a difference in the inflation rate which each index produces. The gap between the CPI and the RPI-recorded inflation rate, which is attributable to this methodological difference, is referred to as the “formula effect”. In December 2009, the ONS estimated that the formula effect was responsible for RPI recording the rate of inflation as 0.54 percentage points above the rate recorded by CPI. However, by December 2010, the difference had increased to 0.86 percentage points—a 0.32 increase. What caused this substantial change? In 2010, the ONS changed the way it collected prices for clothing. It increased the sample size of clothing it recorded prices for, relaxed the rules on what types of clothing were considered comparable, and began collecting prices during the January sales. This is colloquially known as the strappy tops problem.

This was believed to be a routine methodological change, but it had a strange effect on the recorded price change of clothing in the RPI. From 1987 to 2009, the average annual price change in women’s clothing as measured by the RPI was a 2.5% decrease, but from 2010 to 2017, the average annual price change was an 11.1% increase. Something had clearly gone amiss. The ONS held up its hands and admitted that it had made an error. Witnesses were generally agreed that the interaction of the Carli formula with the new method of price collection was to blame for the overestimation of price rises. Although the error also affected CPI, it affected RPI more, and the ONS said that the change was responsible for 0.3 percentage points of the 0.32 increase in the formula effect.

That may sound very technical so far, but that error created real-life winners and losers. Who won? Holders of index-linked gilts. These gilts are linked to RPI, and the resulting 0.3 percentage point increase in the index led to an undeserved windfall. Chris Giles has estimated that the value of interest payments received by index-linked gilt holders was increased by about £1 billion a year. Who lost? Commuters, because rail fare increases are linked to RPI, and students, because the interest on student loans is linked to RPI. The increased difference between inflation as recorded by RPI and CPI also encouraged Governments to engage in the practice known as index shopping. Benefits, tax thresholds and public sector and state pensions were all switched from being uprated by the higher RPI to the lower CPI.

This brings us to the most surprising part of the story, with which my noble friend refused to engage at Question Time. The UK Statistics Authority, of which the ONS is the executive arm, has refused to correct the error, despite admitting that it had made a mistake. Why? As the correction of the error would be likely to reduce the rate of RPI inflation, it would adversely affect holders of index-linked gilts.

The 2007 Act requires the authority to obtain the consent of the Chancellor of the Exchequer to such a change. Sir David Norgrove, the authority’s chairman, told us that the 2007 Act meant that there was no point in requesting the change, as the Chancellor would just say no. Last week, he wrote to me to say that he was unable to reply to our report after all this time as discussions with the Government continue. In my mind, this undermines the independence of that body. The National Statistician, John Pullinger, who retired last week, suggested to the committee that Section 7 of the 2007 Act required him to take into account the interest of those who would be affected negatively by any such change, such as index-linked gilt holders.

This is not the committee’s interpretation of Section 7. Section 7(1) gives the authority the objective of,

“promoting and safeguarding the production and publication of official statistics that serve the public good”.

Section 7(3) states that the authority should,

“promote and safeguard … the quality of official statistics … good practice in relation to official statistics, and … the comprehensiveness of official statistics”.

Section 7(4) states that,

“references to the quality of any official statistics includes … their impartiality, accuracy and relevance, and … their coherence with other official statistics”.

The committee’s reading of this is that the authority is, to put it mildly, at risk of failing in its statutory duties by its refusal to attempt to correct the clothing error in RPI, which it openly admits. It is not for the authority to pre-empt the decision of the Chancellor, as its chairman suggested. The Chief Secretary to the Treasury told us that it was difficult for the Chancellor to say yes or no to a proposal he had not received. The Chancellor told us that he was happy to hear from the authority. The committee was unconvinced by the National Statistician’s suggestion that he should take into account the interests of index-linked gilt-holders when deciding whether to make a change. It is not clear from section 7 that this is a relevant consideration to be taken into account. We believe that the authority is required, by its statutory duties, to attempt to fix the issue with clothing prices.

The decision not to correct the error is part of a wider neglect of RPI by the statistical authorities. Following a review of inflation indices, the authority removed national statistics status from RPI in 2013 and now treats RPI as a “legacy measure”. Following the recommendations of a 2015 review by Paul Johnson, it has resolved to make no further methodological improvements to the RPI. However, that is a very surprising stance, given that RPI remains in widespread use. Paul Johnson told us that he had changed his mind since his 2015 review. He said that his recommendation to make no further improvements to RPI was predicated on RPI being phased out. He said that given this has not happened, the committee should ask the authority to correct the RPI. We therefore called for the UK Statistics Authority to resume its programme of periodic methodological improvements to RPI.

When the Governor of the Bank of England asked us to look into this, he suggested that with three official measures of inflation—RPI, CPI and CPIH—it would be good to consolidate the focus into one. We agree, and believe that in the future there should be one measure of general inflation that is used by the Government for all purposes. To achieve that, work is required on how best to capture owner-occupied housing costs in inflation indices. Witnesses criticised the approach of the RPI which uses mortgage interest costs, and the approach of CPIH, which uses rental evidence. CPI does not account for owner-occupied housing costs, save for minor repairs.

We said that the UK Statistics Authority, together with its stakeholder and technical advisory panels and a consultation of a wide range of interested parties, should agree on a best method of capturing owner-occupied costs. Once a method has been agreed, the authority—again, after consultation—should decide which index to recommend as the Government’s single general measure of inflation. We would like to see that adopted within five years.

Sir David Norgrove told us that RPI is not a good measure of inflation and does not have the potential to become one. We disagree, and believe that an improved RPI would be a viable candidate for the single general measure. A single general measure of inflation would prevent governments from index-shopping. Table 2 on page 39 of the report shows that when the Government are making payments to the public, CPI is the index used to uprate payments; but when the public are making payments, it is RPI that is used. The Government say that they are changing that. However, in May this year, the latest example was when National Savings and Investments index-linked savings certificates were switched from RPI to CPI. In other words, pensioners and savers around the country are being cheated. It appeared to be a switch motivated by its favourability towards the Government, rather than a principled approach to uprating.

The present Government, however, have taken some steps to address the imbalance. Business rates were changed to be uprated by CPI rather than RPI, and discussions have taken place around uprating rail fares by CPI rather than RPI.

A single general measure would remove the temptation to index-shop. As the single general measure of inflation will take time to be implemented, the Government need to take interim action to stop this unfair practice. They should switch to CPI for uprating purposes in all areas where they are not bound by contracts to use RPI. The exception to this recommendation is the interest rate on student loans. As recommended in our report, Treating Students Fairly, this should be reduced to the 10-year gilt rate—something that the Augar review, which we will debate tomorrow, was not able to recommend because, I am told, the Treasury leaned on committee members to say that they should not make any recommendations that would result in increased public expenditure.

This interim switch to CPI should also apply to new issuances of index-linked gilts. We heard evidence that there was sufficient demand for CPI-linked gilts. Ben Broadbent from the Bank of England dismissed concerns from the Debt Management Office that the existence of CPI and RPI-linked gilts would lead to market fragmentation. Anyone who knows anything about the gilts market knows that an argument about market fragmentation lacks some credibility. We heard concerns about the effect that the change to the calculation of RPI would have on existing index-linked gilts, the last of which is due to mature in 2068 for private sector bonds and pension schemes. As some witnesses discussed, a sudden change, such as redefining RPI, CPI or CPIH, would be inappropriate, but once the single general measure of inflation is in place, the Government and the UK Statistics Authority should decide whether RPI, if it is not the chosen measure, should continue to be published in its existing form or whether a programme of adjustment should be made to RPI so that it converges on the single general measure.

To avoid disruption, any programme should take place gradually over a sufficiently long period to a plan that was clearly communicated at the outset. That includes our recommendations. The Spring Statement said that the Government would respond to a report by the end of April. The Chancellor wrote to me on 30 April to say that the issues raised in the report are “complex and wide-ranging”—a bit like social care, which we will report on next. He said that the “breadth, complexity and importance” of the issues meant that the report requires further education. Sorry, I mean further consideration—a Freudian slip. He said that the Government would respond to the committee’s report as soon as is practicable to do so, but wrote to me last week to say that the issues are so complex that the report requires further consideration.

The report cannot remain unanswered. It raises serious questions about decision-making by the statistics authorities. The Government and the UK Statistics Authority need to address the challenges highlighted by our report. I beg to move.

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[Baroness Browning (Con)]

My Lords, I support this report from my noble friend Lord Forsyth and his committee. There is very little that my noble friend and I disagree on. He trained me well when I was his PPS many years ago and I fully support the thrust of this report. The governance and probity of the UK Statistics Authority has quite rightly been called into question. The parts of the report that go into the legal basis for it leaving in place what is clearly an error as far in the RPI calculations must be addressed quickly.

As someone who takes a particular interest in disability benefits, over the years it has been a matter of great irritation to me—I put it no stronger than that—that there are winners and losers. As my noble friend described, the Government’s index-shopping is a sleight of hand; unless one is engaged every day in studying these types of statistics, the average person in receipt of this increase or decrease is probably not going to notice it in actuarial terms, but will certainly notice it in their pocket. Therefore, I support what the report is suggesting.

In Box 1.A of last year’s Budget report, it seemed that the Government recognised only too well that there is a fundamental problem here. They said that,

“the government will not introduce new uses of RPI”,

which makes me think that they are more aware of what needs to be done than they have indicated to my noble friend in correspondence.

[Lord Forsyth of Drumlean]

I am grateful to my noble friend. That may well be the case, but they did introduce a new use of CPI with National Savings.

[Baroness Browning]

Indeed. I used the phrase “sleight of hand” quite deliberately. Clearly, there needs to be some fundamental change here. The legal basis for the change is well set out in my noble friend’s report. I find it rather strange to be debating whether something that has been proven in law to be wrong should or should not be changed, and why there are so many reasons against changing it. A can-do approach by the Treasury is needed to bring about the committee’s recommendations.

I am not going to speak for long, although I should declare that I am one of those elderly pensioners in receipt of some government index-linked investments—a very modest holding. I do not know whether that will be good or bad. I think it has been bad already, but never mind—I have declared it to the House.

My noble friend said that at some point in the evidence session to the committee, somebody—I have forgotten who—said that they should be cautioned against market fragmentation of the gilts market, and my noble friend said that that was most unlikely. I share that view. However, in the two areas of gilts that are addressed in the report, one of those organisations already holds gilts with the dates as set out by previous speakers, and that particular group needs to be addressed. With the future issuance of gilts, if there is just one rate it also means that anybody looking at it to decide whether it is a good investment would at least know where they stood.

I would also like my noble friend to bear in mind that, for investments and savings generally, we are in an age of trading by algorithms. Huge sums of money are moved around in nanoseconds. Whether it is the manager of a corporate pension fund or the individual being given financial advice about quite a modest investment, gilts have for many years been the foundation of good advice. The fewer assets people have, the more they are recommended to have a higher holding of government-based investments rather than the equity-based ones which have the higher risk, which we would all be familiar with.

The way in which the changes to gilts are brought about, as outlined in this report, needs some careful handling. It would be detrimental to best advice and best interests, for the corporate and individual investor and the reputation of gilts, if the changes that are clearly necessary resulted in people becoming nervous or not feeling it worth while to have at least a floor of that type of investment, particularly when it is a mixed investment. Over the years, we have seen fewer people prepared to take smaller returns on investments; they have what is almost a cavalier approach to savings and investments. Gilts have played a very big part in securing what most people would recognise as best advice. The changes are necessary for those who already hold gilts and those who will consider newly issued gilts. I hope it will be understood that the security of gilt-edged investments is an important part of that good advice, which our financial services market has relied on for many years.

--- Later in debate ---

[Lord Young of Cookham]

I said, “to name but a few”, but I will gladly add the issue raised by the noble Lord to the list. Some, but not all, wage increases are linked to RPI.

Some uses of the measures are interlinked; for example, for pension schemes whose members, many of whom are in private sector defined benefit schemes, have pension payments that increase by RPI. This means that, in turn, those schemes seek RPI-linked assets to hedge those liabilities. As a result, a large share of the Government’s outstanding RPI-linked debt is held by those pension schemes. The Pension Protection Fund estimates that almost 90% of outstanding index-linked gilts are held by UK defined benefit pension schemes and UK insurance companies.

The breadth, complexity, and importance of these issues mean that the committee’s report requires further careful consideration. Given the complexities of the issue, it is sensible that the Government and the UKSA produce a well-considered response—while respecting the UKSA’s independence, of course.

[Lord Forsyth of Drumlean]

A very kind and polite person from the Chancellor’s office rang me to say that there would not be a response. I said that I was not sure that the House would like that very much, but he said, “Don’t worry, Lord Young will be able to deal with the debate”. The Minister gave a reason for the complexities of the system: that so many things rely on the RPI. If that is so, is that not a reason to make sure that the RPI is accurate? I cannot get my head around it.

[Lord Young of Cookham]

That goes to one recommendation directed at the UKSA. That issue will be addressed directly in the government response to the recommendations. I cannot give my noble friend an answer today; I hope that he understands why.

In introducing the debate, my noble friend wondered whether the Government discussing this issue with the UKSA somehow compromised the UKSA’s independence. It is perfectly legitimate for the Government to discuss matters with the UKSA without interfering with its independence in decision-making. We discuss a wide range of issues with it—as we should, given that the ONS is the producer of economic statistics. One can have that dialogue without encroaching in any way on the UKSA’s independence. The Government continue to discuss the relevant issues raised by the report; the Chancellor wrote to my noble friend last week, outlining that point. I stress to my noble friend, the noble Lord, Lord Sharkey, and other noble Lords that we are working hard to respond to the committee’s report as quickly as possible. We will communicate a date for this response in due course and will provide sufficient notice for the markets.

Let me move on to the central focus of the inquiry, namely the RPI. As the Government have stated before, we recognise that there are flaws in the way that RPI is measured and that, as a result, its rate of inflation is higher than that of other measures, such as the CPI and CPIH, which is the CPI including owner-occupiers’ housing costs.

The report from the committee is the latest in a series of reports on this intractable issue. I highlight this to stress how complex it is. In 2012, the then National Statistician launched a consultation on potential changes to the RPI following concerns about the increased wedge between RPI and CPI, which had been driven primarily by the 2010 change in the collection of clothing prices. There was then a considerable response, both on matters statistical and non-statistical, and in 2013 the then National Statistician responded, arguing that the RPI did not meet the highest standards expected for a national statistic. That answers the question of the noble Lord, Lord Lea, as to why it was regarded as discredited: the UKSA stripped the RPI of its national statistic status.

However, given its widespread use in the economy, the National Statistician argued that the RPI should remain unchanged. In 2015 a review into consumer price statistics, which had been led by Paul Johnson of the Institute for Fiscal Studies, was published. This also criticised the RPI and recommended that it should be classed as a legacy measure and that its use should be actively discouraged.

Let me explain the Government’s use of inflation statistics and highlight how they have not ignored the criticisms of RPI. Since 2010 the Government have reduced their use of RPI. They have moved the indexation of direct taxes, benefits, public sector pensions and the state pension from RPI to CPI. More recently—this addresses the accusation of index shopping made by a number of noble Lords—in April 2018 the Government brought forward switching the indexation of business rates from RPI to CPI.

--- Later in debate ---

[Lord Forsyth of Drumlean]

My Lords, I thank everyone who took part in the debate, and my noble friend for that excellent reply. He is a sort of Kate Adie of the Treasury at the moment, deployed in difficult circumstances to report on what is going on at the front. It is the second occasion on which he has responded to an Economic Affairs Committee report—the previous one was on digital tax—where every speech has been in support of the committee’s report and he has had to explain why the Treasury is not responding in the way we would like. On this occasion he has not actually ruled out doing something and we await a response with bated breath.

It is a complex matter—we in the committee had to put some hot towels on our heads. But members of the committee are reasonably bright and we were able to come up with some clear recommendations. We look forward to when the Chancellor of the Exchequer is before the committee later this year and hope that by then there will be a response. This is a complex subject, but the ordinary layman might find it very difficult to understand why, as my noble friend said, RPI is important in a range of areas in our economy and therefore it is necessary for us to continue with an RPI that everybody accepts is flawed. That is a very difficult proposition to accept.

The other matter that is very clear is that the debate has focused, quite rightly, on the degree of independence of the statistical authorities. Perhaps it is really for another place to consider whether it is right that the appointments to that body are made by the Government rather than by the House of Commons or by Parliament as a whole—but here I am broadening the debate.

I shall say a couple of words about the excellent speeches that have been made. I thank the noble Lord, Lord Turnbull, for his speech and for his enormous contribution to the Economic Affairs Committee, not least in persuading me that we need to build more social housing and to remove the cap on local authority borrowing. I am delighted to say that on that occasion the Treasury accepted our recommendation.

We are also losing the noble Lord, Lord Sharkey, from the committee. He has made a formidable contribution. It has been a great pleasure for me to chair the committee with such fine brains, including those who spoke on behalf of the committee in this debate—that is, my noble friend Lord Tugendhat and the noble Lord, Lord Burns. I am very disappointed that we have not been able to recruit the noble Lord, Lord Macpherson, to the committee, because having such experienced Treasury people endorsing our reports must make it extremely difficult for people such as my noble friend to respond to them.

Having taken my noble friend’s assurances that he will have a word with the Chancellor, that the Treasury will get on with responding and that the statistics authorities will read this debate and see the strength of feeling that has been expressed on all sides, I beg to move.

Motion agreed.

Statistics: Accuracy

Lord Forsyth of Drumlean Excerpts

Monday 1st July 2019 Lords Chamber

[Lord Young of Cookham]

Under the Ministerial Code, if a Minister misleads the House, he or she is obliged to put it right. So far as Ministers doing the right thing, a year ago the Home Secretary resigned after inadvertently misleading the House. I say in passing that when it comes to the creative use of figures, none of us can lay a glove on the Liberal Democrats, with their use of bar charts—“Only the Lib Dems can win here”. These multicoloured instruments of fantasy now have a website all of their own on Buzzfeed.

[Lord Forsyth of Drumlean (Con)]

My Lords, does my noble friend not think it wrong that the official statistics body has openly admitted that there is an error in the retail prices index which results in commuters, students and other groups being short-changed? Should not a body responsible for the integrity of our statistics resile from its current position, where it refuses to adjust the error?

[Lord Young of Cookham]

My noble friend tempts me to reach for my folder which has a 20-minute speech in response to his debate, which is shortly to begin, on the use of the retail prices index and the role of the UK Statistics Authority. If he can contain himself until then, he will get a very full reply.

National Health Service: Pensions

Lord Forsyth of Drumlean Excerpts

Monday 10th June 2019 Lords Chamber

[Lord Young of Cookham]

My Lords, the Armed Forces Pension Scheme continues to be one of the best available defined-benefit occupational schemes. Service personnel on the AFPS are not required to contribute towards their pension throughout their career. However, we continue to monitor the differences between the various schemes to ensure that they are fair and provide appropriate support to the workforce.

[Lord Forsyth of Drumlean (Con)]

My Lords, does my noble friend the Minister not recognise that this is not a problem confined to the NHS or indeed the armed services? It arises because the former Chancellor of the Exchequer, George Osborne, reduced the size of the pension pot from £1.8 million to £1 million over a short period of time. As a result, if people with final salary pension schemes reach the age of 55 and do not retire but continue, they are taxed at an outrageous 55%. The remedy lies in the Treasury undoing the mess that it created in the first place.

[Lord Young of Cookham]

There are a number of contenders for the leadership of our great party at the moment. If my noble friend feels this is a cause which will gain currency in my party, no doubt he will pursue it with one of those candidates. However, I return to what I said a few moments ago. The changes we made were progressive, to ensure there was not an inequity in the tax relief benefit.

Electoral Commission: Referendums and Elections Spending

Lord Forsyth of Drumlean Excerpts

Thursday 23rd May 2019 Lords Chamber

[Lord Young of Cookham]

Following our exchange yesterday, I have been in touch with the Minister for the Constitution and he has agreed to the meeting that was discussed. It took me 24 hours to agree to that proposition; the noble Lord may think he is on a roll when it comes to the second one. So far as that is concerned, the Government have regular contact with the Electoral Commission on a range of issues, including its powers, and we keep those matters under review.

[Lord Forsyth of Drumlean (Con)]

My Lords, in his contacts with the Electoral Commission, could my noble friend encourage it to consider the issue of collusion between trade unions and the Labour Party in campaigning in general elections? Expenditure made by trade unions in campaigning should be accounted for as part of the Labour Party’s contribution.

[Lord Young of Cookham]

The Electoral Commission will have heard the suggestion from my noble friend, which aroused some excitement on the Benches opposite. I am sure that all political parties want to abide by the law, and declare donations as appropriate.

Political Parties: Donation Rules

Lord Forsyth of Drumlean Excerpts

Wednesday 22nd May 2019 Lords Chamber

[Lord Young of Cookham]

As I said on Monday, there appears to be some headroom in the Government’s legislative programme at the moment. Sitting beside me are two members of the relevant Cabinet sub-committee that processes bids for legislation and they will have heard my noble friend’s suggestion. Were there to be such a Bill, I hope that it would be taken through by law officers and not by me.

[Lord Forsyth of Drumlean (Con)]

My Lords, given that the largest ever political donation to the Liberal Democrats was given by a convicted fraudster, Mr Michael Brown, and that they refuse to return that money to the people who have been defrauded, will my noble friend look at the law to see whether we should require political parties who have been given money by convicted criminals to return it on behalf of those who have lost out?

[Lord Young of Cookham]

That was a slightly less consensual approach from my noble friend than that from the noble Lord, Lord Kennedy. If we did go down that road, I doubt whether any legislation would be retrospective. I suspect my noble friend would agree. It would be for the Electoral Commission in the first place to put proposals forward for such legislation.

Making Tax Digital for VAT (Economic Affairs Committee Report)

Lord Forsyth of Drumlean Excerpts

Monday 29th April 2019 Lords Chamber

Moved by

[Lord Forsyth of Drumlean]

That this House takes note of the Report from the Economic Affairs Committee Making Tax Digital for VAT: Treating Small Businesses Fairly (3rd Report, HL Paper 229).

[Lord Forsyth of Drumlean (Con)]

My Lords, I rise to introduce the Economic Affairs Finance Bill Sub-Committee’s report on the powers of HMRC. Perhaps I will leave those who do not wish their tax affairs to be considered to leave the Chamber.

In this debate we are considering two reports from the committee: The Powers of HMRC: Treating Taxpayers Fairly and Making Tax Digital for VAT: Treating Small Businesses Fairly. These reports sprang from the sub-committee’s inquiry into the 2018 draft finance Bill. As the House will know, the sub-committee exists to scrutinise the draft finance Bill for issues of tax administration and clarification or simplification, and not the rates or incidence of tax.

Last year’s draft finance Bill did not contain many show-stopping measures, as Members might have noticed when the final Bill progressed through the House. We therefore decided to conduct thematic inquiries based on a few of its clauses, considering the cumulative effects of increased HMRC legislative powers over recent finance Bills and checking progress on the Making Tax Digital programme, which we considered in 2017. An example of the cumulative powers which perhaps went unnoticed in the Finance Bill was that anyone who has overseas investments can now have their tax affairs backdated for 12 years rather than four or six. That includes having an overseas property or perhaps having shares in a company listed on a US or other foreign exchange.

Before explaining our conclusions, I would like to thank the sub-committee members, who were recruited at short notice for a fast-paced inquiry. I also thank our excellent special advisers to the inquiry, Elspeth Orcharton and Robina Dyall, and the committee staff who produced the report: Sam Newhouse, Luke Hussey, Lucy Molloy and Lloyd Whittaker.

Making Tax Digital for VAT obliges all businesses with an income above £85,000 to submit their VAT returns through software that connects to HMRC’s database. It came into force at the start of this month. It is the first part of the Government’s Making Tax Digital programme, about which I will not go into detail other than to say that it aims to make tax digital. We first considered Making Tax Digital in 2017, when it was due to be implemented for income tax in April 2018. We found that HMRC had underestimated the cost to businesses and overestimated the benefits to the Exchequer, and that many businesses had no idea that they would soon be forced to change their whole accounting processes. The sub-committee recommended that all mandation of the programme be delayed until April 2020 at the earliest.

A year and a half later, when we started our 2018 inquiry, the deadline had been moved back to April 2019 and income tax had been removed from the scope of the first stage. We hoped that, by then, HMRC would have learned the lessons of our previous report, but we were disappointed. HMRC has again underestimated the cost to business. It says that, on average, there will be a one-off transition cost of £109 and an ongoing cost of £43 per year. But one practitioner told us that it could cost clients transitioning from paper records as much as £2,600. There seems to have been no effort to calculate a cost for the smallest businesses, which will need more agent support and may be more likely to use paper records. The definition of a small business used in HMRC’s estimate includes any business with taxable turnover between £85,000 and £10 million. This takes in 96% of VAT-registered businesses.

HMRC has still not done enough to raise awareness. The Institute of Chartered Accountants in England and Wales found in a survey as recently as last summer that 42% of businesses which are now required to comply with Making Tax Digital for VAT were not aware of its existence. The Treasury announced triumphantly last month that, as of December, over 80% of businesses in scope had started to prepare; but the fact that nearly one in five had not started to prepare, just three months before the introduction of Making Tax Digital, should have been more worrying. In its own research, the Daily Telegraph reported on 30 March, in a survey of some 500 companies, that 23% of affected companies had not even heard of Making Tax Digital; an additional 28% had heard of it but did not know how it would affect their business.

It seems likely that these are the same small businesses that HMRC also forgot about in calculating the costs of its programme. Serious questions remain about the expected benefits of the wider Making Tax Digital programme. HMRC and the Treasury expect it to yield higher tax revenue as businesses make fewer errors filling in their tax returns. But this does not seem to account for the fact that mistakes can run in both directions: businesses could be paying too much as well as too little. There is no convincing explanation of how businesses are meant to cope in rural and other areas where broadband connections are insufficiently good for this purpose.

We recommended that Making Tax Digital for VAT be delayed for a further year to address these problems. Clearly, that ship has now sailed. In the Spring Statement, the Chancellor reiterated that there would be no further mandation until after 2020. Our report recommended that no further mandation takes place until April 2022, to allow the Government to properly analyse and learn lessons from the implementation of Making Tax Digital for VAT.

Delaying until 2022 would also allow a reassessment of the benefits of the programme and its costs to the smallest businesses. We also recommended that the Government publish a revised long-term strategy for Making Tax Digital, accounting for the recommendations in our reports and the experiences of the programme so far. I ask my noble friend Lord Young whether he can give any further updates on these recommendations when he responds to the debate on behalf of the Government.

Our inquiry also sought to ask whether, after a plethora of new HMRC powers to address tax evasion and avoidance in recent years, there remains a fair balance of power between HMRC and the taxpayer. We concluded that HMRC’s powers have outpaced taxpayer safeguards and tipped the scales in HMRC’s direction. Before I begin, I must emphasise that the sub-committee wholly supports efforts to tackle tax evasion and avoidance but those efforts should enhance, not diminish, fairness in the tax system.

We found that several powers had been introduced with insufficient safeguards attached for taxpayers, particularly those on lower incomes or without agent representation. For example, accelerated payment notices require taxpayers to pay up front an amount of tax that HMRC thinks the taxpayer has avoided, before any dispute about whether the taxpayer is actually liable to pay tax to HMRC is settled by the courts; follower notices require taxpayers to pay tax that HMRC says the taxpayer has avoided by using a scheme that HMRC thinks is similar to one that has been challenged successfully in the courts. Taxpayers cannot appeal these notices, only the underlying tax liability. Taxpayers who continue to appeal a tax liability after receiving a follower notice and lose can face penalties of up to 50% of the tax liability added to their final bill. Both notices prioritise the fast recovery of tax revenue over fairness for taxpayers and, in my view, are attacks on access to justice. The sub-committee was very grateful to the noble and learned Lord, Lord Judge, who was able to advise the sub-committee on its draft conclusions. He criticised these powers for making HMRC judge in its own cause and fettering access to justice. I look forward to his contribution later in this debate.

To consider the overall balance of HMRC’s powers and taxpayer safeguards, we recommended a new collaborative review of powers between government and the tax profession, repeating an exercise so successfully conducted between 2005 and 2012 when Customs and Excise merged with the Inland Revenue. The Government noted this recommendation in their response, and I hope my noble friend can offer more clarity in his response to this debate on whether the Government will consider a new powers review.

In addition to legislative imbalance, we heard evidence of an aggressive and uncompromising culture of enforcement at HMRC. For example, witnesses told us that HMRC had presented voluntary requests for information as statutory requirements, made inappropriately harsh decisions on penalties, and alleged more serious conduct against taxpayers in order to access longer times for assessing tax. There is a sense, one witness told us, that HMRC is aiming to collect the maximum amount of tax rather than the right amount of tax. It may be that HMRC’s declining resources have made it impossible for it to satisfy demands to recoup higher amounts of tax revenue and treat taxpayers fairly. This is one area of government expenditure where increased expenditure actually produces increased revenue.

We recommended that consideration be given to the role of HMRC’s adjudicator, who currently considers taxpayers’ complaints about HMRC. She should, for example, proactively investigate the conduct of HMRC investigators in the manner of an inspectorate, or simply expand the types of taxpayers’ complaints that she can hear and strengthen her power to settle them. We also recommended a review of the case for an independent body to scrutinise the operations of HMRC.

The loan charge was the most distressing part of our committee’s evidence-taking. The new HMRC anti-avoidance measures, which came into force on 5 April 2019, introduced the measure known colloquially as the loan charge. This is an example of both the phenomena I have mentioned: disproportionate powers and an overtly aggressive culture. We received, and continue to receive, a huge amount of evidence on the impact this is having on individuals, which is often very difficult to read. There are already reports in the media of at least six suicides as a result of the implementation of the loan charge.

The loan charge seeks to tackle a tax avoidance scheme called disguised remuneration in which individuals, usually contractors, are paid in loans rather than income, to avoid income tax and national insurance contributions, on the understanding that those loans would never need to be repaid. The loan charge will classify any outstanding loans from these schemes, from 6 April 1999, as taxable under income tax. For those who have been using these schemes for many years, this requires them to pay many years of income tax in one go in one tax year.

In going back to 1999, the loan charge is retrospective. There is a long-established principle in the tax system that taxpayers are entitled to certainty in their tax affairs. As such, HMRC cannot go back further than six years, except in cases of fraud, but this charge goes back 20 years. HMRC says this is because the loans received in 1999 are still outstanding. The tax therefore applies to the present loan balance, not the past loan income. However, the problem with disguised remuneration schemes is that these are not really loans; they are income under another name. HMRC’s treatment of the loans as income in the loan charge is evidence that it agrees. We therefore recommended that the charge be disapplied to any disguised remuneration which occurred in years which would otherwise have been closed to HMRC inquiry.

Retrospection notwithstanding, we support HMRC in its attempts to address present and future disguised remuneration—it is clearly tax avoidance. However, we have pleaded with it, with limited success, to consider the different types of individuals embroiled in these schemes. Unlike some tax avoidance schemes, this affected middle- to lower-income individuals, rather than high-income individuals with easy access to professional advice. They believed the promoters of these schemes—often their employers—when they told them that the schemes were legitimate and approved by QCs and even by HMRC itself. They were perhaps naive, but they were not malicious.

One witness told us about a social worker affected by the charge. Before I continue, I note that we cannot independently verify the facts of this case, but it is illustrative of many examples received. The social worker was made redundant by her local council, which then offered to re-employ her as a contractor, as long as she used a particular scheme. Unknown to her, this was a disguised remuneration scheme. She was made aware of this fact only when she was presented with a bill by HMRC many years later. Some might say she should have investigated further, but as the witness said, she is a social worker, not a tax expert. The loan charge unfairly assigns the same culpability to lower-income individuals without easy access to professional tax advice as to better-advised individuals who should have known better. What is surprising about all this is that many of the schemes were promoted by employers with deep pockets, but we have found no evidence that HMRC is showing the same enthusiasm in pursuing either the employers or the promoters of the schemes.

I will finish by reflecting on the Treasury’s engagement with our inquiry. We invited the Financial Secretary to the Treasury, Mel Stride, to give evidence. At first, he said he was busy with the Budget, so we delayed our inquiry to accommodate him. He declined to attend on two occasions and he has since declined two further invitations to attend the Economic Affairs Committee itself. As rationale, the Treasury asserts a convention we do not recognise, claiming that the fact that no Treasury Minister has attended a sub-committee before represents a precedent. The Financial Secretary repeated this argument in the Financial Times on 31 March.

This is a matter of coincidence, not convention. No such agreement was in place when the sub-committee was created in 2003. In the past its inquiries have often been technical, uncontroversial and answerable entirely by HMRC officials, but the gravity of the evidence we received in this inquiry required a ministerial response. When HMRC and Treasury officials gave evidence, they could not answer several of our questions—quite understandably, because they were matters for Ministers. Furthermore, two of these invitations were from the Economic Affairs Committee, which has a long history of hearing from Treasury Ministers. The Chancellor gives evidence every year, and the Chief Secretary to the Treasury is likely to give evidence to us just next month. The Governor of the Bank of England attends every year.

In future years, when the finance sub-committee considers issues it believes merit a ministerial response, it will continue to invite Ministers from the Treasury. I hope that we will be able to co-operate more constructively for the good of this House and the Government. I would be glad of any reassurance to that effect from my noble friend Lord Young when he responds on the Treasury’s behalf. I beg to move.

--- Later in debate ---

[Baroness Kramer (LD)]

My Lords, what a brilliant debate. I almost hesitate to speak for fear of diluting what has really been extraordinary. When a unanimous voice comes with passion from so many Benches, I am sure that the Minister will take on board and take back to HMRC and the Government that this is not a party-political issue or an attempt by one faction to embarrass the Government or make life difficult for HMRC; it reflects a genuine, sincere and deep concern among people who have looked at the powers and the way in which HMRC is implementing programmes and feel that there is a real risk that it is undermining its own reputation, as well as the respect that the collection of tax has within the United Kingdom. That respect is critical if taxpayers are genuinely to believe that, when they are asked to pay, it is on a fair basis and they will get appropriate and fair treatment.

I was privileged to be a member of the finance sub-committee and I thank the noble Lord, Lord Forsyth, for his extraordinary and skilled chairmanship. I know that he does that every time, but it is not an easy thing to do and I hope that he will not mind if we all take this opportunity to thank him for exercising that skill and leadership.

I am also a member of the All-Party Parliamentary Loan Charge Group, which started taking evidence essentially as the sub-committee’s process came to a close. I will try to use some of the information that I have received from participating in those hearings, some of which is quite shocking.

I shall turn briefly to the report on Making Tax Digital. I suspect that everybody would agree that making tax digital over time is entirely appropriate and that it is reasonable to start with VAT. It is a programme that must be implemented well and effectively—but that is not the experience that the sub-committee heard about when it took evidence. My noble friend referred to the fact that nearly 20% of small businesses impacted by this requirement have absolutely no idea, and many more have not been able to access relevant software.

Regarding the cost, I would far rather go with the estimates from the Federation of Small Businesses than with the, frankly, rather silly numbers that we heard from HMRC, which seem to suggest that it is completely out of touch with the real world of software costs in the marketplace. I point out that HMRC has allowed a delay for what it considers to be large and complex organisations—big businesses with a swathe of staff and several departments to take them through this process—while small firms are being told that they now have to report their tax through this new digital process. We understand that there will be some sort of leeway for those who attempt but fail—but, frankly, given HMRC’s lack of ability to relate to or communicate with small businesses, I am not sure that many have a great deal of faith in it.

Communication with that particular group is unbelievably weak. There really is no excuse, because HMRC knows every small business that is liable to pay VAT, so, if it chose, it could communicate with them directly. The answer that we frequently get is that information was put on the website on the “Spotlight” page, as I think it is called. That is considered to be communication, but it makes absolutely no sense. We heard from many people who were represented by accountants and specialists. My great fear—and, I think, that of the committee—is for the many people who do not have that representation and who are completely in the dark. As I said, this ought to be a good programme. It should be on a voluntary basis and have all the time that it needs, but poor implementation undermines what could be a long-term programme of significance.

However, I want to focus much more on the tax powers report. I agree with all those who have raised the extraordinary issue of the denial of rights to appeal accelerated payments notices and follower notices to tax tribunals, and who totally object to the disproportionate penalties for appealing follower notices and GAAR decisions. Justice is fundamental, and I wish that HMRC would understand that and take it on board. I cannot understand the argument for extending the time limit for assessing offshore tax to 12 years. Who in their right mind keeps records for 12 years, particularly on a small property or a few shares? This is nonsensical. HMRC is merely making up for the fact that it has been lax in pursuing cases where it believes that there is something to investigate. It should not be throwing the burden of its own incompetence, I might say, on to the taxpayer.

But I want to talk mostly about the loan charge. I agree with all those who have said that it is the little people who get no understanding from HMRC. In a sense, HMRC has not recognised that this is the pool of people it is dealing with when it comes to the loan charge. Many of the people who ended up becoming self-employed did so because of outsourcing. The majority worked once for local or central government, or for bodies such as the BBC, or even for HMRC. They did not seek to become self-employed. They were told that the only way to do this particular line of work was to become self-employed. Indeed, they were told, “If you want to be recruited, this is the agency we are using. Go to them, they will provide you with the advice and mechanisms to allow you to become self-employed and continue with your job”. This goes all the way from social workers to IT contractors.

HMRC denies engagement in this process but is totally culpable. On the All-Party Parliamentary Group we heard from people who were consultants to HMRC and are now being faced with a loan charge. This is perhaps a very good example, because the individual from whom we got the most detail was told that, to work as a contractor for HMRC, they would have to go to a particular recruitment agency—which had been retained, and was presumably being supervised, by HMRC—that would provide them with various options to enable them to structure themselves as self-employed.

[Lord Forsyth of Drumlean]

I am most grateful to the noble Baroness, and very interested in what she says. As she may recall, we did ask officials at HMRC whether any people involved with it had been involved in a loan charge. At first, the question was not answered. Then, on the second or third occasion, we were told that it was not aware of any evidence of this. So it might be useful to make that information available to HMRC so that we are not misled in the future.

[Baroness Kramer]

I think that the individual has made HMRC aware and happens to have an email trail, which makes the process rather easier to understand. On many of these occasions, people were not told, “You are going into a loan scheme”, or that they were going into some form of disguised remuneration. They were told that there were two or three ways in which they could structure themselves as self-employed. The word “loan” was rarely used. They were told that the advantage of scheme X—it always had a fancy name—was that the administration of it was quite simple. For many people, it was not financially particularly advantageous, because they paid a huge fee for the administration of the scheme: 18% was the standard charge. When that is added to the tax they were paying, they were not taking home more, and they had every reason to think that they were working in an approved situation.

Some people perhaps knew that one scheme was more advantageous in tax terms than another—not everybody is in the same position—but virtually everyone we talked to said that if they had had any clue that HMRC was troubled by this, they would of course have stepped away. When they did find this out, many did step away but were then put into another scheme with similar characteristics. So we have a population here who did not understand what they were getting into. They did not intend this—and intent is significant and important when you go after people for what effectively are their life savings.

HMRC says that it understands about vulnerable customers, but there is plenty of evidence that people have now sold businesses, sold their homes or gone bankrupt. Families have split up because, I am afraid, money can become very significant in shattering a family structure, particularly when someone has to dissolve their whole pension pot to meet a very large bill that comes in over one year. Being told that it could be spread over three years is pretty meaningless because the number is so fantastically large. Many people on the receiving end of a loan charge are no longer employed and have no way to pay.

I was horrified that some of the 70 individuals who submitted evidence to the APPG—I am not sure how many—have actually been called by HMRC, with messages left on their answerphone that have been picked up by business partners and family members who had no idea that there was an issue. We need an answer about that from HMRC. I was even more shocked that on 24 April, giving evidence to the Treasury Select Committee, the Chancellor claimed that the secretariat to the APPG was partly staffed by people who were promoters of loan charge schemes, which was absolutely not true. I hope that that has been retracted by this point in time.

When I pulled these notes together—the situation now may be slightly different—only a single promoter of a loan charge scheme, Hyrax, had been successfully prosecuted, but on the grounds that it breached DOTAS rules, not because it sold the schemes to people. Indeed, it has been allowed to keep its 18% fees that were charged to users. Hyrax’s penalty appears to be a requirement that it discloses the users’ names to HMRC so that they can be pursued. On the six other promoters that HMRC has been investigating, we hear that charges will not be pursued because they did not breach DOTAS; only the users of the schemes will be pursued. As far as I know, no one has yet gone and asked the employers—which ultimately would of course include HMRC, a beneficiary of this move to outsourcing and to self-employment under tax-advantage pricing—and nor do I believe that they have yet gone to local government, to central government departments or to the various public bodies.

Surely this is a real abuse. I understand that HMRC is under extraordinary pressure, but I believe that at the decision-making level people are completely detached from those on whom they have an impact. They have very little sense of the world of contracting and self-employment, very little understanding of how people made those decisions and what their capacities and capabilities were, and very little understanding of the impact of their decisions. With a body that is responsible for implementation, it is key that that changes.

I totally support the various recommendations in these two incredibly powerful and important reports, but I hope that, in addition, the Government will now consider not just a report but a proper review of the loan charge and a minimum delay of six months in implementing. I know that it is officially implemented, but that can always be delayed. On Making Tax Digital, surely we could now initiate a delay for small businesses, look again and make sure that it is implemented properly and effectively. It could be a superb programme and it should not be undermined.

[Lord Davies of Oldham (Lab)]

My Lords, I welcome the noble Lord, Lord Young. He has a somewhat challenging baptism in replying to this first debate in his new position. We all know his competence and that he always wins considerable support from the House for how he presents his arguments. However, I can scarcely recall another debate in which every contributor has identified issues that the Government have palpably failed to respond to. Nor are these minor pettifogging details; they are fundamental questions about how a government department should operate, and how a response to a committee report should be presented. The noble Lord has a great challenge before him.

I do not need to stress again the points made in this debate because we all have, strongly at the front of our minds, key issues on which we expect the Minister to make a response. The only figure I would like to bring to your Lordships’ attention—I do not know whether the Minister will bring this in as part of his defence—is that HMRC has 15,000 fewer civil servants than in 2010. Of course, we can all see ways in which government departments can work more efficiently and we all know the advantages of new technologies and so on, but a large part of that loss of people was a straight reflection of a determination to create a smaller state, with lower costs for the Government. These circumstances are part of the price that we are paying.

If there is one thing which stands out in this whole sorry saga, it is that HMRC persisted with conduct which was already causing enormous consternation not to people who were adept at tax evasion or those who employed professionals to look after their tax affairs, but to ordinary citizens applying for jobs. The report makes that clear. Their employers, or the agents working for those employers, took them on board and indicated a loan would be advantageous form of payment for their employment. That is why we have so many people who deserve the sympathy of every one of us in this House and all of us concerned with government. Ordinary people now find themselves facing charges which are not the kind of thing that might be easily disposed of by the better-off in society, but multiples of their actual earning power each year; these are now demanded as owed tax. This is a parlous position. What has been identified in this debate is just how dismissive the Government have been thus far on the issue.

[Lord Forsyth of Drumlean]

Of course, the noble Lord is quite right about the substantial cuts in the resources available to HMRC. That has undoubtedly been a factor in its ability to deal with inquiries and to deal with people sensitively. However, it is not to blame for implementing the loan charge, which was passed by Parliament—by the House of Commons. Dealing with this requires a change in the law. Do the Opposition support that?

[Lord Davies of Oldham]

The answer is categorically yes. In fact, I was going to develop that argument briefly but I do not need to now: in his opening speech, the noble Lord made the main charge against the Government and their response to the report thus far quite clear. I utterly endorse that position. I am very grateful for the speech he made today and the way in which he obviously led the committee to produce these high-quality reports.

One of the things which stands out in the reports is that the Government found a whole series of the recommendations quite unacceptable. Of the recommendations in the digital taxation for VAT report, eight were accepted, seven were accepted in part and only six were rejected outright. However, the majority of the recommendations in the other report were rejected. The Government ought to have a pretty strong case when responding on this matter to a significant body such as a House of Lords committee led by the noble Lord, Lord Forsyth, but it seems fairly obvious that the Minister has somehow been shielded behind the perspective that only the House of Commons has any authority with regard to the economy. We all know the law—we all know why the House of Commons produces its Finance Act and we in the House of Lords defer to it as presented—but that is a little different from a committee examining the conduct of a government department. From what I can see, on the whole, Ministers have not been prepared to attend the committee and have been rather dismissive of many of its hugely significant recommendations.

Expressions have been made during the debate with which I have the greatest sympathy. I am not talking about the speeches from the noble Lord, Lord Kerr, and the noble and learned Lord, Lord Judge, who were both quite definitive in what they had to say—I of course agreed with the judgments they reached—but there were other comments that strengthened my support for the committee. The noble Lord, Lord Tugendhat, indicated the difference between how this part of taxation is dealt with and how welfare support is often dealt with. This is a tragedy that has gone on for a number of years, but so has welfare legislation and the great problems with universal credit, in which people who are devoid of resources are being asked to wait for weeks to get the money to which they are entitled. I was very grateful to him for bringing our attention to that.

The noble Baroness, Lady Noakes, criticised the use of the word “customer”. I too found it difficult when the railway companies started to refer to us as customers—they were not very confident that we would become “passengers” and go anywhere, but we were “customers” because we had paid for the ticket. There is a lot that we ought to seek to correct, through gentle persuasion, about the terms in which big organisations and businesses address us.

Two issues about the Government’s estimation come out strongly in the report. We can see that the Revenue and the Government are motivated by the fact that there could be considerable increases in resources through Making Tax Digital. The Opposition understand the argument for Making Tax Digital and endorse it, but it has to be introduced and developed in a better way, as the reports have identified. Those in this unfortunate position with the loan charge have earned salaries and tax is payable on them. There obviously has to be care about how people are challenged to make these payments, because many have limited resources, but there is no doubt that HMRC’s objective was to ensure that tax was legitimately paid on payments allocated to workers. The 2017 court case made this absolutely clear. Therefore we are not in any way, shape or form castigating HMRC for pursuing the issue in principle; we are concerned about the practice.

It has been quite clear from this debate that the committee has identified the department’s position with great force and accuracy. We expect Ministers to take note. We all have faith. I greatly regret the loss of the noble Lord, Lord Bates, the immediate predecessor to the noble Lord, Lord Young. Although I clashed with the noble Lord, Lord Bates, on very many occasions, I never had the slightest doubt about his genuine attempt to present his case accurately, effectively and with the greatest concern for the rights of the House. I am not so sure that Financial Secretaries in the other place have shown much respect for this body, but I am sure that the noble Lord, Lord Young, will seek to answer the very real questions asked in this debate, and treat the committee and its excellent reports with the respect due to it.

[Lord Young of Cookham (Con)]

My Lords, I thank my noble friend Lord Forsyth for introducing this debate, and for agreeing to reschedule it from its previous slot, which would have been at a less civilised hour. I also thank the Economic Affairs Committee, for its two detailed reports, and all noble Lords who have taken part in this exceptionally well-informed debate.

I have read both the reports and the Government’s response with particular interest, as a former Financial Secretary to the Treasury with responsibility for HMRC 25 years ago—some 15 years after the noble Lord, Lord Lawson, who was referred to in our debate. Although we have debated these two reports together, they are very different. The one on powers is wide ranging, hard hitting and contains some radical proposals—particularly those which we have just heard from the noble and learned Lord, Lord Judge. The one on making tax digital is more narrowly focused, more consensual and concerned with the pace of travel—as mentioned by my noble friend, Lord Tugendhat—rather than its direction. The current Financial Secretary carefully considered both documents and gave a detailed written response. Although he did not agree with all the recommendations, he was happy to accept the majority of them, in whole or in part. We are still reflecting on the report.

I take very seriously the comments made by my right honourable friend, and the comments made by my noble friends Lady Noakes and Lord Forsyth, the noble Lord, Lord Kerr, and others, about his reluctance—his refusal—to give evidence before the committee. My understanding is that the sub-committee’s inquiry was focused on the Finance Bill, which is properly the preserve of the other place, and as such, no Treasury Minister has given evidence to the sub-committee in the nearly 20 years of its existence. However, I take on board the comments and undertake to convey them to my right honourable friend, to see whether, were a further invitation to be extended to him by the committee, he might reflect again on his decision not to appear.

Before addressing the issues raised in the debate, I join others, particularly the noble Lord, Lord Davies, in paying tribute to my colleague and noble friend Lord Bates, who earlier this month stood down from his position as a DfID Minister and Treasury spokesman. No one regrets his resignation more than I do, as part of his ministerial burden falls on my shoulders. He was an exceptional, dedicated and popular Minister, covering government business on a wide range of topics, from overseas aid to the Trade Bill, from financial services onshoring to the performance of our economy —to name but a few. For each, he brought intellectual clarity and a strong defence of the Government’s record, but also a listening ear. We all wish him well as he walks from Belfast to Brussels raising funds for a cause he is passionate about.

I apologise—58 years too late—for running into the noble Lord, Lord Kerr, on my bicycle in Oxford. Had I known that in 2019 he would make a trenchant attack on a government policy I was obliged to defend, I would have navigated with much more diligence. I thought I was in enough trouble when he sat down—but then the noble and learned Lord, Lord Judge, got up.

I turn to the question of HMRC’s powers, which dominated our debate. I am conscious that I will not answer all the questions raised but I will write to rectify that omission. The British people expect HMRC to take decisive action to tackle tax avoidance and evasion, and Parliament has voted to grant the department a variety of powers which allow it to carry out this essential function. It is of course also essential that there are safeguards in place for taxpayers, but the purpose of the powers is to allow HMRC to collect the tax that we need to fund vital public services, a point made by the noble and learned Lord, Lord Judge.

I note what the report says in paragraph 58 about scrutiny of the loan charge but, as someone who has taken a Finance Bill through the other place and sat in Committee on the Finance Bill in opposition, it is my experience that Members in the other place are extremely wary about giving HMRC new powers over their constituents. This legislation was taken through the parliamentary process, with scrutiny in the House of Commons, following a public consultation on the policy and on the draft legislation. As my noble friend knows, we have also set out in a report published last month the rationale for, and impact of, the charge on disguised remuneration loans.

[Lord Forsyth of Drumlean]

On the subject of the scrutiny in Committee on the Finance Bill in the other place, I think I am right in saying that there was a speech from a Minister, a speech from the Opposition and two other speeches. None of the issues about retrospection et cetera was raised. I think there has also been an Early Day Motion signed by many Members and several debates, including one in Westminster Hall, none of which has altered the Government’s response in any way.

[Lord Young of Cookham]

I am sure that if my noble friend and I had been on the Finance Bill at the time, we might have raised some of the issues that he has now raised. I make the point again that the legislation went through all its stages in the other place after its publication in draft.

I was grateful for what my noble friend Lord Tugendhat said about HMRC in some generous words, which I know will be well received by the hard-working public servants in that department. I believe all Governments, and both Houses, are committed to striking the right balance between helping the compliant majority to fulfil their obligations, and providing appropriate support to customers who need extra assistance to get things right, while taking robust action against those who seek to avoid paying their fair share of taxes. For this reason, the Government welcomed the committee’s detailed contribution to this important debate.

I say to my noble friend and to others who have taken part in this debate that my comments will reflect the Government’s response to the reports, including the updated response which we published in March. I will share with the Chancellor and other Ministers in the Treasury the tone of the debate and the deep concern expressed by Members on all sides about some of the actions that have been taken. Again, without any commitment, I will see whether within the confines, which I hope the House understands, there is any flexibility available to reflect the anxieties that so many Lords referred to.

Several noble Lords spoke more specifically about the charge on disguised remuneration loans. My noble friend Lady Noakes made this the focal point of her speech. As acknowledged by the report:

“Disguised remuneration schemes are an example of unacceptable tax avoidance that HMRC is right to pursue. All individuals using these schemes must accept some degree of culpability for placing an unfair burden on other taxpayers”.


It is the Government’s view, supported by a unanimous Supreme Court ruling, that these schemes are not and have never been effective, and that tax was always due. It is unfair to the vast majority of ordinary taxpayers who pay all their taxes to let anyone benefit from contrived tax avoidance of this sort. I am sorry to disappoint the noble Lord, Lord Kerr—

[Lord Young of Cookham]

With respect to the noble Baroness, the unanimous decision of the Supreme Court was that the tax was due and is payable by the employee and not the employer. I will come on to the employer in a moment. I was about to disappoint the noble Lord, Lord Kerr, on one of the questions he put to me. But if it was always the case that the tax was due, as I have just said, the loan charge is not retrospective, as he implied. I am not sure that he meant to imply this, but it does not have to be paid in the current tax year. It becomes liable, but I hope that people will engage with HMRC and agree terms that may cover a longer period.

[Lord Forsyth of Drumlean]

I apologise for interrupting my noble friend again, but there are two points here. The court proceeding he referred to was the Rangers case, which said that liability was with the employer. The point that my noble friend Lord Kerr was making was that this is treated as an emolument in one year, which means that the incidence of tax is higher because goes over the top rate. That is the point.

[Lord Young of Cookham]

My understanding is that the tax now due accrued over a period of time, and was payable in the year in which it was accrued. That has been consolidated and crystallised into the loan charge. If I am wrong, I will write to my noble friend.

The Government are committed to tackling the promotion of tax avoidance and that is why HMRC has been investigating more than 100 promoters and others involved in marketing tax avoidance, including many who sold disguised remuneration arrangements. HMRC recently won a legal case, mentioned by the noble Baroness, Lady Kramer, over a contractor loan avoidance scheme promoter, Hyrax Resourcing Ltd. This will help collect over £40 million in unpaid taxes.

The charge on disguised remuneration loans has been criticised by those who say that it ought to be the employer who has to pay the tax that is outstanding. I agree, so let me be clear that HMRC will seek to collect the loan charge from employers in the first instance, and will pursue individuals for the tax due only where it cannot reasonably do so from the employer; for example, if the employer is no longer in existence or is offshore. In those cases, HMRC seeks to collect the tax liability from the individual who benefited from the tax avoidance.

--- Later in debate ---

[Lord Forsyth of Drumlean]

My Lords, those last few remarks from my noble friend are extremely reassuring. My noble friend Lord Bates gave him a bit of a hospital pass; had the debate not been deferred, it would have been answered by him. In fact, his formal response is an example of why the committee felt that we needed to look rather more strategically and fundamentally at the basis on which HMRC is held to account. That is not to say that the committee was entirely critical of HMRC. Some of the criticism arises from legislation which has been passed by Parliament. If my noble friend had come at the invitation of the committee and had listened to our points, I think we would have made considerably more progress.

We have had a fantastic debate, with a brilliant speech by my noble friend Lady Noakes not just on the nomenclature of customers but on the real issues here, which are illustrated by some of the problems. My noble friend Lord Tugendhat rightly pointed to the difficulties which HMRC has.

One gets the impression that Mr Osborne said to HMRC: “I need the money. Get it in”, but, at the same time, “Cut the numbers”. Therefore, perhaps some corners have been cut, to disadvantage. My noble friend Lord Trenchard pointed out the basic and fundamental conflict of interest in HMRC, which brings me to the issues pointed out in a very telling speech by the noble and learned Lord, Lord Judge. Honestly, in this House, if he says it is wrong, it usually is. I am grateful that my noble friend has decided to discuss this with the Chancellor.

I think we will lose the noble Lord, Lord Kerr, from our committee because of the turnover rule. He made a fantastic contribution and asked the three questions which I hope my noble friend will be putting to the Chancellor. I also thank the noble Baroness, Lady Kramer, who has updated us on the work being done by the All-Party Group on the Loan Charge. What has happened is very worrying. The path to hell is paved with good intentions. I have no doubt that the loan charge legislation was implemented with good intentions, but it has proved to be a path to hell for far too many people, not least those working in the public sector.

The noble Baroness, Lady Kramer, mentioned the BBC. I have read in a newspaper—we did not receive any evidence—that it appears that it will pick up the tab for all its employees. One way or another, it seems that this requires further work.

The noble Lord, Lord Davies, was right to highlight the pressures on the Inland Revenue, and I was very grateful for his commitment that the Opposition would change the legislation if they got the chance—which may very well encourage colleagues to bring forward amendments at a later date in the other place.

Most of all, I am grateful to my noble friend for the way in which he has answered what has been a powerful debate and undertaken to take it back to discuss it with colleagues. One thing that we have changed on the Economic Affairs Committee is that when we produce reports, we do not just move on to the next issue but come back to them to review what progress has been made. I am sure that there will be further work on the loan charge. We look forward to seeing the Government’s response. I am most grateful.

Motion agreed.

House of Lords (Hereditary Peers) (Abolition of By-Elections) Bill [HL]

Lord Forsyth of Drumlean Excerpts

Report stage (Hansard): House of Lords
Friday 15th March 2019 Lords Chamber

[Lord Strathclyde (Con)]

My Lords, Amendment 2A is not on the Marshalled List. I apologise; it was tabled rather late yesterday and I did not have an opportunity to discuss it with the noble Lord, Lord Grocott. I had a eureka moment in my bath yesterday morning, when I was thinking about the noble Lord and his Bill, and came to the conclusion that it was an appropriate way to deal with this legislation and solve a very serious lacuna at the heart of the Bill.

Before I go on, I join my noble friend Lord Cormack in saying how right it is that this House should stop at 11 am for one minute to mark the terrible attacks in New Zealand. I hope that my noble friend Lord Young will direct us at a suitable time so that we can honour that moment with appropriate dignity.

Given the sort of parliamentary chaos that has been going on over the past couple of weeks in another place, it is wonderfully reassuring for people to come to this House and find that we can have a straightforward debate—one we have held many times in the past 20 years—discussing in detail how to progress with reforming your Lordships’ House.

As the House knows, I have been involved in many such debates, as has the noble Lord, Lord Grocott, but this is the first time I have spoken on this Bill during this Session. I have no idea how long this Session will last, but even if it lasts just another couple of months, I hope the noble Lord will agree that it is extremely unlikely that this legislation will get into law. I do not know whether we will finish Report today or when the Bill will receive its Third Reading. However, to be clear, I oppose the legislation because it would create a wholly appointed House. As the House knows, I am broadly in favour of politicians in the United Kingdom being elected, not appointed, but I know that that is not a popular view in this House.

[Lord Forsyth of Drumlean (Con)]

If my noble friend is so certain that the Bill will not make it on to the statute book, why on earth is he moving this amendment?

[Lord Strathclyde]

I was just about to come to that. My amendment is small and humble but it deals with an important issue. As it is unlikely to become law, we now have time to study it in some detail—if the principle behind it is accepted today, as I hope it will be—before Third Reading, when we can add detail to it. I am grateful to my noble friend for allowing me to clarify that.

What is the most difficult part of this Bill? It is the third and fourth lines of Clause 1, which say,

“thereby making the House of Lords a wholly appointed Second Chamber”.

This is the central part of the legislation, to which I would like to add the words,

“and create a statutory House of Lords Appointments Commission”.

I have nothing but the greatest respect for the noble Lord, Lord Grocott, and for his integrity and tenacity in coming back time after time with this legislation. However, it is a profoundly political Bill. In Committee, my noble friend Lord True explained why that was. By doing this, we will remove the ability of 40-plus Conservative Members of this House to replace themselves without a guarantee that they would be replaced in any other shape. I wholly understand why the noble Lord thinks that is a desirable outcome, and I hope he will understand why I think it is an undesirable outcome. He certainly does not duck the issue. The noble Lord is completely up front about his objective.

The lacuna at the heart of the Bill is that it removes the ability to have hereditary by-elections but does absolutely nothing to improve the way others are appointed to this House. I want to put that right. I hope that the noble Lord, Lord Grocott, will agree with me that it is something we need to tackle, and why not tackle it in this Bill? It has been promised for more than 20 years by the party that the noble Lord, Lord Grocott, supported so ably in government. It appeared in several White Papers in the early part of the century. Now is the opportunity to debate it further and, I hope, to put it in this Bill. I have said that it is a humble amendment but it deals with a big issue, and I hope very much that the House will accept at least the principle behind it.

--- Later in debate ---

[The Earl of Caithness]

My Lords, that is not a declarable interest, but I think all those who are interested enough to listen to this debate will know that I am a hereditary Peer, and it does not take much looking up on Google to decipher whether a Peer is a hereditary.

The noble Lord, Lord Grocott, also said that he did not want me to speak. It was not until, I think, the 42nd minute that I was allowed to get to my feet, so I have not been delaying the Bill.

The noble Lord also mentioned patronage, which is of great interest to my noble friend Lord Cormack. I am sorry that he has changed sides. He will recall that, on 10 November 1999, in the other place he said:

“I believe without equivocation … that the House of Lords will be better for the 92”.


He raised another point a little earlier in his speech:

“We are witnessing a crude exercise of patronage”.—[Official Report, Commons, 10/11/1999; col. 1200.]


That was the patronage of the then Prime Minister Mr Blair, and I wonder what my noble friend thought of the patronage of Mr David Cameron in his Dissolution list when he ceased to be Prime Minister. That is why my noble friend Lord Strathclyde had one of his many eureka moments—this time it was in the bath yesterday morning, but he has had a number of them—and it is also why I tabled Amendment 58, which requires the setting up of a statutory appointments commission. I go into more detail than my noble friend Lord Strathclyde—I set out exactly what I want.

[Lord Forsyth of Drumlean]

Does my noble friend not see the irony of a hereditary Peer arguing against patronage, given that all hereditary Peers are here as a result of patronage given some generations ago? As to the image of my noble friend Lord Strathclyde in his bath, does he not think that this matter requires rather longer consideration than the time he might have spent in his bath?

[The Earl of Caithness]

We are giving it consideration. It was that eureka moment in the bath that has prompted this debate. My noble friend Lord Forsyth knows full well my position on hereditary Peers. I do not think that they should be here, and I also think that this ought to be an elected House. However, in 1999 there was a binding-in-honour agreement that the hereditary Peers would stay here until stage 2 of House of Lords reform. The noble Lord, Lord Grocott, never refers to that and I can quite understand why, but to us it was a fundamental part of the agreement. If I am being criticised for standing up for a binding agreement and principle, so be it, and I am very sad that other noble Lords do not take the same principled view on the matter.

--- Later in debate ---

[Lord Adonis]

My Lords, that is a completely absurd intervention from the Liberal Democrat Benches. Of course democracy comes with a cost. The question is whether we are prepared to meet it. That is the whole issue. Of course I recognise that my amendment is absurd, but this is the key point. We are talking about amendments that the noble Lord tells us have to be minor changes to the current Bill. It is less absurd than the status quo, which is that the only people who will have a say are these 40 hereditary Peers. It is significantly preferable that the people of the country should have a say.

What I wanted to do was move to a fully elected House in the Bill. I wanted to do what I think is actually Lib Dem policy. I was told by the clerks that was beyond the Long Title. That is why I tabled the amendment. The only amendment that was acceptable was one that would make the election of hereditary Peers subject to the whole electorate. I could not do the really radical thing that I wanted to do, which is to have the election of Members of this House by members of the public from among members of the public—a revolutionary idea, but one we should be implementing.

[Lord Forsyth of Drumlean]

The noble Lord has stolen my thunder by admitting that his amendment is absurd and part of an exercise to try to talk this legislation out, which is a disgrace. I wonder what Brenda from Bristol would think of his proposition that 40 million people should vote for the hereditaries.

[Lord Adonis]

I think Brenda from Bristol might be keen to take part in this election, because she currently has no say over any Member of this House. For the first time, Brenda from Bristol would have the opportunity to nominate and vote for somebody to sit alongside the noble Lord, Lord Forsyth. She would give thanks to the noble Lord, Lord Strathclyde, and to me for making it possible, because under the independent Appointments Commission that the noble Lord, Lord Strathclyde, is proposing, Brenda from Bristol might well be nominated, whereas she stands very little chance of Mrs May noticing her, which is the only way to get into this place at the moment.

HS2

Lord Forsyth of Drumlean Excerpts

Thursday 13th December 2018 Lords Chamber

[Lord Young of Cookham]

The noble Lord makes a powerful case for more resources for transport in addition to the money that we have already committed to HS2, in both phase 1 and phase 2. He wants additional resources to improve connectivity with Liverpool. A spending review is just starting in which I am sure the Department for Transport and those departments that have an interest in the northern powerhouse will make bids. I note his strong representations that improved connectivity for Liverpool should be a high priority.

[Lord Forsyth of Drumlean (Con)]

Has the Minister had the opportunity to read the reports from the Economic Affairs Committee of this House on HS2, and can he confirm how many billions could be saved by a marginal reduction in the speed of this train?

Constitutional Convention

Lord Forsyth of Drumlean Excerpts

Thursday 13th December 2018 Lords Chamber

[Lord Foulkes of Cumnock (Lab)]

My Lords, I am particularly grateful to my noble friends in the Labour group in the House of Lords for agreeing to this topic and allowing me to speak to it. It is very important, as indicated by the number and distinguished nature of the speakers who have put their names down for the debate. I hope others will forgive me if I start by saying how pleased I am that my friend and former colleague, in the other place and in this House, the noble Lord, Lord Higgins, has agreed to make his valedictory speech in my debate. I am honoured by this; we look forward to it very much indeed. But we shall miss his wisdom when he is no longer with us.

It is encouraging that we are debating a constitutional issue that is not Brexit. Is that not a relief? This issue is a long-standing interest of mine—some might even say that it is an obsession. I was first motivated to become interested in it in the late 1960s and early 1970s by the late Professor John P Mackintosh, a Member of Parliament whom some noble Lords will remember. He was a very powerful and eloquent advocate of the need for devolution of power away from Whitehall and Westminster to the nations and regions of the United Kingdom. He was the author of the seminal book The Devolution of Power and a very good friend of mine. He and all of us who were concerned about devolution of power at that time saw a central metropolitan bureaucracy here in London that did not understand or take account of the different needs of the different parts of the country—not just Scotland, Wales and Northern Ireland but the regions of England.

We sought to remedy that for Scotland with the devolution of both legislative and administrative power to a Scottish assembly, as we called it at the time, and we campaigned for it. I am glad that my noble and good friend Lord McConnell of Glenscorrodale will speak today, because he and I fought shoulder to shoulder in that campaign, along with my noble friend Lord Maxton, who I am glad to see is also here, and many others. Sometimes it seemed like a lone fight but it gathered momentum—if noble Lords will excuse that word—as we went along.

We succeeded in persuading the Labour Government to agree to a referendum, which was held in 1978, but frustratingly, although we got a majority in that referendum, it failed to achieve the 40% turnout threshold that had been forced into the legislation by opponents, led by the late George Cunningham. Sadly, 1979—a date I will never forget, as it was when I was honoured to be elected to the House of Commons—saw the return of a Tory Government, which meant that nothing was done to pick up the idea and campaign for devolution. Some felt that the opportunity had been lost for ever.

[Lord Forsyth of Drumlean (Con)]

Would the noble Lord like to put it on the record that the Tories in Scotland will always be grateful to the SNP for bringing down the Labour Government on that issue and thus enabling Margaret Thatcher to become Prime Minister?

[Lord Foulkes of Cumnock]

For once, I am grateful to the noble Lord, Lord Forsyth, for intervening because he has reminded me of that, and we should keep reminding the people of Scotland that it was the SNP that helped to bring down Jim Callaghan’s Government and gave us Margaret Thatcher and a Tory Government for nearly 18 years.