Finance Bill

Following on from my right hon. Friend's exposition, I want to speak briefly to amendment 10, which stands in my name. Amendment 10 simply calls for a report on the implications of aligning the rates of capital gains tax with those of income tax. I drafted amendments that were not in order, which calls into question the ability of Back Benchers to amend the Finance Bill and is perhaps something that can be discussed at a later date. When capital gains tax was introduced in 1965, it was an attempt to get some equivalence between income tax and taxation on gains through capital investments. There has been reform since then. It is interesting that, under Conservative Chancellors, capital gains tax was aligned with income tax rates. Then, in the late 1990s, the Labour Government introduced the tapers and the link to the time that an asset was held. In 2007, there was further need for reform when it was discovered that executives of hedge funds were determining carried interest—their bonuses, that is—as part of their capital gains tax relief. As a result, they were effectively paying 10% tax on their income—less than their own cleaners. All parties in the House acknowledged that that was a scandal and recognised the need for reform. It is accepted that there is an element of compromise between, on the one hand, an equitable tax relationship between income tax and capital gains tax, and, on the other, an arrangement that will support genuine entrepreneurs and business. There has always been an element of fudge, but there was a view that we would try to address the issue in this Finance Bill, whoever was in Government. The previous Government were considering capital gains tax reform, and that was widely supported by the Institute for Fiscal Studies and the Institute of Chartered Accountants. Indeed, Lord Lawson himself made statements about the need for a more equitable relationship between the two, in order to tackle tax avoidance. Such reform was also included in the Liberal Democrats' manifesto. I do not want to bait the Lib Dems tonight. This is too important an issue for that, although it can be quite entertaining. In an interview with Andrew Marr, the Prime Minister said:""I think everyone recognises there is a problem. When you have a capital gains tax rate of 18% and a top rate of income tax at 50%, you'll find people finding all sorts of ways to treat income as capital gains."" He went on to say that the new Government would look at taking a different route to help what he described as the fairness agenda. The problem is exacerbated by the 50% increase. With income tax at 50%, even the 28% rate of capital gains tax proposed in the Bill will still leave a 22% differential to encourage further tax avoidance as people designate their income as capital gains. My amendment simply asks for a report to be produced that will examine afresh the implications of the alignment between income tax and capital gains tax. I believe that we shall return to this issue in further Finance Bills, because I do not believe that this compromise will hold, or that it will be seen to be equitable or fair. I believe that tax avoidance will continue, certainly among the highest paid, who will re-determine their income as capital gains in order to pay the lower rate of 28%. I accept that an increase of 10% is significant, but it is not significant enough to implement the fairness agenda that the incoming Government have proposed.