My Lords, I am pleased to introduce the report of the sub-committee of the Economic Affairs Committee on the draft Finance Bill 2016. I particularly acknowledge the tremendous contribution made to the committee’s work by our specialist advisers, Tony Orhnial and Elspeth Orcharton, and the work of Ayeesha Waller, the clerk to our committee. I thank the Minister for his kind remarks about the committee’s work and for responding to a number of the issues that we raised.
The committee had two overriding concerns: would the measures simplify the personal tax system; and would they reduce the compliance burden imposed on taxpayers? We looked at three separate proposals in the Bill: the reform of taxation on personal savings and dividend income; the new powers for HMRC to issue simple assessments of an individual’s tax liability; and the establishment of a permanent Office of Tax Simplification.
We generally welcome the changes proposed and acknowledge that they have the potential to simplify the tax affairs of many individuals and to consolidate the role of the Office of Tax Simplification. We recommended, for instance, that taxpayers should be given more time than the 30 days proposed to dispute a simple assessment, and to expand the Office of Tax Simplification’s statutory remit to give it an integral role in the future strategy of tax policy. We are pleased to see that the 30-day limit has been extended to 60 days, but were disappointed that the statutory role of the Office of Tax Simplification has not been extended to cover its role in tax policy.
We were very critical of the way these proposals had been developed and of HMRC’s plans for implementing the changes. The Government have trumpeted their new approach to tax policy but often fall far short of what is needed. There was no significant consultation on the taxation of savings income and dividends, which, if it had taken place, could have significantly reduced the complexity of the changes. HMRC’s own research shows that taxpayers are hardly aware of how the current tax system works, let alone the changes. HMRC’s communications strategy continues to rely far too heavily on the website GOV.UK, and on the efforts of banks, building societies and other intermediaries. HMRC simply cannot, and should not try to, subcontract responsibility to third parties for explaining important tax changes.
We were concerned that not all savings instruments will have interest paid without the deduction of tax, but are pleased to note that this will be covered in the 2017 Finance Bill.
We urged the Government to reconsider their decision not to publish route maps outlining their longer-term plans for those areas of the tax system they were proposing to change. Far too often, taxpayers are blindsided by sudden and dramatic changes to tax arrangements which can undermine years of personal tax planning. This is particularly evident in the tax arrangements for personal savings and pensions, which often vary on an annual basis and are now subject to an overall review that could lead to far-reaching changes. Taxpayers need to be supported in making longer-term plans and taking personal financial responsibility. It is the role of government to set a framework that will encourage people to make the appropriate long-term provision for their pension, confident that the Government will resist the temptation to tinker endlessly with the rules.
On 15 August, some five months later than expected, HMRC published its consultation document, Making Tax Digital: Bringing Business Tax into the Digital Age. The document, which totals nearly 250 pages and asks 129 questions, is probably the largest consultation exercise ever undertaken by HMRC and calls for responses by 7 November, just a fortnight before the Autumn Statement.
There is no doubt that, over time, digital returns will simplify the filing process. There are two challenges: first, to make them work for all, and, secondly, not to use the quarterly filings proposed for business as a Trojan horse to disrupt and pressure the cash flow of small businesses by introducing a requirement to make quarterly payments.
Many questions remain. How will elderly people, who are not particularly competent at using online services, manage their tax affairs? How will rural businesses with poor broadband access be able to meet their obligations under the digital system? What help will be available to small businesses to transition to meet the digital filing requirements? We were told by HMRC’s director of process transformation, Emma Churchill, that free software would be made available to small businesses. Subsequently, HMRC announced that it would not make available free software and had agreed to leave it to the commercial sector to deliver the software while support for the transition to digital was being considered. This falls far short of the commitment to provide small businesses with the tools to transition to digital, and it should be reconsidered.
The Government continue to ignore our recommendation, also made in prior years, to introduce robust post-implementation reviews of all major tax reforms and to publish the findings. There is no case for leaving the effectiveness of new tax measures—and of HMRC itself—shrouded in mystery. Will the Government consider this recommendation anew?
The Finance Bill is the last hurrah of George Osborne’s tenure as Chancellor. During his six years as Chancellor he offered great consistency: consistently making the reduction of public sector debt the totemic
goal of his economic management plan; consistently failing to meet his debt reduction targets; consistently overestimating the level of corporate investment; and consistently failing to improve—as the Minister acknowledged—Britain’s unacceptable and disappointingly low level of productivity.
By prioritising the reduction in public debt over growing the economy, he squandered the inheritance left by his wise predecessor, my noble friend Lord Darling, who recognised that growth would have to make a significant contribution to debt reduction and sought to achieve a sensible balance in his economic plan between growth and debt reduction. Fortunately, George Osborne’s consistent failure to hit his debt reduction targets proved to be a blessing in disguise, as it helped prevent the economy deteriorating further.
George Osborne also missed an historic opportunity when he failed to take advantage of ultra-low long-term interest rates to use government debt to fund much-needed investment in new and existing infrastructure in the UK. Larry Summers noted in yesterday’s FT that,
“infrastructure investment … can create quality jobs and provide economic stimulus without posing the risks of easy-money policies in the short run”.
Infrastructure spending will also help address our poor productivity.
His successor, when he appeared before the Economic Affairs Committee last Thursday, struck a more nuanced note. Yes, the Government will continue to target the reduction of public sector debt—but over a longer period, and as part of a package that will include an increase in investment in infrastructure and measures to improve productivity. The Minister is clearly having considerable influence. We look forward to seeing his proposals to achieve all this in the Autumn Statement.
Significantly boosting housebuilding, which our committee recommended in its report Building More Homes, is a priority of the new Government. However, it remains to be seen whether the Government have the will to provide the funding to local authorities, which will be an essential part of meeting current demand, particularly for social housing.
Philip Hammond made an important distinction between “grande infrastructure projets”, such as Hinkley Point and HS2, and a range of smaller and medium-scale road and rail improvements which could be implemented quickly and generate benefit over the next few years. It was disappointing to see that one of George Osborne’s important initiatives—the establishment of an infrastructure commission with statutory backing—has been downgraded to a far more modest initiative without any statutory backing. It is unfortunate that the Government are backing off from the commitment to have a strong, independent body to scrutinise infrastructure investment and other major government or taxpayer-financed projects before they are green lit. Can the Minister confirm that the commission will no longer be on a statutory basis and explain how the Government propose to subject future projects like Hinkley Point B and HS2 to robust, independent and transparent scrutiny?
A talented and skilled workforce is a key ingredient to improving productivity. Philip Hammond told us last week that he envisaged that in a post-Brexit world
he expects control over the movement of people to be used in a sensible way to facilitate the movement of highly skilled people between financial institutions and businesses to support investment in the UK economy. This was welcome news in the City. Can the Minister confirm that this approach will apply to other sectors of the UK economy, such as manufacturing, the creative economy, the professional services sector and academia?
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