Orders of the Day — Income Tax (Trading and Other Income) Bill

House of Commons, 7 March 2005.

John Healey (Labour, Wentworth)

I beg to move, That the Bill be now read the Third time.

I am pleased to open this debate on the Bill, which rewrites our legislation on the taxation of trading, property, and savings and investment income. The Bill has been produced by the Inland Revenue tax law rewrite project, which is a long-term undertaking to rewrite our direct tax legislation so that it is clearer and easier to use. This is the second rewrite Bill to venture into the realms of income tax and it does so in a significant way, by tackling schedules A, D and F in the current legislation. About 20 million people receive income of one variety or another that is taxable under these schedules.

Before I say more about the specifics of the Bill, it might be appropriate to remind the House of the work of the tax law rewrite project. The project was set up in 1996 by the former Chancellor, the right hon. and learned Member for Rushcliffe (Mr. Clarke). It is a project to rewrite the UK direct tax code, the provisions of which have been enacted over at least the past two centuries. The principal aim of the project is that the rewritten legislation should be accepted by all the main users as clearer and easier to use. While making the legislation more accessible, the project also takes great care to preserve the effect of the present legislation, apart from minor agreed changes, and it proceeds through careful consultation and consensus. It is beyond the remit of the project to make any change in the main tax policies. However, the rewrite can encompass minor changes where they will improve the legislation. Examples of such changes are the inclusion of extra-statutory concessions, the repeal of obsolete material and the correction of small anomalies. The explanatory notes list 159 such changes in the Bill.

In its consideration of the Bill, the Joint Committee focused in particular on the minor changes and satisfied itself, and reported to the House, that they were all within the remit of the project. It also heard that the project had dropped any proposed changes that did not meet the approval of its two external committees. The Joint Committee noted the widespread public scrutiny of the Bill as a whole, and of the minor changes in particular, which were flagged up very clearly at each stage in the consultation process.

In the run-up to the Bill, 18 separate consultation papers were published, and the Bill was published in draft form last March. All were published for public consultation. In addition, a response document summarising the comments made on the draft Bill and setting out how the project has taken account of them was issued last September.

Of course, consultation does not stop with formal papers. The project continues to consider other ways to involve users of tax legislation and keep them informed so, over the last two years, the project has made much more use of its website to publish work in progress in the form of early drafts or changes to previously published work.

It may be helpful if I say a few words about the content and approach of the Bill, which is the third of the tax law rewrite project. The charge to income tax is broken down into a number of schedules. Over the years, schedules have come and gone, but currently we have schedules A, D, and F. The Bill tackles income tax charged under those schedules. It brings the charging and calculation rules for the different sorts of income together in updated classifications, such as trading income, savings and investment income, and property income. Unlike current legislation, it integrates foreign income in the same parts as equivalent United Kingdom income, confining any special rules that apply to foreign income to a different part.

The Bill applies for income tax only. The project consulted at an early stage on whether to aim for separation of the income tax code from the corporation tax code. Users of the legislation favour making this separation, so where the legislation rewritten in this Bill currently applies to both codes, the current provisions will be repealed for income tax purposes, but will continue to apply for corporation tax.

The Joint Committee heard that this Bill is the first step in the separation of the income and corporation tax codes. The project will consult further on the extent to which corporation tax provisions should be rewritten in full or should cross-refer to income tax Acts.

Various techniques have been used in the Bill to make the legislation clearer and more accessible. The first and most important element is the imposition of a coherent structure. Instead of the haphazard order of provisions in the existing legislation, the Bill presents all the material in a logical way, with linked topics grouped together.

The Bill also contains plenty of aids to the reader, such as introductory scene-setting chapters and signposts to other relevant provisions. These are designed to help readers to find their way through what is, inevitably, a large body of legislation. Other features of the rewrite process include shorter sentences, modern language, more consistent definitions and greater use of other reader aids such as formulae, tables and method statements. All this combines to make a new style of tax law that is more accessible and altogether more user-friendly.

The project continues to enjoy the strong support of users of the legislation and I am also happy to say that it continues to command strong support from both sides of the House. I pay tribute to Members of the House and of the other place who have played a part in the scrutiny of the provisions to date. The comments made by the representative bodies confirm that this latest Bill from the project has indeed been well received. The Institute of Chartered Accountants in England and Wales said that the Bill, as published in draft last spring,

"is well constructed and we commend its drafting. It covers important ground and . . . facilitates taxpayers' easier understanding of legislation which will affect very many of them, it is a useful addition to the rewritten legislation."

The Chartered Institute of Taxation said:

"we recognise and commend the huge amount of detailed work that has gone into the production of this Bill . . . please extend our congratulations to the entire Project for what is on balance a mammoth and an excellent product."

To sum up, this is an immensely worthwhile project that modernises our direct tax legislation, making it clearer and easier to use. This, the second income tax Bill, is another major milestone in the work of the tax law rewrite project. Work remains to be done to complete the rewrite of income tax, but the Bill is a demonstration of significant further progress and it maintains the project's excellent track record on improving current legislation. I commend it to the House.

George Osborne (Conservative, Tatton)

As I said on Second Reading, the Conservative party very much welcomes the latest product of the tax law rewrite project, which, as the Economic Secretary said, was set up by the previous Conservative Chancellor, my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke). Anything that reduces the impact of the taxes that we impose on taxpayers, certainly in a regulatory sense, is welcome.

I cannot resist welcoming the Liberal Democrat presence, as it was completely absent from Second Reading, as the Minister might remember, which is strange given that the Liberal Democrats are particularly fond of income tax and want to increase the top rate, introduce a regional income tax, local income tax and so on. Under the Liberal Democrats, we would therefore have a lot more tax and a lot less income. Nevertheless, I welcome the hon. Member for Twickenham (Dr. Cable) to his place for Third Reading.

The Economic Secretary mentioned in his short speech the history of income tax and that it was set up at the end of the 18th century to pay for the war with France. At the time, it provoked an outcry in the House of Commons. Charles James Fox, no doubt speaking from this side of the House at the time, said that income tax

"tends to the immediate destruction of"

taxpayers'

"trade, the annihilation of their fortunes, and possibly to the loss of liberty of their persons".

William Pitt had personally designed the new tax system in his combined role of Prime Minister and Chancellor—an arrangement that I am sure that the current Prime Minister would look on with envy—to stabilise the country's finances. I wonder what would happen were Fox and Pitt to glimpse our proceedings today in this near-empty Chamber as we remove from the statute books what remains of the schedule structure of the Income Tax Act of 1803. We are witnessing a little bit of history. As someone who studied history at university, I think it is worth mentioning that.

Of course, the Bill also separates income tax and corporation tax law for the first time since corporation tax was introduced in 1965. That will have a significant impact on 20 million taxpayers, 5.7 million recipients of tax credits and 47,900 tax practitioners, as well as on the £22 billion of revenue collected by the taxes represented in this legislation. The fact that we can pass this Bill, with its 886 clauses, with some confidence that it only makes our direct tax law simpler, more consistent and easier to use, and is not being used as a stealthy tax-raising measure, is down entirely to the heroic work of the three committees that oversee the rewrite project mentioned by the Economic Secretary.

The first of those is the Joint Committee of both Houses, which scrutinises the Bill to make sure that the letter but not the spirit of the law is being rewritten. Like the Economic Secretary, I pay tribute to my right hon. and learned Friend the Member for Rushcliffe for chairing that Committee. It is appropriate that he stays involved, as the Chancellor who established the tax law rewrite project nine years ago. When it met last month, the Committee concluded that it was satisfied that

"the only changes that the Bill makes to the existing law are of such minor significance that they need not be referred to the attention of Parliament."

I am grateful for its work. I have read the proceedings and it is clear that it grilled the officials involved. Clearly, while I suspect that the Chancellor of the Exchequer is desperate to increase income tax revenues to fill his black hole, this Bill will not be his way of doing it.

Another important check on the process is the steering committee. I pay tribute to another former Chancellor, who chairs it—Lord Howe of Aberavon, who also sits on the Joint Committee. Lord Howe is a driving force behind the tax law rewrite project, and the Economic Secretary and I can attest to his personal interest in the Committee proceedings, as he sat in the public seats upstairs to listen to us, which is probably the first time that a former Chancellor has done so. His presence was very welcome.

I also thank my right hon. Friend the Member for Fylde (Mr. Jack) for his work on the steering committee. As I said on Second Reading, the whole project seems to be aimed at establishing a retirement home for former Treasury Ministers. I repeat my offer to appoint the Economic Secretary to it on 6 May.

Chris Bryant (Labour, Rhondda)

Guffaws of laughter.

George Osborne (Conservative, Tatton)

No doubt the hon. Gentleman is looking forward to his own lengthy contribution to the debate. I am sorry that he has moved back to his usual place in the Chamber, because I thought for a second that he had been promoted to the post of the Minister's Parliamentary Private Secretary—that he had finally reached the first rung of the ladder—but, sadly, he seems to have fallen to the ground. I think that I have advised him before to make more helpful interventions on Ministers' speeches if he wants to get on in life.

I also thank the consultative committee: representatives of lawyers, accountants and other tax practitioners and, indeed, representatives of taxpayers such as the Confederation of British Industry, the Institute of Directors, the Federation of Small Businesses and the London chamber of commerce. Theirs is detailed work. Those representatives are in the front line in dealing with the complexity and obscurity of tax laws that we pass here and I thank them for their help in trying to make legislation clearer and simpler.

Let me now deal with the substance of the Bill and specific issues. If the Minister does not wish to intervene, perhaps he will write to me if he thinks he could respond to any points that I raise.

The Minister mentioned the integration of foreign with United Kingdom income tax rules. That is, I think, one of the most welcome features of the Bill. Perhaps the Minister will now consider introducing a single tax form for foreign and UK income. A question was asked about that in the Joint Committee. I know that it is beyond the remit of the rewriting team, but it is very much within the Minister's remit. It might be of practical benefit to the whole rewriting process if people could fill in just one form.

Clause 882, which was also discussed in the Joint Committee, gives the Treasury power to alter the legislation by an order that is subject only to a negative resolution, rather than the affirmative procedure that we would expect. The issue was also considered by the Delegated Powers and Regulatory Reform Committee in the House of Lords. I understand why the power is necessary—technical changes may be needed to correct any mistakes or omissions in this complex legislation—but will the Minister now repeat his assurance to the Joint Committee that he, or other Treasury Ministers, would make such orders only after securing the agreement of the consultative and steering committees? That is, I feel, an important check.

Appendix 4 of the memorandum submitted by the Inland Revenue to the Joint Committee indicated that there were some extra-statutory concessions that had not been written, or rewritten, into the legislation. The reason given by the Revenue was that they were too complex. They include fairly important matters such as directors' fees, the profits and losses of theatre backers, compensation for the compulsory slaughter of farm animals, and wear and tear on furniture and the like in furnished lettings.

I know that the tax law rewrite team gave detailed consideration to what might be done in those areas, but decided that it could not make any great improvement—or that it was not worth trying to do so. Is the Minister satisfied with that conclusion? It seems a shame to leave some particularly complex parts of the law unrewritten just because they are particularly complex. Perhaps once the whole body of direct taxation has been rewritten, the rewrite team will look again at the bits that they have had to leave out. I know that there will only be a few, but it would be a shame just to leave them standing there, unrewritten.

Other clauses affect the tax paid by individuals, both in theory and in practice. The Joint Committee looked in depth at the 43 changes that may lead to the payment of less or, indeed, more tax by an individual. Examples include clause 412, on stock dividends, clause 150, on securities held as circulating capital, and clause 666—a rather inauspiciously numbered clause—on beneficiaries' income from estates in administration. The Joint Committee satisfied itself that the changes are sufficiently obscure as to be very unlikely to have a significant impact and I am sure that it is right. However, as tax law develops and as the courts and the Revenue interpret it, one would not want individuals to end up paying more tax as a result of a rewrite. I hope that the Minister will assure me that, despite the Joint Committee's having satisfied itself on this matter, the Treasury will continue to keep an eye on it as the various rewrite laws bed in and new tax practice develops around them. We do not want taxpayers to pay an unfortunate price for what should be a very welcome process.

I turn now to an issue that I raised on Second Reading, but which is worth airing again on Third Reading. The valuable work done through this process by the tax rewrite team will be completely pointless if it is to be undermined by subsequent legislation that is poorly drafted or inconsistent with the rewritten law's language, and which returns us to the very morass that the rewrite project is supposed to address. This is, as the Minister well knows, a real threat, because it has already happened. Large parts of the Income Tax (Earnings and Pensions) Act 2003 were superseded just a couple of months later by schedule 22 of that year's Finance Act, which was hideously complex, used language inconsistent with the rewritten tax law and, indeed, undermined the whole purpose of the rewrite project. That is not just my view but that of the Inland Revenue itself. Indeed, its "Tax Law Rewrite: Plans for 2004/05" address this very point, saying:

"One issue which gave rise to a considerable amount of comment and discussion during 2003–04 was raised by Schedule 22 to the Finance Act 2003 . . . Critics argued that the style and format of Schedule 22 compared unfavourably with the quality of legislation produced by the project; and that it was highly unfortunate that a substantial part of the second Tax Law Rewrite Act had to be replaced so quickly by new legislation that was perceived to be of lower quality . . . The topic received considerable public airing. It was also discussed on several occasions by the project's Committees . . . this is an issue that will no doubt stay with us—to some degree—and on which we must continue to work. It will be a priority in 2004–05 to keep this issue in front of us and to promote further discussion about how best to tackle it."

I have quoted that passage at length because it is very important and it gets to the heart of the issue, which is whether this process is simply temporary or will bring about a real change in the way in which we produce tax law.

When I raised this issue on Second Reading, the Minister conceded that I had made a fair point. He said that the Government were learning lessons from the debate and from the criticisms that were received of schedule 22. His excuse was that it is difficult to produce good-looking legislation when it needs to be produced to tackle such problems in a fairly short time and under pressure. Of course, he is right, in that parts of the Finance Bill are often produced in that way in order to deal with what the Government of the day would describe as "tax-avoidance schemes". But given that that is a normal process in Finance Bills, the Minister must surely look at a way of ingraining into the team currently writing tax law some of the principles and language used by the rewrite team. Otherwise, we will shortly find that—under perhaps Governments of either persuasion—much of the rewrite team's good work is undermined as bits of the tax law are superseded by hastily and poorly drafted new tax legislation. I ask the Minister to look again into that matter and see what can be done. The Inland Revenue said that it wanted to promote further discussion on how best to tackle the problem in 2004–05 and time is rapidly running out, so this is probably my last opportunity to make the point.

Geoffrey Clifton-Brown (Conservative, Cotswold)

Does my hon. Friend accept that some of the most byzantine legislation emanates from Europe, and will he urge our European colleagues to reflect further on the lessons that we have learned from our tax rewrite system here to see if they can improve their legislation by writing it in that format? [Interruption.]

George Osborne (Conservative, Tatton)

My hon. Friend makes an excellent suggestion. The hon. Member for Rhondda (Chris Bryant) made the point that "Byzantine" does not relate to Europe, but one hopes that, with the Turkish accession, it soon will. The EU, which is now the source of an enormous amount of financial regulation, if not yet tax law, should certainly learn the lessons from our rewrite project, which has been a model of how to produce clear and consistent language. If those in Brussels pay any attention to what is going on in national Parliaments, I hope that they have heard my hon. Friend's point.

The Bill reinforces the determination of Conservative Members—I hope that it is reciprocated on the Government side—to ensure that the rewrite project continues—and continues to be properly funded. As I understand it, it has completed only about a third of its scheduled work and there is at least one more income tax Bill to come, before the team moves on to capital and corporation taxes. I can certainly give a commitment today that a future Conservative Government would ensure that it received all the support that it needed.

We would like the process to go even further and build on the work of the rewrite project by promoting tax simplification—[Interruption.] I see that that commands broad support on this side of the House. We believe that the UK tax system has become over-complicated and changes too frequently. It is riddled with inconsistencies, complexities and obsolete provisions and those inconsistencies impose a considerable burden on taxpayers and businesses, adding to the costs of complying with tax law. They also add to costs of the Inland Revenue and have led to a huge growth in demand for tax services in the past few years.

We have examined the proposals put forward by Lord Howe himself in his Hardman memorial lecture of 2000 and, indeed, the recommendations of the working party that Sir Alan Budd chaired for the Institute for Fiscal Studies. When we are elected to government, we would wish to proceed along the lines recommended and establish a simplification project to run in parallel with the rewrite project. We would also introduce a tax structure review programme to look into the existing primary direct and indirect tax legislation, which would identify measures to be modified, approved or abandoned. We would hope that, just as with the rewrite project embodied in the Bill today, the tax simplification project would command broad support throughout the House. It would follow in its structure many of the structures in the tax rewrite system and we shall shortly publish details of exactly how we wish to proceed.

Tax law has become more complex and I applaud the efforts to rewrite it in consistent and clear language, but we now need to take a further step to make the substance of our tax system altogether simpler and fairer for those who pay it. Having said that, I greatly welcome the Bill before the House today and wish it a speedy passage.

Vincent Cable (Liberal Democrat, Twickenham)

May I add my support for what seems an eminently sensible and uncontroversial piece of legislation? I congratulate those who worked on the tax rewrite project and helped to produce the Bill before us.

Perhaps I should also congratulate the hon. Member for Tatton (Mr. Osborne) on managing to spin out to 20 minutes his contribution to a debate on legislation that we all agree is necessary and almost entirely devoid of controversial policy. He helped to fill in a couple of minutes of his contribution by referring to the Liberal Democrats' enthusiasm for income tax. I did not come here today to engage in party political banter, but I should be happy to respond to the point that the hon. Gentleman made. It is certainly true that one of our policies—our only tax-raising policy—is to increase the rate of taxation on earnings above £100,000 a year. We also propose that there should be greater reliance on the income tax mechanism by exchanging the council tax system for one based on local income tax. One consequence of working through the existing mechanisms of the Inland Revenue would be to show that there was less tax bureaucracy, because there would be no need for council tax benefit systems or valuation systems. We would thus be freeing up resources for more productive purposes. The hon. Gentleman is right in one sense: we are placing more reliance on income tax as a tax mechanism, rather than raising taxes.

George Osborne (Conservative, Tatton)

The hon. Gentleman's party claims to be the real Opposition. Does he think that real Oppositions should turn up to Second Readings of important legislation?

Vincent Cable (Liberal Democrat, Twickenham)

This is important legislation and we are here to respond and agree to it.

George Osborne (Conservative, Tatton)

What about Second Reading?

Vincent Cable (Liberal Democrat, Twickenham)

I am sure that I can give the hon. Gentleman an explanation. We all agree that the Bill is useful; it does not affect the course of parliamentary business. There are much more important issues when we do need to be in the Chamber and when we make an effective contribution.

At the end of the hon. Gentleman's speech, he made the entirely valid point that the fundamental problem is the extreme complexity of the tax system. Most of the complexity is not in the income tax field, but relates to capital gains tax and business taxes, where there is a case for major simplification. There are complexities in the income tax regime, however, and the measure will help with those.

On a personal level, I should like to mention a couple of points on which the legislation is helpful. Until recently, I had little experience of farming, but as I have just married a farmer I have come to appreciate some of the difficulties that many farmers face when dealing not only with the absurd bureaucracy of the Department for Environment, Food and Rural Affairs but also with tax complexities. The sale of a few bales of hay or the temporary renting out of a field to a neighbour for pasture cause enormously complex tax problems. The attention that the Bill devotes to clarifying what trading income means will, I hope, make farmers' lives a little easier.

Another interesting example from the legislation relates to the rent-a-room provisions. The idea that to deal with homelessness one might encourage house owners and householders to let out a room and get some tax relief was useful and sensible, and we should make more use of it. However, the problems presented by the legislation are exemplified by the 20 pages of the Bill devoted to explaining how the various provisions and reliefs are applied. Anything that the legislation can do to clarify those matters will be much appreciated.

The key point, at which the Conservative spokesman hinted, is that the way to deal with both the difficulties of tax language and the complexity of the provisions is for as many people as possible to be lifted out of tax altogether. Last week, we made a small contribution to that through our proposals on stamp duty. Millions of people are on low incomes—pensioners and low-paid workers—and pay income tax, so it would be desirable to lift the threshold for them. We know how difficult that is, because lifting thresholds is expensive; or, if they are tapered, they create higher marginal tax rates. None the less, that is an important strategic objective.

In the meantime, as elderly, frail and poor pensioners often pay income tax, it is important to focus on the specific problems and to give them help through the Inland Revenue to complete the forms and deal with the complexities involved. That is still relevant despite the language improvements in the measure.

I am neither a tax lawyer nor a professor of linguistics, so I have nothing of great substance to contribute to the debate other than to welcome the Bill as a useful piece of legislation, which we support.

John Healey (Labour, Wentworth)

There have been constructive and supportive comments from both Opposition parties. I appreciate the shadow Chief Secretary's welcome for the Bill. He described the project as a model for approaching the challenge of producing clearer, easier, more comprehensible and intelligible tax legislation. I welcome that. I am sure that the House appreciates the sense of history that the hon. Gentleman brought to the debate. Some might say, however, that he and his party are backward rather than forward looking—the party of the past still struggling to become the party of the future.

May I tell the hon. Member for Twickenham (Dr. Cable) that, although it is not really my part to stand up for the shadow Chief Secretary, the hon. Member for Tatton (Mr. Osborne) was able to contribute to the debate for almost 20 minutes in large part because he and his colleagues have given rather more scrutiny to the content of the Bill and its progress through Parliament than the Liberal Democrats? Nevertheless, I welcome his general support for the Bill.

I turn to three or four of the specific issues raised by the hon. Member for Tatton, although this is Third Reading. He talked about the need for a single tax form that would allow taxpayers to declare foreign and domestic sources of income. Especially under Her Majesty's Revenue and Customs, we will consider how to improve the process, particularly the forms that taxpayers must use, but a separate entry for foreign income is still likely to be needed because of double taxation relief, which is confined to foreign income.

On clause 882, as the hon. Gentleman explained, the issue that he raised was one for the Bill's previous stages, both Second Reading and the consideration by the Joint Committee on Tax Law Rewrite Bills. The clause has been examined carefully during the Bill's progress to date and in the Joint Committee. It is designed to make technical changes. However, I am happy to confirm, as I did to the Joint Committee, that it is our intention and our undertaking to introduce regulations under that clause only with the agreement of the tax law rewrite project's steering committee.

The hon. Gentleman believes that some issues may warrant the attention of the tax rewrite project in the future. Of course, such work is for future decision, but the project consults widely on its future work, and I am sure that it will note the hon. Gentleman's comments.

We have discussed schedule 22 before, but the value of such tax rewrite Bills is that they make it easier to fit in changes to tax legislation, while keeping the tax legislation clear in the future. New or amending tax legislation will generally be fitted into the draft structure and the style set out in the Bill. Schedule 22 was introduced in unfortunate circumstances—they were not ideal—and in large part to deal with a severe problem of tax avoidance, but I assure the hon. Gentleman and the House that we do our best to produce a good standard of legislation in Finance Bills and to maintain the style and structure established in such tax rewrite Bills, and we will continue to do so in succeeding Finance Bills.

The Bill is a milestone in the work of the tax law rewrite project. There is widespread and well-deserved recognition of the work of all those involved in producing this income tax rewrite Bill, but in drawing this Third Reading debate to a close, I wish to pay tribute, in particular, to Lord Howe of Aberavon, who has chaired the steering committee, and to the steering committee, which overseas the project. There are representatives from the Labour party and from the Opposition—my hon. Friend the Member for Falkirk, West (Mr. Joyce) and the right hon. Member for Fylde (Mr. Jack).

I pay tribute to the members of the consultative committee—a crucial part of the tax law rewrite project's structure that reviews the project's work and contains leading representatives of accountancy bodies, legal bodies and representatives of taxpayers, too. I welcome the contribution that many other individuals and bodies have made to the consultations. I also pay tribute to the right hon. and learned Member for Rushcliffe (Mr. Clarke), who started the project in 1996. He has maintained his commitment to it and has recently chaired the Joint Committee, as part of the Bill's scrutiny.

Finally, the real work—the day-to-day, week-to-week and year-to-year work—is done by the project team. Dedicated, detailed work is undertaken with great care by Inland Revenue officials, led by Robin Martin, with great distinction. I pay tribute, as many others have, to the project's work and to his leadership. This is not a tax reforming Bill, nor a tax simplifying Bill, but it is, as hon. Members on both sides of the House have said, an important Bill. It will make things easier for everyone who uses tax legislation. I commend it to the House.

Question put and agreed to.

Bill accordingly read the Third time, and passed.