Capital Allowances Bill Second Reading Debate (15 Jan 2001)

- Monday, 15th January 2001

 

Mr. Peter Lilley (Hitchin and Harpenden): I am grateful for the opportunity to speak in this debate. I welcome the fact that the first tax simplification Bill deals with the subject of capital allowances. For me--as, I suspect, for other hon. Members who entered the House at the same time as I did--it has a nostalgic feel about it.

In 1983, when I was first elected to Parliament, simplification of the tax system was in vogue, and capital allowances were the first in the proposed list of candidates for simplification. I remember when the then Chancellor of the Exchequer, now Lord Lawson of Blaby, summoned a meeting of Parliamentary Private Secretaries and other ambitious young men and women to take their views on what he should include in his forthcoming Budget, which was the first of a new Parliament. I think that the first person to speak was Tim Smith, who proposed that we should go for a tax-simplifying Budget, central to which would be the simplification of capital allowances. It is fascinating to recall that everyone at that private meeting agreed with him--all concurred that that was the way to reduce tax rates by spreading the burden of tax more widely.

I confess to being the only person who demurred: for what it was worth, I argued that changes so radical should be introduced to the tax system only if there were substantial benefits, and preferably when one was reducing the overall burden of tax, rather than merely shifting it from one set of taxpayers or from one activity to another, which was all that would have been achieved by the changes supported by Tim Smith and the others. I argued that those changes would merely reduce the burden on some taxpayers, who would never thank the Chancellor--no one is ever grateful in this life--and increase it on others, who would resent the Chancellor for making the changes.

The consequence of my arguments was that, shortly thereafter, I was made the Chancellor‘s Parliamentary Private Secretary. That might have been because he liked those who were sufficiently strong-minded to disagree with him, or because he wanted to shut me up--I have never bothered to ask. However, it meant that I worked with him as his humble bag carrier and ears and eyes around the House. I sat alongside him on the Committee on the Finance Bill in which he carried through the reforms of the capital allowances system in his simplifying Budget, which I think was a couple of Budgets later.

The paradox facing the House today is that the first tax simplification Bill introduced under the new process is to simplify the very element of the tax system that was previously simplified back in 1968 under the radical reforms introduced by the then Chancellor. My question is, in what sense does the Bill further simplify our existing tax system? Several different senses of the word "simplification" can be applied. The first is to make the system shorter, terser and more succinct, but I have to say that the Bill does not qualify as a short, terse and succinct statement of the tax system as it applies to the single element of expenditure--capital expenditure--to which it is addressed. It is 334 pages long, not counting the accompanying notes, which are almost as long, or the annexe explaining how it relates to existing tax law. So it is not a shortened tax Bill.

The second sense of simplification is clarification and moving towards plain English, which is welcome. I have always been an advocate of legislation in plain English, wherever possible. That is applied to a much greater extent in the United States and some other Anglo-Saxon countries. Of course, that does not involve any change in the incidence of taxation and who pays tax. Although the Bill is not, as the Paymaster General said, exclusively about moving to plainer English, it is undoubtedly a clearer statement of the law than we have had in the past, and is therefore welcome. Opening it at random, the first clause I came to was clause 344, which states:

A highway concession in respect of a road is to be treated as extended if--

(a) the person entitled to the concession takes up a renewed concession in respect of the whole or a part of the road, or

(b) that person or a person connected with him takes up a new concession in respect of--

(i) the whole or a part of the road, or

(ii) a road that includes the whole or a part of the road.

I do not query the fact that that is simpler than that which may have gone before. However, it is certainly difficult for a person of limited mental capacity such as myself to understand offhand. When I was a Minister, I had a rule that I would not read any submission from any official that contained a sentence with more than four lines. That clause is a single sentence of six lines. I am sorry that the Government do not go in for greater abbreviation of sentences in the procedure.

The third sense in which simplification is involved in the process concerns consolidation: bringing together provisions from a variety of different Finance Acts so that it is easier for people to find their way round them. That had to be done, and it is a great and welcome advance. Of course, it means that we will need to go through the same process again when future changes are made, to consolidate those in the Bill. Simplification also makes the layout of the Bill more accessible, although, like my right hon. Friend the Member for Fylde (Mr. Jack), I regret that the Government have not adopted the simpler numbering system, which the experts thought would make it far easier to keep track of the law and future changes in it.

Mr. Chope: The Bill now contains 76 chapters, which are not numbered in numerical order. It is therefore not possible to refer to a particular chapter without specifying the part of the Bill to which it refers. Does my right hon. Friend agree that that is confusing for people who read books and are used to chapters that start at number one and go to the end? Will he explain why the committee rejected that proposal?

Mr. Lilley: I am grateful to my hon. Friend for making that point. Of course, I cannot answer on behalf of the Government. We shall have to wait for the winding-up speeches--which, I am sure, will be fairly soon--for an explanation.

Will the Minister say whether it will be possible, under the procedures under which the Bill will be considered, for us to amend the Bill to include a different numbering system? Could we improve it as many experts outside the House want by introducing that numbering system and, if so, how would that be achieved? Although I suspect that it could well involve a complex set of amendments, that process would be worth while given that the Government have failed to undertake it. Obviously, the House would want to embark on it only if it were not persuaded by the Government that there were sensible reasons for not going down that route.

Mr. Jack: To pick up on the point that my hon. Friend the Member for Christchurch (Mr. Chope) made, the committee did not reject three-part numbering. The system of producing our legislation did not enable it to be introduced. I refer my right hon. Friend to the final exposure draft of the new Bill, which is all laid out in three-part numbering.

Mr. Lilley: I am grateful to my right hon. Friend for that illumination of the genesis of the Bill. It is all the sadder, therefore, if the Bill was laid out in such a way that the experts outside, who will have to use it, found helpful, but subsequently remitted. I cannot understand why it is beyond the capacity of the House to insist that its legislation be numbered in a way that is convenient for the companies and tax experts outside this place endeavouring to comply with tax law.

The fourth sense of simplification is tidying up and sanding down rough edges. As I understood the Paymaster General, the measure has been introduced in that sense, which means that there can be slight changes in the incidence of taxation. Some people will pay more tax than previously and others less, but, as she said, the changes will be only minor and it is up to the House to decide what is minor and acceptable as minor in terms of the number of people affected and the change in the tax burden of any of those individuals or companies.

Finally, there is simplification in the sense of a change in the underlying tax structure to make that simpler. That, of course, will affect the incidence of taxation and it goes beyond what the Bill seeks to achieve and what the procedure under which it is being considered enables us to do. In deciding whether to give the Bill a Second Reading, we must decide whether the simplification that it incorporates, which involves the second, third and fourth senses of that word, is adequate or whether we should not bother to go down such a route because it would be more desirable to simplify either by making the Bill much briefer, terser and more succinct or, in the final sense, by changing the underlying tax structure so that it is easier for everybody to deal with.

Given that many individuals outside the House took part in the thorough consultation--the Minister paid tribute to the time and effort that outsiders have devoted to trying to complete the process of simplification--and draftsmen and people of great skill were involved in drawing up the Bill, we have to ask ourselves why, after all that effort, we have been left with such a hugely complex measure of 334 pages. The reason is twofold. The real world is complex. A lot of people assume that all the complexities in taxation result from the imagination of the House or our frequent returns to a particular subject, but, even if one wants matters to be simple, the real world is complex.

When I was Financial Secretary or slightly before--none the less, at some stage in my long and varied career at the Treasury--I said to officials, "Why can‘t we have a simple tax system of one tax rate, apply that to people‘s incomes less their expenditure and that‘s it? We need just a few clauses." The officials looked at me as they had obviously looked at countless generations of Financial Secretaries and Economic Secretaries who had made the same naive points and said, "Minister, how do you define income?" Of course that raises the question whether income includes gambling income, lottery income, benefit income, gifts or rebates and refunds. What moneys should be included? That simple question leads to immense complexity of definition.

I see you looking at me, Madam Deputy Speaker, as if I am about to elaborate. Of course, I am not. I merely point out that, whatever part of the tax system we try to define, contact with the real world is likely to lead to complexities. We in the House cannot avoid that, but we can add layers to the complexity of the real world by imposing further necessary or unnecessary complexities. Above all, if policy pursues several objectives, it will find itself making several distinctions. Every time we make a distinction, we come up against the complexities in the real world and add a few dozen clauses to our Bill.

Much of that accounts for the complexity of legislation in this area, which the draftsmen have done their best to smooth down, but they cannot eliminate it if they retain the underlying conflicting and varied objectives that are incorporated in legislation on capital allowances.

It is only worth going through the process that is before us and putting the Bill on the statute book, in what may be a mildly amended form after its consideration in Committee, if there is no hope of a more radical simplification of the capital allowance structure.

Even minor simplifications as are incorporated in the Bill have costs. Practitioners will find the new system easier to use in the long run, but they will have to become familiar with it first. They will begin by being familiar with the present unnecessarily complicated legislation. Costs will be incurred in going through new legislation, repulping advisory books and bringing handbooks up to date, for example, to ensure that they deal with the proposed legislation.

It is worth doing that for the comparatively minor gains in terms of the simplicity of tax law that the Bill incorporates only if it is not possible to move more radically into a simplification of the entire structure of capital allowances.

The present system, which is incorporated in the Bill, is in large measure the system as simplified by Lord Lawson of Blaby when he was Chancellor of the Exchequer. He sought through a series of reforms to introduce lower tax rates by extending the tax base by simplifying and eliminating where possible, or reducing the value of, allowances of all sorts. In his first endeavour to deal with capital allowances--

Madam Deputy Speaker (Mrs. Sylvia Heal): Order. I remind the right hon. Gentleman that the Bill‘s purpose is to restate the law relating to capital allowances with minor changes. It is not a vehicle to debate policy on capital allowances, except the extent to which the Bill fulfils the purpose set out in its title.

Mr. Lilley: I entirely take your point, Madam Deputy Speaker.

My argument is whether it is worth voting yes or no on that issue. We should vote yes only if there is not a better alternative. We must ascertain whether the structure of the present tax system allows for an alternative. Many would say that there is no possibility of a better alternative and we should vote for the Bill as it stands, but I would argue that there is scope. This is one of the few areas of the tax system where a proposal could sensibly be put forward for radical simplification, which would render the Bill unnecessary.

When the then Chancellor of the Exchequer created the present system in the 1980s, he put the tax treatment of capital allowances in line with what company accounting systems do for capital expenditures--or at least more in line than they had been initially. When he did so, it was difficult for anyone to argue against taking that course. If companies calculate their profits, which they declare in their annual reports, by subtracting depreciation, whatever it is, and an eighth of their capital expenditure on a particular asset each year from their revenues, surely it is reasonable for the tax man to calculate the profits liable to tax on the same basis. That was the argument then, and it is, in effect, the argument incorporated in the Bill.

Companies had no argument against that. They were left speechless when the Chancellor came up with the proposal, even though many of them that had previously enjoyed 100 per cent. capital allowances did not like it. Opposition was rather muted at that time to the changes which we are, in effect, enshrining again in this legislation.

However, there was an alternative answer to that rhetorical question. When companies report in their accounts to their shareholders, they try to provide a measure against which their performance in managing their assets can be judged. They spread their expenditures on their assets over the life of those assets, so that they can be judged on how well they are extracting profit from them, and so that there are no ups and downs in the reported profits, according to the years in which assets were purchased.

Taxes, however, should reflect a company‘s ability to pay tax. That depends how much money it has coming in, as opposed to how much money it has going out. Taxes should reflect the tax flow of the company, rather than how it reports for the purposes of assessing how efficiently it is managing its assets. When a company invests in assets, it temporarily has less money. Subsequently, when the assets generate revenues, the company has more money to pay tax, and it is reasonable to tax it accordingly.

If we were to return to a cashflow basis of assessing the taxation of companies, that would remove the need for many of the distinctions that are incorporated in, and account for, page upon page of the Bill. Yet that is how all other items of expenditure are assessed and treated for tax purposes. We do not think that there is anything anomalous about a 100 per cent. Allowance.

?

Mr. Lilley: We must recognise that chapter after chapter of the Bill--admirable though it is for the clarity of its language and the consolidation of the previous legislation, which was scattered among various Finance Bills--exist to make distinctions between buildings and plant and machinery, between software and hardware, between cars and other vehicles, between short and long-life assets, between hired, leased and bought assets, and between ships and offshore facilities. Those distinctions, which require complex legislation, are the result of policy decisions to discriminate between different classes of assets. If we go ahead with this measure, we shall enshrine those distinctions and discriminations, albeit in a clearer and more lucid form. Alternatively, we could abolish them and save ourselves the trouble of an unnecessary Bill. That would save the tax profession from having to adapt to a Bill that will subsequently be overtaken by further Bills that will render it unnecessary.

We must recognise that all attempts to simplify legislation, of which this measure is a laudable example, are constrained or affected by one of the Lawson‘s laws of taxation. The more onerous the burden of tax, the more complexities have to be incorporated in the legislation. The more onerous the burden, the more necessary it is to have loopholes and easements where the shoe pinches too tightly, and the greater the political pressures to incorporate special concessions for the more powerful interest groups that are affected by the burden of tax.

If our aim is genuine simplification, we should not only rewrite legislation, but get the burden of tax down.

Mr. Lilley: The measure is good as far as it goes, but it will impose costs on people who will have to adapt to it. It is a missed opportunity for the Government to move towards simpler taxation. They will get simpler taxation only if they reduce the tax burden. Sadly, we shall not get that from the Labour party. We shall have to wait for a general election, a change of Government and a change of philosophy. We shall then get simpler taxation.

Mr. McWalter: The right hon. Gentleman must understand that many of his assertions are deeply contestable. We could have a tax rate of 90p in the pound, which would involve just one side of A4 paper.

Madam Deputy Speaker: Order. I remind the hon. Gentleman that he, too, should confine his remarks to the subject of the debate.

Mr. Lilley: I shall make my response to the hon. Gentleman doubly brief. I am delighted to contest a point with him--when he stood against me he lost. We could have a 90 per cent. rate, but the only time we did so was for the petroleum revenue tax. We only have to consider how complex that was to realise the validity of the point that I was making in my closing remarks.

I now happily hand over the baton to other hon. Members to elucidate the importance of the Bill.

 

 

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Capital Allowances Bill Second Reading Debate (15 Jan 2001)

 

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