Committee advises caution over using retrospective legislation
On 18 April the Treasury Committee (TC) published its report, Budget 2012, containing its conclusions and recommendations following its assessment of this year’s Budget.
The TC made a series of recommendations, but commented on the lack of time allowed for scrutiny of the Finance Bill. The Parliamentary timetable this year is affected by the Queen’s Diamond Jubilee and the Olympics, but even without these events, the TC suggests that in future, the Budget may need to be earlier in the year.
"The timings of the Second Reading of the Finance (No. 4) Bill and the Committee of the Whole House stage are highly unsatisfactory. While we recognise that there are exceptional circumstances this year, the new pattern of Prorogation and State Opening risks making the timing of the stages of future Finance Bills tighter than in the recent past. We therefore recommend that the Treasury and the Business Managers work together to plan the timings of future Budgets and Finance Bills so that the House has longer between publication of the Bill and Second Reading and, particularly, between Second Reading and Committee of the Whole House. This may require the Budget to be somewhat earlier in future." (Para 2)
We were pleased to note that following the publication of its report Principles of tax policy in 2011, the TC has continued with its interest in the formulation of good tax policy. In gathering evidence for the report, the Committee asked the ICAEW and other professional bodies for our assessment of how Budget 2012 had measured up to these principles. We submitted these as TAXREP 17/12 and they were subsequently reproduced in their entirety in the Committee’s report.
On specific tax matters, the Committee was cautious about the Government’s use of retrospective legislation:
"We recommend that the Government clarify what retrospection is proposed with regard to stamp duty." (Para 86)
"We recommend that the Government restrict its use of retrospective legislation to wholly exceptional circumstances, which should be narrow and clearly-defined. The Treasury should set these out as soon as possible for consultation, along with an explanation of how gradual further extension of retrospection can be prevented. Any future retrospective tax measure must be justified against the agreed criteria: such justification must include clear explanatory statements to Parliament by the responsible Minister and should invite views from relevant professional bodies." (Para 89)
It remained unconvinced by the Government’s latest proposals for reform of Child Benefit, expressing a concern that they would add further complexity.
It recommended that, where changes to complex areas of taxation are proposed, the greatest possible supporting material be published to allow for greater scrutiny of the possibility of unintended consequences. We would certainly agree with that.
Another area of particular concern to us is the proposed cap on income tax reliefs. The TC has asked for the publication of an assessment of the impact of the cap on income tax reliefs, both on business investment and charities, together with a more detailed explanation of the problem the cap seeks to address. We would quite like to know more about the actual proposals too.
Finally the TC has made the important observation that small businesses will be unaffected by the cut in the main rate of corporation tax announced in the Budget, while they will still suffer from the previously announced reductions to capital allowances rates.
The economy and other matters
The remit of the TC also requires it to comment on the work of the Office for Budget Responsibility (OBR) in relation to the impact of the Budget on the economy.
It expressed concerns over some of the statistics used in analysing the cash available for investment by firms. There were suggestions that Office of National Statistics figures may have over-estimated the amount of cash held by companies that are likely to invest in capital. The OBR now forecasts that the growth in business investment will be slower than it thought in November 2011.
The TC has welcomed the Chancellor’s commitment to increase the capacity of the National Loans Guarantee Scheme if the scheme proves to be successful. It also welcomed the monitoring and reporting by participating banks, together with the independent audit, which has been put in place to ensure that banks pass on the full benefit of lower funding costs to SMEs. It said:
"We expect there to be full transparency about the monitoring of the Scheme and the results of the audit. We will require detailed evidence from the Treasury to show that these guarantees have had the effect intended, and that the scheme is operating in such a way that banks do not retain any benefit, as the Treasury intended." (Para 34)
However, it notes that the scheme will not help SMEs which represent unreasonable credit risks from accessing bank funding in the ‘current unusual market conditions’.
A growing number of non-bank lending sources of funding for SMEs are appearing in the marketplace. The Committee recommends that:
" ... the Government continues to pursue creative solutions, including those suggested by the Breedon review, to increase the level and availability of nonbank funding, and set out the results in detail in the Autumn Statement." (Para 41)
There is plenty of discussion about the redistributional effects of quantitative easing and low interest rates, particularly on how this penalises savers, those with ‘drawdown pensions’ and those retiring now.
The Committee reflects that in the next spending review period, the Government will need, on current forecasts, to find significant further reductions in expenditure. It looks forward to the Chancellor’s update in the Autumn Statement.