Treasury Committee publishes report on 2014 Budget
9 May 2014 01:07 PM
In its report on the
2014 Budget, the Treasury Committee makes recommendations on pensions, savings,
HMRC debt recovery powers and housing
A full list of conclusions and
recommendations appears on pages 91-97 of the report. Some of the
recommendations include:
On pensions
reform
The Committee notes that all
witnesses welcomed the greater flexibility and choice provided by the
Government’s proposed pension reforms. (paragraph 118)
Consumers will need considerable
support in navigating a market which is undergoing major change and in which
consumers are likely to be offered an array of new products. The Committee
recommends that the proposed guidance under the guarantee observe the following
principles. It should:
- Be demonstrably impartial as to
providers and type of product
- Include at least an initial
opportunity for face-to-face guidance
- Be free at the point of use,
with the costs of such provision made transparent
- Make clear to every consumer
exactly what is being offered, the limitations of the guidance, and what
protection it gives consumers in the event of detriment
- Be offered from at least 12
months in advance of the consumer’s stated retirement
date
- Be co-ordinated with
Government-sponsored guidance relating to long-term care (paragraph
186)
Chairman's
comments
“Everyone we spoke to
welcomed the pensions and savings reforms announced in the Budget, in
particular the greater flexibility and choice that they offer to
consumers.
The ‘guidance
guarantee’, announced at the Budget, is an important part of making sure
that consumers benefit from increased choice. We will measure the
Government’s proposals for the guidance guarantee against a set of
principles to ensure their effectiveness.”
On new pensions products, and
the role of the FCA
The market is likely to adapt,
offering a new range of financial products for those approaching retirement. It
is crucial that these products are not defective. Were they to be so, the
reputation of the financial services industry, which has suffered severe damage
in recent years from large scale mis-selling, would be further tarnished.
(paragraph 144)
The FCA has now been given new
powers to intervene early, in advance of detriment occurring. In practice, this
will be extremely difficult to accomplish without creating other forms of
consumer detriment. In particular, it will be essential to avoid stifling
market innovation. The use of these new powers will be a major test of
judgement-based regulation. (paragraph 145)
Chairman's
comments
“The pensions reforms are
likely to lead to financial innovation.
That innovation needs to provide
products that are in the interests of consumers and which are sold
responsibly.
Following the financial crisis,
and the mis-selling scandals, the reputation of the industry is under
scrutiny.
The FCA, with its new powers of
intervention, will also be under the spotlight. This will be an important test
of its commitment to develop judgement-led regulation. Consumers will lose from
heavy handed regulation or the extension of the box-ticking culture that has
bedevilled conduct regulation. This achieved little and often protected nobody.
Effective regulations are badly needed, encouraging innovation, but the FCA
must also act quickly to bear down on consumer detriment where
necessary.”
On the future taxation of
savings
Taken together, the changes
announced in the Budget to ISAs, as well as the reforms to the taxation of
defined contribution pensions at retirement, amount to a substantial increase
in the flexibility available to savers. As this flexibility increases, ISAs and
pensions will become increasingly interchangeable in their effect. In the light
of this, the Committee recommends that the Government set out comprehensively
the approach it intends to take to taxation of all forms of saving. This should
include an examination of the merits of moving further towards taxing savings
once, the scope for bringing closer together the tax treatment of ISAs and
pensions, and the appropriateness of the present arrangements for the pension
tax free lump sum. (paragraph 205)
Chairman's
comments
“For too long, double
taxation has discouraged some forms of saving. These reforms take us towards
only taxing savings once.
The Budget has enhanced
flexibility for those saving, whether in pensions or ISAs. The Government
should now look further ahead. The Mirrlees Review highlighted the complexity
and distortions in the UK tax system’s treatment of
savings.
The Government now has the
opportunity to build on its reforms and the expressions of cross-party support
that they have attracted. In particular, there may be scope in the long term
for bringing the tax treatment of savings and pensions together to create a
‘single savings’ vehicle that can be used—with additions and
withdrawals—throughout working life and retirement. This would be a great
prize. The cross-party support for these savings and pensions announcements
offers the prospect of a more stable and healthy environment for pension and
savings taxation. This can only encourage savings and reduce
dependency.”
On HMRC debt recovery
powers
The proposal to grant HMRC the
power to recover money directly from taxpayers’ bank accounts is of
considerable concern to the Committee. It could develop into a return to Crown
preference by stealth. The Committee considers a lengthy and full consultation
to be essential. The greater detail provided by the Government on 6 May will
need further and extensive examination, and the Committee will take further
evidence on this. Giving HMRC this power without some form of prior independent
oversight—for example by a new ombudsman or tribunal, or through the
courts—would be wholly unacceptable. (paragraph 244)
The Chancellor argues that this
measure can be justified because the Department for Work and Pensions already
has the right to take money directly from people’s bank accounts to pay
child maintenance. However, the parallel is not exact: in those cases, DWP is
acting as an intermediary between two individuals. HMRC would be acting not as
an intermediary between two individuals but rather in pursuit of its own
objective of bringing in revenue for the Exchequer. (paragraph
245)
This policy is highly dependent
on HMRC’s ability accurately to determine which taxpayers owe money and
what amounts they owe, an ability not always demonstrated in the past.
Incorrectly collecting money will result in serious detriment to taxpayers. The
Government must consider safeguards, in addition to those set out in the
consultation document, to ensure that HMRC cannot act erroneously with
impunity. These might include the award of damages in addition to compensation,
and disciplinary action in cases of abuse of the power.
(paragraph 246)
The ability directly to have
access to millions of taxpayers’ bank accounts raises concerns about the
risk of fraud and error, and this should also be covered by the
consultation.
(paragraph 247)
Following the merger of HM
Customs and Excise and the Inland Revenue in April 2005, an extensive review of
HMRC’s powers, deterrents and safeguards was carried out from 2005 to
2012. The Committee believes that sufficient time has now passed to warrant a
post-implementation review of these powers. The aim of this review should be to
ensure that all the powers HMRC has at its disposal remain relevant and are no
more than are sufficient to enable HMRC to achieve its objectives. (paragraph
248)
Chairman's
comments
“The proposal to grant the
power to HMRC to take money directly from people’s bank accounts is very
concerning.
People should pay the right
amount of tax. But HMRC does not always ask for the right
amount.
Some taxpayers may find money
taken from their accounts that later should be paid back. That would be
unacceptable.
Exceptional powers such as this
require prior independent oversight. The Government must demonstrate that it
has dealt with the Committee’s concerns before
proceeding.
The Committee intends to take
evidence from HMRC on this, among other issues,
shortly.”
Housing
House price and commercial real
estate bubbles are easy to spot in retrospect. The problem for the Financial
Policy Committee is to spot them in advance of their bursting and take whatever
action is required to mitigate their negative effects on financial stability.
(paragraph 54)
Wider economic concerns are the
responsibility of the Government and the Monetary Policy Committee. The
Government is also responsible for fiscal and policy tools which directly
influence the housing market. It should therefore state what indicators it
believes are most important in detecting any wider economic risks arising from
the housing market. It should also set out how it plans to address these risks,
should they arise. (paragraph 55)
Chairman's
comments
“The Committee has
expressed concerns about Help to Buy from the time of its announcement at last
year’s Budget. The Committee highlighted the risk that the primary effect
of the scheme, at least in the short-to-medium term, could be to raise house
prices. The Committee has also drawn attention to the risk that withdrawal of
Help to Buy may have a distorting effect on the housing
market.
The need to address these
difficulties places a particular responsibility on the FPC, as well as the
Government, for detecting and addressing the financial stability risks arising
from the housing market.
Housing bubbles are easy to spot
in retrospect. The FPC has been given the challenging role of identifying them
in advance.
The Bank of England has been
granted a large and varied range of tools to address this type of risk to
stability. The FPC will be meeting in June to decide whether any of them should
be used. The Committee will take an early opportunity to secure an explanation,
both to us and to the wider public, for any decisions taken.
“The FPC and the
Bank’s legitimacy can only be enhanced by a wider public understanding of
their powers and decisions.”
Retrospection
Retrospective tax legislation
conflicts with the principles of tax policy recommended by this Committee. In
our Budget 2012 Report we recommended that the Government restrict the use of
retrospection to wholly exceptional circumstances. Witnesses told us that the
Government was not abiding by this recommendation. Furthermore, the Red Book
announced an additional retrospective taxation policy: an extension of the
requirement for taxpayers to pay upfront any disputed tax associated with
anti-avoidance schemes. This policy will retrospectively apply to some of the
65,000 outstanding tax avoidance cases. There may be a case for this policy but
the Government has yet to explain what is wholly exceptional about these cases
that justifies this retrospective measure. It should do so in response to this
Report. (paragraph 225)
Chairman's
comments
“We have deep reservations
about any extension of retrospection in the tax system.
Retrospection runs counter to
the Committee’s principles of tax policy. In particular, it undermines
certainty. Retrospection should be considered only in wholly exceptional
circumstances. The latest measure would have to be justified on those
grounds.
Retrospection puts policy on a
slippery path to arbitrary taxation, discouraging investment and innovation and
creating the scope for great unfairness.”