Just imagine – my pre-budget speech

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I was at a party yesterday. I was challenged by an intelligent person I'd never met before but with whom I'd spent some time discussing my work (and his) about what I'd have done if I'd been Chancellor last week.

On spending I said I'd have increased the emphasis on child poverty. On tax I'd have identified four key problems, most other issues having already been dealt with by prior announcement. These were the taxation of small business, private equity, domicile and Inheritance Tax. I might also have taken the opportunity to attack a fifth issue, which is that of collateralised debt - which is at the core of Northern Rock's problems.

And what would I have done? This is what I would have announced on small business taxation if I had been at the Dispatch Box:

I recognise that there is a problem in providing an appropriate structure in which small businesses can operate that provides them with both limited liability when loss arises through no fault of their own and with flexibility with regard to the payment of rewards that need to vary over time and which reflect the risks the participants in the business bear.

It is becoming increasingly apparent that the limited liability company that the Victorians created to solve this problem is no longer a suitable vehicle for use by the modern enterprise.

As such I am announcing today that I will be appointing X to conduct review into the needs for reform in this area with the intention that a new corporate vehicle should be created based upon a limited liability partnership. It is our intention that all current limited companies and partnerships should be capable of being re-registered as these entities with no tax charge arising at the time of re-registration and that the new entity will allow for realistic rewards to be paid without unreasonable challenge being raised to all those who contribute to the vibrancy of the small business sector. I have placed tight time limits on this review process and intend that the new entity should be available for use from 1 April 2009. In this meantime I have instructed HM Revenue & Customs to respect the ruling in Jones v Garnett - the Arctic Systems case.

One down then. I would aspect the outcome to look something like this. I would then have continued on the theme of private equity:

As many people are aware, senior managers in the private equity sector have recently drawn attention to the obvious injustice of their paying tax at lower rates then their cleaners. They are right, and I admire the courage of those who have made such observations. They have focused public attention on an issue I clearly need to address.

As the House will know this situation has arisen as a result of a non-statutory agreement between HM Revenue & Customs and the British Venture Capital Association as a result of which income arising from what is called the carried interest of senior employees in this sector is taxed as a capital gain and not as income. This was intended to reflect the risk these employees took when promoting smaller companies that were often start-up ventures.

Over the last few years the nature of the British venture capital industry has changed considerably. It now focuses on buying existing businesses and turning them around by the application of management expertise. The risks inherent in this process are quite different from that associated with business start ups. The skills required are often quite different as well.

I am therefore announcing that as from 6 April 2008 the BVCA agreement will apply only to what will be termed 'start up funds'. These will be funds that invest 80% or more of their capital in new, start up or mezzanine finance facilities not exceeding £5 million to any one company. The BVCA agreement will not apply from that date to funds specialising in what is effectively mergers and acquisition activity.

As a result of this change the favourable provisions of this arrangement will in future only be available to those for whom it was intended. I will consult on the arrangements to ensure that this agreement will be effective but would stress from the outset that the arrangement will not apply to any person who seeks to register the ownership of their carried interest outside the United Kingdom, whose income will as a result always be considered UK income subject to income taxation.

This would have restored sanity in this market. Turning to domicile I would have said:

The domicile rule as applied to taxation has been another matter subject to extensive discussion and some wholly unrealistic proposals from the members opposite over the last few weeks and months.

Just as the Victorian solution to the management of small business is no longer appropriate for the twenty first century nor is this 18th century rule any longer suitable for determining how those temporarily resident in this country should be taxed. My Right Honourable Friend the Prime Minister began a review of this matter in 2003, a review which reflected his long stated concern with this rule and I have now resolved that this review should be brought to conclusion.

I am in consequence tabling proposals for consultation today with the intent of bringing forward legislation in my Budget next year which will revise the way in which this country taxes those who reside here temporarily or for only part of a year. I can however inform the House that it is our intention that domicile will no longer play any part in determining a person's taxation liability.

As is the case for all other major economies in the world that matter will be decided upon the basis of fact. The facts to be considered will solely relate to a persons presence or persistent presence in this country. As such it is our suggestion at this time that as from 6 April 2008 residence will be determined on the basis of either substantial presence in a year, meaning 183 or more days in the UK in a year with a day of arrival or departure counting as a day of presence in the UK for these purposes, or on the basis of habitual presence with 91 days presence in the UK on average over any period of three years or more indicating such status, again with days of arrival and departure being counted in that total.

When a person is either substantially or habitually resident in the UK in a year under these rules they will, if our current thinking is reflected in the legislation to be presented to the House, be liable to tax in the UK on their world wide income and gains arising in the year in question, irrespective of whether that sum has been remitted to the UK or not.

A person acquiring residence for the first time (except by reason of their birth) will only be liable to Inheritance Tax on their UK assets for the first seven years of their residence in this country. There after they will be liable upon their world-wide estate.

So, what of Inheritance Tax? Try this:

Much has been said about Inheritance Tax of late. Almost all of it has been said for the wrong reason, and has been aimed at benefiting the wrong people.

It is my belief that the tax system should be progressive in this country. This means that those who have plenty should pay more to ensure that those who have little nothing, whether it be in the way of material wellbeing or opportunity, can enjoy some of the benefits of living in this great country of ours.

Inheritance Tax is a part of that progressive tax system. It reallocates wealth, and is the only tax we have that seeks to do so. In the process it does a number of other things. It is the only tax we have that keeps a brake on house prices. It is the only tax that provides complete exemption for those who create value in our society by their own efforts, whether it be in business or agriculture. It is a necessary tax to ensure that we pass the benefit of being a home owning economy from those who have enjoyed it throughout their lives to those who want to do so. As such I remain committed to this tax, and believe it an important part of our tax system.

That said, there are always pragmatic ways of improving a tax and I have heard calls that I do so. I can therefore tell the House that as from today the Inheritance Tax due on gift of a person's interest in their home to a person with whom they have cohabited for a period of seven years, or on whom they have been dependent for care for a period of two years prior to their death and who has cohabited with them during that time will be deferred until the time of sale of the property in question, This resolves on of the remaining injustices within this system.

Secondly, I am aware that for many the threat of a tax that they believe will be charged at 40% on the gifts they wish to make to their offspring seems excessive and a cause of real worry. As such I will be changing the Inheritance Tax system so that the first £100,000 of gifts chargeable to the tax will from 6 April next year be charged at 15%, the next £100,000 will be charged at 25% and only after that point will tax be charged at the existing rate of 40%.

In combination these measures do two things. They confirm our commitment to just taxation, but they also show that we will listen to those who have concern that drives them into the arms of accountants and lawyers who exploit that fear as much for their own ends as that of their clients. By making clear that the rates at which this tax is charged are low, and that the total payments due by those who are comfortably off, but by no means wealthy will be modest at most, we show that we expect those who have benefited in their lives from good fortune to contribute to the same benefit for all in our society in our future whilst leaving them free to decide who might enjoy the vast majority of their estates. I believe this is the correct combination of principle and pragmatism that is the hallmark of a good tax and as such I recommend this change to the House.

So that's dealt with the big taxation issues of the day. What of Northern Rock? I would have said this:

I am aware that many members of the House will have constituents who have been greatly concerned at the troubles that have afflicted Northern Rock.

I am pleased that the situation of this bank has been stabilised due to prompt action on the part of all involved in regulation of the banking sector in the UK. that does still leave question as to how this situation arose and how it might be prevented from recurring.

I am pleased to tell the House that I am setting up a Commission to address this question. I am asking it to resolve three questions. The first is how it was that the depositors in this bank appeared to enjoy less security than those who provided it with wholesale funds. The second is why the bank used opaque financial mechanisms to secure its wholesale funding, including mechanisms outside the UK. The third is to consider the role of charitable structures in the UK finance industry to create illusions of independence which might not actually exist.

Having asked this Commission to consider this issue I am then giving it the task of making recommendations as to changes required to ensure that transparency and accountability are enhanced within our financial institutions so that the loss of confidence that occurred in the case of Northern Rock need never recur. I am sure that they will receive the support of all in this House in undertaking this task.

Let me be bold. I think there are a great many people who would have been a lot happier to have heard that speech than the one that Alastair Darling actually made.

And if anyone wants to debate that point, I'm happy to move the motion.

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