House of Commons Hansard Debates for 16 Jul 1990

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I assure my hon. Friend that there is no question of fishing expeditions. The Revenue gave banking representatives that categorical assurance when they met on 3 July, and I repeat it. Amendment agreed to.

Amendment proposed : No. 17, in page 20, line 10, at end insert-- (2) The reference in section 326A to a deposit account shall be taken to include a reference to a share account with a building society, and accordingly that section, section 326B and subsection (1) above shall apply to such an account with the necessary modifications.".'.-- [Mr. Ryder.]

Mr. Nicholas Brown : The amendment is not contentious. It ensures that building society accounts qualify as TESSAs provided that the rest of the criteria in section 326A are satisfied.

The amendment is evidence of sloppy drafting. Had the legal flaw not been spotted in time, most building society TESSAs would not, strictly speaking, have qualified as such. The Government were therefore right to correct that flaw.

Amendment agreed to.

Amendment made : No. 18, in page 20, line 14, at end insert-- (3) In section 149B of the Capital Gains Tax Act 1979, for subsection (4) there shall be substituted--

"(4) Any bonus to which section 326 (certified contractual savings schemes) or 326A (tax-exempt special savings accounts) of the Taxes Act 1988 applies shall be disregarded for all purposes of the enactments relating to capital gains tax.".'.-- [Mr. Ryder.]

Clause 29

Extension of SAYE

Amendments made : No. 19, in page 20, line 20, at end insert-- (aa) in that subsection, for the words "be disregarded" onwards there shall be substituted the words "not be regarded as income for any income tax purposes.";'.

No. 20, in page 20, leave out lines 33 to 37.-- [Mr. Ryder.]

Clause 50

Friendly societies : application of enactments

Amendment proposed : No. 23, in page 40, line 22, after section', insert

may make different provision for different cases and'.-- [Mr. Ryder.]

Mr. Nicholas Brown : We accept that the amendment concerns a minor drafting point.

Amendment agreed to.

Clause 51

Authorised unit trusts

Mr. John Watts (Slough) : I beg to move amendment No. 2, in page 44, line 27, at end add--

Authorised unit trusts : unfranked income trusts

468.--(1) This section applies where :--

(a) as regards a distribution period ending after 31st December 1990 a dividend is treated by virtue of section 468(2) as paid to a unit holder (whether or not income is in fact paid to the unit holder), and

(b) all or part (in this section the "appropriate portion") of the dividend is paid from sources other than franked investment income, and

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(c) the dividend is treated as paid by the trustees of a unit trust scheme which is an authorised unit trust as respects the accounting period in which the distribution period falls, and

(d) arrangements with the Board as provided in section 468I are in force in respect of such unit trust scheme.

(2) Where this section applies, if the unit holder to whom the dividend is treated as paid is not resident in the United Kingdom for the whole of the year of assessment in which the dividend is treated as paid and is resident in a qualifying country, he shall be entitled, on the payment (or deemed payment) of the appropriate portion of the dividend, to payment by the trustees of such unit trust scheme of the tax credit (if any) to which an individual resident in the United Kingdom would have been entitled had he received such dividend, and no United Kingdom tax shall be payable in respect of such dividend or the amount of the tax credit so paid.

(3) For the purposes of sub-section (2) above, a person shall be treated as not resident in the United Kingdom and resident in a qualifying country for a year of assessment if this is proved on a claim in that behalf made to the Board.

(4) Where units are held under a trust and the person who is the beneficiary in possession under the trust is the sole beneficiary in possession and can, by means either of the revocation of the trust or the exercise of any power under the trust, call upon the trustees at any time to transfer the units to him absolutely free from the trust, that person shall, for the purposes of this section, be treated as the unit holder.

(5) The trustees shall certify in writing to the investor the appropriate portion of the dividend together with the amount of the tax credit referable thereto and to which a recipient is entitled to a payment as provided in this section.

(6) In this section "qualifying country" means any country which is at any time during such year of assessment a member state of the European Economic Community or any other country which is for the time being designated for the purposes of this section as a qualifying country by order made by the Board.

Authorised unit trusts : payment by trustees

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(1) The trustees of an authorised unit trust may enter into arrangements with the Board in respect of unit holders who would, if such arrangements were in force, be entitled to payment of the associated tax credit under section 468H.

(2) Under such arrangements where a dividend falling within section 468H is treated by virtue of section 468(2) as paid to unit holders in respect of whom the arrangements have been made :--

(a) the trustees may pay to such unit holders the amount of the associated tax credit in respect of the appropriate portion of the dividend (the "additional amount") ; and

(b) all additional amounts so paid shall be set against advance corporation tax which the trustees are liable to pay for the return period in which the dividend was paid and shall discharge a corresponding amount of that liability.

(3) The Board shall not make arrangements under this section unless they are satisfied that the payment of the additional amounts shall not ensure to the benefit of persons other than those entitled thereto.

(4) The effective period of such arrangements shall begin with the date on which the arrangements are made, or such later or earlier date as may be specified in the arrangements, and shall end with the date on which either party receives notice in writing from the other terminating the arrangements, or such later date as may be specified in the notice.

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(5) The trustees shall render the Board an account at such time, and containing such particulars relating to the dividend as the Board may require.'.

The amendment has been suggested by the Unit Trust Association, and in case Opposition Front Bench spokesmen get excited, I have no pecuniary interest in any unit trust or any association for unit trusts, but I have an interest in the general welfare of the industry.

The purpose of the amendment is to improve the competitive position of the unit trust industry in the developing European market. At present, people living in most European countries will receive less income from a unit trust based in the United Kingdom than they could derive from a local fund. That is certainly true of gross receipts and, in some cases, of net receipts as well. That is because United Kingdom trusts are unique in paying corporation tax on their income. As far as I am aware, no European fund suffers from an equivalent tax impost.

Income funds are expected to be a centrepiece of the export ranges of the United Kingdom fund managers seeking to develop the market in Europe. They will be competitive only if they can at least match the income paid out by local funds. The amendment proposed by the Unit Trust Association allows United Kingdom unit trusts to pay out more income so that they can match the local funds. The additional pay-out is the same amount as United Kingdom taxpayers would receive as a tax credit. That removes the disadvantage that they suffer as a result of corporation tax.

The amendment involves no tax cost to the United Kingdom revenue, since, in effect, it will apply only to income on marginal businesses that would not otherwise be flowing through the United Kingdom, and there may be some small increase in United Kingdom tax revenue because, if the fund managers are successful, they will be paying corporation tax on the profits that they earn.

I raised this matter in Committee and I welcomed another concession that the Government had made to the unit trust industry. My hon. Friend the Financial Secretary agreed to look further at the proposals from the Unit Trust Association and, good as his word, as we would always expect of him, he wrote to me with his further thoughts. I thank him for that. He is certainly sympathetic to the desire of the unit trust industry to establish a bridgehead in Europe and to increase our invisible earnings through that mechanism. My hon. Friend raised a number of points in his letter. He said that United Kingdom unit trusts benefit from favourable withholding tax rates on overseas dividends compared with Luxembourg funds that had no treaty benefits. I am told that Luxembourg is not considered the threat. The major competition in this market for United Kingdom managed funds of non-United Kingdom equities--American or Japanese securities--is expected to come more from France and Germany, which have tax treaty networks comparable with those that we enjoy. My hon. Friend also objected that the proposed change is complicated and would be expensive to administer. The legislation involves only the new clause that has informed my amendment. Managers who are not involved in the export business do not need to change their procedures ; others will merely need to identify overseas investors who qualify for a gross distribution, and include on the distribution voucher a note of the amount that represents a tax credit.

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Any extra burden would fall principally on fund managers who chose to operate under such a scheme. Clearly, they think that it would be worth while. They should be given the fiscal opportunity to develop what they perceive to be a major opportunity to increase our invisible earnings. Therefore, I ask my hon. Friend to look again at the matter. I ask him not necessarily to accept my amendment this evening, but at least to give me an undertaking that he will conduct further studies with his officials, perhaps with a view to making some change in next year's Finance Bill.

Mr. Nicholas Brown : There are a range of difficulties in getting British financial products wholly compatible with the practice that pertains in other European countries. It is particularly difficult to make them compatible with the systems used by our EC partners in time for 1992. The hon. Member for Slough (Mr. Watts) seeks to address one of the issues involved. As I understand it, his amendment would stop the United Kingdom charging withholding tax, to the extent that the distribution was attributable to income that was taxable in the hands of the unit trust.

A balance must be achieved in deciding whether the yield to the United Kingdom Exchequer from unit trusts--despite what the hon. Gentleman said, I think that there would be some reduction in yield--would be offset by the advantages that would accrue to the United Kingdom by making unit trusts more attractive to investors from the Common Market. The Government must achieve that balance when deciding whether to accept the amendment.

It is difficult for the Opposition to make a judgment, because detailed advice from the Revenue is available to the Financial Secretary but not directly to us, although I am sure that he will explain to us in a few moments.

I am neutral on the amendment. I commend the hon. Member for Slough for at least trying to address one of the several complex and difficult issues that will have to be addressed before 1992. Delay hurts this country. They are not easy matters to solve, but the hon. Gentleman is right to attempt to do so, and we do not want to thwart him in that.

Mr. Lilley : My hon. Friend the Member for Slough (Mr. Watts) is right to say that we discussed and corresponded on the amendment, which he asked me to reconsider. I have done so, and I will explain why I did not table a similar amendment at this stage.

The amendment is likely to affect only 5 per cent. of funds--95 per cent. of unit trusts are already in a beneficial position vis-a-vis their European counterparts--and only in some countries. In France and Holland, for example, the potential investor would be no better off than he is as a result of the change, because the foreign dividends would flow straight to foreign shareholders. If foreign tax authorities do not like dividends flowing straight to foreign shareholders, they may alter the tax treatment to offset it, and we would be back to where we started. There would always be some benefit for those promoting such funds, because there would be opportunities for tax evasion where money is paid gross rather than net, but we should not go out of our way to promote that.

In the light of my hon. Friend's comments, I shall leave a message that my successor--I can freely impose burdens on my successor that I might not place on myself--should reconsider the amendment, without commitment, before the next Budget.

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Mr. Watts : I thank my right hon. Friend for that sympathetic response. I wish him well in his new responsibilities and beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 74

Debts of overseas governments etc.

Mr. Peter Viggers (Gosport) : I beg to move amendment No. 42, in page 63, line 26, leave out

subject to subsection (3) below'

and insert in certain circumstances".

Madam Deputy Speaker : With this, it will be convenient to consider amendment No. 43, in page 63, line 40, at end insert--

(2A) Subject to subsection (3) below, the circumstances in which subsections (1) and (2) apply are where either--

(a) the loss results from a transaction with a connected party, or (b) within a period of twelve months before and after the event giving rise to the loss the company enters into transactions in the same class of debt with the result that the total amount owed to the company by debtors of that class is no less at the end of that period than it was at the beginning ;

and for the purpose of this subsection parties are connected and debts are of the same class if they meet the conditions laid down in regulations.

(2B) Regulations under subsection (2A) above shall be made by the Treasury but shall be subject to annulment by a resolution of the House of Commons.'.

Mr. Viggers : There is an important point of principle at stake and the amounts involved are large.

Clause 74 and the amendments deal with the treatment of sovereign debt and the rights of banks to write off bad debts against profits. I have always understood that it is an essential point of principle that taxation should be levied on income or profits, which should be properly assessed. It is the duty of directors and auditors to provide a true and fair view of a company's accounts so that taxation can be levied according to that true and fair view. According to those principles, it is critical that bad or irrecoverable debts are written down or written off and proper deductions allowed. Clause 74 breaches that principle. Sovereign debt write-offs are allowed only on a formula basis of 5 per cent a year of the original debt. Prudence may require a higher level of write-off : the directors and auditors may well decide that it is appropriate for larger deductions to be made from the company's accounts. The Bill as currently drafted, however, prevents tax relief in that year.

12.30 am

I am grateful to my right hon. Friend the Secretary of State for writing to me and spelling out the Government's view. I also listened to the arguments that were advanced in Committee. The Government have presented three arguments in favour of clause 74 in its original form. First, they seek to show that it will benefit everyone to introduce certainty and clarity. Secondly, they argue that, according to the Red Book, they will gain some £200 million in the current year as a result of their proposed change. I think that the second argument contradicts the first ; while certainty and clarity may indeed be introduced, the banks will lose out to the tune of £200 million this year.

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The third argument--it is to the credit of my right hon. Friend and his colleagues that they have not tried to make a great point of this--is that banks could engage in tax avoidance. My amendments take account of that possibility and provide for anti-avoidance, but only in cases in which banks have been responsible for avoidance by way of swaps with other banks or deals with connected persons.

In my view, the arguments against the clause as drafted are strong. First, it sets a precedent. In many instances, directors and auditors will seek to put forward their own views on the valuation of assets : it is fundamental that they should be allowed to do so, and that tax should be levied according to their valuation. In the case of, for example, the valuation of properties, stock, goodwill--my right hon. Friend and I both know a good deal about that--and unexplored oil acreage, it is necessary for directors and auditors to form a true and fair view. If their commercial judgment is to be segregated from taxation, I believe that that is a point of principle that the Government will live to regret.

The clause provides for the Treasury to produce regulations. Let me say in advance that I shall not seek to divide the House, but I hope that, when drafting the regulations, my right hon. Friend will take account of what I have said, and also of the cogent points made in Committee.

Sir William Clark : I support my hon. Friend the Member for Gosport (Mr. Viggers). It is extraordinary that the Inland Revenue should take it on itself to decide whether a debt is good or bad : it has no experience whatever of the conditions of the person who owes the money, and no idea of the stability of the country involved--for most of the debts are overseas debts.

Surely, for the Revenue arbitrarily to limit bad-debt provision to 5 per cent.--or whatever formula it may come up with--is entirely contrary to all our tax experience. In the case of any company's accounts, the computation is put in by the accountants ; the accounts have been audited, and the auditor's certificate has dealt with the bad-debt provision. If the directors and the company's financial section cannot satisfy the auditor that the bad-debt provision is too much or too little, it is a reflection on the certificate. Although the auditor has passed accounts saying that, say, 100 units is bad-debt provision, the Inland Revenue, with no experience of the local circumstances--mainly overseas--of the debt, may then arbitrarily decide that, in the computation of profits for that tax year, the only amount allowed is a percentage of the sovereign debt. As my hon. Friend the Member for Gosport has pointed out, there can be argument about the value of oil rights or goodwill. In the case of sovereign debts the bank knows how much has been loaned. The assessment of the bad debt provision for that loan is determined not only by the bank's board of directors but by its representative, the bank manager abroad. Between them they have to satisfy the auditor, and if he is satisfied that the bad debt provision is valid and reasonable, I cannot see why the Inland Revenue, which has no experience of the circumstances of the loan, should take it upon itself arbitrarily to say that the provision shall be only a certain amount. That is a violation of what has happened in the past about bad debt provision.

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We all congratulate my right hon. Friend on his promotion to Secretary of State for Trade and Industry. If he is convinced by the argument advanced by my hon. Friend the Member for Gosport, he should persuade his successor to take action to remove this anomaly.

Mr. Nicholas Brown : It will be no comfort to the hon. Member for Gosport (Mr. Viggers) and the right hon. Member for Croydon, South (Sir W. Clark) and the hon. Member for Berwick-upon-Tweed (Mr. Beith) to learn that the arguments advanced by them were vigorously advanced at length by their hon. Friends in Committee. They were not warmly received by the Opposition or by the Government. I am as certain as one can be in such matters that the Secretary of State will not accept the amendments. It would be peculiar if he did because they are wrecking amendments. They are designed to emasculate new section 88C of clause 74 which deals with actual losses on the sale or write off of debts rather than the claiming of deductions for the provision which new section 88B covers.

Currently, such losses may be claimed only at 5 per cent. per year where the debt confirmed is a less-developed country debt that has already been provided against unless the debt is sold to the debtor nation, in which case the whole loss may be claimed. Amendments Nos. 42 and 43 would mean that the 5 per cent. restriction applied only in two narrowly defined cases ; otherwise the whole loss would be claimable. I am sure from what the hon. Member for Gosport and the right hon. Member for Croydon, South have said that their intention is to restrict clause 74 as narrowly as possible. That is not in the spirit of what Ministers said in support of the clause, and it is certainly not the view of the Opposition. I am sorry that I cannot offer the hon. Gentleman any greater comfort. The hon. Member for Gosport said he did not intend to push the amendment to a Division. However, if we are asked to vote on it, I shall request my hon. Friends to vote against the amendment.

Mr. Lilley : I am tempted to urge my hon. Friend the Member for Gosport (Mr. Viggers) to push his amendment to a Division so that I may have the pleasure of joining the hon. Member for Newcastle upon Tyne, East (Mr. Brown) in the Lobby. I enjoy debating such matters with him, but we rarely vote on the same side. My hon. Friend the Member for Gosport and my right hon. Friend the Member for Croydon, South (Sir W. Clark) advanced important issues which we considered at great length in Committee. I congratulate them on the pithiness of their contributions which were in contrast to those made in Committee. They made their case effectively.

My hon. Friend the Member for Gosport says that it is a matter of principle that tax should fall on profits properly assessed at the time that they are assessed. However, the tax system contains the well established precedent that tax may be phased differently from the way in which it appears in a company's accounts. Not least, capital allowances for tax purposes may differ from those taken in management and company accounts. I do not think that any great principle is involved on timing. We are altering only the time in which the banks pay their profits and not the measure of profits, except in the context of the point raised by my right hon. Friend the Member for Croydon, South (Sir W. Clark).

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The essence of the matter is that sovereign debt is sui generis. It is different from the sort of debts that ordinary companies incur. A bad debt that is incurred by a company is normally fairly obvious because the debtor has ceased to exist, has disappeared, has been made bankrupt or has become insolvent. Countries rarely disappear and are rarely declared bankrupt.

Mr. Nicholas Brown : Sometimes.

Mr. Lilley : That may happen sometimes, but only rarely. I think that in one instance the debts were carried with it, but I must be careful about what I say.

It is a matter of assessing whether a loan is likely to be repaid at the end of its life. I am sure that my hon. Friend the Member for Gosport, who wants profits and debts to be related to timing, is not suggesting that we wait until the end of the loan before we assess whether it is a bad debt and should be written off and given tax relief. Sometimes it is necessary to make an estimate beforehand. It has long been accepted that the Bank of England's matrix is an authoritative guide to the necessary provisions that will be acceptable for tax purposes under tax law. Quite commonly, banks have made provisions in excess of the bank's matrix, and there has been no suggestion that they are automatically eligible for tax. It is only the bank's matrix, which suggests the prudential level that is required, which has been taken as the amount to be written off for tax purposes. In this underlying legislation we are enshrining the matrix in law and removing uncertain elements. A range of parameters has been defined and we are taking mid point. We are removing one or two subjective criteria and leaving objective criteria, and providing certainty and objectivity without changing the principle. I hope that my hon. Friends will understand that I cannot recommend acceptance of the amendments.

My hon. Friend the Member for Gosport said that an attempt has been made to cover tax avoidance. The attempt has not succeeded because debts sold out of the group by one company may well be replaced by debts bought from outside the group by another company in the same group, and that other company may be outside the United Kingdom. In practice, it will be impossible for us to police an international banking group to ensure that that does not happen. Consequently, the possibility of avoidance would be rife if the amendments were accepted. I urge the House to reject the amendments. I understand that it is unlikely that they will be divided upon.

Amendment negatived.

Clause 76

Training and enterprise councils and local enterprise companies

Mr. Nicholas Brown : I beg to move amendment No. 39, in page 64, line 28, at end insert

save that this subsection shall not operate to prevent subsection (1) above from applying where the aggregate values of any benefits which any persons mentioned above receive or are entitled to receive does not exceed two and a half per cent. of the amount of the contribution.'.

We discussed a similar issue to the one raised by the amendment during a debate on the Floor of the House on Tuesday 15 May, which ended with a Division. We have advanced similar arguments to the Government on gift aid, and they have reconsidered their position. When we discussed the matter on 15 May, the Financial Secretary

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said that he accepted that the amendments had been moved in a helpful spirit and that he accepted the spirit behind them. Even though he had no disagreement with them in principle or in substance, the Government believed that the amendments would prove onerous, so they were rejected.

We have returned to the point because the Government have had second thoughts about a similar issue, gift aid. If it is right to think again about the de minimis principle as it affects gifts aid, surely it is right to do so in respect of tax. I hope that the Government will have second thoughts about training and enterprise councils. The amendment is moved in a bipartisan spirit, and I hope that it will be accepted by the Government.

12.45 am

Mr. Ryder : As the hon. Member for Newcastle upon Tyne, East (Mr. Brown) said, the amendment relates to a point that we discussed in Committee : that the relief for business contributions to training and enterprise councils and local enterprise councils will not apply if the contributor receives a benefit in connection with the making of the contribution.

The amendment is designed to provide that, if a company receives benefits connected with a particular contribution that do not exceed in aggregate value 2.5 per cent. of the amount of the contribution, they will not prevent the contribution from attracting relief. We have introduced a de minimis cut-off broadly of that kind in relation to the gift aid provisions to which the hon. Member for Newcastle upon Tyne, East referred, but with a ceiling of £250. The amendment, however, has no ceiling. We did not believe that it was necessary to complicate this much more specific and limited provision by providing a similar cut-off. It is much more likely that the de minimis benefits will be received in connection with a donation to a charity rather than to a TEC--for example, free tickets to the opera in return for a donation to Covent Garden, or free attendance at charitable events.

Perhaps the most likely legitimate benefit that a company is likely to receive in return for a contribution to a TEC is some measure of free training for its work force. My right hon. Friend gave the hon. Member for Derby, South (Mrs. Beckett) an assurance both in our previous debate and subsequently by letter that the Inland Revenue will ignore benefits of that kind in individual cases. However, I recognise that the Opposition are concerned about the benefits rules in clause 76. I believe that their concern is misplaced, but I am ready to give the hon. Gentleman a firm undertaking that, if there is any suggestion that in practice the rules are inhibiting businesses from contributing to TECs and LECs, as we all want them to do, we shall return to the point.

Mr. Nicholas Brown : That is a very helpful assurance, which I welcome. Therefore, I beg to ask leave to withdraw the amendment. Amendment, by leave, withdrawn.

Clause 89

Income tax returns

Amendment proposed : No. 24, in page 76, line 28, after statements', insert

, relating to information contained in the return,'.-- [Mr. Lilley.]

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Mr. Nicholas Brown : The amendment accepts, at least to a degree, the point that we and a number of Conservative Members raised in Committee. The inspectors' powers to demand any kind of accounts and statements to accompany tax returns were, we felt, rather wide. The amendment helpfully addresses that concern.

Amendment agreed to.

Amendment proposed : No. 25, in page 76, line 40, at end insert-- Trustee's return

8A.--(1) For the purpose of assessing a trustee of a settlement, and the settlors and beneficiaries, to income tax an inspector may by a notice given to the trustee require the trustee--

(a) to make and deliver to the inspector within the time limited by the notice a return containing such information as may be required in pursuance of the notice, and

(b) to deliver with the return such accounts and statements, relating to information contained in the return, as may be required in pursuance of the notice ;

and a notice may be given to any one trustee or separate notices may be given to each trustee or to such trustees as the inspector thinks fit.

(2) Every return under this section shall include a declaration by the person making the return to the effect that the return is to the best of his knowledge correct and complete.

(3) A notice under this section may require different information, accounts and statements for different periods or in relation to different descriptions of source of income.

(4) Notices under this section may require different information, accounts and statements in relation to different descriptions of settlement.'.-- [Mr. Lilley.]

Mr. Deputy Speaker (Mr. Harold Walker) : With this, it will be convenient to consider amendment No. 26.

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