House of Commons Hansard Debates for 4 Apr 1995

Column 1543

If tenants have to face rent increases every year, many tenants will be forced to consider leaving the homes that they fought to get modernised and the communities in which they fought to stay. The Minister may say, "Why don't they buy their houses?", but he will know that, in the housing association movement, more and more tenants are being required to sign what are known as assured tenancy agreements, which deny them the right to buy.

I shall not get into a debate about whether anyone should buy a house or continue renting, but if people do not have that option, and if a husband and wife both work and receive no housing benefit, there will come a point when those couples realise that it is not financially worth their while staying, and will decide to move to other accommodation. That is moving away from exactly what we have all been promoting in previous debates-- family values, and communities staying together.

What is the point of community-based housing associations fighting to get property modernised so that they can keep everyone together, when the rents force people out? I do not want to see that. I am sure that the Minister does not want to see that, and I hope that he agrees to this small concession.

Mrs. Helen Liddell (Monklands, East): I wish to take up the time of the House only briefly, primarily because of my concern about certain aspects of the Government's position on universities. Last Friday, as a member of the court of the university of Strathclyde, I had cause to discuss with the principal and the chairman of that university the capital funding difficulties that universities are currently experiencing. I think that it is widely recognised on both sides of the House that universities-- indeed, the whole higher education sector--experience periods of considerable financial difficulty.

This aspect of the Finance Bill was introduced initially for the quite laudable motive of closing tax avoidance loopholes. I believe that the legislation was aimed initially at the trading subsidiaries of banks, which were taking advantage of the laws that then existed to defer and minimise taxation on interest. However, I am concerned that the universities will suffer disproportionately as a result of the new clause. As the hon. Member for Carshalton and Warrington (Mr. Forman) pointed out, the one-year period may not be long enough to allow universities to seek alternative arrangements.

We should give our higher education institutions greater opportunities to concentrate on educational merit and on the pursuit of excellence. They should spend less time dealing with the niceties of financial management. I recognise that that is perhaps a utopian ideal, but university principals and chancellors are concerned that they are spending increasing amounts of time meeting financial arrangements.

Many principals and chancellors have spent a fair amount of time trying to honour the Chancellor of the Exchequer's requirement to seek assistance through the private finance initiative. They are doing their very best in the circumstances. However, they are deeply concerned about the impact of the clause--particularly as it relates to student accommodation.

Column 1544

Those hon. Members with student and student family constituents know that students are currently suffering particular difficulties. Recent events involving the Student Loans Company Ltd. have shown that many families experience great difficulty in assisting young people in higher education. All of us who do not have silver spoons in our mouths and who experienced higher education know how difficult it is to finance young people through university.

If universities are forced to build new student accommodation, and consequently increase the rent in that accommodation, it stands to reason that that higher cost will be passed on to students at a particularly difficult time in their careers. There is no reason why we should take a partisan approach to the matter before the House this evening. We must find an opportunity to reduce the impact on those sectors--the universities and the housing associations, as my hon. Friend the Member for Glasgow, Springburn (Mr. Martin) pointed out--which have been caught in the trap.

I was much taken with the point that we must allow those organisations to choose a suitable time in the financial cycle to enter the market and raise finance. If we force them to raise funds quickly, they will have no choice in the matter. I can see a situation emerging in which the universities will be frightened away from the private finance initiative and perhaps from further capital expenditure because of the stresses that are put upon them. That will mean that less student accommodation will be built, and that many students will be forced into the private rented sector.

Many of us have children who are approaching student age, and we would rather see them accommodated in university halls of residence in an environment where they were more likely to be supervised and where their transition from school to university would be made easier. Many of us have very bad memories of the private rented sector.

Some families in this country are sufficiently concerned about the kind of environment in which their student children are likely to live that they are taking out mortgages, which are placing them under enormous financial pressure. They are trying to buy accommodation, so that their children can have some security as they enter university. Many young people in my constituency are entering university for the first time in their families' histories. Their families are deeply concerned about the kind of university environment that their children will encounter, and they would rather see them living in university accommodation.

I am convinced that, if the Government think through the amendment, they will see the logic of extending the period to five years. I echo the point made by my hon. Friend the Member for Oxford, East, that the amendment seeks to look at a period of only five years, not 10, to make it less unpalatable to the Government.

I cannot believe that right-minded Members, on both sides of the House, would wish to see universities put into a less favourable situation. Many universities are trying to do their best in creating an environment of excellence. Indeed, many are so concentrating on the capital requirements that they will have to meet in the next few years that they are having to think less about the money that will be put into teaching and into research funds.

It is unacceptable, as we reach the turn of the century, when we should look to improve the excellence in our institutions of higher education, that we are putting this unexpected burden on them. It is not a dramatic

Column 1545

amendment. Indeed, all the Opposition's amendments are moderate, and this is no exception. Common sense should apply, and we should ensure that the universities and housing associations are not disadvantaged unwittingly by this aspect of the proposed legislation.

Mr. Clive Betts (Sheffield, Attercliffe): In Committee, we had a good debate on the clause and how it affects--in some ways inadvertently-- both housing associations and universities. I do not think that it was the Government's prime intention in drafting the clause to attack and single out those two institutions for penalties under the new arrangements. Every hon. Member who spoke in Committee accepted that there was a misuse of qualifying indexed securities and deep discount securities by associates of banks, which, effectively, had been set up to gain tax advantages that the Government had never intended should be available to banks in the first place. Associates were set up to gain tax advantages that would not have been available to the banks themselves.

I listened with interest to the hon. Member for Carshalton and Wallington (Mr. Forman), who said that he would not press his amendment because he accepted that if he removed reference to universities and other such institutions, effectively they would not benefit from the concessions that the Government were going to make. I accept the logic of that argument but do not understand why the hon. Gentleman did not go on to say why he was not prepared to vote for the Opposition's amendment, which was moved by my hon. Friend the Member for Oxford, East (Mr. Smith). All that it was seeking to do was to extend the concession for a further four years to allow the deliberations and consultations to which the hon. Gentleman referred, between the banks, universities and other higher education institutions, to take place in perhaps a rather more relaxed atmosphere over a longer period.

Although I can understand that nice noises might be made behind the scenes by the banks to the universities to which they have lent money and which have issued such securities, my worry is that the banks will not come out of the negotiations without an element of profit for themselves. Perhaps they would be prepared to terminate the arrangements in a way that would be less costly to the universities and, indeed, if similar discussions take place, to the housing associations as well. Almost certainly, the costs involved in entering into new arrangements and getting out of the current arrangements will be greater than if the institutions had been able to continue with their QISs and deep discount securities for a number of years under the current arrangements with the tax reliefs that are available.

In other words, even with the Government's concession--even if they allow a breathing space for one year, as a result of which there will be negotiations on new arrangements between the current lenders and the current borrowers, or with new lenders--the costs for the institutions are likely to rise. The problem will then be that inevitably the costs will be passed on to the people who live in the properties that are being built as a result of the security arrangements. I do not understand why the hon. Member for Carshalton and Wallington did not accept that it would be much better for those institutions if they could have five years' breathing space rather than one. That seemed to be the logic of what he was saying. Perhaps he might like to reflect on whether there is still some merit in supporting the Opposition's amendment.

Column 1546

Mr. Forman: I am grateful to the hon. Gentleman for giving way, just so that I can tell him what was going through my mind when I argued my case. My right hon. Friend the Financial Secretary did very well in his reconsideration in Standing Committee, to be able to offer one year's breathing space. If the hon. Gentleman reflects on it, it is perhaps unrealistic to expect five years, bearing in mind the fact that that would take us well into the next Parliament. 4.45 pm

Mr. Betts: There are, perhaps, many Conservative Members, although they are not in their places, who would willingly commit this Parliament to measures that go well into the next Parliament and would commit the future Labour Government to things that they may not want to do.

It is worth going through some of the reasons why housing associations--the area in which I am most interested--are caught in their current position. I do not think that that was the Government's primary intention, and I, like other Opposition Members, accept that the intention was to stop tax abuses by associates of banks. We support that and do not in any way want to undermine it. The arrangements for housing associations have great merit, one of which is that they are long term. By its very nature, building homes is a long-term venture and one needs long-term funding arrangements. To have to scrap one's arrangements and within a year renegotiate alternative arrangements naturally puts the borrower at a distinct disadvantage. The properties are already there. Those involved have to fund them somehow. They are not entering into funding negotiations with free hands, for a new estate of houses. The houses are already there. They need the funding to continue to pay for their properties. That puts them at a distinct disadvantage. Long-term arrangements are important to organisations in that position.

I refer to an important comment that was made earlier by my hon. Friend the Member for Ashfield (Mr. Hoon) about the nature of private sector finance. Many organisations--many are local authorities--that have tried to get involved in those arrangements will say that the greatest problem has nothing to do with ideology or negotiations between the public and private sector--where there is a proper and understood level playing field, and where organisations can sit around a table and come to arrangements to their mutual advantage--but is uncertainty. Most of that uncertainty is created not by the markets but by Government.

Those institutions do not know from one year to the next what the Government's taxation policy will be. They do not understand from a local government perspective, or, indeed, from a housing association perspective, what their vires will be. Will they have powers to do things or will they not? Governments so often change their position on those matters that it is difficult not only for the public sector but for the private sector, if they want to enter into negotiations and make arrangements of a long-term nature, to do so when they are not sure of the position that their partners will be in vis-a -vis Government policy at any one moment. That is a real problem. When the Government change their position from year to year, the financial forward plan for private and public partnerships is undermined and simply does not get off the ground in any meaningful way. That issue comes up time and again,

Column 1547

and the accountants involved in such ventures warn how the Government operate. I hope that the Government will learn a few lessons from that in future.

Associations have also entered into various deals; in many cases, the deals are index-linked, which suits housing associations, because their rental stream tends to go up over time as inflation takes it upwards. It is sensible to link the rental stream to a form of borrowing that is also index-linked. It is good planning and sound common sense. There are tax advantages, which, of course, make the deals attractive, but their very nature is attractive to organisations seeking to invest in a product with a long life and with an income stream that rises on a similar basis to the cost of their borrowing. Initially, tax advantages accrue to associates of banks. When they reach deals with housing associations, at least the majority of those advantages tend to be passed on to the associations and their borrowers.

In Committee, the Financial Secretary said that--although, superficially, many such deals were index-linked, the accumulated interest being paid and taxed only after a discount for inflation--a number of side deals were done. A "shadow" arrangement operated, allowing the interest rate that would otherwise have been charged--perhaps a rate linked to LIBOR, the London inter-bank offer rate--to be assessed and the difference to be paid back to the lenders. They would receive a return as if they were conducting a straightforward deal, but the deal was dressed up to enable tax reliefs to accrue.

I agree that that happens in many deals, but the Government are not seeking to outlaw such arrangements. They do not wish to abolish QISs and deep discount securities, or to abolish the tax reliefs that are available in conjunction with side deals. They merely wish to abolish such deals when they are conducted by associates of banks. Their stated policy is to encourage the development of a bond market with other institutions, and, presumably, to encourage the practices to which I have referred: that is how institutions enter the market, make profits and make their lending attractive to organisations that wish to borrow. As I said, the Government do not oppose the side deals in principle; they oppose them only when they are conducted by associates of banks.

It is not the banks that will suffer as a result of the Government's proposals, however; it is the housing associations that will suffer. Most of the deals, while giving associations the benefit of tax relief while they exist, also include clauses stating that the associations--and, of course, universities--must pick up the costs if a deal is unravelled or tax relief is not available.

The Government should question the morality of the penalty that they are imposing. I understand that, in the case of housing associations, all such deals must receive consent from the Housing Corporation. Every deal has been approved by a quango: Government appointees have vetted those deals and given them their blessing. I think it wrong for housing associations to enter into such deals--deals that the Government support in principle, despite their reservations about the involvement of associates of banks; deals that have been approved by the Housing Corporation.

Indeed, I understand that some of those deals have been approved by the Treasury. I consider it questionable, halfway through a deal that has been approved by the

Column 1548

Treasury, to change the ground rules--in effect, retrospectively--so that the tax reliefs on which the borrowers were counting are no longer available: in fact, to tear up the deal.

I understand and support the Government's main intention, but I feel that the organisations involved need a longer breathing space. Will the Government consider allowing five years for the continuation of arrangements entered into before the Budget announcement? I am not talking about new arrangements. Perhaps a longer period could be allowed in the case of deals that currently involve more than five years, which is the minimum in many cases. It is the minimum in the case of QISs, for instance, to make the deals worth while. Organisations need time to think about their future, to begin negotiations with banks and other institutions and perhaps to seek opportunities for the development of alternative markets as other institutions enter the field. The deals involved are complicated, and unravelling them overnight would be damaging.

We have cited rent levels in the past. Increases have been assessed by various organisations, which have produced figures ranging from £14 to £40 a week in the case of schemes caught by the arrangements that I have described. The amount depends on the finances of the organisations involved, and the way in which the deals were structured. If the Government are concerned about losing their own tax income, however, I think that what I said in Committee is still pertinent. The Nationwide building society, which produced some assessments for me, concluded that, as 78 per cent. of housing association tenants are in receipt of housing benefit and as the full cost of any rent increase resulting from the unscrambling of deals would fall on the Exchequer rather than the tenants, the Government will not gain the full benefit of any tax returns by reducing tax reliefs connected with the schemes.

The Nationwide's calculations show that in the case of 78 per cent. of tenants, the Government would lose £23 a year as a result of the difference between the tax savings and the extra benefit that they would have to pay out. Of course, in the case of tenants not in receipt of housing benefit, the Government will gain the full impact of the extra income tax that they receive, but at the expense of a widening of the poverty gap--at the expense of those who must pay the full amount of rent.

Let me return to the issue of other financial institutions. The Government seem to be saying that if other institutions wish to enter the market and issue securities, it will be possible for housing associations and, indeed, universities to switch their borrowing to those institutions--building societies, perhaps--and enter into arrangements, through QISs and discount securities, allowing them to gain the benefits that they currently gain from schemes involving associates of banks.

As has been pointed out to me by people involved in such markets, however, the problem is that they take some time to develop. It takes time for those in the other financial institutions that I mentioned to understand fully the way in which housing associations work, and to feel that they understand that well enough to lend on the basis on which banks have been prepared to lend on the past.

Associates of banks, and banks themselves, are currently the main lenders in the market. I suggest that, if other institutions were as willing to lend, they would already be in the market and lending. The five-year period proposed by my hon. Friend the Member for Oxford, East would allow a little extra time--in regard to existing

Column 1549

schemes--for other institutions to enter the market and offer alternatives to housing associations and universities, which could accept them on the same or similar terms to their current arrangements with associates of banks, which would have to be terminated on their current terms.

The problem at present is that those involved in the markets do not understand the nature and operations of housing associations because they have not lent to them regularly. It is therefore difficult to secure sufficient private sector funds to cover the cost of a scheme. As I pointed out in Committee, the cost of building most rented accommodation is not reflected in the valuation of such property when it is first built: the open-market valuation is likely to be only about 75 per cent. of the building cost.

Banks, because they understand housing associations, are currently prepared to lend on the basis of a fairly advantageous

valuation-to-debt ratio, but many other institutions that do not know as much about housing associations are prepared to lend only on a ratio of around 150 per cent.--sometimes even higher. If the valuation-to-debt ratio on which the other institutions are prepared to lend is higher than 150, because of the relatively low ratio of valuation to building cost, the amount of the building cost that institutions are prepared to advance will be less than 50 per cent. As we all know, one of the Government's policies in the past few years has been to reduce the amount of housing association grant that they pay on schemes, thus implicitly telling associations to increase their private finance. If the only institutions that can enter into such arrangements are not prepared to lend as much as banks--if they are prepared to lend less than 50 per cent. of the cost of building properties--that, along with the reduction in HAG, means that there may well be a gap in the funding arrangements for new housing schemes. If that gap exists, not only will rents will go up, but new schemes will not be built. That is a problem.

We are saying that there is a real difficulty for housing associations. We accept the main thrust of what the Government are trying to do, and that associates of banks have been manipulating securities for their own advantage. We want to close tax loopholes. We do not want to be seen to be stopping the Government in trying to achieve that. However, if the consequence is that housing association rents will rise steeply and that, at the same time, other institutions will have insufficient time to come into the market and start lending to associations so that there is no funding gap between HAG and private finance, would not it be better for the Government to stop, reflect and give a little more breathing space?

5 pm

My hon. Friend the Member for Oxford, East made a good case. He did not seek to undermine the impact of what the Government are trying to achieve, or to allow new schemes to get off the ground with associates of banks using the arrangements that have been available in the past. The Government should recognise that it is wrong to say to housing associations, in the middle of those arrangements, that they have only one year and that, in that year, they must either pick up the full cost of changes in the tax position under schemes' penalty clauses, or go around looking for another borrower, who may not be available on anything like the same advantageous terms.

Column 1550

The proposal will cost housing associations and their tenants dear. A bit of reflection and a small extension of the period during which the pre-Budget arrangements may continue would be of enormous benefit and would lead to little cost to the Exchequer. I hope that the Financial Secretary will give serious consideration to that.

Mr. Hoon: I shall endeavour not to repeat the many excellent points made by my hon. Friend the Member for Sheffield, Attercliffe (Mr. Betts). He has clearly shown the essential problem addressed by amendment No. 86-- the difficulty faced by housing associations and universities in adjusting to the new tax regime that was established by the Government amendment, which was accepted in Committee. The position was well set out by the Financial Secretary in Committee. Essentially, we are dealing with a relatively small number of institutions that have taken advantage of a tax position created by the Government. About a dozen housing associations have borrowed about £150 million, and a dozen universities have borrowed about £300 million. Each of those institutions acted in good faith on the basis of tax arrangements in force at the time.

The hon. Member for Carshalton and Wallington (Mr. Forman) fairly accepted that, if we are to promote arrangements between the public and private sectors, consistency of tax treatment is essential. That is precisely what the Financial Secretary said repeatedly in Committee. He said that the Government wanted

"to encourage private borrowings by universities and housing associations. That is the thrust of our policy."

I should grateful if, in reviewing the thrust of Government policy over a considerable period, he made it clear whether he really believes that the consistency advocated by the hon. Member for Carshalton and Wallington has been borne out in the way in which the Government have treated, in particular, housing associations and universities.

The nature of those two institutions dictates that what they do is in the longer term. Universities do not build student accommodation simply for this year and the next. They build such accommodation over a prolonged period. That must also be the case with housing associations, whose primary focus is aimed at providing accommodation for families and for people who are not in a position to buy their own accommodation. Such work cannot be turned on and turned off as easily as the Government might suggest.

If that in any way suggests that I am being critical of the Government's position, I should emphasise how much I agreed with the Financial Secretary in Committee, when he said:

"I see some force in the argument that the immediate commencement envisaged in the Bill, backdated to the Budget, could cause disruption to the short- term financial plans of the institutions and a consequent risk of avoidable damage to our objectives both in social housing and higher education."

That is right. That is why he fairly delayed the implementation of the Government's original proposal until 1 April next year. That was a concession. I am not arguing against that, but consistent with the Financial Secretary's comments in Committee, I wonder whether, on reflection, he feels that

Column 1551

the concession is sufficient to allow housing associations and universities to adjust their finance. I should be grateful if he dealt with that point. In Committee, he said:

"That will give them a breathing space in which to reconsider their financial arrangements and, if they wish, to unwind the borrowings caught by the clause."

What investigations have he and the Government made of the practicalities of unwinding financial arrangements for long-term capital commitments in a relatively short time? I seriously wonder whether it is practically possible to unwind financial arrangements in the way that he suggested in Committee. That could not be done without a considerable cost to both housing associations and universities.

Labour Members have said that their concern is the cost to students and to housing association tenants in the form of higher rents. I hope that the Financial Secretary did not make those comments off the cuff to get out of the difficulty in Committee, but that the Government have investigated the ability of both housing associations and universities to unwind borrowings caught by the clause. If not, I assume that the Financial Secretary will accept the logic of what he said previously--that it is right that universities and housing associations should be given a proper period in which to adjust their borrowings.

That proper period was touched on in Committee by the hon. Member for Carshalton and Wallington, who was challenged by my hon. Friend the Member for Attercliffe to explain why he was not able today to support the thrust of the Opposition amendment. The hon. Gentleman intervened on the Financial Secretary in Committee and made it clear that

"a year's breathing space . . . is not adequate to deal with the situation."

I was delighted to discover that he had made his position so clear in Committee. I hope that, in considering the amendment, he will accept that perhaps five years is a more sensible period in which to allow housing associations and universities to adjust their arrangements. If he does not accept the amendment's logic, he will be forced to vote for the year's grace that he said would be inadequate. I hope that, being a man of great consistency, he will follow through his position in Committee and support the amendment.

In the context of that debate, I hope that the Financial Secretary will think carefully about the matter. During the debate, he said that he saw no technical difference between the borrowings of housing associations and universities, and any other borrowing caught by clause 77. I hope that, in considering the matter fairly, as I am sure he will, he will recognise that, although technical differences may not exist, there are practical consequences for both housing associations and universities.

I hope that the Financial Secretary will not rely on the point that he went on to make in Committee, that housing associations and universities should have been on notice that they borrowed those moneys under arrangements that might be changed. He said:

"That might have flashed up some warning signals to the housing associations when they entered into such an agreement that there was a possibility that the tax regime would change, with the result that they would have to bear the costs."--[ Official Report, Standing Committee D , 21 February 1995; c. 426-27.]

Column 1552

Of course, that is precisely what has happened and it has happened because the Government sought to change the rules, originally retrospectively for housing associations and universities. However, I am pleased that the Government at least thought that the retrospective element should not apply in this instance.

The type of comment that I have just cited is most unhelpful in promoting arrangements between the public and private sectors. It is precisely such observations that cause nervous anxieties among those who are contemplating entering into such financial arrangements. If bodies think that, when the Government change the rules, they will say that they--the bodies--should have been on notice that the rules could change, it is less likely that any arrangements will be entered into. I hope that the Financial Secretary will not press the argument too far.

Clearly, we all agree that arrangements between the public and private sectors are necessary. It is also necessary that they should be fair and sensible and not "tax driven and artificial", an expression that the Financial Secretary used repeatedly in his defence of the change. However, as he is a fair-minded man, I hope that he will recognise that the changes should not have adverse, short-term consequences for institutions such as universities and housing associations. I hope that he will also recognise that if he accepted amendment No. 86, he would be providing a proper period in which such institutions could adjust their finances and make proper provision for the people whom they serve.

Mr. Gerry Sutcliffe (Bradford, South): We are not arguing about a matter of principle, because we agree with the Government's proposals to close the loopholes, but difficulties arise for bodies such as universities and housing associations during the transitional period. The Government are suggesting 12 months, whereas we feel that five years would be more advantageous.

Universities in particular are having difficulty with funding and have had to reduce the number of courses. The university of Bradford is having tremendous problems reassessing the courses that it provides, and I imagine that others face the same difficulties. The Minister said in Committee that the Government were not attacking universities or housing associations, but, ultimately, the costs will have to be picked up by students and tenants.

The difference between the Opposition and the Government centres on the period that we consider reasonable for such institutions to be able to develop a way out of the problem. A breathing space of 12 months is inadequate, as my hon. Friends said so eloquently. I hope that the Financial Secretary will reconsider.

Housing Corporation funding for small housing associations has been reduced and many of them are in difficulties. If the Government are interested in efficiency and cost, I should have thought that they would try to support such organisations. The case for the amendment has been well made, and I hope that the Financial Secretary will take on board what has been said and stretch the breathing space to a more reasonable period.

Ms Margaret Hodge (Barking): I have a number of non-pecuniary interests that I must declare at the outset. I chair Circle 33, one of the major housing associations in London, and I am also on the governing body of the

Column 1553

London School of Economics and that of the university of London. I must apologise for not having heard some of the earlier contributions.

This is a sensible amendment that should be accepted by the Government because it would achieve their purpose of ensuring that we get effective private finance into some of the projects undertaken by public sector institutions. I think that the Government are cutting off their nose to spite their face in this instance, because their proposals will have a detrimental effect on their pursuit of their objective.

Had the Government consulted rather more widely, they might have avoided the adverse impact that their proposals will have on a number of higher education institutions and housing associations. Housing associations and universities have used these instruments to borrow, not to avoid taxation liabilities but to pursue their perfectly legitimate objectives. I hope that the Financial Secretary will accept that.

When housing associations first used these instruments in about 1989, they sought permission from the Government's own agency--the Housing Corporation --in the form of a section 9 consent. Instead of legislating retrospectively, it would have been appropriate for the Government to tell the Housing Corporation at that point that they thought that these forms of deep discount securities and loans were not appropriate.

5.15 pm

With his previous hat on, I think that the Financial Secretary will remember that, at that time, the Housing Corporation undertook a thorough investigation. Indeed, I should be surprised if he were not party to that investigation into the structure of the loans when housing associations first entered into them. Having given consent only four or five years ago and allowed housing associations to enter into such loans, it is not good practice for the Government now to cause housing associations additional financial problems by stopping them having the advantages provided by the loans.

Also at that time, other public bodies examined the nature of these loans. The Department of Health considered some of those where housing associations were working with health authorities, and the Treasury ensured that it was happy with the way in which the loan structures were established. At that point, no one said that such schemes were wrong or accused housing associations or universities of avoiding tax. However, by changing retrospectively the tax liabilities of such organisations, the Government are ending up with private bodies meeting public purposes.

The LSE, with which I am connected, has, through deep discount and qualifying index securities, raised about £30 million of which it has spent £16 million on new residences and £14 million on purchasing and refurbishing academic buildings. If higher education institutions cease to have the tax advantages that they currently enjoy, they will no longer be able to supply the student bed spaces that are absolutely crucial for people attending courses in inner London. Since 1989, the housing associations have used about £130 million: £80 million through deep discount loans--the Treasury would now lose the interest on the tax-- and £50 million through qualifying index securities.

Column 1554

Housing associations and higher education institutions should have sufficient time to unravel their loans if they are not to suffer an adverse impact from the early introduction of the Government's proposals. I think that all parties agree with the attempt to get private finance into public bodies, and I should be astounded if the Financial Secretary were to reject such a reasonable amendment.

The Financial Secretary to the Treasury (Sir George Young): This has been a thoughtful debate and it follows an equally thoughtful debate in Committee on the equivalent of clause 81.

There is a measure of agreement among all parties. No one is arguing that housing associations and universities should be caught as from Budget day, which is the case with every other borrower affected by clause 81, and no one has argued today that housing associations and universities should be wholly exempt for ever and a day.

The debate has focused on whether the concession already announced by the Government--to postpone the impact until April next year--is the right one or whether we should have agreed to the longer one proposed by the hon. Member for Oxford, East (Mr. Smith), which expires in the year 2000. The hon. Member for Barking (Ms Hodge) said that we should have consulted, but as I think that I explained in Committee, if one is looking at anti- avoidance--this is an anti-avoidance measure--it is, by definition, difficult to consult in advance.

My hon. Friend the Member for Carshalton and Wallington (Mr. Forman) made a thoughtful speech. I pay tribute to his work as an intermediary between the Committee of Vice-Chancellors and Principals and the Government, for his active interest in the subject and for the positive proposals which he has put to the Government to take some of the tension out of the change which is now under discussion. I take very much to heart what my hon. Friend said about the private finance initiative. I was interested to see, as I am sure was he, that the university of Lancaster has recently launched £35 million of 30-year debenture stock, which is to be listed on the stock exchange. Press reports show that it will pay interest at a fixed rate on a quarterly basis, that it is a public issue to a range of subscribers and that it is otherwise on quite straightforward terms. That is exactly the grain of what my hon. Friend talked about: genuine private finance initiative.

The features of the university of Lancaster launch are very different from those that we have discovered in clause 81. I take very much to heart what my hon. Friend said about--where it is reasonable so to do--promoting certainty and stability. If one is to do that, the designers of the schemes will equally have to put their cards on the table. If the Government proceed with the policy of pre-transaction rulings, an element of certainty will be injected. I welcome what the hon. Member for Glasgow, Springburn (Mr. Martin) said and I join him in paying tribute to those who work for housing associations.

Mr. Forman: I apologise to my right hon. Friend for not intervening with my usual speed. He has just mentioned the possibility of the Government proceeding on the basis of pre-transaction rulings. So far as I understand the view of the university world, such an

Column 1555

approach would be very helpful. If he can build on that, it would go some way towards meeting the concerns which have been expressed by all hon. Members.

Sir George Young: We have already made some progress with post- transaction rulings and we have it in mind to issue--we hope--a consultative document on pre-transaction rulings later this year. The hon. Member for Springburn, as I said, paid tribute to those in his constituency who work for housing associations and I join his tribute. I also recognise the good work done by many universities, which hon. Members have mentioned.

On the private finance initiative, I refer my hon. Friend the Member for Carshalton and Wallington to an article in the Financial Times for the weekend of 25 and 26 March, because it is exactly in line with what he was advocating. It said:

"Other universities are still likely to follow"--

the university of Lancaster--

"as continued expansion in student numbers puts pressure on them to borrow for capital projects."

There is reference to some 12 other universities which are still considering taking part in the initial launch. The move that my hon. Friend advocated is now under way and the Government will certainly play their part in accelerating it.

Clause 81 is directed at a growing trend for lending by banking groups to be packaged as a bilateral issue of debt securities, which are structured, often in a highly artificial way, to secure a tax advantage. The advantage goes to the lender, but part of the benefit passes to the borrower in the form of a reduced cost of borrowing. The clause removes the tax advantage. Although the first-round effect is to increase the tax liabilities of the lenders, the terms of the deals, to which the hon. Member for Sheffield, Attercliffe (Mr. Betts) referred, are such that they trigger off increases in the borrower's costs to compensate the lenders.

Perhaps I should explain briefly how the mischief that concerns us works in practice. Suppose a borrower wishes, for example, to borrow £30 million. The borrower issues a zero coupon bond, having a nominal value of £340 million, redeemable in 20 years' time. Instead of offering that issue to the market at large, the borrower issues the whole of it to a purpose-built subsidiary of a bank. The issuer gets an annual tax deduction for its accruing interest obligations, but the holder only pays tax, if at all, when the discount is realised at the bond's maturity or sale. The tax deferral substantially reduces the holder's effective charge, bringing it below the cost of conventional lending.

In addition, in many of the cases that we have seen, side agreements exist between the issuer and the bank, which allow for the bond to be redeemed on terms quite different from those specified in the terms of the issue. In practice, those side agreements convert the borrowing into London inter- bank offer rate-linked loans and thus conventional bank lending is dressed up in a complex package designed solely to secure a tax advantage that it was never intended to enjoy.

A wide range of borrowers, including housing associations and universities, have used the techniques addressed by the clause. We received a number of representations, which were discussed at length in Committee, that those particular institutions should be

Column 1556

made a special exemption to our proposal. I saw representatives of universities and housing associations and had constructive meetings with them, but we saw no case for exempting them totally, because the techniques used by those institutions are essentially the same as, and just as artificial as, those used by other borrowers. I am afraid that it is not a justification for borrowers to say that those particular tax-driven loans should be excused because the funds have been applied to further public policy objectives; rather, it is the contrary. Such institutions already receive substantial support from public funds. It is essential that that should be controlled and allocated between institutions in a disciplined way and not topped up on a self-service basis by recourse to tax-motivated borrowing structures.

Moreover, failing to act now to close that particular avenue would have given rise to very substantial Exchequer costs, running into hundreds of millions of pounds over time, as universities and housing associations would have every incentive to arrange more and more of their borrowings in that way.

We did, however, see force in Committee in the argument that an immediate commencement, as in the Bill as first drafted, would disrupt the short-term financial plans of housing associations and universities and so risk avoidable prejudice to our own objectives. So, we suggested that the start date for our proposal should be deferred to 1 April 1996 in the case of pre -Budget borrowing for housing associations and universities. I am grateful to my hon. Friend the Member for Carshalton and Wallington for explaining why, on reflection, the amendment in his name does not secure any particular advantage for universities.

I shall now turn to amendment No. 86, moved by the hon. Member for Oxford, East. Even if the commencement were deferred for much longer, as the Opposition propose, the significant Exchequer costs would very often go largely as a windfall gain to the banks concerned, rather than increasing the resources available to serve our housing or higher education policies. We estimate that the cost of the amendment would be about £25 million in aggregate, but the housing associations and universities would in total gain much less. I believe that that can only reinforce the case for rejecting such a change. Such an extended deferral would be unjustified on balance, even if the fruits of it flowed through wholly to the borrowers. It makes no sense to do so if they would go to any substantial extent as a benefit to bankers.

I shall deal with the point made by the hon. Member for Attercliffe who asked why we were just blocking deals for subsidiaries of the banks. If one looks at the history of the qualifying investment securities rules, one sees that they were designed for genuine public issues to the market. If the hon. Gentleman reflects on the side deals, which are a feature of the transactions that we have been discussing, he will conclude that it would be scarcely practicable to issue those artificial side agreements in cases of public issues. It is practicable only when the issue is on a bilateral basis, such as those caught by clause 81. The banks are obviously the main candidates for such deals, but of course we shall look at the matter again if other institutions start using the technique.

Next Section

Home Page