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5.30 pm

Mr. Ian Pearson (Dudley, West): My speech will fall into three parts: first, schedule 7 and the general principle behind it; amendment No. 10; and, finally, amendment No. 9.

Clause 68 and schedule 7 tell a story--

The Chairman: Order. We have finished with clause 68 and are now debating schedule 7.

Mr. Pearson: Thank you, Mr. Morris.

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Schedule 7 tells a story that I have been highlighting, as my hon. Friend the Member for North Warwickshire (Mr. O'Brien) said, for well over a year. It is the all too familiar story of Government dithering, denial and delay followed by climbdown and belated action. That is pretty much par for the course with this Government, but what marks out this case is the fact that their negligence has cost the hard-pressed taxpayer, by my calculation, £1.75 billion in lost revenue, and possibly more.

On the face of it, schedule 7 provides a number of technical amendments to be made to the treatment of certain distributions by companies. They apply to purchases by companies of their own shares and other distributions, mainly special dividends, which are linked to transactions in securities. The decision to make the changes was sneaked out on 8 October--no doubt coincidentally, but certainly conveniently, during the Conservative party conference. It did not, therefore, receive much publicity; it would probably not have received much coverage anyway. The subject of the operation of the imputation system of taxation and its effect on tax-exempt institutions does not interest the average person in the street and would not grab the imagination of the popular press, but if the story had been headlined, "Ken throws away nearly £2 billion of taxpayers' money"--which is what has happened--perhaps the tabloids would have been interested.

Mr. Tim Smith: The hon. Gentleman has twice said that there has been a huge haemorrhaging of revenue. Does he agree that, if the rules that are now proposed had been in place, the companies would not have behaved in the same way? It is unrealistic to think that, if there is a major change in the law, it does not influence people's behaviour. It is nonsense to suggest that a great deal of revenue was lost.

Mr. Pearson: Surely the hon. Gentleman is aware that the estimated cost savings--on the Treasury's own assumptions--to be made from introducing the Bill will be £200 million in the next financial year and £400 million the year afterwards. Substantial savings are predicted even if people's behaviour has been modified as a result of the change.

If the headlines had been, "Ken throws away nearly £2 billion of taxpayers' money", the tabloids would, rightly, have been interested in what happened. The sum being thrown away by the Government is the approximate equivalent of 1p off the basic rate of income tax--or about the total amount that has been given out in grants to good causes since the national lottery began. That money has been needlessly squandered by the Government when it could have been well spent on improving education and the health service.

We are talking about an abuse of the taxation system or, put differently, a tax loophole--something that the Chancellor always denies exists, but later takes action over. The loophole has been consistently pointed out to the Government by the Opposition. In this instance, it consists of a range of smart schemes that have been drawn up by corporate financiers and which favour the big pension funds at the expense of other shareholders. It has cost the taxpayer millions each time for each deal and it has distorted competition in takeovers.

The loophole was becoming known when the 1995 Finance Bill was passing through the House of Commons, and it was apparent long before the drafting of the 1996

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Act. Selective share buy-backs were increasingly used by large companies through 1995 and, as my hon. Friend the Member for North Warwickshire said, the use of special dividends was common in the water and electricity industries. Special dividends were also used in other situations, such as Lloyds bank's bid for TSB and, more recently, Granada's takeover of Forte last year.

It has already been mentioned that many respected financial commentators, such as Lex in the Financial Times and Graham Searjeant in The Times, graphically pointed out the abuse. On 10 January last year, the Financial Times, not for the first time, talked about

"the special dividend wheeze and its close cousin the share buyback".

It said that

"no public interest is served by a loophole that involves taxpayers subsidising corporate raiders."

Labour Members, both here and in the other place, highlighted the abuse. I tabled a number of parliamentary questions on special dividends and raised the subject on the Second Reading of the Finance Bill. I even went so far as to table amendments to the Bill to alter sections 703 to 706 of the Income and Corporation Taxes Act 1988. That was a clear sign to Ministers that something was wrong, but no attention was paid and the scandal of the abuse of share buy-backs and special dividends was allowed to continue.

The Government's response was to deny the problem. The Financial Secretary to the Treasury, who has unfortunately slipped out of the Chamber for a moment--he probably has an inkling of what is to come--in a parliamentary answer dated 1 February 1996 said:

"The payment of a special dividend does not involve a tax loophole."--[Official Report, 1 January 1996; Vol. 270, c. 862.]

Owing to the Minister's dithering and denial, the use of share buy-backs and special dividends escalated. Figures from Kleinwort Benson demonstrate that quoted companies cut their equity capital by £3 billion from the start of the last calendar year to the end of July alone through selective buy-backs.

The cost to the Exchequer has been an estimated £750 million. That loss could easily have been avoided by a half-competent Government. So, too, could the £50 million or so that the Revenue had to pay to subsidise Granada's takeover of Forte, not to mention the money paid in other special dividends.

In The Times on 19 August 1996, Graham Searjeant expressed the hope that

"even at this late stage, the Chancellor might be stirred from his supercilious lethargy to take some action in his autumn Budget."

If the Chancellor read that article--no doubt, while he was on the beach--it took him until Tory party conference week to act. Typically, he blustered his way through the climbdown, conveniently forgetting what had happened before.

The Inland Revenue press release of 8 October 1996 quoted the Chancellor as saying:

"We have seen recently companies buying their own shares or paying special dividends in such a way that the proceeds end up entirely in the hands of those who are entitled to payment of a tax credit. This has costs for the Exchequer, and if action is not taken soon that cost would escalate."

That was the issue of streaming mentioned early by my hon. Friend the Member for North Warwickshire.

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In the press release, the Chancellor said:

"we will not hesitate to take any further action should further evidence of abuse appear."

At least he finally admitted that it was an abuse--a tax loophole exploited by companies and their advisers--and, in so doing, he directly contradicted the Financial Secretary who has said all along that it is not a tax loophole. Perhaps he will now apologise and admit that he got it wrong.

During the debate on the Loyal Address, I challenged the Government to publish their figures on the cost to the Exchequer of allowing the loophole to remain open for so long. I had to follow up my inquiry with a parliamentary question, which was due to be answered on 7 November but was not answered until 2 December--and even then it contained an error. That shows just how unwilling the Government have been to tell the truth on this matter.

The answer from the Financial Secretary used the same method of calculation as that used for the estimated cost savings projected from closing the tax loophole, which produced an estimate of the total cost to the Exchequer of £400 million in the financial year 1995-96 and £450 million in the period from 1 April to 8 October, when the Inland Revenue announcement was made. There we have it--the Financial Secretary admitted that the cost to the Exchequer was a total of £850 million over a period of less than two years.

I believe that that is a gross underestimate and many respected commentators agree. On 9 October, the day after the press release, The Times made what I think is a wonderful comment on the Chancellor's decision. It said:

"The only fair complaint against the Chancellor's attack on the gross dividend scandal is that it has taken him at least a year too long to close a loophole so large that it must be visible from outer space."

It went on:

"The Inland Revenue, so deft at plucking numbers from the air, reckons yesterday's change will eventually save £400 million a year."

That is the figure still quoted by the Government today. However, The Times pointed out:

"share buybacks in 1996 alone appear to have attracted about £750 million in tax subsidies. Over two years, buybacks and special dividends paid in takeovers have probably extracted £1.75 billion from taxpayers."

The staff of The Times know a few things about goings-on in the City, and they should be listened to.

I simply do not believe the figures quoted by the Financial Secretary, nor do I accept that the long overdue changes that are to be made will yield only £200 million in 1997-98 and £400 million from 1998-99 onwards. In my view, the yields will be substantially higher than that, which will be good news for a future Labour Government.

Who will take responsibility for losing taxpayers' money on such a grand scale? Nobody, it seems. That comes as no great surprise, even though the financial director of a public company who was this incompetent at managing the business's finances would be dismissed as soon as blunders on such a large scale came to light. We have to ask, who took their eyes off the ball? Was it the Chancellor? Was it the Financial Secretary? Should everything be blamed on the hapless civil servant who

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undoubtedly gave the Financial Secretary bad advice when he was replying to my question? The taxpayer deserves some honest answers.

The Government's failure to act speedily in the face of the growing scandal of share buy-backs and special dividends exposes as a myth Tory claims to economic competence. When he gave evidence to the Treasury Committee on 9 December 1996, the Chancellor tried to gloss over the Government's negligence in not acting sooner. According to him, the Government acted speedily. He said:

"The particular announcement was timed because the nature of share buy-back was changing at the time and a whole new type of share buy-backs was being devised which in our opinion was not consistent with the purposes for which the previous regime was devised. That was a classic case whereby an allowance or tax arrangement was used for one purpose for a very long time and then suddenly with great ingenuity people found a new way of taking advantage of the tax relief. It is not at all unknown for the government to move quickly, we would have been criticised if we had not, to stop this."

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