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'(4) Section 468Q of the Taxes Act 1988 (dividend distributions to corporate unit holder) shall be amended as follows--
(a) In subsection (1) at the end of paragraph (b) there shall be inserted--
"or is a pension fund as defined in section 231A(4)"
(b) In subsection (2) the words "or income tax" shall be inserted after the words "corporation tax".'. I should at the outset declare an interest, in that I am a chartered accountant, a member of the Institute of Chartered Accountants in England and Wales, and I write a six-weekly article for Accountancy Age. The amendment seeks to deal with an anomaly created by clause 19, which has been caused, like so much else in the Finance Bill, by the rushed and ill considered way in which the new Labour Government are proceeding. As such, and in the spirit of ensuring that the House produces well drafted legislation, I hope that the Government will accept the amendment. The anomaly in question concerns the position of pension funds that invest through unit trusts. Clause 19 prevents pension funds from reclaiming the tax credits on dividend income--an outrageous change to the previous position, which all parties had accepted, that pension funds should be allowed to accumulate assets from income tax-free, thus encouraging the build-up of pension fund assets. As far as we know, it is not the

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Government's intention to tax other income within a pension fund, such as interest income and income from property. At the moment, all the Government intend to do is tax dividend income received by pension funds. The problem arises when a pension fund invests in a unit trust that itself invests in bonds or property. Unit trusts themselves are taxable, but pension funds could effectively reclaim the tax by receiving the tax credits attached to the dividend paid by the unit trust. Now that pension funds are no longer able to reclaim that credit, investing in a balanced unit trust becomes unviable for them, because that would now be taxable. However, if the pension fund itself received the income, it would be non-taxable. If the Government accepted the amendment, it would apply existing provisions in section 468 of the Taxes Act 1988 to stream income paid by a unit trust to reflect the nature of the income it receives, and enable the recipient to claim back only the tax on the income that, had it received such income directly, would not have been taxable. Applying those provisions to pension funds would deal with the problem.

Mrs. Liddell: I regret to tell the hon. Member for Bognor Regis and Littlehampton (Mr. Gibb) that I cannot accept his amendment, but I congratulate him, as a new Member, on getting his amendment debated, albeit briefly. However, I do not see too much enthusiasm for his amendment among his hon. Friends. I do not accept his argument about the anomalous position. I shall go into some of the background to the debate. Authorised unit trusts were introduced as vehicles for investment by individuals, and can be included in personal equity plans. Most PEP-ed investment is in authorised unit trusts and investment trusts. The tax rules are designed to ensure that tax-paying individuals do no worse by investing via an authorised unit trust than they would if they were to invest directly. Those rules involve treating authorised unit trusts like companies for taxation purposes, and the dividends that they pay out to pension funds are treated by clause 19 in exactly the same way as dividends paid to pension funds by a UK company. That is the structure for authorised unit trusts. I come to my point of disagreement with the hon. Member for Bognor Regis and Littlehampton. I do not accept that the position of authorised unit trusts is anomalous. An authorised unit trust that pays dividends out of income it receives from a mixed investment portfolio is in exactly the same position as an investment trust or any other company that pays dividends out of profits arising from different income sources. Furthermore, most pension fund investment through unit trusts in real property is done through unauthorised rather than authorised unit trusts. The treatment of interest and rental income flowing through unauthorised unit trusts to pension funds will not be affected in any way by our proposals. It is now open to many pension funds to invest through pension fund pooling vehicles--a type of unit trust that receives a completely transparent tax treatment. The justification for the amendment is not clear. I know that the change has been touted by the Association of Unit Trusts and Investment Funds, which has written to my hon. Friend the Paymaster General on the subject. However, it is not apparent that the issue is a major one,

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not least because pension funds can and do invest in real property through unauthorised unit trusts rather than authorised ones. I can give the hon. Member and the Committee an assurance that we will review the position should compelling reasons emerge why a pension fund investing in property through an unauthorised unit trust or pension fund pooling vehicle might be placed at a real disadvantage compared with one investing through an authorised unit trust. I am sorry that that sounds so convoluted, but it is better to get the clear position on the record. We see no justification for the amendment, and we do not accept that the change it would make is especially necessary. Pension funds can take action to avoid being disadvantaged in the way that has been suggested. The amendment would also have repercussions, because pension funds would want similar treatment for other dividends, and it would run counter to the whole thrust of the tax credit changes. The Government cannot accept the amendment.

Mr. Gibb: I am grateful to the hon. Lady for accepting that, without the amendment, pension funds will be put at a disadvantage if they continue to invest through authorised unit trusts. The Government's position will be a great disappointment to the industry, because that is another unintended consequence of the proposals, which will require the pensions industry to make sweeping changes to its investment policy as a result of one Budget measure. However, in the interests of later debate, I beg to ask leave to withdraw the amendment. Amendment, by leave, withdrawn. Question proposed, That the clause stand part of the Bill.

Mrs. Liddell: I realise that the Opposition were anxious to have a wide debate on this issue, and I am willing to allow them as much time as possible. I will take on board any points they make, and sum up in some detail later. I stress that the purpose of removing tax credits is specifically to ensure that we remove a distortion from the tax system. The previous Government started the process, and we seek to promote a tax system that is fairer and that encourages longer-term investment in companies.

Mr. Heathcoat-Amory: I am glad that the Financial Secretary will answer the debate in some detail, because we have several questions that remain unanswered. So far, we have been unsuccessful in getting the Government to come clean about what really happened on Budget day to their promises on taxation. More specifically, the Government have not come clean about the damage they have done to millions of people who contribute to pension schemes. Nowhere was the Government's pledge not to increase taxes more quickly--and deceitfully--broken than in clause 19. I wish to establish beyond dispute that the abolition of dividend tax credits for pension fund contributors was a huge tax increase. From Budget day, all pension funds investing in UK equities suffered an immediate and serious drop in their income. I say immediate because the provision took effect from Budget day.

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The Government will get an extra £5 billion a year from the change. There is no magic about that--the money has to come from other people. The new Government have a large majority and can repeal many things, but they cannot repeal the laws of arithmetic. If the Government take £5 billion a year from the income accruing to pension funds, clearly that will have an impact on the millions of ordinary people who contribute to those schemes. They will be hit by an eventual reduction in their pension benefits or by the need to increase their contributions. I make no apology to the Committee for returning to the stated view of the Government on the effects of their proposals. The words of the Financial Secretary were:

"The measure"-- she was referring to the abolition of advance corporation tax credits--


"is good for pensions and pensioners. . . People should understand that our reforms will benefit pension funds."--[Official Report, 3 July 1997; Vol. 297, c. 507.] Those words have gone unamended and uncorrected in the ensuing days, so that remains the official Government view of the effect of these tax changes on pension funds. This enormous tax hit is a benefit for pensioners and pension funds. It is almost breathtaking that the Government can continue to assert that taking £5 billion a year from those who contribute to such schemes is good for them. If that is new Labour economics, we have been warned. The Chancellor was hardly any better on Budget Day. He airily dismissed the matter by saying that pension funds were mostly in surplus, so no one would really be any the worse off. I have news for the Government. More than three quarters of UK pension funds are money-purchase schemes. They do not have surpluses. There is no pot of gold in money-purchase schemes that enables the Government to raid them without anyone noticing. The Budget simply reduces the prospective pensions paid for by those money-purchase schemes, or it will require contributors to them to increase their monthly payments.

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