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Mr. Deputy Speaker: With this, it will be convenient to discuss Government amendments Nos. 12 to 15.
Mrs. Liddell: The amendments take us into the wonderful mysteries of the taxation of life assurance companies. I shall not go into too much detail on this subject, because I do not want hon. Members to get too excited before the holidays. I shall try to give a brief explanation of the purpose of the amendments.
Hon. Members will perhaps detect that the amendments have something to do with foreign income dividends. When we dealt with clause 36, we discussed at length the abolition of FIDs in 1999. The amendments have nothing to do with abolition: they are about the treatment of FIDs received by a life assurance company after 1 July 1997.
Schedule 3 makes a number of detailed changes to the tax treatment of dividends received by life companies, one of which involves the calculations that are made to determine what part of a life company's income is charged at special rates, what part is charged at policyholders' rates and what part at normal corporation
tax rates. The Bill, as drafted, made a minor but necessary change to the way in which ordinary dividends are treated in that calculation, and the treatment of FIDs should have been changed in the same way. However, it was not, because an oversight that occurred when reference to FIDs was inserted in the 1994 Finance Bill was regrettably repeated this year. The amendment makes the necessary change. Failure to do so could cost a few million pounds a year, depending on the extent to which FIDs are paid in the future.
A related change made by the amendment is to remove some disadvantages that life companies have perceived. They affect the so-called notional case one test, of which the right hon. Member for Fylde (Mr. Jack) gave an eloquent description to the Committee considering the 1996 Finance Bill. The test involves a comparison of profits calculated in two different ways. FIDs have hitherto appeared on one side of the comparison but not on the other. There might have been good reasons for that at the time, but, with the treatment of FIDs and ordinary dividends in the hands of life companies and other dealers in shares becoming more similar, there is less reason to distinguish between them.
I may add that, in proposing this change, we have taken account of representations made by the Association of British Insurers.
Amendment agreed to.
Amendment made: No. 12, in page 64, line 23, leave out from 'companies)' to end of line 28 and insert
Mr. Deputy Speaker:
We now come to Government amendments Nos. 13 and 14.
Mr. Deputy Speaker:
These amendments have already been debated. We are now voting on them.
Amendments made: No. 13, in page 69, line 36, leave out 'and'.
No. 14, in page 69, line 43, at end insert
Mr. Tim Boswell (Daventry):
I beg to move amendment No. 25, in page 22, leave out lines 24 to 37.
The intention of the amendment is to modify the Government's proposals on distributions and tax credits arising on or after the tax year 1999-2000. It would strike out the provisions of the Bill that deprive United Kingdom residents who are not taxpayers of the payable tax credits that they can now claim on their dividends. We believe that the amendment says a great deal about the philosophical differences between the Conservative party and the Labour party, and a good deal about the practical outcome of the stances that they each adopt: where they are coming from affects where they get to.
There was a point in the partial imputation system that was introduced by a Conservative Government in 1973. Those of us who served on the Standing Committee that considered the Bill know that the Economic Secretary has emphasised her belief that that was a distortion. She has sold her proposals not as a tax increase--which they are--but as the removal of a distortion that has crept into the tax system. We do not accept that.
I remind the House that the purpose of the changes introduced nearly a quarter of a century ago in 1973, after the former Labour Chancellor, Lord Callaghan of Cardiff, had unsuccessfully tried to produce something similar to what the Government are producing now, was to avoid double taxation on the same profits arising in the hands first of the company then of its shareholders. That was done by arranging that advance payments of corporation tax against dividends should be met by a matching tax credit in the hands of shareholders.
Shareholders were then, and are now even more, a heterogeneous bunch. Many more shares now are held by institutions, some of which, such as pension funds, are non-taxpayers; others, such as insurance companies, have special arrangements. Income on dividends for pension funds is effectively exempt because the funds pay their tax on the way out to pensioners, in whose hands it is taxed.
Other types of shareholders include collective investment vehicles, such as the unit and investment trusts that we debated extensively in Committee, and holders of personal equity plans, who are individuals, but in a protected environment. There is still a significant number of private direct shareholders, especially in privatised companies; it has been estimated that at the peak there were about 10 million, and anyone who reads a company's annual report and looks at the distribution of shareholders will be likely to find that, although the majority of the share capital is held by institutions--often by a limited number of institutions, such as pension funds--there is a numerical preponderance of individual shareholders, who in some cases still account for a significant proportion of the share capital. Those shareholders pay varying rates of tax: some are higher-rate taxpayers; some on the basic rate; some on the lower; and some, the subject of the amendment, do not pay income tax at all.
There are two remarkable aspects of the Government's proposals. The first is that they have found it necessary to put in place elaborate arrangements, as set out in schedule 4, to effect them. Schedule 4 introduces us to the delights
of schedule F ordinary rate, higher rate and trust rate, on the back of a residual tax credit of 10 per cent. The reason for that residual tax credit will become apparent later on.
The effect on the lay taxpayer, the man or woman who has an income from employment and a few shares--let alone somebody older, with a pension and a few shares, who does not find forms easy to manage--is likely to be pretty awkward; the more so now that self-assessment is being introduced.
There will be serious trouble with the self-assessment forms, given that we are talking about a limited amount of people's personal income. It is not their professional income from employment, and they will not all have accountants. It is pretty difficult even for accountants to contend with some of the complexities of schedule 4.
I hope that the Economic Secretary will reflect on those concerns; perhaps she can find a simpler way of effecting the measures. If she reflects, as I wish that someone had reflected before the Bill was introduced, she may come up with a simpler structure.
The Government have set up an elaborate, roundabout route, if not to Paradise by way of Kensal Green, at least to Birmingham by way of Beachy Head. They have very probably succeeded in their goal of achieving no detriment to the ordinary or even the higher-rate taxpayer. Praise the Lord: the Paymaster General is unscathed by the measures. It is only the non-taxpayer--the Aunt Agatha, although she will change her name later in my speech--who will lose out.
The second rather bizarre aspect of the proposals is that Ministers show clear signs of not knowing what they are doing; perhaps that is understandable, even if not formally excusable, given the complexity of the proposals. Conservative Members are thoroughly familiar with the law of Bristol, South, as enacted by the Financial Secretary, from whose constituency it is named. Speaking of the impact of advance corporation tax changes on pensioners, she said:
'shall be amended as follows.
(1A) In subsection (2B) (relevant income from life assurance business to be sum of items in paragraphs (a) and (b)) for paragraph (b) (relevant franked investment income) there shall be substituted--
"(b) the franked investment income of, and foreign income dividends arising to, the company which are referable to its basic life assurance and general annuity business."
(1B) In subsection (8) (interpretation) the definition of "relevant franked investment income" shall cease to have effect.'.--[Mrs. Liddell.]
'and
(c) in paragraph (c) (which provides for Case I profits to be reduced by the shareholders' share of foreign income dividends in respect of such investments) for "in respect of investments held in connection with the company's life assurance business" there shall be substituted "which are referable to the company's basic life assurance and general annuity business".'.--[Mrs. Liddell.]
"The measure is good for pensions and pensioners, not bad for them."--[Official Report, 3 July 1997; Vol. 297, c. 507.]
The same philosophy seems to have affected the Economic Secretary, who said:
"Ordinary shareholders who previously did not pay tax are not adversely affected by the Bill."
Search me about that; indeed, search my right hon. Friend the Member for Wells (Mr. Heathcoat-Amory), because when he rose more than once in the dialogue that ensued to challenge her about that assertion, she replied:
"I refer the right hon. Gentleman to the Official Report."--[Official Report, Standing Committee A, 21 July 1997; c. 224-25.]
Her latest statement on the record therefore remains uncorrected. I believe that it is wrong--we challenge it--and that she should use this opportunity to correct it formally.
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