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6.45 pm
There will indeed be an impact on non-taxpayers who previously received the benefit of payable tax credits, which will be withdrawn with effect from April 1999. Within two years--this is the sole exception of treatment--non-taxpayers will be in exactly the same
position regarding payable credits as pension funds are now, although there are some significant differences between them.
The first difference is that pension funds are much larger, accounting for about half the value of the current tax credits, while individuals, excluding those in PEPs, account for only about £100 million, and the second is that pension funds and other institutions have effective voices to lobby and cry foul at the Government's proposals--they have indeed lobbied us and we rehearsed those points extensively in Committee--but Aunt Agatha has usually and typically only herself to rely on. She will not know what has hit her until she finds that she can no longer reclaim the cash.
In its Budget submissions, the Institute of Chartered Accountants in England and Wales cited an example of a widow aged 80 with a state pension of £3,247 a year and dividends of £1,600, which currently attract a tax credit of £400, which is about £8 a week. Even if she were still to get the nominal 10 per cent. tax credit--and the Government do not propose to offer her even that--she would be £222.23 a year worse off; as it is, she will lose the whole £400. As the institute says, the effect is harsh and is likely to encourage such people to dispose of their shares.
Because people in that situation are approaching the end of their working years, although I hope not of their natural life, and can hardly plough new savings into, for example, individual savings accounts, having instead to rely on what they have, the measure is a dead loss to them.
In Committee, the Economic Secretary briskly referred to the need to encourage savings, presumably in a tax-sheltered medium, such as gilt-edged, and made the remarkably clear but remarkably challengeable assertion that tax credits for non-taxpayers are a contradiction in terms. In doing so, she revealed that she simply did not understand--or, to put it more charitably, perhaps did not accept--that companies representing shareholders were already paying corporation tax on behalf of all their shareholders, including the non-income-tax-paying shareholders who are the subject of the debate. I say "companies representing shareholders" because the two cannot, as it were, be unpicked.
The final anomaly of treatment, which gives rise to political as well as technical concern, is that the Government can take tax credits away from those with no power, but fight shy of taking them from those with more clout. The Budget documentation revealed that foreign shareholders receive some £600 million a year in payable tax credits--but they, of course, have the protection of double-tax agreements. That is what the tax credit--continuing and notional, and never repayable--is about. The Government must go through the rigmarole of maintaining a notional 10 per cent. tax credit as a basis for calculating relief for overseas taxpayers.
The Government now say that the effect is so small that it will make no difference, and that the effective credit is likely to be about 0.25 per cent. of the total income. That gives rise to a dilemma. Either the Government have kept faith with the spirit of the double-tax agreements that are being concluded for this country, or they have gutted them, while preserving a legal shell against legal challenge for the renegotiation of those agreements. Either they are repaying significant funds to overseas shareholders, or they are not; and I think that if they are
not, overseas shareholders and their Governments will draw an inference from that. The tension that is thus engendered also gives rise to unfairness in the difference between the treatment of the foreign taxpayer--the foreign shareholder--and that of the domestic shareholder.
Not only do the Government dislike the small domestic shareholder, whom they deny the benefit of credit that is available to higher-rate taxpayers in this country--because it will still run for lower, basic and higher-rate taxpayers--but they dislike the United Kingdom resident shareholder and non-taxpayer so much that they are prepared to contrive, notwithstanding the complexity involved, to contemplate a system that pays credits to the foreign resident who is in exactly the same income position as the domestic taxpayer to whom they deny those credits--or even in a better position. In those circumstances, I think that Aunt Agatha will change her personality.
Let us suppose that I have two aunts--Aunt Ursula, who lives in Uxbridge, and Aunt Bertha, who has gone to live in Boulogne. Whether she has gone for the seafood or to watch French films--which we debated in another context in Committee--I know not. Both have inherited from their mother a share portfolio--what Victorian novelists would have described as a modest competence--worth, say, £10,000, which generates an annual income of £500. In addition, Aunt Bertha has shares from her late husband worth, say, another £10,000, which means that she has two modest competences, as well as a residence in Boulogne. The other income--pensions and so forth--is the same in both cases.
In those circumstances, who will receive more help from the United Kingdom Treasury--Aunt Ursula of Uxbridge, or Aunt Bertha of Boulogne? You have guessed it, Mr. Deputy Speaker. Not only does Aunt Bertha receive a tax credit on her husband's shares; she receives a tax credit on the shares that she inherited from her mother--which the Economic Secretary is denying her sister Aunt Ursula, who happens to live in Uxbridge.
I shall draw my remarks to a close, having exposed the incoherences of the Government's approach. I can only conclude that the Government have either been hasty in preparing the legislation, or exercised malice. Either they intended to do what they have done, or they do not care what they have done. They preach the brotherhood and sisterhood of man, they talk about the need for investment and they introduce what they would call a Budget for the people; but, when we vulgar persons analyse the Budget, we find that it gives tax credits to British shareholders only when they have enough capital to generate an income large enough to incur tax, and gives greater credits to those who go abroad than to those who stay in this country. It targets the pensioner of modest means who needs the tax credits most. It is unfair and, in the amendment, we challenge its damaging social agenda.
Mr. Gibb:
As my hon. Friend the Member for Daventry (Mr. Boswell) said, the amendment seeks to end a distortion introduced by clause 30. The Government contend that by removing the ability of non-taxpayers to retain their tax credits, they are removing an anomaly or distortion; but the contrary is true. All the measures in the Budget introduce a severe distortion.
The explanatory note attached to clause 30 states:
That point goes to the heart of the imputation system. With your indulgence, Mr. Deputy Speaker, let me try to explain to Labour Members precisely how the imputation system works, and how the taxation of a dividend in the hands of an individual works. Let us suppose that a dividend of £80 is paid to an individual by a United Kingdom company. That £80 must be grossed up in the individual's tax return by tax credit, and the individual is therefore regarded as having received taxable income of £100. A basic-rate or lower-rate taxpayer will have £100 in his or her tax return, and will then pay tax at 23 or 20 per cent., depending on whether he or she is a basic-rate or lower-rate taxpayer. The lower-rate taxpayer will therefore have a tax bill of 20 per cent. of £100, which is £20.
That £20 bill is paid by the tax credit that is attached to the dividend, so the lower-rate taxpayer will have no further liability. The basic-rate taxpayer will have a theoretical bill of £23, but he, too, will have no further tax to pay, because the tax credit received with his dividend wipes out his bill, too. We then turn to the higher rate taxpayer, who is regarded as receiving £100 of dividend income. He or she is taxed at 40 per cent. on that income, so the tax bill is £40, against which is a placed tax credit of £20, giving a final tax bill of £20.
We then turn to the position of the non-taxpayer, who is again regarded as receiving £100 of gross income from the £80 dividend because the dividend has to be grossed up. On the non-taxpayer's tax return, if one is filled in, it says £100 of taxable income from dividends less the personal tax allowance--the implication being that a non-taxpayer has not yet fully used up the tax allowance--therefore the tax bill will, in effect, be zero.
"Currently, the system actually goes further than simply mitigating any double charge to tax. Where a person is exempt from tax, or where their tax credits exceed their tax liability, the tax credit can be paid to them. This introduces a distortion into the system. The payment of tax credits to certain shareholders means that profits paid out by a company can actually face a substantially lower effective tax charge than the profits which are retained by the company and reinvested."
That is a political statement if I ever heard one. Similarly, "The Pocket Budget", produced with £50,000 of taxpayers' money--the so-called Inland Revenue explanatory note--makes a political statement, with which Conservative Members whole-heartedly disagree. My hon. Friend the Member for Grantham and Stamford (Mr. Davies) has already explained that the imputation system does not introduce a distortion, and that removing the so-called distortion itself creates a distortion. The Inland Revenue seems content to state categorically that there is a distortion, but it is treading on a political issue--and, again, the Government are using taxpayers' money to air a political issue.
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