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That is how the imputation system works. As it is currently structured, there is no distortion in the system. The explanatory note goes on to say:
The same applies to pension funds. Parliament decided that pension funds should be tax free, and the purpose to making them tax free is to encourage and help people to save for their old age. That is and should still be a priority, given that the era we are entering is one of an ever-aging population. The fact that a company appears to have a lower effective rate of tax when it distributes profits to a non-taxpayer is irrelevant, because that arises from the special status that we have deliberately attached to non-taxpayers. Parliament decreed that certain individuals should be non-taxpayers for the sound social reasons of helping people on low incomes and encouraging people to take out pensions and provide funds for their old age.
The essence of the imputation system--or, as it should be called, the partial imputation system--is that the combined tax position of both the company and the shareholder is looked at. In most cases, where the shareholder pays tax, the profits distributed are taxed--broadly speaking--only once, at the rate applicable to company and shareholder. For example, a basic rate taxpayer will pay no more tax because the company from which the dividend is received has paid tax on those profits at 33 per cent. A higher-rate taxpayer will pay a little more, because he or she pays tax at 40 per cent.
A UK company receiving a dividend from another UK company will pay no more tax, because the company paying the dividend has already been taxed. When a non-taxpaying shareholder receives a dividend from a UK company, the overall tax position is that the company and shareholder will have an effective rate of tax of about 15 per cent., because one half of that combination of company and shareholder--the shareholder--is not taxable, so the imputation system does not seek to extract tax from that individual. To do so would be to impose a tax that Parliament has decreed, for social reasons, should not be imposed.
The new Labour Government do not understand business tax or the imputation system, so they have effectively imposed a tax that is focused solely on non-taxpayers. It is the most regressive tax ever imposed, and the amendment seeks to undo that damage.
I had hoped that the amendment would be drafted a little wider, because the clause has a detrimental effect on overseas investors. My hon. Friend the Member for Daventry has given a wise explanation of why the Government decided to halve the tax credit from 20 to 10 per cent., apparently in order not to contravene the treaties.
Let us suppose that a United States shareholder invests in a wholly owned subsidiary in Britain. Previously, that company was able to obtain a repayment of half the tax credit, less a withholding of 5 per cent. of the net dividend plus the tax credit. That meant that the effective rate of tax for an overseas United States shareholder in a UK company was about 28 per cent. instead of 33 per cent. It was therefore attractive for US companies to own and invest in the UK.
Now, however, halving the 10 per cent. tax credit leaves only 5 per cent., from which is withheld 5 per cent. of the net dividend plus the tax credit. That leaves almost nothing--in fact a repayment of only 0.25 per cent. or less is received, which will not be attractive to investors from the United States. The consequence of the measure is that it will discourage investment in the United Kingdom, yet the Budget was meant to encourage investment by companies.
Overall, the clause is highly damaging to shareholders, non-taxpayers and overseas investors. Had the Government spent a little time between announcing their Budget intentions and drafting the Finance Bill, and gone to the trouble of consulting outside bodies, many of these points would have been spotted. The Government have accused Conservative Members of arrogance in the way our arguments were advanced, but the truth is that the arrogance is on the Government side. Why did they not spend a little time consulting? There seems to be no real evidence that there was any requirement to get the Finance Bill passed by 4 August--that is certainly the understanding of the Institute of Chartered Accountants in England and Wales--so the rush can only be put down to the arrogance of newly gained power.
Another example of that arrogance comes in clause 39, in which there is a drafting error. The error does not appear to have been amended in the Standing Committee, yet I raised it in Committee. The Financial Secretary said to me:
Mr. Boswell:
I may be able to help my hon. Friend.
Mr. Deputy Speaker (Mr. Michael J. Martin):
Order. Can the hon. Gentleman explain to me why he is discussing a different clause? The amendment before us relates to clause 30. How does clause 39 relate to that?
Mr. Gibb:
I raised it as an example of the Government's arrogance, but I take your point,
Mr. Boswell:
My hon. Friend may not be aware that, within the past few hours, I have received a response from the Government on that point. This shows that it is difficult for any of us, particularly when we cannot seek outside advice and do not have access to expertise, to know whether it is right. It is unfortunate that my hon. Friend has not yet had a chance to see the letter, let alone assimilate it. I am afraid that the same points may well apply to clause 30 as well.
Mr. Gibb:
I am grateful to my hon. Friend for pointing that out, and I look forward to reading the letter when I sit down. I rest my case, Mr. Deputy Speaker.
The amendment was drafted to try to alleviate the unjust position that clause 30 creates, particularly for non-taxpayers. Many retired people in my constituency of Bognor Regis and Littlehampton have small portfolios of shares. As a result of the Budget, after April 1999 they will no longer be able to reclaim small sums of money back from the Exchequer on receiving dividends from their small portfolios.
The measure is regressive and unfair, and I hope that the Government will accept the amendment as a way of alleviating a distortion created by the Finance Bill.
Mr. Edward Davey (Kingston and Surbiton):
The Liberal Democrat party supports the amendment whole-heartedly, as it aims to protect non-taxpaying pensioners on the lowest incomes.
Some of the points that Conservative Members and I raised in Committee were not properly answered by Ministers, who showed no regard for the effect that the measure would have on low-income pensioners. They claimed that that category of pensioners would be protected because removal of tax credits would be phased in and would not come into effect until April 1999. The Government say that, by that time, they will have put in place individual savings accounts, enabling such pensioners a tax exemption on those dividends.
I would argue, however, that the Government are not living in the real world. The hon. Member for Daventry (Mr. Boswell) described the real world of self-assessment and complicated tax legislation. In the real world, savers are inert to changes in the tax regime. Aunt Agatha and Aunt Ursula are probably the most unresponsive of savers. They do not read the financial pages of Sunday newspapers every week for advice and they are much less likely to be aware that such tax measures have even been introduced. Indeed, Aunt Agatha will probably get a shock in April of the financial year 1999-2000, when she will lose her tax credit. She was probably looking forward to spending it, although it would probably have been spent on making ends meet.
The money that will be taken from those pensioners will make the difference between giving them some dignity in their old age and giving them no dignity. I should like to understand why the Government proposed that move, particularly given the efforts that they have expended on behalf of foreign shareholders and higher-rate taxpayers. I do not criticise those efforts,
but simply say that the Government seem to have perverse priorities if they wish to protect those affected by the changes. Why are they not acting on behalf of Aunt Agatha and Aunt Ursula?
"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".
That is misleading: it is not the tax credit that creates the lower effective rate of corporation tax; it is the personal allowance of the non-taxpayer that gives rise to that beneficial effective tax rate. The personal allowance of about £4,000 means that someone earning only £4,000 per annum faces a lower effective rate of tax than someone earning £5,000 per annum; and someone earning £5,000 per annum faces a lower effective rate of tax than someone earning £6,000 per annum. That is because Parliament has decided that people on low incomes should pay a lower effective rate of tax. The House decides at every Budget that it is right that people on low incomes should pay a lower rate of tax, which is why we have the whole notion of personal allowances.
"I am grateful to the hon. Gentleman for making that point."
She went on:
"I am happy to write to him and to other members of the Committee making our"--
that is, the Government's--
"intentions absolutely clear. If the hon. Gentleman is correct, we shall have to return to the matter."--[Official Report, Standing Committee A, 22 July 1997; c. 393.]
Of course, I have received no such letter, and the drafting error in clause 39 remains.
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