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Nevertheless, in Committee the Government insisted on passing that clause and schedule into law unamended. They say that they will look at the issue again, but it is extraordinary that, having failed to consult before legislating, they are now legislating before consulting. That is a serious matter for the House, which is being invited to pass into law something that the Government know is wrong.
Luckily, the House has two amendments before it which would remove the whole shambles from the Bill and give the Government an opportunity to think, discuss and consult. After all, the measures would not have come into force for two years, anyway, so what is the hurry? Sheer arrogance is preventing them from withdrawing these damaging measures, which they know are wrong. Instead, they intend to force into law something that they admit is wrong and damaging, simply because they lack the courage to withdraw it.
I urge the House to take advantage of these modest amendments, which would remove the confusion from the Bill and give the Government an opportunity to have a genuine re-think.
Mr. Howard Flight (Arundel and South Downs):
After the attack on pension fund accumulations, the two other aspects of the Finance Bill that do most damage are the abolition of foreign income dividends and of TESSAs and PEPs in 1999, without announcing what the Government intend to put in their place.
The main advantage of the Anglo-Saxon economies of north America and Britain, in contrast the continental Europe economies, has always been the clarity of our tax law, which has been sharply defined both in this House and by the courts. In continental Europe, tax law is a political mush, with many areas where it is not clear what is within or without the law.
As my right hon. Friend the Member for Wells (Mr. Heathcoat-Amory) said, to legislate for the abolition of FIDs in 1999, but then to say that that will not happen and that the Government will sort it out in the 1998 Finance Bill, makes no sense. Having recognised the problems, the correct course must be not to change the law until there has been full consultation.
Similarly, woolly statements in the Budget speech and in Committee about ending TESSAs and PEPs in 1999 and putting some undefined individual savings accounts arrangements in their place creates unnecessary uncertainty for savers and for the investment management industry. I declare an interest, as I spent 25 years in the industry, and I remain the deputy chairman of an international investment management company.
I recollect that the Chancellor stressed in his Budget speech that his key long-term objective was to increase investment in this country. However, the two interrelated actions that I have described are bad news for savers and for investors, especially at a time when the Government should be promoting and strengthening measures to encourage savings.
If we want to take pressure off interest rates and sterling, we should encourage people to save the £32 billion pay-outs from mutual building societies. Surely we saw the problem coming, so the Finance Bill should have included appropriate measures. The way to
achieve higher investment is through higher savings. Anything that is a potential attack on savings is bad for investment. I shall return to that point later.
I want to focus specifically on FIDs. Surely it is self-evident that it is desirable to retain and encourage international companies based in the United Kingdom. Whether they are foreign-owned or internationally owned, they are a source of tax revenue and employment, with a spin-off for accounting, legal and other services.
Our long-term history shows the wisdom of encouraging our businesses to invest profitably overseas, whether through direct investment by individual companies or portfolio investment by individuals or pension funds. The abolition of FIDs would undermine that. If international holding companies do not know where they stand, which will be the case if the Finance Bill goes through unamended, there is every motive for those companies not to take risks, and to consider moving somewhere else. In addition, I believe that the estimated savings of £250 million per annum are highly optimistic.
The conditions suggested by the Paymaster General to alleviate the position make little sense. If we require 80 per cent. foreign ownership, that merely encourages foreign takeover of British companies, but also encourages British-based international companies to move elsewhere. If we require a fixed percentage of overseas earnings--90 per cent. has been suggested--that would be illogical and inflexible. Indeed, it would discourage international companies from setting up in the UK. To limit the amount that companies could pay out in an FID would impose a fiscal distortion on UK companies' overseas investment.
My biggest objection is one of principle--the attack on FIDs is an attack on the principles behind the double taxation treaties and the underlying equity thereof. Aside from the practical problems that that raises, I am surprised that it should ever have been considered by the Government.
The present rules permit advance corporation tax paid on FIDs, which cannot be offset against UK corporation tax, to be recovered. The reason is simple. An international company pays its taxes in the parts of the world where it operates. It gets double taxation relief on those against UK corporation tax. If it pays dividends, which is a normal and proper thing for a company to do, there is likely to be a shortfall that cannot be offset against its specific UK corporation tax liability.
Therefore, the net effect of abolishing FIDs is that British-based international companies will suffer a tax disadvantage against UK companies. That then encourages UK companies to concentrate their investments in this country, and not spread them around the world where we have such a good record.
More narrowly, FIDs abolition, as proposed, represents for the UK investment management industry a complete undermining of several years of work and substantial expenditure by both the Government and the industry in developing the open-ended investment company as a UK-based investment fund structure designed to compete attractively with Dublin and Luxembourg, encouraging foreigners to come to the UK to use an OEIC to structure their funds to sell around the world. If people go to Dublin or Luxembourg, they will take not only fund management fees but all the ancillary accounting and legal revenues.
It is no wonder that Dublin is laughing, as it again offers a substantial tax advantage for international funds. Speaking as someone in the industry--after years of work trying to get the right product--I find it frustrating that the ground is being cut from under such products just as we are about to use them.
Also damaging for the United Kingdom investment management industry, and related to our not knowing what will happen with FIDs and ACT after the next two years, is the announcement that PEPs and TESSAs will be abolished. Middle England has to be clear that PEPs and TESSA will end.
We have received some notice of the nature of the proposed individual savings scheme in the Inland Revenue's news release, "A New Individual Savings Account". Having thought about the matter in some detail, however, I believe that whatever is proposed will be considerably less attractive than the current PEP and TESSA arrangements if ACT is lost and if the FIDs measures are passed. It will also be less attractive in principle.
The announcement mentions proposals that tax relief will be limited, up to an overall--
Mr. Deputy Speaker:
Order. The hon. Gentleman is speaking about matters that are not relevant to the amendment. We are debating foreign income dividends, not savings schemes. He was properly speaking to the amendment; perhaps he will do so again.
Mr. Flight:
Thank you, Mr. Deputy Speaker; I apologise. I ask the indulgence of yourself and of the House, however, because the matters are interrelated. As you will have noted, when Conservative Members make a point about something damaging investors' interests--whether it is abolition of ACT or of FIDs--we receive the reply from Ministers, "But we have this new savings scheme, which will answer all the problems." I believe that it is fair to give the matter an airing.
Mr. Deputy Speaker:
It may seem fair to give the matter an airing, but the House has given me its rules, which state clearly that hon. Members must stick to the amendment and not stray from it. Perhaps the hon. Gentleman will find another opportunity to raise those issues.
Mr. Flight:
I hear what you say, Mr. Deputy Speaker. I hope that you will give me an opportunity on Third Reading to deal with the matter.
The point that I wish to stress is that abolition of FIDs and the other tax proposals that I have mentioned will not only damage for UK international businesses but bring a lack of clarity to our tax system. The measures are also damaging to the UK investment management industry--which I should have thought it was in the interests of the Government and the House to support. Unless our amendment dealing with FIDs is passed, we will make no progress with the OEIC scheme in competing for business with our competitors in Luxembourg and Dublin.
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