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8.15 pm
Mr. Brooke: My speech will be extremely brief. I think that I am right in saying that my right hon. Friend the Member for South Norfolk (Mr. MacGregor), the right hon. Member for Llanelli (Mr. Davies), the Paymaster General and I are the only four hon. Members participating in the debates on this Finance Bill who were on the 1978 Standing Committee.
I remember the Paymaster General with particular affection on that occasion, because we tried to cause the House to sit into August, and the only way in which we could accomplish that was by ensuring that the Finance Bill was considered for a decent length of time. On one occasion, he joined us after dinner and--slightly to the distress of his Whips--made a very powerful speech, in which, for our purposes, he gently steered the ball towards his own goal. Against that background, and with immense good will, I should like to ask him one question. I hope that you, Mr. Deputy Speaker, will not rule me out of order.
I served in the Committee on the Housing Act 1996. The Government had proposed in that Act severalclauses that they subsequently withdrew because of representations from people in my constituency. Although the Minister for London and Construction, the hon. Member for Greenwich and Woolwich (Mr. Raynsford) made a powerful speech explaining how incompetent the then Government had been, the Opposition had not explained what was wrong with the clauses.
In the case of this Finance Bill and foreign income dividends, not only the Conservative party but my constituents, in a series of multinational companies, have drawn the Government's attention to what is wrong with their clauses. In the Government's posture, I do not understand--I hope that the Paymaster General will tell us--why Ministers, unlike those dealing with the Housing Act 1996, will not straightforwardly withdraw the clauses and return with the proposals on which, they say, they are consulting. Why are Ministers ploughing ahead and saying that they will consult after the clause has been passed? I do not absolutely follow the logic of the Government's actions.
Mr. Gibb:
I do not know whether the Government are aware how much damage they are doing with their decision to abolish foreign income dividends, how much damage has been done since 2 July 1997 or how much damage is being done daily as Ministers dither in deciding how to extract themselves from the mess that they have got themselves into. Conservative Members have mentioned in this debate the problems of United Kingdom companies with overseas holdings, and I mentioned those problems in an earlier debate. Today, however, I should like to deal with the equally disastrous problems--which my hon. Friend the Member for Arundel and South Downs (Mr. Flight) mentioned--that the City of London will face.
The history of the City of London has been bound up in collective investment vehicles. Unit trusts, particularly, have been an enormous success, although they are not particularly attractive vehicles for overseas investors--especially continental Europeans, who do not really understand the trusts concept. Consequently, in recent years, centres such as Dublin and Luxembourg--which my hon. Friend the Member for Arundel and South
Downs also mentioned--have become much more popular locations for collective investment vehicles. The asset management side of the industry is located in the United Kingdom, but the back office--which represents about 60 per cent. of managers' cost base--is located with the vehicle.
Dublin and Luxembourg have open-ended company vehicles rather than trusts. Therefore, those locations have recently become enormously popular for collective investment vehicles. Luxembourg and Dublin combined now have a 22 per cent. share of the European funds market--which represents 12 per cent. growth in just five years. In the same period, the UK's share has remained static at 10 per cent. Moreover, in that period funds managed in Luxembourg and Dublin have quadrupled while those in the United Kingdom have only doubled.
In 1992, the combined assets of UK fund managers in Luxembourg and Dublin were three and one third billion dollars. By 1995, they had increased to $20 billion. Sixty three per cent. of Dublin business has been undertaken by UK fund management houses. This means that we are exporting jobs to Dublin and to Luxembourg. We are talking about thousands of jobs in the back office--jobs in the accountancy and legal professions, to which my hon. Friend the Member for Arundel and South Downs also alluded. In co-operation with the City and the Government, the concept of an open-ended investment company was recently developed. These OEICs were introduced precisely to deal with the problem that I have just outlined.
OEICs are attractive to European investors, but only while we have foreign income dividends. If those companies are to be attractive to European investors, they will have to invest in European or overseas equities. By definition, investors want to reduce the risk of, for example, currency fluctuations, so they will want to invest through vehicles which will themselves invest in European and overseas equities. Of course, if those overseas equities are paying dividends to the UK OEICs, those dividends will have been taxed in the overseas jurisdiction; when they arrive in the UK vehicle, they will be subject to UK tax, but that tax will be offset by double taxation relief.
We now reach the point at which those vehicles want to pay dividends to their investors. Again, the companies will be subject to advance corporation tax, but there is nowhere for those vehicles to offset their ACT because there is no mainstream UK corporation tax liability. The ACT is therefore simply carried forward from one year to the next, indefinitely into the future. As such, it becomes an irrecoverable cost. Unless we have foreign income dividends, it becomes an unsustainable cost.
If a company can demonstrate that the dividends that it is paying out of the OEIC derive from overseas investment income, having FIDs means that that company can obtain a repayment of the ACT that was paid when the dividends were initially paid. Effectively, that means that the ACT is no longer a cost and the company is being taxed only once on its overseas profit. That is precisely what FIDs were designed to do and why OEICs have become an attractive vehicle. If OEICs do not have FIDs, the attempt to overturn the rise of Luxembourg and Dublin will fail. OEICs are taxable on their income at 20 per cent., but they are exempt from tax on their capital gains.
Research shows that, if the Government retained FIDs, and if OEICs were fully established in the UK, a European portfolio moving to the UK would yield more than double an identical fund in an offshore centre, and the yield would be about 40 per cent. more for a global fund than for a European fund. That is the result of the previous Government's development of FIDs and, of course, of our favourable double taxation treaty network.
Until the Budget, Luxembourg and Dublin were greatly concerned about the development of OEICs and the fact that we have FIDs. However, on 4 January the Financial Times said:
I refer the Paymaster General to the letter from Sheila Nicoll, director of legal and fiscal affairs at the Association of Unit Trusts and Investment Funds, who says:
The first was that the Government
The Paymaster General's first suggested solution was thus to relax the rule that international holding companies should be 80 per cent. owned by non-residents. He said that the Government could "reduce that percentage", but to what does he propose to reduce it? If he were to reduce it to nil, he will be virtually reintroducing FIDs, so why on earth does he not withdraw the clause and schedule 6, as my right hon. Friend the Member for Wells (Mr. Heathcoat-Amory) proposes?
The Paymaster General's second proposal was to
The Paymaster General continued:
"OEICs are expected to stem an exodus of investment business to Dublin and Luxembourg."
The previous Government had successfully tackled a serious problem for the City of London but, alas, we then had the Budget on 2 July.
Investment Week magazine states:
"Perpetual is to consider selling offshore funds to the UK market following the Government's decision to scrap Foreign Income Dividends (FIDs).
and
The fund management group is one of several that have now put on hold plans to establish UK-based OEICs to sell into Europe"
"repatriate funds from Dublin or Luxembourg . . . These include Standard Life, Henderson Investors and Barings.
That is the consequence of this enormously damaging measure.
David Mossop, chief executive of Perpetual said:' . . . We have plans to start marketing into Europe in 12-24 months and will now have to consider using Luxembourg vehicles rather than UK OEICs.'"
"we will continue to stress the need for an early statement"
on FIDs. She continues:
"Damage has already been done, and while the toothpaste clearly cannot be put back in the tube, a clearer statement at Report Stage that Ministers have no intention of damaging the international competitiveness of UK-based funds would at least prevent more spillage."
In Committee, the Paymaster General accepted that the Government had committed an enormous gaffe and had been wrong to propose the abolition of FIDs, and that they were now going to consult interested parties to see whether they could come up with a solution to the problem that they had created. He suggested four solutions but, even during the enunciation of those potential solutions, he said:
"I do not know whether any one of these suggestions will solve the problem."
I will briefly run through the Paymaster General's four suggestions.
"could relax the shareholding condition for the international shareholding company rules."
International holding company rules are slightly different from FID rules. One can establish an international headquarters company, which means that one is not obliged to pay ACT initially--one can pay a FID without paying ACT in the first place. When the Chancellor introduced that scheme, he pointed out that the
international holding company rules will remain in place so that these provisions can be used. As everyone knows, however, the international holding company rules can be used only by companies which are at least 80 per cent. owned by non-residents.
"allow surplus ACT to continue to be reclaimed by companies which derive 90 per cent. or, perhaps, a lower percentage--".
Is that not virtually bringing back FIDs? The third suggestion was
"to limit the amount of FIDs that a company could pay to the amount that it had paid historically, perhaps in the average of the past two or three years."
As my hon. Friend the Member for Arundel and South Downs said, that is a terrible distortion of the tax system. It is also horribly complicated but, in any case, if the Paymaster General does that, is he not virtually bringing back FIDs?
"A fourth option would be to that a company could pay no more than a specified proportion of its dividends as FIDs."--[Official Report, Standing Committee A, 22 July 1997; c. 386-7.]
Depending on what proportion the Government deigned to allow the companies to pay, they may or may not be virtually bringing back FIDs. If the Government allowed a lot of FIDs to be paid, they would be bringing back FIDs.
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