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New clause 16

Tax credit compensation for charities with investments in mixed funds

'.--For section 29 (2)(b) of the Finance (No. 2) Act 1997 there shall be substituted--
"(b) to any part of the qualifying distribution which, were it not for section 469 (2) of the Taxes Act 1988, falls to be regarded as income of section 505 bodies.".'.--[Mr. Fallon.]
Brought up, and read the First time.

10.15 pm

Mr. Fallon: I beg to move, That the clause be read a Second time.

Mr. Deputy Speaker: With this, it will be convenient to discuss the following: Amendment No. 53, in clause 47, page 26, line 22, leave out '31st December 2000' and insert '31st March 2001'.

Government amendments Nos. 1 to 3.

Amendment No. 54, in page 27, line 44, leave out '31st December 2000' and insert '31st March 2001'.

Mr. Fallon: I begin, perversely, with the Government amendments, which we welcome. I acknowledge, on behalf of my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond) who raised the point in Committee, how far the Government have gone to extend the definition of what can be supplied in kind as medical equipment. My hon. Friend has another engagement, but he wanted me to convey his thanks to the Minister for meeting us on that point.

As for amendments Nos. 53 and 54, the Economic Secretary will recall our discussion in Committee on these points. Incidentally, I declare an interest, in that I am an

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unremunerated director of a charity that may benefit from the amendments. The issue here was simple: the date at which this new and welcome extension of charitable relief was to begin was intended to allow for a two-and-three- quarter year period. It was proposed initially to bring it into operation on 1 April this year; its implementation has now been delayed until some time after Royal Assent. As the exemption is designed to end on 31 December 2000, charities have been given less than two and a half years. That also means that the exemption ends, rather uncomfortably, three quarters of the way through the tax year.

I suggested to the Minister in Committee that it might be helpful to let the exemption run on for the final three months--January, February and March of 2001. She kindly agreed to consider the matter, which is why we have tabled these amendments.

The purpose of new clause 16 is to help a different group of charities, such as the Thalidomide Trust, which are still disadvantaged by the withdrawal of tax credit relief for UK equity dividends. The withdrawal was in two stages: for pension funds and the like it was put into effect immediately, on the day of last July's Budget; but foreseeing the impact on charities, the Government allowed a breathing space until April 1999. A compensation scheme with a tapered relief for five years was also introduced.

The problem comes for those charities that invested in mixed funds. The Thalidomide Trust was one of the charities that invested in the Aquila funds. These were unit trusts specially created to facilitate efficient investment pooling for pension funds and their charity clients. That worked well because both types of client were entitled to the same tax exemption.

Before investing in those funds, the Thalidomide Trust checked very carefully with the Inland Revenue. On 16 December 1996, it was told that

the exemption. However, as a result of the subsequent July Budget, the pension fund lost relief; charities whose investment was pooled with it lost the relief at the same time--a relief to which they would otherwise have been fully entitled.

You may wonder, Mr. Deputy Speaker, why we raise the matter almost a year after the deed was done. We do so because, on 22 June 1998, the Thalidomide Trust wrote to us, having had little joy from the Government. On 21 January 1998, the charity wrote to the Revenue; it wrote again on 30 March, and then it wrote to the Chancellor. Receiving no satisfaction, it wrote to us.

We took up the matter immediately. I raised it with the Financial Secretary to the Treasury at Question Time last Thursday, 25 June. My hon. Friends will now understand why the Financial Secretary has left the Chamber; they will recall that, when I raised the matter, she advised us not to make "cheap points". To be fair, perhaps she said that on the rebound. It certainly is not a cheap point to the Thalidomide Trust, which stands to lose some £75,000 because of the inadvertent drafting of a clause--or so it was led to believe.

The Thalidomide Trust wrote to the Chancellor earlier this month because, in the final correspondence that the charity had with the chairman of the Board of the Inland

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Revenue, he made it clear that the compensation scheme to which I referred--the relief scheme--was not wholly drawn up by the Revenue, but had been expressly decided on by Ministers. In Mr. Montagu's letter to the Thalidomide Trust--he is the chairman of the Board of the Inland Revenue--he revealed that Ministers were aware of the position of charities that had invested in mixed funds. Apparently, the legislation had to be narrowly drawn in order to avoid complexity--not something that the Government were successful in avoiding elsewhere in the Finance (No. 2) Act 1997. However, I put that to one side.

The consequences were clear. The Thalidomide Trust--other charities may well be in such a position--has lost about £70,000. That is a serious loss because, in a few years' time, the trust will receive no further capital payments. The House needs no reminding that more than 400 people were disabled by the thalidomide drug. They have continuing and very expensive needs.

The previous Government recognised the special difficulty of charities such as the Thalidomide Trust. When, in 1996, it was apparent that the trust had insufficient capital to maintain the distributions to beneficiaries at existing levels, the previous Conservative Government chipped in some £7 million. Tonight, we are talking about £70,000 being taken from it. That is not a huge sum. I should have thought that it was perfectly possible, with all the technical expertise that is available to the Inland Revenue, for the compensation scheme to be adjusted. I very much hope, therefore, that the Minister will reconsider.

Mr. Gibb: As events unfold since the July Budget last year, more and more injustices are becoming apparent from the decision taken last July to end the repayment of dividend tax credits. We are already aware that, as a result of that one decision, pension funds--the funds that will give rise to the incomes of elderly people in their retirement--have been robbed to the tune of £5 billion a year. That means that, unless people increase their contributions to their pension funds, they will lose substantial sums on retirement.

There is considerable evidence that people are not aware of what the Government did to their pension funds last year, and they will have a nasty shock in 20 years if they have not increased their pension contributions, or their employers have not increased their contributions by about 11 per cent. on average. Those pension funds will be inadequately funded, and people's pensions in retirement will be less than they would otherwise have been, and less than people expected.

We have also heard of the injustice arising from the decision taken last July about non-taxpaying pensioners--300,000 of them--who, on average, will be £75 a year worse off as a result of that measure. Earlier today, we heard from constituents throughout the land who will suffer real hardship next April when the measure comes into force, and people will no longer be able to reclaim £100, £200, £300 or £400 a year from their dividend income.

We know already of the injustice being faced by charities generally as a result of the measure taken last July to end the repayment of dividend tax credits. Charities will lose £400 million a year, despite the taper, because tapers eventually taper to an end. At that time,

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charities will lose significant income. Some will suffer very badly indeed, especially those that rely on their investment income from endowments established over the years.

As a result of a letter from the Thalidomide Trust, a further injustice has become apparent, which arises for charities that have invested in mixed funds. One wonders how many further injustices will arise from that one measure. We have seen the wholesale restructuring of the corporation tax regime as a result of a measure taken in the Finance Act last year.

The Thalidomide Trust is a worthwhile organisation which helps to deal with the children affected by the thalidomide drug 30 years ago. As a person of 37 years of age, born at the time that the drug was about, but for the grace of God, I could easily have been one of those children. Contemporaries of my mother took the drug, and people of my age are acutely aware of the damage that it did to so many people in this country. As a result of a measure taken in July 1997, the Thalidomide Trust will lose £70,000 a year.

The matter has been handled callously; there seems to be no sensitivity on the Government's part. It seems that they are so determined to fulfil their pledge of winning two election terms that they intend to fulfil their spending pledges by stealthily taxing pension funds and charitable organisations. They do not care about the consequences for non-taxpaying individuals--the 300,000 pensioners. They do not care what effect their measures will have on the real value of pension funds. Judging from correspondence from the Revenue, the Government clearly do not care about the effect on the Thalidomide Trust.

I quote from another letter from the chairman of the Inland Revenue to the Thalidomide Trust. He states:

Ministers knew what they were doing; it was not an error or oversight. Their action has caused enormous damage to the Thalidomide Trust, and I hope very much that the Minister will tell the House tonight that she intends to reverse the decision and accept the amendments, or propose another measure that will alleviate the £70,000 loss endured by that important charitable trust.

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