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Income Tax
10.1 pm
Mr. Nick Gibb (Bognor Regis and Littlehampton): I beg to move,
- That an humble Address be presented to Her Majesty, praying that the Personal Equity Plan (Amendment) Regulations 1998 (S.I., 1998, No. 1869), dated 31st July 1998, a copy of which was laid before this House on 31st July, be annulled.
- That an humble Address be presented to Her Majesty, praying that the Individual Savings Account Regulations 1998 (S.I., 1998, No. 1870), dated 31st July 1998, a copy of which was laid before this House on 31st July, be annulled.
That an humble Address be presented to Her Majesty, praying that the Individual Savings Account (Insurance Companies) Regulations 1998 (S.I., 1998, No. 1871), dated 31st July 1998, a copy of which was laid before this House on 31st July, be annulled.
Mr. Deputy Speaker: Order. Hon. Members must not continue extraneous conversations when an item of business is before the House.
Mr. Gibb: There is concern that the Government are over prone to using secondary legislation, particularly under the negative resolution procedure, on tax matters. I trust that our debate will prove to be a precedent for dealing with future important, tax-related, negative resolution statutory instruments on the Floor of the House.
The regulations are the latest, but undoubtedly not the last, stage in the catalogue of disasters that makes up what might be called the Government's savings policy. The Government themselves predict that their policy will lead to a fall in the savings ratio from 10.5 per cent. when they took office to 7.75 per cent. over the lifetime of a Parliament. Their savings policy has in fact already led to the ratio falling to 7.75 per cent. within 18 months of their coming to power. That is not so much a savings policy as a dis-savings scandal.
Labour's election manifesto said that the Government would
The new ISA, with its initial £50,000 lifetime limit, penalised the thrifty and the self-employed whose savings had been built up in lieu of a pension. With the announcement of those retrospective and draconian changes to the taxation of savings, people became understandably concerned that at some future date a Labour Government might do the same again. The damage inflicted by the announcement last December alone is incalculable--another major success of the Paymaster General. Perhaps that is why he is not here to defend the regulations which he published on 31 July 1998; he cannot be trusted to defend them himself.
The fanfare and hype that accompanied the Paymaster General's announcement last December, with the Prime Minister boasting that there would be 6 million extra savers--6 million people who would be able to save who could not then--were outdone only by the shock that Treasury Ministers received when faced with the public outcry.
There was outcry at the £50,000 limit on transferring from PEPS into ISAs. There was outcry at the retrospective taxation that was inherent in the new regime as it was introduced. There was outcry at the reduction in tax relief for savers from £10,800 a year to £5,000. There was outcry from the Financial Times, which said that the new system was "unfair", "unattractive" and "bureaucracy gone mad". There was outcry as well from the Consumers Association, which said that it could not see the point of ISAs. It said:
I note that, yet again, the Economic Secretary is to defend the Government's case this evening. I cannot understand why the Government do not put up the gaffe-prone Chief Secretary, the Paymaster General or the Financial Secretary. What is up with the rest of the Treasury team that the Chancellor seems able to trust only the Economic Secretary? She is to be congratulated on that, or perhaps pitied for it.
Will the Economic Secretary answer the following points tonight? The Government's stated objective was to have millions of new savers depositing their spare cash at supermarket checkouts. Last March, the then Chief Secretary said that he wanted to extend the variety of outlets from which ISAs can be bought, including supermarkets.
In defending the regulations, will the Economic Secretary say how many supermarkets will be selling cash ISAs, or equity or insurance ISAs, at the checkout? Will she not admit that the ISA regulations before the House today contain complexity and costs which make it impossible for supermarkets to sell them at the till, which is why the supermarkets have said that they will not be doing so?
Does the Economic Secretary agree with Marks and Spencer that ISAs cannot be offered through the till, or does she agree with Stuart Sinclair, the chief executive of Tesco personal finance, who said:
The catalogue of incompetence continued. In March, the Government finally backed down on their absurd £50,000 lifetime limit and the Chancellor announced details of his proposed scheme. He said that
The Chancellor also said that
ISAs were not really intended to extend savings, but are yet another method by which the Government hope to raise tax revenue. In March, the Chief Secretary admitted that. He said that the problem was that the cost in terms of lost revenue of tax relief for TESSAs and PEPs was £1.5 billion a year, rising on current trends to £2 billion by 2007. That seems a small price to pay when some 3 million people have PEPs and 4.5 million have TESSAs, and those numbers were increasing.
TESSAs and PEPs were very successful savings incentives. As Andrew Dilnot of the Institute for Fiscal Studies said, almost all the objectives of the ISA
Despite all the changes to ISAs since their original launch last December, the savings industry still believes that they are too complex. The regulations add to that complexity. The PEP and ISA Management Association points out that a significant number of PEP holders broke the rules, usually by subscribing to two managers in one year, and had their PEPs declared void; and that, as ISAs are even more complicated, more mistakes will be made.
There are three types of ISA: cash, shares and insurance. They have different limits, but a higher limit in the year 1999-2000. There are maxi and mini ISAs. Mini ISAs are designed so that investors can chose different managers, but maxi ISAs can have only one manager. One cannot have both a maxi and a mini ISA in one tax year. On top of all that, there are the continuing rules for PEPs and transitional rules for moving from a TESSA to a cash ISA, at regulation 5 of the Individual Savings Account Regulations 1998. Today, The Sun exposes an enormous loophole in the regulations--an ISA and a TESSA can be held in the same tax year.
There is concern in the industry that the regulations make it difficult for any one organisation to offer an ISA with a full range of cash, life assurance and equity components, because the regulations allow ISA providers to link up with only one other specialist organisation. There is also concern about the absence of statutory compensation for depositors if an ISA manager who is not himself a deposit taker defaults on cash held before passing on the cash to the deposit taker. Why is there nothing in the regulations to deal with that?
Those problems are compounded for the industry by continued Government delays in publishing regulations and details, which make it nigh on impossible to develop the necessary information technology systems by April 1999, when the regulations come into force--particularly given that there are millennium bug problems to deal with as well. We believe that the Government should delay the introduction of the ISA for at least a year to give the industry the chance to implement new IT systems correctly. They should allow new PEPs and TESSAs to continue during that period.
In its compliance cost assessment of ISAs, the Inland Revenue calculates that the cost of running a cash ISA will be up to £4 per annum per account higher than the annual running cost of a TESSA, and that the cost of running a shares ISA will be up to £2 per annum per account higher than the cost of running a PEP. That is in addition to the £250 million set-up cost which the Inland Revenue estimates for the new ISA.
Those are significant extra costs, and I cannot understand how a more complex and more expensive savings regime with fewer tax incentives will encourage lower-income individuals without savings to start to save. Perhaps the Economic Secretary would elucidate.
No wonder that Standard Life, the largest mutual life assurer in Europe, is refusing to offer the insurance ISA. Peter Robinson, the marketing manager at Standard Life, said:
There are a huge number of concerns about cost access terms marks in the savings industry. They appear to give a halo to the ISA provider--almost a Government guarantee, even though the standard concerns itself only with administration charges and accessibility. The Personal Investment Authority, for instance, has said:
Can the Economic Secretary also clarify a point on which the savings industry is finding it difficult to get an answer? Will she confirm that, for the purposes of the CAT mark, the 1 per cent. charge permitted for shares ISAs does not include costs incurred by the fund in relation to stamp duty on share transactions in the underlying investments?
Although Conservative Members welcome some of the changes to the regulations that have been made since they were published in draft in May, especially those relating to the transitional rules and the extended time limits for reporting requirements, there are still many concerns in the industry over issues such as the determination by the Inland Revenue that protected funds and short-term gilts should be excluded from ISAs because of concern that they will become cash substitutes.
Some in the industry think that the restriction in regulation 7(6) is unnecessary and counterproductive in that these are the very products that best fit the Government's objective of encouraging people to save for the long term, and to obtain a return that is better than that from a deposit account.
"introduce a new individual savings account to extend the principle of TESSAs and PEPs to promote long-term savings."
True to his word, the Chancellor announced in his first Budget that the Government would
"introduce from 1999 individual savings accounts, extending the principle of TESSAs and PEPs and continuing to offer favourable tax reliefs for savings."--[Official Report, 2 July 1997; Vol. 297, c. 306.]
The Government then inflicted enormous damage on people's confidence to save, first, by their imposition of a £5 billion a year tax on people's pension funds, and, secondly, in December 1997, by the Paymaster General's announcement that personal equity plans and tax-exempt special savings accounts would be abolished, and that individual savings accounts would be introduced. Abolition is hardly an extension. It is totally at odds with
the Labour manifesto, and flatly contradicts the words of the Chancellor in his first Budget. [Hon. Members: "Where is he?"] Yes, where is he?
"We see no real advantages but a lot of problems."
There was outrage from the Government's favourite economists, the National Institute of Economic and Social Research, which said that the replacement of PEPs and TESSAs by the ISA would reduce the pool of savings; how right it was with that forecast, with the savings ratio already down to 7.75 per cent. That outcry extended to the postbag of every hon. Member and to the 5,900 letters received by Ministers from members of the public.
"Like many in the industry we believe that the Government missed an opportunity to put together a basic plan to appeal to the mass market. It is a bit of a non-event."
Or perhaps the Economic Secretary agrees with Roger McArthur, chief executive of Sainsbury's bank, who said:
"We believe that it is important to recognise the commercial realities in which the potential ISA providers operate . . . the ISA will work properly only if it is cost-effective for providers as well as customers."
Many supermarkets such as Marks and Spencer may well provide ISAs through their normal mail order financial services operation, but none will operate ISAs through the checkout till, which was a central plank of the Government's objective of extending the number of savers by 6 million. Nothing in the regulations is likely to make that a realistic target.
"the individual savings account will . . . offer complete freedom to move cash in and out".
That is not true, as the details published by the Treasury make clear. Cash can be moved out, but investors can reinvest it only if they have not already put in £1,000 in that tax year, regardless of whether the £1,000 remains.
"the individual savings account will receive a 10-year guarantee that savings up to £5,000 a year can be invested with all existing . . . reliefs."---[Official Report, 17 March 1998; Vol. 308, c. 1102.]
That is not true either, because after five years the tax credit rebate disappears--a slight case of ISA mis-selling by the Chancellor. Many people suspect that the 10-year guarantee introduces a £50,000 lifetime limit by the back door.
"could equally have been achieved by abolishing the five year lock-in period on TESSAs and leaving things as they were."
The Institute of Chartered Accountants--[Interruption], which I am always keen to quote, said:
"It is our conclusion that it would be more straightforward to amend the existing PEP and TESSA savings schemes rather than introduce a wholly new scheme, particularly as the . . . ISA does not appear to offer improved savings incentives, and in fact may well discourage many individuals from saving."
The tax incentives set out in regulation 22 of the ISA regulations are much less. The shares ISA will have a tax credit of only 10 per cent. and only until 2004, whereas under the previous Conservative Government PEPs had the full 20 per cent. tax credit. Will the Economic
Secretary tell the House what the tax advantages are for a basic rate taxpayer who holds equities through an ISA? Given that such an individual is unlikely to use his annual capital gains limit, and that ISA charges, even with the cost access terms standards, are likely to exceed the tax credit, what are the advantages? If the hon. Lady insists that there are advantages, will she tell the House by what date she expects the Prime Minister's forecast of 6 million more savers to have been met?
"We did some focus groups with customers."
The Economic Secretary and her party know all about focus groups.
"They could see the point of the cash ISA and the Stocks and Shares ISA but not the insurance ISA.
Gordon Maw, of Virgin Direct, said:
If they are struggling with the point of it, we were going to be struggling with selling it."
"We wouldn't touch it with a barge pole."
Other companies simply think that it is not commercially viable. Nothing in the Individual Savings Account (Insurance Companies) Regulations 1998 makes it an appealing stand-alone product. Perhaps the Economic Secretary can tell the House how she expects the insurance ISA to succeed.
"The development of the CAT standards amounts in effect to product endorsement. This could lead to the danger that investors could be steered away from other products . . . more suitable for their needs, but which did not meet the CAT requirements."
The level of charges will also act as an anti-competitive barrier to entry. Only those equity ISA providers with large portfolios will be able to charge only 1 per cent. per annum, thus keeping new providers out of the market altogether.
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