Standing Committee E
Tuesday 19 May 1998
(Morning)
[Mr. John Butterfill in the Chair]
(Except clauses 1, 7, 10, 11, 25, 27, 30, 75, 119 and 147)
10.30 am
Mr. David Heathcoat-Amory (Wells): On a point of order, Mr. Butterfill. Clause 85 deals with non-resident insurance companies and the requirement that they should appoint tax representatives in the United Kingdom. I and other members of the Committee have received a submission from Ernst and Young, which includes counsel's opinion that that conflicts with article 59 of the European Union treaty, which precludes discrimination on grounds of nationality. Is it in order, Mr. Butterfill, for the Committee to proceed with legislation that is known to conflict with European law, which ranks ahead of national law? Should the Committee collude in the introduction of an unlawful provision?
The Chairman: That is an interesting point, but not a point of order for the Chair. It will be for the European Court of Justice to decide the matter.
Clause 32
Unrelieved surplus advance corporation tax
Mr. Nick Gibb (Bognor Regis and Littlehampton): I beg to move, amendment No. 31, in page 18, line 39, at end insert
`such provisions to consist of a simple regime limiting the amount of brought forward surplus ACT which can be offset against a company's mainstream corporation tax liability in any year to 15 per cent. of that company's corporation tax profits.'.
The amendment would introduce some simplicity into the Bill, which is riddled with enormous complexity. It is an attempt by outside bodies and Opposition Members to encourage the Government to consider how the measures will be implemented in practice and how business will cope with them. The regulations that were published last week -- they are complex and run to some 18 pages--set out the shadow advance corporation system that will replace the current system. Many outside commentators believe that the new system is too complex and even tougher than the current regime. As I said at our previous sitting, Robert Turnbull of KPMG has stated that
``The regulations contain tougher rules than the present system and some companies might find them difficult to use.''
The amendment would replace the plethora of 18 pages covering the new shadow ACT system and in its place would limit the amount of surplus ACT that can be offset in any one year to 15 per cent. of the company's mainstream corporation tax profits. To me and outside bodies, that seems a much simpler method. The Confederation of British Industry believes that that figure should be 10 per cent. and the Chartered Institute of Taxation believes that the new shadow ACT regime is both unfair and unnecessarily complex and that the figure should be 15 per cent. The system proposed in the amendment would be fair.
A number of companies in this country together have £7 billion of surplus ACT which they seek to offset against their mainstream corporation tax liability. That is a significant sum which has not emerged from thin air. It is hard cash which, over the years, those companies have paid to the Inland Revenue at the end of the quarter in which they paid a dividend. It is grossly unfair that that money should be difficult to offset against their mainstream corporation tax liability. The previous Government introduced the foreign income dividend scheme to try to help companies with large overseas interests to offset that money against their tax liability. It is unfair to say that that is a cost that they must bear because those companies do an enormous service to this country. They invest overseas, sometimes in risky ventures, and bring enormous income to this country from those ventures. It is wrong to say that we do not want those companies to offset that £7 billion against mainstream corporation tax liability. The Exchequer cannot afford to lose £7 billion of revenue, but that money belongs to companies and we should be trying to ease its recovery over the forthcoming years.
My particular concern is that there is a hidden agenda; that the Exchequer and the Inland Revenue do not want that money to be recovered. It would be helpful if the Paymaster General could confirm that no time expiry limit will be placed on surplus ACT and that the Government do not intend now or in the future to say ``From now on, you have three, four or 10 years in which to reclaim this surplus ACT.'' Indeed, the tax faculty of the Institute of Chartered Accountants has said:
``We would welcome confirmation that existing ACT surpluses will be preserved indefinitely.''
The Government have given companies an option: either they can adopt the burden for administering the complex shadow ACT system or they can write off their surplus ACT and not use the new system. That is an invidious option. Companies should not be faced with such a choice. It is their right to recover the money. It should not be a matter of adopting the burden or losing the money. The system should be simple. It should enable companies to recover surplus ACT by following easy administrative arrangements. Companies should not have to make the invidious choice between losing many millions of pounds of surplus ACT and incurring many tens or hundreds of thousands of pounds in administrative costs when they try to reclaim the money.
I urge the Committee to adopt the amendment, which has the backing of outside professional bodies, because it simplifies matters. It would enable companies to recover what is theirs in a fair and equitable system for dealing with the vast £7 billion of surplus ACT. I look forward to hearing what the Paymaster General has to say about the expiry of surplus ACT.
The Paymaster General (Mr. Geoffrey Robinson): I must point out to the hon. Member for Bognor Regis and Littlehampton (Mr. Gibb) that the amendment is almost certainly defective, but he knows that. He has tried to make a point that was raised by some companies involved in the FIDs argument which we had last year when we discussed the previous Finance Bill. I am sure that all of us still have vivid memories of that.
It is a little disingenuous for the hon. Gentleman to suggest that his proposal is done in the name of simplicity. The previous Government's partial solution to the problem of surplus ACT was the foreign income dividend which came into effect in 1994. No fewer than 24 additional sections from 246A to 246Y--we almost got to Z--were inserted into the Taxes Act. Many were extraordinarily complex. For example, section 246I dealt with foreign source profit and distributable foreign profit and section 246B rejoiced in the title of notional foreign source advance corporation tax.
We are getting rid of all that. The hon. Gentleman will be pleased to know that we are going to simplify the system in a way that the previous Government's half-baked scheme did not. Their scheme created no end of problems. It was not taken up by many companies because of the tax credits to which they were committed and the bias towards distribution that that involved. Companies did not take up the option on FIDs to anything like the extent that was envisaged.
We have solved the problem of ACT. We are also committed to dealing fairly with surplus ACT held by companies when ACT is abolished next April. The amendment would not do that for two reasons, which I am sure the hon. Member for Bognor Regis and Littlehampton will want to know. Apart from being technically defective, the amendment would prevent some companies from getting back temporary ACT surpluses as quickly as they had anticipated. That would be a double-edged sword, because it would reduce the limit for set off against corporation tax bills from 20 per cent. to 15 per cent. of tax profits. In contrast, our shadow ACT system will substantially preserve companies' existing expectations. Given that £7 billion is theoretically outstanding, such companies cannot realistically expect to recover all their ACT surpluses.
The amendment would also enable other companies with long-standing ACT surpluses, much of which they may have already written off in their accounts, to recover more of it than would be possible under existing rules. That would therefore constitute a relaxation of the rules. Moreover, the cost to the Exchequer could run to several billion pounds over several years. That is simply not on the cards. If the hon. Member for Bognor Regis and Littlehampton were to talk to companies about the matter, he would find that they largely accept the Government's proposals.
Companies that have built up large amounts of surplus ACT are multinationals such as RTZ and Billiton, which we are pleased to say entered the London market in 1997, and which have little in the way of UK profits. Companies with long-standing ACT surpluses, which they have written off because there is no realistic chance of recovering them, are precisely those that will benefit from the abolition of ACT.
Mr. Gibb: The hon. Gentleman says that companies such as RTZ have written off surplus ATC. They may have done so for prudent accounting and auditing purposes, but they hope and expect one day to recover money that they have written off in their minds.
Mr. Geoffrey Robinson: Well, I cannot read their minds. Perhaps the hon. Gentleman, who is a distinguished accountant, is also a distinguished Freudian or Jungian who can penetrate the inner recesses of the minds of industry tycoons. However, the surplus ATC is written off in their books. It would be unfair to benefit such companies still further by spending huge amounts of the Exchequer's money to improve the prospect of recovery of surplus ACT that they have written off.
The amendment would prove arbitrary and unfair, it would be excessively costly to the Exchequer, and it would itself be unfair on other people who pay tax. I therefore urge the Committee to reject it.
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