Standing Committee E
Tuesday 2 June 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. Michael Fallon (Sevenoaks): On a point of order,
Mr. Butterfill. I welcome you to the Committee and hope
that you enjoyed the recess. We are rapidly approaching
clause 87, which deals with personal portfolio bonds. I
and other members of the Committee have not received a
copy of the draft regulations to be made under the clause.
The Government have helpfully published draft
regulations in time for us to consider other clauses. It is
especially important that we receive them for clause 87
because they define personal portfolio bonds.
The Chairman: That is not a point of order for the
Chair. However, the Minister may wish to catch my eye
at some point.
Schedule 10 agreed to.
Clause 62 ordered to stand part of the Bill.
Schedule 11 agreed to.
Clause 63
Withdrawal except in relation to seafarers
Mr. David Heathcoat-Amory (Wells): I beg to move
amendment No. 62, in page 46, leave out lines 2 to 46.
The Chairman: With this we may discuss the
following amendments: No. 38, in page 46, line 3 at end
insert
`for earnings in excess of £100,000'.
No. 174, in page 46, line 29, at end insert
`192B. (1) Where in any year of assessment
(a) the duties of an employment as an employee of a UK
registered charity or those regarded as such by the
Inland Revenue are performed wholly or partly
outside the United Kingdom, and
(b) any of those duties are performed in the course of a
qualifying period (within the meaning of Schedule 12)
which falls wholly or partly in that year and consists
of at least 365 days,
then, in charging tax under Case I under Schedule E on the amount
of the emoluments from that employment attributable to that period,
or to so much of it as falls in that year of assessment, there shall be
allowed a deduction equal to the whole of that amount.
(2) Schedule 12 has effect for the purpose of supplementing this
section.'.
No. 63, in page 47, leave out lines 1 to 13 and insert
Mr Heathcoat-Amory: May I, through you,
Mr. Butterfill, present our new Front-Bench spokesman,
my hon. Friend the Member for Maldon and East
Chelmsford (Mr. Whittingdale), from whom we will hear a
good deal more? His masterly speech on the film industry,
which spread quickly through the House, got him the job.
His new duties are in addition to his functions as a Whip.
During our scrutiny of the Bill we have become used
to some badly thought out tax measures, but clause 63
must take a prize. It is undoubtedly designed to hit the
rich tax avoider, but instead it will hit the ordinary person
working abroad, probably on a long-term contract, such
as a nurse, engineer or consultant. Those people, who are
earning money for this country, have been able to set
against the tax liability a concession known as foreign
earnings deduction, which has allowed them to pay no tax
if they have remained out of this country for more than
365 days.
Although the concession is not quite that simple, that
definition will do for the purposes of the debate. Indeed,
it was introduced in that form by a previous Labour
Chancellor, Denis Healey, who was doing all he could to
promote export earnings in the face of a severe balance
of payments difficulty.
Mr. Barry Gardiner (Brent, North): I am grateful for
the history lesson, but does the right hon. Gentleman
remember that in 1984 his Government abolished the
25 per cent. rule for those who stayed out of the country
for 30 days at a time? Did he vote for that measure, or
did he have the same qualms that he is expressing now?
Mr. Heathcoat-Amory: Yes, the hon. Gentleman
helpfully anticipates my speech. There have been changes
to the concessions and we are not against further changes.
If abuses are identified, let us collectively, deal with them,
but that is not an argument for the overnight abolition of
the foreign earnings deduction concession, as I shall make
clear. The very people who bring in the earnings on which
the Government are increasingly dependent will be hit by
the clause. They contribute foreign earnings not only
directly through their contracts, but frequently indirectly.
For example, when a consultant is working in another
country, that often leads to the subsequent export of
British goods. Their activities abroad are part of the entire
British export effort. We understood that the Government
wanted to promote exports that is certainly what we
have heard from the lips of the President of the Board of
Trade from time to time but, as usual with the
Government, there is a massive gap between rhetoric
and reality.
Yvette Cooper (Pontefract and Castleford): Will the
right hon. Gentleman give way?
Mr. Heathcoat-Amory: I shall give way in a moment.
The Department of Trade and Industry is doing its best
to promote exports, but it is being undermined by the
Budget. The left hand does not know what the right hand
is trying to do.
Yvette Cooper: Does the right hon. Gentleman agree
that the subsidy is just as helpful for people who are
promoting imports into the country?
Mr. Heathcoat-Amory: It is interesting that the hon.
Lady refers to a subsidy. I suppose that, in her eyes, all
tax concessions are a form of subsidy. I shall give
examples later that contradict her view that the measure
promotes invisible imports as much as it promotes
invisible exports. That is not the view of practitioners in
tax firms and consultants and others working abroad.
I am dwelling on the conflict between what the
Government said they are promoting and what they are
doing in the clause. The danger is clear from the Red
Book, which was published on Budget day. In a
masterpiece of understatement, page 95 states:
"the outlook for the traded goods sector is difficult".
It continues:
"The difficulties faced by UK traded goods producers translate
into improved opportunities for overseas competitors in the
domestic market."
Page 97 states:
"The current account as a whole is forecast to move from a
surplus of £4.5 billion last year to a deficit of £6.5 billion this year."
Those figures are confirmed by the latest statistics, which
show a steady deterioration in the current account. The
need to do something to promote British exports and
overseas earnings is beyond doubt, but the clause will
have the opposite effect. Economic illiteracy on such a
scale should worry the Committee. I know that some of
the people and firms who will be affected have written to
Labour Members, so we look forward to their speaking
on behalf of their constituents and firms in their
constituencies.
It is particularly stupid that the alleged target of clause
63 will probably escape entirely. The purpose of the
measure is to counter tax avoidance by the so-called
media and entertainment personalities those exponents
of cool Britannia who are supposed to be avoiding tax
to an unacceptable extent. Some of them avail themselves
of the foreign earnings deduction concession or, as some
people outside the Treasury have pointed out, they can
make themselves foreign resident for an entire tax year,
which runs from April to April. If they do so, and if they
keep moving from country to country, they will not
establish tax residency in another state, and they will
avoid tax completely. The well advised and the well off
will find another way to achieve what they currently
realise under the foreign earnings deduction concession.
Many media and entertainment personalities have the
flexibility to act in that way they can, at least to some
extent, plan their schedules so that their tax liability fits
into a full tax year. Nurses, doctors, consultants, engineers
and people who work on contract cannot do so to anything
like a similar extent. If a bridge is being built in Turkey
or Tanzania, a civil engineering firm in this country cannot say, "Please will you ensure that the bridge is built
so that our workers can fit their earnings into the British
tax year, which runs from April to April?" If it could do
so, such workers would be regarded, under Inland
Revenue rules, as non-residents, which is the only
alternative to the foreign earnings deduction concession.
Mr. Gardiner: Does the right hon. Gentleman agree
that if the proposals can be avoided by the alleged
abusers the high-earning, high-rolling people who can
flit from country to country that would make a nonsense
of any amendment that has been proposed by the various
organisations of accountants that made representations to
Committee members about the imposition of a capped
ceiling of, under two different proposals, £100,000 or of
£86,000? The right hon. Gentleman's argument shows the
complete insanity of a capping ceiling, which would in
theory allow better-off tax avoiders to continue their tax
avoidance.
Mr. Heathcoat-Amory: The hon. Gentleman is half
way to our position. He is beginning to understand that the
Government proposal is unworkable and misconceived.
Several of my hon. Friends want to contribute to the
debate, so we shall work on him a little more. I agree that
if there is an abuse and unacceptable tax avoidance, a
precisely targeted measure would have been preferable.
As I explained earlier, the Government's proposal will
allow the fat cat entertainers if such people exist to
escape by using alternative parts of the tax Acts.
Meanwhile, ordinary overseas workers will not be able to
avail themselves of the alternative of becoming non-tax
residents. The proposal hits the wrong people.
As I shall discuss later, the Government's proposal will
detonate a bomb in the relevant firms by requiring a huge
paper-chase. If the Government's aim was to mess up
various overseas contracts, they have certainly succeeded.
They dropped that bomb in the middle of those contracts,
many of which were planned years ago. Workers signed
contracts in good faith and are now working abroad. They
understood that their remuneration was based on not
having to pay UK tax, but the Government's policy,
which took effect on Budget day, brought them into the
tax net without any warning or consultation.
10.45 am
The measure affected media and entertainment
personalities such as the Rolling Stones, whom we
remember from our lost youth, and who are currently on
a world tour. They will presumably have to make
alternative arrangements if they can. As has been pointed
out to Committee members, it is not just the Rolling
Stones who are affected, but those who travel with them.
The organisation of a tour of five continents is an
enormous undertaking. The group's representatives have
written to us saying:
"Entertainers and their staff employed on a tour of this magnitude
have had to plan for the dislocation involved for some two years in
advance. The tour stretches over five continents, requiring contracts
to be laid months ahead. All the crew stage hands, hairdressers,
electricians, musicians, etc. have had the goalposts moved and the
bulk of their legal tax relief eliminated mid way through their
employment."
They also point out that the so-called concession whereby
payments made to them before Budget day will still attract
foreign earnings deductions is not a concession at all. A
substantial part of the crew's earnings will be calculated
after the tour has finished, when the profit can be
computed and distributed. Suddenly, those earnings will
incur retrospective UK taxation. It is the retrospective
element to which they particularly object.
We have been contacted not only by those in the
entertainment world but by a number of engineering
firms, including the British Consultants Bureau, which
comprises 270 member firms. Last year, its fee earnings
for this country amounted to some £2.4 billion. It points
out that tax concessions, which in some cases are more
generous than those that the Government seek to abolish,
will continue in other European countries. The bureau
states that
"We had already been pushing the Government to ease, not
harden, the tax regime in which we seek to work. The tax advantages
that many of our EU rivals and others enjoy are enabling them to
quote lower feesThe result of all this is that the capability of UK
consultants to quote competitively for projects is being rapidly
eroded."
Along with a number of member firms, the bureau
points out that the Netherlands gives tax concessions after
just two weeks' involvement in overseas projects. British
firms are therefore struggling pitilessly to compete
internationally. Cost comparisons are constantly made,
and in many ways Britain has a competitive advantage,
although the Budget is eroding that advantage, as we have
discussed in earlier debates.
The Netherlands is not going to remove its tax
advantages because it knows that it must export or die. It
is an outward-looking trading nation whose tax system
helps, and will continue to help, its consultants and
overseas workers, just as ours used to help our workers.
Why are the Government, who supposedly want to assist
the export drive, cutting such people off at the knees?
I shall give some more examples of member firms'
worries. I assume that all Committee members have heard
of Halcrow, which is an extremely famous firm. In 1996,
it received the Queen's award for export achievement, and
in 1997 more than 60 per cent. of its earnings were
secured from abroad. It points out the crazy situation that
will arise should the clause become law. It states:
"Comparing two members of staff each with a fifteen-month
overseas assignment, they will be treated differently for UK tax
purposes if one assignment commences 1 March and one 1 October.
The former will achieve non resident tax status as the assignment
includes a complete tax year, while the latter remains fully taxable
in the UK. The employee remaining liable to UK tax will almost
certainly be liable to taxes in the overseas country and will initially
pay taxes twice on the same income".
By way of conclusion, the company says:
"The change will potentially mean staff salaries will need to be
grossed up for UK tax, with the resulting increase in fees and the
inevitable loss of work."
Either employees must suddenly suffer a retrospective
drop in their after-tax income or, more likely, firms will
have to gross up their salaries, with a loss of profits and
investment, and, in future, a loss of competitiveness. The
laws of arithmetic cannot be defied if an additional tax
burden is imposed on foreign workers, they wil be worse
off or their firms will be less competitive.
I could give many other examples, but I will not
mention all of them. I must mention Mott MacDonald,
however, as the hon. Member representing the
constituency in which it is based is a member of the
Committee. We shall hear from him in due course. It
points to exactly the same difficulties, which it says are
compounded because
"it is usual for us to pay bonuses for any calendar year in the
following year, generally after the end of the following March. The
Government is therefore changing the tax treatment of these
payments with retrospective effect."
It goes on to say:
"The Group is engaged on significant activities in Pakistan,
particularly in the water supply and irrigation sectors. Here, income
of some £7 million per annum is generated and there are about
15 employees who would be affected in any year. The cancellation
of the tax relief will mean that staff would be reluctant to work in,
or return to, Pakistan and positions would be difficult to fill. This
would have a detrimental financial effect on our contracts, not to
mention the effect on staff morale."
This firm and its employees are doing their best to export
goods and services abroad, and are being hit
retrospectively by this Budget.
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