Standing Committee E
Tuesday 2 June 1998
(Afternoon)
[Part I]
[Mrs. Gwyneth Dunwoody in the Chair]
(Except clauses 1, 7, 10, 11, 25, 27, 30, 75, 119 and 147)
Clause 63
Withdrawal except in relation to seafarers
Amendment proposed [this day]: No. 62, in page 46,
leave out lines 2 to 46. [Mr. Heathcoat-Amory.]
4.30 pm
Question again proposed, That the amendment be
made.
The Chairman: I remind the Committee that with this
we are taking 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
The Financial Secretary to the Treasury (Dawn
Primarolo): Good afternoon, Mrs. Dunwoody. Before our
break for lunch, I was explaining to the Committee the likely impact of the abolition of the foreign earnings
deduction on the charitable sector, which is rightly of
interest to all Committee members. We discussed with
charities and the Charities Tax Reform Group the position
of overseas employees. Our discussions centred on
whether charities' employees were non-resident, on
whether they were therefore not liable for tax and would
not be covered by FEDs, and on whether they were
therefore not subject to tax because of residency.
The hon. Member for Witney (Mr. Woodward), who
takes a great interest in charities, made by points for me.
He discussed two-year contracts and the situation in
which overseas workers will be deployed. I said that the
Inland Revenue had made it clear in discussions with
charities that a worker who moves from country to
country is regarded as being continuously overseas and
that if he goes to work for another charity, he will still
be regarded as being in continual employment. He would
almost certainly qualify for relief. We agreed to work with
the Charities Tax Reform Group to explain to charities
the rules for non-residency and how their overseas
workers will be affected. Charities may have an imperfect
understanding of those complex rules, but we have agreed
that it is incumbent on the Inland Revenue to assist them
in establishing when the employees of charities will be
covered by the provisions.
Clause 61, which we discussed previously, dealt with
travelling expenses and subsistence expenses, which will
benefit the charitable sector and those who are posted
overseas.
The hon. Member for Witney asked about consultation.
He will understand but he may not agree that to
consult with the charitable sector on changing the
loophole could have led to its further exploitation. It was
therefore impossible to have even limited discussions with
the sector, although such discussions are now underway.
The hon. Gentleman asked whether clause 63 would
require Voluntary Service Overseas to pay national
insurance contributions. Those rules are unaffected by the
proposed changes to FEDs.
I have made it clear that the Government see this as an
issue of fairness. We are committed to building a modern
tax system that is fair to all, not just to those
Mr. Geoffrey Clifton-Brown (Cotswold): Will the
Financial Secretary give way?
Dawn Primarolo: Just let me finish. The system
should not just be fair to those who escape income tax by
travelling abroad. Those people rely on ordinary taxpayers
who have to pay their share. I gave the example of
someone who works abroad and who does not pay tax on
the £87,600 the figure mentioned in one amendment
that he earns, and a pensioner who receives a tenth of that
income and who is liable to pay tax on that £8,760. That
is not fair. The discrepancy is at the heart of the issue.
As for the issue of international competitiveness, the
Government are assisting businesses by establishing
economic stability and by cutting the main rate of
corporation tax by two per cent. We are helping business.
We do not want a badly targeted relief that is widely
abused and which leaves the ordinary taxpayer to pick up the bill. I was asked about the retrospection issue. I
explained that the abolition of FEDs means that any
payments made after 17 March are liable. That needs to
be clear.
Several questions were asked about bonuses. The hon.
Member for Bury St. Edmunds (Mr. Ruffley) will know
that there is a standard form of ensuring that payments
can be made in a qualifying period without paying tax.
Fixed bonuses often go well beyond the employment
period but are attributed back to the 365-day period
abroad. The Government see that as a standard form of
abuse. People may receive payments two, three or four
years after the end of a contract. Any mechanism that
allows that exploitation to continue is not acceptable.
Mr. Michael Fallon (Sevenoaks): If there is
widespread abuse stretching back months or years, the
Financial Secretary could close off that fortnight by
capping the date to the beginning of the subsequent tax
year. The system is unfair because the bonus can be paid
after 17 March but before the end of the same tax year
and still lose out.
Dawn Primarolo: I understand the hon. Gentleman's
point, but why should someone be paid a bonus on a
contract that ended two, three or four years earlier, before
the abolition of FEDs, and which is free of tax because it
is covered by the qualifying period? That cannot be right.
The hon. Gentleman said that surely there is a way to
avoid that abuse, but there is not. It is a classic type of
abuse. The idea of having a phasing out or transitional
period with a qualifying period that is identified by
contract leaves an opportunity for the abuse to continue.
It is possible for people who are at the end of their
working lives to receive a payment for a contract that
ended a long time ago but which falls within the correct
qualifying period. We cannot allow that.
Although the amendments acknowledge that the FED
scheme is unfair, they want us to be partially unfair and
allow this mechanism to continue with a cap, whether that
is the figure of £100,000 proposed by the Liberal
Democrats or £87,600 proposed by the Conservatives.
The suggestion is that we should have a partial unfairness
so that the rest of the taxpayers pick up only partially
what is unfair although it still amounts to hundreds of
millions of pounds that it is not their job to pay.
Therefore, I ask the Committee to reject the amendments.
Mr. Clifton-Brown: Will the hon. Lady give way?
Dawn Primarolo: If I can just conclude. When it
comes to charities
Mr. Clifton-Brown: That was the point I wanted to
make.
Dawn Primarolo: Yes, I understand that, and I shall
give way to the hon. Gentleman in a moment.
We need to make sure that charities do not have to rely
on the exploitation of a loophole in tax law but are
properly represented in the tax system millennium gift
aid is an example of that.
Mr. Clifton-Brown: I am grateful to the Financial
Secretary for giving way. I hope that it will be worth her
while.
Would she keep an open mind on the issue of charities
being given a special exemption from FEDs, and if so,
would she be prepared to receive further representations
from charities, possibly in the form of a delegation before
Report, in order to discuss the matter?
Dawn Primarolo: I am not prepared to consider an
exemption to FEDs for charities. The Government do not
believe that that is an appropriate way in which to assist
charities. However, the Government are conducting an
extensive review and consulting with charities to ensure
that they are fairly supported and encouraged by the tax
system. I am sure that the hon. Member for Cotswold
(Mr. Clifton-Brown) would not want the very valuable
work undertaken by charities to be underpinned by a tax
loophole that is exploited by others. The main focus of
the clause is to remove that injustice.
Mr. Nick Gibb (Bognor Regis and Littlehampton):
Will the Financial Secretary give way?
Dawn Primarolo: No. I am conducting my remarks.
I have made it very clear that I will not consider an
exception to the FED rules for charities. That position
would be untenable. In leaving the exemption in place for
seafarers, we are agreeing with the previous Government,
who introduced the exemption about the strategic value
and importance of supporting the Merchant fleet,
particularly in terms of security.
In clutching at straws in order to defend a totally
unjustifiable exemption from tax for one group of
workers, Opposition Members are trying to undermine our
arguments by saying that because overseas workers are
caught by the clause, it is a full-frontal attack on charities.
It is not. It is about fairness and UK residents being liable
for UK income tax. The issues raised by charities have
been dealt with and we have correspondence from the
Charities Tax Reform Group. We shall continue to work
with charities to ensure that they understand what reliefs
are already available to them.
On that basis, I ask the Committee to reject the
amendments and ensure that fairness in the tax system
means fairness for everyone, not fairness for everyone
except those who work abroad whom the Conservatives
believe should be immune from tax.
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