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House of Commons
Session 1997-98
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Standing Committee Debates
Finance (No. 2) Bill

Finance (No. 2) Bill

Standing Committee E

Tuesday 2 June 1998


[Part I]

[Mrs. Gwyneth Dunwoody in the Chair]

Finance (No. 2) Bill

(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

    `(1) In subsection 1 of section 193 of the Taxes Act 1988, there shall be inserted after the words "the whole of that amount", the words, "or 87,600, whichever is the lower."

    (2) The amount specified in (1) above shall be uprated in line with the retail price index annually.

    (3) This section has effect for the year 1998-99 and subsequent years of assessment.'.

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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