Standing Committee E
Tuesday 16 June 1998
(Morning)
[Mrs. Gwyneth Dunwoody 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, Mrs. Dunwoody. The point of order is one for you, although it is significant that The Paymaster General is not here to comment on it.
Today we are debating capital gains tax paid by those who dispose of large business assets, and the non-taxation of overseas trusts. The Paymaster General is a sponsor of the Bill and, as such, his name appears on it. In its tenth report, the Standards and Privileges Committee criticised the Paymaster General for his failure to register an interest in an overseas trust.
My point of order concerns whether it is acceptable for the Paymaster General to participate in a debate on matters in which he has a clear and continuing personal interest, both as a Treasury Minister and as a taxpayer. For example, would the Paymaster General be in breach of the rules of the House if he were to vote on, and or to speak to, a debate on overseas trusts without first registering or declaring his interest to this Committee?
The Chairman: As the right hon. Gentleman knows, Members of Parliament are responsible for their own behaviour. Indeed, it is not a matter for the Chair unless decisions have been taken that would in any way bar a Member of Parliament from participating in the Committee. I should also say that I find it hard to reconcile a complaint about the absence of a particular individual from Committee with the view that he should not take part in the debate.
We must be clear about the matter. The Chair works on the straightforward premise that Members of Parliament may participate in the debate provided that they are part of the Committee and that they behave in a manner that is acceptable to the Chair.
Mr. Michael Fallon (Sevenoaks): Further to that point of order, Mrs. Dunwoody. There is a slight difference between Committee members in the generality, and Ministers who are sponsors of a Bill that they are supposed to defend in Committee. The Paymaster General answered questions on capital gains tax on 25 March, on 30 March and on 8 April. He should therefore be in attendance further to explain the Government's position.
The issue was raised on Thursday, when the Paymaster General discourteously failed to turn up to finish the speech that he had begun on Tuesday. He was subsequently discovered in the building, lolling on the Benches in the Chamber during the sitting of the House. Perhaps we could ensure that, if he cannot attend the Committee this morning, he could at least do so this afternoon.
The Chairman: The rules of the House, which are quite clear, do not make a distinction of the sort suggested by the hon. Gentleman.
We should now proceed with the work of the Committee.
Clause 120
Freezing of indexation allowance for CGT
Mr. Nick Gibb (Bognor Regis and Littlehampton): I beg to move amendment No. 76, in page 110, line 16, at end insert
"(1A) Except for the purposes of corporation tax paragraphs (a) and (b) of section 53(1) of that Act shall be replaced by the words `so as to give the gain or the loss for the purposes of this Act'.".
The clause highlights a nonsense. In order to prevent a shareholder who added to a shareholding between 17 March and 5 April from obtaining an extra year's tapering, the Government have had to introduce a new section, 2A9(a), to the Taxation of Chargeable Gains Act 1992. That section will allow the enhanced pool to qualify for loss relief on indexation.
The amendment is brief and technical, and seeks to apply the rules equally to all types of assets. The allowance of indexation for gains only is a complication that could and should be taken out in the interests of simplification. As we move into an era of self-assessment, I believe that we should be seeking simplicity wherever possible. The amendment attempts to do just that.
The Financial Secretary to the Treasury (Dawn Primarolo): The amendment would allow for a gain on a disposal after 5 April 1998 by anyone other than a company to be turned into a loss by the deduction of indexation allowance. At present, indexation allowance can be deducted only to the extent that the gain is reduced to nil. A loss cannot be created by indexation allowance, nor can the amount of a loss be increased by it. Interestingly, because the amendment does not seek to amend the legislation which prevents that from occurring, it would produce the anomalous result that an unindexed gain could be turned into an indexed loss and an unindexed loss could not be increased.
More generally, the amendment attempts to reopen a debate that was started in 1994 by the then Financial Secretary, who I think is now the shadow Chancellor of the Exchequer, during discussions on the 1994 Finance Bill. The Conservative Government introduced a measure to prevent indexation allowance from creating or increasing losses. That proposal was accepted with a transitional relief for 1993-94 and 1994-95 for individuals and trusts. Frankly, I see no justification for returning to the issue at this stage because the allowance will only run to April 1998 and will progressively disappear from the CGT system as assets held at the time are sold. I ask the Committee to reject the amendment and agree not to reopen the debate that was concluded in 1994.
Mr. Gibb: Does the Financial Secretary accept that the effect of new section 2A(9)(a) of the Taxation of Chargeable Gains Act 1992 is to enable loss from an indexation so far as enhanced pools are concerned?
Dawn Primarolo: I have made it clear that the Government have no intention of reopening the 1994[Dawn Primarolo]
debate on indexation losses. I have adequately covered the hon. Gentleman's points.
Mr. Gibb: That was an inadequate answer, but as the issues have been aired in the Committee and people outside the House will be able to read them, and in view of time constraints, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clauses 120 and 121 ordered to stand part of the Bill.
Clause 122
New identification rules for CGT
Mr. Tim Loughton (East Worthing and Shoreham): I beg to move amendment No. 168, in page 112, leave out lines 39 to 47.
The Chairman: With this we may discuss the following amendments: No. 242, in page 112, line 40, leave out "thirty days", and insert "one day".
No. 244, in page 115, line 3, at end insert
Mr. Loughton: The amendments seek to achieve the same end in yet another clause that contains an ill-thought out measure. This hastily instigated measure, which was announced retrospectively in the Budget statement of 17 March, brought down the guillotine on the use of bed and breakfasting that very day. The chief executive of the Association of Unit Trusts and Investment Funds, which is one of the leading trade bodies that deals with investments in pooled funds, said:
"This reveals how often the Inland Revenue and the Government have no philosophical underpinning for tax changes but merely want to raise the tax take in the simplest way possible".
The clause shows that, once again, the Inland Revenue has little understanding of the nature of the problem if, indeed, it is a problem.
In a written answer to a question of mine, the Financial Secretary said:
"The Capital Gains Tax yield from the provisions to counter bed and breakfasting of shares may be of the order of £50 million in the long term, but the short term yield is likely to be low and grow slowly. The number of people undertaking such transactions is highly uncertain but could be of the order of 100,000." [Official Report, 3 June 1998; Vol. 313, c. 195.]
There is much vagueness in that answer, which again emphasises the fact that the Revenue is not really aware of the extent of the problem if, as I said, it is a problem. If at least 100,000 people will probably use the facility of bed and breakfasting, they will not all be tax-avoiding fat cats, as the clause seems to suggest. The clause is misguided because it will encourage short-termism, which the Government for ever harp on about and which they want to deter in favour of long-term investment.
The proposal is misguided because it will disproportionately hit smaller investors rather than the fat cats, about whom we hear so much. This is yet another proposal that will restrict investor choice and lead to a less efficient use of capital and savings. It is another example of the tax tail wagging the investment dog.
It is perfectly legitimate for investors to use the CGT allowance, which currently stands at £6,800 a year, for tax relief. If it were not legitimate, the Government would have abolished it although that is not to say that they do not have a secret agenda to abolish it in the future. It has been the practise for many years to index up the allowance, which the Government did to £6,800. The relief is there to be used; it is not a tax evasion device.
People can take advantage of the allowance in various ways. Consider, for example, an investor with a fairly sizeable fund of £250,000. If he had invested in the UK stock market over the past 12 months he would typically have made a return on capital of about 20 per cent. it was a particularly good year last year and he would have made paper gains of £50,000. A higher rate taxpayer, having stripped out the allowance of £6,800, would face a tax bill of £17,200. The £6,800 CGT allowance is therefore a drop in the ocean and of little consequence to higher net worth investors, who will quickly use it up.
Now consider a smaller investor with £50,000, who would typically used pooled funds for his investment. Over the same period, he would have made a £10,000 paper gain and, after stripping out the allowance, he would have paid a capital gains tax bill of some £1,280. The amounts involved are far more significant to the smaller investor than to the larger investor smaller investors will be more harshly hit if they cannot use the bed-and-breakfasting facility to raise gains of £6,800. One unit trust house in the City said of the proposal:
"For very wealthy investors the loss of the facility is an irritant".
That is exactly my point.
"For modest investors it will be very painful".
We all want to encourage smaller investors to take out successful investments the Government have gone on time and again about the need to encourage long-term investment and about the need for people to save for their retirement schemes, for later residential care costs and for anything else that may come up. If a small investors invested his savings in a top performing unit trust, he would, quite understandably, want to hold on to it. Under the bed-and-breakfasting scheme, he could sell sufficient investments to make a profit equivalent to his CGT allowance and buy back the following morning. That is bed and breakfasting; it allows the annual legitimate allowance of £6,800, or a large part of it, to be used without building up gains for the future. He will no longer be able to do that and will have to sell successful investments each year and become a short-term investor. The Government are forcing investors to sell successful investments or lose a legitimate tax relief.
10.45 am
There is an irony here. When discussing previous clauses covering the initiation of taper relief and the ending of indexation, we asked what was wrong with an investor in a blue chip company such as Glaxo, a leading pharmaceutical company, wanting to sell that investment and take a decent profit after two years 11 months and 30 days. Under the changes in the Bill he will be clobbered with the full rate of capital gains tax, even if he re-invests that money in another blue chip company for example, Barclays or BP. If he does that three and half times during the full 10 years, he will have no capital gains tax relief. An investor may prudently maintain the momentum of his investments by switching from one blue chip company to another FTSE 100 company. Why is he less prudent than someone who buys Glaxo or BP on day one, holds the shares for the full 10 years and receives the benefit of taper relief, although that benefit is likely to be less attractively than the previous indexation benefits? In that case, the Government are encouraging long-term investment in the form of the one investment that the investor started with. By abolishing the bed-and-breakfasting relief, the Government are doing the reverse. They are forcing the investor to sell on a yearly basis a successful investment or face losing a legitimate tax relief. That is entirely inconsistent and contradictory.
|