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

Finance (No. 2) Bill

Standing Committee E

Tuesday 16 June 1998

(Afternoon)

[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 138

Phasing out of retirement relief

Amendment proposed [this day]: No. 110, in page 130, leave out lines 25 to 39.

Question again proposed, That the amendment be made.

The Chairman: I remind the Committee that with this we are considering the following amendments: No. 212, in page 130, leave out lines 35 to 39 and insert

    "Year 250,000 1 million
    1999-00
    2000-01
    2001-02
    2002-03
    2003-04
    2004-05
    2005-06
    2006-07
    2007-08
      225,000
    200,000
    175,000
    150,000
    125,000
    100,000
    75,000
    50,000
    25,000
      900,000
    800,000
    700,000
    600,000
    500,000
    400,000
    300,000
    200,000
    100,000".

No. 213, in page 131, line 6, leave out "2003-04" and insert "2007-08".

The Financial Secretary to the Treasury (Dawn Primarolo): I was explaining to the Committee the purpose of the Government's reform and putting the discussions on the clause in context. First, the Government want to encourage entrepreneurs to ensure that their business grows bigger and that there are more gains. Therefore, if they succeed in that entrepreneurial activity they can keep 90 per cent. of what their business makes, regardless of the scale of the wealth that they create. That massive motivation to encourage entrepreneurial activity is underpinned by the principle of fairness: whatever is made, everyone must pay something of the gains

Mr. Shaun Woodward (Witney: Will the hon. Lady give way?

Dawn Primarolo: I want to make progress. There will be many opportunities for the hon. Gentleman to contribute to the debate.

Everyone should pay something of the gain. We do not believe, and neither, I think do Opposition Members, that asking people to pay 10 per cent. is unreasonable, given the massive incentive that we are introducing.

There will be a transitional period before the new system and the reforms in CGT come into force. It is time to remind the Committee of the Government's objective. Opposition Members may wish that they had taken the opportunity to introduce these reforms and thus encourage entrepreneurial activity.

Before I respond to the arguments for the amendments, I shall respond to the reference by the right hon. Member for Wells (Mr. Heathcoat-Amory) to the Inland Revenue press release dated 17 March. The right hon. Gentleman accused the Government of being misleading, and quoted the following sentence from the press release:

    "Retirement relief will therefore not be fully withdrawn until the tax year 2003-2004, by which time the benefits from taper relief will be substantially greater."

The right hon. Gentleman well knows that the Government's argument is that taper relief will be substantially greater than in the preceding years. He implies that the matter has been misrepresented, but his reading of the press release is a little skew-whiff, and what he suggests is not what the Government intend.

Mr. Woodward rose

Dawn Primarolo: No, I want to make progress in this important debate. It is right to put the Government's view on the record. If I have not dealt with the hon. Gentleman's point when I finish my contribution, I shall be happy to take an intervention later.

The hon. Member for Sevenoaks (Mr. Fallon) asked a specific question to which I shall reply. He asked whether the change was tax neutral, and requested more specific figures. I refer him to Inland Revenue press release 16, published on 17 March. In paragraph 5 of that document, the Government explain that the reforms are expected to have a negligible cost in 1998-99, to cost 25 million in 1999-2000 and to yield 25 million in 2000-01. The document states that for later years the Exchequer effects will depend to a considerable extent upon movement in future asset prices, any behavourial changes by investors and other factors. That statement is wholly genuine. The hon. Gentleman sought to imply that the Government were concealing something from the Committee and that the measure was somehow tax raising. This is not the case. I draw the hon. Gentleman's attention to that paragraph, which sets out the Government's exact position in revealing the Parliament the changes' likely impact.

Mr. Michael Fallon (Sevenoaks): The Financial Secretary has said something very important. I hope that she will correct me if I am wrong, but I think that she is confirming that for the years after 2000 and 2001, the Government do not intend the measure to be a revenue-raising change. Am I right in understanding that it should remain neutral for the term after 2000-01?

Dawn Primarolo: The hon. Gentleman seeks to draw me along a route that he knows it is not possible to take. He understands that the press release makes clear that any effects will depend to a considerable extent on movements in future asset prices and on other points to which he referred. I assure him and Opposition Members that I am not attempting to mislead the Committee. A new set of reforms is being put in place, with specific objectives, to encourage entreprenuerial activity. Without a crystal ball, the Government are not[Dawn Primarolo] able to specifically go beyond the statements in the Inland Revenue press release. I could ask Opposition Members to take my word for it, but I do not think that they would want to.

Mr. Fallon: I shall take your word for it.

The Chairman: Order. The hon. Gentleman may take my word on most things, but not on tax.

Mr. Fallon: I thank the Financial Secretary for yet again giving way. I do not wish to make a great meal of this, but of course she cannot look with a crystal ball into the year beginning 2001 and onwards. I was asking her about the Government's aim. Do they intend the measure to remain broadly neutral, or is it their aim for it to tend towards raising revenue? That is the direct question to which I seek an answer.

Dawn Primarolo: The hon. Gentleman said that he was prepared to take my word on the issue. The Government intend the changes to be broadly revenue neutral. However, I cannot with absolute certainty tell him what will happen in subsequent years, beyond those identified. His is right the aim is for the changes to be broadly revenue neutral. We are seeking to encourage entrepreneurial activity and growth in the businesses concerned. I hope that that answer deals specifically with the hon. Gentleman's point.

Opposition Members repeatedly made the general comment that the reforms will hit small businesses harder than larger businesses. Under the new system, all gains will be subject to the same percentage reduction, whatever their size. The period for which the asset has been held determines the amount of tax that has to be paid, not the size of the gain. Small businesses and large businesses will be treated equally. The measure does not discriminate against any business it is intended to encourage all businesses to grow and to encourage entrepreneurial activity.

Mr. Edward Davey (Kingston and Surbiton): Will the hon. Lady give way?

Dawn Primarolo: The hon. Gentleman has not taken part in the debate so far. I am sure that he will be able to engage in the debate later in the proceedings, but I should like to deal with the amendments first.

Amendment No. 110 would retain the current retirement reliefs until 5 April 2003, instead of gradually reducing those limits over the period from 6 April 1999. Amendments Nos. 212 and 213 would extend the phasing-out period for retirement relief by a further five years, or possibly four years. It is not clear from the amendment which of these periods it is.

Amendments Nos. 212 and 213 contradict each other. Amendment No. 212 would retain the relief for the year 2007-08, while amenement No. 213 states that it would cease in an earlier year. That brings me back to the point that I made earlier. The taper relief, which is central to the reform, will provide a real incentive for investment in the longer term. The generous business taper will encourage all businesses, from the smallest upwards, to reinvest in growth. We want to ensure that entrepreneurs themselves are in control of their companies and that they benefit from the wealth that is created in their companies when they wish, rather than allowing that benefit to be triggered by ill health or by reaching the age of 50.

Fairness is another important aspect of the reform. Abolition of the retirement relief, together with the other changes that we are making, will make capital gains tax a fairer tax. We do not believe that it is right that those with gains, which can be substantial, should pay no tax at all on those gains. That is unfair to the vast majority of taxpayers who do not have capital gains and have to pay tax on their income. The measure reflects the principle of fairness to which I referred earlier.

The importance of the taper is that it reduces the amount of the gain the longer the asset has been held, and by doing so it specifically encourages long-term investment. Conservative Members are blocking out any recognition of the motivation that we are placing in the tax system to encourage people to ensure that their businesses grow.

We have to move to the new system in as reasonable a period of time as we can to ensure that we get the maximum benefit from it. In doing that, it would have been harsher to have taken away retirement relief for people who are very close to retirement and had planned on the basis that most, if not all, of their gains would be tax-free. We have decided to withdraw it gradually by reducing the exemption and half-exemption limit in equal annual stages until the relief ceases entirely in 2003. We are trying to behave as fairly and reasonably as we possibly can in respect of the transition period from one system to the next: we are giving people time to plan. Beyond the phasing out period, we acknowledge that the rates will rise a little in 2003-04, before steadily coming down in later years as the taper builds up. The effective rate on the gains of people over 50 who sell their businesses in 2003-04 who would have paid no tax at all on their gains had they sold this year cannot exceed 22 per cent.

I shall return shortly to the effective rates of taxation that will operate in the phasing-out period, to which several hon. Members referred. It is not easy to move from one system to another, but we believe that our proposal is the fairest solution. It must now be clear that the amendments are unacceptable to the Government because they would delay the real benefits of the reform. Continuing retirement relief in full for five years or phasing it out over 10 years would negate the incentive for long-term investment that the taper provides and perpetuate the unfairness of the present system. Both proposals would have adverse behavioural consequences and delay the simplification resulting from the taper.

4.45 pm

Amendment No. 110 would create a nasty cliff edge on 6 April 2003. Under the amendment, if you, Mrs. Dunwoody, were to sell before that date, you would get full retirement relief with today's generous limits. If you sold after it, you would get no relief. We recognise that phasing out the relief may encourage some people to retire earlier than they might otherwise have done. The only way in which we could have eliminated that effect entirely would have been to close off the relief without warning and with immediate effect. That would have been and been seen to be very unfair. If we accepted the amendment, the problem would be worse. The cliff edge in April 2003 would create a considerable incentive for anyone over 50 to sell up before that date. The distortive effect of such a cut-off in the relief does not make economic sense.

Amendments Nos. 212 and 213, which would extend the phasing-out period from five to 10 years, would retain all the complexities and paraphernalia of retirement relief in the system for a further, damaging period. Retirement relief already creates significant compliance costs for small businesses and the conditions for relief are complex and difficult for people to understand. As Opposition Members know, the system generated much litigation and led to some people missing out on the relief in its entirety. The Government think as should Conservative Members that that is highly unsatisfactory. We do not want to prolong the situation any longer. For those reasons, I ask the Committee to reject the amendments.

I want to respond to the argument that was used by all the Conservative Members who spoke that the Government are imposing a heavy tax burden on those who made their retirement plans on the basis that they would pay no tax. I shall focus on the effective rates so there is no misunderstanding about the tax that people will be asked to pay.

Let us take someone in business on Budget day who has 250,000 the largest gain that is exempt under the current rules. Let us not forget that to achieve a gain of that order, with indexation relief up to April this year, we are looking at gross proceeds from the sale of a business possibly approaching 500,000. If that person sold the business in the year 1999-2000, he would pay an effective tax rate of under 3 per cent. If he sold in 2000-2001, the effective rate would be under 6 per cent. In 2001-2002 it would be under 8 per cent., and in 2002-2003 it would be under 12 per cent. Those are the maximum rates in the phasing-out period. After that, in 2003-04, the effective rate rises, as hon. Gentlemen have made clear, to a maximum of 22 per cent. before dropping progressively over the years. Those rates cannot be said to be unreasonable given the size of the gains involved.

For the reasons that I have set out, the objectives of CGT reform and the placing of retirement relief within it are a fair package, which will ensure that people have the benefit of the gains that they have made and make their contribution in the tax system at a reasonable level.

 
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Prepared 16 June 1998