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Clause 102

Double Taxation Relief

Question proposed, That the clause stand part of the Bill.

Mr. Oliver Letwin (West Dorset): I should begin by declaring the interest that stands in my name in the

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Register of Members' Interests, which apparently gives me the unfortunate and dubious advantage over some representatives of Her Majesty's Treasury of understanding the effect that clause 102 will have on British industry.

Mr. Graham Allen (Vice-Chamberlain of Her Majesty's Household): Is that a recommendation?

Mr. Letwin: I do not know whether the hon. Gentleman will find by the end of my remarks that it is or is not a recommendation. It makes one so profoundly miserable about the process of our government when one understands the way in which the measure came to pass and what it contains that I am left regretting that I understand it.

Mr. Allen: It makes one want to clear off back to the City.

Mr. Letwin: It would be precious little use obeying the hon. Gentleman's usual sedentary animadversions, because if the measure were to have its way, a good part of the activities of the City would be removed at a stroke.

It is surprising in many ways that we are having this debate, because the measures in clause 102 and schedule 30 have been the subject of probably the most sustained and intellectually effective destruction job on a tax measure of the past few decades. Yet we are having a debate because the measure still stands.

The Committee will want to know the history of the measures. We are told something about them in the explanatory notes. I should say in defence of the Treasury, which I am otherwise about to excoriate, that the notes on clauses in this respect are an admirable example of clarity. The officials who wrote them deserve the thanks and congratulations of the Committee for making clear just what is going on in this noxious clause. Paragraph 42 of the notes on clause 102 and schedule 30 makes a statement which is as near to misleading the House as I suspect that parliamentary language will allow me to allege. The statement is:

and hence the subject of clause 102--

That is an oddity. It is perfectly true that there was extensive consultation with business--one of the more extensive consultations that has been carried out in respect of any tax measure in the Bill. Unfortunately, it was consultation on a different proposition.

It is an interesting concept of consultation that we have here. I might consult you, Dr. Clark, about the prospect of my giving you cornflakes tomorrow morning for breakfast. You might tell me that you prefer Frosties. But if my intention was to electrocute you, I might not have discovered everything that I wanted to know about your response to my proposition. The Government's consultation is a somewhat similar case.

I may say also in defence of Inland Revenue officials that the consultation paper is a model of intellectual rigour and one of the loci classici of exposition of the advantages of export of capital neutrality. The document goes through in awesome detail systems of exemption, systems of

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credit, systems of onshore pooling and systems of mixing. It comes to the view, in section 6.32 on page 29, that

So what the Inland Revenue said to British industry in one of the longest and most detailed consultation exercises in recent years was that it was important for the future to strike the right balance between mixer companies and onshore pooling.

Looking round at some of the distinguished Members present, some of whom have served in Ministries and some of whom have been enormously important members of the Treasury, I am sure that they already understand the measure, but in case anyone has the slightest shade of doubt about what clause 102 and schedule 30 do, I inform them that they prevent the practice of mixing. In other words, they prevent the averaging of the rates of tax incurred in foreign jurisdictions by the subsidiaries of a multinational company, and thus, by means of such averaging, a greater offset against United Kingdom tax than would otherwise be the case. There are two methods of achieving that greater offset. One is through mixer companies, which are artificially established subsidiaries offshore, and the other is through the method of so-called onshore pooling, which achieves the same effect but within the United Kingdom tax jurisdiction.

So two possibilities were put in the consultation exercise, either of which would serve admirably the purposes of British industry and of multinationals located and headquartered here. British industry was asked to reply to the consultation document and tell the Inland Revenue which of the two systems was preferable, or whether some other system that would roughly speaking achieve the same results was preferable. That was an admirable and sensible exercise--but what happened when clause 102 came along? Why, Dr. Clark, not the cornflakes but the electric shock. It turned out that the effect of clause 102 was not mixer companies, onshore pooling or something similar to them, but the opposite. It was to destroy at a stroke the system of averaging offshore tax rates, in order to clobber British industry headquartered here with multinational outlets and subsidiaries.

In passing, I might mention that the process that I have described contravenes the Government's own code of practice. I do not think that the Government believe that codes of practice matter. They are prolific in producing codes of practice. When they came to power, they produced more codes of practice than probably all the Governments of that century put together--so many that Ministers probably cannot keep up with which codes of practice they issued or what those codes say.

In December 1997, with a great flourish, the part of the Treasury for which the Paymaster General is responsible--the Inland Revenue and Customs and Excise--introduced a code of practice on consultation. I do not know whether anyone reads these codes of practice inside ministerial offices. I have no doubt that people read them inside the Inland Revenue; they probably they live by them as a kind of bible. I have no doubt that when Ministers conducted the consultation exercise, they

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intended that it should conform to their code of practice on consultation exercises. So I suppose that when they asked people whether they would prefer mixing or pooling, Ministers genuinely meant to choose the one or the other.

It would have been a good idea if they had done that, because page 6, section 3 of the code of practice tells the people consulting on behalf of the Inland Revenue that they ought to assess

of the measure being put forward. It is a little difficult for an industry that is being consulted to assess the likely effect on tax revenues or its tax payments of a measure about which it is not being consulted.

You are learned in many respects, Dr. Clark, and I wonder whether you would find it easy to answer if I were to ask you what would be the tax effect of increasing your income tax by 5 per cent. when what I really wanted to know was what would happen if I increased your income tax by 50 per cent. You might be forgiven for giving me an odd answer. That is what happened in the case of British industry. As it was asked not what would be the effect of the measures in clause 102 but what would be the effect of some other set of measures that have not been implemented and are the opposite of the measures in the clause, it did not give the answer that is required in a consultation exercise. That is probably why the Government misestimated the effect of the measure on their tax revenues.

When I say that the Government misestimated, I do not mean that they got it wrong by 5 per cent. or 10 per cent. Goodness me, no Opposition Member would be so ungenerous to the Paymaster General as to suppose that she could make an accurate forecast of tax revenue. No Chancellor of the Exchequer, no Paymaster General and no Financial Secretary has ever been able to do that. People get it wrong by 20 per cent., 30 per cent. or 50 per cent. All of those are accepted, but this is not a case of getting it slightly wrong. This is a positively heroic error. I cannot recall a time in recent history when such an error has been made. They got it wrong, roughly speaking, tenfold. If the Chancellor of the Exchequer got things wrong to that extent in general, he would bankrupt us and use up our gross domestic product about five times over. It was quite a mistake to make. If such mistakes were generally made about taxation, one could produce some interesting economic effects. Why did the Treasury make the mistake? It made it because it consulted on the wrong measure--the opposite measure. Therefore it did not have the slightest idea what the effect on taxpayers would be.

I say all those things not just because they are important in themselves, but because they relate to the reason why we have a code of practice. Of course, Ministers may have intended the code to be just window dressing, but they sent some earnest officials away to write it. Those officials wrote it sensibly, got down to business and worked out what one should do if one is consulting. They worked out that if one is consulting about tax, it is jolly nifty to find out what the effects on industry will be. Therefore, they said that one should ask that question--but the Treasury and the Inland Revenue did not ask it because they asked a question about a set of measures that they were not proposing to introduce and did not

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introduce. Perhaps the Inland Revenue intended to introduce them, but the Treasury did not; I shall come to that point shortly.

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