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Mr. Letwin: My right hon. Friend is advancing a serious argument that may be absolutely right for many companies. Does he agree that in respect of those about which, as an economy, we may be most concerned--market leaders quoted in the UK--the necessity to have dividend remittances here may be so great that they will none the less ante up?
Mr. Dorrell: My hon. Friend is right to suggest that some companies will have no choice. The principal reason for that will be to pay dividends to UK shareholders. It is entirely possible that many UK shareholders, when faced with the choice between the company paying a substantial tax bill to pay the dividend to them and the company using the money for a different purpose, subject to a lower tax rate somewhere else, will be receptive to the argument that the money be paid to a holding company.
I want to develop the argument a stage further. The likely result in the majority of cases will be that money will not come here and be subject to tax, but will be taken overseas into intermediate holding companies. People may say, "So there we are. That is the end of the story. No one is any the poorer." That is not how it is. If companies start to develop overseas holding companies to which they pay dividends, they will need to manage those dividend flows in those countries, and the holding company function that ought in British interests to be located and developed in Britain will be developed and built in other countries that have more benign treatment of foreign dividend flows.
This Government are developing a policy that is the precise opposite of the intelligent tax policy that would be proposed by a Government who want to be competitive in attracting investment and high-value management functions into the UK, so that the UK becomes a holding company centre and plays a leading part in a developing market economy. They are creating a tax policy that will encourage the growth offshore of high-value management functions. It will relegate the UK to the margin so that it will simply be a responding economy to an overseas holding company function.
That prospect will be hugely damaging in the long run. I do not pretend that it will produce dramatic, overnight damage to UK interests, but it is an important step in precisely the wrong direction. I very much hope that the Government will listen to the force of the argument that
has been made against the proposal, take the proposal away, and reconsider and consult on it properly this time before they bring it back for legislation.
Mr. Jack: I am delighted to support my right hon. Friend the Member for Charnwood (Mr. Dorrell) and others who have spoken in the debate. One of the things that worried me about the Paymaster General's line of analysis was a somewhat scatter-gun passage in her defence of the proposal. She seemed to say that, because the Government had done everything that they had been asked to do on a whole range of domestic corporation tax and company tax issues, that made the proposal in the clause in some way okay.
If we follow that argument, we reach the first line of weakness in the Government's substantiation of the proposal. In the justification of the Government's position on the clause, we have not been offered any overall economic impact analysis. They justify their position through an argument in which the tax tail appears to be wagging a big dog--and the tax tail is of uncertain size. We are told that the Inland Revenue has analysed 200 companies, but we have not been given for public view an anonymised report on that, so how do we know whether the Government's argument is realistic?
During my time in the Treasury, some of the numbers that I was given about policy effects were questionable. Therefore, they were re-analysed and sometimes one agreed with them and sometimes one did not. However, one learned that there was an element of uncertainty in the forecasting process. I shall not indulge in saying which forecast is right or wrong, but I will say that an argument that comes from an uncertain sample of companies with no overall economic impact study is a dangerous point from which to start in, as my right hon. Friend rightly said, a world of highly competitive global capital flows.
I sat down with a company that was exercised by the proposal, but I shall retain its anonymity because it shared with me confidences about its proposed retail expansion plans in mainland Europe. It explained to me how its investment proposals operate under the present arrangements and how they would be impacted upon by a measure that will end the mixing arrangements. It pointed out that a flow of initiating capital went from the United Kingdom to the foreign subsidiary company and was then deployed to develop profitable investments in different parts of Europe.
Why did the company do that? It had its responsibilities to shareholders, but it was equally aware of the activities of its competitors in the same sector who deployed competitive measures not only in mainland Europe, but with the potential to develop them in the UK. To put it at its crudest, it was hand-to-hand fighting to develop competitive investment in Europe. The company deployed the mixing arrangement to ensure that it remained in parity with its European competitors in terms of the taxation on its dividend and interest flows, given the circular situation in Europe.
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We are talking not about some grand world tax jamboree but of a model of a United Kingdom-based company which was seeking to develop profitable investment in Europe to maintain its competitive position against its European competitors.
In the Paymaster General's analysis, she talked about the right or correct level of tax, as if a new equity concept, which I do not recognise, were being created. If the company to which I have referred is not able to be tax competitive with its competition, that will affect its overall viability, and potentially its overall tax condition. I see that the Paymaster General is starting to look somewhat bored. I listened with great care to what she had to say to justify her defence of the Government's position. I hope that she will be able, either tonight or in subsequent discussions in Standing Committee, to respond to these points.
I am not talking about a gigantic multinational company. It is an international company that is seeking to trade competitively. Clearly, the Government's proposals will undermine its position. I accept that my example is perhaps one of many, but it comes from the real world and so far we have heard nothing from the Treasury Bench about how that world operates.
I was glad that the Paymaster General was able to announce that the starting of the process would be delayed. The company that I have talked about and other organisations that have made representations to me, including the Chartered Institute of Taxation, agree that a delay is required. In praying in aid her position, the hon. Lady said that there had been a successful Inland Revenue-run workshop, in which many double taxation arguments had been discussed. I issue her a simple challenge. Is she prepared to authorise the Inland Revenue to arrange another workshop in the intervening period, so that the protagonists can have an open discussion with the Inland Revenue and the Treasury to explore the economic, practical and real-world impacts? [Interruption.] If I heard the hon. Lady correctly, she said from a sedentary position that she refuses to do that.
Dawn Primarolo indicated dissent.
Mr. Jack: I am delighted that the hon. Lady's body language is rather more positive than the words that I half overheard.
If the hon. Lady is truly confident of her position and she believes that no damage will be done to the competitive position of British companies, which are merely seeking tax parity with European investment and competitive positions, she should have no hesitation in inviting companies to a workshop to explore the Government's proposal.
The Government have a big majority and they know that, if they want to, they can have their way. That worries me. However, a big majority and a head-down and blinkers-on attitude towards tax do not make for good tax law. I should know because in certain instances when I was a Treasury Minister we wrote some bad tax law.
Mr. Giles Radice (North Durham): No!
Mr. Jack: This may be the opportunity to respond to the brayings of the right hon. Gentleman. I admit that when we were having to do things in a rush, some things went wrong. We had to put them right. We now have an opportunity to stop wrong things being done by providing for a little more open consultation and discussion so that we can verify the economic impact of the Government's proposals on the United Kingdom, and put aside for one
moment the difficult debate on the moneys that may be raised from the revenue derived from the provisions in clause 102.
Mr. Letwin: I thoroughly agree that making an economic impact assessment is much more important than the mere question of the fiscal effects, as my right hon. Friend the Member for Charnwood (Mr. Dorrell) mentioned. However, does my right hon. Friend accept that it is essential to talk to major companies deciding whether to site their intermediate or ultimate company headquarters here or elsewhere to discover how that would affect their choice?
Mr. Jack: My hon. Friend makes a useful and powerful point that supports the remarks of my right hon. Friend the Member for Charnwood. In all sincerity, I ask the Government to consider the assessment, which is a simple and practical way of resolving a complex matter. I, for one, do not want large numbers of companies, whether small, medium, large or multinational to be significantly disadvantaged in the competitive world of international taxation as a result of the Paymaster General pursuing a concept of correct or right taxation to the exclusion of its competitive impact on British companies.
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