Standing Committee H
Tuesday 13 June 2000
[Dr. Michael Clark in the Chair]
(except clauses Nos. 1, 12, 30, 31, 59, 102 and 113)
[Continuation from column 678]
The Chairman: Order. I have delayed the start of the Division. We now have a quorum plus some, so we will return to our debate.
The Paymaster General (Dawn Primarolo): We have just had an interesting introduction to our discussion on the tonnage tax from the Opposition, Dr. Clark. If you will forgive me for saying so, they are all at sea, but it is full steam ahead from now on.
Mr. Timms: Choppy waters.
Dawn Primarolo: And we are in choppy waters.
The issue before us relates to the shipping industry. The Opposition seemed unable to make up their mind about whether they were in favour of the tonnage tax or against it. If they welcome the measure, they have a strange way of showing it.
Mr. Ottaway: Before the Minister gets too involved, can I make it clear that we support the introduction of the tonnage tax?
Mr. Allen: Move it formally.
Dawn Primarolo: I rest my case. I am not trying to be confrontational with anyone. It is an important subject and Opposition Members have, at least, touched on it in their comments. When the proposals were announced, the Opposition welcomed them, as did the industry and a wide range of commentators. I shall try to deal with the points that arose. Some of them are pertinent to amendments that we have not yet discussed. It might be more suitable for me to comment then.
Members of the Committee are aware of the plight of the United Kingdom shipping industry in recent years. We are a maritime nation, which is facing the prospect of reducing tonnage and a lack of the officers necessary for our ships. In the 1980s and 1990s, we saw a significant and steady decline in the size of the UK-owned and registered fleet. By 1997, it was apparent that a new strategy for British shipping was required, and the Government started to work with the shipping industry and the trade unions to produce a recipe for reinvigorating the British shipping industry. A major element of the package of measures that emerged from that process was the need to create a more favourable fiscal environment for shipping, such as a tonnage tax, which several other countries had introduced.
A comment was made about the code of conduct group and harmful tax competition. First, I would say that the code of conduct group considered the harmful tax competition that may exist between member states. It found that the tonnage tax regimes were not harmful. The hon. Members for Guildford and for Croydon, South raised queries about that, but in the debate about those issues the important thing to emerge was that, although it is important to examine the competitive relationships between member states, we must also look at the competitive relationship for the European Union as a whole. The global nature of the shipping industry means that one cannot look in isolation at the tonnage tax regimes in the European Union, whose number has been growing over the past few years. I cannot remember every member state that has a tonnage tax, but, for instance, Greece has one, as has Luxembourg, that well-known maritime nation, and the Netherlands has a very successful tonnage tax. As a result of seeing what was happening in the Netherlands, the shipping industry encouraged the Government to take a fresh look at the matter.
A major element of the regime is to provide a more favourable fiscal environment for shipping. Following discussions, Lord Alexander of Weedon was asked to produce an independent report into the case for and design of a tonnage tax for the United Kingdom, and that was announced in the 1999 Budget. The consultation undertaken by Lord Alexander was very wide ranging. I am sure that all members of the Committee will acknowledge the business skills and achievement, as well as the knowledge and expertise, that he would bring to such a discussion.
Mr. St. Aubyn: For the record, will the Minister confirm that she disputes the claim of the Chartered Institute of Taxation that Lord Alexander's committee failed to consult properly outside the industry?
Dawn Primarolo: Yes, I dispute that claim. It ill behoves the Committee to allow aspersions to be cast on such an eminent industrialist who has achieved so much. Lord Alexander conducted that inquiry with great thoroughness.
Mr. St. Aubyn: Can I correct what I said? I believe that the institute was referring to the Government's consultations rather than to Lord Alexander's. Would the Minister dispute its claim that the Government failed to consult outside the industry?
Dawn Primarolo: Yes, I do indeed dispute that-what a surprise!-and I shall set out the consultations that the Government undertook. Nobody can be in any doubt that such a tax was proposed, that draft clauses were available, that evidence was taken and that people were asked to express their views.
Lord Alexander set out a design for the tonnage tax regime that would allow the UK shipping industry to exploit our internationally renowned maritime strengths, improve training provision and compete fairly on the international stage without putting the Exchequer at risk from escalating costs. The right hon. Member for Charnwood (Mr. Dorrell) asked about costs, and I shall come to that before I conclude my remarks.
Clause 81 and schedule 22 contain proposals to deliver a tonnage tax for the UK based on Lord Alexander's design. The new regime will be a major improvement in the way in which UK shipping is taxed, as I think all hon. Members have acknowledged in their contributions this evening, and will play a major part in the Government's strategy to secure the future of the UK shipping industry. Indeed, it was warmly welcomed by the shipping industry and has received cross-party support in the press.
Our proposals represent the fruits of extensive public consultation, particularly with representatives of the shipping industry. That is expected of us, but not exclusively. It would be a poor show to introduce proposals for a tonnage tax if we had not spoken directly to the industry and we have tried to take on board its comments.
Lord Alexander recommended that the regime should be flag-blind. He stated:
to make UK registration a precondition for joining the tonnage tax would deprive companies of the operational freedom-
in various parts of the world.
We shall return to flagging when we come to a later amendment.
P&O passenger ships will return to the United Kingdom flag. They are currently managed in the USA and flagged in Liberia. That is an important foundation for the development that we want to encourage in the shipping industry. There is no estimate of the number of ships that may return to the United Kingdom flag, but the Maritime and Coastguard Agency is actively encouraging United Kingdom companies to consider reflagging.
The right hon. Member for Charnwood and the hon. Member for Croydon, South referred to a bonanza, and wanted to know how there could be a bonanza if the total revenue is £20 million. The temptation for tax avoidance would arise because tonnage tax profits are fixed by reference to tonnage. Our view and that of Lord Alexander is that unless we have the safeguards in place, additional profits from non-shipping activities could be diverted into shipping companies and sheltered from tax. Clearly, that is not desirable and it is the reason for possible and substantial future losses to the Treasury. The hon. Gentleman is correct in saying that the legislation is complex. It seeks to establish a complex relationship responding specifically to our objectives for the shipping industry and protecting the Exchequer from other profits being sheltered.
At present, shipping companies can use excess capital allowances and losses to reduce tax on profits from other areas. The tax paid by shipping companies on their shipping profits is not the whole story. I must tell the right hon. Member for Charnwood that the regime outlined in the clause and schedule 22 is expected to cost around £40 million per annum.
Mr. Burnett: Will the Paymaster General explain to the Committee whether the profits or losses of a company in a tonnage tax regime are shielded and not capable of being used in or transferred to other business activities within the group, part of which may be in the regime?
Dawn Primarolo: The purpose of the legislation is to ensure that those profits that fall within the tonnage tax regime, which is, as Committee members pointed out, very generous, are protected by that regime and that other profits and losses cannot be moved into or out of it. I shall return to that matter in more detail later when we consider relevant amendments.
On the training commitment, the right hon. Member for Charnwood and the hon. Member for Croydon, South asked what benefits the UK would receive. Trainees must be UK nationals, other European Economic Area state nationals or British citizens from the Channel Islands or the Isle of Man and ordinarily resident in the UK. In view of the industry's circumstances, that is the best that can be done.
The hon. Member for Croydon, South asked about the central fund and referred to the Maritime Training Trust, which is a charitable body that was set up by the Chamber of Shipping and the maritime trade unions. It is totally independent of the Government and the funds will be used to train seafarers. I have already explained who will qualify as a trainee.
I return to the argument of the hon. Member for Guildford, namely, that we did not consult widely enough. I refute that suggestion, which the hon. Gentleman put to us very gently. I am always amazed at his varied experience and knowledge. If he will forgive me, I hope that this evening we shall not hear about too many of his experiences in the merchant fleet-if we must, I hope that they will be repeatable and suitable for Hansard.
On consultation, the provisions were outlined in detail and issued on 23 December 1999. Since then, we have again issued a full public consultation, draft regulations and a draft statement on practice. We shall return to those matters when we consider later amendments that deal with the related and detailed aspects of the regime. It is not acceptable to say that we have not consulted widely.
The hon. Member for Croydon, South asked about the percentage of the industry that would elect to go into the tonnage tax. I can give him only an estimate, namely, that about 75 per cent. will do so. The tonnage tax is optional and companies may wish to stay in the existing regime. He also asked about the national minimum wage. The tax will have no affect on its application.
The hon. Gentleman asked about boosting the training of cadets. He is, I acknowledge, knowledgeable in this area, and he will know that British seafarers' skills and experience make a vital contribution to many sectors of our economy. That national resource has been severely eroded in the long term, and a shortfall in training and recruitment means that we need to regenerate the UK's maritime skill base. That was a major theme of the tripartite shipping working group and remains a key objective of the Government's shipping policy. I bow to the expertise of other Committee members in this regard, but as I understand it, an age cohort of officers are moving through the industry, many of whom are not far from retirement, and it is not clear who will replace them. If the benefits of the tonnage tax were used for training, we should connect the two main pillars of our policy.
The hon. Members for Guildford and for Torridge and West Devon asked about regulations and practices for dealing with deferred tax. We understand from shipping industry representatives who have sought accountancy advice that, even under the new accountancy standards, tonnage tax will remove deferred tax liabilities in respect of shipping activities. However, I shall look closely at that matter and if that does not answer the question raised by the hon. Member for Torridge and West Devon, I shall come back to him. This regime is based on the design recommended by Lord Alexander. It will provide a sensible balance between immediate write-off of balancing charges-which would have been costly to the Exchequer-and a phasing out over the term of the 10-year election. That will strike the right balance for those issues.
Several other matters were raised and I shall try to deal with them speedily. A question was asked about immigration laws in relation to the tonnage tax. No special immigration laws apply to the tax, but to come within the regime a company's ship must be strategically and commercially managed in the United Kingdom. This is the subject of one of the amendments and we shall be able to explore it more fully when we debate that.
The hon. Member for Torridge and West Devon asked about double taxation treaty partners. The tonnage tax regime does not introduce a new type of tax; it merely allows companies opting into the regime to commute their profits on the basis of the tonnage of the ships that they operate, rather than accounting profits. This is an alternative way of making them subject to corporation tax and I see no reason why our treaty partners should not accept that corporation tax paid on tonnage tax profits is no different, for the purposes of the double taxation agreement, from corporation tax paid on accounting profits.