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Ruth Kelly: As the hon. Member for Somerton and Frome (Mr. Heath) has set out, the new clause aims to remove the investment income of certain sinking funds and service charge funds from income tax or corporation tax. Those funds do not pay corporation tax but they pay income tax at the special rate that is applicable to trusts.
I understand the hon. Gentleman's motivation and, as requested, I shall not dwell on the detail of his proposals. However, there is no rationale for exempting that type of income from tax or for taxing it purely at the lower rate. If the funds were held by individuals in a bank or building society account, the interest arising on that investment would be taxed in the normal way. The fact that funds are held in trust is no reason to exclude them from tax.
The income from the funds is taxed in the normal way for that type of trust, which can be used for a wide variety of purposes. The new clause refers to the Landlord and Tenant Act 1987, which covers such funds whether they are set up for people living in low-cost housing association flats or in leasehold apartments in very well-to-do areas. The rate at which trustees pay tax on income is set to take into account the wide variety of circumstances of those who put funds into the trust or who otherwise benefit from the trust, as the hon. Gentleman pointed out. Those funds are not just for poor tenants. They can be found across all types of housing.
The hon. Gentleman appears to propose that we try to identify those trusts that serve poorer tenants and separate them from those that serve wealthier tenants. That is impractical. In any event, the 34 per cent. rate, which the hon. Gentleman mentioned, is charged on the trustee, not the person who pays money into the trust or the beneficiary. It is set at a rate that takes into account the fact that beneficiaries of the trust may pay tax at the basic or higher rates, and that others might even be non-taxpayers. The rate is set at a level that minimises the opportunities for trusts to be used to avoid tax, because that cannot be right.
The hon. Gentleman suggests that there has been a change in the tax law, but there has not. The Inland Revenue issued guidance because some people were misapplying the tax rates and returning the income incorrectly.
Ruth Kelly: I shall pass on the hon. Gentleman's suggestion, but as I understand the issue, it would be impractical to change the terms under which the trusts are taxed. For that reason and the others that I have given, I urge hon. Members not to accept the new clause.
Mr. Heath: I am grateful to the Minister for giving her attention to a serious attempt to assist a particular category of people. I understand the point that she makes about the difficulties in identifying such people in legal terms. My hon. Friend the Member for Torridge and West Devon (Mr. Burnett) has made a suggestion of some merit and another method might be to put some limit on the size of the sinking funds, so that those below that limitwhich would normally apply to a smaller scheme and lower value propertiesmight fall outside the unified rate and have a lower rate applied to them.
I ask the Minister to give serious consideration to my case. It is not logical for someone who would not normally pay tax, or would pay tax at the basic rate, to be taxed at a much higher rate because by law they have to pay part of their income into a sinking fund. That is an anomaly that deserves closer attention. This is not the right time or place to pursue the matter further, but perhaps the Minister would write to me on the issue. I beg to ask leave to withdraw the motion.
'.(1) Section 8 of the Taxes Management Act 1970 shall be amended in accordance with the following provisions of this section.
(2) The following shall be inserted after subsection (1C)
"(1D) A person whose total income for a year of assessment does not exceed £5,000 may be required, by a notice given to him by an inspector for the purpose of assessing him to income tax
(a) to make and deliver to the inspector, on or before the day mentioned in subsection (1A) above, a statement of his income and gains for the year, and
(b) to deliver with the statement such information as may be required in pursuance of the notice.
(1E) A person who duly complies with a notice served on him in accordance with subsection (1D) above in relation to a year of assessment is not obliged in addition to comply with any notice served on him under subsection (1) above in relation to the same year of assessment.".
(3) In subsection (2), after "return under this section" there shall be inserted "or statement under subsection (1D) above".
(4) This section shall have effect for the year 200203 and subsequent years of assessment.'.[Mr. Edward Davey.]
I raised this issue during the debates on a previous Finance Bill, back in 1999. I gave concrete examples to show that many elderly people have been worried sick by receiving those forms. They often have no liability to income tax, but the forms are sent to them because they are triggered by automatic thresholds in the Inland Revenue computers.
I refer hon. Members to my speech, as reported in column 755 of the Official Report for 5 July 1999. [Interruption.] I suggest that hon. Members take that reference and pocket it; or I could repeat that speech at length. By making that reference, I hope to ensure that my remarks are brief.
I shall move from the examples that I cited in that debate to the substance of the point that I wish to make. At the moment, if there is no convenient PAYE source, it is impossible for Revenue officials to assess an individual for tax purposes other than through the self-assessment process. It is ludicrous that those very detailed tax returns, which cover sources of revenue from unit trusts, bonds and a range of different sources, should be filled in by those people on low incomes who would be affected by the new clause.
Using previous legislation from the Taxes Management Act 1970, the new clause would, in effect, give Revenue officials the power to make very simple, back- of-the-envelope assessments, as they used to do under similar legal provisions. That would help the Revenue by cutting its costs andthis is the important pointit would remove a lot of the anxiety felt by those people.
When I raised this issue with the Paymaster General during an Adjournment debate that I initiated in June 2000, she said that she would look at the matter, and I wish to give her and her colleagues another chance to do so.
I should say that, in drafting the new clause, I have been grateful to people from the Chartered Institute of Taxation for their assistance. The hon. Member for Arundel and South Downs (Mr. Flight) referred to that institute. I should also say that the new clause came from the Low Incomes Tax Reform Group, which was set up by the Chartered Institute of Taxation. For the record, I should like to say that that institute promotes the interests of people on low incomes and has been running a very effective campaign.
Because such a responsible and respectable group is behind the technicalities of the new clause and because the Government have indicated their willingness to consider such a measure, I recommend the new clause to the Paymaster General, and I hope that she will be able to accept it.
The hon. Member for Kingston and Surbiton (Mr. Davey) campaigns tirelessly on the way that the tax system affects low-income pensioners. He wants to make the requirement to comply with their obligations as easy as possiblean objective that I, the Government and all Labour Members share.
The new clause would set a £5,000 limit for people in self-assessment and give an alternative way to check the income of those on low income. In 200203, the personal allowance for those aged 65 to 74 is £6,100. If a retired person's previous income is less than their personal allowance, they should not be in the self-assessment system anyway, except in absolutely exceptional circumstances.
When we have debated this previously, I have referred repeatedly, as I share the hon. Gentleman's concerns, to the work that the Government have been undertaking and the amendments that we have been making to the operation of the self-assessment form.
The problem with the new clause is that it brings more pensioners into the tax system, even if the calculation is simple and quickone that can be made on the back of a fag packet, as I think the hon. Gentleman saidwhich is not the direction in which he or I would want the tax system to move. We need to make sure that we require only those people who have information that is pertinent to their tax levels in submitting forms. In fact, the hon. Gentleman's requirements for the £5,000 limit have an unintended side-effect: those who are self-employed who may make a loss would find that the Revenue was now investigating, and will be required to check their position. I am sure that the hon. Gentleman did not intend that.
We, too, want to reduce the requirements of self-assessment on all taxpayers. Despite the changes that we have made to date, I have asked the Revenue to examine the whole system again to see whether further steps can be taken to make it easier for people to meet their obligations under self-assessment, and, whenever possible, remove from the self-assessment system those who find themselves caught in it but who do not need to be there. I am very grateful for the work that is being carried out with groups such as TaxAid, the Low Incomes Tax Reform Group, the working together group and the professional associations that are actively involved in that discussion with the Revenue. Like the hon. Gentleman, I thank those organisations for the constructive way in which they engage with the Government on this issue.
I hope that the hon. Gentleman sees that he is pushing an open door and that he has made progress with his persistence. A proper and full discussion is taking place with all those groups to produce workable solutions. I hope that, now that he has put on record againabout which I am not complaininghis commitment to pursuing this project, he will withdraw the new clause and await the outcome of the work undertaken by all those groups in collaboration with the Revenue.