Finance Bill

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The Chairman: Order. Another Division is taking place in the Commons. I have given this matter considerable thought over the past two minutes. I have been in the Chair for five and a half hours now and two and a half hours this morning, making eight hours. Unless the Government rule that consideration be now adjourned, I intend to suspend the sitting for one and a half hours to enable people to have a meal and a rest and perhaps to attend to matters that they have not been able to deal with. We will come back at half-past nine.

7.59 pm

Sitting suspended.

9.30 pm

On resuming—

The Chairman: It is almost like old times. Those of us who have been here for a few years are quite used to sitting late, but I am sure that we will not make a habit of this. I am confident that the Committee is about to make fairly rapid progress. We were dealing with schedule 33, to which the lead amendment is No. 142. We will find it convenient to take the Government and other amendments with it.

Mr. Wilshire: On a point of order, Sir Nicholas. I apologise for dashing in when you are on your feet, but I was anxious to be here right at the start. You rightly said that you hoped that we should not make a habit of this, or be here longer than necessary. It is important to put it on the record that the Opposition have worked very hard today not to inconvenience you by dragging you back at this time of night. I do not believe that any accusation that we have wasted time holds water. We made the point on the Floor of the House that there was not enough time for the Committee stage. We have made the point here that there is not enough time.

It appears that the Government are determined to make a certain amount of progress, which is going to inconvenience you, Sir Nicholas. We tried our level best this afternoon to co-operate, and were even prepared, up to the break, to accept that the Government could move their amendments formally in an attempt to make progress, although, for me, that was going almost a little too far. I want to make it clear that we will make as much progress tonight as possible, but we will not trample on democracy. We will not ignore our duty to scrutinise the legislation fairly and properly, so I apologise to you in advance, Sir Nicholas, if you have a late night.

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The Chairman: As Chairman, I am the servant of the Committee. Whether or not we sit late, it is my duty to be here. I must say that I enjoy it, and it is no inconvenience. As the hon. Gentleman will have heard, I said that we are going back to old times, with the House sitting and doing its job until at least 10 o'clock, or later.

The hon. Gentleman raises a relevant and important point of order. I do not think that I am revealing anything that a Chairman should not if I say that when I was speaking to the Paymaster General just before I entered the Room, I commented that other than perhaps getting slightly bogged down in the technicalities of environmentally beneficial machinery, the Committee had worked very hard. I could not think of any debate in which there had been any unnecessary delay or filibustering.

I concede that, in anyone's opinion, the programme motion is very strict and the knives perhaps come down at times that many Members find inconvenient. However, I repeat to the Opposition Whip, the hon. Member for Spelthorne (Mr. Wilshire), that that motion was a decision of the House, and we have to accept it. I hope that both sides of the Committee will continue to work well together, as they have in all the sittings over which I have presided.

Mr. Flight: I congratulate you on your vigour and fortitude, Sir Nicholas, having been in the Chair since 8.55 am.

I was speaking to the amendments, beginning with amendment No. 142. I was about to make the point that the proposals were billed as anti-avoidance legislation to justify their taking retrospective effect. The changes to section 83 of the Finance Act 1989, and much of the other legislation, are not concerned with anti-avoidance. The provision will result in substantial additional tax liabilities, and the introduction of the legislation with retrospective effect is therefore unjustified.

Amendments Nos. 142, 143 and 144 relate to each other. They seek to remove the retrospective effect of the legislation. In particular, new subsection (2) differs significantly from the old subsection (2) in that other income, which was not previously taxable, will be taken into account and taxed. New subsection (2)(b) deems the value of assets transferred from the long-term fund to be brought into account as an increase in long-term assets, which are also taxable. The effect of the provision is retrospective in cases in which other income arises or the transfer from the long-term fund is made pursuant to a pre-existing obligation or an obligation entered into after the date under which the transaction carried out for the purposes of contract occurred.

On amendment No. 147, the proposed changes to section 82(2) will unfairly affect life insurance companies by overriding specific tax exemptions, which apply to all other trading companies. However, we welcome the interest on tax repayment being specifically excluded from the provisions. There remains scope for altering the tax treatment of further items, which would normally be regarded as exempt or non-taxable, in line with other trading companies.

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Amendment No. 147 is a probing amendment; to achieve the balance that we want would only require a modest change.

Mr. Wilshire: The Committee will know that I am not a financial expert. My hon. Friend says that the provision will affect life assurance companies. Can he tell the Committee about its effect on people who have life insurance? Will they get lower payments and be further disadvantaged on top of all the other things that have happened to insurance and pensions companies?

Mr. Flight: My hon. Friend is well aware of the fragile state of the life insurance industry. To the extent that those companies' tax bills go up, there are fewer benefits for policyholders. Some companies charge their policyholders in one way; others charge them in another. The risk is that ordinary citizens and their policies will suffer from the stealth taxes introduced by schedule 33. The provision is particularly inappropriate given that the amounts raised will not be huge. It is a massive change to the tax law that fiddles around to the detriment of policyholders while providing no huge advantage to the public revenues.

Mr. Wilshire: Can my hon. Friend confirm that ordinary citizens will end up getting less money than they thought if the Government implement the changes?

Mr. Flight: The answer to my hon. Friend's question is yes, but the extent of the loss will depend on many other factors. If life companies pay more tax, the net effect will be that ordinary folk who are the beneficiaries of policies will receive less.

Amendment No. 137 seeks to grant a statutory deduction for other expenditure. Subsection (2) takes other income into account as a receipt, which means that there is no basis on which income may be adjusted out in accordance with the case 1 principle, except where there is a statutory exception. There is, however, no commensurate deduction for other expenditure, which the amendment would grant.

Mr. Wilshire: Again, if I understand my hon. Friend correctly, if the Government were to accept the amendment, the ordinary citizen would probably lose less money. If they are minded to resist the amendment, they will be taking more money than is necessary from ordinary citizens' insurance policies.

Mr. Flight: As ever, my hon. Friend makes his point forcefully. He should wait for the next amendment, which is even more significant for ordinary people. Amendments Nos. 133 and 134 seek to address Scottish Widows and Friends Provident. Although there are major differences between those two demutualisations—one was an acquisition, the other a flotation—they share the key feature that surplus assets accumulated in a mutual environment were transferred to a proprietary company and the members of the mutual received the value of those assets. The members were taxed on their receipts and, in the case of Scottish Widows, substantial amounts of tax were paid. In the case of Friends Provident, members have paid or will pay tax on the disposal of their shares. In both cases, the surplus assets remain

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part of the long-term insurance fund of the transferee company, and they can be transferred to the shareholder's fund only if they are first brought into account in the company's regulatory return.

Current tax legislation contains provisions governing the computation of trading profit, and in particular provides that any increase in value of the assets of the company's long-term insurance fund is treated as taxable to the extent that it is brought into account in the company's regulatory return. There are difficulties in identifying specific components of any amount so brought into account, and both companies established a special account, which is referred to as a capital reserve, representing the value of the surplus assets transferred from the mutual in order that the value might be clearly identified. Tax counsel has advised both Scottish Widows and Friends Provident that the existing tax position is clear, and that transfers out of their respective capital reserves do not constitute increases in the value of their assets and are not taxable in the transferee company.

The Finance Bill states that all amounts brought into account in a life company's regulatory return are taxable, regardless of their nature or origin. If the provision were enacted, it would impose a tax on Scottish Widows and Friends Provident at the point at which their respective capital reserves are transferred out to shareholders. In other words, it will result in double taxation of the two organisations' surpluses. Those surpluses arose in a non-taxable mutual environment and belong to policyholders, who paid tax on the value of the surplus assets when Scottish Widows was acquired and Friends Provident was listed. Taxing the same surplus assets now would impose an unfair liability, and the Revenue has acknowledged that the surpluses were properly created in a post-tax environment.

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