Finance Bill

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Mr. Flight: I was at pains to set out that the schedule will close down a tax planning scheme. The Paymaster General did not answer my points about zeroes. Have the Government thought about how the market will operate when there are two different

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classes of holders? I will ask the Government and the Revenue further to consult with the industry specifically on the issue of zeroes, which are not part of the tax planning scheme to which the Paymaster General and I have referred. My point is obscure, but it has not been adequately addressed. In the interests of time, however, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That this schedule be the Thirty-Ninth schedule to the Bill.

Mr. Flight: May I just make one other point on the schedule, which was raised by the Law Society? The schedule is somewhat unhelpful to users, not least because the standard tax handbooks do not reproduce section 47 of the Finance Act 1942 to which it refers. The definition of ''strip'' should be replaced by a self-contained definition that does not cross-refer to another provision.

Dawn Primarolo: The hon. Gentleman is making an observation about ensuring proper communication and drafting. I will certainly examine his point, which, as he rightly says, is rather obscure, but it will take a little time to do so.

Schedule 39 agreed to.

Clause 182

Court common investment funds

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

Mr. Burnett: Is this clause 183?

The Chairman: No. Not for the first time the hon. Gentleman has jumped the gun.

Mr. Burnett: May I say that at this end of the Room one cannot always hear what is going on at your end of the Room, Sir Nicholas?

The Chairman: People often query what I say but not the volume at which I say it.

Question put and agreed to.

Clause 182 ordered to stand part of the Bill.

Clause 183

Authorised unit trusts, OEICs and common investment funds

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

Mr. Flight: The provisions are welcome and will improve the operation of markets, but why have they been restricted to particular categories of collective investment? Are the Government considering extending them to all collective investments including investment trusts?

Mr. Burnett: Those who benefit from the clause will welcome it. It is the only clause in the Finance Bill on inheritance tax. Can we address inheritance tax in general terms? The nil-rate band has been increased from £250,000 to £255,000. The increase is small and the tax catches more and more people, who are invariably not well-off by most standards. Inheritance

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tax is a tax levied on those who do not have sufficient money or assets to avoid it legitimately. Will the Paymaster General tell the Committee whether the Government have any proposals in relation to inheritance tax? Will she please let us know whether they intend to consult on it?

Dawn Primarolo: I assure the hon. Gentleman that I will certainly keep him informed of developments in due course.

Mr. Flight: Since the wider issue has been raised, will the Paymaster General focus on inheritance tax relief applying to private companies, which should be designed to allow them to keep going and not close down because of what they have to pay? There are satisfactory arrangements for trading companies, but there are increasing issues concerning definitions of trading, investment and property that the hon. Member for Torridge and West Devon (Mr. Burnett) touched on earlier. Although I know that it is a difficult territory, some of the concepts are now out of date and worth revisiting. The Paymaster General will be aware of correspondence that she has had on that issue. I hope that she will also examine the agenda of modernising IHT so that it does not damage the economy.

Dawn Primarolo: I am extremely grateful to the hon. Gentleman for advising me where I should settle on the tax system next in preparing the pre-Budget report, and I shall certainly pass on his comments to the Chancellor.

Question put and agreed to.

Clause 183 ordered to stand part of the Bill.

Clause 200

Authorised unit trusts:

interest distributions paid gross

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

Mr. Flight: This clause is welcome and the industry has been pressing for it.

4.26 pm

Sitting suspended for a Division in the House.

4.45 pm

On resuming—

Mr. Flight: I apologise for returning late, Sir Nicholas, I was waiting for another vote. I am sorry to have inconvenienced you and the Committee.

It is appropriate to raise the relevant issue of stamp duty on fund mergers. The industry has discussed that with Government but has so far had no response. There is a general view that there are too many funds, and the Heinemann report highlights the removal of barriers to mergers as a key ingredient of cutting costs for consumers in the industry. The Treasury has endorsed that idea in the context of Heinemann, so I ask the Economic Secretary whether the Government are proposing to address that issue as part of their

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programme to open markets and make the industry more competitive.

The Economic Secretary to the Treasury (John Healey): The clause makes it easier for foreign investors to receive their interest distributions from UK-authorised unit trusts and open-ended investment companies without reduction of tax. Like clause 183, it applies from 16 October 2002 and will allow UK funds to compete more effectively with their overseas counterparts. Entitlement to gross payment currently depends on the completion of non-residence declarations by foreign unit holders. That is often an onerous and off-putting process. The clause extends entitlement to pay gross, first, in cases where the interest is paid through a reputable intermediary and the fund manager has reasonable grounds for believing that the unit holder is entitled to gross payment; and, secondly, where the investor is a company or the trustees of a unit trust scheme.

The short and simple answer to the question asked by the hon. Member for Arundel and South Downs is that we keep policies, including those relating to fund mergers, under close review. The provision allows UK fund managers to compete on an equal footing with their overseas counterparts in other jurisdictions. Taken together with clause 183, it gives UK fund managers a valuable boost in competing overseas. I commend it to the Committee.

Question put and agreed to.

Clause 200 ordered to stand part of the Bill.

Clauses 185 to 190 ordered to stand part of the Bill.

Clause 191

Higher rate of tax: divided companies

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

Mr. O'Brien: I am glad that we have been able to dispatch our business so quickly and arrive at the only clause that deals with insurance premium tax. There is broad relief that, despite a report in The Times prior to the Budget announcing the possibility of a 1 per cent. increase, an increase was avoided. I have a few points and observations to make in the context of supporting and welcoming the clause.

The clause amends schedule 6A of the Finance Act 1994, which was inserted by the Finance Act 1997 under the last Conservative Administration. Section 51A and schedule 6A in the 1997 Act were brought in to prevent the avoidance of VAT by sellers of second-hand cars and household appliances, who would sell goods at a relatively low profit margin coupled with breakdown insurance at a high profit margin, exploiting the fact that, although the supply of goods was subject to VAT, the supply of breakdown insurance was subject only to insurance premium tax.

Section 51A provides that the premiums for insurance falling within paragraphs 2 to 4 of schedule 6A should be subject to insurance premium tax at the higher rate of 17.5 per cent. Paragraph 2 relates to insurance provided by the supplier of a vehicle or a person connected with them. The vehicle is a car or motor bike; the provision does not include

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commercial vehicles—recall the discussion that we had on various aspects of the petroleum tax—nor my beloved ex-services Austin K9 vehicle. Paragraph 3 relates to insurance provided by the supplier of an appliance, or a person connected with them. Paragraph 4 relates to insurance against travel risks, no matter who the supplier is, hence travel insurance is not covered by the changes made by clause 191, except when it is provided free of charge. It is notable that it was announced the other day that travel insurance is not to be regulated when sold through and by travel agents, which obviously raises other issues.

By concession, the higher rate of insurance premium tax is not applied to ''ordinary motor insurance'' sold by car or motor cycle dealers as opposed to breakdown insurance. Also by concession, insurance premium tax at the higher rate is not applied to home contents insurance sold by retailers of domestic appliances. That was recorded in a Customs and Excise news release on 6 February 1997.

Clause 191 is intended to prevent the avoidance of liability for insurance premium tax at the higher rate when a divided company provides insurance. A divided company, which, as paragraph 12 of the explanatory notes on the clause explains, is known in some jurisdictions as a protected cell company, contains segregated compartments within it called cells. The cells can be owned and run independently of each other—their assets and liabilities being segregated—the result being that the person who owns and controls a particular cell may not control the company as a whole so as to make it connected with him. Accordingly, by providing breakdown insurance through wholly-owned cells of protected cell companies that they do not control, motor dealers and retailers of domestic appliances have been able to avoid paying insurance premium tax at the higher rate on the premiums for that insurance.

Although I support and understand the clause, I have a point to make in relation to drafting. There is no amendment proposed; I just want the Economic Secretary to take note. The new rules apply when any division of the divided company is connected with a—that is any—supplier of cars, motor bikes, or appliances. In theory, that could catch insurance provided by someone having no relationship with a supplier, provided that they were connected with another supplier. Although as a practical matter such a situation is likely to be rare, theoretically the drafting might reflect that more elegantly. The original legislation was widely drafted in that it covered the provision of insurance by a person connected with any supplier of cars, motor bikes and appliances.

The Institute of Chartered Accountants in England and Wales noted that the clause is described as an anti-avoidance measure and accepts the logic behind it. However, it noted that the case of Gil Insurance and others—case C-308/01—is currently before the European Court of Justice. That case raises issues about whether the UK higher rate of insurance premium tax is lawful under European VAT law, whether is it unlawful state aid, and, if so, whether it should be repaid to those businesses required by UK law to charge it.

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The Institute of Chartered Accountants in England and Wales has stated:

    ''We note that the Court of Appeal in the 1999 Lunn Poly case [1999] STC 350 has already decided that the differential rates of insurance premium tax constituted a state aid under the EU Treaty, and since the European Commission had not been notified nor given its approval, the differential rates were illegal.

    If Customs are unsuccessful in the ECJ case, the risk must be that clause 191 will also be ruled unlawful. We believe that this clause should be withdrawn pending the decision in that case.''

The Conservatives have not adopted that approach but wish to establish what the Economic Secretary has in mind and what his officials advise him is the status of the clause in the light of that particular case. Customs is contesting it, and the case is currently before the European Court of Justice. I look forward to his response.

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