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Madam Deputy Speaker: With this it will be convenient to discuss new clause 6—Tax credits for ISAs and PEPs—
'Section 76(1)(a) of the Finance Act 1998 (c. 36) shall cease to have effect.'.
Mr. Prisk: I begin by declaring that I have two individual savings accounts—sadly, I do not have any more than that—and that a member of my family works for the Financial Services Authority.
New clause 5 seeks to highlight the Government's plans further to diminish the benefits of ISAs by reducing the tax-free limits for savers and to include investments through the Ofex market, which is a key source of funds for many of the UK's smallest ventures, in the ISA wrapper. As such, it is a probing measure that seeks to help savers and stem the loss of confidence in ISAs.
The Government accept that Ofex securities should be included within the ISA tax-free wrapper, but they have unfortunately decided to defer that change for
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nearly two years until April 2006. Ofex is a highly effective source of finance for our smallest enterprises. Indeed, it is specifically focused on the £500,000 to £5 million to £10 million range, and it is generally accepted as offering an excellent means by which to bridge the equity gap. It is therefore peculiar that, given the Government's stated commitment to closing that gap, the Treasury should wait for two years before acting.
The second problem with that delay is that alternative investment market securities are already eligible, so there is a danger that a distortion could occur in the market and, indeed, in savers' investment decisions. Given that AIM securities tend to favour larger companies, the smallest enterprises might continue to lack funds, which the Government say that they want to encourage to be brought forward. Given the inclusion of AIM securities, why not include Ofex? Our smallest enterprises deserve the same chance of capital investment, so why wait?
The other aspect of new clause 5 is the retention of the established tax-free limits for savers in ISAs. Saving is sadly in danger of becoming a lost habit in this country—the ratio for savings has halved since 1998, and net retail investment in funds last year was among the worst in the past decade. The Government's decision to reduce the tax-free limits from £7,000 to £5,000 on maxi ISAs and from £3,000 to £1,000 on cash ISAs will only make things worse.
A recent survey by Invesco Perpetual shows that 35 per cent. of current equity investors will reconsider their investment, and 17 per cent., which is nearly one in five investors, may choose not to invest at all. Mr. Mike Webb, head of distribution for Invesco Perpetual, said:
"Our research proves that people are angry and confused by the Government's planned changes. The Government needs to be clear on what it wants to convey to investors. It talks openly about people needing to provide for their future, yet it plans to take away the very thing—tax incentives—that encourages people to save in the first place."
If saving is to be encouraged, the Government are sending out the wrong signals by cutting those limits. The result could be that the savings ratio falls still further, leaving future generations increasingly vulnerable to events. We now need a period of stability for savers prior to any review in 2006; in other words, the limits should remain as they are. After all, what credible alternatives are the Government offering? Can the Minister tell us, for example, why savers should commit themselves over the next two years to a savings product that the Government are running down? In the absence of a credible Government alternative, does not the Minister recognise that a two-year hiatus will only further erode people's willingness to save?
4.45 pm
The Government have committed themselves to a review in 2006, but what does that mean in practice? Will a review begin in 2006, or will the Government present their final decision in that year? If it is the latter, does not that further extend the delay? I hope that the Minister will be able clearly to set out, both for savers and for the financial services industry, exactly what the commitment means and when we can expect decisions and statements.
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New clause 6 would reverse the Government's abolition of the 10 per cent. tax credit received by savers on their dividend payments. That would help current savers and future generations alike. In particular, it would ensure that all taxpayers, rich or poor, enjoyed the same incentives to save. I stress that this is a probing new clause.
The tax credit originates from the advance corporation tax regime that the Chancellor abolished in 1997. Hon. Members will recall that the result of that decision was to slash £5 billion a year from the value of people's pensions and investments. That was, frankly, an act of daylight robbery that will cost millions of people thousands of pounds. What is worse, many of those people remain, even today, unaware of just how much the Chancellor has short-changed them. It was, and still is, the worst and most insidious of this Government's stealth taxes.
When the Chancellor raided our savings and pensions in 1997, he also cut the dividend tax credit to 10 per cent. and the dividend income tax rate to 32.5 per cent. for higher rate taxpayers. Then, in the Finance Act 1998, he sought the abolition of the tax credit altogether, with effect from April this year. The net result, ironically, discriminates in favour of higher rate taxpayers over everyone else. The combined effect of the changes to the dividend tax credit and income tax rates strips away any tax incentive for basic rate taxpayers to invest in an equity-based ISA. Cash and bonds are still worth it, but not shares. Do not the Government believe that everyone who is trying to save should enjoy similar tax incentives? Why discriminate by precluding basic rate taxpayers from something that the richest in the land can enjoy? I hope that the Minister will be able to show us where in Labour's manifesto it says that Labour will provide a tax break for the few, not the many.
Last year, when my party tabled a similar new clause, the Minister argued that the markets, not the Government's actions, were encouraging people to invest in anything but shares. Since then, the stock markets have improved, yet there is still a residual problem. The recent survey conducted by Invesco Perpetual found that 47 per cent. of equity ISA investors will be less likely to invest in those ISAs because of this abolition—nearly half of investors are turning away from equity ISAs. Indeed, 13 per cent. said that it will put them off saving altogether. As the PEP and ISA Managers Association and the Investment Management Association said in their recent paper of earlier this year,
"ISAs are a successful and simple savings product and should be at the centre of the Government's strategy to encourage long-term savings. This is not the time to be undermining them."
The Government like to claim that any tax benefits are small, with the average tax credit being around £25. In fact, the actual benefits will vary widely. The whole point of saving is that every pound counts, especially over the long term, and every time the incentives diminish, the savings habit declines. Is that the Government's intention, or an unintended consequence of their proposals? I hope that the Minister will be able to tell us.
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Indeed, in total tax terms, the benefit of this abolition will be far from small for one organisation. The Treasury has failed to highlight the small fact that the Inland Revenue expects to save £200 million every year. That is £200 million that will be lost to savers. Another result of the abolition of this tax credit will be to skew savers towards cash and bonds, distorting the market and therefore distorting prices. Equally, some investors might be pushed towards cash-based and bond-based ISA products when an equity-based product might be far more suitable for their needs. The Government are rightly quick to condemn advice that encourages savers to choose inappropriate products, yet here we have a policy that could well have exactly that effect. Never mind mis-selling, this is mis-taxing, and I wonder who will police the Treasury. This is another example of the Government's meddling with the tax system distorting people's decisions and investments, to their own and the markets' detriment.
The Conservative party believes that the halving of the savings ratio represents a dangerous trend, which the Government have at best neglected and at times encouraged. Savers have been short-changed by Labour, not least by the abolition of advance corporation tax. We believe that savers need certainty and encouragement, and we want to hear why the Government are intent on further eroding the incentives to savers in the absence of any credible alternative. The new clauses seek to encourage savers and to help small enterprises. I hope that the Government will be wise enough to think again on this, and I look forward to the Minister's reply.
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