The Chairman: Order. I have allowed the hon. Gentleman to go very wide of the specific concerns addressed in clause 177, but I do not want this to develop into a general debate on taxation policy, so I hope the Minister will respond fairly briefly.
Ruth Kelly: The hon. Gentleman has made his points. However, I would argue that this is not a debate about taxation policy—we are here to discuss the simplification of the tax regime applying to personal and occupational pensions.
The hon. Gentleman understands that it is the Government's policy to combat pensioner poverty, and I am not going to rehearse the arguments for having introduced the pension credits, the minimum income guarantee and the other measures that this Government have taken to combat pensioner poverty. He also understands other things—for example, that when the stakeholder pension was introduced we made it possible for an individual who has no earnings in any one tax year to contribute to a pension and to gain tax relief up to a value of £3,600. That system is being preserved under the new regime.
We are mindful of the hon. Gentleman's points. We must make tax relief as transparent and accessible to ordinary people as possible, which is why when Ron Sandler examined this area he suggested that we should look more broadly at matching schemes. We have done that through the savings gateway account, and in the pension simplification process we have looked at ways in which pension tax relief can be illustrated.
Mr. Laws: I am grateful to the Financial Secretary for making those comments, and I will focus on clause 177. She has codified the existing reliefs in clause 177 and the associated clauses, but she has also just acknowledged that with the savings gateway the Government are moving towards more generous tax relief on savings for people on low incomes. Does she rule out returning to this issue and adjusting in a more generous way the tax reliefs for people on lower incomes?
Ruth Kelly: I am very interested to hear the hon. Gentleman argue that that is the direction in which we should be moving. Obviously, I shall take his representation into account when we consider such matters in future tax years. However, as he well understands, it would be totally inappropriate for me, as the Minister with responsibility for pension tax relief, to give any indication of where we might or might not go in the future.
The reforms will give substantial benefits to millions and millions of ordinary taxpayers and people who have no earnings in any particular year. For example, they give increased benefits to women who take career breaks. They will be able in any year before a career break to build up a sizeable pension fund in the full knowledge that they will be unable to make contributions of more than £3,600 in the years in which they are not in work. That will substantially help people on low incomes. I ask the hon. Gentleman
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to accept that we have introduced a radical reform that will benefit up to 15 million ordinary pensioners.
Question put and agreed to.
Clause 177 ordered to stand part of the Bill.
Relevant UK individual
Ruth Kelly: I beg to move amendment No. 323, in
clause 178, page 152, line 47, at end insert—
'(2A) For the purposes of this section and section 179 relevant UK earnings are to be treated as not being chargeable to income tax if, in accordance with arrangements having effect by virtue of section 788 of ICTA (double taxation agreements), they are not taxable in the United Kingdom.'.
The clause gives two key definitions for the purposes of determining tax relief: relevant UK individual and relevant UK earnings. Relief is given on UK tax, and it is right that only UK individuals or those who have earnings chargeable to UK tax should benefit from it.
Tax relief will be available on a member's contributions to a registered pension scheme made by or on behalf of the member only if they are a relevant UK individual. An individual will be a relevant UK individual for a tax year if he or she meets any one of four criteria. The first two are that the individual must have relevant UK earnings chargeable to income tax or be resident in the UK at some time during the tax year. The third situation is the individual who is not resident in the current tax year but became a member of a registered pension scheme when they were resident and have been resident in the UK at some time in the previous five years. Finally, a person with general earnings from overseas Crown employment or the spouse of such an individual will be a relevant UK individual.
For the purposes of the provisions, relevant UK earnings mean employment income, income from a trade, profession or vocation, or certain other income that is treated as earned income.
The amendment inserts a clarification for the purposes of clauses 178 and 179 to ensure that if income chargeable to tax is not taxable by virtue of a claim under a double taxation agreement, that income is not treated as relevant UK earnings for the purpose of determining the maximum amount of relief to which an individual is entitled in respect of pension contributions. I believe that the provisions are fair as well as simple and therefore commend the amendment to the Committee.
Mr. Flight: May I just ask the Financial Secretary a relevant question? An individual who lives outside the UK does not pay any UK tax. Given that fact, I have never understood why UK pension schemes should not be open to people from all over the world. In the past, that has always been resisted, even though there was no loss of revenue. Will these provisions have that net effect?
Ruth Kelly: I can confirm to the hon. Gentleman that they will.
Amendment agreed to.
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Clause 178, as amended, ordered to stand part of the Bill.
Clauses 179 to 184 ordered to stand part of the Bill.
Relief for employers in respect of
Mr. Osborne: I beg to move amendment No. 273, in
The Chairman: With this it will be convenient to discuss the following amendments: No. 274, in
No. 283, in
Mr. Osborne: The clause deals with tax relief for employers' contributions to pension schemes. The amendments are fairly technical, so I will rattle through them.
On amendment No. 273, it is not clear from clause 185 whether employer contributions, except in the form of cash, will benefit from tax relief. Of course, that ambiguity exists in current legislation, although the Revenue will accept employer contributions as long as the transfer is unconditional. Given that we have a new regime, and will not have the approval system any more, it seems sensible to clarify that. The amendment would make it clear that a contribution in the form of shares or in another non-monetary form will benefit from tax relief.
Amendment No. 274 is also to clause 185. The Government want to replace the mandatory declaration in respect of employer ordinary contributions with a reference to the normal principles of schedule D, which of course comes under the Income and Corporation Taxes Act 1988. That is understandable, because in this case—though not in others—it wants to remove the distinction between occupational and personal schemes. Of course, one assumes that the underlying policy intention is to encourage pension saving through tax relief. Our amendment makes it clear that mandatory tax relief is granted to employers. Otherwise, the clause allows doubt as to whether the employers are absolutely entitled to a reduction in respect of pension contributions. We do not think that it is clear that tax relief is mandatory.
Amendment No. 283 is to clause 188. The clause limits deemed contributions that qualify for tax relief to the statutory debt under section 75 of the Pensions Act 1995 and the relevant equivalent Northern Ireland legislation. In practice, employers may find themselves making other payments, even when statute does not require it. For example, the section 75 debt includes an estimate for expenses of wind-up. As hon. Members may know, in practice this may be insufficient, so an employer may simply agree to meet the full expenses and/or the cost of any necessary or appropriate trustee
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insurance, even if the estimate for section 75 purposes proves insufficient. In such circumstances—and there may be others—relief should none the less be available. There may be other payments, such as those envisaged under the amendments proposed to the Pensions Bill, which will also need to be covered if they are brought into effect.
As I say, those are technical amendments, but they are an attempt to improve the legislation and to help the Government achieve what they want.
Ruth Kelly: The hon. Gentleman is, of course, correct to say that the Government's aim is to encourage more people to save now for pension provision in future, and we want to encourage employers to contribute to their employees' pension provision. Employers have, of course, traditionally had a key role in providing pensions for their employees, and we want that to continue under the new regime. In pursuit of those aims, clause 185 will allow an employer to claim a deduction for contributions made to any registered pensions scheme. In a simplified regime, instead of there being different rules for employer contributions to an occupational scheme or a personal pension scheme, as the hon. Member for Tatton pointed out, single sets of rules will apply to all employer contributions.
The clause provides that contributions will be allowed as a deduction in the accounting or other period only as they are paid and only if they meet the normal tax rules of deduction for computation of profits. That means that, where a contribution is paid wholly and exclusively for the purpose of the business, it will be allowed as a deduction.
Not all the normal tax rules that apply to deductions will apply here. The normal tax rule that disallows capital expenditure from deductions will not apply for contributions paid to registered pension schemes, so initial contributions to establish a scheme, which might under normal rules be considered to be capital and therefore not appropriate for a deduction, will be allowed under the rules in clause 185.
The amendments would extend the circumstances in which deductions were allowed. Amendment No. 273 would allow employers to make their contributions in the form of transfers of assets, while No. 274 would allow those contributions to be deducted automatically. Amendment No. 283 would deem payments made in ''prescribed circumstances'', which are not defined further, as contributions.
On amendment No. 273, we do not accept that the transfer of assets or money's worth should be allowed as a contribution. It could lead to abuse in a scheme where a member exercised particular control in the sponsoring employer. I note that there is no provision in the amendment as to how such a transfer should be valued. That would inevitably lead to complex arguments between the Inland Revenue and employers on the correct valuation of assets transferred. We think it right that contributions to a registered pension scheme on which tax relief is available should be limited to monetary amounts paid.
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We see a case—in limited circumstances—for assets transferred to be allowed as a contribution and have, as the hon. Gentleman has pointed out, provided for that in clause 184. That allows the transfer of certain Inland Revenue-approved shares to be treated as a member contribution. We do not accept that any additional provision should be made for non-monetary contributions.
On amendment No. 274, we have moved away from automatic deduction to a ''wholly and exclusively'' test. Under the new regime, we have removed all existing controls on funding contributions and benefits. That means that there could be some situations in which automatic relief was not appropriate. For example, in respect of directors of the employing company, or people connected to proprietors of or partners in a business, to introduce rules that excluded such payments would have been long, complex and against the aims of simplification.
The ''wholly and exclusively'' test is well understood and has applied to employer contributions to personal pension schemes for 14 years without causing any great difficulty. Any employer providing pensions to all their employees on an equal basis will continue to get a deduction on contributions paid and need not worry about falling foul of the test.
Amendment No. 283 would extend the meaning of deemed contributions in clause 188 to include payments made in ''prescribed circumstances''. There is no indication in the amendments as to what the prescribed circumstances might be. Clause 188 is designed to deal with a situation where an employer has a legal obligation to pay a debt in specified circumstances. Extending the clause to cover payments that were not incurred under a legal obligation without any clarification in the legislation as to what those circumstances might be would extend the meaning of deemed contribution far too widely. Of course, if the payments satisfied the general rules for employer deduction in clause 185, they would be allowed as a deduction.
I urge the hon. Gentleman not to press the amendments.