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24 May 2005 : Column 670

Income Tax

10.17 pm

The Financial Secretary to the Treasury (John Healey): I beg to move,

Mr. Speaker: With this it will be convenient to discuss the following motions:

John Healey: I welcome the hon. Member for Cities of London and Westminster (Mr. Field) to his place for the first time on the Front Bench, and I welcome his appointment. He is well informed on these issues and takes a serious-minded view of them, and I look forward to the debates that we will have—[Interruption.]

Mr. Speaker: Order. There is far too much noise in the Chamber. I ask hon. Members to calm down and be quiet, or, if they so wish, to leave the Chamber.

John Healey: The orders are the last of the bilateral agreements relating to the European Union savings directive to be presented to the House. Equivalent agreements for the Crown dependencies were debated and approved by the Merits Committee on 14 March 2005.

Three other bilateral agreements relating to the EU savings directive—

Andrew Mackinlay (Thurrock) (Lab): On a point of order, Mr. Speaker. The Minister's microphone is not on and we cannot hear him.

Mr. Speaker: The hon. Gentleman is very helpful. Perhaps the technicians can look at the microphone system.

John Healey: It might have been deliberate and for the benefit of the House on this subject that the microphones were not on.

The three other bilateral agreements relating to the EU savings directive have been signed between the UK and Anguilla, the Cayman islands and the Turks and Caicos islands. These agreements do not require the UK to provide information to those territories, so it is not necessary for them to be debated by the House. However, I have ensured today that copies of those agreements have been placed in the Library.

The House will recall how the agreements came about. It was in 1999 at the Helsinki European Council that the European Union agreed that

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The UK Government fully supported that principle and believed that exchange of information on as wide a basis as possible was the best way to counter cross-border tax evasion.

Original proposals for a directive consisting of an EU withholding tax were rejected by the UK. We fought hard to get an agreement that exchange of information was the right way to counter such tax evasion. Our success was directly attributable to the role that my right hon. Friend the Chancellor of the Exchequer played in that process. The former Liberal Democrat spokesman on these matters conceded in Committee on 14 March that avoiding the withholding tax was "a battle well won".

The EU savings directive, as adopted, will not put at risk the competitiveness of EU financial markets, as an EU-wide withholding tax certainly would have done. Under the directive, paying agents will report details of payments of savings income—essentially interest income—that they make to individuals resident in prescribed territories. Paying agents will make reports annually to HM Revenue and Customs, which will pass the details to relevant tax authorities in the other member state. The UK will receive information on UK residents who are paid savings income by paying agents in those countries.

The EU recognised the strong arguments also advanced first by my right hon. Friend the Chancellor that the global nature of financial markets meant that the principles of the directive also needed to be adopted in financial centres outside the European Union before the directive could go ahead.

Mr. Quentin Davies (Grantham and Stamford) (Con): How will the banks or other agents know the residence of their deposit holders? Surely, the deposit holders who wish to get around the arrangements that are now in place will simply not say that they are resident in the EU and will take their money in a bank account in a tax haven.

John Healey: That is precisely the sort of information that paying agents collect and hold on their customers. We would expect that to be part and parcel of the information that they have on the customer base.

It was therefore agreed that the application by member states of the directive will be contingent on the application of the same measures by certain dependent and associated territories of member states and of equivalent measures by certain third countries—the USA, Switzerland, Liechtenstein, Andorra, Monaco and San Marino. All agreements making up this network have now been signed. We are now working to ensure that all ratification procedures are completed in time for the directive and the associated agreements to take effect from 1 July this year.

Mr. Michael Jack (Fylde) (Con): The Financial Secretary has given the House an indication that it is institutionalised investors who will be covered by the proposals. If private individuals have private
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arrangements for the payment of interest on some form of personal loan, for example, how will they be captured?

John Healey: I shall come in a moment to the application of the agreements. Essentially, they are restricted to the income on savings made by individuals.

The exchange agreements are reciprocal between the UK and each of Montserrat, the British Virgin Islands, the Netherlands Antilles and Aruba. They provide for the effective taxation of savings income payments made cross-border from paying agents in one territory to individuals resident in the other. Montserrat and Aruba have opted to exchange information on savings income payments immediately.

For an initial transitional period, which corresponds to the transitional period of the directive, the British Virgin Islands and the Netherlands Antilles will levy a withholding tax on relevant payments, unless the taxpayer elects for information to be reported to their home state. Those territories applying a withholding tax will pass 75 per cent. of the revenue obtained to the United Kingdom, and they will keep the remaining 25 per cent. in order to cover collection costs. At the end of the transition period, both the British Virgin Islands and the Netherlands Antilles will automatically exchange the information covered by the agreement, although both territories have the option to do so earlier.

The information will be passed in accordance with strict rules to ensure the confidentiality of the information supplied. Information cannot be used for any purpose other than direct taxation without the prior written consent of the party that provided it. And only those persons concerned with direct tax matters may have access to the information.

Mr. John Gummer (Suffolk, Coastal) (Con): What is the Financial Secretary's estimate of the amount of tax that will be saved by the European Union as a result of this complex and important change?

John Healey: As the right hon. Gentleman knows, when any Government deal with tax evasion, it is always difficult to be certain about the scale of the activity and the value of the funds that are being defrauded from the Exchequer, so it is difficult to make a precise estimate. I refer him to the regulatory impact assessment that we published on the EU savings directive two years ago, which set out our estimate of the full impact of the EU savings directive on the UK. Our best estimate was that in the first full year the revenue gained by the Treasury would be in the order of £60 million to £70 million.

Andrew George (St. Ives) (LD): What is the Financial Secretary's assessment of the population of taxpayers who are likely to be brought within the curtilage of the regulations?

John Healey: I do not want to repeat myself, but it is extremely difficult to be precise about figures in matters of tax evasion and tax avoidance. I refer the hon. Gentleman to the regulatory impact assessment that we published a couple of years ago.
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The Government are pleased to have reached an agreement with each of Montserrat, the British Virgin Islands, the Dutch Antilles and Aruba. The exchange of information on savings income on as wide a basis as possible continues to be our ultimate objective and that of the EU. The agreements are a further step towards achieving that objective, and I commend them to the House.

10.28 pm

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