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The Temporary Chairman: I call Mr. David Howarth[Hon. Members: "Chris Huhne."] I apologise to the hon. Member for Eastleigh (Chris Huhne). He is new to this place and some of us who have been here a long time have not yet learned all the names of new Members, for which I apologise to him and the Committee.
I was slightly surprised by the sideways glances made by the hon. Member for West Suffolk (Mr. Spring) at the Liberal Democrat Benches because they implied that he had these matters under enormous control, yet somehow we did not. I merely draw his attention to the amendment paper. Amendment No. 2, which stands in the hon. Gentleman's name, refers to a provision that is not part of the Bill: a section 64(2)(e). I can only assume that the reference was lifted straight off the hon. Gentleman's word processor from when he was examining the Finance Bill presented before the election and that he has not bothered to check that the provision still forms part of this Bill. I do not think that we Liberal Democrats need to take any lectures from the Conservative Front Bench about attention to detail. We know that the Government's majority in the House is substantial, so I hope that the Minister will be sufficiently open-minded to allow the power of argument to persuade him to revise several provisions. I shall thus spell out several worries that we have about clause 18.
Clause 18 sets out the specific powers that are to be delegated to the Treasury to shape the taxation of open-ended investment companiesso-called OEICsand
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authorised unit trusts, or AUTs. The important powers will be able to have a substantial impact on the taxation of those entities. I have three key points to make to the Minister.
First, there is no obligation on the Treasury to be open or transparent when taking such substantial powers. Given the concerns of the industry, there should at least be a commitment to proceed by consultative draft regulations. Even better, the provisions should be subject to a four-year sunset clause to bring them into line with similar provisions in European legislation. The clause is entirely silent about the manner in which the Treasury should proceed, but that is frankly extraordinary given the song and dance that the Treasury rightly made about putting obligations on the European Commission and the European Securities Committee, on which it is represented, when they take decisions about financial services in directives by delegated powers. At the very least, the Treasury should proceed by draft regulations that allow the industry to comment.
I hope that the Minister will assure the Committee that the Treasury will always allow adequate time for consultation. The Treasury was sensible when it insisted that there should be a three-month period for consultation before directives made under delegated powers were adopted at the European level. Laying something before the House for 21 days does not represent a proper consultation by the standards that it has applied to the scrutiny of European legislation.
Secondly, the clause means that there is still the possibility of reintroducing double taxation of a fund designed by the Financial Services Authority as a fund under the qualified investor scheme. The loss of large tax-paying investors' tax advantages could be triggered if investors with more than 10 per cent. of stock liquidated their funds. There are obvious exceptions in the clause for nominees, pension funds and insurers, but there is a serious potential penalty on tax-paying investors in the vehicle, who might find themselves facing a tax liability through no fault of their own.
For example, any investorinstitutional, individual or corporatecould liquidate holdings in a QIS fund, leaving other tax-paying investors, such as corporates or individuals, with more than 10 per cent. of the stock because the funds are open-ended, not closed-ended. The money would be drawn from the open-ended fund leaving other investors necessarily with a higher proportion of what remained. That could put off tax-paying investors because they would not be prepared to take the risk of investing in such a vehicle. The economies of scale in pooled funds would be limited and the UK would be made a less attractive base for such funds. I know of no other EU state that has anything like the measure that we are considering, so it represents an open invitation to incorporate such funds not in London or Edinburgh, but in Dublin or Luxembourg, although I am sure that that is not the intention of the Treasury or the Minister.
I understand that there might have been tax-avoidance structures that may have used funds in a way that caused concern in the Treasury, but surely that is not the case for QIS funds because, of course, they have not yet begun. However, the Bill contains no provisions to deal with other uses of funds, such as retail funds, that could have caused the original worry in the Treasury
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about the possibility of tax avoidance. Furthermore, there is doubt about whether the provisions will catch people. The fund must be required to show that it is managed at arm's length from any investor to ensure that tax-avoidance provisions are effective. The investment function should thus not be influenced by any communication with the investor. That would be more appropriately enforced by a rule from the FSA than by attempting to do so in the way outlined in the clause.
On my third point, I agree with the hon. Member for West Suffolk, so I shall try not to repeat too many of his arguments. The broad principle at stake is tax neutrality. The provisions in clause 18 apply only to open-ended investment companies and authorised unit trusts. They do not apply to the main competitors to those vehicles, namely closed-end funds, or investment trusts as they are more commonly known. One result of the measure would be to widen further the tax advantages enjoyed by OEICs and AUTs compared with investment trust companies, especially when investing in bonds, which would thus distort the market. That would be bad in principle because it would poison fair consumer choice, but it would also be bad in practice because ITCs might be an objectively better vehicle for certain kinds of investments, including bonds, than unit trusts.
For example, I remember in the wake of the Asian financial crisis when there was substantial and persistent selling pressure out of unit trusts that had specialised in the affected countries, which meant that the trusts sold off the most liquid, and often the best, investments to repay their investors. That meant that the less-good investments were left for those who did not get to the door first. There are now specific provisions in the wake of 9/11 to stop a catastrophic run or loss of confidence, but far short of that eventuality, one can experience real problems, especially with investments in emerging markets. By contrast, investment trusts merely see a widening in their price discount to net asset value, which makes them a much safer vehicle when there is high volatility in the asset class, for example in emerging market bonds.
I hope that the Treasury will consider bringing forward a more radical recasting of the tax provisions to put investment trusts, OEICs and AUTs on an equal footing. In general there is a need for the UK to simplify the tax code for all those investment vehicles to ensure that there is a level playing field. I hope that the Minister will assure me that he will consider the matter again.
Mr. Spring: I apologise if I am pre-empting the hon. Gentleman. Will he deal with the subject of REITs, which is at the heart of the amendments, because I would be interested to hear the Liberal Democrats' position on that?
I ask the Minister to address those three points. The first is the proper amount of consultation, which is appropriate given what the Treasury has said in the context of European powers of a parallel nature. The
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second is ensuring that there is a real QIS fund that is attractive to investors because it does not put tax-paying investors at an unnecessary risk. The third is the wider issue of tax neutrality.
Mr. Brooks Newmark (Braintree) (Con): I want to touch on the impact that the current tax regime has on real estate investment trusts, which are at the heart of what we are discussing. Notwithstanding the Government's recent announcements on introducing tax legislation that gives effect to REITs, I remain concerned that it has not happened. The problem centres around the tax of overseas landlords. Although I understand that prior agreements can be and have been established with the Inland Revenue, it is the uncertainty that causes me alarm because it may drive our nascent property fund industry to other countries that have more attractive REITs and tax regimes.
There are three or four specific benefits that I want the Minister to consider. As my hon. Friend the Member for West Suffolk (Mr. Spring) said, if we do not address the problem, we will drive the REIT industry to other regimes. The industry has been extremely successful in the United States for well over a decade, but REIT managers who want to come to this country are being driven to Guernsey, Germany and other European countries with attractive tax regimes. In establishing a bone fide REIT industry, we can offer the great benefit of our successful private equity industry. As we have seen in the United States, many private equity firms have successfully established property fund managers, who in turn have established REITs.
REITs can benefit the United Kingdom economy and the Chancellor. Unless we attract people to this country and develop an attractive REIT regime, we will not increase employment in the City, which is the heart of the financial centre of Europe. It is important that we capture our talent and bring in more investors to the real estate industry as a whole and to REITs specifically. If we employ more people in that industry and, again, in REITs specifically, that will increase the tax take in terms of income tax, because more people will be employed, and in terms of the companies that are established. I ask the Minister to think about what we need to do and to consider the amendments so that we establish a successful REITs industry sooner rather than later.
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