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Ed Balls: Yes. There is no controversy about that. In those Finance Bill debates, concern was expressed that the schedule might have an adverse impact on the venture capital industry. Consequently, a memorandum of understanding was drawn up to give guidance to make it clear that, on the basis of the proper application of the law to all taxpayers and investors, including the private equity industry, some of the fears expressed would not be realised.
Clearly, since then the salience of and media interest in such issues have increased. That applies especially to the way in which business asset taper relief is available to taxpayers who make gains on business assets. The hon. Member for Twickenham explained the genesis of the business taper relief and his principled position on opposing it. I could describe his position as almost Lawsonesque in its consistency—the former Chancellor of the Exchequer Nigel Lawson strongly believed that capital gains should be taxed at 40 per cent., not a lower rate. He believed that any lower rate between the top rate of income tax and capital gains tax would lead inevitably to avoidance. I understand the Lawsonian views that the hon. Member for Twickenham expressed. I take them at face value, not simply because he needs the £5 billion or so to pay for the tax cuts that he wants to promise others.
We have always perceived the purpose of the business taper relief as an important means of encouraging investment and rewarding serial entrepreneurs, business angels and venture capitalists, who are prepared to take risks in growing companies. We probably agree with Conservative Members about that.
There are no special rules for private equity fund managers and we do not collect information on the specific tax reliefs that private equity fund managers receive. It is therefore not possible to identify the particular gains that are made on carried interest or to disaggregate the proportion of the cost of the overall relief, which is approximately £4.78 billion in 2006-07. If we produced the report that the hon. Member for Fareham requested, it would make less interesting reading than he might like.
However, I believe that the hon. Gentleman raised the matter because he wants to know the direction of the review. As he knows, although an effective capital gains regime is vital to encourage enterprise and stimulate investment and entrepreneurship, it must also distinguish between employment reward and capital gains and ensure that a proper balance is struck. Indeed, the shadow Chancellor made the same point when announcing his review last week. He said:
“As leading members of the private equity industry acknowledge, if it looks like income then it would be peculiar not to tax it like income... But if it looks like genuine risk-taking and entrepreneurship then we should do everything to encourage it.”
That is why we are currently reviewing the taxation of a range of employment-related securities, which private equity and non-private equity companies alike use to ensure that the distinction is correctly drawn. If it reassures the hon. Member for Fareham and makes it easier for him to withdraw the motion, I assure him that we will provide an update on that review, too, at the time of the pre-Budget report. I shall make sure that, while avoiding excessive bureaucratic duplication and even more reports, we provide such an update on those issues at the time of the pre-Budget report.
8.45 pm
On the issue of corporate tax deductions for interest payments, I can confirm that the goal of the Treasury review that I announced earlier this year is to determine whether the rules that apply to private and non-private equity investments alike are working as intended. That review is looking at the way in which the rules are working in the light of market developments but, as I said in my March speech, the deductibility of interest as a business expense for tax purposes is a fundamental principle of our tax system. We are not reviewing the basic principle that interest should in general be treated as a business expense and is deductible for taxable profits for companies in any form of ownership. However, we aim to ensure that where shareholder debt replaces the equity element in high-leverage deals, it does so consistent with our intention that interest on debt should be tax deductible. Equity, however, is treated differently, to make sure that we are as consistent as possible in our aim of providing a level playing field. As I said, the review will be published at the time of the pre-Budget report.
The hon. Member for Fareham wondered whether or not Government Members were sending mixed messages about private equity. From the Treasury’s point of view, we have sent a clear message: we believe that private equity can play an important role in the economy by driving change, and by promoting employment and investment. There are some bad private equity deals, however, in exactly the same way that there are some poorly performing public companies. It is much better to look at the conditions to support long-term investment than take a particular view on private equity. I responded to an Adjournment debate introduced by a potential leadership candidate— that candidacy did not last very long—on those matters, so we have debated those issues fully in the House. I do not think that Ministers or the Treasury have sent mixed messages, but the same could not be said of Opposition Members. The shadow Chancellor’s review was reported by the Financial Times on 22 June under the headline, “Tories back higher taxes for private equity”. The article continued:
“The Conservatives have signalled they would support higher taxes for private equity executives, increasing the political momentum for a clampdown this autumn.”
“Mr. Osborne’s inquiry appears to blur the traditional left-right political divisions, with the Tories appearing to be tougher on the super-rich than Labour.”
In his speech earlier this year to the British Private Equity And Venture Capital Association—I think that that the hon. Member for Twickenham referred to that—the shadow Chancellor said:
“Listen to the critics and you would think that the only winners were a secretive bunch of millionaires. But the real winners are the millions of people with pensions invested in the funds that invest in you...The importance of your contribution to our economy is, I believe, rightly reflected in the tax treatment that you receive...I will speak up for your industry and the wealth it creates. I will not make any moves that discriminate against the private equity industry.”
Perhaps we should reconsider our position—perhaps a report should be published, although the shadow Chancellor’s report will be issued before the pre-Budget report, so there will be plenty of time to reflect on its findings. It is often said that the Opposition parties
are good these days at spin, but either they have contradicted the shadow Chancellor’s speech in March or the FT misunderstood the story. In any case, given the number of reports that have been published, I do not think that we will gain enlightenment from a further report. Instead, I encourage hon. Members to look forward to the report by the Treasury Committee with interest. We will respond on all those matters at the time of the pre-Budget report. On that basis, I suggest that the House reject the new clause.
Mr. Hoban: I will take no lessons from the Economic Secretary on spin. We have seen quite enough of his handiwork in the past few weeks. He ought to stick to his job as Economic Secretary, rather than engaging in media management or trying to give lessons to others.
The hon. Gentleman was a little disappointing in his remarks. We share some common ground. We both recognise that the reliefs specified in my new clause are available to all, not exclusively to private equity. However, we are in danger of having a debate in an information vacuum. Questions are being asked about how much the reliefs are worth. There were questions in the Treasury Committee last week, when the people from private equity firms were asked how much capital gains tax was being paid. It would have been helpful if that information were available. Without it, it is difficult for that debate to take place in a rational and well reasoned fashion. The information would provide a context or framework. There is no point in pushing for a report which would consist of a series of blank pages.
In the debate about private equity, we should be careful about drawing the wrong conclusions, reading headlines, not substance, or being distracted by other issues. It is regrettable that the information is not available. The Treasury Ministers may be sending out a clear message, but I am not sure it is the same message as is being given out by their colleagues on the Back Benches or in other positions in Government. No doubt that will all change after Wednesday, in its own inimitable style.
We need to make sure that a proper debate takes place. The fact that the information is not available should be made clear to all the participants. I hope members of the Treasury Committee will read this brief debate and understand the constraints under which everyone is working in the debate. The Minister rightly pointed out the continuation of the memorandum of understanding from a treatment agreed in 1987, and he spoke about the Lawsonian purposefulness of the hon. Member for Twickenham (Dr. Cable).
Of course, the distinction between income and capital has become more important as the capital gains tax reforms made by the Chancellor have unfolded, so it has become a much more important issue when one can be taxed at 10 per cent. and one at 40 per cent. Although the MOU has been around for 40 years, it has been brought into sharper focus as a consequence of those changes. It therefore behoves us all to think carefully about it.
Given that there is nothing to be said in the report, I beg to ask leave to withdraw the motion.
Motion and clause, by leave, withdrawn.
‘(1) It is the duty of a Minister of the Crown, when proposing changes to personal taxation (whether or not taking effect in a future financial year), to prepare and lay before the House of Commons an assessment of the effects of the proposed changes on different earnings groups.
(2) For the purposes of subsection (1) “different earnings groups” means groups representing each earnings decile; and “effects” includes changes in net disposable income and changes in the relative share of national wealth accounted for by each earnings decile.
(3) If the proposed changes mentioned in subsection (1) appear likely to have an adverse effect on groups in the lowest quintile of earnings, the changes shall not take effect unless they are accompanied by transitional relief measures.
(4) “Transitional relief measures” in subsection (3) means measures designed to ensure that any adverse effects of a kind mentioned in that subsection are phased over such a reasonable period as will avoid abrupt changes in the net disposable income of the relevant earnings group.’.— [Mr. Frank Field.]
Brought up, and read the First time.
Mr. Frank Field (Birkenhead) (Lab): I beg to move, That the clause be read a Second time.
I was a few minutes late because I went to check the letter board, hoping that I would have an answer to the question that I first tabled on 16 April and retabled on 30 April. On three occasions on the Floor of the House, I have asked why I had not received a reply. Perhaps, by leave of the House, I may be able to respond at the end of the debate, by which time I may be able to read the parliamentary answer giving us the information that we require. That information is by what amount our constituents will lose out by the abolition of the 10p standard rate of tax, and how many of them and which groups will be affected.
Let me declare an interest: I favour the abolition of the 10p rate of tax. I believe that most of our constituents think about a headline rate, and that is the standard rate. Any move that brings the standard rate down is welcome to me. Indeed, long before I came to the House, I was advocating the abolition of tax allowances so that we could get the standard rate down even further than it has fallen today and is proposed in the Budget.
It is clear from our postbags around the country that three groups stand to lose from the change, and they may not be covered by the tax credits changes that have already been announced and the child benefit changes that might be announced next year. The first group is lower-income households that will see their tax burden increase as a result of the abolition of the 10p rate, while those on higher incomes see their tax take fall. One person put it in powerful terms in their letter to me by saying that they never thought that they would see a Labour Chancellor of the Exchequer redistributing from poorer to richer households. As to the numbers that are affected, I hope, as I said, to read the parliamentary answer in a moment.
Secondly, a number of voters around the country have said that, although their husbands will benefit from cuts in the standard rate, they will lose income through the abolition of the 10p rate because they are viewed in traditional terms as the minor earners in the
household, although most such households would not survive without their two earners. My hon. Friend the Member for Wolverhampton, South-West (Rob Marris) mentioned the third group—this is the first time we have raised the matter in the House—which is people who have retired early, largely because of ill health, and who do not gain the advantages of the additional tax allowances that people gain once they reach the standard retirement age. It could be argued that the change in the tax rates will be offset in that way.
The new clause therefore says that, before the House of Commons considers measures that affect our constituents’ living standards, particularly where we are decreasing them, the Government should give us the information as part of the Budget, so that we know the numbers and the extent to which that cut in income is taking place. We know that the measures before us will affect some people who will lose out in relation to the 10p rate. I am not sure how many, but I am hoping that that will be revealed.
Stewart Hosie: I know that the right hon. Gentleman is expecting a formal answer from the Minister, and I hope that he gets one. The calculations that we have say that 836,000 people in Scotland will suffer because of the change. He might like to consider the UK figure as somewhere between 8 million and 9 million people, which is a huge number. Specifically, 52 per cent. of the workers in Kirkcaldy and Cowdenbeath, who earn less than £17,000 would be worse off. I am sure that that figure may be replicated in similar constituencies around the country.
Mr. Field: That contribution was valuable not only because of the point that was made, but because it gave me a chance to read the parliamentary answer, so I shall read the heart of the mystery into the record before I sit down.
The next part of the new clause is supported on other Benches. Some people try to get ex-leaders of the Liberal party to join their cause; my attempts were more modest, but I hope more effective in engaging the two Liberal Democrats on the Front Bench, the hon. Members for Falmouth and Camborne (Julia Goldsworthy) and for Twickenham (Dr. Cable). We should have a guarantee that, before the proposed measures came into effect with the next Finance Bill, some transitional form of relief would be announced for people who were going to lose money.
After a first reading of the parliamentary answer—I am well aware of what the question was—we know that 31 million taxpayers have benefited from the 10p standard rate of tax, and that some 28 million of them stand to gain as a result of the 20p rate. That means that 3 million people will lose out—31 million minus 28 million—but the written answer may contain further details.
Mr. Field: I will happily give way to my hon. Friend, which will allow me to read the next paragraph.
9 pm
Rob Marris:
First, I think that my right hon. Friend must deduct pensioners who would gain through increases in personal allowances for pensions from that 3 million. Secondly, a fourth category in addition to the
three that he delineated is women aged between 60 and 65 on modest incomes, who will lose out through the abolition of the 10p rate, but who will not gain through the rise in personal tax allowances, because they are not yet 65.
Mr. Field: I willingly add that fourth group who will lose out because of the measure.
The second paragraph of the written answer states that
“four in five households will be better off or see no change in household income”.
That means that one in five households will lose out. The person who kindly gave me this answer is right to say that the final number will depend on whether people are claiming tax credits, whether there are changes in the national minimum wage and whether there are changes to child benefits.
The truth is that, as we allow the Finance Bill to proceed tonight, four out of five households will benefit, but one in five will not, and the one in five are among our poorest constituents who work. I think it shameful that the Government have run away from giving us that information since the middle of April. Unless I am wrong and the Chief Secretary has some different news, we are not prepared to introduce transitional relief to protect a group who are doing everything that the Government have asked them to do, which is to work, to work harder and to maintain their families. Those households are the backbone of this country, and I do not believe that we should kick them.
Mrs. Theresa Villiers (Chipping Barnet) (Con): The Opposition welcome the opportunity to debate the impact of tax changes on different income decile groups. New clause 14 is a constructive contribution to that important debate and we sympathise with the sentiment that underlies it. It is, of course, vital for any Chancellor to carry out a proper and effective empirical assessment of the impact of proposed tax changes, and I shall explain why I believe that that is particularly important in relation to those on low incomes—the right hon. Member for Birkenhead (Mr. Field) has already stated many of the reasons.
We understand the arguments in favour of using transitional measures, where appropriate, to ease the hardship that tax rises can cause. However, it is with regret that I say that, although we will not vote against new clause 14, we cannot support it this evening, because we are concerned how it would work in practice were it actually to be written into legislation. For example, we have some concerns about how feasible it is always to assess the changes in the relative share of national wealth. That assessment would not be easy, because it would be difficult to find the data. Unlike the case of income, there is no obligation to report one’s wealth to the Inland Revenue.
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