Finance Bill

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The Chairman: Yes indeed. I am sorry. The hon. Gentleman was not here a lot earlier this week, and I am afraid the understanding that I had was that we would reach the conclusion of our debates at a reasonable time. That will clearly not be the case. How the hon. Gentleman can utter from a sedentary position what he has done, when he has just spoken for 50 minutes on only one new clause, I fail to understand. I have a responsibility to hon. Members on both sides of the Committee and I am deeply concerned. I give notice that I intend to suspend the Committee for a supper break at approximately half-past 7. We have another nine debates on new clauses. That could take us until 11 o’clock tonight. That is not the way in which I believe the Committee should proceed.
Mr. Hammond: On a point of order, Sir Nicholas, you have referred to my comment from a sedentary position specifically. It was my understanding that it is not usual to refer to discussions through the usual channels, but as you have done so, I would like to say something about the discussions that I have had. We on this side understand that the Government’s requirement is that the Committee stage of the Bill be completed today and we have given the Government an undertaking that we will allow that to happen. We have not at any stage, as far as I am aware, given any commitment about the hour at which that will occur, and I have not been asked by any Member on the Government side to give a commitment as to the hour. It was merely that, for the convenience of the Government’s management of the business of the House, it was necessary to have the Bill out of Committee today, and I repeat our commitment to achieving that.
The Chairman: If that is the case, the spokesman for Her Majesty’s Opposition might have had the courtesy to advise the Chairman accordingly. I have sought to liaise with the Opposition Whip and the Government Whip and I was led to believe on Tuesday that we would complete our deliberations at a reasonable hour today. Clearly, I am a servant of the Committee and I will remain here as long as is necessary, but I give an indication that I have responsibilities. I also have to have a meal. We have already instructed the House authorities to keep the Tea Room open, so considerable costs are involved in what is going on. I personally look in a rather bad light at a gentleman member of the Committee speaking for 50 minutes on a new clause, however important the subject.
Mr. Brooks Newmark (Braintree) (Con): On a point of order, Sir Nicholas, you have alluded to the fact that we said that we would finish at 4. I just want to repeat the point that my hon. Friend the Member for Runnymede and Weybridge made: we did not say that we would finish at 4. Also, as you are well aware, we suggested, and agreed to stay for, extra time on Tuesday, but that option was not taken up by the Government. We gave the option. We gave an undertaking to give an extra 45 minutes at least on Tuesday, but it was not taken up.
Mr. Blizzard: Further to that point of order, Sir Nicholas. Forty-five minutes was offered, not 45 minutes “at least”.
The Chairman: We have had enough recriminations. I can only say that I am very saddened by what has happened. Previously, there has been a constructive attitude and a very happy and genuine mood across the Committee, but that has certainly been undermined. I think that it has disappeared today and I deeply regret it. I call the Financial Secretary.
Jane Kennedy: I, too, am disappointed that after seven weeks of what I believe has been good-natured debate, in which we have covered many serious and detailed topics, we have hit the rocks at the last minute. I certainly recall the hon. Member for Runnymede and Weybridge saying to me at 10.25 on Tuesday morning that the Committee would not sit beyond 7 o’clock on Tuesday whatever else happened. However, we shall return to new clauses 13 and 14.
My hon. Friend the Member for Wirral, West is absolutely right about what happened to pensions. The most significant downward effect on the health of pension funds came from stock market falls during the boom and bust years, which we were subjected to when the Conservative party was in power; from decisions by many firms to take a contributions holiday, despite facing a rise in liabilities; and from rapid increases in life expectancy.
We have a strong record of helping pensioners, with spending around £12 billion more on pensioners than if all we had done was uprate the policies in place in 1997. Half of that additional spend goes to the poorest third of pensioners. Both the PBR and Budget documents already provide full details on measures that impact on pensioners. Another document would only repeat those details.
I shall move on to new clause 14. Our strategy since 1997 has focused on getting as many people back into work as possible. We believe that work is the best route out of poverty and being a Labour Minister for work is the best job in the Government. We are committed to making work pay, through improving financial incentives to work.
As for requiring reports on impacts, the Chancellor’s statement of 13 May, which increased the personal allowances for 22 million basic rate taxpayers in 2008-09 and reduced the number of households that lost out from the Budget 2007, made clear that our aim was to continue the sustained support for those on lower incomes in the future. That is what we will be returning to—
Mr. Hammond: Will the right hon. Lady give way?
Jane Kennedy: I will not give way because I think that we have heard quite enough of the hon. Gentleman during the debate.
Producing a report would add little benefit to the aim of supporting those on the lowest incomes. The new clauses would merely require the Government to duplicate what we already produce. The hon. Gentleman can have had no reasonable expectation that his new clauses would have been accepted. On that basis, I finish my comments.
Motion and clause, by leave, withdrawn.

New Clause 15

Report on exemption from taxation of foreign profits
‘(1) The Treasury shall, before the publication of the 2008 Pre-Budget report, prepare and lay before the House of Commons a report on the effects of introducing a measure to exempt from corporation tax all dividends from non-portfolio investments paid to UK resident companies.
(2) For the purposes of this section, a non-portfolio investment is one where the UK company holds at least 10 per cent. of the ordinary share capital of the investee company.
(3) The report under subsection (1) shall include consideration of the effect of such a measure on—
(a) the public finances;
(b) UK companies;
(c) the competitiveness of the UK economy;
(d) the attractiveness of the UK as a location for multinational headquarters;
(e) the impact on repatriation of foreign profits back to the UK and the likely effects on investment; and
(f) the extent to which special measures would be needed to protect against diversion of profits through countries with a low rate of corporation tax.’.—[Mr. Hoban.]
Brought up, and read the First time.
Mr. Hoban: I beg to move, That the clause be read a Second time.
The clause covers an important issue in the context of the future direction of tax policy. I know that the Financial Secretary is engaged in the debate to see a way forward as chairman of a working party of businesses—I think that there is a trade union member as well. I am grateful that the Government have taken the issue seriously. When I raised it two years ago in a Finance Bill debate, the reaction from Treasury Ministers was that the companies were crying wolf, and that they were not raising a genuine and serious concern, but seeking to put pressure on the Government. I thought that the Treasury was unwise to draw that conclusion, having learnt, from conversations with businesses and tax advisers, that that issue had been on their agenda from an early stage. Having renewed those discussions recently, I understand that businesses are seriously considering relocating their headquarters owing to the uncompetitive nature of the corporation tax regime in this country and, in particular, the way in which it deals with foreign subsidiaries of UK companies.
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We could go down one of two routes. First, we could build on the existing structure under the control of foreign companies legislation, which has worked relatively well, despite some of the challenges that it has faced from the European Courts and companies seeking to use the provisions of various European treaties to attack and undermine it. I shall not rehash debates from previous Finance Bills, but the Committee will be aware of cases involving Marks and Spencer, and Cadbury Schweppes, which are symbolic of the way in which people have used European treaties to undermine that regime. The concern of companies such as UBM and Shire was triggered by the Government’s consultation document, which relates to subsection (3)(f) of my new clause, which deals with
“the extent to which special measures would be needed to protect against diversion of profits through countries with a low rate of corporation tax.”
We could go down a second route: the Government’s consultation document mooted the idea of controlled income, which we touched on in an earlier debate on partnerships. Control of foreign companies rules focus on entities, whereas the Government’s proposals looked at income streams and distinguished two different sources: the first was passive income such as dividends, interest, annuities, royalties and rents. That was because of the recognition that they are often sources of income with operations more susceptible to being structured—I do not want to use the word manipulated—in offshore low-income jurisdictions. The other income stream is active income, where the income arises from trading activity. Of course, that is a much more difficult source of income to structure, and move into a low-tax environment. There are many more issues in deciding where to locate trading operations. Whether one is talking about factories, offices, or plant, there are a whole host of considerations that one might want to take into account. It is more likely that decisions on active income are taken in the much broader context of a genuine commercial decision, rather than in relation to a form of tax structuring.
Many businesses raised concerns about that. The issue goes back to how effective we need to be, and what we need to do to prevent a diversion of income. Many businesses felt that the rules proposed by the Government were intrusive and expensive, and went against the grain in relation to how businesses structure their operations and how they report income from overseas entities into the UK. That potential administrative or compliance burden prompted a number of UK companies to decide to move their operations overseas in advance of what they saw as being the direction of travel in Government policy.
When we debate the issue of participation exemption and the taxation of those companies, we need to think carefully about how we put in place the right structure to prevent the artificial diversion of profits to low-tax jurisdictions. That is an important aspect of thinking through these changes. I am sure that it is something that the Minister and the members of her working party are thinking about. If we get the measure right, it will strengthen the UK as a place to do business.
In thinking about the right reforms to introduce, we need to address the important issue of the impact on public finance because, in the current conditions, we do not want to introduce a series of reforms that cannot be funded from tax revenues. It is difficult to think about the matter carefully and understand what the likely costs will be. The challenge is to understand what the cost of a participation exemption will be. A few years ago, one firm of accountants estimated that it was about £1 billion. That would clearly be a significant loss to the Exchequer. It has also been said that that cost has fallen to about £0.5 billion, and could fall further without Government intervention. As the rate of corporation tax falls, the cost of the participation exemption itself will also fall. It would be helpful to hear the Government’s explanation, as it is one of the issues on which they must be able to report when they consider the impact of moving to a participation exemption. There are other interactions, too, in relation to how they intend to tax foreign profits.
There are two more matters that we would like the Government to address in a report before the publication of the 2008 pre-Budget report are. I shall draw them together for the ease of the Committee, and they appear in subsections (3)(b) and (e) of the new clause. One concern that flows directly from subsection (3)(e) is what is happening at the moment when people choose not to remit foreign profits into the UK? If a company is not prepared to pay the additional corporation tax on that remittance, the profits it has made in overseas jurisdictions are in effect stranded there. They are not necessarily used to benefit the operations of the group as a whole. They may be stuck in a low-tax jurisdiction where there are no investment opportunities to warrant the profits remaining there, but the company is concerned that it will have to pay an additional charge on that remittance, so it is not prepared to pay the dividends into the holding company. The company will receive enough dividends from other group companies to have sufficient reserves to pay a dividend to its shareholders, but it will not go any further than that.
In overseas jurisdictions that have gone down that route, there has been an unlocking of those stranded funds, which have flowed back into the parent companies. If my recollection is correct, that was tried in the States. It was a temporary relaxation, and within a year something like $1 billion flowed into the parent companies. In the case of the UK, what would those parent companies do with the dividends? Would they choose to invest them in UK operations, which would be a good way to seed the growth of the UK economy? Would they feel able to use them to expand in other jurisdictions? Would they decide, if the investment opportunities in the UK were already covered by their funds and they could not make better returns with the remitted profits from overseas, to return the dividends from overseas subsidiaries to their shareholders, in the form of the share buy-back or a special distribution?
It is important when looking at the changes that we understand their impact on the behaviour of parent companies in the UK, because that would provide a broader macro-economic backdrop against which to consider them. In this country, we do not look at the dynamic modelling of tax changes on tax revenues, and a static analysis is undertaken. However, it would be helpful to understand what that macro-economic backdrop is when justifying any decision to scrap the participation exemption.
I want to touch on subsections (3)(c) and (d), which deal with the competitiveness of the UK economy and the attractiveness of the UK as a location for multinational headquarters. On both sides of the Committee—and in the discussions and meetings that I have participated in with the Economic Secretary—there is a recognition that business is mobile, and that people, capital and business can be moved around. The Economic Secretary and I see that particularly in the context of the financial services sector, where businesses can quickly move outside the UK, or into the UK. It is therefore important that we have a tax system that reinforces our competitive position and gives people a reason to come to the UK. Some of that is about the headline rates, and some of it is about the certainty, predictability and stability of the system. We have elaborated on those themes in Committee.
We also need to focus on the structure of taxation for multinationals. In many of our constituencies, the bedrock of the business base is small and medium-sized enterprises; all our constituencies have a long tail of small companies. However, we are dependent on multinationals’ help in growing our economy, and if we are able to produce a participation exemption that helps to keep headquarters of multinational companies here, that is to our benefit. It is easy to dismiss companies moving their headquarters overseas as only a few people and a couple of offices, but it changes the mindset of the company. The company then thinks about where to locate operations. Perhaps its preference would instinctively be the UK, but if the company locates its headquarters in Ireland, it might think that that is not a bad place to do more business. We then start to see an erosion of our tax base. Part of the challenge is to broaden the tax base, by getting more companies into this country and ensuring that those that we have do not go overseas.
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