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Session 2008 - 09
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Finance Bill

The Committee consisted of the following Members:

Chairmen: Mr. Peter Atkinson, Mr. Jim Hood, Sir Nicholas Winterton
Bailey, Mr. Adrian (West Bromwich, West) (Lab/Co-op)
Barlow, Ms Celia (Hove) (Lab)
Binley, Mr. Brian (Northampton, South) (Con)
Blackman, Liz (Erewash) (Lab)
Blizzard, Mr. Bob (Waveney) (Lab)
Bone, Mr. Peter (Wellingborough) (Con)
Breed, Mr. Colin (South-East Cornwall) (LD)
Brown, Mr. Russell (Dumfries and Galloway) (Lab)
Browne, Mr. Jeremy (Taunton) (LD)
Cable, Dr. Vincent (Twickenham) (LD)
Dobbin, Jim (Heywood and Middleton) (Lab/Co-op)
Duddridge, James (Rochford and Southend, East) (Con)
Engel, Natascha (North-East Derbyshire) (Lab)
Field, Mr. Mark (Cities of London and Westminster) (Con)
Flello, Mr. Robert (Stoke-on-Trent, South) (Lab)
Gauke, Mr. David (South-West Hertfordshire) (Con)
Hands, Mr. Greg (Hammersmith and Fulham) (Con)
Hoban, Mr. Mark (Fareham) (Con)
Hosie, Stewart (Dundee, East) (SNP)
Howell, John (Henley) (Con)
Jenkins, Mr. Brian (Tamworth) (Lab)
Joyce, Mr. Eric (Falkirk) (Lab)
Moffatt, Laura (Crawley) (Lab)
Pearson, Ian (Dudley, South) (Lab)
Pugh, Dr. John (Southport) (LD)
Robertson, John (Glasgow, North-West) (Lab)
Roy, Lindsay (Glenrothes) (Lab)
Seabeck, Alison (Plymouth, Devonport) (Lab)
Soulsby, Sir Peter (Leicester, South) (Lab)
Stuart, Mr. Graham (Beverley and Holderness) (Con)
Syms, Mr. Robert (Poole) (Con)
Timms, Mr. Stephen (East Ham) (Lab)
Todd, Mr. Mark (South Derbyshire) (Lab)
Ussher, Kitty (Exchequer Secretary to the Treasury)
Liam Laurence Smyth, Committee Clerk
† attended the Committee

Public Bill Committee

Tuesday 16 June 2009


[Mr. Peter Atkinson in the Chair]

Finance Bill Committee

(Except clauses 7, 8, 9, 11, 14, 16, 20 and 92)

Clause 56

MEPs’ pay, allowances and pensions under European Parliament Statute
10.30 am
Question proposed, That the clause stand part of the Bill.
Mr. Greg Hands (Hammersmith and Fulham) (Con): Thank you, Mr. Atkinson, and welcome back to the Chair for what I think will be a very interesting day for the Committee. May I also welcome the hon. Member for Burnley back to her previous Department? We went head to head last year on a particular clause in the previous Finance Bill, so it is good to have her back.
Clause 56 relates to the tax treatment of Members of the European Parliament. It gives tax relief against United Kingdom tax for the new, or maybe not so new, Communities tax that the European Union will levy on MEPs’ salaries and benefits. The relief will operate in broadly the same way as if the MEP had paid, for example, Belgian tax on his or her earnings. The peculiarity involved, however, is that the UK has no dual taxation treaty with the EU.
The explanatory notes state that, in subsection (1), the clause
“extends the application of ‘double taxation relief’ under the Income and Corporation Taxes Act 1988 (ICTA) to European Community tax deducted from the pay, transitional allowances and pensions of members of the European Parliament (MEPs) under the new Statute for Members of the European Parliament”.
It is worth placing the statute’s reference number, 2005/684/EC, Euratom, on record, as I will refer to it in due course. The explanatory notes go on to explain that, in subsection (2), the clause
“also amends the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) to provide that payment of transitional allowances to MEPs under the Statute will be treated as termination payments in line with the current treatment of other, similar payments.”
It is important for us to consider whether the termination payments are indeed in line with the current treatment of other similar payments, at least in the UK. I intend to examine MEPs’ pay, transitional allowances, pensions and termination payments, all of which are covered by the clause.
The Exchequer Secretary to the Treasury (Kitty Ussher): I cannot resist asking whether the hon. Gentleman feels that that is an argument in favour of joining the euro.
Mr. Hands: It most certainly is not. I have heard some fairly spurious arguments in favour of joining the euro, notably from the noble Lord Mandelson in recent days, but that particular argument may be the most spurious of them all, so we reject it.
Mr. Peter Bone (Wellingborough) (Con): Does my hon. Friend share my concern that the Labour party—sorry, the Government—is now encouraging Britain to join the euro?
The Chairman: Order. I do not think that we will go any further down that route.
Mr. Hands: I thank my hon. Friend for his intervention. He is quite right. I recall that there were a number of tests involved, but they seem to have been thrown out by the Minister, who has returned to the Treasury from the Department for Work and Pensions. Perhaps she came under influence while she was at the DWP.
The fact that the salary, at the time it was voted upon, would be broadly similar to that of an MP was an important factor in Conservative support for the new statute at that time. As far as MEPs’ tax arrangements are concerned, UK MEPs are currently paid monthly via the Cabinet Office, and under those arrangements they pay tax through PAYE, along with national insurance contributions. After the end of the tax year they have to complete a self-assessment form, send it to Her Majesty’s Revenue and Customs at its public department No. 1 office and pay any tax that was not already paid under PAYE. On the face of it, that looks pretty much like the arrangements for any other taxpayer.
However, once the new Europe-wide statute is in force, UK MEPs who were re-elected in 2009 will have the option of staying in the current pay arrangements for as long as they remain MEPs. If they do so, they will continue to be paid their present salary with no change in the tax and national insurance contributions arrangements that currently apply. If, however, they decide to opt for the statute instead—new MEPs will have no choice in that matter, as they must go for the new, standardised, Europe-wide statute—they will be paid directly by the European Parliament, their salary will be paid by Brussels and they will pay that Community tax on it.
Under current plans to implement the statute, the Government have decided to exercise their right to apply UK tax as well, and we in the Conservative party strongly support that. We have consistently argued that it would be iniquitous for MEPs not to pay tax at the same rate as their electors. They will therefore pay UK tax on their salaries but will, under clause 6, be given credit for any Community tax already paid, which is what is proposed in clause 56. They will therefore be taxed at the same rate as a UK resident earning the same salary in the UK.
My understanding of the new statue is that, because MEPs will be paid by the European Parliament, tax will not be deducted under UK PAYE. Instead, any additional UK tax liability will be collected through their self-assessment. MEPs will therefore need to set aside money from their salaries to pay their prospective UK tax bills at the end of the financial year. They will also continue to be liable for employee-rate UK national insurance contributions on their salaries and will work out their contributions each month and make payments, so UK MEPs face a complicated regime.
So, that is a rough synopsis of the provision before us. It is just a shame that the clause could not have been debated a couple of weeks earlier, before the European elections, when it would have been rather more topical. In fact, I wonder whether the Government’s approach will be coloured by the loss of five of their 18 MEPs earlier this month. There are now so few Labour MEPs that I wonder whether the Government were considering a late volte-face on clause 56 and dropping its provisions altogether. With only 13 seats, Labour scored less than parties it loves to criticise.
The Chairman: Order. The hon. Gentleman did mention clause 56, but he is nevertheless straying wide of the clause. I would be grateful if he came back to the matter at hand.
Mr. Hands: You are of course right, Mr. Atkinson, but I will just finish the sentence. They won only 13 seats, fewer than the Polish Law and Justice party, which is one of—
The Chairman: Order. I am quite happy to give some latitude, but the hon. Gentleman is now taking liberties.
Mr. Hands: I apologise, Mr. Atkinson.
Mr. Jeremy Browne (Taunton) (LD): Will the hon. Gentleman show the leadership for which he is renowned by encouraging all Conservative MEPs to forgo any additional salary?
Mr. Hands: I am not quite sure about the leadership for which I am renowned, but what other salaries might be available to MEPs? Did the hon. Gentleman mean outside employment?
Mr. Browne: No, I did not. I understand that they could decide unilaterally to pay themselves the same amount, in pounds sterling in equivalent terms, as MPs in this House, so any increase that they might enjoy, as a result of either a higher rate of pay or exchange rates, could be forgone.
So, when it comes to clause 56, I find it interesting that the Government are proposing tax relief for MEPs, deciding to hide it from public view before the European elections, and have almost no MEPs for the clause to refer to.
Let me say a little about the new rules for MEPs pay, coming into effect next month, which, as mentioned, are the background to clause 56. The new rules will have the most impact in poorer countries, such as Bulgaria, where MEPs earn around 50 times more than the average domestic salary. As we know, the rules will set a standard salary for all 736 MEPs, regardless of the economic conditions of the relevant member state. The think-tank, Open Europe, has said:
“The huge gaps in pay will tempt the most talented people away from national politics.”
That particular issue is probably beyond the remit of today’s debate, but I notice that the Government seem to have decided that there is too little talent left for them in the House of Commons, as shown by the appointment of seven Peers to attend Cabinet.
The Chairman: Order. The hon. Gentleman is trying my patience. I urge him to keep to the essence of clause 56, which is about double taxation relief for MEPs.
Mr. Hands: Indeed, Mr. Atkinson. Ironically, the Government are bringing back MEPs to serve in the national Government. I was going to come back later to the tax treatment of a member of the European Parliament joining the Government.
As the explanatory notes say, the new pay regime takes effect from the new Parliament, which will assemble in a few weeks. The new package has certainly raised some eyebrows, not least because it was voted on by the European Parliament itself. New MEPs will automatically be subject to the new package and re-elected MEPs will be able to choose which package suits them best. I am not aware of any legislature in the world that has that luxury. The consequence is that MEPs will be paid directly by the Community, rather than by their mother country, and will be subject to tax by the Community.
One obvious area that the Minister needs to explain is the EU’s ability to raise tax in its own right—the so-called “tax for the benefit of the Communities”. At first, I thought that the EU having tax-raising powers must be entirely new, but can the Minister confirm that the European Community tax referred to in the explanatory notes is derived from Council regulation No. 260/68 of 29 February 1968? It was designed for Commission staff and later European Investment Bank staff. I shall be grateful if she will explain whether the tax has existed for a long time. The tax is paid back into the EU budget and clause 56 extends the scheme to MEPs. Can the Minister confirm that?
I found that most sources on this Community tax were extremely opaque. The best explanation that I could find was on the website of the EIB:
“Some key-concepts concerning the community tax:
Progressive tax scale: as with the majority of national taxation systems, Community tax is based on the principle of a progressive tax scale: the greater the taxable income the higher the rate of tax.
Brackets: Progressive taxation is achieved by dividing the scale into brackets. The taxable amount in each bracket is taxed at the rate applying to that bracket.
Top bracket: the lowest bracket is zero-rated for tax purposes, the second is taxed at 8%, and so on up to the top bracket, which is taxed at the maximum rate of 45%.”
10.45 am
Many of us will find it ironic that the Finance Bill, which sees an enabling clause to create a new 50 per cent. tax rate for all British subjects, is the same Bill that allows our MEPs to be taxed by this “tax for the benefit of the Communities” at a maximum rate of only 45 per cent. Having said that, it looks as if the HMRC reserves the right, as I have said, for UK MEPs to pay tax on the difference between this “tax for the benefit of the Communities” and UK tax. However, the Minister will need to make that clear and it would be interesting to know whether other states’ MEPs have to pay that. Knowing in which states that is not the case would inform the debate a great deal.
If this “tax for the benefit for the Communities”, as referred to in the explanatory notes, has been in place since 1968 and the UK has had no double taxation treaty with the EU, which is actually the origins of clause 56, have there been cases in the last 41 years of someone working for the EU—perhaps the Commission, or a body such as the EIB—actually being taxed twice? That is the implication of the Government’s argument for introducing these measures.
I suppose that all those subject to the Community tax are probably resident in Belgium, but that is not necessarily the case, perhaps, for a member of staff of the EIB working in a London branch. I would be grateful for an explanation of whether they are paid by the EU, but have effectively been subject to taxation by both authorities in the period since 1968. It would be helpful to have some light shone on that, because we are talking about introducing a new clause which may have been needed in 1968, but not in 2009.
The Minister will also have to explain the coefficients being used for these taxes. Returning again to the EIB website, the best explanation I could find of this “tax for the benefit of the Communities” was:
“The original tax scale was laid down by regulation 260/68: coefficient of 100%. This coefficient is readjusted on a regular basis by the Council of Ministers of the E.C. The current coefficient adapting the tax brackets is 486.7097%.”
So the Committee needs to know what has been increased almost five fold since 1968 in this “tax for the benefit of the Communities” referred to in the explanatory notes. Is it the level of the tax brackets, or the actual percentage taxed on the lowest band? I simply do not understand what these coefficients are, but it is very important for us to know what they are.
It is worth having a look at what sort of sums might be involved in clause 56. The think tank Open Europe published a comparison last week between the costs of the UK and the European Parliaments. Their findings are that the European Parliament cost taxpayers a staggering £1.8 million a year for each MEP. That is in contrast to the House of Commons, which cost taxpayers only £364,000 for each Member for each year. The other place costs only £208,000 per member per year. So the overall bill is over five times the level of a national MP, or nine times the level of a peer.
Mr. Brian Binley (Northampton, South) (Con): Are they worth it?
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Prepared 17 June 2009