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|©Parliamentary copyright||Prepared 8th February 2011|
Publications on the internet
General Committee Debates
European Committee Debates
Financial Sector (Taxation)
The Committee consisted of the following Members:
Alison Groves, Committee Clerk
† attended the CommitteeThe following also attended (Standing Order No. 119(6)):
Penny Mordaunt (Portsmouth North) (Con): It might be helpful to the Committee if I take a few minutes to explain the background to the document and the reason why the European Scrutiny Committee recommended it for this debate.
“The EU should lead efforts to set a global approach for introducing systems for levies and taxes on financial institutions with a view to maintaining a world-wide level playing field and will strongly defend this position with its G20 partners. The introduction of a global financial transaction tax should be explored and developed further in that context.”
“Further work is necessary on levies and taxes on financial institutions, at both the international and internal levels… there should be further coordination between the different levy schemes in place in order to avoid double-charging. The Council is invited to report back to the European Council in December 2010. The different options regarding the taxation of the financial sector should also be examined, as well as good practices aimed at impeding tax havens and tax evasion.”
The Commission communication and accompanying staff working documents assess two proposed new forms of taxation in the financial sector: financial transaction taxes, which are designed to tax the value of single transactions and are applied to a broad range of financial instruments; and financial activities taxes, which, in their most extensive form, fall on total profit and remuneration and, in contrast with financial transaction taxes, tax corporations.
The European Scrutiny Committee therefore recommended the document for debate to allow Members to examine the case for an EU-level proposal for such taxation and to consider the choice between a financial transaction tax and a financial activities tax.
The Government are committed to maintaining the position of London and the UK as a leading international centre for financial and related services. The UK is leading the debate both in the EU and internationally
We have already introduced a bank levy that is designed to complement these reforms and to ensure that banks make a fair and substantial contribution that reflects the risks they pose to the UK’s financial sector and to the wider economy. It remains an open question whether the levy alone offers a sufficient answer to the question of how the financial sector should contribute.
The Government believe that a financial transaction tax would need to be applied globally. Many questions remain unanswered as to whether the model offers a stable and efficient mechanism to raise revenue.
The Commission document notes that further work is needed on both options. I want to make it clear that any proposal on financial sector taxation would be carefully examined to assess its implications for the UK. The Government believe that direct taxation remains primarily a matter for member states, and we would consider any future legislative proposals on financial sector taxation from the Commission in that light.
As we continue to engage in those discussions, it will remain important that we look at tax issues in the round and consider the cumulative effect of taxes on the financial sector, while ensuring the position of London and the UK as a leading international centre for financial and related services.
Chris Leslie (Nottingham East) (Lab/Co-op): We have quite a substantial document in front of us today, and I am grateful to the European Scrutiny Committee for highlighting the importance of the papers. It might be easier if I go briefly through my set of questions as a group, although I am conscious that if they are specific, that sometimes makes things difficult.
First, will the Minister update the Committee on the specific conversations he or the Treasury has had with other Finance Ministers, either at ECOFIN level across the European Union or internationally, about the financial transaction tax or the financial activities tax? If those measures are being debated across the EU or internationally, can he give us a sense of how far down the road we are in discussing them?
Secondly, in the bundle the Commission says that in the summer it is due to publish a detailed assessment of the two arrangements—the financial activities tax in particular, but I think it says the alternate financial transactions tax as well. What process does the Minister envisage will be available for Parliament to scrutinise that assessment? Will there be another hearing in the European Scrutiny Committee, or is he likely to make a statement to Parliament? Obviously, the detailed assessment will be the more critical point in policy terms.
We seem to be doing this in threes, so, thirdly, can the Minister confirm the yield predicted on page 39 of the bundle? With a financial activities tax, 21.3% of the EU yield would come to the UK, which could be roughly €5.5 billion—about £4.5 billion—if we use the addition-method financial activities tax at the 5% level set out in table 7 on page 38. That seems to be what is in the document, but I want the Treasury to confirm that that is broadly the ballpark figure in those scenarios. Those are my first three questions.
Mr Hoban: In response to the hon. Gentleman’s first question, there have been discussions about the financial activities and transaction taxes at ECOFIN. For example, in September 2010 there was a debate in which the Chancellor took part, which demonstrates the seriousness with which those ideas are taken. I, too, have had discussions with ECOFIN on financial services taxes more broadly.
On the next stage of the process, as the explanatory memorandum published by the Exchequer Secretary to the Treasury, my hon. Friend the Member for South West Hertfordshire (Mr Gauke), pointed out, we do not expect the Commission to come forward with the more work until summer 2011, and we look forward to seeing what that work is. Traditionally, when the Commission publishes documents, we refer them to the European Scrutiny Committee with an explanatory memorandum, as we have in this case, and that forms the framework for further parliamentary scrutiny and engagement. My constituency neighbour, my hon. Friend the Member for Portsmouth North, talked about the role the Committee played, and if it decided to look at this issue in future and recommend it for debate, either in Committee or on the Floor of the House, we would welcome that degree of parliamentary scrutiny.
The document states that estimates of yield are complex to determine. Part of the challenge and one of the reasons why people are attracted to such taxes is that they affect behaviour. It is difficult to come up with a precise figure on yield because the tax may affect behaviour in a particular way. It may be reducing profits and remuneration, and international businesses may decide to relocate their businesses outside the EU to minimise the impact of the financial activities tax. A quite heavy caveat is applied to the figures as a consequence of some of those behavioural and measurement issues.
Kelvin Hopkins (Luton North) (Lab): It is a pleasure to serve under your chairmanship, Mr Leigh. The papers refer, among other things, to what they describe as the “irrecoverable VAT problem”. Some financial services are exempted from VAT, yet we are governed by the EU’s common value added tax system. Would it not be more sensible for member states, particularly those with their own currencies such as us, to decide for themselves
Mr Hoban: Of course, as the hon. Gentleman recognises, there are differential rates across the EU, but in respect of VAT there is a common tax base across the EU. That matter is decided at international rather than UK level, so any attempt to expand the scope of VAT would need to be dealt with at European level, rather than domestically.
Kelvin Hopkins: To follow on from that, I understand that VAT recovery rates in the financial sector vary from 0% to 74%, which is a pretty wide range. To what extent does Britain have a better VAT system, or collection system, than other member states? Are we suffering in any way financially because of those arrangements?
Mr Hoban: It is difficult to say. I will not engage in a discussion about comparable VAT systems across Europe—that would test the patience of most people, even those who are experts in this field. However, there are different VAT arrangements, which will affect the amounts recovered. The hon. Gentleman may be aware of the ongoing discussion about financial advice. For example, commission on products is not, I think, subject to VAT, whereas fees for advice are. Therefore, the extent to which banks or financial institutions are able to recover VAT and so on depends on the structure and nature of financial services businesses.
Chris Leslie: My hon. Friend the Member for Luton North asked a question on VAT similar to mine, so I will not dwell on that point, but will the Minister say what his understanding is of the yield from the stamp duty reserve tax, which is currently levied on shares and securities? Does he agree that, in broad terms, that is essentially a form of transaction tax?
Finally, will the Minister refresh the Committee’s memory on the Treasury’s current estimate of the net fiscal cost of Government intervention in supporting the financial system more broadly? The motion talks about the “risks” borne by the taxpayer. We know that the taxpayer did buy out a number of financial institutions and their shares, and provided guarantees and contingent liabilities for many of the banks in the system. What is the best figure the Treasury can put on how much the taxpayer invested in propping up the banking system for the duration of the credit crisis?
Mr Hoban: The hon. Gentleman makes an interesting point about stamp duty. It is quite a significant revenue raiser for the Treasury—in 2009-10, it raised about £3 billion. There is an issue about who actually pays stamp duty. One of the arguments put forward by a number of people in the City is that abolishing stamp duty would have significant wider economic benefits. Of course, another point is that stamp duty, if my memory serves me right, is not levied on contracts for difference, which are used in a great deal of the share trading that goes on in the City. People respond to incentives in the tax system and their behaviour changes as a consequence. Stamp duty is a good example of that happening. People have changed the way in which they trade shares, so the yield from stamp duty is lower than it would be if there were no contracts for difference.
The hon. Gentleman might be aware of the Swedish experience of a transactions tax, which was a significant reduction in transaction volumes. History is littered with examples of situations in which Governments’ intervention has changed the nature of financial transactions. The eurobond and eurodollar market in the UK is a consequence of changes made to the US tax regime back, I think, in the early 60s. That is one reason why I recognise that a transaction tax will be effective only if it is levied on a global basis.
Kelvin Hopkins: Some call the financial transactions tax the Robin Hood tax, which has a flavour about it, but it was originally called the Tobin tax, because it was invented by Professor Tobin. Although we understand that such a tax must be introduced on a world basis, it was suggested that the EU should negotiate on our behalf. Given that Britain has a separate currency area, would it not be more appropriate for it to negotiate for itself? Should we not be a negotiating player in the debate instead of subsuming ourselves in European representation?
Mr Hoban: We will decide the best way in which we can participate in the debate and we will consider what the appropriate vehicle will be. However, I point out to the hon. Gentleman that when the International Monetary Fund looked at financial transactions taxes carefully, it did not endorse them. It argued that further work was needed to see if such a tax would act as a stable and efficient mechanism to raise revenue, so there is a range of issues to consider.
The hon. Gentleman might wish to ask a supplementary about, but I should apologise for forgetting to answer the question put by the hon. Member for Nottingham East about the commitment to bailing out the banks, which was engaged in by the previous Government. A £20.5 billion investment was made in Lloyds Banking Group. Some £20.3 billion was invested in ordinary shares of the Royal Bank of Scotland, while another investment of £25.5 billion was made in RBS B shares. There was an equity holding in Northern Rock of £4.4 billion. Obviously, those were the costs, and one hopes that the taxpayer will see a return as a consequence of the sale of the stakes in those banks.
At the end of December, our stake in Lloyds bank was valued at £18.3 billion. That might seem to be a slight loss, but £2.2 billion is not slight in most people’s books. The RBS ordinary shares were valued at £16.8 billon and the B shares were valued at £24.6 billion. There is no valuation on Northern Rock because it is a wholly owned business but, as hon. Members are aware, United Kingdom Financial Investments Ltd is currently advertising for people to advise it on the disposal of our interest in Northern Rock.
John Mann (Bassetlaw) (Lab): Will the Minister elucidate what he perceives the French position to be in relation to the changes? Is there any possibility that the French are outmanoeuvring us in considerations within Brussels?
Mr Hoban: The French have expressed support for a transactions tax and President Sarkozy is pursuing it. However, the IMF’s study, which is one of the most authoritative studies of transactions taxes that has been
John Mann: Will the Minister tell us on how many occasions he and other Ministers have been out to Brussels or other European capitals to negotiate these important issues? Obviously, we need to be clear that we are fighting our own corner properly.
Mr Hoban: The hon. Gentleman was missing from the first part of the sitting, when the hon. Member for Nottingham East raised similar questions. Discussions are taking place at a European level. The Chancellor of the Exchequer discussed the proposals in ECOFIN in September, and I took part in a similar discussion at a different ECOFIN meeting. No further proposals are on the table and the Commission is doing more detailed work with a view to publishing a document later this year. We see this as a matter for national Governments, not for the EU.
Kelvin Hopkins: The Minister refers to the work of the IMF, but some of us do not regard every pronouncement from the IMF as holy writ. It frequently makes major mistakes with regard to the management of the world economy and the world financial system. The Minister mentioned its concern about reducing the number of transactions, but surely reducing volatility in international financial transactions would be a good thing, because the focus would then be on international transactions for investment purposes rather than gambling.
Mr Hoban: The hon. Gentleman confuses volatility with volume. It is possible to have a volatile market with relatively few transactions, or a stable market with many transactions. He needs to think carefully about the trade-off between the two.
That the Committee takes note of European Union Document No. 15282/10 and Addendum, relating to financial sector taxation; recognises that decisions regarding direct taxes are primarily a matter for sovereign governments; supports the timely action the Government has already taken to introduce a permanent levy on bank balance sheets to ensure that banks make a full and fair contribution in respect of the potential risks they pose to the wider economy; notes that the Government continues to explore the costs and benefits of financial activities taxes and will work with international partners to secure agreement; and further supports the Government’s position that an EU-wide financial transaction tax could lead to the relocation of financial services outside the EU.—(Mr Hoban.)
Chris Leslie: As time passes and memories of the banking crisis begin to wane slightly, we are in danger of forgetting that the international community came together in 2009 at the G20 in Pittsburgh to identify the role that targeted taxation might play in ameliorating risk and ensuring that the financial services sector made a fairer contribution across the globe. One part of that—the financial stability contribution—was interpreted by the IMF, and subsequently by Her Majesty’s Treasury under the auspices of the current Chancellor of the Exchequer, to equate to a bank levy.
We will eventually debate that levy during our proceedings on the 2011 Finance Bill. As the Minister knows, however, I think that it is quite a tepid and enervated version of the financial stability contribution that they could have put in place. Some reports have suggested that that ought to have raised about £4 billion, but the Government’s version will raise £2.6 billion, which is a relatively paltry sum in such circumstances. The Government changed their position in October. According to the original plans for the banking levy, there would have been a £20 billion threshold for the liabilities on a bank’s balance sheet that would be subject to the levy. The Government have changed that threshold to a tax-free allowance, so banks will be allowed to have £20 billion of liabilities and will be taxed only on the amount above that at a rate of 0.04%, which will rise in subsequent financial years to 0.07%.
In his opening statement, the Minister said that there must be a substantial contribution. Indeed, he said that it is open to question whether the levy alone is sufficient. His comments to the Committee were more circumspect than the rather forward position that he has taken in the motion. If the Government say that the bank levy is a “full” contribution in respect of the possible risks, that is quite interesting. They are essentially saying that the bank levy at that £2.6 billion yield on a normalised year is adequate, that they are content with it, and that it represents the full picture. That is not quite the phrase that the Minister used in his earlier statement, so if he will address that, I will be grateful.
The main issues that we are debating, however, are the financial transactions tax and the financial activities tax. My hon. Friend the Member for Luton North mentioned the Robin Hood tax, which is advocated vociferously by many charities and voluntary organisations. Many of us will have been lobbied by those wonderful e-mail-based campaigns that frequently have a habit of filling our inboxes. According to the Robin Hood tax website, its campaign is supported by hundreds of thousands of British people. It alleges that its supporters include Lord Turner, the chairman of the Financial Services Authority, which is intriguing, the philanthropist George Soros—I am not sure that that is the only way in which he could be described—Warren Buffet, Joseph Stiglitz and, of course, the French President, Nicolas Sarkozy, so the proposition is not to be sniffed at.
As you might expect, Mr Leigh, given that I am a Nottingham MP, I could not refuse an invitation to attend a seminar on the Robin Hood tax. When I went along to the seminar, I was impressed by the strong case that was made by the charities advocating the measure, which they envisaged as a minor transaction levy, albeit one with the potential to raise significant and useful resources. I therefore urge Ministers to help rather than to hinder international efforts to design a possible solution. That does not necessarily mean taking forward one
That is the Minister’s opinion, but it seems that the idea is being dismissed at this stage, although we have not seen the Commission’s full assessment or heard various other propositions. The matter needs further study, so I hope that the Treasury allow that to happen.
The principal issue in the realms of what the Government see as possible is the financial activities tax which, given that it addresses profits and remuneration, is obviously a different concept. I asked the Minister if he would confirm the possible yield as set out in the particular version proposed—there are several different designs—and those resources are significant, and indeed potentially more significant than the banking levy. I am therefore curious to know what progress the Chancellor has been making in moving that forward. In the June Budget, the Chancellor said that he was interested in this particular financial activities tax and that he was trying to press for consensus on it. As I have said to the Minister on several occasions, however, there is no sense of leadership or drive from the Treasury on the issue. There may well have been a discussion at ECOFIN, but if the Chancellor stated in June that the proposal was on the table yet we are not going to revisit it until a year later—even in the form of a basic assessment—there does not seem to have been a rapid assessment of the measures that might be necessary to reflect the risks that have been presented by the financial services sector.
I am always interested to hear Ministers say that such tax issues are for nation states to deal with independently—I agree—but whenever the issues are debated at a national level, it is always said that we cannot act at that level because all our institutions will flee abroad and there will be regulatory arbitrage. However, when we have the opportunity to debate such issues at an international level, whether in the EU or more widely, we hear, “Those environments are too difficult for us to pursue; we have to sit back and wait.” The Minister is spinning a rather canny political Catch-22. However, it is important that we press ahead with the propositions so that we can at least see the detail that they contain and then make decisions on the basis of the facts.
A number of other points are raised in the bundle about bank resolution funds and the EU framework for crisis management. I wonder whether the Minister has any comments on those, because although they are not cited in the motion, they are aspects of the paperwork before us. I assumed that a statutory instrument on investment banking special administration reserve funds that we have discussed was similar to the bank resolution fund that is considered in some of the EU paperwork before the Committee.
The papers suggest that the role of the European-wide supervisory authorities—the European Banking Authority and others—in EU-wide crisis management has not yet been fully determined. Does the Minister agree that as we move into the rather lengthy debate we will have about financial services regulatory overhaul in the UK, we will need clarity about the role that the EBA and others will play in relation to bail-in proposals, debt write-down tools and so on?
John Hemming (Birmingham, Yardley) (LD): I start by registering a declaration of interest. I chair JHC—standing for John Hemming & Co.—that I founded many years ago. It operates computer systems for financial services transactions—a very direct link there. I also buy and sell shares, some of which are in financial institutions.
I have historically been quite supportive of the idea of extending financial transaction tax. It was initially called the Tobin tax and then the Robin Hood tax. There are complications with it. At the moment we have stamp duty, which has logic to it: the state provides a legal environment in which contracts can be enforced. People pay a stamp duty because they require a judicial process whereby the contracts are enforced. That obviously applies to property transactions, because to have a Land Registry and the like there must be something to fund it. It applies to equity transactions. However, there are lots of other transactions it does not apply to. There is a substantial argument for broadening the range of transactions it applies to, and something also needs to be done about tax havens.
It is good that in the first paragraph referring to the decision of the European Council it looks towards a “global financial transaction tax”. That is the way that works. The obvious thing is this. It is very simple to take a computer—the computers that can operate all the settlement systems now are much smaller—and plonk it on an island in the middle of the Atlantic and say, “That is in a tax haven.” When dealing with large transactions, a small percentage tax can make it worth while going through the hassle of setting up that computer system in the middle of the Atlantic to avoid the transaction tax. Hence, something has to be done on a global basis. The logic to it is quite straightforward. We need a rule of law globally as well as in each individual country. For somebody to piggy-back off that and not contribute payment is wrong.
The key is to look globally and deal with tax havens. It is a mistake to assume that there will be the same number of transactions if even a very small levy is introduced. Obviously, the number of transactions will go down. The effect of introducing any financial transaction tax affects the number of transactions, because people’s decisions on whether to act or not change. We should welcome what is being done at the international level.
Chris Leslie: I am listening very carefully to the hon. Gentleman, who obviously speaks with some knowledge of the issues. Is he not slightly disappointed at the wording of the motion, which implies dismissing all variants of a financial transaction tax as unworthy of even detailed consideration?
That is obviously true. We have a complicated situation regarding the legal environment of places such as Jersey or Guernsey. It is a strange situation because they are subject to the European convention on human rights, but not to the European Court of Justice. The difficulty is that if it is not done globally, the effect will be
Kelvin Hopkins: I agree with much of what the hon. Member for Birmingham, Yardley has just said. I would go rather further. I am a strong supporter of a financial transaction tax; I think a Europe-wide tax would be beneficial and fears about a massive shift of financial activity overseas would be unfounded. The level of tax proposed here is 0.005%, which is one 200th of 1%. So it would hardly be noticed on an individual transaction. It would start to build up only when there were many transactions after a short space of time, so it reduces the volatility. If investment has been made overseas or money has been transferred overseas for investment purposes, the returns would be 5%, 10% or whatever. This would be an infinitesimal part of that return so it would not affect investment.
I do not believe that people will shift en bloc overseas for a tax of that kind. For one thing, people have their own loyalties to their own state. They will not necessarily want to move abroad. A fear is put about that if we tax bankers more effectively, they will all rush abroad. Tens of thousands of highly skilled people work in the City now. Apparently it is sucking the best brains out of Oxbridge and wherever these days, especially those who can do mathematics. But for every one who goes abroad, I am sure there are a hundred who are prepared to do their jobs at half the price and even less. Certainly the kind of money that is talked about in the City is staggering. The figures are beyond the imaginings of most ordinary people. Even in the City there are people who would give their eye teeth for some of these salaries or a fraction of them. But the idea that individuals would move overseas in large numbers because of taxation and their bonuses is overstated.
So a financial activities tax would be fine. Personally, I am happy with much more substantial personal taxation of bonuses. I remember the levels of taxation we had in the 1970s before the dramatic reductions in high rates of tax under Mrs Thatcher and Nigel Lawson. I do not suggest that we should go back to those levels of tax. For those who are young and do not remember them, the top marginal rate of tax was 83p in the pound and there was a 15% surcharge on top of that for unearned income. People whose income was all unearned could in theory pay 98% on the top part of their income. We are not suggesting going back to anything like that, obviously. At the moment we are down at a top rate of 50% and until recently it was 40%. If a handful of played-out pop singers and greedy bankers go abroad and leave the rest of us to run the country, well I am not worried. I think it would be a splendid thing.
I am strongly in favour of a financial transactions tax and a much more effective tax of very high incomes as well. Imposing a financial transactions tax just on euro and pound transactions would apparently raise €12 billion a year. That is a useful amount of income. I am sure that in these times we could all do with that extra income from a source that will not affect poor people. It will not affect my constituents directly at all but will make a marginal difference to some of those on very high incomes.
John Hemming: The hon. Gentleman argues that it would not affect his constituents to have a financial transactions tax. Would he not accept that there would be a small effect on those people who go abroad and pay for things abroad?
Kelvin Hopkins: Yes, possibly. But with the depreciation of the pound, the cost of everything abroad has gone up. For those of us who like the occasional bottle of wine imported from France, which I confess I do myself, paying a bit more is justified if it will help the wider economy, and help the Exchequer to raise a few more pounds and our industries to export more. That is fine; I am happy about that. I am only on a MP’s salary plus a couple of little bits of pension. I am not a wealthy banker, although I cannot speak for Conservative Members who might know more about large incomes than I do. However, I would not object to paying a little more tax to ensure a fairer and more successful society.
I may be regarded as somewhat sad, but I have spoken in and attended more than 100 of these Committee meetings over the last 14 years. They are useful, and I want to see the system of scrutiny continue and be strengthened. That is my view, and I hope that the Government will be persuaded by my socialistic views on redistributive taxation, and help bring down the international gambling with finance that has led to such difficult circumstances. I also hope that we do not inhibit international transactions for investment purposes rather than short-term speculative gains. I hope that the Government will be persuaded by such thoughts in due course.
John Mann (Bassetlaw) (Lab): It is a pleasure to serve under your chairmanship, Mr Leigh. This is my first such Committee and I do not know what I have done to receive the accolade of that appointment. I do not know whether any of the Whips are around, but I am happy for this Committee to be one of my last because there are far wiser counsels than I on such matters, and I defer to my hon. Friend the Member for Luton North as one such expert.
Having been appointed to this important Committee, I feel it is important to say a few words on the matter at hand, and particularly on the duplicity of this coalition Government when it comes to taxation, finances and banking. We have an option, and I do not have an interest to declare, although I would have done in the past as I ran lorries across Europe. I am aware of how the Government’s choice of taxation—VAT—impacts on businesses such as the one I part owned. It is interesting to see that in the history of this country, it is always one party that chooses to persecute hauliers and other similar business people. We have the opportunity to shift from VAT to FAT—a financial activities tax. That would be a good way of raising revenue in this country as well as across Europe. I disagree with my hon. Friend the Member for Luton North. I am not in favour of more taxes; I am in favour of fairer taxes, rather than the unfair, anti-business, anti-people taxes that this unholy coalition is bringing upon us. As ever, that opportunity has been squandered.
Kelvin Hopkins: I remind my hon. Friend that I was one of a small number of people who voted against the abolition of the 10% tax rate under the previous Government. In my speech, I emphasized that taxes on individual incomes—on all incomes—are important.
The Chair: Order. That is very interesting, but this is a fairly narrow debate. We are supposed to talk about financial transaction taxes, or financial activities taxes. I know that Mr Mann is an experienced MP and he will not stray too widely.
John Mann: Mr Leigh, I will not stray at all. The issue is why this hopeless coalition is failing to bat for the FAT in Europe and ensure that a financial activities tax is introduced in collaboration with our friends in France, Germany and elsewhere. That is the question. The motion as framed is wholly inadequate. Even with the Eurofanatical Liberals present today, the coalition has an incredible blind spot when it comes to Europe. As with all other things Europe, some would say about the financial activities taxes that the Government consider Europe merely to be a flight path to cross before meeting their friends in the Communist party of China, with whom they spend far more time than doing what they should be doing—batting for Britain in the institutions of Europe to ensure that the British national interest is put first.
It is the British national interest that demands that we have such a taxation introduced on the financial institutions. Those are the same financial institutions that paid total disregard—indeed, contempt—for the Government’s softly, softly approach, even in relation to revealing how much they get in pay and bonuses. Those are the same investment bankers in relation to whom, as we saw with Cadbury’s and Kraft, there is no competition. These are not people who would relocate to Hong Kong, because, as we saw with Kraft and the takeover of Cadbury’s, they were all in on it. All of them had a share of the action and they were all charging fees and making profit out of the disgraceful destruction of a brilliant and traditional British company. That is what the Government are doing.
Mr William Cash (Stone) (Con): I very much endorse the hon. Gentleman’s remarks about the decimation of Cadbury’s. I have been following the matter for a long time. In fact, I ought to declare an interest because they are cousins of mine. The way in which that company’s work force have been treated—
John Mann: My comments on such leveraged buy-outs and takeovers are relevant because a financial activities tax will do nothing but claw back money taken by those same bankers into the Treasury’s coffers, to allow the Government the choice to invest more, to cut VAT, or to do whatever else any Government now or in the future should do. I hope that Ministers are drawing up precise and detailed policies to ensure that, when the coalition collapses in the near future on the back of its inaction on these taxes in Europe, we have the opportunity to take forward the cudgels on behalf of the British national interest and the British people.
Finally, there is something wholly missing from the Government’s agenda in Europe when it comes to taxation on the bankers: there is nothing whatsoever on dealing with the tax havens, many of which are in British dependencies. We have the opportunity to take a lead in Europe on that matter, but it was wholly missing from our pitiful contribution to the subject. I exhort the Government to get out there. They should get into Paris, Bonn and particularly Brussels and lead on these things, rather than being the laggards as usual—shame on the Minister and his ministerial colleagues for their ineptitude on this. The motion is wholly inadequate, and I trust some strong politic will come forward from the Opposition, because our shadow Ministers might be in power soon.
Mr Cash: I rise—I hope the Minister will accept this in the right spirit—to congratulate the Government on taking the line set out in the motion, which is incredibly important. The Minister need not be surprised, because he knows perfectly well that it is very much in line with the views of those of us who do not want EU-wide invasions of our sovereignty—certainly in matters of tax—to go an inch further. I am slightly worried about the phrase:
“the EU should lead efforts to set a global approach for introducing systems for levies and taxes on financial institutions with a view to maintaining a world-wide level playing field and will strongly defend this position with its G-20 partners.”
I have served on Committees such as this and have discussed this European issue for long enough to know that, when a European Council meeting refers to exploring means of achieving things that are not necessarily consistent with our sovereignty or our own right to determine our own rates of taxation, which is fundamental to the House, there is a potential inconsistency between, on the one hand, the European Council agreeing to do it on a global scale and to explore it further and, on the other hand, saying that we are going to defend our sovereignty.
The motion uses the word “primarily”, which also arose in relation to the financial stability mechanism, where the word “solely” would have been far better. My first point therefore is that decisions regarding direct taxes should be described as “solely” a matter for sovereign Governments.
My second point is that I do not believe that there are any unexplained benefits. Thirdly, I very much support the proposition that an EU-wide financial transaction tax could lead to the relocation of financial services outside the EU. In that context, we have the Vickers commission and the Financial Services Authority, but the bigger, overarching question is that of the supervisory authorities, which are being created under the jurisdiction of the EU itself as we speak and by which the final decisions on all the drafting of all the regulations will be determined in line with the principles prescribed by the European Court of Justice. That is where the power is being shifted. I have written to the Financial Times and have written other letters to, and articles in, papers and so on about the subsidiary authorities that have been created. The fact is that I have been warning about the issue for two and a half years.
The Minister and I attended an extremely important conference before the general election. It was convened by my hon. Friend the Member for Ludlow (Mr Dunne), who is now a Whip, and all the main players were present. I remonstrated very strongly indeed about the de Larosière report, as it then was. The hon. Member for Bassetlaw has a point, although he approaches the issue from a different angle. I do not for a moment object to his standing up for the workers in this context, but the plain fact is that, if we have such overarching jurisdictions and if the law is no longer to be made in Parliament and the House of Commons on behalf of the electors, we are in danger of saying that we will defend sovereignty, while actually conceding it through a whole range of other so-called superior jurisdictions. The shadow Minister and I have had a word about this—we need not go into details—and I know that the Opposition are beginning to get slightly concerned about the issue as well.
John Hemming: The hon. Gentleman seems to be arguing that we should never pool sovereignty or sign up to a treaty under any circumstances. I agree that Parliament is always sovereign, but his argument seems to be that we should never pool sovereignty.
Mr Cash: My argument is the argument of myself, as the Member of Parliament for Stone. The Chair’s argument is probably quite similar, but I shall not go down that route. He does not have an opinion on this matter. I am saying that the business of pooling sovereignty simply does not apply in relation to the raising of taxes. It is as simple as that. We can go back to Pym, Hampden or whoever we like. Let us not go down the history road, but I say with respect to the hon. Member for Birmingham, Yardley that the pooling of sovereignty in relation to taxation is out: dead parrot—no way. I am glad that that is what the Minister states is his intention. I just want to see it working in practice.
Mr Cash: I would not have agreements that in any way interfere in any shape or form with the right of Members of Parliament, elected by the voters of this country, to decide both taxation and expenditure.
Kelvin Hopkins: I agree entirely with the hon. Gentleman about sovereignty on taxation matters, but the problem is that there has been an elision of that with whether or not a financial transaction tax is a good thing. If that were separated out, we might have a sensible debate, but I hope that my Whip will guide me to vote no to the motion.
Mr Cash: Any concession with respect to jurisdiction over the City of London is a retrograde step, as I have said many times. We will deeply regret having allowed it to happen, and I think that some of that thinking is embedded in the policies that are being devised at a global level.
Mr Hoban: I am grateful for what has been a thought-provoking debate. The hon. Member for Luton North said that his appearances in Committees rank in the hundreds. I thought that the hon. Member for Bassetlaw was auditioning to be his successor as a regular attendee of the Committee. I am sure that his enthusiasm will have been noted by the Opposition Whip on this occasion.
These documents present the European Commission’s analysis of possible EU-level approaches to taxation in the financial sector and, as we said earlier, this country’s contribution to an already well-developed national and international debate. I wish to set out some of the background to the documents. We in the United Kingdom are strongly of the view that it is right that banks should make a contribution to lessen the risks that they pose to the UK financial system and the wider economy. That is why the Government announced in the June 2010 Budget that we would introduce a permanent levy on the balance sheet of banks in 2011 and, in line with the Budget announcement, the new bank levy came into force on 1 January.
I was rather bemused by the comments of the hon. Member for Nottingham East. I cannot recollect a commitment in the Labour party manifesto to introduce bank levy unilaterally. Indeed, a previous Chancellor of the Exchequer was against that and ruled it out. He and his colleagues stood on that manifesto. It is therefore a bit rich for us to be lectured by Opposition Members. They said that they would wait for international co-ordination to introduce a levy. We made it clear that we would proceed unilaterally, if necessary. That is exactly what we have done, but our leadership has led to agreement on the levy being secured with France and Germany, and we introduced a joint announcement. Subsequently, Hungary, Austria and Portugal either introduced or announced the introduction of bank levies.
As well as ensuring that banks contribute to the public purse, the levies also encourage banks to move away from risky funding levels that threaten the stability of the financial sector and the wider economy. It is estimated that, once fully implemented, the levy will raise £2.5 billion in revenue each year. That is an appropriate contribution, which balances fairness with the competitiveness of the UK banking system.
Mr Hoban: It reflects the balance: we want to ensure that the banks make a fair contribution, but we recognise the importance of international competitiveness of the UK financial services sector, which I will touch on later. We are operating in a global and mobile financial services sector, and banks can make decisions about where they locate their activities. I will expand on that later. The balance is about right.
There is a question about whether the levy alone offers a sufficient answer to the question of how much the financial sector should contribute. There has been a lively international debate about further measures to raise revenue from the sector. The Commission’s papers consider the case for two leading options: the financial activities tax and the financial transactions tax. The IMF has undertaken a separate analysis of the different options for the financial sector to make a fair and substantial contribution. It published its final report in June 2010. That report considered the activities tax, transaction tax and bank levies.
Mr Cash: Does the Minister concede that there is a serious problem if global decisions are taken? Even if they are not done specifically within the EU legislative framework, they effectively arrive at the same position, because parallel arrangements are entered into by different countries and, within the EU, they all end up by achieving the same policy, though not specifically under the rubric of a particular European legal base.
Mr Hoban: My hon. Friend makes an argument against voluntary co-operation in almost all circumstances. I am not sure where we are at. Decisions can be made by countries that achieve the same goal. I do not think that that is a particular problem. There are a lot of areas where countries exercise their sovereign rights and reach the same conclusion or the same process. I do not think that we should be as exercised about that as my hon. Friend appears to be.
The IMF report recommended a levy based on a broad balance sheet charge, with the possible accompaniment of a financial activities tax. The IMF has stated that the bank levy in the UK is broadly in line with its proposed design, and such a design meets the objectives of reducing risk, enhancing fairness and raising revenues efficiently.
The financial activities tax—or FAT—is levied on the sum of profits and remuneration of financial institutions and can be designed to serve a range of purposes. The Commission staff working document assesses three particular forms of FAT. First, the addition method FAT is a broad version of FAT that would be applied to the total profit, minus capital formation, plus total remuneration. The IMF suggests that this would be a proxy for value added, noting that—this goes to the point raised by the hon. Member for Luton North on VAT—the financial sector may be under-taxed through being VAT exempt. The Commission staff working document notes that most financial services supplied within the EU are VAT exempt, so VAT incurred by financial institutions on related costs cannot be deducted—thus VAT exempt does not mean VAT free in such situations.
The second FAT option—the rent-taxing FAT—would be designed to tax rents only. Such a tax would be designed by taxing high remuneration and cash flow profit above a defined level of profit. The third design
The financial transactions tax has been the topic of most debate. They have often been put forward as a tool that might enhance the efficiency and stability of financial markets and reduce their volatility. They have also been suggested as a potential source of revenue in various international forums.
Mr Cash: On the question of “potential risks” that banks have posed to the wider economy, does the Minister agree that there is perhaps a growing necessity to hive off the banking system to ensure that retail banks provide small and medium-sized businesses with what is required on the one hand, and get a lot of this apparently extraneous activity of investment banking and the accumulated derivative activities away from the banks, so that we end up with banking for ordinary people?
Mr Hoban: My hon. Friend raises questions that are within the remit of the Independent Commission on Banking. Sir John Vickers is considering a range of issues on the structure of banking and I would not wish to prejudge the outcome of his work.
The hon. Member for Luton North has suggested that a financial transaction tax would not be distorting. It is worth focusing on that: he argues that it would cause little distortion because it would be levied at a low rate on a broad base. Such an argument is not persuasive, however, according to the IMF. If the central principle—the sole policy objective—is to raise revenue, taxing transactions between businesses, which is what many financial transactions are, is unwise. Distorting business decisions reduces total output, so more could be raised by taxing output directly. A tax levied on transactions at one stage cascades into price at all further stages of production.
The hon. Gentleman has said that a financial transaction tax would affect fat cats, and he implied that it would be a proxy for a tax on income. Such a tax does not necessarily create limited distortion. We see that financial transactions can be particularly vulnerable to avoidance by engineering. I have quoted an example of contracts for differences, which is a route that people use to avoid paying stamp duty on share sales.
Kelvin Hopkins: Transactions between companies—payments—will surely not be affected by a tax at one two-hundredth of 1%, which is utterly negligible. Such a tax would only affect rapid transactions across currencies and exchanges where they multiply up. It would make no difference between companies paying simple transactions for a service or goods, but it would raise useful revenue. It would shift activities towards investment and proper payment, rather than speculative gambling on the foreign exchanges.
Mr Hoban: The hon. Gentleman should reflect on what he has said. The financial transaction tax is based on the volume in a transaction, not necessarily on the number of transactions. It is not a fixed amount per transaction; it is a percentage based on the volume of
In the UK financial services sector, processing centres are a source of employment. Such centres employ people who process the transactions that are booked here—such as JP Morgan Chase in Bournemouth, Deutsche Bank in Birmingham, Citibank in Belfast, and others. They process transactions on a global basis and their employees are drawn from the local work force. Such people are not necessarily earning high incomes—they are not fat cats. A direct employment benefit comes from processing those transactions here, but the hon. Gentleman argues for a tax that would drive those jobs and transactions offshore. I am not sure that he has thought through the impact of introducing such a tax on a unilateral basis, which involves a significant cost.
John Hemming: Does the Minister agree that the hon. Member for Luton North contradicts himself? He argues, on the one hand, that the number of transactions will remain the same, and on the other, that speculative transactions would disappear.
Mr Hoban: Indeed; of course, if his behavioural point were true, it would lead to fewer transactions and a collapse in tax revenues, which is why the IMF has been critical of a transactions tax. Much of the detail has to be thought through to produce a tax that will raise a reasonable amount of revenue and not create distortions.
John Hemming: Of course, that is not necessarily an argument for not having a global financial transactions tax. The point is that we should not take the number of transactions at the moment, assume that we can magic out of that number £12 billion—or whatever it may be—and expect that not to have any effect.
“While there is large interest in achieving the goals outlined…by a financial transaction tax, the debate has not yet focused on more detailed issues, including the definition of the tax base, the tax rate, the taxable event and the degree of coordination needed for a successful implementation of an FTT.”
Kelvin Hopkins: On the Minister’s first point, is he saying simply that a small tax on a very large sum is larger than a small tax on a very small sum? Obviously, taxing at two-hundredths of 1% on £1 billion will raise more than on £1 million, but the percentage is what counts. When people invest and transactions take place, taxes of perhaps 1%, 2% or 3%—or even 0.5%—are being talked about, which would still be vastly more than that tiny amount.
Mr Hoban: The point that I made to the hon. Gentleman was on the confusion of the number of transactions with the value of transactions, and on the suggestion that the number of transactions would be reduced, but there is a complex of relations that has yet to be worked through in detail.
Kelvin Hopkins: Those who designed the Robin Hood tax took into account the fact that there will be a reduction in the number of transactions, particularly where rapid transactions obviously build up within a short space, but they nevertheless still think that a significant amount of revenue would be raised, which would be useful.
Mr Hoban: There are a series of complex issues regarding the design of a financial transactions tax that have yet to be resolved. The hon. Gentleman has alluded to high-frequency trading, but when the Tobin tax was suggested, that did not exist. There is much debate on this topic, and some of the concerns inherent in the design of a transaction tax have led the European Commission to express a preference in its working document for a financial activities tax over a transaction tax. However, it notes that further work is needed, and it has launched a comprehensive impact assessment of both options.
The Commission is not the only contributor to the debate; the IMF, in response to a request from the G20 following the Pittsburgh declaration, has also looked at those models. Like the Commission, the IMF came out in favour of a financial activities tax, and it expressed concern that, under a transaction tax, the real burden may fall largely on final consumers rather than, as often seems to be supposed, earnings in the financial sector. The IMF’s preference was for a financial activities tax working in tandem with a bank levy, and its principal recommendation, which we have followed, was for a broad-based balance sheet charge.
The hon. Member for Nottingham East made a couple of comments. In passing, when he listed the supporters of a Robin Hood tax, I was not sure whether I heard his name or the Leader of the Opposition’s name mentioned. [ Interruption. ] The hon. Gentleman says that it is too early to say—there is a surprise. The hon. Member for Bassetlaw expects the Opposition suddenly to sweep to power. I hope they are ready if that happens, as it did not sound to me as though they had got very far with their thinking. The Leader of the Opposition apologised on Friday for the system of financial regulation designed by the shadow Chancellor, and we note that apology.
The hon. Member for Nottingham East asked a question on the links to EU crisis management, which is important. There is a continuing debate about crisis management tools, and the Commission has published a consultation document. We are working through that. Within that it has called for EU-level resolution funds. The hon. Gentleman may be aware of the bank levy in Germany, the proceeds of which are going to go into a resolution fund; in the UK we have a different approach and think it should go into general taxation. We have made it clear that we do not support resolution funds. We think there is a clear moral hazard that flows from them because they would effectively support a bail-out and that would send, I think, the wrong signal to the banking sector at this time.
The hon. Gentleman raised the issue of a threshold rather than an allowance. We concluded from our consultation on the bank levy that a threshold created an artificial point and would distort behaviour in the market. That is why we moved to an allowance. However, because our aim is to raise £2.5 billion from the levy in a full year, we increased the rate of levies to enable us to achieve that rate and return, taking a different approach to the debate about an allowance or a threshold.
Let me be clear that the Government are committed to maintaining London’s and the UK’s position as a leading international centre for financial and related services. Any tax measures must be seen in the broader context of the UK’s competitiveness and the regulatory reform. The cumulative impact of such measures should be borne in mind. It will be important to look at all the issues in the round, and to consider the overall effect on the financial sector before taking any action. It is within that context that we will measure the options currently on the table.
Our analysis to date suggests that a transaction tax applied in Europe alone could lead to significant relocation of financial services. It happened when Sweden introduced financial transaction taxes, and there is no evidence to suggest it would not happen to Europe if a similar measure were introduced in isolation. The Government therefore believe that a transaction tax would have to be applied globally.
As we announced in the June 2010 Budget, working with international partners, the Government are examining the costs and benefits of a financial activities tax. We do not think that any of the three options should be ruled out at this stage, but it will be important to consider the issues in the round and to consider the cumulative effect on the financial services sector. EU negotiations on modernising the VAT treatment of financial services are continuing, and the impact of changes should be borne in mind.
I welcome the congratulations of my hon. Friend the Member for Stone, who has left the debate, and who took a robust position on the matter. We need to examine the taxes carefully and make our own decisions. Direct taxation remains primarily a matter for member states, and we would consider future legislative proposals on financial sector taxation from the Commission only in that light.
That the Committee has considered Union Document No. 15282/10 and Addendum, relating to financial sector taxation; recognises that decisions regarding direct taxes are primarily a matter for sovereign governments; supports the timely action the Government
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