§ "4. Overseas bearer instruments issued after the day of 1966 by or on behalf of any foreign state or government, or any foreign municipal body, or any company which is neither resident in the United Kingdom nor controlled directly or indirectly by a company which is so resident".—[Mr. Nott.]
§ Brought up, and read the First time.
§ The Chairman
I think that it would be for the convenience of the Committee if with new Clause No. 49 we discussed new Clause No. 50 (Exemptions relating to stamp duty on foreign bearer bonds):In Schedule 1 to the Stamp Act 1891, there shall be added to the exemptions under the heading "Bearer Instrument" the following further exemption:—4. Overseas bearer instruments issued after the day of 1966 by or on behalf of any foreign state or government, or any foreign municipal body, or any company which is not resident in the United Kingdom".
§ Mr. Nott
New Clause No. 49 seeks to exempt from 2 per cent. Stamp Duty overseas bearer bonds issued by nonresident borrowers which are not controlled by a United Kingdom company. As an example, it would exempt from 2 per cent. Stamp Duty overseas bearer bonds issued by, say, General Motors, or Australia, or Austria, or the City of Oslo when their loans were handled by the City of London.
New Clause No. 50 seeks to exempt from the same 2 per cent. Stamp Duty overseas bearer bonds issued by borrowers even if they are so controlled by a United Kingdom company. This Clause would apply, as an example, to an international loan handled by the City 196 of London for, say, the overseas subsidiary of I.C.I., or Unilever or Beecham.
There are three important principles lurking behind this somewhat technical Amendment. First, there is the general need to reform those Stamp Duty laws which yield little or no revenue, and yet which inhibit the free working of markets. I do not think that this is a particularly controversial objective.
Secondly, there is the need to assist those United Kingdom companies that wish to follow the Chancellor's request and finance their overseas capital expenditure by borrowing locally abroad, or on international markets. This is an objective of which the Chancellor himself, in his Budget statement, has expressed himself to be in favour.
Thirdly, there is the need to remove those Stamp Duty anomalies which yield practically no revenue and yet at the same time restrict the ability of London to compete with other financial centres, such as New York and Zurich, in the handling of international loans and thereby the earning of foreign exchange by the sale of its services.
I need hardly add that none of these activities, nor the acceptance of either of these Clauses, would involve the loss of any foreign exchange. Indeed, there would be precisely the opposite effect of helping our invisible balance of payments.
In this connection, the previous Governor of the Bank of England has estimated the net foreign exchange income of the City of London from the sale of its services to amount to the equivalent of about £200 million, and these vast earnings, which come into our invisible balance of payments, are not easily made. They require considerable competition and effort.
To continue to earn this foreign exchange, the City needs a proper appreciation of the problems that stand in the way of the earning of further 197 "invisibles" for our balance of payments. Since the summer of 1964, the City has handled the issue of some 500 million dollars' worth of international loans, on which it has earned 1½ per cent. in the form of commissions, legal expenses, accountancy fees, advertising revenues and all the other services that it provides.
In addition, as a result of its prominent rôle in this business, it has also earned about another quarter of 1 per cent. on issues handled from New York and other financial centres. I want to stress again that it has earned, with no loss of foreign exchange, 1½ per cent. on about half a billion dollars' worth of loans handled by London, and a further quarter of 1 per cent. on another half a billion dollars' worth of loans which originated from other financial centres.
In spite of the fact that all this net foreign exchange income has been earned in this country, one of the many obstacles which the City has faced in developing this market has been the 2 per cent. ad valorem stamp duty on overseas bearer bonds. To make this business competitive the City has been forced, with the full knowledge of the Treasury and the Bank of England, to arrange for all overseas bearer bonds to be delivered in Luxembourg where no Stamp Duty is incurred. Thus, with no gain to the Revenue whatever, London, in order to compete with New York and Zurich—because this is a competitive business, just as the sale of our exports is a competitive business—has been forced into what might be described as a rather unseemly device and has been involved in having to make rather undignified explanations to would-be foreign borrowers, whether it be the Republic of Austria or Australia or any other country. This sort of anomaly is used by our competitors in this business—and competition increases every day—as another example of London's failing ability to act as a leading international capital centre.
Another unfortunate aspect of this 2 per cent. Stamp Duty is that it prevents the London Stock Exchange from playing a predominant rôle in the marketing of international loans. In the days when London was the great exporter of capital in the world, dealers regarded it as the true market place of the world, and just as London has become over the last few 198 years one of the leading market places for Euro-dollar deposits, and we have earned considerable foreign exchange income from that, so it could become a much greater earner of foreign exchange if the Stock Exchange were enabled, by the abolition of this Stamp Duty, to play its full part as an international capital market.
The reason why it cannot do so at present is that the jobbers in London find the complications and delays of having to keep bonds in Luxembourg, and not in this country, so great that by necessity they hold few bonds on their books. This involves a very wide dealing margin, making it very expensive to deal in bonds in London, and it restricts the quantity of bonds and amount in which they can deal.
What is required is the abolition of this Stamp Duty on issues in this very restricted category—it is extremely restricted—and a nominal duty on the transfer because in this way the London market could begin to play its full part. The Inland Revenue would at least gain a nominal return—and I understand that at the moment it gains practically nothing—and the business which the City of London is trying to handle and which is earning this country considerable foreign exchange could be expanded with no risk whatever to sterling.
Lastly, in connection with Clause 50. it is surely equally in the interests of this country that bearer bonds issued by the overseas subsidiaries of companies, such as I.C.I. or Beecham or Unilever—United Kingdom companies which might be trying to follow the Chancellor's directions to finance their overseas capital expenditure by borrowing locally abroad—should also be dealt in in London, again with no risk to our balance of payments, again with no loss of stamp revenue and again with an enhanced opportunity of earning more foreign exchange for this country.
§ 11.45 p.m.
§ Considering the arguments which the Chief Secretary may adduce, I suggest that it cannot be contended that it would be wrong to exempt overseas bearer bonds from this Stamp Duty and not exempt United Kingdom bonds, because United Kingdom investors prefer registered stock and such stock bears only 2s. 6d. per cent. Stamp Duty. Thus, 199 there is no comparability between overseas bearer bonds and registered stock. In the one case overseas investors require the evidence of debt in bearer form while, in the other, registered stock is the common and desired evidence of such debt.
§ The Chief Secretary will be aware that a Clause of this nature has been discussed on several occasions with the Treasury and the Inland Revenue. Several of my hon. Friends and I had understood that general approval had been given to the principle of this suggested change. However, somewhat to the astonishment of the City, such a change was not included in this year's Finance Bill and we are, therefore, interested to know why it was left out.
§ A simple change embodying such a worthwhile principle should not go by default year by year. If we cannot reform our Stamp Duty Acts completely—remembering that they certainly need reforming—we should at least do our best to bring them up to date and apply them flexibly. Since this is, I understand, the last new Clause to be discussed in this Committee, I hope that the Chief Secretary will be flexible and constructive on this point, which would involve no change of attitude or policy on the part of the Government.
§ I have tried to think of any social, economic, political or fiscal argument why the Clause should be rejected. Frankly, I cannot think of one. I repeat that the revenue from this Stamp Duty is negligible, that it restricts the activities of the City in increasing its earnings of foreign exchange, that it prevents the London Stock Exchange from increasing its commissions on foreign business and that this change would in no way be discriminatory against any section of the community.
§ Mr. John Smith
(Cities of London and Westminster): I support the new Clause. As my hon. Friend the Member for St. Ives (Mr. Nott) pointed out, it would not only increase our earnings of foreign exchange but it would also improve the machinery of the market. We are considering an historical anomaly which dates from the time when the advantages of bearer instruments were immeasurably greater than they are today—from a 200 time when the advantages of handling foreign business in this way were much greater—and it was, therefore, right that such an instrument should pay a higher rate of Stamp Duty.
But there is also a social argument for removing this duty, which is that it simply condemns people to needless clerical drudgery and slavery, in particular in having to go through the motions to avoid the tax altogether by doing this business through a foreign country.
Like so many sensible Opposition suggestions, the new Clause is supported by my constituent, the hon. Member for Manchester, Cheetham (Mr. Harold Lever), who last year in this Committee put forward an extremely sensible Amendment, which was rejected, concerning the definition of investment trusts. On that occasion the hon. Gentleman's proposal was supported by my hon. Friends, but was rejected, and I hope that on this occasion he will be rewarded by the Treasury accepting the Clause.
There is another reason why the Clause should be accepted. It is a proposal in which the public will take no interest whatever. It has no publicity value and, therefore, the Government could adopt it without in any way appearing to spoil their record of total rejection.
Fourthly, I feel that it would be nice if we could end our long discussion in this Committee on something other than a discord. I should like to feel that nothing separated me from my constituent opposite except, possibly, the Floor of the House. In order to help this process of ending on a happy note, we have offered the Government what they so seldom nowadays offer to us, namely a choice. If they cannot go the whole hog and accept new Clause No. 50, I hope that they will fall back, in an end-of-term spirit, on New Clause No. 49.
§ Mr. Harold Lever
I wish very briefly to support this new Clause for the reasons so cogently and unprovocatively enunciated by the hon. Member for St. Ives (Mr. Nott) and by my own Member of Parliament, the hon. Member for the Cities of London and Westminster (Mr. John Smith). It must be rare in this Committee that a Member can be so directly supported on the Floor of the 201 House by his own constituent. In this case, as this is a purely non-party and non-political issue, I am very happy to give that support.
§ Mr. MacDermot
The hon. Member for the Cities of London and Westminster (Mr. John Smith) misdirected his persuasive advocacy by urging the Chief Secretary to be flexible and constructive. As it is my task to reply to the debate, I can assure the hon. Member that I will remain faithful to my reputation of being inflexible and neutral.
The arguments put forward in support of these Amendments are that they would facilitate the working of the market in London; that they would improve its facilities compared with those of other centres, and would increase our foreign exchange earnings. For reasons I shall give, I am somewhat doubtful whether they would achieve the last of those objects. I do not dispute that it would be a facility for those engaged in this market but, listening to the arguments, one would think that in some way the London market was at a gross disadvantage compared with other centres in the matter of issuing and dealing in foreign bearer securities.
That is not the case. In fact, in important respects our market is at a considerable advantage compared with other markets. Most other European centres have a duty which they impose on the issue of and dealings in these securities, but have it in such a form that it cannot be avoided where the transactions are between foreign residents or nationals and where the security is not delivered within the country itself.
For the reason which the hon. Gentleman indicated, where foreign bearer securities are issued on behalf of a State or a company abroad, provided the bond itself is not delivered in this country the duty is not payable. That is the reason why arrangements are made for their delivery to be effected in Luxembourg. This is something that has been going on for a very long time, it is well known and organised, and quite unobjectionable. This is the advantage which results from our Stamp Duty law.
In other countries, one cannot succeed in evading the duty by effecting the delivery in Luxembourg. The hon. Gentleman referred to Zurich. There is a 202 liability to duty if foreign bearer securities are issued in Zurich; it is not something one can avoid by arranging delivery in Luxembourg. There is also a duty in New York—a much smaller one in that case—
§ Mr. Hordern
If this practice is, as the Financial Secretary says, unobjectionable, does he not think it a good idea to make it even more unobjectionable?
§ Mr. MacDermot
No, for the reasons I am about to give, if the hon. Gentleman will be patient. I am seeking only to deal at the moment with clearing away any possible misunderstanding there might be among hon. Members listening to the debate who might think that there is some great disadvantage in our system compared with that of other countries, and to point out that the reverse is the case.
§ Mr. Nott
I am sorry to interrupt the hon. and learned Gentleman, but would he not agree that if we are concerned with the earnings of foreign exchange in this country we do not simply want not to put ourselves into a worse position than anyone else. What possible reason is there for not putting ourselves into a better position?
§ Mr. MacDermot
I cannot understand the impatience of hon. Gentlemen opposite. It is awfully difficult to answer three different arguments at the same time. I am seeking to answer the arguments addressed to me seriatim, and I have been dealing so far with one argument.
Now comes the question as to what would he the effect of the change that is asked for in this Clause. The effect, in our view, would be twofold, or I will put it this way: there are two reasons why we think the proposal is objectionable. If the exemptions proposed by the Clause were given to foreign bearer bonds issued and transferred here free of Stamp Duty, they would of course be competing with stampable securities as investments for internal investors.
If we were minded to do that on principle, I would submit that the present juncture would be a singularly inopportune moment to introduce such a change. At a time when my right hon. Friend finds himself obliged to take a number 203 of steps to restrain investment abroad, anything which would cheapen the cost, however marginally, to United Kingdom residents to invest in foreign securities is not something to be encouraged.
I see hon. Gentlemen opposite shaking their heads. We will hear their reply, but this would be the effect at the present moment of what is proposed in this Clause.
Of course, it would not be the effect if the relief were extended also to United Kingdom bearer securities, ones issued on behalf of United Kingdom borrowers, and this is really our major ground of objection. We think that if we were to accept what is proposed in this Clause it would be bound to lead to pressure, and rightly so, for a similar exemption for other bearer securities. One really cannot distinguish on principle any reason why the one class should be exempted and not the other, and this in itself would then undermine the basis of the whole of the Stamp Duty and lead to pressure not merely for bearer securities but for the Stamp Duty there is on issues and transfers of shares.
We have looked at this proposal which has been put up and considered both under the previous administration and certainly by us since we have been in office. It has been looked at very carefully. I could accept what has been said that its immediate effect would be negligible in terms of revenue for the reason I gave at the outset—that a great deal of this business is transacted in the way I have described in Luxembourg. So I am not putting this on the basis of its immediate effect but because it would be striking at the principle underlying Stamp Duty and would erode the basis of the duty.
§ 12 [...]m.
§ Mr. Hordern
I will deal with the two points which the hon. and learned Gentleman produced to thwart the arguments so ably put by my hon. Friend the Member for St. Ives (Mr. Nott).
The first point was that there was not a great disadvantage suffered by our market compared with the markets in Zurich and other financial centres. If we think, as hon. Members do on both sides of the Committee, that invisible earnings are a good thing, surely the 204 argument must be that if other financial centres or countries wish to hamper themselves by separate forms of duty, that is no good reason why we should follow in their wake. In fact, very much the reverse. If invisible earnings, as we all accept, are beneficial to the country's balance of payments position, surely we must try to further those earnings by every means at our disposal. In these Clauses we are not asking for any benefit that has not already been extended to the banking houses which are able to raise loans abroad for foreign companies and governments.
The second point was that there would be competition with stampable investments in this country. I cannot see how this can be so, because the subscribers to these issues are not, and could scarcely be, British residents, because by the very nature of the Exchange Control Acts they are disabled from being able to compete for these loans because of the dollar premium that they have to pay. In consequence, the only people who are providing the funds for these loans are those very foreign centres of which we have spoken before.
The capital market in London is raising from a variety of centres funds for foreign companies and governments which otherwise would certainly have been raised by those foreign centres. In other words, all the net benefits are entirely due to the expertise that exists in the City of London and the ability of those concerned there to outstrip their competitors in other financial centres.
So I have tried to combat with all the moderation at my command the two main arguments that the hon. and learned Gentleman produced. It is very important to say at the end of the new Clauses and of this Bill, in the spirit of my hon. Friend the Member for the Cities of London and Westminster (Mr. John Smith), that we should try to agree on certain benefits that accrue to this country, notably those from invisible earnings. It is simply the case that our total income—I am very glad that the Chancellor is here because he will know this to be true—from both our investment income and our invisible earnings has increased in the last 10 years from £350 million to £750 million. Our invisible earnings have more than covered our trade gap for almost every year in the last 100. So on 205 no account should our invisible earnings be threatened in any way. My hon. Friends are only too aware of how they have been so affected by the various measures that the Government have introduced, notably by the Corporation Tax.
The Financial Secretary might have produced the objection that there might be a loss of revenue—I think that that was what he was saying on his second point—because these activities could have been considered to be competing with stampable investments. But no funds are raised in London at the moment because of the 2 per cent. Stamp Duty. So it cannot be argued that there is a loss of investment, because it is physically not possible to do worse than make no revenue. There cannot be a loss to the revenue on this occasion. Again, the hon. and learned Gentleman has not sought to claim that the Exchange Control Regulations might be breached in any way.
His reply seems to reverse the previous Government's policy of encouraging invisible earnings. Only three years ago the Governor of the Bank of England said that this entrepreneur business of capital filled a vital and vacant rôle in Europe in mobilising foreign capital for world economic development. But, as my hon. Friend the Member for St. Ives said, the Financial Secretary's reply seems to go against what the Chancellor himself is trying to do—to encourage foreign companies to raise money abroad.
This is where so much good work has been done by the City. It therefore seems regrettable that the Government should turn down what the Chancellor himself has put forward as a vital need in our present situation. The position in the capital market is one of great opportunity, although of increasing competition, for our own bankers. The effect of the United States interest equalisation tax has been that the dollars arising from the U.S. deficit are being put to proper use and the Euro-dollar market has increased very rapidly in the last few years.
In 1963 the total market, as it were—the number of loans raised—amounted to only 75 million dollars, rising to 575 million in 1964 and to 775 million last year. In London in 1964–65 the amount raised amounted to 600 million dollars. On a very large proportion of this the commission of 1½ per cent. was earned. This is very valuable income.
206 The point about invisible earnings, as the hon. Member for Manchester, Cheetham (Mr. Harold Lever) would recognise, is that there is no import quantity and this is one of the only gains the Treasury can rely upon without having to think about import quantities as in manufactured goods. However, the Euro-dollar market is becoming more competitive and the rates are creeping up towards 7 per cent. The City will continue to compete in this market and raise loans and issue bonds in Luxembourg but it will be missing the opportunity of building a market in the City for these bonds themselves. London could indeed become the centre of the Euro-dollar market and this is the opportunity the Government are missing by their refusal to adopt this new Clause.
It is all very well to recognise that invisible earnings may come from Luxembourg if bonds are to be issued there, provided that they are not seen to be coming from London. One really cannot see where either the sense of that proposal can lie or the morality of it. It is almost as if it is all right that we should be having invisible earnings so long as they emanate from some mysterious source underground and the Government cannot be seen to be having anything to do with them. That is the weakest possible ground for turning down the well-argued points put by my hon. Friend.
One can but wonder what advice the Government have had from the Bank of England on this question. We are talking here about a net gain to the country in invisible earnings and how the City competes favourably with other financial centres. We have shown that the market is becoming competitive, that we shall lose our commanding position if we do not give further benefits to the City. For all these reasons, it is essential to maintain our very strong position in the Eurodollar market and although I cannot advise my right hon. and hon. Friends to vote against the Government's position we shall certainly look at this again on Report and consider our attitude then. With that assurance, I hope that my hon. Friend will see fit to withdraw the Motion and the Clause.
§ Mr. Harold Lever
I should like to make two very brief observations. First, 207 although I have put my name to it, the Clause is too widely drawn. I agree with the principle, but not with the Clause in its present form. It should have included sterling bonds, and then the points which have been made from the Treasury Bench would not have been necessary. Secondly, in the opposite sense, my hon. and learned Friend is mistaken in supposing that the dollar securities if bought in this country would represent a strain on our dollar resources. On the contrary, the transaction would have the opposite effect, because if dollar bearer bonds are introduced in the City, they would have to be bought from the dollar pool and a quarter of the payments would land in the Treasury's lap.
Therefore, the Treasury has a vested interest in this and, apart from not representing a strain on our dollar resources, it results in an additional gain. I have already said that the present method is too wide, and I hope that during the Report stage we can have an amended Clause upon which a different argument can be put forward. I hope that the right hon. Gentleman will have another look at this and introduce a new Clause freed from the objections which have so rightly been taken to this Clause tonight.
§ Question put, and negatived.