HC Deb 16 July 1974 vol 877 cc329-38

'Where any arrangements under section 343 of the Income and Corporation Taxes Act 1970 are in force in the case of any building society, as respects any year of assessment, income tax shall be deducted from, and repayment of income tax shall be made in respect of, dividends or interest payable in that year in respect of shares in or deposits with or loans to that building society by Pension Funds'.—[Mr. William Clark.]

Brought up, and read the First time.

Mr. William Clark

I beg to move, That the clause be read a Second time.

Mr. Deputy Speaker (Mr. Oscar Murton)

With this new clause I suggest that we discuss new Clause 27 (Consequential amendments).

Mr. Clark

The House will no doubt remember that on 13th June in Committee on the Floor of the House we dealt with a similar clause. In view of that, I am the that it would be for the convenience of the House if we did not repeat all the speeches that we rehearsed on that occasion. I am delighted that the Chancellor of the Exchequer is present to listen to this debate.

One of the snags that faces building societies is that they borrow short and lend long. That is the essence of the building societies' cash flow problem. There is only one source of finance which is capable of lending long—namely, pension funds. By their very nature they lend long. There is a snag for the pension funds in that they are exempt from income tax. I hope that the Financial Secretary will agree and take on board—this is a point that we discussed in Committee—that pension funds are even excluded from development gains tax.

I remind the Financial Secretary that the income of pension funds is running at approximately £1,600 million a year. Consequently, they have a tremendous amount of money to invest. I have tabled the new clause so as to try to convince the Treasury of the true position and to help the economy by allowing pension funds to be allowed, if so desired, to invest in building societies. The one snag is Section 343 of the Income and Corporation Taxes Act 1970. That is the section that controls tax regulations for building societies. I shall not go into the technicalities. The meaning of the section, in a nutshell, is that building societies borrow from the public and pay to the Exchequer what is known as a composite rate. That rate is based on the estimate of the Treasury of the investors who are liable at the standard rate and the investors who are liable at below the standard rate. By that means we get the composite rate, which at the moment is running at 23½ per cent.

I regret—this is a digression—that the result of the talks that have been going on between the Government and the Building Societies Association is that no relief will be given, on the composite rate, to buildings societies. With the increase in the standard rate rising from 30 per cent. to 33 per cent. it is obvious that the composite rate, in the normal course of events, would have followed that upward trend. I regret that the recent talks have been abortive.

Because building societies have the composite rate, the other regulation is that they cannot repay the tax that they deduct from the interest that they pay to their investors. For example, if I invest £100 in a building society and I receive 7½ per cent. tax free, I in fact receive £7.50 interest. It may be that my tax bracket is such that I do not pay tax at the standard rate, or I do not pay tax at the composite rate of 23½ per cent. Nevertheless, the building societies cannot repay any of that tax because of the tax regulations.

That is where the burden of the new clause lies, and I hope that the Financial Secretary will deal with this matter sympathetically. I do not quote from HANSARD, but the Minister said that he would consider the matter with his advisers so as to determine whether he could come forward with something on Report which would allow pension funds to invest in building societies.

Why do pension funds not invest in building societies? The reason is that pension funds are exempted from tax. If they invest with the building societies the regulations do not allow them to reclaim tax. That means that nothing from the pension institutions is flowing into the building societies' coffers. I think it will be readily recognised on both sides of the House that building societies have a cash flow problem. No doubt they will have the same problem in future. I accept that the problem has been overcome temporarily by an injection of £500 million from the taxpayer. However, I do not think that that is the right way to deal with building societies. I think that they should have the right to borrow money from pension funds and that pension funds should have the right to have the tax that is deducted by the building societies repaid to them.

The Financial Secretary knows as well as everyone else that this proposal would not cost the Exchequer one farthing. It would allow pension funds, if they so wished, to invest in building societies. The Financial Secretary said in Committee that he would consider this matter sympathetically. He agreed with me that it would be of no cost to the Inland Revenue. For the life of me I cannot understand why building societies, who want to borrow long because they lend long, should not have this reservoir of long-term investment from pension funds made available to them. It is not available to them, because of the income tax regulations of building societies.

I hope that the Financial Secretary will accept new Clause 26 and also new Clause 27, which is consequential. By doing so he will confer great benefit on building societies and, in turn, on people who want to borrow from building societies.

8.0 p.m.

Mr. Michael Latham

I congratulate my hon. Friend the Member for Croydon, South (Mr. Clark) on tabling the new clause, which is similar to the one he moved in Committe of the whole House. I congratulate him further on getting it selected for a second time. This has given the Financial Secretary an opportunity to tell the House his thoughts on the matter.

When we discussed the clause before, I said that although I was sympathetic to the idea in principle—as I still am—it was essential to ensure that any money from pension funds which came into building societies should be long-term money. We cannot have huge sums of hot money flowing in and out.

The record of the building societies over the last 20 years in increasing their assets has been truly remarkable. For example, between 1950 and 1972 the value of their total shares and deposits rose from £1,160 million to £14,269 million, making them one of the largest financial institutions in the country, with one building society bigger than the whole unit trust movement.

We must also remember the amount of pension fund money which would be potentially available if the clause were accepted. Over the last few years the value of life insurance and pension funds has expanded even more rapidly than that of building societies, rising from about £9 billion in 1960 to about £25 billion in 1971. We are talking about potentially enormous sums of money being attracted into the building society movement, but it must be essentially on a long-term basis.

Ironically, in spite of the difficulties with mortgages over the last few months, which have helped to motivate the new clause, the level of receipts from investors has never been particularly low. According to the table of receipts, in May 1973. building society receipts were £558.2 million. In May 1974, building society receipts were £502 million. The difference is that in May 1973 there was a far lower level of withdrawals. Whereas in May 1973 the net receipts of building societies—the money potentially available for mortgages—was £210.9 million. in May 1974 they were only £93 million. although the amount of money received was not dissimilar.

The problem is not the amount of money which has come into the building societies—that has remained much the same; the problem is that the level of withdrawals is high. That is why I have expressed concern about the possibility of hot money from pension funds going in and out quickly.

The right hon. Gentleman the Secretary of State for the Environment, in a letter of 25th June to the Director General of the Brick Development Association which was published in a Press notice, said: I believe that the threat of a mortgage famine has been ended. The short-term loans to building societies coupled with a marked improvement in building society receipts following the Budget have already been reflected in a sharp increase in the level of new mortgage commitments entered into by building societies. The remarks made by the Secretary of State were not received with a great deal of enthusiasm by the brickmakers, who responded by threatening to shut down several brick factories.

I am concerned about the nature of the repayment of the building society loan which the Financial Secretary mentioned in replying to the earlier debate. The terms of the loan which the Government entered into with the building societies involved the building societies in having to pay back, from September this year, 50 per cent. of the amount by which their net receipts exceeded £50 million in any one month. If that scheme had been operated in May—the latest figures I have to hand—there would have been a repayment of £93–50/2 million, which equals £21½ million. That is a significant proportion of the net receipts available to the building societies in that month, and there would, therefore, have been less money available to be pumped out in home ownership mortgages.

If the Government continue to require repayment of the loan, as they must—it would be better to set a higher figure than £50 million, which is the present basis. The figure should be raised to net receipts over £125 million, although I understand that that would entail the loan being rolled forward for a longer period. That revised figure is essential, if only to give a greater degree of confidence to prospective house buyers and to builders to get ahead with the work which the whole House wishes to be done.

The main problem with new housing starts is not the availability of mortgage money. The House knows that I previously had interests in this regard, although I no longer have them. In my discussions within the last two weeks with both large and small builders, many of them have told me that the availability of money for their new houses is all right. The problem conies in the secondhand chain, and also in the lack of confidence of people in buying houses. One big builder told me that he was embarrassed by not being able to use the whole of the mortgage quota available to him from his local building society. That shows that the availability of mortgage money is not as great a problem is as generally thought. What is needed is the confidence to go ahead and buy a house.

The situation in the private house building market is very bad, and little has happened to induce me to believe that it will improve. If I may be so arrogant as to quote what I said in my maiden speech, I said: It is no secret why this situation has arisen. It is because of the high level of interest rates and the shortage of building society finance. That is a fact of life. I have yet to be persuaded that any Government can do much about it…I fear, therefore, that the Secretary of State for the Environment has as gloomy a task ahead of him in his high office as had my right hon. and learned Friend the Member for Hexham (Mr. Rippon). There is little that either can do on their own. What needs to be done requires the support of the Chancellor of the Exchequer, and in some cases it is altogether beyond the control of the Government altogether."—[OFFICIAL REPORT, 12th March 1974; Vol. 870, c. 167.] Although the clause would certainly be a useful change, much more is needed and needed now. The Economic Development Committee for Building forecast is of 120,000 private housing starts this year, compared with the 215,000 achieved last year. I believe that that forecast will prove to be too optimistic and that the outturn will be even lower. There is a real need to reawaken long-term confidence in the house-buying public. This will require new measures by the Government, some of which will require changes in Part III of the Bill. Let us deal with that situation when the time comes.

Dr. Gilbert

I have listened with interest to the well-informed remarks of the hon. Member for Melton (Mr. Latham). I shall not deal with all the points he raised, but his remarks were addressed more to the state of the building industry than they were to the provisions in the new clauses.

The hon. Member for Croydon, South (Mr. Clark), as usual, moved his new clause in a reasonable and constructive manner. I told the Committee at an earlier stage that I had considerable reservations about the practical effect of the proposals and about the attitude of the Building Societies Association towards them. I could not see that they would be particularly enthusiastic to have a facility of this sort available for I could see it having no practical effect.

Having said that, I have honoured my commitment given in Committee and made inquiries into the subject. I discovered that the Building Societies Association is anxious to have a clause on the lines of the two new clauses. There fore I am prepared to be as reasonable as the hon. Gentleman in meeting his point. When one undertakes to meet a point in Committee one can always see what can be done about tying up technical defects later on Report. In this case I am in some difficulty because both clauses contain technical defects to which I shall refer briefly in a moment—defects which it has not been possible for us to smooth away by a Government new clause in time for today's proceedings.

The difficulty about new Clause 27 is that it fails to delete a provision in Section 343(3) of the principal Act that prohibits any repayment of tax on building society interest. This would frustrate the whole object of the new clauses, which is to permit repayments of tax in the special case of pensions fund investments.

Clause 26, which is a substantial new provision, contains rather more fundamental weaknesses. In the first place it provides for deduction of tax in respect of interest paid to pension funds but does not provide for that tax to be paid to the Revenue. Secondly, the repayment of tax to pension funds is mandatory and is not subject to the normal rules and provisos in the Income Tax Act. Thirdly the term "pension funds is not defined. It is not limited to approved pension funds. I could give the hon. Gentleman an illustration of the sort of tax avoidance device to take advantage of the somewhat loose drafting contained in the new clauses. However, I shall not weary the House unless the hon. Gentleman wishes me to do so. I assure him that we have looked closely at this matter.

I accept the full intention of what the hon. Gentleman seeks to achieve in legislative terms. It is no criticism of the hon. Gentleman that his clauses are somewhat defective. It is difficult for a private Member, even if well advised, to produce a draft that will satisfy the necessary scrutiny of the parliamentary draftsmen. I hope the hon. Gentleman will accept my assurance that, even though I am still unpersuaded that the economic effects of his proposals will be substantial—and I should be surprised if they have any economic effects in the short or medium term—I am prepared to accept the purpose of the new clauses.

I would not wish it to be said that we have rejected an opportunity to help the building societies. Therefore, if the hon. Gentleman withdraws the new clauses, I give him a commitment that in the next Finance Bill we shall table some new clauses to give full effect to what he has in mind.

8.15 p.m.

Mr. R. Carr

I should like to say a few words about the new clauses. It seems unlikely that the Financial Secretary will have an opportunity to introduce another Finance Bill for many years to come. Therefore, I believe that the Opposition should express some view on this topic.

I should like to pay tribute to my hon. Friend the Member for Croydon, South (Mr. Clark) because it is an example of what a Member of Parliament can do. My hon. Friend has been pursuing this line of argument with persistence and skill for some time in the life of the Conservative Government as well as during the term of office of the present Government. I am glad that he has come to a point at which the Government of the day have agreed to accept his argument in principle. One can be doubtful, as the Financial Secretary was doubtful, whether pension funds will flow into the building societies to the extent we would like to see even with the new Clauses. What is certain is that they will not flow into the building societies with the law as it now stands. I believe that the principle of the clause proposed by my hon. Friend will enable a possibility to be turned into a reality. Therefore, it is right that we should support the principle of the clause.

I am disappointed that, because of technical defects, the Financial Secretary could not accept the clause as it stood. I am also disappointed that the Government have not found it possible to come forward with their own corrected version of these provisions in time for the Bill. Nevertheless, we must accept that there are technical defects and we must look to the next Finance Bill.

I note the undertaking given by the Financial Secretary. If, as I imagine and hope, the next Finance Bill falls to be introduced by a Conservative Chancellor. I see no reason why this provision should not be dealt with in that legislation, whoever introduces it.

Mr. Graham Page (Crosby)

It was unreasonable of the Financial Secretary to reject the clause on technical drafting grounds. Each point he made in respect of drafting was such that the Bill could have been amended quite easily in the time between the clause having been tabled and the present debate. The hon. Gentleman could have brought forward Government amendments to put the clause right.

He said that the principle of the clause was acceptable. There would be no loss to the Revenue if the clause were accepted. Indeed, there is every chance of further funds being introduced into building societies on a long-term basis of the clause were accepted. I cannot be as kind to the Financial Secretary as was my right hon. Friend the Member for Carshalton (Mr. Carr). I think that there has been unreasonable delay in bringing forward technical amendments to a clause which has been well known. It is not as though my hon. Friend the Member for Croydon, South (Mr. Clark) has just produced the clause at the last moment. He has campaigned for it for a long time. The clause has been on the Order Paper. I must protest at its rejection on technical grounds which could have been put right by Government amendment.

Dr. Gilbert

I take the point made by the right hon. Member for Crosby (Mr. Page). We have tried in good faith to meet the proposal made by the hon. Member for Croydon, South (Mr. Clark) and at our instigation discussions were held only this week with representatives of the Building Societies Association to try to meet the hon. Gentleman's points. I will not conceal that, before those meetings had taken place, my intention was to advise the House not to accept the new Clause. It was only as a result of those discussions, when I learned that the Building Societies Association was in favour of the hon. Gentleman's proposals, that I changed my mind and was prepared to recommend them to the House.

The question then was whether we could put in a manuscript amendment in time to put the matter right. There would have been difficulties and it would not have been of service to the House to put down an amendment in that form in a great rush. Indeed, the hon. Member for Croydon, South conceded that these clauses would not have any practical effect in the near future. By the time that we managed to bring them forward the situation is unlikely to have changed very much. It do not think that the hon. Gentleman is losing anything at all.

Mr. William Clark

I am grateful for the support given to me by my right hon. Friend the Member for Crosby (Mr. Page). I do not say this in a carping way—I know about the difficulties of printing and so on—but I think that from 13th June, when the matter was first raised and the undertaking was given, the Treasury could have started its discussions with the building societies earlier. I have no vested interest.

In view of the categoric assurance from Government and the categoric assurance from my right hon. Friend the Member for Carshalton (Mr. Carr), who is the Opposition spokesman on Treasury matters, we cannot lose whichever—[Interruption.] Hon. Gentlemen opposite should get their facts right before they distort them. I was about to say that we cannot lose because, whichever party wins the General Election, the building societies have a categoric assurance from both sides on this matter. Therefore, I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

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