Commons Sitting of 27 April 1982

Preamble
The House met at half-past Two o'clock
PRAYERS
[MR. SPEAKER in the Chair]
Oral Answers to Questions
  DEFENCE

    Falkland Islands
    Mr. Kenneth Carlisleasked the Secretary of State for Defence how it is intended to ensure the military security of the Falkland Islands in the long-term.
    Sir William van Straubenzeeasked the Secretary of State for Defence if he will make a statement on operations in the Falkland Islands area.
    Mr. Frank Allaunasked the Secretary of State for Defence if he will make a statement regarding his military measures against Argentina; and if he will ensure that priority is given to safeguarding the lives of the Falkland Islanders and the British residents in Argentina in any policy he contemplates.
    Mr. Edwin Wainwrightasked the Secretary of State for Defence how many letters he has received, at the latest available date, criticising Her Majesty's Government's military dispositions in the Falkland Islands area before 1 April.
    The Secretary of State for Defence (Mr. John Nott): I refer my hon. Friends and the hon. Members to the statement made by my right hon. Friend the Prime Minister yesterday, informing the House of the operation undertaken on 25 April to repossess the British dependency of South Georgia and of the continuing diplomatic efforts to reach a negotiated solution to the crisis provoked by Argentine aggression.
    There remains a substantial Argentine force on the Falkland Islands. The Royal Navy task force, deploying to the area of the Falkland Islands, is prepared for a wide range of military options. The House will not expect me to discuss these. However, the safeguarding of civilian lives will be one of our highest priorities.
    Since the Argentine invasion of the Falkland Islands I have received over 600 letters, the vast majority of which have been generally supportive of the steps that the Government are taking.
    I would prefer not to speculate on the future military security of the Falkland Islands while they remain occupied by Argentine armed forces.
    Several Hon. Members rose—
    Mr. Speaker: Order. I shall call first those hon. Members whose questions are being answered.
    Mr. Carlisle: Does my right hon. Friend agree that the only certain way to ensure the future security of the
    708
    Falkland Islands is for the Argentine to understand beyond any shadow of doubt that it cannot gain its wishes by an act of aggression and that a lasting settlement can be reached only when it has withdrawn its forces?
    Mr. Nott: I agree with my hon. Friend. That principle applies to many countries and islands throughout the world.
    Sir William van Straubenzee: I appreciate that the military operations take place against a background of ceaseless diplomatic activity to find a peaceful solution, but does my right hon. Friend appreciate that if it should be necessary to take additional action, which might include the neutralisation of hostile air forces, there would be widespread support, particularly if the objective were the limiting of casualties, as has been so brilliantly displayed up to now?
    Mr. Nott: I share my hon. Friend's desire that we should do everything possible to find a peaceful solution to this dispute. However, if force becomes necessary, I agree that we should use the minimum amount to achieve our objective.
    Mr. Allaun: Do the islanders want the attack that was clearly implied by the Prime Minister yesterday, with all the blood and tears that that would entail for their families and for British Service men and their wives, children and parents? No one has asked the islanders what they want. As the Argentine Government have agreed today to allow a Red Cross team to go to the islands, should not the United Nations be authorised to send a team to ascertain the Falkland Islanders' views?
    Mr. Nott: The Falkland Islanders cannot be consulted about such matters at the moment, because they are the victims of an act of aggression. Nobody would be happier than I if we could contact the Falkland Islanders to ascertain their wishes. That is our principal purpose.
    I had not received the information about the Red Cross team, but we raised the matter some time ago and there appeared to be little enthusiasm. If that information is correct, I am delighted that the Argentine has agreed that a Red Cross team should visit the island.
    Mr. Foulkes: Has the Secretary of State made, or does he intend to make, any arrangements to use an air base in Chile in the event of a military engagement with the Argentine over the Falkland Islands?
    Mr. Nott: I cannot comment on that. We have had widespread support from countries all round the world, but I cannot comment on such matters.
    Mr. Beith: After all that has happened, does the right hon. Gentleman now realise that visible, flexible naval power is a more important independent deterrent for Britain—and one that Britain may even be obliged to use on its own—than a nuclear deterrent?
    Mr. Nott: I am certainly in favour of visible naval power. The conventional Navy receives about £½ billion more in real terms per year than when right hon. and hon. Gentlemen opposite were responsible for such matters. Among the lessons that we have learnt from this incident is that, in the last resort, Great Britain must be responsible for its own defence. There is no way in which this country can ultimately be protected without a nuclear as well as a conventional deterrent.
    Lord James Douglas-Hamilton: Given that South Thule is in the general Falkland Islands area, will my right hon. Friend tell the House how many Argentines are illegally present on the island, and will he keep the matter under close review?
    Mr. Nott: I am very conscious of the position there. I do not know the exact number involved, but it is between 40 and 70. The number varies as the winter approaches.
    Mr. John Silkin: How can the security of the Falkland Islands—or, indeed, of the British Isles—be preserved on the basis of the last defence White Paper? Will the right hon. Gentleman assure the House that the Government intend to provide a strong and proper conventional maritime defence and to scrap Trident?
    Mr. Nott: The principal threat to Britain comes from the Soviet Union and its allies, not from Argentina. As a member of NATO, we maintain a range of forces, both conventional and nuclear, to deter that threat. I repeat that the amount that we are now spending on the conventional naval programme—I emphasise "conventional naval programme"—is £½ billion more than what was spent on it when the Labour Party was in office.
    Mr. Silkin: Has not the right hon. Gentleman yet understood that one-third of the task force will be scrapped two years from now under the defence White Paper scheme?
    Mr. Nott: Again, that is an inaccurate remark. Of the destroyers and frigates now in the task force, not one is on the sales list and not one was on the sales list before the incident began. The figure of 17 vessels is a figment of the right hon. Gentleman's imagination.
    Mr. Robert Atkins: Does my right hon. Friend agree that the Royal Navy's ability to put together in four days a task force of sufficient size to go to the South Atlantic is a tribute to the Royal Navy's present capability? Is it not nonsense for the Opposition to suggest that the Royal Navy has suffered from cuts in the defence budget when the task force proves what can and will continue to be done?
    Mr. Nott: As I said in our debate recently, nothing in our plans for the future will prevent a naval task force of the type now at sea from being sent on a similar task in 1985 or 1990. However, any such task force in 1985 or 1990 will have been further modernised and will have more up-to-date weapons. In a few year's time the task force will be even more powerful than it is today.
    Mr. Skinner: Now that the Secretary of State and his colleagues have found out that they are dealing with a Fascist junta in the Argentine, will they give a categoric assurance, so that similar mistakes are not made in future, not to sell any more arms to Fascist regimes?
    Mr. Nott: I cannot give any assurances—[HON. MEMBERS: "Why not?"]—about the possible actions of Fascist juntas. However, the vast majority of the modern weapons possessed by the Argentines were sold to them during the time of the Labour Government.

    Hong Kong
    Mr. Hooleyasked the Secretary of State for Defence whether it is intended to reinforce the garrison in Hong Kong.
    The Minister of State for the Armed Forces (Mr. Peter Blaker): No, Sir. However, the new agreement with the Hong Kong Government on defence costs, which came into effect on 1 April 1981, provided for the permanent garrison to be increased by one infantry battalion and supporting elements. This new battalion became operational last month.
    Mr. Hooley: Does not the fiasco of the loss of the Falkland Islands clearly demonstrate that it is futile and absurd to give military guarantees to nineteenth century colonies that are scattered round the globe? Is it not dishonourable and unjust to those concerned, and should we not abandon that policy?
    Mr. Blaker: I am sure that even the hon. Gentleman would not regard the situation in Hong Kong as identical with or similar to the situation in the Falkland Islands. I should not have thought it excessive for there to be five infantry battalions in a territory with a population of 5 million people.
    Mr. Adley: Will my hon. Friend put the matter in straightforward perspective? Is not any suggestion of any similarity in the relationship between the Government of the People's Republic of China and this Government over Hong Kong and that facing Britain and Argentina over the Falkland Islands utterly ridiculous? Will my hon. Friend confirm that we enjoy an excellent relationship with the People's Republic of China—[Interruption.]—and that the perceived military threat both to China and to Hong Kong comes only from the Soviet Union? Will my hon. Friend also confirm that we are in touch with the People's Republic of China to ensure that we act jointly, if necessary, against that threat?
    Mr. Blaker: I agree that we have very close relations with the People's Republic of China.

    Communications
    Mr. Neil Thorneasked the Secretary of State for Defence if he is satisfied that wherever necessary the Armed Forces are able to communicate world-wide without unreasonable delay.
    The Under-Secretary of State for the Armed Forces (Mr. Jerry Wiggin): Yes, Sir.
    Mr. Thorne: Given the importance of long-haul communications—whether by satellite or high frequency systems—to any country with world-wide responsibilities, will my hon. Friend ensure that, in considering whether we need to continue to rely on American satellites, proper credit is given to the enormous potential of both the British Marconi and Plessey communications systems?
    Mr. Wiggin: My hon. Friend's views have been noted. Wisely, he has been in correspondence with my hon. Friend the Under-Secretary of State for Defence Procurement. We shall bear that point in mind.
    Dr. McDonald: When does the Minister expect the British defence satellite to come into operation?
    Mr. Wiggin: It is not customary to give details of such operational matters.

    Defence Budget
    Mr. Jim Marshallasked the Secretary of State for Defence what is the percentage and absolute increase in the defence budget over the years 1980–81 and 1981–82 due to (a) inflation and (b) increase in real expenditure.
    Mr. Nott: It is too early to say yet what the final outturn on the defence budget for 1981–82 will be, but it is expected that spending will be very close to the cash provision published in Cmnd. 8494. On that basis, the total cash increase over the years 1980–81 and 1981–82 will be some £3,400 million. Of this, some £2,870 million is currently estimated to be due to inflation of 18 per cent. and 11½ per cent. respectively, and some £530 million provides for a real increase of about 4½ per cent. The 1982–83 cash provision provides for real growth of some 11 per cent. over 1978–79.
    Mr. Marshall: On the assumption that we manage to evict the Argentines from the Falkland Islands, how much additional expenditure will be necessary in this year and succeeding years to maintain in that area a permanent naval presence of sufficient strength to deter any future aggression by the Argentines?
    Mr. Nott: Clearly a large amount of money will be needed to maintain a substantial naval presence in the South Atlantic. We are seeking a negotiated settlement for the future security of the Falkland Islands without the necessity for a naval presence.
    Mr. Viggers: Does my right hon. Friend agree that the increase in defence spending, particularly the increase in the proportion of spending that has been devoted to the Royal Navy, has enabled us to equip the task force with missiles and torpedoes and thereby make it more formidable than would have been possible three years ago?
    Mr. Nott: My hon. Friend is right. The need is constantly to update and provide better weapons systems for the Royal Navy. My hon. Friend probably realises that we are devoting a slightly higher percentage of the total defence budget to the conventional naval programme than did the Labour Government. We have not transferred expenditure from the Navy to other areas.
    Mr. Denzil Davies: As the Secretary of State does not appear to have learnt anything over the past few months and still believes that he has a good defence strategy, will he explain why his defence White Paper has been postponed and is being rewritten?
    Mr. Nott: I thought there was a general wish, shared by both sides of the House, that we should not publish the defence White Paper until the crisis was over. I responded to that feeling by postponing publication of the White Paper. However, the White Paper is substantially complete. As soon as the House feels that it is appropriate, I will publish it.
    Mr. Denzil Davies: Is the Secretary of State saying that the White Paper has merely been postponed? We were told earlier that there was an addendum or an erratum to it. If there is an addendum, what is it about?
    Mr. Nott: I can explain that very simply. The defence White Paper is already substantially complete. It can be published at any time. There is nothing in it that in any way contradicts or embarrasses the Government vis-a-vis the
    712
    Falklands crisis. I felt that it was more appropriate to hold back publication of the White Paper for a few weeks during the crisis.
    When the crisis is over, we will consider whether any adjustments should be made within the policy already announced. That must be the sensible way to proceed.
    Mr. Peyton: Does my right hon. Friend accept that some of us agree that there is nothing outlandish in being ready to learn from events?
    Mr. Nott: I agree with my right hon. Friend. Of course, we will look at the current situation to see whether there are any necessary and desirable adjustments to be made to the general strategy that we have already outlined. That is nothing to be ashamed about.

    Guard Dog Training Units
    Mr. Bill Walkerasked the Secretary of State for Defence if he has any proposals to merge the Service guard dog training units; and if he will make a statement.
    Mr. Wiggin: We are considering changes in our arrangements for training guard dogs and their handlers. Concentration of the work into one unit is one of several possibilities.
    Mr. Walker: I thank my hon. Friend for that reply. Does he agree that the primary use of an active Royal Air Force airfield is for flying? [HON. MEMBERS: "Reading."] It is important that I do read.
    Mr. Speaker: Order. Public confession of reading at Question Time is always a mistake. If the hon. Gentleman looked up more often it would help.
    Mr. Walker: I know the question so well that I do not need to read it.
    Does my hon. Friend agree that an active RAF airfield is for flying? Does he further agree that when an airfield is being shared by other units, particularly a dog training unit, which impinge on the flying training of the Central Flying School and the Central Gliding School, that cannot be in the best interests of the RAF for pilot training? Does my hon. Friend also agree that there will be advantages in wind scent training if dogs are trained at one establishment for all Service requirements?
    Mr. Wiggin: I am aware of the conflict of interests at Syerston. However, the Ministry of Defence must use its available assets to the best advantage. I do not think that this particular difficulty can be resolved.
    Mr. Latham: Is my hon. Friend aware that the RAVC headquarters in Melton Mowbray, where much vital dog training takes place, has extremely strong links with the town? Is he further aware that it has great support from local people and that, if he is looking for expansion, they would be happy to accommodate him?
    Mr. Wiggin: I do not wish to disappoint my hon. Friend, but the future of the Army's dog training facilities will be included in my inquiry.

    Middle East (Peace-keeping Operations)
    Mr. Campbell-Savoursasked the Secretary of State for Defence if he will make a statement on the involvement of British forces personnel in peace-keeping operations in the Middle East.
    Mr. Blaker: Thirty-seven British Service officers and men are currently deployed to the Sinai. Their main task is to act as the headquarters company of the multinational force and observers, which was set up to help maintain peace in the area following the Israeli withdrawal. We also provide some logistic support for the United Nations interim force in Lebanon from our bases in Cyprus.
    Mr. Campbell-Savours: Will the Minister confirm that there have been hundreds of violations of the ceasefire on the border between Lebanon and Israel? If Britain has a contingent in the multinational force, will it not be possible for the Government to report direct to the House of Commons on the number and nature of any future violations?
    Mr. Blaker: We do not have a contingent in the force in the Lebanon. We supply some logistic support for that contingent from our bases in Cyprus.
    Mr. Archie Hamilton: Is my hon. Friend aware that many people feel that a more robust attitude should be taken by the United Nations forces in South Lebanon towards the enclave run by Major Haddad, which is causing embarrassment to everyone in the Lebanon.
    Mr. Blaker: I take note of that point, but it is for my right hon. Friend the Foreign Secretary.

    Cyprus
    Mr. Christopher Priceasked the Secretary of State for Defence what economies, or increases in real expenditure, have been made in the sovereign base areas in Cyprus in each of the last 10 years; and what savings or additional costs have resulted in cash terms and at constant prices.
    Mr. Blaker: I regret that the information sought by the hon. Member is not readily available and could not be obtained without disproportionate effort. However, I am arranging for details of the estimated budgetary cost of the British Forces in the sovereign base areas and associated sites since 1974–75 to be published in the Official Report at both current and constant prices.
    Mr. Price: As we are able to maintain such substantial forces in those permanent bases, what do the Government intend to do about a far more serious invasion than that of the Falkland Islands? The invasion to which I refer involved a great loss of life and serious injury in an area for which Britain had statutory responsibilities. Will the Government use these forces to put right the problems arising from that invasion, especially as the Government of Turkey are now proposing to put in gaol the democratically elected Prime Minister of the country, Mr. Bulent Ecevit, for up to five years?
    Mr. Blaker: As I recall, when the invasion to which the hon. Gentleman referred took place, the Labour Party was in power. Therefore, the question of military action does not now arise. This is a problem for diplomatic action, and it is a matter for my right hon. Friend the Foreign Secretary and others.
    Sir Anthony Kershaw: Has not the maintenance of the sovereign bases in Cyprus over the years contributed to the stability of the area and helped our allies and friends of peace in that part of the world?
    Mr. Blaker: I agree with my hon. Friend that the sovereign base areas are extremely valuable. They are situated at strategic points on the world atlas.
    The information is as follows:

    £ millions

    At current prices

    At constant 1982–83 estimates prices

    1974–75

    57

    173

    1975–76

    34

    85

    1976–77

    42

    87

    1977–78

    46

    87

    1978–79

    53

    89

    1979–80

    59

    83

    1980–81

    63

    76

    1981–82

    72

    77

    Royal Ordnance Factories
    Mr. Strawasked the Secretary of State for Defence if he will make a statement on the future organisation and ownership of the Royal ordnance factories.
    The Under-Secretary of State for Defence Procurement (Mr. Geoffrey Pattie): I hope to be able to make a statement in the near future.
    Mr. Straw: Is the Minister aware that he and his colleagues have been saying that since December 1980 when we first debated the future of the Royal ordnance factories? The Prime Minister has said that the prospects for privatisation of the ROFs in the near future are not good. Will the Minister now make it clear that the Government will abandon all ideas of privatising the ordnance factories and allow the employees to get on with the excellent job that they are doing?
    Mr. Pattie: This is a complex issue. We have been right to take our time before reaching a decision. We do not want to delay that decision much longer. Immediate privatisation is not in prospect, but we believe that changes should be made to the constitution of the Royal ordnance factories to allow them to operate more competitively than hitherto in commercial life.
    Mr. Robert Atkins: Does my hon. Friend agree that putting the Royal ordnance factories in the position of Companies Act companies and giving them a separate sales team, as the ROFs believe is necessary, would go a long way to increase their already great effectiveness both in this country and abroad?
    Mr. Pattie: I agree with much that my hon. Friend has said. I know that he will await the announcement with interest.
    Mr. Golding: Does the Minister agree that the present crisis shows the importance of keeping the Royal ordnance factories under Government control and ownership? Is he aware that it is important to my constituents who work at Radway Green that an announcement is made as quickly as possible in order to dispel the uncertainty with which they have lived for too long?
    Mr. Pattie: I assure the hon. Gentleman that an announcement will not be unreasonably delayed. I take this opportunity to congratulate the ordnance factories on the contribution that they have made and are making.
    Dr. McDonald: Will the Minister assure the House that in any changes that the Government envisage, this now

    715
    extremely profitable enterprise, with an expected profit of £30 million this year, will not go to benefit the Government's friends?
    Mr. Pattie: The hon. Lady should wait for the announcement, which will not be unduly delayed.

    HMS "Hermes"
    Mr. Trotterasked the Secretary of State for Defence whether he will now retain HMS "Hermes" in service till the end of the decade.
    Mr. Blaker: As we explained in Cmnd. 8288, our general strategy involves keeping two carriers in service throughout the 1980s and beyond. We therefore plan to phase out HMS "Hermes" once HMS "Ark Royal" joins the Fleet.
    Mr. Trotter: The departure of HMS "Invincible" and HMS "Hermes" for the South Atlantic at 72 hours' notice was a great achievement for both the Navy and the dockyards, but does my hon. Friend agree that we were fortunate that one of those carriers was not in for a refit at the time? Does he further agree that it is not merely desirable, but essential, that there should be three major ships if two are to be available for service at any time, as is clearly necessary?
    Mr. Blaker: My hon. Friend will take the point made by my right hon. Friend the Secretary of State, that the strategy set out in Cmnd. 8288 was designed with the point in mind that the main threat comes from the Soviet Union. I remind my hon. Friend that by 1985 we shall have in service two aircraft carriers that will be a good deal more powerful than the two that we have now.
    Mr. Jay: In view of the great success of the task force, will the Government cancel the sale of HMS "Invincible" to Australia?
    Mr. Blaker: No, we cannot cancel the sale of HMS "Invincible" to Australia, as it has already been agreed. I repeat my right hon. Friend's point that when the Falkland Islands crisis is over we shall consider whether any adjustments are needed within the general strategy, but the general strategy set out in Cmnd. 8288 remains valid.
    Mr. Churchill: Is it not clear that in the years ahead the Royal Navy will need to have two carriers ready for sea at any moment? Does my hon. Friend agree that that is impossible with a two-carrier fleet? Will the Government therefore consider the fact that, in terms of cost-effectiveness, increasing the fleet to three carriers will double the number of carriers that can be put to sea? Should not that be the purpose of an addendum to the defence White Paper?
    Mr. Blaker: I am not sure that my hon. Friend is right to say that such an increase will double the number of carriers that can be put to sea. If we have two, two will be available for two-thirds of the time. I cannot add to the reply given to the right hon. Member for Battersea, North (Mr. Jay).
    Mr. Wellbeloved: Is it true that HMS "Hermes" uses the same type of fuel as HMS "Britannia"?
    Mr. Blaker: Yes, that is true, but if the hon. Gentleman is suggesting that as a reason for sending HMS
    716
    "Britannia" on the task force he is on unsound ground, as it would have required an extra Royal Fleet Auxiliary to be sent especially for HMS "Britannia", which would have been extremely uneconomic.
    Mr. Cormack: As my right hon. Friend the Secretary of State agreed with our right hon. Friend the Member for Yeovil (Mr. Peyton) that lessons might be learnt and that there is nothing to be ashamed of in that, is not the retention of HMS "Hermes" and HMS "Invincible" a lesson that we might consider learning?
    Mr. Blaker: I have already replied to a question about HMS "Invincible". I cannot add to what I said in response to the right hon. Member for Battersea, North.
    Mr. Denzil Davies: Is the Minister aware that if General Galtieri had waited a few months we should not have had a task force to send to the South Atlantic, because HMS "Hermes" would have been in the knacker's yard and HMS "Invincible" would have been on the way to Australia? Why do the Government not admit that their defence strategy, especially their naval strategy, is in ruins and that the Secretary of State's tenure at the Ministry of Defence has been disastrous?
    Mr. Blaker: Once again the right hon. Gentleman is extremely badly briefed. I do not know how he can be ignorant of the fact that HMS "Hermes" will remain in service until 1985.

    Defence Plans
    Mr. Peter Bottomleyasked the Secretary of State for Defence if he proposes any changes to the defence plans announced in his White Paper.
    Mr. Nott: The adjustments to our force structure announced in Cmnd. 8288 are designed to produce a balanced range of capabilities to counter the prime threat to the United Kingdom posed by the Soviet Union and its Warsaw Pact allies, but versatile enough to respond wherever our interests are threatened. When the Falkland Islands crisis is over we shall naturally consider whether any adjustments are needed within the general strategy.
    Mr. Bottomley: Is my right hon. Friend aware that I regard that as a very sensible answer and that I shall therefore not ask for any more details at this time?
    Mr. Douglas: Will the Secretary of State reconsider the actions that have been taken and those that are in train in relation to the dockyards, in view of their excellent performance during the Falkland Islands crisis?
    Mr: Nott: In view of the present emergency I have said that no further redundancy notices should be issued in the immediate future, but our general strategy for the future of the dockyards must remain unchanged.
    Mr. Alexander: Does my right hon. Friend agree that it would be sensible to postpone closure of the Gibraltar dockyard, a subject which we were not able to probe on an earlier question? Is he aware that there is considerable anxiety on both sides of the House about the proposed closure?
    Mr. Nott: I realise that there is anxiety about this matter. We are giving every possible assistance to finding some future for the Gibraltar dockyard, other than its existing defence function. It is a very unhappy event to

    717
    close any extablishment, but unless we tailor the future support of the Royal Navy to the size of our front-line forces we shall not be able to afford to go on putting more resources into modern weapons systems, new platforms, combat stocks and other requirements. We cannot have an overlarge support structure that we do not require.
    Mr. Denzil Davies: Will the Secretary of State clarify the position about redundancies at Chatham dockyard? Last week there was a report from the Ministry of Defence that the redundancies would be postponed, but there is now some confusion over whether that is so. Will the Secretary of State confirm, or otherwise, that all the redundancies in the pipeline for Chatham have at least been postponed?
    Mr. Nott: As I have just said, no further redundancy notices will be issued in the immediate future. I believe that further redundancies at Chatham were to be declared on 7 May. Those will not now be declared. No further redundancies will be declared in the immediate future, but our general plan for the future of the dockyards remains unchanged.

    Falkland Islands (Task Force Vessels)
    Mr. Beithasked the Secretary of State for Defence how many of the vessels engaged in the Falkland Islands task force are due to be sold or scrapped.
    Mr. Blaker: With the exception of HMS "Endurance", whose long-term future we shall be considering, one warship and three Royal Fleet Auxiliaries are due to be disposed of by the end of next year.
    Mr. Beith: Do Ministers now recognise that the decision to scrap HMS "Endurance" was taken by the Argentine as a signal that Britain would not be ready to defend the Falkland Islands? Is he aware that the British public were genuinely horrified to learn that the Government regarded as unnecessary the vessels and dockyards that were so effectively pressed into service? Does he appreciate that that calls into question not only the policy but the continued position of the Ministers responsible?
    Mr. Blaker: I think that the Government have conceded that the planned withdrawal of HMS "Endurance" may have been taken by the Argentines as some kind of signal, but HMS "Endurance" cannot have been taken by them as a deterrent, because the invasion occurred when it was still on station. With regard to the launching of the task force, as my right hon. Friend has said, we could repeat such an effort in the future after our plans have been put into effect.
    Mr. Henderson: In view of the substantial reduction in the equipment and the morale of the Armed Forces during the period of the Lib-Lab pact and the intense opposition of the Labour and Liberal parties to the Government's proposals to increase spending on defence, does it not surprise my hon. Friend that we should now be hearing cries for further defence expenditure from right hon. and hon. Members on the Opposition Benches?
    Mr. Blaker: I agree with my hon. Friend. I was not aware that any of the Opposition parties was planning to spend more on defence than the Government are. I repeat a point that has already been made, that under our present plans we shall have more major ships in operation in 1985 than we have now.
    Mr. John Silkin: Is the hon. Gentleman not deluding himself and the House when he imagines that by closing down the Gibraltar, Chatham and, virtually, the Portsmouth dockyards we will in future be able to have a task force that is capable of being anything like the present task force?
    Mr. Blaker: Perhaps the right hon. Gentleman has not yet fully seized the importance of the fact that we are to do away with the major mid-life modernisations that we have previously undertaken. The consequence is that in 1985 we shall have more major ships operational than we have at present.

    Naval Expenditure
    Mr. Newensasked the Secretary of State for Defence if he will reconsider the priorities in naval spending in view of the developments in the Falkland Islands.
    Mr. Nott: As I have already said, the main threat to the United Kingdom is posed by the Soviet Union and her allies, and the response to this threat remains our overriding priority. We therefore plan to proceed within the general framework outlined last year, which includes maintaining a capability to deploy as necessary outside the formal boundaries of the Alliance.
    Mr. Newens: How on earth does the right hon. Gentleman expect to inspire any confidence in the future defence policy of the country when he is refusing, at this stage, to admit, even in the light of the Falkland Islands crisis, that he got any of his priorities wrong, when the whole country realises that we would not be in the present mess if he had got them right? Does the right hon. Gentleman not recognise that the vast expenditure on nuclear weapons is completely unjustified and that, in the light of the equivocation of the United States, vast numbers of people in this country now regard it as utterly wrong to rely on cruise missiles, under American control, based in Britain?
    Mr. Nott: I suggest to the hon. Gentleman that no other nation in the world—and in that I include the two super powers—could have put to sea a task force of this size in three days. There is nothing in our plans that would prevent such a force, with two carriers and an equal number of more modern frigates and more modern weapons, from putting to sea in 1985 and 1990.
    The hon. Gentleman criticised our expenditure on nuclear weapons. My answer is that without a defence against nuclear blackmail by the Soviet Union there would be no point in having a task force of this kind.
    Mr. Moate: Has this crisis not demonstrated above all the extent to which our naval strength depends upon our fleet of nuclear hunter-killer submarines? As that fleet, which is to be enlarged, depends essentially upon adequate refit and refuelling facilities, will my right hon. Friend confirm at least that he is looking again at all the arguments that were deployed so strongly in favour of keeping our existing refit facilities?
    Mr. Nott: I agree that the necessity for a surface fleet is absolutely clear. I also agree that our fleet of SSNs has been a key factor in this crisis. Our fleet of SSNs will grow from 12 to 17 during this decade. My hon. Friend is right.

    719
    As I have often said to him, we will have sufficient refit capacity at Rosyth and Devonport to handle our fleet of SSNs.
    Mr. William Hamilton: If the right hon. Gentleman's record is so impeccable, why did he offer to resign?
    Mr. Nott: I should be the last to claim that my record is impeccable, so I am sure that hon. Members will cheer at that. Of course my record is not impeccable. I have lessons to learn from this incident, just as anyone else has. I have learnt three lessons: first, that the readiness of combat stocks and spares is crucial; secondly, that the readiness of sufficient fuel is crucial; and, thirdly, that the ability to use civilian assets taken up by the Department of Trade in an emergency of this kind is crucial. Those are some of the lessons that we have learnt, and of course there will be others.

  PRIME MINISTER

    Falkland Islands
    Mr. Dalyellasked the Prime Minister if she will make a statement on the present position in the Falkland Islands.
    The Prime Minister (Mrs. Margaret Thatcher): Following my statement yesterday, I must emphasise again today that, while the Government remain determined to do everything possible to achieve a negotiated settlement, time is fast running out. I know that Mr. Haig understands this and that he has been in touch with the Argentine Government today.
    The Foreign Ministers of the Organisation of American States are still meeting. As Mr. Haig told the meeting yesterday, treatment of the dispute within the framework of the Rio Treaty would be neither appropriate nor effective: UN Security Council resolution 502 provides the surest guide to a peaceful settlement.
    British forces in South Georgia have contacted all the British Antarctic Survey personnel and the two wildlife photographers. All are reported safe and well, and food and other supplies are being delivered. Arrangements have now been made for them to leave shortly.
    Mr. Dalyell: What did the Prime Minister say to the Secretary-General of the United Nations' earnest request not to escalate the problem?
    The Prime Minister: I am very well aware of the Secretary-General's request and that the Security Council's resolution must be complied with. It is Argentina that has flagrantly failed to comply, and it is because of that failure that we must now be free to exercise our right to self-defence under article 51.
    Mr. St. John-Stevas: Is my right hon. Friend aware that, at a time when the House is rightly proud of the British forces in South Georgia and united in their support, it also firmly supports her efforts to achieve a diplomatic settlement of this dispute? Will she, even at this eleventh hour, consider a new step, namely, utilising the mediation services of the Holy See, which has unrivalled experience in such matters, particularly in Latin America?
    The Prime Minister: I am grateful to my right hon. Friend. As he knows, His Holiness is already mediating in a dispute between Argentina and Chile. His Holiness sent a telegram yesterday to Her Majesty the Queen urging
    720
    the Government to make every effort to find a peaceful solution on the basis of justice and international law, and he hopes and wishes to believe that such a peaceful solution is still possible.
    Mr. Foot: The right hon. Lady's reply on the subject of the appeal from the Secretary-General of the United Nations was insufficient and unsatisfactory. Does the right hon. Lady not appreciate that this is a new element in the situation? Is it not extraordinary that she did not include any comment on it in her reply to my hon. Friend the Member for West Lothian (Mr. Dalyell)?
    Will the Prime Minister look at this matter in a much fuller context? Will she undertake to ensure that the Foreign Secretary goes to New York to discuss this matter with the Secretary-General? We are supposed to act under the authority of the United Nations. Indeed, it is the only authority under which we are supposed to act. The right hon. Lady has a duty to the House and to the nation to ensure that the fullest and most immediate response possible is made to the appeal of the Secretary-General.
    The Prime Minister: We have an excellent ambassadorial representative at the United Nations, and he was there to receive this statement. In the second paragraph of that statement the Secretary-General said:
    "In this critical situation, the Secretary-General therefore appeals to both parties to comply immediately with the provisions of Security Council resolution 502".
    That is our wish, too, and unless and until—
    Mr. Spearing: Read on.
    The Prime Minister: I am perfectly prepared to read both the first paragraph and the next.
    This is a mandatory resolution of the Security Council, which has the force of international law. No statement can overcome something that has the force of international law. Also, under the United Nations charter, until that resolution is complied with Great Britain has the right of self-defence under article 51. We have taken, and continue to take, the view that unless we bring military pressure to bear the Argentines are unlikely to withdraw from the Falklands.
    Mr. Foot: I put it to the right hon. Lady again that her reply is entirely unsatisfactory and does not come anywhere near measuring up to the scale of events. Will she now tell us the answer that was given by our ambassador to the Secretary-General on this matter? Will she respond to my suggestion that the Foreign Secretary, who went to Washington to discuss these matters with Secretary Haig, should go to New York to discuss these matters with the Secretary-General, too, before any further escalation of violence occurs?
    The Prime Minister: I think that our ambassador's reply is likely to have been—[Interruption.]—of the nature that the best way to comply is for the United Nations to bring pressure to bear on the Argentine to withdraw her forces. If she withdrew them there would be no problem whatsoever.
    Mr. Foot: It seems from the right hon. Lady's reply that she does not even know what our ambassador said and was making the answer up as she went along. I say to the right hon. Lady, as straight as I can, that if she does not make a proper response to this appeal from the Secretary-General of the United Nations—who is entitled to make such an appeal under the constitution of the United

    721
    Nations—along the lines that I have suggested, with either the Foreign Secretary or somebody else going to New York to discuss the matter—and I put it in a hypothetical manner—she will inflict a grievous blow to our country's cause. I hope that she will consider the matter properly.
    The Prime Minister: I totally disagree with the right hon. Gentleman. If we were to refuse to take any further military action during this negotiation he would put many of our soldiers and sailors in jeopardy.
    Hon. Members: Resign.
    Mr. Foot: The responsibility in this matter rests with the right hon. Lady and with all hon. Members of the House of Commons. I ask the right hon. Lady not to take any further steps in the escalation of military matters and to give the House of Commons the chance of deciding what should be the proper response to the appeal of the Secretary-General. I ask her not to take any military action, but to take this diplomatic action after consulting the House of Commons.
    The Prime Minister: I stand by the terms of the United Nations resolution and of the United Nations charter. Until the terms of that resolution are complied with and the Argentine forces withdraw we shall continue to exercise our rights under article 51. My reply to the Secretary-General is to urge him, as well as the right hon. Gentleman, to address his remarks to the junta in the Argentine.
    Hon. Members: Resign.
    Mr. Crouch: Is my right hon. Friend aware that the whole House welcomes the emphasis that she continues to give to working to find a peaceful solution to the crisis? In view of Secretary of State Haig's declaration that the United States will do all that it can to resolve the differences between ourselves and Argentina without further conflict, can my right hon. Friend say what differences stand in the way of a peaceful and honourable settlement?
    The Prime Minister: As I said in reply to the hon. Member for West Lothian (Mr. Dalyell), Mr. Haig has been in touch with the Argentine Government today. We hope that that will be fruitful. The main stumbling block is that the Argentines have not withdrawn their forces, but have steadily reinforced their garrison. Throughout the whole of the period since the passage of the United Nations resolution they have continued to reinforce their forces on the Falkland Island with both men and materials.

    Engagements
    Mr. Dormandasked the Prime Minister if she will state her official engagements for 27 April.
    The Prime Minister: This morning I had meetings with ministerial colleagues and others. In addition to my duties in the House I shall have further meetings later today.
    Mr. Dormand: Is the right hon. Lady aware that the belligerence that she has shown in the past two days misjudges not only the critical situation in the Falkland Islands but the mood of the British people? I do not in any way underrate the many difficulties and problems involved, but does the right hon. Lady agree that at this stage what is required above all else is a rapid
    722
    intensification and widening of economic sanctions, particularly through the agencies of the United Nations? At the same time, will she make it clear to President Reagan, in straight talking, that his neutralism will not be forgotten in this country?
    The Prime Minister: I do not believe that we have misjudged the views of our citizens over the Falkland Islands. I hope that the hon. Gentleman will remember, too, that there are many British citizens living under occupation on the Falkland Islands. He will be as anxious as I am to see that they are not under that occupation for a moment longer than is necessary. The easiest way to achieve that is for the Argentines to withdraw their forces. They broke the peace first.
    Mr. Colvin: Reference has been made to the attitude of the British people. They are resolutely behind my right hon. Friend. My question refers to the attitude of the Argentines. Can my right hon. Friend confirm that the full resources of our propaganda machine are being mobilised so that the Argentines are aware of the real truth of the situation and are not being force-fed lies by their military dictators?
    The Prime Minister: We are doing as much as we possibly can, especially through the BBC external services, to put out the facts of the situation. I cannot say how often they are heard in the Argentine.
    Mr. Benn: Is it not clear from the Prime Minister's statements yesterday and today, and from the "Panorama" interview last night, that the Government never had the slightest intention of using the United Nations for the purpose of negotiation, or of negotiating directly under resolution 502, and that it was always the Prime Minister's intention that there should be only a military expedition? Is it not clear, to that extent, that she has hitherto grossly misled the House and the country?
    The Prime Minister: The right hon. Gentleman is talking nonsense. I suspect that he knows it. The Government went immediately, the day after the invasion, to the Security Council, gained the support of many other nations and secured the passage of that resolution. It is over three weeks since that resolution was passed. It has not been complied with. On the other hand, Argentina has continued to make the situation worse. We want a peaceful settlement. The easiest way to achieve that is for the Argentines to withdraw their troops.
    Sir Paul Bryan: As the rights and wrongs of the dispute have already been established by international law and supported by the Security Council, is not three weeks about as long a period of intense negotiation as can be justified if both parties are negotiating in good faith?
    The Prime Minister: My hon. Friend is right. Not only have three weeks passed, but during that time the Argentines have put more and more reinforcements on the islands, which shows that they do not intend to comply with the resolution. As we have been saying recently, and as Mr. Haig has been saying, time is running out, because the military options in that part of the world must have regard to the weather and climatic conditions. We still require a peaceful settlement, and we can get one if the Argentines are willing to have it.
    Mr. Speaker: Mr. David Steel.
    Mr. David Steel rose—
    Mr. Foot: May I ask the Prime Minister these further questions? Will she publish as speedily as possible the timing and exact wording of the reply given by our ambassador to the Secretary-General's statement, so that we can all see what was said on behalf of our country? Will she reconsider what I have said about the Foreign Secretary going to New York? If the case is as good as she says, why should not our Foreign Secretary go to New York and state it there? That is what I ask for. If the right hon. Lady does not respond to my request she will do great injury to our country in the eyes of the whole world. As we act in this matter only under the United Nations charter, I urge the right hon. Lady to accept that the advice that I am giving her is in the best interests of the country as a whole.
    The Prime Minister: I do not think that there is a formal reply to such a message. Various views are expressed informally, but it is not a formal reply. Formal reports are given by our ambassador to the United Nations, as they must be, about article 51 and the precise action that we have taken. We have full details of that. I stress to the right hon. Gentleman that resolution 502 is mandatory. Unfortunately, the United Nations does not enforce it and has no means of enforcing it. Therefore, we can only bring the best possible pressure to bear on the Argentine to enforce it.
    As the right hon. Gentleman may have heard our ambassador say this morning from New York, there is no disposition there at the moment to return to the United Nations so long as Mr. Haig's peace initiative is in play. My right hon. Friend the Foreign Secretary has recently returned from Washington. I do not think that he could achieve anything by going to New York now.
    Mr. Foot: Does the right hon. Lady's reply to me mean—I can construe it only in this way—that there is to be no official reply on behalf of her Majesty's Government to the appeal from the Secretary-General?
    The Prime Minister: I can make an official reply if the right hon. Gentleman wishes. It will not be any different from what I have said, because the governing factor in United Nations law—I use the word "law"—and in international law is the resolution of the Security Council. The only possible thing that one can call upon the Secretary-General to do is to implement it. The only thing that I call upon the right hon. Gentleman to do is to use all his powers and influence with the Argentine Government to implement it.
    Several Hon. Members rose—
    Mr. Speaker: Order. In view of the time, most exceptionally I intend to call the Leader of the Liberal Party. [HON. MEMBERS: "Why?"] I shall tell the House why. It is because I believe in fair play.
    Mr. David Steel: Thank you, Mr. Speaker. The record will show that you called me before the time ran out. I gave way to the Leader of the Opposition. Will the Prime Minister clarify two matters? Were the proposals that the Foreign Secretary brought back from Washington commended to the Government by Mr. Haig? Have the Government made a detailed response to those proposals?
    The Prime Minister: The proposals do not yet have the status of formal proposals. They are still discussions. We have let Secretary Haig know our views, but my right lion. Friend did that while he was still in Washington.
    Mr. Hoyle: On a point of order, Mr. Speaker. In view of the news blackout on the Falkland Islands situation, which might mean that our troops have landed there, should not the Prime Minister make a statement on the matter?
    Mr. Speaker: Order. It is unfair for someone who is trying to make a political point to raise it on a point of order.

Business of the House
3.35 pm
The Lord President of the Council and Leader of the House of Commons (Mr. John Biffen): With permission, Mr. Speaker, I should like to make a short business statement.
The business for this Thursday will now be a debate on the Falkland Islands, on a motion for the Adjournment of the House. The business which was set down for that day, namely, the Finance Bill in Committee, will be taken on another occasion.
Mr. John Stokes: Is it wise to have yet another debate on the Falkland Islands? Will it help our diplomacy, and will it help our task force?
Mr. Biffen: I believe that it will be wise because the sound sense of the House will reinforce our diplomacy.
Mr. Speaker: Mr. Norman Lamont.
Mr. Michael English: On a point of order, Mr. Speaker. May I put a question on the business statement?
Mr. Speaker: It was a brief statement, merely changing the business for one day. If the hon. Gentleman feels that he must ask a question about it, I shall call him.
Mr. English: Thank you, Mr. Speaker.
Instead of the debate being on the Adjournment, will the right hon. Gentleman consider whether it should be on a motion to refer the legalities of the issue to the International Court of Justice? If we propose that to the Security Council, the Security Council has the power to do it whether Argentina wishes it or not.
Mr. Biffen: This form of motion, which is customary, was chosen after consultations through the usual channels. I am sure that they will have heard the hon. Gentleman's comments.
Mr. David Winnick: Is the right hon. Gentleman aware that, if hostilities break out and fighting takes place on an extensive scale, there will be a need not just for a debate on Thursday but for a debate on Friday or Saturday? If there is to be war without a declaration of war between this country and Argentina, the House must meet to decide in an ongoing situation.
Mr. Biffen: The hon. Gentleman elaborates a number of hypotheses on which the House would like to make a judgment, should those hypotheses occur.

British Shipbuilders (Financial Support)
3.38 pm
The Minister of State, Department of Industry (Mr. Norman Lamont): With permission, Mr. Speaker, I shall make a statement on future financial support for British Shipbuilders.
The House will be aware that the industry's financial performance has shown some striking gains after the painful adjustments of the last two years. Losses have declined from £110 million in 1979–80 to a target of £25 million in 1981–82 after intervention fund assistance. The cash needs of British Shipbuilders have declined from £236 million in 1979–80 to £150 million in 1981–82. These gains are a tribute to the leadership of Mr. Atkinson and the realistic response of the employees and trade unions.
Under its corporate plan, British Shipbuilders aims to break even in 1983–84 and thereafter to move into profit without intervention fund assistance. But for British Shipbuilders to achieve its target will require continued substantial improvements in performance. Productivity still has to surpass pre-nationalisation levels.
Moreover, the plans of British Shipbuilders assume a sustained increase in real prices for ships. However, in present market conditions it would be wrong to place any great reliance on this happening. This makes it all the more important for British Shipbuilders to control costs tightly and become more competitive. While the volume of Ministry of Defence orders will remain substantial—last year orders were placed to the value of £460 million including associated weapons—British Shipbuilders seems likely to need to make adjustments and will need to regain export markets. British Shipbuilders has already made a start on the adjustment process by diversifying Cammell Laird and Scott Lithgow, and has had a welcome success in securing offshore orders.
Against this background, the Government have considered the question of financial support for 1982–83 only and will review the position later. For 1982–83 an external financing limit has already been announced of £123 million which takes account of the decision of my right hon. and learned Friend the Chancellor on the national insurance surcharge. For the same year we are setting a trading loss limit of £10 million after intervention fund assistance. The present tranche of the intervention fund expires in July this year and British Shipbuilders has sought further intervention fund support. The Commission is currently considering the general question of aids to shipbuilding and how best to ensure that where these are given they foster progress towards viability. I will report later to the House on the progress of consultation with the Commission.
With the agreement of British Shipbuilders and Harland and Wolff, we are going to ask consultants to look into the question of marine engine capacity at British Shipbuilders and Harland and Wolff to see whether the total capacity could be more effectively deployed. We have also been mindful that private sector engine manufacturers have over a long period complained about unfair competition from British Shipbuilders and Harland and Wolff. My right hon. Friend the Secretary of State will shortly announce Government funding for Harland and Wolff for 1982–83. We have also put to Mr. Atkinson the concern of the

727
private sector ship repairers on unfair competition from British Shipbuilders which was highlighted by the recent report of the Select Committee on Industry and Trade. I know that Mr. Atkinson regards the performance of this sector as unsatisfactory and British Shipbuilders is reviewing the situation as a matter of urgency.
On the question of privatisation, it remains the Government's firm intention—time permitting—to take powers to facilitate the introduction of private capital for British Shipbuilders. I recognise the impatience of my hon. Friends for the Government to make progress in this area.
Very substantial support has been given by the Government to British Shipbuilders, but it still faces a task of considerable magnitude in obtaining a firm prospect of viability. The Government are determined that aid to British Shipbuilders will be temporary and diminishing. Government support by itself cannot buy viability or security of employment. The need to improve performance remains urgent. The fuller order books this year represent an opportunity for the industry to prove itself.
Dr. John Cunningham: Is the Minister of State aware that we regard this as a particularly inappropriate time for the Government to be making a statement about financial support for British Shipbuilders? We know that the defence White Paper has just been withdrawn. We know that the defence White Paper of a year ago smashed to pieces the proposals in the then British Shipbuilders' corporate plan. Is it not therefore asking an impossible task of the corporation to meet a plan when it knows nothing of the Government's intentions with respect to warship building and orders for the corporation?
Is it not also curious that the statement on financial support should be made at a time when the statement itself admits that no agreement has been reached within the EEC on intervention fund support which is crucial to the survival of some of British Shipbuilders' existing capacity?
I join the Minister in welcoming and paying tribute to the massive commitment that the unions have given to the 15 per cent. improvement in productivity in British Shipbuilders last year. We are opposed to the inferences in the statement to the reduction in financial support for the corporation.
The external financing limit is to be reduced and the loss limit is to be reduced by 60 per cent. Will the Minister of State explain how he expects British Shipbuilders to meet these targets when it has no idea of what is required of it in warship building? In the middle of a national crisis in the Falkland Islands, with heavy dependence on the Navy and support ships, is it not preposterous to reduce support for our shipbuilding industry?
Will the Minister confirm that section 2 of the Aircraft and Shipbuilding Industries Act 1977 lays a statutory duty on the corporation to take cognisance of the defence requirements of the country, and in particular of the Navy? Does not that have implications for what the Minister had to say about the ship repair capacity of the corporation?
What is the Government's response to calls from the unions, from the Opposition Dispatch Box and, most recently, from the Select Committee on Industry and Trade for the creation of a maritime strategy for Britain. As a shipping and shipbuilding nation of major consequence, we have no maritime strategy.
728
Will the hon. Gentleman make clear his reference to £460 million of defence orders for the corporation last year? Is not the overwhelming proportion of that money for armaments which are not built by the corporation? If so, will he make it clear to the House?
Finally—[Interruption.] This is a most important statement for many people on the Clyde, the Tyne, Merseyside and elsewhere, and I make no apology for asking a number of questions. They are important to Labour Members and to the areas we represent.
Will the Minister say what level of investment cash will be available to the corporation as a result of his statement? Does it not foreshadow further major redundancies in British Shipbuilders?
Mr. Lamont: I have some sympathy with he hon. Member's first point. The statement has been long delayed and, therefore, we felt that it was right that it should be made to the House even though uncertainties surround it.
With regard to the question of uncertainty about the EEC, I have said that we shall come back to the House and make a full statement when it has made its deliberations on the intervention fund and assistance for shipbuilding generally.
On the subject of the defence review, the hon. Gentleman will have noticed that my statement was concerned with the short term. The figures and facts in it deliberately relate to the short term and the next year. Anything that is decided as part of a review of defence policy will be taken into account for the longer term.
The hon. Gentleman asked about reducing limits—loss target and the external financing limit. There is nothing new here. British Shipbuilders is aware that the Government's requirement is that both these limits should decline with time. It has succeeded in achieving that in the past, and I am confident that it will achieve it this year. I see no reason why that should not continue in the future.
The hon. Gentleman also asked about defence requirements. The Ministry of Defence has placed orders worth £460 million. Those orders include weapons systems and eight ships, including a nuclear submarine, two type 23 frigates and five patrol craft for service in Hong Kong.
As to a maritime policy, of course we shall examine and respond to the recommendations of the Select Committee. However, one must bear in mind the fact that shipping is also of interest in Britain and that a large part of British shipping is carried on between third countries. An overprotective maritime policy would not be in the interests of British shipping, and I am sure that British shipowners do not wish to be compelled to place orders in Britain.
The hon. Gentleman also asked about investment. During the past year we have invested about £30 million and next year we expect to invest £50 million, so it is not all retreat. There is some advance and provision for the future.
The hon. Gentleman's final question was about employment. Obviously there are some implications for employment in the decisions that have been taken by my right hon. Friend the Secretary of State for Defence, but British Shipbuilders expects that, by a policy of diversifying into offshore work and by obtaining a larger share of the export market, it can contain redundancies to about 2,000 to 3,000 over four years.
Mr. James Molyneaux: Is the Minister of State aware that there has been great difficulty

729
in refuting the allegation that British shipbuilding representatives have improperly sought to influence shipowners in Brazil against placing engine contracts with Harland and Wolff in favour of John G. Kincaid and Co. Ltd? In assessing the future of the Harland and Wolff marine engine works, will the Minister and the Secretary of State for Northern Ireland take into account the fact that there is, and can be, no other outlet for marine engine skills in Northern Ireland?
Mr. Lamont: I shall certainly take the hon. Gentleman's latter point into account. The purpose of the inquiry is simply to see whether there is over-capacity in the engine sector and whether the complaints of the private sector about subsidised competition are justified.
I was not aware of the hon. Gentleman's first point, but I shall consider it.
Mr. Neville Trotter: One welcomes the substantial support that the Government have given to the shipbuilding industry in the past three years, the commitment to achieve viability and the substantial reduction in losses as a result of the achievements of the management and work force. What is the time scale of the urgent action promised by the chairman on the loss-making repair yards? It is difficult to understand how one can justify a position whereby the efficient, privately owned yards are being undercut and are in danger of being put out of business by the loss-making State yards. Do the Government aim to deal with the problem during the current year or does "urgent" mean longer?
My hon. Friend, in his long and good account of the future of the industry, omitted to comment upon the export of warships. If we are to receive—regrettably in my view—nadequate orders for warships from our Navy because of high costs, it is more important than ever that there should be exports. We have had no real success in recent years in selling significant numbers of warships overseas. My hon. Friend's Department should carry out an inquiry into the problem. It is such an important issue that we need an independent inquiry into it.
Mr. Lamont: On my hon. Friend's first question, I hope that the matter will be cleared up in the coming year. I share his concern about the loss-making side of ship repairing, because it is no good safeguarding jobs in the public sector merely to make people redundant in the private sector. The Government have no powers to direct British Shipbuilders to cease to operate in any area, although we have expressed our great concern about the matter to the chairman and we have made it clear that if he wishes to dispose of any part of the ship repairing side we shall not be slow to give him consent.
We must do much better in the export of warships. We have not exported a frigate since the early 1970s. The reasons for that are much disputed and varied. It may be that the design is too much tailored for our use, but we are hopeful that the type 23 frigates, the SSK submarine and the "Leeds Castle" class of offshore vessel will bring about a better era. I am not sure that we need an inquiry, but I assure my hon. Friend that we attach great importance to exports. The strategy that has been announced depends upon British Shipbuilders securing a larger share of the export market than it has in the past.
Several Hon. Members rose—
Mr. Speaker: Order. If hon. Members will co-operate and ask brief questions, leading to brief replies, I shall call every hon. Member who has risen.
Mr. John Evans: Will the Minister confirm that there is a major dispute about export orders between British Shipbuilders and the Admiralty? British Shipbuilders claims that the Admiralty's orders are much too sophisticated to form the basis of obtaining orders, especially from poorer countries which require simple frigates and destroyers.
Mr. Lamont: This has been a source of controversy in the past. I and my colleagues in the Ministry of Defence meet frequently to discuss this question, because we are mindful of the criticism that has been made in the past. Our defence needs are paramount, but wherever possible we wish to have in mind the export potential for orders. I know that my right hon. Friend the Secretary of State for Defence also takes that view, and the position is now different from that of the past.
Mr. Michael Grylls: Why has British Shipbuilders, which is still heavily dependent on taxpayers' support and still making a loss, doubled its pay offer to its employees from 3 per cent. to more than 7 per cent.?
Mr. Lamont: The wage settlement is a matter for the management of British Shipbuilders. We have made it extremely clear that British Shipbuilders will be expected to find the money for the settlement within its present allocation. That is a tight limit and the corporation must find offsetting savings in order to finance the settlement. Public sector wages must lead the way down.
Mr. Ian Wrigglesworth: Is the Minister aware that his statement is most disappointing because it takes us no further ahead in any of the major decisions affecting the future of British Shipbuilders? Will he clarify two points?
First, the hon. Gentleman said that productivity must still surpass pre-nationalisation levels. What is the position on productivity? We are told that it has been increased. Why has it not yet surpassed pre-nationalisation levels? Secondly, what does the Minister mean about the introduction of private capital into British Shipbuilders? Does he not realise that such statements give rise to great uncertainty in the minds of both management and work force and will he clarify exactly what he means?
Mr. Lamont: As I explained to the hon. Member for Whitehaven (Dr. Cunningham), we were anxious to make this statement as soon as possible—it has already been delayed—despite uncertainties, such as the EEC's attitude to the intervention fund. Productivity has been improving sharply and I pay great tribute both to Mr. Atkinson and to the work force for their co-operative attitude. There have been many changes against a difficult background and a large slump in orders. Productivity has been low, although improving, because the throughput of ships has been very low.
As to private capital, I confirm that it has always been our intention, time permitting, to take powers to introduce private capital into British Shipbuilders. We believe that private ownership and enterprise offer the best prospects for secure employment and orders in the future.
Mr. Robin Maxwell-Hyslop: Does British Shipbuilders continue to give loss-making quotes on ship

731
repairs, contrary to the specific recommendations of the Select Committee and to the undertakings given to the Select Committee by Mr. Atkinson, because Mr. Atkinson does not know what is going on in British Shipbuilders or because he is powerless to control it? Why does my hon. Friend pretend that he is powerless to control it when he can make the availability of public funds contingent on the immediate cessation of this practice which is so damaging to the private sector which cannot draw on public funds?
Mr. Lamont: I am powerless only in that I cannot order British Shipbuilders to cease ship repairing. Nevertheless, my hon. Friend is quite right. Through the EFL and other financial frameworks within which British Shipbuilders operates, we have great influence on it and the activities it undertakes. We have, of course, drawn Mr. Atkinson's attention to the evidence that was given to the Select Committee as well as the recommendations of the Select Committee. I have recently discussed some of the examples of contracts that were taken at a loss. Mr. Atkinson is considering them urgently. It is intolerable that jobs in the private sector should be sacrificed in that way.
Mr. Robert C. Brown: Is the Minister aware that his reference to privatisation will be viewed with dismay by a work force that has increased productivity by no less than 15 per cent. in the past 12 months? Does he realise that yards such as Swan Hunter on the Tyne will have no future if the Government are determined to sell off naval shipbuilding, which is where the profit lies?
Mr. Lamont: I do not agree with that at all. Naval shipyards did extremely well under private ownership in the past and I do not see why they should not do so again.
Mr. Michael Colvin: Is the Minister aware that the repair activities of British Shipbuilders since it came into being as a result of nationalisation in 1977 has lost £43½ million of taxpayers' money? Further to the question of my hon. Friend the Member for Tiverton (Mr. Maxwell-Hyslop), is the Minister aware that its activities are contrary to article 92 of the Treaty of Rome and are rapidly driving free enterprise ship repairers, such as Jefferies in my constituency, into bankruptcy? Will he give an undertaking that the study that he is to institute will include the ship repairing side, which needs to be investigated in depth?
Mr. Lamont: The losses on ship repairing are extensive, especially when calculated on a per man basis.
On his question about article 92 of the Treaty of Rome, my hon. Friend will know that the Shipbuilders and Ship-repairers Independent Association has made a complaint to the Commission. We are extremely worried about that and we do not want to see the private sector undermined by loss-making contracts taken by the public sector.
Mr. Don Dixon: Does the Minister appreciate the importance of the shipbuilding industry in the present crisis? Should he not pay credit to the Labour Government, who saved the industry by nationalisation and by placing the Polish orders? Does he accept the importance of fetching forward a maritime policy that covers shipping and shipbuilding? Does he accept also that only when there is such a policy will there be a scrap-and-build scheme that will give a future to merchant shipbuilding in Britain?
Mr. Lamont: The present Government have done a great deal for British shipbuilding as well. We have given the industry £600 million. That can hardly be called a small allocation. We have backed the industry and there have been some remarkable improvements in the last couple of years.
The hon. Member referred to the Polish shipping order. I am not sure that I regard that as a model for the future. The total cost to the taxpayer is currently estimated at £72½ million, of which £28 million was intervention fund assistance and £39 million was losses incurred during construction. The way forward for British Shipbuilders must be by becoming more competitive, by increasing productivity and by improving the quality of ships. There are signs that those improvements are taking place.
Mr. Michael Morris: Is my hon. Friend aware that the pace of privatisation is a major disappointment? If he believes that it is right to have a major maritime manufacturing capacity, will he perhaps give a lead to those who have the ability to succeed and privatise those companies that are successful and leave rationalisation to those that are not?
Mr. Lamont: I sympathise with my hon. Friend. His point is in contrast to the responses of other hon. Members about privatisation. He will realise that we cannot privatise British Shipbuilders without taking legislative powers so to do. There would then be the question whether we could find buyers—whether people would be willing to invest. In the first instance, however, nothing can be done without legislation.
Rev. Martin Smyth: Although the Minister recognises the problems facing shipbuilding in the modern world, will he consider broadening the inquiry to cover the relationship between British Shipbuilders and Harland and Wolff to give the latter a greater place in British shipbuilding? Will he bear in mind that some years ago Harland and Wolff was steered up the wrong channel and was put into the construction of super tankers and was, as a result, unable to compete at the right level and use the undoubted talent and equipment available for the prosperity of the United Kingdom at large?
Mr. Lamont: I cannot comment on the hon. Gentleman's question because Harland and Wolff is a matter for my right hon. Friend the Secretary of State for Northern Ireland. My only involvement with Harland and Wolff is with the announcement that I made today about the inquiry into the engine section.
Mr. R. C. Mitchell: Is the Minister aware that the best action that the Government could take to help British Shipbuilders now would be to clarify their future naval shipbuilding orders so that. British Shipbuilders can plan properly ahead? He is constantly telling naval shipyards to export. As quite a large proportion of the Argentine navy was built in this country, from which countries should British Shipbuilders seek export orders?
Mr. Lamont: I shall not answer the last part of the hon. Gentleman's question because, as he knows, each case must be considered collectively with my right hon. Friend the Secretary of State for Foreign and Commonwealth Affairs and my right hon. Friend the Secretary of State for Defence.

733
The hon. Gentleman's first point is extremely important. We are trying to make the future of defence orders clear to British Shipbuilders. The matter must be handled like any other item of public expenditure. It must be rolled forward year by year, with each year becoming more firm the further forward one goes. In that sense, defence spending is treated no differently from any other item of public expenditure. However, we have frequent discussions with the Ministry of Defence and British Shipbuilders to ensure that they are as aware as possible of the Government's forward thinking on defence.
Dr. John Cunningham: Will the Minister now answer the two questions that I put to him and which he has not answered? First, is there not a statutory requirement on British Shipbuilders to take cognisance of the need, especially in connection with defence, to maintain a ship repair capacity? Is that not what the Act says?
Secondly, do not the Minister's comments about British Shipbuilders needing to make "adjustments" imply further reductions in capacity? Does he agree that that will mean a repeat of lost orders, such as the recent P & O liner order that went abroad because apparently we do not have the space to build it? Will that not, in turn, involve further redundancies?
Mr. Lamont: On the hon. Gentleman's first point, British Shipbuilders has a statutory duty to carry on ship repairing. I am not sure that it is related to defence. I shall have to check that. However, it certainly has a statutory duty to carry on ship repairs.
On the hon. Gentleman's second point, I referred in my statement mainly to the adjustments that would be required as a result of defence decisions. British Shipbuilders hopes and intends that by capturing part of the export market and by further diversification into the offshore market the redundancies that might be caused will be limited to the 2,000 to 3,000 over four years that I mentioned. Merchant shipbuilding will obviously depend considerably on the market and on what happens to ship prices.

Public Opinion Polls (Disclosure)
4.10 pm
Mr. Dick Douglas: I beg to move,
That leave be given to bring in a Bill to regulate the publication of public opinion polls to ensure a fair and balanced presentation.
As participants in the democratic process going before the electorate, we in the House know particularly that the most important poll and the one that really matters is that which takes place through the secret ballot in a general election. However, since 1937, when British Gallup was founded, great attention has been paid to the findings of opinion polls, and considerable sums of money are spent by the media and others in sponsoring such polls. It is, of course, highly debatable whether such polls really influence public opinion and, as such, the electoral process. But, in a situation where there is a close—perhaps too close—connection between the media and the pollsters, there are strong grounds for being suspicious of the manipulation of polls, their findings and their presentation for a biased and partisan political purpose.
The pollsters' organisations are aware of this. They have recently drawn up an international code of practice for the publication of public opinion poll results. Article 4 of the code of practice states that the validity and value of public opinion polls depend on three main considerations: first, the nature of the research techniques used and the efficiency with which they are applied; secondly, the honesty and objectivity of the research organisations carrying out the study; and thirdly, the way in which the findings are presented and the uses to which they are put. Few would quarrel with those views. The Bill seeks to give a statutory framework and to aid the public's understanding and awareness of just what the poll results mean.
The Bill would seek, inter alia, to ensure the disclosure of the organisations that commissioned and conducted the polls, the statistical techniques used, the cost of the polls, the details of questions and the numbers questioned, and the dates on which the poll data were taken.
Additionally, and perhaps most importantly, it would seek to require the media to give a fair and balanced presentation of the results and not, for example—
Mr. Speaker: Order. I hate to interrupt the hon. Gentleman, but he is reading every word. He knows that that is not our custom. He must not read his speech to the House.
Mr. Douglas: I apologise, Mr. Speaker. I had thought that that would be the most expeditious way of proceeding.
My Bill is designed to ensure that the media give a fair and balanced presentation of the poll results and not the snapshot presentation given, for instance, this morning by the BBC, which quoted a poll in today's Daily Star in pursuit of certain conversations and interviews. I do not think that the BBC can be proud of its method of approach in this instance. It should have disclosed that the sample size for this poll was a mere 600 adults from 100 constituencies. If that type of information had been given through the media, the general public would perhaps have had a more sanguine and objective view of the presentation.
An organisation is needed to oversee the polls, and particularly the pollsters, in a general election atmosphere.

735
It may be possible for an organisation to be set up to liaise, for instance, with the Press Council and other such organisations to vet the poll findings and to ensure their objectivity.
Question put and agreed to.
Bill ordered to be brought in by Mr. Dick Douglas, Mr. John Maxton, Mr. George Foulkes, Mr. Martin J. O'Neill, Mr. William Hamilton, Mr. Phillip Whitehead and Mr. Barry Sheerman.

PUBLIC OPINION POLLS (DISCLOSURE)
Mr. Dick Douglas accordingly presented a Bill to regulate the publication of public opinion polls to ensure affair and balanced presentation: And the same was read the First time; and ordered to be read a Second time upon Friday 7 May and to be printed. [Bill 116
Orders of the Day

  Finance Bill
  (Clauses 18, 22, 29, 65, 71, 75, 117 and 128 and
  Schedule 10)
  Considered in Committee [Progress 26 April]
  [MR. BERNARD WEATHERILL in the Chair]

  Finance Bill
    Clause 65

      INCREASE AND INDEXATION OF ANNUAL EXEMPT AMOUNT
      4.15 pm
      Mr. Jack Straw: I beg to move amendment No. 18, in page 45, line 12, leave out subsection (1).
      The Chairman: With this it will be convenient to take the following amendments:

      No. 19, in page 45, line 22, leave out subsection (1A).

      No. 20, in page 45, line 24, leave out subsection (1B).

      Mr. Straw: No one yet knows what will be the long-term costs to the Government arising from the Falklands crisis. As the crisis arose from the bungling and ineptitude of the Government, the costs in political terms for those responsible are likely to be very great. There will also be the financial costs, which the British taxpayer will have to bear in one way or another.
      Whatever the long-term costs and consequences for the Conservative Party and the Government arising from the crisis, there are, sadly, many short-term advantages for them. One is the media concentration on the crisis, which has acted as a convenient smokescreen behind which the Government are able to carry on almost unnoticed their principal task of securing a fundamental shift of power and wealth in favour of the already rich and powerful and away from the 90 per cent. of the population who have to work for a living or who would like to do so if they were given the chance.
      It is not only in respect of the movement of Britain's forces that a news blackout operates. The Government have not needed a "D" notice to black out concentration on what they have been doing to capital taxation and tax handouts to the rich. That has already been done for them. I invite the Committee to study examples of what the Government have done under the smokescreen provided for them by the Falklands crisis. Last week the Secretary of State for Employment—that semi-house—trained polecat, as my right hon. Friend the Leader of the Opposition so eloquently described him—announced additional punitive measures in the Employment Bill to enable strikers to be instantly dismissed with no warning or recourse to justice.
      There was another example last night of the Government and their supporters confirming one of the meanest, nastiest and, in our judgment, least defensible of all the decisions that they have made—their denial to the unemployed of the restoration of the 5 per cent. abatement of benefit promised when taxation was introduced.

      737
      Another example occurs this evening to show that the Falklands crisis acts as a smokescreen for the Government. No one should be in any doubt that the Government are abolishing, through clauses 65 and 71, capital taxation as we have known it. The system of capital taxation that has stood for 17 years is being ended. I pray in aid of that assertion the Financial Times whose writer on capital gains tax said on 13 March:
      "However, with the raising of the annual slice of exempted gains to;£5,000—a figure which itself is to be indexed in future—it is clear that for most investors CGT will cease to be a relevant factor in planning their future investment strategy".
      The reality, simply from the proposal in clause 65, is that capital gains tax, in the words of the Financial Times,
      "will cease to be a relevant factor"
      in planning people's future investment strategy. The first full-year cost of the proposals in clauses 65 and 71, according to the Red Book, taking account of what the Government are doing in terms of the threshold, in terms of benefits to trusts and in terms of the indexation of the tax itself, is a cool £260 million from a tax yielding only £600 million. Even in the first full year of the operation of these changes virtually half the yield of the taxes is wiped out.
      Mr. Anthony Beaumont-Dark: I am trying to follow the point that the hon. Gentleman is making.
      Mr. George Foulkes: It must be difficult for the hon. Gentleman.
      Mr. Beaumont-Dark: We must all try together, must we not? There has been talk about capital gains tax evasion, or avoidance virtually. What I thought the Government were trying to do in this case was to do away with capital confiscation. If we consider what has happened to the retail price index since, say, 1965, we see that it has gone up about 500 per cent., so the money that is paid out is only illusory. Surely it is fair to do away with capital confiscation and have a genuine capital gains tax.
      Mr. Straw: I understand the point that the hon. Gentleman is making. Indeed, it is the one that lies behind the Government's proposals in both clauses 65 and 71. I shall answer the hon. Gentleman's point about whether capital gains tax has indeed been a confiscatory tax when we deal with clause 71. I say only for his consideration in the meanwhile that if capital gains tax were as confiscatory a tax as he suggests, is it not strange that the yield of capital gains tax in the most inflationary period that we have known between 1973 and this year has lagged vastly behind the rise in prices? The yield this year is £540 million. If the yield had kept pace with inflation it would have been £1,123 million. There has been substantial built-in protection against inflation within the operation of the tax, if not within its conception. That is the reality, and we can debate that at great length on clause 71.
      Let me return to clause 65 and the amendments. I was saying that the first full-year cost of these changes in clauses 65 and 71 would be £260 million, virtually half the yield of the tax. What we are not clear about is what the final full-year cost of the changes will be. We are not clear about that, either because the Government themselves are unclear about it, or because they are clear but are unwilling to tell us. Certainly the Government have been unable to
      738
      provide any significant and reliable estimates about the end full-year cost of the changes. When the Minister replies to the debate and to the debates on clause 71, I hope that he will provide the Committee with detailed estimates—albeit on a range of possible assumptions—about the likely final full-year cost of the changes that the Government are making.
      The Red Book speaks in euphemistic terms of these costs being substantial. Taking account of answers that have been given to the House on other occasions, our guess is that the yields are likely to be curtailed drastically and that over a period of five to 10 years capital gains tax will to all intents and purposes cease to exist as a significant tax.
      Clause 65 seeks to do two things. First, it seeks to increase the exemption threshold from £3,000 to £5,000. Secondly, having increased the threshold below which people are exempt altogether from any charge to capital gains tax in any one year, it proposes to index the £5,000 amount in line with the retail prices index. The cost of this single change is £60 million in a full year. The coincidence that this sum of £60 million is exactly the sum that the Government have refused to give back to the unemployed by restoring the 5 per cent. abatement will not be lost on my right hon. and hon. Friends.
      Mr. D. N. Campbell-Savours: It is a disgrace.
      Mr. Straw: It is indeed, as my hon. Friend says, a disgrace.
      The Government will seek to justify the changes in two ways. First, they will say that this is the first increase since 1980–81, when the floor was increased to £3,000 from its previous level of £1,000 and certain tapering provisions were related to it. Secondly, the Minister may seek to argue, as the Chancellor sought to do in the Budget debate, that the increase in the thresholds provides a quid pro quo for the failure of the Government within the new scheme of indexation to allow the indexation of gains that accrued up to 6 April 1982.
      Indeed, when the Chancellor made his Budget speech he said exactly that:
      "Because we have not found it possible to extend the new scheme to cover past gains, I propose also that the exempt slice should be increased to £5,000. That is the best solution to the problem of the past"—
      let hon. Members note that—
      "and will simplify administration both for the taxpayer and the Revenue."
      He went on to say:
      "For the future, I intend that this threshold too should be statutorily indexed."—[Official Report, 9 March 1982; Vol. 19, c. 755.]
      I shall deal in turn with those two justifications for the change. First, there is the question whether the general indexation of thresholds should apply to the threshold of capital gains tax. Despite this being the year of the index, as the hon. Member for Croydon, South (Sir W. Clark) has found to his discomfort, the Conservative Party has never applied the rule of indexation of thresholds with any consistency.
      The Conservative Party opposed the introduction of capital gains tax in 1965 and the right hon. Member for Sidcup (Mr. Heath) led the opposition on the Floor of the House. What is significant about the Conservative Party's position is that when the right hon. Member for Sidcup came into Government in 1970 no changes of any

      739
      significance were introduced to the system of capital gains tax which he and so many others in the Conservative Party had opposed in 1965. There were no changes apart from the abolition of the short-term capital gains tax and its rolling up into the long-term system. There was no change to the thresholds, and the system of the alternative charge to tax which took the place of the thresholds stayed throughout those four years without a single change being made, so far as I have been able to ascertain, by the right hon. Member for Sidcup or his Government.
      It was only in the 1977–78 Budget that a threshold was formally introduced. At that stage the threshold was £1,000, with various tapering provisions up to £5,000. If, as we believe, the £1,000 threshold introduced in 1977–78 was a sensible floor for administrative and other reasons, there can be no justification for a 500 per cent. increase in the threshold in the four years that have elapsed since, when in that period prices could not have increased by more than 70 per cent.
      It is important to stress that the case for thresholds for capital gains tax is different from the case for thresholds for income tax. In respect of income tax the case for thresholds is one of equity and the need to make income tax as progressive as possible. In other words, those with the lowest incomes should pay least and those with the smallest incomes should pay nothing. That cannot apply in respect of those who have a charge to capital gains tax, because it must be possible to count on the fingers of one hand the number of people whose sole source of cash is capital gains and who have no other income. Almost all those with capital gains of more than £1,000 have substantial incomes. All but perhaps a few of those about whom we are talking already have substantial incomes. Therefore, the case in equity for exempting some of their capital gains, as though it were the floor of their income, does not arise.
      4.30 pm
      To the extent that those people do not have high incomes, the case is made for taxing capital gains as income. That is the concept in the United States, although it applies with certain changes. A flat rate to the charge is applied where it suits the taxpayer, but the concept is a fundamental part of the United States taxation system.
      Sir William Clark: The incidence of capital gains tax in the United States is far different from ours, because there are so many exemptions and the threshold is so high. Does the hon. Gentleman not agree that capital gains tax as we have had it has been a tax on inflation and on thrift?
      Mr. Straw: I do not agree with either proposition. We shall deal with the reality of capital gains tax as it has operated when we debate clause 71. I have already said that the yield on capital gains tax is half the real value that it was in 1973. If the tax were indeed a tax on inflation it would at the very least have kept level with inflation, but it is half during the period of the highest inflation that we have known for 50 years.
      I do not suggest that in the United States there is a higher capital gains tax charge than in this country. I prayed in aid the United States example to emphasise that the concept is that capital gains coming into tax are treated as income. When we reach clause 71 I shall suggest that if there is concern on the Conservative Benches about some people who do not have high incomes, but who have
      740
      high capital gains, the way to deal with them in equity is to tax their gains as income, just as the Conservative Government did when they introduced the short-term capital gains tax in the 1962 Budget.
      I make that first point to make it clear that the case for thresholds in capital gains tax is different from the case for thresholds in personal taxation. The case for thresholds in a capital gains tax is twofold. First, there is some administrative convenience in setting a floor below which it is uneconomic to try to bring the gains into charge. Secondly, thresholds were seen as a rough-and-ready offset for inflationary gains. The central part of our objection to the increase in the thresholds is that thresholds and the indexation of capital gains will provide relief against inflation twice over.
      If one indexes capital gains so that only real gains are taxed, what is the case for a threshold, other than a minimum level for convenience? The Chancellor himself seems to have accepted the logic of that point when he justified the increase in thresholds specifically in respect of that part of gains which he could not index. His whole justification for increasing the threshold was in respect of past gains which he could not index.
      The right hon. and learned Gentleman said:
      "Because we have not found it possible to extend the new scheme to cover past gains, I propose also that the exempt slice should be increased to £5,000. That is the best solution to the problems of the past".—[Official Report, 9 March 1982; Vol. 19, c. 755.]
      If that is the justification—and I understand at least its intellectual coherence,—why is the exemption to be indexed by reference to post-1982 inflation? What is it to do with post-1982 inflation if it is to cover the gains of the past? Why is it available as an offset, not just against gains that arise before 1982, but gains that arise after 1982?
      Sir William Clark: The hon. Gentleman is supporting our future amendments.
      Mr. Straw: I am glad to have the hon. Gentleman's support. I look forward to his coming into the Lobby with the Opposition when we vote on amendment No. 18. He can back his words with action.
      Mr. Campbell-Savours: Is it not significant that those Conservative hon. Members who are demanding more money by seeking support for their amendments are not those who were here yesterday when we discussed the 5 per cent. abatement for the unemployed? It is disgraceful.
      Mr. Straw: I accept what my hon. Friend says. The Conservative hon. Members who were absent yesterday, when we discussed an issue of far more importance to many more millions of people, will have to explain themselves.
      If the justification for the increase is that it is to cover past gains that cannot be indexed, why is it to be available for gains that can be indexed, and why is the exemption limit itself to be indexed according to post-1982 inflation?
      It does not take a moment's examination to realise that the proposal to increase the thresholds is not justified. Having tried to deal with our objections and our suggestion, the Minister may fall back on the suggestion that indexation is a general policy of the Government However, indexation is not a general policy, but a selective and specific device that the Government introduce, avoid or abandon as it suits them. They introduce indexation for gilt-edged stocks, capital gains

      741
      tax and capital transfer tax—taxes on the rich. They avoid indexation on taxes for everybody else by refusing to index thresholds last year, and they avoid indexation of benefits for the unemployed by cutting the real value through the abolition of the earnings-related supplement and by the cut in benefit by 5 per cent. They abandon indexation altogether in respect of other aspects of the tax system.
      If indexation is a principle that the Government wish to apply consistently, why have they not indexed the £25,000 limit on mortgage interest? They have remained remarkably silent about the £25,000 limit. It has not been touched while the Government have been in power. Their position is selective.
      The Government have abandoned indexation altogether when it comes to public expenditure. Not only have they gone to cash planning, but they have refused even to provide indices which give an indication of what that cash planning means in real terms. If they start to preach general principles on indexation, we shall have to ask them to refer that to the trade unions representing the nurses and other National Health Service workers, who are asking for no more than the Government are giving to wealthy capital taxpayers, which is to index their incomes.
      Mr. Mendes-France said that to govern was to choose. The Government have chosen to give away £60 million by the clause, on top of at least another £200 million that they will give away by introducing general indexation into capital taxation. That is not justified by any general principle or by any rules of fairness, nor does the proposal have any intellectual coherence, even within the Government's own scheme, and we shall oppose it.
      Sir William Clark: The hon. Member for Blackburn (Mr. Straw) moved the amendment with his usual clarity and felicity, but he was unable to refrain from bringing class into the issue. I share his regret that the Government have not indexed mortgage interest relief and have failed to increase the £25,000 limit. I am delighted to know that he will support such an increase when we discuss the matter in Standing Committee. Undoubtedly an amendment will be tabled that will seek to increase the limit.
      The Government have gone some way in the indexation of revenue in the national account. Of course, this is a matter of priorities. The Government have selected certain items and said "This is an injustice. Consequently we shall try to alleviate it."
      As I said in an intervention in the speech of the hon. Member for Blackburn, I am convinced that capital gains tax is a tax against wealth creation. It is a tax on inflation and on thrift. The hon. Gentleman made great play of the fact that the return for the Revenue has not kept pace with inflation. In the gilt market, which comprises a good deal of capital gains tax, holdings are exempt after one year. It is obvious that there has been a move from equities to gilts to avoid capital gains tax. That is the reason for the product from capital gains tax not keeping pace with inflation.
      I remind the hon. Member for Blackburn that between 1965 and 1982 the rate of inflation has gone up by about 430 per cent. The clause does not seek to index-link inflation. If someone purchased two or three blocks of shares in 1965 for £2,000 and if inflation increased by 430 per cent., those shares, without increasing in real value,
      742
      will be worth £8,600. The threshold will have increased by £5,000, but a person with a small investment of £2,000, for example, will still pay tax of about £3,600.
      If Labour Members wish to be fair, I am sure that they will accept that capital gains tax is unfair. I am delighted that another step has been taken to reduce a great injustice. Insufficient attention has been paid to the effect that the tax has had on thrift. I hope that my hon. Friend the Financial Secretary to the Treasury will resist the amendment. Many of my right hon. and hon. Friends do not think that the Government have done enough, and we shall be pressing for more to be done, to encourage the creation of wealth. There should be no hindrance to the creation of wealth, because wealth will create the jobs that the country needs.
      Mr. Richard Wainwright: I cannot be the only hon. Member whose reaction was gloom and disappointment when the hon. Member for Blackburn (Mr. Straw) quoted with apparent approval a statement in the Financial Times to the effect that if the measures in this clause are accepted the ordinary investor might as well forget about capital gains tax. That came from a member of the party of growth, the party that will inject into the economy a new dynamic, and the party that has at last forsworn some of its cruder nationalisation proposals. Some members of that party are prepared to help the mixed economy.
      I had hoped that if ever we had to suffer a Labour Government led by those now on the Opposition Front Bench they would bring the compensation of some more Racal-type companies that would forge ahead and bring a modest capital reward to their shareholders. Apparently that will not be so. It seems that we can forget about real capital gains under Labour. As the Government are doing something at last about the iniquity of taxing mere inflation gains, the tax could well be forgotten, according to the hon. Member for Blackburn. That is not my view because I do not regard a Labour Government as inevitable. We are discussing an issue that is real and important.
      4.45 pm
      The introduction of a Finance Bill always involves the awkward question of priorities. Those in Opposition parties and Back Benchers generally are in a fearful plight because of the age-old and, I think, outmoded convention that we cannot propose increases in taxation. It is a charter for irresponsibility of which I have taken advantage in my time. When sceptical Yorkshire constituents of mine, having listened to my great plans for the future of the infrastructure of Britain, ask "'Owt pay for it, lad?", I have to say "I am awfully sorry but we are not allowed to propose from our Benches in the House of Commons the raising of taxes". I thereby get off the hook in a way that is unjustifiably easy. That is crazy.
      There is another convention. The Government have adopted the childish ploy—they did so last year and I am sorry that they did not learn their lesson—of calculating the total cost of all the various proposals of the Opposition parties. The Financial Secretary to the Treasury said last week that that would be done clause by clause. The Government will then present the Tory press with an enormous multi-million pound bill at the end of our proceedings. That convention is absurd and not one that I would admit to for a moment.

      743
      Certain important priorities have been dismissed already in Committee by the Government, including that of getting some degree of civilisation into our income tax thresholds. We are confronted with the problem that the Government have already dismissed the most important priority of all in the Finance Bill. Should we from an Opposition stance go on to press for other but much lighter priorities? For what it is worth, I say that we must continue to do so within our judgment of what the economy can stand. That is how I regard the amendments.
      It is true that the Government's approach to indexation is thoroughly messy and unworthy of a British Government with such a well-staffed Treasury. I am glad that the Select Committee on the Treasury and Civil Service is about to consider making an inquiry into indexation in the hope of making some proposals to the Government on how a reasonably coherent and respectable approach can be devised. It seems, for example, to be taken for granted by the Government that all indexation must be based on the retail price index. That presents the great danger of applying the standards of chalk to matters of cheese. I hope that some thought will be given to appropriate indices for certain taxes.
      My party has been on record for years as being in favour of the full indexation of the tax system. Since the early 1970s we have not been impressed by the argument that to do so is to give way to inflation. We believe that it is merely realism and fairness. However, that only amounts to indexation being the automatic norm, subject always, and quite often in practice, to the will of the House. We are not saying that all exemptions, allowances and rates at a certain moment are dead right for all times and must thereafter be indexed without any change or challenge.
      However, there is an overwhelming case for the rather messy measure of indexation which the Government are at last introducing. The present allowances are out of date. Although this would not have been a high priority for us if we had been in a position to write the Finance Bill, we believe that the Labour Party's amendments should be opposed on the basis that even a shoddy, sporadic and unsystematic indexation is better than none at all.
      Mr. Campbell-Savours: The debate is important to all Labour Members. The clause illustrates the Government's determination in this place, irrespective of the national situation, to represent their friends exclusively and to ensure that money that is rightfully the property of those who are not privileged is given to the better off in society. It is a disgraceful clause.
      Sir WilliamClark: How can the hon. Gentleman say that money is given when it is merely the reduction of a payment?
      Mr. Campbell-Savours: The hon. Gentleman will be well aware that yesterday's amendment on the abatement would have required £60 million from the Treasury. That money is being conceded in this clause. It is grossly unjust and it militates not just against the interests of those whom Labour Members represent, but of those whom all political parties should seek to represent.
      The Financial Secretary to the Treasury (Mr. Nicholas Ridley): The cost to the PSBR this year is zero. The cost that the hon. Gentleman has mentioned will not build up for more than two years.
      Mr. Campbell-Savours: Is the hon. Gentleman suggesting that the indexation measures that he is
      744
      introducing will have no effect on Treasury receipts in the coming years? Let us not qualify it by "this year" or "that year". Legislative change is taking place, as a result of which money will be made available to the better off in society. Inevitably, a reduced amount of capital gains tax will be paid, because the indexation of capital gains tax and the raising of the threshold from £3,000 to £5,000 will mean that people will be able to pay a lesser amount of money to the Treasury.
      An article in Financial Weekly in 1980 pointed to the dramatic decline that would take place as a result of t he reductions in capital gains tax that had been introduced in successive Budgets. It said:
      "At a moment when the Chancellor is telling the nation that it must carry on with its strict monetarist diet of bread and water…he would be announcing that the wealthiest section of it could not merely carry on eating its cake, but have a dollop of cream on top as well…the uproar would surely not be confined to the Left. Conservatives are not deeply devoted to equality, but neither—unless they have entirely forgotten the principles of Disraeli—are they deeply devoted to widening social divisions. And Conservative MPs undoubtedly number more of the unemployed and of the low-paid among their constituents than they do payers of these capital taxes."
      This and other clauses on capital transfer tax and capital gains tax have generated the belief in Britain that the Government believe in a two-nation society. The British people want a one-nation Government who believe that such concessions should not be made. Every Government, irrespective of their political colour, should set out to protect the under-privileged in society even if they feel that they are elected by the privileged. This Government, more than any other that I can remember, have set out to protect exclusively their own. That is disgraceful.
      Mr. D. A. Trippier: What rubbish.
      Mr. Campbell-Savours: The hon. Gentleman would do well to consult the under-privileged in his constituency.
      Mr. Trippier: I do.
      Mr. Campbell-Savours: I wonder whether the hon. Gentleman has ever told his constituents at his surgeries that he believes that they should not get increases in State benefits and that the increases should be paid to the better off in society. I bet that he has never put it that way. In failing to do so he pursues and further promotes the idea that prevails throughout my constituency and the Northern region that the unemployed have been forgotten.
      The hon. Gentleman represents an industrial valley in Lancashire. Does he tell his constituents that he walks into the Lobby slavishly in pursuit of Government policy, and against their interests, to provide additional money for the better off in society?
      Mr. Trippier: Before the hon. Gentleman bursts a blood vessel, may I ask whether, as a Socialist Member of Parliament, he is in favour of wider share ownership? Is he aware that many people employed by such companies as ICI come under the terms of reference referred to by my hon. Friend the Member for Croydon, South (Sir W. Clark)? Is he further aware that many trade unions in Britain which hold shares will also be affected by this legislation? Its effect is not confined to the rich. Is he aware also that there are many pensioners in Britain who have saved over a long period of time? No one seems to have answered the point made by my hon. Friend the Member for Croydon, South that this is a tax on thrift. Is the hon. Gentleman against thrift?
      Mr. campbell-Savours: It is a Budget judgment. I and my hon. Friends maintain that the interests of the unemployed in Britain who will have their unemployment benefits taxed from July this year are more important than the interests represented by the groups to which the hon. Gentleman has referred. If the hon. Gentleman were to direct himself to the real priorities in society he would look after the under-privileged, those who have no work, not those who are able to benefit by company share schemes.
      Mr. Trippier: The hon. Gentleman might write to the TUC recommending that it sells all its shares, which are in a sizeable portfolio which is published annually.
      Mr. Campbell-Savours: I shall do more than write. I shall produce for the House an "Investment and Tax Planning Bulletin, No. 7", dated March 1981, by Pilling Trippier Financial Planning Services Ltd., 14 St. Anne's Square, Manchester M2 7HT. If I am not mistaken, the hon. Gentleman is a director of that company. I presume that that investment and tax planning guide is distributed to the customers of the hon. Gentleman's company. There is a reference in that guide to the action to be considered before 5 April 1981 relating to capital gains tax.
      It is interesting to note what the hon. Gentleman's company had to say about capital gains tax. In conditions where our people have insufficient resources to meet their daily needs, it said:
      "You can save up to £900 by action before 5 April. You can deal with capital gains of up to £3,000 in the current tax year without incurring a tax liability."
      In other words, those people can remove money from the hands of those in need and by manipulating their financial affairs—through the advice of Messrs. Pilling Trippier—pcan save a few pounds.
      5 pm
      The document went on to say:
      "If you wish to retain assets then a 'bed and breakfast' transaction can enable you to do this and still save the tax."
      We all know that in capital gains tax law a bed and breakfast transaction means that someone sells his holdings the day before the end of the financial year, realises the capital gain within that financial year and buys them back the following year, so gaining money from the Exchequer that would otherwise go to the unemployed.
      In a business prospectus the hon. Member for Rossendale (Mr. Trippier) advised his constituents in the Rossendale Valley, and whoever wished to subscribe to that monstrous document and nonsense, that they should do that. Those who suffer are those who are not in a position to protect themselves. They do not have a trade union, or friends in the Treasury, unlike the hon. Gentleman and his hon. Friends.
      Sir William Clark: I hope that the Opposition Front Bench does not agree with the hon. Gentleman's remarks. If an hon. Member, in his professional career outside the House, points out to all and sundry the law of the land and says that, for example, the exemption limit is £3,000, it is not normal practice either in the House or in Committee for an hon. Gentleman to make such a disgraceful attack on him. In all honesty, the hon. Member for Workington (Mr. Campbell-Savours) should apologise to my hon. Friend the Member for Rossendale (Mr. Trippier).
      Mr. Campbell-Savours: The hon. Gentleman may say that I made a disgraceful attack, but he will be pleased to know that if the hon. Member for Rossendale had not been
      746
      in the Chamber I would not have referred to his company, but only to the contents of the leaflet. I am told that it is the custom that if an hon. Member is in his place in the Chamber, another hon. Member does not need to give him notice that he intends to refer to one of his interests. Therefore, I believe that my remarks were in order and I see no reason to apologise. I have only quoted from a document put out by a company with which he has some relationship.
      I have seen several reports in the national media that refer to such gains as paper gains, or as gains that are not real if inflation is taken into account. If paper gains are being taxed, we must expect the revenue to rise with the rate of inflation.
      Sir William Clark: No.
      Mr. Campbell-Savours: Perhaps the hon. Gentleman will tell me why that is not the case.
      Sir William Clark: The total receipts from capital gains tax do not necessarily have to rise in line with the rate of inflation for the simple reason that there are certain securities in the capital market—gilt-edged securities—that do not bear capital gains tax. Obviously, if there is a shift from the equity to the gilt market, the totality of the capital gains tax—as a result of the preferential treatment given to the gilts market by successive Governments—could not possibly keep pace with inflation.
      Mr. Campbell-Savours: Does that account for the fact that the yield from capital gains tax is half the level of the rate of inflation? The statistical evidence does not show that. Therefore, that is not a good reason for justifying the dramatic fall in the amount of money received by the Exchequer from capital gains tax.
      Mr. Beaumont-Dark: The hon. Gentleman must bear in mind that capital gains tax is meant to be what it says it is. When a gain is made it is taxed. If the hon. Gentleman were to check these figures as well as he has checked his other figures he would see that the index of ordinary stocks has risen by less that half the rate of inflation. Therefore, if the capital market is growing at a much slower rate than the rate of inflation, how can the hon. Gentleman expect to get so much profit from it unless he increases capital gains tax? I am not being clever. I have only spoken common sense, which might help the hon. Gentleman sometimes.
      Mr. Campbell-Savours: Perhaps the hon. Gentleman has provided the solution—to increase the rate of capital gains tax. We are interested in the gross receipts to the Revenue and in the proportion of receipts that arise from capital gains tax. If things are built into the system—as the hon. Member for Croydon, South (Sir W. Clark) suggested—that reduce, in certain areas, the amount of money that can be raised from capital gains, the Government must respond by imposing new forms of capital taxation to make up for the money lost to the Exchequer. If they do not do that, the unemployed will pay.
      Conservative Members may disagree, but it is significant that those Conservative Members who wish to discuss this amendment to secure additional resources for their friends were not in the Chamber yesterday when we discussed the plight of the unemployed and the 5 per cent. abatement. Perhaps the hon. Member for Birmingham,

      747
      Selly Oak (Mr. Beaumont-Dark) would like to intervene to tell me why he did not speak on yesterday's amendment dealing with the 5 per cent. abatement. Will he tell us?
      Mr. Beaumont-Dark: I was under the impression, Mr. Godman Irvine, that you were in charge of the debate, not the hon. Member for Workington (Mr. Campbell-Savours). I listened to much of yesterday's debate, but I did not feel that it was absolutely necessary to take part in it. Indeed, we would benefit if the hon. Gentleman took less part in this debate, so that we could all hear some common sense instead of his nonsense.
      Mr. Campbell-Savours: I can understand the hon. Gentleman's embarrassment when some of us bring out the truth about capital gains tax.
      Mr. Trippier: We are bothered about the hon. Gentleman's embarrassment in being unable to answer the questions asked by myself and by my hon. Friend the Member for Croydon, South (Sir W. Clark). Is the hon. Gentleman against thrift?
      Mr. Campbell-Savours: From his experience of the Rossendale Valley and his knowledge of me, the hon. Gentleman should know that I am not against thrift.
      In a written question last October, the Financial Secretary was asked whether he would consider indexation that took account of inflation. I believe that that has been done in this Budget. His reply to such proposals was that they
      "would result in an unwelcome increase in the cost of administration—for taxpayers as well as for the Revenue—while drastically reducing the yield."—[Official Report, 22 October 1981; Vol. 10, c. 168.]
      That was his reply. Perhaps the Financial Secretary will intervene to tell me that that was not what he said at the Dispatch Box last October in reply to a question on the effect of indexation on taxpayers and on the Revenue. Indeed, I hope that the Financial Secretary will address himself to that point. What did he mean by
      "while drastically reducing the yield."?
      Is he saying that one day capital gains tax will no longer exist and there will be nothing to pay, or that the cost of collection is greater than the possible benefit to the Treasury?
      Gross imbalances are now developing in Britain between capital transfer and capital gains tax and the benefit to the Exchequer, and the income tax and direct taxation paid by the constituents of all hon. Members. I have always believed that capital penal taxation should be far higher than it was even under the Labour Government. If we wish to restore initiative and incentive, we must use a completely different argument from that deployed by some Conservative Members.
      To reduce laziness in business, industry and management one must give management the conditions in which it will want to make an additional effort. To do that, capital taxes must be increased and more emphasis placed on reducing direct taxation. That is where the real incentive lies. No incentive is derived from reducing capital taxation. That only breeds laziness and the sense of "Well, why bother? I am well-off. It does not matter." That is the problem with British industry. People accumulate a little nest egg, settle themselves down and think that they need not make any additional effort. That is clear from the way in which they invest their capital.
      748
      I end by referring to the views expressed in 1964 by Mr. Samuel Brittan. He must have been a young man then, and perhaps wiser than he is today, although I understand that he is a wise economist. He said:
      "Is it conceivable that, if a new tax system were being designed for Britain, income would be taxed so heavily and effectively and capital hardly at all?"
      That is what has happened. It is a disgrace. I hope that my right hon. and hon. Friends will join me in the Lobby with defections from the Conservative Benches. Of course we shall never get them, but we live in hope. I hope that Conservative hon. Members will show their constituents that they sympathise with the unemployed and that such feelings are not the monopoly of Labour Members.
      Mr. Beaumont-Dark: There are still times when one is surprised by what one hears. When I listened to the hon. Member for Workington (Mr. Campbell-Savours)—
      Mr. Campbell-Savours: The truth hurts.
      Mr. Beaumont-Dark: The truth can hurt if it is the truth. I cannot believe that penal taxation is the only way to encourage enterprise, that there is no need to create wealth, or that successful people tend to be slothful because the very essence of being successful and wealthy promotes the feeling that they do not need to work.
      The hon. Gentleman should look at the problems that we face and the reasons why we need this benefit to capital. He should look at the companies that create the most employment and are the best hope for the people of this country. I agree that vast fortunes have been made, but successful companies, in a capital sense, are Racal, Sainsburys, Plessey, Tarmac, and Guest Keen and Nettlefold. Some of the great companies are run and largely owned by wealthy families. They have become wealthy because they have built successful companies. Surely it is not Labour Party policy that penal taxation is the way to encourage enterprise. If we wish to give more to the unemployed or to those who are on low pay, we shoud not crush the wealthy; we should encourage the creation of wealth. It is arrant nonsense to say that making concessions on capital taxes is taking money that rightly belongs to others. The whole idea of capital gains tax, and of this clause, is not to enable people to avoid paying taxes, but to prevent them from having their capital confiscated. There has been capital confiscation.
      5.15 pm
      The hon. Member for Workington tends to forget that people create wealth from income on which they pay their due taxes. The taxation system does not mean that wealthy people do not pay taxes. They pay huge taxes. I hope that, as the debate proceeds, we shall hear more practical suggestions from the Opposition Benches than the suggestion that penal taxation will encourage enterprise and that capital confiscation is the only way forward. No wonder people are loth to return a Socialist Government.
      We do not wish to grind people down, but nor do we believe that people should have all the concessions that can be given. As the hon. Member for Colne Valley (Mr. Wainwright) said, sometimes difficult decisions have to be taken. The hon. Member for Workington may be under the impression that no one should earn more than £15,000 a year. If so, concessions will not create anything. People must be encouraged to strive. We must encourage people to be successful and to take risks. That is the purpose of this and other clauses.

      749
      The impression given by the hon. Member for Workington and his hon. Friend the Member for Blackburn (Mr. Straw) was that only a few people with surplus cash actually invest it. I deal in investments. More than 3,000 clients of my company are not wealthy people, but they have invested small amounts of money hoping that when they retire they can do something useful with it. They want to look after themselves, possibly buy a cottage in the country, or look after their families. Why should Socialists consider that criminal? People who save do not deprive others of money. The more we encourage people to save, the more good will be done in this country.
      Mr. John Maxton: The hon. Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) made a remarkable case against my hon. Friend the Member for Workington (Mr. Campbell-Savours), but my hon. Friend made a remarkably good case against the clear class basis of the legislation. The whole of the Government's tax strategy has been directed towards allowing—to use a less harsh term—the wealthy to keep more of their income and at the same time hammering those who are much worse off.
      The Opposition believe that that is done for one simple purpose—to benefit and put cash into the pockets of those who support the Conservative Party and pay its bills. The Government argue that the legislation is based on the economic strategy that allowing the wealthy to have more money will encourage them to invest it and create wealth. The hon. Member for Selly Oak said that if one releases money and puts more money into the pockets of the wealthy, they will invest it in productive industry and as a result we will have lower unemployment and more jobs. That is the Government's economic strategy.
      Sir William Clark: The hon. Gentleman said that the legislation had been introduced to help those who support the Conservative Party. We must get the record straight. For every pound spent by the Conservative Party, about 80p comes from the doorstep and 20p from large donations. The complete reverse applies for the finances of the Labour Party. Institutions such as the trade unions provide 80p, and 20p comes from the doorstep.
      Mr. Maxton: If I go too far into the financing of political parties, I think that you, Mr. Godman Irvine, will call me to order. The hon. Gentleman forgets that the bulk of Labour Party finance comes from ordinary members at local constituency level paying their dues.
      Sir William Clark: What about the trade unions?
      Mr. Maxton: The trade unions, too, are made up of ordinary working people paying their dues.
      Conservative Members argue that giving money to the wealthy releases capital for investment so that jobs and wealth are created and industry becomes more productive, but the Government have been doing that for three years. They have been giving more money to the wealthy by constantly reducing taxation for the better off, presumably releasing capital for investment by the wealthy or non-wealthy people to whom the hon. Member for Selly Oak referred. But where is that capital investment? Where are the new jobs and the improvement in productivity that the Government seek as a result of tax cuts? They do not exist. If the Government give people extra money to invest, the
      750
      recipients will put it where they can make the most profit, and one can scarcely blame them for that. They do not invest in productive industry in this country. They may invest abroad. They may buy a painting or some other work of fine art. They may buy a second house or other property. Certainly, in the main, they have not invested in productive industry in this country in the past three years, although large sums of money have been given to the wealthy for that purpose.
      Mr. John Browne: The hon. Gentleman where the productivity and the jobs were. Is he aware that under the Conservative Government productivity has increased dramatically and that 100,000 jobs are now being created every week? To me, that shows that these things are indeed happening. The net figure is different, of course, but these are genuine new jobs rather than false jobs being created.
      The hon. Gentleman also said that people were now free to invest outside the United Kingdom. As the report produced by his right hon. Friend the Member for Huyton (Sir H. Wilson) made clear, there is a shortage not of capital but of investment opportunities. We are trying to create those opportunities.
      Mr. Maxton: The hon. Member made a remarkable little speech in that intervention. Of course 100,000 people may find jobs each week, but they are not new jobs. That is the difference. There is movement between jobs, but 100,000 new jobs are certainly not being created every week. I wish that they were, because we should then very soon get rid of unemployment.
      Mr. Straw: In six months or so.
      Mr. Maxton: My hon. Friend is a much quicker mathematician than I am. I accept his figure.
      In reality, the investment is not taking place and there are more than 3 million unemployed people. Indeed, we all know that that is an unrealistic figure and that the true total is far greater. That is largely the result of the Government's economic policy. Money is being given to the wealthy on the completely phoney argument that it will be used for investment, but it is not being used for investment and there is increasing unemployment and lower productivity. That is the Government's record. At the same time, the wealthy are becoming wealthier.
      Sir William Clark: No. That is rubbish.
      Mr. Maxton: The hon. Gentleman says that that is not true, but people are paying less tax, so they are becoming wealthier. That is obvious. I do not think that even the hon. Gentleman, disputatious though he is, would suggest that if he sells some of his many shareholdings next year and pays less capital gains tax than he would have paid this year he is not better off. He cannot argue that. Of course he would be better off. He would have more money in his pocket.
      I am glad that the hon. Member for Croydon, South (Sir W. Clark) made those comments, because on the index linking of pensions he takes the opposite view. In last week's debate on public expenditure, he made a ferocious attack on the indexation of pensions and public expenditure. Yet today, when his wealthy friends stand to benefit, he suddenly supports indexation. I find that double standard difficult to take.
      Sir William Clark: If the hon. Gentleman looks up the Official Report he will see that I did not take part in that debate.
      Mr. Maxton: I may have mentioned the wrong debate—perhaps the hon. Gentleman will tell me in which debate it was—but certainly he recently condemned the indexation of pensions. Yet he now supports the indexation of incomes for another group of people.
      Mr. Campbell-Savours: It was on the Second Reading of the Bill.
      Mr. Maxton: I am grateful to my hon. Friend. Certainly the hon. Gentleman made such an attack recently.
      In a sense, we are dealing with tax-free income. With regard to unemployment and sickness benefit, the Government say that all income should be taxed. I believe that all hon. Members agree on that. According to the Financial Times of 13 March, the clause will be of great benefit to those who receive regular annual income from bonds and unit trusts. The profit is made by selling units and comes back to the holder of the bond. It is used as income and not as capital gains in the strict sense of the term. If the Financial Times is correct, people will now be able to receive not tax-free capital gains but tax-free income. Yet that is against the very principle that the Government sought to impose through the taxation of unemployment and sickness benefit.
      Again, the wealthier members of society will receive the benefit. It is all very well for the hon. Member for Rossendale (Mr. Trippier) to say that many ordinary people sell properties and shares and make capital gains, but I should think that remarkably few of the people whom I represent make capital gains of more than £3,000 per year.
      Mr. Trippier: I understood that Labour Members were very close to the trade union movement. Many trade unions own large numbers of shares and make gains far greater than £3,000 per year. As my hon. Friend the Member for Croydon, South (Sir W. Clark) said, much of the money contributed by the trade union movement to the Labour Party is raised through shares.
      5.30 pm
      Mr. Maxton: If a trade union passed money from its investment funds to the Labour Party, it would be breaking the law. The money of the Labour Party comes from the contributions of members. No trade union is allowed to pass any other money but that to the Labour Party. I take the hon. Gentleman's point about trade unions having investments, but I am saying that they should be taxed on any income from those investments. Unlike Conservative Members, who believe that they should speak for the financial benefit of their personal friends—and some trade union members are my personal friends-1 believe that if people make high incomes out of such yields they should be taxed on them. That is the principle in which the Labour Party believes, and if such a recipient happens to be a trade union, it should be taxed. I do not think that the hon. Gentleman's point is valid.
      Conservative Members keep using the phrase "We wish to encourage thrift." They want to encourage thrift so that the money can be used for investment. To some extent—wrongly—they always think in terms of capital gains tax in relation to shareholding. But CGT is not just
      752
      about shareholdings. A large amount of investment, with people making money out of CGT, has nothing to do with the creation of wealth and the investment in share capital in order to create that wealth.
      There is, for example, the whole question of the second-home owner, who will be one of the beneficiaries of this provision. The property investor will also be a beneficiary. Some second-home owners have perfectly legitimate reasons for owning that property, but at the same time it has been the rule that people should get tax benefit only on the property in which they live, that they should not be able to get tax benefit on the second property. That principle is to some extent being broken by this provision, because any inflationary gain made from owning a second house will now not be taxed. The tax will come in only where a person makes a real gain. Because, in the property market, most properties only keep pace with inflation, it means that most people will now not pay capital gains tax on a second property. They do not pay it on the first property anyway.
      There is also the fact that capital gains tax is also about investment in art and other investment purely for financial gain—for example, buying gold coins, Krugerrands, and so on, which again have nothing to do with the production of wealth. No extra jobs are created. It is pure speculation. Yet now, as a result of the Government's proposal, a large amount of the profit being made by people out of such investment will not be taxed. That is grossly unfair, particularly at a time when it is the poor who are paying increasingly more in taxation.
      I raised that aspect last week through the case of a widow in my constituency earning £59 a week and paying £9 in taxation. That is grossly unfair in any terms, but it is even more so when one puts it against the sort of benefit going to the very wealthy in our society.
      Conservative Members keep saying that we must have indexation. But we must always bear in mind that the retail prices index has much more relevance to those on lower incomes than to those on higher incomes. If we take 10 per cent. from my poor woman on £59 per week, that is to her very much more in real terms than is 10 per cent. from someone earning £25,000, £30,000, £50,000 or £60,000 a year. Most people on low incomes spend the bulk of their money on essentials, and many of those essentials have soared in price for the very poor over the past few years. If we had an "essentials" retail prices index as opposed to a total retail prices index, we should arrive at different figures. For example, public transport costs have gone up very much more than the cost of living, as have rents. These are the prices that hit the very poor.
      Once one gets beyond a certain income level one is able to make a large number of choices in terms of spending one's income, and that makes an enormous difference in terms of the retail prices index. We must bear that factor in mind. That is where the indexation to the retail prices index that is proposed is a disgrace, and I shall have great pleasure in voting for the amendment.
      Mr. John Browne: I strongly support the general approach of my hon. Friend the Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) and I shall not add to it and waste further time.
      I am opposed to capital gains tax in principle, because at present it offers to the Government a relatively small yield of less than 1 per cent. of the revenue, it wastes a lot of the productive time of people from all walks of life

      753
      and in some of the professions in dealing with it—the brokers, accountants and so on—time which could otherwise be used to increase the productivity of British industry and achieve an increased growth rate in our gross domestic product. It also has high administrative costs, very few of which achieve anything in terms of our national well-being. My most serious criticism of a capital tax of this nature is that it reduces the incentive to invest in British industry.
      Mr. Campbell-Savours: The hon. Gentleman says that it reduces the incentive to invest in British industry. Why is it that, in reducing the take of capital taxation, investment, according to a reply yesterday by the Secretary of State for Industry, fell from £4,439 million in 1979 to £4,157 million in 1980 and to £3,602 million in 1981? The hon. Member for Leek (Mr. Knox) asked:
      "Does my right hon. Friend agree that those figures provide wide evidence of a worrying decline in investment in manufacturing industry?"—[Official Report, 26 April 1982; Vol. 22, c. 602.]
      This is after three years of reducing capital taxation.
      Mr. Browne: I am delighted to answer that question. I was going to point out that capital gains tax is not the only influence on investment. Of itself, it reduces the incentive to invest. The hon. Gentleman points out that in a time of reducing capital gains tax, or capital taxes, investment has dropped. As I tried to illustrate to the hon. Member for Glasgow, Cathcart (Mr. Maxton), the biggest disincentive to investment is lack of investment opportunities. That is the critical problem. It is not the subject of this amendment, so I shall not waste the time of the Committee by talking about it too much. The amendment deals only with the subsidiary factor of capital gains tax. This only adds fuel to the disincentive.
      Mr. Maxton: Perhaps the hon. Member for Winchester (Mr. Browne) will tell us what part of the Government's economic strategy will create these new investment possibilities for the investor.
      Mr. Browne: The Government have introduced 72 new measures specifically designed to boost investment in new and small businesses. I make no bones about my support for them. My only criticism is that the measures are not dynamic enough and that they are too complex. I have said that many times. However, to say that the Government have done nothing is ridiculous.
      Capital gains tax is a disincentive to investment in British industry. The discriminatory benefits that gilt-edged security investments enjoy add further to this disincentive to invest in British industry in terms of equity. Therefore, I am opposed to capital gains tax in general for those basic reasons.
      However, capital gains tax that does not take account of inflation is confiscation for that inflation amount, and, therefore, daylight robbery. I am opposed to that. Therefore, I welcome the clause. I particularly welcome the increase in the exemption threshold, because that is correct. It alleviates the burden of capital gains tax.
      I accept the indexing of capital gains tax and welcome it. However, I welcome it with mixed feelings, because, as my hon. Friend knows, I am strongly opposed to indexation as a basic philosophy.
      Mr. Maxton: Ah!
      Mr. Browne: I am trying to explain.
      Mr. Maxton: The hon. Gentleman believes in it only when it suits him.
      Mr. Browne: No. I believe that the Government are wrong in doing this. They are trying to select indexation on one side and not on the other. It is impossible to have fairly balanced indexation unless everything is indexed. However, if that were to happen, we would never stop inflation. That is why the Government should be rolling back indexation, not extending it. I am very sorry to see that they are not rolling back indexation, but if we are to have indexation—
      Mr. Maxton: Vote against.
      Mr. Browne: —if we are to have indexation at all, then one of the crying needs is in capital gains tax. I regret that it does not go back to 1965 and that it means even more complication in the calculations of capital gains. Calculating this complex taxation will increase further the dead time and the dead expenditure that otherwise could be used for the benefit of the nation.
      As I have said before, and on Second Reading, I am strongly opposed to indexation, because it is a sweet pill to offer to people to make inflation easier to live with. It is the greatest financial con trick of the lot—an even greater financial con trick than inflation itself.
      Mr. Campbell-Savours: Does the hon. Gentleman accept that there is very little difference between a person on supplementary benefit who, to use the words of the hon. Member for Aberdeen, South (Mr. Sproat), is "scrounging" and the person who, by taking advantage of the capital gains tax laws, is able, under bed and breakfast operations, to arrange his financial affairs so that he extracts from the Exchequer a similar amount of money with a similar amount of effort? What is the difference?
      Mr. Browne: I am not quite clear as to the hon. Gentleman's question.
      Mr. Trippier: I should like to help the hon. Member for Workington (Mr. Campbell-Savours) as he appears not to understand the bed and breakfast system.
      Mr. Campbell-Savours: It is in the prospectus.
      Mr. Trippier: The hon. Gentleman should read it more carefully. I am grateful for the free advertising that he has given to it. None the less, that information was accurate.
      The hon. Gentleman should remember that if bed and breakfasting were to take place, establishing a profit under £3,000, which was the position before the last Budget, no revenue would have been paid to the Treasury in any event. On the other hand, if the bed and breakfasting operation was shown to establish a loss, that does not matter, because there would be a loss in any event. Therefore, again no money would go to the Treasury.
      Mr. Browne: I do not quite understand the logic of the point of the hon. Member for Workington, but I can comment on what he said about bed and breakfast. Capital gains have to be triggered, as do capital losses. It is a legitimate exercise that one should be able to trigger a loss as well as a gain. However, I do not see the connection with supplementary benefit, because in the former case all that is avoided is the unnecessary payment of tax. One is not extracting from the Exchequer; one is avoiding paying unnecessary tax.

      755
      5.45 pm
      The Government are wrong in accepting the extension of indexation because its effect is to build inflation into our economy. Already, the equivalent of 38 per cent. of Government expenditure is effectively index-linked. That was the level of indexation last year, and now we are increasing it. How can we hope to reduce inflation in the long term? I find it extremely worrying to be extending the principle of indexation.
      By reducing the support at grass roots level for any Government who may come in with tough policies to reduce inflation, we are doing something very dangerous. A party with tough anti-inflation policies will not be elected, because once a person has an index-linked salary, tax threshold, pension and capital gain, he does not feel the ill effects of inflation. We will all be isolated from the ravages of inflation, so there will be no need or will to vote for a Government who will act against inflation with tough economic policies. An anti-inflationary policy is a hard enough bullet to bite anyway. Nobody will be willing to bite it in future.
      The most serious charge I level against the Government is that by extending indexation they are building inflation into our economy. I support the Government on this amendment, because, if we are to have indexation, it should be applied to capital gains tax. However, I warn my hon. Friends that I believe that indexation as a principle is wrong. We should be moving to roll it back, rather than to extend it. Therefore, as the Bill progresses, I shall need to be convinced that these policies are correct.
      Mr. Maxton: Will the hon. Gentleman vote against the clause stand part?
      Mr. Browne: My intention is to vote with the Government on the clause. As I said, if there is to be indexation, I support, and should indeed call for, indexation for capital gains tax. Otherwise, such a tax is confiscation and daylight robbery.
      Mr. Maxton: Vote against Third Reading.
      Mr. Browne: Third Reading is my problem.
      This Budget will be remembered as the Budget of indexation. That is something that I will have a hard job understanding and supporting.
      Mr. John Home Robertson: The hon. Member for Winchester (Mr. Browne) is the kind of Tory rebel that we have come to know and love. If he goes on in this way, he will end up as a Parliamentary Private Secretary. He said at the beginning of his speech that he did not agree with the principle of capital taxation. That point encapsulates the difference between the Conservative Party and the Labour Party. The hon. Gentleman is prepared to say that he will do away with capital taxation altogether—in other words, to assist the wealthy—when only yesterday he went through the Lobby to increase the burden on the unemployed and low-paid.
      Mr. John Browne: I did not say that I wished to assist the wealthy. However, I believe that it is a genuine incentive for them to invest in the country, which increases jobs and so on, if the Government take less from them. We can take income tax, but we should not take from their capital.
      Mr. Home Robertson: The hon. Gentleman has made his point abundantly clear. He wants to leave more money
      756
      in the pockets of those who are already well off. We all understand that that is what the Conservative Party stands for.
      The group of amendments that we are debating would do away with the proposed increase and indexation of the annual exempt amounts for capital gains tax purposes. We are entitled to an explanation from the Minister of exactly why the Government propose that form of indexation of and tax relief on capital taxation in the first place. Is it the Government's intention simply to cut taxation for wealthy people who want to realise their wealth? If that is so, the Government should be thoroughly ashamed of themselves for introducing such a form of tax releif in a Finance Bill in which they intend to bring unemployment benefit into the tax net for more or less the first time.
      On the other hand, I wonder whether it is the Government's intention to make a serious attempt to approve and refine what is at present a crude lax mechanism, which is intended to redistribute wealth. To my mind, that is a thoroughly worthwhile objective. It is extremely doubtful whether the Government want to improve or refine the mechanism for redistributing wealth. In the unlikely event of that being so, the Government would deserve credit, but if that is their purpose they have chosen a ham-fisted and indiscriminate way of going about it.
      In fairness to all concerned it must be said that capital gains tax can be a singularly arbitrary imposition on people who cannot afford to pay it under certain circumstances. It can be damaging to small businesses. We all know of people wishing to raise funds by selling property to invest in machinery in their businesses, only to find that the tax man takes an inordinate share of the proceeds of such a sale. Almost every hon. Member must have come across the widow in his constituency whose husband had invested his savings in property and who finds out she has been drawn into the tax net.
      My hon. Friend the Member for Blackburn (Mr. Straw) said that wealthy people paid capital tax. He is right. Those are the only people who are intended to pay capital tax. I am sure that all Opposition Members agree that that is justifiable. All of us should take on board the fact that some poor people also fall into that trap. I refer to the people who may be on low incomes or fixed incomes who have savings, perhaps in the form of property, which are subject to capital transfer tax and capital gains tax. That is not a simple matter. It is brazen nonsense for the Government to introduce such tax relief for the wealthy. Those are the people for whom the relief is intended. The hon. Member for Winchester made that clear.
      Mr. Straw: I accept what my hon. Friend said. I tried to make that clear. In general, I believe that my hon. Friend accepts that those who come into charge on capital gains tax and who have gains above the exemption limits are likely to have fairly substantial incomes. In so far as they do not, the argument can be made for gains to be treated as income and brought into charge as income, so that the system becomes fair. For example, if a widow has a low income but is living off capital gains, if the gain were charged to income she would be charged tax at a lower rate than under the capital gains tax rate.
      Mr. Home Robertson: I accept the point that my hon. Friend is trying to make. That illustrates the fact that the taxation policy of the Labour Party is intended to be fair

      757
      to people, while it is abundantly clear that the policy of the Conservative Party is the opposite. It is brazen nonsense for the Government to offer such taxation relief to wealthy people, including people on substantial incomes, in the same Finance Bill in which they are bringing people receiving unemployment benefit into the tax net.
      Mr. Trippier: I shall endeavour to make a brief contribution, having listened carefully to the debate.
      I am amazed by some of the things that Opposition Members have said. In certain respects I wondered whether they were speaking on behalf of the Labour Party. I was surprised that the hon. Member for Blackburn (Mr. Straw), who is a neighbouring Member of Parliament and a reasonable man in every way, was so political about what I thought he would not normally object to. I remember that the Labour Government indexed capital gains tax. They did not increase the rate of the capital gains tax. Therefore, they did not wish to create a disincentive to savers or discourage thrift in any way. Listening to Opposition Back Bench Members, one would have thought that the Labour Government had sought to increase substantially the capital gains tax rate, which they did not. Therefore, I wondered whether we could try to bring into the debate a modicum of reasonableness because I believe that the vast majority of Opposition Members accept that people should be allowed the freedom to invest their money and to save by doing just that.
      So far capital gains tax has been a levy on illusory gains. I welcome the acceptance inherent in the Budget proposals that such a levy is totally unfair. I also welcome the raising of the exemption limit to £5,000 of net gains in any one year and the principle underlying the proposal that in future years the limit will be indexed in line with the retail price index.
      In his Budget speech my right hon. and learned Friend the Chancellor of the Exchequer rightly drew attention to the fact that the changes in capital gains tax are not designed just to help investors. When selling a share, investors have a variety of motives, but frequently the money realised from the sale of one shareholding is used to buy another. That is of immense benefit to industry.
      If one wanted a good example of that, one could recall the number of rights issues now coming out from companies requiring more cash. Shareholders can contribute. Opposition Members need to be reminded that we are talking about wider share ownership. The benefits that employees of ICI can draw can be considerable. They are accumulated over a number of years. When the time comes for those people to choose to sell the shares—why should they not sell those shares?—they can be caught in the tax net.
      However, there are serious problems with the proposals that my right hon. and learned Friend the Chancellor of the Exchequer has put forward. The measures do not implement what I believe to be the Chancellor of the Exchequer's intention, which is to index more effectively any future capital gains. The reason why the intention fails is that by enhancing the original purchase cost the effect will be unfairly spread.
      It is difficult in such a debate to go into the details of what is a capital gains tax matter. To illustrate my point I shall take the example of two shareholders. One bought
      758
      5,000 shares at £1 each in 1970 and the second bought the same number of shares at £3 each in 1979. By March 1982 the price of those shares has risen to £4·20. I shall assume a further rise to £4·60 by April 1983. When the calculations that my right non. and learned Friend the Chancellor of the Exchequer has suggested are implemented, an unfair tax burden will be put on the investor who has had his shares longer. That cannot be the intention of my right hon. and learned Friend.
      I strongly suggest that it might be much better for the Government to reconsider the matter in Committee and raise it again on Report. It might be more acceptable to many of my hon. Friends were my right hon. and learned Friend to introduce a new capital gains tax starting date of 6 April 1982.
      6 pm
      Mr. Ridley: We have debated two subjects. First, the exempt allowance and the indexation thereof on which there were some thoughtful and helpful contributions but which, otherwise, was another opportunity for the richer-getting-richer-and-the-poorer-getting-poorer brigade to make their usual noises. I should like to spend a short time on discussing capital taxes in general because the Committee has done that. It would be right for me to examine the overall picture.
      The hon. Member for Blackburn (Mr. Straw), having ventured gently towards the Falkland Islands, came back to say that we were destroying the capital taxes. He then quoted figures for the capital gains tax in which he gave the yield as £650 million.
      Mr. Straw: No—£600 million.
      Mr. Ridley: Very well—£600 million. I misheard the hon. Gentleman.
      The capital gains tax yield is expected to be £850 million. I do not want the hon. Gentleman to feel that it would be right, if that was his intention, to leave out the yield from companies because, in large measure although not entirely, the benefits of the measures in the Bill also apply to companies. Therefore, the capital gains tax yield must be regarded as £850 million.
      Mr. Straw: I say in my defence that I quoted directly from table 23 in the Red Book, which gives the 1982–83 forecast as £600 million.
      Mr. Ridley: I agree. As the hon. Gentleman knows, companies pay capital gains tax and the figures for companies are shown in the corporation tax yield. I was not seeking to catch him out. I was seeking to put the record straight.
      It will be of interest to the Committee to examine the yield of capital taxes over the years. The hon. Member for Barking (Miss Richardson) tabled a question on 1 April. The answer to it appears in c. 376 of Hansard for 7 April. It gives the proportion of total Government revenue that has come from capital taxation of all sorts. Capital taxation as a percentage of total Government revenue was 3·7 per cent. in 1970; in 1971 it was 4 per cent.; in 1972 it was 4·4 per cent.; in 1973 it was 5–2 per cent.; and in 1974 it was 3·9 per cent.
      Mr. Campbell-Savours: Too little.
      Mr. Ridley: In 1975 it was 2·9 per cent.; in 1976 it was 2·6 per cent.; in 1977 it was 2·4 per cent.; in 1978 it was 2·1 per cent.; and in 1979 it was 2 per cent. Since my right

      759
      hon. Friends have been in charge of these matters, the figures are 1·9 per cent. for 1980 and 2·2 per cent. for 1981.
      It comes ill from the Opposition and particularly from the hon. Member for Workington (Mr. Campbell-Savours) to complain that the present Government or previous Tory Governments have been a little soft on capital taxes. I would understand it if my hon. Friends made the point that we had been a little too hard. It was the Labour Party which was soft on capital taxes in terms of yield. I do not criticise it too much for that. We have had wild debating from the hon. Members for Workington and Glasgow, Cathcart (Mr. Maxton)—"a little ray of sunshine" occurs to me as a description for the hon. Member for Workington. I suggest that the hon. Member gets his figures right and does his homework.
      The hon. Gentleman also betrayed an appalling ignorance of bed and breakfasting. He seems to think that it was a terrible adulterous crime or some ghastly form of tax evasion. He showed that he did not understand it when he was asked to explain what it meant. We shall discuss bed and breakfasting later in the Bill. I wish we could facilitate it. All it means is that one wishes to take the opportunity to declare one's gain and account for one's tax before one actually has to do so. It could be described as a way of bringing forward a tax liability.
      Mr. Maxton: If the Minister is correct in saying that this is a legitimate device, why was considerable suprise expressed in the financial world when the Chancellor of the Exchequer did not take any action against bed and breakfasting? It was thought that the Chancellor would take legislative action against the practice of bed and breakfasting.
      Mr. Ridley: First, there are provisions about bed and breakfasting in the Bill which do not make it illegal or alter the possibilities of doing it. The provisions make it slightly more expensive because stamp duty and commission will have to be paid on bed and breakfasting. This is done because of the one-year rule and the need to find a satisfactory treatment of share pools. It is not correct to say that nothing has been done about it.
      Secondly, I cannot understand why anyone would have wanted my right hon. and learned Friend the Chancellor to deal with it or would have expected him to. In many ways, the more bed and breakfasting that takes place, the greater the immediate revenue yield will be. If bed and breakfasting took place in excess of the exempt allowance, it would have that effect. Some of my hon. Friends, and particularly my hon. Friend the Member for Horsham and Crawley (Mr. Hordern), wish to bring forward a declaration on gains so that tax can be paid early and the slate can be wiped clean. We shall debate those matters in due course.
      Mr. Campbell-Savours: Does any loss to the Exchequer arise from bed-and-breakfasting operations?
      Mr. Ridley: There could be a gain to the Exchequer if people bed and breakfast in excess of their exempt allowance. It they do not bed and breakfast, there is no loss to the Exchequer. It is not a loss to the Exchequer. It is a matter of people availing themselves of their rights to switch investments which are losing or gaining and cancelling out the present net loss or gain. In addition, one can bed and breakfast to the extent of one's exempt
      760
      allowance, but that is not a loss of revenue. One might say that having a personal allowance for income tax is a loss of revenue to the Exchequer, but I do not believe that anyone is in favour of abolishing personal allowances. Therefore, I do not accept that there is a loss.
      The hon. Member for Blackburn asked about the eventual cost of the capital gains tax provisions. I believe that he meant the cost as a whole and not just in relation to clause 65. The cost depends entirely on inflation. If we have no success, if inflation become greatly worse and if we have the policies of the right hon. Member for Stepney and Poplar (Mr. Shore) and inflation reaches Argentine proportions, the loss of yield from the provisions will be enormous. On the other hand, if my right hon. and learned Friend the Chancellor guides our economic fortunes for another two or three Parliaments until, say, the end of the century, the loss of revenue will be practically zero. It would depend entirely on how many real gains were made. That depends on the extent to which business starts to take off and activity recovers and, later, the extent to which people cash in on their assets.
      Mr. Straw: Did the Treasury or the Inland Revenue do any illustrative projections of the loss of yield on various inflation assumptions? I assume that the figure in the Red Book of £150 million as the full year cost for 1984–85 is based on some projections of the likely yields. Secondly, why did the Financial Secretary say in October 1981 that indexation of capital gains tax would reduce drastically the yield of the tax?
      Mr. Ridley: We did estimates for three years ahead. For instance, the cost of this clause—the exempt allowance, the indexation thereof and raising it to £5,000—will be nil this year. It is likely to be £15 million in the next financial year and £60 million in a full year. However, we did not do projections beyond that because the cost of the rates of inflation and the activity in the economy would be very difficult to estimate.
      Against that, I was astonished to read amendment No. 22 in the name of the official Opposition, which destroys uplift indexation allowance for the first year. I must tell the Opposition now, so that they can prepare their position for when we reach the amendment, that the cost of their amendment would be £80 million in a full year. Far from wishing to claw back the concessions that my right hon. and learned Friend suggested for capital gains tax, the Opposition apparently wish to add to them by a further £80 million. On the net tally, which the hon. Member for Colne Valley (Mr. Wainwright) dislikes so much, the Opposition are plus £60 million on this amendment and minus £80 million on the next, so we have another £20 million to add to the tally.
      Mr. Richard Wainwright: Does the Financial Secretary realise that, in the way that the Finance Bill must go through the House, it is absurd to add up cumulatively the cost of all the proposals because most Opposition parties are fishing to get one or two proposals adopted and never dream of getting all their proposals through?
      Mr. Ridley: I did not threaten to add up the alliance proposals. All that one needs to do is to add up the Labour Party's proposals and cut them in half, because the alliance is always in the middle.
      The hon. Member for Blackburn's second question was why we said that this would drastically reduce the yield of

      761
      the tax. It is true that indexation as from the date of the introduction of capital gains tax, or some form of basing the values of 6 April 1982, would be a way of relieving gains made before the Budget in past years. There are many ways of approaching the problem of how to relieve past gains, but that would be extremely expensive. It would drastically reduce the yield, as I said in that answer. That question was not about future indexation, but about indexation in general. The Labour Government's Green Paper talks about indexation not in terms of the future, as we are proposing, but in general. We did not feel that we could afford the cost. There are other reasons why we did not do that, but this is not the time to go into them. They will arise on a later amendment.
      6.15 pm
      My hon. Friend the Member for Rossendale (Mr. Trippier) gave the example of a person who invests now and a person who invested 10 years ago. He said that the indexation allowances would be on a different capital base in each case. I wish to deal with that point fully, but, again, there is an amendment on it which we shall discuss later.
      The proposed amendment will cost £60 million in a full year and the numbers of people paying capital gains tax will fall. Last year it was estimated that about 200,000 people paid capital gains tax, falling this year to 175,000 and estimated next year to be 135,000. The Opposition are proposing that a further 65,000 should be kept in the capital gains net. By definition, that will mean those who make the smallest gains of under £5,000. If the Opposition wish to restrict the relief given by this clause, it is odd that they should concentrate the hardship on the smallest gains. That is not consistent with what they seem to be talking about.
      Although I do not wish to labour the point, it is important to remember that the amendment would require 275 extra staff at the Inland Revenue in order to deal with the small gains. That is an important consideration for a Government who are devoted to cutting the size of the Inland Revenue.
      The allowance will be indexed and we had quite a debate about indexation. The hon. Member for Come Valley wished to have clarification, but my hon. Friend the Member for Winchester (Mr. Browne) wished only to complain about indexation wherever it raised its ugly head. We did not consider it in that way. Whatever else we do, it seems sensible to index the levels of taxation thresholds. That does not mean that they are automatically pegged. We have not stuck to a single index threshold throughout the entire personal taxation system in this Budget, but we have on excise duty.
      Before the House considers any threshold in any tax year it should examine it from the position of the indexed figure. The Government or Parliament may propose an upward or downward variation. If we start from that premise, it seems that if it is good for income tax and the allowances thereunder, it is increasingly good for thresholds in other taxes. It does not commit the House, but is a good basis from which to start. I would justify the exemption allowance being indexed on that ground.
      762
      I say to my hon. Friend the Member for Winchester that that is not digging inflation into the system with the determination that he seemed to suggest. We do not stick to the indexed figures every year.
      Mr. Richard Wainwright: The hon. Gentleman's elucidation of the Government's attitude to indexation has been mildly interesting. What is the Government's programme in that respect? For instance, when will the corporation tax threshold be indexed?
      Mr. Ridley: I do not know that one has a programme. This year, we have again in practice indexed the small company corporation tax relief. I am dealing with individual taxation. In corporation tax, it is the only threshold. There are no others in corporation tax and there should not be. Small company relief is the only one. I shall be happy to discuss the issue with the hon. Member for Blackburn when we debate corporation tax. I doubt whether it is right to index upper and lower limits for corporation tax or profits relief. As the hon. Member for Blackburn knows, the problem is whether to go for a slab or a slice system and the effect on the marginal disincentive of any extra profits. However, we should not debate that now.
      The increase from £3,000 to £5,000, as my right hon. and learned Friend the Chancellor of the Exchequer said in his Budget Statement, is no more than a measure of rough justice for past gains. The Government have set their face firmly against trying to unravel the past of the tax because that would be extremely expensive, extremely complicated and unfair to those who have sold and realised gains and paid their tax as opposed to those who are still sitting on their gains.
      For those reasons, none of our proposals contains any direct assistance to those whose gains were made before 6 April 1982. In recognition of that, my right hon. and learned Friend thought that it was right to increase the allowance from £3,000 to £5,000. That is not a huge increase, but I recognise the force of some of the arguments advanced by the hon. Member for Blackburn.
      We are now changing the system of capital gains tax. We have broken the log-jam that the Labour Party was unable to break when it tried to do so during its stewardship of the Treasury. We found it difficult during the first two years of our stewardship. We want to change to a tax that makes a proper level of taxation on gains that are real, not paper, and that is thought to be fair and reasonable. We may not have got every aspect right at this stage. We face the problem of the huge build-up of past gains. They may stretch to billions of pounds that we are unable, for the reasons that I have given, to do anything about. In many people's eyes, the small increase in the exempt allowance to £5,000 will not seem an adequate recognition of the difficulties of the past.
      The Committee must also consider the means of taxing real gains in a fully indexed tax when the past gains problem is behind us, downstream a few years and has been got progressively out of the system. Should we do so by a flat rate such as we have now or at income tax rates as the Opposition have suggested? We must ask also what part will exempt allowance play in any future tax of that type.
      Sir William Clark: I understand that my hon. Friend said that one of the reasons why the Chancellor did not go in front of 1982 was that many people had realised assets

      763
      before 1982 on which they had paid capital gains tax. My hon. Friend also said that if the Chancellor went back before 1982 there would be an inequity with regard to the payment of tax and between two taxpayers. It is an extraordinary philosophy when one thinks of what happened in the past when relieving or increasing tax.
      What about the introduction of the development land tax? Those who sold land before the development land tax came into effect have paid no tax at all. Those who still held land or property paid as soon as the Government decided that there should be a tax. It is a strange philosophy that if the Government of the day want to change the tax structure we should go back to the time before that decision was made and say that those who have sold their assets before today will be unfairly treated as compared with those who sell them tomorrow.
      Mr. Ridley: I am not sure that we have set ourselves against any form of retrospective taxation or relief for the three reasons that I gave. One of those reasons, to which my hon. Friend the Member for Croydon, South (Sir William Clark) referred, is not invalid. If we say that the past is past, we will not reopen it and we cannot compensate for what has happened in the past, all are treated equally, however unfair the treatment may be.
      Sir William Clark: We all suffer the same misery.
      Mr. Ridley: Yes, the misery of capital gains tax is equally shared. If, on the other hand, we say that we shall try to retrieve past gains from some of those who have made them in the 17 years of the operation of the tax but have not realised or paid them, the man who has paid perhaps a colossal sum, who might have held on if he knew that this would happen, might be represented in the Committee and move amendments that would be extremely difficult to resist. However, that is not the only reason. Cost is the main one and complexity another. It is for those reasons that we have decided not to do it.
      Mr. Straw: The Financial Secretary said that he recognised the force of some of the Opposition's arguments. Does he accept that there is a logical inconsistency between justifying the increase in the exemption limit to £5,000 to take account of past gains but then to create a situation where that allowance can be offset against both past and future gains?
      Mr. Ridley: The place of the £5,000 allowance in any system of capital gains tax, which is purely on true gains, not paper ones, is clearly a matter that the House will want to examine shortly.
      I hope that I have come some way to meeting the case of the hon. Member for Blackburn. I hope that he will understand mine. I am being attacked by my hon. Friends for doing nothing, and for sticking to my point about doing nothing, about the past. The small increase from £3,000 to £5,000 must be seen in the context of our inability to tackle that problem. Once that problem is out of the way, we can re-examine the matter. For those reasons, I hope that the Committee will resist the amendment.
      Mr. Robert Sheldon: I start by drawing the attention of the Financial Secretary to the way in which amendments are tabled by the Opposition. He will know, because he has it in his brief, that there will be several arguments against the details of any amendment. Any Treasury Minister knows that he has two matters to look at on any amendment. In the top right hand corner of
      764
      the brief that is provided for him he will see "Resist", and usually it will say that the amendment is "defective". Any sensible Financial Secretary or Treasury Minister will pay no attention to those words. The hon. Gentleman, who was a member of previous Finance Bill Committees, will not find any occasion on which I made use of that argument.
      Sir William Clark: When the brief said "Resist", the right hon. Member for Ashton-under-Lyne (Mr. Sheldon) resisted.
      Mr. Sheldon: That was when I was prepared to listen to the arguments and to debate those arguments rather than to read the brief. My point was that I did not make use of the word "defective". I fully understand the limitation of the Opposition in drafting financial legislation that will stand up in a court of law. For the Opposition to waste time on these matters when we are here to discuss political matters is futile. One has to choose the issues. The issue that we have chosen is that to which the Minister must address his mind. If the Minister or the Committee comes to the conclusion that the issue chosen by the Opposition is right, sensible and acceptable, then the Minister, who knows nothing about these matters, will ask the Inland Revenue to draft legislation to put into effect the argument deployed by the Opposition and accepted by the Committee. That is the way these things happen. I hope that we shall not hear again the argument that was deployed by the Minister. It does not advance his cause.
      6.30 pm
      I am arguing the general point put forward by the hon. Member for Winchester (Mr. Browne) against indexation. The hon. Gentleman pointed to the complicated nature of the legislation and its effect, in particular, on the bed-and-breakfast clauses. I have never experienced an occasion when the main elements of important legislation were not understood by the financial, taxation or legal bodies of opinion that examined them. It took weeks, as the hon. Member for Horsham and Crawley (Mr. Hordern) rightly pointed out, before the implications were understood. This is an illustration of the complexity of the legislation and of the inability of the Treasury to inform Parliament, through written answers or other means, of what it had in mind. There is an obligation on the Treasury, when it comes forward with such important matters, to make sure that its intentions are clear. I hope that the Minister will put aside his brief and that he will attempt to understand the issues before coming back to the Committee. It was an act of dereliction that people were misled for such a long period.
      That is not the only complication. There are the indexation provisions in schedule 9. The hon. Member for Rossendale (Mr. Trippier) referred to the problems of this rough and ready justice, as the Financial Secretary referred to it. It will be interesting to hear in Standing Committee why the Minister chose so complicated a method of dealing with a matter that is surely capable of greater refinement.
      The capital gains tax was introduced by a Conservative Administration in 1962. It is interesting that a Conservative Administration started the tax and that a Conservative Administration will virtually kill it off. The tax was introduced to deal with the killings that were being made on the Stock Exchange as a result of the activities of a number of flamboyant operators. The measures in the

      765
      Bill mean that the capital gains tax has, at best, an uncertain future and, at worst, is due for virtual demolition.
      According to the Red Book, the indexation of capital gains will mean a reduction of revenue of £150 million. That is a vast sum of money. It also shows that increases in the thresholds for individuals and trusts will mean a reduction of a further £60 million in revenue and that relief for transfers out of settlement will reduce the yield by a further £45 million. The total amount is £255 million without taking account of note (g). There are those who say that, on first receiving the Red Book, one should go through the notes. There is much to be said for that argument. According to note (g), the eventual effect in respect of disposals is likely to be "substantial". No figures are quoted. I suggest that for the word "substantial" there should be substituted an ordinary word that everyone understands—"enormous". One has only to make a few calculations about possible future inflation to see that that is the likely outcome.
      In this legislation, the threshold is being increased from £3,000 to £5,000, after which it will be indexed. The relationship between capital and income taxes is getting out of joint. That cannot be right. When the Conservative Party, on coming to power, retained the capital transfer tax, the Opposition thought that a bipartisan approach had been established and that these matters were properly subject to taxation. We knew that the amounts would vary depending on the views of different Governments. However, we thought that the principles and the structure would remain much the same.
      We had hoped that, at a later stage, the loopholes disclosed in the tax system—income tax, corporation tax or capital taxation—would be closed, whichever party came to office. The Labour Government closed the capital tax loopholes; the Conservative Government opened them. However, both Governments were interested in closing the income tax loopholes. As my hon. Friend the Member for Workington (Mr. Campbell-Savours) pointed out, there has been no agreement on capital taxation. I do not believe that capital taxes have acted as a brake on expansion, as some hon. Members have claimed.
      I know that the Government will be adding up the cost of the Opposition's amendments. We shall hear, long before the Committee stage is concluded, the old story of the profligacy of the Socialist Party and how it wastes money. If, however, the Government are prepared to accept some of our major amendments, we shall happily drop others. I give Treasury Ministers the undertaking that, if the Government are prepared to drop some of their clauses, we shall be happy to drop some of our amendments. The amendment now under discussion will assist, not reduce, the revenue. The party that formed the Government who effectively introduced capital gains tax in 1962 should not end it in the manner that is proposed by making it subject to indexation.
      The problem is the manner in which people's investment decisions will be altered fundamentally as a result of the legislation. A person with £100,000 can invest in a second home, possibly in Spain, and can thereafter reckon that it will keep pace with inflation at perhaps 10 per cent. We are inflation proofing that type of investment. If, on the other hand, a person with £100,000 buys Government stock, there is no inflation proofing. Such a
      766
      person will have to pay income tax of up to 75 per cent. on the return on that investment. There is a wide discrepancy between the return on money put into a second home and on money put into Government securities.
      Capital gains tax was introduced to deal with the increase in personal wealth, whether that increase came from an increase in income or in capital. There cannot be an identity of taxation between the taxation of capital and the taxation of income, but at least both should be subject to tax. In a number of cases one has the choice of paying tax on the one or the other. The Government are creating a privileged kind of security that will distort the investment process in a way that I do not think Treasury Ministers fully comprehend.
      Mr. Beaumont-Dark: If one puts £100,000 in a property, one pays no income tax, because there is no income, but tax will have to be paid on the capital gain when the property is sold. The £100,000 which is put into a Government security—a most laudable thing to do—will attract tax upon the income, as the right hon. Gentleman said. However, it is possible, as he knows, to make a handsome capital gain on many gilts. No tax is payable on such profit. The right hon. Gentleman pooh-poohs it. Many redemption stocks stand at under half their price, so it is possible to make £50,000 tax free.
      Mr. Sheldon: The hon. Gentleman is too knowledgeable in these matters to believe that the ordinary person will make a fortune out of gilts, except in the limited sense that there might be small profits from buying stocks below their valuation. This is a minor matter. The hon. Gentleman knows, and I know, that the opportunities for capital gains on Government stock are limited. The possibilities for capital gains on second homes are much greater. Taking inflation at 10 per cent. a year, that will be free of any tax, whereas the inflationary element in Government securities is subject to taxation. It cannot be right that the inflationary element in Government stock should he taxed at up to 75 per cent. whereas the inflationary element relating to property is not taxed at all.
      The Government are taxing income-producing assets much more than capital gains-producing assets. This is an anomaly as great as the taxing of inflationary gains. If the Government believe in indexation, why have they assumed that the 30 per cent. rate is immutable? Why has there been no discussion on it? The 30 per cent. rate, which has been held to be right at a time when inflationary gains are being taxed, cannot be right when inflationary gains are made free of tax.
      Mr. Ridley: I want to get it clear. The right hon. Gentleman put his name to the Green Paper, published by the Labour Government, which explored the possibility of indexation or tapering. Is he now opposed to indexation?
      Mr. Sheldon: The hon. Gentleman must surely know that the Inland Revenue Green Paper was put out for consultation. Various suggestions were made, but the rate of tax was not mentioned. Surely he cannot believe that a Labour Government would have taxation at 30 per cent. when capital gains were indexed. This was a matter for consultation and discussion.
      I am saddened because we have had no discussion whatsoever on the rate of tax which should be chargeable under the new regime. The hon. Gentleman made no attempt to show why in equity the rates should be the same.

      767
      The hon. Member for Croydon, South (Sir W. Clark) and the hon. Member for Rossendale called capital gains tax a tax on thrift. I do not know what that means. We tax work. Many people who earn their money in very difficult circumstances are taxed, and rightly so. If people are able to save a certain amount of money, that represents an economic advantage that ought to be subject to the tax system. Taxation on thrift does not deal with increases in inherited thrift.
      6.45 pm
      When Conservative Members start getting pious about the problems of those with large sums of money, I doubt whether the feeling of emotion lasts as long as my journey to Ashton-under-Lyne. There I encounter people in much greater difficulties than many about whom we hear in this Chamber. We do not see such people here for obvious reasons, but we should always remember them and their problems.
      The hon. Member for Winchester called this an indexation Budget. I think that it will become known as the indexation Budget, but I do not believe that the measures on indexation have been proposed because the Government have necessarily come to believe in indexation. They believe that in some matters indexation can help the better off and that therefore they should introduce indexation.
      There is a broad division between both sides. We believe in not just rough justice, but justice for the unemployed. Unemployed benefit might have been indexed. The 5 per cent., of which the Government took no notice, might have been restored. The Labour Government implemented the indexation of personal allowances. We believe in the indexation of such matters. As we see in this legislation, the Conservative Government believe in the indexation of higher rates of tax, capital gains, capital gains tax thresholds and capital transfer tax. If the Government really believed in indexation as a whole, they should have examined the whole area of economic activity. Had they done so, they would have come to very different conclusions. We shall vote for the amendment as an illustration of the Government's wrong priorities in these important matters.
      Question put, That the amendment be made:—
      The Committee divided: Ayes 116, Noes 211.

      Division No. 132

      6.47 pm

      AYES

      Abse, Leo

      Cunningham, DrJ. (W'h'n)

      Allaun, Frank

      Dalyell, Tam

      Archer, RtHonPeter

      Davidson, Arthur

      Atkinson, N.(H'gey,)

      Davies, Ifor (Gower)

      Barnett, Rt Hon Joel (H'wd)

      Davis, Terry (B'ham, Stechf'd)

      Bidwell, Sydney

      Deakins, Eric

      Booth, RtHonAlbert

      Dean, Joseph (Leeds West)

      Boothroyd, MissBetty

      Dixon, Donald

      Bottomley, RtHonA.(M'b'ro)

      Dobson, Frank

      Bray, Dr Jeremy

      Dormand, Jack

      Brown, Hugh D. (Provan)

      Dubs, Alfred

      Buchan, Norman

      Dunwoody, Hon Mrs G.

      Callaghan, Jim (Midd't'n&P)

      Eadie, Alex

      Campbell-Savours, Dale

      English, Michael

      Carter-Jones, Lewis

      Evans, John (Newton)

      Clark, Dr David (S Shields)

      Faulds, Andrew

      Cocks, Rt Hon M. (B'stol S)

      Fitt, Gerard

      Concannon, Rt Hon J. D.

      Flannery, Martin

      Cook, Robin F.

      Fletcher, Ted (Darlington)

      Craigen, J. M. (G'gow, M'hill)

      Foot, RtHonMichael

      Cryer, Bob

      Foster, Derek

      Cunliffe, Lawrence

      Foulkes, George

      Cunningham, G. (IsligtonS)

      Freeson, Rt Hon Reginald

      768

      George, Bruce

      Parker, John

      Hamilton, W. W. (C'trai Fife)

      Parry, Robert

      Harrison, RtHonWalter

      Price, C. (Lewisham W)

      Heffer, Eric S.

      Radice, Giles

      Hogg, N. (EDunb't'nshire)

      Robertson, George

      HomeRobertson., John

      Robinson, G. (Coventry NW)

      Homewood, William

      Rooker, J. W.

      Hooley, Frank

      Sheerman, Barry

      Hoyle, Douglas

      Sheldon, Rt Hon R.

      Jay, Rt Hon Douglas

      Shersby, Michael

      John, Brynmor

      Shore, Rt Hon Peter

      Jones, Rt Hon Alec (Rh'dda)

      Silkin, RtHonJ. (Depfford)

      Lambie, David

      Silverman, Julius

      Lamond, James

      Skinner, Dennis

      Leighton, Ronald

      Snape, Peter

      Lewis, Ron (Carlisle)

      Spearing, Nigel

      Litherland, Robert

      Spriggs, Leslie

      Lyon, Alexander(York)

      Stoddart, David

      McCartney, Hugh

      Stott, Roger

      McDonald, DrOonagh

      Strang, Gavin

      McKay, Allen (Penistone)

      Straw, Jack

      McWilliam, John

      Taylor, Mrs Ann (Bolton W)

      Marshall, D(G'gowS'ton)

      Thomas, Dafydd (Merioneth)

      Martin, M(G'gowS'burn)

      Thorne, Stan (Preston South)

      Mason, Rt Hon Roy

      Tinn,James

      Maxton,John

      Varley, Rt Hon Eric G.

      Maynard, Miss Joan

      Weetch, Ken

      Mikardo,Ian

      Welsh, Michael

      Millan, RtHonBruce

      White, Frank R.

      Mitchell, Austin(Grimsby)

      Wigley,Dafydd

      Morris, Rt Hon A. (W'shawe)

      Williams, Rt Hon.A.(S'sea W)

      Morris, Rt Hon C. (O'shaw)

      Winnick, David

      Morton, George

      Woolmer, Kenneth

      Moyle, Rt Hon Roland

      Newens, Stanley

      Tellers for the Ayes:

      O'Neill, Martin

      Mr. James Hamilton and

      Palmer, Arthur

      Mr. Ioan Evans.

      NOES

      Adley, Robert

      Crouch, David

      Aitken,Jonathan

      Dean, Paul (North Somerset)

      Alexander, Richard

      Dickens, Geoffrey

      Alison, Rt Hon Michael

      Dorrell, Stephen

      Alton, David

      Dover, Denshore

      Ancram, Michael

      Dunn, Robert (Dartford)

      Aspinwall,Jack

      Edwards, Rt Hon N. (P'broke)

      Atkins, Rt Hon H.(S'thorne)

      Eggar, Tim

      Atkins, Robert (PrestonN)

      Elliott, SirWilliam

      Banks, Robert

      Faith, Mrs Sheila

      Beaumont-Dark, Anthony

      Fell, Sir Anthony

      Beith, A.J.

      Fenner, Mrs Peggy

      Bendall, Vivian

      Fisher, Sir Nigel

      Benyon, Thomas(A'don)

      Fletcher, A. (Ed'nb'ghN)

      Benyon, W. (Buckingham)

      Fletcher-Cooke, SirCharles

      Berry, HonAnthony

      Fookes, Miss Janet

      Bevan, David Gilroy

      Gardiner, George(Reigate)

      Biffen, Rt Hon John

      Glyn, Dr Alan

      Blackburn,John

      Goodhart, SirPhilip

      Body, Richard

      Goodhew, SirVictor

      Boscawen, HonRobert

      Goodlad, Alastair

      Bradley, Tom

      Gow, Ian

      Brinton, Tim

      Greenway, Harry

      Brocklebank-Fowler, C.

      Griffiths, E.(B'ySt. Edm'ds)

      Brooke, HonPeter

      Griffiths, Peter Portsm'thN)

      Brown, Michael(Brigg&Sc'n)

      Grist, Ian

      Browne,John(Winchester)

      Grylls, Michael

      Bryan, Sir Paul

      Hamilton, Hon A.

      Buchanan-Smith, Rt.Hon.A.

      Hamilton, Michael(Salisbury)

      Budgen, Nick

      Haselhurst, Alan

      Cadbury,Jocelyn

      Hawksley, Warren

      Carlisle, John(Luton West)

      Hayhoe, Barney

      Carlisle, Rt Hon M. (R'c'n)

      Heddle,John

      Cartwright,John

      Hicks, Robert

      Chapman, Sydney

      Higgins, Rt Hon Terence L.

      Clark, Hon A. (Plym'th, S'n)

      Hogg, HonDouglas(Gr'th'm)

      Clarke, Kenneth (Rushcliffe)

      Horam,John

      Cockeram, Eric

      Hordern, Peter

      Cope,John

      Howell, Rt Hon D.(G'ldf'd)

      Cranborne, Viscount

      Howells, Geraint

      Critchley,Julian

      Hoyle, Douglas

      769

      Hunt, David (Wirral)

      Renton, Tim

      Hunt, John (Ravensbourne)

      Rhodes James, Robert

      Hurd, Rt Hon Douglas

      RhysWilliams, SirBrandon

      Johnston, Russell (Inverness)

      Ridley, HonNicholas

      Jopling, RtHonMichael

      Ridsdale, SirJulian

      Kaberry, SirDonald

      Rifkind, Malcolm

      Kershaw, Sir Anthony

      Roberts, Wyn (Conway)

      Lang, Ian

      Rodgers, RtHonWilliam

      Latham, Michael

      Roper, John

      Lawrence, Ivan

      Rossi, Hugh

      Lee,John

      Rost, Peter

      LeMarchant, Spencer

      Sainsbury, HonTimothy

      Lennox-Boyd, Hon Mark

      Sandelson, Neville

      Lester, Jim (Beeston)

      Shaw, Giles (Pudsey)

      Lewis, Kenneth (Rutland)

      Shaw, Michael (Scarborough)

      Lloyd, Ian (Havant & W'loo)

      Shelton, William(Streatham)

      Lloyd, Peter (Fareham)

      Shepherd, Colin (Hereford)

      Loveridge, John

      Shersby, Michael

      Lyell, Nicholas

      Sims, Roger

      Lyons, Edward (Bradf'dW)

      Smith, Cyril(Rochdale)

      Mabon, Rt Hon Dr J. Dickson

      Smyth, Rev. W. M. (Belfast S)

      McCrindle, Robert

      Speed, Keith

      Macfarlane, Neil

      Speller,Tony

      MacGregor,John

      Spence, John

      MacKay, John (Argyll)

      Squire, Robin

      Maclennan, Robert

      Stanbrook,Ivor

      McNair-Wilson, M.(N'bury)

      Steel, Rt Hon David

      McNair-Wilson, P. (NewF'st)

      Steen, Anthony

      McQuarrie, Albert

      Stevens, Martin

      Major, John

      Stewart, A. (ERenfrewshire)

      Marland, Paul

      Stewart, Ian (Hitchin)

      Mates, Michael

      Stradling Thomas, J.

      Mather, Carol

      Taylor, Teddy (S'end E)

      Maude, Rt Hon Sir Angus

      Tebbit, Rt Hon Norman

      Mawby, Ray

      Temple-Morris, Peter

      Mawhinney, DrBrian

      Thomas, Rt Hon Peter

      Maxwell-Hyslop, Robin

      Thompson, Donald

      Mellor, David

      Thorne, NeilC(IlfordSouth)

      Meyer, Sir Anthony

      Thornton, Malcolm

      Mills,Iain (Meriden)

      Townend, John (Bridlington)

      Mills, Peter (WestDevon)

      Trippier, David

      Mitchell, R. C. (Soton Itchen)

      van Straubenzee, Sir W.

      Moate, Roger

      Viggers, Peter

      Molyneaux,James

      Waddington, David

      Morris, M. (N'hampton S)

      Wainwright, R.(ColneV)

      Morrison, Hon C. (Devizes)

      Wakeham, John

      Murphy, Christopher

      Walker, Rt Hon P.(W'cester)

      Myles, David

      Walker, B. (Perth)

      Neale, Gerrard

      Walker-Smith, Rt Hon Sir D.

      Nelson, Anthony

      Waller, Gary

      Neubert, Michael

      Walters, Dennis

      Newton, Tony

      Ward, John

      Normanton,Tom

      Warren, Kenneth

      Onslow, Cranley

      Watson, John

      Owen, Rt Hon Dr David

      Wellbeloved, James

      Page, Richard (SW Herts)

      Wells, Bowen

      Parris, Matthew

      Wells, John (Maidstone)

      Patten, Christopher(Bath)

      Wheeler, John

      Pattie, Geoffrey

      Wickenden, Keith

      Percival, Sir Ian

      Wilkinson, John

      Pollock, Alexander

      Williams, D. (Montgomery)

      Powell, Rt Hon J.E. (S Down)

      Wolfson, Mark

      Prentice, Rt Hon Reg

      Price, SirDavid (Eastleigh)

      Tellers for the Noes:

      Prior, Rt Hon James

      Mr. Selwyn Gummer and

      Proctor, K. Harvey

      Mr. Tristan Garel-Jones.

      Raison, Rt Hon Timothy

      Question accordingly negatived.
      Sir William Clark: I beg to move amendment No. 32, in page 45, line 14, leave out from '(a)' to end of line 16 and insert
      'for "individual" in each place where it occurs, there shall be substituted "person" and'.
      The Chairman: With this we may take the following amendments:
      No. 33, in page 45, line 17, leave out from '(b)' to end of line 19 and insert
      'for "£3,000", in each place where it occurs, there shall be substituted "the exempt amount for the year" and'.
      No. 34, in page 45, line 19, at end insert
      '(c) for "£5,000", where it occurs in subsection (5)(b), there shall be substituted "an amount equal to twice the exempt amount for the year".'.
      Sir William Clark: I need not detain the Committee for long, because it is a simple amendment. I am sure that even Opposition hon. Members will be able to agree the justice of it. Amendments Nos. 33 and 34 are consequential.
      As I read it, section 5 of the Capital Gains Tax Act 1979, as it refers to "an individual", means that companies are excluded. The amendment seeks to substitute "person" for "individual". I understand that, legally, a person means a company as well.
      7 pm
      I remind my hon. Friend the Financial Secretary to the Treasury that in his Budget Statement my right hon. and learned Friend the Chancellor of the Exchequer said:
      "I propose, therefore, that, as from this April, gains, including those of companies, will, in principle, be calculated after taking account of inflation which occurs after that date."—[Official Report, 9 March; Vol. 19, c. 755.]
      If we are to have an exemption limit of £5,000, and if, as my right hon. and learned Friend said, we are to extend it to companies as well as to individuals, it is not a bad idea to have that spelt out in the Bill. My reading of clause 65 is that it does not include companies, which is diametrically opposite to what my right hon. and learned Friend said.
      Mr. Ridley: I am grateful to my hon. Friend the Member for Croydon, South (Sir William Clark) for the clarity and brevity with which he moved the amendment. He suggested that my right hon. and learned Friend the Chancellor of the Exchequer sought to index gains for companies and had somehow forgotten to do so. That is not so. My right hon. and learned Friend did not forget. The gain will be indexed for companies. The indexation provisions in clause 65 relate to the £5,000 exempt allowance. Companies have never had an exempt allowance for capital gains tax purposes. That was not what my right hon. and learned Friend said he would do, and it was not our intention to allow that £5,000 allowance for companies.
      The analogy is with income tax, where there is a personal allowance for each taxpayer. However, in corporation tax there is no exempt slice of profits or a similar tax-free allowance for corporation tax purposes. There is no reason why there should be, because no minimum standard of profit is necessary to maintain the life of a company.
      Companies are chargeable to capital gains tax. They are charged at 30 per cent. of the capital gains tax rate. This is done by leaving out of account a fraction of the net chargeable gains after losses of the accounting period and charging the balance at 52 per cent. At present the fraction is eleven-twentysixths. I do not think that my hon. Friend would think it right, on reflection, further to help companies in respect of gains. They will benefit from the indexation provisions.
      In the Budget we have provided massive help to companies in a series of different ways. My right hon. and learned Friend feels that what we have done will be of

      771
      great help to companies and that it is not necessary to go any further in respect of capital gains tax. I think that my hon. Friend will agree that the exempt allowance of £5,000 would not be suitable for companies. They do not present the same staff problems in assessing the gain and they do not actually need an exempt slice in the same way as an individual, who should and does get it.
      Sir William Clark: I am grateful to my hon. Friend. I understand that whether a company is paying tax at 40 per cent. on the lower rate, or 52 per cent. at the standard rate, the reduction of eleven-twentysixths brings down the charge on capital gains for the company to 30 per cent. However, can my hon. Friend assure me that in the computation of the capital gains on the sale of any asset by a company, the cost of that asset will be index-linked from April 1982 as it is for an individual? If he can give me that assurance, I shall willingly withdraw the amendment.
      Mr. Ridley: I am happy to give my hon. Friend that assurance.
      Sir William Clark: I beg to ask leave to withdraw the amendment.
      Amendment, by leave, withdrawn.
      Sir William Clark: I beg to move amendment No. 35, in page 46, line 27, at end insert—
      '(4A)(a) Where in any year of assessment the taxable amount of an individual does not equal or exceed the exempt amount for the year in section 5 of the Capital Gains Tax Act 1979 so far as it relates to him, then the amount of the difference between the said taxable amount and the said exempt amount shall for the purposes specified in subsection (c) below be carried forward to the next following year of assessment and added to the amount which would, apart from this subsection, be the exempt amount for that next year in relation to that individual, and the total thereof shall be the exempt amount for that next following year for that individual.
      (b) Where in any year of assessment there is in relation to an individual an excess of the exempt amount for the year as calculated under subsection (a) above over the taxable amount of that individual for that year as ascertained for the purposes of section 5 of the Capital Gains Tax Act 1979, that excess shall for the purposes specified in subsection (c) below be carried forward to the next following year and paragraph (a) above shall apply to the said excess as if it were the amount of the difference referred to in the said paragraph (a).
      (c) Paragraphs (a) and (b) above apply only for the purpose of calculating capital gains tax payable in relation to disposals in any year of assessment of business assets as defined in section 126(1)(a) and (b) of the Capital Gains Tax Act 1979 and nothing in paragraphs (a) and (b) above and (d) below shall affect the calculation of capital gains tax payable in respect of disposals of assets other than business assets as hereinbefore described.
      (d) Subject to paragraph (c) above references to the exempt amount or a multiple or a fraction of the exempt amount in subsection (5)(b) of section 5 and in Schedule 1 of the Capital Gains Tax Act 1979 shall be construed as if the exempt amount herein referred to meant the exempt amount ascertained under paragraphs (a) and (b) above.'.
      This is a long but simple amendment. If the wording is not correct, I am sure that my hon. Friend will not criticise me. The £5,000 exemption limit is all right if an individual has liquid assets—for example, a portfolio of
      772
      shares. If he has such assets he can make profits each year, or sell his assets and enjoy the £5,000 exemption limit. I am especially interested in family businesses. An individual's only asset may be in a family business, which may have been started and built up over 10 or 15 years. As there has been no sale the £5,000 exemption is lest. This puts an unfair burden on those who start businesses which are successful and which create jobs as opposed to those who invest in stocks and shares.
      The purpose of the amendment is to ensure that when a family business that is in one person's hands is sold, having been started and built up over five, 10 or 15 years, the £5,000 exemption can be accumulated. That means that when the owner of the business sells it he will be able to enjoy the same exemption as that which is enjoyed by his counterpart.
      Mr. Ridley: I am grateful to my hon. Friend for drawing attention to the great importance of not letting capital gains tax damage the family business. However, I suggest that the present arrangements are pretty generous. Business assets can be well sheltered under capital gains legislation. When business assets are sold and the proceeds are reinvested in further business assets, any gain can be rolled over and the tax charge deferred. When a person eventually sells his business on retirement, for example, gains of up to £50,000 are entirely exempt from tax. These concessions are of great value and they are specially designed to be so because of the importance that we attach to small businesses.
      My hon. Friend suggested that the £5,000 allowance should be allowed to be accumulated forward. Incidentally, I am not making a drafting point. I merely say that his amendment as drafted goes beyond the normal definition of business assets and includes shares in a trading company.
      The trouble with the proposal is that nowhere else in the capital gains legislation is it possible to carry forward these exempt allowances. In the same way, it is not possible to carry forward personal allowances in income tax. To make this change would be revolutionary and novel. It would be complicated and it would destroy one of the principles, to which we have always held, that an annual allowance is an annual allowance and cannot be carried forward. It would cost more money. We have put the money that is available to remodel capital gains tax into the right areas. Bearing in mind what I have said, I hope that my hon. Friend feels that his amendment need not be pressed.
      Sir William Clark: I am fully aware of the retirement benefit for family businesses. However, I still think that the matter needs to be looked at again, perhaps not in this Finance Bill but in subsequent Finance Bills. There is an injustice between a person who is producing jobs in a business where he cannot sell off parts of his investment portfolio. I hope that my hon. Friend will assure me that the Chancellor's mind is not closed to what I am saying.
      I do not wholly accept my hon. Friend's point that an annual allowance is an annual allowances and personal allowances are not carried forward. I appreciate that personal allowances are not carried forward. However, in many aspects of our taxation there is roll-over relief and in many cases one can defer tax. Stock relief is a good example. I would not go along the same road as my hon. Friend on that argument.

      773
      I appreciate that the Government have done an enormous amount for small businesses—the start-up scheme, the enterprise zones, retirement benefit and so on.
      If my hon. Friend can assure me—as I am sure he will—that the Chancellor's mind will not be closed to this in future years, I shall withdraw my amendment.
      Mr. Ridley: We want to ensure that the capital gains tax and the capital transfer tax to not damage any business, whether it be a one-man business, an unquoted company or a quoted company. We have a record of looking most sympathetically at the effects of these taxes on all sorts of businesses. We may have to review in the future the effects of this tax on all sorts of enterprises and businesses.
      There has been a major change in the tax. We must debate it in this Chamber and upstairs. People must get used to it and understand it. We should let the new tax settle down. Then I give my hon. Friend the assurance that my right hon. and learned Friend the Chancellor of the Exchequer will be looking to ensure that the shoe is made to pinch less wherever there is prosperity in business.
      Sir William Clark: In view of that assurance, I beg to ask leave to withdraw the amendment.
      Amendment, by leave, withdrawn.
      Clause 65 ordered to stand part of the Bill.

    Clause 71

      INDEXATION ALLOWANCE ON CERTAIN DISPOSALS
      7.15 pm
      Mr. Straw: I beg to move amendment No. 22, in page 52, line 22, leave out paragraph (b).
      I might save the hon. Member for Cirencester and Tewkesbury (Mr. Ridley) a great deal of trouble if I tell him that we recognise the technical and other defects of the amendment. The hon. Member for Colne Valley (Mr. Wainwright) has explained the difficulties that the Opposition face in putting forward amendments as vehicles for debate. We will register our opposition to what the Government are proposing to do on the indexation of capital gains at this time by a vote on the clause itself and not on the amendment.
      The amendment provides us with an opportunity to examine in detail the case for this major and expensive change which the Government are making in the Finance Bill. The Chancellor justified the change in clause 71, to index capital gains, by describing the tax on inflationary gains as an "injustice". He said:
      "I cannot, however, allow this injustice to continue."—[Official Report, 9 March 1982; Vol. 19, c. 755.]
      The Chancellor's choice of words is significant for the Opposition. The taxation of inflationary capital gains is an "injustice". The double taxation of unemployment benefit is merely an "unfortunate necessity". The choice of words is strongly reminiscent of the Prime Minister's strange sense of moral values which led her to describe inflation as an evil but unemployment merely as a problem.
      We acknowledge that the change in capital taxation is one that the Government and their many friends in the City have sought for many years. On the face of it, the case for indexing capital gains before they are brought into charge may appear to some to be strong. It is argued that inflation was not appreciated as a problem in the mid-1960s when
      774
      the present capital gains tax was devised. It is also said that the tax structure took no account of the prospect of the high levels of inflation that existed throughout the 1970s.
      In my judgment, both those assertions are incorrect. First, there was substantial debate in the House and in Committee about the consequences of inflation on the charge to capital gains tax and whether or not that would be fair. The right hon. Member for Sidcup (Mr. Heath), in leading for the then Opposition, during the Second Reading of the Finance Bill in 1965, charged that the capital gains tax
      "makes absolutely no allowance for inflation."—[Official Report, 10 May 1965; Vol. 712, c. 72.]
      The right hon. Gentleman made the charge that the tax took no account of inflation as long ago as 1965 when the tax was first introduced. He and others Members of the Conservative Opposition were countered by arguments from the Government that the tax rate of 30 per cent. had been set deliberately low and at a flat rate to take account of inflation. That point was repeated in the Green Paper published in 1977, to which the Financial Secretary referred in the previous debate.
      The Green Paper said at paragraph 24:
      "When the United Kingdom capital gains legislation was introduced in 1965 it was decided that the tax should be at a relatively low flat rate which took account of the possibility that the gains might have accrued over a longish period but were being charged to tax in one year, and also that they might contain an inflationary element."
      The possibility of an inflationary element was clearly in the minds of those who constructed the tax. It was one of the arguments used at the time to counter the belief that the tax took no account of inflation.
      It is evident from the right hon. Member for Sidcup's subsequent conduct in this respect—as in respect of his conduct on thresholds—that he and the Conservative Government of 1970 to 1974 were convinced by the Labour Party's arguments. It is on record that in those halcyon days of 1970 to 1974 the Conservative Government, led by the right hon. Member for Sidcup, made no attempt to interfere—despite rising levels of inflation—with the basic structure of the tax, its flat rate or its alleged lack of provision and relief for inflationary gains.
      If the ostensible taxation of inflationary gains is the injustice that the Chancellor of the Exchequer now alleges, and if it is as onerous as the Stock Exchange chairman has claimed, one might expect the yield from the capital gains tax to rise broadly in line with inflation. Let us consider what has happened to the yield from capital gains tax during the historically high inflation that Britain has encountered since 1973. Between March 1973 and March 1980, prices—as measured by the retail prices index—rose by about 347 per cent. At the same time, the yield from capital gains tax—according to the Inland Revenue's figures—rose from £324 million in 1973–74 to £540 million in 1981–82. That was an increase of only two-thirds compared with the 347 per cent. increase in the retail prices index. If the real value of the 1973–74 yield had been maintained, that yield last year should have been £1,123 million, not the actual figure of £540 million.
      The truth is that this capital tax and other capital taxes have not been as onerous as Conservative Members often proclaim. The Financial Secretary quoted the figures that were given to my hon. Friend the Member for Barking (Miss Richardson) on 1 April. He sought to make a point that will redound greatly to his disadvantage. He made

      775
      exactly the point that we now seek to make. As the figures given to my hon. Friend show, the take from capital taxes as a proportion of the total yield from all taxes, far from increasing during the period from 1973 to 1982, has declined consistently and now stands at only 1·4 per cent. of the total yield of taxation.
      It does not lie in the Financial Secretary's mouth to criticise the Labour Government for allowing the yield to fall while at the same time proposing measures that will push that yield down still further. He must make a choice between the arguments that he advances. He cannot advance both arguments. The figures from my hon. Friend the Member for Barking, as well as those that I have given about the cash yield compared with prices over the past nine years, prove beyond peradventure that the tax has not been as onerous or unjust as the Government and their friends in the City suggest.
      Conservative Members may complain about the tax, but they ignore the effect of substantial reliefs on the charge to tax and the operation of thresholds which, combined with bed and breakfast devices, have enabled those who would otherwise have been brought into charge to avoid it. I accept that they have been avoiding that charge lawfully, but the House should realise that bed and breakfasting, although lawful, is artificial, because the transactions are made to reduce a taxable charge and not for any other purpose. Bed and breakfasting operates so that if a taxpayer has made a gain and has other assets that show a loss, he can sell and buy them overnight, create a loss, set that against the gain that he has made and thus avoid gains that exceed his exemption limit. Therefore, thresholds and bed and breakfasting are important mechanisms by which people have been able to reduce their liability to tax. They have acted as offsets against inflation.
      The other important relief that has offset inflation is the flat rate. The operation of the flat rate with thresholds has meant, in practice, that a substantial element of relief against inflation has been built into the operation of the tax. My right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) made the important point that, even with the alleged taxation of inflationary gains, those who have made capital gains have been treated far more lightly than those who have made gains from income. The Financial Times of 13 March 1982 said:
      "Capital growth has always been more attractive, especially for wealthier investors in the higher income tax brackets which can lead up, eventually, to the investment income surcharge. This can produce a marginal tax rate of 75 per cent., compared with a capital gains tax rate of 30 per cent."
      That brings me to our principal objection to the Government's proposal on the indexation of capital gains. As many Conservative Members have made clear, the Government are not indexing many other aspects of the taxation system so fully. Far from evening up the balance between the taxation of income and the taxation of capital—the Government have often justified their proposals by suggesting that there is an injustice in the present taxation of capital—these proposals will create an even greater imbalance. They will widen the gap between the treatment of income and the treatment of capital for tax purposes.
      As a result, it will be even more advantageous to hold assets that realise a capital gain, instead of holding those that produce income. Although the Government intend to tax only the real gain on any assets, they will continue to
      776
      do so at the low flat rate of tax of 30 per cent., which was specifically introduced as an offset for the fact that inflationary gains were being taxed. Now that inflationary gains are not to be taxed, the case for a separate low flat rate of tax for capital gains must disappear, both in justice and in logic. The gains that are taxed should be brought into charge as part of an individual's or company's income and should be subject to the appropriate marginal rate of income tax or to the standard rate of corporation tax. The Government should introduce that essential and fundamental reform if they are to press the proposal for indexing gains.
      The flat rate of tax at 30 per cent. was introduced, as the Inland Revenue made clear, as a rough and ready offset for inflationary gains. There is no doubt about that. Now that only real gains are being introduced and chat inflationary gains are being abandoned for tax purposes, those gains, which will be relatively few and far between for individual taxpayers, must be brought into charge against an individual's income. It is important to point out that when Mr. Selwyn Lloyd was Chancellor of the Exchequer and the Conservative Government first developed the concept of charging capital gains to tax—albeit only short-term capital gains—they were charged to tax as part of income and a separate flat rate tax was not established for them. That was sensible.
      The then Chancellor could have said that we must bring those short-term gains into charge as income because in the short-term there would be very little inflation to set against them. If that was right, as it then was, now that the Government are setting up a system to offset inflation they must bring the gains into tax against income. I look forward to the Minister's explanation of why the Government have set their face against doing that. I assume that they have, as there seem to be no proposals in the Bill to make that change. Why are the Government sticking to the rate of 30 per cent., as though it were permanent for ever and a day? There is no justification for that. The 30 per cent. rate may have stood for 17 years while inflationary gains were taxed, but the case for it no longer exists if we abandon the taxation of inflationary gains.
      7.30 pm
      If the Government fail to introduce that consequential and important change alongside their proposal to index capital gains, I ask the Committee to consider the effects in terms of equity, and in other terms, of making capital gains even more advantageous for those who hold assets that produce income. Again, my right hon. Friend the Member for Ashton-under-Lyne dealt with this on the previous amendment.
      Without further changes the clause will discriminate heavily in favour of the wealthy holder of assets who can move into assets which have a capital appreciation attached to them. The clause will discriminate against holders of assets who do not wish to risk their capital. There is always risk, except for index-linked stocks, and there is usually a risk attached to assets that are purchased to gain an income by capital appreciation.
      The clause will discriminate against holders of small capital assets who wish to achieve an income from them. Many of those against whom the tax system will now discriminate more heavily than hitherto are the little old ladies and widows with small nest eggs which have be en invested to produce an income. For example, if they put

      777
      their money into a building society they will receive no capital gain from their investment. All their income from the building society, if they are paying higher rates, will be brought into charge, and if they are not paying higher rates it will still be subject to tax.
      However, if they can find a capital asset into which to put their money and can achieve an equivalent capital gain to the income that they would receive from the building society, they might be able to set the whole of that gain against inflation during the period and pay minimal tax. Instead of paying tax on 10 per cent. per year, they will be paying tax on no more than 1 or 2 per cent., at a flat rate of 30 per cent., whereas with their income it would be at the marginal rate, whatever that might be.
      Therefore, our first objection to indexation is that there is no alteration to the way in which the gain is brought into charge and that it is brought into charge against the flat rate.
      Mr. Foulkes: My hon. Friend is being far too reasonable about the Government's proposals. He should be far more furious with the Government, because this is yet another example where those who have already more than enough money will get even more while others, such as the widows to whom my hon. Friend referred, will get even less and will be taxed—in some cases for the first time. Should not my hon. Friend be whipping up some fury against this iniquitous Government?
      Mr. Straw: I accept my hon. Friend's criticism. I am always too reasonable with the Government, although I expended a certain amount of what might have been detected as fury in the previous debate.
      Mr. Robin F. Cook: Reasoned indignation.
      Mr. Straw: Reasoned indignation. I shall have similar criticisms to make of the Government later. As well as being furious about the Government's proposals, I believe that this is an unjust change to make at a time when so many poor people, both in an out of work, are facing great difficulties.
      There are also important objections in terms of tax law and the kind of tax system that we develop.
      The second objection relates to the yield from this taxation. To some extent, I accept that the Financial Secretary dealt with the general question of yields. In reply to my intervention he said that the Treasury had produced illustations of the effects of these changes over a three-year period. Will he make projections available to the Standing Committee, taking the possible consequences of these changes over a 10-year period on various realistic assumptions about growth and inflation? Three or four examples of growth and inflation could be given. It cannot be beyond the wit of the Inland Revenue and the Treasury to produce such figures.
      Mr. Ridley: What assumption would the hon. Gentleman have me make about who will win the next general election?
      Mr. Straw: The hon. Gentleman can make whatever assumption he wishes. We should be serious about this. He has often stood at the Dispatch Box or cheered when his right hon. and hon. Friends have stood there defending the Government's record on inflation. He has said that
      778
      much of what has happened over the past three years on inflation was nothing to do with the Government, that it was the unanticipated result of the so-called world recession and the doubling of oil prices in 1980.
      The inflation that occurred in 1973 and 1974 was to a substantial extent due to the quadrupling of oil prices. It had nothing to do with the change of Government. I concede that some of the inflation with which the Government have had to contend has been due to forces beyond their control. Therefore, if we are to be serious, it is possible to put forward projections of yield on a variety of assumptions. If the hon. Gentleman wishes, I shall write to him setting out possible scenarios.
      For example, we could do a projection on an average rate of inflation of 10 per cent. and nil growth, or 3 per cent. growth. We could do another on an average inflation rate of 5 per cent., again with nil growth or 3 per cent. growth. If the hon. Gentleman wishes to categorise one possibility as more likely under a Labour Government and another as under a Conservative Government, that is up to him, but it is not unreasonable to request those figures.
      We shall not claim that the figures relating to the higher inflation rate are based on the likely outcome under a Conservative Government, provided that the hon. Gentleman does not claim they would be the outcome of a Labour Government. We should leave aside the election and take a serious view of the possible and probable outcome, over the next 10 years, on three or four assumptions. We appreciate that there are uncertainties, but surely it is reasonable to have such projections with an indication of the range of the yield loss that is likely to arise under the changes.
      The third objection to the Government's proposals is the administrative complexity and cost. Because of the always substantial, but now even greater, advantages of capital gains as opposed to income, the Inland Revenue has always had to develop and establish rules to prevent income from being converted into capital for tax purposes. In these changes the Government have had to resort to some fearsomely complicated rules concerning the calculation of gains over the transitional period. As I understand it, although I do not claim fully to comprehend every rule in the Bill—
      Mr. Robert Sheldon: Nobody does.
      Mr. Straw: I am reassured to learn from my right hon. Friend that nobody does. He is probably right. The understanding of these provisions will probably be like that of the Schleswig-Holstein question—confined to three men, one who had moved, one who had gone mad and one who had died. The same is said of the rate support grant—a view with which the Treasury no doubt agrees.
      While we object strongly in principle to the Government's introduction of the scheme at this time, we shall examine critically the way in which they intend to operate it in detail. We have no interest in allowing on to the statute book a scheme which appears to have rules that are arbitrary and difficult to follow if alternatives can be found. On the face of it, the basis of calculating gains over a transitional period seems rather arbitrary. Certainly the proposed rules seem to have satisfied no one.
      No doubt the Chancellor expected bouquets from the Stock Exchange, if from nobody else, when he introduced the changes. Instead, he has received only brickbats from ever ungrateful friends. On Thursday last the chairman of

      779
      the Stock Exchange was reported in the Financial Times as saying that the proposals were nonsense. Moreover, the Lex column commented on the chairman's remarks as follows:
      "As the Stock Exchange points out, much of the revenue lost to the Exchequer will find its way into the pockets of tax advisers."
      It seems that little of the benefit will actually find its way into the pockets of the taxpayers.
      We shall examine the rules very closely. Under the transitional rules adopted in 1965, when the Labour Government introduced capital gains tax for the first time, for capital quoted as shares a value was fixed on the shares at 6 April 1965, while pro rata rules operated in other cases. If the Government say that similar rules cannot be adopted on this occasion without a loss of yield on the tax overall, we shall have to consider whether an increase in the rate of tax would achieve the same yield on the basis of fairer and more coherent rules.
      I hope that the Financial Secretary will also tell us more today about the administrative costs of the scheme. No one reading the Bill and trying to make head or tail of the chapter on capital gains and the schedules can possibly deny that they are complicated. As my right hon. Friend for Ashton-under-Lyne pointed out, it was some weeks before the full complexity and consequences of the rules dawned even on many who claimed to be experts.
      On 22 October, when asked whether the Treasury had considered indexation of capital gains, the Financial Secretary replied that the yield would be drastically reduced and that the proposal
      "would result in an unwelcome increase in the cost of administration—for taxpayers as well as for the Revenue".—[Official Report, 22 October 1981; Vol. 10, c. 168.]
      The Financial Secretary has said that in that reply he had in mind the indexation not just of prospective gains but of past gains and that was why he replied as he did. I must say that that was not obvious on the face of it. Do those remarks also apply to the cost of administration? What will be the administrative cost of the changes? Will they, as one suspects, add quite substantially to the cost? In particular, what will be the cost of administration as a proportion of the new and much lower yield of this taxation?
      The fourth objection takes up the point made by my hon. Friend the Member for South Ayrshire (Mr. Foulkes)— the overall equity of introducing this change at this time. I have already referred to the selective indexation favoured by the Government. Capital taxation is already far from onerous, and income tax for higher earners has been significantly relaxed, but unemployment benefit has been cut in real terms. Hundreds of thousands of people are denied employment due to reductions in public spending, and the weak and poor are perpetually told that they cannot have the most marginal improvement in their standard of living because the country cannot afford the cost. In those circumstances, one must ask whether now is the time to embark on further gratuitous handouts to the rich and the wealthy. Our answer is that now is not the time. In the present situation there is no justification for this proposal and we shall oppose it.
      7.45 pm
      Mr. Richard Wainwright: The clause and the amendment relate to indexation. I reminded the Committee earlier of the Liberal Party's long advocacy that we should consider taxes year by year on an indexed
      780
      basis and make such amendments as may be proper against the background of taxes already indexed. The sovereignty of Parliament and its right to range over the whole spectrum, including increases in taxation proposed by Opposition parties, would thus remain intact, but the debate would take place against a background of indexed taxes.
      Earlier, the Financial Secretary tried to show that the Government had a coherent approach—I shall not use the word "philosophy", which would be to degrade a splendid subject—to indexation. He made much play of the fact that the Government were getting round to a consistent indexation of what he described as thresholds. He seemed, however, to be referring to one type of threshold—what might be described as the exempt threshold—and trying to confine the word to those thresholds which gave exemption to taxpayers with a modest liability.
      When I speak of indexation, I mean indexation of all the various thresholds, including those at which higher rates of tax come into play. I am glad to say that not only the Liberal Party but the alliance takes that view. The SDP is with us on this.
      Having made all that fuss about indexation, and having taken that stance, we must consider whether the clause and the amendment are likely to give indexation a bad name. For instance, in the previous Parliament I strongly opposed the various devolution Bills because, ardent federalist Briton that I am and ardent regionalist within Britain, I considered that the Bills were giving that principle a bad name. Naturally, I apply the same criteria to this amendment, which, on balance, will make indexation stink. That is not something that I want to support. It is being applied in the most ham-handed way.
      The only general class of beneficiaries will be professional tax advisers, unless the Financial Secretary, with the full authority of the Treasury, is able to revive the old notion, in which some citizens used to take comfort, that the tax office is one's best friend. If someone were perplexed about the filling up of forms and the making of elections and options were beyond his intelligence, even when he tried to apply himself to it, he did not need to go to the expense of going to a professional adviser; he could take all the papers to the friendly local tax office and be advised impartially, treated as somebody who must be given the utmost consideration and supplied with the most excellent advice.
      It would influence my attitude if the Financial Secretary were able to say that that still holds good, with all the reassuring qualities that it once had, and that all these enormous complexities—I have in my hand a 12-page set of complexities dashed off by a leading firm of accountants since the Finance Bill was published—will be dealt with by tax offices without the intermediation of professional advisers. This would be at no risk to the taxpayer's minimum liability. Unless that assurance is forthcoming, the administrative snags that have been deliberately introduced for the first time into capital gains computations in the Bill will be formidable. They are likely to interfere severely with the working of the stock market because of the drop in the volume of transactions, certainly from very small investors.
      I am sure that the Financial Secretary and many of his colleagues are genuine and effective supporters of wider share ownership. Many of my constituents are employed at one of the largest dyestuffs factories in Europe—the ICI factory in Huddersfield. These people are in on wider

      781
      share ownership and have been since the 1950s when ICI started that scheme. Various other public companies in the district, wanting to show that what ICI could do they could do in their own smaller way, copied that scheme. Such schemes have on the whole, at least until recently, been a good thing for the employees. These small shareholders will be brought into this mesh. Dealing in their shares for honourable reasons will land them in an administrative mess.
      I do not wish to weary the Committee with anything like all the examples that I have, let alone those that will come to light if the tax has to be administered. However, I shall mention one inconsistency. As the clause stands, disposals are first related to acquisitions within the previous 12 months on a first in, first out, basis. However, on earlier acquisitions we switch to a last in, first out, basis. Traders who started doing that with their stocks for stocktaking purposes would, in some instances, quickly find themselves subject to a back duty investigation, because consistency is required. To muddle up these two contrasting methods of deciding how to value the items involved is to ask for trouble. It cannot be justified on any intellectual basis.
      There is also the requirement that assets must be held for 12 months to qualify for indexation. I agree that one of the worst aspects of this method of computation is that, as indexation starts only this year, it will give greater advantage on past gains to the relatively short-term holder to the disadvantage of the longer-term investor.
      I am surprised that the Government should want to give the comparatively short-term holder, who starts to hold the shares at the same time as the indexation starts, a more favourable deal than is given to genuine long-term investors in a company who have been standing by while it builds up its business over the years before 1982.
      When it comes to the very short-term investor, apparently there has to be the 12-month rule. That has created a whole host of precautionary regulations to prevent spouses transferring assets in such a way as to obtain an indexation allowance on a third party sale. I could go on with the administrative horrors that will be created for the first time, adding to the cat's-cradle of our tax regulations, and will bear particularly hard on those who realise relatively small parcels of shares.
      Will the clause give indexation a bad name when the ordinary citizen sees what indexation involves him or her in? I hope that the Financial Secretary will explain why losses are not to be subject to indexation. What is the justification? I am glad that the subject will be argued fully, but it is difficult to understand why indexation should apparently be made to stop short of creating a tax loss or converting an apparent inflationary gain into a real loss.
      Unless the Financial Secretary can give me a series of reassurances on the apparent grave inadequacies in the clause as drafted, I shall feel bound to recommend my right hon. and hon. Friends to oppose it for the reasons that I have given.
      Mr. Mark Lennox-Boyd: I did not intend to speak on this amendment, but there are one or two matters that I should like to raise because I am somewhat puzzled by them. I am happy to follow the hon. Member for Colne Valley (Mr. Wainwright) because, if
      782
      he looks at the amendment carefully, he may find that he can support it. As I understand it, amendment 22 deletes paragraph (b) from clause 71(1). That exempts for the first 12 months holding period any assets from the indexation of capital gains. I should have thought that the hon. Member for Colne Valley would be happy to accept that amendment, as I would. However, I doubt whether that is what the hon. Member for Blackburn (Mr. Straw) had in mind when he moved the amendment.
      There are two small points that I should like to draw to the attention of the Committee, and in particular to that of the hon. Member for Blackburn. He elaborated the argument that the original intention of the flat rate 30 per cent. was as an offset for inflationary gain and that it would have been higher had inflation not been taken into account. He went on to say that that argument in 1965 was given tacit approval by the Conservative Government of 1970–74. However, if he examines the course of history, he will have to accept that no one at that time could possibly have expected the levels of inflation that have occurred since 1965. The pound in 1969 purchased goods that would require £5 today on the retail price index. Since 1969 money has declined to one fifth of its value. Therefore, any taxation of 30 per cent. on a gain between 1969 and today of 500 per cent., which is wholly attributed to inflation, will result in a substantial wealth tax, if that is a more appropriate phrase to use.
      8 pm
      The hon. Member for Blackburn further suggested that the fact that the yield on capital gains tax had gone down in those intervening years was an argument for suggesting that not much needed to be done in any sense of equity. However, whatever arguments there may be on equity, they are fallacious. The substantial reason why the yield has gone down is that between 1969 and today the stock market has hardly moved. In the whole range of investors in the stock market no one has been able to obtain capital gains that would have kept up the yield in inflationary times as well.
      I should like the hon. Member for Blackburn to consider another form of investor who is not among the very rich—the man who has had a second home since about 1970. Can he be expected to be able to do bed and breakfast, if that is something that helps the investor on the stock market?
      Mr. Ridley: The hon. Member for Blackburn (Mr. Straw) said that the Bill had proved to be extremely difficult to understand. I do not believe that the subsection with which we are dealing can be that difficult to understand as my hon. Friend the Member for Morecambe and Lonsdale (Mr. Lennox-Boyd) certainly understood it. The amendment would abolish the twelve-months ban on getting the exemption allowance. The hon. Member for Colne Valley (Mr. Wainwright) referred to that. I shall return to the substance of that point when I respond to what the hon. Gentleman said. It would cost £20 million next year and £80 million in a full year if we were to accept the amendment. Though it would be nice to accept the amendment and tempted though I am to do so, I am not sure that we can afford the extra cost that would be involved in such a big concession.
      The hon. Member for Blackburn moved the debate to wider considerations. We considered the rate on real gains. He referred to the 1977 Green Paper on the future of capital gains tax. He fairly said that the reason why a

      783
      30 per cent. flat rate had been set was that it would have to cover inflation. He quoted from the Green Paper, which stated that
      "the gains might have accrued over a longish period, but were being charged to tax in one year".
      I shall return to that point in a moment.
      The hon. Gentleman said that the yield had dropped because of various devices that people got round. The yield has risen from £324 million to £508 million. That is excluding gains made by companies, which are individuals' gains only. It is less than the increase in the cost of living. I do not accept that that is due to bed and breakfasting.
      The yield continued to decline in real terms when the Labour Government were in power and had a lower threshold of only £1,000 and even less at the beginning. Bed and breakfasting may enable gains to be set off against losses, but where genuine gains are being made that is of no help. As the hon. Member for Colne Valley said, perhaps we should look to the treatment of losses. I do not believe that bed and breakfasting, which sets off a loss against a gain, is something about which we should complain. It does not rob the Revenue. The only way of robbing the Revenue is not to sell an asset that is full of gain and on which one would pay regular tax if one sold it.
      The reason for the fall in the capital gains tax yield is that equity shares have performed no better than money and have gone down considerably in real terms over the period of the tax. Therefore, there have been, let alone no gains, real losses in capital by many people who have held equity shares. That is bad for industrial investment and jobs. That is one reason.
      Another reason is the exemption for capital gains tax for those who hold gilts over a year. They have tended to invest in gilts to some extent to the disadvantage of equities. They will not pay any tax if they invest in gilts. The gains of many people are still bottled up and have not been realised. There are people with land, second houses and many other forms of assets that are difficult to sell and impossible to bed and breakfast. One cannot bed and breakfast a work of art, a field or a farm. Such assets are stored up. There is a vague estimate that the total value of unrealised gains could be about £20 billion. Therefore, the matter depends on when people choose to realise those gains. With tax such as it has been, they have tried to hold on as long as possible and not to realise them.
      The hon. Member for Blackburn referred to the form of the tax. On reflection, I do not think that it would be right to have real gains charged to income tax rates. Supposing a man spends his life building up a small business, which becomes a middle sized business, he retires and has made a good sum of money through that prosperous and successful business. That is the typical business that we have been talking about. In the year that he retires a large capital sum is realised. Nearly all of it is gain. It is all applied to his income in tax at 75 per cent. and he is left with practically nothing. That is not what we should do.
      Mr. Campbell-Savours: That is an exaggeration.
      Mr. Ridley: Exaggeration? I have never heard anything so ridiculous in all my life. It is not an exaggeration. The proposition from the Opposition Front Bench was that a man who makes a real gain should have it charged as income tax, presumably at higher rates, when
      784
      he realises it. That could take away three quarters of a man's labours in a year. The point is made in the Green Paper published in 1977. It states that
      "gains might have accrued over a longish period but were being charged to tax in one year".
      There must be an element of gains that accrue over a longish period that are being charged to tax over a longish period or not at punitive rates of income tax or higher rates of income tax.
      Mr. Straw: As I understand it, the small business man would receive substantial relief as a result of the retirement provisions. A Labour Government would make arrangements for those to continue. I was referring to the principle whether, once inflationary gains had been excised altogether from charge, the residual gains, which would be much less than in the Financial Secretary's example, should not in principle be brought into charge and income tax. I do not understand why they should not.
      Mr. Ridley: The hon. Member wishes to make a thoughtful contribution about the right future development of the tax. I would welcome it if he would agree with us that the tax should at least be indexed. That, indeed, was the position of the Labour Government.
      There are imperfections, as I accepted earlier. But we should try to correct them and consider soberly and unrancorously the right way forward. I do not accept that a charge to income tax was preferable to some form of flat rate charge. The extreme example which I gave earlier shows the lack of wisdom of that course of action.. We are right to stay with a flat rate and not to charge it all to income. It may be that we are dealing with a man's main asset, his life's work, his entire capital. Suddenly to charge that to income in one year cannot be right.
      The hon. Member for Blackburn asked about the future yield. I would seek to answer any parliamentary questions that the hon. Gentleman tabled; I always do. The Inland Revenue might tell me that the questions would cost more than £50 to answer or involve an unacceptable degree of speculation, but there would be no harm in him trying.
      It would be fairly meaningless to try to predict the rate of inflation and the rate of growth three, five or 10 years hence and the rate of economic activity which would engender real gain. The hon. Gentleman can give us his assumptions about them. There is a paradox in what he seeks to do. I suspect that he is seeking to prove that our indexation of the tax will cost the Revenue a great deal. That would be true only if inflation was high. We would enable him to make extremely ferocious speeches from the Opposition Front Bench if we were to assume the type of rates of inflation which would be associated with the economic policies of his right hon. Friend the Member for Stepney and Poplar (Mr. Shore). Therefore, I should like to fit into the model a 50 per cent. rate of inflation which would allow the hon. Gentleman to demonstrate what a great deal it would cost to index capital gains tax when we had a 50 per cent. rate of inflation.
      The cost of administration is another important aspect. The hon. Member for Colne Valley said that we are trying to make a complex change. I agree that it is complicated. In all that we have said about our attempts to increase capital gains tax, we have warned that it would be extremely complicated. Certainly any attempt to increase tax on past capital gains would make it even more complicated. An attempt to re-base the valuation on assets as at 6 April 1982 would add even more complication.

      785
      We had it very much in mind when designing the reforms that we needed to set the complication and the cost of administration as low as possible. We always said, as did the Labour Government's Green Paper, that any attempt to have justice in this area would be very complicated.
      8.15 pm
      Mr. Richard Wainwright: The Financial Secretary has presented the Government's criterion as simply a matter of complication. Is it not true that the Government must have equated the cost to the Exchequer and complication? He said that to index from the start of the tax would be very complicated. In deciding not to do that, were the Government also bearing in mind the cost of the operation?
      Mr. Ridley: We most certainly were. The £5,000 exempt allowance releases 65,000 people from paying capital gains tax in the future. That in itself saves complication and cost of collection, because it is well known that the more people one can let out of any tax the fewer tax inspectors are needed to gather it.
      I shall deal with the other point made by the hon. Member for Colne Valley and my hon. Friend the Member for Rossendale (Mr. Trippier) about the different starting base for the indexation allowance when we come to amendment 36.
      Mr. Straw: Before we leave the question of complexity, what figures does the Financial Secretary have about the administrative cost as a proportion of the yield and how that relates to earlier years?
      Mr. Ridley: I cannot do so now, but I shall give that information to the hon. Gentleman. There is an initial small increase in staff of about 20 for one year, which dies away and becomes a reduction in staff after some time. However, I am speaking from memory and I cannot give that as a proportion of the yield. It is difficult to convert staff into money in the middle of a speech.
      As the hon. Member for Colne Valley knows, this amendment would greatly reduce the complications of the 12-month rule. It would also greatly increase the costs by £80 million in a full year. The Committee may wish to make that change, but I detected some reluctance in the hon. Member for Blackburn to press his amendment. I am not sure that I can promise to follow him into the Lobby if he presses this amendment. I would be with him in spirit, but the cost of it would make me tardy to follow him through the doors, even perhaps to turn into the Opposition Lobby. It may be wiser if the hon. Gentleman does not press the amendment to a Division.
      Mr. Straw: I explained at the outset that the Opposition regarded the amendment as a vehicle for debate. The hon. Member for Morecambe and Lonsdale (Mr. Lennox-Boyd) was not present when I said that. I also repeated what the hon. Member for Colne Valley (Mr. Wainwright) said about the problems that face the Opposition when drafting amendments.
      I am grateful to the Financial Secretary for confirming that there will be an increase in the number of staff to administer the proposed change. That increase, even though it is only 20 jobs, must be set against the significant reduction in the yield of the tax, even on the Treasury's own estimates.
      Mr. Ridley: There will be no reduction in the yield of the tax in the year in which there is an increase in staff. By the time that there is a reduction in the yield, there will also be a reduction in the number of staff.
      Mr. Straw: As I cannot make such calculations while on my feet, I shall look forward to seeing evidence of what the Financial Secretary has promised. The Opposition believe that the administrative costs are likely to increase.
      The Financial Secretary referred to the Labour Government. Governments are judged by their actions. It is not true that the Labour Government favoured indexing capital gains, if by that the Financial Secretary insinuates that the Labour Party is in favour of indexing capital gains now and in this way. In response to comments made on the 1977 Finance Bill, the Labour Government published a consultative Green Paper by the Inland Revenue. That document set out the advantages and disadvantages of indexation. The then Minister of State, Treasury, my right hon. Friend the Member for Llanelli (Mr. Davies), said that the Government would not go ahead with the indexation of capital gains because they regarded that as unfair when the indexation of incomes was not being proceeded with. That should be clearly placed on the record.
      The responsibility for this change lies with the present Government. They cannot pray in aid a Green Paper which, by its very nature, was consultative, and which the Labour Government, in the light of the representations that they received, deliberately decided to take no action on.
      The Opposition recognise that there are serious defects in the amendment. As it will cost money at a time when we are trying to save money for the Government with regard to capital gains tax, I beg to ask leave to withdraw the amendment.
      Amendment, by leave, withdrawn.
      Sir William Clark: I beg to move amendment No. 26, in page 52, line 28, leave out paragraph (c).
      The Chairman: With this it will be convenient to take amendment No. 27, in page 53, line 14, leave out subsection (5).
      Sir William Clark: I agree with the indexation of capital taxes, but many other hon. Members must agree that the way in which the Government have done it has made it complicated for accountants. I declare an interest. I am an accountant, although I do not practise. Nevertheless, we are presumably stuck with it. I have always advocated that the rough way of indexation is to reduce the rate of capital gains tax. In other words, it starts at 30 per cent. for those holding an asset for one year who then sell it. If the asset is held for two years, the tax should be 25 per cent., then 20 per cent. and continue tapering off. That would be simple within six years. Administrative costs would be minimal.
      Every time that it is advanced, the Inland Revenue says that such a system would be very complicated. Although I say it with the greatest deference and diffidence, I am absolutely certain that the Inland Revenue has put forward that argument under Governments of both parties, because it was trying to think of something else to say to justify the "Resist" written at the top of the Minister's brief. It picked any excuse for saying that it would be too complicated.
      A five-point drop in taxation each year means that if one held an asset for six years no capital gains tax would

      787
      be payable. That may be considered too long. There could be tranches of two years so that it is phased out over 12 years. If that does not meet the Revenue's approval, it can be done over 18 years. We are making heavy weather about indexation.
      It has been long established in our taxation that we deal with profits and losses in a consistent manner. I am delighted that the hon. Member for Colne Valley (Mr. Wainwright) raised this point. The introduction of indexation, complicated as the Government have made it, is nevertheless an important step in taxing real profits. We shall come to the inflationary element in the sale of assets on amendment No. 36. It is, however, illogical and inequitable not to adjust losses in the same manner, from a computation point of view, as one adjusts profits.
      I give two examples; I am sure that there are many more. If one purchases an asset costing 100 units, assuming that the indexed cost is 130 units, and the owner sells the asset for 120 units, he has made an indexed paper loss of 10 units. According to my reading of the clause, the 10 units are not allowed to be carried forward.
      Another example is the investor who purchases two assets for 100 units each and sells them over a period. I propose to assume that the indexation cost of both the assets he has purchased has doubled. Consequently, the indexation cost will be 200 for the first asset and 200 for the second. If he sells the first asset for 250 units, showing a profit of 50 units, and sells the other at 150 units, showing a loss, he will be liable, according to my reading of the Bill, for a capital gains tax on 50 units because he cannot, on the second asset, take the shortfall on his indexation.
      I do not know what my hon. Friend intends to say, but if he cannot give me an assurance tonight, and if capital gains tax is to be indexed, there must be an examination of the matter again between now and Report. If it is right to index where there is a profit, it is also right to index where there may be a loss. Otherwise, the consistency and logicality of taxation are lost.
      8.30 pm
      Mr. Ridley: I am grateful to my hon. Friend the Member for Croydon, South (Sir W. Clark) for raising an important issue. Admittedly, the case has to be argued against the powerful position that my hon. Friend has put forward. The immediate and apparent symmetry and logic of what he said are difficult to resist. If he goes into it in greater depth he may see what made the Government propose not to allow the indexation of losses.
      I make no great argument about it, because we are talking here about the form and shape of the tax, but the cost of the concession that my hon. Friend is seeking would be nothing in the present year, £6 million in 1983–84 and £20 million in a full year. That is another £20 million, which would have to be added to the cost of the changes that we are making. That is the gravamen of what I want to argue.
      Going back to the last debate, the hon. Member for Come Valley (Mr. Wainwright) made the point forcefully that the complication was bad enough as it was, that the number of staff involved was great and that the number of difficulties for taxpayers was even greater. If we were to allow the indexation and the carrying forward of losses, every taxpayer who made an indexed loss would want to have that loss agreed with the Revenue and put into his portfolio, as it were, to be carried forward year after year.
      788
      The identifying of all these losses, agreeing their indexation and then recording that they had been made as they were carried forward would be a mammoth clerical operation.
      Sir William Clark: Will my hon. Friend forgive me if I tell him that that is not what will happen? If one makes a profit on one stock, on whatever it is indexed at, and gets the actual profit on that, and in the same year sells stock that has not been indexed because it has been sold at a loss, there is no carry forward. It would be set off against the total capital gains tax of that fiscal year.
      Mr. Ridley: As my hon. Friend knows, at present one can carry forward losses, but only losses which are in terms of money of the day. One cannot carry forward gains. This brings me to the point that he made about the symmetry of the taxes. They are not symmetrical now, because one can carry forward a loss until such time as one has a gain to set it against, but one cannot carry forward a gain until such time as one has a loss to set it against. The proposition here is not whether we allow losses against gains, nor whether it shall be possible to carry them forward, but whether losses should be indexed.
      To allow the indexation of losses is different from allowing simply the recording of losses. The evidence of a loss having been made is easy to produce in ordinary money terms. If one buys a share for £100 and sells it for £80, there is a loss of £20. If the losses are indexed, every share in the portfolio and every share that is sold will have to be indexed even though there is little or no chance of those losses being used, because the losses will have to be accepted at their new indexed value by the tax inspector.
      We estimate that there will be about half a million such losses a year to be recorded, agreed and carried forward and that this would involve about 2,000 extra Inland Revenue staff. There might be about £20 billion of gains floating about, so people would be trying to carry forward as much indexed loss as they could. We are trying to avoid those immense complications.
      Sir William Clark: My hon. Friend and I are at cross-purposes and are arguing a different point. The indexation here indexes the cost of the assets. That is the base. Instead of being 100 units it will be 130, or whatever the index may be. The profit or loss when one sells it is the difference between the 130 and the proceeds. In some cases there will a profit and in others there will a loss If one has 10 assets costing 100 units each, when they are indexed up they may be worth, say, 1,300 units. I am saying that, whether they are sold at a profit or a loss, the cost of the assets should then total 1,300 units. That is very different from the indexation of a loss or a profit. The indexation of the cost determines whether one has made a loss or a profit
      Mr. Ridley: It is difficult to follow my hon. Friend's arithmetic. We need a blackboard. I am dealing only with the proposition in my hon. Friend's amendment, which is that the losses should be indexed. My hon. Friend may not be saying that, but that is what the amendment says.
      Sir William Clark: No. I might accept that there is something wrong with the amendment, but its spirit is that we have gone for indexation in the same way as the Government have. The indexation here merely indexes the cost, which is the basis of the computation of one's profit or loss when one sells the asset. As there is a difference

      789
      between my hon. Friend and myself, why cannot the Government reconsider the matter? I do not accept that the amendment would mean 2,000 more staff in the Inland Revenue. I cannot see how that could be. If one can index the cost of assets that one sells at a profit, one can also index just as easily the cost of those that one sells at a loss.
      Mr. Ridley: I do not deny that. I do not think that we are arguing about different amendments. I withdraw that allegation now that I have heard my hon. Friend once again. My point is that at present there are many losses, even with inflation. If we add to those losses indexation losses—
      Sir William Clark: I am not trying to index existing losses. The indexation would start on 6 April 1982, and any losses carried forward would be carried forward at whatever they were. I am saying that with regard to any sale from April 1982, whenever that sale occurs, the cost of the assets will be indexed, whether they are sold at a loss or at a profit. That will give a true capital gains tax. If my amendment covers previous losses, I apologise, because it is not intended to cover a carry forward.
      Mr. Ridley: My bon. Friend did not allow me to finish my sentence. I did not allege that his amendment sought to index past losses. I was saying that from now on there would be many more losses, because there would not simply be a loss when one's share went from 100 to 80. A loss would be shown if, the original purchase price having been indexed, one did not sell the share for more at the end of the period.
      Sir William Clark: No.
      Mr. Ridley: I shall repeat that, if my hon. Friend does not get it. There would be many more indexed losses recorded than there are losses now, because we are taking the inflationary element out of the tax. People will wish to record and to agree with the tax inspector that they have those losses. That is a facility that one could not deny them. We cannot be in the business of recording half a million losses a year, with all the staff implications that that would have, in order to allow people to carry such losses forward.
      Sir David Price (Eastleigh): What is my hon. Friend's basis for saying that the Inland Revenue would have to record half a million losses? I have no idea what the figure would be, but he asserts that that would be the number. How does he know?
      Mr. Ridley: The Inland Revenue alone can tell what the consequences would be. It says that it would require 2,000 extra staff to record the extra losses if there were indexation of losses.
      I have been asked to give the figures for staff and I have given them, and in all cases they have been accepted. Just to say that the Inland Revenue is wrong does not seem to get us any further in this debate. This is why, although I understand the symmetry that my hon. Friend seeks, it does not seem to me that we can involve ouselves in a complication of this magnitude, especially when what we are trying to do is to make this tax one that will be accepted as fair by those who have to pay it.
      If we have made the concessions of indexing gains and providing a higher exempt allowance, they are, of course,
      790
      concessions, for the sake of avoiding complication, which were meant to cover the omission to do things like this, because things like this are so expensive and complicated.
      Sir David Price: It had not been my intention to divert the Committee's attention towards my own thoughts on the amendment, but, having heard my hon. Friend, I feel it necessary to say a word or two. I cannot see what this extra work is about which the Financial Secretary has made such a fuss, because the basic calculation in working out the indexation of, for example, a portfolio of shares is the same whether it is a gain or a loss.
      It may be that what my hon. Friend the Financial Secretary is suggesting is that the form of indexation proposed in the clause may not be right way of doing it, but I did not produce this method. He and my right hon. Friend the Chancellor did. It is not me and my hon. Friend who are being inconsistent. I suggest that it is my hon. Friend the Financial Secretary who is being inconsitent. He says that the amendment will involve 2,000 more Inland Revenue staff. With the greatest respect to the Inland Revenue, just to give us that figure and say that it covers half a million transactions is not sufficient evidence. I apologise for being a sceptical character but I should like a little more information to support that contention.
      Mr. Maxton: We heard earlier that only 135,000 people affected by the changes under the clause would be paying capital gains tax. It seems to me that half a million loss transactions between 135,000 people paying capital gains tax is a large number.
      Sir David Price: I suggest that the Inland Revenue's estimate of 2,000 extra staff ignores that we are in the age of computers. We know that all stockbrokers have their portfolios on computers and can run them through their computers easily.
      The Inland Revenue is still moving towards the computerisation of income tax. It is being slow about it. I remember being told years ago on the Select Committee that considered the tax credit scheme in 1973–74 that perhaps it would be computerised within four or five years. I am told that is still the standard figure of the Inland Revenue for the timetable on computerisation. Nevertheless, one day it will get there. Therefore, I do not regard this as a major obstacle.
      I always thought that my hon. Friend was an ally of the taxpayer. I quarrel with his use of the phrase that it would be a tax concession to produce this fiscal consistency. I never thought that I would hear those words from the lips of my hon. Friend. He disappoints me. I thought that he was on the side of the people, taxpayers, and not on that of the tax gatherer. Of course, we have these little lacunae from time to time. However, as I told the Committee, it was not my intention to intervene, but merely to listen to the wisdom of my hon. Friends. Nevertheless, I am so disappointed with my hon. Friend the Financial Secretary that I feel I must record my disappointment.
      Mr. Ridley: I take my hon. Friend for Eastleigh (Sir D. Price) through the argument, which perhaps I have not put across properly. If there is indexation of the basic cost of an asset, which is then sold in the future, not in the past, a very much greater number of transactions than hitherto turn out to be losses. That is a measure of the unfairness of capital gains tax in the past. Many real losses have not

      791
      been shown as losses. Such is the iniquity of what we have been inflicting upon the taxpayer that the costs of recording the increased scale of losses which indexation would reveal would involve an additional 2,000 staff.
      Sir William Clark indicated dissent
      8.45 pm
      Mr. Ridley: My hon. Friend does not believe that. He can only take the advice that the Revenue gives us. I have no means of checking it, nor has he. It will be a sober moment for the Committee when it realises how many real losses the Revenue has been taxing as paper gains and when it appreciates the implications of trying to index losses.
      Mr. Maxton: Am I right in saying that the hon. Member for Croydon, South (Sir W. Clark) is seeking to put into real terms what the value of a portfolio would be over 12 months? Certainly his hon. Friend the Member for Eastleigh (Sir D. Price) is seeking to do so. I find it remarkable that they should be taking that approach when the Government, with their wholehearted support, have stopped using real terms when talking about public expenditure.
      Sir William Clark: Are the Government prepared to consider this matter between now and Report?
      Mr. Straw: An occasion on which the hon. Member for Croydon, South (Sir. W. Clark) proposes an increase of 2,000 civil servants should not go unnoticed on the Opposition Benches. Indeed, it will not go unnoticed on many occasions in future.
      Sir David Price: My hon. Friend the Member for Croydon, South (Sir W. Clark) and I do not accept the estimate of an additional 2,000 civil servants. I spent the early part of my life in work study and I should like to see staff figures in more detail. In matters of taxation there are many things that we do not accept without question. However, it seems that it is the gospel of my hon. Friend the Financial Secretary to the Treasury that the number of staff of the Inland Revenue is beyond question. I am sorry, but it is not beyond question. I do not accept the estimate of 2,000.
      Mr. Campbell-Savours: If the hon. Gentleman is so concerned about the real statistics, perhaps he will agree to table a written question so that we may all study the answer.
      Sir David Price: The hon. Gentleman encourages me. I wish always to be helpful to the House of Commons.
      Sir William Clark: I apologise for having kept the Committee for so long on what I thought was a simple amendment. I am extremely disappointed by the Financial Secretary's response, but to facilitate progress I beg to ask leave to withdraw the amendment
      Mr. Foulkes: Coward.
      Amendment, by leave, withdrawn.
      Mr. Charles Morrison: I beg to move amendment No. 31, in page 52, line 41, at end insert
      `and any sum which, in the computation of the chargeable gain, was taken into account by virtue of subsection (5) of section 79 of the Finance Act 1980'.
      As the Committee knows, clause 71, as it stands, allows for indexation of two types of expenditure in
      792
      computing capital gains—the original cost or acquisition value of the asset, and subsequent capital expenditure on enhancement of its value.
      Two other items are normally deductible in calculating capital gains—the incidental costs of making the disposal, which by their nature would not need indexation, and any capital transfer tax paid on the transfer of the asset by gift to the present owner.
      My amendment seeks to apply indexation to the capital transfer tax paid. It comes into the computation by virtue of section 79 of the Finance Act 1980 which was introduced to reduce double taxation on gifts of assets.
      Although there may be some theoretical objection to indexing past payments of tax, it is difficult to see that there is any real difference in principle. Capital transfer tax is paid following the gift of the asset. From the point of view of the current owner, it is a price that has to be paid to ensure his title to the asset. In fact, the CTT is part of the capital cost, or, to coin a phrase used by the Minister, it is part of the basic cost of the asset. Therefore, there does not seem to be any particular reason why it should not be included in the indexation.
      The Committee will not be surprised to know that the amendment has the strong support of the National Farmers Union, of which I am a member. The NFU is concerned with the best interests of its members. The amendment will also be of considerable interest and importance to many small business men and shopkeepers. Therefore, I shall be pleased if my hon. Friend decides to accept the amendment. If not, I hope that he will keep an open mind and give the matter further consideration.
      Mr. Ridley: I am grateful to my hon. Friend the Member for Devizes (Mr. Morrison) for bringing this matter to our attention. As he said, the amendment would extend indexation to capital transfer tax which was taken into account on the subsequent disposal of an asset which had qualified for the general rollover relief for gifts. The indexation allowance is calculated by reference to relevant allowable expenditure—broadly, the cost of acquiring an asset and any sums spent on enhancing its value. The capital transfer tax which is taken into account on the subsequent disposal of an asset, which has quaffed for the general rollover relief for gifts, does not fall into either of these categories and, therefore, it is excluded from indexation.
      The Government are not proposing to index the whole of capital gains tax. That would be prohibitively costly. The new relief concentrates on the injustice of imposing a charge on paper gains by providing relief for the effect of inflation occurring after March 1982.
      Many aspects of the capital gains tax regime are not to be indexed. We have just had a fairly good example of that in the case of losses, which my hon. Friend the Member for Croydon, South (Sir W. Clark) feels should be indexed. Another example is the amount allowed under section 79(5). A third example would be the credit given for foreign tax paid.
      The amount allowed under section 79(5) is a sum of capital transfer tax. There is no reason, in principle, to index it when the amount of tax is not being adjusted for inflation. The effect of section 79 is to defer the payment of the capital gains tax liability. Subsection (5) then exempts from charge a sum equal to the capital transfer tax liability. The taxpayer is already obtaining a substantial advantage by having the use of the money until any capital

      793
      gains tax falls due, and he is not losing through inflation. Therefore, our current opinion is that such an indexation adjustment is not justified.
      As my hon. Friend made an express request, I shall re-examine the matter. If there is any reason for departing from that course, I shall let him know, but that is how the Government feel about it.
      Mr. Foulkes: I should like to seek your guidance, Mr. Armstrong, on a general matter that is not unconnected with the amendment.
      Last year, I was a member of the Committee on the Finance Bill, and the Committee of Selection has favoured me, yet again, with that privilege this year. Last year, several of my colleagues, including my hon. Friends the Members for Workington (Mr. Campbell-Savours) and Glasgow, Cathcart (Mr. Maxton), and I raised the point that the Finance Bill was different from other Bills and from general debates in the House. When debating the Finance Bill in Committee, hon. Members can move amendments that will result in a direct pecuniary advantage to them. Different issues are raised from those covered by the general declaration of interest, which is published in the annual declaration of interests. It would help if, before the Committee begins upstairs, you could guide hon. Members on that matter. Last year, it caused great concern.
      The Second Deputy Chairman (Mr. Ernest Armstrong): As the hon. Gentleman knows, hon. Members are required to declare their interests. It is a matter for each hon. Member, but I understand that the hon. Member for Devizes (Mr. Morrison) declared his interest
      Mr. Charles Morrison: My interests are set out in the register. I said that I was a member of the National Farmers Union, although I did not do so at the beginning of my remarks. I apologise if I misled the hon. Member for South Ayrshire (Mr. Foulkes)
      Mr. Ridley: It is not standard practice, even in the House, to go so far as to declare that one is a member of a union before putting forward its interests. I congratulate my hon. Friend on his honesty and honour.
      Mr. Morrison: I am grateful to my hon. Friend for his congratulations. I was a little disappointed by his initial reply, but I was glad to note that it was merely his current opinion that the indexation of capital transfer tax was not justified and that he would give the matter further consideration. On that basis, I beg to ask leave to withdraw the amendment.
      Amendment, by leave, withdrawn.
      Sir William Clark: I beg to move amendment No. 36, in page 52, line 41, at end insert
      `provided always that the taxpayer in relation to whom capital gains tax falls to be calculated on any disposal of an asset to which this section applies may elect that the amount of "relevant allowable expenditure" shall not be as otherwise provided herein but shall be the market value of the asset on the disposal of which this section applies as at 1st April 1982 if the disposal is by a company and as at 6th April 1982 in all other cases and such election as mentioned above shall be notified to the Board of Inland Revenue within twelve months from the receipt by the taxpayer of the notice of assessment in relation to that disposal'.
      This debate need not be as acrimonious as the last one. I hope that the Government will agree to consider the
      794
      amendment. I accept the principle of indexation. During the debate on a previous amendment I said that the Government were being pretty heavy handed in the way that they operated the indexation. However, there is an anomaly and an injustice about the cost of an asset before 1982. As a result of indexation, only real capital gains will be taxed from 1982. However, before 1982 there is nothing to relieve the huge inflation that took place before that.
      For example, someone who purchased an asset in 1965 for £10,000 would find that his asset—without any increase in its real worth—was worth £43,000 because there had been an inflation rate of 430 per cent. between 1965 and today. On paper, that means that if the asset is sold for that figure, there is a £33,000 profit on which capital gains tax is payable. I accept that the Chief Secretary has increased the exemption. As a result, the profit is reduced by £5,000 from £33,000 to £28,000. Therefore, on the inflation element between 1965 and 1982, there is a capital gains tax liability of £28,000, which is £8,400.
      Although great strides have been made to alleviate some of the capital gains anomalies, we still have a long way to go. I am asking for a revaluation of all assets on 5 April 1982. I am sure that hon. members will recollect that, when capital gains tax was amended, 5 April 1965 was the date on which those owning assets could have them revalued. I suggest that we take 5 April 1982 for a revaluation and start from there.
      I am not necessarily wedded to that date. I should be happy if the Financial Secretary were to say that we should take 1981. Indeed, I should be happy if he said that we should take 1975 or 1976. However, I hope that my hon. Friend will consider the amendment or give an undertaking to consider the matter between now and the next Budget. I hope that he will consider the pre-1982 inflation. I remind the Committee that between 1965 and 1982 inflation was extremely high and is built into the capital gains liability of many people who own assets.
      I hope that the Financial Secretary will be a little sympathetic to my amendment.
      9 pm
      Mr. Lennox-Boyd: The gravamen of the amendment is to meet the problem that there cannot be protection against future gains induced by inflation on assets which have been held for several years and have increased in value during a period of inflation. I hope that my hon. Friend accepts that that is one of the anomalies in the Goverment's proposals. I assume that he accepts my statement. I do not see him nodding his head, but I shall not argue the point
      Mr. Ridley indiated assent
      Mr. Lennox-Boyd: I take it that my hon. Friend is now nodding his approval.
      To satisfy the hon. Member for South Ayrshire (Mr. Foulkes), I should say that I probably stand to gain from the amendment. However, I support the amendment because my hon. Friend the Financial Secretary and my right hon. and learned Friend the Chancellor of the Exchequer both said during the Budget debate that they sought to protect investors against future capital gains induced by inflation. My hon. Friend said:
      "Although we were unable to apply the relaxation to past gains, for the future no one who merely maintains the value of

      795
      his investment will pay tax except in relation to his first year of holding the asset."—[Official Report, 10 March 1982; Vol. 19, cc. 938–9.]
      The Bill does not meet that statement. If my hon. Friend cannot accept the amendment, is that because of the cost entailed or for technical reasons? I doubt whether it is the former reason. If it is for the latter reason and he believes that it would be awkward to have a base date of April 1982, surely that is inconsistent. We have to accept a base date of 1965 which institutes the whole capital gains tax procedure.
      Mr. Beaumont-Dark: I have a modest interest in this matter.
      Mr. Foulkes: The hon. Gentleman is here to represent Selly Oak and not his own interests.
      Mr. Beaumont-Dark: This is an amazing place. If one says that one has an interest to declare, others say that one should not have it. If one does not declare it, it is said that one should. If the hon. Gentleman had let me finish, I should have said that I had an interest to declare.
      My interest is that most people I know, including myself, have invested far more for long-term gain than for short-term gain. They have invested in the long-term future of industry and business in Birmingham. Those who have held longest now find themselves likely to pay more capital gains tax than those who bought for very short-term advantage over, for example, the past two years rather than 18 years.
      My right hon. and learned Friend the Chancellor, whom I applauded from this very seat, said in his excellent speech:
      "It is intolerable for people to be permanently condemned to pay tax on gains that are apparent but not real".
      He later said:
      "the tax…ought never to have been levied in the first place. This change is no more than simple justice." [Official Report, 9 March 1982; Vol. 19, c. 755.]
      We are talking here about simple justice.
      The Inland Revenue has a wonderful habit, which would be enviable were it not usually for the wrong reasons, of always being able to turn something that is fair, just, sensible and intended to alleviate pressure on people and investment into a veritable lead balloon. Reading this turgid prose, one certainly has the feeling that this proposal was very quickly dusted down and shoved into a Finance Bill.
      I know that some hon. Members regard capital gains as next to mortal or even immortal sin, but I hope that the Committee will recognise the virtue in the idea that those who have held for many years and whom we wish to encourage to hold should not be at less advantage than those who have held for only two years. I believe that the Government will gain in revenue, prestige and appreciation if they consider the virtue of that.
      Mr. Richard Wainwright: Does the hon. Gentleman, with his great experience in these matters, agree that the poor treatment of long-term shareholders in the Bill will not only penalise such holders but also damage the reputation of the Stock Exchange? The Stock Exchange will become far more a place for those who have held for a short time to deal in their shares, while the long-term holder will rule less in Stock Exchange dealings. Thus, the surely false allegation that the Stock Exchange is a casino may be brought a little nearer because the long-term holder will be so much discouraged.
      Mr. Beaumont-Dark: The point that the hon. Member makes is that the great idea of investment is that it should be investment, and that it should encourage long-term holdings.
      The good intention of the Government could be brought about, with little loss in revenue, if the date were changed. I recognise that the Government, rightly, say that they do not want to reward short-term holders. The way around that is to accept 6 April 1981 as a base date and to start from there. We cannot keep the 1965 date as the base for ever. If we talk about indexing and updating, the next thing to do is to index and update the time limit. I hope that the Government will do something about this anachronism.
      Mr. Ridley: My hon. Friends the Members for Croydon, South (Sir W. Clark), Morecambe and Lonsdale (Mr. Lennox-Boyd) and Birmingham, Selly Oak (Mr. Beaumont-Dark) have put forward the amendment to allow taxpayers to rebase their values at April 1982 values. It has been put forward on the basis that there is a perceived unfairness as between those who purchase assets in 1965, or since then, and those who purchase assets now. It is argued that, because of the nature of the indexation allowance in the Bill, the man who had purchased 10 years ago would obtain a much smaller indexation allowance than the man who purchased today.
      There is an inconsistency about that basic part of the argument because one cannot compare a man who made a purchase of an identical asset 10 years ago with the man who makes that purchase today. The question is, how did the man who makes that purchase today get his money to make that purchase, and what was happening to his money during the 10 years when he did not have investment in the same assets? The only way that like can be compared with like in this matter is to take two people who both bought identical assets 10 years ago. One of them decides to bed and breakfast the asset and to pay the tax today and the other decides not to, but to keep it, to keep the tax and not to incur liability.
      We then go on for another 10 years with inflation at differing rates and with the indexation allowances applying. After this period, both individuals sell their assets—the one who bed and breakfasted them and the one who did not. They obviously obtain identical prices because they were identical assets. It will be found by anybody who cares to do the arithmetic that there is no advantage to the man who bed and breakfasted 10 years ago.
      The ultimate gain, the ultimate tax payable and the ultimate amount of capital retained are identical in both cases except that the man who bed and breakfasted is obviously standing out of whatever he may have paid in tax during the period after the bed and breakfast and before he finally sold. The loss of that amount of tax must be counted as a disadvantage to him. This proves that there is no unfairness as between the man who bought 10 years ago and the man who buys now. That is easily demonstrated by looking at the figures. I should be happy to show how the arithmetic is computed. On closer examination, it will be found that that is right.
      9.15 pm
      It is not our policy that we should give any relief for the past. I gave three reasons—the immense complication, the large costs and the possible problem of retrospection and fairness. The amendment involves considerable relief

      797
      for gains in the past. They are, as it were, being disregarded and the values are being uplifted to the present values. The cost of the amendment would be zero in the corning year, as are all such costs, in 1983–84 it would be £20 million, and in a full year it would be £80 million. That shows the extent to which we would be relieving past gains through my hon. Friend's approach.
      My hon. Friend the Member for Selly Oak made a distinction between those who have held for a long time and those who are short-term investors. The man who has held for a long time would be penalised by the amendment because the man who makes a short-term investment and has sold would get no benefit from the change in the tax that my hon. Friends have suggested.
      I gave an example of two people who bought identical assets. That example shows that it pays to hold for a long time. We can discuss the matter in relation to shares where bed and breakfasting is available and is a possibility, but the real difficulty is with assets where bed and breakfasting is not available.
      Having anticipated all those problems and having worked out the figures within the limited amount that my right hon. and learned Friend the Chancellor of the Exchequer has available for the major transformation in capital gains tax, we found a way which is fair to all investors at the minimum of cost and which unblocks the log-jam of the past when no one has been prepared to do anything about that. There are blemishes, such as losses and the one-year rule, and another difficulty that the hon. Member for Colne Valley (Mr. Wainwright) mentioned. We shall come across many more difficulties in Committee. I accept that the system is not perfect.
      Let us live with the tax as we have redesigned it and as we can afford it. In the light of my explanation that no unfairness is involved, I hope that my hon. Friend the Member for Croydon, South will withdraw his amendment.
      Mr. Lennox-Boyd: I should be grateful if I could be provided with the detailed series of examples to prove the points that my hon. Friend the Financial Secretary has made because I cannot accept what he has said. I should be grateful if that could be done in the next three weeks.
      Sir William Clark: Was my hon. Friend the Financial Secretary about to reply to my hon. Friend the Member for Morecombe and Lonsdale (Mr. Lennox-Boyd)?
      Mr. Ridley: I was trying to find the page so that I could tear it out and give my hon. Friend the answer now. I shall do so.
      Sir William Clark: Before I decide whether to withdraw the amendment or to press ahead with it, I should like to raise this matter. I should be interested to see the examples to which my hon. Friend the Financial Secretary has referred, especially the examples when one can bed and breakfast and there is no difference between the longterm holder and the short-term holder. At first blush, I disagree entirely with my hon. Friend. If he has examples and I can be convinced, I am prepared to accept them.
      Where an asset has been held which is not capable of being bed and breakfasted—property, land or whatever—will my hon. Friend consider whether some alleviation can be given between the 1982 cost and the cost in 1965?
      Mr. Ridley: I agree with my hon. Friend that this is a problem. The un-bed and breakfastability of a Rembrandt or an acre of land is a disadvantage which is experienced by the owners of those assets but not by the owners of quoted shares. That has always been a disadvantage. There is nothing new about it. There was always bound to be such a disadvantage with an exemption allowance. The calculations that I shall send to my hon. Friends prove that in no circumstances does it pay to bed and breakfast except for obtaining the benefit of the exempt allowance. That is the point, and that is where the difficulties lie. I make no secret about it.
      We have examined carefully the question whether bed and breakfasting can be extended to assets which are not quoted shares. It appears to be extraordinarily difficult to do, and the technical difficulties are such that we do not believe that we can offer to do it. It may be that my hon. Friends will find attractive the argument that we are seeking to give a preference to equity shares and that for reasons of industrial investment there is nothing wrong with saying that the owners of equity shares might, for the first time, develop a certain advantage over the owners of other assets. I am delighted to tell my hon. Friends that we shall continue to examine the matter.
      Sir William Clark: In view of my hon. Friend's explanation, I beg to ask leave to withdraw the amendment.
      Amendment, by leave, withdrawn.
      Question put, That the clause stand part of the Bill:—
      The Committee divided: Ayes, 158, Noes, 101.

      Division No. 133]

      [9.20 pm

      AYES

      Adley, Robert

      Fletcher, A.(Ed'nb'ghN)

      Alexander, Richard

      Fletcher-Cooke, SirCharles

      Alison, RtHonMichael

      Fookes, MissJanet

      Ancram, Michael

      GardinenGeorge(Reigate)

      Aspinwall, Jack

      Garel-Jones, Tristan

      Atkins, RtHonH. (S'thorne)

      Goodhart, SirPhilip

      Banks, Robert

      Goodlad, Alastair

      Beaumont-Dark, Anthony

      Gow, Ian

      Bendall, Vivian

      Gray, Hamish

      Benyon, Thomas(A'don)

      Greenway, Harry

      Benyon, W (Buckingham)

      Griffiths, E.(B'ySt.Edm'ds)

      Berry, HonAnthony

      Griffiths, Peter Portsm'thN)

      Bevan, DavidGilroy

      Grylls, Michael

      Biffen, RtHonJohn

      Gummer, JohnSelwyn

      Blackburn, John

      Hamilton, HonA.

      Body, Richard

      Hamilton, Michael(Salisbury)

      Boscawen, HonRobert

      Hawksley, Warren

      Brinton, Tim

      Heddle, John

      Brooke, HonPeter

      Hicks, Robert

      Brown, Michael(Brigg&Sc'n)

      Hogg, HonDouglas (Gr'th'm)

      Buchanan-Smith, Rt. Hon. A.

      Hordern, Peter

      Cadbury, Jocelyn

      Howell, RtHonD. (Gr'ldf'd)

      Carlisle, Rt Hon M. (R'c'n)

      Hunt, David (Wirral)

      Chapman, Sydney

      Hunt, John(Ravensbourne)

      Clark, Hon A. (Plym'th, S'n)

      Hurd, RtHonDouglas

      Clarke, Kenneth(Rushcliffe)

      Jenkin, RtHonPatrick

      Cockeram, Eric

      Jopling, RtHonMichael

      Cope, John

      Kaberry, SirDonald

      Cranborne, Viscount

      Kershaw, SirAnthony

      Critchley, Julian

      Lawrence, Ivan

      Crouch, David

      Lee,John

      Dean, Paul (NorthSomerset)

      LeMarchant, Spencer

      Dorrell, Stephen

      Lennox-Boyd, HonMark

      Dover, Denshore

      Lester, Jim(Beeston)

      Edwards, RtHon N. (P'broke)

      Lloyd, Peter (Fareham)

      Eggar, Tim

      Loveridge, John

      Elliott, SirWilliam

      Lyell, Nicholas

      Faith, MrsSheila

      McCrindle, Robert

      Fenner, MrsPeggy

      Macfarlane, Neil

      Fisher, SirNigel

      MacGregor, John

      799

      MacKay, John (Argyll)

      Shaw, Giles (Pudsey)

      McNair-Wilson, M. (N'bury)

      Shelton, William(Streatham)

      McQuarrie, Albert

      Shepherd, Colin(Hereford)

      Major, John

      Sims, Roger

      Marland, Paul

      Speed, Keith

      Mather, Carol

      Speller, Tony

      Maude, Rt Hon Sir Angus

      Spence, John

      Mawby, Ray

      Sproat, Iain

      Mawhinney, DrBrian

      Stanbrook, Ivor

      Maxwell-Hyslop, Robin

      Stevens, Martin

      Mellor, David

      Stewart, Ian (Hitchin)

      Meyer, SirAnthony

      Stradling Thomas, J.

      Mills, Iain(Meriden)

      Taylor, Teddy (S'end E)

      Mills, Peter (WestDevon)

      Tebbit, RtHonNorman

      Mitchell, David(Basingstoke)

      Temple-Morris, Peter

      Morris, M. (N'hamptonS)

      Thomas, Rt Hon Peter

      Morrison, HonC. (Devizes)

      Thompson, Donald

      Murphy, Christopher

      Thorne, Neil(IlfordSouth)

      Myles, David

      Thornton, Malcolm

      Neale, Gerrard

      Townend, John (Bridlington)

      Nelson, Anthony

      Trippier, David

      Neubert, Michael

      van Straubenzee, Sir W.

      Newton, Tony

      Viggers, Peter

      Normanton, Tom

      Waddington, David

      Onslow, Cranley

      Wakeham, John

      Page, Richard (SW Herts)

      Walker-Smith, Rt Hon Sir D.

      Parris, Matthew

      Waller, Gary

      Patten, Christopher(Bath)

      Ward, John

      Pattie, Geoffrey

      Warren, Kenneth

      Percival, Sir Ian

      Watson, John

      Pollock, Alexander

      Wells, Bowen

      Prentice, RtHonReg

      Wells, John(Maidstone)

      Price, SirDavid (Eastleigh)

      Wheeler, John

      Prior, RtHon James

      Wickenden, Keith

      Renton, Tim

      Wilkinson, John

      Ridley, HonNicholas

      Williams, D.(Montgomery)

      Ridsdale, SirJulian

      Wolfson, Mark

      Rifkind, Malcolm

      Roberts, Wyn (Conway)

      Tellers for the Ayes:

      Rossi, Hugh

      Mr. Ian Lang and

      Sainsbury, HonTimothy

      Mr. Nick Budgen.

      NOES

      Allaun, Frank

      Grimond, RtHonJ.

      Alton, David

      Hamilton, James(Bothwell)

      Atkinson, N. (H'gey)

      Hamilton, W. W. (C'tral Fife)

      Barnett, RtHon Joel (H'wd)

      Harrison, Rt Hon Walter

      Beith, A.J.

      Haynes, Frank

      Booth, RtHonAlbert

      Heffer, Eric S.

      Bray, Dr Jeremy

      HomeRobertson, John

      Brown, Hugh D. (Provan)

      Homewood, William

      Buchan, Norman

      Hooley, Frank

      Callaghan, Jim(Midd't'n& P)

      Horam, John

      Campbell-Savours, Dale

      Howells, Geraint

      Clark, Dr David (S Shields)

      Hughes, Robert (Aberdeen N)

      Concannon, Rt Hon J. D.

      John, Brynmor

      Cook, Robin F.

      Johnston, Russell(Inverness)

      Craigen, J. M. (G'gow, M'hill)

      Jones, Rt Hon Alec (Rh'dda)

      Cryer, Bob

      Jones, Dan (Burnley)

      Cunningham, DrJ. (W'h'n)

      Lamondjames

      Davidson, Arthur

      Leighton, Ronald

      Davies, Ifor (Gower)

      Lewis, Ron (Carlisle)

      Davis, Terry (B'ham, Stechf'd)

      Litherland, Robert

      Deakins, Eric

      Lyon, Alexander(York)

      Dean, Joseph (Leeds West)

      Lyons, Edward (Bradf'dW)

      Dixon, Donald

      McCartney, Hugh

      Dobson, Frank

      McDonald, DrOonagh

      Dormand, Jack

      McKay, Allen(Penistone)

      Douglas-Mann, Bruce

      Maclennan, Robert

      Dunwoody, Hon Mrs G.

      McWilliam, John

      Eadie, Alex

      Marshall, D(G'gowS'ton)

      Evans, Ioan (Aberdare)

      Mason, Rt Hon Roy

      Evans, John (Newton)

      Maxton, John

      Faulds, Andrew

      Maynard, MissJoan

      Fletcher, Ted (Darlington)

      Millan, RtHonBruce

      Foot, RtHonMichael

      MitchellAustin(Grimsby)

      Foster, Derek

      Mitchell, R.C. (Soton Itchen)

      Foulkes, George

      Morris, Rt Hon C. (O'shaw)

      Freeson, RtHon Reginald

      Newens, Stanley

      George, Bruce

      Parker, John

      800

      Parry, Robert

      Straw, Jack

      Penhaligon, David

      Thomas, Dafydd(Merioneth)

      Price, C. (Lewisham W)

      Thorne, Stan (PrestonSouth)

      Rooker, J. W.

      Tinn, James

      Roper, John

      Wainwright, R. (ColneV)

      Sheerman, Barry

      Walker, Rt Hon H. (D'caster)

      Sheldon, Rt Hon R.

      Wellbeloved, James

      Shore, Rt Hon Peter

      Welsh, Michael

      Silverman,Julius

      White, FrankR.

      Snape, Peter

      Wigley, Dafydd

      Spearing, Nigel

      Woolmer, Kenneth

      Spriggs, Leslie

      Stewart, Rt Hon D. (W Isles)

      Tellers for the Noes:

      Stoddart, David

      Mr. Lawrence Cunliffe and

      Stott, Roger

      Mr. George Morton.

      Strang, Gavin

      Question accordingly agreed to.
      Clause 71 ordered to stand part of the Bill.

    Clause 75

      REDUCTION OF TAX
      9.30 pm
      Mr. Richard Wainwright: I beg to move amendment No. 28, in page 57, line 31, after `(2)', insert
      `Subsection (2) of section 37 of the Finance Act 1975 shall be amended by the insertion after the word "transferor" of the words "to or for the benefit of a beneficiary where that beneficiary thereby becomes entitled to more than one-tenth of the value of all chargeable transfers made by that transferor". 5(3)'.'.
      The amendment is focused on the need for capital transfer tax to be payable by those who receive gifts, legacies or bequests. It is also focused on the need for the rate of tax that recipients and transferees pay to be based on the wealth of the recipient cumulatively for his lifetime. It would, therefore, radically alter the capital transfer tax that is now payable by the donor or by the executors of the deceased.
      The Liberal Party's objection to capital transfer tax in the form that the Government want it to continue is that it does nothing to encourage the wealthy to distribute their property on a really wide scale. It may encourage some wealthy people to make some gifts during their lifetime, but they pay just as little or just as much if they make that gift to one recipient or to several hundred recipients.
      That seems to us to be a waste of what I call the tax lever. I am sure that it is accepted on both sides of the Committee that taxation, if properly designed, can be a powerful lever. For instance, a provision that went through the House almost unnoticed in 1916 to relieve from tax occupational pension funds has ever since been the basis, the fount and the origin of the enormous pension funds industry and the beneficial pension funds system that has almost uniquely developed in this country. That was the operation of the tax lever. A comparatively humdrum sort of measure turned out, perhaps to the astonishment of those who introduced it, to be the lever that shifted wealth into pension funds.
      We believe that capital taxation should not be regarded as a weapon of vengeance to satisfy the blood lust of some political enthusiasts. Nor should it be a means—this is the Liberal grievance against capital transfer tax—of transferring wealth simply from private hands to the Stale.
      Mr. Foulkes: I find the hon. Gentleman's remarks interesting. I wonder whether he can clarify one matter.

      801
      He talked about the Liberal Party's view. He has used the word "we" on a number of occasions. Is he expressing simply the Liberal Party's view, or do his remarks represent the considered view of the alliance of which he is part?
      Mr. Wainwright: I am competent to speak only for the Liberals. All I can say in response to the hon. Gentleman is that, so far as I am aware, the Social Democratic Party is not and cannot yet be possessed of a constitution that enables it to make full policy decisions. Members of the Social Democratic Party will speak for themselves in their own time.
      I hope that a capital transfer tax transformed into an accessions tax will commend itself not only to the SDP, but to the more civilised segments of the Labour Opposition, to various nationalist parties and to members of the Conservative Party who, for all the distracted air of the Financial Secretary at the moment, cannot be expected to go on supporting a tax that simply transfers capital wealth from individuals to the State which promptly uses it for current purposes. It is a thoroughly non-Conservative concept that wealth should be centralised in this way and taken away from the private sector.
      The amendment is illustrative. It is not within my power to draft and produce an amendment that could transform the capital transfer tax in the sense that I have indicated is desirable. So far as it goes, the amendment provides that if gifts are spread among more than 10 beneficiaries, those gifts will carry the lighter of the two capital transfer tax scales—the scale for lifetime gifts. The more punishing schedule of rates on death is reserved for gifts that are spread among fewer than 10 people. This carries out the principle that I have been trying to describe.
      A tax paid by the recipient, and depending upon the recipient's total wealth accumulated over a lifetime, would involve a certain amount of extra administration. We hope that there would be far more recipients whose records would have to be taxed than there are donors. It would be the natural consequence of such a tax.
      Only the records of donors have to be kept on a cumulative basis by the Inland Revenue at the moment. We expect that there would be a larger number of files and a greater amount of clerical work, but there would be no greater complication of administration. There would simply be a greater clerical load, which I hope would be computerised.
      An important characteristic of the tax is that Liberals hope that, in the long run, it would be a poor revenue earner because, as I said at the outset, it is intended, in the form we want it to take, to be a powerful lever to push wealthy people into distributing their wealth as widely as possible—for instance, to their employees or to a whole class of people whom they regard as deserving of encouragement rather than simply passing it down to their own kith and kin and trying to keep it clotted into as large and powerful lumps as possible.
      If the use of the tax bludgeon were successful in making wealthy people act on the advantages of spreading their wealth widely, it follows automatically that the tax yield to the State would eventually become quite small. In a perfect Liberal State—I am not ashamed of being a perfectionist so long as it does not come in my lifetime—there would be no yield from the tax, because
      802
      all wealthy people would behave with the utmost rationality. They would ask their professional advisers to help them to get rid of their wealth to the largest number of people as soon as possible so that they would not have any penalty to pay to the State.
      That state of affairs would surely commend itself to those who follow some of the more enlightened Conservative traditions of British politics. For the tax to be a powerful lever to make people distribute their wealth, the tax rates should be tough. If the tax were properly based in the manner that I have tried to describe, it would be fair to toughen up the rates considerably to make the lever all the more powerful.
      I hope that I have said enough to illustrate the principle on which Liberals want to see this tax rebased. It would then be more appropriately described as an accessions tax than as a capital transfer tax, although it would still be a tax on transfers.
      It is always important to refer to the way other developed countries address themselves to tax problems. Within the OECD, that enormous range of countries, only New Zealand and the United States of America operate a similar and primitive estate-based tax. That should give the Committee pause for thought. In 1976, Eire changed to an inheritance tax, which is halfway to our proposal, after a great deal of deliberation in its properly elected Dail. Four countries—France, Greece, Ireland and Portugal—operate the principle that I have been enunciating of accumulating for tax purposes gifts received by each donee over the whole of his lifetime. In that they are way ahead of us. I have to agree that no other country has adopted an accessions tax in the full sense that I am advocating.
      I hope that this matter will be debated increasingly and that the Government, if they are to live up to the radical image that some of their supporters try to cultivate, will give serious thought to it and set studies on foot within the Inland Revenue on how the capital transfer tax could be transformed into a useful tax lever for distributing wealth more widely.
      9.45 pm
      Mr. Ridley: It is always a matter of congratulation to the hon. Member for Colne Valley (Mr. Wainwright) that he can secure such a large proportion of his party to hear him. I calculate that 25 per cent. are present. I confess that it would be lovely if we could say that there were 25 per cent. of the Labour Party, or even of my hon. Friends, present. I do not know whether the Labour Party has been able to muster even 1 per cent. at any point of our debates today, which are fundamental to it.
      There were two important revelations from the hon. Gentleman. First, we had a glimpse of the perfect Liberal State. It seemed more like Eire than anything else. It is a frightening thought. I hope that we shall not see too much of that perfect Liberal State.
      The other interesting observation was that the SDP is not allowed to make policy because of its constitution. I do not know whether the hon. Member for Gateshead, West (Mr. Horam) subscribes to that view. I do not know whether the observation was a way of inviting the SDP to deny what the hon. Member for Colne Valley said or whether it really is so. Perhaps it is an attempt to justify the known reluctance of the right hon. Member for

      803
      Glasgow, Hillhead (Mr. Jenkins) to say anything that could possibly be construed as policy. So we shall never know what the perfect SDP State is.
      Mr. John Horam: Winning.
      Mr. Ridley: I come to the amendment, which is very modest. It would allow a bequest—or gift within three years of death—whose value does not exceed one-tenth of that of the chargeable transfers made by the donor to be chargeable to capital transfer tax at the lower lifetime rates rather than at the death rates. It would probably benefit a few people a little.
      There are some drafting difficulties, but I shall not dwell on them. It would be difficult to allocate the difference between lifetime rates and death rates as between different beneficiaries. Indeed, the allocation for the tax as a whole between those who qualified under this relief and others who qualified only under the will would give rise to endless difficulties and altercations as to how much tax should be attributed to whom. It would be complex, and it would be open to the defect which the hon. Gentleman identified in his speech on the subject last year when he said that
      "it is open to potential donors to get together and plan an operation in which each of them will give relatively modest gifts to a variety of persons."—[Official Report, 12 May 1981; Vol. 4, c. 670.]
      I do not want to dwell on those difficulties, because I recognise that the hon. Gentleman was canvassing a change from the present tax to an accession tax. In fact, the amendment is leading towards an inheritance tax. We gather from the hon. Gentleman that he wants not an inheritance tax but a cumulative accession tax. There would be many advantages in that system of taxation. If we were starting from scratch now, I would tend to agree with the hon. Gentleman.
      One of the big factors is the resistance to violent change and structural surgery which taxpayers are beginning to develop. We know the arguments. One is that we have changed the rules and the basis of corporation tax more often than any other country in the Western world. Indeed, when the Conservative Party issued a Green Paper canvassing the possibilities of changing to a donee base tax or an accession tax and consulted widely on it in 1972, the proponderant and overwhelming advice of taxpayers and their advisers was that it should not do so because of the complication and the upheaval that it would cause.
      However, the capital transfer tax that we were left by the Labour Party was so savage and punitive that we had to undertake some fairly drastic surgery, if only to draw its teeth. To have changed the form of it as well would have involved a major and unacceptable degree of change in a short time.
      Mr. Cook: Earlier this evening the Financial Secretary complained that the Labour Government allowed the revenue from capital taxation to decline. He is now describing the capital transfer tax as an unduly onerous imposition. May we please have the true view of the Financial Secretary?
      Mr. Ridley: We are now talking about capital transfer tax. Earlier I was talking about all capital taxes. The hon. Gentleman will find that the revenue from capital transfer tax has increased. Without having been indexed since its inception, the tax is yielding a great deal more in real terms—well, perhaps not in real terms. I shall have to check that.
      Mr. Foulkes: The hon. Gentleman will.
      Mr. Ridley: The upheaval that is proposed would lead to great difficulties. People have made dispositions according to the existing tax. They may be giving some of their capital to their families to take advantage of the lifetime transfer rates. It is necessary—this is true of all major tax reforms—to see whether the confusion and difficulties of major upheavals outweigh the advantages of moving to purer and more perfect forms of taxation.
      When major structural changes are made in taxation, it is very soon evident that so many changes have to be made to meet this or that transitional problem that one often ends up with a tax that is no better in itself. We shall bear in mind what the hon. Gentleman has said. We do not share his view that change is possible, although we certainly do not resist his view that the sort of tax he envisages might well be desirable.
      Mr. Richard Wainwright: I am sorry that the Financial Secretary did not take up my question whether the Government regard capital taxes mainly as a source of revenue or whether they have inherited the Labour Party's hope, when it introduced capital transfer tax, that it would be an engine for the redistribution of wealth. The Labour Party's policy is at least clear, although it is not one which I accept for a moment, but the Government's position in retaining this tax and nevertheless trying to amend it seems shoddy. That is because they cannot possibly share the Labour Party's view about the redistribution of wealth, yet they are manifestly failing to get much revenue out of it. It seems that the Financial Secretary has tried to dodge the position that the Government have adopted. Some of their supporters want more enlightenment. I do not know why the Government choose to sustain the tax and to take up our time by making alterations to it.
      When the right hon. Member for Leeds, East (Mr. Healey) introduced capital transfer tax in 1974 he said that it was the intention of the Labour Government to make the rich howl with pain. The object was redistribution. The Labour Government sincerely believed that this new swingeing form of tax, which would remove the voluntary element from capital taxes, would usher in a period of redistribution.
      It is time that the House of Commons recognised that such taxes have not proved to be the way of redistributing wealth. If CTT had worked, it would have concentrated more wealth in the State and would not have benefited the great generality of the people by giving them wealth of their own. However, it has not even concentrated more wealth in the State. It has not been a success as a revenue raiser.
      Let the Labour Party face the fact head on that the new capital taxes, for all their modern shape, are now raising a far smaller percentage of total revenue than the old and much derided death duties. Those duties were a rocky lot and I would not have dreamt of defending them because of the large voluntary element within them. Individuals tended to pay them only if they were run over by a bus at an early age instead of dying in their bed or in hospital in their eighties. It is extraordinary that relatively new arid allegedly modern capital taxes are less efficient at raising revenue than the old death duties.
      The Financial Secretary will not come clean about what he wants from the capital taxes. Does he want to sharpen them so that they become better revenue raisers, or has he

      805
      some vestigial Disraelian ideas of redistributing and splitting up large concentrations of wealth? The Government's attitude on capital taxes remains as obscure as ever.
      The Financial Secretary quoted some alleged words of mine that implied that an accession tax would be easy to dodge by a form of conspiracy. He must have dug up a quotation of mine on a different tax. The words that he used suggested that donors could get together, form a conspiracy and give small gifts to the same recipient. Unless they were extremely small gifts, they would be more fully caught by an accession tax than by the present capital transfer tax. The Committee must be fed up with hearing me say that an accession tax is paid by the recipient on a cumulative basis. If a recipient is lucky enough to receive gifts over his lifetime from many people, he will pay a much higher rate of tax. I do not understand how the conspiracy theory that the Financial Secretary has dug up applies to the amendment.
      I am extremely disappointed with the Financial Secretary's reply. However, I have recognised since putting pen to paper that the amendment is by no means a competent vehicle for bringing an accession tax into being. Now that the subject has ben ventilated, I beg to ask leave to withdraw the amendment.
      Amendment, by leave, withdrawn.
      Question proposed, That the clause stand part of the Bill.
      10 pm
      Mr. Cook: In previous debates the Financial Secretary has produced and flourished before the Committee his totalisator in which he keeps the running cumulative total of the cost of Opposition amendments. The basis for that totalisator is wholly specious, as has been patiently explained to the Financial Secretary by the hon. Member for Colne Valley (Mr. Wainwright) and by my right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon). If he persists in that specious totalisator, we must insist that he at least makes a deduction in respect of the debate that we are about to have, and the division that will follow it. Surprising though it may seem to the Financial Secretary, on this occasion we seek to save the Inland Revenue money. We seek to prevent the Inland Revenue from giving away the £85 million which it proposes to hand over to the wealthy who are liable to capital transfer tax.
      The Financial Secretary and I had a preliminary skirmish a moment ago concerning the yield from capital transfer tax. Before I turn to the gravamen of that dispute, may I say how much I applaud the Financial Secretary's stamina in conducting single-handed the proceedings of the Committee since it commenced at 4 o'clock. That is an achievement which should go down on the record, particularly as it occurs at a time when we have a record number of Treasury Ministers and when the Financial Secretary might reasonably be expected to be relieved of part of the onerous burden that he has accepted tonight.
      Having accepted the burden of garrisoning the Dispatch Box for the past six hours, it is perhaps not surprising that the Financial Secretary should have been in error when he responded to me off the cuff in our earlier exchange on the yield of capital transfer tax. The figures that he gave for the declining revenue from capital taxation are just as true
      806
      for capital transfer tax and its predecessor estate duty as they are for the totality. Indeed, the taxes largely account for the decline in those figures. In 1948 estate duty provided 9 per cent. of total Government revenue and in 1973 it provided only 4 per cent. Now, capital transfer tax, and the dribble of estate duty that we still receive, provides barely 1 per cent. of total Government revenue. Nor is the decline a measure of the relative increase in income from income tax. The absolute value of the yield has also declined. The Financial Secretary is wrong to suggest that the yield in absolute or real figures has increased. In 1973–74, we received £412 million in estate duty. Last year we received only £470 million from capital transfer tax. Those are the raw cash figures. If we deflate that figure to give us the drop in real terms, we find that over that decade the yield from tax on capital transfers has declined by a staggering two-thirds to one-third of the level of only a decade ago.
      In the financial year 1982–83 there will be a further fall in cash revenue as a result of the measure which we are currently debating. The expected revenue for this year is £465 million, which is almost precisely the same in cash terms—not real terms—as the figure for 10 years ago which was £459 million. Moreover, those figures, which measure the decline in yield from estate duty and capital transfer tax, coincide with a period in which personal wealth has increased. The result is that receipts have declined not just as a percentage of total revenue but as a percentage of personal wealth. The corollary of that is that the tax yield from income has had to increase to compensate for the declining yield from capital taxation.
      A book was written some time ago entitled "The Treasury under the Tories" by an author who is well-connected with the present Treasury team. He wrote:
      "Is it conceivable that if a new (tax) system were being designed for Britain that income would be taxed so heavily and effectively, and capital hardly at all?"
      We may differ as to the cause of that decline in yield from capital taxation, but there can be no disagreement about that essential background to this evening's debate. We must consider the proposals by the present Treasury team for a further relaxation in the regime for capital taxation against an historic background of a long-term trend in the decline in both the incidence of that tax and the yield from that tax. Instead of seeking to reverse that trend, the Government have sought to accelerate it. They have done so on the basis of a prejudice that was staunchly defended by the Chancellor of the Exchequer in his Budget Statement, when he said:
      "there is no case whatever for maintaining a system of capital taxes which, by holding back business success and penalising personal endeavour, does serious economic and social damage".—[Official Report, 9 March 1982; Vol. 19, c. 754.]
      That assertion has nothing but blind prejudice to sustain it. Research after research shows that the most significant factor in deciding who dies wealthy is who is born wealthy. When we reduce the tax on the transfer of wealth and capital we are not rewarding personal endeavour—as the Chancellor of the Exchequer would have us believe it—but are perpetuating inherited wealth. There is not a shred of evidence to show that inherited wealth contributes to economic success.
      On the contrary, the greater the degree of inherited wealth in a nation, the more business decisions are taken by those who are chosen by the accident of birth rather than by their ability.
      Mr. Douglas Hogg: Accident of birth? It is a very deliberate act.
      Mr. Cook: The hon. Gentleman cannot justify those who inherit the power to take decisions because they inherit the wealth that enables them to do so by a conscious and deliberate act of family planning on the part of their parents. The persipience of the parents in that family planning act does not confer on the heir the investment judgments to handle large sums that he may inherit by what I still maintain to be the accident of birth.
      Therefore, there is no evidence to support the Chancellor of the Exchequer's prejudice. However, that has not prevented the right hon. and learned Gentleman and his colleagues from acting vigorously upon it. In the Government's first year of office they doubled the threshold for capital transfer tax. That removed from the scope of capital transfer tax no less than two-thirds of those liable to it. That is in striking contrast to the Government's record on income tax. For income tax, they have lowered the threshold in real terms and thereby increased the number of taxpayers. Last year, the Government slashed the rates on life-time transfers of capital. They also destroyed the cumulative principle and thus enabled those who pay the tax to start afresh after 10 years from scratch.
      This year, the Government are completing their assault on capital transfer tax by carrying out a major uprating of the thresholds. The Government's consistent generosity to those who are liable to capital transfer tax has raised the eyebrows not only of Opposition Members but also of members of the public. The day after the Budget Statement, the Financial Times carried an illuminating article on capital transfer tax. It stated that the intentions of capital transfer tax had been steadily eroded since the tax was introduced in 1975. It added:
      "when the likely reliefs are added to the reduction in standard tax rate bands, the real tax burden has been reduced since 1975 up to quite high asset totals."
      We can get a measure of just how generous that relief has been by considering one of the tables in the schedule. That table, and the table that it replaces, shows that the threshold for the 40 per cent. band is increased by 43 per cent., the threshold for the 50 per cent. band is increased by 50 per cent., and the threshold for the 60 per cent. band is increased by 56 per cent. These figures comfortably exceed the RPI movement since last year and in most case exceed the RPI movement since the Government took office. The Government are plainly intent on doing for capital taxation what they have been unable to afford to do for the income tax thresholds.
      Mr. Campbell-Savours: Why?
      Mr. Cook: That is a pertinent question to which I shall address myself before I conclude. I hope that the Financial Secretary will be able to answer it.
      However, I first refer to a helpful press release issued by the Inland Revenue at the time of the Budget Statement. I fear that the Inland Revenue may not be so helpful next year, following the use that we have been able to make of its press release this year. The Inland Revenue provided a table giving illustrations of the reduction in liability that will flow from the table in the schedule. The largest percentage reduction is concentrated at the lower end of wealth-holding. That is perfectly understandable, because that is where the largest revenue from this tax lies. Sixty
      808
      per cent. of the revenue from CTT, and a rather larger proportion of taxpayers who are liable to CTT, relate to estates of less than £250,000.
      What is the reduction in the proportion of tax paid by those with estates of less than £250,000? The Inland Revenue tables show that an estate of £100,000 will have a reduction in liability of no less than 22·4 per cent. That is nearly double the increase in tax thresholds for income tax payers. An estate of £150,000 will have a reduction in tax liability of no less than 19·7 per cent. An estate worth £250,000 will have a reduction in tax liability of no less than 15·9 per cent.
      Those are generous estates. Moreover, the reductions can apply to estates of double those values. One of the uniquely generous aspects of CTT is that transfers between spouses are exempt from tax. Thus, the reductions are available to estates that are twice as large by the simple device of dividing the estate between both spouses and then transferring two separate estates to the same heir. Thus, the reduction of 15·9 per cent. can be claimed by a joint estate up to £500,000.
      Those are large sums of money. The hon. Member for Truro (Mr. Penhaligon) startled the Committee yesterday by saying that Members of Parliament are among the top 2 per cent. of PAYE payers. However, if the House as one body were to seize the advantage offered by the clause and schedule I doubt whether the majority of Members, well paid though we may be, could put together an estate of £100,000. I certainly doubt whether that could be achieved with the majority of Opposition Members. I am absolutely certain that it could not be achieved by the majority of our constituents. Anyone in my constituency who could achieve an estate of £100,000 to donate to his heir would be a freak case.
      As we address ourselves to the generosity with which the few have been treated, the Committee is bound to remember that each of us, irrespective of which side of the Chamber we sit on, represent far more unemployed and far more pensioners than those liable to CTT, who will benefit from the proposed reductions.
      The fact that a small number of people who by definition are among the most wealthy in our nation should receive such a generous reduction in their tax liability prompts two questions which I shall address to the Financial Secretary because he will have to answer them if he is to persuade the Committee that it would be proper to allow the clause to remain in the Bill.
      10.15 pm
      First, why should this reduction in tax liability receive priority, given the steady decline in revenue from capital taxation as a percentage of personal wealth? Against the background of the declining yield and the declining incidence of capital taxation over the past 10 years, what possible justification can there be for a further reduction in the incidence of tax on capital transfer, especially as, by and large, the people caught by capital transfer tax who will therefore benefit from the clause and the schedule are the same people who in the past three years have benefited from the Government's uprating of the higher rate band threshold for investment surcharge?
      Secondly, why should this reduction in tax liability be given priority when for so many less advantaged groups the tax burden has increased in the past three years? Treasury Ministers are fond of telling us how little the saving that could be made on a measure such as this would

      809
      contribute towards uprating the standard personal allowances. That may be so. Nevertheless, the cost of this measure in absolute terms is significant. It should not be underestimated. It is £85 million. There are things that can be done with such a sum.
      Last Thursday, the hon. Member for Colone Valley proposed an amendment to extend the age allowance to women pensioners between the ages of 60 and 65. The Committee will know from that and from previous debates that such women are not at present eligible for the age allowance. Therefore, their State pension takes them over the tax threshold. Any additional income that they receive above the State pension then triggers an income tax liability at often ferocious marginal rates. I think that many hon. Members on both sides of the House recognise that that is unjust and irrational when the same people may claim supplementary pension.
      The Minister of State told the hon. Member for Come Valley what the amendment would cost. By coincidence, the cost of relieving that group of pensioners of tax was £85 million, which the Minister of State described as a substantial sum. The Financial Secretary must now tell the Committee why that substantial sum can be found to reduce the tax on estates of £100,000 but not to assist the incomes of people who have to live on £40 per week.
      There is another contrast. Yesterday, the Committee debated the 5 per cent. abatement of unemployment benefit. I shall not rehearse all the arguments for the restoration of that abatement. I merely point out that the cost of restoring the 5 per cent. to the unemployed would be £60 million in a full year—less than the sum conceded by the clause and the schedule to those with estates of more than £100,000.
      Those are stark contrasts. They cast into bold relief the grotesque social priorities of the Treasury. Because of those contrasts, we believe that the clause has no place in the Bill and we shall vote to take it out.
      Mr. Richard Wainwright: I wish to pursue briefly the analysis of the various rates helpfully embarked upon by the hon. Member for Edinburgh, Central (Mr. Cook), but from a rather different point of view.
      As I said earlier, my party believes that all these taxes should be considered by the Committee on a basis that has been indexed for inflation. If the Committee in its wisdom then decides that the indexed result is not satisfactory, in no sense should we be slaves to indexation, but should proceed to make alterations. Nevertheless, we should start from a basis of considering the taxes in a form brought up to date by the application of the retail price index.
      I have made that calculation, which is just simple arithmetic, on the rates and rate bands for capital transfer tax both at death and for life-time transfers, indexing them from the beginning of the operation of the tax in 1975. I found that in both cases, at any rate up to £500,000, the rates are still higher than would be justified by straightforward indexation. I do not know whether the Minister will respond to this when he replies to the debate, but it would be interesting to know the Government's ongoing thoughts about capital transfer tax rates. Are the reductions this year simply part of a process to try to bring them into line with the inflation-adjusted rates or do the
      810
      Government intend to stop at this point? What is the intention? It helps to know whether the Government have any idea where they are going.
      The simple process of applying the RPI to the 1975 rate bands produces another aspect about which I should like to hear from the Government, because, taking briefly the rates for transfers arising from death, at £60,000 transferred the rate is 15 per cent. higher than is the figure produced by applying the RPI. In the range from £60,000 to £½ million, the tax rate is 10 percentage points higher. When we get to the range from £½ million to £6 million the rates proposed in the schedule to the Bill are only 5 per cent. higher than the index would have produced.
      More interesting, and requiring more explanation, is the astonishing position on the life-time rates. Here again, on transfer of £60,000, the level proposed in the schedule is 15 per cent. higher than indexation on the RPI would have produced. When we get to only £220,000, the proposed rate in the Bill is 7½ per cent. higher than the indexed rate would have been. However, when we reach the level of £½ million and go up to £5million, the proposed rates are 7½ per cent. less than the indexed rate. When we reach £5 million, the rates proposed in the Bill are 20 per cent. less than indexed rates would have been.
      Why are the Government changes—on the death rates to some extent, but on the life-time transfer rates to a remarkable extent—so heavily weighted in favour of large dispositions? It seems odd that, while the Government are prepared to maintain rates of tax higher than are justified by indexation, up to£½ million of life-time transfers, from that time onwards in their schedule and from that scale, the rate of tax is markedly less than indexation would have produced. It is clear and undeniable that it is a great shift only for large dispositions. It is on that aspect that I should welcome the comments of the Government before advising my right hon. and hon. Friends about the vote.
      Mr. Foulkes: At the start, I must confess that I am afraid that I cannot match the grasp shown by my hon. Friend the Member for Edinburgh, Central (Mr. Cook) of the fiscal details that he deployed with such devastating effect against Conservative Members. They sat there, transfixed and somewhat shattered, by his attack on them. That is a great tribute to my hon. Friend the Member for Edinburgh, Central. It shows how deadly on the mark he was with his remarks. I hope that the Committee will excuse a rather more broad brush approach from me.
      Mr. Douglas Hogg: We do not expect anything else.
      Mr. Foulkes: As the hon. Member for Grantham (Mr. Hogg) said, the Committee would not expect anything else.
      However, I should like to amplify something which I raised earlier, and which was remarkable during the Committee stage of the Finance Bill last year, which many hon. Members who are here tonight sat through. We found that amendment after amendment was put forward and argued forcibly by Conservative Members who had pecuniary interests in, and who were making direct pecuniary gains out of, those amendments. We got the impression that they were spending hour after hour and night after night looking after their personal interests rather than the interests of their constituents whom they are paid to represent. Many of their constituents are the

      811
      unemployed, low wage earners, widows and retired people, and are not benefiting from amendments such as those that we have seen tonight.
      It is about time that we said much more. Conservative Members should be challenged again and again on that matter. They should be reminded that they are here to represent the whole of their constituencies, particularly most of their constituents who are now unemployed, the poor, widows and the retired and who are in need of a great deal of help. They are not the people who will be helped by the clause.
      The clause is headed "Reduction of Tax". That is an amazingly bland and misleading statement. The Government are not a Government of tax reduction. The ordinary person and wage earner has had a substantial increase in tax under this Government, who promised tax reduction. The people who are rich and who have more than enough money are receiving a reduction in taxation, which they do not need.
      We are grateful to my hon. Friend the Member for Blackburn (Mr. Straw), who has been dragging those facts out of the Government to show that the ordinary worker's tax burden is much worse thanks to the Government, who promised a decrease in taxation. That person was duped and tricked by the Government, as were many others in the electorate by the blandishments and twisted advertising by Saatchi and Saatchi, which led them to believe things that have never been delivered.
      I hope that in comparison with Conservative Members who are championing the rich in clause 75, Opposition Members will increasingly become the champions of the ordinary pay-as-you-earn taxpayer. That is the person whose tax is taken at source. I speak as one of them. Many Conservative Members have many more complicated involvements in tax affairs, but in the Opposition most of us have ordinary, simple tax matters. We should be the champions of the pay-as-you-earn taxpayer. Many of those taxpayers are paying more tax than they should. I hope that we are the people who will look after the interests of those people and make sure that the ones who will be helped through clause 75 are made to pay more tax.
      I had to resort to publications such as the Financial Times so that the situation became clearer to me. My hon. Friend the Member for Glasgow, Cathcart (Mr. Maxton) helped me in explaining the effects. I am glad to say that he is not my tax adviser. I would be in greater difficulties if he was. However, he is my adviser on the right publications to read.
      The Financial Times tells us that even before the Budget £200,000 could be transferred tax-free over an 11-year period and £300,000 could be transferred tax-free over a 21-year period. With the spouse being able to transfer a gift of £3,000 a year, that means an extra £66,000. Over 11 years £266,000 can be transferred tax-free.
      In Patna, Dalmellington, Drongan and Rankinston not many people have £266,000 to transfer over an 11-year period. I shall go as far as to ay that there are not many people in Grantham, not since the grocer's daughter moved South to Finchley, who have that sort of money to transfer. Hon. Members such as the hon. Member for Grantham (Mr. Hogg) should be looking after the interests of widows, the retired and the elderly and not the interests of the people with £266,000 to transfer over 11 years.
      Sir William Clark indicated dissent—
      10.30 pm
      Mr. Foulkes: The hon. Member for Croydon. South (Sir W. Clark) should look out, because these strange Social Democrats are creeping into Croydon.
      The Financial Times goes on to say that the teal tax rates for capital transfer tax are lower in 1982 than they were in 1974. That astonished me, even though I realise how devastating the Government's policies have been. The rates are even lower for the favoured groups, the business men and farmers with assets in excess of £1 million.
      Clause 75 is a millionaire's charter, which is not inappropriate from the present Cabinet which contains so many millionaires. According to the Financial Times, the reliefs for favoured taxpayers are now so large that, far from being progressive, as one would expect from this type of tax, capital transfer tax has reached the point where the tax rate declines as assets increase. Therefore, the wealthier one is, the less one is taxed. That is absurd.
      In real terms, capital transfer tax does not exist as an effective tax.
      After a detailed analysis of capital transfer tax, the article in the Financial Times states that there is scope for some future radical Chancellor.
      Unfortunately, my right hon. Friend the Member for Stepney and Poplar (Mr. Shore) is not present, but I know that he has in mind the type of radical measures that are indicated in the article that are necessary if capital transfer tax is to become an effective tax again.
      My hon. Friend the Member for Edinburgh, Central gave some telling examples of how £85 million could be spent more effectively. He said that it could be spent on dealing with 60 to 65-year-old women or on dealing with the tax level for the unemployed whom the Government have cast aside in favour of the millionaires.
      Recently, I went to a meeting of the Cumnock branch of the National Association of Widows. That is a growing association which is rightly concerned with the tax position of widows in Britain. Those widows are working alongside married women, they are doing exactly the same job, and receiving exactly the same gross earnings, but because of the current tax position, they go home with less money at the end of the week than the married woman doing the same job who has a husband who is also probably earning a great deal. The Government could have done something about that, and £85 million would have been a great contribution towards it. The Government have cast aside the widows. Instead, they favour the millionaires.
      My hon. Friend the Member for Cathcart said in an earlier intervention that there should be some indexation of public services. It is appropriate to see the hon. Member for Edinburgh, Pentlands (Mr. Rifkind) leaving the Chamber because, in his previous existence, he was one of the terrorisers of local government. There is no indexation from him or from his right hon. Friend the Secretary of State for the Environment. There is no indexation for the huge increases in fuel and other costs that local authorities must bear. That means that the services to the poor and the unemployed, who do not receive indexed benefits—the health and social work services upon which they depend—are being cut and their social wage is depressed. Again, those people have been cast aside in favour of the millionaires.

      813
      This is a millionaire's charter. Clause 75 is a millionaire's clause. This Government are a millionaire's Government. I hope that at the next election they get the votes of every millionaire but no others.
      Mr. Maxton: As my hon. Friend the Member for South Ayrshire (Mr. Foulkes) said, Conservative Members spent a long time in Committee on the Finance Bill 1981 arguing for the very wealthy in our society. Yet the press concentrates on tax increases on cigarettes and income tax changes, and the matters that should have tremendous psychological effects in terms of what the world outside thinks about Conservative Members are hardly reported.
      The House of Commons used to be called the most exclusive club in Britain. That is no longer true. The most exclusive club in Britain now comprises the payers of capital transfer tax. It is a remarkably small number of people. One must be a very stupid wealthy person to pay capital transfer tax after what the Chancellor did in last year's Budget. All fiscal studies state that if one pays capital transfer tax, first, one does not have much money, and, secondly, one has not been well advised on how to use that money.
      A study of the Chancellor's changes, as shown in "Fiscal Studies" of November 1981, makes it clear that anyone with considerable wealth, say £1 million plus, is most unlikely to be a potential payer of this tax. The study states:
      "It is easy to acquire access to the business relief, for instance by purchasing a sleeping partnership; or to become qualified for `working' farmer CCT relief by purchasing a farm, and employing a manager to do the farming."
      That comes close to giving advice that is very near the bone in terms of the tax that people should pay.
      The article goes on to say that the Chancellor does not seem to realise the implications of what he has done, because if he did he would now be taking credit, certainly from Government Back Benchers, for the practical abolition of capital transfer tax. That is what almost happened last year. This year we are seeing the final nail driven into the coffin of capital transfer tax. Very few people pay it.
      Another example given in the study is that all personally owned businesses will have low tax rates. Even the assets worth as much as £4 million the effective tax rate will be less than 12 per cent. once in a generation, which is about 0·4 per cent. a year. It is nonsense, but again it is the psychology of the Government of giving to the wealthy and taking from the poor in our society. We have said that time and time again on the Floor of the House. Those Labour Members who have been appointed to the Committee on the Finance Bill will continue to say that throughout the Committee stage as well. This is about inherited wealth. It is largely about millionaires' or multimillionaires' sons, who will continue to be multimillionaires.
      As my hon. Friend the Member for Edinburgh, Central (Mr. Cook) said, it is not about giving a person the opportunity to accumulate wealth and then to use it. It is about handing on wealth to people who, essentially, have done nothing to earn it.
      I shall end with a quotation on wealth:
      "Money is like dung. If you leave it in a large heap it simply stinks. If you spread it over a large area of ground it brings forth fruit."
      814
      The Government's policy on taxation is ensuring that money is heaped up higher and higher into ever bigger dung heaps. It stinks more and more.
      Mr. Campbell-SavoursI shall be brief, as I spoke at length in the debate on capital gains tax. I suggest to the Financial Secretary that the level of capital transfer tax that he proposes, with the reduction of £80 million in tax receipts, does not command the support of the majority of his Back Benchers even though it may command a majority in the Lobbies. A number Conservative Members are deeply disturbed about the inequalities that he is sowing in society by pursuing his strategy. During the remaining stages of the Bill, I should like to take soundings of his Back Benchers.
      The threshold that the Government are introducing this year is based on the highly ideological views of Treasury Ministers. They may not be representative of the views held by the more moderate and sensible elements—there must be some—in the Conservative Party.
      On the history of capital gains tax, I am told that immediately before the First World War it provided 16 per cent. of total revenue.
      Mr. Douglas Hogg: It was called estate duty.
      Mr. Campbell-Savours: The hon. Gentleman is absolutely right.
      I am also told that £465 million will be raised in the forthcoming year—approximately 1·2 per cent. of total revenue. That represents a substantial reduction. There must be a consensus in the country as to what should be the real level of tax gain from inherited wealth from lifetime transfers.
      Casting aside the political arguments—we have had them all today I am trying in the spirit of late-night reasonableness to advance a sensible suggestion, There must be a consensus about a fairer distribution. Will the Financial Secretary consider taking soundings, even at this late stage, to establish the consensus in the country and then next year come back with a Budget strategy on capital transfer tax that more fairly represents the view of the British people?
      What we are doing tonight is wrong. It is clearly unjust. We cannot in all equity propose that £85 million be given to the very few better-off privileged people in society when, in the same week, we have refused to concede the case of the unemployed and the under-privileged. Not even a Conservative Government can do that in fairness.
      The Financial Secretary must realise that, putting aside traiditional arguments, there are Conservative Members who realise that what I say is true. He must give them the right to put their case. It is significant that tonight, once again, only the Financial Secretary on the Conservative Benches has defended the Government. If Conservative Members believed passionately that what is being done is right, they would also have defended the Government. There are few hon. Members present. No one will defend the position of the Minister. There must be consensus. I hope that the Minister will establish it for the Budget next year and so enable us to put an end to the nonsense that has developed over the last three years when large amounts of money have geen given to very few people. Everyone knows that it is wrong. We must stop it.
      10.45 pm
      Mr. Ridley: The hon. Member for Edinburgh, Central (Mr. Cook) picked me up on figures that I gave him about

      815
      the yield of capital transfer tax. Admittedly, I was working from memory and not from any paper. I must make it clear that there has been decline in the yield from capital transfer tax in real terms but not in money terms. The hon. Gentleman was wrong on that point. After making his allegation, he recalled the yield from estate duty in 1973. We are not talking about estate duty. The Labour Party changed the tax to capital transfer tax. The question put to me related to capital transfer tax since its introduction. I shall give the figures.
      In 1975–76 the combined yield of CTT and the remnants of estate duty was £330 million. For 1982–83 the forecast is £475 million. In money terms it has crept up from £330 million to £475 million. In real terms it has crept down, if I may use that expression, from £289 million in 1975–76 to £178 million at March 1975 prices. It is interesting to note that during the years of the Labour Government it crept down just as steadily as it has since then. It went down in real terms from £292 million to £266 million, and to £228 million in 1978–79. There has been a decline, almost steady in real terms, in the yield of this tax since it was introduced. Although the hon. Gentleman's Government made no change, or very little change, during that time the yield reduced.
      Mr. Cook: Is the Financial Secretary saying, in retrospect, that had the Labour Government, in the Finance Bill of 1977 or 1978, brought forward proposals to increase the rates of CTT to remedy this decline, the Opposition, of which he was then a distinguished Member, would have supported it?
      Mr. Ridley: This is a hypothetical case. I should most certainly not have supported it. It is, however, odd for a Government out of office to ask whether, if they had done something while in office, I should have supported it. It is, I think, anterior hypothecation.
      The reason for the decline in the real yield has to be sought in factors outside the tax. Asset values have by no means kept value with inflation. Share prices are practically level. They have not remotely kept value with inflation. Wealth has been diminishing due to a decline in the real value of many people's capital assets. There has been a certain element of avoidance—I am not saying evasion. People have preferred to take their wealth with them overseas rather than pay this tax. A certain amount of emigration has taken place simply to avoid paying capital transfer tax. The Committee cannot be surprised, if it sets high rates of tax, if people try to take evasive action. Those are the sorts of reasons why the yield of capital transfer tax has fallen.
      There is no connection between the yield of the tax and the severity of the rates. The rates have got progressively more severe. The thresholds and bands have not been indexed and they have not been altered in any substantial way until this Budget, except for the change in the lifetime rates which was made last year.
      I should like to give the Committee some figures. The original value of the threshold was £15,000. The indexed equivalent of that today is £39,000 and we have put it up to £55,000. The 50 per cent. rate was payable on the band of £100,000 to £120,000 when the tax was brought in. The equivalent of that today is £260,000 to £315,000. The Budget proposal is for £165,000 to £200,000, almost £100,000 lower. The maximum tax level, 75 per cent., was payable on an estate of £2 million. That indexed is
      816
      now £5¼ million, yet the proposal in the Budget is only £2½ million. So the rates of tax and capital transfer tax bear much more heavily now than at the time since they were introduced by the right hon. Member for Leeds, East (Mr. Healey).
      That is borne out by figures which I gave, and which I wish to correct, on Second Reading. I gave a figure which turned out to be wrong and I should like to set the record straight. I said that even after the Budget changes capital transfer tax would be heavier in real terms than it was both when the Government came into office and when the tax was first introduced. I also said that those with the largest estates would pay more in real terms than before, while those with the smaller estates would pay less.
      Both points are absolutely valid. The first figure that I gave was correct. In real terms the yield of the tax following the Budget changes will be £5 million more. in a full year than it would have been on the rates of tax at the time of the election. However, the later figures have been checked again and have been found to be incorrect. On a similar basis, the additional yield, compared with that on the introduction of the tax, will be £60 million, made up of an additional £75 million from the larger estates, less a reduction of £15 million from the smaller estates. Those are the correct figures.
      Labour Members who became indignant a short while ago because they thought the rates of capital transfer tax would mean a give-away of £85 million were wrong on all counts. First, the cost of these reforms is not £85 million this year, but £35 million. It will be £75 million next year and £85 million the year after. Secondly, even the rates En the Bill are far less onerous than those which their Government proposed. We have increased the tightness of capital transfer tax both since we came into office and since the tax was first introduced. I am not particularly pleased about that or proud of it, but we should get the facts right.
      When the money is obtained simply by allowing the process of inflation to erode tax rates, it is absurd to say that to try, however imperfectly, to put that right is to give money to the rich. It is a ridiculous comparison and stands logic, fairness and honesty on their head to a degree that makes one suspect every word that the hon. Member for South Ayrshire (Mr. Foulkes) said.
      Mr. Robert Sheldon: The hon. Gentleman has put on record the letter that he wrote to me explaining the errors that he made in his Second Reading speech on 6 April, but he has not referred to one point which he made in that speech and which I questioned at the time. He has just spoken of ridiculous comparisons. One of the comparisons which he made was with the yield of the tax in 1975. That was the year of the tax's introduction. It was not a full year. The following years are the proper basis of comparison, not the year when a tax is introduced.
      Mr. Ridley: I can give the right hon. Gentleman the figures: 1975–76, £330 million; 1976–77, £383 million; 1977–78, £398 million. Those were the three years when the net real yield of the tax declined.
      The hon. Member for Colne Valley (Mr. Wainwright) made a fair point. It is true that we have tried to reduce the burden on those who make life-time transfers. We have not had the resources to do other than to allow the burden on death transfers to increase.
      Two organic changes have taken place in the structure of the tax and are carried further in the Budget. The first

      817
      is a change from relieving the smaller estates and putting a higher burden on the bigger ones. The second is relieving life-time transfers and putting a slightly heavier burden on transfers at the time of death.
      My hon. Friend the Member for Croydon, South (Sir W. Clark) was going to move an amendment urging us to go further in the direction of aiding life-time transfers. For the sake of the Committee he kindly did not move it, but it is the direction in which I think it is right to go.
      Mr. Richard Wainwright: Can the hon. Gentleman confirm that the schedule provides that for the largest dispositions under life-time transfers the real rate of tax is reduced compared with what it was in 1975?
      Mr. Ridley: I cannot confirm or deny that. I shall check the figures and let the hon. Gentleman know.
      The tax, alas, bears more heavily on taxpayers than it did when it was introduced and than it did when we came to power. We have tried to do what we can, within a tight economic situation, to make it fairer and more acceptable. To compare it with other aspects of fiscal and financial policy is to miss one vital matter—that if such taxes become unacceptable to the successful, they will not stay here. If there are any people who will help widows and the poor, they are those with the ability and the power to create wealth. To put burdens upon them beyond what they will bear without going away is deliberately to condemn the very people that I am trying to help—I sometimes wonder whether the hon. Gentleman is—to a worse position in future through his blind prejudice and stupidity.
      Mr. Cook: I believe that the Committee is entitled to a response to the Financial Secretary's speech. He concluded by attempting to suggest that the tax on capital transfer was a tax on success. It appears that he was not listening when I opened the debate on the question whether the clause should stand part of the Bill. The great majority of the estates that come within the scope of CTT have been achieved by the accident of birth and not by success, business endeavour or hard work. Those who are born wealthy are those who die wealthy, and likewise those who die wealthy were born wealthy.
      Over a period, Governments of both parties have reduced the yield from the tax on capital and there has therefore been an increase in the tax on income. By and large it is income that is the product of hard work. It is income that is obtained by success and by those who endeavour, and it is they who have to pay a higher rate of tax because those who were born with large amounts of capital pay less tax.
      The Minister did not attempt to address himself to the questions asked by my right hon. and hon. Friends. In the clause we are being asked to give away £85 million to those who are liable to CTT. The Committee has asked properly and legitimately why we should be able to find £85 million for those with estates in excess of £100,000 when we cannot find £85 million for widows under 65 years and for those who are unemployed. We have had no answers to our questions because the questions are unanswerable. For that reason, we propose to divide the Committee and to seek to strike the clause from the Bill.
      Question put, That the clause stand part of the Bill:—
      The Committee divided: Ayes, 155, Noes 74.

      Division No. 134]

      [11.01 pm

      AYES

      Adley, Robert

      Macfarlane, Neil

      Alexander, Richard

      MacGregor, John

      Alison, RtHonMichael

      MacKay, John (Argyll)

      Alton, David

      Maclennan, Robert

      Ancram, Michael

      McNair-Wilson, M.(N'bury)

      Aspinwall, Jack

      McQuarrie, Albert

      Atkins, Rt Hon H. (S'thome)

      Major, John

      Banks, Robert

      Marland, Paul

      Beaumont-Dark, Anthony

      Mather, Carol

      Beith, A.J.

      Maude, Rt Hon Sir Angus

      Bendall, Vivian

      Mawhinney, DrBrian

      Benyon, Thomas(A'don)

      Maxwell-Hyslop, Robin

      Benyon, W. (Buckingham)

      Mellor, David

      Berry, HonAnthony

      Meyer, Sir Anthony

      Bevan, David Gilroy

      Mills, Iain(Meriden)

      Biffen, Rt Hon John

      Mills, Peter (West Devon)

      Blackbunr, John

      Mitchell, David (Basingstoke)

      Body, Richard

      Morrison, HonC. (Devizes)

      Boscawen, HonRobert

      Murphy, Christopher

      Brinton, Tim

      Myles, David

      Brooke, Hon Peter

      Neale, Gerrard

      Brown, Michael(Brigg&Sc'n)

      Nelson, Anthony

      Buchanan-Smith, Rt. Hon. A.

      Neubert, Michael

      Budgen, Nick

      Newton, Tony

      Cadbury, Jocelyn

      Normanton, Tom

      Carlisle,John (Luton West)

      Onslow, Cranley

      Carlisle, Rt Hon M. (R'c'n)

      Page, Richard (SW Herts)

      Chapman, Sydney

      Parris, Matthew

      Clarke, Kenneth (Rushcliffe)

      Patten, Christopher(Bath)

      Cockeram, Eric

      Penhaligon, David

      Cope, John

      Pollock, Alexander

      Crouch, David

      Price, SirDavid (Eastleigh)

      Dorrell, Stephen

      Prior, Rt Hon James

      Dover, Denshore

      Renton, Tim

      Dunn, Robert(Dartford)

      Ridley, HonNicholas

      Eggar, Tim

      Ridsdale, SirJulian

      Elliott, SirWilliam

      Rifkind, Malcolm

      Faith, MrsSheila

      Roberts, Wyn (Conway)

      Fenner, MrsPeggy

      Roper, John

      Fookes, Miss Janet

      Rossi, Hugh

      Gardiner, George(Reigaye)

      Sainsbury, Hon Timothy

      Goodhart, SirPhilip

      Sandelson, Neville

      Goodlad, Alastair

      Shaw, Giles (Pudsey)

      Gow, Ian

      Shelton, William(Streatham)

      Gray, Hamish

      Shepherd, Colin(Hereford)

      Greenway, Harry

      Sims, Roger

      Griffiths, E. (B'ySt.Edm 'ds)

      Smith, Cyril(Rochadle)

      Griffiths, Peter Portsm'thN)

      Speed, Keith

      Grimond, Rt Hon J.

      Speller, Tony

      Grylls, Michael

      Spence, John

      Hamilton, Hon A.

      Sproat, Iain

      Hamilton, Michael (Salisbury)

      Stanbrookm, Ivor

      Hawksley, Warren

      Steen, Anthony

      Heddle, John

      Stevens, Martin

      Hicks, Robert

      Stewart, Ian (Hitchin)

      Hogg, Hon Douglas(Gr'th'm)

      Stradling Thomas, J.

      Horam, John

      Taylor, Teddy (S'end E)

      Howell, RtHonD.(G'ldf'd)

      Tebbit,RtHonNorman

      Howells, Geraint

      Temple-Morris, Peter

      Hunt, David (Wirral)

      Thomas, Rt Hon Peter

      Hunt, John(Ravensbourne)

      Thompson, Donald

      Hurd, RtHonDouglas

      Thorne, Neil (IlfordSouth)

      Jenkin, Rt Hon Patrick

      Thornton, Malcolm

      Jopling, RtHonMichael

      Townend, John(Bridlington)

      Kaberry, SirDonald

      Trippier, David

      Kershaw, Sir Anthony

      van Straubenzee, Sir W.

      Lamont, Norman

      Viggers, Peter

      Lang, Ian

      Waddington, David

      Lawrence, Ivan

      Wainwright, R. (ColneV)

      Lee, John

      Wakeham,John

      Lennox-Boyd, HonMark

      Waller, Gary

      Lester,Jim (Beeston)

      Ward, John

      Lloyd, Peter (Fareham)

      Watson,John

      Loveridge, John

      Wells,John(Maidstone)

      Lyell, Nicholas

      Wheeler,John

      Lyons, Edward (Bradf'dW)

      Wickenden, Keith

      819

      Wilkinson, John

      Tellers for the Ayes:

      Williams, D. (Montgomery)

      Mr. Selwyn Gummer and

      Wolfson, Mark

      Mr. Tristan Garel-Jones

      NOES

      Allaun, Frank

      Dean, Joseph (Leeds West)

      Atkinson, N. (H'gey)

      Dixon, Donald

      Booth, Rt Hon Albert

      Eadie, Alex

      Bray, Dr Jeremy

      Evans, Ioan (Aberdare)

      Brown, Hugh D. (Provan)

      Evans, John (Newton)

      Buchan, Norman

      Foot, RtHonMichael

      Callaghan, Jim (Midd't'n&P)

      Foster, Derek

      Campbell-Savours, Dale

      Foulkes, George

      Clark, Dr David (S Shields)

      George, Bruce

      Cocks, Rt Hon M. (B'stol S)

      Hamilton, James(Bothwell)

      Concannon, Rt Hon J. D.

      Hamilton, W. W. (C'tral Fife)

      Cook, Robin F.

      Harrison, Rt Hon Walter

      Craigen, J. M. (G'gow, M'hill)

      HomeRobertson, John

      Cryer, Bob

      Homewood, William

      Cunliffe, Lawrence

      Hooley, Frank

      Dalyell, Tam

      Hughes, Robert (Aberdeen N)

      Davies, Ifor (Gower)

      John, Brynmor

      Davis, Terry (B 'ham, Stechf'd)

      Jones, Rt Hon Alec (Rh 'dda)

      820

      Jones, Dan (Burnley)

      Rooker, J. W.

      Lamond, James

      Rowlands, Ted

      Leighton, Ronald

      Sheerman, Barry

      Lewis, Ron (Carlisle)

      Sheldon, Rt Hon R.

      Litherland, Robert

      Shore, Rt Hon Peter

      Lyon, Alexander (York)

      Skinner, Dennis

      Mc Donald, Dr Oonagh

      Spearing, Nigel

      McKay, Allen (Penistone)

      Stoddart, David

      Mc William, John

      Stott, Roger

      Marshall, D(G'gowS'ton)

      Straw, Jack

      Maxton, John

      Thomas, Dafydd(Merioneth)

      Maynard, Miss Joan

      Thorne, Stan (PrestonSouth)

      Millan, Rt Hon Bruce

      Tinn, James

      Mitchell,Austin(Grvmsby)

      Walker, Rt Hon H.(D'caster)

      Morris, Rt Hon C. (O'shaw)

      Welsh, Michael

      Morton, George

      White, Frank R.

      Newens, Stanley

      Woolmer, Kenneth

      Parker, John

      Parry, Robert

      Tellers for the Noes:

      Price, C. (Lewisham W)

      Mr. Frank Haynes and

      Robinson, G. (Coventry NW)

      Mr. Hugh McCartney.

      Question accordingly agreed to.
      Clause 75 ordered to stand part of the Bill.

    Schedule 10

      RATES OF CAPITAL TRANSFER TAX
      Sir William Clark: I beg to move amendment No. 38, in page 157, line 20, column 3, leave out figures to line 32 and insert—

      'Nil

      15

      17½

      20

      22½

      25

      27½

      30

      32½

      35

      37½'

      This is the last amendment to be moved tonight. At this late hour brief speeches are probably in order. However, if I make a brief speech, I hope that my hon. Friend and the Patronage Secretary will not think that it diminishes the validity of my argument. Since the Conservative Party came to office, the totality of capital taxes has increased. Indeed, my hon. Friend the Financial Secretary was gracious enough to acknowledge that. There have been improvements in the thresholds for capital transfer tax, but I cannot understand why, under the Bill, the rate for the lifetime transfer is half that of the death transfer, but only part of the way.
      If the transfer is made during the donor's lifetime, my amendment will mean half the death rate all the way through. I cannot see why, after £200,000, the rate does not go down, for example, to 27½ per cent. In the Bill it is set at 30 per cent., 35 per cent., 40 per cent., and so on. I should like an explanation of why this year my hon. Friend the Financial Secretary and my right hon. and learned Friend the Chancellor saw fit only to halve the lifetime transfer rate, as compared with the death rate, for part of the way. There must be a reason. Is my right hon. and learned Friend the Chancellor doing it half this year and half next year? I look forward to hearing my hon. Friend's answer.
      Mr. Ridley: My hon. Friend's amendment would have the effect of making the lifetime transfer rate exactly half that of the death rate all the way up the scale. It would
      822
      begin to bite only at the level of £200,000, where it would part company with the present rates and begin on large estates above £200,000.
      I cannot argue against the amendment on grounds of cost. To accept the amendment would cost only a couple of million pounds. It is hard to say when that would begin to come through as there are few people at that level who will be subject to the tax in any one year. It is a question of judgment. My right hon. and learned Friend suggested recasting the lifetime gift scale in the previous Budget, and all that has happened is that the bands have been, as it were, moved upwards. The shape and structure derives from last year.
      The effect of the amendment on an estate of £1 million would, as drafted in the Bill, be £325,000 of tax payable. The amendment would reduce that still further to £277,500. As I said earlier to the hon. Member for Come Valley (Mr. Wainwright), our judgment is that we should shade the rate more in favour of lifetime transfers and smaller estates. This is a lifetime transfer on a larger estate.
      I do not claim that our judgment is necessarily better than that of my hon. Friend. My right hon. and learned Friend thinks that he has got it just about right, but we will reconsider the scale next year to ascertain whether an alteration is needed. We shall bear in mind my hon. Friend's point on this feature of the scale in the hope that we can convince him jointly and mutually that we are right.
      Sir William Clark: I thank my hon. Friend for his reply. If the lifetime rate were to be halved, even on the higher value estates, that would accelerate the payment of CTT to the Revenue and it is possible that there would be more transfers during the lifetime of the larger estates. However, in view of my hon. Friend's remarks, I beg to ask leave to withdraw the amendment.
      Amendment, by leave, withdrawn.
      Schedule 10 agreed to.
      To report Progress and ask leave to sit again.—[Mr. Lang.]
      Committee report Progress; to sit again tomorrow.

      LIAISON COMMITTEE
      Ordered,
      That Mr. Cranley Onslow be discharged from the Liaison Committee and Sir Timothy Kitson be added to the Committee.—[Mr. Lang.]

      British Firms Overseas (Taxation)
      Motion made, and Question proposed, That this House do now adjourn.—[Mr. Lang.]
      11.20 pm
      Mr. Michael Grylls: The story of this United States taxation, which I am delighted to be able to raise in the House today, began when President Reagan was Governor of California. At that time, the Franchise Tax Board of California began to overstep the bounds of reasonableness and to use the vexatious system of taxation which became known as the world-wide reporting system. Governor Reagan opposed such action, but at that time the tax board was autonomous.
      Other states then realised that there was the loophole exploited by the California board through the world-wide reporting system to raise revenue to which, in the view of most people, it was not entitled and the system began to be copied throughout the United States.
      United Kingdom companies operating in the United States would have been saved from this taxation inequity by article 9(4) of a treaty between the United Kingdom and the United States which would have prohibited individual American states from using such a world-wide combined reporting system in assessing taxation for United Kingdom companies.
      The House will recall that that treaty was signed on 31 December 1975 but was not ratified until nearly five years later. In 1978, however, the United States Senate removed from the treaty the clauses prohibiting the world-wide reporting system, although the majority of senators favoured the prohibition. Britain was then asked to accept the treaty after the removal of that vital part which would have saved our companies having to face that system. We were assured, however, that the United States Congress would resolve the situation by legislation and that it was really just a hiccup in the Senate.
      The problem that I have outlined has been closely followed by the House—rightly, as we have a duty to protect our big trading companies overseas. On 19 July 1979, 129 hon. Members joined me in signing an early-day motion expressing the view that a vital feature of any relationship between the United Kingdom and the United States regarding relief from double taxation should include the prohibition of a world-wide reporting system. I hope to show that the views expressed in that early-day motion are every bit as valid or even more valid today than they were then.
      Following the early-day motion and the debate, a number of hon. Members, including myself and the late Sir Graham Page, as well as the then Minister of State, Treasury, visited Washington in September 1979 and January 1980. I say this merely to demonstrate the position. During our visits, we and the Minister of State were assured that legislation was not far off.
      On 18 February 1980 the House debated ratification of the treaty. I well remember telling the House of the assurances that I had received on my earlier visit to Washington and the assurances that I had had from the Chairmen of Ways and Means there that hearings would begin that very spring.
      When I took part in the debate in February 1980, I remember saying that the message should be that we should accept the treaty and the convention because they had immense importance outside the world-wide reporting
      824
      system, and were important to Third world countries. Therefore, we should accept the treaty but rely on our friends to sort out this thorny and difficult problem so that United States-United Kingdom relations could return to a fair and friendly basis.
      Many in the House today will believe that they have been badly let down by our friends on the other side of the Atlantic who have not delivered the legislation, despite the assurances which were given and the fact that we took the treaty in the belief that the Americans would sort it out.
      During that debate the then Minister said:
      "To those who remain concerned about the unitary question, I say that there is no disposition on the part of the Government to let the issue die. If the House approves the convention and if it is ratified thereafter, we shall be prepared to place on record, for all to see, our reservations on the unitary system. The Administration in the United States were left in no doubt by what I told them.†We do not propose to bury the issue if the House gives its approval to the convention and the three protocols. I have indicated the various ways in which we propose to pursue the issue in the years to come.
      I hope very much that the problem will be solved for us in large measure by the Hughes/Mori Bill."—[Official Report, 18 February 1980; Vol. 979, c. 179–99.]
      The Hughes/Mori Bill was legislation going through the Californian senate. The Minister was right, and if that legislation had been passed and been successful it would at least have solved the problem in California. Unfortunately, the Bill was not passed, so the problem was not even partially solved. We were left with failure by the United States side and so far, I regret to say, a failure by our Government to get the United States to introduce the legislation.
      When the ratification took place on 25 March 1980, the British Government rightly expressed their strong disapproval of the world-wide combined reporting system in a note. It concluded:
      "It must be emphasised however that the acceptance of the Senate reservation in no way implies approval of the unitary basis and that it is the urgent request of Her Majesty's Government for the reasons given above that the Government of the United States should use its best endeavours to eliminate the international application of the unitary basis of taxation."
      The Government were right to put in that reservation.
      The present chairman of the Committee on Ways and Means in the United States recommended in 1977, when he was head of the task force to look into the question of foreign source income, that legislation should be enacted to prohibit this world-wide combined reporting system. In the United States Congress the chairman has received in the past two months written requests for hearings from members of his party who are members of the Committee and sponsoring a new Bill through Congress—H.R. 1983. I regret to say that to date there has been no response to this request to have hearings and proceed to that legislation in the United States.
      There has been one more step. The Departments of Justice, Commerce, State and Treasury and the Trade Representatives Office of the Reagan administration all agreed to enter an amicus brief by the United States Solicitor-General, the senior law officer in the United States, in a case currently before the United States Supreme Court. That was filed in January of this year and was an important step. I hope that it will result in at least some changes in the world-wide reporting system.
      However, it was strange, and I wish to quote from a letter that I have received from the Under-Secretary of the

      825
      Treasury in Washington in the last two days. He referred to the amicus curiae brief that had been filed by the United States Solicitor-General and said:
      "The amicus brief argues that state use of the so called worldwide combined unitary method may result in multiple international taxation and impairs uniformity in the conduct of U.S. international tax policy."
      This is a quirk in the present situation in the American Administration. The Under-Secretary goes on to say:
      "The Administration has not taken a position on the Mathias-Conable legislation."
      That is current legislation before the Congress. He states:
      "The legislation raises difficult issues involving the desired relationship between the taxing powers of the states and the international economic relations of the United States. Those issues are of acute importance and sensitivity, particularly in light of the President's recently announced New Federalism initiatives for returning revenue sources and programme responsibility to the states. The Treasury Department is currently conducting a thorough, objective study of these issues."
      I think that the House of Commons in London would say to the United States Government in all seriousness that they cannot relinquish their right to determine international economic policy. They cannot shrug that off, leave it in the hands of the States and leave foreign companies at their beck and call and taxed in that strange way.
      Where does that leave us? Parliament has been patient since 1975. This short debate gives us the opportunity to make it crystal clear to the United States Government that we cannot continue to accept the use of combined worldwide reporting systems by individual States while the United States Government have agreed in over 40 treaties not to use it. We are not alone in our opposition. Recently there have been treaties between the United States and France and Canada. The European Community on behalf of its member States has presented two successive demarches to the United States Government seeking a solution to the problem.
      We have been patient because we are dealing with friends. We took our friends on trust. Unfortunately, in this instance our friends have not delivered. The only thing left to the British House of Commons—there will be increasing pressure on us to do this—is for us to take our own legislative action to apply a combined world-wide reporting system to United States companies that operate in Britain.
      I do not hide from the House the fact that I would much regret having to do that, but the pressure is such and the damage that has been done to British companies is so serious that the only leverage that we have on Congress is to do to them what they have done to us. Then perhaps mutually we can both agree to stop doing it.
      I realise that when the President comes to Britain in a week or two there will be many things for him and the Prime Minister to discuss, but I hope that my hon. Friend the Financial Secretary will be able to give me an assurance that my right hon. and learned Friend the Chancellor of the Exchequer will be able to raise the matter with Treasury Secretary Donald Regan, if he accompanies the President to the Versailles talks in France or earlier in London. I hope that my right hon. and learned Friend will say to him loud and clear that the patience of the House of Commons is running out. We have been overpatient. Unless action is taken quickly in the United States, we shall have to take action here because we believe that that is the only way in which we can protect
      826
      our companies, which have been the subject of the system. Almost without exception they have agreed that it is grossly unfair, it distorts international trade and is damaging to the friendly business relations that we wish to continue with the United States.
      I ask my hon. Friend whether once again he would strongly make that view known to the United States Government and take advantage of the forthcoming visit to do that.
      11.34 pm
      The Financial Secretary to the Treasury (Mr. Nicholas Ridley): I congratulate my hon. Friend the Member for Surrey, North (Mr. Grylls) on securing the debate and on choosing a subject that I think is of great importance. It is useful to have this chance to put on the record the Government's continuing concern about the situation.
      The use by certain States of the United States of the worldwide combined reporting system in conjunction with the unitary basis of taxation has been a long-standing issue between the United Kingdom and the United States of America. This basis is contrary to generally accepted international principles endorsed by the OECD.
      The problems associated with the unitary basis of taxation are, first, that the State usually takes a larger share of profits than would be appropriate on normal internationally accepted principles. Secondly, the true commercial results of the business operated in the State are ignored. Thirdly, unrelieved double taxation could occur by the attribution of a share in already taxed world profits. Fourthly, there are excessive compliance costs in supplying worldwide data. Fifthly, it may set a precedent for other countries to use this arbitrary method.
      As my hon. Friend said, the UK/USA double taxation convention as originally drafted would have excluded this method of taxation. The United States Senate rejected the treaty's application to State taxation on constitutional grounds. It threw out the famous article 94. The convention as now in force therefore only debars the United Kingdom and United States federal Governments from using the unitary basis in certain circumstances, and not, therefore, the States.
      During the debate in the House on 18 February 1980 on the convention, the Government undertook not to let the issue die. The proposed United States legislation supported by the Carter Administration failed because of the Presidential election. Details of the representations to the present United States Administration are contained in the written answers which I have given on various dates. I shall run through the more salient of them.
      In reply to a question from my hon. Friend, I stated:
      "The Government have strongly urged the United States Government to introduce or support legislation to prevent the application by States of a unitary basis of taxation to British companies, not least because of the representations received from British industry. Within the last six months fresh approaches have been made, both orally and in writing, to the present Administration, and these include a note presented by the United Kingdom on behalf of the European Community expressing the joint concern of the ten Governments."—[Official Report, 11 December 1981; Vol. 14, c. 511.]
      As President of the European Community, we persuaded the other countries, and they joined with us, to leave a note with the Treasury in Washington urging it to do something about this.
      Secondly, my right hon. and learned Friend the Chancellor of the Exchequer wrote to the Secretary of the

      827
      United States Treasury reiterating our concern, and giving him firm support on the matter of the amicus curiae brief which was lodged by the United States Government with the Supreme Court in the case of Chicago Bridge and Iron Company v Caterpillar Tractor Company et al. This brief was referred to by my hon. Friend. The brief challenges the constitutional validity of the application of the unitary apportionment method to multinational groups of companies. I have arranged for a copy of the brief, which includes as appendices the note presented on behalf of the European Community and my right hon. and learned Friend's letter, to be placed in the Library.
      In addition to what the Government have done formally, I assure my hon. Friend that there have been many informal approaches to the American Government, making clear our concern at the lack of progress and the worries about how much longer we must wait for something to be done about this matter. We have not been alone. The CBI has done much to try to persuade the American Government of the rightness of our case. My hon. Friend the Member for Surrey, North-West has done an especially effective and energetic job in single-handedly trying to promote this cause both in Britian and in America. So also did the late Sir Graham Page, whose memory we all cherish so much. He and my hon. Friend fought a splendid crusade.
      The American Solicitor-General has now filed the amicus curiae brief in the Chicago Bridge and lion Co. v Caterpillar Tractor Company State of Illinois case. That brief includes in the appendices the letter from my right hon. and learned Friend the Chancellor of the Exchequer, which challenges the constitutional validity of the application of the unitary proportion method to multinational groups of companies. The Supreme Court decision is expected in June.
      It might help if I quote a few lines from my right hon. and learned Friend's letter to Mr. Donald Regan:
      "It also introduces an undesirably asymmetric element"—
      that is unitary taxation—
      "into the tax relationship between our two countries, since the unitary basis of taxation with worldwide combined reporting is not used by the United Kingdom at any level of government. This
      828
      imbalance is causing increasing concern, not only on the part of British companies which have made representations about it, but in Parliament where Questions have been asked."
      Now Adjournment debates have been raised, not least by my hon. Friend the Member for Surrey, North-West.
      It may be unrealistic to expect any positive steps by the American Administration to support the two Bills now before Congress which would curb the unitary method of taxation until the Chicago Bridge case decision is known. If that decision does not resolve the issue to our satisfaction, the Government will redouble their efforts to press the American Administration to act. My hon. Friend has put forward several constructive suggestions, for which I am grateful. I shall certainly send a report of his speech to the American embassy so that it is relayed immediately to Washington, where the Adminstration can read of the strong feelings that he and many hen. Members, as well as businesses, share in this matter. I shall also bring to my right hon. and learned Friend the Chancellor's attention his suggestion that he should raise the matter with Mr. Donald Regan when he is here in the summer. I shall ask him to take particular note of that.
      My hon. Friend went a little further and suggested that we might have to resort to some retaliation or enactment of similar legislation against American companies if they do not desist from doing this in some American states. I hope that it will not come to that, but I note the growing irritation. We shall make it clear to the American Government that the criticisms, as expressed by my hon. Friend, are mounting and that we cannot forever accept this assymetry in our taxation arrangements arid the deletion of article 9(4) from a treaty that was freely negotiated by both Governments and then altered unilaterally by one of the legislatures. If one of the legislatures in Washington feels able to alter treaties, the re is no reason why one of our Houses of Parliament should not have the same views in due course.
      I am grateful to my hon. Friend and we shall redouble our efforts in the ways that I have suggested.
      Question put and agreed to.
      Adjourned accordingly at sixteen minutes to Twelve o' clock.