INTEREST PAID ON DEPOSITS WITH BANKS ETC.

HC Deb 03 May 1984 vol 59 cc577-611

Mr. Cockeram

I beg to move amendment No. 60, in page 16, line 31, at end inser— '(2) In calculating the tax payable in accordance with subsection (1) the first £70 in any special account, or the first £140 in any joint special account, shall be excluded, and no assessment of income tax shall be made on the person receiving payment of such interest, provided that the account is approved by the Inland Revenue and that the person entitled to any interest holds only one such special account.'.

The Temporary Chairman (Sir Michael Shaw)

With this it will be convenient to discuss also the following:

Amendment (a) to the proposed amendment, leave out `£70' and insert '£80'.

Amendment (b) to the proposed amendment, leave out `£140' and insert `£160'.

Amendment No. 47, in schedule 8, page 136, line 43, at end insert—

'(h) it is a gross interest account, namely a savings account approved by Inland Revenue having a maximum balance of £1,500 for a single account or £3,000 for a joint account and being the sole account held by the person to whom interest is payable.'. Amendment proposed to amendment No. 47, leave out `£1,500' and insert `£3,000'.

Mr. Cockeram

We all know the phrase, "The unacceptable face of capitalism" and I believe that clause 27 will come to be known as the unacceptable face of Treasuryism. If it is implemented, the composite rate of income tax, which at present applies to building societies alone, will apply to all interest paid on personal deposit accounts at banks.

The composite rate of tax is to be 25 per cent. rather than the normal 30 per cent. It is worth examining why the rate is to be reduced to 25 per cent. It is an average rate of net tax paid by a spectrum of the population. It takes into account the fact that there are many non-taxpayers because they receive low incomes, are children or are old-age pensioners. It is incongruous for the Government to raise personal allowances as they have done in the Bill by 12 per cent. and to claim that by so doing they are taking 850,000 people out of income tax if, at the same time, they impose this composite rate of income tax on all bank interest which will bring into tax people who formerly have not paid tax for the reasons that I have outlined.

Mr. Bermingham

I agree with every word that the hon. Gentleman has said so far, but does he accept that the British Bankers Association, in a briefing document sent to many hon. Members, has estimated that approximately 3 million non-taxpayers have deposits or savings accounts?

Mr. Cockeram

I acknowledge the expertise of the source of that information, and if that is the association's estimate, I am interested to know it.

6.30 pm

It was a declared and avowed policy of the Government at the general election, fought only 12 months ago, to reduce the burden of taxation, but this proposal goes contrary to the principle on which we fought the election. One may ask therefore why the Treasury has come forward with this proposal. It has declared that it has done so to conform with another aim that was part of the manifesto, that to reduce the number of civil servants. I freely accept that the proposals to deduct from bank interest at source the composite rate of income tax will involve many fewer civil servants than when, as now, interest is paid gross and the tax is collected in arrears from those who are subject to tax, but the effect runs contrary to the declared policy of the Tory party.

Sir Raymond Gower

While my hon. Friend is making these valid points, perhaps he will explain how the Treasury's proposal squares with the third objective of our policy, which is to simplify the tax structure.

Mr. Cockeram

One can have two views on that. It can be claimed that the tax structure is being simplified, but it is not part of our policy to create anomalies and injustices in the process of implementing that proposal.

The amendment proposes that bank interest shall in future be treated in the same way as bank interest in an ordinary account in the National Savings bank, whereby the first £70 of interest on a personal account and £140 on a joint account are exempt from taxation. It seems that the Government's proposal differentiates between private sector banks and building societies and the public sector in the shape of the National Savings bank by imposing a tax on the former and exempting the latter. That is not what the Conservative party sought to espouse at the last general election.

The proposed amendment will have the effect of enabling banks in the private sector to treat those on low incomes with an account at the bank in the same way as they are treated in the public sector. The banks in question will be called upon to declare to the Inland Revenue the names and amounts of interest that is paid.

I suspect that when my hon. Friend replies, he will refer to the possibility of evasion if the amendment were to be carried, but I point out that the possibility of evasion exists at the moment with the National Savings bank. There is nothing to stop a person opening an account in one part of the country and claiming the £70 of interest free, going to another part of the country and opening another account, then sitting back and waiting to see whether the Treasury, via the Inland Revenue, catches up. That is possible at the moment, but the Treasury is clearly satisfied that it is not happening on a material scale or it would not continue the concession.

It is the policy of this Government to exempt from income tax as many as possible of those on a low income, because we are indulging in a rather generous policy in paying out as much as the country can afford on social security and other benefits to such people. It is incongruous to suggest, therefore, that those people should, at the same time, be taxed, as they will be if the clause is carried. We declare that it is our policy, as it is, to encourage thrift across the full spectrum of population, including those on low income, but this clause will go against that policy.

The clause will particularly hit the Trustee Savings bank which has a high proportion—almost 100 per cent.—of its deposit accounts from the private sector, as distinct from the clearing banks which have a large proportion of their accounts with companies and the corporate sector. Some 20 per cent. of Trustee Savings bank accounts from the private sector belong to those on low incomes—children, pensioners and others. It is that 20 per cent. that will in future be subject to taxation if the clause is carried. That is not part of what we fought an election on 12 months ago.

The proposal is that the accounts so specifically designated in the four banks will be treated in the same way as are similar accounts with the National Savings bank. Interest will be paid gross and the account will be clearly designated as such. For those who say that we are seeking fiscal neutrality that treats everyone alike, I shall add two comments. First, this amendment also referred to building societies when I first tabled it, enabling them to offer similar accounts. For technical reasons, I was advised that references to building societies had to be removed from the amendment, and so they were. I hope that when my hon. Friend replies he will note my comment and perhaps refer to building societies as well.

My second point about fiscal neutrality is that I hope that my hon. Friend will not use that argument to justify clause 27, because if he does, I shall intervene to ask him why, if he believes in fiscal neutrality, he has not ensured that the National Savings bank similarly should charge the composite rate for its interest, which at the moment is paid gross. If we believe in the theory of fiscal neutrality, we believe in it not merely for the private sector but for the public sector.

Linked with amendment No. 60 is amendment No. 47 to schedule 8, which is an alternative way to achieve similar objectives. The amendment would allow the creation of gross income accounts with a capital sum of £1,500 maximum in the name of any one individual or £3,000 for a joint account, the interest on which would again be paid gross to achieve some of the objectives of the earlier amendments. Each individual, or in the case of the joint account, each pair of individuals, would be allowed only one such account as they are at the National Savings bank. Again, interest would be declared to the Inland Revenue by the banks.

Lest anyone were to say that this would create an anomaly or a difficulty, I point out that schedule 8 already lists seven exemptions. My proposal would add an eighth. Under schedule 8, banks are instructed to pay interest gross on timed deposit, on debentures, on deposits taken in the ordinary course of business activities, and on debts on a security on sums deposited by someone outside the United Kingdom. Foreign banks are covered as they will not be required to pay interest net. I do not think that the House will find anything unacceptable in my eighth addition to the list of exemptions in view of the anomalies that will be created if the measure proceeds.

It is interesting that the Wilson committee in 1980 advocated fiscal neutrality, as did the National Consumer Council's report on banking last year. Both those reports accepted the principle. The purpose of these amendments is to establish fiscal neutrality and to enable the private sector to compete with the public sector on equal terms. They propose that thrift should be encouraged in all income groups and that conforms with Conservative policy, whereas the Bill offends Conservative policy. Accordingly, I seek the support of my hon. Friends.

Mr. Terry Davis

It might be helpful if I explain my amendments to the amendments tabled by the hon. Member for Ludlow (Mr. Cockeram). The hon. Gentleman referred to the general arguments for clause 27 and schedule 8. I shall not follow him in those arguments, although I agree with almost everything that he said. I hope that we shall be able to consider those arguments in the stand part debate if the amendments are not accepted. In the interests of brevity I must also say that I agree with everything that the hon. Gentleman said about the merits of his amendments. I seek only to persuade him to change the figures.

Amendment No. 60 follows a suggestion by the British Bankers Association, which sought to put all savings on the same basis as that for the Trustee Savings bank. The figure of £70 comes from the present practice regarding interest and tax paid on accounts in the Trustee Savings bank.

Sir Geoffrey Finsberg

The hon. Gentleman means the National Savings bank, not the Trustee Savings bank.

Mr. Davis

I am grateful to the hon. Gentleman. I meant to say the National Savings bank. The Trustee Savings bank is one of those affected by the Government's proposals.

The hon. Member for Ludlow follows the lead of the British Bankers Association in seeking to put all accounts on the same basis as those in the NSB. I am asking him to increase the amount from £70 to £80, because in the Budget the Government have increased personal allowances by 12 per cent. It is therefore reasonable that we should also increase the amount of interest that is tax free. If the hon. Gentleman accepts my amendment, and if his amendment is accepted by the Government, I hope that the Government will extend it to the NSB. I am asking for £80 instead of £70, on the narrow points of the Government's other measures which increase the amount of personal allowances. It is proportionate.

I have also tabled a amendment to amendment No. 47. I am seeking to provide for people to hold £3,000 in an account instead of £1,500. Having listened to the hon. Gentleman's arguments, I now understand how he arrives at the figure of £1,500. It is connected with the figure of £70. He is seeking to make the same provision with amendment No. 47, but in a different way, as he is seeking to make with amendment No. 60. My argument for inserting the figure of £3,000 instead of £1,500 arises as a result of the provisions for social security and supplementary benefit.

Sir Raymond Gower

Does the hon. Gentleman propose to confine his change from £1,500 to £3,000 and to leave the £3,000 for a joint account as it is?

6.45 pm

Mr. Davis

Yes. Hon. Members will know from their constituency work that if someone has £3,000 in a savings or other account it is disregarded for the purposes of calculating supplementary benefit. The interest on those savings is also disregarded in that calculation. If we adopt the amendment tabled by the hon. Member for Ludlow we shall provide for people to be excused tax on interest on an account with £1,500. They will then be taxed on the interest paid on a sum between £1,500 and £3,000 if they have those additional savings in another account. I am anxious to achieve consistency, and it would be sensible for the Government to disregard the interest on savings of £3,000 for the purpose of income tax, in the same way as they disregard that interest for the purpose of calculating supplementary benefit. It makes no difference whether the account is a single or a joint one.

At present, a single householder on a long-term rate receives £34.10 per week in supplementary benefit and a single householder on an ordinary scale rate receives £26.80 per week. If that person has £2,000 in a trustee savings bank, he will be taxed on the interest which amounts to £80 a year. That is not right. It is in everyone's interest that people living in such straitened circumstances should be excused tax on their interest. The Government have accepted that those amounts are so small that they should be disregarded in the calculation of supplementary benefit.

I shall not make the point at length, because it is obvious. I hope that I shall be able to persuade Conservative Members to support my amendments to the amendments tabled by the hon. Member for Ludlow.

Sir William Clark

It is my pleasure to follow the hon. Member for Birmingham, Hodge Hill (Mr. Davis). It is always a delight to learn that Labour Members are now coming round to the view that interest and dividends are an essential part of the economy and should be encouraged rather than taxed out of existence. I welcome that change in attitude on the part of some Labour Members.

I hope that when my hon. Friend the Minister replies he will not have on the top of his brief an instruction from the Treasury to resist the amendments. Apart from having a bank account, I have no vested interest in banks. I accept that a composite rate is probably, on balance, from an administrative point of view, extremely welcome, but we sometimes twist the economy for adminstrative purposes and anomalies creep in.

I am speaking with all the sincerity and force that I can when I say that it is time that we told the Inland Revenue that it is becoming paranoiac about loopholes in our tax system. One has only to look at the Bill. When it deals with the control of foreign companies, there is a labyrinth of restrictions on this, that and the other. Under the guidance of the Revenue the Treasury penalises the private sector to catch one person who is avoiding or evading tax. The Treasury penalises 999 taxpayers to catch just one.

The Minister may argue that there are too many loopholes. That will not wash this time because, as my hon. Friend the Member for Ludlow (Mr. Cockeram) said, the National Savings bank has enjoyed a tax exemption for some years. The Minister may argue that the exemption was given to the National Savings bank—which used to be the Post Office Savings bank — because of the Treasury premise that the interest paid was low. It used to be only 2.5 per cent. The evidence from the clearing banks is that many of their 3 million deposit accounts are held by people who are not in the tax bracket. To exempt accounts with a low interest rate from tax is small comfort to those who do not pay tax anyway.

I understand that the composite rate is to be 25 per cent., although it is not yet settled. That will hit many small depositors. People in the income tax bracket usually pay tax at the 30 per cent. rate. The argument is that, instead of paying 30p in the pound, savers with a deposit account will pay only 25p. That is fine for the taxpayer, but it is small comfort to the person who does not pay tax.

My hon. Friend the Member for Ludlow has explained why the composite rate is 25p rather than the standard rate. It is simply because so many people affected do not pay income tax. That is the only reason. In my experience, the Inland Revenue is never over-generous to the taxpayer. The lower rate is given not out of generosity, but out of a sense of rough justice because many of the people concerned do not pay tax.

Many people with deposit accounts at banks will hear that they are to be taxed and move their accounts from the banks. The clearing banks fear that there could be a massive withdrawal of funds. Has the Treasury worked out the liquidity ratio of banks if there were a sudden diminution in deposit holdings? I hope that the Government have considered that.

I agree with my hon. Friend the Member for Ludlow that the private sector should be encouraged. The Government have introduced economic packages for the private sector such as the business expansion scheme, the start-up scheme and the loan guarantee scheme. They are geared to help the private sector to increase its activity and the creation of wealth, yet the Government are introducing an inhibiting factor for the private sector.

I cannot understand the philosophy of the clause. Why penalise the private sector? What is so different about the National Savings bank? Why should the National Savings bank be exempt? Another advantage is being given to the public sector. Everyone knows that money in the National Savings bank is used by the Government to help with their borrowing requirement. There are many fiscal advantages in investing in Government stock, including exemptions from capital gains tax on the gilt market. The Government are creating another advantage. People who invest their money in a bank deposit account will have to pay 25 per cent. tax without exemption.

I do not argue about whether the figure should be £70 or £80; the principle must be settled. The Government proposal is inequitable. I do not want to take away the £70 limit from the National Savings bank, but, in all fairness, people should enjoy the same exception whether they invest in the National Savings bank or any other bank. What is the difference? There is no difference, except that the Government cannot get their hands on deposits in other banks.

I hope that the Minister will accept the amendment. I urge him strongly to consider it. We have a year before the provision comes into effect. If during that year an announcement is not made about the £70 exemption, people will withdraw their funds from banks. That would be a retrograde step. I urge my hon. Friend, even if the drafting is defective, to do something about this matter on Report. I have never heard a Government say that a Back-Bench amendment is perfect. They often ask for it to be withdrawn because the wording is wrong. We do not mind that. We shall withdraw the amendment if the draftsmen can devise an amendment which agrees with the spirit of our proposition.

Mr. Fisher

It is a pleasure to follow the hon. Member for Croydon, South (Sir W. Clark) and the hon. Member for Ludlow (Mr. Cockeram). I certainly support the spirit of the amendment, although I prefer the amendments tabled by my hon. Friend the Member for Birmingham, Hodge Hill (Mr. Davis) because they are marginally more generous in the exclusion. I urge Government Members to support my hon. Friend's amendments. If my hon. Friend's amendments fall we shall support amendment No. 47. The spirit of all the amendments on this matter is the same. The all-party agreement is welcome and interesting. I hope that it is infectious and that the Minister catches the spirit and accepts the amendment.

The principle behind the amendment is crucial. It seeks to protect the small saver—the non-taxpaying investor. Does the Minister agree that the small, non-taxpaying saver should be protected? Is that person who is so insignificant to Governments worthy of being protected?

If the Economic Secretary accepts the amendment, let him say so now and we can move on to the next amendment. If not, will he explain why the Government have no interest in protecting the small saver and small non-taxpaying investor?

The people about Whom we are speaking include children and pensioners, and I declare my interest in the subject in that I have four children all of whom have savings accounts. Hon. Members with children, I am sure, recognise that we should encourage our children to be thrifty—to save their money and later to become good consumers—and spend their money wisely.

7 pm

Mr. Tim Eggar (Enfield, North)

I am delighted to hear a good Socialist arguing in favour of thrift among children. I hope that his children's money is not invested either in a bank account or building society account. If it is, he is doing them a disservice. If he wants to maximise the amount of interest they receive, helping them to become real rentiers, he should persuade them in the present circumstances to invest in the National Savings bank.

Mr. Fisher

The hon. Gentleman is wrong when he says that they should take that course in the present circumstances. At present, as in the past, it is perfectly acceptable for them to have their money in a bank. He is referring to what the situation will be if the amendment is not accepted.

Mr. Eggar

Perhaps the hon. Gentleman will telephone his local bank to ask what rate of interest is currently being paid on his children's accounts. He should then contact the NSB and inquire what interest they will get there. I suggest that he will then advise his children to shift their accounts to the NSB.

Mr. Fisher

We on these Benches are grateful for such advice. We should have to pay heavily for investment advice outside the House.

Mr. Terry Davis

My hon. Friend will appreciate that one always obtains good advice from Conservative members on where to place investment. I took the trouble before the debate to check the interest rates. The hon. Member for Enfield, North (Mr. Eggar) did not make it clear that he was talking about one type of NSB account. The ordinary account does not carry such a high rate of interest.

Mr. Eggar

Perhaps it can be described as suitable for children.

Mr. Terry Davis

I am prepared to accept—

The Temporary Chairman

Order. The advice bureau has gone far enough. Let us now return to the subject of the amendment.

Mr. Fisher

If the hon. Member for Enfield, North (Mr. Eggar) catches my eye during the Division, perhaps he will give me some more free advice on behalf of my children, who I am sure will benefit enormously from it.

The banks and financial institutions recognise how important it is that people are taught young the idea of saving and becoming responsible members of society. Naturally, the banks are not entirely disinterested in having them become savers. They do their job effectively and I accept that they are performing an important function.

I do not want to go too far into the realms of Dickensian sentimentality, but in addition to children who save, we must consider little old ladies and pensioners, who are often small investors in banks. For it is important that they should be protected in the way proposed by the amendment.

I hope that the Minister will give figures of the typical amounts of interest received on the deposits which will come into the maw of the Treasury. Such figures would establish beyond doubt the sort of level at which we should be aiming. My hon. Friend the Member for Hodge Hill is suggesting a level different from that suggested by the hon. Member for Ludlow. We could arrive at a definitive sum if we knew that average figure.

Of the 3 million non-taxpaying investors of whom the British Bankers' Association speaks in its brief, may I ask the Financial Secretary to say how many are pensioners and how many are children in the non-taxpaying bracket? Without those details it must be difficult for him to calculate the cost of the amendment, which—as it has been on the Notice Paper for several days—the Treasury should have costed out.

I presume that the hon. Member for Croydon, South is right to say that the Economic Secretary's brief is marked "Resist". If so, a costing must have been done, in which case the hon. Gentleman must have arrived at the number of pensioners and children who will be affected. Without that empirical evidence, his brief is worthless. If he does not have those statistics, I trust that he will obtain them during the remainder of the debate.

We accept that the Economic Secretary is an honourable man. But if he resists the amendment, there will be nothing to protect the people about whom we are speaking. Surely, he does not want to put young children and pensioners who are not taxpayers at a disadvantage. "As easy as taking candy from a baby" is a well-known expression. If the amendment is not accepted, it will be changed to, "As easy as taking tax from a baby". The Prime Minister's reputation of being a milk snatcher will, if the amendment is not accepted, be changed to describe her as a tax snatcher. She will become "Thatcher the children's tax snatcher", and I suspect that she does not wish to have that round her neck.

If the Minister has a heart behind his Treasury facade, let him throw off the shackles of his brief and accept the amendment, preferably with the Opposition amendments to it. His hon. Friends will come into the Lobby but will not know for what they are voting. If he throws away his brief and does the decent thing for young children and non-taxpaying pensioners, nobody will be any the wiser because his hon. Friends will vote the way they are told. I urge the hon. Gentleman to do the decent thing, to throw away his "Resist" brief and to improve the quality of life for those concerned.

Sir Geoffrey Finsberg (Hampstead and Highgate)

This is an interesting debate. I was somewhat worried by the warmth and—I hope that I shall not be accused of making personal remarks—weighty support of the hon. Member for Birmingham, Hodge Hill (Mr. Davis) for the amendment. He and I have had some duels in the past, and, for the benefit of the Economic Secretary, I shall refer to them later.

The Opposition amendments to the amendment are somewhat naive. They would go against one of the major points put forward by my hon. Friend the Member for Ludlow (Mr. Cockeram), that of fiscal neutrality, because the national savings figure would have to be increased, and that would give the perfect excuse to the Minister to reject the amendment because he could say that even more money would be involved. For that reason, Opposition Members cannot expect much support for their proposals in this matter.

The hon. Member for Stoke-on-Trent, Central (Mr. Fisher) does not need advice from my hon. Friends. Our very good friend, the grandfather of his children, Sir Nigel Fisher, could give him all the free and expert advice he needs, without incurring the wrath of the Chair, which I shall do if I go further into that matter.

If the hon. Gentleman is looking for the support of Conservative Members, he did not play his cards properly when he talked about my right hon. Friend the Prime Minister in terms of her being a child tax snatcher. That comment may persuade some of my right hon. and hon. Friends that we should not find ourselves in the same Lobby, if there is a Division, as the hon. Gentleman. I caution him by saying that a good speech was spoilt by a throw-away line, which I do not think helped his case.

Mr. Fisher

I hope that the hon. Gentleman will temper his understandable loyalty to the Prime Minister by an examination of the facts behind the amendment. If he wishes to do the decent thing by non-taxpaying pensioners and young children, he must support the amendment, despite his loyalty to the Prime Minister.

Sir Geoffrey Finsberg

My loyalty to the Prime Minister stems from the fact that I believe that she is entirely right in thinking that the economy must be put right. However, I do not think that the Treasury is right in pursuing a policy which was never intended to have the effect which is now apparent.

My hon. Friend the Member for Croydon, South (Sir W. Clark) said that the Minister's brief would be marked "Resist". I am certain that that is so. Having had four years of briefs, I can confirm that it will be so marked. However, when I was responsible for taking the Dentists' Bill, as it then was, through Committee, with the hon. Member for Hodge Hill leading for the Opposition, I crossed out "Resist" on many occasions and said that I would accept an amendment because the arguments had convinced me that it would be right to do so. Alternatively, I said that I would consider an amendment. That did not endear me to some of my civil servants, but I felt that that was the right course.

I do not expect my hon. Friend the Economic Secretary to the Treasury to accept the amendment, but I do not expect him to say that he rejects it and will not consider the matter again. Many of his colleagues share his policies, including some who are as senior and distinguished as my hon. Friend the Member for Croydon, South. Against that background, he should say that he is prepared to consider the issue again. Of course, I expect him to say that he will do so without commitment. If he is prepared to take a chance by saying that he will accept the amendment, I shall not argue with him; I would not seek to persuade him not to take that course. I merely say that he owes it to his colleagues to say that he is prepared to consider the matter again.

I should declare my interest as a regional board member of the Trustee Savings bank.

Mr. Cockeram

My hon. Friend has reminded me of an omission from my speech. I should likewise declare a similar interest. I hope that the House will excuse me for my oversight, for which I apologise. I thank my hon. Friend for allowing me to intervene to make this correction.

Sir Geoffrey Finsberg

I have not enjoyed the benefit of any briefing from the British Bankers Association, which seems to be more at home with Labour Members. I am glad that that is so. I am delighted to learn of the late conversion of Labour Members. I listened with fascination to the information that was given to us by certain Labour Members.

With one exception, to which I referred in the VAT debate, my right hon. Friend the Chancellor of the Exchequer introduced a superb Budget. That being so, why do the Government have to muck it by penalising the private sector and favouring the public sector? However my hon. Friend the Economic Secretary may try to answer me, that is the fact. If the clause is not amended, only National Savings bank depositors will be beneficiaries. There will then be direct encouragement for savers to transfer their savings up to about £1,200 a year, into the National Savings bank.

I did not believe that that was the Government's economic policy. That was certainly not the policy on which Conservative candidates contested the previous two elections. As my hon. Friend the Member for Croydon, South said, we have before us a Revenue idea. Revenue officials slip these provisions into complicated Budgets and Ministers find that they are stuck with them. That is not the way in which we should proceed. After all, Ministers and the House generally decide taxation policy. The responsibility for those decisions does not rest with civil servants of the Inland Revenue.

7.15 pm

There has been a growing feeling for too long—I accept that it may be wrong but my hon. Friend the Economic Secretary cannot say that it does not exist—among the British public that Revenue officials are becoming more and more domineering at the expense of the ordinary citizen. The preference that is to be given to the National Savings bank is not in accordance with the philosophy for which I have fought for nearly 40 years within the Conservative party.

As the hon. Member for Stoke-on-Trent, Central said, many little old ladies and little old gentlemen put their money into building societies on the advice of the same bank managers who no doubt told them to put their money into Rolls-Royce or the Mersey Docks and Harbour Board. Bank managers are great experts on investment! They put their money into building societies and they do not pay tax, but no one tells them that even in building societies they are paying the composite rate and are therefore on the losing side. This happens to many small investors—many of them are little old ladies and gentlemen—who have limited amounts on deposit in the joint stock banks and the Trustee Savings bank. As my hon. Friend the Member for Croydon, South has said, they are paying tax quite unnecessarily. There may have to be a campaign to persuade them to take their money out of these investments and to put it into the National Savings bank.

But why should we do that? My hon. Friend the Economic Secretary may recall that it was not so long ago when there was a substantial volume of opinion in the Conservative party that the National Savings bank and Giro should be taken out of the public sector and placed in the private sector. Instead, we are going very much in the opposite direction.

Mr. Bermingham

As the hon. Gentleman suggests, there would have to be an advertising campaign to persuade the non-taxpaying small depositor to place his savings in the National Savings bank. If that were to happen, the amount of money available to the joint stock banks, which are the basic funding source for much of industrial investment, would perforce decrease.

Sir Geoffrey Finsberg

That very point was made while the hon. Gentleman was absent from the Chamber, whether he was seeing Iranian students or not. The argument was well advanced previously. I make that point in a way which I hope the hon. Gentleman will not find offensive. If he reads the report of our debate in Hansard tomorrow, he will find that I am right.

My hon. Friend the Economic Secretary may talk about evasion. The proposals of my hon. Friend the Member for Ludlow appear to be sufficiently watertight to preclude evasion, coming as they do from a Bank Bencher. I accept that parliamentary draftsmen will be able to make them more watertight. If there is a will, the Treasury can will the means to meet the ends that my hon. Friends and I would like.

My hon. Friend the Economic Secretary is a courteous and receptive Minister and I am sure that he has grasped the direction of my argument. I do not ask him to say that he accepts the amendment—this may make some of my hon. Friends unhappy—but I ask him to say that if the amendment is withdrawn he will, without commitment, think about it again. That will give him a chance to tell us at a later stage where we are going from here.

Mr. Austin Mitchell

The hon. Member for Hampstead and Highgate (Sir G. Finsberg) put the case for the amendment with great effectiveness. It is a pity that he prepared a trap-door from which to escape the onus of voting for the amendment. It appeared that he was going to wound, yet was afraid to strike. He should strike, because his statements rang true and should be followed up.

I welcome amendment No. 60 and the improvements in amendments (a) and (b). The measures right a wrong that needs righting. There is no need for the composite rate. The system is being introduced to allow the Government to achieve their objective of cutting by about 1,000 the number of civil servants—an ambition which the Government pursue with no eye to the realities—in the Inland Revenue. The work will be shifted to the banks, which will charge account holders and spread the burden of charges down, as they usually do. The marble halls are good at putting the burden of changes and administration on the smaller customers, especially those who have overdrafts, as I do.

Amendment No. 60 rights an injustice for about 3 million people who receive interest but pay no income tax and who should not pay this form of taxation on their accounts. The composite rate measure breaches the basic principle of the taxation system that the income to he taxed should be aggregated so that those whose total income is below a taxable level do not pay tax. I am sure that if the people taxed in this way were part of a more powerful vested interest and richer section of society Conservative Members would make a greater outcry and the Government would display greater sensitivity.

The only fair way to get around the problem is to allow those who should not pay the tax to reclaim the tax taken by the composite rate. I assume that this system operates in other countries. Do other countries make provision to rebate the tax to those who should not be paying it because their income is too small?

It might be possible to give a certificate to certain account holders stating they are not eligible for taxation. That has effectively been done for account holders living overseas, and that scheme is being maintained in the legislation for another two years. Why cannot the accounts of smaller account holders who do not pay tax be certificated in the same way? These are principles of elementary justice. The reason given for not taking those measures is that it would be administratively inconvenient and too expensive. The principle of reform in shifting work from the Civil Service to the banks would be undercut.

And wretches hang, that jurymen may dine. Small account holders will be taxed because it is administratively inconvenient to do anything else.

Essentially, the Government are stealing money from account holders, when the Government are not entitled to that money. They are taxing people who should not be paying tax. That is theft, filching and tea-leafing. It is fiscal mugging. Taxing people who should not be paying tax is stealing—it is as simple as that. There is no reason to mince our words about this matter. The mites of the widows and orphans are being stolen. Money will be taken from those groups which the Government usually put in the front line in their defence of capitalism. There is usually an outcry from Conservative Members that taxation proposals will take the mite from the widows and orphans, but the Government are now doing the same thing in the name of administrative convenience.

The 3 million people affected must include many old-age pensioners. I hope that the Economic Secretary will cite the number of account holders who are old-age pensioners. The Government, when abolishing the investment income surcharge, said, "We are doing this because it will help many old-age pensioners." The Government prided themselves on removing that surcharge, which affects only those with savings of £70,000 or more. They said that their measure would help those on low incomes.

If that principle is all right when abolishing taxation, it should be maintained when introducing taxation. It is not right to abolish the investment income surcharge, justifying that action as helping old-age pensioners, yet to take money away from those same people on the ground of administrative convenience. All hon. Members will see in their surgeries people with bank account statements and books who will ask, "Why is this money being taken away?" We shall have to explain why that is happening, unless the amendment is accepted and the Government make some concession.

If this measure were being undertaken by a Labour Government—it would not, of course—the public relations agency employed by the Conservative party would attack us as piggy-bank raiders, mite milkers, penny-pinchers and all the adjectival diarrhoea that always pours out from the central Government agencies. The Government pride themselves on this measure.

Sir Geoffrey Finsberg

I hope that during this sudden outburst the hon. Gentleman will tell us why it was right in the years of Labour Governments for money to be filched from the elderly who had accounts in building societies. Why did the hon. Gentleman do nothing about that?

Mr. Mitchell

As I understand it—I hope that the Economic Secretary will correct me if I am wrong—most people saving with building societies have to pay tax. That is why many people go to building societies with their savings. They would have to pay tax on the interest from a bank deposit. We are now talking about non-taxpayers. The principle is iniquitous for people with accounts who are not taxpayers. Are the Government so desperate for money to keep the confidence trick of economic recovery going that they must take the mites from the widows and orphans and pinch pennies from piggy banks in this fashion?

Mr. Eggar

As well as being an unpaid adviser to hon. Members' children, I am a consultant to a bank, although one that does not take retail deposits. It is well known to the House that people have worried about the differing treatment given to building societies and banks for a considerable time. Building societies and banks have had arguments about whom the different treatment benefits.

7.30 pm

During the debates on the Finance Bill 1982 I supported the idea that the Government are now introducing, which is that, if we cannot abandon the composite rate—there are good administrative reasons for not doing so—we must introduce the composite rate for the banks as well as the building societies.

I was slightly amused by the brief sent to me and other hon. Members by the banks. I am sorry that my hon. Friend the Member for Hampstead and Highgate (Sir G. Finsberg) was not included in the banks' largesse. They argued fiercely on behalf of the children, the small depositors and the non-taxpayers, yet they did not do that when the composite rate applied to the building societies. In fact, had they done so, they would have benefited because small depositors and non-taxpayers misguidedly invested in building societies, which allowed the building societies to offer a lower composite rate that was attractive to standard and higher rate taxpayers.

One of the most curious things about the battle between the building societies and the banks for retail deposits has been that the banks, rather than using their ability to pay gross and realise the marketing advantage in the amount of interest they could pay over the building societies, consciously preferred to pay a lower rate of interest and so reduce their funding costs.

Mr. Cockeram

My hon. Friend has referred to what he likes to call the battle between the banks and the building societies. There is no such battle. He has charged the banks with being inconsistent because they are now expressing an interest in the deposits of the small saver, widows and children. He overlooks the fact that the banks have always paid gross interest on such deposits and, therefore, they have not had cause to speak up on behalf of those investors who previously have not been penalised by paying tax. It is only now that such a proposal has been put forward that they need to point out the consequences of it. I hope that we will not become involved in what my hon. Friend chooses to call a battle between one financial sector and another. It has not been referred to by other speakers.

Mr. Eggar

I am sure that my hon. Friend will allow me to develop my argument in my own way. The banks complained about the so-called composite rate advantage for the building societies. It was an advantage because a number of small investors, who would have been best advised to invest in gross interest paying accounts, chose to invest in the building societies, thus reducing the effective tax paid by standard rate taxpayers.

The banks consistently failed to pass on gross interest payments to their depositors. They preferred to take the slight marketing advantage that they held—the difference between the net and the gross interest payments—and use it to reduce their funding costs.

The main argument against the Government's proposal is that it exempts National Savings accounts. We must examine whether that is a serious exemption. It gives the non-taxpaying investor an option—he does not have to choose a net paying account, he can choose a National Savings account where he will be paid gross. Will the Government use that tax advantage for themselves, or will it be passed on to the investor? I hope that my hon. Friend the Minister will answer that question.

The Temporary Chairman

Order. The hon. Gentleman is straying into a clause stand part debate. He must stick to the amendment.

Mr. Eggar

Although I take your point, Sir Michael, the amendment seeks to put bank and building society accounts on the same basis as National Savings accounts. I shall observe your ruling, Sir Michael, but would argue that the Government's policy on National Savings accounts is a crucial part of the issue. If the Government behave reasonably and pass on the advantage of the gross payment to the investor rather than keep part of it for themselves, my criticism would not apply.

There are three main reasons why I believe that the Government will be forced to pay a proper rate of interest on a gross basis. First, they will still have to compete with building societies and banks for deposits and will have to take account of the interest paid by them. Secondly, my right hon. Friend the Chancellor made a clear policy announcement in the Budget that interest rates on National Savings accounts would be kept competitive. That implies that they must be competitive with both market rates of interest and the different tax treatment of accounts.

Thirdly, there are sound monetary control reasons why it is in the Government's interest to benefit to the maximum from National Savings deposits rather than going to the gilts markets. However, I recognise that that argument might stretch the amendment a little too far.

I believe that what the Government are doing is fair and right. It puts banks and building societies on an equal competitive footing. My only slight reservation concerns the way that they intend to fix interest rates on National Savings accounts. I hope that my hon. Friend the Minister will reassure me on that point.

Mr. Bermingham

I apologise to the hon. Member for Hampstead and Highgate (Sir G. Finsberg) for missing the point that he made in an earlier speech. I am grateful to him for explaining it to me.

I agree with the fiscal arguments advanced by the hon. Member for Enfield, North (Mr. Eggar) on purely monetary matters. However, the House should address itself to more philosophical questions, such as that posed not only today but in previous sittings of the Committee when the Financial Secretary said that we must look at the Budget in the whole and at what is given and what is taken.

I have looked extremely carefully at the Budget and I have seen the various gifts—for example, the abolition of the national insurance surcharge, which we discussed earlier. I also see what has been taken. We have been given an undertaking that the abatement of the long-term hardship payment of 5 per cent. will be reconsidered. That means nothing, because the long-term chronically sick are suffering. Many of them are non-taxpayers, yet they suffer a £3 a week deduction.

Let us consider what the Treasury has done about the composite interest rate. I do not want to repeat the arguments of many hon. Members, including Conservative Members, with whom I agree. I add my support to amendment No. 60. They are saying that it is not philosophically correct to tax the untaxed—that is, those who should not be subject to taxation. I believe that that is a fundamental principle of taxation, and that is why I urge amendment (a) to amendment No. 47 upon Conservative Members and the point that it makes about social security benefits. The amendment would make the minimum balance £3,000, whether for a single person or a married couple. It is only right that someone who receives social security should not suffer taxation on the interest that may be earned on a small saving, which is often such a person's sole capital asset. Often it represents the cost of his funeral.

The philosophical point is whether it is right to tax those who should not be subject to tax. I hope that that consideration is at the heart of this worthy amendment, which I support. I openly acknowledge the point made earlier about building societies. I am prepared to go on record as saying that I do not believe that the composite rate for building society investments—it is 25 per cent., when taxation is taken into account — is morally justified. I said that within my party before I came to House, and I shall continue to say it, because I cannot see how it is morally or philosophically correct to penalise someone with a few paltry pounds of savings. If he is not currently in a position to pay tax, he should not have to pay it now. I support the amendments, because they pass taxation along the line.

At the end of the day the Government must justify themselves on moral grounds and on whether a measure is fair, and not consider it simply in terms of votes in the House. The justification of fairness cannot often be provided, although the result will be delivered because of the Government's voting strength.

I should like the Minister to explain how it is that if I have, say, £50,000 in cash and put that into a bank on deposit for 28 days I can get a certificate and do not have to pay any tax. I leave the Treasury Ministers to work out the interest at 10 per cent. over 28 days, but I believe that it is just under £1,000. If I were to spend that £50,000 on a house, so that I have no more unearned income and only a small pension from my income in any year, I should not pay tax on the interest earned in that 28 days.

I have another question for the Treasury Ministers. if I had a very high unearned income, it would be in my interest to stick some money in a building society, if the measure were passed, as there would be a composite overall lower rate of tax to pay on it, because I would pay tax at the new rate. If I am wrong in that, no doubt the Economic Secretary or the Minister will correct me. There are ways in which I can manage my affairs so as to minimise my tax liabilities. It seems, once again, that if one is at the top end of the scale one is doing all right, but that if one is at the bottom and is not meant to pay tax, one is not doing so well in terms of the Budget.

7.45 pm

I keep returning to what the Economic Secretary said in answer to a remark made earlier in Committee. I continue to look quite happily for an answer to the question whether those at the bottom of the scale will get anything out of the Budget.

I find what is proposed quite remarkable The Committee of London Clearing Bankers described the composite rate as "unjust" and as "Robin Hood in reverse" and said that the measure would force the 3 million bank customers who pay no tax into the tax net; worse, that it would subsidise the better off. It cannot usually be said that the committee of London Clearing Bankers is a great supporter of the Labour party, but if it says that the proposal is not very fair, I tend to listen, because it may be right. Perhaps it is just like the glib undertaking given the other night about abatement.

I shall try not to use emotive phrases when I talk about children's piggy banks. I do not need to do that, as the story speaks for itself. When I was at school a long time ago, we had a penny savings club. We brought in our pennies and piled them up. Now we say to our children or grandchildren, "When you take your pennies into Lloyds or Barclays or Natwest, do not worry. You will be learning two lessons, because the Government have said so. Lesson one is how to save, and lesson two is how to pay income tax." Income tax payments will start in the classroom, with kiddies' savings, if the measure is passed unamended.

I say with due respect to the hon. Member for Hampstead and Highgate that, although I have been in the House for only nine months, I have learnt that it is dangerous to say that we may be given an undertaking by the Government if the Minister considers the matter. That never happens.

Sir Geoffrey Finsberg

Rubbish.

Mr. Bermingham

It is not rubbish. It does not happen unless the Government give a firm undertaking that x or y will be done. If the Minister stands at the Dispatch Box tonight and undertakes to bring forward a clause to enact the spirit of the amendments that have been introduced by hon. Members, we shall all go home happy at a day's work well done. On the other hand, if the Minister merely says that he will think about the matter, my natural north country suspicions will be aroused. I shall say to myself when the Minister returns, "Not much change"—to use a good Lancastrian and Yorkshire expression. That means that the piggy banks of England will be—

Mr. Kirkwood

What about the piggy banks of Scotland?

Mr. Bermingham

I apologise to the hon. Gentleman for omitting Scotland and Wales. Those piggy banks will become, so to speak, the first steps in a child's taxpaying life. That is not very nice to think about.

Mr. James Kilfedder (Down, North)

There are piggy banks in Northern Ireland, too, and I accept the apology of the hon. Member for St. Helens, South (Mr. Bermingham).

I support my hon. Friend the Member for Ludlow (Mr. Cockeram). I note that the Minister has not shown much sign of responding to the speeches made in Committee. This short debate has been marked by much good humour and I hope that the Minister will not make a bland speech or a speech merely saying that he will consider the points raised by hon. Members. I intend to support the amendment, if need be in the Lobby. An important principle is involved. It is not just a question of 3 million depositors. The Government should ensure that someone who does not pay tax is not forced to do so as a result of the Bill.

I declare an interest as a member of the Trustee Savings bank parliamentary committee. I am anxious to ensure that the Government adopt the amendments, particularly as many people, both young and old, save with the Trustee Savings bank. I urge the Government to accept the

Mr. Farr

I support my hon. Friends the Members for Ludlow (Mr. Cockeram) and for Croydon, South (Sir W. Clark), and the two amendments. I understand that they have the full support of hon. Members on both sides of the House and that there is, unusually for the House, unanimity on this subject. I hope that my hon. Friend the Minister is listening to me, and that he will consider what my hon. Friend the Member for Croydon, South has said. If the brief of my hon. Friend the Minister says that he should resist the amendment, I hope that he will bear in mind that the amendments have been tabled in a most friendly way and that we do not expect a categorical refusal. If, for good reasons, he cannot give us as full or as hopeful an answer as we might have wished, we nevertheless hope that he will be reasonably helpful about the future conduct of affairs.

I was particularly impressed by what my hon. Friend the Member for Hampstead and Highgate (Mr. Finsberg) said about those who will be caught inadvertently by the Bill. In a telling speech, my hon. Friend said that the same old ladies and gentlemen who had been caught before would be caught again, perhaps because they had followed, through lack of experience, advice that was not as good as it should have been. I agreed with what he said about the old ladies who had been advised, and who had paid the price for not receiving very good advice in the past. They are typical of the vulnerable elderly, not only in Hampstead and Highgate but in Harborough and the rest of the country. They are patriots— the sort of people who would invest in war loan. They probably took the bank manager's or Government's advice many years ago. They always seem to lose out, so the Government have a duty and responsibility to put the matter right.

I have no interest to declare other than the fact that the Leicester building society and the Market Harborough trustee savings bank are in my constituency. They are very distressed about the situation. I fully support my hon. Friend the Member for Ludlow about the changes that should be made to put the National Savings bank on an equally fair and competitive footing as the Trustee Savings bank and the building societies. If the same exemption as now applies to the National Savings bank applied to building societies and the Trustees Savings bank there might be a saving in administrative costs for the Inland Revenue.

I have followed the debate quite closely and I cannot believe that the Government intended this situation. If my hon. Friend the Minister is in any doubt about what hon. Members have said today, I will arrange a meeting for him in my constituency with the chairman of the Leicester building society and the chairman of the Market Harborough trustee savings bank. He will then hear from the horse's mouth of their apprehension about the severe effects that the Bill will have on their economies unless some change is made.

The Temporary Chairman

Before calling the Minister to speak, perhaps I should say that I am grateful to hon. Members for the way in which they have stuck, in general, to the terms of the amendment. Inevitably, the debate has moved to the fringe of what I felt was possible, and I suspect that the Minister may well feel that he will have to move towards a general clause stand part type debate. If that is so, I trust that any widening of the debate will be kept to a minimum and that any points made in his concluding speech will not be repeated during the clause stand part debate. I thought that that guidance might be helpful.

The Economic Secretary to the Treasury (Mr. Ian Stewart)

I shall endeavour to follow your guidance, Sir Michael, which has been most helpful to us.

The debate has ranged widely over the principle of the composite rate, and it is not really possible for me to reply properly without mentioning that, as well as the technical points raised by the amendments. My hon. Friend the Member for Ludlow (Mr. Cockeram) pointed out that the amendment had, for technical reasons, been tabled only in relation to bank deposits. He asked me to bear in mind that it was not his intention that the suggestion of the amendment should be that banks ought to be treated differently from building societies. Accordingly, I shall address my remarks to the spirit of the amendment and not just to the technicalities, as that would limit me to the proposal for banks alone.

It would, of course, be absolutely outrageous to propose that there should be an unfair advantage to the banks through having such tax-exempt arrangements if a composite rate is applied to them, if building societies, which have had a composite rate for a long time, are not treated similarly. Amendment No. 60 seeks to exclude the first £70 of interest from the composite rate for the taxpayer. Amendment No. 47 provides that banks should be allowed to hold gross interest accounts for the purpose of paying the gross interest, which would then be exempt in the hands of the taxpayer. So the two go very much together.

If the proposals were applied both to the banks and the building societies, they would cost £300 million to £350 million a year. Amendment (a), tabled by the Opposition, would mean a figure of about £400 million, because they ask for higher figures on the gross interest accounts and higher figures for exemption from the composite rate to the depositor. The provisions for special accounts contemplated by these amendments would complicate the whole system of the composite rate in a way in which it would not be easy, or feasible, to manage. The amendments would cut across the concept of the composite rate, which is designed to introduce greater simplicity and parity of treatment for depositors. They cannot be accepted on those grounds, and the ground of cost.

8 pm

Sir William Clark

The formidable cost of £350 million presupposes that present deposit accounts will remain where they are. If, as many hon. Members believe, most deposit accounts are switched from the clearing banks to the National Savings bank, the loss will be equal because the £70 exemption will also be switched. Is the £350 million cost, which is a frightening figure, the net cost after the Treasury's estimate for the switching of funds? If all present small deposit accounts were switched to National Savings banks, it would still cost the Revenue £350 million. Therefore, the effect of the amendments would be nil

Mr. Stewart

I appreciate my hon. Friend's point. That is why I can only give an approximate figure of the potential cost and cannot be specific. The impact will depend on the way in which funds are moved between homes. I shall come later to the question of movement.

Mr. Cockeram

If the opposition of my hon. Friend the Member for Croydon, South (Sir W. Clark) were followed through, and all those people who are not liable for income tax were to switch their accounts to the National Savings bank, what would the consequences be for the composite rate? In those circumstances, with the tax-free element removed, the composite rate would be the same as the standard rate of 30 per cent., and the knockon effect on savings in building societies would be considerable.

Mr. Stewart

The point raised by my hon. Friend wall arise on clause 26 when we shall consider how the composite rate is established.

If there were no non-taxpayers with bank or building society accounts and the composite rate applied, the composite rate would move rapidly to 30 per cent. That did not happen with building societies, and it is unlikely to happen with banks when the composite rate is applied to them.

Sir Geoffrey Finsberg

The Minister cannot expect the Committee to accept his figure of £350 million without answering the question of my hon. Friend the Member for Croydon, South (Sir W. Clark). The Minister must have calculated how much money would be affected the other way. The Committee is entitled to ask him for at least a rough figure.

Mr. Stewart

I am not entirely sure what figure my hon. Friend seeks, but if he tables a question I shall give him precise information.

The figures take into account the likelihood of movement of non-taxpayers' accounts from banks when the composite rate is applied to them. However, they do not assume that all non-taxpayers will move their accounts from banks. There are many uncertainties — for example, the attitude of the banks to the level of interest rates which they set when the composite rate applies. We took those factors into account and our best estimate has been between £300 million and £350 million. Some bank customers may move to building societies and yet remain within the composite rate. It is almost impossible to predict exactly how these dispositions will take place. I shall return to the question of the movement of funds between the two bodies.

The hon. Member for Birmingham, Hodge Hill (Mr. Davis) spoke to the amendment which substitutes £80 for £70. He suggested that on the basis of indexation or uprating of personal allowances the £70 figure should be set at £80. That figure is not appropriate for indexation in that way or in relation to personal allowances. The amount of interest received varies as much by changes in interest rates as by the amount in the deposit. We should not bring the figure of £70 into the indexation provisions.

The hon. Member for Stoke-on-Trent, Central (Mr. Fisher) asked how many non-taxpayers would be affected, and how to cost the implications of the amendments. Their cost arises, not from the lack of imposition of tax on non-taxpayers, but from the exemption of tax from taxpayers. The figures are based on the assumption that most depositors with banks and building societies are taxpayers and would be relieved by a provision for a £70 or £80 exemption.

The amendments would introduce a hybrid arrangement into the composite rate system in the building societies and banks, which would make the arrangements exceedingly complicated. One of the main purposes of the composite rate system is to bring about greater simplicity. It was suggested that the arrangements were designed by Revenue officials whose attitude was not always helpful. May I say in their defence that I am sure that the Revenue officials who implemented the existing arrangements with building societies, will behave scrupulously when the new arrangements are introduced.

The position on the payment of composite rate tax was that there was a major distortion between the building societies and the banks. My hon. Friend the Member for Croydon, South and others asked the Government to reconsider our decision. We gave careful thought to our proposals before the Budget. All the points raised tonight were considered then. In view of the reaction to the proposals since the Budget, I have examined the provisions carefully in the light of what was suggested, but still believe that we should introduce the composite rate proposals as stated in the Budget. It would be dishonest and misleading of me to say that I shall reconsider the proposals with a view to changing them.

It is better to be straightforward and clear about that rather than to say something which might lead my hon. Friends or anyone else wrongly to believe that we would consider changing the proposals in the way that they have asked.

We cannot leave the discrimination between building societies and banks under the composite rate system as it is now. It is a major distortion. The Wilson committee said that the two should be put on a common basis. The National Consumer Council described the composite rate system applied to building societies as a major competitive imbalance. Indeed, the Wilson committee said that the building societies had an unfair advantage over other savings institutions, and the banks have objected. There are three possible ways of dealing with that distortion. One is to achieve absolute fiscal neutrality, as my hon. Friend the Member for Ludlow said, either by abolishing the composite rate or by extending it to all bodies that pay interest on accounts, including the National Savings ordinary account.

I shall deal with each point briefly in turn, because the decision to resist these amendments depends on an overall view of the balance of advantage and disadvantage in the composite rate scheme. At the time of the Budget my right hon. Friend the Chancellor said that the composite rate for building societies had worked well for the past 90 years, but that it had advantages and disadvantages. He made no secret of that. The disadvantage was that a minority of depositors who are below the income tax thresholds still pay tax at the composite rate. However, that has not stopped many of them using building societies because of the competitive rates offered. The advantage of the scheme is its extreme simplicity, especially for the taxpayer. Most taxpayers are spared the bother of paying tax on interest through PAYE or individual assessment. I must tell the hon. Member for St. Helens, South (Mr. Bermingham) that that is the case only for standard rate taxpayers. There is a separate assessment for those who pay higher rates. Equally, the Revenue is spared the need to recruit many extra staff to collect the tax due on interest paid without deduction.

If one took one of the routes to absolute fiscal neutrality, the proposal to abolish the composite rate would not just involve recruiting 1,000 extra staff for the Inland Revenue to cover the banks. The Revenue would need about 2,000 extra people to deal with tax on building society accounts and, bearing in mind the fact that interest-bearing current accounts are spreading rapidly in the banking system, it is likely that up to another 3,000 staff would be required as that process continued. We are talking about 6,000 or more extra Inland Revenue staff, which would mean tens of millions of pounds more in direct staff wages and overheads. That solution is absolutely out of the question on grounds of public manpower and administrative costs.

That route would also make life much more complicated for many taxpayers. The National Consumer Council said that the composite rate was attractive to many consumers because they had no subsequent dealings with the tax authorities. The scheme has been convenient in practice. I do not pose this argument, as some hon. Members have suggested, on the ground of dealing with the problem of evasion. That would be a marginal consequence of introducing the composite rate across the board.

If we deduct tax at source, we ensure that the full amount of tax is collected, and we shall probably include some tax which, for one reason or another, may not be collected now. However, that is not the main objective of the scheme; it is simply a useful consequence in terms of compliance with the tax.

8.15 pm

Another route to achieving absolute fiscal neutrality would be to take the composite rate across the board, but that would leave no avenue for non-taxpayers to obtain gross interest. My hon. Friend the Member for Enfield, North (Mr. Eggar) suggested that that would not be attractive to the Committee, and I agree with him entirely. I am sure that the Committee would not want non-taxpayers to be deprived of all possible means of obtaining gross interest.

Mr. Cockeram

Is the Minister seriously propounding the philosophy that the Conservative Government will drive the small saver from the private sector into the public sector?

Mr. Stewart

I am not developing a philosophy. I am merely saying what, in practical terms, I believe the Government should provide and what the great majority of hon. Members would support: that we should not follow a course which denied to non-taxpayers the opportunity of obtaining gross interest.

Sir William Clark

We are not concerned with the philosophy. The effect of this clause will be to force the small, non-taxpaying saver into the public sector—the National Savings bank. It will become the only instrument whereby a small saver can obtain tax-free interest. My hon. Friend the Member for Ludlow (Mr. Cockeram) is asking whether, since this is the effect of the clause, we are changing Conservative philosophy.

Mr. Stewart

I can only repeat that I was not basing this argument on philosophy. I was explaining to the Committee why the Government came to the conclusion that they did in the Budget.

Sir Geoffrey Finsberg

Will my hon. Friend give way?

Mr. Stewart

If I am not allowed to deploy my arguments, my speech will take a very long time.

Sir Geoffrey Finsberg

We cannot leave the matter there, even if my hon. Friend wishes to deploy his arguments, because he has failed to answer two specific questions put to him by four Conservative Members. Does he accept that the consequence of the proposal will be to benefit only the state sector? If the philosophy of the Government is to encourage the private sector, how can he equate that with the clause? I apologise to him if he was about to answer those questions. If he was not, I shall have to speak again and try to force him to answer those simple questions.

Mr. Stewart

My hon. Friend was kind enough to say earlier that he believed that I would deal with the debate courteously, and I shall do my best. However, it is difficult to deal with these points if I can get out only one sentence at a time. I would now like to discuss whether National Savings accounts should be exempted from these arrangements, because I know that the matter has greatly worried several of my hon. Friends.

Mr. Campbell-Savours

To save time, will the Economic Secretary simply answer yes to his hon. Friends?

Mr. Stewart

Many points have been put to me from different angles, and it is only fair, after such an important debate, that I should try to respond to them all.

It has been suggested that the proposal to exempt National Savings accounts gives them an unfair advantage. I must point out first that they are not competing in the same way with other deposit takers on business on both sides of the balance sheet. They are competing for deposits but they are not competing for lending. There is a difference between the separation that exists under the present system between banks and building societies and the difference between banks and building societies on the one hand and National Savings on the other.

Mr. Bermingham

Perhaps the Minister will answer the question, as he has already been asked to do by my hon. Friend the Member for Workington (Mr. Campbell-Savours) and then explain how the non-taxpayer who seeks to deposit £100 or £200 cannot be said to have an attraction towards the state sector because no tax will be deducted and he will get the interest gross. What did the Minister mean when he said that there are other features in regard to lenders? Is he suggesting that the non-taxpayer will be attracted back to the bank because he wants a loan?

Mr. Stewart

I shall try to be as courteous to Opposition Members as I am to my hon. Friends. It is difficult. I am endeavouring to explain why the Government have put forward these proposals, and the Committee is not showing much enthusiasm to hear the case that I am trying to put. It would be helpful if I were to be allowed to complete my case. When I have explained the arguments that should be deployed I shall give way again.

Dealing still with National Savings, the point has been raised by several hon. Members that the Government would be able to compete unfairly against institutions in the private sector. My hon. Friend the Member for Croydon, South (Sir W. Clark) and others spoke of whether this would have an effect on the liquidity of banks because it would draw deposits away from them. My answer is that the National Savings target for the next year will be the same as the target for the last two years, that is, £3,000 million.

We have also made a change in regard to the accounts of INVAC and the income bonds of National Savings to reduce the ceiling from £200,000 to £50,000 so that above that level they do not compete with deposits in banks. National Savings will not be attempting to raise extra money from depositors as a result of the introduction of the composite rate. There may be a change in the disposition of the bodies with whom individual depositors place their funds, but it is not a part of our purpose to use this exemption for National Savings to take money away from banks and building societies. Indeed, by holding the target at £3,000 million, which is the same as in the past, we are not even taking into account the increase that would be available because of inflation and expansion of the economy. Therefore, there will be an extra amount of deposits available to building societies and banks if that target is held steady.

Sir William Clark

I was not arguing about the target of the National Savings movement. What I was arguing was that if banks are lending money to industry and their deposits decrease, they will still have to maintain their liquidity ratio, and this has nothing to do with the target. Has the Treasury taken this into account? That is all I ask.

Mr. Stewart

With respect to my hon. Friend, that is the point that I was answering. If the flow of money into National Savings is maintained at the same level, then, by definition, the banks and building societies are not being deprived of deposits. So the availability of deposits for building societies and banks will increase, while the target for National Savings is not being increased.

The Department of National Savings has for some time had a tax-free interest band, which is now £70 on the ordinary account. That has generally been welcomed in the House and in previous Finance Bill Committees, but it does not extend to the private sector. Therefore, there is already discrimination in National Savings which the House has found it right to accept in the past. I believe that hon. Members would be right to accept similar arrangements in future, but I do not think that we should widen arrangements of that kind. They would be much more difficult to control and would call into question the merits of having such exemptions.

In regard to the payment of interest gross as opposed to the tax-free band, in existing circumstances there is a distinction because stocks bought through the National Savings register pay interest gross whereas interest on debentures, company securities and so on is paid after deduction of tax. There are elements of discrimination in the National Savings mechanism already and it is appropriate that we should not deprive non-taxpayers of the means of obtaining a source of gross interest.

We have therefore felt it right to deal with the composite rate problem by extending the composite rate to banks but not to National Savings facilities. This will even out competition between banks and building societies. There is already a rapid increase in interest-bearing accounts in banks. This may well accelerate that increase. Of course, there will be some inconvenience and cost to the banks in introducing this arrangement but I should like to point out something announced at the time of the Budget but perhaps not fully appreciated: arrangements under schedule 20 to the Finance Act 1972, which governs the offset of interest paid under deduction of tax against interest received under deduction of tax from banks and other institutions, will apply to composite rate tax. This will accelerate the advantage to the banking sector by an amount which it is hard to estimate precisely without knowing the details of their business, but which could be of the order of £70 million which will be useful in dealing with the costs of establishing composite rates.

The question is not a matter of philosophy, as my hon. Friends have suggested. One could argue anything on the basis of philosophy and on the basis of what is practically sensible under the circumstances. I put forward an argument which I think is practically sensible under the circumstances for extending the composite rate to the banks, but not to National Savings. Whether or not the composite rate is deducted is not the deciding factor in where depositors place their money.

In regard to recent levels of interest rates the banks have been quoting 5.25 per cent. on deposit, which is a gross rate without deduction of tax, and building societies have been quoting 6.25 per cent. which is a net rate after deduction of composite rate tax. The National Savings ordinary account pays 6 per cent. and INVAC 9.25 per cent. Therefore, it is not surprising that some money has moved between banks and National Savings or between building societies and banks on other grounds. Many depositors put their money with banks because of the other facilities that they can obtain by holding deposits in the banks rather than in other institutions.

The rate of interest that is received by the depositor can hardly be the only or, indeed, the major determining factor in where funds are placed. To that extent much of the comment during the debate has suggested that the impact of the introduction of the composite rate will be much more severe and damaging than I believe it is likely to be.

The banks will want to compete in this market and will do so either by the services that they provide or by the rates of interest that they pay, which may not be the same after the introduction of the composite rate. I must resist the temptation to join the advice bureaux of hon. Members who were suggesting where depositors should place their money. Factors other than the composite rate will enter depositors' considerations.

I sympathise with the points raised by those who have taken part in the debate, but I cannot accept that their arguments outweigh the undoubted advantages of the composite rate system.

8.30 pm

Sir William Clark

Hon. Members on both sides of the House are always worried about how much concessions sought in amendments will cost the Exchequer. My hon. Friend has said that the Treasury's best estimate of the cost of the amendment is £350 million.

Let us go through the calculation slowly. There are 3 million deposit accounts. The amendment of my hon. Friend the Member for Ludlow (Mr. Cockeram) would allow exemption for the first £70 of interest on each of those 3 million accounts. I make that £210 million. If we do not take off the composite rate, it will cost the Exchequer 25 per cent. of £210 million, which is £52 million. At the standard rate, it will cost the Exchequer £70 million.

We should be given the correct figures. The estimate of £350 million seems to have been plucked out of the air. I cannot see how that would be the cost to the Exchequer when the total interest relieved if each account has a £70 exemption—and some do not—would be only £210 million a year, subject to tax of £52 million. That is very different from £350 million.

I do not think that many of my hon. Friends can understand why there is a difference between the National Savings bank and other banks. The Economic Secretary said that the ordinary banks are different because they lend money to people to buy machinery and so on and that the National Savings bank does not lend. But that is not true; the National Savings bank lends to the Government. There is no difference between the institutions that we are talking about.

I hope that my hon. Friend will at least clear up the difference between my calculation of the interest at £52 million and the Treasury's estimate of £350 million.

Mr. Stewart

I explained that quite a while ago in response to an intervention by the hon. Member for Stoke-on-Trent, Central (Mr. Fisher), who made a similar point. The cost of the amendment is substantially the cost of relieving from tax the taxpaying depositors and not the depositors who pay no tax.

Mr. Terry Davis

It seems that some Conservative Members do not follow the Economic Secretary's calculation. The hon. Member for Croydon, South (Sir W. Clark) referred to 3 million deposit accounts as if that was the total number of accounts, and he did his calculations on that basis. However, there are 3 million non-taxpayers, but many more deposit accounts, all of which would benefit from the £70 exemption.

Mr. Stewart

If the hon. Gentleman has put that more clearly than I did earlier, I am grateful to him. That is, indeed, the reason. We are talking about taxpaying depositors with the banks and the building societies and the figures that I gave apply both to building societies and to banks.

I do not want to develop what I said earlier about competition with National Savings, but we are trying to reduce discrimination and distortion in competition, and in the case of National Savings, competition is only on the deposit-taking side and not on the commercial lending side.

Mr. Bermingham

Will the Economic Secretary make it absolutely clear that he is saying that the effect of the composite rate will be to cause a number of non-taxpayers to switch their accounts to the National Savings Bank, which has only one borrower—the Government? The bank has a target of £3 billion to raise this year and if people switch their accounts the Government will presumably not be making so many calls. Is that what the hon. Gentleman is saying?

Mr. Stewart

I am not sure that I follow the hon. Gentleman's argument. The National Savings target will remain the same and, therefore, the Government will not be seeking to raise more money. If money comes to National Savings accounts because of the introduction of the composite rate—as, no doubt, some will, though it is difficult to quantify it—that will reduce the extent to which National Savings will seek to raise money from other sources. I mentioned the reduction in the limits on other accounts, which will serve partly to offset that.

I have covered most of the points raised in the debate and I ask the Committee to reject the amendments.

Mr. Cockeram

I find the Economic Secretary's reply unsatisfactory politically. I do not believe that he has produced any arguments in favour of special treatment for the public sector and the taxing of the private sector and he has not produced adequate arguments to support the taxation of people who would not otherwise be taxed. That is contrary to all the other themes of the Budget, including the raising of personal allowances.

I also feel that my hon. Friend has not produced satisfactory technical answers to justify the basis of the Government's proposal. I shall continue to make representations to him and my right hon. Friend the Chancellor of the Exchequer, and I reserve the right to raise the matter again on Report. I am sorry that I cannot support my hon. Friend.

Sir Geoffrey Finsberg

I hope that my hon. Friend the Economic Secretary will accept that he has not answered two questions. I desperately wish to help him to help us, but he does not seem willing to do so. He said that he cannot be wholly accurate, which I accept, and he quoted a figure of £300 million to £350 million, but he did not answer the point by my hon. Friend the Member for Croydon, South (Sir W. Clark) who asked by how much that £300 million or £350 million would be reduced by people switching from the joint stock banks or the building societies to the National Savings bank. If the Economic Secretary has been over the matter with his usual care, the Treasury must have had figures to put before Ministers.

The second question that my hon. Friend has not answered requires only a simple yes or no reply. Does he accept that the result of what he intends will be to encourage the state sector against the private sector? The question is as simple as that.

Mr. Terry Davis

The Economic Secretary made a brave and honest speech, but I am sorry that he called in aid of his arguments the report of the Wilson committee and the views of the National Consumer Council. I regret his references to the views of those bodies, because he turned them round and implied that they had advocated what the Government are doing. That is not correct.

The hon. Gentleman said that those bodies had criticised the distinction between the banks and the building societies and he used them to support his case. That was unfair because although it is true that those bodies condemned the distinction between banks and building societies, they urged that the composite rate on building societies should be scrapped—the opposite of what the Government are doing. They wanted equality, but equality of a different sort. They did not want to put the composite rate of tax on bank accounts; they wanted to abolish it for building societies. It is a question of levelling up or levelling down.

The Economic Secretary made a brave and honest speech, but his approach was rigid and inflexible. He would not accept my amendment to amendment No. 60, but I was not convinced by his arguments. He said that the exemption of £70 was not suitable for indexation, but he gave no reason for that view. I shall not press him on that point now. I shall wait to read in Hansard what he said.

I was very disappointed when the Economic Secretary refused to accept, or even to consider, amendment No. 60. He said that the cost of the amendment would be £300 million to £350 million a year. However, he was unable to answer question put to him by his hon. Friends, especially the hon. Member for Hampstead and Highgate (Sir G. Finsberg), the hon. Member for Croydon, South (Sir W. Clark) and the hon. Member for Ludlow (Mr. Cockeram) about how many people will switch to National Savings bank accounts as a result of the Government's provisions. I came to the conclusion that the Minister did not know the answer. I am sorry that he was not able to give us clear information. Apart from cost, his only other argument was that the amendment would complicate the administration of the composite rate. That argument, too, was not convincing.

The question of cost has impressed some hon. Members. The Economic Secretary said that the cost of accepting amendment No. 60 would be between £300 million and £350 million a year. The Government, in this Bill, propose to abolish the investment income surcharge. That tax was paid only by those who receive more than £7,000 in interest from their investments. That tax raised £360 million for the Revenue in a full year.

We can see what the priorities of the Government are. They have abolished the investment income surcharge and given £360 million to people who have very high investment incomes, but they are imposing a composite rate of tax on those whose incomes are so low that they will pay no income tax. The Government apparently cannot afford amendment No. 60. They can afford to give £360 million to those who get £7,000 in interest on their investment, but those who pay no income tax are to be brought into the tax net.

Sir William Clark

The Government's figure of £350 million is based on 3 million accounts. There are 5 million deposit accounts and, taking the first £70, we are talking about interest of £350 million. However, only 25 per cent. of that £350 million is a cost to the Exchequer, and the building societies, which are not included in the amendment, are not affected.

Mr. Davis

I accept the latter point, although I accept the Minister's logic when he said he would have to extend it to both institutions. He assumed that he would have to tidy up the legislation to provide for the building societies. The hon. Member for Croydon, South (Sir W. Clark) may not agree with the Minister, but I do.

The hon. Member for Croydon, South is mistaken in saying that the Economic Secretary would say that the total interest would be £350 million. The Minister said that the cost of the amendment would be £350 million. I see the Minister nodding his head in agreement.

The Government say that they cannot afford to lose £350 million in revenue through accepting amendment No. 60, which would provide for at least £70 to be tax-free for small savers as well as big savers. Three million people who do not pay tax would benefit from the amendment. However, the Government can afford to abolish the investment income surcharge at a cost of £360 million.

I would prefer the adoption of amendment No. 47, together with my amendment (a), but amendment No. 60 has been called first and we shall support it.

Mr. Campbell-Savours

Wholly inaccurate figures are being bandied about the Chamber. Can my hon. Friend extract the correct figure from the Minister? We believe that figure is less than £100 million. The Minister says that it is more than £300 million. The House should be told tonight what the true figure is.

Mr. Davis

I am sorry to disappoint my hon. Friend, but if Conservative Members cannot extract better figures from the Minister I doubt whether I shall be able to do so.

Mr. Campbell-Savours

This is a matter of importance. If the Minister is unable to give us an accurate figure, the House should adjourn pending the presentation of accurate information. It is irresponsible for a Minister to use figures during a debate while knowing that he is deliberately misleading the House.

Mr. Davis

I should prefer to finish our consideration of the clause rather than to adjourn. We shall hope to explore the major point on clause stand part.

I object to clause 27 even if it is amended, but if amendment No. 60 was made it would be a better clause. Many hon. Gentlemen are concerned about the effects on competition between the different institutions, and especially the effect on the banks. The Opposition are concerned about the effects on small savers, particularly those who do not have to pay income tax at present. Nevertheless, we shall make common cause with Conservative Members and do our best to impose amendment No. 60 on the Government.

Mr. Cockeram

In view of the unsatisfactory nature of the Minister's reply I intend to pursue the matter further with my right hon. Friend the Chancellor of the Exchequer and with my colleagues. I shall consider putting down further amendments or new clauses on Report. I beg to ask leave to withdraw the amendment.

Hon. Members

No.

The Chairman

Does the hon. Member for Birmingham, Hodge Hill (Mr. Davis) wish formally to move amendment (a)?

Mr. Davis

In the interest of unity and harmony with Government Members, I do not propose to move it.

Question put, That the amendment be made:—

The Committee divided: Ayes 22, Noes 122.

Division No. 278]	[8.48 pm
AYES
Banks, Tony (Newham NW)	Howells, Geraint
Barron, Kevin	Hughes, Simon (Southwark)
Bell, Stuart	Kennedy, Charles
Bermingham, Gerald	Kilfedder, James A.
Campbell-Savours, Dale	Kirkwood, Archibald
Cocks, Rt Hon M. (Bristol S.)	McDonald, Dr Oonagh
Cohen, Harry	McWilliam, John
Cook, Frank (Stockton North)	Skinner, Dennis
Davis, Terry (B'ham, H'ge H'l)	Smith, C.(isl'ton S & F'bury)
Dobson, Frank
Fisher, Mark	Tellers for the Ayes:
Gould, Bryan	Mr. Frank Haynes and
Hamilton, W. W. (Central Fife)	Mr. Austin Mitchell.

NOES
Alison, Rt Hon Michael	Hunter, Andrew
Amess, David	Jackson, Robert
Ashby, David	Jessel, Toby
Baker, Nicholas (N Dorset)	Jones, Gwilym (Cardiff N)
Baldry, Anthony	Jones, Robert (W Herts)
Bellingham, Henry	Kershaw, Sir Anthony
Benyon, William	Key, Robert
Biggs-Davison, Sir John	Knight, Gregory (Derby N)
Boscawen, Hon Robert	Lang, Ian
Bowden, Gerald (Dulwich)	Latham, Michael
Bright, Graham	Lawler, Geoffrey
Brinton, Tim	Lennox-Boyd, Hon Mark
Brown, M. (Brigg & Cl'thpes)	Lester, Jim
Buck, Sir Antony	Lyell, Nicholas
Butterfill, John	Macfarlane, Neil
Carlisle, Kenneth (Lincoln)	MacKay, Andrew (Berkshire)
Chapman, Sydney	Mather, Carol
Chope, Christopher	Miller, Hal (B'grove)
Clarke, Rt Hon K. (Rushcliffe)	Mills, Sir Peter (West Devon)
Clegg, Sir Walter	Moore, John
Conway, Derek	Murphy, Christopher
Coombs, Simon	Neubert, Michael
Cope, John	Powell, William (Corby)
Couchman, James	Rathbone, Tim
Cranborne, Viscount	Rees, Rt Hon Peter (Dover)
Currie, Mrs Edwina	Renton, Tim
Dunn, Robert	Rhodes James, Robert
Durant, Tony	Roe, Mrs Marion
Eggar, Tim	Rossi, Sir Hugh
Evennett, David	Ryder, Richard
Fallon, Michael	Sackville, Hon Thomas
Forman, Nigel	Sainsbury, Hon Timothy
Forth, Eric	Shelton, William (Streatham)
Fraser, Peter (Angus East)	Sims, Roger
Freeman, Roger	Smith, Tim (Beaconsfield)
Galley, Roy	Spencer, Derek
Goodhart, Sir Philip	Spicer, Jim (W Dorset)
Goodlad, Alastair	Squire, Robin
Gow, Ian	Stanbrook, Ivor
Gower, Sir Raymond	Stevens, Martin (Fulham)
Gregory, Conal	Stewart, Ian (N Hertf'dshire)
Griffiths, E. (By St Edm'ds)	Stradling Thomas, J.
Griffiths, Peter (Portsm'th N)	Sumberg, David
Grist, Ian	Thatcher, Rt Hon Mrs M.
Ground, Patrick	Thomas, Rt Hon Peter
Gummer, John Selwyn	Thompson, Donald (Calder V)
Hamilton, Neil (Tatton)	Thompson, Patrick (N'ich N)
Harris, David	Tracey, Richard
Hawkins, Sir Paul (SW N'folk)	Twinn, Dr Ian
Hayes, J.	van Straubenzee, Sir W.
Hayward, Robert	Viggers, Peter
Heathcoat-Amory, David	Waddington, David
Heddle, John	Wakeham, Rt Hon John
Hickmet, Richard	Walden, George
Hogg, Hon Douglas (Gr'th'm)	Wardle, C. (Bexhill)
Holt, Richard	Whitfield, John
Hooson, Tom	Whitney, Raymond
Howard, Michael	Wiggin, Jerry
Howarth, Alan (Stratf'd-on-A)	Wolfson, Mark
Howell, Rt Hon D. (G'ldford)
Howell, Ralph (N Norfolk)	Tellers for the Noes:
Hubbard-Miles, Peter	Mr. John Major and
Hunt, David (Wirral)	Mr. Archie Hamilton.

Question accordingly negatived.

Question proposed, That the clause stand part of the Bill.

Mr. Terry Davis

I thought that some other amendments had been selected for debate on clause 27.

The Chairman

No.

Mr. Davis

The list of amendments that I obtained in the Lobby, Mr. Walker, shows that you selected amendments Nos. 61, 62 and 63 to be debated together—

The Chairman

Order. Those are to schedule 8, not to clause 27.

9 pm

Mr. Davis

I beg your pardon, Mr. Walker.

The Government have said that their aim with the clause and the schedule is to pursue fiscal neutrality. One way to achieve that would be to abolish the composite rate on building society accounts, as has been urged by the banks, the Wilson committee and the National Consumer Council. That proposal has been rejected by the Economic Secretary because, he says, it will involve more civil servants, and he has suggested that instead we should introduce a new system of a composite rate of tax on interest on a whole range of accounts, which we shall discuss in our debate on the schedule.

The Government say that their proposal is neutral, but by neutral they mean that there is no effect on revenue. The clause is not neutral in its effect on people. It will redistribute the tax burden from taxpayers to non-taxpayers. That means that someone with a low income on which he is not liable for tax will become liable for tax on the interest that he receives on some of his savings—it depends on the form of savings. Someone whose income is as low as £30 a week could become liable for tax on the interest that he receives from savings, whereas a taxpayer on £300 a week will see his tax burden reduced. That is the Government's idea of neutrality.

The Trustee Savings bank has calculated that 20 per cent. of its customers are non-taxpayers, in that they do not pay income tax. Those people will now become liable for tax on the interest that they receive on their accounts in the Trustee Savings bank. The banks have calculated that 3 million people will now become liable for tax on interest, when they have not been liable for tax before.

I can give some examples of what this will mean. Let us consider the case of a retired man in his sixties who was self-employed and has sold a small business and invested the money, or someone who has been made redundant and has invested his redundancy payment, in one of these accounts. I have a letter from one such person. He explains that he is 55 years old and has been unemployed for two years. His total savings, accrued during 31 years of employment, amount to £20,000 and he has increased them with his redundancy payment. He receives no benefits from the social security system and has no earnings, because he is redundant. His sole source of income is the interest of £2,000, before tax, on his savings. As he says in his letter, I exist (rather than live) on my interest topped up with steadily declining capital. That man would not have been liable to income tax, because he is married, but he will now pay tax on the interest that he receives.

There are many people in that situation, many of them in their 60s, who are waiting until they become entitled to their retirement pension, and they rely on the married man's tax allowance of £3,155 to avoid liability for any income tax.

The Government say that national savings are an alternative, but there is an important difference. National savings accounts do not provide a monthly income. They provide interest, which is paid on a six-monthly or annual basis. It is not possible for someone who has invested his redundancy payment or savings to obtain a regular monthly income from that form of investment. Therefore, people have to put their savings into other forms of investment, such as the Trustees Savings bank and other savings institutions where they can get the interest more frequently. One gentleman to whom I have spoken arranged for the bank to pay him the interest monthly so that he could have a monthly income. That is an important distinction between savings institutions and National Savings accounts.

Under the Government's proposals, 3 million non-taxpayers will be charged tax. They include not only the kind of people whom I have described, who have suffered from the effects of Government policies which have led to an increase in unemployment. They include those who have previously not been liable for tax on their small savings. They include people on supplementary benefit, pensioners and married couples whose income is less than £60 a week. The changes will benefit a similar couple on £350 a week, because they will be paying a lower rate of tax as a result of the composite calculation. I have already drawn attention to the contrast between the Government's policy on that and their policy on the investment income surcharge. That change benefits people whose income is £700 a week, and costs £360 million.

The Government are attacking small savers, particularly children, and we shall deal with this aspect in an amendment to the schedule. Not only children will be affected; so will their grandparents. That is the effect of the composite rate of tax. The Government have described the Budget as a savers' Budget. It is not. It may be an investors' Budget, but it certainly is not a savers' Budget. The Government have also described it as an incentive Budget. Where is the incentive to children to learn the habit of thrift, and where is the incentive for pensioners who have made sacrifices to save? We all know pensioners who have small amounts of money invested in various savings accounts which is intended for their burial. It is accrued and jealously guarded for that purpose. It is extremely important to those elderly people to have that money available, especially with the present death grant. For the first time the Government will be taxing the interest that these people receive on their small savings. Other old-age pensioners who save weekly or monthly to pay electricity, gas and rates bills and who receive small amounts of interest will now be taxed.

The Government are reducing the taxes paid by people who have capital of more than £70,000 and are introducing a tax for people who have saved a few hundred pounds who have not previously been liable to pay any tax at all on their income. We object to the clause in its entirety. In his reply to a previous amendment the Economic Secretary could only defend the Government's measures as being simple for taxpayers. It may be simplicity that he is aiming for, but the clause is expensive for non-taxpayers. It is being introduced at the expense of people who are not liable for income tax, and the Opposition oppose it.

Mr. Kirkwood

I feel obliged to make a short contribution to the debate. I came to the debate with a fairly open mind, and I have listened carefully to the arguments, but the Treasury Bench has come off worse by a long chalk in the argument.

I am not well up in the economic theory of the balance of advantage as between building societies, banks and the rest. It may be that at another time and in another place the Economic Secretary will be able to persuade me of the merits of the theology of that argument. It may be that the banks and building societies are not on a par under the present arrangements. From what I have heard tonight, one way to redress the balance would be to go in exactly the opposite direction from the way that has been chosen. The Economic Secretary has not chosen to do so and so we are faced with the position where the small depositors, who are the main depositors in banks such as the Trustee Savings bank in constituencies such as my own—the elderly and the young—will be clobbered by the way that they are treated for tax purposes. I am disappointed that the Minister did not even say that he would consider exemptions for institutions such as the Trustee Savings bank, the joint stock banks or banks north of the border. If he had done that, I should have listened with more sympathy to his arguments.

If the Government do not intend to countenance the suggestions that I have mentioned, they are guilty of pushing depositors towards investing in the National Savings bank. That is astonishing for a Conservative Administration. It is unexpected. I should never have believed that I would hear a Treasury Minister advocate such action.

I shall study what the Minister said about the amendments. I did not understand half of what he said. That may be due to my ignorance, but it may be because of the confusion which crept into the discussion on the amendments. I shall read Hansard carefully and return to some of the arguments on Report.

I have listened to the debate for a number of hours and I cannot ask my hon. Friends to support the Government if a Division is called. I shall advise my hon. Friends to vote against the clause because of the way in which the Government are treating small depositors and the effect that the proposal will have on the Trustee Savings bank. We heard a quote from a letter—

The Chairman

Order. I am reluctant to interrupt the hon. Gentleman, but we seem to be trespassing on amendments Nos. 61, 62 and 63 which refer to specific deposit takers. I hope that we will not trespass too far on amendments which lie ahead.

Mr. Kirkwood

I am grateful for that advice, Mr. Walker. I was saying that the Government have not convinced me that the arrangements will give the necessary protection to small depositors. For that reason, the Government cannot expect support from these Benches. I hope that they will come back on Report with some remedies.

Mr. Ian Stewart

I dealt with the arguments thoroughly when replying to the amendments to the clause, so I do not think that I need respond to the hon. Member for Hodge Hill (Mr. Davis). The hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood) did not contribute to the earlier debate. I am sorry that I did not persuade him and others of the merits of the case.

I have always said that there are advantages and disadvantages in the composite rate scheme. The disadvantage is that non-taxpayers who deposit their money in the big banks and building societies will be subject to the composite rate. They do not have to do that. Therefore, it is not right to say that they are being clobbered. They have the opportunity to use the National Savings bank. It is right to keep that avenue open for them.

Mr. Campbell-Savours

Such people may have that opportunity, but under that scheme they can withdraw money only every six months. How can the Minister expect people who want a monthly income to invest in that way?

9.15 pm

Mr. Stewart

Arrangements for National Savings vary greatly between the different instruments and accounts. The hon. Gentleman raises an interesting point, which we shall consider. We are always anxious that National Savings should meet the needs of those who put their savings into them.

On the general point, I repeat to the hon. Members for Roxburgh and Berwickshire and for Hodge Hill that there are many factors besides the composite rate which determine where depositors place their money, and I believe that in the proposals as they stand the advantages greatly outweigh the disadvantages.

Mr. Terry Davis

Is the hon. Gentleman giving an assurance that he will consider the possibility of interest being credited to National Savings accounts on a monthly basis? I should be grateful for that assurance.

Mr. Stewart

That is not a matter for the Finance Bill. As I said—and this embraces the point that the hon. Gentleman made—we are always open to suggestions, and I heard what he said.

Question put, That the clause stand part of the Bill:—

The Committee divided: Ayes 123, Noes 18.

Division No. 279]	[9.15 pm
AYES
Alison, Rt Hon Michael	Gow, Ian
Amess, David	Gower, Sir Raymond
Ashby, David	Gregory, Conal
Baker, Nicholas (N Dorset)	Griffiths, E. (B'y St Edm'ds)
Baldry, Anthony	Griffiths, Peter (Portsm'th N)
Bellingham, Henry	Grist, Ian
Benyon, William	Ground, Patrick
Biggs-Davison, Sir John	Gummer, John Selwyn
Boscawen, Hon Robert	Hamilton, Neil (Tatton)
Bowden, Gerald (Dulwich)	Harris, David
Bright, Graham	Hawkins, Sir Paul (SW N'folk)
Brinton, Tim	Hayes, J.
Brown, M. (Brigg & Cl'thpes)	Hayward, Robert
Buck, Sir Antony	Heathcoat-Amory, David
Butterfill, John	Heddle, John
Carlisle, Kenneth (Lincoln)	Hickmet, Richard
Chapman, Sydney	Hogg, Hon Douglas (Gr'th'm)
Chope, Christopher	Holt, Richard
Clarke, Rt Hon K. (Rushcliffe)	Hooson, Tom
Clegg, Sir Walter	Howard, Michael
Conway, Derek	Howarth, Alan (Stratf'd-on-A)
Coombs, Simon	Howell, Rt Hon D. (G'ldford)
Cope, John	Howell, Ralph (N Norfolk)
Couchman, James	Hunt, David (Wirral)
Cranborne, Viscount	Hunter, Andrew
Currie, Mrs Edwina	Jackson, Robert
Dunn, Robert	Jessel, Toby
Durant, Tony	Jones, Gwilym (Cardiff N)
Eggar, Tim	Jones. Robert (W Herts)
Evennett, David	Key, Robert
Fallon, Michael	Knight, Gregory (Derby N)
Farr, John	Lang, Ian
Finsberg, Sir Geoffrey	Latham, Michael
Forman, Nigel	Lawler, Geoffrey
Forth, Eric	Lennox-Boyd, Hon Mark
Fraser, Peter (Angus East)	Lester, Jim
Freeman, Roger	Lyell, Nicholas
Galley, Roy	Macfarlane, Neil
Goodhart, Sir Philip	MacKay, Andrew (Berkshire)
Goodlad, Alastair	Major, John

Mather, Carol	Stanbrook, Ivor
Miller, Hal (B'grove)	Stevens, Martin (Fulham)
Mills, Sir Peter (West Devon)	Stewart, Ian (N Hertf'dshire)
Molyneaux, Rt Hon James	Stradling Thomas, J.
Moore, John	Sumberg, David
Murphy, Christopher	Thatcher, Rt Hon Mrs M.
Neubert, Michael	Thomas, Rt Hon Peter
Newton, Tony	Thompson, Patrick (N'ich N)
Powell, William (Corby)	Tracey, Richard
Rathbone, Tim	Twinn, Dr Ian
Rees, Rt Hon Peter (Dover)	van Straubenzee, Sir W.
Renton, Tim	Viggers, Peter
Rhodes James, Robert	Waddington, David
Roe, Mrs Marion	Walden, George
Ryder, Richard	Wardle, C. (Bexhill)
Sackville, Hon Thomas	Whitfield, John
Sainsbury, Hon Timothy	Whitney, Raymond
Shelton, William (Streatham)	Wiggin, Jerry
Sims, Roger	Wolfson, Mark
Smith, Tim (Beaconsfield)
Soames, Hon Nicholas	Tellers for the Ayes:
Spencer, Derek	Mr. Donald Thompson and
Spicer, Jim (W Dorset)	Mr. Archie Hamilton.
Squire, Robin

NOES
Banks, Tony (Newham NW)	Howells, Geraint
Bell, Stuart	Hughes, Simon (Southwark)
Bermingham, Gerald	Kennedy, Charles
Campbell-Savours, Dale	Kilfedder, James A.
Cocks, Rt Hon M. (Bristol S.)	Kirkwood, Archibald
Cohen, Harry	McDonald, Dr Oonagh
Cook, Frank (Stockton North)	McWilliam, John
Davis, Terry (B'ham, H'ge H'l)	Skinner, Dennis
Dobson, Frank
Fisher, Mark	Tellers for the Noes:
Gould, Bryan	Mr. Austin Mitchell and
Hamilton, W. W. (Central Fife)	Mr. Frank Haynes.

Question accordingly agreed to.

Clause 27 ordered to stand part of the Bill.