§ Mr. William Powell (Corby)I beg to move amendment No. 55, in page 87, leave out lines 3 to 26 and insert—
FIRST TABLE Portion of Value Rate of Tax Lower limit Upper limit Per cent. £ £ 0 64,000 Nil 64,000 30 I begin by declaring an interest, in that I act as adviser to the Unquoted Companies Group.
SECOND TABLE Portion of Value Rate of Tax Lower limit Upper limit Per cent. £ £ 0 64,000 Nil 64,000 15.'. In his Budget speech on 13 March my right hon. Friend the Chancellor said:
Unnecessarily high rates of tax discourage enterprise and risk taking. This is true of the capital taxes, just as it is of the corporation and income taxes. It is a matter of particular concern to those involved in running unquoted family businesses. The highest rates of capital transfer tax are far too high and badly out of line with comparable rates abroad. I propose therefore, in addition to statutory indexation, to reduce the highest rate of capital transfer tax from 75 per cent. to 60 per cent. — [Official Report, 13 March 1984; Vol. 56, c. 299.]I welcome the reduction which my right hon. Friend announced in his Budget speech. The effect of the amendment is further to reduce capital transfer tax from 60 to 30 per cent. The amendment aims to tackle two problems in one. First, the indexation of capital transfer tax rates under the Finance (No. 2) Act 1983 has ignored the substantial increases caused by inflation between 1974 and 1982—
§ Mr. Campbell-SavoursWill the hon. Gentleman give way?
§ Mr. Powell—in the value of assets subject to tax.
§ Mr. Campbell-SavoursWill the hon. Gentleman give way?
§ Mr. PowellThe retail price index has increased by a factor more than 300 per cent. since 1974—
§ Mr. Campbell-SavoursOn a point of order, Mr. Armstrong. Is it in order for the hon. Member for Corby (Mr. Powell) to come to this Chamber and read his speech, especially since it is such an appalling one?
§ The First Deputy Chairman of Ways and Means (Mr. Ernest Armstrong)It is quite in order for hon. Members to refer to notes.
§ Mr. Campbell-SavoursBut he is reading his speech, Mr. Armstrong.
§ The ChairmanOrder. The hon. Gentleman has just started his speech, and some hon. Members make more references to notes than do others.
§ Mr. PowellThe retail price index has increased by a factor of more than 300 per cent. since 1974, so in real terms the tax on death is heavier over the range of £75,000 to £2.42 million than it was in 1974.
However, there is no logical reason for levying a tax on death at graduated rates. The suggested new tables in my amendment would exempt completely smaller estates up to the present ceiling proposed by the Government, and would introduce one rate of tax on all estates—30 per cent. on death and 50 per cent. on lifetime gifts. That is not as satisfactory as it would be were the tax on lifetime gifts abolished, which I hope my right hon. Friends will do in due course, but which I do not urge upon them tonight.
The yield from capital transfer tax on lifetime transfers, including the tax on discretionary trusts, was £30 million in 1981–82, which is the latest year for which figures are available. That figure compares with a peak of £32.8 million in 1978–79. Since capital transfer tax is collected in arrears, the figure for 1981–82 will have been little affected by the reduction in the rate of tax on lifetime transfers from 75 to 50 per cent., which was announced in 1981. In 1984 the top rate was further reduced to 30 per cent.
There are no published figures to enable an up-to-date estimate to be made of the yield of capital transfer tax on lifetime transfers. However, the current figure should be substantially less than £38 million; let us say £25 million. The amendment would reduce the yield of capital transfer tax on lifetime transfers by nil at the bottom of the scale and by half at the top. Let us call it an average of 25 per cent. A quarter of £25 million gives a full-year cost of some £6 million. That is about £2 million in the first year.
The total yield of capital transfer tax is forecast for 1984–85 to be £680 million. After the deduction of the £25 million which I have just analysed on lifetime transfers, the yield on death is some £655 million. Therefore, the cost of my amendment on the same basis as for lifetime gifts is a quarter of £655 million—that is, £164 million in a full year and £66 million in 1984–85. The total cost on death and lifetime transfers is therefore £170 million in a full year and £68 million in the first year.
As the Chancellor said in his Budget statement, the highest rates of capital transfer tax are far too high and are 617 badly out of line with comparable rates abroad. Of course, the provisions of the Finance Bill will reduce the maximum rate from 75 to 60 per cent., but this contrasts with a maximum rate in Scandinavia for tax on transfers to lineal descendants of 39 per cent., in the rest of the European Community minus ourselves of 27.22 per cent., and in other western European non-EC countries of 20.2 per cent. This contrasts with a rate of 20 per cent. in France and 35 per cent. in Germany.
§ Mr. FisherIs the hon. Gentleman aware of the proportion of total taxes, including social security contributions, that is paid as taxes on capital in this country? If he is, he will be aware that only Ireland, Luxembourg and Germany pay a lower proportion of tax than people in this country and that everybody else in the Common Market pays a great deal more.
§ Mr. PowellThe hon. Gentleman is entitled to his opinion. I simply dispute his facts.
§ Mr. PowellNo; I have just given way and I want to develop my argument on why it is necessary that there should be the change that I propose.
Experience shows that capital transfer tax is often a major and insurmountable barrier to the expansion of unquoted companies. The reason for this is simple. Capital transfer tax is a graduated tax and the cost of funding it from personal resources rises rapidly to prohibitive levels as the business grows. If the principal motivation is to keep the firm as a family company, capital transfer tax can be an absolute barrier to expansion that would otherwise be desirable commercially. Family firms desire to maintain control and to pass a secure and sound business to the next generation. Capital transfer tax therefore acts as a business disincentive tax. It acts as a direct disincentive to growth, in that beyond a certain size further expansion implies eventually a larger capital tax liability than can be met other than by selling the company and terminating its existence as an independent organisation.
The fiscal destruction of larger unquoted companies is doubly undesirable. First, by virtually every relevant criterion of efficiency, unquoted companies out-perform quoted companies. This applies to profit ratios, to the growth of net assets and to other profit and growth rates, all of which shows that unquoted companies are at a decided advantage over quoted companies. Yet the fiscal bias against unquoted companies relative to quoted companies, as characterised in the present structure of capital transfer tax, tends to lower the general efficiency of British industry.
Unquoted companies are relatively efficient because they are compelled to be so by their more limited financial base. They have to bear their own losses and they cannot afford cross-subsidisation or empire building. That characteristic also assists growth, since unquoted companies, in contrast to quoted companies, are not bound by market forces to distribute dividends and they therefore plough back a greater part of their revenue into investment, which tends to increase their capital transfer tax burden. That is absurd.
10 pm
The damage done by capital transfer tax on unquoted companies is social as well as economic.Unquoted 618 companies represent independent centres of economic power and, except to the extent that they are inhibited by capital transfer tax, they take a long view of the future, often extending over several generations.
By contrast, quoted companies are inevitably more influenced by short-term considerations, particularly the profit figures of last year and next year. Moreover, their decision-takers, because they are disposing of other people's money and not their own, are often more averse to risk than are decision-takers in unquoted companies. The safest course for salaried decision-takers is generally to keep in step with their counterparts in other companies.
The course that is often more profitable in the long term is to go against that trend and, therefore, although the principle of safety in numbers operating in the quoted sector tends to exaggerate cyclical variations between boom and slump, the devolution of decision-taking to locally based owner-managers, with a long-term view, has the opposite effect.
Many unquoted companies follow a policy of no redundancies, which can be justifiable commercially for an owner-managed company with a long time scale, even when it is not right for a quoted company subject to shorter-term pressures.
The depth and duration of the present recession has been increased by the dismantling of so many well-established unquoted family companies in recent decades because of the threat of estate duty and capital transfer tax. The economic recovery would be more rapid and enduring if the abolition of capital transfer tax enabled established and successful unquoted companies to make their full contribution once again.
Similarly, unquoted companies are dispersed all over the country and, unlike the head offices of quoted companies, are not concentrated in a small number of large cities. The existence of numerous independent centres—
§ Mr. Campbell-SavoursWill the hon. Gentleman give way?
§ Mr. PowellYes, at the end of the sentence. The existence of numerous independent centres of economic power and decision-taking helps to maintain activity away from the major centres of industrial production and the more prosperous areas of the country.
§ Mr. Campbell-SavoursInstead of saying that he would give way at the end of the sentence, the hon. Gentleman should have said that he would give way at the end of the page. Did he consult his constituents in Corby about his contribution to the debate? How many of his constituents will gain from the reduction of the CTT liability of those who have more than £80,000? Did the hon. Genleman ask his 55,000 constituents? If so, how many will benefit from his proposal—10 or 20?
§ Mr. PowellWe would not expect the hon. Gentleman to pursue a sensible argument. My constituents and the hon. Gentleman's constituents will benefit from all steps taken to strengthen new companies that are growing. Companies are growing in my constituency particularly rapidly and my amendment will assist that process. I shall show how that relates to a number of initiatives taken by the Government in the past three or four years. However, CTT and estate duty have prevented unquoted companies from making their maximum contribution to keeping up 619 the level of activity in the peripheral regions, including the constituency of the hon. Member for Workington (Mr. Campbell-Savours). Once an independent company is sold or taken over, it becomes merely the branch or subsidiary of a large concern. Instead of being relatively immune to eonomic storms by reason of the long-term horizon of its owner-managers, it becomes exceptionally vulnerable because the new owner will treat it as a prime candidate for retrenchment if business turns down.
Capital transfer tax on unquoted companies has made a significant contribution to the problems of the disparity between the peripheral areas and the centre. Although my arguments are focused on unquoted companies, they go wider. Other assets as well as unquoted company shares are better held personally than by institutions. For example, it is also desirable for directors and managers of quoted companies to have substantial holdings of their companies' shares. This amendment will at last reduce the rate schedule of CTT, which has never been indexed for the more-than-threefold increase in prices between 1974 and 1982 and which rises to two and a half times the average top rate in the rest of Europe on transfers to beneficiaries in the direct line.
The amendment will still leave our own rate higher than those that exist in the rest of the European Community, but it will be a major benefit to a vital sector of our economy and will assist in the process that we have begun of regenerating British industry. In the past three or four years there have been the business start-up scheme, the loan guarantee scheme and the business expansion scheme, which have enabled a large number of new companies to he formed. This reform in CTT will enable these new companies to grow and prosper down the generations, and it will be a major step to ensuring that they are able to take their place alongside existing well-established companies. I commend the amendment to the Committee..
§ Mr. Peter ReesThe Committee will agree that my hon. Friend the Member for Corby (Mr. Powell) moved his amendment with great lucidity and that it raises a point of considerable importance.
620 On the more technical aspects, I must tell the Committee that the amendment would not fundamentally simplify the tax, because it would still be necessary to calculate the complex reliefs. A compelling argument, to my mind, is that the cost would be considerable. The Chancellor and I have to bear that in mind. For 1984–85 the cost would be £55 million, and in a full year it would be £175 million. There are slight discrepancies between my figures and those of my hon. Friend, but we can iron them out later if necessary. The figures are broadly similar.
My right hon. Friend the Chancellor of the Exchequer made it clear that the Budget has to be neutral. A cost of this nature could not be absorbed. However, I welcome my hon. Friend's commendation of the relief that we have introduced in clause 98. We may debate the scope of the clause on clause stand part.
My hon. Friend developed an attractive argument about the unquoted company and I should be the first to recognise the contribution that such companies make to the economy.
My hon. Friend was pressed by the hon. Member for Workington (Mr. Campbell-Savours). The hon. Gentleman must recognise that, in Corby and elsewhere, unquoted companies are making their contribution to the provision of jobs. Notwithstanding their rather odd contribution to job creation in the form of the national income surcharge, I know that the Opposition are preoccupied—as we are—with the need to provide jobs.
I hope that my hon. Friend will feel that justice has been done to his powerful case. In view of the considerable cost of his amendment in tax terms, I hope that he will not feel disposed to press it to a Division.
§ Mr. William PowellIn view of the considerable step that my right hon. Friend the Chancellor has been able to take in the Budget to reduce the maximum rate from 75 to 60 per cent., I do not think that it would be right to press the amendment, and I therefore beg to ask leave to withdraw it.
Amendment, by leave, withdrawn.