HC Deb 17 July 1986 vol 101 cc1282-90
Mr. Ian Stewart

I beg to move amendment No. 18, in page 42, line 41, leave out 'in subsection (2)' and insert the same basis as the banks in regard to payment of interest. In his Budget statement on 19 March 1985, he said: On 6 April, the banks will move over to the composite rate system for the payment of tax on bank interest. I now need to legislate to put the corresponding composite rate payments by building societies on a similar footing, starting next year. This is the most important sentence of all: This will not produce any additional revenue." —[Official Report, 19 March 1985; Vol. 75, c. 797.] It is no secret, because it has been widely commented upon in the press and I understand that there was an item about it on the radio this morning, that some societies, notably the Woolwich building society and the Leeds Permanent building society have complained that, contrary to the Chancellor's intention, there is substantial extra revenue, and they are having to pay it. The Woolwich has estimated that the provisions will cost it £65 million. I have seen it suggested that the extra burden on the entire building society movement may be in excess of £400 million.

We must ask how that lies with the Chancellor's intention that there should be no additional revenue. I think that I should explain how it arises. I shall take the example of the Woolwich building society, which has been most assiduous in ensuring that people understand its case. We are talking of a composite rate tax which is charged on interest paid to depositors in building societies, which is then deducted by the societies when they make interest payments to depositors, and which then has to be handed over to the Revenue.

In the old system, that tax was deducted by the societies when the interest was paid to the depositors and an amount was subsequently paid over to the Inland Revenue based on the interest paid in the society's accounting year ending in the tax year in question, sometimes called the basis year. In January of this year the Woolwich building society paid about £138 million to the Inland Revenue—this was the tax for the tax year 1985–86—based on the interest paid to depositors in the 12-month accounting period to 30 September 1985. Had the system remained unchanged I understand that there would be no dispute whatever between the Revenue and the society that the payment last January discharged the society's liability for the full tax year 1985–86, that is, to 5 April 1986.

Now that the system has changed, that is where the problem arises. The purpose of the change, which no one challenges, is to secure that tax in future should be paid quarterly in arrear on the actual payments made by the society to its depositors, and these payments will be made at the end of February, May, and November in each year. However, there is a transitional problem involved in moving from the old to the new system.

I would remind my hon. Friend that when this happened to the banks—and it happened a year earlier—the simple solution was taken of dropping out a year. No attempt was made to tax any interest twice. When the system moved from the preceding year basis to the actual basis, the banks simply had one year's interest dropped out of the system.

With the building societies, the Treasury has chosen to adopt a different tactic. The regulations, to which my hon. Friend referred, took the device of deeming some of the interest that had been paid to have been paid later than the dates on which it was actually paid and then to take that interest and tax it under the new system even though—this is the point that the societies make, to which I am bound to say I have not seen a convincing answer—it has already been covered by the tax paid under the old system.

My hon. Friend in his discussions with the society says that what he is doing is bringing forward the date of the society's liability to hand over the tax due. What the regulation does—and this is the point where my hon. Friend may be misdirecting himself—in the case of the Woolwich is to take the interest payments for the period 1 October 1985 to 28 February 1986, even though all basic rate income tax liability upon them has been fully discharged by the payment made last January, and deems them to have been made at a later date for the purpose of taxing them again.

By any normal interpretation of the words, that is double taxation. I ask my hon. Friend to bear in mind that, although the tax is collected vicariously from the building societies, it is in fact a tax upon building society investors in respect of the interest received by the investors. On the occasion of the first payment of tax, the investors duly received the appropriate credit, namely, the discharge in full of their basic rate income tax liability on the interest. On the occasion of the second taxation which the transitional provisions now impose, the second interest payment, of course, being entirely fictitious, the investors get no extra credit. This is, therefore, extra taxation.

I call in aid the fact that, in order to support amendment No. 18, the Treasury tabled a Ways and Means resolution, because of course it is raising extra tax. Without the Ways and Means resolution, it would have no power to do this. The House considered that on 8 July.

Where does this leave us? The Inland Revenue, for reasons that may well be imagined, instructed the draftsman to effect the transition in such a way as to defeat the Chancellor's expressed intention that This will not produce any additional revenue. The way that the draftsman has done that is by using the words, found in line 6, not previously brought into account. That will allow the Revenue to claim, in the case of the Woolwich, that the interest that it paid for the period between 13 September and 28 February this year has not been brought into account arid so can be taxed further by the deeming system under the new arrangements.

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That is wholly misconceived and it is entirely wrong in principle. The principle of taxation has been clear for many years. In the well-known case of Fry v. The Burmah Corporation in 1930, the judge said You do not tax the years by which you measure; you tax the year in which you tax"— in this case 1985–86— and measure by the years to which you refer. In consequence of the general principle of income tax law, the payments of tax made by the Woolwich and all other building societies on or at 1 January this year represented tax on all the interest received by their investors during the whole of the year of assessment ending 5 April 1986. Any attempt to bring some of those interest payments back into charge a second time is double taxation; yet that is precisely the effect of the words "brought into account" in the amendment. It effectively subjects that income to tax twice over at a cost to the Woolwich of £65 million.

Is that really my hon. Friend's intention? It seems to sit uneasily alongside the expressed intention of my right hon. Friend the Chancellor of the Exchequer in the Budget last year. He has assured me that it is not his intention, but I can equally assure him that the words of amendment No. 18 mean that that will happen. I and my right hon. and learned Friend the Member for Dover (Mr. Rees), IA, ho has considerably more experience in these matters than I have, and my hon. Friend the Member for Beaconsfield (Mr. Smith) have sought to remove those offending words "brought into account" and instead insert the words "charged to tax".

Those five months of interest have been charged to tax and, as I understand it, the Treasury does not dispute that. In his letter to the Woolwich of 11 March, my hon. Friend the Economic Secretary wrote: We agree that the payment of tax made by the Society at the beginning of this year [1986] satisfied its liability for the 1985–86 tax year. That appears to be common ground. They should not be taxed again, and our amendment will ensure that there is no double taxation; that my right hon. Friend the Chancellor's intention of no extra revenue is achieved; and that the Woolwich Equitable building society does not have to find an extra £65 million on top of the tax that it has already paid.

It is the job of the House to see that the Inland Revenue does not, in the words of yet another former Treasury Minister, my noble Friend Lord Bruce-Gardyne writing in the Sunday Telegraph this week, indulge in two bites at the self-same cherry. Without sub-amendment (a) that is precisely what the Government's amendment will do. With it, we shall avoid having two bites at the cherry.

Mr. Michael Meadowcroft (Leeds, West)

Appearing in unaccustomed garb as a Treasury spokesman, I am encouraged by being on the same side of the argument as the distinguished Members whose names are attached to the secondary amendment, namely, the right hon. Member for Wanstead and Woodford (Mr. Jenkin), the right hon. and learned Member for Dover (Mr. Rees) and the hon. Member for Beaconsfield (Mr. Smith). The problem affects not only the Woolwich but particularly in my case the Leeds Permanent which finds itself in exactly the same uncomfortable position.

When a Government change the basis for assessing income tax two dangers arise. One is that some items will be taxed twice, and the other is that during the transition the new tax may fall more heavily upon some taxpayers than others even though equal taxable amounts are involved, usually because of different dates of accounting. That is happening in this case. Both dangers are present in the amendment that has been proposed by the Treasury Minister.

The amendment is based on the view that the taxpayer has to bear the transitional cost. Surely that is a reversal of previous Government practice. For instance, when PAYE was introduced, the Exchequer bore the cost of the transitional period. We are not talking about small amounts. For building societies the cost will be between £500 million and £600 million.

I want to use the Leeds Permanent building society to give an example of the effects of the Government amendment. Up to now the Leeds Permanent has paid income tax on 1 January every year to discharge its liability up to 5 April. Under the new scheme some liability will have to be met at 1 October because the Leeds Permanent accounting year ends on 30 September. Therefore, the amount which had previously been taxed up to 5 April will become the basis for a second, duplicated tax liability under the new scheme.

As the right hon. Member for Wanstead and Woodford said, the amendment will create in effect a new six-month liability. I am aware that if things progress normally for building societies the actual cash will not be paid over. However, the point is that the new six-month liability will hang over the head of the building society in the event of the tax account being finally squared off. As I understand it, it is analogous to an individual with a private telephone paying the telephone rent in advance. Normally he could claim a rebate if he ceased to have the telephone, but under the Government scheme he would still be liable for the amount that had been paid in advance.

Because of their legal basis, building societies cannot take the same risk as an individual in regard to a small amount, such as telephone rental. Therefore, what had previously been a reserve on a building society's balance sheet will become a liability. The Leeds Permanent, for example, will have to sacrifice some £74 million of reserves. For the individual investor in the Leeds Permanent that is equal to a reduction in reserve backing of £31. The whole sum is equal to a quarter of the society's total reserves. It represents a fall in the society's reserve ratio of just over 1 per cent.

As the right hon. Member for Wanstead and Woodford said, unfairness is being perpetrated on certain building societies. It depends capriciously upon the accounting year of each society. For instance, the Halifax, the largest building society in the world, with an accounting year ending on 31 January, will escape most of the double taxation.

It is important to point out that none of us wishes to terrify investors in building societies because their reserves are massive and well able to cope. I am sure that the right hon. Member for Wanstead and Woodford would want to make that point about the Woolwich. We wish to avoid any sensational reporting of the possible effect of the double taxation. Nevertheless, I should have thought that the large number of investors in the Leeds Permanent and the Woolwich would cause the Government to think again.

The Government should accept the amendment proposed by the right hon. Member for Wanstead and Woodford, otherwise there will be few courses of action open to them. One would be for them to take on the cost of the transitional period themselves. That would enable the change to come into effect without its being unfair to some societies.

Another aspect is important. Despite vigorous representations to the Treasury, including those of my hon. Friend the Member for Colne Valley (Mr. Wainwright), who would have spoken tonight had he not been in America with a Select Committee— that is a salutary reason why I am performing in a less adequate way than he would have done—there has not been a response that the societies regard as adequate.

The Leeds Permanent and the Woolwich have commenced a High Court action to seek to have the relevant statutory instruments declared ultra vires. Yet Government amendment No. 18 will pre-empt that court action by giving explicit powers to the Government to make a statutory instrument. That suggests that the Government feel vulnerable to the court action in process, and that that amounts to retrospective taxation.

It is unfair for the Government to make the building societies bear the cost of the transition. If they must do so, it is absolutely crucial that it be done in a manner that affects all building societies equally, which is not the case under the present system. I hope that, if the House divides, hon. Members will support the secondary amendment.

Mr. Tim Smith (Beaconsfield)

My name appears in support of amendment (a) to Government amendment No. 18. Sometimes when we consider taxation, people say that it is just a technical matter. This is a technical amendment. On the other hand, £65 million worth of tax is at stake for the Woolwich building society. A substantial amount is also involved for the Leeds Permanent building society. It is a technical matter. On the other hand, a substantial amount of revenue is at stake.

I think that my hon. Friend the Economic Secretary to the Treasury is aware that I have taken an interest in the matter for some time. A few months ago, he kindly agreed to see Mr. Cumming of the Woolwich building society to discuss it. I do not want to enter into a debate about the merits of that. I was encouraged by the fact that my right hon. and learned Friend the Member for Dover (Mr. Rees), who is an expert in such matters, felt that substituting the words "charged to tax" for the words "brought into account" would put the matter beyond doubt.

I hope that it will be possible, if the Woolwich wishes to do so, to challenge the matter in the courts and for the courts to be able to determine whether there is double taxation. Although I am an accountant, I do not feel qualified to comment on that. I am not a tax specialist. I think that the Woolwich should be given that opportunity. That is why I support amendment (a).

Dr. McDonald

I support the amendment moved by the right hon. Member for Wanstead and Woodford (Mr. Jenkin). From the extent to which I have considered this complex matter and the advice that I have received not only from the Woolwich but from the Building Societies Association, I believe that there could be an element of double taxation involved in the way in which the regulations which govern the transitional period for the change and the way in which the composite rate of taxes is charged to building societies are framed. A figure of £65 million has been cited for the Woolwich. I think that it is about £40 million net. The overall figure for building societies over the next three years, beginning with this year, is about £450 million.

As the story unfolded, I could not help but wonder whether the Government, having lost various possible sources of revenue this year, such as the sale of water authorities, might have thought that it could gain more revenue over the next two or three years by this measure. I am sure that that is not the case—that there is some misunderstanding with the regulations or that the regulations have been ill conceived so that they impose the burden of double taxation which is quite unfair. That did not happen to the banks when the same tax regime was imposed on them. It is unfair that this should happen to the building societies.

There are two further problems. I understand that the matter has been discussed for a long time between the Economy Secretary to the Treasury and the Building Societies Association and the Leeds Permanent and Woolwich building societies separately. Last year the Building Societies Association had many discussions with the Inland Revenue. It made representations to, and had meetings with, Treasury Ministers. The council of the association recorded its grave concern about the effect of the transitional arrangements, but it concluded that the point had been pursued as far as possible.

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In pursuing the point with the Treasury, the problem that faces the Building Societies Association is that this affects building societies unequally. The accounting periods and the dates for the end of the accounting periods differ from one building society to another. Some building societies are little affected by the change. Others — in particular, the Leeds and the Woolwich building societies which have long accounting periods that finish at the end of September—are particularly hard hit by the double taxation element in the transitional provisions.

Therefore, I understand why it was difficult for the Building Societies Association to pursue this matter to the limit. The Economic Secretary knows that the Leeds and the Woolwich building societies were due to pursue it through the courts by means of a judicial review. They had applied for leave, leave had been granted, and proceedings were due to commence on 15 July. They fear that, if passed, the Government's amendment will preclude the possibility of pursuing the matter in the courts. They regard it as entirely unfair that the Government should have tabled this rather hasty amendment which precludes them from pursuing their action to any real effect.

In order to clarify the issue and to rule out, once and for all, the possibility of double taxation during the transitional period, I hope that the Economic Secretary will accept the amendment of the right hon. Member for Wanstead and Woodford. It would clarify the point and leave the Woolwich and the Leeds building societies to pay the right amount of tax due in the transitional period, but they would not have to pay double that amount. I hope that the Economic Secretary will accept the amendment. If he merely gives an assurance that double taxation will not be imposed, that will not be sufficient. What stands as part of the Bill when it becomes law is, as the Economic Secretary knows, what is significant, not what is said by way of comment on the meaning of amendments during a debate. By accepting this amendment, any injustice that is caused to building societies during the transitional period will be entirely avoided.

Mr. Ian Stewart

I shall try to respond to all the points that have been raised. I appreciated the balanced manner in which my right hon. Friend the Member for Wanstead and Woodford (Mr. Jenkin) introduced his amendment more than I have appreciated some of the comments on the subject that have been aired in the last few days.

My right hon. Friend suggested that some of the criticism was misconceived. Apart from retrospection, I hope to deal with the legal question before coming to the substance of the timing of the taxation.

I agree with my right hon. Friend that to introduce in the amendment words which ensure that a provision in last year's Finance Bill has the import that was intended is not retrospective legislation. He asked me about the point of a Ways and Means resolution. I asked exactly the same question, and I was told that if anybody had any doubt about it, it could conceivably require a Ways and Means resolution. The fact that the Government did not have any doubt about it did not seem to matter, but I bow to legal advice on that.

Mr. Patrick Jenkin

With the greatest respect, that does not dispose of the argument. The fact that whether an additional tax is being levied is in doubt, and the fact that my hon. Friend was advised that to put the matter beyond doubt he should have a Ways and Means resolution suggests that there is a prima facie case that there is an additional tax. Perhaps my hon. Friend should address himself to that.

Mr. Stewart

I note what my right hon. Friend says, but I do not accept that our amendment enlarges the ability of the Revenue, through regulations, to raise tax. Nevertheless, because there is a widening of scope, which in theory could enable regulations to be introduced of a wider form than might have been possible before, a Ways and Means resolution is apparently required. I only say what the position is as I am advised. However, I would not rely on that point.

In addition to the fact that the amendment makes sure that the section in last year's Finance Act operates as was intended, it was known at the time how the regulations should be formulated. That was widely discussed with the Building Societies Association. Although detailed provisions could be introduced into any Finance Bill saying that regulations shall provide A, B, C, D, all the way through to Z, if the basis and substance of the regulations are already known, there is a correspondingly lesser need to spell out so much in detail. The point on detail has now been raised, and that is why we are introducing it.

My hon. Friend the Member for Beaconsfield (Mr. Smith) touched on the legal question, as did other hon. Members. The purpose of the amendment is purely to ensure that the regulations as promulgated are within the vires of the power in last year's Finance Act to make them. It is not related to the content of the regulations on other grounds.

I have been told by a senior officer of one of the societies involved that the Government would be wrong to suppose that by means of the amendment we would be protecting ourselves from scrutiny of the regulations by the courts. I accept what I am told, but the amendment is directly addressed to the relationship between the section in last year's Finance Act and the regulations that follow.

Let me come to the substance and the claim of my right hon. Friend the Member for Wanstead and Woodford of double taxation. My first point on that is that the whole system of the transition has been designed to bring in, following the words of my right hon. Friend the Chancellor, which my right hon. Friend the Member for Wanstead and Woodford quoted, the same amount of money to the Revenue in 1986–87 as would have been brought in if there had been no change in existing practice. As far as I know, that is what the system will achieve. There is no question of this provision, through the regulations, increasing revenue to the Exchequer this year. It merely accelerates the payments made by some societies. The hon. Member for Thurrock (Dr. McDonald) pointed out that not all societies are affected equally; it depends on their year end.

If the Woolwich or, for example, the Leeds Permanent building society has, say, £60 million involved in the period between the end of its financial year and the end of the fiscal year, that amount would fall out of tax altogether if it were not for these provisions. That tax, although applicable to interest and dividends paid, would not be accounted for. It has been said that if we stated "charged to tax", instead of "brought into account", that would solve the problem for the Woolwich. It might do, although I do not know whether it would, but it would deprive the Revenue of a substantial sum. I do not know what the figure is exactly, but we are talking about hundreds and millions of pounds. I said that it "might" rather than that it "would", because we are talking, not about the society's tax, but about a tax on the investment income of depositors. There is a difference between the tax that a society or company pays itself, and a tax that is accounted in respect of interest paid. There is, indeed, a crucial difference.

In the case of the banks, there has not been such a scheme before, and so no comparison can be drawn. The money was paid gross to the recipients, and they paid income tax through their own assessments. Let us suppose that the tax regime of a building society, such as the Woolwich, had ceased — without going into these transitional arrangements — to be done through the composite rate of tax at the end of September 1985, and that gross payments had been introduced from that date. The amount of tax payable by the Woolwich in 1985–86 would have been identical, but there would have been income tax to pay on interest and dividends from October to March by investors and members. That money would have had to be paid to the Revenue.

The fact that a composite rate tax is being used means that it is collected on behalf of those investors and depositors, and subsequently paid to the Revenue. If the existing system had continued that would have been the amount of tax payable in relation to composite rate tax during the fiscal year 1986–87. We have had to do a bit of catching up. In order to put the building societies on a footing with the banks, with quarterly payments, they will have a rather smaller time lag between the time of collecting the composite rate and the time that it is paid.

Clearly, different societies will be affected differently. The longer the period before the end of the fiscal year that a society has its own year end, the more it has to catch up. The Woolwich and the Leeds Permanent building societies are having to catch up more, because their year end at 30 September is much earlier than that of the bulk of building societies, at 31 December.

The new scheme will merely provide, in the case of a 30 September society, that in the fiscal year 1986–87 the tax for which it accounts at the composite rate of tax on investments and deposits will be not only for the 12 months from October 1985 to September 1986, which it normally would have been under the old system, but for the five extra months to February 1987. Of course, I accept that this means—

It being Ten o'clock, the debate stood adjourned.

It being Ten o'clock, MR. SPEAKER proceeded to put forthwith the Question which he was directed by paragraph (1) of Standing Order 19A (Questions on Voting of Estimates &c.) to put at that hour.