Taxation of Savings

HC Deb 15 May 1989 vol 153 cc124-40 11.19 pm

The Economic Secretary to the Treasury (Mr. Peter Lilley)

I beg to move, That this House takes note of European Community Document No. 4763/89 relating to taxation of savings; and supports the Government's view that the proposals are unnecessary, ineffective and damaging.

Mr. Teddy Taylor (Southend, East)

On a point of order, Mr. Deputy Speaker. I wonder whether you can help me. The document that we are debating, No. 4763/89, is printed partly in the French language and some of the information contained in it is not in the English part of the document. It provides additional information that is not available in the English part. Is it in order for us to debate a document that is printed partly in a language other than English?

My second point of order relates to Standing Order No. 109, which states: No document received by the clerk of a select committee shall be … altered without the knowledge and approval of the committee. My understanding is that the document considered by the Select Committee on European Legislation was wholly in the English language, whereas the one that we have obtained from the Table Office is partly in French. I wonder whether you could give us some guidance, because my understanding is that when the matter was raised previously, in the early 1900s when another language was used in the House, it was declared to be out of order.

Mr. Deputy Speaker (Sir Paul Dean)

The matter is in order. The Standing Order which the hon. Gentleman has quoted does not apply to the House, but the points that he is making are perfectly legitimate ones to make in the debate.

Mr. Tony Marlow; (Northampton, North)

On a point of order, Mr. Deputy Speaker.

Mr. Deputy Speaker

Of course, I shall take the point of order, but I remind the House that the debate has started and that we are cutting into debating time.

Mr. Marlow

I am grateful, Mr. Deputy Speaker. Will you clarify the ruling that you have just given? It is not likely to happen, but were it to happen that the document upon which the debate was based was totally in a foreign language, are you saying that the debate would go ahead?

Mr. Deputy Speaker

I am saying that there is nothing in the Standing Orders to cover this matter in relation to debates in the House. But these are perfectly legitimate matters to raise during the debate.

Mr. Jonathan Aitken (Thanet, South)

As a historian, Mr. Deputy Speaker, you will be aware that in the past hon. Members have been ruled out of order for making parts of their speeches in a foreign language—especially Mr. David Lloyd George, then a rising Welsh Back-Bench Member—

Mr. Alex Carlile (Montgomery)

It was not a foreign language.

Mr. Aitken

He was ruled out of order for using a tongue other than the English language. Since your predecessors have ruled out of order the speaking of Welsh, why is it in order for someone to refer to these documents in French?

Mr. Deputy Speaker

We are not dealing with speeches in the House. I was asked about the language of documents, and I made clear what the Standing Orders cover. But I repeat that these are legitimate points to make in the debate.

Mr. Marlow

Further to that point of order, Mr. Deputy Speaker.

Mr. Deputy Speaker

Order. I have dealt with the hon. Gentleman's point, and I cannot see that any points of order arise.

Mr. Lilley

It may be for the convenience of the House if I address it in English—

Mr. Marlow

If it is not proper to use a foreign language in debate, is it possible, is it proper and is it in order to read extracts from this document, which happens to be in a foreign language, during the debate?

Mr. Deputy Speaker

That is hypothetical.

I should say that Mr. Speaker has not selected the amendment.

Mr. Lilley

I shall speak in English, Mr. Deputy Speaker.

The Government believe that the Commission's proposals for a compulsory withholding tax Community-wide are unnecessary, ineffective and damaging. The origin of the proposals lies in the capital liberalisation directive which required the Commission to support proposals on reducing tax evasion and required the Council to take a position by the end of June. But it did not require the Council to accept those proposals. It specified clearly that acceptance would require unanimity, and the implementation of the remainder of the capital liberalisation directive, with the eventual abolition of exchange controls throughout the Community, in no way depends upon agreement on those proposals.

There are plenty of arguments of principle—no doubt we shall hear them this evening—and plenty of reasons why the House may not wish to give up its sovereign right to impose taxes or not to impose them. In any case, the practical arguments against the proposal are overwhelming. In the first place, it is clearly unnecessary. We can easily understand the fears of countries that are about to abolish exchange controls that abolition may give rise to an outflow of funds to evade taxation. Those fears were expressed in the House when exchange controls were abolished in 1979, but our experience provides no evidence to suggest that the abolition of exchange controls is likely to be followed by a significant outflow of tax avoidance funds.

Germany, which has had no exchange controls for a long time, had no measurable problem of outflow of tax avoidance funds until it imposed a withholding tax. That shows that it is not capital liberalisation but the very imposition of a withholding tax that leads to an outflow of tax avoidance funds.

Moreover, those who are prepared to evade their countries' tax laws are likely to have been prepared also to avoid their exchange controls before they were abolished.

In addition, a network of double taxation agreements between countries, including the United Kingdom, largely meets the requirements of minimising tax evasion.

We believe that the proposal will also be ineffective. It contains several loopholes that will enable people to avoid paying tax. It rightly specifies that there will be no withholding tax on Eurobonds and contains a rather imprecise proposal that there should be no tax on interest to commercial companies. There is also the possibility of not having a withholding tax on small savings.

More important than that, it is quite clear that those who wish to avoid paying the withholding tax can simply put their money outside the Community altogether. New York, for example, has no withholding tax and in Switzerland fiduciary deposits attract no withholding tax. No doubt if the Community went ahead and imposed such a tax, tax havens would spring up around it like mushrooms over night. They would be the welcoming recipients of funds from the Community.

The ambition is expressed in the directive not only that the Community should establish a withholding tax but that agreement should be reached that all other countries should do likewise. That is wholly unrealistic and represents a tacit admission that, without such agreement globally, the proposal would merely lead to funds being diverted outside the Community.

It is a damaging proposal, not just because it would lead to an outflow of tax avoidance funds but because it would lead to an outflow of perfectly legitimate funds and, indeed, to the non-retention of funds from abroad because, although they are not subject to withholding tax in principle, many foreign holders of funds will not wish to go through the process of identifying themselves, reclaiming tax and going through the bureaucratic procedures necessary once a withholding tax exists.

Mr. Marlow

Does my hon. Friend accept that the secret reason, the secret agenda, the real reason for this proposal for a withholding tax is not because the European Commission thinks that a withholding tax is a good, natural, decent or reasonable tax? It is a stalking horse. What they want is other European sources of finance. They are trying this one out now, and if they do not get this one, they will try another one.

Mr. Lilley

That may be one of the motives. Ours is not to speculate about the motives but merely to determine whether it is a desirable proposal. I believe it to be a damaging proposal.

The other problem—apart from the outflow of perfectly legitimate funds and the outflow of funds from abroad—is that such a tax would drive financial markets abroad. That is a more serious problem from Britain's point of view. A withholding tax is incompatible with the operation of many commercial wholesale financial markets. Deposits change hands frequently and it is virtually impossible to keep track of the identity of those who own them, to whom the interest is payable and whether they are residents and therefore liable to withholding tax or non-residents and therefore not liable.

Where a discount is payable that diminishes over time, which many financial instruments enjoy, it is difficult to tell who the declining discount is attributable to and who not and therefore how a withholding tax could be levied on it. There are numerous other difficulties in the operation of the wholesale markets that are incompatible with the workings of such a tax and that is extremely important to the United Kingdom as it has the largest and most successful wholesale markets.

The German experience demonstrates emphatically that the views expressed are not alarmist but practical and empirically verified. Preceding the imposition of the withholding tax in Germany in January and during the subsequent four months there has been a massive outflow of capital. As a result, an interest rate differential has been established whereby it is more expensive to borrow deutschmarks in Germany than it is outside that country. Germany has therefore done itself the disservice of raising the cost of borrowing to its Government, industry and people relative to those abroad who borrow deutschmarks. The German banks put the cost of imposing the withholding tax at about $420 million. Small wonder that the Germans have decided to abandon the experiment of withholding tax and, on Friday, came out against the idea of a European-wide withholding tax.

Opposition to the proposal is widespread not just in this country from the British Bankers Association and Building Societies Association, but from individual institutions in the financial market. The European equivalent to the Confederation of British Industry has said that it thinks that the withholding tax could turn out to be more harmful than the illness it was meant to cure and that it would inevitably lead to a flight of capital from Europe.

Mr. Teddy Taylor

Can my hon. Friend explain how the withholding tax would work in relation to British building societies that have special interest rate arrangements?

Mr. Lilley

At present we have a composite rate tax on deposits in building societies and banks up to £50,000. Over and above that, although the holder of such deposits is liable to tax, we do not withhold it at source as such large sums are often mobile, involved in rapid financial transactions and therefore difficult to follow. The liability remains, but no CRT above that £50,000.

Mr. Taylor

How would the withholding tax work on British building society accounts?

Mr. Lilley

If the proposal were implemented, we would be required to impose a withholding tax, not just the present one of 21 per cent. up to £50,000, but at least 15 per cent. on all deposits, including those above £50,000.

The United Kingdom has argued consistently, on the basis of its experience, against the proposal and our arguments have been making increasing headway. We have been joined by Luxembourg and the Netherlands in opposing the directive and now most emphatically by the Germans. Criticisms have also been expressed by Greece and Portugal, which are particularly worried about its impact on remittances from emigrants, and the Irish Republic is also critical.

The German decision to suspend its own withholding tax from July of this year effectively delivers the coup de grace—if I am allowed to use that phrase in this debate —to the proposal. Those who persist in pursuing the idea are rather like the German philosopher Hegal who, on being told that his scientific theories had been refuted by the facts, declared: So much the worse for the facts". The German experience with its withholding tax has proved emphatic and final.

Fortunately, the Commissioner responsible for taxation, Madame Scrivener, has declared herself to be pragmatic and flexible and I believe that she will not long detain the Commission or deflect the Community with the proposal from the more important objective of completing the single market. I hope that the House will send a clear message to the Community that it does not believe that the Community's interests will be best served by a withholding tax of this kind.

11.35 pm

Mr. Chris Smith (Islington, South and Finsbury)

We are, effectively, discussing two documents. The first deals with the proposals for withholding tax and the second with the proposals for co-operation to combat tax evasion on investment income.

The Opposition approach the document on withholding tax with considerable scepticism and caution. We share many of the Government's concerns about the proposal. We take a more sympathetic view of the second document than do the Government.

The Commission's aims for withholding tax initially sound laudable. First, it aims to ensure that the differences between the tax regimes of member countries do not distort and impede the process of capital movement liberalisation. Secondly, it aims to promote genuine, cross-frontier competition in financial services. With the approach of 1992 and the prospect that Britain's financial services industry could take a substantial share of European activity in the financial services sector, genuine cross-frontier competition is important.

Thirdly, the Commission says that it wishes to acknowledge that complete harmonisation is neither necessary nor desirable at the moment. Finally, it says that it wishes to maintain the internal balance of the systems for the taxation of income in the different member states. I shall return to that point, because it is crucial to the argument about our response to the document. The Opposition fear that the proposed directive does not secure the aims that the Commission says that it will.

Our concerns are fivefold. First, we believe that the internal balance of systems of taxation is extremely important. The directive might provide the possibility of upsetting the internal balance which this Parliament might seek through the British taxation systems. We have criticisms of the present internal balance struck by the Government. We were discussing that precise point only last Wednesday in relation to the extremely generous provision which the Government are currently making for the tax provisions on equity saving, as opposed to other forms of saving. However, it is important for us to preserve the possibility of striking a balance which might be different from that sought by the commission.

We do not have any quarrel with the principle of a witholding tax, but we might, as a country, wish to consider the establishment of thresholds that might fall foul of such a directive. We might wish to seek differences between different forms of saving and their tax treatment. In addition, we might wish to use the tax system to promote industrial investment by means of individual contribution. All those possibilities might, in some circumstances, be ruled out by the provisions of the proposed directive. We believe that it is important, within the internal balance of our taxation system, to preserve considerable flexibility.

Secondly, we fear that the loopholes that the Commission suggests—the Economic Secretary spelt this out—provide the opportunity for a coach and horses to be driven through its own proposals. Such loopholes include the exemptions for particularly designated savings income, for the vague attribution of industrial or commercial income, for residents of third countries and for international loans, such as Eurobonds. Those loopholes provide a fundamental insecurity to the system which they seek to establish.

Thirdly, we must recognise that the option would remain open to Governments —even if such a directive were brought in—to use interest rates as a financial market booster if flexibility in fiscal measures were removed. The temptation to switch from the use of fiscal policy to monetary policy would become greater under such a system.

Fourthly, we are worried that it appears from the documents that, in one respect, the Commission wishes to treat capital gains in some respects as pure investment income. There is a strong argument for treating income from whatever source in similar fiscal ways. There is a bias in the United Kingdom fiscal system against earned income; it should be rectified, but we are not sure whether article 2(2) of the directive is the right way in which to go about that.

Finally, we are concerned that there are practical difficulties for the wholesale markets, as the Economic Secretary outlined, and that the directive might well impede the efficient operation of those markets.

We have a number of serious doubts about the contents of the proposed directive on withholding tax. Accordingly, we shall not seek to divide the House, because we share the Government's doubts on the issue. However, the Government are being too alarmist in believing that such a proposal will have an adverse impact on the City and financial institutions. One is tempted to ask whether they can stand up to a world of competition on equal terms. If they can, they should not be worried by provisions such as these. Nevertheless, our doubts require careful discussion with other member states.

We take a rather more robust view of the second document, on co-operation to combat tax evasion, than the Government. We do not believe there is an absolute necessity to link to the proposals. The second document could he implemented, with modifications, before the first. It seems entirely sensible that member states should remove administrative barriers to the exchange of information in order to assist the process of identifying and clamping down on tax evasion. The document goes out of its way to stress that there should be no attempt to breach doctrines of bank confidentiality, but within administrative practices it identifies scope for greater co-operation. The Government should consider in their response not only the administrative burdens that that might place on the Inland Revenue but the possibility of advantage to our Inland Revenue from information gathered by other member countries' revenue departments.

The problem with the Government's response becomes clearest in their explanatory memorandum: The Government is concerned that … the use of tax investigation resources may be dictated by overseas priorities to the detriment of domestic priorities. What domestic priorities? It is quite clear that our Government have devoted far too little attention to cutting out tax evasion. They have not given sufficient resources to the Inland Revenue to enable it to tackle tax fraud. Only last Wednesday, during the debate on the Finance Bill, my hon. Friend the Member for Newcastle upon Tyne, East (Mr. Brown) pointed to the considerable manpower losses in the Inland Revenue that the Select Committee on the Treasury and Civil Service has identified.

A total of 260 tax inspectors left the Inland Revenue in 1987–88 and 170 left in the previous year. Let us be quite clear. The average yield of a grade 7 tax inspector undertaking accounts work in one of the specialised tax offices dealing with, in this instance, large commercial firms was almost £1 million per head in 1987–88. Loss of manpower within the Inland Revenue is serious and we know that even before the relative decline in Inland Revenue staffing, the Revenue was understaffed.

The Government have been dragging their feet on the need to crack down harder on tax evasion. That is in sharp contrast to the approach by the Department of Social Security. It is a classic case of one law rigorously pursued for the poor and another languorously applied to the rich. The directive would help in a small way to improve our performance and the performance of other member states in tackling tax evasion. We urge the Government to support it rather more enthusiastically than they appear to be doing.

11.46 pm

Mr. Teddy Taylor (Southend, East)

We should welcome straightaway this very tough motion submitted by the Government because it appears to indicate a change of attitude. I welcome that, and I think that all those who take a genuine interest in the European Community will also welcome it. In the motion the Government condemn as unnecessary, ineffective and damaging a proposal which, I understand, all the Ministers in the Council agreed to ask for only 12 months ago.

We have got a major change. Twelve months ago we wanted a proposal to be considered and now we quite rightly say that it is ineffective, damaging and nonsense. It would be a mistake not to welcome what is obviously a clear change of heart by the Government on the presentation of this mass of crazy Eurodocuments which push forward bureaucracy, harmonisation and Socialism and, unfortunately, force them on the people of Britain.

Secondly, it is utterly and completely ludicrous that an important proposal by the Common Market for new taxes on savings should be discussed at a quarter to 12 at night. In a rather controversial speech, my right hon. Friend the Member for Old Bexley and Sidcup (Mr. Heath) said he thought that there was an attempt to mislead the public on the nature of the European Community. I can understand how he and others might feel, because the people of Britain are not being told what is going on in the European Community. I wish to goodness that they were and that my right hon. Friends the Member for Old Bexley and Sidcup and the Prime Minister and everyone else would tell people what was happening in the European Community and how it affected them.

At a quarter to 12 at night we are debating this important new measure. Tomorrow after 10 o'clock there will be another important new measure and there will be another on Wednesday after 10 o'clock. The people of Britain will hear little, if anything, about what is being proposed and what, in some cases, is being forced on them, whether they like it or not, by the majority vote of the European Community.

Mr. Marlow

And in French.

Mr. Taylor

As my hon. Friend says, we now have these things partly in French.

The Minister has rightly said that he thinks he can stop this. Mr. Jacques Delors has correctly said that, as a result of the Single European Act, about 80 per cent. of a significant part of the laws that we normally approve will effectively be taken over by the Common Market and that the majority of member states will decide on laws to be applied in Britain, whether or not the Parliament or the Government like them.

The Minister has said that this is one of the 20 per cent. on which we have unanimity, but we had this before. The Speaker's Counsel told us that there was unanimity on the summer time order, and the Common Market could not force it on us. There was no doubt about it. However, then the Commissioner of the Common Market presented a proposal, under article 100A, which we thought was unlawful and that our legal advice agreed was unlawful, but it still happened. The only way to stop that is to get the 12 member states to agree that the EEC Commission is wrong.

I am delighted with the stand that the Minister has taken on this most dreadful proposal for nonsensical bureaucracy, coming from the EEC. However, is he confident that there is no way that the EEC could ask for a majority vote? We have to think of the proposals of the court. As my hon. Friend is aware, to our cost, we have had the court forcing taxes on Britain. I am delighted to see that the Prime Minister is against the Common Market imposing new taxes on us, but it has been doing it through the court. For example, the new tax of VAT on spectacles and hearing aids was forced on Britain not because our Government or Parliament wanted it but because the court told us that we had to do it. In the same way, the proposals to impose taxes on industry and commerce, on electricity, gas, water and sewage and all new industrial buildings were carried through not because our Government or Parliament wanted to do it, but because the court told us to do it. I should like the Minister to make it abundantly clear—we know that he takes a deep interest in these matters—that there is no way in which this ludicrous arrangement can be forced on Britain if we do not want it.

Will my hon. Friend say something about what is planned, in case it is forced on us? I can remember sitting here listening to the right hon. Member for Ashton-under-Lyne (Mr. Sheldon), then a Treasury Minister, telling us that the Common Market would never abolish our zero rates of VAT, but he was wrong, not because he cheated or lied but because the Common Market moves all the time and takes more and more power.

The Minister will be aware of what "interest" is, as defined by this proposal. It is: premium, prizes or the difference between issue and redemption prices on discount instruments. Does that mean that prizes from premium bonds will be affected by this income tax? Does it mean that when people buy Government bonds at a discount, someone will work out the difference between what they buy them at and what the repayment prices are, and they will have to pay their Eurotax on this? What does it mean by "prizes"? It says here that prizes will be subject to the withholding tax. Are we talking about raffles? What are we talking about? I hope that the Minister will give us a clear idea about what we can look forward to.

The same is true of building societies. In view of what the Minister said, I am sure that many of the honest people in Britain who have saved for their retirement and have money in a building society will be worried about what the Common Market is planning to do. My hon. Friend should also give us some idea about what will happen with the overseas territories of the EEC.

People should know about these things but they do not. These orders are taken at midnight and no one knows about them. The hon. Member for Ashfield (Mr. Haynes) is nodding his head. He knows about it. We are having debates about how we will not allow people to come here from Hong Kong, but only yesterday we heard that people from the Portuguese colony next door to Hong Kong will be able to come here without any restriction.

Mr. A. J. Keith (Berwick-upon-Tweed)

Yes.

Mr. Taylor

That is the result of Common Market legislation, which the Liberals always supported enthusiastically. I am not blaming them for it because lots of people are responsible for this. Many such things are happening, and people do not know about them.

I am delighted that the Government are getting tough with the Common Market. We have had crazy proposals. It has let us down on every pledge. I remember all the talk about controlling spending, an issue on which the Prime Minister fought so hard. The Court of Auditors report spoke of the promised 3 per cent. increase in spending, which became a 20 per cent. increase because of fiddles.

I remember all the talk about the reforms of the CAP, but they never happened, and they never will happen, because we cannot reform the CAP. The Government seem to be waking up to the nonsense, the bureaucracy, the waste and the Socialism of Europe, and we should all say hooray. I am sure that I carry hon. Members on both sides of the House with me when I say that people have got to be told. We know that the Prime Minister will be tough on the Common Market, but the people must be told what the issues are.

The people will want to know whether the balance of trade with the Common Market is dreadful, good or horrifying. Most people do not know. People will want to know how much money we are paying into the Common Market. They would like to know now, but they do not. That is because no one is telling them.

I hope that my hon. Friend the Minister, an excellent Treasury Minister, will say, "Yes, we shall try to do all in our power to reject this Common Market rubbish. Yes, we shall tell the people of Britain what is happening." If that happens, we shall hear no more complaints from my right hon. Friend the Member for Old Bexley and Sidcup or from anyone else. If the people are told what is happening, they will back the Government 100 per cent. in trying to stop this flood of bureaucratic, costly and Socialist Eurononsense.

Mr. A. J. Beith (Berwick-upon-Tweed)

The hon. Member for Southend, East (Mr. Taylor) warned us of bogeymen hidden in corners and even claimed a convert to his view in the Prime Minister's latest stance on Europe. I do not think that she Is a total convert. As I understand it, she still believes that we should be a member of the Community. However, she seems to be having difficulty accepting some of the implications of that. It is, of course, no part of accepting the implications to assume that every proposal that emanates from the Commission is correct.

The proposal that is before us is directed to a problem that we would be foolish to deny exists. There could be substantial capital flows arising out of differential tax regimes in different countries and substantial tax evasion. However, having referred to that problem, the Commission advances a procedure are that is unlikely to solve it. Indeed, in some respects it may make it significantly worse. These seem to be good reasons for sending the Commission back to the drawing board and saying, "You will not solve the problem this way so you had better look for another way of tackling it."

I am saying that the problem will not be solved for several reasons. First, the Commission's proposal is likely to generate capital movements all of its own. As the Minister said, the Germans found out about that. Such movements will probably be outside the Community. There are substantial loopholes within the proposal by its very nature. The Eurobond is the most significant example of that. Another example is the proposal in paragraph 18(iii) that Member States would be free not to apply the withholding tax to tax-exempt savings income (savings books and other common forms of saving)". These savings will differ in about every country in the Community. It would be open to someone in Britain to take out every sort of tax-free saving in every different European country. In many instances different proposals would be used to encourage saving in different member countries. Someone who took that course would not have to pay any withholding tax on these savings. By this process he could accumulate a pretty substantial slice of income that would not attract the withholding tax. There is a series of loopholes of that sort.

There would be the enormous complexity of the clearing house mechanism, which would collect the tax at the withholding tax level at, say, 15 per cent. The member Governments would still have to maintain the differential between the withholding tax arid the level at which they choose to tax savings. There is an obvious differential in Britain between the withholding tax level and the current composite rate that applies to bank and building society accounts.

It could be argued that the Commission's proposal represents a further limitation on that sometimes forgotten group, the non-taxpayers, whose members are receiving rather a raw deal at present. It is difficult now for an elderly non-taxpayer with age relief to find anywhere to put his savings where income tax is not deducted at source. National Savings represent an exception, but they would probably be exempt under the Commission's proposal. The offshore account is a reasonable proposition for someone who would not be liable for tax and who does not want to go through the process of having to reclaim tax, still less to have to pay tax that he cannot reclaim.

What would be the position, under the proposals that we are considering, of offshore accounts in the Isle of Man or the Channel isles? Both the Isle of Man and the Channel isles have association with the Community. What would be the position of offshore accounts in those territories under the withholding tax proposal?

The Commission's proposal is not a sensible way of tackling the problem. Therefore, we must consider the options. The alternative to avoiding substantial tax evasion is more information sharing between member states. To that extent, the mutual assistance directive seems to me more welcome than the Government suggest. Their tortuous argument that tax inspectors will suddenly be preoccupied with worrying about tax avoiders from Germany rather than with those in Britain is extraordinary. Mutual assistance is a reciprocal arrangement in which part of the burden of dealing with each other's tax evasion problems is shared. There is an element of that in all the bilateral tax arrangements we make with numerous other countries.

I am intrigued to know why the Government have, as I understand it, taken a hostile view of the joint OECD and Council of Europe proposal, which embraces a much greater number of countries, on the sharing of information. If information sharing is to be as effective as possible, it might best be backed by compulsory disclosure and total reporting of a kind that a number of member countries strongly resist because of their traditions of bank secrecy. Sometimes I think that right hon. and hon. Members such as the hon. Member for Southend, East should remember that other member states also hold strong views on practices that they do not think the Community as a whole should adopt. Looked at from the British perspective, it seems odd to us that the pattern should be preserved in some member states in which substantial tax evasion can occur with the knowledge of the banks, and without there being any communication between them and those countries' tax authorities.

The proposed information sharing mechanisms offer a reasonable way of tackling tax evasion without introducing other, even more serious, distortions of capital flows than the measure now before the House is designed to solve. I am more hostile to the withholding tax proposal than even the hon. Member for Islington, South and Finsbury (Mr. Smith), when he spoke on behalf of the Labour party in the new, responsible Euro-Labour party mould with a very wise and statesmanlike speech.

I do not merely have reservations about the EC's proposal but I think that it is plain wrong. The Government should resist it, but take a more co-operative approach to information sharing and to other measures for dealing with tax evasion, to avoid trapping Britain in a cumbersome mechanism that will create more problems than it solves.

12.1 am

Mr. Tony Marlow (Northampton, North)

Over the years the Government and I have had our differences on European issues, but may I say how much I congratulate the Government on the motion that they have put before the House. It is succinct, it is to the point, it is the model of a motion.

I will endeavour to put this particular measure in the context of the debate which, if it has not started in the United Kingdom, jolly well should be started with the European elections coming up. Yesterday, there was an elderly gentleman on our television screens—an elderly gentleman suffering from delusions of grandeur. It was of course my right hon. Friend "L'Europe c'est moi." He told us—whether we want it or not, whether we know it or not, whether we like it or not—that we in this country are now members of, part of, subsumed within, the united states of Europe.

Even allowing for the source of that advice, that comment showed a breathtaking arrogance. It was justified on the basis that my right hon. Friend the Member for Wallasey (Mrs. Chalker), along with a gentleman named Goebbels and 10 other individuals, signed this, in many ways offensive, piece of paper—the Single European Act. It is that document that has spawned the measure we are talking about this evening.

The one saving grace of this document is that it requires that this measure should be adopted not by majority vote, as so many of our laws are adopted, but by unanimity. Yesterday we were told that the treaty is important. But this House is important and the British people are important. This House and the British people have never agreed to be part of, to be subsumed in, a united states of Europe. Elderly gentlemen sometimes make mistakes. They get out of touch. In this case, this particular right hon. elderly gentleman is totally in touch. That is a rugby expression, Mr. Deputy Speaker, meaning that he is off the field of play.

My right hon. Friend the Member for Henley (Mr. Heseltine) was somewhat more tactful. He said, "You cannot actually choose the bits of Europe that you like: you cannot have your Europe a la carte." Why not? If it is in our interests and we have the power to secure those bits that will benefit our country and the British people, why not have them? Certain issues in Europe are decided by unanimity. If a proposal is put forward that requires unanimity—such as the one that we are discussing—and we do want it, why not kick it out? If a proposal comes up for majority voting and we are in favour of it—if by manipulation, manoeuvre and argument we can get it through, and if it is in Britain's interests—why not have it?

There are good parts to Europe, and there are bad parts. The good parts include the single European market, of which I am sure that most hon. Members are in favour: free trade in goods and general benefits all round. Another good part is political co-operation. Any part in which we have interests in common and can work together sensibly is good. But this measure, this withholding tax, is one of the bad parts of Europe. There are other bad parts which should be seen alongside it. There is the European social charter, which would place massive burdens on our industry and on European industry. It would return to the industry of this country many of the disastrous apparatus that the Government have taken such a long time to get rid of.

My right hon. Friend the Member for Henley says that we cannot have Europe a la carte. I think that he ought to answer the question whether he wants this measure—the withholding tax—and whether he wants the European social charter. If that is what he wants, let him explain the benefits to us.

Another bad European measure has been put before the House, similar in badness to the measure that we are debating tonight. We debated the subject of smoking in public places. The European Commission, God bless us, felt that it was time that Europe took competence over such an issue. I suppose that the theory is that if one sits in a public lavatory chain-smoking in Dover, it will pollute the pastures of the French peasants in the Pas de Calais. Such little things please such little minds in the European Commission, and this is one such issue.

Why the withholding tax? We have no need for a withholding tax. What is the motive for the proposal? Why harmonise?

Mr. Ian Taylor (Esher)

I entirely endorse what my hon. Friend is saying about withholding tax, with which most hon. Members appear to disagree. Will he recognise, however, that the motivation for the proposal was the much greater benefit to the Community provided by the agreement of the French and the Italians—against their better judgment—to remove their own obstacles to capital movements? In other words, they were going to abolish exchange controls, an event which I am sure that my hon. Friend will also welcome.

Mr. Marlow

I think that we all welcome that event, but as I read and understand the treaty, it was going to happen anyway. Everyone was committed to the removal of constraints on capital flows. There was no general commitment in favour of the withholding tax, however. If we can get the good, why put up with the bad as well?

Why, then, did the Commission want to introduce the withholding tax? Why did it want to harmonise taxes? A harmonised tax is a European tax. Any tax that is harmonised is potentially a source of European finance. What we must decide is whether we believe that taxes should be raised by Europe or within the nation states of Europe. I believe, and I think that the House believes, that we should raise our own taxes and spend our own money.

Why? First, we have had very bad experiences of money that is raised for Europe and spent by Europe. The main area of European expenditure is, of course, the common agricultural policy, and day after day we read stories of how it is riddled with fraud and the money is wasted. My hon. Friend the Member for Southend, East (Mr. Taylor) has told the House on many occasions that half the money spent on the common agricultural policy is spent on the storage and destruction of food. European policies are extravagant and wasteful and they spawn a great deal of criminal activity. That is another reason why we should not have a withholding tax.

The vast majority of the British people and the vast majority of right hon. and hon. Members believe that as we are in Europe we should stay in Europe, work with Europe and make Europe work. But that is a Europe of nation states, not a united states of Europe. A small minority is in favour of a united states of Europe, but if we start having more European levels of taxation we shall have more European levels of expenditure and we shall also move across the threshold from a Europe of nation states to a centralised, bureaucratic, Socialist united states of Europe. Let me explain why.

If Europe gets involved in personal levels of taxation the—level of tax that is charged to entrepreneurs—and if Europe gets involved in corporate taxation and controls the taxes that are paid by industry and commerce, there will be a tendency for them to be centralised at a high level in order to provide resources and scope for more European policies. If the national Governments and national Parliaments of the nation states of Europe maintain the right, the power and the ability to raise their own taxes, they will tend to compete one with another. Instead of having high levels of European tax there will be low levels of national tax. If there are low levels of national tax, there is only one way that we can succeed. That is through growth—through giving scope to business, enterprise, commerce and industry.

If we want to have a prosperous Europe in the 21st century, national Governments and national Parliaments must decide what taxes are to be levied and how they are to be levied. If we move in the direction of centralised European taxation—of this withholding tax—or of any other areas of European taxation, we shall move towards the nightmare that has so often and so accurately been described by my hon. Friend the Member for Southend, East of a centralised, bureaucratic, Socialist united states of Europe.

12.12 am

Mr. Frank Haynes (Ashfield)

I have listened very carefully to what has been said, including what was said by the Minister and the hon. Members for Southend, East (Mr. Taylor) and for Northampton, North (Mr. Marlow). It is the same old story. As the hon. Member for Southend, East said, here we go again, late at night, and it will happen again and again. It is high time we put a stop to it. The House should grab this one by the hair and do something about it. Ministers do not appear to be prepared to do anything about it. The Economic Secretary says that he disagrees with everything that his hon. Friends say. If there were to be a Division on the amendment, he would vote against it. I agree with the amendment, but it has not been selected. Had it been selected, the -Minister would have voted against it.

The Minister is not always here when we discuss EEC matters. He is tucked up in bed, nice and warm. But some of us are here until the early hours of the morning discussing EEC matters. [Interruption.] The Government Whip is here, too. It is not often that I agree with him, but I agree with him tonight. He is here, too, until the early hours of the morning, along with some of my right and hon. Friends.

We are sick to death about what is going on. It is high time that it stopped. The Minister tells us what to do about taxation, but we can deal with that problem ourselves without the EEC telling us what to do. What help does the EEC intend to give us to carry out that job? The ordinary working class folk of this nation pay their tax automatically; it is deducted at source. That applies to Members of Parliament, too. His pay is taxed before he gets it. [Interruption.] I did not intervene when the hon. Member for Berwick-upon-Tweed (Mr. Beith) was on his feet. He is a pro-European. He agrees with everything that they say, coming across that flipping water. We have had enough of it.

Mr. Beith

Will the hon. Gentleman give way?

Mr. Haynes

No, but I will in a minute. Dr. Death, who usually sits a bit further down this Bench, is always pushing about the European monetary system. A lot of us do not agree with it. He can keep pressing if he likes—he is one of a minute group. There are only three of them here.

A lot of hon. Members disagree with some of what is being proposed. I often disagree with what the Minister says.

Mr. Beith

I am having difficulty following the current Labour party stance. The hon. Gentleman is a Labour Whip. I listened to his Front Bench spokesman say that the directive on sharing information is welcome and that the Labour party understands the motivation behind the other, although it has some reservations about it. That does not seem to add up to the view that the hon. Gentleman is presenting—that Europe should not be considering these issues arid that we can manage by ourselves. [Interruption.]

Mr. Haynes

Now we have Pembroke yawping. He disagrees with everything that Opposition Members say. The hon. Member for Berwick-upon-Tweed will not get me to fall out with my hon. Friend on the Front Bench. That one was tried when we debated smoking, as the hon. Member for Northampton, North said. A Conservative Member tried to get me to criticise one of my lovely hon. Friends on the Front Bench. Once again, the Minister was tucked up all nice and warm between the sheets while we were here working.

I am expressing my own point of view here. I am entitled to do that if I want to. I represent an electorate of 66,000 and a population of more than 100,000. I am speaking on their behalf. I know what they say to me about taxation and the unfairness of it. We do not need Europe to tell us how to deal with our taxation. We can do it ourselves. The Minister is nodding. Does he agree that the House should be allowed to determine the destiny of its people and not be told what to do from across the water? Will the Minister get up and say so? He will not, because he agrees with many of the instructions that come from across the water. That is his problem. He will not get up and be honest like me and say, "I do not accept those things which they tell us we should be doing. We determine it. We decide." [Laughter.] The hon. Member for Pembroke (Mr. Bennett) may laugh, but his grandfather would not have laughed. I am talking about a serious matter. He knows who I am talking about. The fellow it am talking about was a real Socialist.

Mr. Nicholas Bennett (Pembroke)

Not like Kinnock!

Mr. Haynes

We are all Socialists over here—except this lot behind me. I am expressing my view. It may be a bit different from that of my hon. Friend the Member for Islington, South and Finsbury (Mr. Smith), who is on the Front Bench. He is speaking on behalf of the party. I thought that we could express our views in this place. I usually do. I did this afternoon with the Secretary of State for Energy. I told him where to get off. That was necessary. Once again, I was representing my constituents.

I shall be here only another three years if the Prime Minister is prepared to go all the way. I shall enjoy those three years. I shall express my opinion forcefully. I think that hon. Members agree that I do just that. I shall continue to do so provided, of course, I catch the eye of the occupant of the Chair. I never speak without being called. I behave myself in the Chamber, as do many others. [Interruption.] I do not do things like that. The hon. Member for Northampton, North, with his coat of many colours, should have worn a rose today, like my hon. Friend the Member for Nottingham, North (Mr. Allen); it would have looked very nice. But I am straying from my argument about taxation, and I want to save you from having to pull me into line, Mr. Deputy Speaker.

I have made my point, but I shall continue to make my point about Europe telling us what to do. I shall decide for myself what I do and I shall express my views on behalf of my constituents because I believe that they do not need telling what to do.

As I told the hon. Member for Southend, East last week, we stand side by side and arm in arm in the argument about Europe. If Europe would leave us alone, we could get on with the job and do the right thing on behalf of the people we represent here.

12.20 am

Mr. Lilley

The debate has been remarkable because the proposal from the Commission has been rejected not only by the Government and the Opposition, but even by the representative of the Liberal party. If that is not a message which the Commission should take to heart, nothing is.

In response to the points made by the hon. Member for Islington, South and Finsbury (Mr. Smith), the hon. Member for Berwick-upon-Tweed (Mr. Beith) and one or two others, I should make it clear that the Government are wholeheartedly opposed to any form of tax evasion. It is right and proper for national Governments and Governments in co-operation to act against tax evasion. Nor are we against withholding tax at source, where it is appropriate. We have the composite rate tax which could be described as a form of withholding tax. We use it where we believe that it is effective and where it does not have damaging practical consequences, as it would if it were extended to commercial markets and large deposits.

We believe that Governments should co-operate and we have one of the largest networks of double taxation agreements with other countries which enable us to co-operate in collecting taxation and preventing evasion. It is right that that should continue.

We are quite happy to consider the proposals, although we have reservations about some aspects in the second directive. We certainly have no difficulties with their approach; there are merely practical problems in a directive which has not yet been given very thorough consideration by the Commission or by member states.

My hon. Friend the Member for Southend, East (Mr. Taylor) asked me for an assurance that the proposal required unanimity and could not be imposed on us by the workings of the European Court. I give him that assurance. In the case of taxation, the operations of the European Court apply only when a directive has been brought into effect by unanimous assent by the member states. Then the court has the duty to interpret it and, in the event of any dispute, rule on the precise meaning of the directive. As a result of such rulings, it was determined that a directive agreed to in 1977 under the Labour Government had a wider sense than was originally thought, in the case of the ruling on opticians and spectacles, and the ruling that we are currently putting through the House applying VAT to property and construction.

My hon. Friend the Member for Northampton, North (Mr. Marlow) made a number of valuable points, in particular that competition between national Governments in their setting of tax rates is not necessarily a bad thing as it can provide downward pressure on tax when normally all the pressures are upwards. That is particularly important given that Europe is a trading community which has to be competitive with the rest of the world. If Europe were ever to believe that it was immune to competition from the rest of the world and set tax rates which would render it uncompetitive with the rest of the world it would put itself at a grave disadvantage. So long as tax rates are primarily set by national Governments taking account of their competitive position in Europe and against the rest of the world, that danger will not arise.

I am grateful to the House for largely supporting the Government's position on withholding tax. The message that the House has given will contribute to a sensible decision on the issue in Brussels.

Question put and agreed to.

Resolved, That this House takes note of European Community Document No. 4763/89 relating to taxation of savings; and supports the Government's view that the proposals are unnecessary, ineffective and damaging.