Authorised unit trusts: payment by trustees

HC Deb 16 July 1990 vol 176 cc805-8

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1. (1) The trustees of an authorised unit trust may enter into arrangements with the Board in respect of unit holders who would, if such arrangements were in force, be entitled to payment of the associated tax credit under section 468H.
2. (2) Under such arrangements where a dividend falling within section 468H is treated by virtue of section 468(2) as paid to unit holders in respect of whom the arrangements have been made:—
1. (a) the trustees may pay to such unit holders the amount of the associated tax credit in respect of the appropriate portion of the dividend (the "additional amount"): and
2. (b) all additional amounts so paid shall be set against advance corporation tax which the trustees are liable to pay for the return period in which the dividend was paid and shall discharge a corresponding amount of that liability.
3. (3) The Board shall not make arrangements under this section unless they are satisfied that the payment of the additional amounts shall not ensure to the benefit of persons other than those entitled thereto.
4. (4) The effective period of such arrangements shall begin with the date on which the arrangements are made, or such later or earlier date as may be specified in the arrangements, and shall end with the date on which either party receives notice in writing from the other terminating the arrangements, or such later date as may be specified in the notice.
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5. (5) The trustees shall render the Board an account at such time, and containing such particulars relating to the dividend as the Board may require.'.

The amendment has been suggested by the Unit Trust Association, and in case Opposition Front Bench spokesmen get excited, I have no pecuniary interest in any unit trust or any association for unit trusts, but I have an interest in the general welfare of the industry.

The purpose of the amendment is to improve the competitive position of the unit trust industry in the developing European market. At present, people living in most European countries will receive less income from a unit trust based in the United Kingdom than they could derive from a local fund. That is certainly true of gross receipts and, in some cases, of net receipts as well. That is because United Kingdom trusts are unique in paying corporation tax on their income. As far as I am aware, no European fund suffers from an equivalent tax impost.

Income funds are expected to be a centrepiece of the export ranges of the United Kingdom fund managers seeking to develop the market in Europe. They will be competitive only if they can at least match the income paid out by local funds. The amendment proposed by the Unit Trust Association allows United Kingdom unit trusts to pay out more income so that they can match the local funds. The additional pay-out is the same amount as United Kingdom taxpayers would receive as a tax credit. That removes the disadvantage that they suffer as a result of corporation tax.

The amendment involves no tax cost to the United Kingdom revenue, since, in effect, it will apply only to income on marginal businesses that would not otherwise be flowing through the United Kingdom, and there may be some small increase in United Kingdom tax revenue because, if the fund managers are successful, they will be paying corporation tax on the profits that they earn.

I raised this matter in Committee and I welcomed another concession that the Government had made to the unit trust industry. My hon. Friend the Financial Secretary agreed to look further at the proposals from the Unit Trust Association and, good as his word, as we would always expect of him, he wrote to me with his further thoughts. I thank him for that. He is certainly sympathetic to the desire of the unit trust industry to establish a bridgehead in Europe and to increase our invisible earnings through that mechanism.

My hon. Friend raised a number of points in his letter. He said that United Kingdom unit trusts benefit from favourable withholding tax rates on overseas dividends compared with Luxembourg funds that had no treaty benefits. I am told that Luxembourg is not considered the threat. The major competition in this market for United Kingdom managed funds of non-United Kingdom equities—American or Japanese securities—is expected to come more from France and Germany, which have tax treaty networks comparable with those that we enjoy.

My hon. Friend also objected that the proposed change is complicated and would be expensive to administer. The legislation involves only the new clause that has informed my amendment. Managers who are not involved in the export business do not need to change their procedures; others will merely need to identify overseas investors who qualify for a gross distribution, and include on the distribution voucher a note of the amount that represents a tax credit.

Any extra burden would fall principally on fund managers who chose to operate under such a scheme. Clearly, they think that it would be worth while. They should be given the fiscal opportunity to develop what they perceive to be a major opportunity to increase our invisible earnings. Therefore, I ask my hon. Friend to look again at the matter. I ask him not necessarily to accept my amendment this evening, but at least to give me an undertaking that he will conduct further studies with his officials, perhaps with a view to making some change in next year's Finance Bill.

Mr. Nicholas Brown

There are a range of difficulties in getting British financial products wholly compatible with the practice that pertains in other European countries. It is particularly difficult to make them compatible with the systems used by our EC partners in time for 1992. The hon. Member for Slough (Mr. Watts) seeks to address one of the issues involved. As I understand it, his amendment would stop the United Kingdom charging withholding tax, to the extent that the distribution was attributable to income that was taxable in the hands of the unit trust.

A balance must be achieved in deciding whether the yield to the United Kingdom Exchequer from unit trusts—despite what the hon. Gentleman said, I think that there would be some reduction in yield—would be offset by the advantages that would accrue to the United Kingdom by making unit trusts more attractive to investors from the Common Market. The Government must achieve that balance when deciding whether to accept the amendment.

It is difficult for the Opposition to make a judgment, because detailed advice from the Revenue is available to the Financial Secretary but not directly to us, although I am sure that he will explain to us in a few moments.

I am neutral on the amendment. I commend the hon. Member for Slough for at least trying to address one of the several complex and difficult issues that will have to be addressed before 1992. Delay hurts this country. They are not easy matters to solve, but the hon. Gentleman is right to attempt to do so, and we do not want to thwart him in that.

Mr. Lilley

My hon. Friend the Member for Slough (Mr. Watts) is right to say that we discussed and corresponded on the amendment, which he asked me to reconsider. I have done so, and I will explain why I did not table a similar amendment at this stage.

The amendment is likely to affect only 5 per cent. of funds—95 per cent. of unit trusts are already in a beneficial position vis-a-vis their European counterparts—and only in some countries. In France and Holland, for example, the potential investor would be no better off than he is as a result of the change, because the foreign dividends would flow straight to foreign shareholders. If foreign tax authorities do not like dividends flowing straight to foreign shareholders, they may alter the tax treatment to offset it, and we would be back to where we started. There would always be some benefit for those promoting such funds, because there would be opportunities for tax evasion where money is paid gross rather than net, but we should not go out of our way to promote that.

In the light of my hon. Friend's comments, I shall leave a message that my successor—I can freely impose burdens on my successor that I might not place on myself—should reconsider the amendment, without commitment, before the next Budget.

Mr. Watts

I thank my right hon. Friend for that sympathetic response. I wish him well in his new responsibilities and beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.