§ 'Section 174 of this Act shall not come into force until such time as the Board have by regulations provided that no payments shall be made from a special reserve fund except as provided for under Schedule 20 to this Act.'.—[Mr. Darling.]
§ Brought up, and read the First time.
§ Mr. DarlingI beg to move, That the clause be read a Second time.
§ Madam Deputy Speaker (Dame Janet Fookes)With this it will be convenient to discuss the following: new clause 2—Payment under section 174—
'No payment shall be made from a special reserve fund established under section 174 of this Act except for the purposes expressly provided for in Schedule 20 to this Act.'.Amendment No. 29, in clause 183, page 142, line 26, leave out from the beginning to end of line 28 and insert—'(3) The provisions of this Chapter shall come into force on such date as a Minister of the Crown may by order made by statutory instrument appoint; and different days may be so appointed for different provisions or for different purposes.(4) No order shall be made under this section unless a draft thereof has been laid before and approved by the Commons House of Parliament.'.Amendment No. 6, in schedule 20, page 291 line 42, at end insert—'(3) The arrangements must be such as to secure that, except as required or permitted (whether expressly or by 692 necessary implication) by this Part or Part II of this Schedule, no payments shall be made into or out of the member's special reserve fund.'.Amendment No. 21, in schedule 20, page 294, leave out lines 27 to 29.
§ Mr. DarlingWe come now to a debate on Lloyd's and the special reserve fund, the subject of an extensive discussion in Committee. We touched on some of the issues during points of order to Madam Speaker, mentioning the difficulties in which some Conservative Members might find themselves because they are Lloyd's names. Looking around, it is clear to me that many of them have absented themselves from the debate because of the difficulties, but I am sure that when the bell sounds they will come back to vote.
This group of clauses and schedule 20 create a special reserve fund to enable Lloyd's names to put money aside to meet insurance losses. We are not against the principle of making provision by means of such reserves—they are a thoroughly good thing—but our objection throughout has been that we should not allow Lloyd's names to benefit from a device that will enable them to shelter large sums from tax.
One of our principal objections was that under the Bill as drafted it would be possible for a Lloyd's name to put aside sums into the special reserve fund, to shelter them tax free, to see them accumulate and then to withdraw them at will to gain maximum tax advantage. In Committee, we pressed a series of amendments to prevent that happening. To our great surprise, the Government tabled an amendment last week in which they effectively climbed down from the position that they had adopted in Committee, and accepted that the Opposition amendments had a substantial point. The Government's amendment and our new clauses 1 and 2 seek to do the same thing: they would stop the special reserve funds from being used as a tax shelter by Lloyd's names.
I welcome Government amendment No. 6, because it will prevent Lloyd's names from using the special reserve fund for anything other than meeting insurance losses. I am sure that that was the intention of the legislation and that will be its effect. I am grateful to the Financial Secretary for reconsidering the matter. He has certainly departed from the suggestion made in Committee by some of his hon. Friends that the Opposition were raising a matter that had no basis. The Government now admit that it has a substantial basis, and I am sure that they agree that it would be wrong to allow Lloyd's names to use the special reserve fund as a tax shelter. For that reason, we welcome the Government amendment.
§ Mr. DorrellI am grateful to the hon. Gentleman for the welcome he has given to the amendment. I hope that he will accept that it is hardly a climbdown for the Government to table an amendment that has the effect of ensuring that the result sought by both sides of the Committee is delivered by the legislation. Our policy objective has been unchanged throughout consideration of the Bill.
§ Mr. DarlingI understand that the Financial Secretary must preserve his position. If tackled by his hon. Friends, ministerial colleagues or the Prime Minister, he can point to this passage in Hansard and say that he has put on record the fact that the Government were not climbing 693 down. If that is not the case, why did so many of his hon. Friends accuse us of scaremongering and raising falsely-based fears?
I am sure that the Minister will accept that, had we not pressed the matter and drawn attention to the fact that a tax shelter would be created, no amendment would have been tabled and Lloyd's names would have been able to use the special reserve fund as a tax shelter. It is important to recognise that the Government have now accepted our position, and that the possibility of using the special reserve fund as a tax shelter has been virtually shut off.
§ Mr. DorrellI do not accept that in the absence of this amendment it would have been possible to use the special reserve fund as a tax shelter. I made it clear in Committee that the safeguards against that eventuality were contained in the deed establishing the trust fund. I said to the Committee:
We are debating now into which piece of paper the principle should be written."—[Official Report, Standing Committee A, 17 June 1993; c. 495.]In response to the views expressed in Committee, we have written it into both pieces of paper.
§ Mr. DarlingThe Minister is being tenacious. I remember that he said that it did not matter in which piece of paper it was contained. Our preference is to have that tax loophole shut off by this particular piece of paper because this is the statute and the law. We do not want to leave it to the discretion of those who draft the trust fund documents. Nevertheless, we give the Government amendment a fulsome welcome.
Amendment No. 21 deserves attention. We will seek a Division on it at an appropriate time, although that may be some hours, if not days, away. Amendment No. 21 would have the effect of rendering the special reserve fund liable for tax on an annual basis. At the moment, paragraph 9, schedule 20 provides:
Profits or losses arising from assets forming part of a special reserve fund shall be excluded for the purposes of income tax … and for the purposes of capital gains tax".This matter was discussed briefly in Committee because the main part of the debate was taken up by our principal objection. We were not entirely convinced by the Minister's argument.It is important that we should accept that, while Lloyd's names should not be discriminated against under the tax system, neither should they be unduly favoured in a way that most members of the public would find intolerable.
I think it is important to put on record the importance of Lloyd's. That point is usually raised by Conservative Members, although not many are here today. Lloyd's is crucial to the United Kingdom, not only because of its reputation—which remains formidable, despite its recent well-publicised difficulties—but for its contributions to the country's earnings. Although Lloyd's has recorded record losses in recent years, the fact that it has significant potential for earnings in the future is important.
Subject to its unique structure, Lloyd's should, in principle and in general, be treated in the same way as any other taxpayer. It should be encouraged but not favoured, and should stand on its own feet. There should be no question of the Government being allowed or encouraged to bail out names who are in financial difficulties. Reports of certain names—particularly those who are Members of 694 the House—being in severe financial difficulties and in danger of eventual bankruptcy are somewhat exaggerated. I notice that the hon. Member for Lancaster (Dame E. Kellett-Bowman) agrees.
No matter the difficulties faced by those hon. Members, even if in extremis, I am sure that the good and the great who bankroll the Tory party will step in and ensure that they are not disbarred from being Members of the House.
As to names who are not Members of the House, when they went into Lloyd's they were, by any standard, sufficiently well off to take advice; they knew, or should have known, the risks that they were taking. They were well placed to take the advice which most people would take before joining and becoming names.
As I have said, I do not believe that Lloyd's names should be given preferential treatment or more favourable treatment and opportunity than those who take risks in other industries. As I understand it, it is not possible for people in similar positions to make a general provision against future losses. Lloyd's names are being treated in a slightly different way from people in other industries. For example, it is not possible for someone running a small business to accumulate money, tax free, against future losses—I am sure that many wish that they could. We should look long and hard before we give a particular privilege to Lloyd's when there is no justification for doing so.
Amendment No. 21 would subject the funds in the special reserve fund to taxation, which is entirely reasonable. No doubt the Minister will argue that the money can only be used, for the most part, to meet insurance losses. We agree with that. However, on cessation of business, when a Lloyd's name ceases to underwrite and winds up his or her special trust fund, there is a pay-out. I am concerned that, although there is a ceiling of 50 per cent. of profits on the fund, the money could accumulate, tax free—over the years the sum could be quite substantial—and the Lloyd's name could then choose when to cease underwriting to achieve the maximum tax advantage. That is why we raised the matter in Committee and, now, on Report.
The Minister will no doubt talk about the importance of Lloyd's names being able to make provisions against future losses. He will also make the point, with some force, that many of the difficulties in which Lloyd's names currently find themselves would not have arisen had they made provisions against future losses. All of that is true up to a point. As I said in Committee, we are not against special reserve funds; indeed, as the Minister reminded me in Committee, it was a Labour Chancellor, Sir Stafford Cripps, as he then was, who made that provision.
Currently, the maximum contribution limit is £7,000. We are proposing a much higher ceiling and it is therefore important to look again at the taxation provisions. That is why we attach so much importance to stopping the special reserve fund from being used as a tax shelter. I believe that to complete the process the assets in the fund should be subject to income tax or capital gains tax, as the case may be, to prevent accumulation.
Lest anybody feels that we are being unfair to Lloyd's, or discriminating against it, the House should note that the management of Lloyd's has taken substantial steps to put the organisation on a proper footing.
It is all but publicly admitted that self-regulation has failed and it can be strongly argued that the Lloyd's Act 1982 needs to be repealed and replaced. We know why that 695 will not happen. Notwithstanding Madam Speaker's ruling a short time ago, the whole question of the conflict of interest of some hon. Members, as Lloyd's names, would arise were the 1982 Act revisited.
5 pm
It highlights the fact that many Tory Members cannot consider the City, in particular Lloyd's, objectively because the wealth of so many of them is tied up in it. That is intolerable and should not be allowed to happen. Lloyd's must be considered in the same way as other companies. Its future should not be influenced by the fact that so many Tory Members have a vested personal interest in it. The fact that the Government have a small majority in the House means that their judgment is impaired because so many Tory Members—not just Back Benchers but at least four members of the Cabinet—are Lloyd's names. We should all pause to consider the fact that the Government would be prevented from looking at the Lloyd's Act again because so many Tory Members cannot make an impartial judgment on the matter.
Lloyd's management anticipates that profits will return by the 1995 year of account. Together with the measures that it is taking to deal with the pre-1985 losses, that shows that Lloyd's can be put back on a proper footing. Those steps and the taxation measures that we are asked to approve tonight lead us to suppose that, even with the taxation that we propose, Lloyd's names will be treated fairly and need have nothing to complain about.
The importance of Lloyd's and the fact that its management is trying to put the business on a proper footing must be emphasised. We do not want to discriminate against Lloyd's but to ensure that it will be treated in the same way as other taxpayers, whether corporate or individual.
The United Kingdom insurance industry must be able to make provision for losses. That is one of its problems in competing against other EC countries. The fiscal regime, particularly in France and Germany, allows companies to make provision against future claims. In this country, it is impossible to do that on the same scale. Although the Government are now consulting on the matter, they have yet to decide what to do. However, it is important that we accept the provision against future claims.
We must remember that Lloyd's is not a corporation or normal insurance company. The difference is that individual taxation is at stake. I am in favour of allowing provision against future losses but we must be careful when dealing with individual taxation to ensure that, as far as possible, we treat individual names in the same way as other taxpayers engaged in investing their money. It is important not to discriminate against others who try to invest their money in industry, for example.
§ Mr. DorrellI agree with the hon. Gentleman but seek further precise clarification. If we were to introduce reserving for catastrophe insurance for the corporate insurance industry, does he think that that would validate similar reserving arrangements in Lloyd's?
§ Mr. DarlingAs I was about to say, a distinction must be made. In general, we would support the principle of reserving for corporations but in Lloyd's there is a difficulty. By the time the Government introduce those measures there may be more corporate members of Lloyd's, in which case their taxation will be akin to that of other insurance companies. The difficulty with Lloyd's is 696 that in future there will be two classes of names: first, incorporated capital, with which I have dealt, and, secondly, individual names who will be taxed broadly like individual taxpayers. Naturally, special provisions are made for Lloyd's. That is where the difficulty arises.
As I said in Committee, I am prepared to allow individual names to make provisions against further losses provided, first, that they cannot use the device to shelter earnings against tax—that matter has already been dealt with—and, secondly, that they cannot accumulate money tax free within the special reserve fund and therefore secure an advantage that is not available to other individual taxpayers. That is what amendment No. 21 strikes at.
§ Mr. BeithIn Committee we seemed to agree on the principle that any relief allowed to Lloyd's names should be on a basis comparable to that available in the rest of the insurance industry. The hon. Gentleman has argued that that comparability will not apply under the Bill and that, if it did, he would still not be in favour of names having tax relief on provisioning. I do not understand that.
§ Mr. DarlingThe right hon. Gentleman is unnecessarily confused. There is a distinction between the taxation of corporations, to use a general term, and the taxation of individual taxpayers. Both sides of the Committee broadly welcomed the principle of reserving and we hope that the Government will make proposals for the United Kingdom insurance industry. The difficulty in Lloyd's is that, at present, all its names are individual taxpayers. I suspect that in future an increasing number of its names will be corporate taxpayers. But, so long as they are individual taxpayers, we should accept the principle of reserving, which we do by allowing the creation of a special reserve fund. I am simply concerned that it should not confer an additional benefit over and above what is necessary to encourage reserving. That is why we wanted to close the tax loophole. The right hon. Member for Berwick-upon-Tweed (Mr. Beith) was against that.
We also want to prevent the accumulation of large sums of capital tax free, which is a concession that is not available to others engaged in industrial enterprise. So long as individual taxpayers are Lloyd's names, there will always be a problem. I suspect that, given the sums at risk, incorporated capital will make up most of Lloyd's base in the future. We must wait and see what happens.
We must not allow individual Lloyd's names to be given tax benefits that are not available to others engaged in a similar enterprise, other than insurance. I trust that that makes the matter clear.
§ Mr. BeithMay I pursue the point a little further? The same difference would apply within the corporate sector. If concessions of the kind that the hon. Gentleman and I support are made to the corporate sector, it will make a difference to corporations that put capital into insurance and those that do not. The same will apply to individuals. What they have in common is the peculiar nature of insurance risk and markets. Surely that is an argument in favour of comparable treatment.
§ Mr. DarlingThe right hon. Gentleman carries his argument a little far. Clearly, depending on the business that a company carries out, certain tax provisions are 697 available to one group of companies and not to another. Were we discussing petroleum revenue taxation, which we are not—
§ Mr. SalmondUnfortunately.
§ Mr. DarlingI agree with the hon. Member for Banff and Buchan (Mr. Salmond). However, oil companies are taxed differently from companies that make rivets, for example. We must accept that insurance companies are taxed on a different basis from oil and other companies.
A clear distinction can be drawn between the taxation of corporations and the taxation of individuals. I do not wish to labour the point, but I am sure that the right hon. Member for Berwick-upon-Tweed accepts the distinction. I assume that, being a Liberal Democrat, he favours the principle of fairness between individual taxpayers. The House must think long and hard before giving individual taxpayers who are Lloyd's names benefits that are not available to other individual taxpayers, while accepting that insurance differs from certain other enterprises.
I am worried that, if the special trust funds are not taxed, Lloyd's names will be able to accumulate large sums. That will not be necessary to meet insurance losses because the sums would be paid out on cessation.
Some substantial tax benefit may arise, but that device cannot be used by other taxpayers. I do not want to labour the point, but we should think long and hard before giving such concessions. That was precisely the thrust of my argument in Committee. I am sorry that the Liberal party did not accept the Labour party's argument because the Tories have accepted it. I am sure that the right hon. Member for Berwick-upon-Tweed will reflect that he might have got it wrong. If it is good enough for me, the Financial Secretary and the Labour party, it should be good enough for the Liberal party—perhaps the fact that it is not tells us something about the Liberal party.
There was an exchange on the subject in Committee. I did not entirely follow what the Financial Secretary said on a similar amendment. He seemed to set some store on the fact that only 50 per cent. of the profits could be put into the special reserve fund—I accept that. However, I am concerned that if up to 50 per cent. of substantial profits were placed in the fund, which remained untouched for a period of years, after 20 years underwriting, a substantial sum might have accumulated. I fully accept that that is secondary to the main issue which I raised in Committee and which has now been addressed. But we cannot leave the matter there because it is important.
§ Mr. DorrellThe argument that I advanced in response to the debate in Committee was the same argument that I shall make in a few moments. I shall be interested to hear the hon. Gentleman's response. The key factor is not that there is limitation of 50 per cent. on profit earned on insurance in any one year. As I said in Committee, the key limitation is the separate limit of 50 per cent. of premium income—the amount up to which the reserve can be built to protect the interests, not primarily of the Lloyd's names but of the policyholders. That is a key test of the liquidity of an insurance business run by a Lloyd's name.
§ Mr. DarlingI accept that there are two tests, but that does not seem to detract from the argument that the funds should be subject to tax—I said that the Minister set some 698 store on precisely that. The debate between us is whether those funds should be taxed. I believe that they should. That does not lessen the importance of the argument that we advanced in Committee about plugging the loophole. I hope that the Government will be vigilant and alert to the possibility of a Lloyd's name or another party finding a way to circumvent new clauses 1 and 2, or Government amendment No. 6. I hope that the Government will plug any future loopholes that come to light as a result of the operation of the special reserve funds.
As I said, the Opposition want to see Lloyd's thrive and prosper. We want it to put its problems behind it, but we want to ensure that Lloyd's names are taxed on a fair basis. We do not believe that is happening at present, and it is for that reason that I want to press amendment No. 21 to a vote.
§ Mr. Peter Hain (Neath)I do not wish to—and could not—reopen the ruling that Madam Speaker made earlier this afternoon, but I appeal to those hon. Members who are Lloyd's names not to vote on the new clause—a vote which will probably be taken tomorrow evening. I urge them to follow the precedent set on 24 March 1981 when we were discussing the Bill relating to Lloyd's when—I think—53 names abstained. Although the Government's majority was much greater then and hon. Members could afford to abstain in those numbers, I do not think that they can be excused for failing to do so tomorrow.
Like my hon. Friend the Member for Edinburgh, Central (Mr. Darling), I accept that there is a strong case for tax reform of the Lloyd's insurance market. The establishment of a new reserve fund would put Lloyd's on a level playing field with some of our strongest competitors in France, Switzerland and, above all, Germany—Munich Re is Lloyd's biggest competitor. It would also encourage the prudent management of outstanding liabilities.
The Bill is a recipe for tax avoidance. Any income arising from assets in the reserve fund is exempt from income tax while it remains there. Amendment No. 21 seeks to address that issue, but any capital gains arising from the disposal of assets held in the fund are exempt from capital gains tax. The amount paid into the fund will be treated as a fully deductible businesss expense although, admittedly, withdrawals will be taxed as profits.
It is said that, as a sort of balance against those provisions, there is a new basis of tax assessment which treats capital appreciation on invested premiums as income rather than capital gains. That is said to be a disadvantage to Lloyd's names which just about balances the advantages that they receive from the tax privileges they gain from the new reserve fund. I asked the tax department at Lloyd's to justify the Chancellor's assurance that those two changes, running parallel with each other, were, as he said, broadly tax neutral. The department officials were able only to assert that that was the case and were unable to provide figures or costings to prove it. That makes me suspicious that the overall package is a nice little earner for Lloyd's names.
It is also important to ask why the changes are being made now. It is partly because of the huge losses in the year of accounts over the past three years—1988, 1989 and 1990. But the crisis is not simply about the problems of hurricane Hugo but about City fraud. The crisis is not just about asbestosis problems, but the yuppyitis which 699 produced a "money-for-nothing" era in the City—with my apologies to Dire Straits. It seems that the chickens from that era have come home to roost and the Government are seeking to clear up the mess.
We have had a sad, sorry and sordid tale of working names indulging in insider dealing by dumping loss-making activity and underwriting on external names while maintaining a profitable business for themselves. As a result, many ordinary names became victims of malpractice and corruption. Some victims are numbered among the 44 Conservative Members of Parliament who are Lloyd's names. I am not sure whether the number includes the Attorney-General, the three Cabinet Ministers who are Lloyd's names or the Tory party chairman—all of whom are named in my early-day motion 2299. That is why there is pressure on the Government to bail out Lloyd's. It is tantamount to an abuse of Parliament that a certain restricted and privileged group of Members of Parliament are being bailed out in that manner.
§ Mr. BeithWill the hon. Gentleman clarify for the record whether he would regard as an abuse of Parliament the passing by the House of the new clause arid the amendment about which the hon. Member for Edinburgh, Central (Mr. Darling) spoke or the inclusion of any part of that new clause, amended or not, in the Bill?
§ Mr. HainThe amendment tabled by my hon. Friend the Member for Edinburgh, Central improves the Bill and I hope that it is accepted. But my basic argument about the abuse of Parliament is that hon. Members who are names should not be able to vote themselves tax privileges which they will receive from the changes. I am not denying that there is a case for modernising the tax regime.
It seems that, although it is said that the tax changes are not fully retrospective, they go back to the 1992 year of account for reserving and also to the 1992–93 year of account for tax assessments. There is a sense in which the new regime will enable those hard-pressed names at least to reassure those who are making claims on their resources that they will have better years to come. I wish that the same fairness and equality was applied to the bankrupt individuals and small businesses who are going to the wall in the current recession—indeed, they have been doing so in accelerating numbers during the past few years. Why should they be treated differently and on a less privileged basis than Conservative Members of Parliament who are Lloyd's names?
§ Mr. Clive Betts (Sheffield, Attercliffe)Would my hon. Friend like to comment on the double standards in this area? The House lays down rules by which local councillors have to declare their interests. A councillor with an interest of any kind, not merely a financial one, not only has to declare it but is prohibited from speaking or voting when the subject of his interest is being discussed at a council meeting. Should not the House follow its own rules?
§ Mr. HainMy hon. Friend makes his point well.
My amendment No. 29 would require an annual vote to allow Parliament to keep a check on Lloyd's, which is otherwise a law unto itself as it is not subject to any statutory regulation. It is in a unique position and an 700 annual vote on the application of the tax regime would allow us to monitor the progress of Lloyd's as it modernises its structure.
Lloyd's should be subject to statutory regulation, and if it were, many Opposition Members would be more willing to grant the new tax regime proposed, even in a modified way, by the Government. Although the recent reforms by Peter Middleton and David Rowland to restructure and modernise Lloyd's, to separate the market from regulation and to introduce corporate capital were welcome, Lloyd's remains an anachronism and it needs to be modernised and updated.
In the past two decades Lloyd's has been hit by one scandal after another and each has been followed by an internal inquiry. There was an inquiry by Cromer in 1970 and that was followed by inquiries by Fisher in 1980, by Neill in 1987 and by Sir David Walker last year. Although those inquiries led to reforms that were welcomed at the time, further scandals emerged. The latest reforms are welcome, but why should they provide any more of a guarantee than the others? Those reforms did not provide any guarantee whatever as there were further scandals in their wake.
§ Mr. Jim Cunningham (Coventry, South-East)In view of recent events, the Government's proposals, and the question mark over how the company has been managed in the past two or three years, does my hon. Friend agree that there should be a public inquiry? After all, the Government are to give to Lloyd's benefits that they will not give to other insurance companies.
§ Mr. HainThe case for a public inquiry was strong over a year ago when news of the crisis broke. My hon. Friend makes his point well.
It is fundamentally wrong to give tax privileges to Lloyd's names without the quid pro quo of statutory regulation. If we modernise Lloyd's tax regime and encourage the company to move into the 21st century—I almost said the 20th century—we should require from all the markets a willingness to accept the regulation that only statute can bring. If there were such regulation many people outside and probably many Lloyd's names would have much more confidence in the company's future.
§ Mr. BeithWhen the hon. Member for Neath (Mr. Hain) speaks about this matter I often think of the hon. Member for Brent, East (Mr. Livingstone) and his assertion in Committee two years ago when we first debated the matter at length, that the attitude that Lloyd's was a place in which the seriously rich dabble was not at all to be found in the Labour party. He may have had cause to modify that opinion.
The case for making any kind of special provision for Lloyd's names is certainly not that some people who were very rich are no longer rich, or at least will not be when their accounts are finally cleared. It is certainly not that the Government should respond with tax concessions to the appalling happenings in some of Lloyd's syndicates. Such arguments provide no basis whatever for tax concessions. They do not weigh in this case and they have not persuaded Opposition Members that there is a case for some measures. I intervened in the speech by the hon. Member for Edinburgh, Central (Mr. Darling), but it is still not clear whether he is in favour of any measures.
The case for some provision is so that this country may have a continuing involvement in the insurance market to 701 the extent to which Lloyd's has been involved, and so that we may continue to have the earnings that that produces. No other argument would weigh with me because Lloyd's names were aware of the risks. Their money was used not only as a guarantee to Lloyd's but to earn money in other ways in the meantime. They ought to have foreseen what has happened to them, although the catastrophes were not really foreseen by anybody. However, when taking on an insurance risk one must assume the worst case.
Those names might have been justified in supposing that their affairs would be handled properly and honestly and without insider dealing. However, the fact that that did not happen is not the Government's fault because things went wrong within Lloyd's. The case for making a provision on which there seems to be some consensus within the parties is to ensure future earnings from insurance of the kind that Lloyd's can provide. The principle that seemed to weigh with a number of us was that any provision should be appropriate in the context of the insurance industry and should be available to other participants in that industry. There cannot be strict comparability between all forms of risk because there is not a quite comparable form of risk. Capital may not be put up for insurance if we cannot set out a sensible basis.
The Government are legislating to deal with the Lloyd's problem but are still consulting and forming their opinion about what should be done for the rest of the insurance industry. That is less than satisfactory. The hon. Member for Edinburgh, Central expressed the surprising view that a strictly comparable treatment of Lloyd's names and of people who were corporately involved in insurance, whether at Lloyd's or anywhere else, would not meet with his approval. He rested his case on the difference between individual and corporate tax affairs. There are indeed differences, but the hon. Gentleman did not suggest that any of them should be systematically offset to an appropriate figure in some arrangement that combined the two. He seemed to rest a great deal of weight on a structure that would not bear it. I suspect that the hon. Gentleman's real reason is to have something to vote on so that the Lloyd's names can be flushed out.
I had some sympathy with the hon. Member for Neath who said that it was unsatisfactory, certainly in the view of the outside world and certainly by comparison with local government, for people with a direct personal interest to be able to vote on their own affairs in a way that can make a large difference to them. I agree with the hon. Gentleman that those people should abstain and throw themselves upon the mercy of the House, in which case they would depend on Labour votes. Up to a point that might be thought resonable because Labour's Front-Bench spokesmen have said that they are in favour of the broad, main elements of the package in the Bill, especially as all doubt has now been removed by the Government's amendment, which ties up the loose ends from Committee, on the first of the two points about which the Opposition were concerned.
Labour Front-Bench spokesmen are taking a perfectly reasonable attitude in seeking to get matters right. What worries some of the Lloyd's names is the belief that the hon. Member for Neath and a few other hon. Members are not in favour of having any such measures in the Bill. The reason for a vote on the amendment at some time is not 702 because one can logically defend it but because there has to be some sort of vote to show up those Lloyd's names who will vote in their own interests. I shall watch the vote with the same interest as Labour Members, but I am still not satisfied that the position is right.
One reason for voting against the amendment is that the process has not been completed. We are doing something for Lloyd's names that we have not yet done for the rest of the insurance industry. That is a reasonable ground and I should like the Minister to address it. Throughout I have sought to argue the principle that we are recognising the special character of insurance risk and the need to ensure that it will still be possible for risks to be taken so that we can continue to obtain the substantial invisible earnings that an experienced insurance industry stands to earn for us. Over the years, Lloyd's has played a particular part in that risk operation—a part quite different from the rest of the commmercial insurance industry.
5.30 pm
The events of recent years have placed a large question mark over Lloyd's future. We must all hope that the current reforms within Lloyd's will change not only the way that it is run but the way that it is perceived, because a very great deal of damage has been done. My judgment, for what it is worth, is that further damage will be done if there is not some reasonable tax framework, but I want to be sure that that framework is comparable throughout the insurance industry. If the Government cannot say that they are moving towards that, they will cast doubt on their case against Labour's amendment. However, if they can say that they are seeking to achieve comparability, I cannot understand why the Labour Front Bench should not welcome that with open arms.
§ Mr. SalmondI want to pick up the point made by the right hon. Member for Berwick-upon-Tweed (Mr. Beith) about public perception and how the debate will be viewed outside the confines of the Chamber. The rush to provide assistance for Lloyd's names and the fact that so many of them are Conservative Members of Parliament will be widely understood outside the House.
I well recall that when we have debates on Members' salaries and secretarial allowances, Conservative Members—almost unanimously, although there are some exceptions—tell us to be very careful when voting on matters that affect our own finances. Today, they are silent about the care that should be taken in this debate and in the vote on the amendment.
People outside the House will be appalled by the proposed assistance for Lloyd's names because the Budget will impose severe hardship on whole categories of people. The hardship that those people experience daily is far greater than the hardship that any of the Lloyd's names have yet experienced. Those who will be greatly disadvantaged by the Budget will not welcome the rush to assist a fairly privileged group of people.
I can think of another comparison—those employed in the North sea drilling industry. Parliament is not providing the time and opportunity to discuss whether their jobs will be lost, but is providing the time and opportunity to discuss the rush to assist Lloyd's names. That brings the House of Commons into disrepute. I am not complaining about that because part of my role in politics is to ensure that the House is brought into 703 disrepute. The activities and the self-interest that are so clearly displayed in the debate will considerably extend that process. Whether or not the Conservative Members who are Lloyd's names decide to abstain in the vote tomorrow, they may come to rue the day politically when the whole process was embarked upon with such unseemly haste.
§ Mr. DorrellTo hear the hon. Members for Banff and Buchan (Mr. Salmond) and for Neath (Mr. Hain) talk, no one would believe that the proposal is a revenue-neutral package that will deliver neither benefit nor cost to Lloyd's names in the aggregate.
The hon. Member for Neath asked me how the proposed figure was arrived at. Of course, it is an estimate. The change arising from the introduction of a special reserve fund will, when it is up and running, have a revenue cost of about £50 million a year, while the extra tax gathered as a result of treating profits on the premium trust fund assets as income will produce a revenue yield of about £50 million a year. Therefore, to talk about the package as a great tax break for Lloyd's names simply does not accord with the facts.
I want to deal with the points raised by the hon. Member for Edinburgh, Central (Mr. Darling). In the first part of his speech at least, he tried to be constructive and to respond to the issues of tax principle that we discussed in Committee. I welcome the fact that he has accepted that amendment No. 6 covers the concern that he expressed then. Grudging though that acceptance was, I hope that we can take it that that represents the Opposition's endorsement of our proposals to deal with that aspect.
In Committee, we agreed that two issues of tax principle underlie the treatment of the Lloyd's insurance market. First—and there is no disagreement on this in any part of the Houseߞwe cannot approach a policy for the taxation of Lloyd's names on any basis other than the principles of fiscal neutrality, which the hon. Member for Edinburgh, Central clearly espoused in Committee and repeated this afternoon. As has been recognised by several hon. Members who have spoken this afternoon, we are not introducing the proposals in response to short-term considerations at Lloyd's and we are certainly not introducing them out of a desire to create a tax shelter. As I have said, it would be strange if we were to do so as there is no revenue cost associated with the proposals. I agree with the hon. Gentleman about the importance of fiscal neutrality.
I also agree with the hon. Gentleman that the issue that underlies the Government's proposals for the Lloyd's insurance market is the general acceptability of reserving in the context of all insurance business. The right hon. Member for Berwick-upon-Tweed (Mr. Beith) said that he found the argument for reserving persuasive, especially in the context of the comparison between this country's tax system and that which prevails in other countries, notably France and Germany. That is one of the issues that the House will want to take into account when it considers the general issue of reserving for insurance business.
However, I suggest that the House take particular account not of that argument, important though it may be, but of the argument based on tax policy and tax equity as between one taxpayer and another. The Government have undertaken to publish a consultative document during the summer on the general question of reserving for insurance business. In that document we shall make it clear that the 704 issue of tax equity is whether it is sensible to continue to tax insurance business on the basis of an annually declared profit, when some insurance businesses specialise in covering catastrophe risks where it is in the nature of that business that catastrophe claims will not necessarily crystallise in the year in which the premiums are gathered to pay for them. Indeed, it is part of a catastrophe-based insurance business that several years' premiums may be necessary to cover the risk of a catastrophe. Annuality, in the context of such a business, may not be a sensible way of taxing that business. That is the principal argument for introducing reserving for insurance businesses.
I agree with the right hon. Member for Berwick-upon-Tweed that the argument applies equally whether the insurer is a company or an individual. I cannot understand the point made by the hon. Member for Edinburgh, Central about the distinction between an individual and a corporation as the insurer. If reserving is right to cover catastrophe when the insurer is a corporation, it is self-evident that the same must apply when the insurer is an individual. It is because the Government are receptive to that idea, and are proposing to consult on the detail and principle in the corporate context, that we propose the introduction of a catastrophe reserve in the Lloyd's market, where the limiting factor on the right of a name to commit resources to that reserve will be 50 per cent. of the pre-reserving profit and 50 per cent. of the premium limit of the name, the latter clearly being the restraining influence on the total size of reserve that can be built.
§ Mr. SalmondRegardless of whether the Minister is right about the essence of the argument, if he were a Lloyd's name—which he is not—would he consider it appropriate, and in accordance with his conscience, to vote on the issue?
Mr. Dorrell: In such circumstances, I would accept the advice of the Chair on what was and was not in order.
The right to reserve is limited by both the provisions that I mentioned, as the hon. Member for Edinburgh, Central recognised. Furthermore, the right to withdraw from the reserve is limited, as the hon. Gentleman has now recognised. The quid pro quo is the commitment to build up a reserve limited by the size of the insurance business that is being done—that is the effect of the 50 per cent. of premium income limit—along with tax-free build-up of the assets within the reserve.
The hon. Member for Edinburgh, Central asked why the reserve should be allowed that tax-free build-up. There are two answers. The first arises from the reason for the creation of the reserve. It is being created to give extra security to the policy holder, assuring him that the claim he may need to make at some future date will be backed by adequate resources. It ensures that the insurer need not be driven to, and perhaps over, the limit of bankruptcy. That is the key consideration. It arises from the need for a test of liquidity within the insurance business, and the Government's desire not to require insurance businesses to declare profits that later prove nugatory, because when the claims bills come in the profit is found not to have existed.
We are limiting the right of a name to build up a reserve and limiting the size of the total reserve. We are introducing the reserve because we expect it to provide the policy holder with extra security. I therefore consider it sensible to reach the limit determined by premium income as quickly as possible in order to provide the insured party 705 of the insurance business with better security. That is the first tax-principle reason for allowing the reserve to build up without charging tax on the investment return.
There is a second argument, based on practicality. What would be the practical consequence of taxing the investment return on the build-up of assets in the reserve? Hon. Members on both sides of the House have agreed that payments into the reserve will be made before tax and that there will be a tax deduction for them—they will be tax free. Surely all hon. Members would want payments out of the reserve to be taxable income.
It is difficult to see how, in practice, tax-free payments into the reserve could be subject to tax as the reserve built up and then subject to tax again as payments out of the reserve were made to the names. That would mean taxing twice the investment return secured on the assets in the reserve. Surely it is much more simple and straightforward to recognise that the assets going into the fund should be tax free—that it is in the public interest to allow the fund to build up reasonably quickly to provide better liquidity for the insurance business and better protection for the policy holder, and then to tax withdrawals from the fund in their entirety at the time of withdrawal, recognising that the terms on which assets can be withdrawn are strictly controlled. The hon. Member for Edinburgh, Central has now recognised that.
I cannot commend the new clause to the House. It strikes me as being wrong in principle, because it counters the purpose of providing the reserve in the first place, and wrong in practice, because it would lead to an administrative nightmare in trying to distinguish between payments out of the reserve that had already borne tax, the investment return, and those that had not, the original capital payments into the fund. There are arguments of both principle and practice against the new clause, and I suggest that the House reject it.
§ Mr. DarlingI am sure the House will accept that there is a substantial difference between the taxation of individuals and company taxation. If we had the choice, we would all love to be taxed as companies: if we all had the option of setting expenditure against pre-tax income, no doubt we should take the opportunity to do so. Anyone who has ever been a schedule D taxpayer—as I have in my time—will know that it is far more advantageous than being a schedule E taxpayer, because of the various allowances. I am sure that both the Minister and the right hon. Member for Berwick-upon-Tweed (Mr. Beith) will accept that we already treat individual and corporate taxpayers differently. That is why I believe that we must be careful to put Lloyd's names on an equal footing with other taxpayers.
I have some sympathy for the right hon. Member for Berwick-upon-Tweed: having backed the Government in Committee, he must feel badly let down on discovering that they are now backing Labour on Report. I was pleased to note that Government amendment No. 6 is phrased in almost identical terms as new clauses 1 and 2, which I drafted in about 40 seconds. I wonder whether the parliamentary draftsman is being paid at the same rate as 706 I am to draft Opposition new clauses. I was surprised that the Government met the aims of our new clause as they did, but I am pleased nevertheless.
My hon. Friend the Member for Neath (Mr. Hain) and the hon. Member for Banff and Buchan (Mr. Salmond) were right to stress the position of Lloyd's names who are also Tory Members of Parliament. The rules of the House allow them to vote, but if they speak they must declare an interest. The fact is that most will not speak and will declare no interest; but, when the Division Bell sounds, they will walk into the Lobby along with other Conservative Members to vote themselves a tax concession. It is all very well to say, within the rules of the House, "It is not just them; it is others outside." I am sure, however, that many taxpayers would like their representatives to secure for them the same benefits that Lloyd's names in the House are able to secure for others outside.
The situation is unsatisfactory, and I consider that Opposition Members are right to draw attention to it. The Government's judgment is tainted by the fact that so many Conservative Members—double the party's majority—are Lloyd's names. Four members of the Cabinet are Lloyd's names: of course their judgment is called into question. When members of the public consider the funding of the Tory party, they are bound to ask whether the Government are fit to run the country when they cannot exercise unfettered, untainted judgment in this regard.
§ Mr. DorrellWhere is the tax break in a series of proposals that are revenue neutral?
§ Mr. DarlingI was coming to that.
The Minister was plainly uncomfortable when I drew attention to the general issue—the difficulty in which he and his right hon. and hon. Friends now find themselves. It is no wonder that, over the past few weeks, the country has been preoccupied with the question of who funds the Tory party, and that so many Tory Members of Parliament have substantial interests outside the House. It is astonishing that some of them find time to be Members of Parliament, given the interests that they have to declare. I think that legitimate and important points have been raised in this short debate—not just about the reserve provisions available to Lloyd's, although it was right to draw attention to that, but about the fact that the Government have and represent so many vested interests that they cannot exercise the objectivity that most people expect of a Government.
As I have said, we broadly welcome this part of the Bill. It is important to establish matters on a proper footing. That is why we were very selective about the amendments that we tabled. If the Minister had been right, it would have been very tempting for some people to vote against the entire provision, but we did not do that—we wanted to focus criticism where it deserved to be focused. Before the acceptance of our proposal today, a tax shelter was being created. The Government have accepted that that has happened. They have therefore tabled an amendment that closes that tax shelter loophole.
One remaining matter must now be dealt with, and—
§ Mr. Alan Duncan (Rutland and Melton)Will the hon. Gentleman give way?
§ Mr. DarlingNo, I am just about to finish. The hon. Gentleman has not been here for the entire debate. He cannot expect to walk into the Chamber when it suits him 707 in order to raise a matter. If he wants to speak on Report, he can do so when we debate the many other matters that are before us.
Amendment No. 21 deals specifically with unfinished business. We are not persuaded by what the Government have said; therefore, we shall seek to press the amendment to a Division. I understand that, for technical reasons, the amendment will not come before the House until tomorrow afternoon, so we shall vote on it when we reach it. In the meantime, as the aims of our new clauses 1 and 2 have been fully met by Government amendment No. 6, I beg to ask leave to withdraw the motion.
§ Motion and clause, by leave, withdrawn.