HC Deb 12 July 1993 vol 228 cc777-84
Mr. Nicholas Brown

I beg to move amendment No. 26, in page 54, line 38, at end insert—

'( 1A) The amendment made by subsection (1) above shall not have effect as respects so much of the amount or value of any distribution as is payable to a section 505 body which, in accordance with regulations made by the Board, supplies a certifcate to the company making the distribution to the effect that it is such a body.

(1B) A body is a section 505 body if it is—

  1. (a) a charity (as defined in section 506(1) of the Taxes Act 1988);
  2. (b) a body mentioned in section 507 of that Act (heritage bodies); or
  3. (c) an Association of a description specified in section 508 of that Act (scientific research organisations).

(1C) The Board may by regulations make such incidential consequential, transitional provision as they consider necessary or expedient in connection with subsections (1A) and (1B) above (including provision amending any provision of the Taxes Acts).'.

Mr. Deputy Speaker

(Mr. Michael Morris): With this, it will be convenient to take the following amendments: No. 8, in page 54, line 41, at end insert—

'(2A) The amendment made by subsection (1) above shall not have effect as respects so much of the amount or value of any distribution as is payable to a section 505 body which, in accordance with regulations made by the Board, supplies a certificate to the company making the distribution to the effect that it is such a body.

(2B) A body is a section 505 body if it is—

  1. (a) a charity (as defined in section 506(1) of the Taxes Act 1988);
  2. (b) a body mentioned in section 507 of that Act (heritage bodies); or
  3. (c) an Association of a description specified in section 508 of that Act (scientific research organisations).

(2C) The Board may by regulations make such incidental, consequential, transitional and supplemental provision as they consider necessary or expedient in connection with subsections (2A) and (2B) above (including provision amending any provision of the Taxes Acts).'.

No. 9, in page 57, line 24, [Clause 80], leave out from beginning to end of line 25 on page 58.

Mr. Brown

It is appropriate that, having discussed one tax rise, albeit an overt tax rise, we now proceed to discuss a substantial concealed tax rise, and one which bears in a most unfair way on charities—[Interruption.]

Mr. Deputy Speaker

Order. I should be grateful if hon. Members would either listen to the hon. Gentleman speaking to the amendment or retire quietly from the Chamber.

Mr. Brown

Conservative Members, whose consciences must already be pricking them, should stay and listen to my exposition of what is intended to be a relieving measure —[Interruption.] They shout and jeer. suggesting that they are not sympathetic to the cruel and unfair position in which charities find themselves.

Those Tory Members who served on the Committee considering the Finance Bill will be aware that we have received a substantial number of written representations about the point. It would probably do Tory Members some good—at least it would inform them—if I read each and every one of those representations into the record. It would take some time. However, they might prefer it if I broadly outlined the Opposition's case, and if I were heard in silence it would be easier for me to do so. [Interruption.] I see that the hon. Member for Medway (Dame P. Fenner) is already seized by my remarks and wishes to make a contribution. Would she like me to give way to her?

Dame Peggy Fenner (Medway)

indicated dissent.

Mr. Brown

No. I am sure that it is shame that keeps her seated.

When the former Chancellor addressed the issue of advanced corporation tax in his Budget speech, he promised us a measure which would, on the one hand, help all dividend-paying companies. That sounds like good news. He said that he would provide help in a way that would also raise considerable revenue. That should have set the alarm bells ringing, as of course it did, among two interest groups: pensions and charities, especially charities that rely on income from equity investments.

10.45 pm

To some extent, at least, the Government realise that the impost is shameful because they have provided for transitional arrangements to ease in the tax. The arrangements grant temporary relief to charities, so the Government clearly realise the harm that they are doing.

The impact on charities is bound to be severe and bizarre because the extra tax will come directly from the money that charities use for charitable purposes—in effect, a shift of money from those purposes to the Exchequer, for the Chancellor's purposes. And those purposes, according to Conservative Members, are to do with reducing the deficit.

The irony lies in the fact that the work that the charities which have written to us are doing is often financially assisted by the Government. Charities make a part payment towards certain projects, and the Government make another payment towards them. Some of the projects jeopardised by the extra tax are the very ones on which the Government have looked favourably—in some cases, they have even helped them by way of partnership.

Certainly, the charitable purposes of the organisations that have sent in representations are approved by the Government. The work that they do often substitutes for public provision. The organisations say that the Government are transferring responsibilities from the public sector to the charitable organisations at the same time as withdrawing funding from them through the tax system. They are also withdrawing funding through local government sources, inner city partnerships and other schemes.

Charitable organisations tell us that they expect to lose about £100 million eventually under these changes. They expect to lose £130 million from the VAT impost; and to offset all that, they expect an extra £31 million in gift aid and payroll giving—nothing like enough to make up for their losses.

This has been a bad year and a bad Finance Bill for charities. That is not just my view; it is also the view held by the Charities Tax Reform Group. Ministers are attempting to breach an important principle here—that charities should be exempt from taxation on their incomes. We seek to remedy that state of affairs by means of our amendments.

Mr. Alan Howarth

The proposed tax change to advance corporation tax in the Budget has not hit the headlines, but it represents the most important change for charities.

The way in which the change will affect four charities illustrates the seriousness of the damage that will be caused to charitable income. Once the new system is fully operational, the Royal National Lifeboat Institution will lose £250,000 a year as a result of the reduction in tax relief on dividend income. The gravity of that loss should be measured in comparison with the £80,000 that that charity will have to pay as a result of the imposition of 17.5 per cent. VAT on fuel and power. Barnardos will lose £200,000 as a result of the loss of tax relief on dividend income, while it will have to pay out £122,500 as a result of the VAT imposition.

The Coal Industry Social Welfare Organisation will have to pay an additional £460,473 in tax on dividends compared with £15,556 on VAT on fuel and power. The most spectacular figure, if I may use that adjective, is the amount of the burden on the Wellcome trust, which will have to pay no less than £10 million additional tax on dividend income compared with £70,000 in VAT on fuel and power. Those figures illustrate the importance of the issue.

The cost to charities of the reduction in the value of tax credits on dividends by the end of the transition period will be, on the Government's admission, not less than £50 million and the Charities Tax Reform Group calculates that the sum cannot be less than £100 million.

I tabled amendments Nos. 8 and 9 to protect charities from this proposed change. I did so after careful discussions with the Charities Tax Reform Group, which itself took advice from a parliamentary draftsman. I was therefore rather surprised when the hon. Member for Peckham (Ms Harman) lifted my amendment No. 8 and retabled it some three lines further forward in the Bill. Some people would call that pilfering; I would call it plagiarism. Plagiarism is a weakness displayed by people who want the world to be impressed by what they do, but who do not produce their own ideas, and lack candour, courtesy and shame. It is a pity that the hon. Lady could not support my amendment. Policy towards charities should not become another arena for party political opportunism.

Mr. Nicholas Brown

rose—

Mr. Howarth

I would be happy to give way to the hon. Member for Peckham if she cares to defend her conduct. Does the hon. Lady wish me to give way to her or would she prefer a knight errant in the person of the hon. Member for Newcastle upon Tyne, East (Mr. Brown) to champion her cause?

Mr. Brown

The hon. Gentleman should not be too chirpy about all of this. He spent the first part of his speech whingeing about his right hon. Friends on the Front Bench and now he is whingeing at my colleagues on the Opposition Front Bench. He should be grateful for our support. If he refers to the Committee proceedings, he will discover that our position is entirely consistent.

Mr. Howarth

It is just a shame that once again the Opposition have been unable to produce their own ideas about how to deal with the problem.

I appreciate the Government's need for increased revenue. I also appreciate why my right hon. Friend the then Chancellor considered the possibility of improving the Government's revenue from taxation of investment income, and I am grateful for the transition period that the Government propose to allow to charities.

The Government say that the transition period will allow charities time to rearrange their portfolios, as if to suggest that charities might, by and large, escape the impost. I fear that matters will not be so simple. Responsible trustees will need to keep a balance in their investment portfolios and I am far from optimistic that charities will be able to escape from more than a limited proportion of the new tax burden. My amendments therefore call on the Government to convert the transitional relief into permanent relief. Technically, there would be no difficulty about doing that and I believe that my amendments would achieve that purpose.

Why is it so important that charities should be given permanent relief from the new taxation? The Government need a clear and consistent strategy in relation to charities. They are asking charities to do more and more. With care in the community, they are inviting charities into a new, more formalised and more extensive partnership with the state. It is right that they should do so. State agencies can only do so much. We are bumping up against the limits to which the Government can tax and borrow. State bureaucracies are relatively clumsy; indispensable though they are in social provision, they lack sensitivity to the infinite variety of personal human need.

Charities have entrepreneurial qualities; they are innovative, with a capacity to respond flexibly to new needs as they are identified. They are also highly cost effective as they lever voluntary energies. We need what Beveridge described as a comprehensive policy of social progress, which means harnessing all the resources of society. The Government should develop a new partnership with charities so that we can mobilise society's generosity. Charitable activity benefits not only the recipients but the givers, and strengthens our society's bonds.

For those reasons, the Government need a fully considered, clear view of the role of charities and the nature of the partnership that they want with charities and voluntary organisations. That implies that they should consider the range of their policies systematically to ensure that they are consistently supportive of charities. It means, for instance, that a national lottery intended to raise additional money for good causes should not be so designed as to generate a net financial loss to charity. I am sorry that my amendments on that subject were not selected, but I will say no more on the matter as I would be straying out of order if I did.

Cumulatively, the tax concessions for charities introduced by the Government during their period in office had, before the Budget, reached the impressive total of between £900 million and £1 billion. Sadly, the Budget will reduce that total by not less than £100 million once all the measures in it are fully operational. Of those, the ACT change is particularly important.

Mr. Dorrell

I am listening to my hon. Friend carefully. Will he enlarge on the calculations leading to the estimate that when the ACT changes have run their full courses they will cost the charities world £100 million? Charities currently receive tax credits to the value of approximately £200 million. I do not understand, in simple arithmetic, how reducing the tax credit rate from 25 to 20 per cent.—a reduction of a fifth—can lead to a reduction of a half in the value of tax credits received by charity.

Mr. Howarth

I do not have all the figures to hand to assist my hon. Friend with the details of the computation. However, I am sure that he will respect the Wellcome trust as a source. The Wellcome trust considers that the measure will cost it an extra £10 million. If my hon. Friend considers the other large charitable foundations which we are fortunate to have in this country, and the totality of registered charities with investment income of widely varying levels throughout the country, he should not be surprised. The Charities' Tax Reform Group, which has a reputation for integrity and a high level of competence in policy analysis and how it develops its recommendations, has suggested that figure, so I hope that my hon. Friend will be willing to accept it as a serious estimate.

At a time when the Government are asking charities to do more, when private donations to charities have been depressed as a consequence of the recession, and when central Government and local government grants to charities have been under pressure, the Government have chosen to present a Finance Bill reducing the overall value of the tax concessions that they provide to charities. The Government should be more systematic and consistent in their relationship with charities and their policy towards them.

Let us consider the case of the Wellcome trust. The Government are looking to medical charities to support a larger proportion of the cost of medical research in this country. As it is, medical charities contribute more to those costs than the Government's directly funded Medical Research Council does. I make no complaint about that. But it seems to be an instance of where the left hand in Whitehall is not very clear about what the right hand is doing. The Government want medical research charities to do more to support medical research, but then reduce their capacity to do so.

11 pm

It is time that the Government reconsidered the balance of reliefs between giving and expenditure. Given the background of the large public sector borrowing requirement, the 20p basic rate which my right hon. Friends have held out to us for some time past still seems a good way off in the distance. The treatment of ACT can, however, be seen as a straw in the wind and a prelude to the 20p basic rate. As the Government are successful over the years in reducing levels of income tax, the value of income tax concessions and of relief on giving falls. Charities receive less money back as the rates of tax become lower, and as it becomes less tax efficient for donors to give to charities it becomes less attractive to them to do so, so income to charities on that side will tend to fall. At the same time, for good economic reasons, the Government have chosen to switch the burden of taxation to indirect tax so that the rates have increased. The extent of the application of indirect taxation is also increasing. It is timely that my right hon. and hon. Friends should reconsider at a fundamental level their strategy for fiscal support for charities.

I hope that the Government will be able to reconsider their policy on ACT in relation to charities.

Mr. Andrew Rowe(Mid-Kent)

Is there not another important argument? If the Government demand more and more from charities and the income to charities from donors falls, there will inevitably be a demand for the shortfall to be made up by direct grant from public sources? The danger of that process is that more and more charities will be pushed into becoming service providers to a monopoly purchaser. Charities would then lose much of their principal value—the fact that they have considerable freedom to choose whom they will help and how they will help them.

Mr. Howarth

With his deep knowledge of the charitable world, my hon. Friend has made an extremely important point. The Government must be wary that their tax policies do not result in their cutting off their nose to spite their face, to use a rather inelegant phrase.

Will my right hon. Friends rethink the ACT measure as it bears on charities? Will they give careful thought to the scope for a VAT refund scheme? It is extremely important that before we reach the autumn Budget some searching and radical thought should be given by my right hon. Friends across the range of Departments on what they expect of charities and how they are to support them.

Mr. Dorrell

In introducing the debate, the hon. Member for Newcastle upon Tyne, East (Mr. Brown) drew attention to the language that my right hon. Friend the Member for Kingston upon Thames (Mr. Lamont) used in introducing the change in the Budget speech. He made it clear that the purpose of the advance corporation tax change in the round was, first, to help dividend-paying companies and, secondly, to raise revenue. There has never been any doubt that that has been the effect of the slightly complex changes in ACT and tax credit rates.

The policy injects £1 billion this year and £1 billion next year into British company balance sheets. In the third and subsequent years, it delivers £1 billion into the Exchequer as a revenue-raising measure. Therefore, it both helps dividend-paying companies and raises revenues, as the Chancellor made clear that it would when he introduced the change.

The effect of the amendment would be to maintain a 25 per cent. rate of ACT and associated tax credits where the shares of company are held by a charity. That proposal was also supported by my hon. Friend the Member for Stratford-on-Avon (Mr. Howarth). It is not difficult to see why that course does not commend itself to the Government, bearing in mind the practical effect of that tax change. It would discriminate between shareholders when determining the tax consequence of paying a dividend. The amendment requires that when a company pays a dividend it would first have to find out whether a share on its shareholders' register was held by a charity. If it was, the company would be required to pay 25 per cent. ACT rather than 20 per cent. to allow the charity to reclaim a 25 per cent. rate of tax credit on the dividend.

The proposal is extremely complex. My hon. Friend the Member for Stratford-on-Avon said that it would be possible to implement it. I cannot argue that it would be impossible, but it would certainly be complicated. Companies would be denied the benefit of the change, at least those with charities on their shareholders' register, and in the worst case it might make the charity undesirable and unwelcome as a shareholder. The hon. Member for Newcastle upon Tyne, East seems to be learning the lesson of his hon. Friend the shadow Chancellor because he is building for himself a lectern on the Opposition Dispatch Box. [Interruption.] I hope that he will not read it all.

I have illustrated why I do not find the proposal by the hon. Member for Newcastle upon Tyne, East supported by my hon. Friend the Member for Stratford-on-Avon attractive. That should not be taken to undermine in any way the Government's commitment to charitable enterprise and to providing the broadest possible support to charitable activity.

I entirely agree with my hon. Friend the Member for Stratford-on-Avon about the importance of encouraging charitable activity and its value to the person receiving it and those who are engaged in providing it. My hon. Friend was right when he said that charitable activity is part of the bond that binds society. It is precisely for that reason that we have proposed for the various organisations that will be affected by the change in ACT a long transitional arrangement. That will shield charities from the immediate consequences of the reduction in the rate of income tax on dividend payments from 25 to 20 per cent.

However, they cannot be shielded from that change indefinitely, nor is it right that they should be, especially when we remember, as my hon. Friend the Member for Stratford-on-Avon acknowledged, that charities have already felt the effect of the reduction in the standard rate of income tax and therefore of tax credits and ACT from 33 to 25 per cent. The Government are committed to a further reduction to 20 per cent. We have given notice of the effect of the reduction in the value of tax credits. We are committed to it and when the transition provided for in the Bill has run its course, charities will face the new situation. As I have said, that does not reduce the value that the Government attach to charitable activity. However, we recognise that the inevitable consequence of a reduction in the standard rate is that the associated tax credits will also reduce in value. I cannot commend the amendment.

Amendment negatived.

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