HC Deb 29 July 1997 vol 299 cc194-209
Mr. Tim Boswell (Daventry)

I beg to move amendment No. 25, in page 22, leave out lines 24 to 37.

The intention of the amendment is to modify the Government's proposals on distributions and tax credits arising on or after the tax year 1999–2000. It would strike out the provisions of the Bill that deprive United Kingdom residents who are not taxpayers of the payable tax credits that they can now claim on their dividends. We believe that the amendment says a great deal about the philosophical differences between the Conservative party and the Labour party, and a good deal about the practical outcome of the stances that they each adopt: where they are coming from affects where they get to.

There was a point in the partial imputation system that was introduced by a Conservative Government in 1973. Those of us who served on the Standing Committee that considered the Bill know that the Economic Secretary has emphasised her belief that that was a distortion. She has sold her proposals not as a tax increase—which they are—but as the removal of a distortion that has crept into the tax system. We do not accept that.

I remind the House that the purpose of the changes introduced nearly a quarter of a century ago in 1973, after the former Labour Chancellor, Lord Callaghan of Cardiff, had unsuccessfully tried to produce something similar to what the Government are producing now, was to avoid double taxation on the same profits arising in the hands first of the company then of its shareholders. That was done by arranging that advance payments of corporation tax against dividends should be met by a matching tax credit in the hands of shareholders.

Shareholders were then, and are now even more, a heterogeneous bunch. Many more shares now are held by institutions, some of which, such as pension funds, are non-taxpayers; others, such as insurance companies, have special arrangements. Income on dividends for pension funds is effectively exempt because the funds pay their tax on the way out to pensioners, in whose hands it is taxed.

Other types of shareholders include collective investment vehicles, such as the unit and investment trusts that we debated extensively in Committee, and holders of personal equity plans, who are individuals, but in a protected environment. There is still a significant number of private direct shareholders, especially in privatised companies; it has been estimated that at the peak there were about 10 million, and anyone who reads a company's annual report and looks at the distribution of shareholders will be likely to find that, although the majority of the share capital is held by institutions—often by a limited number of institutions, such as pension funds—there is a numerical preponderance of individual shareholders, who in some cases still account for a significant proportion of the share capital. Those shareholders pay varying rates of tax: some are higher-rate taxpayers; some on the basic rate; some on the lower; and some, the subject of the amendment, do not pay income tax at all.

There are two remarkable aspects of the Government's proposals. The first is that they have found it necessary to put in place elaborate arrangements, as set out in schedule 4, to effect them. Schedule 4 introduces us to the delights of schedule F ordinary rate, higher rate and trust rate, on the back of a residual tax credit of 10 per cent. The reason for that residual tax credit will become apparent later on.

The effect on the lay taxpayer, the man or woman who has an income from employment and a few shares—let alone somebody older, with a pension and a few shares, who does not find forms easy to manage—is likely to be pretty awkward; the more so now that self-assessment is being introduced.

There will be serious trouble with the self-assessment forms, given that we are talking about a limited amount of people's personal income. It is not their professional income from employment, and they will not all have accountants. It is pretty difficult even for accountants to contend with some of the complexities of schedule 4.

I hope that the Economic Secretary will reflect on those concerns; perhaps she can find a simpler way of effecting the measures. If she reflects, as I wish that someone had reflected before the Bill was introduced, she may come up with a simpler structure.

The Government have set up an elaborate, roundabout route, if not to Paradise by way of Kensal Green, at least to Birmingham by way of Beachy Head. They have very probably succeeded in their goal of achieving no detriment to the ordinary or even the higher-rate taxpayer. Praise the Lord: the Paymaster General is unscathed by the measures. It is only the non-taxpayer—the Aunt Agatha, although she will change her name later in my speech—who will lose out.

The second rather bizarre aspect of the proposals is that Ministers show clear signs of not knowing what they are doing; perhaps that is understandable, even if not formally excusable, given the complexity of the proposals. Conservative Members are thoroughly familiar with the law of Bristol, South, as enacted by the Financial Secretary, from whose constituency it is named. Speaking of the impact of advance corporation tax changes on pensioners, she said:

The measure is good for pensions and pensioners, not bad for them."—[Official Report, 3 July 1997; Vol. 297, c. 507.] The same philosophy seems to have affected the Economic Secretary, who said: Ordinary shareholders who previously did not pay tax are not adversely affected by the Bill. Search me about that; indeed, search my right hon. Friend the Member for Wells (Mr. Heathcoat-Amory), because when he rose more than once in the dialogue that ensued to challenge her about that assertion, she replied: I refer the right hon. Gentleman to the Official Report."—[Official Report, Standing Committee A, 21 July 1997; c. 224–25.] Her latest statement on the record therefore remains uncorrected. I believe that it is wrong—we challenge it—and that she should use this opportunity to correct it formally.

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There will indeed be an impact on non-taxpayers who previously received the benefit of payable tax credits, which will be withdrawn with effect from April 1999. Within two years—this is the sole exception of treatment—non-taxpayers will be in exactly the same position regarding payable credits as pension funds are now, although there are some significant differences between them.

The first difference is that pension funds are much larger, accounting for about half the value of the current tax credits, while individuals, excluding those in PEPs, account for only about £100 million, and the second is that pension funds and other institutions have effective voices to lobby and cry foul at the Government's proposals—they have indeed lobbied us and we rehearsed those points extensively in Committee—but Aunt Agatha has usually and typically only herself to rely on. She will not know what has hit her until she finds that she can no longer reclaim the cash.

In its Budget submissions, the Institute of Chartered Accountants in England and Wales cited an example of a widow aged 80 with a state pension of £3,247 a year and dividends of £1,600, which currently attract a tax credit of £400, which is about £8 a week. Even if she were still to get the nominal 10 per cent. tax credit—and the Government do not propose to offer her even that—she would be £222.23 a year worse off; as it is, she will lose the whole £400. As the institute says, the effect is harsh and is likely to encourage such people to dispose of their shares.

Because people in that situation are approaching the end of their working years, although I hope not of their natural life, and can hardly plough new savings into, for example, individual savings accounts, having instead to rely on what they have, the measure is a dead loss to them.

In Committee, the Economic Secretary briskly referred to the need to encourage savings, presumably in a tax-sheltered medium, such as gilt-edged, and made the remarkably clear but remarkably challengeable assertion that tax credits for non-taxpayers are a contradiction in terms. In doing so, she revealed that she simply did not understand—or, to put it more charitably, perhaps did not accept—that companies representing shareholders were already paying corporation tax on behalf of all their shareholders, including the non-income-tax-paying shareholders who are the subject of the debate. I say "companies representing shareholders" because the two cannot, as it were, be unpicked.

The final anomaly of treatment, which gives rise to political as well as technical concern, is that the Government can take tax credits away from those with no power, but fight shy of taking them from those with more clout. The Budget documentation revealed that foreign shareholders receive some £600 million a year in payable tax credits—but they, of course, have the protection of double—tax agreements. That is what the tax credit—continuing and notional, and never repayable—is about. The Government must go through the rigmarole of maintaining a notional 10 per cent. tax credit as a basis for calculating relief for overseas taxpayers.

The Government now say that the effect is so small that it will make no difference, and that the effective credit is likely to be about 0.25 per cent. of the total income. That gives rise to a dilemma. Either the Government have kept faith with the spirit of the double-tax agreements that are being concluded for this country, or they have gutted them, while preserving a legal shell against legal challenge for the renegotiation of those agreements. Either they are repaying significant funds to overseas shareholders, or they are not; and I think that if they are not, overseas shareholders and their Governments will draw an inference from that. The tension that is thus engendered also gives rise to unfairness in the difference between the treatment of the foreign taxpayer—the foreign shareholder—and that of the domestic shareholder.

Not only do the Government dislike the small domestic shareholder, whom they deny the benefit of credit that is available to higher-rate taxpayers in this country—because it will still run for lower, basic and higher-rate taxpayers—but they dislike the United Kingdom resident shareholder and non-taxpayer so much that they are prepared to contrive, notwithstanding the complexity involved, to contemplate a system that pays credits to the foreign resident who is in exactly the same income position as the domestic taxpayer to whom they deny those credits—or even in a better position. In those circumstances, I think that Aunt Agatha will change her personality.

Let us suppose that I have two aunts—Aunt Ursula, who lives in Uxbridge, and Aunt Bertha, who has gone to live in Boulogne. Whether she has gone for the seafood or to watch French films—which we debated in another context in Committee—I know not. Both have inherited from their mother a share portfolio—what Victorian novelists would have described as a modest competence—worth, say, £10,000, which generates an annual income of £500. In addition, Aunt Bertha has shares from her late husband worth, say, another £10,000, which means that she has two modest competences, as well as a residence in Boulogne. The other income—pensions and so forth—is the same in both cases.

In those circumstances, who will receive more help from the United Kingdom Treasury—Aunt Ursula of Uxbridge, or Aunt Bertha of Boulogne? You have guessed it, Mr. Deputy Speaker. Not only does Aunt Bertha receive a tax credit on her husband's shares; she receives a tax credit on the shares that she inherited from her mother—which the Economic Secretary is denying her sister Aunt Ursula, who happens to live in Uxbridge.

I shall draw my remarks to a close, having exposed the incoherences of the Government's approach. I can only conclude that the Government have either been hasty in preparing the legislation, or exercised malice. Either they intended to do what they have done, or they do not care what they have done. They preach the brotherhood and sisterhood of man, they talk about the need for investment and they introduce what they would call a Budget for the people; but, when we vulgar persons analyse the Budget, we find that it gives tax credits to British shareholders only when they have enough capital to generate an income large enough to incur tax, and gives greater credits to those who go abroad than to those who stay in this country. It targets the pensioner of modest means who needs the tax credits most. It is unfair and, in the amendment, we challenge its damaging social agenda.

Mr. Gibb

As my hon. Friend the Member for Daventry (Mr. Boswell) said, the amendment seeks to end a distortion introduced by clause 30. The Government contend that by removing the ability of non-taxpayers to retain their tax credits, they are removing an anomaly or distortion; but the contrary is true. All the measures in the Budget introduce a severe distortion.

The explanatory note attached to clause 30 states: Currently, the system actually goes further than simply mitigating any double charge to tax. Where a person is exempt from tax, or where their tax credits exceed their tax liability, the tax credit can be paid to them. This introduces a distortion into the system. The payment of tax credits to certain shareholders means that profits paid out by a company can actually face a substantially lower effective tax charge than the profits which are retained by the company and reinvested. That is a political statement if I ever heard one. Similarly, "The Pocket Budget", produced with £50,000 of taxpayers' money—the so-called Inland Revenue explanatory note—makes a political statement, with which Conservative Members whole-heartedly disagree. My hon. Friend the Member for Grantham and Stamford (Mr. Davies) has already explained that the imputation system does not introduce a distortion, and that removing the so-called distortion itself creates a distortion. The Inland Revenue seems content to state categorically that there is a distortion, but it is treading on a political issue—and, again, the Government are using taxpayers' money to air a political issue.

That point goes to the heart of the imputation system. With your indulgence, Mr. Deputy Speaker, let me try to explain to Labour Members precisely how the imputation system works, and how the taxation of a dividend in the hands of an individual works. Let us suppose that a dividend of £80 is paid to an individual by a United Kingdom company. That £80 must be grossed up in the individual's tax return by tax credit, and the individual is therefore regarded as having received taxable income of £100. A basic-rate or lower-rate taxpayer will have £100 in his or her tax return, and will then pay tax at 23 or 20 per cent., depending on whether he or she is a basic-rate or lower-rate taxpayer. The lower-rate taxpayer will therefore have a tax bill of 20 per cent. of £100, which is £20.

That £20 bill is paid by the tax credit that is attached to the dividend, so the lower-rate taxpayer will have no further liability. The basic-rate taxpayer will have a theoretical bill of £23, but he, too, will have no further tax to pay, because the tax credit received with his dividend wipes out his bill, too. We then turn to the higher rate taxpayer, who is regarded as receiving £100 of dividend income. He or she is taxed at 40 per cent. on that income, so the tax bill is £40, against which is a placed tax credit of £20, giving a final tax bill of £20.

We then turn to the position of the non-taxpayer, who is again regarded as receiving £100 of gross income from the £80 dividend because the dividend has to be grossed up. On the non-taxpayer's tax return, if one is filled in, it says £100 of taxable income from dividends less the personal tax allowance—the implication being that a non-taxpayer has not yet fully used up the tax allowance—therefore the tax bill will, in effect, be zero.

However, the non-taxpayer will have only a cheque for £80 in his or her hands, despite having theoretically having received income of £100. Where does the remaining £20 come from? The answer is that the non-taxpayer applies to the Inland Revenue, which sends a cheque for £20, corresponding to the tax that the company paid over to the Inland Revenue through the advance corporation tax mechanism just after the dividend was paid. The company has paid the tax of the taxpayer, but if the individual receiving the dividend is not a taxpayer, that individual expects to get the tax back and thus be in the same position as the other two types of taxpayers in having received gross income of £100.

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That is how the imputation system works. As it is currently structured, there is no distortion in the system. The explanatory note goes on to say: The payment of tax credits to certain shareholders means that profits paid out by a company can actually face a substantially lower effective tax charge". That is misleading: it is not the tax credit that creates the lower effective rate of corporation tax; it is the personal allowance of the non-taxpayer that gives rise to that beneficial effective tax rate. The personal allowance of about £4,000 means that someone earning only £4,000 per annum faces a lower effective rate of tax than someone earning £5,000 per annum; and someone earning £5,000 per annum faces a lower effective rate of tax than someone earning £6,000 per annum. That is because Parliament has decided that people on low incomes should pay a lower effective rate of tax. The House decides at every Budget that it is right that people on low incomes should pay a lower rate of tax, which is why we have the whole notion of personal allowances.

The same applies to pension funds. Parliament decided that pension funds should be tax free, and the purpose to making them tax free is to encourage and help people to save for their old age. That is and should still be a priority, given that the era we are entering is one of an ever-aging population. The fact that a company appears to have a lower effective rate of tax when it distributes profits to a non-taxpayer is irrelevant, because that arises from the special status that we have deliberately attached to non-taxpayers. Parliament decreed that certain individuals should be non-taxpayers for the sound social reasons of helping people on low incomes and encouraging people to take out pensions and provide funds for their old age.

The essence of the imputation system—or, as it should be called, the partial imputation system—is that the combined tax position of both the company and the shareholder is looked at. In most cases, where the shareholder pays tax, the profits distributed are taxed—broadly speaking—only once, at the rate applicable to company and shareholder. For example, a basic rate taxpayer will pay no more tax because the company from which the dividend is received has paid tax on those profits at 33 per cent. A higher-rate taxpayer will pay a little more, because he or she pays tax at 40 per cent.

A UK company receiving a dividend from another UK company will pay no more tax, because the company paying the dividend has already been taxed. When a non-taxpaying shareholder receives a dividend from a UK company, the overall tax position is that the company and shareholder will have an effective rate of tax of about 15 per cent., because one half of that combination of company and shareholder—the shareholder—is not taxable, so the imputation system does not seek to extract tax from that individual. To do so would be to impose a tax that Parliament has decreed, for social reasons, should not be imposed.

The new Labour Government do not understand business tax or the imputation system, so they have effectively imposed a tax that is focused solely on non-taxpayers. It is the most regressive tax ever imposed, and the amendment seeks to undo that damage.

I had hoped that the amendment would be drafted a little wider, because the clause has a detrimental effect on overseas investors. My hon. Friend the Member for Daventry has given a wise explanation of why the Government decided to halve the tax credit from 20 to 10 per cent., apparently in order not to contravene the treaties.

Let us suppose that a United States shareholder invests in a wholly owned subsidiary in Britain. Previously, that company was able to obtain a repayment of half the tax credit, less a withholding of 5 per cent. of the net dividend plus the tax credit. That meant that the effective rate of tax for an overseas United States shareholder in a UK company was about 28 per cent. instead of 33 per cent. It was therefore attractive for US companies to own and invest in the UK.

Now, however, halving the 10 per cent. tax credit leaves only 5 per cent., from which is withheld 5 per cent. of the net dividend plus the tax credit. That leaves almost nothing—in fact a repayment of only 0.25 per cent. or less is received, which will not be attractive to investors from the United States. The consequence of the measure is that it will discourage investment in the United Kingdom, yet the Budget was meant to encourage investment by companies.

Overall, the clause is highly damaging to shareholders, non-taxpayers and overseas investors. Had the Government spent a little time between announcing their Budget intentions and drafting the Finance Bill, and gone to the trouble of consulting outside bodies, many of these points would have been spotted. The Government have accused Conservative Members of arrogance in the way our arguments were advanced, but the truth is that the arrogance is on the Government side. Why did they not spend a little time consulting? There seems to be no real evidence that there was any requirement to get the Finance Bill passed by 4 August—that is certainly the understanding of the Institute of Chartered Accountants in England and Wales—so the rush can only be put down to the arrogance of newly gained power.

Another example of that arrogance comes in clause 39, in which there is a drafting error. The error does not appear to have been amended in the Standing Committee, yet I raised it in Committee. The Financial Secretary said to me: I am grateful to the hon. Gentleman for making that point. She went on: I am happy to write to him and to other members of the Committee making our"— that is, the Government's— intentions absolutely clear. If the hon. Gentleman is correct, we shall have to return to the matter."—[Official Report, Standing Committee A, 22 July 1997; c. 393.] Of course, I have received no such letter, and the drafting error in clause 39 remains.

Mr. Boswell

I may be able to help my hon. Friend.

Mr. Deputy Speaker (Mr. Michael J. Martin)

Order. Can the hon. Gentleman explain to me why he is discussing a different clause? The amendment before us relates to clause 30. How does clause 39 relate to that?

Mr. Gibb

I raised it as an example of the Government's arrogance, but I take your point, Mr. Deputy Speaker. I hoped that the clause would be amended before Third Reading, and I am keen that the Bill should not enter the statute book containing a drafting error.

Mr. Boswell

My hon. Friend may not be aware that, within the past few hours, I have received a response from the Government on that point. This shows that it is difficult for any of us, particularly when we cannot seek outside advice and do not have access to expertise, to know whether it is right. It is unfortunate that my hon. Friend has not yet had a chance to see the letter, let alone assimilate it. I am afraid that the same points may well apply to clause 30 as well.

Mr. Gibb

I am grateful to my hon. Friend for pointing that out, and I look forward to reading the letter when I sit down. I rest my case, Mr. Deputy Speaker.

The amendment was drafted to try to alleviate the unjust position that clause 30 creates, particularly for non-taxpayers. Many retired people in my constituency of Bognor Regis and Littlehampton have small portfolios of shares. As a result of the Budget, after April 1999 they will no longer be able to reclaim small sums of money back from the Exchequer on receiving dividends from their small portfolios.

The measure is regressive and unfair, and I hope that the Government will accept the amendment as a way of alleviating a distortion created by the Finance Bill.

Mr. Edward Davey (Kingston and Surbiton)

The Liberal Democrat party supports the amendment whole-heartedly, as it aims to protect non-taxpaying pensioners on the lowest incomes.

Some of the points that Conservative Members and I raised in Committee were not properly answered by Ministers, who showed no regard for the effect that the measure would have on low-income pensioners. They claimed that that category of pensioners would be protected because removal of tax credits would be phased in and would not come into effect until April 1999. The Government say that, by that time, they will have put in place individual savings accounts, enabling such pensioners a tax exemption on those dividends.

I would argue, however, that the Government are not living in the real world. The hon. Member for Daventry (Mr. Boswell) described the real world of self-assessment and complicated tax legislation. In the real world, savers are inert to changes in the tax regime. Aunt Agatha and Aunt Ursula are probably the most unresponsive of savers. They do not read the financial pages of Sunday newspapers every week for advice and they are much less likely to be aware that such tax measures have even been introduced. Indeed, Aunt Agatha will probably get a shock in April of the financial year 1999–2000, when she will lose her tax credit. She was probably looking forward to spending it, although it would probably have been spent on making ends meet.

The money that will be taken from those pensioners will make the difference between giving them some dignity in their old age and giving them no dignity. I should like to understand why the Government proposed that move, particularly given the efforts that they have expended on behalf of foreign shareholders and higher-rate taxpayers. I do not criticise those efforts, but simply say that the Government seem to have perverse priorities if they wish to protect those affected by the changes. Why are they not acting on behalf of Aunt Agatha and Aunt Ursula?

The hon. Member for Bognor Regis and Littlehampton (Mr. Gibb) said that part of the Government's argument is that they want to remove all distortions from the system. I disagree with the hon. Gentleman that the change in ACT does not remove distortion; there is a genuine argument that removing the ACT credit system removes distortion in the way companies decide on their dividend and investment policies. However, removing tax credits from non-tax-paying pensioners is not about removing distortions; it is about over-tidy minds in the Inland Revenue.

It is preposterous to suggest that protecting that group of non-tax-paying pensioners would have led to distortions within companies' dividend policies. It is ludicrous to suggest that quoted companies would change their investment mix if that protection were given to non-tax-paying pensioners. The Liberal Democrat party will therefore support the amendment whole-heartedly.

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Mrs. Liddell

I oppose the amendment. I do not wish to keep repeating myself—although why should I change what has been happening for the past couple of hours? The amendment goes over old ground and was discussed at length in Committee. It would stop the second stage, in 1999, of the abolition of payable tax credits for all UK shareholders.

I am not clear whether the amendment is also intended to allow pension funds to claim payment of tax credits again from 1999, although that may be one of its consequences. It comes to mind, given the comments of the right hon. Member for Hitchin and Harpenden (Mr. Lilley) on a previous set of amendments. I do not want to go over old ground. We have explained again and again why we have taken action to remove a distortion in the corporation tax system, which was affecting company behaviour and investment.

The entitlement to payable tax credits is removed from pension funds from Budget day and from others from 6 April 1999. The amendment would stop the second element of that change, leaving in place a permanent anomaly and distortion whereby some people would be entitled to a payable tax credit while others would not. That would simply not be sustainable.

As I have said repeatedly, it was not easy to decide whether we should move to abolish tax credits, because we recognised that it would be a complex measure and that we would have to take into account many knock-on effects. Clause 35 relates to charities, which was the subject of one of the best debates in Committee. Hon. Members on both sides recognised the great work done by charities and were unanimous on wanting to protect them. This measure, however, seeks to get rid of a distortion.

If we simply wanted to get rid of the distortion and completely ignore the long-term needs of ordinary savers—the Aunt Berthas, Aunt Agathas and Aunt Ursulas—the hon. Member for Bognor Regis and Littlehampton (Mr. Gibb) would be right to criticise us. If we sought simply to draw the line in 1999, he would be right to condemn us for saying that ordinary taxpayers would not suffer. However, that is not what we are doing. We are taking a two-year period to allow people to adjust their portfolios and savings requirements.

By 1999, we hope to have in place individual savings accounts. I have already made it clear to Opposition Members how anxious we are to include them in discussions about the future of individual savings accounts.

That is why, if the hon. Gentleman quotes what I said in Committee and does not match it with our intention to introduce individual savings accounts, he is right. However, through individual savings accounts we are seeking to develop a savings vehicle that suits all low-income savers, and is transparent and easy to understand. For many people, savings are as complex as the taxation system. We now have an opportunity to introduce a savings account that Aunts Agatha, Bertha and Ursula would find easy to comprehend and which would benefit them.

Mr. Gibb

The hon. Lady used the word "protected" with regard to charities. She said that charities need to be protected. I asked her from what. Perhaps I can suggest an answer: protected from the damage that clauses 30 and 19 do to charities. If she believes that charities should be protected from those devastating measures, what about pensions and non-taxpayers? Do they not also need protecting?

Mrs. Liddell

If the hon. Gentleman wants me to replay all the arguments of the Bill, I will happily do so, and it will take up the time until 9 o'clock, which will mean that hon. Members will not have an opportunity to debate other matters.

We took action to protect charities because they do not have the freedom of manoeuvre that other investors have. That is why we have given seven years. It is interesting to see the extent of the selective amnesia of Opposition Members. It was the previous Conservative Government who reduced the level of ACT. In doing so, the right hon. Member for Charnwood (Mr. Dorrell) said clearly: I did not seek to disguise the fact that the measure is revenue-raising. It is intended to raise revenue from a part of the economy where it can be raised, in the context of the Budget, with minimum damage."—[0fficial Report, Standing Committee A, 15 June 1993; c. 387.] We have acknowledged that charities will encounter difficulties. We recognise that if we take away something that has benefited certain groups of savers, we must put something in its place. That is why we are moving to the introduction of individual savings accounts.

I challenge the hon. Gentleman. Here is an opportunity for him to channel his undoubted talents into helping to create a savings vehicle that takes into account those who do not even have the modest competence about which the hon. Member for Daventry spoke. The hon. Member for Bognor Regis and Littlehampton belongs to a profession that is not known for hyperbole. He should remember that. He speaks about the measure as the most damaging and regressive change in the history of creation. That is wrong. We are getting rid of a distortion so that we can improve matters for the future.

It does no good to attack officials. The hon. Gentleman may think that in attacking me, he is attacking only me, but when he attacks the Revenue, he attacks the officials who construct the explanatory notes, and they do so with the best intentions.

We had a lengthy discussion in Committee about self-assessment. Hon. Members spoke about the complexity of the tax system. May I point out that the tax system did not become complex just from 1 May. The previous Government had 18 years to demystify the taxation system and the legislation surrounding taxation. What we propose to do with corporation tax and ACT is to remove yet another complexity from the taxation system.

There will be plenty of time to adjust the forms that must be filled in for self-assessment, to take the change into account. When taxpayers receive dividends, their dividend voucher will show, as now, figures for the dividend and the tax credit. They will have to copy those over to their tax returns, just as they do at present. They will not have to do anything more when completing their tax returns. The hon. Member for Daventry and I discussed in Committee the need to make all the procedures as straightforward as possible.

We had our usual foray into geography with the hon. Member for Daventry. I always learn new phrases from him. I had never heard the one about Paradise by way of Kensal Green. In Airdrie and Shotts, I may have difficulty explaining that to the people of Bonkle and Newmains, who do not even know where Kensal Green is. I am grateful to the hon. Gentleman for the information that it was an allusion to G. K. Chesterton. It is some years since I last read Chesterton, but perhaps we can have a conversation about it some time. I have some comments to make, but I will not take up the time of the House.

The Government have been honest and open about the decision to enhance the neutrality of the taxation system. We have tried to have a full and wide-ranging debate. A number of hypothetical cases have been used. The hon. Member for Daventry spoke about the 80-year-old widow; the same example was used by the Institute of Chartered Accountants. She will not save more through 1999. However, she will be able to switch to tax-favoured individual savings accounts during 1999. The decision about whether she saves more is entirely up to her.

Let me take up the issue of Aunt Bertha from Boulogne, vis-a-vis Aunt Ursula from Uxbridge. Neither UK nor French individuals will generally be able to obtain payment of tax credits from 1999. Credits will not generally be available to portfolio investors such as Aunt Bertha. The notion that Aunt Bertha would be more severely disadvantaged than Aunt Ursula is wrong.

Mr. Boswell

I should be grateful if the Economic Secretary would clarify the point. If there is provision for relief for foreign shareholders under double tax agreements, why should it not be available for the individual portfolio investor?

Mrs. Liddell

Individual portfolio investors have two years to adjust their portfolios. The question of tax credits for non-residents under double taxation agreements was fully discussed. The hon. Member for Bognor Regis and Littlehampton began the debate on double taxation agreements in the Standing Committee. Some agreements with other countries provide for a given proportion of tax credits to residents of those countries. It has always been clear that, if the amount of tax credit fell, so would the payment under the agreement. That happened in 1993, as I am sure right hon. and hon. Members can tell the hon. Gentleman.

That follows the spirit and the letter of our agreements with foreign Governments. We are not overriding those agreements. We are keeping tax credits at a certain level, to try to avoid any question of disadvantage to UK-based groups with US subsidiaries and some US investors, mainly individuals in US-dollar-denominated preference shares issued by UK banks and others.

There is an interesting assumption that the Labour Government are suddenly homing in on ACT. In reality, the previous Government began eroding ACT in 1993. Only a few weeks ago, the special adviser to the former Chancellor referred to the distorting impact of ACT. It is wrong to suggest in the extreme phrases that we heard from the hon. Member for Bognor Regis and Littlehampton that the change represents the end of civilisation as we know it.

The right hon. and learned Member for Rushcliffe (Mr. Clarke), who had Edward Troup as his adviser, clearly received information that there was a distortion. I cannot believe that, in the space of a few days, that gentleman would have changed his position. It is a logical assumption that the previous Chancellor was urged to get rid of the distortion.

We have carefully considered the effects of the change. That is why we are anxious that individual investors should have the opportunity to invest in new tax-privileged individual savings accounts in 1999. If we were not offering that, there would be some substance to the hon. Gentleman's criticism. However, we intend to take that measure. I have suggested that there is cause for common ground in creating an acceptable tax vehicle. That is one of the reasons why we have been generous in providing transitional arrangements for charities so that they receive compensation over five years.

Mr. Brooke

The hon. Lady has said that those who will be disadvantaged by the provisions—several examples were given earlier—will be compensated by the individual savings account. Will she give an assurance that the Treasury will consult those who are disadvantaged and who have investments at present?

7.30 pm
Mrs. Liddell

There will be widespread consultation. We referred to that at great length in the Standing Committee. The second stage will not kick in until 1999 in order to give people an opportunity to adjust their portfolios, given sensible advice and in recognition of the nature of the individual savings account that will be on offer. I urge the House to reject the amendment.

Mr. Boswell

The Economic Secretary is clearly in a hole, and she is doing her best to scramble out of it. She has created a series of measures in haste that target the least well off and the least sophisticated shareholders. Although she has not explicitly conceded that she is doing damage, her comments suggest that some will be damaged unless they rearrange their affairs. She has made a series of suggestions about what may be done in two years through the individual savings account. That may be a way forward in the future—particularly if the hon. Lady is prepared to rebrand as an individual savings account the small shareholdings of individuals who do not want to change those shareholdings or lose control of them.

We have no details of that proposal at present, and no clear proposition in that regard. We have simply a withdrawal of the payable credit in two years. That is the Government's certain proposal. We find it socially damaging and unacceptable, so we shall press our amendment to the vote.

Question put, That the amendment be made:—

The House divided: Ayes 149, Noes 326.

Division No. 72] [7.31 pm
Ainsworth, Peter (E Surrey) George, Andrew (St Ives)
Allan, Richard (Shef'ld Hallam) Gibb, Nick
Ancram, Rt Hon Michael Gill, Christopher
Arbuthnot, James Gillan, Mrs Cheryl
Atkinson, David (Bour'mth E) Goodlad, Rt Hon Alastair
Atkinson, Peter (Hexham) Gorman, Mrs Teresa
Baker, Norman Gorrie, Donald
Ballard, Mrs Jackie Gray, James
Beggs, Roy (E Antrim) Green, Damian
Bercow, John Grieve, Dominic
Blunt, Crispin Hamilton, Rt Hon Sir Archie
Body, Sir Richard Hammond, Philip
Boswell, Tim
Bottomley, Peter (Worthing W) Harvey, Nick
Bottomley, Rt Hon Mrs Virginia Heald, Oliver
Brady, Graham Heath, David (Somerton & Frome)
Brazier, Julian Heathcoat-Amory, Rt Hon David
Breed, Colin Horam, John
Brooke, Rt Hon Peter Howard, Rt Hon Michael
Browning, Mrs Angela Howarth, Gerald (Aldershot)
Bruce, Ian (S Dorset) Hughes, Simon (Southwark N)
Burns, Simon Hunter, Andrew
Burstow, Paul Jackson, Robert (Wantage)
Butterfill, John Jenkin, Bernard (N Essex)
Cable, Dr Vincent Johnson Smith, Rt Hon Sir Geoffrey
Campbell, Menzies (NE Fife)
Cash, William Key, Robert
Chapman, Sir Sydney (Chipping Barnet) King, Rt Hon Tom (Bridgwater)
Kirkbride, Miss Julie
Chope, Christopher Laing, Mrs Eleanor
Clark, Rt Hon Alan (Kensington) Leigh, Edward
Clarke, Rt Hon Kenneth (Rushcliffe) Letwin, Oliver
Lewis, Dr Julian (New Forest E)
Clifton-Brown, Geoffrey Lidington, David
Cormack, Sir Patrick Lilley Rt Hon Peter
Curry, Rt Hon David Livsey Richard
Davey, Edward (Kingston) Lloyd, Rt Hon sir Peter (Fareham)
Davis, Rt Hon David (Haltemprice) Loughton, Tim
Davies, Quentin (Grantham) Luff, peter
Day, Stephen Lyell, Rt Hon Sir Nicholas
Donaldson, Jeffrey MacGregor, Rt Hon John
Dorrell, Rt Hon Stephen McIntosh, Miss Anne
Duncan, Alan Maclean, Rt Hon David
Duncan Smith, Iain Maclennan, Robert
Emery, Rt Hon Sir Peter McLoughlin, Patrick
Evans, Nigel Madel, Sir David
Faber, David Malins, Humfrey
Fabricant, Michael Maude, Rt Hon Francis
Fallon, Michael
Fearn, Ronnie Mawhinney, Rt Hon Dr Brian
Flight, Howard Merchant, Piers
Forsythe, Clifford Nicholls, Patrick
Fowler, Rt Hon Sir Norman Norman, Archie
Fox, Dr Liam Oaten, Mark
Gale, Roger Ottaway, Richard
Page, Richard Taylor, John M (Solihull)
Paice, James Taylor, Sir Teddy
Pickles, Eric Temple-Morris, Peter
Prior, David Townend, John
Redwood, Rt Hon John Tredinnick, David
Robertson, Laurence (Tewk'b'ry) Trend, Michael
Ruffley, David Tyler, Paul
Russell, Bob (Colchester) Tyrie, Andrew
Sanders, Adrian Viggers, Peter
Sayeed, Jonathan Walter, Robert
Shephard, Rt Hon Mrs Gillian Wardle, Charles
Shepherd, Richard (Aldridge) Webb, Professor Steve
Simpson, Keith (Mid-Norfolk) Wells, Bowen
Smith, Sir Robert (W Ab'd'ns) Whittingdale, John
Soames, Nicholas Widdecombe, Rt Hon Miss Ann
Spelman, Mrs Caroline Willetts, David
Willis, Phil
Spicer, Sir Michael Winterton, Nicholas (Macclesfield)
Spring, Richard Woodward, Shaun
Stanley, Rt Hon Sir John Yeo, Tim
Streeter, Gary Young, Rt Hon Sir George
Stunell, Andrew
Swayne, Desmond Tellers for the Ayes:
Syms, Robert Mr. Malcolm Moss and
Tapsell, Sir Peter Mr. Nigel Waterson.

Question accordingly negatived.

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