DEPOSITARY RECEIPTS AND CLEARANCE SERVICES: EXCHANGES OF SHARES (Hansard, 30 June 1998)

§ The Paymaster General (Mr. Geoffrey Robinson)
I beg to move, That the clause be read a Second time.
The clause makes two changes to the scope of the relief from stamp duty reserve tax, known as SDRT, when there is an exchange of shares held in a depositary receipt scheme or a clearance service. SDRT on share transfers is usually charged at 0.5 per cent., but the rate is 1.5 per cent. when United Kingdom shares are issued or transferred into a depositary receipt scheme. The higher rate is a kind of season ticket charge. It reflects the fact that transfers of depositary receipts within the scheme will not be liable to the tax. There are similar rules for clearance services.
There is a relief from the 1.5 per cent. charge when there is an exchange of shares in a takeover or merger. For example, when company X takes over company Y, there is no 1.5 per cent. charge on the shares that company X issues into the depositary receipt scheme in exchange for the existing shares in company Y. Normally, 1.5 per cent. tax will already have been paid when the existing shares in company Y entered into the scheme in the first place. The aim of the relief is to prevent a second 1.5 per cent. charge from being levied merely because new shares are being issued in exchange for the existing ones.
The new clause deals with two points. First, the Inland Revenue has received legal advice that the relief works more narrowly than the way in which it has been applied because, in this context, the meaning of exchange is confined to cases where company X issues shares to company Y shareholders in exchange for the existing company Y shares. In practice, there are also cases where the existing company Y shares are cancelled and new company Y shares are issued to company X in return for the issue of new shares in company X to company Y shareholders. Until the receipt of the legal advice, such cases were also considered to be within the scope of the relief. The new clause will enable them to continue to qualify for relief.
Secondly, the new clause will restrict the relief in certain cases where it may be available, but is not justified because there is no double charge to be relieved. In such cases, no 1.5 per cent. charge has been paid on the existing shares in the target company Y because they were outside the scope of the charge. A particular example is where company Y is a foreign company because the 1.5 per cent. charge applies only to shares in UK companies. Under the new provision, the issue of new shares will qualify for relief only if the existing shares in the target company Y are chargeable securities within the scope of the 1.5 per cent. charge.
I hope that hon. Members will agree that the new clause makes desirable changes to the current rules, and I commend it to the House.

§ Mr. David Heathcoat-Amory (Wells)
In general, the House should disapprove of the Government introducing provisions at an extremely late stage to remedy deficiencies in legislation, especially as they have had 155 more than a year to address such problems and correct them. The House is being invited to accept a new clause to the Finance Bill, which is not only being presented at a late stage, but requires a ways and means resolution; it is a most unusual procedure which should be reserved for special circumstances.
We have no quarrel with the substance of the new clause, as it is a relieving measure aimed at correcting a deficiency. Our complaint is that the Government looked closely at stamp duty when they were drawing up the Budget. We know that, because they used it as one of their back-door tax-raising measures. Stamp duty was increased by £500 million a year. That will be the total burden on businesses and householders when the provisions take full effect. The Chancellor, quite misleadingly, suggested in his Budget speech that the burden would be borne entirely by rich householders, when 75 per cent. of it will be borne by the corporate sector.

§ Mr. John Bercow (Buckingham)
Does my right hon. Friend agree that irritation at the Government's hurried presentation of the new clause is compounded by the fact that the Paymaster General has not thought it proper to give the House any assurance that none of his own business interests is affected either way by the proposed new clause?

§ Mr. Heathcoat-Amory
We must await an assurance from the Paymaster General that his many interests have been properly declared. The stamp duty provisions will bear down heavily on the corporate sector. My hon. Friend would like to know whether that will affect the Paymaster General's business interests.
The Conservatives want to protect the interests of corporate Britain, which is suffering grievously from a succession of tax rises. That is why investment is due to fall next year and the year after, according to the Government's figures, and why unemployment could start to rise. The last thing that business wanted or expected was a heavy burden from a dramatic 50 per cent. increase in the upper rate of stamp duty.
It is a pity that the Government did not take sufficient trouble to spot the problems that they are creating with their tax policies. The Financial Secretary wrote to alert me to the new clause, but the letter is dated only yesterday. It is most regrettable that we have to digest, comment on and scrutinise complicated measures with only a day's notice, when the Government have had many months to prepare their Budget and the Bill.
When did the Inland Revenue receive the legal advice? Could the matter not have been dealt with in a more timely fashion to give the House a better opportunity to scrutinise the provision?

§ Mr. Edward Davey (Kingston and Surbiton)
Part of the new clause extends the relief, to ensure that it operates as intended. As the right hon. Member for Wells (Mr. Heathcoat-Amory) said, that is welcome. However, the Government have taken the opportunity of reacting to the legal advice to introduce a restriction on the relief that will affect some mergers in which one company is foreign, as the Paymaster General said. The restriction will have little effect on Exchequer revenues, but it will damage the corporate sector by affecting tax calculations 156 for mergers and will result in the holding company relating to some mergers being located outside the United Kingdom. At the moment, the tax incentive is for the holding company to be in the UK.
We benefit from having such holding companies in this country. They bring extra tax to the Exchequer, they employ people and there are spin-off benefits. Any measure that restricts the incentive to locate in the UK must have significant and overriding grounds for being introduced. The Paymaster General did not make that case when introducing the new clause. I hope that he will come up with some stronger arguments when he replies.

§ Mr. Geoffrey Robinson
The problem emerged just before the Budget. We received the legal judgment only very recently. This is a relieving measure which companies and industry clearly want. We have done well to respond so quickly. In seeking the co-operation of the Opposition to facilitate the measure, we are acting in the best interests of British companies.
The hon. Member for Kingston and Surbiton (Mr. Davey) raised a separate point. I think that he is probably referring to the correspondence between Mr. George Ritchie of Deloitte and Touche, and my hon. Friend the Financial Secretary. We have acknowledged that there could be a problem, particularly with a UK company acquiring a United States one. Many other factors are taken into account in such situations—not just tax, but the tremendous advantages for holding companies in the UK. Those advantages have been considerably enhanced following the abolition of advance corporation tax, and there has been a problem with foreign income dividend streams. Billiton—a massive South African group—chose the UK, on balance, for those reasons. It was a reasoned correspondence with Mr. Ritchie.
The measure has been introduced not purely on financial grounds, but on the principled basis that the tax should be paid, but not double paid—we are making that specific relief. There must be a compelling reason for the tax not to be paid. We will keep the situation under review and see what develops.