HC Deb 13 June 2000 vol 351 cc916-22

Motion made, and Question proposed, That this House do now adjourn.—[Mr. Clelland.]

11.34 pm
Mr. Oliver Letwin (West Dorset)

The Economic Secretary and I have both had a long day in the proceedings on the Finance Bill, and you, Mr. Deputy Speaker, will share the delight when I say that I have no intention of prolonging our proceedings unnecessarily.

The reason for the debate is a sequence of events, which I first raised in a debate on the Floor of the House, about clause 102 of the Finance Bill. That clause has a particular effect. By bringing into play schedule 30 of the Bill, it seriously adversely affects companies that either do or might have their headquarters in the United Kingdom—multinational companies with a range of international subsidiaries.

Of course, the subject of my Adjournment debate is not the substance of that measure, but the process that led to the inclusion of the clause and schedule in the Bill. The Government, perhaps unguardedly, issued a splendid document when they first came to power. It is probably one among many. It purports to be a code of conduct for the Government in implementing new tax measures.

With the substance of the code itself, I have no quarrel. It is an admirable code; it says many sensible things. By far the most important thing that it does is to impose on Ministers—it was, of course, Ministers who were responsible for its production so, through it, Ministers imposed upon themselves—the admirable duty to consult when introducing new tax measures.

When we inspect the notes on clauses that accompany clause 102, we find that Ministers announced that they had conformed to the code of conduct and consulted widely on the measures being introduced. The strange thing is that, in a certain sense, that is absolutely true. The Inland Revenue did, indeed, consult widely on the measure in question. Unfortunately, however, the way in which it consulted on the measure was to ask whether it should carry out either of two actions, A or B. For the purposes of the debate, it is not material what A or B are. They have been sufficiently exposed in my remarks and in those of Ministers during Committee proceedings on the Finance Bill.

What Ministers proceeded to do in their Bill was C—an action entirely different from A or B, about which Ministers consulted. Those who were consulted were, broadly, all the large industries and the major representative bodies in Britain—the Confederation of British Industry, the Institute of Directors, the Association of Corporate Treasurers, the Chartered Institute of Taxation and so on. They were consulted about two things, neither of which were the things that Ministers went on to do. Those are, I think, undisputed facts. As a consequence, those bodies were consulted only in name.

If the code of practice means that Ministers must engage in a process called consultation, where the question they ask has no bearing on what they actually intend to do, that code is a set of words or a set of spin—if I can use that word in the context of recent events—but it is without substance. That is one option that the Economic Secretary has in replying to the debate.

The Economic Secretary may wish to say that I and others mistook the purpose of the code—its sole purpose was, in fact, to present the appearance of a set of rules without substance—and that Ministers were, therefore, thoroughly justified in consulting about things that they had no intention of doing. They did not actually do those things, despite the words of the code, because the code is not to be taken as anything more than mere appearance.

I doubt that that is the defence that the Economic Secretary will wish to use, but I admit that it would be a rational defence. We would all then know where we were. We could solemnly stand up, tear up the codes and explain to the public at large that, although there is a code, it is not a code—it does not mean anything because the propositions in it are without substance. There is another possibility, which is that the code has a meaning and substance, and that it does mean something when it says that Ministers have to consult.

As an earnest seeker after truth, I wrote to the Cabinet Secretary to ask a series of questions, particularly whether there were administrative sanctions that would give the code substance, and what the role of the accounting officer—in this case, the permanent secretary to the Treasury—would be if there had been a contravention by the Government of the Government's code. I did not add to that question—perhaps it was an oversight—" on the assumption that the code has substance and meaning". I rather took it that, as between the Cabinet Secretary and me, there would be agreement that if the code had been issued by the Government, there was a presumption that it had substance and meaning.

In the way of these things, very often it is impossible to find anything so parodic as real life, and this was one such a case. There is, as we know, the splendid programme "Yes, Minister", and there is, as we all know, the wonderful character Sir Humphrey. Many people believe that Sir Humphrey is an exaggeration of what really happens, and that "Yes, Minister" is a parody of what really occurs. However, in his response to me, the Cabinet Secretary showed that the parody lies in reality and that Sir Humphrey is merely a pale imitation of reality.

The Cabinet Secretary did not take very long to reply; he was admirably prompt. Nor was he verbose in his reply; his reply was admirably concise. Nor was he obscure in his reply; his reply was admirably clear. Nor, however, did he in the least reply in substance to my inquiry. What he told me was that the Government had decided that the Government had fulfilled their code of practice, and that, therefore, I should put my mind at rest.

This is a splendid state of affairs. Sir Humphrey does not tell us that he thinks that the Government have obeyed the code of practice—far from it. I suspect that the Cabinet Secretary—who I take it is one of the most distinguished people in the country—was very carefully advised. Almost certainly, if the code had any substance, the Government had broken it. Therefore, far be it from him to say that he thought that the Government had obeyed it.

Nor did the Cabinet Secretary tell me what an accounting officer would do, or whether there were any administrative sanctions. I take it that he did not answer those questions because, as I suspected, there are no administrative sanctions and there is no role for the accounting officer. I am sure that the Cabinet Secretary knows those things very well, and that he was, therefore, very careful not to tell me anything except the strict and literal truth—which I am sure is the strict and literal truth—that the Government consider that the Government obeyed the code of practice.

I should like at some time to have an opportunity in the House to debate a new variant of the highway code—the Letwin variant of the highway code. The difference between the highway code as it is and the Letwin variant is that, under the Letwin code, it will be not be policemen or magistrates, but Letwin who decides whether Letwin has obeyed the highway code. I offer you the prospect, Mr. Deputy Speaker, that there will be very few occasions indeed on which Letwin judges that Letwin did not obey the highway code.

If all we have in this code of taxation is Ministers judging whether Ministers have obeyed the code—and if there are no administrative sanctions, no role for the accounting officer and no method of monitoring; hence, if the code itself has substance, the substance can be contradicted in practice with impunity—we have not a code, but a farce.

The reason that I raise this issue—apart from the fact that, in this particular instance, it is of signal practical importance—is that the measures in question, on which we were not consulted within any ordinary meaning of the term, will have the effect of destroying a very large part of the British economy. However, I raise it not only for that reason of substance, but because it calls into question all the other codes that have been produced by the Government.

It is my intention, following the Minister's response to this debate, to inaugurate a series of investigations, and to seek to persuade Select Committees to inaugurate a series of investigations, into the way in which the Government have treated their own codes of practice more generally. I think that that is a fruitful line of inquiry. We have already begun to discover that the hallmark of this Government, who have done some good things, is that their explanation of their own prowess vastly exceeds their delivery.

Before the election, the present Government made enormous play of the need to revolutionise the conduct of Government—to clean up their act. When they came to power, they tried to fulfil that promise—or to appear to do so—by issuing a huge new set of rules that would govern their conduct and ensure that they acted in a proper spirit. Now, some years later, we discover either that this particular set of rules, and presumably others, are a mere facade, or that they have meaning, but are wholly unenforceable and hence a farce in practice and in relation to a matter of the gravest importance. That is the charge and I look forward to seeing how the Economic Secretary, albeit at a late hour and after arduous work earlier in the day, responds to it.

11.46 pm
The Economic Secretary to the Treasury (Miss Melanie Johnson)

It gives me great pleasure to respond to the hon. Member for West Dorset (Mr. Letwin) and I assure him that, as far as I am concerned, the night is but young. Before I reply to his comments and questions, let me say that I find it curious that he is raising a subject for which he has Front-Bench responsibility, although he is obliged to introduce this debate from the Back Benches. As it would not be proper for me to do otherwise, I remark purely on the curiosity of that fact.

Hon. Members will recall that during the debate on clause 102 of the current Finance Bill in Committee of the whole House on 3 May the hon. Gentleman made a series of accusations against the Government. He said that the Government had consulted on two different proposals and had then introduced neither of them, but had done something quite different. He repeated those allegations here tonight.

In March 1998, the Government announced a review of the system of double taxation relief for companies. The hon. Gentleman acknowledged that this was the prelude to extensive consultation with business. In our previous debate on the subject, he called it one of the more extensive consultations that has been carried out in respect of any tax measure in the Bill.—[Official Report, 3 May 2000; Vol. 349, c. 221.] It was gratifying to hear that and he repeated similar points this evening.

Then, as tonight, the hon. Gentleman went on to criticise the consultation process. To be more precise, he alleged that the discussion paper that the Inland Revenue published in March 1999 had invited business to say whether it preferred offshore mixing of foreign profits on the one hand, or onshore pooling of foreign profits on the other, as ways of averaging the rates of tax paid in foreign jurisdictions by the subsidiaries of UK multinationals. He went on to say that the outcome of the review showed that the Government's code of practice on consultation had been contravened, as the Government did something quite different—by not introducing onshore pooling and by tightening up the existing rules on offshore mixing.

At this point, it is necessary to see exactly what the discussion paper said, and to look at it more widely than the hon. Gentleman did on 3 May when he quoted a few passages, which he unfortunately did not understand.

Paragraph 3 of the introduction to the paper said: A number of people suggested that, because the review was intending to consider the basic policy issues that underpin systems of double taxation relief generally and in the United Kingdom in particular, it would be helpful to have a document which focused on policy issues in a relatively high level manner. That is what this discussion paper is intended to do. The paper was deliberately pitched at a "relatively high level". It did not purport to place the details of every option on the table—quite the reverse.

Chapter 3 of the March 1999 discussion paper looked at the economic arguments concerning double taxation relief. It discussed the concepts of capital export neutrality and capital import neutrality. A policy of favouring CEN would lead to support for the credit method of relieving double taxation, which the UK has traditionally adopted. A policy of favouring CIN would lead to support for the exemption method, which the UK has never used.

The paper, in paragraph 3.16, came down in favour of CEN and, consequently, in favour of the credit method. It said that that had the advantage of going some way to achieving CEN for the UK economy. However, that left plenty of questions unanswered about the details of the precise form of the credit method that the UK should adopt.

It does not automatically follow that the UK, when using the credit method, should undertake to give credit for every penny of foreign tax paid, irrespective of the rate at which it is paid. That could be done only if some of the foreign tax was, in effect, credited against UK tax payable in respect of UK activities. That would lead to full CEN for profits repatriated to the UK, but, as noted in paragraph 3.22 of the paper, there would be an open-ended Exchequer cost (subject only to the amount of United Kingdom tax payable before any DTR). There would be more UK outward investment to countries with higher tax rates than the UK, and the foreign tax credited on that investment would be a national welfare (economic) loss. Those points were elaborated in paragraphs 3.23 to 3.25 of the paper.

Although the economic arguments favoured CEN and the credit method, the paper took the economic arguments further and looked at the precise form of the credit method that the UK should adopt. The economic arguments came out against a system that would undertake to give relief for all foreign tax, irrespective of the rate at which the foreign tax had been paid.

Against that background, chapter 6 of the paper was devoted to offshore mixer companies and onshore pooling. It noted that there were arguments for and against both systems. A number of reservations were expressed about the use of offshore mixer companies. Paragraph 6.12 noted that they allow relief to be given for foreign tax that is paid at a rate in excess of the UK rate. Paragraph 6.13 stated: The use of a mixer company enables a United Kingdom company to have more relief for underlying tax than would be the case if it owned each of its sub-subsidiaries directly rather than through the mixer company. Paragraph 6.14 noted: The ability of companies to mix underlying tax … will influence the way in which groups structure their overseas interests. In principle, this can constitute a tax-driven distortion of the way in which groups would otherwise structure themselves for commercial reasons and hence setting up these structures can be seen as a compliance cost. Paragraph 6.15 stated that mixing can also encourage a group which has highly taxed income to divert investment to low tax countries, and vice-versa, to achieve the right blend of highly and lowly taxed income which will enable all foreign tax to be relieved and lowly taxed income to be sheltered from United Kingdom tax by foreign tax paid in a high rate country. Those are the arguments that the Government have followed in explaining why we think that the use of mixer companies to avoid UK tax on low-taxed foreign profits should be restricted.

Paragraph 6.16 of the Inland Revenue paper noted that, because mixing increases the amount of foreign tax for which relief can be given in the UK, it can take the UK's DTR system closer towards "full credit" than would be the case if mixing did not take place, and hence closer to achieving CEN.

That economic argument in favour of mixing was immediately balanced by another economic argument against it, namely that mixing may also create distortions through an incentive to invest more in low-tax countries to obtain the advantage of extra DTR in respect of income from high-tax countries.

Paragraph 6.16 also noted that there were issues about Exchequer cost and the sharing of tax revenues between the United Kingdom and higher tax jurisdictions. Therefore—this is a key point—the paper noted that there were economic arguments for and against the use of mixer companies. Arguments of a more technical nature were also noted, including reservations about mixer companies.

Chapter 6 of the paper went on to discuss onshore pooling. The various forms that onshore pooling might take were discussed, and the paper mentioned the technical and economic arguments for and against onshore pooling. The arguments were similar to those concerning offshore mixing.

Chapter 6 concluded in paragraph 6.32: Mixer companies have been in use for a considerable number of years. Multinational groups have structured their overseas interests accordingly. Relief for underlying tax, which mixers facilitate, of around £4bn is allowed each year. Both mixer companies and onshore pooling present a number of interesting and complex issues of both an economic and a technical nature. It will be important for the future to strike the right balance between them. That paragraph says clearly enough that it would be important for the future to strike the right balance between the interesting and complex issues of both an economic and a technical nature concerning mixer companies and onshore pooling. Certainly, as I have indicated, the paper went out of its way to discuss the pros and cons of both.

The hon. Gentleman, however, prefers to read the final sentence as if it said "It will be important for the future to strike the right balance between mixer companies and onshore pooling." That is a meaningless concept. One cannot strike a balance—let alone the right balance— between two systems that purport to do the same thing, especially as the paper pointed out that the arguments for and against offshore mixing are much the same as those for and against onshore pooling. Clearly, the hon. Gentleman has either misread or misunderstood the passage.

One can, however, strike a balance between the arguments for and against the two systems. The issue is whether the Government have struck the right balance in deciding in favour of restrictions on the use of mixer companies. The proper place to discuss that, of course, is during a debate on the Finance Bill. Indeed, the hon. Gentleman has already had one opportunity to do so on the Floor of the House in a Committee of the whole House.

The hon. Gentleman claims that the March 1999 Inland Revenue paper "Double Taxation Relief for Companies" offered business a choice between two particular systems of double taxation relief, neither of which turn out to be on offer. He is fundamentally wrong. The paper said nothing of the sort. It follows that there is no substance in the hon. Gentleman's accusations that the Government contravened the code of practice on consultation, and that the points that he made about administrative sanctions for such a contravention simply do not arise.

Question put and agreed to.

Adjourned accordingly at two minutes to Twelve midnight.