HC Deb 03 May 2000 vol 349 cc220-59

Question proposed, That the clause stand part of the Bill.

Mr. Oliver Letwin (West Dorset)

I should begin by declaring the interest that stands in my name in the Register of Members' Interests, which apparently gives me the unfortunate and dubious advantage over some representatives of Her Majesty's Treasury of understanding the effect that clause 102 will have on British industry.

Mr. Graham Allen (Vice-Chamberlain of Her Majesty's Household)

Is that a recommendation?

Mr. Letwin

I do not know whether the hon. Gentleman will find by the end of my remarks that it is or is not a recommendation. It makes one so profoundly miserable about the process of our government when one understands the way in which the measure came to pass and what it contains that I am left regretting that I understand it.

Mr. Allen

It makes one want to clear off back to the City.

Mr. Letwin

It would be precious little use obeying the hon. Gentleman's usual sedentary animadversions, because if the measure were to have its way, a good part of the activities of the City would be removed at a stroke.

It is surprising in many ways that we are having this debate, because the measures in clause 102 and schedule 30 have been the subject of probably the most sustained and intellectually effective destruction job on a tax measure of the past few decades. Yet we are having a debate because the measure still stands.

The Committee will want to know the history of the measures. We are told something about them in the explanatory notes. I should say in defence of the Treasury, which I am otherwise about to excoriate, that the notes on clauses in this respect are an admirable example of clarity. The officials who wrote them deserve the thanks and congratulations of the Committee for making clear just what is going on in this noxious clause. Paragraph 42 of the notes on clause 102 and schedule 30 makes a statement which is as near to misleading the House as I suspect that parliamentary language will allow me to allege. The statement is: The measures contained in Schedule 30— and hence the subject of clause 102— have been drawn up after extensive consultation with business. That is an oddity. It is perfectly true that there was extensive consultation with business—one of the more extensive consultations that has been carried out in respect of any tax measure in the Bill. Unfortunately, it was consultation on a different proposition.

It is an interesting concept of consultation that we have here. I might consult you, Dr. Clark, about the prospect of my giving you cornflakes tomorrow morning for breakfast. You might tell me that you prefer Frosties. But if my intention was to electrocute you, I might not have discovered everything that I wanted to know about your response to my proposition. The Government's consultation is a somewhat similar case.

I may say also in defence of Inland Revenue officials that the consultation paper is a model of intellectual rigour and one of the loci classici of exposition of the advantages of export of capital neutrality. The document goes through in awesome detail systems of exemption, systems of credit, systems of onshore pooling and systems of mixing. It comes to the view, in section 6.32 on page 29, that 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 £4 billion a year 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. So what the Inland Revenue said to British industry in one of the longest and most detailed consultation exercises in recent years was that it was important for the future to strike the right balance between mixer companies and onshore pooling.

Looking round at some of the distinguished Members present, some of whom have served in Ministries and some of whom have been enormously important members of the Treasury, I am sure that they already understand the measure, but in case anyone has the slightest shade of doubt about what clause 102 and schedule 30 do, I inform them that they prevent the practice of mixing. In other words, they prevent the averaging of the rates of tax incurred in foreign jurisdictions by the subsidiaries of a multinational company, and thus, by means of such averaging, a greater offset against United Kingdom tax than would otherwise be the case. There are two methods of achieving that greater offset. One is through mixer companies, which are artificially established subsidiaries offshore, and the other is through the method of so-called onshore pooling, which achieves the same effect but within the United Kingdom tax jurisdiction.

So two possibilities were put in the consultation exercise, either of which would serve admirably the purposes of British industry and of multinationals located and headquartered here. British industry was asked to reply to the consultation document and tell the Inland Revenue which of the two systems was preferable, or whether some other system that would roughly speaking achieve the same results was preferable. That was an admirable and sensible exercise—but what happened when clause 102 came along? Why, Dr. Clark, not the cornflakes but the electric shock. It turned out that the effect of clause 102 was not mixer companies, onshore pooling or something similar to them, but the opposite. It was to destroy at a stroke the system of averaging offshore tax rates, in order to clobber British industry headquartered here with multinational outlets and subsidiaries.

In passing, I might mention that the process that I have described contravenes the Government's own code of practice. I do not think that the Government believe that codes of practice matter. They are prolific in producing codes of practice. When they came to power, they produced more codes of practice than probably all the Governments of that century put together—so many that Ministers probably cannot keep up with which codes of practice they issued or what those codes say.

In December 1997, with a great flourish, the part of the Treasury for which the Paymaster General is responsible—the Inland Revenue and Customs and Excise—introduced a code of practice on consultation. I do not know whether anyone reads these codes of practice inside ministerial offices. I have no doubt that people read them inside the Inland Revenue; they probably they live by them as a kind of bible. I have no doubt that when Ministers conducted the consultation exercise, they intended that it should conform to their code of practice on consultation exercises. So I suppose that when they asked people whether they would prefer mixing or pooling, Ministers genuinely meant to choose the one or the other.

It would have been a good idea if they had done that, because page 6, section 3 of the code of practice tells the people consulting on behalf of the Inland Revenue that they ought to assess the likely effect on tax revenues of the measure being put forward. It is a little difficult for an industry that is being consulted to assess the likely effect on tax revenues or its tax payments of a measure about which it is not being consulted.

You are learned in many respects, Dr. Clark, and I wonder whether you would find it easy to answer if I were to ask you what would be the tax effect of increasing your income tax by 5 per cent. when what I really wanted to know was what would happen if I increased your income tax by 50 per cent. You might be forgiven for giving me an odd answer. That is what happened in the case of British industry. As it was asked not what would be the effect of the measures in clause 102 but what would be the effect of some other set of measures that have not been implemented and are the opposite of the measures in the clause, it did not give the answer that is required in a consultation exercise. That is probably why the Government misestimated the effect of the measure on their tax revenues.

When I say that the Government misestimated, I do not mean that they got it wrong by 5 per cent. or 10 per cent. Goodness me, no Opposition Member would be so ungenerous to the Paymaster General as to suppose that she could make an accurate forecast of tax revenue. No Chancellor of the Exchequer, no Paymaster General and no Financial Secretary has ever been able to do that. People get it wrong by 20 per cent., 30 per cent. or 50 per cent. All of those are accepted, but this is not a case of getting it slightly wrong. This is a positively heroic error. I cannot recall a time in recent history when such an error has been made. They got it wrong, roughly speaking, tenfold. If the Chancellor of the Exchequer got things wrong to that extent in general, he would bankrupt us and use up our gross domestic product about five times over. It was quite a mistake to make. If such mistakes were generally made about taxation, one could produce some interesting economic effects. Why did the Treasury make the mistake? It made it because it consulted on the wrong measure—the opposite measure. Therefore it did not have the slightest idea what the effect on taxpayers would be.

I say all those things not just because they are important in themselves, but because they relate to the reason why we have a code of practice. Of course, Ministers may have intended the code to be just window dressing, but they sent some earnest officials away to write it. Those officials wrote it sensibly, got down to business and worked out what one should do if one is consulting. They worked out that if one is consulting about tax, it is jolly nifty to find out what the effects on industry will be. Therefore, they said that one should ask that question—but the Treasury and the Inland Revenue did not ask it because they asked a question about a set of measures that they were not proposing to introduce and did not introduce. Perhaps the Inland Revenue intended to introduce them, but the Treasury did not; I shall come to that point shortly.

Mr. Edward Davey

Will the hon. Gentleman confirm that the code on consultation allows the Government to introduce anti-avoidance measures without consulting, but that the Government have explicitly said that these measures are not about anti-avoidance?

Mr. Letwin

The hon. Gentleman, as so often on these matters, is absolutely right. First, this is not an anti-avoidance measure. Secondly, it does not tackle avoidance. Thirdly, the Government have admitted that, and fourthly, as he rightly said, the code specifically exempts anti-avoidance and some other measures from consultation. For example, it exempts measures that would be evaded if consultation about them took place.

However, this clause does not fall into that category. It is a classic case of a highly complex and important tax measure being introduced, about which there should have been consultation, and about which the code says there should have been consultation. There was no consultation, because the consultation took place about something else—the opposite measure.

I have written today to the Cabinet Secretary to ask him what is to be done about a Department that breaks its own code of practice. I have asked him what administrative sanctions apply, what a Department should do when such a contravention comes to light, and how its accounting officer should behave.

I have also asked the most important question. Hundreds of highly paid individuals in British industry—this is not my major point, but it is important—have spent a couple of years thinking about what the Inland Revenue has proposed, and they tried to answer its question. They spent a lot of time with their advisers, and that is expensive time. Perhaps it is some of the most highly paid time in the country, but all that was a total waste of time and money because they answered a question about cornflakes when they were facing electrocution.

I have asked the Cabinet Secretary what administrative redress and what ex gratia payment the Treasury and the Inland Revenue will make to people who have wasted their time because of a consultation exercise about the wrong thing. If the answer to my question is, as it may be, that there is no such redress, my advice to those sections of British industry would be to bring a class action and to test in court whether there can be redress in such a case. There jolly well should be.

I have outlined the history of the consultation exercise. I now come to the brilliant measure itself. How does it achieve its intended result? What is its intended result?

Mr. Stephen Dorrell (Charnwood)

What is the purpose of the measure?

Mr. Letwin

That is exactly the right question. What is the measure's intended result? I admit to a profound perplexity on this matter. It is possible, although I hardly dare allege such a thing in such an august assembly as this, that the person or persons who invented the measure—I do not think that they are in the Inland Revenue at all—intended that it should raise a lot of extra money for the Exchequer. I hardly dare allege that, because Ministers have denied it repeatedly and I know that they are honourable. However, someone somewhere in the Treasury—not a Minister, but certainly not in the Inland Revenue, because it consulted about the opposite change—had the brilliant idea that he could invent the most complicated and stealthiest tax of all time—a tax that he hoped no one at all would understand, which would raise a large sum of money. That is one possibility.

The intervention of my right hon. Friend the Member for Charnwood (Mr. Dorrell) is particularly apposite to the other possibility, and my right hon. Friend the Member for Fylde (Mr. Jack) made the point forcefully on Second Reading. It is also possible that this is a simple case of a catastrophic administrative error, and the measure has no aim at all. The Government have not the slightest intention of achieving the results that it will achieve, or any other discernible results. They might simply be engaged on an acte gratuit to prove that one can be an existentialist Treasury. That is a possibility. Surely, we should follow the dictum that, when one has looked in all the possible places and not discovered the true answers—we know that they are not true because Ministers have denied them—we have to look in the impossible places. Therefore, I suggest that it is possible that the measure is an arbitrary action or a knee-jerk reaction. If so, it represents an interesting departure in administration. If tax policy is to be conducted on that basis—without warning and with or without consultation, but perhaps with consultation on the opposite—we may discover that all sorts of taxes are changed in the coming years. I rather look forward to that. It will be fun to stand at the Dispatch Box and watch them go by as one watches the symbols on a one-armed bandit.

The Temporary Chairman (Dr. Michael Clark)

We are captivated by the hon. Gentleman's hypotheses, but we would be even more engaged if he discussed the substance of the clause.

Mr. Michael Jack (Fylde)


Mr. Letwin

Before I give way to my right hon. Friend, may I wholly accept your admonition, Dr. Clark? I shall return to discussion of the clause.

Mr. Jack

I am grateful to have the opportunity to enable my hon. Friend to get back on track. He may recall that on Second Reading the Paymaster General gave us a hint of the missing reason for the proposal. In some way, it would have a remarkable effect in lowering high tax rates in other tax jurisdictions. Has my hon. Friend had a chance to consider the validity of that line of argument?

Mr. Letwin

I am now about to come to something really astonishing. This point relates directly to the clause, but my right hon. Friend and I are both suffering from an important form of selective amnesia. I have exactly the same memory as him of what happened in an exchange on Second Reading, so I read the Hansard report of what the Paymaster General said in response to him on Second Reading. Strangely enough, the report appears to be slightly different from my memory. I know that Hansard is always accurate, so my right hon. Friend and I—I assure you that we have not discussed this with each other, Dr. Clark—must have suffered from a collective hallucination. I am glad of that. If the Paymaster General had said what we mistakenly supposed—contrary to the Hansard record—that she had said on that occasion, she would have said something so manifestly ludicrous that it would have been impossible to imagine that it could have come from a Minister of the Crown.

The Temporary Chairman

Is this hypothesis No. 2?

Mr. Letwin

No, Dr. Clark, because I shall come on to what the Paymaster General said in Hansard, which is one of the arguments now being alleged for the clause.

I hope that I can end this excursion simply by saying that I am unclear about what on earth the Government are trying to achieve by the clause. Therefore it is difficult to tell whether it will achieve its aim. However, it is clear what it will achieve. First, it will clobber British industry for about £4 billion a year—I may be wrong, but I am not wrong by the scale on which the Chancellor was wrong. It might be £3.5 billion—I shall grant the Paymaster General that—or it might even be £3 billion. There is not a serious set of accountants or business men in Britain today who think that the figure is much less than that.

When Pricewaterhouse first referred to that effect of the clause, the Government did something that takes us beneath the level about which we should joke. Instead of answering the point and investigating it seriously—to do them justice, I think that they have begun to do that, and I shall discuss the reasons why shortly—they impugned on the Floor of the House the honour and professionalism of a serious professional who is one of the partners of Pricewaterhouse. I regard that as gross abuse of parliamentary privilege. The Paymaster General should take that back on behalf of the Government or repeat it outside the House of Commons, which would mean that she would be sued for a serious amount of money.

Mr. Beard

Is the hon. Gentleman suggesting that when PricewaterhouseCoopers was asked for instances of companies that would suffer from the proposed legislation, it was not able to quote even one?

8.30 pm
Mr. Letwin

The hon. Gentleman, no doubt honourably and genuinely, is entirely misled about what happened within the Treasury. If necessary, I am prepared to go into the details of what happened, which I happen to know. I will not detain the Committee with that because I now propose to list those who have said exactly what the effects of the proposal will be—

Mr. Beard


Mr. Letwin

The hon. Gentleman tries my patience. It is true that the responses were subsequent, but 24 hours subsequent to the visit and before the Paymaster General's statement in the House. If we were to get to the seriousness of the matter, things could become very uncomfortable for Ministers.

We now have absolute clarity about what British industry thinks of the proposal. I will start with the Institute of Directors. I suppose that Labour Members will think that it is prejudiced. However, it is pretty moderate on the subject. It states that it is a further blow to UK-based multinationals… The Government should withdraw this paragraph from the Finance Bill…and have a proper consultation prior to the Finance Bill 2001. The consultation in 1999 bears no relation to the UK system as amended by this paragraph, and is therefore worthless in this context.

I know that the CBI will be dismissed by some Labour Members as a mere collection of capitalists. However, what does it have to say about the matter? It states: This clause introduces Schedule 30 containing a draft of radical and unheralded changes to the existing law on Double Tax Relief, particularly in relation to restriction of relief involving mixer companies. The biggest problem which business has with the provision is their adverse effect on the international competitiveness of businesses located in the UK. I shall return to that point in a moment. The CBI continues: Companies of different sizes across the sectoral spectrum, whose business is vital to the success of the UK economy, have raised concerns about the adverse impact of the proposals. Forty of the CBI's companies, a small fraction of those that will be affected, are estimated to be losing about £700 million a year.

The CBI continues: Specific problems are discussed below but the overall effect of the adverse changes…has been to create a situation where a number of commentators, including companies which have contacted the CBI, are saying that the UK will now have one of the worst, if not the worst, double tax regimes amongst the G7 nations.

What does the Association of Corporate Treasurers have to say?

Mr. Jack

Before my hon. Friend departs from the point about foreign jurisdictions, will he note that in response to a parliamentary question that I tabled to the Paymaster General, inviting her to put on record what information the Treasury had about foreign tax jurisdictions in this context, she was unable to supply any?

Mr. Letwin

I am grateful to my right hon. Friend. had noticed that. That is why later I shall supply the information for the Treasury; I think that he is already in possession of it. If it had looked into the matter, I am sure that it would have discovered what the Inland Revenue already knew. As the Treasury was introducing a measure, the opposite of that which the Inland Revenue had been consulting about, it is quite possible that it did not want to ask the Inland Revenue what the effect of the measure that the Inland Revenue thought that it was not introducing would be if it were introduced.

The Association of Corporate Treasurers tells us that the announcement on 21 March of the sweeping and fundamental changes to the double tax relief … system took the entire business community by surprise …. these changes reduce the UK's competitiveness as a base for multinationals…The suddenness of the change and its fundamental nature is extremely disconcerting. I do not know whether the association is also regarded as a dangerous group of lunatic capitalists, but the Chartered Institute of Taxation really cannot be put into that category by the Paymaster General. She spends most of her time in the House of Commons telling us how she will close loopholes, apparent loopholes or what seem to her to be loopholes, that will destroy other sections of British business, on the ground that the institute has told her to do so. The institute, her favourite body, tells us: In the discussion paper dated March 1999, and in discussions with the Inland Revenue International Division— that is an important point in itself because it mentions not just the paper but what was said after it was issued— the impression was given that offshore mixer companies were accepted and that, indeed, some form of onshore pooling was being considered. In the event, the proposals go in the opposite direction. This calls into questions the bona fides of the consultation process and the way in which the Revenue and the Treasury work together in relation to taxation policy decisions.

We have begun to hear what will be the prolonged murmur of companies that are thinking of re-siting their headquarters away from the UK. Zurich Allied cited its reasons a few days ago; today, it is SmithKline Beecham. Whatever the Paymaster General may care to do to an innocent partner of a major accounting firm when he raises the truth, I doubt that even she will want to assert that those companies, which between them employ thousands of people in this country, are to be neglected, ignored or abused. We have the seeds of a serious malaise in our economy; they have been sown by a provision that is unheralded and unannounced, and about which there was no effective consultation.

Why did it happen? Part of the reason, probably, was that the Inland Revenue was genuinely and honestly moving in an entirely rational direction. From what we can gather, an economic adviser in the Treasury then had a bright idea. It was suggested to Ministers that they could make a large amount of money very easily and quickly from a source that had not been the subject of the initial levy when the Government first came into power, but which was mighty rich. The Ministers were told that it would never be defended in public because no one would have the gall to do so. That was because the source was nasty capitalists coming from abroad called multinational companies. I think that that is what happened.

Was the process by which it happened respectable? No, it was not. I have dealt with that already. Regardless of the merits of the measure, the process was disreputable. Much more important is the question whether it is substantively tolerable. What are the Government's arguments for taking £3 billion, £3.5 billion or £4 billion a year off the multinationals that are headquartered in the UK, and do they stand up to scrutiny? The first argument is that the figures are all wrong, and unfortunately that argument is right, but it backfired. As I have pointed out, the figures that are wrong are those of the Government, and the measure makes a huge hit on the multinationals headquartered in Britain.

The second argument has not been made here, but I suspect that it has been made in some quarters in the Treasury, and it is rather more ingenious. The hon. Member for Kingston and Surbiton (Mr. Davey) will enjoy this argument, which is parallel to some of those used during the proceedings on the Government Resources and Accounts Bill. It runs as follows: multinationals currently headquartered in Britain are shackled by the ingenuity of the capital gains tax arrangements because they cannot move their headquarters abroad without crystallising a huge capital gain arising from the difference between the historic cost of the subsidiaries that they have acquired and their current market value. We can therefore sting them for £3 billion, £3.5 billion or £4 billion because they will not be able to leave these shores and we will not suffer the adverse effects that would be caused by their doing so.

That is a curate's egg of an argument—some parts are good and other parts are not so good. The bit that is good is that it is true. The ingenuity of the capital gains tax system means that existing multinationals with old acquired subsidiaries are shackled to this country. That is not an unusual arrangement; most countries have it. Those companies cannot get out because if they tried to do so they would have to pay the Chancellor a whopping bill—which would probably be greater than the one that we are discussing—all at once, and he would be a happy man. He could put away another several billion pounds to pay off national debt or to spend on the national health service, à choix.

There are two slight problems with the argument. The first is that not all the major multinationals acquired their subsidiaries and assets abroad long ago. Some, such as Vodafone-Mannesmann, have recently acquired massive overseas subsidiaries. I pose as no expert on these matters, but it is not clear that they are shackled to this country. Vodafone-Mannesmann is the biggest company in Britain, the biggest company quoted on our stock market and the most important single element of the very market that the stock exchange today conjoins with markets in Frankfurt and New York.

If the measure is passed, the company might move its headquarters abroad, and if it did, what would go with it? All the lawyers, accountants and consulting engineers, all the people in the City and all those who service all those people, from tea to printing, would lose out. We are not talking about thousands, millions or tens of millions of pounds; we are talking, over time, of hundreds of millions of pounds of economic value that will be lost to this country.

Mr. Howard Flight (Arundel and South Downs)


Mr. Letwin

In the long run, as my hon. Friend says, we could lose billions of pounds.

The second slight problem concerns all the companies that are not yet headquartered here. I have personal experience of this matter, because at one stage I was restructuring INTELSAT, a satellite organisation that involves all 137 countries of the world. The question arose of where the organisation should locate the headquarters of its new privatised spin-off. The most extensive search was performed, ironically by Pricewaterhouse, on behalf of INTELSAT, to identify the countries where multinational companies would most like to have their headquarters. The two that came top of the list were the UK and the Netherlands.

What would happen today? The UK would be at the bottom of the heap. For that reason, if clause 102 is passed, an intangible and unquantifiable economic value will be lost over the years because companies that would have brought their headquarters here will not do so. They will go to the Netherlands or other countries. The idea that the measure will have no real effect because companies are shackled is just true enough to be deeply misleading.

There is a third argument, which Ministers have used and to which my right hon. Friend the Member for Fylde alluded a moment ago. Ministers have tried to claim that we will have a highly competitive regime even after clause 102 has been passed. I am not now suffering from the selective amnesia to which, regrettably, my right hon. Friend and I are subject, because I was able to find this point in Hansard. On 17 April, the Paymaster General said: when we compare how we tax our multinationals and, in particular, the use of our controlled foreign company legislation, with the practice of our European partners— she may be thinking of places where there are many company headquarters such as Luxembourg or the Scilly Isles— we find that the Government's proposals are to bring us into line with the competitive practice of other countries.—[Official Report, 17 April 2000; Vol. 348, c. 758.]

I mention the Scilly isles because the proposition is absurd. The USA has onshore pooling and uses a general basket of offshore credits. Japan has onshore pooling via a worldwide basket. Canada exempts dividends from trading activities worldwide. France and Germany exempt 95 per cent. of dividends from significant shareholdings. Italy does likewise, but only within the EU, although that is changing in 2001 and the exemption will be universal.

Of the G7 countries, the UK, under clause 102, becomes the only one that does not have onshore pooling or exemption as a way of achieving the same effect. The Paymaster General brilliantly exposes us to be the sole candidate to be at the bottom of the heap, the one country that companies would want to avoid if they were seeking to site their headquarters in a major economy.

I do not know what the Paymaster General thought that she meant when she said: when we compare how we tax our multinationals…we find that the Government's proposals are to bring us into line with…competitive practice, unless she thinks that bringing us into line with competitive practice means ensuring that we are last in the race. If that is the hon. Lady's general notion of how the UK should be competitive, we have grounds beyond the clause to worry.

8.45 pm

The fact is that the measure, which does not have the justification that it has no real cost, nor that it has no ill effect, nor that it leaves us competitive, has been given another basis by some of the Treasury's utterances: we have been told on various occasions that it is fairer. Only some companies can form mixer companies—how unfair, how wrong; therefore, we must prohibit that practice, which favours the mighty. However, a slight intellectual impediment afflicts that argument. The average fish-and-chip shop does not need to form mixer companies, because it does not have very many international subsidiaries. That point clearly eluded the Paymaster General during her investigation of the subject. It tends to be the case that, before a company has foreign subsidiaries, it becomes rather large—indeed, it becomes a multinational company. Therefore, the unfairness spotted by the hon. Lady is one that does not have the quality of existing.

The next argument advanced is that the system produces capital export neutrality. The Paymaster General and almost everyone here in the Committee knows about that, but, just in case anyone less informed is reading Hansard, I shall explain that capital export neutrality is an important principle: it is that we should have a tax regime that makes our companies when they invest abroad relatively indifferent to which tax regime they choose to invest under, so that they invest instead in the places where they can most efficiently produce, and that is to the advantage of our companies and their shareholders in the UK. It is an admirable aim, which the Inland Revenue consultation document states as an objective.

However, it would be extremely odd if that were the aim that really explained why the measure is a proper one. First, the Inland Revenue's own consultation document makes it clear, in paragraph 1.6 on page 6, that the overriding objective should be "the national interest" of the UK economy. Whatever the measure does for capital export neutrality, it certainly is not in the interests of the UK economy to send all the multinational headquarters scuttling. Secondly, it is not a strong argument in favour of the scheme because paragraph 3.16, on page 12 of the consultation document, makes it clear that: The ordinary credit system adopted by the UK and a number of other countries has the twin advantages of going some way towards achieving…CEN— that is, capital export neutrality— for the United Kingdom economy. In other words, the Paymaster General's argument that the system needs to be got rid of because getting rid of it is necessary for the sake of capital export neutrality has the disadvantage that her own Department denies that fact.

Finally, we come to the mystery guest—the item about which my right hon. Friend the Member for Fylde and I are suffering selective amnesia—the thing the Paymaster General never said. Contrary to the imaginings of my right hon. Friend and me, she did not say that the measure would induce foreign countries to adjust their tax rates—oh no. She said something entirely different—and I know she said it because it appears in the Official Report at precisely the moment that we thought she said what we thought she said. In fact, she said something quite interesting: The use of mixer companies has made UK investors more or less indifferent to the high tax rates in countries in which they invest— I note in passing that she thereby exposed the fact that the system did achieve the effect of capital export neutrality that she otherwise argued it did not achieve, but leave that lacuna as well. She continued: and we need to change that focus— I note in passing that she meant "We need to destroy the capital export neutrality that the Inland Revenue, in its consultation document, said we needed to create," but leave that lacuna. She said: we need to change that focus to ensure that we receive— now comes the seminal phrase that my right hon. Friend and I, through our imaginings and hallucinations, never heard— the correct amount of tax.—[Official Report, 17 April 2000; Vol. 348, c. 791.] Thus, at the end of a vast circle of imaginings, we come back to our beginning, and it turns out that the measure is, after all, a remarkable one that fits into the category that we have come to know and love—that of the stealth tax. It is designed to create a means of collecting the correct amount of tax— that is, a large amount of tax. When I hear the Paymaster General and her colleagues in future talking of things that are "correct", I shall know that they mean elephantine, gargantuan, enormous. That is the amount of tax that the measure raises, and a brilliant way it is of doing so.

Mr. Jack

I am grateful to my hon. Friend for focusing on the word "correct" because his analysis has alighted on a new principle of taxation. Has he by any chance in his assiduous research come across a definition of "correct" in taxation terms?

Mr. Letwin

I would answer that most instructive intervention—except I know, Dr. Clark, that your beady eye is on me and that if I were to go into the wide-ranging lexicon employed by the Government, you would upbraid and stop me. I shall not be tempted down that line, although we must remember that the correct amount of tax will always henceforth mean in the Government's jargon a very enormous amount of tax.

What will be the effect of that tax? It will be to charge those already in this country, to send some of the great new enterprises packing and to deter hereafter, virtually completely, all the highly mobile multinational companies from siting their headquarters in this country. It will try to undo the good work of today in creating our stock markets as a parallel with Nasdaq and Frankfurt; it will try to ensure that our great service industries in the financial services are destroyed; it will in fact try to destroy as much of the British economy as it can in pursuit of the correct amount of tax. I must quickly add one other comment. I apologise for detaining the Committee, but it is rather interesting. The debate is in fact wholly otiose. I have not noticed the Minister intervening or asking to make a statement today, but I have noticed, because somebody has passed it to me, that a statement has already been issued to the press about the matter. We already know the answer to the debate, only it is embargoed until 22.00 which, unless I am also suffering from a hallucination, is some little while from now.

It is a strange—a passing strange—thing. We thought that Parliament was debating the matter because it might decide on it and instruct itself and because Ministers might pay attention to Parliament. No, it was not to be. Ministers decided at an earlier hour this evening how they would respond, issued a statement and embargoed it until—I regret to tell them that they may not be quite right—they imagined that we would have finished speaking. Although I shall certainly close my current remarks anon, I am slightly tempted to detain the Committee through the night so that we could read tomorrow morning the text of the statement in the newspapers, and would not have to rely merely on my possibly misleading and hallucinatory version of the release.

It is interesting that the release is as ambiguous as could be. Ministers have told the press that they will keep the measure intact but that they will delay its introduction—mysteriously—from 1 July 2000 to 31 March 2001. With your percipience, Dr. Clark, you may be able to detect a reason for doing that, but I must admit that, with my humble intellect, I am precluded. I have not the slightest idea why, if one is to retain the measure intact and not alter any major part of it, one would want to delay its introduction by nine months. If its purpose is to create a means of collecting the correct— we remember, that means an elephantine— amount of tax, why not introduce it early? What is the point of delaying the collection of this huge, correct amount of tax by nine more months? I cannot imagine that the Chancellor of the Exchequer has suddenly become generous in his old age.

It may just be—I hesitate to speculate—that the Government's real intention behind the delay is to think again, to tear up this noxious, ludicrous, misguided measure and to start again without admitting that they are doing so. If that is so, we will not be ungenerous. We will not taunt them. We will acknowledge that that was the right thing to do. All the Paymaster General needs to do this evening is to remedy a wrong measure, wrongly introduced through the wrong consultation process, with the wrong estimates of its effects, and with the Government wrongly pretending that they are not undoing it while possibly undoing it.

The Paymaster General can remedy all that at a stroke by saying tonight, in the House of Commons, where such things ought to be done, that she is sorry; that the Government made a mistake—we are all human—that they withdraw the measure; that they will table amendments to get rid of it; that obeying their own code of practice, they will carry out a proper consultation, consulting about the measure that they intend to adopt, rather than about the measure that they do not intend to adopt; and that they will eventually produce a sensible proposal that achieves whatever mysterious effect they were trying to achieve, other than to raise the correct amount of tax. If the Government do that, we shall thank them heartily.

Dawn Primarolo

I shall begin by responding to the hon. Member for West Dorset (Mr. Letwin), who broke the embargo on information that we forwarded to the Liberal Democrat and Conservative spokespersons in order to keep those on the Front Benches fully informed of the Government's thinking on the matter.

When the Finance Bill was published, it was announced that there would be further consultation on clause 102 between then and 19 April. Given that the debate had been called for this evening, it seemed appropriate to inform the House at the earliest opportunity of the Government's decisions in their consultations with industry. When I have dealt with that, I shall return to some of the points that the hon. Gentleman made in his opening remarks.

On Budget day two years ago—

Mr. Quentin Davies

Will the hon. Lady give way?

Dawn Primarolo

I want to set out the argument, then I shall give way to the hon. Gentleman. When the Government try to ensure that representatives of the Opposition Front Benches are kept fully informed on an important issue, it is not helpful when that is used as a debating point at the Dispatch Box.

Mr. Davies


Dawn Primarolo

With all respect to the hon. Gentleman, no, I shall not give way.

Mr. Letwin


Dawn Primarolo

I am not sure which part of the word "no" the hon. Member for Grantham and Stamford (Mr. Davies) and his hon. Friend are having difficulty with. It might be the N or the O. I shall not give way until I have responded to the points made by the hon. Member for West Dorset.

On Budget day two years ago, the Chancellor announced that the Inland Revenue would carry out a review of the UK's system of double taxation relief for companies. That would involve a review of the functioning and the fairness of the existing system, its effectiveness in meeting the objectives of the relief, and business compliance costs, while having regard to the overall cost of the relief. I shall return to the question of cost.

Following extensive consultation with business, the Inland Revenue published a discussion paper on Budget day last year. Comments were invited by 30 September on the matters discussed in the paper and on other issues concerning double taxation relief. The Government carefully considered the points that were made by business, tax advisers and representative bodies during the review. Our decisions, together with draft legislation giving effect to them, were published on Budget day this year. A further period of consultation was allowed and we invited comments.

I note that the adviser to the Chancellor of the Exchequer under the previous Government, Mr. Troup, when giving evidence to the Treasury Committee on the double taxation changes, welcomed them. If hon. Members want chapter and verse for his remarks, I shall be happy to provide it.

9 pm

Having undertaken the consultation, the Inland Revenue and the Treasury have had a number of meetings with companies, tax advisers and representative bodies, such as the CBI. The Inland Revenue has addressed meetings that have been well attended, and a number of individual companies have discussed with the Treasury and the Inland Revenue how the double taxation relief changes will affect them. I cannot name them for reasons of confidentiality. To do so would mean identifying companies that have been using mixer companies in order to reduce their UK tax on low-taxed profits, or that have been planning to do so. The Inland Revenue and the Treasury have also received a number of letters from tax advisers and representative bodies.

The Government have taken on board all the comments and have made the following decisions. It has always been the Government's intention to allow companies a period in which to bring dividends to the UK and to claim relief for the underlying tax under the old rules. That is why the draft legislation provides for a start date of 1 July. Several companies have asked for a longer period. They have pointed out, for example, the difficulties with minority shareholders in foreign subsidiaries, or with foreign restrictions on when dividends can be paid. The Government do not want those companies to be disadvantaged compared with others that do not have the same problems. They have therefore decided that the restriction on the relief for the underlying tax should come in from 31 March 2001.

Secondly, the schedule provides that, if a double taxation agreement expressly rules out credit relief for foreign tax, relief cannot be claimed under UK domestic law either. The amendment that we are making will ensure that provisions apply only in the case of future arrangements.

The provision that clarifies how relief for underlying taxes is allowed when a group of companies is taxed as a single entity in another country will be amended so that it applies whenever the foreign group of companies is in the ownership chain below the UK company and not just, as the draft legislation allows, where one of the companies in the foreign group is owned directly from the UK.

Finally, except in cases of abuse, the restriction of the amount of underlying tax for which relief may be claimed will not apply where the company that pays the dividends and the company to which it is paid are resident in the same country.

The Government remain committed to stopping the use of mixer companies to avoid UK tax on low-taxed foreign profits. The change extends the period for paying dividends into the UK under the old rules. The CBI welcomes those changes and will say so publicly. The Government have listened and discussion will continue.

Mr. Letwin


Dawn Primarolo

I wish to put the record straight with regard to the points made by the hon. Gentleman on consultation, cost, what has been advised on the consultation period and what we are doing with regard to the totality of the changes. When I have answered his initial questions he may intervene.

The Opposition want to focus on one small measure, but that is part of a package of double taxation relief measures, which, in many areas, gives businesses exactly what they asked for. The relief for foreign tax has been extended when overseas companies merge, allowing foreign tax to be carried backwards and forwards for use in another year. The Government have legislated for a number of practices to improve transparency and certainty with regard to relief. Other changes undertaken by the Government—the reduction in the corporation tax rates, the extension of group rules for losses and chargeable gains, the abolition of stamp duty on intellectual property, the consultation on tax relief for the cost of purchasing goodwill, the consultation on rollover relief for gains on disposable substantial shareholdings—have all been welcomed by business.

The accusation that the change to double taxation relief will make the United Kingdom uncompetitive does not stand up. Double taxation relief is only one consideration that companies take into account when they decide where and when to set up their groups. The changes to double taxation relief need to be considered with the other elements in the package.

Let us consider the proposals on mixer companies and the controversy that has grown around them, especially on the Opposition Benches. The Government regard it as wrong that a group that holds overseas investments through an offshore holding company—and is therefore able to mix its subsidiaries' high-taxed and low-taxed profits—should able to obtain more foreign tax credit relief than if it held its investments directly from the UK.

The new rules will secure a fairer share of tax revenues for the United Kingdom; remove distortions in group structures, as groups will not be able to obtain more relief for foreign tax by adopting one structure rather than another; and remove distortions in investment decisions, as groups with low-taxed profits will be in the same position.

The previous Government knew all about those distortions. They acted in 1996 to prevent specific actions.

Mr. Letwin

Will the Paymaster General give way?

Dawn Primarolo

I shall not give way to the hon. Gentleman until I have answered his first series of points.

As soon as the previous Government shut the gate on artificially generated high-taxed profits, the avoidance industry was at work encouraging people to generate artificial low-taxed profits. In October 1998, in the full knowledge that the review of double taxation relief was in full flow, one adviser wrote an article in Accountancy, in which he referred to the eccentricities of the UK's double tax relief system, which encourages UK groups to gain tax efficiencies by using offshore intermediate holding companies. The writer expressed surprise that the take-up rate for such holding companies among UK multinationals was substantially less than 100 per cent. He noted that many groups earned most of their overseas income in high-tax jurisdictions. How, therefore, could a mixer system help them? The writer had the answer. He advised: Intermediate mixer holding companies are appropriate even for these multinationals since low-taxed income may be generated within the intermediate mixer holding company itself for blending with the high-taxed overseas dividend income received. The low-taxed income can be created through establishing a tax efficient financing operation within the mixer company, which then on-lends its funds to other group companies by way of intra-group loans. It is sad to say that we have evidence that some of the loudest opposition to the provision on mixer companies comes from companies that took that particular tax planning advice.

The Government have decided that such tax-driven distortions, which generate artificial high-taxed income one year and artificial low-taxed income the next, should no longer be a feature of the system. The new rules will also level the playing field between groups that have mixers and those that do not.

The current rules have the unintended effect of allowing other countries that maintain high tax rates to secure more tax revenues at the expense of UK taxpayers generally. They provide a subsidy from the UK to high-tax regimes.

The change will also make the UK's controlled foreign companies rules work better. The rules are designed to prevent multinationals from avoiding UK tax by diverting profits to companies in tax havens and preferential regimes. Companies are exempt from the CFC rules if they pay back at least 90 per cent. of their profits to the UK as dividends. The assumption behind the exemption is that UK tax will be paid on the dividends and so there is no need to apply the CFC rules. However, mixing means that UK tax is often not paid on the dividends.

I cannot do better than to quote from an article published in the September 1998 edition of International Tax Review. It refers to mixer companies and says: It is much easier to repatriate low tax dividends to the UK than ever before and this has made something of a mockery of the CFC regime. What does it matter being forced to repatriate low tax dividends if no additional UK tax is payable on them?

The far-sighted writer of that article was from PricewaterhouseCoopers.

The Opposition have said that we did not consult properly, but business has known all along that mixer companies were being considered in the review. It cannot possibly have been under any illusion that that was not the case. The matter was freely discussed at meetings, as tax advisers and the Inland Revenue have said. To confirm that, in September 1998, an article in International Tax Review speculated that an outcome of the review of double taxation relief would be restrictions on the use of mixer companies. It stated: Those companies that are taking advantage of the famous "Dutch Mixer" are probably drinking at the last chance saloon. Legislation to seriously curtail the Dutch mixer could be on the statute books by 2000. Guess which company the far-sighted writer of that article came from—PricewaterhouseCoopers.

Mixer companies were dealt with in the discussion paper that the Inland Revenue published 12 months ago. It identified all the issues that the Government have taken into account in announcing the change and noted that the effect of mixing is to allow a United Kingdom company to have relief for foreign tax which is paid at a rate above the United Kingdom tax rate. It stated that the principle of mixing can constitute a tax-driven distortion of the way in which groups would otherwise structure themselves for commercial reasons and added that mixing can also encourage a group which has highly taxed income to divert investment to low tax countries, and vice versa … As the hon. Member for West Dorset said, the paper concluded that mixer companies 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 … The Government believe that the changes have achieved that balance.

In July 1999, the Inland Revenue ran a workshop for business on double taxation relief. The hon. Gentleman sought to ridicule and undermine that consultation process, but many supportive letters on the approach that it had adopted were received. One person wrote that he would recommend the Inland Revenue to extend the approach to other areas of taxation under review. Another wrote that the workshop provided an excellent format for taxpayers to understand the Revenue viewpoint and to express their own views.

In 1999, the writer of an article in Tax Planning International Review said that an unusual feature of the review is the extent to which members of the Inland Revenue's international division have discussed it in open forum. Hon. Members might think that views have changed since then, but that point was repeated by a different commentator in Accountancy Age on 30 March this year—after the Budget announcement. In September 1999, the chairman of the CBI tax committee told the Treasury that the review had been extremely well organised and that the CBI had felt able to participate in a full and meaningful way. As I have said, it will welcome the changes that the Government have announced.

I shall deal with the points about the Red Book, the calculations, whether the Revenue's figures are wrong and whether there is a dastardly plot in the Treasury. The total net yield from the double taxation relief changes is estimated at £100 million in a full year. The yield from the restriction on the use of mixer companies is estimated at £150 million to £175 million in a full year. I shall explain how the Revenue achieved that forecast; the hon. Gentleman is right that nothing is perfect, but it cannot be far off.

The Inland Revenue identified 1,000 groups that claim relief for underlying tax. About 600 do not use mixer companies and so are unaffected by the change because they hold their subsidiaries direct from the UK or do not have low-taxed profits on which they want to avoid UK tax. Half the remaining 400 have mixer companies whose purpose is to mix high-taxed and low-taxed profits on their way into the UK.

9.15 pm

The Inland Revenue reworked about 200 double taxation relief claims from the companies that would most obviously be affected by the changes. Those claims involved £1.5 billion of relief from underlying tax. The Inland Revenue calculated what the effect of the changes would have been on the claims, and then applied the calculation. The Revenue has explained the methodology at meetings with business and tax advisers, and it has been agreed that that is the correct way in which to proceed.

Mr. Letwin

Will the hon. Lady give way?

Dawn Primarolo


Let us now consider the effect of widely varying high tax rates. We have not been allowed to see some of the calculations, or the assumptions on which they were based. We do not know where those concerned got their figures. I can, however, reveal some interesting facts relating to how much relief we already provide, which will put the amount that companies might lose into context.

We suspect that those making the calculations are doing some double counting. Some companies may appear on the top ten client lists of more than one firm of accountants. We believe that the groups involved are deliberately adopting a worst-case scenario by assuming that they will in one fell swoop bring back to the United Kingdom all their past years' low-taxed profits, when they would never have done so in other circumstances. That is totally unrealistic. We also believe that they assume that the companies will bring back to the UK the entirety of their offshore profits every year. That is another improbable scenario, as was pointed out in an article in The Economist as long ago as 1 April.

It also appears that some companies are including in their projections tax that they would have expected to save as a result of schemes into which they had planned to enter, but which have not yet been established. We have seen examples of that over the last few weeks, and it confirms that the Government are right to act now.

Some people's forecasts of the extra tax that companies will pay fail the most basic credibility tests. About £4 billion of relief for underlying tax is allowed each year. The figures in some estimates are reaching the truly absurd. I am not sure whether this has been repeated, but an estimate of between £8 billion and £10 billion has been attributed to PricewaterhouseCoopers, although it denied that quickly when challenged. The restriction on the use of mixer companies would take away more double taxation relief than is allowed in the first place, which is nonsense.

PricewaterhouseCoopers claims to have identified 20 companies which, between them, will lose £2 billion a year as a result of the changes relating to controlled foreign companies and double taxation relief combined. As usual, we have not been told which companies are involved, or what assumptions were made in the calculations. Suffice it to say that the list alleges that five of the companies will lose £300 million each. That is remarkable given that, according to the latest figures available to the Inland Revenue, only two companies in the country—which may not even be clients of PricewaterhouseCoopers, and on its list—receive more than £300 million of double taxation relief in the first place. Alleging which will be the biggest losers and how much will be lost by referring to 20 companies when we know of only two that are receiving the relief puts the figures into perspective.

Mr. Edward Davey

Will the hon. Lady give way?

Dawn Primarolo

No, because I think it important for the figures to be put into perspective, so that hon. Members cannot distort the debate.

On Second Reading, the hon. Member for Arundel and South Downs (Mr. Flight) said that the mean of the forecasts of all the leading accounting firms was that the change relating to mixer companies would raise at least £3 billion. I am not sure whether the hon. Member for West Dorset repeated that figure today, but it, too, defies belief. It is fanciful to say that the change can take away three quarters of the relief for underlying tax that is currently allowed each year.

The fact is that the figures that have been quoted have not been substantiated. No methodology has been advanced. The figures that we have for companies claiming relief do not match those figures; a simple, straightforward attack is being made on the Inland Revenue and the Treasury.

The clause makes it clear that the Government have an active policy of encouraging competitiveness, of ensuring fair relations in our tax system and, moreover, of ensuring that companies, national or multinational, are free to take decisions about their structures according to commercial viability, and not tax. For those reasons, clause 102 is the right place to make the changes and this is the right Bill for them to be in. Hon. Gentlemen simply have not got their facts right.

Mr. Edward Davey

That was one of the most defensive speeches that I have heard from a Treasury Minister. The Government realise that they are on the ropes on the issue. The U-turn that they have published tonight in the embargoed press release, from which the hon. Member for West Dorset (Mr. Letwin) read earlier, is only the first of the U-turns that I think they will be forced to make when they look at the damaging effects that the provision will have on British industry. If hon. Members sitting behind the Treasury Bench were taken in by the Paymaster General's arguments, let me throw some of those arguments back at her.

For example, the Paymaster General said that Mr. Troup, the adviser to the previous Chancellor of the Exchequer, told the Treasury Select Committee that the proposals were sensible, but she quoted selectively from his evidence. As a member of the Select Committee, I was there. I do not recollect that he was as supportive of the Government's position as she tried to make out. He said: As far as the policy is concerned, there clearly was a mischief in what were called "mixer companies", which allowed companies with tax bills overseas effectively to buy in low-taxed income to shelter their profits, but he went on to say: Whether it is the right way of doing it I think is more questionable. I think that this can be characterised as a sledgehammer. He went on: The change in the behaviour is likely to be a reduced remittance of dividends to the UK— exactly the point that the hon. Member for West Dorset made. Mr. Troup concluded his remarks by saying: I am concerned as to the effects on investment decisions and on location decisions and I am concerned about the way this policy has been brought through. The Paymaster General tried to quote Mr. Troup in support of her arguments. If she had quoted from him extensively, she would have shown that he was against the policy that the Government have been advocating tonight.

Mr. Letwin


Mr. Davey

I give way because I believe that this is a debate.

Mr. Letwin

In contradistinction to the Paymaster General, the hon. Gentleman has no reason to fear giving way. Does he agree that it is not remarkable that she misquoted Mr. Troup, because she misquoted her own Inland Revenue consultation document?

Mr. Davey

The hon. Gentleman is exactly right. There were many mistakes in what the Paymaster General said. We will look at Hansard, just as he looked at the Second Reading debate. Later, we will use her arguments against her and prove many of them to be totally fallacious. Again, the example that she gave with respect to the amounts of money that could be taken out of British industry seemed to be deliberately misleading, or perhaps I should say unintentionally misleading, Sir Alan, to keep within your constraints.

Mr. Beard

Will the hon. Gentleman give way?

Mr. Davey

I will when I have made the point, if the hon. Gentleman will bear with me.

The Paymaster General suggested that only two companies currently get the relief at an amount above £300 million per annum, but presumably she was using past data—data on tax returns for 1989–1999. Presumably, tax accountants are not using past data. They are examining the current tax year and future tax years, understanding their clients' business. That is why there are likely to be different estimates and, indeed, why those accountants cannot share that information with the Government; that would break the confidences of their clients. The Government must decide whether they will work with industry, consult properly and trust industry—which, they claim, they are trying to work with elsewhere—to build the economy, or whether they are trying to punish it.

Mr. Beard

My right hon. Friend the Paymaster General has dealt with that point in detail. She said that the Inland Revenue undertook an exercise involving all companies to which the legislation would apply and that it had worked through half of those 400 companies to try to work out the implications of the legislation. That is the source of the figures that my right hon. Friend gave, which are orders of magnitude lower than those that have been quoted elsewhere. The Government have used a perfectly respectable method of approach to the problem. We have heard nothing of anybody else's approach and no reason why that approach should be objected to.

Mr. Davey

I am afraid that the hon. Gentleman was not listening to the Paymaster General as carefully as others of us were. I understand that she was talking about historic data, not the projected data which are being quoted in the newspapers.

Mr. Letwin

I am grateful to the hon. Gentleman for giving way. He may have noticed that at that juncture—one of many—I tried to intervene on the Paymaster General in order to ask her whether, at the meetings to which she referred, it was the case, as I have heard from people who were present, that it was pointed out to the Inland Revenue and the Treasury that the base year that they were using was exceptional and hence misleading. Does the hon. Gentleman agree that it would be useful if the Paymaster General answered that question? Was that pointed out to them?

Mr. Davey

It would indeed be useful if the Paymaster General answered that question, but I fear that she will not, and that is a problem. It was very noticeable and should be on the record that the Paymaster General refused to take interventions from the hon. Member for West Dorset and myself, thereby reducing the quality of the debate and the ability of the House to get to the truth. If a Treasury Minister is not prepared to take detailed interventions on a matter of this importance, the House is in a truly awful position. We need proper debate so that we can get to the truth. The Minister ought to be able to take cross-questioning.

Mr. Beard

I thank the hon. Gentleman for giving way to me again. He has not said what criticism he has of the methodology that my right hon. Friend the Paymaster General has set out. We have heard only the vague comment that the Government picked the wrong starting date [Interruption.] The hon. Member for West Dorset (Mr. Letwin) is shouting from a sedentary position, but the sources that he quoted espoused figures ranging between £200 million and £8 billion. On what grounds does the hon. Member for Kingston and Surbiton (Mr. Davey) object to the methodology that my right hon. Friend has quoted as the basis of the Treasury estimates?

Mr. Davey

We have touched on that. I am glad that the hon. Gentleman intervened for a second time to enable me to make the point yet again. Taking one exceptional year is not the best way of making the calculation. If the Government want to make the calculation properly, they should take several years and use averages and work with accountancy firms and the firms concerned to produce a more accurate figure—[Interruption.] Rather than shouting from a sedentary position, the hon. Member for Bexleyheath and Crayford (Mr. Beard) should let me finish.

The Liberal Democrats are arguing that the Government should halt the progress of the legislation and engage in proper and full consultation with business to produce the exact and accurate calculations that the hon. Gentleman seems to want the Government to carry out. It appears from the way in which the debate is proceeding tonight that those figures have not been properly produced, and we need them. British industry needs them so that it is not penalised by the legislation.

Mr. Beard

Will the hon. Gentleman give way?

Mr. Davey

No. I have already given way to the hon. Gentleman twice, which is more than the Paymaster General did.

We need to look at the wider implications of the measure. British and multinational companies are increasingly concerned about the way in which the Government go about tax legislation and consultation on potential tax changes. It is a serious matter. If we are to attract investment into the country, whether it is from companies operating in Britain or from Britain, we need to ensure that those companies can feel confident that they will be operating under a relatively stable and predictable tax regime, not one that will suddenly change without due consultation or proper analysis.

Presumably, the objectives of achieving stability and ensuring proper analysis lay behind the code of consultation itself. That is why the code of consultation offers a very sensible way of improving our tax system. The problem—as the hon. Member for West Dorset so eloquently explained to the Committee—is that the Government have not abided by their own code.

9.30 pm
Mr. Letwin

The hon. Gentleman is making a serious point which I perhaps omitted to stress sufficiently. Does he agree that, even if the Government were to return with the same damaging measure after a proper re-consultation of the type that he and I advocate, such action would at least do something to restore multinational corporations' now very damaged confidence in the Government and, much more importantly, in the United Kingdom?

Mr. Davey

The hon. Gentleman is right—it would restore at least some confidence. I think, however, that that confidence has been quite badly shattered already, and that the damage has been caused after the introduction of other damaging measures, such as abolition of advance corporation tax, which I wanted to debate earlier. The Government's actions are beginning to suggest that there is something old Labour about the Administration. I was talking to one business man who described clause 102 as being akin to something that the hon. Member for Brent, East (Mr. Livingstone) might have wished to introduce. The measure is a deliberate attempt to target and attack multinational corporations.

The hon. Member for West Dorset did the Committee a great service in his excellent speech, which was a tour de force on a rather complicated matter. He dealt with the matter with far greater precision than I feel that I am able to apply to it. However, although he analysed the possible motives behind the measure, he may have missed out one motive, which is that the measure is simply a knee-jerk reaction and ideological attack on a part of British industry. That would be particularly worrying. Nevertheless, the Government say that they want to talk to business and to understand business. The Labour party even says that it wants to be the party of business.

I think that, if they have not already done so, the businesses that will be affected by the measure should contact No. 10 Downing street. I do not believe that the Prime Minister is particularly happy with this type of measure. As the architect of new Labour, he should be concerned that such measures will undermine everything that he has been attempting to do with the Labour party.

Mr. Oliver Heald (North-East Hertfordshire)

He should be told.

Mr. Davey

This is a very serious point. I hope that the Paymaster General will tell the Committee whether she has had proper and full discussions with the Prime Minister about the implications of clause 102 and schedule 30 for British industry, and perhaps for the relationship that British industry will in future have with the Labour party. British industry—composed of small, medium and large businesses—is increasingly fed up with the way in which the Government are going about their business. British industry has grave concerns.

Ministers have to realise that capital is increasingly mobile, and that—despite the potential capital gains liabilities that the types of firm hit by the measure may have in one particular year—those firms will realise that, in the long run, it is cheaper to move abroad. Worse, the measure will alter the investment decisions made by those firms on all their portfolio. The measure really is profoundly affecting the way in which both British and multinational businesses are going about their work.

I urge Ministers not simply to rush out a press release that looks as if it has been cobbled together not after a full consultation but after a rather short consultation, saying that they will delay implementation of the measure, perhaps thereby helping a few firms. I hope that the Government will go much further and say that they will fully re-consult British industry, think again, and return to the House with other measures that will tighten up on abuse—if there is abuse; I do not think that the Paymaster General has very effectively made the case that there is—but not threaten the underlying health of many of the United Kingdom's greatest companies.

Mr. Beard

I think that the quality of debate from Opposition Members tonight has been as low as I have ever heard it. That is well evidenced by the call for greater consultation on the basis of nothing more than tittle-tattle in back rooms which does not stand up against the analysis given by my hon. Friend the Paymaster General.

Mr. Letwin

I am sorry to interrupt the hon. Gentleman so early in his speech, and it is gracious of him to give way at this point. However, I do so because he referred to tittle-tattle. Does he think that the commentary from the CBI, the Institute of Directors, the Chartered Institute of Taxation and six of the major world accountancy firms counts as tittle-tattle?

Mr. Beard

We have already heard from my hon. Friend the Paymaster General the extent of the consultation that has taken place, including that with the CBI. The arguments put earlier by the hon. Member for West Dorset (Mr. Letwin), particularly those about the financial impact on these companies, were little more than tittle-tattle. He has not produced one scintilla of evidence in the whole debate to justify any of the excessive numbers that he mentioned. The nearest he came to a fact was to say that the starting date for my hon. Friend's analysis was not the one that he would have chosen.

Mr. Jack

Could the hon. Gentleman assist my memory by citing either the document or the paragraph in a document in which the clause was the subject of detailed scrutiny and consultation?

Mr. Beard

The document in which that appears is the Finance Bill, and it is also in the explanatory notes. There has been wide consultation. As my hon. Friend said, nobody who had considered the Inland Revenue document on double taxation relief for companies and other documents over a period of 18 months could have been unaware that such an issue would arise. My hon. Friend has outlined the discussions that have taken place in recent weeks and months.

When Mr. Troup gave evidence to the Select Committee on the Treasury, he said that he believed that there was mischief involved in mixer companies, yet he has been quoted as though he were antagonistic towards the Government's proposals.

Mr. Quentin Davies

Did the hon. Gentleman pay attention to the speech of the Paymaster General, whom he is now so gallantly trying to defend? If he did, he would have noticed that she cited a whole range of documents, newspapers, tax experts and some Inland Revenue documents, but not a single Government document that referred to the possibility of abolishing mixing relief.

Mr. Beard

My hon. Friend was at that point quoting the people who had been consulted, and their responses. She was therefore not likely to quote a Government document that outlined what had already been said. [Interruption.] The hon. Member for West Dorset has spent most of the evening convulsed with amusement. I cannot see that the joke is other than on him for having made such a to-do about something, when the nearest he has come to any serious purpose has been to talk Britain down. That seems to be the hallmark of those on the Opposition Front Bench. The hon. Gentleman spoke with some satisfaction about the number of companies that will be transferring their headquarters from Britain. He seemed to delight in talking Britain down. Earlier, he regaled the Committee with his own qualifications. If those qualifications are to be used to prop up his arguments, perhaps he should use those arguments to a more constructive end than trying to destroy a policy that is in the country's interests.

The other allegation that the hon. Gentleman made was that the purpose of the measure was uncertain. As has been said, one purpose is to secure a fairer share of tax revenues for the United Kingdom, by more effectively limiting the relief available for foreign tax paid. There is no doubt that countries that maintain higher rates of tax revenue do so under the mixer arrangement at the expense of United Kingdom taxpayers. It is a strange party that, in the European debate, talks of sovereignty and of foreigners taking our sweets off us, but is willing to tolerate such a position on tax being refunded to the UK.

Mr. Letwin


Mr. Beard

I will give way in a moment, but I wish to continue with my list.

The pretence was that there was no purpose in the provision and that it was there merely to damage the United Kingdom, or almost; it was the red saboteurs—the parliamentary equivalent of the ones outside. That was the level of the speech, and it needs knocking.

Another argument, which must be taken seriously, is that the present arrangements cause a distortion in group structures. Many companies are induced to have these pseudo-subsidiaries—the mixer companies—when they do not need them for any management purpose. There is no reason in logic, business or taxation why we should give preference to that sort of grouping, arriving at one sort of arithmetic, compared with the direct refunding of profits under the system that is proposed.

Those distortions carry through to the investment decisions that British companies are taking. The tax system ought to be neutral in that respect. It ought not to be perverting investment decisions so that they go one way rather than the other, but that is one of the impacts of the present arrangements that my hon. Friend the Paymaster General discussed.

Mr. Letwin

Does the hon. Gentleman agree that it would be of some advantage to the United Kingdom if it had a regime that was sufficiently competitive to enable some multinationals to be headquartered here so that they paid some tax here? Does he recognise that I was maintaining a certain level of humour because had I not done so, I might have expressed the anger that some of us feel about a measure that, because it is so misguidedly trying to raise revenue, will have a lasting negative effect on the UK economy, which neither this Government nor their successors will be able to remedy for decades.

Mr. Beard

The position that I detect from the hon. Gentleman's theme is similar to the one he adopted when he dealt with the previous theme—indeed, it resounds through the Opposition. It is to be on the side of anyone who is relieving businesses and other people of tax. In this case, we are seeing a last-ditch stand to defend a Government of 20 years who were lax on the tax system against a Government who have come in and are trying to put it right. The indignation of the hon. Gentleman and many of those who are complicit in the exaggeration of the impact of these measures is well summed up in, I think, George Bernard Shaw's aphorism that there is nothing more indignant than a vested interest masquerading as a moral principle.

Mr. Dorrell

I begin by declaring an interest as a director and shareholder of a company that operates with foreign subsidiaries, some of them held through intermediate holding companies. I have some personal involvement in this issue.

I congratulate my hon. Friend the Member for West Dorset (Mr. Letwin) on a skilful presentation of the case. The issue is important because of its possible impact on tax revenues. It is much more important because of the disincentive that it introduces into our tax system for large multinational companies to locate their head office functions and, importantly, intermediate head office functions on UK soil. So, for all the reasons advanced by my hon. Friend, I hope that the Government will withdraw this proposal, reconsider how to set about the taxation of foreign dividend flows into the UK and undertake a proper consultation on whatever proposals for legislation they then introduce.

9.45 pm

We all know that some anti-avoidance legislation needs to be introduced without consultation so that its effect is not nullified by people acting in advance of the effective date of the new law. However, the Government realise that this proposal is not one such. Today, they announced that the effective date of the new law is to be delayed until March next year, so there is no need to proceed without proper consultation on the proposal.

It is crystal clear that there has not been sufficient consultation on the precise implications of the Government's proposal. Given everything that has been said, it is incumbent on the Government to reconsider the matter. They should then hold proper consultations on their precise proposals for legislation. I hope that that is the lesson the Government will draw not only from this debate but from the wide public discussion of this badly thought out proposal.

Mr. Letwin

My right hon. Friend speaks with the authority of a former Financial Secretary to the Treasury. Does he agree that if there is an abuse such as that which has been identified on transfer pricing or cross-lending from low-tax subsidiaries, the appropriate method for dealing with it would be the onshore pooling that was the subject of the consultation paper? There is a means to deal with any feared avoidance of that type; the Treasury could go back to that.

Mr. Dorrell

I agree with my hon. Friend. Given the choice between the offshore mixers that have developed and onshore pooling, I should have a strong preference for the latter. One reason for that is because the one point made by the Paymaster General with which I agreed was that the combination of the controlled foreign companies legislation and offshore mixers is a genuine abuse. The Government are on strong ground if they want to address that aspect of the problem. However, their difficulty is that in dealing with that genuine abuse, they have created a much bigger problem than the one they set out to solve.

It is important for the Committee briefly to remind itself that, in an increasingly globalised economy, not only huge multinational companies but a broad range of British companies have foreign operations in various parts of the world, trading under tax regimes whose rates are different from those in the UK. The question the Committee must address is whether British-based companies which earn profits in other parts of Europe or the world—including the developing world—and pay tax in those countries at rates determined by their national Governments, should, if the management choose to bring the after-tax profits back to the UK as dividends, pay an extra tax yield to the UK Exchequer.

Some countries—Holland is a major one—make no claim whatever to tax dividends from earnings that are fully taxed in overseas territories. In a globalised economy, a strong case can be made that, if revenues have been taxed overseas, the repatriation of those revenues to the host country as dividends should lead to no further taxation obligation. That is the Dutch position.

The traditional UK position has been that we claim to tax those flows, but we make that claim only if the average rate of tax paid overseas is lower than that paid in the UK. That has been the effect of the mixer company.

What the Government have now moved to—uniquely among 67 countries, as my hon. Friend the Member for West Dorset rightly said—is the proposition not that we should allow that averaging process to take place through mixer companies, but that any British-owned company that earns revenue anywhere in the world, pays tax to the appropriate national Government at the rate that that Government deem sufficient and then repatriates the revenue to the UK ought to pay a marginal tax rate to the UK Exchequer if the tax paid where the profit is earned is lower than that set by the UK Government. I do not believe that that is correct as a matter of principle, but if the Government insist on legislating for such an arrangement it will be hugely damaging to the UK's role as a command control tower for international companies operating in different parts of the world.

There has been a long discussion in the newspapers—we have heard more of it this evening—about whether the tax yield will be £175 million, as the Paymaster General said, or £3 billion, as PricewaterhouseCoopers has suggested. I draw two conclusions from that argument. First, as the hon. Member for Kingston and Surbiton (Mr. Davey) said, it underlines the case for a proper consultation. It is absurd that we can be discussing the introduction of a new tax law when we, the people's representatives, do not know whether the effect will be to bring in £175 million or £3 billion.

To be honest, the second conclusion reinforces the Government's position rather than some of the things that my hon. Friend the Member for West Dorset said. I simply ask myself what course of action the management of a company are likely to take when faced with a choice between bringing earnings from the place where they were earned back to the UK, and therefore paying a substantial tax bill to the UK Exchequer, and taking those earnings to an intermediate holding company in some other country where they will not have to pay tax. It seems overwhelmingly likely that unless the revenue is essential for paying further dividends to UK shareholders, companies will choose to take the revenues to overseas holding companies. That will not produce a huge tax revenue to the UK.

Mr. Letwin

My right hon. Friend is advancing a serious argument that may be absolutely right for many companies. Does he agree that in respect of those about which, as an economy, we may be most concerned—market leaders quoted in the UK—the necessity to have dividend remittances here may be so great that they will none the less ante up?

Mr. Dorrell

My hon. Friend is right to suggest that some companies will have no choice. The principal reason for that will be to pay dividends to UK shareholders. It is entirely possible that many UK shareholders, when faced with the choice between the company paying a substantial tax bill to pay the dividend to them and the company using the money for a different purpose, subject to a lower tax rate somewhere else, will be receptive to the argument that the money be paid to a holding company.

I want to develop the argument a stage further. The likely result in the majority of cases will be that money will not come here and be subject to tax, but will be taken overseas into intermediate holding companies. People may say, "So there we are. That is the end of the story. No one is any the poorer." That is not how it is. If companies start to develop overseas holding companies to which they pay dividends, they will need to manage those dividend flows in those countries, and the holding company function that ought in British interests to be located and developed in Britain will be developed and built in other countries that have more benign treatment of foreign dividend flows.

This Government are developing a policy that is the precise opposite of the intelligent tax policy that would be proposed by a Government who want to be competitive in attracting investment and high-value management functions into the UK, so that the UK becomes a holding company centre and plays a leading part in a developing market economy. They are creating a tax policy that will encourage the growth offshore of high-value management functions. It will relegate the UK to the margin so that it will simply be a responding economy to an overseas holding company function.

That prospect will be hugely damaging in the long run. I do not pretend that it will produce dramatic, overnight damage to UK interests, but it is an important step in precisely the wrong direction. I very much hope that the Government will listen to the force of the argument that has been made against the proposal, take the proposal away, and reconsider and consult on it properly this time before they bring it back for legislation.

Mr. Jack

I am delighted to support my right hon. Friend the Member for Charnwood (Mr. Dorrell) and others who have spoken in the debate. One of the things that worried me about the Paymaster General's line of analysis was a somewhat scatter-gun passage in her defence of the proposal. She seemed to say that, because the Government had done everything that they had been asked to do on a whole range of domestic corporation tax and company tax issues, that made the proposal in the clause in some way okay.

If we follow that argument, we reach the first line of weakness in the Government's substantiation of the proposal. In the justification of the Government's position on the clause, we have not been offered any overall economic impact analysis. They justify their position through an argument in which the tax tail appears to be wagging a big dog—and the tax tail is of uncertain size. We are told that the Inland Revenue has analysed 200 companies, but we have not been given for public view an anonymised report on that, so how do we know whether the Government's argument is realistic?

During my time in the Treasury, some of the numbers that I was given about policy effects were questionable. Therefore, they were re-analysed and sometimes one agreed with them and sometimes one did not. However, one learned that there was an element of uncertainty in the forecasting process. I shall not indulge in saying which forecast is right or wrong, but I will say that an argument that comes from an uncertain sample of companies with no overall economic impact study is a dangerous point from which to start in, as my right hon. Friend rightly said, a world of highly competitive global capital flows.

I sat down with a company that was exercised by the proposal, but I shall retain its anonymity because it shared with me confidences about its proposed retail expansion plans in mainland Europe. It explained to me how its investment proposals operate under the present arrangements and how they would be impacted upon by a measure that will end the mixing arrangements. It pointed out that a flow of initiating capital went from the United Kingdom to the foreign subsidiary company and was then deployed to develop profitable investments in different parts of Europe.

Why did the company do that? It had its responsibilities to shareholders, but it was equally aware of the activities of its competitors in the same sector who deployed competitive measures not only in mainland Europe, but with the potential to develop them in the UK. To put it at its crudest, it was hand-to-hand fighting to develop competitive investment in Europe. The company deployed the mixing arrangement to ensure that it remained in parity with its European competitors in terms of the taxation on its dividend and interest flows, given the circular situation in Europe.

10 pm

We are talking not about some grand world tax jamboree but of a model of a United Kingdom-based company which was seeking to develop profitable investment in Europe to maintain its competitive position against its European competitors.

In the Paymaster General's analysis, she talked about the right or correct level of tax, as if a new equity concept, which I do not recognise, were being created. If the company to which I have referred is not able to be tax competitive with its competition, that will affect its overall viability, and potentially its overall tax condition. I see that the Paymaster General is starting to look somewhat bored. I listened with great care to what she had to say to justify her defence of the Government's position. I hope that she will be able, either tonight or in subsequent discussions in Standing Committee, to respond to these points.

I am not talking about a gigantic multinational company. It is an international company that is seeking to trade competitively. Clearly, the Government's proposals will undermine its position. I accept that my example is perhaps one of many, but it comes from the real world and so far we have heard nothing from the Treasury Bench about how that world operates.

I was glad that the Paymaster General was able to announce that the starting of the process would be delayed. The company that I have talked about and other organisations that have made representations to me, including the Chartered Institute of Taxation, agree that a delay is required. In praying in aid her position, the hon. Lady said that there had been a successful Inland Revenue-run workshop, in which many double taxation arguments had been discussed. I issue her a simple challenge. Is she prepared to authorise the Inland Revenue to arrange another workshop in the intervening period, so that the protagonists can have an open discussion with the Inland Revenue and the Treasury to explore the economic, practical and real-world impacts? [Interruption.] If I heard the hon. Lady correctly, she said from a sedentary position that she refuses to do that.

Dawn Primarolo

indicated dissent.

Mr. Jack

I am delighted that the hon. Lady's body language is rather more positive than the words that I half overheard.

If the hon. Lady is truly confident of her position and she believes that no damage will be done to the competitive position of British companies, which are merely seeking tax parity with European investment and competitive positions, she should have no hesitation in inviting companies to a workshop to explore the Government's proposal.

The Government have a big majority and they know that, if they want to, they can have their way. That worries me. However, a big majority and a head-down and blinkers-on attitude towards tax do not make for good tax law. I should know because in certain instances when I was a Treasury Minister we wrote some bad tax law.

Mr. Giles Radice (North Durham)


Mr. Jack

This may be the opportunity to respond to the brayings of the right hon. Gentleman. I admit that when we were having to do things in a rush, some things went wrong. We had to put them right. We now have an opportunity to stop wrong things being done by providing for a little more open consultation and discussion so that we can verify the economic impact of the Government's proposals on the United Kingdom, and put aside for one moment the difficult debate on the moneys that may be raised from the revenue derived from the provisions in clause 102.

Mr. Letwin

I thoroughly agree that making an economic impact assessment is much more important than the mere question of the fiscal effects, as my right hon. Friend the Member for Charnwood (Mr. Dorrell) mentioned. However, does my right hon. Friend accept that it is essential to talk to major companies deciding whether to site their intermediate or ultimate company headquarters here or elsewhere to discover how that would affect their choice?

Mr. Jack

My hon. Friend makes a useful and powerful point that supports the remarks of my right hon. Friend the Member for Charnwood. In all sincerity, I ask the Government to consider the assessment, which is a simple and practical way of resolving a complex matter. I, for one, do not want large numbers of companies, whether small, medium, large or multinational to be significantly disadvantaged in the competitive world of international taxation as a result of the Paymaster General pursuing a concept of correct or right taxation to the exclusion of its competitive impact on British companies.

Mr. Quentin Davies

I remind the Committee of my interests as declared in the Register. As far as I am aware—although I have been almost deliberate in not finding out—the firms with which I am associated are not directly at risk from the Government's proposals.

I congratulate my hon. Friend the Member for West Dorset (Mr. Letwin), the shadow Financial Secretary, on a brilliant forensic devastation of the Government's case, which was suffused with Ciceronian irony. I am sorry that the hon. Member for Bexleyheath and Crayford (Mr. Beard) failed to grasp that, but the rest of us enjoyed it enormously—with the possible exception of the Paymaster General, who was the target of his devastating analysis.

My hon. Friend made a case against the Government on three counts. The first is far and away the most important. The significance of it goes way beyond the issues that we are discussing this evening and the matter of tax law. My hon. Friend brought forth documentary proof, no less, of a matter that several of us have been raising for a long period—since the election. The Government are profoundly indifferent to Parliament and systematically treat it in a disdainful and frivolous fashion, documentary evidence of which can now be seen in the press release, apparently embargoed until 10 o'clock, in which the Government announce a series of changes—including some totally inadequate concessions—on the matter under discussion.

That demonstrates a double contempt of Parliament. First, the press release makes it clear that the Government are not interested in what Parliament has to say on the matter. They had decided the matter and were going to make an announcement this evening, making plain that that announcement could not be influenced by what might be said in our debate. One cannot get much more contemptuous than that.

Secondly, the Government clearly took it for granted that their proposals would be endorsed by the vote in Committee. That is as much—indeed, even more—of an insult to Government Members and their docility as it is to the sovereignty of Parliament. We have seen many signs of the Labour Government's insidious attitude towards Parliament and the fundamental responsibility of the Executive branch to be accountable to Parliament. We have not seen before the sort of dramatic documentary evidence that my hon. Friend introduced in Committee this evening, for which we should all be grateful.

Against that background, it is not surprising that my hon. Friend exposed, quite incontrovertibly, the Government's mockery of the consultation process. The Inland Revenue has clear rules for consultation and, apparently, a consultation process on the issue of double taxation relief and corporate taxation was launched. However, at no stage during the course of that proceeding did the Government reveal what they actually proposed to do. Therefore, a mockery of a consultation exercise was held in which all sorts of proposals were discussed except those that the Government intended to introduce in the Finance Bill. That was no consultation at all. The Government underestimate the intelligence of Members of Parliament and the public if they think that they can get away with that.

Mr. Letwin

Does my hon. Friend agree that there is an even more remarkable aspect to the consultation? The final date for responses to the consultation process was, if memory does not deceive, September last year, and the measure was introduced in March this year. Therefore, even if, in the interim, the Government had changed their mind, there were some months in which the consultation exercise could have been repeated, on a new basis.

Mr. Davies

The Government are clearly guilty as charged on this most serious allegation.

The Paymaster General more or less accepted the charge against her when, in her speech this evening, she quoted various speculative press articles that apparently had succeeded in foreshadowing some of the measures the Government intended to present to the House. In no circumstances can a speculative press article be a substitute for consultation. If the Government of this country are in the process of consulting the public on a specific legislative proposal and it so happens, coincidentally, that The Sun, The Mirror or some other publication carries an article about a possible course of action that the Government might adopt, it cannot be argued retrospectively that that speculative article formed part of the consultation process and that those who were engaged in the process were supposed to respond to the speculative press article during their discussions with the officials who took part in the charade.

Mr. Letwin

My hon. Friend reminds me of a point on which I attempted to intervene on the Paymaster General, although, with her customary graciousness, she failed to give way. Does he agree that it was pretty remarkable that, when the hon. Lady quoted one source as having congratulated the Government on their measures after—as she said and as I believe the record will show—the Budget was introduced, she referred to an article published in one of the journals on 30 March? Does he agree that it is pretty unlikely that someone could get published on 30 March an article that was written after a Budget that was itself produced after 20 March?

Mr. Davies

My hon. Friend's case is made. During our exchange, there has been complete silence on the Government Benches, and the Paymaster General herself has attempted to hide her embarrassment by sinking her head into her brief.

Our case is a serious one whose importance far exceeds that of any decision that we are likely to take tonight about the taxation of corporations in this country. This evening, we have seen revealed, in all its hideous ugliness, the naked arrogance of Executive power. A low point has been achieved under the Government and the situation gets worse every day, but this evening we have witnessed the most dramatic demonstration yet.

Let me now turn to the substance of the tax proposals before the Committee. One has to start by recognising that there is an apparent anomaly and unfairness in the system of double taxation relief in that, under double taxation agreements, residents of this country are given relief for foreign tax that they have already paid in countries with which we have such an agreement, provided that the rate of tax paid is equal to, or less than, the prevailing rate of tax at which they are assessed in this country, but if they are taxed abroad at a rate of corporation tax that is higher than the rate in this country, they receive no relief for that excess. One might think that that is not even-handed. However, if, under double taxation arrangements, a country were to relieve completely any tax paid under a foreign jurisdiction, it would not only lose revenue, but would be subsidising foreign countries that chose to establish higher rates of withholding or corporation tax, and that would be a perverse thing to do.

10.15 pm

I now come to a technical error that the Paymaster General made in her speech, which pales into insignificance when compared with the constitutional errors that I am afraid she and her Government have perpetrated tonight, but is important. She told the Committee that a system of offshore mixing to secure an average rate of taxation on which relief would be available in this country would itself induce, or provide a subsidy for, foreign countries to tax at higher rates. That is not true. She was confusing a situation in which we relieve all foreign tax with a system of pooling or of mixing, when the tax rates are averaged out.

A British company that establishes an offshore mixing company clearly has an incentive to ensure that the average rate of tax that is incurred is as low as possible. Therefore, it has an interest in resisting investment in countries where the rate of tax is higher. So it is not true that, in an offshore mixing company, the present system—the status quo—creates an incentive or subsidy for foreign countries that tax more highly than we do. I hope that the Paymaster General will think through what she has said because that error may have led her seriously astray in drafting the proposals before us.

Mr. Letwin

Does my hon. Friend agree that it is extraordinary that the Minister who made those remarks chairs a committee on so-called harmful tax competition, in which she effectively takes exactly the opposite position—that tax competition is helpful and not harmful?

Mr. Davies

I hope that my hon. Friend is right to say that the Paymaster General views tax competition as helpful and not harmful, because it is essential that, in the European Union or, indeed, generally in the world, we retain some competitive pressure on Governments to hold back their inclination to tax and to spend as much as possible. Tax competition seems to be an extremely benign force. I hope that he is right to say that the hon. Lady is fully persuaded of its importance.

I do not want to sit down without having dwelt on the most important flaw and error in the Government's thinking on the matter. It is a rather naive error to discount entirely the behavioural consequences of such a major change. It does not make the slightest sense to anybody who has had the remotest experience of business life to suppose that one can change anywhere in the world the rules under which multinational companies are taxed without any consequence for their structure or organisation. There will of course be behavioural consequences.

It is not possible for someone who is paid to run the tax department of a major multinational to receive the news that there has been such a significant change and not to recommend to his board any consequent changes in the structure or operation of that company. It is not possible for any director of that company who is doing a proper job for which he or she is paid not to respond to such a recommendation and not to do what rationally is in the interests of the company in the light of the changed circumstances.

It is possible to distinguish between the possibilities that will be open to companies now that the opportunities of running an offshore mixing vehicle are about to be abolished. One would be not to repatriate dividends in order to pay a dividend from a UK company to UK shareholders when necessary, but to borrow instead. That of course implies extremely inefficient cash management and costs that any responsible company would be reluctant to incur. It implies a change in the gearing of that company, which would be resisted by professional managers in any company that is properly managed.

It is fairly unlikely that that course will be adopted. Companies will find ways of not repatriating the dividends at all. As my right hon. Friend the Member for Charnwood (Mr. Dorrell) said, the natural inclination will be to keep those profits offshore and use them to fund other investments. That means that the total dividend flow into the UK will be less than it otherwise would be. I draw the Government's attention to the fact that we have a current account deficit, which is growing. It will grow further if dividends are not repatriated to this country.

Then there are the second-line effects to which my right hon. Friend the Member for Charnwood referred. Companies are accumulating more cash abroad and are making investments abroad. They will increasingly be drawn into setting up administrative structures abroad and perhaps incurring costs abroad, by switching research and development abroad or some other cost that can relatively easily be transferred. That will result in the loss of employment—possibly valuable employment—and the loss of high-value added activities to this country. That is not a good day's work for any Government.

Finally, what concerns me about the proposal is the opportunity costs. I have not heard that term used once this evening. It seems that the Government have not even considered the opportunity costs. I assume that, if the hon. Lady had asked the Revenue to do a study of them, we would have heard about that this evening in her long apologia. I assume that no one has examined opportunity costs, which are the essence of the matter.

We are speaking about future decisions about the location of investment, the location of headquarters, and the right locus for the incorporation of companies. The debate is being conducted at a time of unprecedented international merger and acquisition activity. As we know, particularly within the single market but not limited to the single market, there have been an enormous number of major mergers between multinational companies. Some have been mentioned this evening. My hon. Friend the Member for West Dorset rightly drew attention to Vodafone Mannesmann, which is the biggest involving this country, and there have also been British Steel and Hoogovens, now called Corns; AstraZeneca; and SmithKline Beecham and Glaxo. In a few weeks, there may be Lafarge and Blue Circle.

There is a list of such enormously momentous acquisitions or mergers in progress. On every such occasion, the decision will have to be taken by the two parties where to locate the new operation, where it should be headquartered, how it should be structured, who should hold the subsidiary companies, and through what vehicle. The Government have chosen this precise moment to make a destructive attack on the attractions of this country as a locus for the headquarters of such emerging multinational companies. There can be no worse incompetence than that.

We have seen an amazing display this evening by the Government, on the one hand of arrogance and abuse of our constitution, and on the other hand of neglect of the fundamental economic duty of the Government to promote a framework in which future investment, employment and growth in this country are maximised.

Mr. Letwin

I shall not long detain the Committee. I am sure that hon. Members are grateful for that.

The hon. Member for Kingston and Surbiton (Mr. Davey) made clear in his speech much that is important about the wrongness of the process in which the Government are engaged.

My right hon. Friend the Member for Charnwood (Mr. Dorrell), the former Financial Secretary No. 1, made a powerful case about the effect of the measure on the location of headquarters. My right hon. Friend the Member for Fylde (Mr. Jack), the former Financial Secretary No. 2—I do not suggest by that any order of priority, other than of speaking—made it clear that we needed an analysis of the economic impact of the measure. My hon. Friend the Member for Grantham and Stamford (Mr. Davies) made it abundantly plain that we are dealing with an abuse of process, an abuse of Parliament and an abuse of substance.

In the Paymaster General's response to the debate, she made three arguments. Her first was that, although the text of the consultation document, which she proceeded to misquote, made no mention whatever of the proposal that is hereby being enacted, and hence in no way was there any consultation on that proposal, it was nevertheless—I think I quote almost exactly—quite obvious to anyone engaged in the process that this would be, or might be, the measure that was forthcoming. If she thinks that it is quite obvious, it is odd that the CBI thought that it was unexpected, that the Institute of Directors thought that it was unheralded, that the Chartered Institute of Taxation thought that it was a surprise and that most of British industry is hopping up and down because it claims that it was never told about it. If it was obvious enough for the Paymaster General, she might have let some others into the secret. It would have been helpful.

Secondly, the Paymaster General told the Committee that the yield would be minute, not enormous, and she told us that on the basis of Inland Revenue calculations. She did not see fit to give way to allow me to ask the question which I invite her to answer now. Was it pointed out to the Inland Revenue and to her economic adviser in a meeting with accountants when the issue was raised that the base year upon which the calculation was made was exceptional? She did not answer then and she does not answer now. The fact is that the calculations that she suggested are not substantiated, are probably inaccurate and are not reflected in the views of any of those who have commented on this, whether the CBI, the IOD, the major firms or the various firms of accountants. Not in one of those sources do we find a similarity of view about the amounts to be raised. It would be interesting to know whether the hon. Lady is willing to stake her continued career on the effect of the measure next year, or, if it is to be delayed by nine months, a year later.

Thirdly, the Paymaster General claimed that the measure had been welcomed or heralded by a large number of people in various articles. It would be interesting to know whether it is generally the Treasury's practice to ignore the advice, after a proposal is put forward, of the big six accountancy firms, the CBI, the Chartered Institute of Taxation and the IOD, in favour of three or four academic articles, one of which was undoubtedly submitted for publication before the Budget and hence—although apparently it was quite obvious—before the writer had the slightest idea what the proposal in question would be.

But all those things, as my right hon. and hon. Friends have pointed out, pale into utter insignificance when compared with what the Paymaster General did not say. In the whole of her speech, she never once mentioned whether the measure would substantially deter important companies from locating their headquarters in the UK, and, if so, whether that would have a huge and sustained knock-on effect on our economy.

I can only conclude either that the Paymaster General does not care what happens to the UK economy, which is unlikely, or that she—this must be the more likely case—knows that there is a real problem here, but does not want to admit it or consult on it because she knows that it would entail admitting that the Government have, in this case, as Governments do because they are composed of human beings and we are all fallible, we as much as they—[Interruption.] My hon. Friends may disagree, but I admit on behalf of the Conservative party that we are human. So, too, are the Government. Unfortunately, Ministers and officials, in this case probably an economic adviser and a few Ministers, over against the Inland Revenue, have made a tremendous and signal error.

The easy way to deal with those errors is to withdraw the proposal by letting the clause fall and to return later with one of the options described in a perfectly reputable Inland Revenue consultation document, and discussed the length and breadth of British industry—either the mixer companies or the onshore pooling. We could all then rest easy that the Government will not go down in history as having destroyed a large chunk of our economy. As things stand, that is exactly what is likely to happen and it will be a disgrace if the Government do not withdraw the clause.

Question put, That the clause stand part of the Bill:—

The Committee divided: Ayes 254, Noes 123.

Division No. 178] [10.29 pm
Adams, Mrs Irene (Paisley N) Corbyn, Jeremy
Ainger, Nick Corston, Jean
Ainsworth, Robert (Cov'try NE) Cox, Tom
Alexander, Douglas Cranston, Ross
Crausby, David
Armstrong, Rt Hon Ms Hilary Cryer, Mrs Ann (Keighley)
Atherton, Ms Candy Cryer, John (Hornchurch)
Austin, John Cummings, John
Banks, Tony Cunningham, Rt Hon Dr Jack (Copeland)
Barnes, Harry
Bayley, Hugh Dalyell, Tam
Beard, Nigel Darling, Rt Hon Alistair
Benn, Hilary (Leeds C) Davey, Valerie (Bristol W)
Bennett, Andrew F Davidson, Ian
Benton, Joe Davies, Rt Hon Denzil (Llanelli)
Dawson, Hilton
Bermingham, Gerald Dean, Mrs Janet
Berry, Roger Denham, John
Best, Harold Donohoe, Brian H
Blackman, Liz Doran, Frank
Blears, Ms Hazel Dowd, Jim
Boateng, Rt Hon Paul Drew, David
Borrow, David Eagle, Maria (L'pool Garston)
Bradley, Keith (Withington) Edwards, Huw
Bradshaw, Ben Ellman, Mrs Louise
Brinton, Mrs Helen Ennis, Jeff
Brown, Rt Hon Gordon (Dunfermline E) Field, Rt Hon Frank
Fisher, Mark
Brown, Rt Hon Nick (Newcastle E) Flint, Caroline
Brown, Russell (Dumfries) Flynn, Paul
Browne, Desmond Foster, Rt Hon Derek
Butler, Mrs Christine Foster, Michael Jabez (Hastings)
Byers, Rt Hon Stephen Foulkes, George
Campbell, Mrs Anne (C'bridge) Fyfe, Maria
Campbell-Savours, Dale Gardiner, Barry
Cann, Jamie George, Bruce (Walsall S)
Caplin, Ivor Gerrard, Neil
Caton, Martin Gibson, Dr Ian
Cawsey, Ian Godman, Dr Norman A
Chaytor, David Godsiff, Roger
Clapham, Michael Goggins, Paul
Clark, Rt Hon Dr David (S Shields) Gordon, Mrs Eileen
Clark, Dr Lynda (Edinburgh Pentlands) Griffiths, Nigel (Edinburgh S)
Grocott, Bruce
Clarke, Charles (Norwich S) Grogan, John
Clarke, Eric (Midlothian) Hain, Peter
Clarke, Rt Hon Tom (Coatbridge) Hall, Mike (Weaver Vale)
Clarke, Tony (Northampton S) Hanson, David
Clwyd, Ann Harman, Rt Hon Ms Harriet
Coaker, Vernon Heal, Mrs Sylvia
Colman, Tony Healey, John
Connarty, Michael Henderson, Ivan (Harwich)
Cooper, Yvette Hepburn, Stephen
Corbett, Robin Hill, Keith
Hinchliffe, David
Hodge, Ms Margaret
Hoey, Kate
Hood, Jimmy Perham, Ms Linda
Hoon, Rt Hon Geoffrey Pickthall, Colin
Hope, Phil Pike, Peter L
Howells, Dr Kim Plaskitt, James
Hughes, Kevin (Doncaster N) Pollard, Kerry
Humble, Mrs Joan Pond, Chris
Hurst, Alan Pound, Stephen
Hutton, John Prentice, Ms Bridget (Lewisham E)
Iddon, Dr Brian Prentice, Gordon (Pendle)
Jackson, Ms Glenda (Hampstead) Prescott, Rt Hon John
Johnson, Alan (Hull W & Hessle) Primarolo, Dawn
Johnson, Miss Melanie (Welwyn Hatfield) Prosser, Gwyn
Purchase, Ken
Jones, Rt Hon Barry (Alyn) Quin, Rt Hon Ms Joyce
Jones, Helen (Warrington N) Radice, Rt Hon Giles
Jones, Ms Jenny (Wolverh'ton SW) Rammell, Bill
Jones, Dr Lynne (Selly Oak) Rapson, Syd
Jones, Martyn (Clwyd S) Raynsford, Nick
Jowell, Rt Hon Ms Tessa Reed, Andrew (Loughborough)
Keen, Alan (Feltham & Heston) Reid, Rt Hon Dr John (Hamilton N)
Khabra, Piara S Roche, Mrs Barbara
Kilfoyle, Peter Rooker, Rt Hon Jeff
Ross, Ernie (Dundee W)
Rowlands, Ted
Ladyman, Dr Stephen Roy, Frank
Lawrence, Mrs Jackie Ruane, Chris
Lepper, David Ruddock, Joan
Levitt, Tom Ryan, Ms Joan
Liddell, Rt Hon Mrs Helen Sarwar, Mohammad
Linton, Martin Sawford, Phil
Lloyd, Tony (Manchester C) Sedgemore, Brian
Llwyd, Elfyn Sheerman, Barry
Love, Andrew Simpson, Alan (Nottingham S)
McAvoy, Thomas Skinner, Dennis
McDonagh, Siobhain Smith, Rt Hon Andrew (Oxford E)
Macdonald, Calum Smith, Miss Geraldine (Morecambe & Lunesdale)
McDonnell, John
McFall, John Smith, Jacqui (Redditch)
McGuire, Mrs Anne Smith, John (Glamorgan)
McIsaac, Shona Smith, Llew (Blaenau Gwent)
McKenna, Mrs Rosemary Snape, Peter
Mackinlay, Andrew Soley, Clive
McNamara, Kevin Spellar, John
MacShane, Denis Squire, Ms Rachel
Mactaggart, Fiona Steinberg, Gerry
McWilliam, John Stevenson, George
Mahon, Mrs Alice Stewart, David (Inverness E)
Marsden, Paul (Shrewsbury) Stewart, Ian (Eccles)
Marshall, Jim (Leicester S) Stoate, Dr Howard
Marshall-Andrews, Robert Strang, Rt Hon Dr Gavin
Meacher, Rt Hon Michael Stuart, Ms Gisela
Michael, Rt Hon Alun Taylor, Rt Hon Mrs Ann (Dewsbury)
Milburn, Rt Hon Alan Taylor, David (NW Leics)
Miller, Andrew Temple-Morris, Peter
Moffatt, Laura Thomas, Gareth (Clwyd W)
Moonie, Dr Lewis Thomas, Simon (Ceredigion)
Moran, Ms Margaret Timms, Stephen
Morgan, Ms Julie (Cardiff N) Tipping, Paddy
Morley, Elliot Todd, Mark
Morris, Rt Hon Ms Estelle (B'ham Yardley) Touhig, Don
Trickett, Jon
Murphy, Denis (Wansbeck) Turner, Dennis (Wolverh'ton SE)
Murphy, Jim (Eastwood) Turner, Dr Desmond (Kemptown)
Naysmith, Dr Doug Turner, Dr George (NW Norfolk)
Norris, Dan Twigg, Derek (Halton)
O'Brien, Bill (Normanton) Tynan, Bill
O'Hara, Eddie Vis, Dr Rudi
Olner, Bill Ward, Ms Claire
O'Neill, Martin Welsh, Andrew
Organ, Mrs Diana Wicks, Malcolm
Osborne, Ms Sandra Wigley, Rt Hon Dafydd
Palmer, Dr Nick Williams, Rt Hon Alan (Swansea W)
Pearson, Ian
Williams, Mrs Betty (Conwy) Wright, Dr Tony (Cannock)
Wilson Brian
Winnick, David
Wood, Mike Tellers for the Ayes:
Worthington, Tony Mr. David Clelland and
Wray, James Mr. Graham Allen.
Amess, David Kirkwood, Archy
Arbuthnot, Rt Hon James Lansley, Andrew
Atkinson, Peter (Hexham) Leigh, Edward
Ballard, Jackie Letwin, Oliver
Beith, Rt Hon A J Lewis, Dr Julian (New Forest E)
Bercow, John Livsey, Richard
Blunt, Crispin Lloyd, Rt Hon Sir Peter (Fareham)
Boswell, Tim Loughton, Tim
Brady, Graham Lyell, Rt Hon Sir Nicholas
Brand, Dr Peter McIntosh, Miss Anne
Brazier, Julian MacKay, Rt Hon Andrew
Brooke, Rt Hon Peter Maclean, Rt Hon David
Browning, Mrs Angela Maclennan, Rt Hon Robert
Bruce, Ian (S Dorset) Madel, Sir David
Bruce, Malcolm (Gordon) Malins, Humfrey
Burstow, Paul Maples, John
Butterfill, John Maude, Rt Hon Francis
Campbell, Rt Hon Menzies (NE Fife) Mawhinney, Rt Hon Sir Brian
May, Mrs Theresa
Cash, William Moss, Malcolm
Chapman, Sir Sydney (Chipping Barnet) Nicholls, Patrick
Norman, Archie
Clappison, James Ottaway, Richard
Collins, Tim Page, Richard
Cormack, Sir Patrick Paice, James
Cran, James Paterson, Owen
Curry, Rt Hon David Pickles, Eric
Davey, Edward (Kingston) Portillo, Rt Hon Michael
Davies, Quentin (Grantham) Robathan, Andrew
Davis, Rt Hon David (Haltemprice) Robertson, Laurence
Dorrell, Rt Hon Stephen Rowe, Andrew (Faversham)
Duncan Smith, Iain Russell, Bob (Colchester)
Emery, Rt Hon Sir Peter St Aubyn, Nick
Faber, David Shephard, Rt Hon Mrs Gillian
Fabricant, Michael Simpson, Keith (Mid-Norfolk)
Flight, Howard Smith, Sir Robert (W Ab'd'ns)
Forth, Rt Hon Eric Spicer, Sir Michael
Fowler, Rt Hon Sir Norman Stanley, Rt Hon Sir John
Fox, Dr Liam Steen, Anthony
Gale, Roger Swayne, Desmond
Garnier, Edward Syms, Robert
Gibb, Nick Tapsell, Sir Peter
Gill, Christopher Taylor, Ian (Esher & Walton)
Gray, James Taylor, John M (Solihull)
Green, Damian Taylor, Matthew (Truro)
Greenway, John Taylor, Sir Teddy
Tredinnick, David
Grieve, Dominic Trend, Michael
Hamilton, Rt Hon Sir Archie Tyler, Paul
Hammond, Philip Tyrie, Andrew
Harvey, Nick Waterson, Nigel
Hawkins, Nick Webb, Steve
Heald, Oliver Whitney, Sir Raymond
Heath, David (Somerton & Frome) Whittingdale, John
Heathcoat-Amory, Rt Hon David Widdecombe, Rt Hon Miss Ann
Hogg, Rt Hon Douglas Willetts, David
Horam, John Wilshire, David
Howard, Rt Hon Michael Winterton, Mrs Ann (Congleton)
Howarth, Gerald (Aldershot) Winterton, Nicholas (Macclesfield)
Jack, Rt Hon Michael Yeo, Tim
Jackson, Robert (Wantage) Young, Rt Hon Sir George
Jenkin, Bernard
Key, Robert Tellers for the Noes:
King, Rt Hon Tom (Bridgwater) Mrs. Eleanor Laing and
Kirkbride, Miss Julie Mr. Peter Luff.

Question accordingly agreed to.

Clause 102 ordered to stand part of the Bill.

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