Income Tax Deductions: Recovery (Hansard, 19 October 1989)

The Paymaster General (The Earl of Caithness)
My Lords, there is no question of the Inland Revenue placing difficulties in the way of individual non-taxpayers who seek to recover tax paid at source on their bank deposit interest. The tax is composite rate tax which, by law, is not repayable.

§ Lord Boyd-Carpenter
My Lords, I thank my noble friend for that Answer. Does that not mean that if someone whose total income is below the level of tax liability as determined by Parliament invests his 1024 savings in a deposit account at a bank, the Inland Revenue deducts income tax at source and refuses to repay it?

The Earl of Caithness
My Lords, it is true that tax is deducted at source and is not recoverable. It is a composite rate tax. It is below the basic rate, at 21.75 per cent.

Lord Bruce of Donington
My Lords, will the noble Earl not agree that it is not the responsibility of the Inland Revenue but of the taxation statute itself, by virtue of which this state of affairs has been in operation since the fiscal year 1985–86 when the composite rate was first introduced? It was clearly stated at that time by the Government that the tax would not be repayable.
Is the noble Earl aware that that state of affairs needs further consideration by the Government because in the next fiscal year there will be a separate assessment of a husband and wife and both will have personal allowances available to offset? In the normal way where money is invested in dividends—in equity shares—tax would become repayable in respect of a certain proportion of their personal allowances.
Is the noble Earl also aware that in the meantime there is the temptation to shift funds out of British banks into Jersey and Isle of Man banks, where banks pay interest on their deposits gross? Will the noble Earl give some consideration to giving some publicity to the facilities offered by the national savings investment accounts which pay tax gross and where deposits can be withdrawn at one month's notice?

The Earl of Caithness
My Lords, the first part of the noble Lord's supplementary was based on a wrong assumption. He said that it was brought into effect in 1985–86. At that time the banks were brought into line with the building societies, which have had a composite rate for nearly 100 years or at least since the 1890s. Therefore, many governments of all colours and persuasions have thought that the composite rate was the right method. Indeed, my noble friend Lord Boyd-Carpenter as Chief Secretary would have been responsible for the composite rate in his time.
The noble Lord then went on to pose some questions to which he gave the answers. We are not party to dictating where investors should put their money, but he was quite right to say that national savings pay tax gross.

§ Lord Mellish
My Lords, is the Minister aware that there is an injustice here? It is unusual for anyone on this side of the House to support the noble Lord, Lord Boyd-Carpenter, on anything. However, surely this is a case where a man is not liable to pay income tax of any kind and yet it is deducted by the bank and is kept by the Inland Revenue and no effort is made to return it. Why not?

The Earl of Caithness
My Lords, that was discussed at length in another place. Because it was a Finance Act it was not discussed in your Lordships' House. I think that there are perhaps three reasons 1025 why the composite rate has been used for nearly 100 years. The advantages are that it is simple from the Inland Revenue's point of view and from the point of view of the non-taxpayers, who are saved the inconvenience of having to discuss the matter of reclaiming tax with the Inland Revenue and prove to its satisfaction that the tax was not due. It has also been assessed on that basis for a long time. If the composite rate was made refundable to non-taxpayers, the composite rate and the basic rate would become indistinguishable.

§ Lord Boyd-Carpenter
My Lords, is my noble friend aware that whatever the deficiencies of past Ministers who should have known better, the fact remains that tax is being extorted from people whose incomes are at a level at which it is generally understood that tax is not payable? Is that not only wrong in principle but also a considerable deterrent to saving?

The Earl of Caithness
My Lords, as regards any investment by a non-taxpayer it is true that if that investment is with a bank or building society, tax is not repayable. However, as the noble Lord, Lord Bruce of Donington, said, there is national savings, where the interest is paid gross.

§ Lord Stoddart of Swindon
My Lords, is the noble Earl aware that the present rate for national savings income bonds is 11.5 per cent. gross, which is 8.6 per cent. net? Anybody with £1,000 or more can get 9.5 per cent. net from a building society. That is what the noble Lord is getting at. In fact, non-taxpayers are not being given any opportunity to have a safe haven for their savings at the real and current rate of interest because the Treasury holds the monopoly on such savings.

The Earl of Caithness
My Lords, I disagree with the noble Lord. There is a choice of opportunities for the investor: one is paid net of tax and the other is paid gross.

Lord Campbell of Croy
My Lords, was not the reason for the change in 1985 that the Government felt it was right to produce a level playing field for banks and building societies? Therefore, the composite rate was applied to banks as well as building societies. However, might not a better solution be to do away with the composite rate altogether? That would still keep the playing field level.

The Earl of Caithness
My Lords, my noble friend was right to say that it was to produce a level playing field. As I understand it, the rates net of tax as a result of a level playing field and more competition are more beneficial than the old gross rates.

§ Lord Harmar-Nicholls
My Lords, is my noble friend's spirited defence of the present situation an indication that, despite the strong evidence being produced by questions, the Government are not likely even to think of doing something about it?

The Earl of Caithness
Oh no, my Lords, my noble friend will know how carefully we listen to arguments.

Lord Bruce of Donington
My Lords, is the noble Earl aware that the Question put by his noble friend, the noble Lord, Lord Boyd-Carpenter, related exlusively to bank interest and that therefore I was quite correct in saying that that part did not come into operation until the fiscal year 1985–86?
Will the noble Earl give some indication as to whether, in view of the prospect—indeed, the certainty—of a husband and wife being separately assessed in the year 1990–91, he will give further consideration to this matter and thus help to prevent funds seeping abroad to Jersey and to the Isle of Man?

The Earl of Caithness
My Lords, I certainly apologise to the noble Lord if I misunderstood the first part of his question. I thought he said that the composite rate was invented in 1985–86. With regard to independent taxation, when that comes in next year, at the moment depositors will be taxed under the composite rate scheme as at present.

§ Lord Renton
My Lords, in view of the strong and unanimous representations that have been made this afternoon and in spite of the doughty effort of my noble friend to defend the indefensible, will he invite the attention of the Chancellor of the Exchequer to what has passed in the House?

The Earl of Caithness
My Lords, I always draw to the attention of my right honourable friends what has passed in this House.