Clause 13 - Relief from income tax and capital gains tax
Child Trust Funds Bill
9:30 am

Mr Joe Benton (Bootle, Labour)

I remind the Committee that with this we are discussing the following: Clause stand part.

Amendment No. 159, in

clause 27, page 15, line 12, after '31', insert

'and subject to the provisions of section 13'.

Mr David Laws (Yeovil, Liberal Democrat)

Good morning to you, Mr. Benton, on the last full day of our proceedings.

The amendment invites the Treasury to table to Parliament a report setting out the cost to the taxpayer of the measures in the Bill, particularly those that

allow for greater tax relief than is usually the case. The context is our concern about whether the Treasury is dealing fairly and even-handedly with lower-income groups, as opposed to the upper-income groups that will benefit from extra tax relief.

Obviously, I shall not lead us away from the subject of the amendment, but the comments by the hon. Member for Tatton (Mr. Osborne) on the Financial Times article, which suggested that the subscription level would be £10 rather than £5, indicate that the Government might, as we feared, be moving in the direction of favouring upper-income over lower-income groups. The Financial Secretary denied the story, which suggested—I raised this suspicion last week—that low-income families will be unable to save £5 a month and will be forced to save at least £10 a month. We shall see whether the Minister or the story is correct when the regulations come out. I would wager a small sum on the Financial Times being correct, but we shall see. [Hon. Members: ''Disgraceful.''] Well, it is disgraceful if details have been leaked before the regulations have been issued.

Mr Joe Benton (Bootle, Labour)

Order. We should return to the amendment.

Mr David Laws (Yeovil, Liberal Democrat)

The issue in the amendment is how the Government treat upper-income groups in respect of the child trust fund. At the end of last week's proceedings, we referred to exchanges on the issue in the Treasury Committee and to the Treasury's Mr. Holgate. He admitted that, in the Treasury's view, the assumptions that had been made about the tax cost of setting aside income tax settlements legislation were quite arbitrary. My hon. Friend the Member for North Norfolk (Norman Lamb) pressed Mr. Holgate further about the assumptions and asked him whether he could share them with the Committee. Mr Holgate replied:

''To offer you something would be to pretend to have a degree of wisdom on this subject which nobody possesses.''

That raises the question whether the Minister's estimate of a cost of up to £10 million per year for laying aside the tax legislation is reasonable.

Mr George Osborne (Tatton, Conservative)

Does the hon. Gentleman share my regret that Mr. Holgate has not been answering for the Government in this Committee? He is not as polished as the Minister and therefore lets slip what are the holes in the proposals.

Mr David Laws (Yeovil, Liberal Democrat)

The hon. Gentleman makes a powerful point. However, having taken evidence from Mr. Holgate on occasion in the Treasury Committee, I can tell the hon. Gentleman that Mr. Holgate is not always as insightful as the Minister. As he is not here to defend himself I will stick more or less to the script of the evidence.

This is a vital issue, and I come back to the important points made by the hon. Member for Newcastle upon Tyne, Central (Mr. Cousins), who said to the Minister:

''I think you will accept that, by not applying the income tax settlements legislation which is embedded in income tax practice right across the board, for every kind of savings provision you can make for your children a major step has been made, and it is not

just an issue of the sums of money involved but also the question of equity. There is a specific provision in the Bill to exempt the income tax settlements legislation and you do have to take that on board as being a significant step.''

In the exchange that follows an attempt is made to go into more detail about how the Treasury has come up with its estimate of less than £10 million a year as the cost of disallowing the tax legislation.

Again, Mr. Holgate gives information based on how taxpayers would need to allocate their cash to avoid tax in comparison with other savings vehicles. He estimates that each individual could legitimately avoid £33.60 of tax each year. I am not sure whether that is not a slightly low figure, in view of the returns that might be expected on savings. To come up with the figure of less than £10 million a year the Treasury must be estimating the number of people who will exploit the opportunity even to that small degree. It would be useful to hear from the Minister what that number is.

Later Mr. Holgate states that clearly, over time, the costs of that tax relief will rise and then level off at about £600 by the age of 18. That is a considerable increase on the figures that have been mentioned for the earliest years of the fund. Presumably the growth of that tax relief is one factor in the Treasury's decision to disallow the income tax settlements legislation.

The amendment therefore invites the Minister to tell us the estimates for the cost of the measure in the early years, and it invites us to consider whether the Exchequer will use that tax relief sensibly. It asks the Treasury to cost the tax relief right up to 2022, the end of the first CTF accounts starting in 2004. Clearly that cost will rise steeply over time. That appears to be the implication of the evidence that Mr. Holgate gave to the Treasury Committee. It also appears to be the implication of the comments that the Financial Secretary made on Second Reading, when she said:

''As a further incentive, income tax settlements legislation will not apply to child trust fund accounts. Given that such an account will run for 18 years, the settlements legislation could have caught large numbers of people in the later years of the account.''—[Official Report, 15 December 2003; Vol. 415, c. 1344.]

The implication of the comments by the Financial Secretary and Mr. Holgate is that the Treasury anticipate that the up-front costs of disallowing the tax legislation will be quite modest, but that the costs will rise quite steeply over time. On the basis of Mr. Holgate's figures of £600 in the final year of the CTF account and £33.60 in the first year, I calculate the multiplier to be something like 18. In crude terms, a tax relief that could cost up to £10 million initially would cost £180 million or more by the end of the relevant period. I am sure that the Financial Secretary will pick up on that point when she responds.

We should be concerned about the costs for a number of reasons. One is that the tax cost of such savings schemes always increases significantly over time, and the Treasury has a record of underestimating the extent to which people will take up such opportunities. We might think, for example, of the tax costs of the PEPs and TESSAs that were introduced under Conservative Governments and curbed when the Labour party came to power in 1997. One reason

for curbing those savings plans and the tax relief associated with them was the fact that the tax relief was growing out of control and the tax benefit was going to people who were extremely wealthy.

I should not have thought that the Minister would want to see that pattern repeated with this proposal, particularly because we are debating tax relief in the context of many other aspects of the Bill which will adversely affect people on lower incomes in respect of disregard for benefits and deprivation of capital. There are separate amendments relating to those matters, but that is the context in which we are debating this issue.

I return to the comments that I made to the Minister at the beginning of the debate. I cannot see, in principle, any reason that we would wish, in the child trust funds, to extend greater tax relief to people on higher incomes than is already allowed for. I do not want to see the Exchequer spending money on the Bill to incentivise savings for people on higher incomes. Those people already have the money to save, and they are the ones who already save. If the Bill is to have value, it should lie in Government giving incentives to save, and those should be directed towards people on lower incomes.

If the Committee is to agree to the Government's proposal to disallow the tax legislation—a matter that caused the hon. Member for Newcastle upon Tyne, Central a great deal of concern—we need answers to two questions. The first concerns the Treasury's best estimate of the cost, how that cost will increase over time, and what assumptions underlie those estimates.

The second question is why the Financial Secretary and the Government have decided, in any case, to disallow the tax legislation. I assume it is because the hon. Lady thinks that the Bill and its taxation elements would become too complex over time if people were trying to unravel the effects of being in breach of the existing tax legislation or of going above the ceiling of £100 that they are allowed to earn on interest income without paying tax.

Perhaps the Treasury is also concerned about how to separate the returns from the Government's initial contribution to the fund from the contributions that would be made by outside parties. If so, I would like to hear more about that from the Minister. In her view, does the degree of complexity create an overwhelming case for disallowing the tax legislation? Has she considered any other ways in which the existing legislation could continue to be applied in a way that was practical and saved the Treasury the cost of the tax relief, which could rise significantly over time?

Ms Ruth Kelly (Financial Secretary, HM Treasury; Bolton West, Labour)

I do not want to rehearse all the arguments about the minimum contribution method. We have had that debate once in Committee, and will no doubt have it again on Report. I can offer no comment on the story from the Financial Times. The decision on the minimum contribution is intimately linked to the charge cap level.

Mr David Laws (Yeovil, Liberal Democrat)

Will the Minister confirm whether anybody in the Treasury told the Financial Times that the minimum contribution level would be £10?

Ms Ruth Kelly (Financial Secretary, HM Treasury; Bolton West, Labour)

I do not see how they could have done, as the decision has not been made. However, as I have said, I do not want to rehearse the arguments that we have already had in Committee.

The hon. Gentleman referred to the impact of income tax settlements legislation on child trust funds. He has largely missed the point. The child trust fund is not likely to be used as a vehicle for tax avoidance. That is partly because contributions made by a parent would be tied into the CTF account until the child reached the age of 18, but also because the money will belong to the child, rather than the parent. In other children's accounts, the parent has access to the money as the child and the fund mature. That situation is much more likely to be used for the purposes of avoiding income tax.

The hon. Gentleman asks whether it is merely a matter of complexity. Obviously, it would be complex to apply the tax settlement legislation, but the fact is that we would want to apply it only if we thought that there was a substantial likelihood of income tax being avoided through the child trust fund.

The hon. Gentleman asks about the figures involved. The CTF accounts will run for 18 years, and the tax legislation might have caught large numbers of people in the later years. Parental contributions of £100 a year would have tax consequences after 11 years, and contributions of £200 a year would have tax consequences after six years. In other words, the settlements rule would be triggered after 11 years and six years respectively on relatively modest contributions to the account, and contributions of £100 or £200 are what we want to see. I do not think that many people would argue that such behaviour was linked to tax avoidance.

The Government publish estimates on the cost of tax relief twice a year, at the time of the Budget and pre-Budget reports. The hon. Gentleman asked how much the tax incentives on a child trust fund would cost the Government. We have said that the costs are expected to be negligible in the early years and to rise over time. I can reaffirm that, as was made clear to the Treasury Committee, over time the cost remains small in relation to the cost of an endowment.

The amendment would require a report on the scope of tax avoidance in CTF accounts. Reports on tax avoidance and compliance and child trust funds would form part of the annual report that the Paymaster General makes to Parliament on the Inland Revenue's activities, alongside reports on all other areas operated by the Revenue. I believe that the proposals for tax relief for child trust funds fit with the objectives of encouraging long-term savings and the building up of an asset for the child. I therefore recommend that the Committee reject the amendment if the hon. Gentleman decides not to withdraw it.

Mr David Laws (Yeovil, Liberal Democrat)

I am grateful to the Minister for her comments. I appreciate that the Exchequer has made a low estimate of the cost of this particular measure. However, such estimates have a habit of going astray

over time. May I gently remind the Minister of the estimates that the Treasury made just a few years ago for the costs of the film industry tax relief? That was supposed to cost £30 million or £40 million, but within a very short period the estimate had risen to something like £400 million a year.

The Minister said that many people would not wish to take up the tax avoidance opportunity because the beneficiaries would ultimately be children rather than themselves. However, there are many individuals who, precisely because they have a high income and large tax liabilities, want to minimise those liabilities in any way they can, including giving money to children. If that minimises their tax liability, it reduces the amount of money going to the Exchequer and the amount available for more worthwhile schemes.

I will not press the amendment to a Division, but I hope that the Minister will keep the issue under review. In the Select Committee, the Minister told the hon. Member for Newcastle upon Tyne, Central that she would go away and consider the issue in the general context of when the income tax settlements legislation should apply.

I hope that the Minister will confirm that the annual Treasury booklet, which shows the cost of tax relief, will include an estimate of the cost of this relief. I hope also that, through that mechanism, the annual Budget statements and the pre-Budget reports, we can keep an eye on whether the tax relief grows in line with the Treasury's estimates. I hope that if it does not we will have the opportunity to intervene. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 13 ordered to stand part of the Bill.

Clause 14 ordered to stand part of the Bill.