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