I beg to move Amendment No. 68, in, page 11, line 21, at end insert:
' and subject to an exception for the years 1974–75 and 1975–76 where the emoluments are foreign emoluments'.
I am grateful for the explanation that you have just given, Mr. Thomas.
We are now moving in our consideration of the Finance Bill to a stage where we shall be dealing with Clauses 14 to 18. Admittedly, we are here concerned only with Clause 14. But the whole group together with Schedule 2 are concerned with the new arrangements for taxing foreign income as promised by the Chancellor of the Exchequer in his Budget speech at col. 315.
The right hon. Gentleman said:
My predecessor informed the House that a review of the whole subject was being undertaken by the Inland Revenue and that he would take account of the result of this in his 1974 Budget. This task now falls to me."—[OFFICIAL REPORT, 26th March 1974; Vol. 871, c. 315.]
The amendment is concerned not so much with the actual changes set out in the clauses but with delaying them. My right hon. Friend the Member for Altrincham and Sale (Mr. Barber) set a good
example when Chancellor in giving time for the House and the country to assess the value of legislation before it was passed, so that prior comment could be full and informed. This is why I am particularly anxious that that good example should be followed in this case.
The changes in Clause 14 affect two types of person. The first is someone living and working in this country who goes abroad and is paid abroad for work that he does there. Up to date he has paid United Kingdom tax only on sums remitted to this country and not on the whole salary. If the clause is not amended, he will, subject to special allowances contained in Schedule 2, have from now on to pay United Kingdom tax on the whole salary, whether or not it is remitted. Of course, he will also have to pay the appropriate tax in the country in which the income arises. The other type of person concerned is someone domiciled abroad but living here and working for a foreign company. Here again, up to now the liability to United Kingdom tax has arisen only on that part of the salary remitted to this country.
The law relating to taxation of foreign earnings by United Kingdom residents has existed for a long time. As with all taxation law, over the years this law has at times, been used in a way which was not originally intended, but there was good reason in the first place for taxing foreign earnings differently, and those reasons are probably stronger today than ever. They take into account the different rates of tax here and in many other countries.
The people most concerned with this type of income are in management. Whatever the Labour Party may say, the high rates of tax suffered by our management classes are a deterrent not only to the managers here but to those seeking to come here to work. I therefore want to make sure that the changes in the clause come about after plenty of time for public discussion, so that we can be as certain as possible that they will not seriously damage this country by discouraging enterprise, by discouraging new businesses from coming here from abroad and possibly by encouraging management here to think about emigrating.
That is not idle speculation. On 12th June, in a report headlined "Foreign
company deterred by new UK tax rule", the Daily Telegraph said:
At least one major investment project by a foreign company has been cancelled so far as a result of the Government decision to tax foreigners working in Britain.
It went on:
It is believed the investment was planned by a major electronics group in Wales, but the tax change is said to have tipped the balance against a new plant being located in the United Kingdom.
This is the sort of thing that can damage our economy and our expansion prospects. I want to guard against it by delaying the implementation of the clause.
Of necessity, both the clause and the amendment are very technical. One has to consider whether a person is "resident", whether he is "ordinarily resident" and whether he is "domiciled" in this country. Several distinctly puzzled people have asked me in the last few days what these strange terms mean. They have often puzzled legal luminaries with far greater knowledge of the law than ourselves, but I will venture on a short explanation.
A person is resident in this country, for example, if he is physically in this country for six months or more, if he shows by the pattern of his living that he visits the country year after year or if he has accommodation here which he visits during the tax year—although there are exceptions to that last category. Each case has to be looked at on its merits, and these are only examples of cases which have arisen. One can be resident in more than one country at the same time. As for "ordinarily resident", I can only say that ordinary residence denotes a greater permanence and that perhaps one could regard an ordinary residence as being the place in which one has habitual presence.
A learned judge has said that this matter of residence is a matter of common sense. Perhaps I need say no more. Any lawyer will confirm that anything that depends on common sense involves great complications. Someone has said that this country is ruled not by logic but by Acts of Parliament; nowhere is that more true than in dealing with the subject of residence.
The matter is made the more complicated and confused by a Ways and Means motion which we shall consider later, under which "residence" in certain circumstances will be the same as "domicile". Under another proposal the phrase "ordinary residence" can be amended so that the word 'ordinary' is omitted. Domicile can be regarded as one's permanent home even if one does not live there. This too has been described by tax pundits as being a very difficult subject.
My amendment is limited. I fully accept that if it is accepted other amendments would have to follow in its train. I seek not to alter the proposal but a delay of two years in implementing the tax changes in respect of foreign emoluments. Let us suppose that a United States company employs an American citizen to run its European operations from London or to run its British branch in the United Kingdom. Up to now that United States citizen living here would only have had to pay United Kingdom tax on that part of his remuneration which has been remitted to him here. He would have had to pay United States tax, with certain allowances given to people living abroad.
During 1974–75 and onwards, under the clause as it stands, that remuneration, subject to the Schedule 2 allowance, will be subject to United Kingdom tax. Since the allowance is 50 per cent., it means that 50 per cent. of that remuneration, whether or not remitted to this country, will suffer United Kingdom tax. Without any period of grace, the person is faced with what could be a substantial change in his tax circumstances.
If his contract of service and his commitments in respect of housing, education, etc., were all taken in good faith in the light of the existing tax law, which was known at the time he made his arrangements, he could well have assumed that our tax law was designed to encourage this United States company to set up its establishment in this country and its employees to live and work here. My amendment seeks to give a two-year period of grace so that he would have a chance of re-assessing the position. This provision would not then apply to him until the year 1976–77.
Not only would this be much fairer to those foreigners such as this American, who may have been attracted to working and living in this country by the existing law, but it would also put the taxing of foreign emoluments on a par with the taxing of foreign investment income of similar persons; that is to say, persons who are ordinarily resident but not domiciled in this country. Under Clause 18 such people will continue to be taxed only on the income received in the United Kingdom until 1976–77, at which date they will become subject to the nine-year residence tax.
It appears unjust that the changed law should be operated immediately in the case of the foreigner receiving pay or pension from abroad, whereas if his income from abroad takes the form of investment income the change of law will operate only after two years, and then only if he has been here for nine years. It seems particularly unjust since an employed person is under instruction and is not an entirely free agent as to where he works and therefore lives. A man living on his investment income presumably is free to live where he likes.
I hope I have put this amendment moderately. These clauses involve a review of a difficult field of tax law. The Chancellor has already felt it right to alter this taxation in one respect; for instance, under Clause 18.
We tax management far too heavily in this country. Tax tends to deter management from coming here. I have given an example of the effects it is likely to have. It tends to encourage management to leave the United Kingdom. Do not let us act too hastily in changing this law. In two years' time we shall have a much truer picture of the consequences of this action. The two-year delay in implementation proposed by this amendment will be in the national interest.
I ask the Government to accept this amendment in the spirit in which I have moved it even if they cannot accept the exact wording.
The Committee will be grateful to my hon. Friend the Member for Scarborough (Mr. Shaw) for the extremely lucid way in which he has explained a number of technical aspects of the clause which we are now debating. It is important that one should clarify the considerable obscurity of the clause as it is drafted.
There was a remarkable situation where for the earlier part of my hon. Friend's speech—given that we were told by the Government that this is a matter of great political importance—there was not one person on the Government side of the Chamber other than those sitting on the Front Bench. It is true that one or more have now come in. None the less, that is a very remarkable fact. Even the hon. Member for West Lothian (Mr. Dalyell) was not here. That shows a lack of enthusiasm on the part of the Government back benches. The hon. Member has returned now and we are glad to see him.
My hon. Friend has pointed out that the clause is divided into two parts, the Case I part, which is concerned with the United Kingdom resident who is operating abroad, and the Case 2 part of it, which is concerned with the non-United Kingdom resident who is operating in this country. The way in which the Government have widened the scope of the problem, which was already under debate, is extraordinary—that is to say, the question of whether there was some abuse of the provisions for the taxation of people from this country who were working abroad—because in the Chancellor's Budget Statement he, almost as an afterthought, threw in this suggestion:
My hon. Friend the Chief Secretary will later announce somewhat similar proposals applying to foreigners temporarily working in Britain whose employer is resident abroad. Obviously, they are not in quite the same position as persons who live here on a permanent basis and they will be assessed to tax on half of their earnings."—[OFFICIAL REVORT, 26th March 1974; Vol. 871, c. 316.]
It is quite extraordinary that, having isolated a particular form of abuse, the Chancellor should, by way of afterthought, include this other category of people. But the reality of the situation, while we on this side of the Committee accept that there have been abuses in both cases, is that there are very grave dangers if one adopts what the present Government have frequently adopted—a shotgun approach to this kind of problem.
Our balance of payments gains very considerably from the earnings of people from this country who work abroad for varying periods. We gain considerably from those people from overseas who work here, who not infrequently bring with them considerable financial resources and investment to this country and help to encourage the situation that London is indeed the financial centre of the world.
The amendment is concerned with the first of these categories—the position of the United Kingdom resident working abroad. I want to concentrate now upon that category and we shall turn to the second case later. It is remarkable that the two should have been put in together almost, it appears, as an afterthought of the Chancellor of the Exchequer.
I should make clear another point at this early stage. The amendment seeks to delay implementation of a particular part of the clause. There was also an amendment—No. 71—which would have sought to have delayed the operation of the whole clause. But amendments of that kind are not normally selected because they tend to be out of order. Even a series of amendments designed to delay different parts of the clause are also likely to be out of order. Nevertheless, my hon. Friend has made the general point, which is very important, that this legislation has been produced in considerable haste to cover both the cases I have mentioned.
This is in marked contrast with the view which my right hon. Friend the Member for Altrincham and Sale (Mr. Barber) and the Conservative Government always took—that if we were to make changes in the fiscal system, particularly those which could have dangerous effects on the overall position of the country, the sensible way to do it was to have thorough consultation to ensure that those who had interests and a case to put were enabled to do so before the House of Commons was asked to legislate. That is why the hallmark of our tax reform proposals was the Green Paper approach. It would thereby have been possible to deal with some of these problems without the kind of extensive shotgun approach the Government have adopted. If the Government had wanted to do anything like this, it should have been subjected to the most careful public debate before legislation.
This is the essence of my hon. Friend's remarks, and it is unfortunate in many ways that his is not a general delaying amendment. But that was not technically possible. I hope that those who take an interest in these matters outside will realise that it is only for technical reasons that we are not suggesting that the clause as a whole should have more careful scrutiny before we are asked to make a decision on it.
The reality of the situation in relation to abuses which may take place in both cases is not simply that the Chancellor of the Exchequer is effectively throwing out the baby with the bathwater but that he is drowning the baby before he throws it out. He is rushing into this legislation in a way which the CBI, for example, has suggested is very wrong. It takes the view that the right approach would be to discuss the matter more fully before action is taken. This is not to say that we do not recognise that there may be abuses in both cases covered by the clause. But the danger in taking hasty action is that it has serious effects on the economy and the standard of living of the country as a whole.
The other point one should make is that, given the haste with which this provision has been introduced, the extent of the representations which we have had on the effect of the clause is quite remarkable. My experience in the House goes back for 10 years, and I do not recall such a weight of representation as I have had on this occasion from those who feel that their legitimate interests will be affected by the Chancellor's proposals.
For example—and no doubt my hon. Friends will wish to elaborate and enumerate others—we have the case of those who go overseas on behalf of mining interests. A great many of them go for a comparatively short period—we shall return to the question of the 365-day rule and so on later—because of necessity their firms have to send experts abroad. These people will be caught by the clause. As a result, firms will find it difficult to get their experts to go abroad because the tax disadvantages in doing so will be considerable compared with the existing situation. Yet such operations may well bring very considerable advantage to the United Kingdom balance of payments. They are entirely legitimate but necessitate experts going abroad for a short time, returning to base, then going abroad again, and so on.
A second group—and again no doubt my hon. Friends will produce other examples—is consultants generally— consultants in economics or management, or those engaged in particular scientific operations of one kind or another. The same situation applies to them.
A third group about which we have had representations is that of academics going abroad for a sabbatical year. I have always taken the view that the exchange of academics across international frontiers is of great advantage to this and other countries. I want to quote a letter from someone working at a university. It says:
I now have a letter from my accountant which says that, in his opinion, 90 per cent. of the income I receive for working as a professor …
at an American university—
which I do two or three months a year and intend to do for 5 or 6 months after I retire, will be taxable as English income with no allowance at all for expenses. This means that I cannot even charge my air fare … and get no allowance at all for the cost of living there. Clearly any conceivable trip under these circumstances would show a large loss. If this goes further I really don't feel that I shall be able to stay in this country.
That brings out the shotgun approach which the Government have engaged in. In seeking to catch some particular abuse, they are considerably inhibiting and perhaps totally frustrating a number of legitimate operations from which everyone in the country in general is likely to gain.
A number of cases arising from this complex of clauses have been brought to my attention—for example, that of Professor Harry Johnson, of the London School of Economics, for whom I, like many others, have the highest respect as an academic of the very first rank and from whom academic life, particularly of economists, in this country, has gained over the years. Now we hear with regret that, if this legislation goes through as it is, he will not feel it possible to maintain what has been a very fruitful occupation both in this country and overseas, in the United States and elsewhere.
I quote this as an example of the way in which introducing rushed legislation of this kind is likely to have such effect. The real danger is that rushed legislation very often produces rushed reactions. A number of us will have heard of people who, even in advance of legislation, have said "If this is the kind of attitude that the Government are going to adopt to people in our position, we will have none of it and will go anywhere because we do not know where we stand."
Many of these arrangements—not the short-term arrangements of visiting professors and so on—may well be on a long-term contract basis. Later we shall discuss the effect on groups of people who have made long-term contracts. Such people have taken long-term decisions which at this stage they can unscramble only with considerable personal loss and perhaps complete disruption of their family life. This is the kind of thing that is likely to happen as a result of this provision. We therefore do not feel that this rapid legislation, designed to tackle particular abuses—we do not say they should not be tackled—is the right way of going about things. We do not favour this broad shotgun approach.
Naturally, we shall seek later to ameliorate the overall effect of this provision, but my hon. Friend was right to propose this amendment. I hope that the Chief Secretary will feel that a moratorium of this sort would be appropriate. The damage which could be done to the economy is considerable in both Cases covered by the clause. I hope that we shall manage to persuade the Government that they ought to have second thoughts about this and rethink the overall approach.
As one who shares an equal affection for Professor Johnson and who was also, like the hon. Member for Worthing (Mr. Higgins), supervised by him, I must say that I do not think that his is the happiest of examples. The hon. Gentleman knows, and I know, that this is Professor Johnson at his most provocative. He was trailing his coat. If this example is to be used, certain other questions have to be asked. Should we shed many tears for Professor Johnson when we compare his problems with those faced by millions of others in our society?
When Professor Johnson writes that he cannot keep going, these are just his peculiar standards, not the standards, of most of us. It is a rather unfortunate example. I am curious to know why The Times thought it of sufficient importance and general application to put in on the front page.
I, too, have had a number of letters about this subject. On a factual point, is it true, as some of our correspondents claim, that they will not get tax relief on the various genuine expenses they incur, such as travel? Secondly, will the man who goes abroad for nine to six months be disadvantaged as against a man who goes for two years?
I congratulate my hon. Friend the Member for Scarborough (Mr. Shaw) upon the extremely temperate way in which he has moved his amendment in an attempt to get the Government off a considerable hook. Many of us admire Professor Harry Johnson. Both Front Benches would have done much better today if they had received a few lessons about the gold standard from him. We had instead a lamentable display by a total ignoramus who, I think, is called the Paymaster-General. Whatever the wretched creature was called, he made a complete fool of himself for a quarter of an hour this afternoon.
If the Treasury had listened a bit more to Harry Johnson this country would have had more gold in its reserves today. This mismanagement will cost the country hundreds of millions of pounds.
I accept your rebuke, Mr. Thomas. I come back to this question of Professor Harry Johnson and say that it would have been of great value to both Front Benches had they paid more attention to his advice. It is a cause for genuine sorrow that he should now be departing.
Perhaps the Chief Secretary could look carefully at a few other comparisons. This does not just affect the academic world, for which we know some back benchers opposite have a terrible contempt. They regard people in that world as being overpaid. We have the usual phoney stuff which comes from those who are fortunately absent this afternoon. The hon. Gentleman must realise that a good part of our exports depend upon follow-up services. He ought to consider some of the tax advantages afforded to American, French or Dutch engineers and technicians working for their national interests overseas. In all of these cases he will find that the British engineer or technician is at a great disadvantage. This must affect our export chances because so much of our export sales, especially in engineering, depends upon follow-up services. I hope that the hon. Gentleman will cogitate with his advisers about this.
The wider point can be expressed in a simple way, by asking whether this will be investment advantageous to this country and what will this tax bring in. The collection is a purely voluntary one because those who find this tax intolerable will leave, like Professor Johnson. We shall create a Euro-engineer pool or a world engineer pool in the same way as we have, through the stupidity of various Governments, created a Eurodollar, which is under no Government control at all. We shall get precisely the same thing with human beings. They will have no loyalty to Labour Members, least of all to the Chancellor, who cannot make up his mind whether he is a Socialist or a Communist.
The right hon. Gentleman is a strange Jekyll and Hyde creature who talks occasionally about screwing the rich and then about the great advantage of the patriotic endeavors of industrialists who support his measures. Leaving aside the psychiatric treatment which will one day come to the Chancellor, there will be; considerable dangers in the creation of this pool of people who have no attachment to this country and who will fare much better when employed outside it.
I hope that the Chief Secretary will give us some ideas about what this tax will bring in and will make some calculation of the damage it can do to investment and of how it will cause us to lose experts on whose training we have expended thousands of pounds. The national investment in a technician can be £50,000 to £60,000. If such a person leaves, that is the loss we suffer. I hope that the Government will show a little more sense and will not pay quite so much attention to the Chancellor in his "Hydish" mood or to Labour back benchers in their more raucous moods saying "Squeeze the rich till they squeak". I hope he will apply his mind to a more rational approach to the taxation of technical, better-trained, people.
I am happy to support my hon. Friend the Member for Scarborough (Mr. Shaw). This is an important amendment because of its effect on all those citizens from other countries who have been in this country for some time and are probably at the height of their powers and are certainly of great benefit to our economy. Under the Bill those who have been here eight years are enabled to make a deduction of 50 per cent. of their foreign emoluments before they pay tax. Should they remain here for over nine years they will become liable to what can only be described as the most penal conditions of this Bill. The amendment delays the impact of the proposals until those who are affected have had further time to consider them.
Let us take, for example, the case of the American executive who has lived in this country for eight years. I understand that he will be liable—
I do not quite follow the Chief Secretary. The argument has proceeded widely and I distinctly heard my hon. Friend speak eloquently about these very matters. I am talking about the impact of the proposals as a whole which are summarised in Schedule 2, which is the schedule to this clause.
The impact is due to occur in the year 1974–75. The amendment proposes that the impact should occur later. My hon. Friend the Member for Worthing (Mr. Higgins) suggested that there must be further time for considering the impact of the proposals. The impact is large on executives of important overseas companies based in this country. I can think of many overseas companies which operate management advisory services of considerable benefit to our economy. McKinsey and Company, Inc. advised numerous companies in this country and, indeed, the Government and overseas Governments. American citizens with McKinsey have been over here for many years and regard this country as the centre of their working operations. It is only reasonable that they should have time to adjust their affairs. If the proposals in the Bill are implemented those people will have to consider whether they can remain in this country at all.
The same is true of important American organisations concerned with finance for industry and invisibles. These concerns, many of which are American, have come here recently to participate in the growing Eurodollar market. Whatever one's apprehensions about the growth of the Eurodollar market—and I share the apprehensions of my right hon. Friend the Member for Stafford and Stone (Mr. Fraser)—the market is growing rapidly because of the large increase in the supply of money which is to be made available to pay for Arab oil. These banks have come here recently, they participate in the Eurodollar market and often represent considerable invisible earnings to our country.
I have met the chairmen and managing directors of some American banks, and they have told me that unless the Finance Bill is amended satisfactorily they will be forced to return home and their operations will have to be carried out by United Kingdom subjects who will not necessarily be versed in the way in which American banks operate.
The hon. Member for Gates head, West (Mr. Horam) may leave it to me. I shall have to work very hard to do so, but if I find that the hon. Member for Horsham and Crawley (Mr. Hordern) is straying I shall pull him up.
I am grateful to you, Mr. Thomas. I trust your judgment absolutely. Furthermore, I am certain that you have a great deal more knowledge of this subject than has the hon. Gentleman.
The Bill affects not only the people who are here increasing our invisible earnings, but large American companies which have invested in our country and are continuing to do so on a massive scale. They will be forced to think again if they are not allowed to extend consideration of their affairs for a longer period, as suggested by the amendment.
American industry in this country has habitually invested far more here than have British companies of a similar size. There are 1,000 American companies operating here, of which 270 employ 481,000 United Kingdom subjects, of whom 125,000 work in the development areas. Some international companies can select the area in which they operate. They have no obligation to operate from the United Kingdom. They can equally well operate from Belgium, Holland, France or West Germany. The selection they make is based largely on trade and communications, but it is also based on their ability to attract outstanding executives, perhaps from their own country, to carry out their programmes. That selection is bound to be affected by considerations of taxation.
The proposal for the 50 per cent. deduction puts them in a worse position than do the taxation arrangements available in Belgium and France. If they are here for longer than nine years, and if they have no time to make adjustments to their affairs they will consider carefully whether to make any fresh investment in this country. They have to take account of their net remuneration after tax and of the effect of the Bill on their investment income. If the provisions of the Bill are implemented, their investment income in the United States will be liable to the full United Kingdom tax at the top rate.
In the United Kingdom the top rate of tax on investment income is 98 per cent., starting at £21,000. In the United States the top rate of tax is 75 per cent., and it is not reached until the level of income is £170,000. It is clear that unless the provisions in the Bill are put back for two or three years so that American citizens have more time to adjust their affairs, many of them, and many other foreign nationals, will decide not to operate here because of the effect on their investment income in their own countries.
What is to prevent them from being subject not only to taxation on their investment income but to the wealth tax which the Labour Party has threatened? The amendment would allow them further time to arrange their affairs.
I will refer briefly to the position of the United Kingdom citizen who works abroad for part of the time. Some people work for companies and some are partners in overseas operations. I am thinking particularly of large consulting engineering firms where it is essential, if they are to operate at all, to operate in an overseas partnership. According to the Bill, the year of assessment is 1974–75, but for a partnership, where the preceding year of assessment is taken into account, there is an adverse effect. The effect of the amendment would be to delay the impact of the assessment for two or three years.
I have an interest in this matter, which I hasten to declare, as a member of a Swiss partnership. We shall deal with these matters at a later stage of the Bill when other amendments will be considered. The present amendment deals with a matter of great importance for these large industrial partnerships. Having already made provision for taxation out of profits—if they made any— they now discover that their arrangements will be nullified by the date put forward in the Bill.
I am delighted to support the amendment, and I wish to make one or two comments about the situation of the United Kingdom resident who goes abroad. We shall have an opportunity to refer in more detail to these matters later on in the Committee stage, and I shall not argue the matter in full on this amendment.
I believe that my hon. Friend is correct in seeking in his amendment to have this provision postponed so that its effect can be more fully understood by the Committee. It was certainly clear from the point of order from the Labour benches a few minutes ago that these provisions are not fully understood in the Committee. The amendment refers not only to a United Kingdom resident who works abroad for part of the year but to those with foreign emoluments—those who are non-domiciled and who have a nonresident employer.
The Bill will make it difficult for a United Kingdom resident who works abroad to compute his income since he will receive no allowance for the additional costs which he will have to pay in living and working abroad. Furthermore, he will receive no allowance for the cost of travelling to and from his overseas post. This will take away a great deal of his gross income, but it is on that gross income that he will have to pay United Kingdom tax.
There are other areas in which the situation overseas is different from the position in this country. I refer, for example, to the question of medical expenses. If a man is working in this country and is paid here, he is covered by the National Health Service, but if he goes on assignment to the United States or somewhere else where medical assurance is more the rule and happens to fall ill, he may incur a great amount of medical expenses which are not deductible from gross income. These matters need to be fully understood and appreciated by the country. We need to see the effects of these provisions before the Committee plunges into this departure in the tax system. It is of great importance that we do nothing to prevent people from this country going abroad for short periods. This is important in terms of our visible and invisible exports.
I have a great interest in this subject since it is a matter which I considered in some depth in the Treasury until about three months ago. I support the idea underlying the amendment. Perhaps I could deal with the general situation of a United Kingdom resident in the context of this amendment.
I wish to make one last appeal to the Chief Secretary to look at this matter again. This is a complicated tax matter, and we appreciate that a very great deal had to be studied by incoming Treasury Ministers in the three weeks before the Budget. Perhaps the Chief Secretary and I are among the few people who have read the underlying papers which led up to the measures contained in the Finance Bill.
I should like to say a few words about the consultation which went into drawing up the views of the Inland Revenue on this subject. It is necessary to refer to the history of the matter in some detail. The provisions arose out of the Lonrho situation. I am sure that all hon. Members in the Committee will agree that the alleged situation in Lonrho is totally unacceptable to Members of Parliament and indeed to the whole country. I say "the alleged situation" which arose in Lonrho, because it must be said that nobody has the slightest idea whether or not the principal characters in that episode were taxable at the highest marginal rates. From my general knowledge I would say they probably were fully taxable; I may be wrong, because I have no means of knowing. But following Lonrho it was politically necessary to take action against the siphoning of income into tax havens and the growing use of this tax avoidance device which had become an affront to public opinion.
Having made these opening comments, I must confess that with our absurdly high marginal rates of tax, the tax system will be kept alive and breathing through its loopholes. Accountants, lawyers and other professional people will continue to concoct legal means of limiting the amount taken by the Revenue when it attempts to plunge its shovel into a man's stores. The skirmish between the Inland Revenue and professional advisers will continue. Those advisers will tend to be one jump ahead of the Inland Revenue. It will always be the function of Treasury Ministers to back up the Revenue in what is an extremely difficult task. However, the skirmish between the Revenue and professional advisers is a more healthy situation than one which all Governments are in danger of provoking. I refer not to legal avoidance but to deliberate, planned evasion of taxes.
The ending of the remittance basis will tend to bring the Inland Revenue and the Exchange Control into greater contempt, because I believe that it will provoke fraud and more rather than less evasion. The new arising basis— because most of these payments are made overseas—will be difficult to police. A tax law which is difficult to police is not good law. To give the Inland Revenue its due—and I have the greatest respect of for its integrity and intelligence—it was given a mandate to take action following Lonrho and came up with the proposals embodied in the Bill. The only problem is that the Inland Revenue's recommendation is wrong. I know that when the officials read my speech they will not be surprised to hear me take the view that the Inland Revenue's recommendations, in this case, are not the right ones.
Yesterday I took the opportunity, as I am entitled to do to look at some of the papers from the time when I was a Minister not many months ago. I can say, I think without breaching any confidences, that as late as 20th February, eight days before the General Election, my colleagues and I were all still seeking an answer to the problem and we had not arrived at the conclusion which the Government have now embodied in the Bill. I must strongly emphasise that we had not decided to remove the remittance basis, and we certainly thought it was completely wrong to consider doing so in the case of pensions. I do not have the time to go into why I think that would be a great mistake.
The proposals in the Bill represent the cleanest, simplest and easiest way of ending the avoidance. However, when considering this matter my right hon. Friend the Member for Altrincham and Sale (Mr. Barber) was determined not to do anything which would damage the wider United Kingdom interest and discourage genuine business and professional engagements overseas. He was determined not to do anything that might, in a very intangible way—because these are intangible matters—undermine the delicate position of London as a major financial centre. He was concerned about the pensions problem in the event that the remittance basis was ended. Here we are talking not just of London as a financial centre, but as a cultural and artistic centre, because that enters into the matter as well. I do not want to go into all the reasons because they are well known to the Chief Secretary, but, while we do not wish to have the United Kingdom as a tax haven, it is not necessary for the measures in the Bill to be brought forward in this Bill to get over the avoidance devices that have been used.
I am not all that happy at the process of consultation. It is not the fault of the Inland Revenue that the process of consultation is what it is. It is all wrapped up with the Budget secrecy tradition, which I think everyone agrees is carried too far. Following our mandate after the Lonrho affair, the Inland Revenue considered the matter in some depth with the Tax Reform Committee. On a case like this, the Tax Reform Committee is not really a representative body. It consists of men of the greatest eminence and skill, some of them, because they are so eminent and skilful, being too busy to attend the meetings. But essentially the committee at the moment lacks—and this is nothing against the men who are on it— men of practical entrepreneurial qualities. It is made up too much of senior members of the Bar and so forth. If the committee is to continue with this work it should broaden its base.
Another aspect is that the Department of Trade and Industry, which is the Whitehall spokesman for British industry, did not fight its corner very well on this issue in its discussions with the Revenue. I do not criticise the civil servants, but the processes of consultation in arriving at this kind of measure will have to be improved. I suppose I shall get into trouble for saying this, but I do not believe the DTI officials, in this case, were the intellectual equals of the Inland Revenue, which, after all, is charged with the duty to collect the taxes. The process of consultation has therefore reached its most important point in this debate. I hope that the Chief Secretary will consider the debate as the final and most important and genuine consultation of the whole affair.
I was very keen at one stage to have, instead of the ending of the remittance basis, a time apportionment arrangement under which the Inland Revenue looked into each separate situation and decided that the United Kingdom citizen had spent so much time and effort abroad but where the onus lay upon the individual to show the Inland Revenue just how much time and effort he had spent overseas. I have come to accept that this is probably administratively not very sensible. Another possibility is that suggested by my right hon. Friend where it is clearly possible to tamper with the percentage in Schedule 2. If the Chief Secretary is unsympathetic to everything else I hope that, as a last resort, he will look at this proposal because it is the simplest way of amending the Bill, even though I do not consider it to be the right way of doing it.
I should like the Chief Secretary to consider two other possibilities, and I hope that he will agree to look at them before Report. All my right hon. and hon. Friends who were looking at this matter were coming round to the view that these were two possible alternatives to the ending of the remittance basis Instead of taxing 90 per cent. of earnings as proposed in Schedule 2—my right hon. Friend's amendment suggests 50 per cent. —will the Chief Secretary consider exempting overseas earnings up to a specified percentage of the United Kingdom individual's total United Kingdom income? For example, take a United Kingdom individual with a total income of £10,000. Can we not perhaps consider treating on the remittance basis up to, say, 50 per cent. of that man's overseas earnings—and I stress I am dealing here with United Kingdom residents. That is one possibility which has not been properly studied but should be.
Of course, the tax avoidance problem is not one for the individual who works in France, Germany, the Netherlands or the United States and spends his time there. If he earns an income in the EEC or in the United States above a certain level, he will pay full French, German, Dutch or United States taxes. There is a belief in some quarters that a man who earns an income on overseas business does not pay tax. That applies only in the case of a tax haven. It is perfectly reasonable for a man working in France or Germany and whose work does not touch the United Kingdom to pay French and German tax. The problem is a tax haven problem. This is not a question of a man who does business in the EEC because he will be taxed on an EEC basis, although he may pay lower marginal rates than United Kingdom rates.
Can we not look at the concept of a reasonable rate so that the man working overseas pays either the tax rate prevailing in the country where he works or, if he is earning that money by a device in a tax haven—whether it be the Channel Islands, the Cayman Islands or a place where there is no tax for non-residents— taxes at the United Kingdom basic rate? There would then be no way in which a man working overseas paid no tax. He would pay at a minimum a reasonable rate which might be, say, the United Kingdom basic rate. That man would then either remit the money on a remittance basis and pay United Kingdom tax, or he would pay German, French or American taxes and would be taxable on that basis, or he would pay at a "reasonable rate" at the minimum. These are two other possibilities as well as the opportunity of reducing the percentage in Schedule 2. Personally, I think that both of them are preferable to an ending of the remittance basis. The ending of the remittance basis, for pensioners especially, will be extremely harsh and unjust. A man might have devoted the whole of his life to working in the colonial service overseas.
In fact, there is other legislation for upgrading public service pensions which the Labour Party supported in this House. There is other legislation which impliedly accepts the concept that if a man spends the whole of his life overseas he is entitled to benefit from the remittance basis. I do not believe that we are right to end the remittance basis generally, and certainly not in the case of pensions. I could not be more aware of the difficulties involved in the alternatives but I ask the Minister to consider those that I have mentioned.
I have made a comparatively non-controversial speech but I feel most strongly on this issue. I think that on the present basis the ending of the remittance basis will be damaging to the wider interests of the United Kingdom. I do not expect the Minister to confirm this, but I believe that we are all looking to an alternative which ends avoidance, which deals with the genuine political problem and which at the same time does not damage the United Kingdom interest.
Dr. Reginald Bennett:
I am sure that the Committee will be most grateful to my hon. Friend the Member for St. Ives (Mr. Nott) for his profound and well-reasoned consideration of the subject under discussion. I do not pretend to be able to follow to any extent the complexity of his well-informed thinking.
My hon. Friend made a reference to the financial value of the City of London as a trading centre. I have received representations from members of certain Italian-owned banks. I know that there have been consultations in London involving the whole consortium of the banks that are Italian owned. They have been boiling with indignation and they have sent me a document in which they state quite roundly that if this legislation goes through as at present intended the senior officials of the Italian-owned banks in London will cease to function here. The banks will take their own decision whether to cease their operations in London completely or to downgrade them to a petty basis.
I do not know whether the Chief Secretary has heard about these matters but I believe that the Committee should be fully cognizant of them. I take this opportunity of bringing them to the attention of the Committee.
This has been an interesting debate. I am much obliged to the hon. Member for St. Ives (Mr. Nott) for the excellent way in which he told us of his experience of this problem. I am grateful for his remarks.
Before coming to the detail of the amendment I shall consider the general question of Clause 14 and some of the points that have been raised. The hon. Member for St. Ives talked about whether it was right to deal with the problems of avoidance. He said that when his right hon. Friend the Member for Altrincham and Sale (Mr. Barber), the former Chancellor of the Exchequer, decided to look into avoidance it was accepted that there was a serious problem to consider regarding the remittance basis. He said that he feared that to change it would create more evasion. It is possible that he may be right. I have no way of knowing whether he is right or wrong.
It is obvious that the remittance basis is a complicated matter. There are already degrees of evasion as well as avoidance, as I am sure the hon. Gentleman will be aware. We shall deal with it, as he knows, by virtually doing away completely with the remittance basis. The hon. Gentleman has put forward one or two suggestions which I shall consider carefully. He considered the time apportionment basis and decided that that was not a proposition for obvious reasons.
The hon. Gentleman asked whether I would consider reducing the 90 per cent. basis of charge on overseas earnings. A number of hon. Members have referred to that, to the taxation of expenses and various matters regarding the taxation of academics and others who go abroad for a short time. If they go abroad beyond any 365 days they are not liable to United Kingdom tax in any way. That arises under Schedule 2. I am more than willing to consider these matters sympathetically when we come to consider Schedule 2.
If the Minister cannot enlighten the Committee this evening I ask him to apply himself, before we come to Schedule 2, to a point of particular concern relating to those who enjoy foreign emoluments. Let us assume that an American who is employed by an American bank serves in the United Kingdom. He may participate in a share option scheme and in pension arrangements in the United States which may not count as emoluments under United States fiscal law. It is clear from our earlier debates that any participation in a share option scheme is likely to give rise here to a charge on tax. It is unlikely that an American pension scheme has been vetted and approved by the Inland Revenue. Will the American banker that I have used in my example be assessable in respect of such matters in the United Kingdom? If the Minister cannot give us an answer now I hope that he will do something before we come to Schedule 2, otherwise, we shall have to debate the matter carefully at that stage.
I have given a great deal of thought to the situation that the hon. and learned Gentleman has described. However, it does not arise under this clause. We are talking about the non-United Kingdom man who comes here for less than 9 or 10 years. He is taxed on only 50 per cent. of his earnings within the United Kingdom. I think that may have caused some misunderstanding for the last hour or so. I am sure that the hon. and learned Gentleman understands that under Clause 14 non-United Kingdom citizens who come here and work for less than 9 or 10 years will pay tax on only 50 per cent. of their earnings in this country. Therefore, the American in the hon. and learned Gentleman's example would not be taxed on any share option scheme or pension scheme in which he participates in the United States. That arises on Clause 18 on the 9 or 10 year situation, which we shall come to later. It does not apply to Clause 14.
I do not think that the Minister has understood my proposition. Let us assume that an American bank— I only take as an example an American because we know that they have share option schemes to a greater degree than in most other countries—sends one of its employees to this country for three or four years with a salary of $X or£X. Let us suppose that the American bank employee continues to participate in a share option scheme and in a pension scheme as a reward for his services as acting as the bank's representative in the City of London. Is the Minister saying that in that situation the Inland Revenue will calculate the benefits from participation in the share option and pension schemes and assess his tax liability on 50 per cent. of that? If so, that is a staggering and terrifying proposition.
That is precisely what I did not say. I am sorry if I did not make myself clear but this is a complex issue. The American in the hon. and learned Gentleman's example would not be taxed on any benefit from his share option scheme if he is here for less than 9 or 10 years. He would only be taxed here on 50 per cent. of his earnings. I hope that that is clear. If it is not, I shall be happy to give way again and deal with this and any other matter.
I was referring to earnings paid in this country. That is my understanding of the matter. If I hear further from on high, I shall amend that statement, but my understanding is that the American in the example would be taxed at 50 per cent. of his earnings here. If I am wrong about the share options, I can assure hon. Members that that is not the intention under the less than 9–10 years situation. We shall put down amendments if necessary, but I do not think that it will be necessary.
That was not my understanding, but the Chief Secretary's expertise on the matter is far greater than mine. Does tax on 50 per cent. earnings in the United Kingdom apply if the non-resident here temporarily is employed by a British employer as well as if he has a foreign employer?
I think that both my hon. and learned Friend the Member for Dover and Deal (Mr. Rees) and I are under the impression that what the Chief Secretary said is not precisely correct. Will he give an undertaking that if that is so he will correct it in the debate on the Question "That the Clause stand part of the Bill"?
I shall look into that. I understand that a person is not taxed on share option schemes abroad but is taxed on 50 per cent. of his earnings here.
I was dealing with the points raised by the hon. Member for St. Ives and his suggested alternative methods of dealing with the matter as opposed to the remittance basis. I promise him that I shall examine them. But the questions of 90 per cent. of earnings, the taxation of expenses or otherwise, and so on arise on Schedule 2, and I shall be considering those matters sympathetically when we come to the schedule in Committee upstairs. I promise also to look into the concept of a reasonable rate, but my first reaction—admittedly very quick—is that this might well make the matter even more complex.
The debate was started by the hon. Member for Scarborough (Mr. Shaw). His amendment is very simple—to put off for two years the commencement of the clause. Here I should like to refer to the background to the need for the clause and the other clauses in question. As the hon. Member for St. Ives said, it stemmed from what was known as the Lonrho affair. At that time there was considerable agreement on both sides of the House that that kind of abuse of a tax-avoiding scheme was an affront to hon. Members. One or two may have disagreed, but that was the general view, and it has led to the clauses. However, we are here dealing only with Clause 14.
I am not sure who is being hysterical or over-reacting, but I shall come to the point the right hon. Gentleman and other hon. Members raised.
The clause deals with United Kingdom citizens working abroad on a short-term basis—that is, less than 365 days—and non-United Kingdom citizens working here for less than 9 or 10 years. This is where there has been a considerable misunderstanding during the debate.
We have heard speeches about United States and Italian citizens and others leaving this country because of the more stringent arrangements after 9 or 10 years under Clause 18. One hon. Member asked whether we had had representations. We have had many representations, but almost all of them were on Clause 18. We have had very few representations on Clause 14 and the 50 per cent. basis of taxation. The United States Chamber of Commerce was not concerned; it accepted that this was reasonable.
I shall try to explain why it is reasonable. The hon. Member for St. Ives pointed out that this country is something of a tax haven for the type of person we are considering. Until I started to look at the matter, I had never realised that Britain was a tax haven, but it was, for certain non-United Kingdom citizens.
The argument is really about whether the 50 per cent. basis for less than 9 or 10 years is so stringent as to force those people abroad instead of working here. Where will they go? On 12th June, in answer to a Written Question, I gave comparisons of net incomes after tax in a number of countries, most of them in Europe, but including Japan. I compared taxation for foreigners there with the taxation of foreign citizens working here for less than 9–10 years under our proposals. In every case they were better off in the United Kingdom than in any of those other countries, even with Clause 14. Hon. Members can see that answer at c. 562 of HANSARD for 12th June.
Will the hon. Gentleman look at the French figures? It is easy for someone working in France to take his holiday in the last month of the year and, therefore, not pay this rate of tax. That is a simple and accepted way of getting round it for American executives in France. If the hon. Gentleman went into these matters more closely, and if some of the brilliant men at the Treasury spent a year or two looking at practical matters, we should be greatly advantaged.
I am obliged to the right hon. Gentleman. If he is saying that there are methods of avoiding French taxation, that is true, but I assure him that there are also methods of avoiding British taxation. I declare an interest. I have been dealing with that matter for many years.
I was giving the facts of the tax systems of the various countries. [Interruption.] I can only refer to the tax systems, and under those systems the position is as I have stated it.
A great deal of the substance of the debate has been about Clause 18 and the problems that will arise for those who are here for longer than 9 or 10 years. I shall give serious consideration to those matters when we debate upstairs the amendments to that clause. They do not apply to Clause 14.
Equally, many of the points raised— for example, whether 90 per cent. of the income of a United Kingdom citizen who goes abroad to work for less than 12 months should be taxed—come under Schedule 2. I am prepared to listen sympathetically to those arguments when we come to the schedule, but they do not apply now.
The purpose of the clause was to stop a major tax avoidance industry that was going on because of the remittance basis. There is no dispute about that. The question was how best to deal with it. What we have done, certainly by removing the remittance basis as proposed under the clause, is to cut out substantially part of the abuse that was occurring. It will certainly cut out some of the things— not necessarily those which occurred in the Lonrho case; none of us knows whether or not that has yet been caught for tax. But certainly it will cut out many abuses by those who have been using the remittance basis and have been able to avoid tax because of that system. Where they are using that system properly they have, quite genuinely and legally, been able to avoid their tax liability.
We have all accepted that this was an abuse and an affront and had to stop. Now we have stopped it, and it surely must be wrong for the Committee, recognising that it is an affront and an abuse and that the clause stops it, to say with the amendment that it should be left for another two years. I see no reason why we should leave it for another two years. It is an abuse which should be stopped now.
The Chief Secretary does not appear to have grasped the force of the amendment. Lonrho had nothing to do with foreign emoluments. One presumes that it was entirely to do with United Kingdom residents. On this amendment we have been debating the case of foreign domiciled employees of foreign companies who are here, and I hope, with great respect, that the Chief Secretary will recognise that.
I do not want to argue with the hon. and learned Gentleman as to who is right. I leave him to argue with his hon. Friend the Member for St. Ives. I am not resting on the Lonrho case. I thought that no one disagreed that the remittance basis allowed considerable abuse. What the clause does is to stop it. I do not believe that we should wait two years to do so. Therefore, I ask my right hon. and hon. Friends to oppose the amendment.
I am enabled to make a brief contribution to the debate because of the very liberal and broad way in which, on what is a narrow amendment, the debate has been interpreted. As the Chief Secretary has said, a great deal of argument has ranged on what is really contained in Clause 18, but as that clause will be considered in Standing Committee and Clause 14 is but part of the same broad process of dealing with not only British people resident abroad who are sending remittances here but also people from abroad who are working here, it is right that the debate should have been interpreted in this way.
The great danger that the Government are in, in this case, is that in order to deal with what is emotionally and politically a very live issue, namely, the knowledge that there has been very considerable tax avoidance in this sphere—to put it at its lowest—the Government want to deal with it in such a way as to harm the long-term interests of this country. That is the fear which arises. Any detached person would agree. We are in danger, as J. M. Keynes once suggested, of getting the answer precisely wrong rather than broadly right. There is a clash of interest here between the long-term broad interests of the country and the more narrow sphere of dealing with immediate problems of tax avoidance or evasion.
The Government would be quite wrong not to appreciate the strength of feeling on this matter by those who are extremely well disposed towards this country. The truth is that Britain is becoming an increasingly unattractive place for a multinational or international company to have its headquarters. No one would dispute that. It may be that the overall wisdom of the House of Commons is that that is a good thing. But if that is so, we must at least face the implications. Surely this country has always had what can be described as a rather open economy. We are in the perceptible process, under the previous Government and the present Government, of making it more and more a closed economy. The argument against going into the Common Market, advanced from the Government side of the House greatly, was that the Common Market was too closed an economy, too nationalistic. We are in great danger, while arguing against the Common Market on that basis, of becoming more nationalistic ourselves.
Let me give an example. A friend of mine, a fellow countryman, happens to be the chairman of an international company. Its export earnings last year for this country were £71 million. In addition, it received into this country £34 million in dividends from other countries—though it paid some of this sum out to foreign shareholders. However, the net benefit to our balance of payments was enormous. I know that people in that company are greatly concerned whether they should continue in this country. A corollary to this matter is the unattractiveness for British citizens who are employees of international companies, who serve a time in France or the United States and then return to this country and find themselves in tax difficulties. The Chief Secretary has not given an adequate answer to the question that was posed about share option schemes in the United States and whether benefits from those schemes are taxable in this country. It would be of interest to know his final reply on that matter.
I am absolutely sure, however, that this whole question needs more careful consideration. There has not been enough consultation on the matter with people who are tremendously interested and are staying in this country and making the system work, and who agree that these abuses should be put right. They are abuses. Hon. Members on the Opposition side of the Committee have not tried to hide that fact.
The Chief Secretary said that this country was a tax haven for many foreigners working here. That is true, and that is essential if we are to remain a centre of international trade and to have benefits from the invisibles. Let us take shipping as an example. I know some people who have interests in shipping. I have no interests in the City or in any of these companies. I have simply listened to the contributions made by these people. I know, for example, that many employees of shipping lines—for instance, the Greek lines, run from Piraeus where their ships are when their trading is done in this country—live here for six months of the year and in Greece for six months.
We are reaching a point at which our taxation system is such as to just change the balance in favour of those who are under pressure to leave this country. We have competitors. In the last year or two France has been adapting her tax system to try to attract international companies to set up international headquarters there. We are very lucky in many ways in that many international companies which have headquarters here have very distinct British ties. Many of their representatives frankly admit that they prefer living in Britain to living in any other country.
I know a young man who is an extremely able businessman and a British citizen. He is the European director of a very large multinational concern. He will not live in this country at present, though he would very much like to live here. When the Chief Secretary says that from calculations he has had made he finds that the net income of these people would be larger in Britain than it would be in any other country, he should realise that in practice that is not true.
Therefore, although I entirely agree with the Government, as does every sensible detached person who has made representations to me, that there are abuses which must be dealt with, it would be foolish for this country to jeopardise now much of the basis of its international position, as New York did with shipping just after the end of the war. Many great shipping interests, at the end of the war, went to New York. They left this country. The Chief Secretary would do well to inquire why they left New York in the 1947–52 period and the international dealings returned to this country.
That is why this whole question needs to be examined again. Far greater consultation is needed. The Government have shown a willingness to consider many of the representations that have been made to them. Nevertheless, the process of dealing with this great problem is being rushed too much.
I wish to make a number of comments on the amendment because, although I know that several of my hon. Friends wish to express views on the subject, we have a number of debates on the clause still ahead of us and I sense the desire on both sides of the Committee to draw this debate to an end, given those further opportunities.
I notice that the Chief Secretary declared an interest in that in the past he dealt with these matters in a professional capacity. May I take this opportunity to wish that he may quickly return to that lucrative service industry of which he was such a distinguished member? If I have to declare an interest, it is simply an interest as a poor taxpayer who finds it as difficult as other taxpayers to understand the complexities of a provision of this kind.
The Chief Secretary took the view that as this was the first amendment on this and the related clauses and the schedule it was right to make a number of general remarks, and, Sir Myer, you and your predecessors in the Chair have allowed a number of general remarks to be made which have stretched the confines of the amendment if not to bursting point at least somewhere near it. Therefore, I take this opportunity briefly to put on record some of the Opposition's general views on the subject.
I want first to make it clear, as my hon. Friends have done and as the hon. and learned Member for Montgomery (Mr. Hooson) has done on behalf of the Liberal Party, that we all recognise that there are abuses. None of us pretends that there are not, and we all wish to see them stopped. But in saying that we wish to stop abuse we also say quite clearly from the Opposition benches that we must avoid the danger of doing great damage to the national interest—damage to what the hon. and learned Member for Montgomery has just described as the long-term broad interests of this country.
There is a danger that in stopping abuse—which we all want to do—we may damage the national interest. We genuinely believe, and obviously very large numbers of people outside this House believe, that the proposals in Clause 14 and the associated clauses and the schedule stop the abuse at too high a price for the national interest as a whole. In trying to get at the minority who abuse, we must take care that we do not damage the overall national interest or the interests of large numbers of business men and women and artists and professional people of all sorts who come here and give useful service to the community in an economic, social and a cultural sense.
We believe that this country gains great advantage from our citizens going out and working abroad, from citizens of other countries coming to live and work here on a long-term basis, and from overseas businesses and organisations setting up here in Britain This is of great value to the country. It is a matter which struck me forcibly when the case of Professor Johnson was mentioned earlier. We must realise that the people and organisations that we are discussing have a choice whether to stay here or to go away. Similarly, United Kingdom residents may decide either not to bother to work abroad, as they do at the moment, or to leave the United Kingdom for good. In the same way, citizens from foreign countries living and working here can go elsewhere.
I heard one or two hon. Members ask where there was to go which was as favourable as Britain, even under these proposals. My right hon. Friend the Member for Stafford and Stone (Mr. Fraser) pointed to France. It is well known that Belgium is also fairly favourable. What is more, we have to recognise that at the moment France is actively trying to make herself more attractive to both organisations and individuals to work and to base their activities in that country. We must not say too easily that there is nowhere else that these people can go. There are plenty of other places, and, overall, it is in our interests that they should stay here and be joined by others in the future and also that our own people should find it reasonably advantageous to go and work abroad for considerable periods.
There is also the matter of fairness to individuals, and this arises most clearly in the case of overseas service pensions. Some 10 years ago I was the Minister in charge of technical aid to the developing countries. For that reason, I have a fairly vivid recollection of this. There is a great deal of interest in this House on behalf of such people, and there is no doubt in my mind that these proposals are harsh and unfair on them. Anyway, that is the view of the Opposition, having listened to all the many representations that we have had on the subject.
We feel that this clause and its related clauses and the schedule do not avoid the danger to which I have referred. We believe that these proposals are too rushed. I agree that the Chancellor of the Exchequer and his Treasury colleagues have had a very short time in which to consider these proposals. But, in view of the fact that they have themselves said that they wish to have a second Finance Bill this year—not even waiting the normal full year—would it not be better to withdraw these proposals temporarily, to publish a Green Paper, to listen to and to think about what is said as a result of that Green Paper, and then to bring forward in their second Finance Bill proposals to deal with what we all accept to be abuses, bearing in mind that we all want to deal with them but that, in dealing with them, we also want to avoid some of the potential damage which we and very many responsible people outside this House believe will be done by the proposals as they stand?
If the Government will not do that, we shall do our best to improve these proposals by amending this and the other clauses and the relevant schedule. But I fear that, however successful we are and however pliant the Chief Secretary becomes in listening to our arguments, it will not be possible to avoid damage.
I make it clear on behalf of the Opposition that in due course, which I believe will probably be in the autumn, we shall reconsider this matter ad initial, and that if the Government proceed with proposals on these lines they can be assured that a future Conservative Government will tackle the abuse in a different manner.
The amendment we are now debating touches only one part of the problem, but at least it ameliorates the position significantly. Therefore, I welcome the fact that my hon. Friend the Member for Scarborough (Mr. Shaw) has introduced it. But, although we are glad to hear from the Chief Secretary that he will consider various matters later as we come to them, I believe that this amendment is sufficiently important and sufficiently constructive to advise my right hon. and hon. Friends to support it in the Division Lobby.
|Division No. 41.]||AYES||[5.49 p.m.|
|Adley, Robert||Grieve, Percy||Mudd, David|
|Alison, Michael (Barks ton Ash)||Grist, Ian||Neave, Airey|
|Allason, James (Hemel Hempstead)||Grylls, Michael||Neubert, Michael|
|Ancrant, M.||Hall, Sir John||Newton, Tony (Braintree)|
|Archer, Jeffrey (Louth)||Hall-Davis, A. G. F.||Nott, John|
|Atkins, Rt.Hn.Humphrey(Spelthorne)||Hamilton, Michael (Salisbury)||Onslow, Cranley|
|Awdry, Daniel||Hampson, Dr. Keith||Oppenheim, Mrs. Sally|
|Banks, Robert||Hannam, John||Osborn, John|
|Beith, A. J.||Harrison, Col. Sir Harwood (Eye)||Page, Rt. Hn. Graham (Crosby)|
|Bennett, Dr. Reginald (Fare ham)||Harvie Anderson, Rt. Hn. Miss||Pardon, John|
|Benyon, W.||Hastings, Stephen||Parkinson, Cecil (Hertfordshire, S.)|
|Berry, Hon. Anthony||Havers, Sir Michael||Percival, Ian|
|Biffen, John||Hawkins, Paul||Peyton, Rt. Hn. John|
|Boardman, Tom (Leicester, S.)||Hayhoe, Barney||Pink, R. Bonner|
|Body, Richard||Heath, Rt. Hn. Edward||Price, David (Eastleigh)|
|Boscawen, Hon. Robert||Heseltine, Michael||Quennell, Miss J. M.|
|Bowden, Andrew (Brighton,Kemptown)||Higgins, Terence||Raison, Timothy|
|Braine, Sir Bernard||Hooson, Emlyn||Rathbone, Tim|
|Bray, Ronald||Hordern, Peter||Redmond, Robert|
|Brittan, Leon||Howe, Rt. Hn. Sir Geoffrey (Surrey, E.)||Rees, Peter (Dover & Deal)|
|Brown, Sir Edward (Bath)||Howell, David (Guildford)||Rees-Davies, W. R.|
|Bruce-Gardyne, J.||Howell, Ralph (Norfolk, North)||Renton. Rt. Hn. Sir David (H't'gd'ns're)|
|Bryan, Sir Paul||Howells, Geraint (Cardigan)||Renton, R. T. (Mid-Sussex)|
|Budgen, Nick||Hunt, John||Ridley, Hn. Nicholas|
|Bulmer, Esmond||Hutchison, Michael Clark||Rifkind, Malcolm|
|Burden, F. A.||Irvine, Bryant Godman (Rye)||Roberts, Michael (Cardiff, N.-W.)|
|Butler, Adam (Bosworth)||James, David||Roberts, Wyn (Conway)|
|Carlisle, Mark||Jenkin, Rt. Hn. P. (R'dgeW'std&W'fd)||Rodgers, Sir John (Sevenoaks)|
|Carr, Rt. Hn. Robert||Jessel, Toby||Rost, Peter (Derbyshire, S.-E.)|
|Chataway, Rt. Hn. Christopher||Johnson Smith, G. (E. Grinstead)||Sainsbury, Tim|
|Churchill, W. S.||Jones, Arthur (Daventry)||Shaw, Giles (Pudsey)|
|Clark, A. K. M. (Plymouth, Sutton)||Jopling, Michael||Shaw, Michael (Scarborough)|
|Clark, William (Croydon, S.)||Joseph, Rt. Hn. Sir Keith||Shelton, William (L'mb'th.Streath'm)|
|Clegg, Walter||Kellett-Bowman. Mrs. Elaine||Shersby, Michael|
|Cocksfoot, John||Kershaw, Anthony||Silvester, Fred|
|Cope, John||Kimball, Marcus||Sims, Roger|
|Cordle, John||King, Evelyn (Dorset, S.)||Smith, Dudley (W'wick&L'm'ngton)|
|Cormack, Patrick||King, Tom (Bridgewater)||Spicer, Jim (Dorset, W.)|
|Corrie, John||Knight, Mrs. Jill||Spicer, Michael (Worcestershire, S.)|
|Co stain, A. P.||Lamont, Norman||Sproat, lain|
|Critcl ley Julian||Lane, David||Stanbrook, Ivor|
|Crouch, David||Langford-Holt, Sir John||Steel, David|
|Davies, Bryan (Enfield, N.)||Latham, Michael (Melton)||Steen, Anthony (L'pool, Waver tree)|
|d'Avigdor-Goldsmid, Maj.-Gen. James||Lawrence, Ivan||Stewart, Ian (Hitchin)|
|Dixon, Piers||Lawson, Nigel (Blaby)||Stokes, John|
|Dodsworth, Geoffrey||Le Marchant, Spencer||Stradling Thomas, J.|
|Dray son, Burnaby||Lester, Jim (Beeston)||Tapsell, Peter|
|Durant, Tony||Lewis, Kenneth (Rtland & Stmford)||Taylor, Edward M. (Gl'gow, C'cart)|
|Dykes, Hugh||Lloyd, Ian (Havant & Waterloo)||Taylor, Robert (Croydon, N.W.)|
|Edwards, Nicholas (Pembroke)||Loveridge, John||Tebbit, Norman|
|Emery, Peter||Luce, Richard||Thatcher, Rt. Hn. Margaret|
|Eyre, Reginald||McAdden, Sir Stephen||Thomas, Rt. Hn. P. (B'net,H'dn S.)|
|Fairgrieve, Russell||MacArthur, Ian||Townsend, C. D.|
|Farr, John||McCrindle, R. A.||Trotter, Neville|
|Fell, Anthony||Macfarlane, Nell||Tugendhat, Christopher|
|Fanner, Mrs. Peggy||MacGregor, John||Tyler, Paul|
|Finsberg, Geoffrey||McLaren, Martin||van Straubenzee, W. R.|
|Fisher, Sir Nigel||Macmillan, Rt. Hn. M. (Farnham)||Viggers, Peter|
|Fletcher, Alexander (Edinburgh, N.)||McNair-Wilson, Michael (Newbury)||Waddington, David|
|Fletcher-Cooke, Charles||Madel, David||Wainwright, Richard (Colne Valley)|
|Fookes, Miss Janet||Marshall, Michael (Arundel)||Walder, David (Clitheroe)|
|Fraser. Rt. Hn. Hugh (St'fford&Stone)||Mother, Carol||Walker, Rt. Hn. Peter (Worcester)|
|Freud, Clement||Maude, Angus||Walker-Smith, Rt. Hn. Sir Derek|
|Fry, Peter||Mawby, Ray||Warren, Kenneth|
|Gardiner, George (Reigate&Banstead)||Maxwell-Hyslop, R. J.||Weather ill, Bernard|
|Gardner, Edward (S. Fylde)||Meyer, Sir Anthony||Wells, John|
|Glyn, Dr. Alan||Miller, Hal (B'grove & R'ditch)||Winstanley, Dr. Michael|
|Godber, Rt. Hn. Joseph||Mitchell, David (Basingstoke)||Winterton, Nicholas|
|Good hart, Philip||Moate, Roger||Worsley, Sir Marcus|
|Goodhew, Victor||Monro, Hector||Young, Sir George (Ealing, Acton)|
|Goodlad, A.||Moore, J. E. M. (Croydon, C.)|
|Gorst, John||Morgan, Geraint||TELLERS FOR THE AYES:|
|Gow, Ian (Eastbourne)||Morgan-Giles, Rear-Adam.||Mr. Marcus Fox and|
|Gower, Sir Raymond (Barry)||Morris, Michael (Northampton, S.)||Dr. Gerard Vaughan.|
|Gray, Hamish||Morrison, Peter (City of Chester)|
|Abse, Leo||Freeson, Reginald||Morris, Rt. Hn. John (Aberavon)|
|Allaun, Frank||Garrett, John (Norwich, S.)||Moyle, Roland|
|Ashton, Joe||Garrett, W. E. (Wallsend)||Mulley, Rt. Hn. Frederick|
|Atkins, Ronald (Preston, N.)||George, Bruce||Murray, Ronald King|
|Atkinson, Norman||Gilbert, Dr. John||Newens, Stanley (Harlow)|
|Barnett, Guy (Greenwich)||Ginsburg, David||Ogden, Eric|
|Barnett, Joel (Heywood & Royston)||Gourlay, Harry||O'Halloran, Michael|
|Bates, Alt||Grant, George (Morpeth)||O'Malley, Brian|
|Bennett, Andrew F. (Stockport, N.)||Grant, John (Islington, C.)||Orbach, Maurice|
|Bishop, S. S.||Griffiths, Eddie (Sheffield, Brightside)||Orme, Rt. Hn. Stanley|
|Blenkinsop, Arthur||Hamilton, James (Both well)||Ovenden, John|
|Boardman, H. (Leigh)||Hamilton, William (Fife, C.)||Owen, Dr. David|
|Booth, Albert||Hamlin, William||Padley, Walter|
|Boothroyd, Miss Betty||Hardy, Peter||Palmer, Arthur|
|Bottomed, Rt. Hn. Arthur||Harper, Joseph||Park, George (Coventry, N.E.)|
|Boyden, James (Bishop Auckland)||Harrison, Walter (Wakefield)||Parker, John (Dagenham)|
|Bradley, Tom||Hatton, Frank||Parry, Robert|
|Broughton, Sir Alfred||Henderson, Douglas (Ab'rd'nsh're,E)||Peart, Rt. Hn. Fred|
|Brown, Hugh D. (Glasgow, Provan)||Hooley, Frank||Pen dry, Tom|
|Buchan, Norman||Horam, John||Phipps, Dr. Colin|
|Buchanan, Richard (G'gow, Springbrn)||Howell, Denis (B'ham, Small Heath)||Prescott, John|
|Butler, Mrs. Joyce (H'gey, WoodGreen)||Huckfield, Leslie||Price, William (Rugby)|
|Callaghan, Jim (M'dd'ton & Pr'wlch)||Hughes, Rt. Hn. Cledwyn (Anglesey)||Radice, Giles|
|Campbell, Ian||Hughes, Mark (Durham)||Rees, Rt. Hn. Merlyn (Leeds, S.)|
|Cant, R B.||Hughes, Robert (Aberdeen, North)||Reid, George|
|Carter, Ray||Hughes, Roy (Newport)||Richardson, Miss Jo|
|Carter-Jones, Lewis||Irvine, Rt. Hn. Sir A. (L'p'l.EdgeHill)||Roberts, Albert (Normanton)|
|Castle, Rt. Hn. Barbara||Irving, Rt. Hn. Sydney (Dartford)||Roberts, Gwilym (Cannock)|
|Clemitson, Ivor||Jackson. Colin||Robertson, John (Paisley)|
|Cocks, Michael||Janner, Greville||Roderick. Caerwyn E.|
|Cohen, Stanley||Jay, Rt. Hn. Douglas||Rodgers, George (Chorley)|
|Coleman, Donald||Jeger, Mrs. Lena||Rodgers, William (Teesside, St'ckton)|
|Colquhoun, Mrs. M. N.||Jenkins, Hugh (W'worth, Putney)||Rooker, J. W.|
|Colcannon, J. D.||John, Brynmor||Roper, John|
|Conlan, Bernard||Johnson, James (K'ston upon Hull,W)||Rose, Paul B.|
|Cook, Robert F. (Edinburgh, C.)||Johnson, Walter (Derby, S.)||Ross, Rt. Hn. William (Kilmarnock)|
|Cox, Thomas||Jones, Barry (Flint, E.)||Rowlands, Edward|
|Craigen J. M. (G'gow, Mary hill)||Jones, Dan (Burley)||Sandelson, Neville|
|Cronin, John||Jones, Gaylord (Carmarthen)||Sedgemore, Bryan|
|Crosland, Rt. Hn. Anthony||Jones, Alec (Rhondda)||Selby, Harry|
|Criers, G. R.||Kaufman, Gerald||Sheidon, Robert (Ashton-under-Lyne)|
|Cunningham, (lsl'ngt'n,S&F'sb'ry)||Kelley, Richard||Shore, Rt. Hn. Peter (S'pney&P'plar)|
|Cunningham, Dr. JohnA. (Whiten Vn)||Kerr, Russell||Short, Rt. Hn. E. (N'ctle-u-Tyne)|
|Dalyell, Tam||Kinnock, Nell||Silkin, Rt. Hn. John (L'sham.D'ford)|
|Davies, Bryan (Enfield, N.)||Lambie, David||Sillars, James|
|Davies, Denzil (Llanelli)||Lamborn, Harry||Silverman, Julius|
|Davies, Ifor (Gower)||Lamont, James||Skinner, Dennis|
|Deakins, Eric||Latham, Arthur(CityofW'minsterP'ton)||Small, William|
|Dean, Joseph (Leeds, W.)||Lawson. George (Motherwell&Wishaw)||Smith, John (Lanark shire, N.)|
|de Freitas, Rt. Hn. Sir Geoffrey||Lead bitter, Ted||Snape, Peter|
|Delargy, Hugh||Lestor, Miss Joan (Eton & Slough)||Spearing, Nigel|
|Dell, Rt. Hn. Edmund||Lever, Rt. Hn. Harold||Spriggs, Leslie|
|Dempsey, James||Lewis, Arthur (New ham, N.)||Stallard, A. W.|
|Doig, Peter||Lewis, Ron (Carlisle)||Stewart, Donald (Western Isles)|
|Dormant, J. D.||Lipton, Marcus||Stewart, Rt. Hn. M. (H'sth, Fulh'm)|
|Douglas-Mann, Bruce||Loughlin, Charles||Stoddart, David (Swindon)|
|Duffy, A. E. P.||Mabon, Dr. J. Dickson||Stonehouse, Rt. Hn. John|
|Dunn, James A.||McCartney, Hugh||Stott, Roger|
|Dennett, Jack||McCormack, lain||Strang, Gavin|
|Eadie, Alex||McElhone, Frank||Strauss, Rt. Hn. G. R.|
|Edelman, Maurice||MacFarquhar. Roderick||Summerskill, Hn. Dr. Shirley|
|Edge, Geoff||McGuire, Michael||Swain, Thomas|
|Edwards, Robert (W'hampton, S.E.)||Mackenzie, Gregor||Thomas, Jeffrey (Abertillery)|
|Ellis, John (Brigg & Scunthorpe)||Maclennan. Robert||Tierney, Sydney|
|Ellis, Tom (Wareham)||McMillan, Tom (Glasgow, C.)||Tin, James|
|English, Michael||Madden, M. 0. F.||Tomlinson, John|
|Ennals, David||Magee. Bryan||Tomney, Frank|
|Evans, Fred (Caerphilly)||Mahon, Simon||Tuck, Raphael|
|Evans, loan (Aberdare)||Mallalleu, J. P. W.||Urwin, T. W.|
|Evans, John (Newton)||Marks, Kenneth||Varley, Rt. Hn. Eric G.|
|Ewing, Harry (St'ling,F'kirk&G'm'th)||Marquand, David||Wainwright, Edwin (Dearne Valley)|
|Ferny Hough, Rt. Hn E.||Marshall, Dr. Edmund (Goole)||Walden, Brian (B'm'ham, Lady wood)|
|Fitch, Alan (Wigan)||Mayhew,Christopher (G'wh,W'wch,E)||Walker, Terry (Kingwood)|
|Flennery, Martin||Meacher, Michael||Watkins, David|
|Fletcher, Raymond (Ilkeston)||Mulish. Rt. Hn. Robert||Weitzman, David|
|Fletcher, Ted (Darlington)||Mendelson, John||Well beloved, James|
|Foot, Rt. Hn. Michael||Mikardo, Ian||White, James|
|Ford, Ben||Millan, Bruce||Whitehead, Phillip|
|Forrester, John||Mitchell, R. C. (S'hampton, itchen)||Whitlock, William|
|Fowler, Gerry (The Wrecking)||Molloy, William||Willey, Rt. Hn. Frederick|
|Fraser, John (Lambent, Norwood)||Morris, Charles R. (Openshaw)||Williams, Alan Lee (Hvrng, Hchurch)|
|Williams, Rt. Hn. Shirley(H'f'd&St'ge)||Woodall, Alec|
|Williams, W. T. (Warrington)||Wool, Robert||TELLERS FOR THE NOES|
|Wilson, Gordon (Dundee, E.)||Wrigglesworth, Ian||Mr. Laurie Pavitt an|
|Wise, Mrs. Audrey||Young, David (Bolton, E.)||Mr. John Golding.|
I beg to move Amendment No. 69, in page 11, line 26, leave out 'the deduction' and insert
'a deduction of 50 per cent. or such larger deduction as is'.
This is a narrow amendment, which I hope the Chief Secretary will be able to accept. Although it covers a relatively small range of individuals, they are important. It is designed to ensure that British companies are in no circumstances put at a disadvantage compared to other companies because they have no overseas subsidiary. We have been debating and shall again debate suggestions relating to Schedule 2 about foreign emoluments for people resident or ordinarily resident in the United Kingdom, those in Case I, and persons who are not resident here or who, if resident, are not ordinarily resident— those under Case II.
The amendment applies only to Case II and would provide that whatever the deduction under Schedule 2 for foreign emoluments the deduction of foreign earnings for non-residents should be 50 per cent. A foreigner working in the United Kingdom who receives some of his reward abroad as foreign emoluments already qualifies for only half his income to be taxed under United Kingdom law. The amendment would produce the same effect whether or not the firm were domiciled in the United Kingdom.
Foreign emoluments can arise only for someone who is not domiciled here and whose employer is non-resident. They do not apply to foreign earnings of employees of firms resident in the United Kingdom, regardless of the domicile of the earners. This means that if a British firm without an overseas subsidiary employs a foreigner, that foreigner is at a disadvantage compared to anyone else employed by a British company and working abroad, or a foreigner employed by a foreign company and working in the United Kingdom. There are technically, no foreign emoluments, although the firm concerned trading abroad may be able to pay its nonresident employee overseas.
This means, for example, that if a wholly English company with no overseas subsidiary and no foreign links, apart from branches or trading agencies, is employing here a non-national, someone who is not domiciled here or who, if resident, is not normally resident, and this employee is paid part of his salary at his home, he cannot be treated as if he were a foreign employee of a company which has either an overseas subsidiary to pay the salary or of one which is itself a subsidiary of a foreign company.
This may be a narrow point, but it is important. It means that it is impossible for a wholly English company to employ, say, a Dutchman as an agent abroad and pay part of his salary in Holland on the same lines as a Dutch firm employing him sometimes in England, sometimes abroad, and paying part of his salary in Holland.
The reason that we have confined the amendment to Case II and have put it down to the clause rather than the schedule is that this proposition is wholly independent of the question whether or not the proportion is altered when we debate the schedule. The general case has been made out for an amelioration, which the Chief Secretary, not unreasonably, said that he would consider when we debate Schedule 2. But this amendment cannot be made to Schedule 2 because that deals wholly with foreign emoluments. The reference in this clause to Case II is to the deductions provided in Schedule 2 for the emoluments, if they are foreign emoluments. I am simply saying that if they are not technically foreign but are paid abroad by a British firm, they should be treated in the same way. I hope that the Chief Secretary will be able to meet this point.
I am sure that the Committee is now aware how complicated these matters are, with or without the amendment.
The amendment would affect persons who are not resident in the United Kingdom and also those who are resident but not ordinarily resident. An example would be someone who normally lives and works abroad but comes here to work for a short period. The amendment would give him, first, a deduction of 50 per cent. in any case and then, under Schedule 2, a deduction where the earnings are foreign earnings. In practice, only half his earnings for the job he does in the United Kingdom would be charged to tax, whether or not they were foreign emoluments.
In other words, a foreigner living here but not yet ordinarily resident—staying here for a short time—would, under the amendment, pay tax on half his pay, whether his employer was a foreign company or a wholly British company. If a foreigner came here for a short period to work for British Rail or ICI, under the amendment he would pay tax on only 50 per cent. of his earnings here.
The earnings in the United Kingdom of people within Case II of Schedule E already qualify for a 50 per cent. deduction if they are foreign emoluments. I apologise for the word "emoluments" which I do not like, but I gather that it covers all sorts of things which another word might not. So the amendment affects only those who are within Case II but who are either domiciled in the United Kingdom or are domiciled abroad but are working for concerns resident in the United Kingdom. It shows how easy this is.
Both categories are treated under Clause 14 in the same way as under the present law. There seems no reason why the full amount of their earnings in this country should not be charged to tax. The reasons for giving a deduction for foreign earnings or emoluments cannot apply as only their earnings for duties carried out in this country are liable to tax.
There is often provision for relieving these earnings from United Kingdom tax by way of double taxation agreements. Where the person concerned is not resident here the double taxation agreement with his country of residence would normally provide that his United Kingdom earnings are not taxed in the United Kingdom. It would depend on the person and the kind of double taxation agreement existing with the country concerned.
A person who is here long enough to become resident, though not ordinarily resident, will continue as before to be liable to tax on his earnings in this country, without a special deduction, unless they are foreign emoluments. That is neither unreasonable nor unfair. I cannot imagine what justification there can be for taxing a man working in this country on only half of his earnings— whether he be a non-United Kingdom citizen or otherwise—if, under the terms of the amendment, a non-United Kingdom citizen working beside another in the same factory, shop, office or warehouse would pay only half as much tax as the other. That cannot be right. Those are the reasons why I cannot accept the amendment.
Our rule in the United Kingdom is much less stringent than that in the United States. Under the United States rule they would be liable to pay tax on the full amount of world income in similar circumstances. We are not saying that.
For those reasons I hope the right hon. Gentleman will accept this explanation.
I understand the Chief Secretary's argument. I, too, apologies for using the word "emoluments". I do so because of its technical meaning.
If a United Kingdom firm with a wholly-owned subsidiary overseas seconds from that subsidiary to its United Kingdom head office, someone from that overseas subsidiary, and that person continues to be paid from the overseas subsidiary, he is treated better than his opposite number who is coming from a branch rather than an overseas subsidiary, because, being from a branch, he must be on the payroll of the parent company and not on that of the overseas operation. I should be glad if the Chief Secretary would undertake to look into that aspect of the matter.
I am concerned that English firms without overseas subsidiary companies should be able to bring back someone from their branch or allied organisations and still make part of their payment without deducting the full tax.
This is important as regards some trainees from the developing countries. There are firms which bring people from Africa to train in this country. I speak from my personal experience of editorial staff. Although these persons are perhaps not members of the company, they are paid while working for it. They are paid partly abroad. These are not technically foreign emoluments. These persons do not necessarily remain part of our staff. They may return to work for the Ghana Government, for instance, as school textbooks editors. I do not want anyone to be inhibited from bringing persons to train here because of the different tax treatment of those people simply because of a technicality about what are or are not foreign emoluments.
I should like to raise one technical point, which I do not fully understand, although I do not wish to make the confusion worse.
It has been suggested that there is a difference of treatment of a United Kingdom company, for instance, in the North Sea oil situation. For instance, a small United Kingdom company based in Aberdeen with no overseas subsidiaries wishes to employ for a period an expert from the United States. The payments it can make to him will inevitably be taxed at United Kingdom rates compared with a similar company which has an overseas subsidiary and somehow manages to balance the two payments, so that the company with the overseas subsidiary is slightly better placed. This amendment would help with that although it may drive a coach and horses through other aspects. Would the Chief Secretary please look at that?
I beg to move Amendment No. 61, in page 11, line 31, leave out subsection (2) and insert:
' (2) Where a person performs any duties of an office or employment in the United Kingdom the emoluments from which are assessable under Case I of Schedule E and, in addition, he receives emoluments in respect of duties performed under a directorship or employment to which section 198 of the Taxes Act 1970 applies, such part only of his total emoluments shall be deemed to be in respect of duties performed wholly outside the United
Kingdom as is just and reasonable taking into consideration the nature of those duties and the period of time during which the person was engaged on them. Any remaining part of the total emoluments shall be assessable under Case I of Schedule E'.
The Temporary Chairman:
With this we shall take Amendment No. 57, in page 11, line 31, leave out subsection (2) and No. 67, in line 36, leave out from 'that' to end of line 38 and insert:
'the emoluments were just and reasonable having regard to the duties performed by him wholly outside the United Kingdom',
and Government Amendments Nos. 56 and 55.
It would be for the convenience of the Committee to take the amendments in the order you, Sir Myer, have suggested.
The amendments raise a number of points. In one respect we have seen that the Government have had second thoughts. They have put down Amendments No. 56 on the Order Paper, although it is not as perfect as it might be. None the less, the Government have shown that they have looked at the matter and are prepared to suggest some amendment. I shall ask them to go further than they would apparently at this stage wish to go.
I have sat opposite the Chief Secretary for the last three or four years. I have been told by him that VAT was a very complicated tax, contrary to the view I have expressed. To find him now putting forward this collection of clauses, and the complex issues involved, reinforces my view that it would be difficult to devise a tax as simple as VAT. Equally, it would be difficult to devise a tax more complex than this one, once one begins to look behind the wording, because, although the wording is not long, the points covered by the wording are very complex. Partly for the reason he mentioned, the words "emoluments" and "domicile" and other technical words embody what would otherwise take up several paragraphs. The use of jargon in that context is helpful.
Amendment No. 61 is to some extent paved by some of the other amendments which have been related to it. We wish to pursue this point because we are concerned at the way in which the Government seek to put in the Bill as now drafted the onus of proof on the taxpayer in a way which we feel is not justified. Indeed, in purely practical terms, we have some doubt whether it can be operated.
Perhaps I am mistaken but I thought I saw the Chief Secretary nodding in response to these remarks. He seemed a little in sympathy with what I am saying. Perhaps I might spell out the point in the hope of persuading him as the evening goes on.
The reason for Amendment No. 61 is that it is frequently the case that the employees of a United Kingdom company are seconded abroad for varying periods to work for an overseas subsidiary to provide technical and managerial services to the overseas subsidiary. That is a frequent commercial practice that may produce overseas earnings for this country, which in all economic circumstances are likely to be important. It is also true to say that in many cases the period of absence abroad of the expert or technician—he may be an accountant or scientist, for example—is remunerated by the overseas company and not necessarily by the parent company. The clause would treat such remuneration, as I understand it, as fully taxable in the United Kingdom without deduction unless —this is the crucial part of the clause— the employee shows that his overseas earnings relate to an employment abroad which is unconnected with his employment in the United Kingdom.
A moment's consideration suggests that that is not a matter which is easy to prove, because it may well be that the expert concerned is employed by his company in the United Kingdom and is paid in the way I have suggested. But, clearly, the subsidiary company has some link with the parent company. That being so, it may well be that in many cases it is extremely difficult for the individual concerned, or his company, to show that what he has been doing abroad is not connected with his employment in the United Kingdom.
I think it may be the case that in reality the operation the expert is conducting abroad is quite separate and that he simply goes from here to there and returns to base from time to time. In such a case, the two operations in any technical sense are quite separate and, indeed, in any economic sense may be quite separate, except to the extent that the particular individual is employed by a company in this country which has subsidiaries abroad.
It is not clear how the employee would discharge the onus of proof. There may be many instances where, for purely commercial reasons, the point of the overseas employment is that it would be connected with the employment in this country. But there seems no reason why such commercial arrangements should be attacked as a whole. The real point of concern, I presume, given the origin of these clauses, would appear to be that overseas employment or emoluments might be loaded at the expense of earnings in this country. I take the main point about which the hon. Gentleman is concerned, to be that a chap is employed here, works for a subsidiary abroad and in the event gets more money paid overseas than is really justified by the value of the operation he undertakes there. That I believe to be the crux of the matter.
If that is so, the amendment would stop any attempt at such artificial avoidance without affecting normal commercial arrangements. There is no partisan point in this. We are seeking, as my right hon. Friend the Member for Farnham (Mr. Macmillan) suggested, to improve as well as we can the clause as drafted. It may be that one ought to scrap clauses 14 to 18 altogether, but, given that we cannot do that, this is one of the points which should be cleared up because we do not see any point in putting legislation on the statute book which in practice it will not be possible to operate. At the same time, as we have pointed out, we are quite certain that it is right that abuse should be stopped, and we would not wish to open a loophole in that respect.
I turn now to Amendment No. 57. We are not clear why the Government think it reasonable that if a duty is carried out wholly abroad which has any connection whatever with the United Kingdom employment the earnings of that foreign emolument should not qualify for the 10 per cent. deduction. It should be sufficient that the duties are wholly abroad to qualify for the 10 per cent. deduction, whether there is any connection with the United Kingdom employment cr not. This is another point on which we hope to be able to persuade the hon. Gentleman.
Amendment No. 67 is directed at the point that the clause catches all foreign earnings related to employment in the United Kingdom. The suggestion of my hon. and learned Friend the Member for Dover and Deal (Mr. Rees), in whose name the amendment stands, is that, in place of the Government's proposal "just and reasonable" earnings overseas should be taxed as foreign emoluments. No doubt my hon. and learned Friend will explain Amendment No. 67 more fully.
I come now to Government Amendment No. 56. The provision to which it relates is designed to prevent tax avoidance, and we understand that. But it is arguable in this instance that it goes wider than necessary. We are seeking to remove the unnecessary side effects so that the employee, whether he is a foreigner working here, or, alternatively, a United Kingdom citizen working abroad, could prove simply that he had been paid emoluments regardless of his employment in the United Kingdom. Government Amendment No. 56 relates to this point, but it seems to us that it has disadvantages, that the expression "would have been" is very difficult to prove. The Government propose to leave out the words
they would have been paid
and to substitute
their amount would have been the same".
We are not clear how it is that the Government think that anyone is going to prove what the amount would have been even though it did not happen, so to speak. I think that our amendment is better than the Government's and has a great deal to be said for it.
The hon. Gentleman says that it is different. We will listen with interest to how he explains that it is different. At all events, subject to what he has to say and whether he can persuade us on the point, our impression is that our proposal is better, and we are not convinced that it is significantly different from what the Government themselves have now suggested.
We are trying to make it easier for people to present a case to the Inland Revenue. This is something which ought to be in favors of the taxpayers. There is no point in passing a law which simply makes it unnecessarily difficult for taxpayers, who are otherwise working to the benefit of the country and the economy, to make a case to the Inland Revenue, with all the corresponding consumption of time and diversion from their normal duties.
I hope that the hon. Gentleman will look favorably on our amendments and at any rate suggest that a selection of them should be agreed to.
Amendment No. 57 goes further than that of my hon. Friend the Member for Worthing (Mr. Higgins). I want to delete the whole of the subsection. I am sure that the Chief Secretary will not agree with this. I thought that this subsection was aimed at the situation where a person, having lost a remittance basis of relief, switches his emoluments to a foreign country. No one condones this sort of evasion. I am afraid that the wording of the subsection will hit a lot of innocent people who are not indulging in any tax evasion.
I must declare an interest, in that I am a director of a company which from time to time sends experts overseas in connection with particular projects. Obviously they are paid overseas.
This subsection will make the job of finding expatriates to go abroad for a short time extremely difficult. It can be a fairly traumatic experience for expatriates. They will no doubt leave their wives and children for a while. There may be educational problems, and so on. There are problems for the industrialist in persuading the employee to go abroad. If a man goes abroad and is then penalised by having his tax increased, I fear that we shall not get sufficient recruits.
Taken in its wider context, we must consider those who go abroad, under the aid programme, for instance—agronomists, economists, and so on. It could mean that the developing countries will suffer because of the sledge-hammer which the Government are using to stop the evasion that comes from remittance and artificially transferring one's income abroad.
The economy of this country is not as strong as we should like it to be. Consequently, it is incumbent on any Government to make certain that nothing is done to harm our invisibles. I have no interest in engineering consultancy but I am told that the amount of capital work which British consulting engineers are currently carrying out abroad adds up to nearly £4,000 million. In 1973 nearly £60 million was contributed in this way to our invisible earnings. We must not harm those in any way. We must of course eradicate any sort of evasion, but let us not use a sledge-hammer to get rid of the evasion and damage our invisible earnings in the long term.
I hope that the Chief Secretary will consider this sympathetically. I can assure him that we shall come back to it, not necessarily on this Clause. No doubt in Committee we shall be able to have general debates pressing this point under Schedule 2 and other clauses.
Until my hon. Friend the Member for Croydon, South (Mr. Clark) intervened—I have the most profound respect for his expertise in these matters—I thought that I understood subsection (2). Having listened to him, I feel that one of us is at fault. I shall listen to the Chief Secretary's intervention with great interest. As I understand it, the subsection is meant to cover the case of a person who holds two directorships—one in a United Kingdom-based company and another—I choose the country at random—with a subsidiary based in Liberia. He spends three-quarters of his time in London working for the United Kingdom-based parent company and a quarter of his time in Monrovia working for the Liberian subsidiary.
By an extraordinary chance when his aggregate emoluments are examined, it is found that three-quarters attach to his Monrovian duties and only a quarter to his London duties. It may be that in certain situations that would be an obvious abuse of existing rules. I think that there is a case for saying that that kind of situation could be dealt with under existing law. However we know the predilection of the Government, and the Departments which back them up, for the overkill.
I assume it was to achieve this overkill that subsection (2) was introduced. It is certainly an overkill, because it would be practically impossible, in all but rather unusual circumstances, to meet the rather stringent tests it imposes. The taxpayer would have to show that the payment for his Monrovian duties would have been made irrespective of whether he performed any duties in London. In most cases the payment by the Liberian company would have depended on the tenure of his position with the London company. If he were sacked by the London company it would almost certainly follow that he would be sacked from the Monrovian subsidiary. So he would not be able to say with a clear conscience that his Monrovian salary would have been paid irrespective of whether he performed any duties in London. I assume this was the point of the subsection. But it has gone a little too far and imposes an impossible duty upon such a person.
The Chief Secretary has tabled an amendment but I am not persuaded that it quite cures the defects, if I have identified a defect in the subsection. If the Committee carries the Government amendment it will mean that a person in the situation I have described has to demonstrate that the amount of his Monrovian emoluments would be the same whether or not he performed any duties with the London-based company.
Assume the situation I have outlined. Assume the man has these two situations and that he has been sacked from his London company. Can he really say to the Inland Revenue "Yes, My Monrovian emoluments would have been the same."? In reality he would be bound to say that he would have lost his Monrovian position too.
Admirable though the Chief Secretary's amendment may be in its intention, I hope, it does not meet the situation which Amendment No. 67 seeks to cure. I would ask the Chief Secretary to look with a little more sympathy than he may be disposed to at the moment at Amendment No. 67 because it seeks to set a different test. The test is that the person in question should be able to say" The duties I have performed in Monrovia are genuine. The emoluments I have been paid are in proportion to those duties. I satisfy you on that point, and, therefore, there is no argument about the basis for taxation on those Monrovian emoluments.
My amendment has the same objective as that of the Chief Secretary. Without immodesty, I and my hon. and right hon. Friends like to feel that it is a little more exact. This is not a great political point between us. It is almost a fine point of draftsmanship. I know that the Chief Secretary can be very experienced and confident in this area. But, should I have shaken his confidence by what I have said, should he feel that there is possibly a case for adopting Amendment No. 67 rather than his own amendment, may I suggest, since it is a point of draftsmanship, that he enlists the help of one of the Law Officers? I put that forward with due diffidence but, as it is a point of drafting and we know the Chief Secretary's expertise in taxation and tax avoidance, perhaps he will enlist a little support before turning down, if he is minded to, the amendment in my name.
I thank hon. Gentlemen opposite for the kind remarks that they have made about me—it is somewhat unusual. I always look at their amendments with understanding, even when I disagree with them. There is a considerable difference between what we propose and what hon. Gentlemen have in mind.
I will speak first to Government Amendment No. 56, because its purpose is to clarify the position. The taxpayer does not have to show that the two jobs are unconnected. The purpose of Amendment No. 56 is to make clear that it is not the intention of the subsection to prevent a person who has a job in the United Kingdom from also having a job which qualifies him for a deduction under Schedule 2. The intention is that, to qualify for the deduction, he will have to show that the emoluments of the overseas job would have been the same whether or not he had the United Kingdom job and that no part of the pay for the United Kingdom job has been diverted to overseas income. As the hon. Member for Worthing (Mr. Higgins) correctly appreciated, that is the purpose of the subsection.
In moving Amendment No. 61, the hon. Member for Worthing spoke in much the same terms as other hon. Members. Although the other amendments are slightly different, they are all on the same lines. Amendment No. 57 leaves out subsection (2), and Amendment No. 55, by providing that the taxpayer simply has to show that he is entitled to receive the emoluments, makes subsection (2) ineffective.
If a man who had a job here and a job abroad, with a total income from the two jobs of, say, £10,000, arranged to receive £1,000 here and £9,000 abroad when the bulk of the work was done here, under Amendment No. 55 he would simply have to show that he was paid the £9,000 abroad. In view of the way in which hon. Gentlemen opposite have spoken of the need to cut out that form of tax avoidance, I hope that they will recognise that that amendment would be ineffective.
We are dealing here with the type of tax avoidance that occurred because of the remittance basis. People were able to go abroad for a short period and earn substantial sums—and sometimes even receive golden handshakes—and as long as those sums were remitted here they were not taxed. We all accept that that cannot be right and must be changed. That is what the clause does. If we were to put the onus on an inspector of taxes to show that the payment abroad was just and reasonable, he would be in an impossible position. At the same time, I do not like the idea of putting the onus on the taxpayer because that is not a provision that we want in our tax laws any more than in our courts of law.
The hon. Member for Worthing said that by taxing too heavily a United Kingdom citizen we might prevent him from going abroad for a short period. The hon. Member for Croydon, South (Mr. Clark) also put forward that argument. He said that the provision would catch British consultant engineers who wished to go abroad with their wives and families. If they went with their wives and families they would normally go for longer than a year and would, therefore, not be caught by the clause. They would not pay United Kingdom taxes. Some might take their wives and families abroad for less than a year, but it would be nonsense to allow a man to go abroad for one week of the year and arrange to have paid to him substantial sums free of tax. That is why it is essential to put the onus on the taxpayer rather than on the inspector.
With respect, the Chief Secretary does not wholly understand Amendment No. 67, which stands in my name. There is no question of shifting the onus of proof. The onus of proof is always on the taxpayer to dispute an assessment, except when it is out of time. It is merely that the form of words in my amendment is more apt to achieve in a reasonable way the objective which he and I apparently share.
In that case, unfortunately, the objective which the hon. and learned Gentleman has in mind would not be met in many cases. The inspector of taxes would have to show that the amount that the taxpayer was claiming as having been earned or paid abroad was just and reasonable, and it would put the inspector in an impossible position.
The effect of Amendment No. 67 would be that the inspector of taxes and the appeal commissioners would have to prove that the claim was not just and reasonable. The point I am making is that they would not be able to prove that fact. If a man receives some of his income in Monrovia because he works there, and some income here, and if that man wants to avoid tax, the inspector of taxes would not have the slightest chance of discovering whether what that man said about income abroad was right or wrong. But if there were a genuine case involving a man who has been to Monrovia and earned, say, a quarter of his income there, that man would have no difficulty in proving that to the inspector's satisfaction. In those circumstances the man's earnings in the United Kingdom would be taxed in one way and what he earned abroad would be subject to deductions allowed in Schedule 2.
I hope that is reasonably clear—and if it is not clear I shall clarify it further. That is the situation. If we leave the matter as the amendment suggests, it will be extremely difficult for the Inland Revenue to cut out the avoidance of tax —and all hon. Gentlemen want to see the situation put right. For this reason, I hope that the amendment will be withdrawn.
I hesitate to detain the Committee, but it is becoming evident that the Chief Secretary has not understood the problem. He has not understood my amendment, or his own. The onus of proof in tax matters—I hate to talk like a lawyer, but I am one—is always on the taxpayer unless an assessment is raised out of time. Therefore, the Chief Secretary talks nonsense when he says that the onus is on the inspector. The onus remains on the taxpayer throughout to justify his foreign emoluments.
Since it is clear that the Chief Secretary is confused, and has confused the Committee, I suggest that on this small but important point—a matter that is likely to affect a whole range of people- -the Committee might have the assistance of one of the Law Officers to give an authoritative ruling on this point. I do not think it right that the Committee should proceed in a state of total confusion when the Chief Secretary does not understand the position or, indeed, the amendment which he supports.
I am sorry if I have upset the hon. and learned Member for Dover and Deal (Mr. Rees) in his present legal mood, but may I tell the Committee what the effect of the Opposition amendments would be? This matter relates to Clause 14(2) in respect of a taxpayer who has an overseas job as well as a United Kingdom job. I am sorry if I have confused the Committee, but we are now dealing with a complex tax matter which probably few people outside understand. The amendment relates to a situation where the pay for an overseas job has to be shown to be bona fide related to the job. Under the amendment the only criterion for the overseas pay is that it should be just and reasonable. I am saying that that is not a satisfactory way of going about the matter and that it would be impossible for an inspector of taxes to prove that such a claim was reasonable. That is why I resisted the amendment. I am sorry if the hon. and learned Gentleman does not understand the situation.
I am sorry to delay the Committee, and I shall do so for only a moment, but my hon. and learned Friend the Member for Dover and Deal (Mr. Peter Rees) has raised an important point. I am an accountant rather than a lawyer, and it is accountants who to a large extent will have to use this legislation in whatever form it is passed by Parliament.
I do not see how the Chief Secretary can argue that the onus will be on the inspector. If the amendment proposed by my hon. and learned Friend were passed the legislation would state that emoluments would not be treated for the purposes of Case I of Schedule E unless the taxpayer
shows that the emoluments were just and reasonable having regard to the duties performed by him.
Clearly the onus would be on the taxpayer.
I do not think that the situation gets to that stage until the inspector is satisfied that the taxpayer has not shown a claim to be reasonable. I believe that Government Amendment No. 56 is defective, since it imports the idea that the amount would be the same. This would apply, presumably, whether or not the United Kingdom job had been performed. If, for example, a professor from a British university were to deliver abroad a number of lectures, the amount he received would in part be received because he is a professor from Oxford, or wherever it may be. If he were not a professor at Oxford, the amount he received for the lectures would be different. It seems to me that, if we are to achieve the aim which both sides of the Committee have in mind, this is not a reasonable test to apply.
One or two of my hon. Friends have apologised for delaying the Committee, but although we are discussing this matter on the Floor of the House we should not be in any hurry to dispose of it. Certainly, if we were in Committee upstairs, we should probe the matter thoroughly, and I believe that we should also carry out that process when we are discussing matters on the Floor.
I find myself sandwiched between two accountants and one lawyer. I speak in these matters as a humble economist. Perhaps it is rare for economists to admit that they are humble, but in the middle of this discussion I feel that I can do so without any fear of embarrassment.
The Chief Secretary should consider whether the Law Officers could help on this occasion. It is a brave man who tells my hon. and learned Friend the Member for Dover and Deal (Mr. Peter Rees) that he does not understand a matter of this kind and does not understand the way the onus of proof should go in a particular case. I think we might well have the Law Officers' views on this topic.
It seems to me that the Chief Secretary got perilously close to saying that neither the taxpayer nor the Inland Revenue will be able to prove what is at issue, and that therefore the onus should be on the taxpayer. That is a rather dangerous situation in which to find oneself.
My hon. and learned Friend said that, whether or not we accept these amendments, the onus is always on the taxpayer, except where the matter may be out of time. He further argued, as I understood him, that that would be the case regardless of whether the amendments were accepted. I am not clear whether the Chief Secretary agrees with that point of view. We should be clear whether that is the point at issue and the Chief Secretary should make his position clear. I understood the hon. Gentleman to disagree with my hon. and learned Friend. If that is the case, I believe that we should have the advice of the Law Officers.
I am not clear whether there is a distinction between deciding whether the onus of proof is on the taxpayer to show whether a claim is just and reasonable, or whether he has to prove that he has paid that amount regardless of whether he has a home company. Perhaps I did not express that very clearly. There are two things that a taxpayer or the Inland Revenue may be asked to prove. They are either that the amount that has been received abroad is just and reasonable or, alternatively—and it is alternatively, because it is not the same thing—that the amount he is paid is such that he would have been paid that amount even though he had no base, that is to say, no home company. I agree with the view which was implicit in one thing that the Chief Secretary said, that the time apportionment basis might not be right. Let us take the simple case of a highly qualified surgeon. He may go abroad and conduct a particularly difficult operation the pay for which reflects his expertise as a doctor rather than the length of time he spends abroad. That case could not be dealt with purely on a time apportionment basis.
May we have an answer on the specific point made by my hon. and learned Friend the Member for Dover and Deal? If that is the difference between us, we need to resolve it.
I support what was said by my hon. and learned Friend the Member for Dover and Deal (Mr. Rees). As I understand it, the Chief Secretary is not arguing that the onus of proof is on the inspector. As my hon. and learned Friend said, the onus of proof must remain with the taxpayer. The Chief Secretary says that it remains a matter for the inspector to decide whether it is just and reasonable and that, therefore, means, in effect, that the onus of proof should remain with the inspector. My hon. and learned Friend tells me that the words "just and reasonable" are frequently used where the onus of proof lies absolutely with the taxpayer. If that is the case there is no change in terms of where the onus of proof lies. It therefore seems that this amendment is preferable to the one the Government are proposing. Although this is a small point it is one that should be recognised and met—now, with the assistance of Law Officers, or on Report, or at some other time.
I always wanted to place this matter on a "just and reasonable" basis. If the onus of proof is on the taxpayer, we are faced with the problems which the Chief Secretary mentioned— the question how the tax inspector deals with such a matter. But of course the tax inspector must decide, in a whole range of other matters, what is just and reasonable. He must apply that judgment to all the claims under Schedule D, deciding whether a claim for expenses is just, fair and reasonable. Of course, as in all matters of government, Ministers must accept, ultimately through sheer exhaustion what they are told by Departments. In government I sought to help the Revenue a little more by introducing the time apportionment basis. But the taxpayer would have been able none the less to try to show that the time apportionment basis was not just and reasonable because he performed extremely valuable services in, say, Monrovia but he was a moron at his job in the United Kingdom. Hence, the onus is on the taxpayer to show what is just and reasonable. I do not understand why, in this one area, this method of approach is unsatisfactory. I never shall. Some day someone may be able to explain it to me, but after two years of instruction I am still dumbfounded.
If the taxpayer has difficulty in proving to the inspector what is just and reasonable, will it not be equally difficult for him to prove that the amounts would have been the same and to get the inspector to agree?
The difficulty is—this deals with the point raised by the hon. Member for St. Ives (Mr. Nott)—that the clause seeks to put the onus on the taxpayer. The hon. Member asked why in this area alone that should not happen. The answer is that this is a complex area, involving remittance, overseas earnings, domicile, and so on. Anyone who has been in this Committee in the last hour or so will have come to the reasonable conclusion that these are difficult matters.
If an inspector of taxes or the appeals commissioners had to decide whether or not a taxpayer was correct in saying that the £10,000 he earned abroad was just and reasonable, the only real evidence that the inspector would have on which to do that would be that the money had been earned. That would have to be accepted as prima facie evidence. That is the basic reason for the difficulty. There would be no other way in which an inspector of taxes or the appeals commissioners could deal with the case. That is why, if the amendment were accepted, a situation would be created in which the avoidance would not be removed and a substantial loophole would be left.
I am not a lawyer, and I would not wish to argue matters of law. I therefore promise the Committee that if, on further examination—which I shall certainly arrange to be carried out, in view of the legal knowledge of the hon. and learned Member for Dover and Deal (Mr. Rees), which is much greater than I could ever wish to have—it turns out that I am wrong, I shall bring the matter back on Report. However, as I understand it, the result would be as I have explained to the Committee, and I hope for these reasons that it will accept that the amendment will make matters worse.
The Committee will be pleased to hear that in two minutes' time I must leave to take part in a television programme. We could not have had a better illustration than has been provided by the debate that this subject is the most obvious candidate for a Green Paper. It is such an important matter. However much economists, lawyers, bankers and layment in the Committee may argue, this whole area is an extremely sensitive one. We could get it wrong. If the Royal Commission on Taxation could discuss this matter in great depth and could come to a conclusion which could then be changed—as it was when Mr. Macmillan was Chancellor in 1956, as a result of a debate in Committee—Ministers will not be humiliating themselves but doing the sensible thing if they decide that there should be consideration in depth.
I said originally that this matter had not had the process of outside consultation which I genuinely believe it deserves.
I hope that the Committee will forgive me for intervening once again. It seems that we are making a little progress. The first objection raised by the Chief Secretary was that it would put an impossible onus on the inspector of taxes. However, after mature consideration, he has now changed his mind and has said, "Yes, the onus is on the taxpayer but it would be difficult for the inspector to challenge the taxpayer's evidence". We have seen a substantial change of view.
I take up the point made by my hon. Friend the Member for Norfolk, South (Mr. MacGregor). If it is difficult for the inspector to challenge the taxpayer's evidence that emoluments were just and reasonable, why is it easier for the inspector to challenge the taxpayer's evidence that the emoluments would have been just the same?
The Chief Secretary has been candid, disarming and charming, as he so often is. He would add greatness to his qualities if he admitted that he totally fails to understand the problem. In the long run it seems that the only answer is to have a Green Paper. We can revert to that on the debate which I hope you will be allowing, Mr. Murton, on the debate on the clause.
If we are to make any progress on these points, I suggest in all humility, as a lawyer asking for lawyers' assistance, that the Law Officers should clarify the matter. I should accept their view. We should accept the view of such a distinguished quarter. If we had their clarification we could get away from these arid legalisms and turn to the broader question of whether the clause should stand part of the Bill.
If I said that I failed to understand the whole of this matter I would not be achieving greatness but telling lies to the Committee. I shall do what I have said, which I hope will be acceptable to the Committee.
None the less, it might be helpful to consolidate the progress which, as my hon. and learned Friend the Member for Dover and Deal (Mr. Rees) has rightly said, we seem to be making. Of course, we have a long way to go yet before the Bill gets anywhere near Third Reading.
Are we to understand that the Chief Secretary agrees that whether or not the amendments are accepted the onus of proof is on the taxpayer? I hope that we can have a clear answer. That would help us at a later stage.
I turn to the point made by my hon. Friend the Member for Norfolk, South (Mr. MacGregor). Is it the case that there are two alternatives before us—namely, that the taxpayer must discharge the onus of proof in any event and that he can say that what he has received is fair and reasonable, or, alternatively, that what he has received is the same as if he had no United Kingdom employment? Do we have those two alternatives before us? At a later stage the House, as it will then be, may well feel that it would like to make a choice between those two alternatives.
I have the general feeling, which is shared by many of my hon. Friends, that I would prefer the taxpayer to have to show that it was fair and reasonable rather than just the same. To show that it is the same is a difficult proposition. I do not understand how the taxpayer would begin to set about achieving that task, whereas to show that it is fair and reasonable is something that the taxpayer may seek to do.
If we could have the Chief Secretary's answers on these matters—I hope that he can answer them first time round without having to come back yet again— we might accept his undertaking that he will return to the matter on Report. I hope that if necessary he will return with the Law Officers, although, as has already been pointed out, my hon. Friends and I would prefer to have the whole matter more broadly discussed within a Green Paper.
If I came back with the Law Officers it is my guess that the debate would be even more arid than has been suggested. Equally, that would apply if we had a Green Paper. Following a Green Paper there would probably be a Bill, and I believe that the matter would then become even more complicated. I do not accept that argument. The onus of proof is on the taxpayer, but in practice an impossible position would be created, as the inspector would not be able to disprove that what was put forward by the taxpayer was just and reasonable. The inspector would find his position totally impossible. That is why I have not been able to accept the amendment.
I am sorry if the matter is not clear to some hon. Members. If an inspector had to disprove that a payment—it could be substantial—had been just and reasonable he would place himself in an impossible situation. He could not do anything about it. That is why the onus is on the taxpayer and that is why I am not prepared to accept the amendment. I am terribly sorry.
I am sorry to come back yet again. I hoped, as my hon. and taught Friend the Member for Dover and Deal had said, that we were making some progress. We now seem to have taken a step backwards. The point put forward by my hon. and learned Friend, which is supported by other of my hon. Friends, is that in any case—accept the amendment or not—the onus is on the taxpayer. However, we cannot see why that is relevant to the question whether the amendments are accepted. Does the hon. Gentleman accept that?
The onus is on the taxpayer, but, as I have tried to explain, the situation becomes impossible for an inspector. I thought that I had said that earlier. If I did not, I apologies.
That does not make sense. We must get the matter straight. I hope that the Chief Secretary will try again, as it is important that we get the matter right. That is why it has been suggested that we should send for the Law Officers, or at least one of them. If the onus is on the taxpayer whether the amendments are accepted or not the hon. Gentleman cannot say that the position which is created is impossible, because that is what his own Bill is doing. It may be that his Bill is impossible. If so, he should say so more clearly than he has up to now.
I hesitate to intervene, but I am depressed, Sir Oscar, to see the Chief Secretary happily giggling his way through this debate. He throws up his hands and does not try to answer a crucial question. There are two states of affairs—we shall have the Bill either unlamented or as it is sought to be amended. If the Chief Secretary is saying that the onus is in the same place whether or not the Bill is amended, will he make one final enormous effort to get to the Dispatch Box and say these words after me: "The onus is in the same place under the Bill whether or not it is amended."?
It would be difficult to make the matter clear to the hon. Member for Working (Mr. Onslow), who has not been in the Chamber for most of this afternoon. I have made it clear that the onus is on the taxpayer. However, if the amendments were accepted the inspector of taxes would be in an impossible position because he could not disprove that a payment abroad, which would be a form of evidence, was just and reasonable.
I think that the Committee will agree with me that the way in which the Chief Secretary has answered our questions has been highly unsatisfactory. However, we accept that he has been trying. We do not approve of the way in which he has reacted to some of our remarks. I believe that the best thing to do is for us to put clearly on the record that we expect the Chief Secretary to return to this matter on Report and for it then to be thoroughly sorted out. Let him then have a proper set of answers, or let the Law Officers explain the position. On that basis and on no other we are prepared to let this go.
I beg to move Amendment No. 62, in page 12, line 29, leave out subsection (5) and insert:
'(5) In section 221(4) of the Taxes Act, for the words from "but" to "employment for that year" there shall be substituted "but the circumstances in which he performs the duties of his employment are such that the emoluments received are foreign emoluments or duties are performed wholly outside the United Kingdom"'.
The amendment is intended to improve the wording of subsection (5), which deals with the calculation of taxation of retirement benefits. The effect of the subsection as it stands is to amend Section 221(4) of the Taxes Act so that an employee will be taxed on sums provided by his employer on his behalf under an unapproved retirement benefit scheme unless there is no charge to tax from Cases I and II of Schedule E, as amended by the clause, subject to any further changes that might be made in Schedule 2.
What that means, in effect, is that, as the pension deriving from the sums with which the clause deals is also taxed, an employee may well effectively be double taxed, being taxed once on the pension and once on the sums going to provide it. I do not see how the Government can justify this form of double taxation. I do not believe that it is necessary in making the changes which the subsection makes to go so far as the subsection goes. Our suggested wording achieves what the Government set out to achieve, without being so unfair, and without going to such great lengths.
Pensions arising in this country are already taxed. Clause 15 will abolish the remittance basis for foreign pensions and annuities. At least, we have still to go through the Committee stage on that clause, so perhaps it will not do so. But at present it does, and the amendment restores the former position for such pensions.
No one can doubt the injustice of suddenly applying United Kingdom tax to overseas pensions earned before April 1974, whereas pre-April 1974 earnings will not be affected. I do not understand the Government's reasons for leaving earnings before April 1974 unaffected and suddenly saying that United Kingdom tax will apply to overseas pensions earned before that date.
Such pensions are often paid from pension funds to which contributions were made from income wholly earned abroad, and income on which foreign tax was paid in full. By contrast, contributions in the United Kingdom receive tax relief. Therefore, it is perhaps not unreasonable to tax the pension itself. But no United Kingdom tax relief is given for contributions paid overseas, and, therefore, the argument cannot be applied with any justice or equity to overseas pensions.
Further, in some overseas countries no tax relief is given for pension contributions. That applies, for example, to the Middle East, Japan and Indonesia, all places where British people have worked for many years.
The amendment would restore an element of justice which the present wording of the subsection removes. We must bear in mind that many people who have retired from overseas employment still spend at least part of their year abroad. I do not see why they should pay United Kingdom tax on the income spent abroad for that purpose. It is money which has been earned overseas, resulting from contributions which have been paid overseas. It is money which frequently is spent overseas, money which often has received, in the hands of the owner, no tax relief for pension contributions.
There is a further minor point. People who have been working abroad and are affected by the subsection have not benefited from the social services and other Government expenditure in the United Kingdom to nearly the same extent as United Kingdom residents have. Now they will be taxed as if they had.
The Government should see the justice of accepting the amendment. I hope that the Chief Secretary will be as direct and forthcoming in response to this appeal as he can be. I hope that we shall be able to settle the matter now rather than let it drag on until later stages of the Bill.
I support my right hon. Friend the Member for Farnham (Mr. Macmillan), because there is a certain amount of retrospection in the subsection. The Chief Secretary should consider the amendment with more sympathy. I am sure that he is always sympathetic, but I want him to show a little more sympathy this time.
If a person goes abroad and joins a pension scheme, he knows that when he returns to this country he has a certain tax advantage. It is on that premise that he takes on the job. I fully agree with my right hon. Friend that pensions that are paid and have been earned before April 1974 should not be subject to the stringent controls in the Bill. Pensions earned by people going abroad for the first time after April this year are a different matter, because those people's terms of contract will take into account that when they retire there will be no tax advantage as a result of earning their pension abroad.
This is a question of retrospection. I think that if the Chief Secretary looks at it from that point of view he will see the validity of my right hon. Friend's argument. It is nonsensical that a person who has spent all his working life abroad— whether in the colonial service or in a company—and has been enjoying a pension with a tax advantage on the remittance basis, because it is a foreign emolument, should now have it cut on his retirement. The provision may be all right for new pensioners, but if the Chief Secretary does not exclude existing pensioners there will be an element of retrospection. I hope that the hon. Gentleman will reconsider the matter.
'. I support my right hon. Friend the Member for Farnham (Mr. Macmillan) and my hon. Friend the Member for Croydon, South (Mr. Clark). The Chief Secretary could give way on this point, which is purely and simply a matter of retrospection. Anyone who enters a pension scheme after April this year knows what he is in for, and takes the consequences. But we are considering quite a large number of people who draw considerable benefit from having worked abroad. The Chief Secretary might very well give way on this small point.
The amendment affects the tax treatment of contributions to an unapproved pension fund by an employer in respect of an employee. Under Clause 14(5) as it stands, these will be treated as income of the employee unless the emoluments of the employment qualify for a 100 per cent. deduction because they are in respect of duties carried on wholly abroad for 365 days or more or are "foreign emoluments" in respect of duties carried out wholly abroad.
The amendment seeks to extend the exemption, as the right hon. Member for Farnham (Mr. Macmillan) says, to cases in which, first, the "foreign emoluments" are for duties carried out in this country, and, second, the duties are performed wholly outside the United Kingdom but for fewer than 365 days. Where the foreign pension scheme can be approved by the Inland Revenue there is no problem. The employers' contributions do not rank as employees' remuneration. The foreigner who will now be liable on half his United Kingdom earnings and is a participant in a non-approvable fund in his home country presents something of a problem.
I am obliged to the right hon. Gentleman for raising this matter. Although, as I would like to show, the amendment would do rather more than we would want to do, I nevertheless would be prepared to recommend that on Report we have an amendment to meet the main burden of the right hon. Gentleman's argument.
Concerning the man based in the United Kingdom, it seems to us—this is another part of what the amendment would achieve—that there are no grounds at all for exempting the contributions to an improvable pension scheme. Such differences as foreign jobs make are recognised; that is to say, by giving them the relief of the deduction from emoluments which extends to employers' pension fund contributions. Nor, as a practical matter, does it seem likely that the United Kingdom based man who goes abroad for a relatively short period and is paid from the United Kingdom will find himself a member of an unapproved fund. Such funds hardly exist. Section 221 of the Taxes Act is, in effect, an in terrorem provision, and no one is going to set up such a fund just for the man who goes briefly abroad.
That is the reason why I cannot accept the amendment. I hope that the right hon. Gentleman and other hon. Members will understand that. But I shall be prepared on Report to ensure that an amendment is tabled to meet the first part, which I have mentioned, of the right hon. Gentleman's amendment.
I am grateful to the Chief Secretary. I take his point about the difficulty of accepting the amendment as it stands. We shall look, I hope with approval, at what he proposes for the foreigner who is a member of a fund in his own country which is not approvable in this country, for whatever reasons. I hope that the hon. Gentleman will also include the Englishman who has worked abroad in the past or is working part-time abroad and is a member of a fund which is unapprovable partly because it is a foreign pension fund and some of the African and other developing countries do not allow such a fund to be approvable. That is another point which I hope will be covered in the hon. Gentleman's undertaking.
In view of the undertaking, I beg to ask leave to withdraw the amendment.
When I was prompted to intervene briefly a little while ago I committed what was, if not a solecism, an unwarranted anticipation of an event which we hope will occur. I look forward very much to the time when we shall be addressing you, Mr. Murton, as "Sir Oscar". I shall try to stick to "Mr. Murton" for the time being, though I hope that it will not be a very long "time being".
I intervene on this occasion in the sense of someone who is a stranger in a strange club. I know how these debates are carried on between a small coterie of Members—though it is not too small, because I see a gratifying number of my hon. Friends present and a number of Ministers. The Ministers, however, are totally unsupported except by a Parliamentary Private Secretary and a recumbent figure. This must develop a sort of amity, a bonhomie. I understand that, in order to keep his end up, the Chief Secretary is bound to giggle from time to time. When intruders enter, it is as though a stranger comes. I do not care a row of beans if I did cause a certain frisson when I entered.
This is not a very good clause. It would be a great advantage if it were not in the Bill at all. I rely for that statement not merely upon my judgment of what the clause says but on my knowledge of what its effect will be.
In passing, may I say that I never quite understand why this particular exclusive club which meets from time to time to consider Finance Bills seems to get on without what other clubs which meet to consider other pieces of legislation usually regard as essential—that is, an Explanatory Memorandum. I thought that it might help me if I had a look at what the Explanatory Memorandum said about the clause. I could not find the memorandum. If any hon. Member could tell me where it is, I should be very grateful —although no, I would not be grateful, because it would prolong my speech.
Different rules apply in different places. I shall come to my point, which is a letter addressed to D. Healey, Esq., M.P., House of Commons. The letter was copied to me, so I suspect that the Chief Secretary has a copy in his archives. This admirable letter reads as follows:
Dear Sir, I wish to spell out to you some of the adverse effects which will result from the introduction of a taxation on the world wide income of foreigners, by stating facts.
My employer, an American, has indicated to me that if the proposal becomes law he will be forced to move out of the United Kingdom. The following will result from the movement of one man. Approximately 60 Britishers will lose their jobs. Many export orders placed at present in the United Kingdom will be placed abroad. There will be a loss in dollars to the United Kingdom of around $1,250,000 per annum. British charities, at present receiving several thousand dollars per annum from the personal pocket of my employer will suffer. If this is to be the result of one man leaving the United Kingdom the effect of the promised mass exodus could, I consider, be only to the detriment of the country.
I have spoken to a number of people whose political opinions range from bright red to bright blue and not one of them has expressed to me any opinion other than that they consider this proposed tax to be the height of stupidity. I strongly recommend, therefore, that fresh thought be given to the matter.
That is an admirable letter. I have not seen the reply from D. Healey, Esq. The letter was dated 2nd May, so I should have thought that a reply might have been sent by now. Perhaps the Chief Secretary will tell me whether a reply has been sent.
There is no point in my attempting to conceal the identity of the American concerned. He is Mr. Paul Getty. He is not the only American resident in my constituency or the only American who will remove himself and his business from this country if this legislation has the effect which my constituent supposes it will. I do not know whether the removal of Mr. Getty and other Americans from this country is the deliberate intention of the ventriloquist whose dummy is to answer the debate.
If this legislation is to go into the statute book, will the Chief Secretary tell us what information he has so far had about the number of people who will behave in the way which my constituent, who stands to lose his job, has said he believes may happen? What statistics have the Chief Secretary and the Treasury been able to garner about the exodus of Americans and others from British soil, where they have been conducting business which, directly and indirectly, has brought in substantial sums of money and substantial profits—to make no bones about it—to the British economy? Can he quantify the loss which is likely to accrue if the effect of this legislation is as forecast, or what evidence can he show that the loss will not be as forecast?
If the House of Commons has to pass legislation, it should do so in the knowledge of what the effects of the legislation will be. We may be able to assess the motives of those who bring it before us if we know that they are aware of the consequences of their actions. If they have taken a certain line of action without any knowledge of its consequences, it will lead us to one justifiable conclusion. If they know what is to happen and do not care about it, that will lead us to another justifiable conclusion, But, in this case, when we are talking about substantial sums of money, I do not think that we should make any bones about the fact that we are entitled to know whether this is being created as a situation to the disadvantage of this country by oversight or by deliberate and set purpose.
I speak on behalf of my constituent who has written to me and on behalf of 59 others. As the letter says, they stand in imminent danger of losing their jobs. Naturally, they regret that fact. Naturally, they regret that there will be other substantial losses of various kinds to the economy and to our society generally.
I do not make this plea on behalf of Mr. Getty. He has always been careful to play no part in the British political scene. So far as I know, he is not responsible for any of the Press notice which this possibility has already attracted. On 7th June the Daily Express carried a report in its William Hickey column which is not entirely accurate but clearly reflects upon the letter sent to "D. Healey, Esq.". But if that is taken to suggest that Mr. Getty had any part in making this public, I must say that I have no knowledge that that is so, and I have not spoken to Mr. Getty on the subject.
My constituent and the many others who may find themselves in the position which he describes as a result of this legislation are entitled to expect a full and satisfactory explanation from the Chief Secretary whether he views this prospect with total equanimity or whether the representations which have been made since this proposal was first put forward have led him to change his mind about the desirability of the proposals in the Bill and whether at this late stage he cannot take some sensible remedial action which will enable the situation to continue whereby we have in our midst a number of people who have been welcomed for years, who have always been led to believe that the contribution which they made to our economy was appreciated, and which they could continue to make, and who are naturally astonished about what is being done.
This debate has established two matters. The first, Mr. Murton, is the high esteem in which many right hon. and hon. Members hold you. The second is the extreme complexity of the subject that we have been discussing.
I agree with my hon. Friend the Member for St. Ives (Mr. Nott). Never has there been a more obvious subject for a Green Paper. It seems to me that in view of all the uncertainty that has been revealed and in view of the probable damage which has been spelt out, the Government would be well advised to take that course and to reconsider the whole matter.
I must declare an interest, in that I am a director of a merchant bank and of insurance broking companies in the City of London. For that reason, I am concerned about the possible consequences of the Bill upon the business conducted in the City.
The Chief Secretary suggested that few representations on this clause had been received and that many more had been directed to Clause 18, but we have been in some difficulty throughout this debate, which is one reason why, on occasions, the rules of order have been a little stretched. We have been confined to a set of amendments, and we are now confined to a specific clause, when in reality there are three interrelated clauses which separately and collectively affect the foreign community working here.
Recently, Christians have celebrated Trinity Sunday, and preachers up and down the land have described that great mystery. In my own parish church, the curate, with his usual eloquence, produced a can of Three-in-One oil and described its interrelated properties. He could have pointed equally well to Clauses 14, 16 and 18 of the Bill. The Athanasian Creed, in language of complexity and incomprehensibility which rivals even the efforts of the parliamentary draftsmen, spells out the direst penalties for those who deviate a jot from its interpretation of the mystery. In the case of the Finance Bill, the penalties are reserved for foreigners who are misguided enough to work and dwell among us.
The difficulty that we are all in is that the combined consequences cannot be dealt with adequately in this debate. I speak only to emphasise the need to return to the matter again in greater detail in Standing Committee and to express the view that it would be much better if the Government reconsidered the abolition of the remittance basis and came back to the House only after presenting a Green Paper and allowing adequate time for the consequences to be considered.
The collective decisions of foreign firms will be taken because of the combined effects of this clause, dealing with individuals, of Clause 16, dealing with the income from trade carried on abroad, and of Clause 18, dealing with the taxation of worldwide income of persons resident here for comparatively long periods. In assessing their decisions, they will consider the costs in terms both of remunerating employees and of taxes paid on their organisations as organisations. They will think about the consequences on their staff as individuals and the impact on their employment policies. They will think of the relative benefits here and elsewhere and of the personal consequences for the proprietors. If, for one or all of those reasons, they concluded that they will be worse off in Britain than in another country of relatively equal convenience, they will go elsewhere.
First, I will say a word about the position of individual employees in this country working away from their own countries. They usually accept some inconvenience. They are removed from their families and friends. They have obligations in their countries which they still have to maintain. Normally, their firms undertake to see that they are at least no worse off than if they stayed at home paying taxes at the local rates. Until now, they have done so in a variety of ways. I freely concede that some may be rather undesirable.
Whatever methods such employees have adopted in the past, they will have to reassess that cost, and many are already doing so. They are having to consider complex and, as yet, undecided matters. I am advised that one of them is the question whether fares to and from the place of work from the home country are taxable as income. Whatever figures the Chief Secretary may produce about relative rates of taxation, many of them are concluding that it is not worth it to stay here.
I am not so much concerned about some of the very large American banks which have taken the opportunity to cut down on expensive London office staff. I would be concerned if many of the foreign banks and consortium banks already here started to move their offices to Europe, but I am particularly concerned about many examples I have been given of the small or medium-sized non-European organisations which are now hesitating to set up here and which are, instead, considering places such as Brussels. These organisations already have to face the high cost of office accommodation in London, but they are inclined to come here because of the services which we can offer and because of the language factor. However, faced with what they regard as excessive taxes on their key executives, many have frankly and freely stated their intention of going instead to Brussels or elsewhere.
There are also many executives who come from abroad to work for companies resident here. Some come from parent or associated companies abroad and some come as individuals. They now face the double burden of higher taxes under this Clause and, if they stay for long periods, as many do, the penal impositions of Clause 18. We have heard this week of the example of Professor Johnson.
I work for a banking group in which some outstanding men are posted here from an American associate, and many major British companies are receiving the services, skills and business acumen of top American, European or Canadian executives. I have in mind one or two of the best known shipbuilders, many firms engaged in North Sea exploration, as well as others. Nine years is not a long period, and it is ludicrous to drive away a top executive at what may be the most productive period of his career.
I speak with particular anxiety about the consequences for our immensely important invisible earnings. I make this remark with particular feeling on a day when a particularly disastrous batch of trade figures has been announced. I think that there are more non-British shipping related companies operating in the City of London than anywhere else in the world.
Let us take the Greek shipping community as an example. There are 150 Greek firms, some of which are full operating companies and some offices of convenience based in the City of London. Many came here a decade or so ago— for reasons which have already been mentioned in the course of our debates— from New York. Today, they are ready with their bags packed to depart to Brussels, Zurich or some other suitable capital. Many made this abundantly clear in the Poseidon gathering in Athens, where there was plain speaking on this subject. No Greek ship owner or any other overseas business man will sit in London and pay taxes on his world-wide income. It may be unreasonable that these gentlemen should escape British taxes, and I can see all kinds of arguments, on all the clauses, on grounds of equity, but the simple fact is that these people have complete freedom of choice, and if we impose taxes on them it will not benefit the revenue here; the people involved will simply go elsewhere.
At present, many of these people live here and educate their children here. They have got to know and like us. They do business with British banks, the British insurance market, and with the Baltic Exchange, as well as use all the services which the City of London has to offer. If they are forced elsewhere, all this business is put at risk and in future many would prefer to deal with institutions outside this country.
The magazine Seatrade stated in its May edition:
Should a major proportion of foreigners decide to leave London, the financial service industries must follow. The British merchant banks the British shipbrokers, the insurance underwriters, the ship management companies, the equipment service officers, all will have to set up colonies abroad to service their clients. If they do, the non-national city will be that much more parochial.
The abolition of the remittance basis, which is the central theme of the debate, could, in my view, have a catastrophic consequence for many of these overseas organisations now established here, for a variety of reasons. Certainly for ship owners hitherto based in London, and domiciled here, who have operated established companies in other parts of the world, the United Kingdom will be the loser.
From all sides the story is the same. Cases have been referred to in the debate, and many of us have received representations from a wide variety of organisations. We have also seen copies of some of the representations made to the Chancellor of the Exchequer.
This set of proposals—this unholy trinity of clauses—may give a few doctrinaire Socialists the moral satisfaction of catching a few United Kingdom citizens who are taking advantage of the rules, but they will do incalculable harm to British business and the British economy and, in turn, to the living standards of the British people.
I ask the Government to lake the advice which my right hon. Friend the Member for Carshalton (Mr. Carr) gave earlier this afternoon and withdraw the whole package—the whole unholy trinity.
The Chief Secretary said that he had to bring in legislation and, indeed, that any Government ought to bring in legislation—I believe that is what he meant—as a result of certain events such as Lonrho. Everyone would agree that in the circumstances some legislation was required, but I believe that the Government have entered into the matter far too hastily and have not con- sidered the effects which the legislation will have on our future economy. These are my main criticisms.
Today, we have been dealing with a series of difficult amendments, and my hon. and learned Friend the Member for Dover and Deal (Mr. Rees), one of the greatest experts on tax, has been arguing with the Chief Secretary. These amendments are extremely complicated and difficult to understand; indeed, as a layman I do not pretend to understand them. Yet one can see from the exchanges today, not only involving our own Front Bench but also amongst the back benchers, whether they be accountants or lawyers, that there is an element of doubt in these measures.
The debate has shown that the Government ought to have taken much longer to consider the matter, and ought to have brought out a Green Paper setting out the situation and sought views upon it.
We are not concerned with just a part of the Bill, but the amendments which we have been discussing are illustrative of the Government's attitude and have shown that the Government have not had a chance—I do not blame them for this —in the three months or the six months that they have been looking at the matter, or possibly longer, covering the period when they were in Opposition, to appreciate the effect which such proposals would have on our future economy, not only upon individuals, but on companies.
I would like the Chief Secretary to admit that the Government have made a mistake. There is no real necessity to introduce this particular attack on foreign earnings upon which this country is at present so dependent. We could easily have waited until the autumn Budget, if we are to have one, and the Government could then have brought forward measures perhaps not entirely acceptable but which, nevertheless, would have been much easier for us to accept and which would have been far less disastrous in their effects on the country at large.
This country has built up over a number of years a centre of invisible earnings and of banking, and if people are to be influenced by this new form of overseas taxation we shall find that there will be one of three prospects materialising—a move out into Europe; a failure to attract new banks and money into this country; or a decision by everybody that it is no longer worth while having centers of business in this country. The last prospect worries me more than anything else.
Our foreign earnings are the heart of our economy. Before we seek to change the taxation system the Government should consider all these matters very carefully. I hope that the Chief Secretary has appreciated the points made to him.
During the Budget debate, many hon. Members congratulated the Chancellor on his stamina. Of course, stamina is a prime quality for any democratic politician, but perception is another necessary quality. This clause and the complex of clauses of which it forms part show a remarkable lack of perception by the Chancellor and his right hon. and hon. Friends.
The Chief Secretary had the temerity to say that they had received no representations, or very few, about the clause. He must live in a very cloistered world. Without any exertion—barely setting foot in the City—I have been overwhelmed by representations by all manner of people, both British people who work abroad and foreigners who have chosen to make their base in this country.
It may be that the existing system is not perfect. Very few taxation systems are perfect. As my hon. Friend the Member for St. Ives (Mr. Nott) perceptively remarked, a high rate tax system breathes through its loopholes. That is what Labour Members must appreciate. One cannot impose a high rate system without having some loopholes—otherwise, the pressures become too great and people will resort not to avoidance but to evasion. The Chief Secretary, as a former practising accountant, will appreciate the distinction.
I hope that the Chief Secretary will correct the widespread misconceptions in his party that, crudely speaking, by paying one's emoluments to the Cayman Islands, Jamaica or Monrovia, one can avoid United Kingdom tax. He knows that that kind of crude payment will not avoid tax. It is not at that kind of evasion that these clauses are aimed. But of course, that kind of evasion will be generated if the clauses are enacted without substantial amendments.
The real question here is not how much tax this country has lost in the past, or how much it may collect in future. I agree with my hon. Friend the Member for Pembroke (Mr. Edwards), that very little tax will be gained. Those who up to now have made the United Kingdom their base of operations will go abroad. Thus, not only shall we lose that taxation, such as it is; we shall also lose those people's rates and everything else that they contribute to this country's welfare. Also, those who have remained here but traveled abroad for some months a year to do business overseas will move their bases. They will cease to be United Kingdom-resident or domiciled and will set themselves up abroad. I forecast with utter confidence that these clauses—in particular, Clauses 14 and 18—if enacted in their present form, will result in a net loss and not a net gain to this country.
But the real question is not a fine calculation of whether there will be more or less tax. The question is, do we want London to remain a great commercial and financial centre? Do we want to maintain, nourish and expand our commercial and financial outposts across the world? Do we want to encourage or discourage the enterprising members of our community who wish to go and do business abroad? Do we want them to go abroad, make their fortunes and come back, or go abroad and stay abroad?
This clause, combined with the other causes that we shall be debating, will have a profoundly damaging effect not only on the City but on the whole fabric of our economic life. It became apparent in our earlier debates that the Chief Secretary had not fully appreciated the finer points of these provisions. Who can blame him? He has been under great pressure since 28th February. I therefore hope that he will forgive me if I now draw attention not only to some of the finer points which have eluded him but to some of the greater ones.
Let us take the Eurodollar market. Its creation—as in the case of any market—depended on a combination of complex factors, but I should like to suggest two which are particularly relevant to our debate. First, there was the interest equalisation tax, introduced in the States. I wonder whether the Chief Secretary has appreciated that President Nixon has just reduced the rate to zero. If he has noticed that fact, has he thought through the implications for the Eurodollar market in London and Europe?
A market like this and, if one likes, the stock market and the capital market depend on a concentration of skilled operators. What will the effect of these measures be on the Eurodollar market or the capital market? These operators, whether British, American, Liberian, Greek or Italian, have international skills that can be practiced and are marketable anywhere. If the burden of personal taxation heaped on them is more than they feel to be just, they will move their centre of operations.
As my hon. Friend the Member for Pembroke, who has such knowledge of these matters, has said, they can easily go, if not to Paris—the Chief Secretary's answer in this respect was highly suspect, because he ignored all sorts of factors which most businessmen would take into account—to Brussels, where the rates are lower, to Zurich or to Geneva. They might even go to Luxembourg. Is that really to the long-term advantage of this country?
I do not want to stray too far from the subject of this debate, but let us combine this measure with the doubling of the rate of stamp duty. This clause cannot be taken in isolation; one must consider the combined impact on people operating in this country. If one is an Arab with money to invest, it does not matter whether one rings up London or Zurich or whether one's stocks and shares are bought here or in Zurich. At least, it has not mattered up to now, but it will matter significantly. I should like the Chief Secretary to inquire from the officials in the Box what the comparable rates of stamp duty are. Let us have an answer on that.
I ask the Chief Secretary to take this argument seriously. If, so far, he has been deaf to the representations which have reached me and my hon. Friends, let him go to the City and have one of those tax account lunches which he and his hon. Friends are so worried about. I am sure that the City would be delighted to entertain him if they could get through to him and his colleagues just what their meas- ures are likely to do to the City as a commercial centre. Let them stand him a good lunch.
I turn to what may appear to be a technical point which the right hon. Gentleman did not appear to have grasped when I put it to him in an earlier debate. Has he realised what is involved if the kind of person who is temporarily resident and doing a job here is to be taxed on the total emoluments paid to him by his firm? I come back to the question of share option and pension schemes, and the like. The right hon. Gentleman attempted to brush this aside, saying, "We shall of course be taxing only emoluments paid for services in this country."
Let him inquire from the Official Box —if he has any doubt—what would happen if the Chase Manhattan Bank—I take the name at random; I have not been in touch with it—wrote to one of its bright employees in New York, "Do your tour of duty in London. We shall pay you a salary and you will still get your entitlement under our pension and share option schemes. Year by year you will be able to buy more under the share option scheme." Under our tax laws those things will be treated as emoluments for services performed in London. Therefore, by the very test that the Chief Secretary applied, they will be taxable here.
First, the calculation will be enormously difficult and, second, it will impose an unwarrantable burden of tax on such a man. It is no consolation to him to be told, "Your United Kingdom counterpart is paying tax over there." His short answer will be, "More fool him. I am going back to New York, where they appreciate my services and I do not have to suffer tax at this kind of rate."
I have one tiny practical question. How, for instance, will the pension schemes of foreign companies employing people here be approved for tax purposes by the Revenue? The Revenue is overloaded as it is. Imagine every company employing people in London submitting its pension schemes for approval by the Revenue. This is a practical administrative point, which the Chief Secretary cannot ignore.
I ask the Committee to consider the realities. Those foreigners who work here and who come from countries which have double taxation conventions with this country will play fair. They will have to, because most double taxation conventions contain provisions for an exchange of information by the revenue authorities of both countries. I take the United States as the most obvious example, but this could apply to any country which has a double taxation convention with the United Kingdom. Such people would have to play fair. Their firms will infallibly make them return the whole of their emoluments, whether paid in London, Cincinnati or Paris.
Let us take the case of an employee who comes from a country which has no double taxation convention with the United Kingdom. When asked by the inspector, "What is your company paying you?" he will return particulars of the emoluments paid to him in London. Does the Committee think that he will make a return of the emoluments paid to him in Monrovia, Beirut or Kuwait? He will not. There will be set up an unfair discrimination between those who have to play fair and those who need not. All the abuses which the Chief Secretary and his hon. and right hon. Friends have pilloried during the past year will be multiplied, and not reduced, by the provisions that he hopes to introduce.
In the time available the Chief Secretary has not thought through the implications of disturbing the existing system. One can only come back to the perceptive suggestions made by my hon. Friend the Member for St. Ives, who has a great deal of practical experience on both sides of the fence—both as a business man and in the Treasury. Why does the Chief Secretary not admit that this may be a slightly ill-thought-out measure? Why does he not withdraw it for further consideration? Let us have a Green Paper. We are to have one dealing with the wealth tax. This is equally important for the welfare of this country.
The matter of expenses cannot be confined to the debate on Schedule 2. Has the Chief Secretary considered how to give relief to a person who holds one directorship in this country and another in Buenos Aires? Will he obtain relief for his air fare, the cost of his hotel, and entertaining his suppliers there? This point cannot be brushed aside by saying that he must be paid such gross emoluments as ensure that, after he has paid tax, he will be left with enough to cover all his expenses. At current rates of tax that is not realistic.
It is apparent that too many things have to be thought out with more care and greater leisure than lie at our disposal during the Committee stage of this Bill if it is to be passed by the middle of July.
It is a badly thought-out Bill. It was conceived in prejudice and produced in haste. If it is enacted in its present form the taxpayers of this country will repent at leisure.
I therefore welcome the robust pledge given by my right hon. Friend the Member for Carshalton (Mr. Carr). I hope that in the meantime, during the moments given to them, the Government Front Bench will do their best by listening to the arguments for the amendments which have been put forward, which are not party political amendments but are genuinely designed to rationalise and to humanise this provision.
I hope they will do their best to introduce at least a measure of sense into what is an extremely damaging complex of provisions.
Sir Oscar—[Laughter.] You will understand my confusion, Mr. Murton, because you have been knighted so many times this afternoon during this Committee that I thought I had mused an important announcement.
I made my speech in the debate on Clause 14 on a very narrow amendment of my hon. Friend the Member for Scarborough (Mr. Shaw). Having now had time to study the amendment, I realise I was out of order. But what I said then holds good, for I was making a "Clause stand part" speech on the remittance basis as it affected residents of the United Kingdom. I do not wish to repeat what I said.
I now wish to have the opportunity in Committee of the whole House to speak about non-residents, because I am not a member of the Committee upstairs, for which many thanks, after seven years
I do not think the 50 per cent. rule for non-residents is particularly obnoxious. I take my hon. Friend's point. But I have not heard a lot of complaint about it. The Government have not, I believe, received a large volume of protest about the 50 per cent. rule.
I have spoken to a number of American institutions, and what worries me more than the 50 per cent. rule is the moment at which the full United Kingdom marginal rates come into force after the 10-year period. I realise, however, that ninety-eight per cent. of the employees of overseas firms never work for as long as 10 years in the United Kingdom. The employees of the banks and the oil companies move around. Therefore, why one may ask, am I worrying about the 10-year rule?
It is because there are in the City of London and in areas where professional advice is very important an army of people who have spent more than 10 years here, non-residents of the United Kingdom, who may be experts in the shipping business or the Eurodollar market, and there are a great number of them who are not domiciled in the United Kingdom. I do not know if I am using the correct technical terms. I think I am making my position clear. The shipping business is to a great extent peopled by members of Greek citizenship, and they have been in London for more than 10 years. We do not want to lose the business of Lloyd's to New York. If one extends the 10 years to 20 years the problem is still there. I prefer the 50 per cent. rule to work its way right through for those people. This may not be inherently very satisfactory but it is practical. If one is going to leave them alone because one believes that, by tackling them, one will severely damage London's business, one then has the problem of what one does with British residents, because it is not fair to say "We are leaving all the non-residents alone or are only tackling them as to 50 per cent.", and then penalise the British person—he may be a British citizen resident in London conducting international business from the United Kingdom—who is competing with the American, the Greek or the Egyptian, who are paying no United Kingdom tax, or tax on only a 50 per cent. basis. It does not seem sensible.
If we heavily discriminate against our own nationals and tax them at the marginal rate of 75 per cent. and say that we are going to have the American, Egyptian or Greek living in London paying no, or little, tax, that will not be fair. We do not want to discriminate against our nationals in that way.
Since I think that the 10-year rule is damaging to the country—I am talking of non-residents—I would not tackle the non-resident problem in this way. I know that it is rather unsatisfactory, but for good and wider reasons I would let them be. In that case, if I wanted to deal with the Lonhro situation, I would not do nothing. But I know that I could not end the remittance basis as proposed because if I ended it I should be heavily discriminating against British nationals. I hope that I am making myself clear.
I come to the view, for this reason, that we must not abolish the remittance basis. The Chief Secretary comes to the opposite view He says "I want to abolish the remittance basis. Therefore, I must be fair and tax non-residents." But I say that we should leave the nonresidents alone, because unless we do we shall be damaging the City, Lloyd's and the shipping business, and keep the remittance basis in a revised form. That s my judgment.
I repeat that if the Government leave non-residents alone they have to devise something else, something that is less severe for residents than what is proposed in the Bill. I have made alternative proposals which the hon. Gentleman has said he will look into. I am delighted with the commitment which the Opposition Front Bench has made. That commitment means everything, because Governments change.
I hope that the hon. Gentleman will look at the question of getting rid of the 10-year provision and keeping the figure at 50 per cent. for non-residents. This will involve thinking up something rather less harsh than what is proposed in Schedule 2 for residents. I suggest something totally different from ending the remittance basis. By all means let us deal with the tax haven problem, but not in the way proposed by the Government.
I apologise for a rather garbled unprepared speech, but I am trying to find ways to meet what is a genuine problem.
Mr. Norman Lament:
I follow one point made by my hon. Friend the Member for St. Ives (Mr. Nott)—the apparent asymmetry between the 50 per cent. deduction for nonresidents and the 10 per cent. deduction for United Kingdom residents in foreign emoluments when these people may be competing directly with each other in the provision of services.
It is perhaps surprising, given the latitude which the Chair has so generously allowed, that we have not concentrated more on the problems that arise in respect of United Kingdom residents, considering that the amendments have covered almost every provision dealing with foreign emoluments. In such circumstances, we might perhaps have expected to deal a little more with the problems of United Kingdom residents.
I agree with what my hon. and learned Friend the Member for Dover and Deal (Mr. Rees) said—that in a country with high marginal rates of taxation the remittance basis in the past has acted as something of a safety valve. Whereas one might have expected the Government to modify the system, they have gone far towards eliminating special treatment altogether. The result is that many hardworking and hard-pressed executives will find themselves caught in the backwash of the Lonhro affair.
There are many activities carried out abroad which will now be much less attractive. For example, there is the case of the consultant engineer going abroad for short periods. I want to focus my remarks on the person who goes abroad for a short period—for less than the 329 days, which is 365 days less 36 days, which is allowed under the Bill.
It is often very difficult to persuade middle management to go abroad. It means that they have to separate from their families for quite a number of occasions in the year. It will be all the more difficult to persuade them to go abroad for over a year so that they will benefit from the provisions of this clause. It means prolonged separation from their families and often going to unglamorous and uncomfortable places, very often on extremely important business.
Another group who will be caught is the academics. The fear has been expressed that someone who has a post abroad specifically for the academic year may be caught severely under these pro- visions because it looks at the moment as though an academic year would not qualify for the 365-day provision. The implication of the Bill at the moment seems to be that the work done abroad should be carried out over the period of 365 days. This matter is causing considerable concern.
While the Government have gaily gone on putting up the tax in this area, there is no indication in the Bill that additional allowance is to be made for the costs of working abroad. For example, the Englishman working in the United States could incur medical expenses which would be deductable for United States taxation but would not be deductible against his assessment in this country. At the same time, he would not get the benefit of the National Health Service. Likewise, an engineer going to a high-cost low-tax country may find himself at a considerable disadvantage in returning hospitality.
If the Government intend to maintain this asymmetry between the 50 per cent. for non-residents and the 10 per cent deduction for United Kingdom residents, I hope that they will look at the question of expenses which are deductible and allowed at the moment. This point has been mentioned by a gentleman who has already featured in this debate—Professor Harry Johnson. He made the point in his letter to the Director of the London School of Economics announcing his resignation. After referring to changes which have been made in the taxation system, he said:
Under the new tax proposals, and with the same main activities, I would still have to pay income taxes to the United States Government; and I would be able to deduct only a fraction of what I would have to pay the United Kingdom Government, both because United Kingdom marginal tax rates are so much higher and because British definitions of legitimate business expenses for academic workers exclude certain kinds of expenses that in the United States and elsewhere are accepted as necessary costs of membership in the academic community.
I think that this whole area of expenses will, in the light of these changes, have to be looked at. I do not think that the Government's way is a good way of trying to meet the point. One of the unfortunate consequences of moving more and more towards high taxation is that expenses that can be deducted and allowable become more and more important.
If it is thought that the remittance basis has been the subject of abuse and that changes are necessary, surely the changes ought to be balanced much more carefully against the costs of providing services abroad.
I do not know whether the Chief Secretary, as a former accountant, still reads Accountancy Age. and whether he saw the article by Professor Prest about the effects of the taxes the hon. Gentleman is introducing. Professor Prest quoted a number of examples, including one of a consultant drawing a fee of £5,000; under the previous arrangements, after various expenses, he had an emolument, after tax, of £1,450; it is calculated that after the changes in this Bill that man will end up making a loss on his operation abroad.
One will have to look again at the whole matter of costs and expenses involved in providing services abroad. The Government seem to think that companies can simply pay executives rather more, but, first, it is very difficult and very expensive for companies to do that, and very difficult, with the high rates of marginal taxation, to do so in a way to make any difference at all. The effect of the 10 per cent. deduction will simply be to prevent movement into the higher income tax bracket, if that at all. So if change is necessary it ought to be balanced much more against both the costs and consequences.
The consequences for the United Kingdom's economy will be these. There will be an effect on outward investment. That may not be a very bad thing. I can understand people perhaps arguing that one wants to restrict outward investment, but this is a very rough and ready and arbitrary way of going about it. These provisions are bound to have an adverse effect on our balance of payments; services depend on costs, and they have to be price competitive, as any other goods have to be that one intends or tries to export. The third consequence is that these provisions in the Bill are likely to have a significant effect on tax morality in this country. We have a very efficient Inland Revenue in this country and the most compliant taxpayers in the world, but I am not sure that that is a situation which will go on for ever after this Bill.
The Chief Secretary has said that the ending of the remittance basis would be regretted only by those directly affected by it. I do not think that everyone will take such a narrow, self-interested view. The ending of the basis in this way will be regretted by anyone who thinks about the consequences, and anybody who wants to avoid this country just retreating into its shell will regret that many commercial developments will pass us by.
I should like to follow, briefly, the remarks by my hon. Friend the Member for Kingston-upon-Thames (Mr. Lamont) and my hon. Friend the Member for St. Ives (Mr. Nott). I think that I had managed to follow the logic of the arguments of my hon. Friend the Member for St. Ives, but it would be possible for many of these points to be considered on later clauses and on Schedule 2. The many amendments which we have proposed would, if accepted, go a long way to achieving what he has in mind irrespective of the arguments for or against the remittance basis.
I must declare that I have a comparatively short acquaintance with the international financial and commercial community. It has greatly aided me in these matters, but I have no axe to grind, and certainly no overseas earnings.
It is quite clear from what has been said that this is not a debate on party lines, because, to put it at its worst, many of the people about whom we are concerned have no votes in this country. What we are concerned about are the unnecessary effects, severe in some areas, on this country's economy.
It has also become clear that we are talking not just about this clause, but about all that is associated with it, because many of the worst effects of the Government's proposals will come from other clauses and the Schedule. However, this clause is the standard bearer of all those clauses, and it is the only one of them which we are considering in Committee of the whole House. In view of the enormous alarm and despondency which this set of clauses has created in many key areas of our financial and commercial life it is right that we should debate this one fully on the Floor of the Chamber.
I want to look at some of the evidence. I shall deal first with the question of foreign domiciles. A great deal has been
said about the effects on Americans. Many of us have received representations —I know the Government have—not only from the American Chamber of Commerce but from individuals. I quote from the "Fortnightly Newsletter for US Citizens Abroad", which said in early May that:
Officials in Belgium … are confident that in the near future—even within six months— swarms of foreigners now resident in England will switch residence to Belgium because of more generous tax incentives Belgium hopes to be able to offer. Some officials express certainty that they can induce more and more foreign corporations to set up headquarters in Belgium as a result of more liberal tax concessions to be offered them.
I do not know whether that is an accurate representation of the attitude being expressed in Brussels. The point is that it is being said—and fairly widely said—among the international community. It is such fears upon which people act. That same magazine conducted a straw poll of 41 per cent. of its readership in this country. It revealed that 69 per cent. were considering leaving as a result of the Finance Bill and 49 per cent. were considering a change of policy in relation to their United Kingdom headquarters.
This is an important feeling, and one of which we must take account. We have heard about the Greek shipping community in the City of London. There is certainly a widespread fear that many of these people will leave and thus put at risk a high degree of marine insurance broking and ship broking business held by Lloyd's and "the Baltic. I have seen evidence from a small number of brokers that at least £3 million of broking income could be at risk as a result of these changes.
We also know that many head-hunters are already busy among key American and European executives in this country, especially in view of the effects of Clause 18. Even journalists who have been here for some time are complaining about the effects of these measures.
It is vital that we realise that these people have a most important part to play. We must take their concern into account. Taxation is the crux. It is because of our high rates of tax that we need a more generous formula to help retain many of these people with foreign domiciles.
I agree that the worst effects will come through Clause 18 rather than this Clause. There are certain matters in Schedule 2, for those who are here for less than nine years, which could give rise to a good deal of concern. We shall have to look at this in Committee.
If we turn to the effects on the European headquarters of many international companies and consultancies we see that unless a more liberal attitude is taken towards them there is a risk of Brussels superseding London as a centre for many international companies. There is also a risk that there will be some decline in the influence of the City as a financial centre. Some management consultancies have written to The Times while others have written privately to the Chancellor, and others, pointing out that they are already giving advice to their clients to the effect that they should think carefully before they establish their European headquarters here or think about moving them.
As these consultancies have pointed out, the decision to locate a major corporate headquarters in London or elsewhere is often marginal. We have some advantages and some disadvantages. Unfavorable tax treatment could easily tip the balance. It is a sensitive area, in which confidence matters greatly. We can see this applying in some cases to American banks which are holding fire on decisions whether to locate their enlarged centers here or on the Continent.
So far we have tended to concentrate on the effect on the City. This subject goes well beyond that. There is the effect which will come about, through the influence of Clause 16, on partnerships trading abroad. When we consider the effect that it will have on individuals we are not just talking about directors or senior industrialists; we are talking about export managers who are away for four or five months a year, getting the export contracts. In their written evidence to many of us, these people, whether constituents or otherwise, have made it clear that they are greatly concerned about the effects of this measure.
I understand that in the past year at least one-third of the earnings of the Management Consultants' Association's members were achieved overseas. Much of those earnings are now at risk. We are talking about professional people— consultants, engineers, accountants, bankers, and even pop stars. The question of the academics has been fully aired. All these people contribute substantially to our export drive and have a substantial beneficial effect on our balance of payments.
We are also talking about able, ambitious, mobile and, on the whole, well-paid people who are working in a market which is highly competitive and who--particularly the younger ones—are prepared to consider remaining permanently abroad. This year it is extremely difficult to recruit British graduates from American business schools because of fears of not only this but other aspects of the Finance Bill. When they are abroad they compete with much better-paid foreigners, in terms of net income. They must be able to keep up their standards and to look the others in the eye.
Here we must consider carefully the question of expenses. When one looks at tax rates one understands why. The Chief Secretary referred to a table which appeared in HANSARD on 12th June relating to foreign domiciles. The effect on British nationals is shown in a table produced by the Treasury on 9th April. Taking the countries with which we are most concerned competitively--Belgium, because of the position of Brussels, France, Germany and the United States —one sees not only that our earned income top rate is well in advance of that of any of the other countries but that the income rate at which it is payable is much lower. The graduated scales follow that pattern through. Often allowances and reliefs in the other countries are much more beneficial than ours.
One sees other weaknesses in this set of clauses in the transitional period. One sees the unfairness to groups of people who have already made their commitments and who suddenly have to face a higher tax bill in a short period. The Chancellor of the Exchequer has introduced the principle of a six-year transitional period for loan interest reliefs, and it would be unreasonable not to have a similar provision here.
Finally, I come to the cost. It is clear from questions that have already been asked and answered in the House that the cost is minimal. On any cost-benefit analysis, especially in relation to foreign domiciles, the balance is likely to come out heavily on the wrong side, because of the loss of able individuals which one foresees, the loss to the balance of payments through headquarters moving elsewhere, the loss to the City of invisible earnings—it is notable that the Committee on Invisible Exports has been forceful in its evidence to the Chancellor on this question—and because there is no real political gain from these measures. We are using a steam-hammer to crack a nut, or to crack a basket of nuts only one of which is rotten. It is right, in this debate on the clause, to give notice that we are greatly concerned about several aspects of this set of measures as dealt with in the later clauses, and that we shall be pressing for changes. I am glad that the Chief Secretary said that he would be prepared to look sympathetically at some of the amendments later, and I hope that he will accept them when they come.
Like my hon. Friends the Members for Kingston-upon-Thames (Mr. Lamont) and Norfolk, South (Mr. MacGregor) I want first briefly to refer to Schedule 2, as it forms part of the unholy alliance of clauses which we have been considering for the past few hours. I declare an interest as a director of a British bank that does the greater part of its business in Australia and New Zealand but, unfortunately, I have no overseas earnings to declare.
When he was justifying the 365-day provision in Schedule 2, the Chief Secretary remarked that people normally go abroad with their wives and families for more than a year, and he therefore thought that the 365-day provision was reasonable. Surely, we are also concerned with people who go abroad to promote British exports and build multi-million-pound process plants, for example, in the chemical engineering industry, for British contractors. Those people go abroad without their wives and families for a period of between three and six months, often experiencing unpleasant climatic conditions in countries such as Saudi Arabia, Libya and part of Latin America. One of the few ways by which they can be persuaded to go is by offering them some financial incentive during the time they are away from their families. This is what happened in the past. Under Schedule 2 it will not happen in future.
I have received a copy of a letter sent to the Chancellor of the Exchequer by the Association of Chemical Engineering Contractors. It points out that about 75 per cent. of its work is overseas, connected with export orders, and that the key construction staff which its firms send to sites overseas are usually abroad for between three and 12 months—rarely for more than a year. To persuade staff to accept these assignments in remote parts of the world, and severe climatic conditions, firms have to offer them financial incentives and home leave every three months. The staff is also required to return to headquarters for consultations. All these factors make the new 36-day limit on time spent in the United Kingdom difficult, and mean that those companies and others will tend to lose design and engineering staff to foreign contractors who offer better tax terms in respect of time spent overseas.
Before the Chief Secretary goes ahead with Schedule 2, I suggest that he should look at the tax benefits given to overseas earnings by countries such as France, Holland and Germany, which are our competitors in exports. He must take care that by hitting these design, supervisory and management staff when they go abroad we do not just make it that much easier for engineering competitors from other industrialised countries to win export orders in the developing countries. I hope that the Chief Secretary will consider this point when the Bill goes upstairs.
I turn to Case II and the revision of Schedule E. This is a matter of considerable interest to me because for many years I worked with a British-based mining company which had a great deal of international business. In that company we made it a matter of policy to bring foreigners to Britain from overseas companies not only so that we could benefit from a study of their Australian accents or the foreign languages which we could learn from them, but also so that they could contribute to the development of policy and management by their different approach to problems. Many British companies benefit from a conscious policy of bringing in foreigners and thus injecting new thought into management and policy-development groups in the United Kingdom.
I should like to deal, under Schedule E, with the question of the overall level of tax on world earnings. I agree with the comments made by my hon. Friend the Member for St. Ives (Mr. Nott). I have no great objection to the 50 per cent. rule, which is not all that invidious, but I believe that it is wrong that it should stop suddenly at the end of 10 years. At the end of 10 years people have been in Britain for a long time, but it is often at that time that they contribute most to the company employing them. It must be wrong to drive them away at that point in time by removing tax benefits which they have enjoyed. I suggest that the Chief Secretary should consider rolling on this 50 per cent. treatment of their world earnings so long as they remain in this country.
Finally, I should like to move on to a point on which we have all been muddled in the last hour or two. This relates to whether foreigners who work for British companies are in future to be treated in the same way, as regards United Kingdom earnings, as are foreigners working for non-resident companies. I understood the Chief Secretary to say earlier, in answer to an intervention of mine, that in future foreigners working for British companies would be treated in exactly the same way, in relation to their United Kingdom earnings, as are foreigners working for non-resident companies. If that is so, I welcome it, because it is right and it has not been the case up to now. It clearly should be the practice, because it is quite wrong that in attracting expert foreigners here for some specific skill or technology they possess British companies should be put at a disadvantage compared to non-resident companies.
North Sea exploration is an example. Most people with North Sea technology are North American. They will have to be recruited to come here, and that recruitment is now going on. Considerable numbers of these people are being taken on to help us develop North Sea oil and gas fields as quickly as possible. We shall need them increasingly over the years ahead. They are drillers—men able to operate drilling rigs—deep-sea divers and wire line experts. It would be a great pity if foreign oil companies operating in the North Sea were able to entice these people to British shores more easily than the British companies simply because they were able to offer them better tax treatment. I hope that the Chief Secretary will confirm that the interpretation he gave earlier is the right one and that in future British companies will not be at this disadvantage.
Many of my hon. Friends have dwelt on the disadvantages to the City of Clause 19, and I shall not proceed further on that subject. I merely remind the Chief Secretary that the Paymaster-General, in an answer to a Question put down by me about the cost to our invisible earnings of his proposals to tax the worldwide earnings of foreigners working in the United Kingdom said:
I recognise the need for careful consideration of the proposals affecting foreigners in Britain and have indicated my intention to judge the issues raised on their individual merits."—[OFFICIAL REPORT 8th May 1974: Vol 873, c. 191.]
I hope that he will show us tonight and later in Standing Committee that these are not just fine words but that the Government will back them up with action.
I apologise for intervening now in the debate without having attended any of the earlier proceedings on the clause. One of the disadvantages of the House of Commons is that so many things are taking place simultaneously, and I am deeply engaged in the Standing Committee on the Trade Union and Labour Relations Bill, which is sitting in the afternoons as well as in the mornings. I had therefore intended that this would be the first Finance Bill since I entered the House in which I would not be intervening or playing a part. I shall delay the Committee only for one moment.
The provision of the clause particularly affect the City of London, which is in my constituency. They also particularly affect the City of Westminster, which is in the other half of the constituency. Since a great many, if not the vast majority, of the largest British and overseas firms with headquarters in this country have them in the city of Westminster if they do not have them in the City of London, I have had some opportunity to study first-hand the concern not only of the financial community but of the industrial community, both British and foreign-owned, in this country. In addition, I have an interest to declare since I am a director of an American-owned oil company, the headquarters of which are, like so many other companies, in my constituency.
In my opinion, the concern that has been voiced by the many companies which have written to me and to some members of the Committee is genuine. There has, of course, been some degree of abuse both by private individuals and by companies. I recognise that some of the abuse has taken place under the auspices of quite distinguished names both of individuals and of companies and that practices have been allowed to flourish which should not have been allowed to continue. I am confident that if the Conservative Party had won the last General Election some action would have been taken to put an end to those abuses.
It is no part of my case to argue that abuses do not exist or that they should not be acted against. However, as my hon. Friend the Member for Norfolk, South (Mr. MacGregor) has said, the Government are taking a sledgehammer to crack a nut. There is a great danger that by over-reacting to some of the problems that have gained publicity and to some that have not serious damage will be done to the whole fabric of the business community in the City of London and at the other end of my constituency, in Westminster. I hope that the Treasury Bench will take it from me, as the hon. Member for the City of London and Westminster, South, that the worries expressed by my hon. Friends are valid and that they should be taken into account.
Something was said a short time ago about the 10-year rule. I saw the Financial Secretary nod when it was said that if someone had been here for 10 years he had been here for a long time. In that sense he was right to nod. I bring out this point because I believe it illustrates the sort of mistake which the Government can make. It is sometimes suggested that someone who has been here for 10 years must be counted as part of the scenery and treated as if he was indigenous and that it cannot be said that it was necessary that he need have been here for so long. It is said that the great companies could produce other people who would be able to do the job just as well. However, it is often the case that a large banking enterprise or an oil company, for example, may have an important link man who may well be here for a long time and in a sense is irreplaceable because he has been here for a long time.
It is practical considerations of that sort, and not some of the more theoretical considerations which I fear may motivate the Treasury Bench that I hope will be taken into account. I must apologise to the Committee for intervening at this stage, not having taken part in the earlier debate. I know how irritating such interventions are to hon. Members. However, this is a matter of enormous concern to my constituency and, through my constituency, of enormous concern to the country. I could not allow the debate to pass without impressing upon the Treasury that I believe from my vantage point that the concern expressed by my right hon. and hon. Friends is genuine and that it should be taken into account.
Mr. J. Bruee-Gardyne:
Like my hon. Friend the Member for the City of London and Westminster, South (Mr. Tugendhat), I must apologise to the Committee for intervening at this late stage in the debate. I shall be very brief.
I have mixed feelings about the clause. It has never seemed entirely logical that a foreigner who has been resident in this country for many years and is using this country's facilities and services should benefit from a different tax regime or that he should be obliged to pay tax to a country in which he has not lived for many years and whose services he does not use. The other side of the argument is that without any doubt, as my right hon. and hon. Friends have pointed out time and time again, the enactment of this clause will do a great deal of harm to our invisible earnings and, therefore, to our balance of payments. If that is the sort of thing that the Treasury Ministers want to do against the background of our present trade returns, they need their heads examined.
The conclusion I draw is that this is the inevitable consequence of our having a fiscal system that is uniquely vicious against those with higher incomes. The answer to the problem is to bring this country more nearly into line with the tax regimes prevailing in other countries which do not suffer from the jaundiced, green-eyed attitude to fiscal policy in the Labour Party. So long as we have these distinctions, the dilemma presented by the clause will face us.
This has been an interesting debate. I am obliged to the hon. Members who have invited me to lunch in the City to learn what the City is saying about the matters we are considering. I have already listened to the City, and I have an idea what it is saying.
I hope, Mr. Gurden that you will not mind if I stick to the clause. Many hon. Members have acknowledged that their main fears stem not from the clause but to some extent from Schedule 2 and to a greater extent from Clause 18. Indeed, the hon. Member for St. Ives (Mr. Nott) said that in his view a 50 per cent. tax in the circumstances of the clause was not obnoxious, and the hon. Member for Mid-Sussex (Mr. Renton) agreed with him. That is the point that we are debating.
The hon. Member for Norfolk, South (Mr. MacGregor) talked about a straw poll, saying that a large percentage of Americans indicated in the US Newsletter that they were thinking of leaving. But it cannot be because of the clause. There is a considerable misunderstanding amongst Americans and many other foreigners about its effect.
I shall be happy to do so, but we are now debating Clause 14. The fears are based on a misunderstanding. Those concerned have little reason for those fears.
When we were debating the amendments I referred to the prospects for foreigners who decided that they would rather work abroad for a period of less than 9 or 10 years than work here. I recalled that in an answer to a Written Question I had indicated on 12th June, in c. 562 of HANSARD, that, with a 50 per cent. tax level here, the net-of-tax return is still better here than in all other countries. One hon. Gentleman said that it was likely to be better in Belgium, because the Belgians are thinking of changing their tax laws. But I am advised that under the present Belgian law it is better from a lax point of view—and, if I may say so, from many other points of view—to be in London instead of Brussels.
It was said in our earlier debates that it is easier to avoid the tax in France. I replied that it is possible to avoid taxes in any country. I do not believe that we should be considering the matter from that point of view. We must look at the tax systems as they exist, and on the 50 per cent. basis that we propose people would be better off here net of tax than in those other countries. That, therefore, is the main burden of the argument.
I appreciate the problem that it is difficult to look at this matter in isolation. That is true. It is difficult to look at the clause in isolation, but it is equally difficult, with our rules of order, to talk about every other clause in the Bill or even four or five of them. On the other hand, although it is difficult, it is fair to say—indeed, the hon. Member for St. Ives and the hon. Member for Mid-Sussex said so—that the 50 per cent. basis can be taken on its own, separate from what we are proposing under Clause 18. It is possible to look at the way that we are proposing, under Clause 14, to tax those non-United Kingdom citizens who work here, when they work here for less than 9 or 10 years, on 50 per cent. of their earnings here. That is not really an obnoxious point of view.
On the other points that have been made about Clause 18 and Schedule 2, as I said earlier I recognise and am well aware of many of the problems that have been raised by hon. Members. I indicated previously that I was more than willing to look at Clause 18 and Schedule 2 when we reached them, but I find it hard to deal with them in detail as at this moment.
Reverting to Clause 14, concerning the British resident who works abroad for less than 12 months—it will be appreciated that if he works abroad for more than 12 months, he will, as before, not be paying United Kingdom tax—as it stands under Schedule 2 90 per cent. of his earnings would be taxed. I am prepared to look at that schedule when we reach it in Standing Committee. But the reason for this must be understood. One hon. Member said that this section was conceived in spite. That is not really true —or, if it is true, it was conceived by the previous Government. In this instance, I suggest that that was the reason that they set out on this path. They did so for the very good reason, after the Lonrho affair, that they recognised, as the Treasury did before, I am sure—as the hon. Member for Worthing (Mr. Higgins) has admitted—that the remittance basis of tax had been enormously abused and it was possible perfectly legally to use that remittance basis to pay very little tax here.
One hon. Member said that we might, for example, have a situation in which we should find an exodus of pop stars. The only reason why that would happen would be that they had not been paying tax here and did not like the idea of paying tax under the clause. I do not know whether we should prepare our legislation on that basis, but I do not think so. That is why I cannot agree with many of the hon. Members who have spoken in the debate.
At this point, however, I should like to deal with some of the rather more technical points that have been raised. I come first to the question of share options. On the questions of "domicile", "resident", "ordinarily resident" and so on, as the hon. and learned Member for Dover and Deal (Mr. Rees) will realise, this is a very complex area. I hope that the hon. and learned Member will forgive me if I give him the facts as they have been given to me. I shall read them.
The position about stock options and foreign emoluments is as follows. If, for example, an American who comes here to work for the United Kingdom branch of an American corporation were granted a stock option before he took up duty in the United Kingdom, there would be no United Kingdom tax liability on any gain from his exercise of the option. If the option is granted while he is resident and ordinarily resident and working here— that is, he is within Case I of Schedule E —he will be taxable on one-half of the gain from this exercise if exercised while he is still resident here. If exercised after he has ceased to be resident here, the gain would not be taxable. Thus, generally speaking, gains from the exercise of options will be taxable here only where the option was both granted and exercised here. This is surely fair, given that stock options are a form of remuneration.
I hope that that explanation indicates some of the complexities of the tax both as it has been and as it will be.
I ask a question which I know the Chief Secretary will not be able to answer. We do not want to place the person who happens to be an American citizen in a worse position than the British person working for an American corporation. As I understand it, if he was a British resident working for an American oil company and he was to receive an option on Standard Oil of New Jersey, if it still exists, and then was to go abroad and was to exercise it while working abroad for Standard Oil of New Jersey, he would be taxable when he exercised it as if it was income. But it may be that I have it wrong. In any event I do not expect an answer now.
I think that the hon. Gentleman has got it wrong. I will drop him a note about it.
I turn to another matter raised by the hon. Member for Mid-Sussex. A foreigner coming here to work for a United Kingdom company is liable to United Kingdom tax on the whole of his United Kingdom earnings under Case II. The position is exactly the same as it was. Clause 14 does not affect it.
I think I am right in saying that we shall be coming to pension schemes on Schedule 2—but I do not hold fast to that, either. I will look into it.
I hope that I have dealt adequately with Clause 14. I am sorry if I have not dealt with Clause 18 and with Schedule 2, and I hope that I shall be forgiven if I do not deal with the Eurodollar market and the interest equalisation tax in the United States. Both matters may be in order, but they seem to be a little outside Clause 14, and we can deal with them later. At the moment, there are other matters to discuss.
Several hon. Members have referred to the need for a Green Paper. That need could only be said to apply to other clauses. Certainly it could not apply to Clause 14. For reasons which I tried to give in earlier debates on amendments, I suggest that if we had a Green Paper on an area as complex as this, all that would happen is that when we came to the Bill itself we should be little better of.
The hon. Member for St. Ives conceded fairly that the 50 per cent. basis in Clause 14 was reasonable. He could not see that it was obnoxious, anyway. Like other hon. Members, he was not happy about the abolition of the remittance basis. But hon. Members will recognise at the same time that there was a serious avoidance problem—indeed, an abuse— whereby British taxpayers were avoiding tax on a grand scale. They recognise that.
The hon. Member for St. Ives put a number of propositions, all of which were very complicated, about how one might perhaps deal with the matter other than through the abolition of the remittance basis, and I promised to look at them. But all I can say now that is that if we want to stop the major abuses, which have been recognised by both sides of the Committee, the only practical way to do this in such a complex area is to abolish the remittance basis, and thus we have decided to go ahead with that proposal. But Clause 14 is a separate matter and relates to a much narrower point which I hope will now be acceptable to the Committee.
As has been made clear by my hon. Friends who have taken part in the debate, a number of representations have been received by hon. Members and, indeed, probably by the Government, from many people in industry, in the City, and in the teaching and acting professions, and from journalists. They have all been concerned not so much that their interests are damaged by this legislation, by Clause 14, but that in order for their interests not to be damaged beyond endurance they may have to take steps to arrange their lives differently, in a way which will damage this country and our economic position and perhaps, in particular, our overseas and invisible earnings, as well as our standing as a financial centre and market. In the past other financial centers have to their disadvantage lost their standing partly through tax legislation and fiscal systems which have discouraged people from remaining in those centers and have encouraged them to come here.
In reading a large number of letters from various people I was struck at the high proportion who were concerned not about themselves but about the country. A large proportion of letters came from, or were about, people who could avoid these proposals quite simply, without any breach of the law or the need to engage expert accountants, simply by going away.
My hon. Friend the Member for Pembroke (Mr. Edwards) referred to the Euthanasia Creed, in a somewhat theological line. I rather hoped that the Chief Secretary was going to quote Browning at him and use that great phrase:
I the Trinity illustrate,
Drinking watered orange-pulp—
In three sips the Arian frustrate;
While he drains his at one gulp.
The complaint from this side of the Committee is that the Chief Secretary and the Government have insisted on taking this matter at one gulp and have tried to justify it partly by the charm and humour with which the Chief Secretary has replied. But he must not be allowed to get away with phoney arguments simply because he is nice to the Committee. That attitude does not justify his argument.
It has been claimed that it would be too complicated to have a Green Paper on the matter. My hon. Friend the Member for St. Ives (Mr. Nott) said that he was not worried about the 50 per cent., but he was concerned that this was a case of seeing a fly on a marble table and that the Chief Secretary had decided to kill the fly, regardless of the effect that his action would have to destroy the table. My hon. Friend suggested that there were perhaps other ways of tackling the matter and that it would not be necessary to go as far as abolishing the remittance basis altogether.
The Chief Secretary's reply was that he did not think so, that it was too complicated to go into here and that a Green Paper would be so complicated no one could understand it. It is a thin argument that one cannot explain something because it is too complicated. As my hon. Friends have said, if it is as complicated as that, it will be impracticable to work and will put an intolerable strain on the Inland Revenue.
Of course it is necessary to prevent abuses. Many years ago I pointed out in a debate on anti-avoidance legislation that the net spread by the Inland Revenue invariably caught the sprats while the sharks broke through. My hon. Friends have shown that many innocent sprats will be damaged by these provisions. There have been references to the fiscal effect and to what one might call "tax morality". Much of the problem comes from high tax rates and the fact that a system virtually without loopholes is likely to lead not to less but to more avoidance and to evasion.
But we are complaining about something more. It has been said that the Chief Secretary made no attempt to quantify the effect of these clauses on the economy. We are seeing here the not unusual spectacle—this is not a party point—of fiscal purity as set out by the Inland Revenue overcoming common sense and economic good sense. Many things should be done if one stuck strictly to the rule book but they would tend to have an adverse economic effect.
The fact that my hon. Friend the Member for the City of London and Westminster, South (Mr. Tugendhat) felt moved to put his views with studied moderation, outlining the seriousness with which his constituents, who are largely those whose employees and organisations will be affected, regard the issue, should be taken seriously. My hon. Friend was worried about the 10-year period and the practical considerations. Many people are resident in more than one place over the whole of their working lives; this is particularly true of the shipping industry. I know more than one person who is what one might call Anglo-Greek and spends six months in one country and six months in another. Now they will not, nor will their businesses. That seems a severe loss to our invisible exports.
The Chief Secretary said that it is not really Clause 14 that is causing the trouble. I agree that that is not the main fear, but it is a part of it. I cannot let him get away with the argument as each part of the Bill is discussed that it is tolerable by itself. We know that they are all part of a whole which is totally insupportable. It is dangerous to accept this 50 per cent. rate for foreigners without argument or protest. It is part of a wider complex of measures which themselves may be no more damaging than Clause 14 but are nevertheless all part of one whole.
As regards United Kingdom residents, the Chief Secretary said that the major abuse of the remittance basis could not be allowed to continue. I agree. He implied that any major abuse depends on the existence of tax havens. I am more concerned about those who now go overseas—not necessarily for long periods but for short irregular periods—doing difficult sales jobs, frequently in unpleasant parts of the world, who are separated from their families and have had up to now some form of minor compensation provision in their tax agreement. That is not a serious tax avoidance but forms part of the incentive which we are now losing. That is what I meant by referring to the dangers of posing too purist an argument from the point of view of the integrity of the tax. We are damaging those we need to encourage and those who it is difficult enough already to get to do what is frequently an awkward job personally and one which sometimes is physically unpleasant. That is why we are having this debate.
My hon. Friend the Member for Pembroke made it clear that Clauses 14, 16 and 18 hang together. My right hon. Friend the Member for Carshalton (Mr. Carr) indicated that we would do everything possible in the course of the Committee and Report stages of this Bill to improve these clauses, and the schedules that go with them, as we see they should be improved. He made it clear that that did not imply that we accepted that this method was the right way of dealing with any abuse of the remittance basis as it now is. He gave a firm undertaking that in due course he would consider this afresh, without prejudice, from the arguments we have put forward in detail during the passage of this Bill. I gladly repeat that undertaking.
In the light of this, and the possibilities of amending Clause 14 and Schedule 2, I would not advise my hon. Friends to divide the Committee on this clause but end by expressing our dissatisfaction with the complexity of clauses dealing with this intricate matter and the use the Chief Secretary has made of this complexity to charm the Committee with his expertise rather than answer the points put to him.