Schedule 16

Orders of the Day — Finance Bill – in the House of Commons at 4:06 pm on 8th May 1985.

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INDEXATION

Question proposed, That this schedule be the Sixteenth schedule to the Bill.

Photo of Mr Archy Kirkwood Mr Archy Kirkwood , Roxburgh and Berwickshire

I do not wish to detain the Committee, and will speak briefly about paragraph 19, My hon. Friend the Member for Colne Valley (Mr. Wainwright) and I tabled two amendments only yesterday which, understandably, were not selected. I wish to seek advice from Treasury Ministers on the contents of paragraph 19, and do not argue a particular point.

There is an element of confusion among substantial financial institutions, such as the pension funds, about the meaning of paragraph 19 and it would be helpful to clarify the position. The Inland Revenue press circular said that in relation to holdings paragraph 19 provides the general ordering rule that securities shall be identified with those acquired earlier rather than later. It than has in brackets the initials FIFO, which I assume mean first in, first out.

If I understand the paragraph, it sets out for the purposes of capital gains tax the order of identification of assets disposed of. Paragraph 19(2) changes the rules that have applied since 1 April 1982. No doubt the Chief Secretary will confirm my understanding of that.

Under the 1982 legislation, assets were identified on a last in, first out basis, which ensured that indexation relief was kept to a minimum. The Budget statement provided that indexation relief should be extended, but the Finance Bill goes beyond anything mentioned in the statement—it provides for the introduction of a first in, first out basis of identification.

Financial institutions have built up their holdings over many years. The new rules entail identification of disposals with the earliest acquisition, so that disposal of part of the holding will give rise to a significantly higher gain than would have obtained under existing legislation. In large part that gain will reflect inflation before the introduction of indexation. The practical consequence will be that the institutions will not sell any holdings that have been held for many years simply to avoid the penal taxation that might apply if my understanding of the schedule is correct.

That would be undesirable. It would inhibit the institutions' freedom to manage their portfolios efficiently. More importantly, it would reduce the tax take to nil. Portfolio managers are not daft and they will freeze their holdings. The intention of the Budget statement was to relieve inflationary gains rather than increase the yield of capital gains tax.

The amendment that we tabled yesterday sought to establish whether we understood the position correctly. Treasury Ministers should make the position clear so that appropriate adjustments can be made and steps taken by portfolio managers to resolve these questions.

Photo of Mr Terry Davis Mr Terry Davis , Birmingham, Hodge Hill

Is the hon. Gentleman trying to reduce the capital gain and therefore reduce the tax, or is he trying to increase the capital gain and therefore increase the tax?

Photo of Mr Archy Kirkwood Mr Archy Kirkwood , Roxburgh and Berwickshire

That is a fair question. I am not arguing a case. I followed the debate yesterday——

Photo of Mr John Maxton Mr John Maxton , Glasgow Cathcart

You are sitting on the fence.

Photo of Mr Archy Kirkwood Mr Archy Kirkwood , Roxburgh and Berwickshire

No, I am not sitting on the fence. If I am given the opportunity, I want to say that I freely supported the attitude taken by the hon. Member for Thurrock (Dr. McDonald) and the Labour party in our previous debate. I agree that we should seek to maximise the amount of money from capital gains tax. I am worried about the position where the changes by default would end up with the tax take being reduced. Portfolio managers will freeze their holdings if the first in, first out principle applies. I hope that I have answered the question as clearly as possible.

There is confusion about the interpretation of paragraph 19. I am not trying to be clever—mine is a probing speech. Senior portfolio managers, who know far more than I about these provisions, are confused. It would be useful if the Chief Secretary could clarify the position.

Photo of Mr Peter Rees Mr Peter Rees , Dover 6:30 pm, 8th May 1985

I had noticed the amendments that the hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood) had tabled. I appreciate his concern and I shall respond to his remarks as lucidly as I can.

The hon. Gentleman will recall that between 1965 and 1982 the FIFO rule—first in, first out—applied. After a measure of indexation was introduced in 1982, both the FIFO and LIFO—last in, first out—rules applied. Now we are reverting to the original intention of the legislation, to FIFO, and I shall list the advantages that we see in returning to that.

We hope that it will leave taxpayers at the earliest opportunity—of course, it is within their control whether it will be so—with one holding of shares and one pool of expenditure. It will therefore be a considerable simplification, and simplification is sought by hon. Members in all parts of the Committee.

It will no longer be necessary to keep details of shares acquired more than 20 years ago. That should be particularly helpful for those with computer programmes. The effect of the rule on individual taxpayers—I appreciate that the hon. Member for Roxburgh and Berwickshire was concerned more with institutions—will depend on the price and acquisition date of their holdings. They will have to check on their position in that respect.

The hon. Gentleman pointed out that people with big, pre-1982, gains might be frozen, as it were, into a particular position. I regret that, but it must be for them to judge. I explained clearly in answer to the first set of amendments to clause 54 moved by my hon. Friend the Member for Tatton (Mr. Hamilton) and when replying to the debate on the last series of amendments that, in our view, the tax is now in a sustainable and acceptable form. That does not, however, rule out minor amendments. It is for people to draw their own conclusions on that.

I do not believe that the provision will necessarily have the consequences that the hon. Gentleman forecast, but he is right to say that the position should be made absolutely clear. While the language may seem somewhat convoluted—it is a complex subject—I hope that I have explained what the provisions convey. We shall look again at the wording. In the meantime, I hope that I have conveyed the intention of the Government.

Photo of Mr Dale Campbell-Savours Mr Dale Campbell-Savours , Workington

It would not be in order for me to ask questions about amendments that have not been selected. However, if the wording of those amendments were set out in a document other than the Order Paper and were submitted to the Chief Secretary, would the right hon. and learned Gentleman reply that what was proposed would cost or save the Exchequer money?

Photo of Mr Peter Rees Mr Peter Rees , Dover

It is difficult to forecast. It would depend on the judgment of the managers of individual portfolios. It would vary according to the composition of the portfolio, how much of it was pre-1982 and post-1982, what the shares were and whether the managers took the view that eventually something more dramatic might happen to the tax in question.

I hope that I have conveyed the Government's intention. I hope, too, that the schedule conveys our intention. I promise the Committee to look again at the words of the provision to see whether there is any possible ambiguity. If there is, we shall return with a suitable amendment.

Question put and agreed to.

Schedule 16 agreed to.