Orders of the Day — Finance Bill

Part of the debate – in the House of Commons at 6:37 pm on 29 April 1986.

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Photo of Mr Michael Grylls Mr Michael Grylls , Surrey North West 6:37, 29 April 1986

The right hon. Member for Ashton-under-Lyne (Mr. Sheldon) is a much respected Member of Parliament. Although I might have been tempted to agree with some of his comments on competition policy, I was rather less tempted to agree with his remarks on capital transfer tax. Nearly 2 million people run their own independent small businesses, and they may react adversely to his sideswipe at people's idle heirs and at his comment that they were a good reason for having an effective and tough capital transfer tax.

I believe that the change made represents a central and long-term part of the Budget, which will encourage independent businesses. If it is impossible to pass on a business intact to the next generation of owners or managers, that unit of competition will go. Moreover, why should we encourage people to start firms if they must be sold on their death or retirement? I warmly congratulate the Government on abolishing capital transfer tax, to all intents and purposes, on lifetime gifts.

I listened to the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) and found it sad that he seemed to have learnt or understood nothing about independent businesses. Most, if not all, do not reach their optimum size in one generation. They need to be passed from one generation to another, and to grow at every stage. Thus it is vital that our tax policy should facilitate that.

The passing on of productive assets from one generation to the next is crucial if a free enterprise system is to work effectively, and it is in this area that two thirds of new jobs are currently being produced. I hope that in a purely party political sense people in independent businesses will pay careful attention to what the Opposition have said about their determination, if they are ever entrusted with power again, to reintroduce a swingeing capital transfer tax. I hope that will be noted by everyone.

I want to move away from that subject and speak about a matter that was debated nearly a year ago, that of unitary tax. The House will remember that we had a major debate on that last year. The issue is of great importance not only to the United Kingdom but to the United States and to our main trading partners. The House will remember the debate on Report stage of last year's Finance Bill. It is important that as we debate this year's Finance Bill we should recall that debate. Perhaps during the summer the House will want to encourage the Government to take further retaliatory action to keep up the pressure on the United States Administration.

Last year the House unanimously passed a new clause which is now section 54 of the Finance Act 1985. That gives the Government power by order to withdraw payments of tax credits attached to certain dividends received by companies with a presence in a unitary tax state such as California. I know that many of my hon. Friends carefully follow this issue in the United States and there is no doubt that the passing last year of the retaliatory provision was a milestone that has inspired action in Washington.

On 8 November 1985 President Reagan issued a presidential statement in which he said that his Administration would introduce legislation to abolish unitary tax on a worldwide reporting basis. Secondly, he said that he would enter into negotiations with the United Kingdom to try to amend the United Kingdom-United States tax treaty and try to ensure that when court cases occurred in the United States US interests were represented. In response to the American Administration's initiative our Government also issued a statement. They welcomed the Administration's proposed action and announced that the Government intended to enter into negotiations also to amend the United Kingdom-United States tax convention.

In recognition of the statement issued by President Reagan, our Government announced that they would forbear from initiating retaliatory action under section 54 of the Finance Act 1985 on the strict understanding that the United States legislation—this is an important point for the House to recall—will be passed into law and will take effect by 31 December 1986.

The United States Administration introduced their legislation into Congress last December but, alas, I have to say that it received what at best can only be described as lukewarm Congressional support. Indeed, the legislation did not have as many sponsors as many of us hoped it would have. I understand there was to be a subcommittee hearing in the Senate on 16 May but that intiitial hearing has been cancelled. We are now at the end of April and no further action has been taken in terms of a Bill being heard by the two key Congressional Committees, the Finance Committee in the Senate and the Ways and Means Committee in the House of Representatives. Little progress seems to have been made on the treaty route. The House may want to press the US Administration today and on every other occasion we can to give much more vigorous support to legislation in Congress than they have to date. I hope the Government will pay attention to that comment.