Authorised unit trusts: payment by trustees

New Clause 16 – in the House of Commons at 9:45 pm on 15th July 1991.

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468H—(1) The trustees of an authorised unit trust may enter into arrangements with the Board in respect of unit holders who would, if such arrangements were in force, be entitled to payment of the associated tax credit under section

468G.

(2) Under such arrangements where a dividend falling within section 468G is treated by virtue of section 468(2) as paid to unit holders in respect of whom the arrangements have been made—

  1. (a) the trustees may pay to such unit holders the amount of the associated tax credit in respect of the appropriate portion of the dividend (the "additional amount"); and
  2. (b) all additional amounts so paid shall be set against advance corporation tax which the trustees are liable to pay for the return period in which the dividend was paid and shall discharge a corresponding amount of

that liability.

(3) The Board shall not make arrangements under this section unless they are satisfied that the payment of the additional amounts shall not enure to the benefit of persons other than those entitled thereto.

(4) The effective period of such arrangements shall begin with the date on which the arrangements are made, or such later or earlier date as may be specified in the arrangements, and shall end with the date on which either party receives notice in writing from the other terminating the arrangements, or such later date as may be specified in the notice.

(5) The trustees shall render the Board an account at such time, and containing such particulars relating to the dividend as the Board may require.'.—[Mr. Watts.]

Photo of Mr John Watts Mr John Watts , Slough

I beg to move, That the clause be read a Second time.

New clause 16 would introduce two new sections into the Income and Corporation Taxes Act 1988–468G and 468H. I am moving the clause on behalf of the Unit Trusts Association, although I have no financial interest in that association.

My hon. Friend the Financial Secretary to the Treasury will have seen the same new clause in the Committee of last year's Finance Bill. I will therefore be brief in rehearsing the arguments because they are well known to him. I am moving the new clause again tonight to elicit what progress has been made in the discussions between my hon. Friend the Financial Secretary and the unit trust industry about changes in the tax regime to improve the competitive position of the British unit trust industry in the export market, particularly in the European Community. I know that my hon. Friend has an aversion to the phrase "level playing field", so I will avoid using it. The whole underlying purpose of the new clause is to provide a better basis on which the United Kingdom industry can compete and sell into what is an important investment market.

Without going into the detail of the drafting, which is unnecessary, the new clause would allow a foreign investor in a United Kingdom unit trust to receive dividends gross without deduction of tax. Such investors, perhaps in France or in Germany, would already be entitled to a tax credit and would be able to recover at a subsequent date tax deducted at source. If they invested in a domestic vehicle—in a French or German fund—they would not suffer that initial deduction. From the point of view of cash flow, the investor is better placed if a United Kingdom fund is able to pay dividends gross than he is under the present taxation arrangements. I know that in the past the Treasury has argued that that is a small part of the United Kingdom unit trust industry's business and that there is insufficient justification for changing the law to provide a better tax regime.

The industry, of course, argues that one of the reasons why it is currently a small area of business is that the existing tax regime is unfavourable to the development of the business and that if the changes that I propose were made it would be far easier for it to sell its products into the European market and to add to our invisible export earnings. The industry argues that it would generate additional revenue for the Treasury because, although the investment vehicle itself would not generate tax income for the Treasury, the management activities of the unit trust managers would be more profitable and, therefore, they would pay more tax.

I have described the argument in essence. At present, the industry cannot compete in international income funds on the same terms as some of its European competitors. That sector of funds is critical to United Kingdom fund managers' export success because it combines the strengths of London as an international fund management centre with the increasing demand in Europe from the aging population for such investment vehicles which means that there is a large and growing market. I hope that my hon. Friend can give some encouraging reply to the debate today.

Photo of Francis Maude Francis Maude The Financial Secretary to the Treasury

I am grateful to my hon. Friend the Member for Slough (Mr. Watts) for raising the matter in the way that he has. I know that he has had a long-term interest in the matter and has, with my hon. Friend the Member for Beaconsfield (Mr. Smith), pursued it consistently and effectively. All hon. Members share my hon. Friends' concern that United Kingdom unit trusts should be able to compete effectively with their continental counterparts.

The special lower rate of corporation tax which we introduced for unit trusts in 1989 removed a serious disadvantage faced by unit trusts. The main beneficiaries were bond funds and it is encouraging to see recent advertisements for newly set up unit trusts investing in bonds. Moreover, an individual in this country who wants to invest in a collective investment fund cannot generally do better than to invest in a unit trust.

In the rest of the European Community, unit trusts investing in United Kingdom equities and in international equities growth are in a good position to compete with their continental counterparts. That is important given that those unit trusts account for the bulk of existing funds under management. The United Kingdom industry has most experience of running equities funds.

I recognise that the Unit Trust Association is concerned about the competitive position of unit trusts invested in bonds, and those that are invested in international equities for income. As I understand it, the new clause is aimed at improving the competitive position of these funds by allowing them to pay income to continental investors free of United Kingdom tax.

10.45 pm

The benefits, however, would not be as great as has been suggested. First, Britain is already a better place to set up income funds in international equities than Luxembourg, which is often seen as London's main competitor. However, in some cases a home country fund of this sort, for example, a French fund for a French investor, can produce a better return for investors. That would remain the case even if the new clause were adopted.

Second, taxpaying investors in other European Community countries, such as France, which give full credit for British tax would not end up with any more income from unit trusts after tax. They would simply end up paying extra home country tax that would cancel out the British tax that was saved.

Third, it is far from clear that tax is the main constraint on more sales by unit trusts on the continent. There are also the problems of the unfamiliarity of the trust vehicle in many Community countries and the difference in pricing methods. The Department of Trade and Industry is considering the case for company law changes to permit open-ended investment companies which might be more familiar to continental investors. But, as my hon. Friends accept, that is a complex exercise which will inevitably take some time.

The new clause is lengthy, and I fear it would be lengthier still once some extra parts had been added to make it workable. The end result would inevitably be a more complicated tax regime for unit trusts. It would mean a greater administrative burden for unit trust managers.

Overall, therefore, the new clause's disadvantages outweigh any benefits that it might bring, which might be more limited than has been suggested.

One of the disadvantages would be that there could be problems over foreign tax for equities funds on income from abroad which, in an extreme case, could mean that United Kingdom investors were worse off.

I know that the UTA is shortly to respond to an invitation from the DTI to put forward suggestions as to the form open-ended investment companies might take. It seems to me that the best way forward would be to see whether my right hon. Friend the Secretary of State for Trade and Industry decides companies of this sort should be allowed. If so, we can then move on to look at how open-ended investment companies should be taxed, once we know what they look like. At that stage, we would of course be glad to have the industry's views on their tax treatment, including any comments on how continental investors should be dealt with.

I assure my hon. Friends that this is something that we take seriously. I have discussed this matter personally with the UTA on at least one occasion, if not several. It is certainly not something that we are allowing to go by default. We are concerned that British fund management, which is, after all, a great British success story, should not suffer competitive disadvantages by comparison with competition elsewhere in the European Community.

Photo of Mr John Watts Mr John Watts , Slough

I am grateful to my hon. Friend for his acknowledgement of the importance of the role of the unit trust movement and his clear willingness to continue to examine with it the ways in which its competitive position might be improved.

On that basis, I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.