51A.—(1) Subject to the provisions of any regulations under section 51B, where gilt-edged securities of an eligible person are for the time being held under arrangements that satisfy the applicable requirements—
(2) For the purposes of this section gilt-edged securities are securities of an eligible person so long as—
(3) For the purposes of this section the arrangements under which any gilt-edged securities are held shall be taken to satisfy the applicable requirements if—
(4) The conditions that may, for the purposes of subsection (3)(a) above, be imposed by regulations under this section in relation to arrangements for the holding of any gilt-edged securities shall include—
(5) Regulations made by the Treasury for the purposes of this section may—
(6) Any person who—
(7) In this section 'gilt-edged securities' means any securities which—
(8) In this section 'international organisation' means an organisation of which two or more sovereign powers, or the governments of two or more sovereign powers, are members; and if, in any proceedings, any question arises whether a person is an international organisation for the purposes of this section a certificate issued by or under the authority of the Secretary of State stating any fact relevant to that question shall be conclusive evidence of that fact.
With this, it will be convenient to discuss also the following: Government new clause 11—Periodic accounting for tax on interest on gilt-edged securities.
Government new clause 10—Treatment of price differential on sale and repurchase of securities.
Government new clause 9—Manufactured interest on gilt-edged securities.
Government new clause 7—Power to make special provision for special cases.
Government new clause 8—Stock lending: power to modify rules.
Government amendment No. 15.
The introduction of these new clauses comes after an informed and thorough debate in Committee on the issue of the gilt repo market. The six new clauses make the tax changes necessary to facilitate the introduction of an open market in the sale and repurchase of Government securities. It may be helpful to the House if I refer briefly to each of the new clauses and say a few words about their intent.
New clause 12 enables interest on gilt-edged securities, which at present is normally paid after deduction of tax, to be paid gross under arrangements to be set out in Treasury regulations and brought into effect on an appointed day, which is expected to be at the beginning of 1996.
New clause 11 enables regulations to be made to introduce a system of quarterly accounting for tax on gilt interest received gross. It is to be brought into effect on an appointed day, reflecting the date on which gilt interest first becomes payable gross under the arrangements provided for by new clause 12. This quarterly accounting system is necessary to contain the effect that paying gilt interest gross would otherwise have on the public sector borrowing requirement. The arrangements will reduce the cost from about £1.2 billion over two years to about £100 million in total.
New clause 10 ensures that the tax rules for the treatment of repos reflect the underlying economic reality of the transaction. It also prevents the risk of tax being lost by repos being used to turn income into capital. Because of the risk of loss of tax, the provisions will come into effect from Royal Assent.
New clause 9 makes the necessary amendments to existing legislation to enable manufactured payments of gilt interest to be paid gross in all circumstances, which will simplify the position considerably. It should in particular assist the operation of the gilt repo market as participants will be able to make manufactured payments of gilt interest gross, regardless of the circumstances or identity of their counterpart.
The main purpose of new clause 7 is to provide regulatory powers to enable the operation of legislation affecting repos to take account of the detailed workings of the agreements under which these transactions are carried out. New clause 8 enables regulations to modify the circumstances in which transfers of security under stock lending arrangements are disregarded for tax purposes in computing the profits of the trade or in computing capital gains.
The new clauses will facilitate the introduction of an open gilt repo market by enabling gilt interest to be paid gross in a much wider range of circumstances than before. The Exchequer will be protected by the auditing regime for the new arrangements and by the new quarterly accounting system. The new clauses also provide for the price differential under a repo to be treated as interest for tax purposes and for consequential adjustments to be made to the capital gains tax rules. The new clauses provide regulatory powers to cater for the technical details of repo transactions and enable the tax rules to be modified in the light of market developments.
This is a far from satisfactory way in which to legislate on this or any other matter. Although, as we made clear in Committee, the Opposition generally support the introduction of a repo market, we are concerned that the Government have introduced at this late stage some complex new clauses which provide for further regulations to be made to deal with matters which may be technical, but which are crucial to a number of taxpayers. That is not a satisfactory way in which to legislate, especially when one considers that in the next two days we have to consider 28 different groups of amendments and new clauses. Inevitably, the new clauses dealing with the repo market will not get the attention that they would otherwise have had.
That said, I accept that the Government are anxious to get the market under way at the beginning of next year and we shall not vote against the new clauses. However, the difficulties raised by legislating in this way are perhaps summed up by new clause 12, which provides that anyone who
contravenes, or fails to comply with, any requirement … under this section … shall be liable to a penalty not exceeding £25,000.
That is a very stiff penalty. Taxpayers may come to the view that it is not fair for Parliament to pass legislation with little consideration and then expect taxpayers to comply with it, with a penalty of £25,000 if they get it wrong. As was said time and again in Committee, the Government should think long and hard about the approach that they are increasingly adopting towards legislating in areas where there are complications and where far greater consideration should be given to ensuring that the regime is correct.
Can the Minister tell us whether unit trusts come within the new regime as it is not entirely clear whether they do? Point 7 of the annexe to the Treasury press release makes it clear that bodies which hold gilts but have no intention of entering into repos will he permitted to transfer their gilts to the new regime to obtain a cash flow advantage. If that is right, what will the cost be to the Treasury? There is a suggestion that that might be a generous, perhaps unintended, consequence of the legislation.
As I have said, we generally support the thrust of what the Government are trying to do, but we believe that they must think long and hard about the way in which they have approached the matter. The introduction of so many complex new clauses and the prospect of complex regulations cannot be happy, especially for all those who will have to make the system operate.
I am at least grateful to the hon. Member for Edinburgh, Central (Mr. Darling) for giving what I took to be a welcome for the intent behind the new clauses and, therefore, implicitly for the considerable saving that will arise for the taxpayer who will, we hope, have to pay a far lower amount of interest on the overall amount of the national debt and on the issuance of new gilts. We should not be introducing the new clauses unless we thought—indeed, the market concurs—that there would be very considerable savings for the taxpayer.
I am sorry that the hon. Gentleman finds the new clauses complex, but we had an opportunity in Committee to discuss in considerable detail the intent behind them. I acknowledge that the translation of that intent into practice, not only in the new clauses but in subsequent regulations, the code of practice and the legal agreements, involve some complexity. That is probably inevitable in a developing, innovative market of this nature where substantial amounts of interest and, therefore, potential tax are involved.
The consultations on the introduction of an open gilt market did not end until the end of January this year. The Government then needed to consider the responses made and decide whether to go ahead and what changes were needed. By that time, it was too late for the necessary legislation to be introduced during the Committee stage. It is essential that tax changes are made in the Bill if an open repo market in Government securities such as already exists in many other countries is to be introduced early in 1996.
In answer to the hon. Gentleman's specific point about the £25,000 penalty, the Inland Revenue will have to audit the scheme to ensure that gilt holders make the proper declarations and that they are eligible before the central gilts office member can hold their gilts in a special account. Those holding gilts directly through a CGO member will make their declaration to that CGO member. Otherwise, the declaration is made to a registered intermediary, who in turn makes a declaration to the CGO member.
The Inland Revenue will audit the scheme to check that only eligible persons are obtaining gilt interest gross and that all the requirements of the scheme have been met. In view of the large amount of interest which may be involved, there will be a mitigable penalty not exceeding £25,000 for any failure to comply with the legislation. I hope that the hon. Member for Oxford, East (Mr. Smith) and his party, which professes concern to defend revenue, prevent loopholes and crack down on those who seek to exploit them, will support a sensible penalty regime which is consistent, commensurate with the size of the transactions taking place and sufficient to provide real deterrence in relation to operation outside the scheme.
The answer to the hon. Gentleman's question about unit trusts is yes, unit trusts are involved. The hon. Gentleman asked about bodies which could join the repo market to register with starred special accounts in the CGO which did not necessarily intend to participate in the repo market but thereby obtained gross payments purely for cash flow purposes. The answer is that the cash flow cost of that is included in the overall assessment of £100 million made for the cash flow cost of players and non-players in the repo market. The amount of interest or the tax forgone for a short while on interest in respect of non-players and players in the repo market is, frankly, a guesstimate. The figure of £100 million is an estimate rather than a guesstimate, but it will be within the total already announced.
While I have not provided an exact answer to the last point raised by the hon. Gentleman, I hope that I have reassured him that we have already taken his point into account in the cost. I emphasise that it is a cash flow cost and not a real cost. We hope that at the end of the day the measure will be an extremely positive sum gain for the taxpayer.