Foreign Income Dividends

Clause 36 – in the House of Commons at 7:45 pm on 29th July 1997.

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Photo of David Heathcoat-Amory David Heathcoat-Amory Conservative, Wells 7:45 pm, 29th July 1997

I beg to move amendment No. 22, in page 29, leave out lines 11 to 27.

Photo of Michael Martin Michael Martin Deputy Speaker (First Deputy Chairman of Ways and Means)

With this, it will be convenient to discuss amendment No. 24, in schedule 6, page 80, leave out from beginning of line 22 to end of line 8 on page 86.

Photo of David Heathcoat-Amory David Heathcoat-Amory Conservative, Wells

Nothing displays the Government's muddled and incompetent policy in this entire Budget better than these two amendments and the clause to which they relate. Foreign income dividends can appear somewhat technical, and it is no disrespect to hon. Members if I say that some of them may not have followed the intricacies of the British corporation tax system. Most people have better things to do, but, luckily, the effect and purpose of the dividends can be easily stated in non-technical terms.

FIDs, as they are called, are a way of relieving certain multinational companies based in this country from paying excessive corporation tax. Without FIDs, important British companies with large foreign earnings would be unable to relieve their advance corporation tax payments. Therefore, they would be paying ACT and tax on their foreign earnings. That is unfair and excessive, as was recognised by the previous Government, who introduced foreign income dividends to relieve the situation.

Under the Government's proposal, British companies earning profits overseas but based in the United Kingdom, would be put at a disadvantage in relation not only to ordinary British companies, but to foreign multinational companies based here. We would have the absurd situation in which a multinational British company would suffer unfair competition from a foreign company, perhaps operating in the same markets, and would be vulnerable to takeover by such a foreign company.

Despite those well-known facts, in his Budget statement the Chancellor of the Exchequer announced with a flourish that foreign income dividends were to be abolished. Any first-year accountancy student or half-decent tax practitioner could have told him that that was daft. We do not know whether he received such advice. I imagine that he probably did, but, with that ignorance, combined with arrogance, that has been the hallmark of the entire Budget process, he went ahead and announced the abolition of foreign income dividends in two years' time. He wrote that into the Bill in clause 36, and in the six-page schedule 6.

When we reached clause 36 in Committee, we warned Ministers that the abolition of foreign income dividends would be extremely damaging, and we advised the Government to withdraw the proposals. As usual, the debate was guillotined, so we had no real opportunity to explore the subject at great length. All six pages of the complex schedule 6 went entirely unexamined because of the timetable motion imposed by the Government.

Luckily, however, we were not entirely alone in drawing attention to the damage that might be caused. When the companies affected heard the Chancellor's statement, they contacted the Treasury and made it clear that, if they were treated in the way set out in the Budget, they would simply leave the United Kingdom. They would prefer to remain here, but they do not have to be located here. They are, by definition, international companies, they operate in many different markets, they have investments in many other countries, and, if pressed, and if sufficiently damaged by the change, they would relocate. The Government would lose not only some important British companies, their headquarters and the employment that they offer, but all the tax.

Even this Government realised that something was wrong, so they eventually started to listen. Not only were they contacted by the companies themselves, but they received urgent representations from business associations and institutes, such as the Confederation of British Industry and the Institute of Directors. All pointed out to the Government how stupid the proposal was.

Drawing almost at random from the letters sent to me as a member of the Finance Bill Committee, I have here a letter from the Association of British Insurers. It says: The measure will have very detrimental effects for British based international groups. There has been inadequate time for consideration of the measure. In these circumstances I ask you to press the Government to withdraw the measure. I believe that that letter was sent to all members of the Committee, but, as usual, Labour Members showed no interest in standing up for British business. They remained entirely silent about the matter, and it fell to my hon. Friends on the Committee to make the appropriate noises.

We now have a Liberal Democrat gracing our presence here this evening, but that is unusual, because they were seldom present in Committee. Perhaps one or two Liberal Democrats are present. I apologise to the hon. Member for Taunton (Mrs. Ballard), who comes from my county of Somerset. I particularly welcome her presence this evening.

However, their presence was highly unusual in Committee, and, during the debate on foreign income dividends, not one Liberal Democrat was present, despite the fact that they had been alerted to the damage that would be caused to important British companies, many of which operate in their and our constituencies. As usual, it fell to Conservative Members to take the entire burden of opposition to this particularly daft proposal in the Finance Bill.

We are not here dealing with a few odd British companies with highly unusual tax positions. We are dealing with companies such as BAT Industries, Burmah Castrol, Coats Vyella, Glaxo Wellcome, Reckitt and Colman, RTZ, SmithKline Beecham and Taylor Woodrow, to name just a few. The damage caused caught the eye of the London Chamber of Commerce and Industry in particular, and it wrote in strong terms to, I think, all members of the Committee, certainly to the Government, in a release headed "Planned tax changes 'could drive firms out of UK"'. Its chief executive said: We are concerned that these proposals will drive many companies out of the UK as they will object to having to pay a tax 'double whammy' in Britain and abroad. He urged: the decision to scrap FIDs was over-hasty and unjustified.

Photo of Rudi Vis Rudi Vis Labour, Finchley and Golders Green

Will the right hon. Gentleman list those companies which have said that they will be leaving the United Kingdom, rather than mention a long list of companies which we all know about? Which ones have said that they will be leaving the United Kingdom if what the right hon. Gentleman says takes place?

Photo of David Heathcoat-Amory David Heathcoat-Amory Conservative, Wells

The discussions between the companies concerned and Ministers were presumably confidential. The companies do not want to issue threats. They prefer to make the threats in private.

I have spoken to representatives of the companies concerned, and they have made it clear to me that they do not have to put up with a hostile tax regime in Britain. They would prefer to remain in the United Kingdom. We are a magnet for these companies. They like our low costs, our flexible labour market and our business-friendly environment, all of which are very much the achievements of the previous rather than the present Government; but they have made it clear that, if they run up against a tax regime that does not understand their particular requirements, and effectively subjects them to double taxation, they will relocate.

If the hon. Gentleman does not think that that was a consideration, will he explain why the Government capitulated and agreed to look again at the matter? They realised that they had made a mess of this, and finally listened to the entreaties. In other words, the penny finally dropped. The Chancellor, and the Paymaster General in particular, realised that a major mistake had been made, and they went into a frenzy of back-tracking, side-tracking and general confusion.

Of course we welcome the rethink—we welcome it when a sinner repents—but the fact that the Government are thinking again does not stop some of the damage. There is still a great deal of uncertainty around about the Government's intentions.

During the debates on the timetable motion, we heard how important it was to get the Bill through in order to give taxpayers certainty. Do my hon. Friends remember that? We heard a lot of that, particularly from the Financial Secretary, who said that certainty and stability were crucial, so the Bill had to be put on the statute book without any delay. But that rush has created the very uncertainty we now see.

The Government have withdrawn the original damaging proposal to abolish foreign income dividends, but they have not replaced it with anything else. Many companies are highly uncertain about what sort of tax regime they will face in future. They do not know where they stand, and the Government still not have told them.

We listened with great interest in Committee when we reached clause 36, when the Paymaster General was due to tell us the result of his deliberations. Although we laboured under the timetable motion, we were careful to give him plenty of time to expand on his plan to give taxpayers the certainty that the Government deemed so important.

What a terrible disappointment that all was. The Paymaster General admitted that a great rethink was going on. Remarkably, he started with the suggestion that it was the companies themselves that should come up with a new arrangement. He seemed unwilling to do any of the work. However, a little later he said that he had four options. They were sketchily set out in his remarks. The first is clearly completely dotty. He suggested that he might restrict foreign income dividends to companies mainly in foreign ownership. To discriminate even more transparently against British companies in that way does not solve the problem; it makes it worse.

As we proceeded with the non-explanation of the conclusions to the non-consultations, we became more and more depressed, because it was apparent that the Government were in a terrible muddle, and were really a victim of their own guillotine. They wanted to bring forward some alternative proposals, but the timetable motion that they have imposed on the Bill and on the House made it impossible to consult fully and table proposals in time for consideration in Committee and by the House.

By bringing forward legislation in such a rush and by refusing to consult, the Government have fallen into their own trap. They now realise that the abolition of foreign income dividends is unsustainable. Therefore, clause 36 and schedule 6 are damaging, contradictory, defective and wrong.

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Nevertheless, in Committee the Government insisted on passing that clause and schedule into law unamended. They say that they will look at the issue again, but it is extraordinary that, having failed to consult before legislating, they are now legislating before consulting. That is a serious matter for the House, which is being invited to pass into law something that the Government know is wrong.
Luckily, the House has two amendments before it which would remove the whole shambles from the Bill and give the Government an opportunity to think, discuss and consult. After all, the measures would not have come into force for two years, anyway, so what is the hurry? Sheer arrogance is preventing them from withdrawing these damaging measures, which they know are wrong. Instead, they intend to force into law something that they admit is wrong and damaging, simply because they lack the courage to withdraw it.
I urge the House to take advantage of these modest amendments, which would remove the confusion from the Bill and give the Government an opportunity to have a genuine re-think.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

After the attack on pension fund accumulations, the two other aspects of the Finance Bill that do most damage are the abolition of foreign income dividends and of TESSAs and PEPs in 1999, without announcing what the Government intend to put in their place.

The main advantage of the Anglo-Saxon economies of north America and Britain, in contrast the continental Europe economies, has always been the clarity of our tax law, which has been sharply defined both in this House and by the courts. In continental Europe, tax law is a political mush, with many areas where it is not clear what is within or without the law.

As my right hon. Friend the Member for Wells (Mr. Heathcoat-Amory) said, to legislate for the abolition of FIDs in 1999, but then to say that that will not happen and that the Government will sort it out in the 1998 Finance Bill, makes no sense. Having recognised the problems, the correct course must be not to change the law until there has been full consultation.

Similarly, woolly statements in the Budget speech and in Committee about ending TESSAs and PEPs in 1999 and putting some undefined individual savings accounts arrangements in their place creates unnecessary uncertainty for savers and for the investment management industry. I declare an interest, as I spent 25 years in the industry, and I remain the deputy chairman of an international investment management company.

I recollect that the Chancellor stressed in his Budget speech that his key long-term objective was to increase investment in this country. However, the two interrelated actions that I have described are bad news for savers and for investors, especially at a time when the Government should be promoting and strengthening measures to encourage savings.

If we want to take pressure off interest rates and sterling, we should encourage people to save the £32 billion pay-outs from mutual building societies. Surely we saw the problem coming, so the Finance Bill should have included appropriate measures. The way to achieve higher investment is through higher savings. Anything that is a potential attack on savings is bad for investment. I shall return to that point later.

I want to focus specifically on FIDs. Surely it is self-evident that it is desirable to retain and encourage international companies based in the United Kingdom. Whether they are foreign-owned or internationally owned, they are a source of tax revenue and employment, with a spin-off for accounting, legal and other services.

Our long-term history shows the wisdom of encouraging our businesses to invest profitably overseas, whether through direct investment by individual companies or portfolio investment by individuals or pension funds. The abolition of FIDs would undermine that. If international holding companies do not know where they stand, which will be the case if the Finance Bill goes through unamended, there is every motive for those companies not to take risks, and to consider moving somewhere else. In addition, I believe that the estimated savings of £250 million per annum are highly optimistic.

The conditions suggested by the Paymaster General to alleviate the position make little sense. If we require 80 per cent. foreign ownership, that merely encourages foreign takeover of British companies, but also encourages British-based international companies to move elsewhere. If we require a fixed percentage of overseas earnings—90 per cent. has been suggested—that would be illogical and inflexible. Indeed, it would discourage international companies from setting up in the UK. To limit the amount that companies could pay out in an FID would impose a fiscal distortion on UK companies' overseas investment.

My biggest objection is one of principle—the attack on FIDs is an attack on the principles behind the double taxation treaties and the underlying equity thereof. Aside from the practical problems that that raises, I am surprised that it should ever have been considered by the Government.

The present rules permit advance corporation tax paid on FIDs, which cannot be offset against UK corporation tax, to be recovered. The reason is simple. An international company pays its taxes in the parts of the world where it operates. It gets double taxation relief on those against UK corporation tax. If it pays dividends, which is a normal and proper thing for a company to do, there is likely to be a shortfall that cannot be offset against its specific UK corporation tax liability.

Therefore, the net effect of abolishing FIDs is that British-based international companies will suffer a tax disadvantage against UK companies. That then encourages UK companies to concentrate their investments in this country, and not spread them around the world where we have such a good record.

More narrowly, FIDs abolition, as proposed, represents for the UK investment management industry a complete undermining of several years of work and substantial expenditure by both the Government and the industry in developing the open-ended investment company as a UK-based investment fund structure designed to compete attractively with Dublin and Luxembourg, encouraging foreigners to come to the UK to use an OEIC to structure their funds to sell around the world. If people go to Dublin or Luxembourg, they will take not only fund management fees but all the ancillary accounting and legal revenues.

It is no wonder that Dublin is laughing, as it again offers a substantial tax advantage for international funds. Speaking as someone in the industry—after years of work trying to get the right product—I find it frustrating that the ground is being cut from under such products just as we are about to use them.

Also damaging for the United Kingdom investment management industry, and related to our not knowing what will happen with FIDs and ACT after the next two years, is the announcement that PEPs and TESSAs will be abolished. Middle England has to be clear that PEPs and TESSA will end.

We have received some notice of the nature of the proposed individual savings scheme in the Inland Revenue's news release, "A New Individual Savings Account". Having thought about the matter in some detail, however, I believe that whatever is proposed will be considerably less attractive than the current PEP and TESSA arrangements if ACT is lost and if the FIDs measures are passed. It will also be less attractive in principle.

The announcement mentions proposals that tax relief will be limited, up to an overall—

Photo of Michael Martin Michael Martin Deputy Speaker (First Deputy Chairman of Ways and Means)

Order. The hon. Gentleman is speaking about matters that are not relevant to the amendment. We are debating foreign income dividends, not savings schemes. He was properly speaking to the amendment; perhaps he will do so again.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

Thank you, Mr. Deputy Speaker; I apologise. I ask the indulgence of yourself and of the House, however, because the matters are interrelated. As you will have noted, when Conservative Members make a point about something damaging investors' interests—whether it is abolition of ACT or of FIDs—we receive the reply from Ministers, "But we have this new savings scheme, which will answer all the problems." I believe that it is fair to give the matter an airing.

Photo of Michael Martin Michael Martin Deputy Speaker (First Deputy Chairman of Ways and Means)

It may seem fair to give the matter an airing, but the House has given me its rules, which state clearly that hon. Members must stick to the amendment and not stray from it. Perhaps the hon. Gentleman will find another opportunity to raise those issues.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

I hear what you say, Mr. Deputy Speaker. I hope that you will give me an opportunity on Third Reading to deal with the matter.

The point that I wish to stress is that abolition of FIDs and the other tax proposals that I have mentioned will not only damage for UK international businesses but bring a lack of clarity to our tax system. The measures are also damaging to the UK investment management industry—which I should have thought it was in the interests of the Government and the House to support. Unless our amendment dealing with FIDs is passed, we will make no progress with the OEIC scheme in competing for business with our competitors in Luxembourg and Dublin.

I hope later today to have an opportunity to deal with the issues. The measures will be damaging if they are passed unamended. They are bad aspects of the Budget and of the Finance Bill, and we should correct them before they become law.

Photo of Mr Peter Brooke Mr Peter Brooke Chair, Northern Ireland Affairs Committee, Chair, Northern Ireland Affairs Committee 8:15 pm, 29th July 1997

My speech will be extremely brief. I think that I am right in saying that my right hon. Friend the Member for South Norfolk (Mr. MacGregor), the right hon. Member for Llanelli (Mr. Davies), the Paymaster General and I are the only four hon. Members participating in the debates on this Finance Bill who were on the 1978 Standing Committee.

I remember the Paymaster General with particular affection on that occasion, because we tried to cause the House to sit into August, and the only way in which we could accomplish that was by ensuring that the Finance Bill was considered for a decent length of time. On one occasion, he joined us after dinner and—slightly to the distress of his Whips—made a very powerful speech, in which, for our purposes, he gently steered the ball towards his own goal. Against that background, and with immense good will, I should like to ask him one question. I hope that you, Mr. Deputy Speaker, will not rule me out of order.

I served in the Committee on the Housing Act 1996. The Government had proposed in that Act several clauses that they subsequently withdrew because of representations from people in my constituency. Although the Minister for London and Construction, the hon. Member for Greenwich and Woolwich (Mr. Raynsford) made a powerful speech explaining how incompetent the then Government had been, the Opposition had not explained what was wrong with the clauses.

In the case of this Finance Bill and foreign income dividends, not only the Conservative party but my constituents, in a series of multinational companies, have drawn the Government's attention to what is wrong with their clauses. In the Government's posture, I do not understand—I hope that the Paymaster General will tell us—why Ministers, unlike those dealing with the Housing Act 1996, will not straightforwardly withdraw the clauses and return with the proposals on which, they say, they are consulting. Why are Ministers ploughing ahead and saying that they will consult after the clause has been passed? I do not absolutely follow the logic of the Government's actions.

Photo of Nick Gibb Nick Gibb Conservative, Bognor Regis and Littlehampton

I do not know whether the Government are aware how much damage they are doing with their decision to abolish foreign income dividends, how much damage has been done since 2 July 1997 or how much damage is being done daily as Ministers dither in deciding how to extract themselves from the mess that they have got themselves into. Conservative Members have mentioned in this debate the problems of United Kingdom companies with overseas holdings, and I mentioned those problems in an earlier debate. Today, however, I should like to deal with the equally disastrous problems—which my hon. Friend the Member for Arundel and South Downs (Mr. Flight) mentioned—that the City of London will face.

The history of the City of London has been bound up in collective investment vehicles. Unit trusts, particularly, have been an enormous success, although they are not particularly attractive vehicles for overseas investors—especially continental Europeans, who do not really understand the trusts concept. Consequently, in recent years, centres such as Dublin and Luxembourg—which my hon. Friend the Member for Arundel and South Downs also mentioned—have become much more popular locations for collective investment vehicles. The asset management side of the industry is located in the United Kingdom, but the back office—which represents about 60 per cent. of managers' cost base—is located with the vehicle.

Dublin and Luxembourg have open-ended company vehicles rather than trusts. Therefore, those locations have recently become enormously popular for collective investment vehicles. Luxembourg and Dublin combined now have a 22 per cent. share of the European funds market—which represents 12 per cent. growth in just five years. In the same period, the UK's share has remained static at 10 per cent. Moreover, in that period funds managed in Luxembourg and Dublin have quadrupled while those in the United Kingdom have only doubled.

In 1992, the combined assets of UK fund managers in Luxembourg and Dublin were three and one third billion dollars. By 1995, they had increased to £20 billion. Sixty three per cent. of Dublin business has been undertaken by UK fund management houses. This means that we are exporting jobs to Dublin and to Luxembourg. We are talking about thousands of jobs in the back office—jobs in the accountancy and legal professions, to which my hon. Friend the Member for Arundel and South Downs also alluded. In co-operation with the City and the Government, the concept of an open-ended investment company was recently developed. These OEICs were introduced precisely to deal with the problem that I have just outlined.

OEICs are attractive to European investors, but only while we have foreign income dividends. If those companies are to be attractive to European investors, they will have to invest in European or overseas equities. By definition, investors want to reduce the risk of, for example, currency fluctuations, so they will want to invest through vehicles which will themselves invest in European and overseas equities. Of course, if those overseas equities are paying dividends to the UK OEICs, those dividends will have been taxed in the overseas jurisdiction; when they arrive in the UK vehicle, they will be subject to UK tax, but that tax will be offset by double taxation relief.

We now reach the point at which those vehicles want to pay dividends to their investors. Again, the companies will be subject to advance corporation tax, but there is nowhere for those vehicles to offset their ACT because there is no mainstream UK corporation tax liability. The ACT is therefore simply carried forward from one year to the next, indefinitely into the future. As such, it becomes an irrecoverable cost. Unless we have foreign income dividends, it becomes an unsustainable cost.

If a company can demonstrate that the dividends that it is paying out of the OEIC derive from overseas investment income, having FIDs means that that company can obtain a repayment of the ACT that was paid when the dividends were initially paid. Effectively, that means that the ACT is no longer a cost and the company is being taxed only once on its overseas profit. That is precisely what FIDs were designed to do and why OEICs have become an attractive vehicle. If OEICs do not have FIDs, the attempt to overturn the rise of Luxembourg and Dublin will fail. OEICs are taxable on their income at 20 per cent., but they are exempt from tax on their capital gains.

Research shows that, if the Government retained FIDs, and if OEICs were fully established in the UK, a European portfolio moving to the UK would yield more than double an identical fund in an offshore centre, and the yield would be about 40 per cent. more for a global fund than for a European fund. That is the result of the previous Government's development of FIDs and, of course, of our favourable double taxation treaty network.

Until the Budget, Luxembourg and Dublin were greatly concerned about the development of OEICs and the fact that we have FIDs. However, on 4 January the Financial Times said: OEICs are expected to stem an exodus of investment business to Dublin and Luxembourg.The previous Government had successfully tackled a serious problem for the City of London but, alas, we then had the Budget on 2 July.Investment Week magazine states: Perpetual is to consider selling offshore funds to the UK market following the Government's decision to scrap Foreign Income Dividends (FIDs).The fund management group is one of several that have now put on hold plans to establish UK-based OEICs to sell into Europe and repatriate funds from Dublin or Luxembourg … These include Standard Life, Henderson Investors and Barings.David Mossop, chief executive of Perpetual said:' … We have plans to start marketing into Europe in 12–24 months and will now have to consider using Luxembourg vehicles rather than UK OEICs.' That is the consequence of this enormously damaging measure.

I refer the Paymaster General to the letter from Sheila Nicoll, director of legal and fiscal affairs at the Association of Unit Trusts and Investment Funds, who says: we will continue to stress the need for an early statement on FIDs. She continues: Damage has already been done, and while the toothpaste clearly cannot be put back in the tube, a clearer statement at Report Stage that Ministers have no intention of damaging the international competitiveness of UK-based funds would at least prevent more spillage. In Committee, the Paymaster General accepted that the Government had committed an enormous gaffe and had been wrong to propose the abolition of FIDs, and that they were now going to consult interested parties to see whether they could come up with a solution to the problem that they had created. He suggested four solutions but, even during the enunciation of those potential solutions, he said: I do not know whether any one of these suggestions will solve the problem. I will briefly run through the Paymaster General's four suggestions.

The first was that the Government could relax the shareholding condition for the international shareholding company rules. International holding company rules are slightly different from FID rules. One can establish an international headquarters company, which means that one is not obliged to pay ACT initially—one can pay a FID without paying ACT in the first place. When the Chancellor introduced that scheme, he pointed out that the international holding company rules will remain in place so that these provisions can be used. As everyone knows, however, the international holding company rules can be used only by companies which are at least 80 per cent. owned by non-residents.

The Paymaster General's first suggested solution was thus to relax the rule that international holding companies should be 80 per cent. owned by non-residents. He said that the Government could "reduce that percentage", but to what does he propose to reduce it? If he were to reduce it to nil, he will be virtually reintroducing FIDs, so why on earth does he not withdraw the clause and schedule 6, as my right hon. Friend the Member for Wells (Mr. Heathcoat-Amory) proposes?

The Paymaster General's second proposal was to allow surplus ACT to continue to be reclaimed by companies which derive 90 per cent. or, perhaps, a lower percentage—". Is that not virtually bringing back FIDs? The third suggestion was to limit the amount of FIDs that a company could pay to the amount that it had paid historically, perhaps in the average of the past two or three years. As my hon. Friend the Member for Arundel and South Downs said, that is a terrible distortion of the tax system. It is also horribly complicated but, in any case, if the Paymaster General does that, is he not virtually bringing back FIDs?

The Paymaster General continued: A fourth option would be to that a company could pay no more than a specified proportion of its dividends as FIDs."—[Official Report, Standing Committee A, 22 July 1997; c. 386–7.] Depending on what proportion the Government deigned to allow the companies to pay, they may or may not be virtually bringing back FIDs. If the Government allowed a lot of FIDs to be paid, they would be bringing back FIDs.

All the Paymaster General's proposals admit that the only solution to the terrible mess that the Government have got this country and the City of London into is to bring back FIDs. Why is he prolonging the agony of international and multinational companies based in this country, and that of City fund managers who want to boost London as a centre for collective investment funds, by saying they have to wait until the 1998 Budget before he can undo the damage that the Government have now done? Why does he not instead simply accept the amendment and withdraw this very damaging clause, so that, from now on, the City of London and the multinational companies can get on with what they do best, which is investing and making money for this country?

Photo of Michael Martin Michael Martin Deputy Speaker (First Deputy Chairman of Ways and Means)

Order. If the hon. Gentleman wishes to speak, he will have to be quick.

Photo of Shaun Woodward Shaun Woodward Conservative, Witney

I apologise for being so slow, Mr. Deputy Speaker. In considering the amendment, I find myself questioning the rationale behind it and the rest of the Budget. Why, when there seems to be so much evidence to support the need for consultation and a review, do the Government wish to proceed with the clause? The amendment is sensible, given the sheer body of opposition to the proposals. 8.30 pm

Let me remind the House what the Paymaster General said in Committee: There will be two years in which we can not only ask but consult them, and we have made it clear that we will do so. He then referred to my hon. Friend the Member for East Worthing and Shoreham (Mr. Loughton): What is the hon. Gentleman on about? I cannot understand the sense of his remarks."—[Official Report, Standing Committee A, 22 July 1997; c. 387.] I should like to make some sense of the remarks that the Paymaster General found so difficult to draw together. They were ably and simply expressed by my right hon. Friend the Member for Cities of London and Westminster (Mr. Brooke), who suggested that the right thing to do would be to withdraw the clause altogether, rethink it and come back with some better proposals.

There is no question that FIDs were introduced to benefit the United Kingdom. The purpose of the current FIDs system was to provide a means by which companies with foreign operations could avoid double taxation. I hope that Labour Members do not support double taxation, despite their addiction to taxation as a means of living. Double taxation should always be resisted. The reasons for the introduction of the system are extremely important.

The amendment seeks to remove the distortion that the clause will introduce. It is yet another example of the Government's desire to proceed with precipitous haste. They have been in government for only three months and yet they are throwing out this proposal. Has their policy really been thought through?

There is now evidence from so many companies which earn a great deal of money for the United Kingdom. They are clearly extremely worried. The Paymaster General said in Standing Committee that he could not understand what we were on about. It is very simple: we are expressing the concerns of businesses up and down the country that earn money for this country. We are at a loss to understand, if the right hon. Gentleman knows that a review is necessary, what is the point of proceeding with the clause. Of course, withdrawing it might involve some loss of face, and we know that the Minister without Portfolio would be extremely upset with his colleagues were they to do that, but is the measure right for Britain?

The Government spend hours every day constructing reviews and appointing business leaders from all over the City to join various projects. Would it not be better to withdraw the clause and then to draw in experts from some of those companies to review the matter properly and look in detail at the consequences of what the Government wish to achieve?

The Association of British Insurers has been perfectly explicit. It states: The measure should be withdrawn and any changes in this area should be the subject of full consultation. The Government are in love with consultation and working parties. They prefer a review, when a decision would be more appropriate. In case after case, they have a review or set up a working party. Yet when business says, "Let us have a review and full consultation," what happens? In the most arrogant, high-handed way, the Government say, "No, we know best: we will introduce the legislation and if there is a problem, we will try to clear it up in the next two years."

The Association of British Insurers points out: The purpose of FIDs is to ensure that British based multinationals are not at a tax disadvantage in respect of trading income and dividends received from abroad. The withdrawal of the FIDs regime will place such groups at a disadvantage. What is the point of that? The Association of British Insurers recognises: Foreign-owned groups will not be affected by this change because they will be able to set up International Headquarters Companies to remit dividends overseas without paying ACT. What do the Government have against British-based multinationals?

The Government spend a great deal of time talking about the need to create certainty and stability. The Chancellor claimed that his entire Budget was predicated, as he claimed, on the need to create certainty. Yet declaration after declaration by company after company is that the proposal will create uncertainty and instability.

Only a few weeks ago, the Chief Secretary to the Treasury said that there would be "no U-turn" on FIDs. He also added that the Paymaster General was in talks with companies to find an alternative. Where is the certainty when on the one hand the Government say that they will do something but on the other hand realise the need for consultation? What is gained by their precipitate haste?

Some of the companies are issuing warnings. The chief executive of Lasmo wrote to the Chancellor as follows: The very independence of Lasmo, and all British companies which have had international success, is put at risk by your proposals, as we will simply be worth more to a foreign acquirer than we can be on our own. Is that not a significant warning that the Government might wish to heed?

Time after time, we hear sermons from Labour Members about why the Conservative party failed to understand. In speech after speech and sermon after sermon in Committee we heard that our knowledge was not relevant because we lost the election. But the warnings are not from Conservative Members: they are statements from the companies that will be affected by the proposals.

Burmah Castrol, the oil company, said that it would lobby the Chancellor, and stated: It seems a shame that successful groups are being penalised in this way. We need to review our options. Moving offshore is not high among them but remains a possibility. Rio Tinto, the world's largest mining company, is also understood to have written to the Government expressing its opposition. Glaxo Wellcome and BAT have also said that they intend to make known their opposition to the change as they are worried about double taxation on profit. We are talking about big money. Brokers estimate that it represents up to 5 per cent. of United Kingdom dividends.

The consequences of the proposal are serious. SmithKline Beecham, which earns more than 90 per cent. of its profits overseas said: This is a disappointment. If London is going to be a centre for raising capital, this is hardly the thing to do. So why is it being done now? The purpose of our amendment is to ask the Government to have a little humility. The Chancellor, the Paymaster General and the Chief Secretary lecture the Conservative party on the need for humility. Is there not something for them to learn, too? Should they not show a little humility in recognising that, when company after company clearly express not minor concerns but grave, serious concerns about the proposals, it might be better to amend the Bill and take the proposals out pending further consideration?

The Chancellor said that, to stop the yield from ACT being eroded by greater use of foreign income dividends, the Government were ending foreign income dividends from 6 April 1999. Yet expert after expert tells us that that defence is a fig leaf. The change is an arbitrary revenue-raising mechanism. The Government should not take my word for it. I know that Government Members will simply respond to the words of Opposition Members by saying that they are, in their eyes, the words of a discredited Tory party. They do not have to accept our words. They should take the words of Paul George, tax adviser with the accountants Coopers and Lybrand. He said: The abolition of Fids will bring back a distortion in the tax system which can penalise overseas investment by UK multinationals. The logic for the change is not clear. We are searching for the logic, the rationale behind the fact that, although the Government are claiming that they are removing distortions, company after company and adviser after adviser are telling them, "Hold back: this may be a mistake." Yet the Government are proceeding with extraordinary haste in their concern to, in their eyes, tidy up the distortions that they see.

Why do the Government not listen to some of the bodies that I have mentioned? Why do they not have the humility to recognise that in this Finance Bill, which has been put together at extraordinary speed, covering a wide range of areas that were never anticipated in the Labour party manifesto, it would be better to hold back, review, involve all groups who have expressed concern, accept the amendment, and withdraw clause 36?

Photo of Geoffrey Robinson Geoffrey Robinson Paymaster General (HM Treasury)

I shall not need to detain the House for very many minutes as we approach the final moments of the Finance Bill debates. What we have heard has, sadly, been nothing more than a rehash of what we heard on Second Reading and in Committee. Much though we welcome the right hon. Member for Hitchin and Harpenden (Mr. Lilley) to the Opposition Front Bench, he, too, had nothing to bring to the debate.

I shall deal with the core question first to get it out of the way. The simple reason why we had to introduce clause 36, which puts an end to foreign income dividends in two years' time, was that, if we did not, there would be a rising net cost to the Exchequer of almost £1 billion. That is simply because, having removed one element of distortion—the tax credits—in the arrangement that the previous Government had rightly struck between shareholders, companies and the Exchequer, there was every incentive for multinational companies to move much more heavily into FIDs.

I ask Opposition Members to reflect for a second on the fact that, despite introducing the arrangement four or five years ago, multinationals have continued to pay a great deal of dividends in the normal way simply because they have been under pressure from their shareholders for them to obtain tax credits. We do not have precise figures on how much they have paid, but it is a substantial amount. That could grow very much more quickly in the new, unbalanced situation. We want to discuss that balance with industry, consult industry and negotiate with it. For the arrangement to be balanced, it has to be fair among the three parties.

For the Opposition to criticise the Government for allowing time to consult is to deny completely all their criticism about lack of consultation. In this case, we have provided all this time for consultation, which has been welcomed by the companies concerned. We are determined and confident that we will reach a new arrangement with them.

Photo of David Heathcoat-Amory David Heathcoat-Amory Conservative, Wells

If the Government wish to protect their revenue, while at the same time protecting the position of important British companies, why did they not announce a consultation exercise with a view to legislating in a future Finance Bill? Why rush ahead with an ill-judged announcement about the entire and immediate abolition of FIDs, which has turned out to be a fiasco?

Photo of Geoffrey Robinson Geoffrey Robinson Paymaster General (HM Treasury) 8:45 pm, 29th July 1997

I notice that the right hon. Gentleman challenged not the need for a review but the need to get the balance back that his own Government so rightly struck when they introduced FIDs. The point is very narrow. We had to include in the Bill the fact that we could not accept the tax loss that could well amount to more than £1 billion. Industry had to be notified of that. That does not mean that we are prejudging in any way where the new balance will be struck or the mechanism for it.

I notice that Opposition Members were scathing about some of the proposals that I put forward just as starters, but two of them came straight from the initial consultation that we have already had with companies.

Photo of Geoffrey Robinson Geoffrey Robinson Paymaster General (HM Treasury)

I shall give way to the hon. Gentleman in a second. He might deal with the following point in his intervention. I do not think that he is a scaremonger or very irresponsible—if he is, I have misjudged him—but ever since we have been discussing the point, he has mentioned the damage that it is doing. Why did Billiton go ahead with a major flotation that was a great success?

Photo of Nick Gibb Nick Gibb Conservative, Bognor Regis and Littlehampton

I have been told about the damage to which I have referred by the Association of Unit Trusts and Investment Funds. That is the body which is most concerned about the damage. The proposals are doing enormous damage to the City of London. Investment in OEICs has almost been totally wiped out by them. You refer to my criticism—

Photo of Nick Gibb Nick Gibb Conservative, Bognor Regis and Littlehampton

I am sorry, Mr. Deputy Speaker. The Paymaster General refers to my criticism of his four proposals and says that one of the proposals came from industry itself. The reason why I am scathing about them is that they virtually mean that FIDs need to be brought back. If he is merely going to bring them back, why does not he do it today?

Photo of Geoffrey Robinson Geoffrey Robinson Paymaster General (HM Treasury)

We need a new arrangement—a properly balanced arrangement like the previous one among the three parties. That is what I am sure we will strike.

Photo of Geoffrey Robinson Geoffrey Robinson Paymaster General (HM Treasury)

The hon. Gentleman missed much of the debate, but I know that he was very vocal and garrulous in Committee, so I shall give way to him.

Photo of Tim Loughton Tim Loughton Conservative, East Worthing and Shoreham

I am grateful for the hon. Gentleman's somewhat more subdued comments in comparison with the Economic Secretary to the Treasury, who is not in her place. Perhaps, as an employee of the company that floated Billiton, I could be granted the opportunity to respond to the question that he asked my hon. Friend the Member for Bognor Regis and Littlehampton (Mr. Gibb). Why did that company have to be floated at a substantially reduced price than was previously anticipated, due to the changes in the Budget? If it had not been affected by those changes, why is the share price heading below the issue price? The change has not been taken very well, has it?

Photo of Geoffrey Robinson Geoffrey Robinson Paymaster General (HM Treasury)

I should have thought that a share price returning to its issue price happens quite often in the markets. The hon. Gentleman should know that far better than most in the House, and perhaps even better than I. As I have said before, I long ago gave up trying to read the markets and how a price may move on a particular day.

I do not know of any criticism of the Government from the Flemings advisers—I imagine that the hon. Member for East Worthing and Shoreham (Mr. Loughton) was declaring an interest, if he still retains one—or from the company itself. If he considers a personally written letter that arrived on my desk—I will spare him the embarrassment of quoting from it—he will find that the negotiations that we conducted with Billiton and its advisers might well serve as a model for how Government and industry can work together. Far from there being damage, the Government have regained the confidence of industry and of the stock exchange, and we are building on that.

Photo of Mr Peter Brooke Mr Peter Brooke Chair, Northern Ireland Affairs Committee, Chair, Northern Ireland Affairs Committee

I thank the hon. Gentleman genuinely for the straightforward way in which he answered my question. What I am not quite clear about—perhaps he could clarify this—is whether the events on 2 July in the Chamber, on 4 July in Standing Committee, and in debates today are exactly what the Government intended in the first instance.

Photo of Geoffrey Robinson Geoffrey Robinson Paymaster General (HM Treasury)

Yes, exactly. The relevant part of the Budget speech by my right hon. Friend the Chancellor, who has just joined us for these climactic moments as we move towards the last few seconds of the debate, said precisely that. We could see that there would be a problem, and we said, "That is why it has to end then. We must have new arrangements."

I, too, remember the Finance Bills that the right hon. Member for Cities of London and Westminster (Mr. Brooke) rather ungraciously brought up. He knows that to be straightforward and clear-cut gives a deadline against which the negotiations can be undertaken, a benchmark against which the new arrangements can be set. That is precisely what we have done.

Far from there being any uncertainty, we have certainty in the markets, and a willingness on the part of all the major companies that have written to us to enter into the negotiations. We are determined to reach a balance between the three interested parties.

SmithKline Beecham has already proposed one of the suggestions that I put forward. Flemings has also put forward one of the proposals—I see the hon. Member for East Worthing and Shoreham (Mr. Loughton) nodding. For all I know, there may be better and more radical proposals, but what I do know is that we are approaching the negotiations in a spirit of commitment and determination, and that industry is doing the same.

Throughout our debates we have seen and heard the Opposition's crass hypocrisy. They say that they do not have enough time; then they filibuster for hours to fill the time that they get. We have seen them perform with rank incompetence from the very first day, when they could not table any amendments that were in order. The best that they have been able to do tonight consists of two wrecking amendments, which I urge the House to reject.

Photo of David Heathcoat-Amory David Heathcoat-Amory Conservative, Wells

Why cannot the Government, just once, admit that they have messed up? That is clearly what happened, and we all know it. Any impartial outside observer—there are plenty of them—realises that the Government have fallen into a trap of their own making.

On Budget day the Chancellor announced with a flourish, and without qualification, that he would abolish foreign income dividends. He did not say that he might not do it after all, or that he might have a second thought. He did not say that he would consult. It was a bald and unambiguous assertion: foreign income dividends would go.

That is what is in the Bill before us. Clause 36 does not refer to any conditions being attached. Schedule 6, which, sadly, the guillotine denied us the opportunity to debate, puts into practice and lays down detailed mechanisms for the abolition of foreign income dividends.

We all know what happened then. The Government suddenly realised that they had made a mistake. Under the impact of what the Opposition said, what the trade associations, the Confederation of British Industry and so on said, and what the companies were saying, the Government suddenly realised what any tax practitioner could have told them—that one cannot simply abolish foreign income dividends and expect important British companies to go on locating in the City of London or elsewhere in the United Kingdom.

Companies are subject to double taxation without the relief granted by foreign income dividends. We know that, and now the Government know it, too. They did not know it on Budget day, but they have learnt it since. An extraordinary combination of ignorance and arrogance characterised both the Chancellor of the Exchequer's statement on Budget day, and the bluster of the Paymaster General throughout the Committee.

The Paymaster General refused to admit that the clause was defective. It apparently protected the Revenue, but by threatening to drive companies out of the United Kingdom altogether it would have the paradoxical effect of decimating revenues.

Why can the Government not withdraw the clause? It will not come into effect for two years, anyway, so what would be lost by admitting that they have made a mistake? If they accepted our amendments, they would thereby withdraw the damaging proposals and could then have their discussions and consultations with those affected. That would enable them to bring forward some genuinely thought out proposals in plenty of time for the next Finance Bill.

The Government have not established that there is a threat to the Revenue. The Paymaster General merely asserts that there is. Even if there is a need to protect the Revenue, while balancing that with the needs of British companies, that is all the more reason to take the matter rather more slowly.

The Government are a victim of their own timetable motion. We know that, and it is extraordinary that on this small item, this small amendment that would simply withdraw from the Bill something that they know to be wrong, they, in their pig-headed way, proceed in the knowledge that they are thereby putting into law something that they know to be damaging.

We shall persist with our amendments and press the matter to a Division. Outside commentators will draw their own conclusions—that, when the Government talk of the need for a partnership with industry, a need to consult and to listen, those are hollow words from a hollow Government.

Question put, That the amendment be made:—

The House divided: Ayes 150, Noes 330.

Division No. 73][8.54 pm
Ainsworth, Peter (E Surrey)Clark, Rt Hon Alan (Kensington)
Allan, Richard (Shef'ld Hallam)Clark, Dr Michael (Rayleigh)
Amess, DavidClarke, Rt Hon Kenneth (Rushcliffe)
Ancram, Rt Hon Michael
Arbuthnot, JamesClifton-Brown, Geoffrey
Atkinson, David (Bour'mth E)Cormack, Sir Patrick
Atkinson, Peter (Hexham)Curry, Rt Hon David
Ballard, Mrs JackieDavey, Edward (Kingston)
Beggs, Roy (E Antrim)Davis, Rt Hon David (Haltemprice)
Bercow, JohnDavies, Quentin (Grantham)
Blunt, CrispinDay, Stephen
Body, Sir RichardDonaldson, Jeffrey
Boswell, TimDorrell, Rt Hon Stephen
Bottomley, Peter (Worthing W)Duncan, Alan
Bottomley, Rt Hon Mrs VirginiaDuncan Smith, Iain
Brady, GrahamEvans, Nigel
Brazier, JulianFaber, David
Breed, ColinFabricant, Michael
Brooke, Rt Hon PeterFallon, Michael
Browning, Mrs AngelaFearn, Ronnie
Bruce, Ian (S Dorset)Flight, Howard
Burnett, JohnForsythe, Clifford
Burns, SimonForth, Rt Hon Eric
Burstow, PaulFox, Dr Liam
Butterfill, JohnGale, Roger
Campbell, Menzies (NE Fife)George, Andrew (St Ives)
Cash, WilliamGibb, Nick
Chapman, Sir Sydney (Chipping Barnet)Gill, Christopher
Gillan, Mrs Cheryl
Chope, ChristopherGorman, Mrs Teresa
Gorrie, DonaldPaice, James
Gray, JamesPaterson, Owen
Green, DamianPickles, Eric
Greenway, JohnPrior, David
Grieve, DominicRedwood, Rt Hon John
Hamilton, Rt Hon Sir ArchieRobertson, Laurence (Tewk'b'ry)
Hammond, PhilipRuffley, David
Harvey, NickRussell, Bob (Colchester)
Hawkins, NickSanders, Adrian
Heath, David (Somerton & Frome)Sayeed, Jonathan
Heathcoat-Amory, Rt Hon DavidShephard, Rt Hon Mrs Gillian
Horam, JohnShepherd, Richard (Aldridge)
Howard, Rt Hon MichaelSimpson, Keith (Mid-Norfolk)
Howarth, Gerald (Aldershot)Smith, Sir Robert (W Ab'd'ns)
Hughes, Simon (Southwark N)Soames, Nicholas
Hunter, AndrewSpelman, Mrs Caroline
Jack, Rt Hon MichaelSpicer, Sir Michael
Jackson, Robert (Wantage)Spring, Richard
Jenkin, Bernard (N Essex)Stanley, Rt Hon Sir John
Johnson Smith, Rt Hon Sir GeoffreyStreeter, Gary
Stunell, Andrew
Keetch, PaulSwayne, Desmond
Key, RobertSyms, Robert
King, Rt Hon Tom (Bridgwater)Tapsell, Sir Peter
Kirkbride, Miss JulieTaylor, John M (Solihull)
Laing, Mrs EleanorTaylor, Sir Teddy
Leigh, EdwardTemple-Morris, Peter
Letwin, OliverTownend, John
Lewis, Dr Julian (New Forest E)Tredinnick, David
Lidington, DavidTrend, Michael
Lloyd, Rt Hon Sir Peter (Fareham)Tyler, Paul
Loughton, TimTyrie, Andrew
Luff, PeterViggers, Peter
Lyell, Rt Hon Sir NicholasWallace, James
McIntosh, Miss AnneWalter, Robert
Maclean, Rt Hon DavidWardle, Charles
Maclennan, RobertWaterson, Nigel
McLoughlin, PatrickWebb, Professor Steve
Malins, HumfreyWells, Bowen
Mawhinney, Rt Hon Dr BrianWhittingdale, John
Merchant, PiersWiddecombe, Rt Hon Miss Ann
Michie, Mrs Ray (Argyll & Bute)Winterton, Nicholas (Macclesfield)
Moss, MalcolmWoodward, Shaun
Nicholls, PatrickYeo, Tim
Norman, ArchieYoung, Rt Hon Sir George
Oaten, MarkTellers for the Ayes:
Ottaway, RichardMr. Oliver Heald and
Page, RichardSir David Madel.

Question accordingly negatived.

It being after Nine o'clock, Mr. Deputy Speaker proceeded, pursuant to Order [14 July] and Resolution [yesterday], to put forthwith the Question on an amendment moved by a member of the Government.