Clause 148 — Non-Resident Companies: Basis of Charge to Corporation Tax

Part of Finance Bill – in the House of Commons at 5:00 pm on 14 May 2003.

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Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury 5:00, 14 May 2003

There are two key points on which I want to put further questions to the Paymaster General. I also want to respond to her comments about the ingredients for the continuing prosperity of the City of London.

I went into the first point at some length when I asked the Paymaster General whether the judgments of the European Court of Justice to date, and the principles on which they were based, pose an inherent threat to what clause 148 and schedule 25 seek to achieve. As I pointed out, the recent Lankhorst decision could undermine the clause, as interest payments to other EU members of a group would still be deemed to be deductible. If any EU banks or a significant number of foreign banks in the City of London are based in other EU countries, the whole issue of not allowing the charging of wider interest, which the clause is substantially about, could be undermined by the ECJ's principles and rulings.

Secondly, although I acknowledge the fact that the Government have consulted widely, and in the main effectively, with the City on a number of issues and that, in fighting our patch with the EU, there has by and large been effective collaboration between the Government and enterprise, I passionately believe that it is a mistake to think that the continuing prosperity of the City relies purely on geography, networks and established talent. Having lived through 30 years of history, I have to point out to the Paymaster General that that prosperity always related fundamentally to tax.

In 1970, the City of London was a dead duck. It was too large for the UK economy, and it came to life only when the then Labour Government agreed with the Governor of the Bank of England on what amounted to tax-free Euro-banking, which thus took off in London rather than in Zurich or any other location. There is a mixture: the City has to be competitive tax-wise and regulatory-wise, and it has to be attractive tax-wise and regulatory-wise, as well as using its inherent advantage of a pool of talented people. If the City becomes uncompetitive regulatory-wise or tax-wise, business will go to New York, Zurich and other places, as sure as eggs are eggs. We must thus consider how we tax overseas businesses in London in comparison with how they are taxed in New York, Zurich and so forth. As I said earlier, I am well aware that the provisions have been consulted on and that they appear broadly comparable to the arrangements in New York and other locations and therefore are not immediately a threat.

Amendments Nos. 66 and 67 would not undermine those provisions; they would address the two little, specific issues to which I referred. We will not want to press the amendments to a vote, because they are not of fundamental importance, but I wish to tell the Paymaster General that, although the provision itself was done and dusted last year, certain things have changed, and in particular the way in which the ECJ has responded, which may render it inoperative. However, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 148 ordered to stand part of the Bill.

Schedule 5 agreed to.