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Thank you, Mr. Atkinson, and welcome back to the Chair for what I think will be a very interesting day for the Committee. May I also welcome the hon. Member for Burnley back to her previous Department? We went head to head last year on a particular clause in the previous Finance Bill, so it is good to have her back.
Clause 56 relates to the tax treatment of Members of the European Parliament. It gives tax relief against United Kingdom tax for the new, or maybe not so new, Communities tax that the European Union will levy on MEPs salaries and benefits. The relief will operate in broadly the same way as if the MEP had paid, for example, Belgian tax on his or her earnings. The peculiarity involved, however, is that the UK has no dual taxation treaty with the EU.
The explanatory notes state that, in subsection (1), the clause
extends the application of double taxation relief under the Income and Corporation Taxes Act 1988 (ICTA) to European Community tax deducted from the pay, transitional allowances and pensions of members of the European Parliament (MEPs) under the new Statute for Members of the European Parliament.
It is worth placing the statutes reference number, 2005/684/EC, Euratom, on record, as I will refer to it in due course. The explanatory notes go on to explain that, in subsection (2), the clause
also amends the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) to provide that payment of transitional allowances to MEPs under the Statute will be treated as termination payments in line with the current treatment of other, similar payments.
It is important for us to consider whether the termination payments are indeed in line with the current treatment of other similar payments, at least in the UK. I intend to examine MEPs pay, transitional allowances, pensions and termination payments, all of which are covered by the clause.
Let me begin by giving some background information on why the payment of MEPs is changing at all. MEPs pay will be going up as a result of the new scheme of central payments by the EU, rather than payment by the Cabinet Office as is currently the case in the UK. In practice, the new common salary for all MEPs across the EU will mean a significant pay increase in sterling terms for UK MEPs. To be fair, the situation is a result of the decline in the value of the pound thanks to the Governments policies against the euro since the statute was voted on. At the time of the vote, MEPs were voting for a pay rate that was very similar to the current rate, and that was the same as an MPs pay rate.
I thank my hon. Friend for his intervention. He is quite right. I recall that there were a number of tests involved, but they seem to have been thrown out by the Minister, who has returned to the Treasury from the Department for Work and Pensions. Perhaps she came under influence while she was at the DWP.
The fact that the salary, at the time it was voted upon, would be broadly similar to that of an MP was an important factor in Conservative support for the new statute at that time. As far as MEPs tax arrangements are concerned, UK MEPs are currently paid monthly via the Cabinet Office, and under those arrangements they pay tax through PAYE, along with national insurance contributions. After the end of the tax year they have to complete a self-assessment form, send it to Her Majestys Revenue and Customs at its public department No. 1 office and pay any tax that was not already paid under PAYE. On the face of it, that looks pretty much like the arrangements for any other taxpayer.
However, once the new Europe-wide statute is in force, UK MEPs who were re-elected in 2009 will have the option of staying in the current pay arrangements for as long as they remain MEPs. If they do so, they will continue to be paid their present salary with no change in the tax and national insurance contributions arrangements that currently apply. If, however, they decide to opt for the statute insteadnew MEPs will have no choice in that matter, as they must go for the new, standardised, Europe-wide statutethey will be paid directly by the European Parliament, their salary will be paid by Brussels and they will pay that Community tax on it.
Under current plans to implement the statute, the Government have decided to exercise their right to apply UK tax as well, and we in the Conservative party strongly support that. We have consistently argued that it would be iniquitous for MEPs not to pay tax at the same rate as their electors. They will therefore pay UK tax on their salaries but will, under clause 6, be given credit for any Community tax already paid, which is what is proposed in clause 56. They will therefore be taxed at the same rate as a UK resident earning the same salary in the UK.
My understanding of the new statue is that, because MEPs will be paid by the European Parliament, tax will not be deducted under UK PAYE. Instead, any additional UK tax liability will be collected through their self-assessment. MEPs will therefore need to set aside money from their salaries to pay their prospective UK tax bills at the end of the financial year. They will also continue to be liable for employee-rate UK national insurance contributions on their salaries and will work out their contributions each month and make payments, so UK MEPs face a complicated regime.
So, that is a rough synopsis of the provision before us. It is just a shame that the clause could not have been debated a couple of weeks earlier, before the European elections, when it would have been rather more topical. In fact, I wonder whether the Governments approach will be coloured by the loss of five of their 18 MEPs earlier this month. There are now so few Labour MEPs that I wonder whether the Government were considering a late volte-face on clause 56 and dropping its provisions altogether. With only 13 seats, Labour scored less than parties it loves to criticise.
I am not quite sure about the leadership for which I am renowned, but what other salaries might be available to MEPs? Did the hon. Gentleman mean outside employment?
No, I did not. I understand that they could decide unilaterally to pay themselves the same amount, in pounds sterling in equivalent terms, as MPs in this House, so any increase that they might enjoy, as a result of either a higher rate of pay or exchange rates, could be forgone.
We obviously have many more MEPs than any other party, so I have not been able to check those arrangements with each of them, but I understand that they will all be following the rules precisely. I refer the hon. Gentleman to a document on the conservatives.com website, Our Commitment To The British People. I accept that we are straying from the debate a little, but precisely how our MEPs will accord with the rules is there chapter and verse.
So, when it comes to clause 56, I find it interesting that the Government are proposing tax relief for MEPs, deciding to hide it from public view before the European elections, and have almost no MEPs for the clause to refer to.
Let me say a little about the new rules for MEPs pay, coming into effect next month, which, as mentioned, are the background to clause 56. The new rules will have the most impact in poorer countries, such as Bulgaria, where MEPs earn around 50 times more than the average domestic salary. As we know, the rules will set a standard salary for all 736 MEPs, regardless of the economic conditions of the relevant member state. The think-tank, Open Europe, has said:
The huge gaps in pay will tempt the most talented people away from national politics.
That particular issue is probably beyond the remit of todays debate, but I notice that the Government seem to have decided that there is too little talent left for them in the House of Commons, as shown by the appointment of seven Peers to attend Cabinet.
Indeed, Mr. Atkinson. Ironically, the Government are bringing back MEPs to serve in the national Government. I was going to come back later to the tax treatment of a member of the European Parliament joining the Government.
As the explanatory notes say, the new pay regime takes effect from the new Parliament, which will assemble in a few weeks. The new package has certainly raised some eyebrows, not least because it was voted on by the European Parliament itself. New MEPs will automatically be subject to the new package and re-elected MEPs will be able to choose which package suits them best. I am not aware of any legislature in the world that has that luxury. The consequence is that MEPs will be paid directly by the Community, rather than by their mother country, and will be subject to tax by the Community.
One obvious area that the Minister needs to explain is the EUs ability to raise tax in its own rightthe so-called tax for the benefit of the Communities. At first, I thought that the EU having tax-raising powers must be entirely new, but can the Minister confirm that the European Community tax referred to in the explanatory notes is derived from Council regulation No. 260/68 of 29 February 1968? It was designed for Commission staff and later European Investment Bank staff. I shall be grateful if she will explain whether the tax has existed for a long time. The tax is paid back into the EU budget and clause 56 extends the scheme to MEPs. Can the Minister confirm that?
The Minister needs to explain which part of the EU raises the tax and where it goesfor example, to which part of the EU budget. What is more, even if the European Community tax is not new, I am sure that I am not alone in being worried about its extension into fields not foreseen in 1968. The ability to raise taxes would confirm broader fears of a European superstate and measures to give it tax-raising powers should generally be resistednot least, powers over elected representatives from the member states.
I found that most sources on this Community tax were extremely opaque. The best explanation that I could find was on the website of the EIB:
Some key-concepts concerning the community tax:
Progressive tax scale: as with the majority of national taxation systems, Community tax is based on the principle of a progressive tax scale: the greater the taxable income the higher the rate of tax.
Brackets: Progressive taxation is achieved by dividing the scale into brackets. The taxable amount in each bracket is taxed at the rate applying to that bracket.
Top bracket: the lowest bracket is zero-rated for tax purposes, the second is taxed at 8%, and so on up to the top bracket, which is taxed at the maximum rate of 45%.
Many of us will find it ironic that the Finance Bill, which sees an enabling clause to create a new 50 per cent. tax rate for all British subjects, is the same Bill that allows our MEPs to be taxed by this tax for the benefit of the Communities at a maximum rate of only 45 per cent. Having said that, it looks as if the HMRC reserves the right, as I have said, for UK MEPs to pay tax on the difference between this tax for the benefit of the Communities and UK tax. However, the Minister will need to make that clear and it would be interesting to know whether other states MEPs have to pay that. Knowing in which states that is not the case would inform the debate a great deal.
If this tax for the benefit for the Communities, as referred to in the explanatory notes, has been in place since 1968 and the UK has had no double taxation treaty with the EU, which is actually the origins of clause 56, have there been cases in the last 41 years of someone working for the EUperhaps the Commission, or a body such as the EIBactually being taxed twice? That is the implication of the Governments argument for introducing these measures.
I suppose that all those subject to the Community tax are probably resident in Belgium, but that is not necessarily the case, perhaps, for a member of staff of the EIB working in a London branch. I would be grateful for an explanation of whether they are paid by the EU, but have effectively been subject to taxation by both authorities in the period since 1968. It would be helpful to have some light shone on that, because we are talking about introducing a new clause which may have been needed in 1968, but not in 2009.
The Minister will also have to explain the coefficients being used for these taxes. Returning again to the EIB website, the best explanation I could find of this tax for the benefit of the Communities was:
The original tax scale was laid down by regulation 260/68: coefficient of 100%. This coefficient is readjusted on a regular basis by the Council of Ministers of the E.C. The current coefficient adapting the tax brackets is 486.7097%.
So the Committee needs to know what has been increased almost five fold since 1968 in this tax for the benefit of the Communities referred to in the explanatory notes. Is it the level of the tax brackets, or the actual percentage taxed on the lowest band? I simply do not understand what these coefficients are, but it is very important for us to know what they are.
It is worth having a look at what sort of sums might be involved in clause 56. The think tank Open Europe published a comparison last week between the costs of the UK and the European Parliaments. Their findings are that the European Parliament cost taxpayers a staggering £1.8 million a year for each MEP. That is in contrast to the House of Commons, which cost taxpayers only £364,000 for each Member for each year. The other place costs only £208,000 per member per year. So the overall bill is over five times the level of a national MP, or nine times the level of a peer.
The hon. Gentleman makes a very interesting point. In recent months perhaps five times the media attention has been given to ourselves as has been given to MEPs. Over the years, MEPs have been given a little attention, but perhaps a little more light should be shone on those things. I commend, again, my party colleagues in the European Parliament who have published the excellent document Our commitment to the British people. That is a code governing expenses and allowances for Conservative MEPs, to which I refer the hon. Gentleman.
Does my hon. Friend agree that finance Bill clauses such as this would be better scrutinised and understood by our constituents if we turned away from the list system under which practically nobody knows who their MEPs are, and returned to a constituency system in which representatives were elected on a first-past-the-post basis?
I am sure that we are all grateful for your guidance on that particular matter, Mr. Atkinson.
I return to Open Europes comparison, as it is important here. According to that comparison, based on the respective Parliaments budget allocations, national MPs at Westminster claim £148,297 in allowances each year on average, while our counterparts in Brussels can claim up to £363,000 per annum, which is two and a half times as much. Furthermore, MEPs, in contrast to national MPs, do not have to produce receipts to claim their allowances, although that is changing. Mr. Atkinson, I apologise if this is outside the scope of todays discussion, but I am yet to hear of plans for any Liberal Democrat or UK Independence party MEPs to publish their receipts.
Importantly, the Open Europe study found that 22 UK MEPs retiring this year will receive a share of a £20 million pay-off, in both pensions and benefits. Each will be paid
Thank you for that guidance, Mr. Atkinson. I was coming on to describe the tax on those pensions and benefits. Each of those MEPs will be paid up to two years salary to help them adjust to their new life, and will share a £10 million index-linked pension pot. This is where the important matter of the transitional payments comes in. Earlier, I mentioned the Governments argument that the tax treatment of those transitional payments is essentially the same as the tax treatment of redundancy payments in the private sector. I am going to doubt whether that is the case. That is the importance of the transitional payments. Each of those MEPs gets a transitional payment of more than £30,000, up to £55,000 to close their offices and lay off staff, and a pension worth between £175,000 and £235,000.
It is not entirely clear to me whether those extremely generous transitional payments and pensions will be subject to the tax regime that was in place prior to 2009 or the one that will be in place afterwards, or whether some choice might be involved. The explanatory notes state that existing MEPs can chose to
retain their existing remuneration package.
Does that apply to the tax treatment of moneys that they receive after 2009, if they have stood down? In other words, will Community taxes or UK taxes be paid on those transitional payments? That is not entirely clear. I read in The Times of 2 June that the first £30,000 of the transitional allowance will be tax-free, but who will tax the amounts on top of that is not yet clear.
As we debate the clause, we should be mindful of the generosity of the regime in Brussels, but to be fair, and in the interests of balance, the degree of generosity is the cause of some dispute. The head of the UK office of the European Parliament recently told The Guardian that an MEPs allowances are
comparable to an MPs allowance, and accused British media reports of being inaccurate or tendentious. Open Europes analysis, however, is extensive and attributive, and I have yet to see any detailed counter argument.
My hon. Friend and I, as central London Members, are perhaps unaffected by this, but will he also note that there is a similar scam in section 292 of the Income Tax (Earnings and Pensions) Act 2003, which ensures that the additional cost allowances are tax-free? That is basically a scam that our own MPs play on each other, and one hopes that the Treasury will pay immediate and urgent attention to ensuring this particular situation is entirely
It would be dangerous for me to give an opinion on my hon. Friends intervention. He has made his point and perhaps it might be more appropriate for others to respond in due course when considering any reforms of the allowance structure in this place. Nevertheless, the UK office of the European Parliament misleadingly claims that MEPs pension rights are the same as for a Westminster MP when in fact, under the new rules coming into force following the European elections and giving rise to clause 56, MEPs will be entitled to a far more generous pension scheme than MPs. My understanding of the MPs pension scheme is that if we contribute the standard 10 per cent. of our salary over a 10-year periodthat is, a whole years salary of £63,291, although I am not sure that is the latest figurewe will have access to a pension of £15,822 per annum.
By contrast, under the new rules to come into force after the election, MEPs will receive an annual pension of £27,954 which is almost twice as much, after paying in nothing from their own salaries over the same 10-year period. This is what Open Europe has said about the whole package:
The European Parliament has introduced some reforms to come into force after tomorrow. However, under the new rules, UK MEPs will get a huge payrise, and while receipts will for the first time have to be produced for travel expenses, the vast majority of expenses will continue to be available without a receipt. On top of that, the pension becomes even more generous than beforedwarfing the pension that national MPs are entitled to.
When we debate the tax treatment of MEPs, we need to be aware of what we are paying for, previously directly and now to be indirectly.
Another aspect on which the Government will need to provide reassurance is what happens to MEPs and whether they need to pay any tax to the Belgian or French national authorities if they declare themselves to be resident in Belgium or Francethe two locations of the Parliament. With the new tax for the benefit of the Communities, are MEPs now exempted from Belgian taxation if they are mainly resident in Brussels? I do not know the answer. That question has probably cropped up on a number of occasions over the decades but I am not sure of the situation.
One of my London MEPs wanted me to raise a question relating to the tax treatment of those who are or might be deemed non-domiciled MEPs. Independent of any questions relating to MEPS, it would appear that HMRC is increasingly taking the view that EU citizens working in the UK are generally to be treated as non-domiciled. There is a very important issue in London. My constituency has the second highest proportion of non-UK EU citizens in the country. Kensington and Chelsea is the first and the two Cities is probably the third or fourth along with Camden. That means that over 9 per cent. of my constituency are non-UK EU nationals. There is an important point about whether they will normally be deemed non-domiciled, which I believe is the view increasingly taken by HMRC.
Interesting questions arise with MEPs who were not previously UK residents. Let me try to explain by using a specific example. This question to date has been more theoretical than practical. I recall that either in the 1984 or 1989 European Parliamentary elections, Davidnow LordSteel stood in Italy to become an Italian MEP, if my schoolboy memory is correct.
I think my hon. Friend is right. I cannot remember whether he had any chance of winning, but that is a debate for another day. Other than that, I am not aware of a trans-national MEP either coming from the UK or representing the UK. However, as Dr. Tanner pointed out to me, that changed on 4 June, with the election of Marta Andreasen as an MEP for the south-east of England. Some might argue that her election was a little incongruous for UKIP, but that would be to digress. I must say that I have no personal axe to grind against Ms Andreasen at all. In fact, three or four years ago I spent a pleasant half-hour or so with her on the Commons Terrace, being briefed on the hows and whys of the EU not having its accounts properly signed off. She seemed to be a very pleasant lady and I have nothing against her being elected in this way. I am just using her example, more or less at the request of one of my MEP colleagues, to try to establish what the status might be of somebody who is a non-domiciled but UK-resident MEP.
So, looking at Ms Andreasens case from a tax perspective, it throws up more questions than answers about clause 56. This particular MEP for the south-east of England was, as I understand it, born in Argentina of Danish descent, is married to a Spaniard and lives in Spain and has been elected to a Parliament that is based in both Belgium and France. For a moment, I will ignore the policy of UKIP that all UK citizens working in the UK should require a work permit; I will ignore it as I do not think that it is within the scope of todays debate.
However, I want to pose a tax question. Ms Andreasen seems to be someone who is not domiciled in the UK but she may also wish to declare herself to be resident here. Therefore, are the Government expecting that this type of MEP will be taxed only by the new tax for the benefit of the Communities, or do they expect that a non-domiciled UK MEP will also be subject to UK taxation? Furthermore, how will the Governments proposals for non-doms, as outlined in the Finance Act 2008, be applied to non-dom MEPs if they are also deemed to be resident in the UK?
As we know, timing can be key with the Government when it comes to changing the remuneration and tax treatment of politicians. In last years debate on the severance payments for the Mayor of London, we saw just before the election that the Government seemed especially keen on a favourable tax treatment and severance package for any outgoing Mayor. The timing for that was really most curious; I think that it was in the last days of April 2008. The Government told us that the severance payments given to Greater London assembly members and to outgoing Mayors would be akin to private sector redundancy arrangements. They argued that the same was true for Members of Parliament here. As I understand it, a MP who retires here is treated in the same way as one who offers themselves for election but fails to be elected; at least that was the situation until it was reviewed last year.
Thanks to the Finance Act 2008, similar arrangements will be in place for the GLA. The payment is not so much the equivalent of a redundancy payment in the private sector; it is a payment that will be made in all cases to MPs, Mayors and Greater London assembly members when they stand down.
The same now appears to be the case with MEPs and the Governments treatment of them, according to clause 56 and the explanatory notes. Clause 56(2), which is about termination payments, puts the new scheme on to the same basis as the old scheme and gives exemption to EU termination payments in the same way as House of Commons termination payments. Nevertheless, it is still worth pointing out that these rules, for both sets of parliamentarians, are more favourable than those affecting the vast majority of the population. If there was an entitlement in an ordinary employees contract along similar lines, it would normally be taxable in full and the first £30,000 would not be tax-free, as is the case with MEPs. I think that the HMRC website says:
While the first £30,000 of redundancy can be received tax-free, this tax-free limit only applies to ex-gratia payments, which means those made to compensate for the end of employment. Therefore, unpaid wages, notice period payments and bonuses are taxed as normal employment income.
So it would be helpful to have a clarification of the tax status of the termination payment of £30,000in fact, it is more than £30,000paid to MEPs.
As I have said, this matter, in relation to termination payments, was debated with regard to the Mayor of London and the Greater London assembly in the discussions about the Finance Act 2008. The general rule is that redundancy payments of up to £30,000 are not taxable if they are ex gratia and are not provided under the terms of the contract of employment. Interestingly, HMRC has been seeking to widen the definition of what is provided for in the specific terms of a contract to benefits that are provided on a routine or customary basis upon termination. Employees have long been able to argue at tribunal that something has been customary in their employment, so it is understandable that HMRC now seeks to extend that logic to attack payments that are non-contractual, but customary on termination of employment.
Yet, once again, in this years Finance Bill HMRC seems quite happy to allow tax-free termination payments to politicians. I certainly do not argue that Members of Parliament should have special treatmentin fact, quite the opposite. Why, therefore, are payments like this given favourable statutory tax treatment when any other termination payment has to be defended on a case-by-case basis against the Revenue? It is not clear why Members of Parliament, MEPs and Mayors of London should be offered statutory protection from such a challenge. I would again be grateful for the Ministers views.
I think I am going to take issue with my hon. Friend here and ask him to explain the logic. Redundancy is where a job disappears, normally because the company is closing down or is having to cut back. The position disappears. In the case of politicians, the position is not disappearing but involuntarily the person is not allowed to continue in that post. I can understand why there is different tax treatment.
My hon. Friend makes an interesting point. He is right: it is not exactly the same. The easiest thing for me to do is to refer him to the lengthy debate that was held on this very point during the consideration of last years Finance Bill by the Committee of the whole House.
It would also be helpful to get clarification from the Minister about cases where an MEP gives up his or her position voluntarily to take on office in a national Government. The Government do not appear to be particularly expert at these provisions. Indeed, my hon. Friend the Member for Rayleigh (Mr. Francois) drew attention to the case of an MEP who was appointed Europe Minister recently, rather embarrassingly in the course of the Prime Ministers press conference, the day after the European elections. He pointed out that she would be unable to take on the role unless she first stood down as an MEP. That seemed to be news both to the MEP and the Government, despite the fact that anyone familiar with the European Parliament will know that MEPs come in and out of national Government quite often in other countries, requiring them to step down.
Returning to clause 56, what will be the tax status of the severance arrangement for that particular MEP who is now, or maybe is not or perhaps soon is the Europe Minister or is perhaps just the acting Europe Minister? I am still not sure of her status. I think the public have a right to know, not least because she is listed on the No. 10 website as being a recipient of a full ministerial salary, unlike many of her Lords colleagues, or soon-to-be colleagues, who have also been appointed to the Government and/or attend Cabinet.
I have asked the Minister a number of questions during this short debate on MEPs pay arrangements. I shall summarise them again. [Interruption.] I have eight questions. First, is the assumption correct that the tax for the benefit of the Communities is the one derived from the 1986 Council regulation? Secondly, which part of the EU does the tax raising and where does the tax go? Thirdly, have there been cases since 1968 where someone has been paid by the EU Commission or the EIB and has been taxed twice because of the lack of this clause? Is the clause absolutely necessary?
Fourthly, the Minister will need to explain the obscure coefficients I mentioned earlier when referring to the EIB website to try to see whether we really are comparing like with like on these matters. Fifthly, which tax regime will apply post-2009 to MEPs pensions and transition payments? Sixthly, are MEPs as a class of persons now, or were they ever previously, exempted from national income taxes raised in Belgium, France or any other country where they declared themselves to be resident? Seventhly, what about a UK-resident but non-domiciled MEP, like the UKIP MEP I mentioned earlier? I cannot say with any degree of certainty that that is her statusI have made a number of inferencesbut I would be grateful for an explanation of how that sort of person is, or might be, treated under clause 56. Finally, what will be the tax treatment of any severance package of an MEP who steps down voluntarily under the new statute, and how will that compare with the existing arrangements?
We do not, of course, oppose the clause. It would not be right for MEPs to be taxed on their full salaries and other entitlements in their entireties by two separate tax authorities. However, we have many questions and seek a number of clarifications on the whole matter.
Thank you for giving me the opportunity to make the main speech on the clause, Mr. Atkinson. I also support the Governments intentions, although I may express my support in different terms. I congratulate the hon. Member for Hammersmith and Fulham on his customary rigour in seeking ministerial clarity on some individual cases, as well as on the broad principles under discussion.
I wish to make three brief points. First, I see the logic behind all MEPs being paid the same, although some may feel that it is another step down the path towards an EU Parliament that assumes a national profile, rather than one that is an amalgamation of different nation states. Similarly, I see the merit and wisdom of UK MPs being paid the same, regardless of their individual contributions to our deliberations. I am comfortable with that broad principle.
Secondly, I see the logic of phasing in the arrangements. I am willing to be corrected, but I vaguely remember the Conservative party leader, the right hon. Member for Witney (Mr. Cameron), recently talking about closing the existing parliamentary pension scheme to new entrants. If he did make that point, it would similarly involve a phasing, interim arrangement whereby existing MPs would continue to benefit from the current system, rather than a blanket arrangement whereby all MPs, regardless of the length of their service, were required to switch over to the new arrangement. In that context, I see some sense in applying interim arrangements to the European Parliament as well.
Thirdly, I see the sense in taxing MEPs at the same rate as their constituents. Of course, there is a slight difference in that the provision should very much apply to us in this House, because we set the rates of taxation for our constituents, which is not true of MEPs. Nevertheless, I see the sense in MEPs paying the same rates of taxation, whether they be higher or lower than at present, as the people they represent. However, under the salary level, MEPs would not, as was perhaps inferred by the hon. Member for Hammersmith and Fulham, be eligible to pay the 50 per cent. rate on their income unless there was a massive change in the rate of exchange between sterling and the euro. That causes some difficulty, as we have seen in trying to work out whether football transfers have broken records, because the pound is at such a weak level that it affects comparisons between the UK and the eurozone. However, seeing as the dominant EU currency is the euro, it seems logical to pay MEPs at the euro rate rather than at, for example, the Danish krone rate, or at a more significant currency rate, such as sterling.
I am trying to follow the hon. Gentlemans argument. We all know that the Liberal Democrats policy is to join the euro at the earliest possible opportunity. I wonder how he feels about national parliamentarians who are elected by a country but who are paid directly by the EU, rather than by their national taxpayers. Will that have an impact on whether they view their duties as being to their home country or to the EU?
That is not something that causes me sleepless nights. I can see the merit in having the European Parliament administer the pay of its Members. I would of course expect the six MEPs who represent the south-west of England to have foremost in their mind the concerns of the residents of the south-west of England, but I would not expect them to have those concerns exclusively in their minds. If they were able to advance animal welfare standards across the EU, for example, in a way that was advantageous to farmers in Somerset, who currently feel that they have to adhere to superior standards of animal welfare, I would regard them as discharging their function effectively. There are all kinds of roles that MEPs may play, and they might feel that they can make a contribution by advancing some of our European values in other parts of the world to the advantage of citizens there, so I do not wish their remit to be too narrowly confined.
I certainly agree with part of the thrust of the hon. Gentlemans argument: that MEPs have a responsibility to their constituents and also to look at the wider picture, in the same way as debating the clause in Committee is beyond our remit in relation to our constituents in Taunton and in Hammersmith and Fulham. I wonder what his view is on the change of who is making the payments. Does he feel that the fact that Europe is paying UK MEPs, rather than the UK Exchequer, will make no difference to how they view their loyalties, or that that will make some tangible difference?
My feeling is that it would almost certainly make no difference, but I have never served in the European Parliament and so have difficulty putting myself in the mindset of one of its Members and trying to decide what my primary motivation would be. I imagine that I would be highly motivated by the desire to serve the people in the region that elected me and consider the interests of the people in the country I came from. I would also be motivated by a desire to see the EU shaped in a way that conformed to my ideals and values. All those factors would be considerations that would rest with me, regardless of whose name was on the payslip I got at the end of each month.
With respect, Mr. Atkinson, does not the hon. Gentleman recognise the old phrase, which I am sure most west country people would recognise, that he who pays the piper calls the tune? There is a symbolic aspect to this business that ought to be taken into account. One owes ones loyalty to the person who hands out ones pay packet. That is the point; will he recognise it?
The Conservatives are obsessed by symbolism, with regard to the EU, and I am interested in practicalities. I apologise for having a less romantic view of politics than the hon. Gentleman does. I observe that the EU is funded through contributions made by member states, and the question whether MEPs are paid directly by that money raised in the UK, or through the mechanism after the money has gone to the EU, I suspect, will not have as big a bearing on their deliberations as some members of the Conservative party fear.
Perhaps it is not surprising that the hon. Gentleman, as a Liberal Democrat, is not too worried about where the money comes from, but I put it to him that receiving ones pay cheque from an organisation that never has its accounts signed off because they are subject to so many questions would undermine the confidence with which one served. If I were an MEP, I would wish to be paid by the Exchequer of this country.
All I can say is that I hope that Conservative MEPs, who will share the hon. Gentlemans anxiety, will forgo their pay until they feel that the auditing arrangements within the EU are administered to a more satisfactory standard. That seems to be the logical inference.
I am extremely concerned about value for money, so I am concerned by all kinds of statements made by different parties in the House, but I do not wish you to think that I am straying from clause 56, Mr. Atkinson. The Conservative leadership could certainly pay their stamp duty, for example, which would be helpful to the Exchequer.
Is it not the case already that MEPs claim from the European Union for travelling expenses and other things? We know that certain prominent Conservatives made ample use of that fund.
That is my understanding. I have been shocked by the loose attitude that some Conservative MEPs have adopted towards value for money for the taxes that I pay in good faith hoping to see improvements in public services. That point is directly relevant to clause 56, Mr. Atkinson, and I am more than willing to take interventions on it. If you are not keen to expand to that conversation, I will move on to my concluding remarks.
One can only observe that the Conservatives are keen to talk in broad-brush principles and are keen on symbolism, but are less keen on value for money when it comes to Conservative MEPs. Everybody who sees the formation and the practical workings of the European Union and its Parliament in pragmatic and non-paranoidthat may be an accurate way to describe itterms can see merit in an administrative system of this type. It is important that politicians who serve constituencies in the United Kingdom pay levels of taxation commensurate with those of other UK residents. On that basis, I, like the Conservative party, am an enthusiast for clause 56.
It is a great pleasure to follow the hon. Member for Taunton and my hon. Friend the Member for Hammersmith and Fulham, who made such an excellent but unfortunately short speech. I owe the Government Whip an apology because I was very annoyed at the last sitting that we could not continue into the evening as he had choked off debate on the clause. I now understand whyhe had obviously anticipated a longer debate on it than I had.
My hon. Friend the Member for Hammersmith and Fulham was right in putting the Conservative Front-Bench position and saying that we would not vote against the clause. However, my leader, my right hon. Friend the Member for Witney, has shown great leadership in saying that Back-Bench Conservative Members do not have to follow the Whip in Committee, so do not be surprised if there is a Division, Mr. Atkinson.
The clause gives rise to a number of interesting points but I will try to keep entirely to the clause. It has opened up a lot of new ideas that I was not aware of. The Government are right that double taxation should not be allowed and, if a country is taxing a British citizen, that tax should be allowed against British tax. Unfortunately, we are not talking about another country; it is that thing called the European Union, which is supposed to be a Union of nation states so, by that definition, it cannot have tax-raising powers. Before we debated this, I thought that that was the position. Now I understand that it may not be the case.
Without wishing to put too many cats among the proverbial pigeons, does my hon. Friend agree that if the EU were a tax-raising institution, it might spend less money, which might be a good thing?
I quite agree. The problem we have is that the Government are rightly trying to solve a problem for British citizens, who should not be taxed in two places and should get relief against it. That is what clause 56 does, and I agree with it. However, should we be allowing that taxation in the first place when it is not another country but this organisation that is imposing a tax on British citizens? Should not the Government fight this tooth and nail and tell the MEPs not to pay the tax because it is an outrage?
I hope that the Minister will be able to deal with the following technical point. The taxation that will be charged will be through self-assessment at the end of the year. I assume that MEPs receive their money in euros each month. How will that be converted into sterling for taxation purposes? Will it be done on a monthly basis when the money is remitted or at the end of the year when the tax is decided? That could be a significantly different tax charge. As I understand the clause, it will mean a loss of money to the Exchequer. I stand to be corrected, but it appears that there is a European tax charge that will go into the European Unions coffers which will then be set against the tax that the MEPs would have paid. That difference will be a loss to the UK Exchequer. How much will that loss be?
The hon. Gentleman raises a legitimate concern about currency fluctuations within the year and the effect on tax liability. Does he conclude that the Conservative policy of shadowing the deutschmark in the early 1990s would be wisely replicated by shadowing the euro now so that those difficulties could be avoided? That is not my view, but it seems to be the view of Conservative Back Benchers.
Mr. Atkinson, I am sorry that I accepted that intervention. It would be quite out of order for me to deal with it. I promised to stick to the clause and I will do my best to talk about this and the technical issues that come up.
There is an important point here that I had not understood before. In the past, MEPs were taxed on their salary as though they were British citizens. That made a lot of sense, and I understand it entirely because there was no Community tax involved. We now know that there was a Community tax, and I am not sure on whom this was charged. There is an issue. Were these officials or employees of the European Union? If they were, were they just being taxed as citizens of some European Union state and not being taxed here, or was there double taxation? That is a really important point. How much money was involved?
My hon. Friend makes a very important point to which I hope the Minister will respond.
I was just about to refer to clause 56(1)(c) which reads:
Article 14, 15 or 17 (pensions for old-age, incapacity and survivors).
Can I move straight on from there to the Secretary of State for Business, Innovation and Skills, with responsibility for regulatory reform, enterprise and science, First Secretary and Lord President of the Counciland deputy Prime Ministerthe noble Lord Mandelson? He was a commissioner. What was his tax position? Was he being taxed in this country or was he paying some sort of Community tax? Is it something new? Has there been a loss to the Exchequer or has the poor Lord Mandelson actually been paying tax twice? Will there be some sort of retrospective relief for commissioners? I assume that the commissioner is regarded as ordinarily resident in this country.
Lord Mandelson is a high-profile case, but there must be many other people who were caught in this position. It is important to know whether they were paying UK tax, both UK tax and EU tax, or only EU tax. People will want to know that information.
Clause 56 is right in principle, in that it saves British citizens from paying tax twice, but it has opened up a can of worms. Therefore, I hope that the Minister will be able either to answer now all the questions that have been raised or, if that is not possible, to write to the Committee with that information.
May I start, Mr. Atkinson, by saying what an honour it is to serve under your chairmanship? I think that I am serving under you for the first time and I welcome you to the Chair.
It is a pleasure to debate with the hon. Member for Hammersmith and Fulham. I thank him for his kind words. Indeed, as he said, I recall that we had a lengthy debate during the deliberations on the Finance Bill last year. My memory is that it was about sovereign debt issuance and he gave an extremely interesting and, I am sure, historically correct account of various currency crises and sovereign debt issuances by various countries, including the UK. I also seem to remember that my contribution to that debate was principally to point outrather continuallythat although that account was very interesting, it was perhaps not entirely relevant to the specific point on the issuance of Islamic bonds that we were discussing at that time. I feel a strange sense of dĂ(c)jĂ vu now, one year on.
With your forbearance, Mr. Atkinson, I want to point out that the Minister is right that that debate was about sukuk bond issuance, but the question was whether or not it was advisable for a sovereign issuer to be issuing structured notes, regardless of the structure. The debate was not actually about Islamic finance; it was about whether or not sovereign issuers should be going down that road.
I must say that now might be the opportunity for the Minister to apologise for misquoting me later that week to an audience in the City of London in a talk about Islamic finance, by claiming that Conservatives were opposed to Islamic finance, which is certainly not the case. So the debate today gives her an opportunity to apologise for misquoting me, which happened in the same week as the debate that she referred to.
Thank you for your clarification, Mr. Atkinson. All I will say is that my sense of dĂ(c)jĂ vu has now increased.
I have enjoyed the debate today hugely; I always enjoy it when the Conservative party splits very openly in front of our eyes. I have also enjoyed the revelation by the hon. Member for Taunton, when he said that it was difficult to put himself in the mindset of someone who served in the European Parliament. I do not know whether we should draw anything from that comment about his relationship with his leader.
May I gently give the Minister a word of advice? It is possible that there is a difference of opinion within a party, but when it happens people should try to disagree without rancour.
Opposition Members are obviously the best of friends. Moving on swiftly, I am of course grateful for the support of at least the Front-Bench spokespersons of both the main Opposition parties.
As today is the first time that I have served under your chairmanship, Mr. Atkinson, in an attempt to ingratiate myself with you I will attempt to keep my remarks specifically related to the clause. I remind the Committee that the clause simply does two things. Since the European Community is not a territory, as defined in double taxation law, we therefore need another piece of primary legislation to ensure that MEPs will not be subject to double taxation under the new regime. So, we are simply aligning the situation of MEPs with the existing provisions under double taxation law.
The other thing that the clause does is to ensure that the new transitional allowance, as it is called, which is now available to MEPs under the new system, has a basis in law, by linking it to the legal concept of a termination payment.
Can the Minister explain to us, therefore, why the situation is unique? My understanding is that the United Nations or the World Bank will pay their staff whether or not the Minister believes that they level a tax. If that is not the case, why not? Why is it only the EU that decides that it wants to have those tax-raising powers?
Perhaps I can add that to the list of eight questions that the hon. Gentleman has put and that I shall attempt to answer.
Moving on to the specific points, I am delighted by the summary of the eight questions, although perhaps we could have cut to the chase and gone straight to them. I am slightly concerned because I think that I have more than eight answers, but I will do the best I can.
One of the first questions that the hon. Gentleman seemed to ask was whether this was a secret plan and why we were talking about this after the European elections of a fortnight ago. I am delighted exclusively to reveal that our policy was communicated to MEPs in a letter from the Minister for Europe in July last year. We also wrote to MEPs of all parties in March this year. So there was no intent to reveal it only now.
Moving on, I am delighted that the hon. Gentleman has been looking at the EIB website with such diligence. I will write to him on the precise point about coefficients. The substantive point seems to be that, as a result of the double taxation, MEPs will now be subject to an effective tax rate of 27.95 per cent. If we did not introduce the clause in the Finance Bill, their effective tax rate would be 21.84 per cent. So they will be paying more tax at the same effective tax rates as their constituents as a result of the clause, which I think all Members of the Committee would agree with.
The EC tax that is applied to MEPs pay is the same tax that EU officials have paid since 1968.
I must have misunderstood that point. She is saying that MEPs are paying extra tax. Are they getting a refund? She seemed to imply that. What I thought the Minister was saying was that the Community tax was higher than the basic income tax in this country. If that was the case, there would be a refund. Am I wrong in that?
I hope to be able to come back to the net position of the UK Exchequer as a result of all the changes. What I think his question was getting at was that marginal rates, and the way in which they are tiered, are actually higher in the UK than the EC rates. Therefore, as a result of the double taxation treaty, they will pay more tax in total, although there is a sort of credit put in as part of that process.
How will the tax work if an official is employed by the EU, but, for example, works in London? We have heard members of the Committee mention, perhaps, the EIB staff in London and, of course, the European Commission has staff in London. EU officials working in this country will generally be liable for UK tax. Those working in Brussels will generally be liable for Community tax, but obviously each individual situation will be looked at individually.
Are there any cases in which someone working for the EU has been taxed twice? We are not aware of any such cases. The clause is required only because a specific statute has been introduced which provides for MEPs to be paid by the EU instead of by national Governments. That was not previously the case, so MEPs were not previously subject to Community tax.
There was a specific question about Community taxes being levied on transitional allowances. Those MPs who have recently stood down are entitled to resettlement grants under existing pay arrangements. Resettlement grants are subject only to UK tax; they are not subject to Community tax. There were a lot of questions about people who were not, perhaps, UK residents and what their situation was with respect to other member states. Not being a Minister for another member state Government, or indeed a tax administrator for the European Community, I am not able to provide specific answers. However, I will write to the hon. Member for Hammersmith and Fulham to answer the question whether MEPs need to pay tax to the Belgian or French authorities if they are resident there.
Can I take the Minister back to the point that was mentioned a moment ago? Although the MEP whom I mentioned might be an exception at the momentgoing to be a UK resident but a non-domthere will possibly be more cases in future. I mentioned that 9 per cent. of my constituency were EU nationals. It is not impossibleI think that the fourth Conservative candidate on the London list is probably an EU national. Will the Minister clarify the position of UK-resident MEPs who are non-doms?
I am coming to that point. An MEP who after the elections of a fortnight ago ceases to become an MEP will be eligible for the transitional allowance under the new regime that the European Parliament has now agreed.
I come now to the specific points about residents and non-residents, and domiciled and non-domiciled status. In summary, the rules regarding resident and domiciled status for MEPs are no different from those for any other category of person. We know of only one UK MEP who has ever claimed non-residence in the UK. That might be useful background information. It follows that an MEP representing a UK constituency would not then be fully liable for UK tax because they are non-tax resident. It is unlikely that the situation would arise because most UK MEPs obviously have ties, duties and work to undertake, which means that they will be here.
What checks would the Treasury undertake to ensure that an individual was not trying to suggest they were not domiciled anywherein other words, that there was some domicile that they were admitting to and therefore had tax liability in some territory?
We take great pains to ensure that the tax law is not abused and that there is no fraudulent activity, avoidance or evasion. MEPs would be no different from any other category of person in that regard.
A non-resident, non-domiciled MEP would not be fully liable to UK tax. However, if they were non-resident as I said, there has been only one case so farlike all other non-residents they would be liable to UK tax on the portion on their employment duties carried out here. Broadly speaking, days spent working in the UK would be liable to UK tax, as is normally the situation for other people, but employment duties carried out abroad would not be liable to tax.
A resident but non-domiciled MEP using the remittance basis would also be liable to UK tax on those employment duties carried out in the UK and, in some circumstances, as is normal, also liable to UK tax on their duties carried out abroad. I do not want to imply that this is something we are routinely looking into because, as far as we are aware, there has been only one case.
I apologise to the Committee, as I need to clarify what I said previously about whether this is a unique situation. There are some similar circumstances, as hon. Members rightly said, relating to the UN and NATO. I will write to the Committee to explain the parallels.
The hon. Member for Wellingborough asked about exchange rates used for the purposes of self-assessment. If an MEP is paid in euros, the conversion to sterling is at the time of payment, which is normal for any person paid in a different currency. I do not want to confuse the Committee further, and I am mindful of the fact that we have spent a lot of time on this, but I mention for the record that MEPs have the option of being paid in sterling. I do not know whether Conservative MEPs will be taking up this option.
A theme running through some Back-Bench Conservative Members remarks was whether the EU should have tax-raising powers and whether this was the thin end of the wedge. I wish to reassure the Committee that this is an extremely limited tax, which applies exclusively to EU officials and MEPs. It does not imply any wider EU tax-raising powers, and indeed has no basis in law to do so.
I do not know whether that was a slip of the tongue in the Ministers last sentence or so. She linked EU officials and MEPs, as though the clause applied to both. I thought that it applied only to MEPs. There are a couple of issues. How have the tax affairs of officials who are resident in the UK been treated? Have they been paying Community tax and British tax, or just Community tax? What was the loss of revenue to the UK Exchequer due to the double taxation relief mentioned in the clause?
The clause applies only to MEPs. The tax applies to EU officials and MEPs. As I have tried to explainI apologise if I was not clearif there are such categories of people who are working in the UK, they will normally pay UK tax. However, I obviously cannot comment on every individual case.
The question remains as to which part of the EU does the tax-raising and where that money goes. I understand that payments will be made by the European Parliament. Presumably the European Parliament is not a taxing authority, so where do the moneys go?
I presumeI shall correct myself if this is not the casethat under European Community treaties there is a small provision to do that, precisely in the circumstances mentioned.
As I promised, I shall also write to the Committee with the net position of the Exchequer as a result of the changes introduced by the new MEPs agreed statute, and shall add into that the effect of the clause. I am sure that I have answered more than eight questions, and I therefore now commend the clause to the Committee.