Clause 16 - Open-ended investment companies

Finance Bill – in a Public Bill Committee am 6:30 pm ar 21 Mehefin 2005.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Mark Field Mark Field Shadow Financial Secretary 6:30, 21 Mehefin 2005

I beg to move amendment No. 13, in clause 16, page 14, line 39, at end insert—

'(4) In relation to an open-ended investment company mainly invested in interests or rights over land, the rate of corporation tax for the year 2005 and subsequent financial years may be determined under Regulations made under section 18 of this Act to be nil.'.

Chapter 3 relates to authorised investment funds. As the Committee knows, we discussed these matters in some detail on the Floor of the House, at least in relation to clause 18, which had several other aspects that cover the debates relevant to clause 16. I tabled the amendment because it deals with an area that was not discussed in such great detail.

Overall, the funds industry does not want to alter many of the clauses, but it would prefer that the proposed changes be made by primary legislation and not by statutory instrument. The Association of British Insurers has expressed several principled concerns in its representations to the Government. The ABI is concerned that the Government propose to   extend significantly the power that allows them to alter critical areas of the taxation of life insurance companies by regulation rather than by primary legislation. It has expressed strong reservations about the proposals. As a general point of principle, the Conservative party accepts the ABI's view that it is inappropriate for changes to such a significant element of the tax regime for life insurance to be made simply by regulation. The worry is that the clause allows changes to be made without proper consultation or parliamentary scrutiny, and could result in badly thought through and unfair proposals becoming law. We strongly believe that significant changes to tax legislation should be made only by means of primary legislation.

The Government intend using their proposed regulation-making powers to address what they see as flaws within the current system. Again, the ABI accepts that the legislation needs to be reviewed. However, we believe that such a review should be part of a wider review of corporation tax reform in relation to the taxation of life insurance companies—we understand that that is scheduled for some time next year—rather than as a quick fix within the Bill. Without repeating the debate on schedule 2, there are also concerns that aspects of the Bill will have retrospective effect.

Amendment No. 13 addresses some of the issues that we discussed on the Floor of the House on 13 June. It should be noted that, despite several announcements by the Government on introducing tax legislation to give effect to real estate investment trusts, such legislation has not been introduced in this Finance Bill. That is due to problems involving the current method of taxation of overseas landlords, where rents paid to them are subject to a 22 per cent. withholding tax, except where the landlord has the prior agreement of the Inland Revenue. The concern is that REITs will, in effect, escape such a tax on paying distribution to an overseas landlord. However, many other countries have REITs and tax regimes for them. There is a genuine concern that the delay is causing the property fund industry to locate in countries other than the UK.

I am sure that the Minister will have thoughts on a solution. We have tried to highlight the problem that prevents such legislation being introduced following suitable consultation. The reason why the European Union has tried to impose a different regime is that the UK proposals are likely to be ruled illegal under EU law by the European Court of Justice. Our amendment enables one of the suggested solutions to be that tax is charged at nil in the REIT, with greater tax then due to arise on the investor in the REIT if it is so chargeable to tax.

Clause 16 on open-ended investment companies effectively transfers into statute the statutory instrument laid when OEICs could first be established under UK law. That should mean that OEICs will be taxed in the same manner as unit trusts: in other words, on income at 20 per cent., rather than in the manner applicable to other companies.

I hope that the Minister will be able to give some guidance on the Government's thoughts on clause 16.   We could, I know, repeat much of the earlier debate, but many of the concerns that were set out on the Floor of the House on 13 June remain entirely relevant. There is grave concern within the insurance industry that much of the legislation in clauses 16 to 23 is being rushed through the House at a time when a little more sober reflection, given the timetabling of other amendments, would have made a certain amount of sense. I hope that the Economic Secretary has some thoughts on the matter.

Photo of Christopher Huhne Christopher Huhne Shadow Minister, Treasury

There is a problem with both the amendment and the clause, and I should like to give the Economic Secretary an opportunity to address it. The Treasury's long-standing position is that there should be tax neutrality between different investment vehicles. The provisions apply only to OEICs and authorised unit trusts. I mentioned on Second Reading that they do not apply to the main competition to those vehicles, namely closed-end funds or investment trusts. One result will be to widen further the tax advantages enjoyed by OEICs and AUTs compared with ITCs, particularly when investing in bonds. I should like the Economic Secretary to take this opportunity to explain why the Treasury has not addressed that issue in making these changes. Perhaps it is due to the lack of consideration that the hon. Member for Cities of London and Westminster has just described.

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury 6:45, 21 Mehefin 2005

The hon. Member for Cities of London and Westminster asked: why now? Why are we rewriting the regime in this Finance Bill? It is important that we do because we must respond to recent regulatory changes for authorised investment funds. In the circumstances, it makes sense to rationalise the existing regime at the same time.

The Financial Services Authority updated the rules governing authorised investment funds in April 2004. In subsequent consultations to ensure that tax does not hinder the wider investment strategies now permitted by the FSA, a number of respondents mentioned the difficulties of dealing with two separate bodies of legislation—one in primary and the other in secondary legislation. In response to those concerns, the details of the rules applicable to both AUTs and OEICs will in future be in regulations. That will also allow a quicker and easier response to any future changes introduced by the regulator.

It is important not to go over old ground in the REIT debate. We had a long debate on the Floor of the House about REITs. We made clear our intention, if we are able to resolve the technical problems, to introduce proposals in the Finance Bill of 2006. It would be entirely wrong to bring forward now proposals on REITs that we were not happy with and that might lead to an unsatisfactory outcome. We are actively working with stakeholders and specialists to ensure that the proposals that we make on REITs are appropriate. If we introduced measures that ended in unintended and undesirable consequences, we would be subjecting ourselves to considerable and justified criticism.  

I accept that it is important that we get the REIT issues resolved, but it is also important that we recognise that serious outstanding obstacles have to be tacked. That is accepted by the experts in the field.

Photo of Richard Spring Richard Spring Shadow Minister, Treasury

The Minister should examine the experience of other countries. The huge obstacles that Ministers keep referring to have been dealt with by other countries, including other European Union countries and others. Business is being lost to this country. Here we are dealing with legislation to prevent the Exchequer losing money through avoidance, which is one thing, but a problem has been created through delay, which is impossible to understand. As has been publicly stated, business has been taken abroad, because of the Government's unwillingness or incapability to act.

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

It is extraordinary to hear the hon. Gentleman referring to the EU and other EU countries as though we should follow their model. That has not been the position of the Conservative party on any issue that I can recall.

It is important that we get the reforms to the REIT regime right and that they are consistent with our objectives, which are that the reform must be at no overall cost to the Exchequer and that we continue to collect a fair share of tax from the property sector. We cannot apologise for those objectives. They are entirely proper. I accept the importance of making progress, but we must ensure that we get the provisions right.

The hon. Member for Eastleigh (Chris Huhne) asked specifically why the reforms are not being extended at this time to investment trust companies; I think that that was the specific example he gave. He will acknowledge that they are not authorised investment funds and, although they offer an alternative to investors wishing to obtain a wider exposure to the market than just investing in a single share, they are not regulated by the FSA for consumer protection or for eligible investment strategies, as retail collective investment schemes are. The difference between investment trust companies and authorised investment funds therefore consists of more than just the ability to make an interest distribution. Wider issues need to be considered before contemplating any change to the tax rules concerning distributions to investors.

We have put out a consultation document relatively recently on the way that investment trust companies are regulated. We want to study the results of that consultation carefully before we make any final decisions. The Chancellor made it clear in the last Budget that the Government recognise the potential benefits of simplifying and modernising the taxation of pooled investment; that includes investment trust companies. We continue to invite views on whether radical reform, similar to what is happening in relation to pensions, is viable.

Photo of Christopher Huhne Christopher Huhne Shadow Minister, Treasury

The Minister seems to be getting into a byway that is not relevant to the Finance Bill. The issue is not whether investment trust companies are regulated in the same way as authorised investment funds, but whether, as an alternative to those funds, they benefit from tax neutrality. I invite the Minister to   state whether he regards it as sensible to apply to those competing vehicles the principle that there should be tax neutrality as between investment in an investment trust and investment in an authorised investment fund. Will he make a commitment to bring forward proposals, if not this year, then in a future Finance Bill, to put those alternative investment vehicles on a level playing field?

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

I have made it clear that there are reforms that we want to make at an appropriate time, but they must be consistent with the objectives that we have set out. We do not feel that it would be right at this stage, when we have just begun a consultation process, to include relevant proposals in the Bill. However, if, as a consequence of the consultation and of studying the implications of measures in the Bill, it becomes apparent that it would be right, in order to achieve a level playing field, to legislate in that context, of course we would take a sympathetic view. However, we need to be persuaded that that is appropriate.

Photo of Mark Field Mark Field Shadow Financial Secretary

The Economic Secretary has referred several times to the consultation process. Has he any idea how long it is likely to continue and when it is likely to end? As my hon. Friend the Member for West Suffolk (Mr. Spring) has pointed out, much of our business is floating out of the door, away from the UK. It is therefore all the more urgent that we make progress.

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

I simply do not accept that there is empirical evidence for the suggestion that investment is flowing out of the country. The consultation that I referred to has recently concluded. We are now analysing the responses. Having done that we shall consider the appropriate reforms. We shall do that in the next few months, and if appropriate—if, having discussed the matter with the relevant stakeholders, we come to a sensible conclusion that is consistent with our objectives—I imagine that we shall consider including in the next Finance Bill appropriate clauses to answer the concerns of hon. Members. With that, I hope that the Opposition will withdraw the amendment.

Photo of Rob Marris Rob Marris Llafur, Wolverhampton South West

Perhaps I have misunderstood the amendment. I am not a financial expert, but, as I understand matters, authorised unit trusts currently pay tax in the lower band for income tax, which is 20 per cent. Open-ended investment companies, as companies, would pay corporation tax at 30 per cent., but under the legislation they will in fact be paying it at 20 per cent. Amendment No. 13 says that if such   companies were property funds, the rate of tax could be nil—not only for this tax year, but potentially for ever. That strikes me as absolutely extraordinary. Open-ended investment companies get a tax break from 30 per cent. down to 20 per cent., but if they invest mainly in property, the hon. Member for Cities of London and Westminster—perhaps because of his surname—wants to make it nil. I urge Committee members to vote against the amendment.

Photo of Mark Field Mark Field Shadow Financial Secretary

It is rather ironic that the Conservative Member of Parliament with the most urban seat should have the most rural surname. If the good burghers of Wolverhampton, South-West ever regain their senses at a future general election, the hon. Member for Wolverhampton, South-West will have a sure-fire employment opportunity as a drafter of explanatory notes, if nothing else.

Photo of Mark Field Mark Field Shadow Financial Secretary

The explanatory notes are good anyway; we cannot complain too much. I will be happy to withdraw the amendment, although there is some concern that there is a complacency, which I know has been debated at length on the Floor of the House.

Photo of Brooks Newmark Brooks Newmark Ceidwadwyr, Braintree

Does my hon. Friend not agree with John Gellatly of Merrill Lynch Investment Managers? He is quoted on the company's website as saying that there is now more than £3 billion of listed property trusts in Guernsey. Is that not potentially a loss of revenue to the UK Exchequer?

Photo of Mark Field Mark Field Shadow Financial Secretary

I entirely endorse the gospel according to Mr. Gellatly of Merrill Lynch.

There is scope, although obviously not now, for a much wider debate about property taxes. I hope that we will have a chance to have it during our consideration of this Bill because there are grave concerns that we run the risk of disadvantaging much of the UK if we move ahead with the Europeanisation of our property taxes, although that may well be a desire of the Exchequer. However, three minutes to 7 this evening is not the time for that debate. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 16 ordered to stand part of the Bill.

Clauses 17 and 19 to 23 ordered to stand part of the Bill.

Further consideration adjourned.—[Mr. Watson.]

Adjourned accordingly at Seven o'clock till Thursday 23 June at fifteen minutes past Nine o'clock.