Table — Tax credits — 29 Jul 1997

I beg to move amendment No. 11, in page 64, line 22, leave out 'In'.

Mr. Deputy Speaker:

With this, it will be convenient to discuss Government amendments Nos. 12 to 15.

I beg to move amendment No. 25, in page 22, leave out lines 24 to 37.

The intention of the amendment is to modify the Government's proposals on distributions and tax credits arising on or after the tax year 1999-2000. It would strike out the provisions of the Bill that deprive United Kingdom residents who are not taxpayers of the payable tax credits that they can now claim on their dividends. We believe that the amendment says a great deal about the philosophical differences between the Conservative party and the Labour party, and a good deal about the practical outcome of the stances that they each adopt: where they are coming from affects where they get to.

There was a point in the partial imputation system that was introduced by a Conservative Government in 1973. Those of us who served on the Standing Committee that considered the Bill know that the Economic Secretary has emphasised her belief that that was a distortion. She has sold her proposals not as a tax increase--which they are--but as the removal of a distortion that has crept into the tax system. We do not accept that.

I remind the House that the purpose of the changes introduced nearly a quarter of a century ago in 1973, after the former Labour Chancellor, Lord Callaghan of Cardiff, had unsuccessfully tried to produce something similar to what the Government are producing now, was to avoid double taxation on the same profits arising in the hands first of the company then of its shareholders. That was done by arranging that advance payments of corporation tax against dividends should be met by a matching tax credit in the hands of shareholders.

Shareholders were then, and are now even more, a heterogeneous bunch. Many more shares now are held by institutions, some of which, such as pension funds, are non-taxpayers; others, such as insurance companies, have special arrangements. Income on dividends for pension funds is effectively exempt because the funds pay their tax on the way out to pensioners, in whose hands it is taxed.

Other types of shareholders include collective investment vehicles, such as the unit and investment trusts that we debated extensively in Committee, and holders of personal equity plans, who are individuals, but in a protected environment. There is still a significant number of private direct shareholders, especially in privatised companies; it has been estimated that at the peak there were about 10 million, and anyone who reads a company's annual report and looks at the distribution of shareholders will be likely to find that, although the majority of the share capital is held by institutions--often by a limited number of institutions, such as pension funds--there is a numerical preponderance of individual shareholders, who in some cases still account for a significant proportion of the share capital. Those shareholders pay varying rates of tax: some are higher-rate taxpayers; some on the basic rate; some on the lower; and some, the subject of the amendment, do not pay income tax at all.

There are two remarkable aspects of the Government's proposals. The first is that they have found it necessary to put in place elaborate arrangements, as set out in schedule 4, to effect them. Schedule 4 introduces us to the delights

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of schedule F ordinary rate, higher rate and trust rate, on the back of a residual tax credit of 10 per cent. The reason for that residual tax credit will become apparent later on.

Question put, That the amendment be made:--

The House divided: Ayes 149, Noes 326.

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