Finance Bill — 16 Jul 1997

I beg to move amendment No. 16, page 12, line 42, at end insert--

'(4) Section 468Q of the Taxes Act 1988 (dividend distributions to corporate unit holder) shall be amended as follows--

(a) In subsection (1) at the end of paragraph (b) there shall be inserted--

"or is a pension fund as defined in section 231A(4)"

(b) In subsection (2) the words "or income tax" shall be inserted after the words "corporation tax".'.

I should at the outset declare an interest, in that I am a chartered accountant, a member of the Institute of Chartered Accountants in England and Wales, and I write a six-weekly article for Accountancy Age .

The amendment seeks to deal with an anomaly created by clause 19, which has been caused, like so much else in the Finance Bill, by the rushed and ill considered way in which the new Labour Government are proceeding. As such, and in the spirit of ensuring that the House produces well drafted legislation, I hope that the Government will accept the amendment.

The anomaly in question concerns the position of pension funds that invest through unit trusts. Clause 19 prevents pension funds from reclaiming the tax credits on dividend income--an outrageous change to the previous position, which all parties had accepted, that pension funds should be allowed to accumulate assets from income tax-free, thus encouraging the build-up of pension fund assets. As far as we know, it is not the

Government's intention to tax other income within a pension fund, such as interest income and income from property. At the moment, all the Government intend to do is tax dividend income received by pension funds.

The problem arises when a pension fund invests in a unit trust that itself invests in bonds or property. Unit trusts themselves are taxable, but pension funds could effectively reclaim the tax by receiving the tax credits attached to the dividend paid by the unit trust. Now that pension funds are no longer able to reclaim that credit, investing in a balanced unit trust becomes unviable for them, because that would now be taxable. However, if the pension fund itself received the income, it would be non-taxable.

If the Government accepted the amendment, it would apply existing provisions in section 468 of the Taxes Act 1988 to stream income paid by a unit trust to reflect the nature of the income it receives, and enable the recipient to claim back only the tax on the income that, had it received such income directly, would not have been taxable. Applying those provisions to pension funds would deal with the problem.

Question put, That the clause stand part of the Bill:--

The Committee divided: Ayes 334, Noes 182.

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