§ Mr. Straw
I beg to move amendment No. 22, in page 52, line 22, leave out paragraph (b).
I might save the hon. Member for Cirencester and Tewkesbury (Mr. Ridley) a great deal of trouble if I tell him that we recognise the technical and other defects of the amendment. The hon. Member for Colne Valley (Mr. Wainwright) has explained the difficulties that the Opposition face in putting forward amendments as vehicles for debate. We will register our opposition to what the Government are proposing to do on the indexation of capital gains at this time by a vote on the clause itself and not on the amendment.
The amendment provides us with an opportunity to examine in detail the case for this major and expensive change which the Government are making in the Finance Bill. The Chancellor justified the change in clause 71, to index capital gains, by describing the tax on inflationary gains as an "injustice". He said:I cannot, however, allow this injustice to continue."—[Official Report, 9 March 1982; Vol. 19, c. 755.]The Chancellor's choice of words is significant for the Opposition. The taxation of inflationary capital gains is an "injustice". The double taxation of unemployment benefit is merely an "unfortunate necessity". The choice of words is strongly reminiscent of the Prime Minister's strange sense of moral values which led her to describe inflation as an evil but unemployment merely as a problem.
We acknowledge that the change in capital taxation is one that the Government and their many friends in the City have sought for many years. On the face of it, the case for indexing capital gains before they are brought into charge may appear to some to be strong. It is argued that inflation was not appreciated as a problem in the mid-1960s when 774 the present capital gains tax was devised. It is also said that the tax structure took no account of the prospect of the high levels of inflation that existed throughout the 1970s.
In my judgment, both those assertions are incorrect. First, there was substantial debate in the House and in Committee about the consequences of inflation on the charge to capital gains tax and whether or not that would be fair. The right hon. Member for Sidcup (Mr. Heath), in leading for the then Opposition, during the Second Reading of the Finance Bill in 1965, charged that the capital gains taxmakes absolutely no allowance for inflation."—[Official Report, 10 May 1965; Vol. 712, c. 72.]The right hon. Gentleman made the charge that the tax took no account of inflation as long ago as 1965 when the tax was first introduced. He and others Members of the Conservative Opposition were countered by arguments from the Government that the tax rate of 30 per cent. had been set deliberately low and at a flat rate to take account of inflation. That point was repeated in the Green Paper published in 1977, to which the Financial Secretary referred in the previous debate.
The Green Paper said at paragraph 24:When the United Kingdom capital gains legislation was introduced in 1965 it was decided that the tax should be at a relatively low flat rate which took account of the possibility that the gains might have accrued over a longish period but were being charged to tax in one year, and also that they might contain an inflationary element.The possibility of an inflationary element was clearly in the minds of those who constructed the tax. It was one of the arguments used at the time to counter the belief that the tax took no account of inflation.
It is evident from the right hon. Member for Sidcup's subsequent conduct in this respect—as in respect of his conduct on thresholds—that he and the Conservative Government of 1970 to 1974 were convinced by the Labour Party's arguments. It is on record that in those halcyon days of 1970 to 1974 the Conservative Government, led by the right hon. Member for Sidcup, made no attempt to interfere—despite rising levels of inflation—with the basic structure of the tax, its flat rate or its alleged lack of provision and relief for inflationary gains.
If the ostensible taxation of inflationary gains is the injustice that the Chancellor of the Exchequer now alleges, and if it is as onerous as the Stock Exchange chairman has claimed, one might expect the yield from the capital gains tax to rise broadly in line with inflation. Let us consider what has happened to the yield from capital gains tax during the historically high inflation that Britain has encountered since 1973. Between March 1973 and March 1980, prices—as measured by the retail prices index—rose by about 347 per cent. At the same time, the yield from capital gains tax—according to the Inland Revenue's figures—rose from £324 million in 1973–74 to £540 million in 1981–82. That was an increase of only two-thirds compared with the 347 per cent. increase in the retail prices index. If the real value of the 1973–74 yield had been maintained, that yield last year should have been £1,123 million, not the actual figure of £540 million.
The truth is that this capital tax and other capital taxes have not been as onerous as Conservative Members often proclaim. The Financial Secretary quoted the figures that were given to my hon. Friend the Member for Barking (Miss Richardson) on 1 April. He sought to make a point that will redound greatly to his disadvantage. He made 775 exactly the point that we now seek to make. As the figures given to my hon. Friend show, the take from capital taxes as a proportion of the total yield from all taxes, far from increasing during the period from 1973 to 1982, has declined consistently and now stands at only 1.4 per cent. of the total yield of taxation.
It does not lie in the Financial Secretary's mouth to criticise the Labour Government for allowing the yield to fall while at the same time proposing measures that will push that yield down still further. He must make a choice between the arguments that he advances. He cannot advance both arguments. The figures from my hon. Friend the Member for Barking, as well as those that I have given about the cash yield compared with prices over the past nine years, prove beyond peradventure that the tax has not been as onerous or unjust as the Government and their friends in the City suggest.
Conservative Members may complain about the tax, but they ignore the effect of substantial reliefs on the charge to tax and the operation of thresholds which, combined with bed and breakfast devices, have enabled those who would otherwise have been brought into charge to avoid it. I accept that they have been avoiding that charge lawfully, but the House should realise that bed and breakfasting, although lawful, is artificial, because the transactions are made to reduce a taxable charge and not for any other purpose. Bed and breakfasting operates so that if a taxpayer has made a gain and has other assets that show a loss, he can sell and buy them overnight, create a loss, set that against the gain that he has made and thus avoid gains that exceed his exemption limit. Therefore, thresholds and bed and breakfasting are important mechanisms by which people have been able to reduce their liability to tax. They have acted as offsets against inflation.
The other important relief that has offset inflation is the flat rate. The operation of the flat rate with thresholds has meant, in practice, that a substantial element of relief against inflation has been built into the operation of the tax. My right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) made the important point that, even with the alleged taxation of inflationary gains, those who have made capital gains have been treated far more lightly than those who have made gains from income. The Financial Times of 13 March 1982 said:Capital growth has always been more attractive, especially for wealthier investors in the higher income tax brackets which can lead up, eventually, to the investment income surcharge. This can produce a marginal tax rate of 75 per cent., compared with a capital gains tax rate of 30 per cent.That brings me to our principal objection to the Government's proposal on the indexation of capital gains. As many Conservative Members have made clear, the Government are not indexing many other aspects of the taxation system so fully. Far from evening up the balance between the taxation of income and the taxation of capital—the Government have often justified their proposals by suggesting that there is an injustice in the present taxation of capital—these proposals will create an even greater imbalance. They will widen the gap between the treatment of income and the treatment of capital for tax purposes.
As a result, it will be even more advantageous to hold assets that realise a capital gain, instead of holding those that produce income. Although the Government intend to tax only the real gain on any assets, they will continue to 776 do so at the low flat rate of tax of 30 per cent., which was specifically introduced as an offset for the fact that inflationary gains were being taxed. Now that inflationary gains are not to be taxed, the case for a separate low flat rate of tax for capital gains must disappear, both in justice and in logic. The gains that are taxed should be brought into charge as part of an individual's or company's income and should be subject to the appropriate marginal rate of income tax or to the standard rate of corporation tax. The Government should introduce that essential and fundamental reform if they are to press the proposal for indexing gains.
The flat rate of tax at 30 per cent. was introduced, as the Inland Revenue made clear, as a rough and ready offset for inflationary gains. There is no doubt about that. Now that only real gains are being introduced and chat inflationary gains are being abandoned for tax purposes, those gains, which will be relatively few and far between for individual taxpayers, must be brought into charge against an individual's income. It is important to point out that when Mr. Selwyn Lloyd was Chancellor of the Exchequer and the Conservative Government first developed the concept of charging capital gains to tax—albeit only short-term capital gains—they were charged to tax as part of income and a separate flat rate tax was not established for them. That was sensible.
The then Chancellor could have said that we must bring those short-term gains into charge as income because in the short-term there would be very little inflation to set against them. If that was right, as it then was, now that the Government are setting up a system to offset inflation they must bring the gains into tax against income. I look forward to the Minister's explanation of why the Government have set their face against doing that. I assume that they have, as there seem to be no proposals in the Bill to make that change. Why are the Government sticking to the rate of 30 per cent., as though it were permanent for ever and a day? There is no justification for that. The 30 per cent. rate may have stood for 17 years while inflationary gains were taxed, but the case for it no longer exists if we abandon the taxation of inflationary gains.
If the Government fail to introduce that consequential and important change alongside their proposal to index capital gains, I ask the Committee to consider the effects in terms of equity, and in other terms, of making capital gains even more advantageous for those who hold assets that produce income. Again, my right hon. Friend the Member for Ashton-under-Lyne dealt with this on the previous amendment.
Without further changes the clause will discriminate heavily in favour of the wealthy holder of assets who can move into assets which have a capital appreciation attached to them. The clause will discriminate against holders of assets who do not wish to risk their capital. There is always risk, except for index-linked stocks, and there is usually a risk attached to assets that are purchased to gain an income by capital appreciation.
The clause will discriminate against holders of small capital assets who wish to achieve an income from them. Many of those against whom the tax system will now discriminate more heavily than hitherto are the little old ladies and widows with small nest eggs which have be en invested to produce an income. For example, if they put 777 their money into a building society they will receive no capital gain from their investment. All their income from the building society, if they are paying higher rates, will be brought into charge, and if they are not paying higher rates it will still be subject to tax.
However, if they can find a capital asset into which to put their money and can achieve an equivalent capital gain to the income that they would receive from the building society, they might be able to set the whole of that gain against inflation during the period and pay minimal tax. Instead of paying tax on 10 per cent. per year, they will be paying tax on no more than 1 or 2 per cent., at a flat rate of 30 per cent., whereas with their income it would be at the marginal rate, whatever that might be.
Therefore, our first objection to indexation is that there is no alteration to the way in which the gain is brought into charge and that it is brought into charge against the flat rate.
§ Mr. Foulkes
My hon. Friend is being far too reasonable about the Government's proposals. He should be far more furious with the Government, because this is yet another example where those who have already more than enough money will get even more while others, such as the widows to whom my hon. Friend referred, will get even less and will be taxed—in some cases for the first time. Should not my hon. Friend be whipping up some fury against this iniquitous Government?
§ Mr. Straw
Reasoned indignation. I shall have similar criticisms to make of the Government later. As well as being furious about the Government's proposals, I believe that this is an unjust change to make at a time when so many poor people, both in an out of work, are facing great difficulties.
There are also important objections in terms of tax law and the kind of tax system that we develop.
The second objection relates to the yield from this taxation. To some extent, I accept that the Financial Secretary dealt with the general question of yields. In reply to my intervention he said that the Treasury had produced illustations of the effects of these changes over a three-year period. Will he make projections available to the Standing Committee, taking the possible consequences of these changes over a 10-year period on various realistic assumptions about growth and inflation? Three or four examples of growth and inflation could be given. It cannot be beyond the wit of the Inland Revenue and the Treasury to produce such figures.
§ Mr. Ridley
What assumption would the hon. Gentleman have me make about who will win the next general election?
§ Mr. Straw
The hon. Gentleman can make whatever assumption he wishes. We should be serious about this. He has often stood at the Dispatch Box or cheered when his right hon. and hon. Friends have stood there defending the Government's record on inflation. He has said that 778 much of what has happened over the past three years on inflation was nothing to do with the Government, that it was the unanticipated result of the so-called world recession and the doubling of oil prices in 1980.
The inflation that occurred in 1973 and 1974 was to a substantial extent due to the quadrupling of oil prices. It had nothing to do with the change of Government. I concede that some of the inflation with which the Government have had to contend has been due to forces beyond their control. Therefore, if we are to be serious, it is possible to put forward projections of yield on a variety of assumptions. If the hon. Gentleman wishes, I shall write to him setting out possible scenarios.
For example, we could do a projection on an average rate of inflation of 10 per cent. and nil growth, or 3 per cent. growth. We could do another on an average inflation rate of 5 per cent., again with nil growth or 3 per cent. growth. If the hon. Gentleman wishes to categorise one possibility as more likely under a Labour Government and another as under a Conservative Government, that is up to him, but it is not unreasonable to request those figures.
We shall not claim that the figures relating to the higher inflation rate are based on the likely outcome under a Conservative Government, provided that the hon. Gentleman does not claim they would be the outcome of a Labour Government. We should leave aside the election and take a serious view of the possible and probable outcome, over the next 10 years, on three or four assumptions. We appreciate that there are uncertainties, but surely it is reasonable to have such projections with an indication of the range of the yield loss that is likely to arise under the changes.
The third objection to the Government's proposals is the administrative complexity and cost. Because of the always substantial, but now even greater, advantages of capital gains as opposed to income, the Inland Revenue has always had to develop and establish rules to prevent income from being converted into capital for tax purposes. In these changes the Government have had to resort to some fearsomely complicated rules concerning the calculation of gains over the transitional period. As I understand it, although I do not claim fully to comprehend every rule in the Bill—
§ Mr. Straw
I am reassured to learn from my right hon. Friend that nobody does. He is probably right. The understanding of these provisions will probably be like that of the Schleswig-Holstein question—confined to three men, one who had moved, one who had gone mad and one who had died. The same is said of the rate support grant—a view with which the Treasury no doubt agrees.
While we object strongly in principle to the Government's introduction of the scheme at this time, we shall examine critically the way in which they intend to operate it in detail. We have no interest in allowing on to the statute book a scheme which appears to have rules that are arbitrary and difficult to follow if alternatives can be found. On the face of it, the basis of calculating gains over a transitional period seems rather arbitrary. Certainly the proposed rules seem to have satisfied no one.
No doubt the Chancellor expected bouquets from the Stock Exchange, if from nobody else, when he introduced the changes. Instead, he has received only brickbats from ever ungrateful friends. On Thursday last the chairman of 779 the Stock Exchange was reported in the Financial Times as saying that the proposals were nonsense. Moreover, the Lex column commented on the chairman's remarks as follows:As the Stock Exchange points out, much of the revenue lost to the Exchequer will find its way into the pockets of tax advisers.It seems that little of the benefit will actually find its way into the pockets of the taxpayers.
We shall examine the rules very closely. Under the transitional rules adopted in 1965, when the Labour Government introduced capital gains tax for the first time, for capital quoted as shares a value was fixed on the shares at 6 April 1965, while pro rata rules operated in other cases. If the Government say that similar rules cannot be adopted on this occasion without a loss of yield on the tax overall, we shall have to consider whether an increase in the rate of tax would achieve the same yield on the basis of fairer and more coherent rules.
I hope that the Financial Secretary will also tell us more today about the administrative costs of the scheme. No one reading the Bill and trying to make head or tail of the chapter on capital gains and the schedules can possibly deny that they are complicated. As my right hon. Friend for Ashton-under-Lyne pointed out, it was some weeks before the full complexity and consequences of the rules dawned even on many who claimed to be experts.
On 22 October, when asked whether the Treasury had considered indexation of capital gains, the Financial Secretary replied that the yield would be drastically reduced and that the proposal
would result in an unwelcome increase in the cost of administration—for taxpayers as well as for the Revenue".—[Official Report, 22 October 1981; Vol. 10, c. 168.]The Financial Secretary has said that in that reply he had in mind the indexation not just of prospective gains but of past gains and that was why he replied as he did. I must say that that was not obvious on the face of it. Do those remarks also apply to the cost of administration? What will be the administrative cost of the changes? Will they, as one suspects, add quite substantially to the cost? In particular, what will be the cost of administration as a proportion of the new and much lower yield of this taxation?
The fourth objection takes up the point made by my hon. Friend the Member for South Ayrshire (Mr. Foulkes)— the overall equity of introducing this change at this time. I have already referred to the selective indexation favoured by the Government. Capital taxation is already far from onerous, and income tax for higher earners has been significantly relaxed, but unemployment benefit has been cut in real terms. Hundreds of thousands of people are denied employment due to reductions in public spending, and the weak and poor are perpetually told that they cannot have the most marginal improvement in their standard of living because the country cannot afford the cost. In those circumstances, one must ask whether now is the time to embark on further gratuitous handouts to the rich and the wealthy. Our answer is that now is not the time. In the present situation there is no justification for this proposal and we shall oppose it.
§ Mr. Richard Wainwright
The clause and the amendment relate to indexation. I reminded the Committee earlier of the Liberal Party's long advocacy that we should consider taxes year by year on an indexed 780 basis and make such amendments as may be proper against the background of taxes already indexed. The sovereignty of Parliament and its right to range over the whole spectrum, including increases in taxation proposed by Opposition parties, would thus remain intact, but the debate would take place against a background of indexed taxes.
Earlier, the Financial Secretary tried to show that the Government had a coherent approach—I shall not use the word "philosophy", which would be to degrade a splendid subject—to indexation. He made much play of the fact that the Government were getting round to a consistent indexation of what he described as thresholds. He seemed, however, to be referring to one type of threshold—what might be described as the exempt threshold—and trying to confine the word to those thresholds which gave exemption to taxpayers with a modest liability.
When I speak of indexation, I mean indexation of all the various thresholds, including those at which higher rates of tax come into play. I am glad to say that not only the Liberal Party but the alliance takes that view. The SDP is with us on this.
Having made all that fuss about indexation, and having taken that stance, we must consider whether the clause and the amendment are likely to give indexation a bad name. For instance, in the previous Parliament I strongly opposed the various devolution Bills because, ardent federalist Briton that I am and ardent regionalist within Britain, I considered that the Bills were giving that principle a bad name. Naturally, I apply the same criteria to this amendment, which, on balance, will make indexation stink. That is not something that I want to support. It is being applied in the most ham-handed way.
The only general class of beneficiaries will be professional tax advisers, unless the Financial Secretary, with the full authority of the Treasury, is able to revive the old notion, in which some citizens used to take comfort, that the tax office is one's best friend. If someone were perplexed about the filling up of forms and the making of elections and options were beyond his intelligence, even when he tried to apply himself to it, he did not need to go to the expense of going to a professional adviser; he could take all the papers to the friendly local tax office and be advised impartially, treated as somebody who must be given the utmost consideration and supplied with the most excellent advice.
It would influence my attitude if the Financial Secretary were able to say that that still holds good, with all the reassuring qualities that it once had, and that all these enormous complexities—I have in my hand a 12-page set of complexities dashed off by a leading firm of accountants since the Finance Bill was published—will be dealt with by tax offices without the intermediation of professional advisers. This would be at no risk to the taxpayer's minimum liability. Unless that assurance is forthcoming, the administrative snags that have been deliberately introduced for the first time into capital gains computations in the Bill will be formidable. They are likely to interfere severely with the working of the stock market because of the drop in the volume of transactions, certainly from very small investors.
I am sure that the Financial Secretary and many of his colleagues are genuine and effective supporters of wider share ownership. Many of my constituents are employed at one of the largest dyestuffs factories in Europe—the ICI factory in Huddersfield. These people are in on wider
781 share ownership and have been since the 1950s when ICI started that scheme. Various other public companies in the district, wanting to show that what ICI could do they could do in their own smaller way, copied that scheme. Such schemes have on the whole, at least until recently, been a good thing for the employees. These small shareholders will be brought into this mesh. Dealing in their shares for honourable reasons will land them in an administrative mess.
I do not wish to weary the Committee with anything like all the examples that I have, let alone those that will come to light if the tax has to be administered. However, I shall mention one inconsistency. As the clause stands, disposals are first related to acquisitions within the previous 12 months on a first in, first out, basis. However, on earlier acquisitions we switch to a last in, first out, basis. Traders who started doing that with their stocks for stocktaking purposes would, in some instances, quickly find themselves subject to a back duty investigation, because consistency is required. To muddle up these two contrasting methods of deciding how to value the items involved is to ask for trouble. It cannot be justified on any intellectual basis.
There is also the requirement that assets must be held for 12 months to qualify for indexation. I agree that one of the worst aspects of this method of computation is that, as indexation starts only this year, it will give greater advantage on past gains to the relatively short-term holder to the disadvantage of the longer-term investor.
I am surprised that the Government should want to give the comparatively short-term holder, who starts to hold the shares at the same time as the indexation starts, a more favourable deal than is given to genuine long-term investors in a company who have been standing by while it builds up its business over the years before 1982.
When it comes to the very short-term investor, apparently there has to be the 12-month rule. That has created a whole host of precautionary regulations to prevent spouses transferring assets in such a way as to obtain an indexation allowance on a third party sale. I could go on with the administrative horrors that will be created for the first time, adding to the cat's-cradle of our tax regulations, and will bear particularly hard on those who realise relatively small parcels of shares.
Will the clause give indexation a bad name when the ordinary citizen sees what indexation involves him or her in? I hope that the Financial Secretary will explain why losses are not to be subject to indexation. What is the justification? I am glad that the subject will be argued fully, but it is difficult to understand why indexation should apparently be made to stop short of creating a tax loss or converting an apparent inflationary gain into a real loss.
Unless the Financial Secretary can give me a series of reassurances on the apparent grave inadequacies in the clause as drafted, I shall feel bound to recommend my right hon. and hon. Friends to oppose it for the reasons that I have given.
§ Mr. Mark Lennox-Boyd (Morecambe and Lonsdale)
I did not intend to speak on this amendment, but there are one or two matters that I should like to raise because I am somewhat puzzled by them. I am happy to follow the hon. Member for Colne Valley (Mr. Wainwright) because, if 782 he looks at the amendment carefully, he may find that he can support it. As I understand it, amendment 22 deletes paragraph (b) from clause 71(1). That exempts for the first 12 months holding period any assets from the indexation of capital gains. I should have thought that the hon. Member for Colne Valley would be happy to accept that amendment, as I would. However, I doubt whether that is what the hon. Member for Blackburn (Mr. Straw) had in mind when he moved the amendment.
There are two small points that I should like to draw to the attention of the Committee, and in particular to that of the hon. Member for Blackburn. He elaborated the argument that the original intention of the flat rate 30 per cent. was as an offset for inflationary gain and that it would have been higher had inflation not been taken into account. He went on to say that that argument in 1965 was given tacit approval by the Conservative Government of 1970–74. However, if he examines the course of history, he will have to accept that no one at that time could possibly have expected the levels of inflation that have occurred since 1965. The pound in 1969 purchased goods that would require £5 today on the retail price index. Since 1969 money has declined to one fifth of its value. Therefore, any taxation of 30 per cent. on a gain between 1969 and today of 500 per cent., which is wholly attributed to inflation, will result in a substantial wealth tax, if that is a more appropriate phrase to use.
The hon. Member for Blackburn further suggested that the fact that the yield on capital gains tax had gone down in those intervening years was an argument for suggesting that not much needed to be done in any sense of equity. However, whatever arguments there may be on equity, they are fallacious. The substantial reason why the yield has gone down is that between 1969 and today the stock market has hardly moved. In the whole range of investors in the stock market no one has been able to obtain capital gains that would have kept up the yield in inflationary times as well.
I should like the hon. Member for Blackburn to consider another form of investor who is not among the very rich—the man who has had a second home since about 1970. Can he be expected to be able to do bed and breakfast, if that is something that helps the investor on the stock market?
§ Mr. Ridley
The hon. Member for Blackburn (Mr. Straw) said that the Bill had proved to be extremely difficult to understand. I do not believe that the subsection with which we are dealing can be that difficult to understand as my hon. Friend the Member for Morecambe and Lonsdale (Mr. Lennox-Boyd) certainly understood it. The amendment would abolish the twelve-months ban on getting the exemption allowance. The hon. Member for Colne Valley (Mr. Wainwright) referred to that. I shall return to the substance of that point when I respond to what the hon. Gentleman said. It would cost £20 million next year and £80 million in a full year if we were to accept the amendment. Though it would be nice to accept the amendment and tempted though I am to do so, I am not sure that we can afford the extra cost that would be involved in such a big concession.
The hon. Member for Blackburn moved the debate to wider considerations. We considered the rate on real gains. He referred to the 1977 Green Paper on the future of capital gains tax. He fairly said that the reason why a 783 30 per cent. flat rate had been set was that it would have to cover inflation. He quoted from the Green Paper, which stated thatthe gains might have accrued over a longish period, but were being charged to tax in one year".I shall return to that point in a moment.
The hon. Gentleman said that the yield had dropped because of various devices that people got round. The yield has risen from £324 million to £508 million. That is excluding gains made by companies, which are individuals' gains only. It is less than the increase in the cost of living. I do not accept that that is due to bed and breakfasting.
The yield continued to decline in real terms when the Labour Government were in power and had a lower threshold of only £1,000 and even less at the beginning. Bed and breakfasting may enable gains to be set off against losses, but where genuine gains are being made that is of no help. As the hon. Member for Colne Valley said, perhaps we should look to the treatment of losses. I do not believe that bed and breakfasting, which sets off a loss against a gain, is something about which we should complain. It does not rob the Revenue. The only way of robbing the Revenue is not to sell an asset that is full of gain and on which one would pay regular tax if one sold it.
The reason for the fall in the capital gains tax yield is that equity shares have performed no better than money and have gone down considerably in real terms over the period of the tax. Therefore, there have been, let alone no gains, real losses in capital by many people who have held equity shares. That is bad for industrial investment and jobs. That is one reason.
Another reason is the exemption for capital gains tax for those who hold gilts over a year. They have tended to invest in gilts to some extent to the disadvantage of equities. They will not pay any tax if they invest in gilts. The gains of many people are still bottled up and have not been realised. There are people with land, second houses and many other forms of assets that are difficult to sell and impossible to bed and breakfast. One cannot bed and breakfast a work of art, a field or a farm. Such assets are stored up. There is a vague estimate that the total value of unrealised gains could be about £20 billion. Therefore, the matter depends on when people choose to realise those gains. With tax such as it has been, they have tried to hold on as long as possible and not to realise them.
The hon. Member for Blackburn referred to the form of the tax. On reflection, I do not think that it would be right to have real gains charged to income tax rates. Supposing a man spends his life building up a small business, which becomes a middle sized business, he retires and has made a good sum of money through that prosperous and successful business. That is the typical business that we have been talking about. In the year that he retires a large capital sum is realised. Nearly all of it is gain. It is all applied to his income in tax at 75 per cent. and he is left with practically nothing. That is not what we should do.
§ Mr. Ridley
Exaggeration? I have never heard anything so ridiculous in all my life. It is not an exaggeration. The proposition from the Opposition Front Bench was that a man who makes a real gain should have it charged as income tax, presumably at higher rates, when 784 he realises it. That could take away three quarters of a man's labours in a year. The point is made in the Green Paper published in 1977. It states thatgains might have accrued over a longish period but were being charged to tax in one year".There must be an element of gains that accrue over a longish period that are being charged to tax over a longish period or not at punitive rates of income tax or higher rates of income tax.
§ Mr. Straw
As I understand it, the small business man would receive substantial relief as a result of the retirement provisions. A Labour Government would make arrangements for those to continue. I was referring to the principle whether, once inflationary gains had been excised altogether from charge, the residual gains, which would be much less than in the Financial Secretary's example, should not in principle be brought into charge and income tax. I do not understand why they should not.
§ Mr. Ridley
The hon. Member wishes to make a thoughtful contribution about the right future development of the tax. I would welcome it if he would agree with us that the tax should at least be indexed. That, indeed, was the position of the Labour Government.
There are imperfections, as I accepted earlier. But we should try to correct them and consider soberly and unrancorously the right way forward. I do not accept that a charge to income tax was preferable to some form of flat rate charge. The extreme example which I gave earlier shows the lack of wisdom of that course of action.. We are right to stay with a flat rate and not to charge it all to income. It may be that we are dealing with a man's main asset, his life's work, his entire capital. Suddenly to charge that to income in one year cannot be right.
The hon. Member for Blackburn asked about the future yield. I would seek to answer any parliamentary questions that the hon. Gentleman tabled; I always do. The Inland Revenue might tell me that the questions would cost more than £50 to answer or involve an unacceptable degree of speculation, but there would be no harm in him trying.
It would be fairly meaningless to try to predict the rate of inflation and the rate of growth three, five or 10 years hence and the rate of economic activity which would engender real gain. The hon. Gentleman can give us his assumptions about them. There is a paradox in what he seeks to do. I suspect that he is seeking to prove that our indexation of the tax will cost the Revenue a great deal. That would be true only if inflation was high. We would enable him to make extremely ferocious speeches from the Opposition Front Bench if we were to assume the type of rates of inflation which would be associated with the economic policies of his right hon. Friend the Member for Stepney and Poplar (Mr. Shore). Therefore, I should like to fit into the model a 50 per cent. rate of inflation which would allow the hon. Gentleman to demonstrate what a great deal it would cost to index capital gains tax when we had a 50 per cent. rate of inflation.
The cost of administration is another important aspect. The hon. Member for Colne Valley said that we are trying to make a complex change. I agree that it is complicated. In all that we have said about our attempts to increase capital gains tax, we have warned that it would be extremely complicated. Certainly any attempt to increase tax on past capital gains would make it even more complicated. An attempt to re-base the valuation on assets as at 6 April 1982 would add even more complication.
785 We had it very much in mind when designing the reforms that we needed to set the complication and the cost of administration as low as possible. We always said, as did the Labour Government's Green Paper, that any attempt to have justice in this area would be very complicated.
§ Mr. Richard Wainwright
The Financial Secretary has presented the Government's criterion as simply a matter of complication. Is it not true that the Government must have equated the cost to the Exchequer and complication? He said that to index from the start of the tax would be very complicated. In deciding not to do that, were the Government also bearing in mind the cost of the operation?
§ Mr. Ridley
We most certainly were. The £5,000 exempt allowance releases 65,000 people from paying capital gains tax in the future. That in itself saves complication and cost of collection, because it is well known that the more people one can let out of any tax the fewer tax inspectors are needed to gather it.
I shall deal with the other point made by the hon. Member for Colne Valley and my hon. Friend the Member for Rossendale (Mr. Trippier) about the different starting base for the indexation allowance when we come to amendment 36.
§ Mr. Ridley
I cannot do so now, but I shall give that information to the hon. Gentleman. There is an initial small increase in staff of about 20 for one year, which dies away and becomes a reduction in staff after some time. However, I am speaking from memory and I cannot give that as a proportion of the yield. It is difficult to convert staff into money in the middle of a speech.
As the hon. Member for Colne Valley knows, this amendment would greatly reduce the complications of the 12-month rule. It would also greatly increase the costs by £80 million in a full year. The Committee may wish to make that change, but I detected some reluctance in the hon. Member for Blackburn to press his amendment. I am not sure that I can promise to follow him into the Lobby if he presses this amendment. I would be with him in spirit, but the cost of it would make me tardy to follow him through the doors, even perhaps to turn into the Opposition Lobby. It may be wiser if the hon. Gentleman does not press the amendment to a Division.
§ Mr. Straw
I explained at the outset that the Opposition regarded the amendment as a vehicle for debate. The hon. Member for Morecambe and Lonsdale (Mr. Lennox-Boyd) was not present when I said that. I also repeated what the hon. Member for Colne Valley (Mr. Wainwright) said about the problems that face the Opposition when drafting amendments.
I am grateful to the Financial Secretary for confirming that there will be an increase in the number of staff to administer the proposed change. That increase, even though it is only 20 jobs, must be set against the significant reduction in the yield of the tax, even on the Treasury's own estimates.
§ Mr. Ridley
There will be no reduction in the yield of the tax in the year in which there is an increase in staff. By the time that there is a reduction in the yield, there will also be a reduction in the number of staff.
§ Mr. Straw
As I cannot make such calculations while on my feet, I shall look forward to seeing evidence of what the Financial Secretary has promised. The Opposition believe that the administrative costs are likely to increase.
The Financial Secretary referred to the Labour Government. Governments are judged by their actions. It is not true that the Labour Government favoured indexing capital gains, if by that the Financial Secretary insinuates that the Labour Party is in favour of indexing capital gains now and in this way. In response to comments made on the 1977 Finance Bill, the Labour Government published a consultative Green Paper by the Inland Revenue. That document set out the advantages and disadvantages of indexation. The then Minister of State, Treasury, my right hon. Friend the Member for Llanelli (Mr. Davies), said that the Government would not go ahead with the indexation of capital gains because they regarded that as unfair when the indexation of incomes was not being proceeded with. That should be clearly placed on the record.
The responsibility for this change lies with the present Government. They cannot pray in aid a Green Paper which, by its very nature, was consultative, and which the Labour Government, in the light of the representations that they received, deliberately decided to take no action on.
The Opposition recognise that there are serious defects in the amendment. As it will cost money at a time when we are trying to save money for the Government with regard to capital gains tax, I beg to ask leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ The Chairman
With this it will be convenient to take amendment No. 27, in page 53, line 14, leave out subsection (5).
§ Sir William Clark
I agree with the indexation of capital taxes, but many other hon. Members must agree that the way in which the Government have done it has made it complicated for accountants. I declare an interest. I am an accountant, although I do not practise. Nevertheless, we are presumably stuck with it. I have always advocated that the rough way of indexation is to reduce the rate of capital gains tax. In other words, it starts at 30 per cent. for those holding an asset for one year who then sell it. If the asset is held for two years, the tax should be 25 per cent., then 20 per cent. and continue tapering off. That would be simple within six years. Administrative costs would be minimal.
Every time that it is advanced, the Inland Revenue says that such a system would be very complicated. Although I say it with the greatest deference and diffidence, I am absolutely certain that the Inland Revenue has put forward that argument under Governments of both parties, because it was trying to think of something else to say to justify the "Resist" written at the top of the Minister's brief. It picked any excuse for saying that it would be too complicated.
A five-point drop in taxation each year means that if one held an asset for six years no capital gains tax would 787 be payable. That may be considered too long. There could be tranches of two years so that it is phased out over 12 years. If that does not meet the Revenue's approval, it can be done over 18 years. We are making heavy weather about indexation.
It has been long established in our taxation that we deal with profits and losses in a consistent manner. I am delighted that the hon. Member for Colne Valley (Mr. Wainwright) raised this point. The introduction of indexation, complicated as the Government have made it, is nevertheless an important step in taxing real profits. We shall come to the inflationary element in the sale of assets on amendment No. 36. It is, however, illogical and inequitable not to adjust losses in the same manner, from a computation point of view, as one adjusts profits.
I give two examples; I am sure that there are many more. If one purchases an asset costing 100 units, assuming that the indexed cost is 130 units, and the owner sells the asset for 120 units, he has made an indexed paper loss of 10 units. According to my reading of the clause, the 10 units are not allowed to be carried forward.
Another example is the investor who purchases two assets for 100 units each and sells them over a period. I propose to assume that the indexation cost of both the assets he has purchased has doubled. Consequently, the indexation cost will be 200 for the first asset and 200 for the second. If he sells the first asset for 250 units, showing a profit of 50 units, and sells the other at 150 units, showing a loss, he will be liable, according to my reading of the Bill, for a capital gains tax on 50 units because he cannot, on the second asset, take the shortfall on his indexation.
I do not know what my hon. Friend intends to say, but if he cannot give me an assurance tonight, and if capital gains tax is to be indexed, there must be an examination of the matter again between now and Report. If it is right to index where there is a profit, it is also right to index where there may be a loss. Otherwise, the consistency and logicality of taxation are lost.
§ Mr. Ridley
I am grateful to my hon. Friend the Member for Croydon, South (Sir W. Clark) for raising an important issue. Admittedly, the case has to be argued against the powerful position that my hon. Friend has put forward. The immediate and apparent symmetry and logic of what he said are difficult to resist. If he goes into it in greater depth he may see what made the Government propose not to allow the indexation of losses.
I make no great argument about it, because we are talking here about the form and shape of the tax, but the cost of the concession that my hon. Friend is seeking would be nothing in the present year, £6 million in 1983–84 and £20 million in a full year. That is another £20 million, which would have to be added to the cost of the changes that we are making. That is the gravamen of what I want to argue.
Going back to the last debate, the hon. Member for Come Valley (Mr. Wainwright) made the point forcefully that the complication was bad enough as it was, that the number of staff involved was great and that the number of difficulties for taxpayers was even greater. If we were to allow the indexation and the carrying forward of losses, every taxpayer who made an indexed loss would want to have that loss agreed with the Revenue and put into his portfolio, as it were, to be carried forward year after year. 788 The identifying of all these losses, agreeing their indexation and then recording that they had been made as they were carried forward would be a mammoth clerical operation.
§ Sir William Clark
Will my hon. Friend forgive me if I tell him that that is not what will happen? If one makes a profit on one stock, on whatever it is indexed at, and gets the actual profit on that, and in the same year sells stock that has not been indexed because it has been sold at a loss, there is no carry forward. It would be set off against the total capital gains tax of that fiscal year.
§ Mr. Ridley
As my hon. Friend knows, at present one can carry forward losses, but only losses which are in terms of money of the day. One cannot carry forward gains. This brings me to the point that he made about the symmetry of the taxes. They are not symmetrical now, because one can carry forward a loss until such time as one has a gain to set it against, but one cannot carry forward a gain until such time as one has a loss to set it against. The proposition here is not whether we allow losses against gains, nor whether it shall be possible to carry them forward, but whether losses should be indexed.
To allow the indexation of losses is different from allowing simply the recording of losses. The evidence of a loss having been made is easy to produce in ordinary money terms. If one buys a share for £100 and sells it for £80, there is a loss of £20. If the losses are indexed, every share in the portfolio and every share that is sold will have to be indexed even though there is little or no chance of those losses being used, because the losses will have to be accepted at their new indexed value by the tax inspector.
We estimate that there will be about half a million such losses a year to be recorded, agreed and carried forward and that this would involve about 2,000 extra Inland Revenue staff. There might be about £20 billion of gains floating about, so people would be trying to carry forward as much indexed loss as they could. We are trying to avoid those immense complications.
§ Sir William Clark
My hon. Friend and I are at cross-purposes and are arguing a different point. The indexation here indexes the cost of the assets. That is the base. Instead of being 100 units it will be 130, or whatever the index may be. The profit or loss when one sells it is the difference between the 130 and the proceeds. In some cases there will a profit and in others there will a loss If one has 10 assets costing 100 units each, when they are indexed up they may be worth, say, 1,300 units. I am saying that, whether they are sold at a profit or a loss, the cost of the assets should then total 1,300 units. That is very different from the indexation of a loss or a profit. The indexation of the cost determines whether one has made a loss or a profit
§ Mr. Ridley
It is difficult to follow my hon. Friend's arithmetic. We need a blackboard. I am dealing only with the proposition in my hon. Friend's amendment, which is that the losses should be indexed. My hon. Friend may not be saying that, but that is what the amendment says.
§ Sir William Clark
No. I might accept that there is something wrong with the amendment, but its spirit is that we have gone for indexation in the same way as the Government have. The indexation here merely indexes the cost, which is the basis of the computation of one's profit or loss when one sells the asset. As there is a difference 789 between my hon. Friend and myself, why cannot the Government reconsider the matter? I do not accept that the amendment would mean 2,000 more staff in the Inland Revenue. I cannot see how that could be. If one can index the cost of assets that one sells at a profit, one can also index just as easily the cost of those that one sells at a loss.
§ Mr. Ridley
I do not deny that. I do not think that we are arguing about different amendments. I withdraw that allegation now that I have heard my hon. Friend once again. My point is that at present there are many losses, even with inflation. If we add to those losses indexation losses—
§ Sir William Clark
I am not trying to index existing losses. The indexation would start on 6 April 1982, and any losses carried forward would be carried forward at whatever they were. I am saying that with regard to any sale from April 1982, whenever that sale occurs, the cost of the assets will be indexed, whether they are sold at a loss or at a profit. That will give a true capital gains tax. If my amendment covers previous losses, I apologise, because it is not intended to cover a carry forward.
§ Mr. Ridley
My bon. Friend did not allow me to finish my sentence. I did not allege that his amendment sought to index past losses. I was saying that from now on there would be many more losses, because there would not simply be a loss when one's share went from 100 to 80. A loss would be shown if, the original purchase price having been indexed, one did not sell the share for more at the end of the period.
§ Mr. Ridley
I shall repeat that, if my hon. Friend does not get it. There would be many more indexed losses recorded than there are losses now, because we are taking the inflationary element out of the tax. People will wish to record and to agree with the tax inspector that they have those losses. That is a facility that one could not deny them. We cannot be in the business of recording half a million losses a year, with all the staff implications that that would have, in order to allow people to carry such losses forward.
§ Sir David Price (Eastleigh)
What is my hon. Friend's basis for saying that the Inland Revenue would have to record half a million losses? I have no idea what the figure would be, but he asserts that that would be the number. How does he know?
§ Mr. Ridley
The Inland Revenue alone can tell what the consequences would be. It says that it would require 2,000 extra staff to record the extra losses if there were indexation of losses.
I have been asked to give the figures for staff and I have given them, and in all cases they have been accepted. Just to say that the Inland Revenue is wrong does not seem to get us any further in this debate. This is why, although I understand the symmetry that my hon. Friend seeks, it does not seem to me that we can involve ouselves in a complication of this magnitude, especially when what we are trying to do is to make this tax one that will be accepted as fair by those who have to pay it.
If we have made the concessions of indexing gains and providing a higher exempt allowance, they are, of course, 790 concessions, for the sake of avoiding complication, which were meant to cover the omission to do things like this, because things like this are so expensive and complicated.
§ Sir David Price
It had not been my intention to divert the Committee's attention towards my own thoughts on the amendment, but, having heard my hon. Friend, I feel it necessary to say a word or two. I cannot see what this extra work is about which the Financial Secretary has made such a fuss, because the basic calculation in working out the indexation of, for example, a portfolio of shares is the same whether it is a gain or a loss.
It may be that what my hon. Friend the Financial Secretary is suggesting is that the form of indexation proposed in the clause may not be right way of doing it, but I did not produce this method. He and my right hon. Friend the Chancellor did. It is not me and my hon. Friend who are being inconsistent. I suggest that it is my hon. Friend the Financial Secretary who is being inconsitent. He says that the amendment will involve 2,000 more Inland Revenue staff. With the greatest respect to the Inland Revenue, just to give us that figure and say that it covers half a million transactions is not sufficient evidence. I apologise for being a sceptical character but I should like a little more information to support that contention.
§ Mr. Maxton
We heard earlier that only 135,000 people affected by the changes under the clause would be paying capital gains tax. It seems to me that half a million loss transactions between 135,000 people paying capital gains tax is a large number.
§ Sir David Price
I suggest that the Inland Revenue's estimate of 2,000 extra staff ignores that we are in the age of computers. We know that all stockbrokers have their portfolios on computers and can run them through their computers easily.
The Inland Revenue is still moving towards the computerisation of income tax. It is being slow about it. I remember being told years ago on the Select Committee that considered the tax credit scheme in 1973–74 that perhaps it would be computerised within four or five years. I am told that is still the standard figure of the Inland Revenue for the timetable on computerisation. Nevertheless, one day it will get there. Therefore, I do not regard this as a major obstacle.
I always thought that my hon. Friend was an ally of the taxpayer. I quarrel with his use of the phrase that it would be a tax concession to produce this fiscal consistency. I never thought that I would hear those words from the lips of my hon. Friend. He disappoints me. I thought that he was on the side of the people, taxpayers, and not on that of the tax gatherer. Of course, we have these little lacunae from time to time. However, as I told the Committee, it was not my intention to intervene, but merely to listen to the wisdom of my hon. Friends. Nevertheless, I am so disappointed with my hon. Friend the Financial Secretary that I feel I must record my disappointment.
§ Mr. Ridley
I take my hon. Friend for Eastleigh (Sir D. Price) through the argument, which perhaps I have not put across properly. If there is indexation of the basic cost of an asset, which is then sold in the future, not in the past, a very much greater number of transactions than hitherto turn out to be losses. That is a measure of the unfairness of capital gains tax in the past. Many real losses have not 791 been shown as losses. Such is the iniquity of what we have been inflicting upon the taxpayer that the costs of recording the increased scale of losses which indexation would reveal would involve an additional 2,000 staff.
§ Mr. Ridley
My hon. Friend does not believe that. He can only take the advice that the Revenue gives us. I have no means of checking it, nor has he. It will be a sober moment for the Committee when it realises how many real losses the Revenue has been taxing as paper gains and when it appreciates the implications of trying to index losses.
§ Mr. Maxton
Am I right in saying that the hon. Member for Croydon, South (Sir W. Clark) is seeking to put into real terms what the value of a portfolio would be over 12 months? Certainly his hon. Friend the Member for Eastleigh (Sir D. Price) is seeking to do so. I find it remarkable that they should be taking that approach when the Government, with their wholehearted support, have stopped using real terms when talking about public expenditure.
§ Sir David Price
My hon. Friend the Member for Croydon, South (Sir W. Clark) and I do not accept the estimate of an additional 2,000 civil servants. I spent the early part of my life in work study and I should like to see staff figures in more detail. In matters of taxation there are many things that we do not accept without question. However, it seems that it is the gospel of my hon. Friend the Financial Secretary to the Treasury that the number of staff of the Inland Revenue is beyond question. I am sorry, but it is not beyond question. I do not accept the estimate of 2,000.
§ Mr. Campbell-Savours
If the hon. Gentleman is so concerned about the real statistics, perhaps he will agree to table a written question so that we may all study the answer.
§ Sir David Price
The hon. Gentleman encourages me. I wish always to be helpful to the House of Commons.
§ Sir William Clark
I apologise for having kept the Committee for so long on what I thought was a simple amendment. I am extremely disappointed by the Financial Secretary's response, but to facilitate progress I beg to ask leave to withdraw the amendment
§ Amendment, by leave, withdrawn.
§ Mr. Charles Morrison (Devizes)
I beg to move amendment No. 31, in page 52, line 41, at end insert`and any sum which, in the computation of the chargeable gain, was taken into account by virtue of subsection (5) of section 79 of the Finance Act 1980'.As the Committee knows, clause 71, as it stands, allows for indexation of two types of expenditure in 792 computing capital gains—the original cost or acquisition value of the asset, and subsequent capital expenditure on enhancement of its value.
Two other items are normally deductible in calculating capital gains—the incidental costs of making the disposal, which by their nature would not need indexation, and any capital transfer tax paid on the transfer of the asset by gift to the present owner.
My amendment seeks to apply indexation to the capital transfer tax paid. It comes into the computation by virtue of section 79 of the Finance Act 1980 which was introduced to reduce double taxation on gifts of assets.
Although there may be some theoretical objection to indexing past payments of tax, it is difficult to see that there is any real difference in principle. Capital transfer tax is paid following the gift of the asset. From the point of view of the current owner, it is a price that has to be paid to ensure his title to the asset. In fact, the CTT is part of the capital cost, or, to coin a phrase used by the Minister, it is part of the basic cost of the asset. Therefore, there does not seem to be any particular reason why it should not be included in the indexation.
The Committee will not be surprised to know that the amendment has the strong support of the National Farmers Union, of which I am a member. The NFU is concerned with the best interests of its members. The amendment will also be of considerable interest and importance to many small business men and shopkeepers. Therefore, I shall be pleased if my hon. Friend decides to accept the amendment. If not, I hope that he will keep an open mind and give the matter further consideration.
§ Mr. Ridley
I am grateful to my hon. Friend the Member for Devizes (Mr. Morrison) for bringing this matter to our attention. As he said, the amendment would extend indexation to capital transfer tax which was taken into account on the subsequent disposal of an asset which had qualified for the general rollover relief for gifts. The indexation allowance is calculated by reference to relevant allowable expenditure—broadly, the cost of acquiring an asset and any sums spent on enhancing its value. The capital transfer tax which is taken into account on the subsequent disposal of an asset, which has quaffed for the general rollover relief for gifts, does not fall into either of these categories and, therefore, it is excluded from indexation.
The Government are not proposing to index the whole of capital gains tax. That would be prohibitively costly. The new relief concentrates on the injustice of imposing a charge on paper gains by providing relief for the effect of inflation occurring after March 1982.
Many aspects of the capital gains tax regime are not to be indexed. We have just had a fairly good example of that in the case of losses, which my hon. Friend the Member for Croydon, South (Sir W. Clark) feels should be indexed. Another example is the amount allowed under section 79(5). A third example would be the credit given for foreign tax paid.
The amount allowed under section 79(5) is a sum of capital transfer tax. There is no reason, in principle, to index it when the amount of tax is not being adjusted for inflation. The effect of section 79 is to defer the payment of the capital gains tax liability. Subsection (5) then exempts from charge a sum equal to the capital transfer tax liability. The taxpayer is already obtaining a substantial advantage by having the use of the money until any capital 793 gains tax falls due, and he is not losing through inflation. Therefore, our current opinion is that such an indexation adjustment is not justified.
As my hon. Friend made an express request, I shall re-examine the matter. If there is any reason for departing from that course, I shall let him know, but that is how the Government feel about it.
§ Mr. Foulkes
I should like to seek your guidance, Mr. Armstrong, on a general matter that is not unconnected with the amendment.
Last year, I was a member of the Committee on the Finance Bill, and the Committee of Selection has favoured me, yet again, with that privilege this year. Last year, several of my colleagues, including my hon. Friends the Members for Workington (Mr. Campbell-Savours) and Glasgow, Cathcart (Mr. Maxton), and I raised the point that the Finance Bill was different from other Bills and from general debates in the House. When debating the Finance Bill in Committee, hon. Members can move amendments that will result in a direct pecuniary advantage to them. Different issues are raised from those covered by the general declaration of interest, which is published in the annual declaration of interests. It would help if, before the Committee begins upstairs, you could guide hon. Members on that matter. Last year, it caused great concern.
§ The Second Deputy Chairman (Mr. Ernest Armstrong)
As the hon. Gentleman knows, hon. Members are required to declare their interests. It is a matter for each hon. Member, but I understand that the hon. Member for Devizes (Mr. Morrison) declared his interest
§ Mr. Charles Morrison
My interests are set out in the register. I said that I was a member of the National Farmers Union, although I did not do so at the beginning of my remarks. I apologise if I misled the hon. Member for South Ayrshire (Mr. Foulkes)
§ Mr. Ridley
It is not standard practice, even in the House, to go so far as to declare that one is a member of a union before putting forward its interests. I congratulate my hon. Friend on his honesty and honour.
§ Mr. Morrison
I am grateful to my hon. Friend for his congratulations. I was a little disappointed by his initial reply, but I was glad to note that it was merely his current opinion that the indexation of capital transfer tax was not justified and that he would give the matter further consideration. On that basis, I beg to ask leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Sir William Clark
I beg to move amendment No. 36, in page 52, line 41, at end insert`provided always that the taxpayer in relation to whom capital gains tax falls to be calculated on any disposal of an asset to which this section applies may elect that the amount of "relevant allowable expenditure" shall not be as otherwise provided herein but shall be the market value of the asset on the disposal of which this section applies as at 1st April 1982 if the disposal is by a company and as at 6th April 1982 in all other cases and such election as mentioned above shall be notified to the Board of Inland Revenue within twelve months from the receipt by the taxpayer of the notice of assessment in relation to that disposal'.This debate need not be as acrimonious as the last one. I hope that the Government will agree to consider the 794 amendment. I accept the principle of indexation. During the debate on a previous amendment I said that the Government were being pretty heavy handed in the way that they operated the indexation. However, there is an anomaly and an injustice about the cost of an asset before 1982. As a result of indexation, only real capital gains will be taxed from 1982. However, before 1982 there is nothing to relieve the huge inflation that took place before that.
For example, someone who purchased an asset in 1965 for £10,000 would find that his asset—without any increase in its real worth—was worth £43,000 because there had been an inflation rate of 430 per cent. between 1965 and today. On paper, that means that if the asset is sold for that figure, there is a £33,000 profit on which capital gains tax is payable. I accept that the Chief Secretary has increased the exemption. As a result, the profit is reduced by £5,000 from £33,000 to £28,000. Therefore, on the inflation element between 1965 and 1982, there is a capital gains tax liability of £28,000, which is £8,400.
Although great strides have been made to alleviate some of the capital gains anomalies, we still have a long way to go. I am asking for a revaluation of all assets on 5 April 1982. I am sure that hon. members will recollect that, when capital gains tax was amended, 5 April 1965 was the date on which those owning assets could have them revalued. I suggest that we take 5 April 1982 for a revaluation and start from there.
I am not necessarily wedded to that date. I should be happy if the Financial Secretary were to say that we should take 1981. Indeed, I should be happy if he said that we should take 1975 or 1976. However, I hope that my hon. Friend will consider the amendment or give an undertaking to consider the matter between now and the next Budget. I hope that he will consider the pre-1982 inflation. I remind the Committee that between 1965 and 1982 inflation was extremely high and is built into the capital gains liability of many people who own assets.
I hope that the Financial Secretary will be a little sympathetic to my amendment.
§ 9 pm
§ Mr. Lennox-Boyd
The gravamen of the amendment is to meet the problem that there cannot be protection against future gains induced by inflation on assets which have been held for several years and have increased in value during a period of inflation. I hope that my hon. Friend accepts that that is one of the anomalies in the Goverment's proposals. I assume that he accepts my statement. I do not see him nodding his head, but I shall not argue the point
§ Mr. Lennox-Boyd
I take it that my hon. Friend is now nodding his approval.
To satisfy the hon. Member for South Ayrshire (Mr. Foulkes), I should say that I probably stand to gain from the amendment. However, I support the amendment because my hon. Friend the Financial Secretary and my right hon. and learned Friend the Chancellor of the Exchequer both said during the Budget debate that they sought to protect investors against future capital gains induced by inflation. My hon. Friend said:Although we were unable to apply the relaxation to past gains, for the future no one who merely maintains the value of 795 his investment will pay tax except in relation to his first year of holding the asset."—[Official Report, 10 March 1982; Vol. 19, cc. 938–9.]The Bill does not meet that statement. If my hon. Friend cannot accept the amendment, is that because of the cost entailed or for technical reasons? I doubt whether it is the former reason. If it is for the latter reason and he believes that it would be awkward to have a base date of April 1982, surely that is inconsistent. We have to accept a base date of 1965 which institutes the whole capital gains tax procedure.
§ Mr. Beaumont-Dark
This is an amazing place. If one says that one has an interest to declare, others say that one should not have it. If one does not declare it, it is said that one should. If the hon. Gentleman had let me finish, I should have said that I had an interest to declare.
My interest is that most people I know, including myself, have invested far more for long-term gain than for short-term gain. They have invested in the long-term future of industry and business in Birmingham. Those who have held longest now find themselves likely to pay more capital gains tax than those who bought for very short-term advantage over, for example, the past two years rather than 18 years.
My right hon. and learned Friend the Chancellor, whom I applauded from this very seat, said in his excellent speech:It is intolerable for people to be permanently condemned to pay tax on gains that are apparent but not real".He later said:the tax…ought never to have been levied in the first place. This change is no more than simple justice." [Official Report, 9 March 1982; Vol. 19, c. 755.]We are talking here about simple justice.
The Inland Revenue has a wonderful habit, which would be enviable were it not usually for the wrong reasons, of always being able to turn something that is fair, just, sensible and intended to alleviate pressure on people and investment into a veritable lead balloon. Reading this turgid prose, one certainly has the feeling that this proposal was very quickly dusted down and shoved into a Finance Bill.
I know that some hon. Members regard capital gains as next to mortal or even immortal sin, but I hope that the Committee will recognise the virtue in the idea that those who have held for many years and whom we wish to encourage to hold should not be at less advantage than those who have held for only two years. I believe that the Government will gain in revenue, prestige and appreciation if they consider the virtue of that.
§ Mr. Richard Wainwright
Does the hon. Gentleman, with his great experience in these matters, agree that the poor treatment of long-term shareholders in the Bill will not only penalise such holders but also damage the reputation of the Stock Exchange? The Stock Exchange will become far more a place for those who have held for a short time to deal in their shares, while the long-term holder will rule less in Stock Exchange dealings. Thus, the surely false allegation that the Stock Exchange is a casino may be brought a little nearer because the long-term holder will be so much discouraged.
§ Mr. Beaumont-Dark
The point that the hon. Member makes is that the great idea of investment is that it should be investment, and that it should encourage long-term holdings.
The good intention of the Government could be brought about, with little loss in revenue, if the date were changed. I recognise that the Government, rightly, say that they do not want to reward short-term holders. The way around that is to accept 6 April 1981 as a base date and to start from there. We cannot keep the 1965 date as the base for ever. If we talk about indexing and updating, the next thing to do is to index and update the time limit. I hope that the Government will do something about this anachronism.
§ Mr. Ridley
My hon. Friends the Members for Croydon, South (Sir W. Clark), Morecambe and Lonsdale (Mr. Lennox-Boyd) and Birmingham, Selly Oak (Mr. Beaumont-Dark) have put forward the amendment to allow taxpayers to rebase their values at April 1982 values. It has been put forward on the basis that there is a perceived unfairness as between those who purchase assets in 1965, or since then, and those who purchase assets now. It is argued that, because of the nature of the indexation allowance in the Bill, the man who had purchased 10 years ago would obtain a much smaller indexation allowance than the man who purchased today.
There is an inconsistency about that basic part of the argument because one cannot compare a man who made a purchase of an identical asset 10 years ago with the man who makes that purchase today. The question is, how did the man who makes that purchase today get his money to make that purchase, and what was happening to his money during the 10 years when he did not have investment in the same assets? The only way that like can be compared with like in this matter is to take two people who both bought identical assets 10 years ago. One of them decides to bed and breakfast the asset and to pay the tax today and the other decides not to, but to keep it, to keep the tax and not to incur liability.
We then go on for another 10 years with inflation at differing rates and with the indexation allowances applying. After this period, both individuals sell their assets—the one who bed and breakfasted them and the one who did not. They obviously obtain identical prices because they were identical assets. It will be found by anybody who cares to do the arithmetic that there is no advantage to the man who bed and breakfasted 10 years ago.
The ultimate gain, the ultimate tax payable and the ultimate amount of capital retained are identical in both cases except that the man who bed and breakfasted is obviously standing out of whatever he may have paid in tax during the period after the bed and breakfast and before he finally sold. The loss of that amount of tax must be counted as a disadvantage to him. This proves that there is no unfairness as between the man who bought 10 years ago and the man who buys now. That is easily demonstrated by looking at the figures. I should be happy to show how the arithmetic is computed. On closer examination, it will be found that that is right.
It is not our policy that we should give any relief for the past. I gave three reasons—the immense complication, the large costs and the possible problem of retrospection and fairness. The amendment involves considerable relief 797 for gains in the past. They are, as it were, being disregarded and the values are being uplifted to the present values. The cost of the amendment would be zero in the corning year, as are all such costs, in 1983–84 it would be £20 million, and in a full year it would be £80 million. That shows the extent to which we would be relieving past gains through my hon. Friend's approach.
My hon. Friend the Member for Selly Oak made a distinction between those who have held for a long time and those who are short-term investors. The man who has held for a long time would be penalised by the amendment because the man who makes a short-term investment and has sold would get no benefit from the change in the tax that my hon. Friends have suggested.
I gave an example of two people who bought identical assets. That example shows that it pays to hold for a long time. We can discuss the matter in relation to shares where bed and breakfasting is available and is a possibility, but the real difficulty is with assets where bed and breakfasting is not available.
Having anticipated all those problems and having worked out the figures within the limited amount that my right hon. and learned Friend the Chancellor of the Exchequer has available for the major transformation in capital gains tax, we found a way which is fair to all investors at the minimum of cost and which unblocks the log-jam of the past when no one has been prepared to do anything about that. There are blemishes, such as losses and the one-year rule, and another difficulty that the hon. Member for Colne Valley (Mr. Wainwright) mentioned. We shall come across many more difficulties in Committee. I accept that the system is not perfect.
Let us live with the tax as we have redesigned it and as we can afford it. In the light of my explanation that no unfairness is involved, I hope that my hon. Friend the Member for Croydon, South will withdraw his amendment.
§ Mr. Lennox-Boyd
I should be grateful if I could be provided with the detailed series of examples to prove the points that my hon. Friend the Financial Secretary has made because I cannot accept what he has said. I should be grateful if that could be done in the next three weeks.
§ Sir William Clark
Was my hon. Friend the Financial Secretary about to reply to my hon. Friend the Member for Morecombe and Lonsdale (Mr. Lennox-Boyd)?
§ Mr. Ridley
I was trying to find the page so that I could tear it out and give my hon. Friend the answer now. I shall do so.
§ Sir William Clark
Before I decide whether to withdraw the amendment or to press ahead with it, I should like to raise this matter. I should be interested to see the examples to which my hon. Friend the Financial Secretary has referred, especially the examples when one can bed and breakfast and there is no difference between the longterm holder and the short-term holder. At first blush, I disagree entirely with my hon. Friend. If he has examples and I can be convinced, I am prepared to accept them.
Where an asset has been held which is not capable of being bed and breakfasted—property, land or whatever—will my hon. Friend consider whether some alleviation can be given between the 1982 cost and the cost in 1965?
§ Mr. Ridley
I agree with my hon. Friend that this is a problem. The un-bed and breakfastability of a Rembrandt or an acre of land is a disadvantage which is experienced by the owners of those assets but not by the owners of quoted shares. That has always been a disadvantage. There is nothing new about it. There was always bound to be such a disadvantage with an exemption allowance. The calculations that I shall send to my hon. Friends prove that in no circumstances does it pay to bed and breakfast except for obtaining the benefit of the exempt allowance. That is the point, and that is where the difficulties lie. I make no secret about it.
We have examined carefully the question whether bed and breakfasting can be extended to assets which are not quoted shares. It appears to be extraordinarily difficult to do, and the technical difficulties are such that we do not believe that we can offer to do it. It may be that my hon. Friends will find attractive the argument that we are seeking to give a preference to equity shares and that for reasons of industrial investment there is nothing wrong with saying that the owners of equity shares might, for the first time, develop a certain advantage over the owners of other assets. I am delighted to tell my hon. Friends that we shall continue to examine the matter.
§ Sir William Clark
In view of my hon. Friend's explanation, I beg to ask leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Question put, That the clause stand part of the Bill:—
§ The Committee divided: Ayes, 158, Noes, 101.800
|Division No. 133]||[9.20 pm|
|Adley, Robert||Fletcher, A.(Ed'nb'ghN)|
|Alexander, Richard||Fletcher-Cooke, SirCharles|
|Alison, RtHonMichael||Fookes, MissJanet|
|Aspinwall, Jack||Garel-Jones, Tristan|
|Atkins, RtHonH. (S'thorne)||Goodhart, SirPhilip|
|Banks, Robert||Goodlad, Alastair|
|Beaumont-Dark, Anthony||Gow, Ian|
|Bendall, Vivian||Gray, Hamish|
|Benyon, Thomas(A'don)||Greenway, Harry|
|Benyon, W (Buckingham)||Griffiths, E.(B'ySt.Edm'ds)|
|Berry, HonAnthony||Griffiths, Peter Portsm'thN)|
|Bevan, DavidGilroy||Grylls, Michael|
|Biffen, RtHonJohn||Gummer, JohnSelwyn|
|Blackburn, John||Hamilton, HonA.|
|Body, Richard||Hamilton, Michael(Salisbury)|
|Boscawen, HonRobert||Hawksley, Warren|
|Brinton, Tim||Heddle, John|
|Brooke, HonPeter||Hicks, Robert|
|Brown, Michael(Brigg&Sc'n)||Hogg, HonDouglas (Gr'th'm)|
|Buchanan-Smith, Rt. Hon. A.||Hordern, Peter|
|Cadbury, Jocelyn||Howell, RtHonD. (Gr'ldf'd)|
|Carlisle, Rt Hon M. (R'c'n)||Hunt, David (Wirral)|
|Chapman, Sydney||Hunt, John(Ravensbourne)|
|Clark, Hon A. (Plym'th, S'n)||Hurd, RtHonDouglas|
|Clarke, Kenneth(Rushcliffe)||Jenkin, RtHonPatrick|
|Cockeram, Eric||Jopling, RtHonMichael|
|Cope, John||Kaberry, SirDonald|
|Cranborne, Viscount||Kershaw, SirAnthony|
|Critchley, Julian||Lawrence, Ivan|
|Dean, Paul (NorthSomerset)||LeMarchant, Spencer|
|Dorrell, Stephen||Lennox-Boyd, HonMark|
|Dover, Denshore||Lester, Jim(Beeston)|
|Edwards, RtHon N. (P'broke)||Lloyd, Peter (Fareham)|
|Eggar, Tim||Loveridge, John|
|Elliott, SirWilliam||Lyell, Nicholas|
|Faith, MrsSheila||McCrindle, Robert|
|Fenner, MrsPeggy||Macfarlane, Neil|
|Fisher, SirNigel||MacGregor, John|
|MacKay, John (Argyll)||Shaw, Giles (Pudsey)|
|McNair-Wilson, M. (N'bury)||Shelton, William(Streatham)|
|McQuarrie, Albert||Shepherd, Colin(Hereford)|
|Major, John||Sims, Roger|
|Marland, Paul||Speed, Keith|
|Mather, Carol||Speller, Tony|
|Maude, Rt Hon Sir Angus||Spence, John|
|Mawby, Ray||Sproat, Iain|
|Mawhinney, DrBrian||Stanbrook, Ivor|
|Maxwell-Hyslop, Robin||Stevens, Martin|
|Mellor, David||Stewart, Ian (Hitchin)|
|Meyer, SirAnthony||Stradling Thomas, J.|
|Mills, Iain(Meriden)||Taylor, Teddy (S'end E)|
|Mills, Peter (WestDevon)||Tebbit, RtHonNorman|
|Mitchell, David(Basingstoke)||Temple-Morris, Peter|
|Morris, M. (N'hamptonS)||Thomas, Rt Hon Peter|
|Morrison, HonC. (Devizes)||Thompson, Donald|
|Murphy, Christopher||Thorne, Neil(IlfordSouth)|
|Myles, David||Thornton, Malcolm|
|Neale, Gerrard||Townend, John (Bridlington)|
|Nelson, Anthony||Trippier, David|
|Neubert, Michael||van Straubenzee, Sir W.|
|Newton, Tony||Viggers, Peter|
|Normanton, Tom||Waddington, David|
|Onslow, Cranley||Wakeham, John|
|Page, Richard (SW Herts)||Walker-Smith, Rt Hon Sir D.|
|Parris, Matthew||Waller, Gary|
|Patten, Christopher(Bath)||Ward, John|
|Pattie, Geoffrey||Warren, Kenneth|
|Percival, Sir Ian||Watson, John|
|Pollock, Alexander||Wells, Bowen|
|Prentice, RtHonReg||Wells, John(Maidstone)|
|Price, SirDavid (Eastleigh)||Wheeler, John|
|Prior, RtHon James||Wickenden, Keith|
|Renton, Tim||Wilkinson, John|
|Ridley, HonNicholas||Williams, D.(Montgomery)|
|Ridsdale, SirJulian||Wolfson, Mark|
|Roberts, Wyn (Conway)||Tellers for the Ayes:|
|Rossi, Hugh||Mr. Ian Lang and|
|Sainsbury, HonTimothy||Mr. Nick Budgen.|
|Allaun, Frank||Grimond, RtHonJ.|
|Alton, David||Hamilton, James(Bothwell)|
|Atkinson, N. (H'gey)||Hamilton, W. W. (C'tral Fife)|
|Barnett, RtHon Joel (H'wd)||Harrison, Rt Hon Walter|
|Beith, A.J.||Haynes, Frank|
|Booth, RtHonAlbert||Heffer, Eric S.|
|Bray, Dr Jeremy||HomeRobertson, John|
|Brown, Hugh D. (Provan)||Homewood, William|
|Buchan, Norman||Hooley, Frank|
|Callaghan, Jim(Midd't'n& P)||Horam, John|
|Campbell-Savours, Dale||Howells, Geraint|
|Clark, Dr David (S Shields)||Hughes, Robert (Aberdeen N)|
|Concannon, Rt Hon J. D.||John, Brynmor|
|Cook, Robin F.||Johnston, Russell(Inverness)|
|Craigen, J. M. (G'gow, M'hill)||Jones, Rt Hon Alec (Rh'dda)|
|Cryer, Bob||Jones, Dan (Burnley)|
|Cunningham, DrJ. (W'h'n)||Lamondjames|
|Davidson, Arthur||Leighton, Ronald|
|Davies, Ifor (Gower)||Lewis, Ron (Carlisle)|
|Davis, Terry (B'ham, Stechf'd)||Litherland, Robert|
|Deakins, Eric||Lyon, Alexander(York)|
|Dean, Joseph (Leeds West)||Lyons, Edward (Bradf'dW)|
|Dixon, Donald||McCartney, Hugh|
|Dobson, Frank||McDonald, DrOonagh|
|Dormand, Jack||McKay, Allen(Penistone)|
|Douglas-Mann, Bruce||Maclennan, Robert|
|Dunwoody, Hon Mrs G.||McWilliam, John|
|Eadie, Alex||Marshall, D(G'gowS'ton)|
|Evans, Ioan (Aberdare)||Mason, Rt Hon Roy|
|Evans, John (Newton)||Maxton, John|
|Faulds, Andrew||Maynard, MissJoan|
|Fletcher, Ted (Darlington)||Millan, RtHonBruce|
|Foster, Derek||Mitchell, R.C. (Soton Itchen)|
|Foulkes, George||Morris, Rt Hon C. (O'shaw)|
|Freeson, RtHon Reginald||Newens, Stanley|
|George, Bruce||Parker, John|
|Parry, Robert||Straw, Jack|
|Penhaligon, David||Thomas, Dafydd(Merioneth)|
|Price, C. (Lewisham W)||Thorne, Stan (PrestonSouth)|
|Rooker, J. W.||Tinn, James|
|Roper, John||Wainwright, R. (ColneV)|
|Sheerman, Barry||Walker, Rt Hon H. (D'caster)|
|Sheldon, Rt Hon R.||Wellbeloved, James|
|Shore, Rt Hon Peter||Welsh, Michael|
|Snape, Peter||Wigley, Dafydd|
|Spearing, Nigel||Woolmer, Kenneth|
|Stewart, Rt Hon D. (W Isles)||Tellers for the Noes:|
|Stoddart, David||Mr. Lawrence Cunliffe and|
|Stott, Roger||Mr. George Morton.|
§ Question accordingly agreed to.
§ Clause 71 ordered to stand part of the Bill.