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5.45 pm

Mr. Geraint Davies: I am honoured. I thank the hon. Gentleman for giving way. Is he aware that the 20,000 companies--or 2.8 per cent. of companies overall--that will be affected are large, sophisticated companies? Is the hon. Gentleman aware that the system allows a certain amount of flexibility--profit projections and re-evaluations will be conducted each quarter on a rolling basis? Companies of that magnitude of sophistication and

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success will obviously have their own accountants and will be able to accommodate quite easily the sorts of changes that the Government are introducing. Therefore, the single point that the hon. Gentleman has made for the past five minutes is wrong.

Mr. Quentin Davies: I think that the hon. Gentleman's comments would cause surprise--and possibly even derision--in most boardrooms in this country with which I am familiar. One is able to predict one's profits not because one has sophisticated company management but because one is able to predict the factors that will determine those profits. I have given several illustrations of that point already--I can give more, but I might go slightly beyond the margins that you have laid down, Mr. Butterfill.

The Temporary Chairman: Order. The hon. Gentleman has already gone so far outside those margins that the chances of a clause stand part debate are diminishing by the minute.

Mr. Davies: I see that I shall be blamed for anything that goes wrong in the debate. However, I am at least released from some of the constraints that were imposed on me a few moments ago.

The fact is that no company can predict what will happen in its markets. Every company deals with uncertainty. Companies may have complete control of everything that it is in their power to control, but they cannot control the behaviour of their customers, what happens to interest rates or the general economic and physical climates. Few companies feel able to make profit projections for their shareholders--or for any other purpose--or public statements of what their profits are likely to be 12 months ahead. The reference to the 20,000 companies that will be affected has cropped up several times in the discussion: several Labour Members have intervened to cite that figure. I suppose that it must be in the Walworth road handout about this clause. It represents a certain naivety.

If the clause were designed simply to impose a new corporate tax regime on the Financial Times 100 companies--the top 100 companies--it would have a considerable economic impact. Those companies already deliver a substantial proportion of the United Kingdom's gross domestic product. However, the provision is not confined to the FT 100, 500 or 1,000; it applies to the top 20,000 companies. If a Government want a particular tax regime to have a major economic effect, they will want to levy it on the top 20,000.

It is extraordinary that the hon. Member for Croydon, Central should have been deceived by the Walworth road handout into asking such a question. The hon. Gentleman knows well that the majority of companies are one-man or one-woman businesses, and that the output of such companies may be very small.

The clause is drafted so as to undermine the responsibility of Parliament for the aspect of taxation to which it relates. It is--

Mr. Cranston: Will the hon. Gentleman give way?

Mr. Davies: I shall not give way. I want to encourage the hon. Gentleman, if he really has something to say in

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this debate, to say it in his own speech. Labour Members have come to the Chamber with a Walworth road handout and have made, in many instances, ill-thought-through comments. They have not yet made a substantive contribution to the debate. Indeed, they have not shown the slightest inclination to want to do so.

We are faced with extremely bad tax law. If Parliament accepts the precedent that has been put before it, Parliament should be ashamed. The clause will lead to an additional general burden of corporate taxation, which is the last thing that the country needs. It will also impose on companies the complete absurdity and artificiality of having to predict their profits, when, by definition, profits cannot be predicted because they are subject to uncertainties outside the control of companies. That is, by definition, unreasonable and unfair. I look forward to hearing whether there is a rationale for any of the extraordinary proposals that are set out in the clause. Will Labour Members tell us what that rationale is?

Mr. Gibb: Clause 30 is the latest stage of incompetence in a saga that stems from the July Budget, when the Chancellor of the Exchequer decided to abolish the repayment of dividend tax credits to taxpayers generally and to pension funds in particular.

That decision was designed to raise about £5 billion a year by the back door, and in a way that the Government hoped would not be noticed by the public. However, it has been noticed by the public, because it is the public who have to pay. They will have to pay, on average, an extra £200 a year in higher pension contributions. Gavyn Davies, in his evidence to the Treasury Select Committee in March, said that the abolition of dividend tax credits has been paid for by the household sector. He said:


Clause 30 has been introduced to clear up the problems that have been created by that decision.

When the Government announced the end of the repayment of dividend tax credits they realised that it would lead to a spate of payments of foreign income dividends. That was because if pension funds were no longer to receive the tax credit, they might as well receive FIDs. As a result, FIDs were introduced to enable companies to pay dividends to their shareholders out of foreign earned profits without having to account for ACT. This ACT could not generally be offset against a company's mainstream corporation tax liability because there is generally no UK tax that is payable on such profits as a consequence of double tax relief.

As no ACT is paid on FIDs there is no tax credit available to the recipient of a FID. Until last July, therefore, pension funds were not very keen on receiving FIDs. They needed to be able to claim the tax credit. However, after July, FIDs became attractive since the repayment of dividend tax credits has been abolished in any event.

The Government recognised that there was a potential long-term problem. That being so, they announced that FIDs would be abolished. There was an outcry from Britain's multinational companies. Already there are£7 billion of unreclaimed ACT at cost to British industry. The Government are effectively saying now that those moneys can never be reclaimed.

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After various non-starter proposals made by the Paymaster General in the debates that followedthe Government's decision, the only solution that the Government could come up with was to abolish the entire ACT system--the entire imputation system that had been in place since 1972. That, of course, would lead to a huge cash-flow cost if companies' advance payments of corporation tax were abolished. That is why we had the consultation document in November on the proposals that we now see in clause 30 for quarterly payments of corporation tax.

Unfortunately, that is not the end of the tale of incompetence and of ill-thought-through proposals.I believe that there is a serious shortage of competent Ministers in this Government. Those who are competent find themselves doing more and more work so as to carry their less able colleagues. Thus mistakes, or errors, proliferate even among the few competent Ministers that the Government have. I see the Paymaster General nodding. I wonder which category he sees himself falling into.

The supplementary memorandum from the Treasury is to be found at page 82 of the fourth report of the Select Committee on the Treasury. It points out that the Treasury had underestimated the number of FIDs that would be paid instead of normal dividends as a result of the July changes in ACT. The memorandum reads:


It was clear to everyone--

Mr. Quentin Davies: I listened to my hon. Friend's quotation with some interest. It is obvious that the Revenue is not particularly good at forecasting the revenue that it will receive at the end of any given current year. That being so, why does my hon. Friend suppose that the Revenue should expect companies to be better at forecasting their revenues?

Mr. Gibb: My hon. Friend makes a telling point. It is incredible that the Revenue failed to predict that there would be more FIDs paid as a result of the decision that was made last July. Everyone knew that there would be more and more FIDs and that there would be a rush to use FIDs as it was no longer possible to reclaim tax credits on ordinary dividends. Why did the Government underestimate the effect of their decision?

Mr. Cranston: Will the hon. Gentleman comment on a quotation from an accountant, John Whiting, tax partner at Price Waterhouse, who commented on the point raised by the hon. Member for Grantham and Stamford(Mr. Davies) when he would not let me intervene.Mr. Whiting said:


the Government--


    "have listened to some of the arguments put during consultation."

What is the comment of the hon. Member for Bognor Regis and Littlehampton (Mr. Gibb) on that?

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