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Mr. Edward Davey: The hon. Gentleman is making an important point. One way to assist companies as they plan

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for the next financial year would be if the Government were, in a pre-Budget report, to pre-announce at that early stage their intention to allow retrospective taxation and the possible shape of it.

Mr. Letwin: Yes. I think the hon. Gentleman's suggestion is an improvement on mine. I agree that it would be helpful if these matters were made clear in a pre-Budget report. I am sure that there will be time enough to do that. If there really is a problem, the scale of it will then have become clear.

I do not ask the Paymaster General to make a firm commitment on Report to a particular series of steps. However, if she will agree to reflect on these matters and to work out a scheme of action that will ensure that there are not unnecessary, significant and crippling costs--crippling is perhaps an exaggeration--for multinational companies currently headquartered in the UK, we shall have achieved a reasonable solution. This is a textbook case of why it is worth while going through the rather ghastly and laborious process of Second Reading, Committee and Report--it has given the industry and the professionals time to bring out the real problem.

I give due credit to the Paymaster General because she has shown considerable forbearance and understanding as we have gone through the parliamentary process. In the end, she has produced a sensible and workmanlike solution. She will not go down in history as the sort of Agrippa that we feared. On the contrary, she will be recognised as the kindly aunt of British industry.

Mr. Barry Gardiner (Brent, North): We have come a long way over the past few months, and the amendments reflect that. I pay a sincere tribute to the work of the hon. Member for West Dorset (Mr. Letwin), who, in a powerful speech at the beginning of our consideration of these matters on the Floor of the House, drew attention to the problems that stemmed from the original drafting. He did his cause nothing but good by the way in which he argued rationally and reasonably throughout consideration in Committee, not taking the line of party political advantage. I have been impressed by that, and I pay him tribute for adopting that approach.

I pay tribute also to my hon. Friend the Paymaster General for the way in which she has consistently responded to, and taken on board, the points that have been made. With the amendments, we shall end up with much improved legislation. As the hon. Member for West Dorset said, that is a tribute to the parliamentary process of Second Reading, Committee and Report.

7.45 pm

In Committee, I recall the Paymaster General making some fine points about the way in which changes to double taxation must be considered, together with all the other elements of the tax system. We must take account of that. I say in response to the comments of the hon. Member for West Dorset about US Treasury gain that business has repeatedly pointed out that there is extreme reluctance to take on board aspects of the US taxation system in this country. Relief for interest is restricted, capital gains are taxable and double taxation relief is extremely complicated in the US. On that basis, I do not think that the amendments will be the windfall for the US Treasury that the hon. Gentleman might have led us to believe.

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We have ended up with 16 pages of highly complex legislation, and, at short notice, we have had to come to terms with how that will impact on industry. There is still the opportunity for pause for further reflection. When we consider the revised figure of 45 per cent., it seems that companies using overseas holding companies to hold trading companies in higher tax countries are penalised. An example would be if a German subsidiary were held below a holding company. A capped rate of 30 per cent. would apply to double taxation relief. That is the UK corporation tax rate. If the subsidiary company were held directly, the cap is 45 per cent., and can therefore be pooled against more lowly taxed profits. There are areas that need further consideration. There can be commercial reasons for holding companies other than simply tax reasons. These will restrict the ability to mix and pool dividends when shares are held under a holding company.

A UK company using an EU holding company is now worse off than if foreign trading companies were held directly in some situations. I question whether that is in line with the free movement of capital that is demanded within the EU. However, the movement that we have seen over the past few months has been enormous. We have ended up with much better legislation than would have been the result had we proceeded on the basis on which we started. I pay tribute to my hon. Friend the Paymaster General for the work of her team and for her willingness to listen to all the arguments that have been presented to her.

Mr. Letwin: What the hon. Gentleman says is true. However, I hope that I shall not be accused of disloyalty to my right hon. and hon. Friends if I defend the Paymaster General against the hon. Gentleman's accusation. It is an inherent part of the logic of onshore pooling that the holding should be direct for the unrelieved portion to be mixable. It is almost necessary that there should be strict compulsion that all the mixing should be done onshore for the regime to be clear. I accept the hon. Gentleman's point that that will mean that the subsidiaries of trading subsidiaries, rather than controlled foreign companies, will also be caught. I accept also his point about the effects in Germany, for example. However, that is an inherent part of the logic and we must accept that consequence, whereas the restructuring that I was talking about is transient.

Mr. Gardiner: I accept those points. Where we have ended up may have certain consequences that are disadvantageous but, on balance, we have a package that is a huge improvement on the original drafting, and one that should be welcomed by the House.

Mr. Edward Davey: If only, on the odd occasion, Prime Minister's Question Time could be as consensual as this debate. It has been quite amazing. There has been a great deal of agreement between both sides, and that is welcome. I associate myself and the Liberal Democrats with the comments of the hon. Members for West Dorset (Mr. Letwin) and for Brent, North (Mr. Gardiner). The way in which this debate has been conducted has shown how Parliament, when it is at its best, can help to defend British industry and the interests of our country.

It is not often that I say that about the way in which the House scrutinises financial matters. On many other occasions, I have criticised the way in which it has dealt

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with expenditure, and the way in which it deals with tax matters is not often to be praised. We often consider new clauses and amendments late in the day and do not have sufficient time to debate them. One could apply that criticism to some measures in the Bill, but the Government have consulted recently and that has assisted us in our work. I add my support to the call of the hon. Member for West Dorset that the Government continue with that consultative process as we wait to see how these complex measures work in practice. If the Paymaster General can assure us that they will deal with the issue in the pre-Budget report and that they will at least consider the need for possible retrospective legislative change, that will be incredibly helpful.

One could, at this point, make several party political points about the whole process and say that lessons need to be learned. However, those lessons probably have been learned--I certainly hope so. It would be a wise idea for Ministers to listen to their officials and not just to their political advisers. If officials had been in charge of drawing up the Bill, we would not have faced the problems of the past few months. We would have had better legislation if the proposal that we are now examining had been introduced in a more considered fashion. The hon. Gentleman is probably right to say that onshore pooling is probably superior to the old offshore regime, but it would have been better if such a move had been made after substantial consultation and had not been rushed through in a short time.

I wish to reflect on one or two details that give rise to slight cause for concern. The first appears in Government amendment No. 106 and in the proposed new section 806H to the Taxes Act 1988 which is headed "Surrender of relievable tax by one company in a group". The arrangements for group provisions for other areas of taxation are often made by primary legislation, but the proposed new section 806H suggests that that should be done by regulation in this case. That is unusual. Perhaps when the parliamentary draftsmen were trying to put such detailed legislation together, they felt that they had no other alternative. One can have sympathy for that view. However, it is not necessarily a good precedent and it is not how group relief is dealt with for other taxation purposes.

I associate myself with a point made about how the cap relates to subsidiaries in Tokyo. That issue is a cause for concern. The current proposal relates to both the cap and to the underlying withholding tax. Perhaps it should be reconsidered at a later stage.

A separate point on the relief of capital gains on the sale of shareholdings has been brought to my attention. It may relate to the point that the hon. Gentleman made about the United States tax regime, but my point applies to Dutch mixer companies. It is my understanding that, when a subsidiary held via a Dutch mixer is sold, there is no UK tax on that gain. Is the Paymaster General concerned that, when a UK onshore mixer company sells a subsidiary, it will face a capital gains tax liability that would not exist if a Dutch mixer company is closed and moves onshore as the result of restructuring? I am not sure whether that is so, but I would be grateful if the Government could reassure me on that point.

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