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Baroness Strange: I support my noble friend Lord Lyell on this amendment which stands also in my name. However, as I am not a chartered accountant, I do not believe that I can explain it any better or more explicitly than he has. I am only a second-hand chartered accountant, being the mother of one.
Amendment No. 280 is designed to state the purpose and nature of the extended basic rate of income tax. At present, the Bill provides that the Scottish variable rate is to be a varied basic rate of UK income tax. If that policy is followed through, Amendment No. 280 is required to clarify the purpose of the legislation. The amendment's effect is to make certain that any reference to the basic rate will be at, for example, 26 per cent. for a Scottish taxpayer and therefore the withholding of income tax from a deed of covenant will be at 26 per cent. The full amount held may then be reclaimed by a charity to which the taxpayer wishes to donate. At present, when a basic rate taxpayer signs a deed of covenant to a charity and agrees to give a net amount of, for example, £77, the taxpayer's liability is the same whether or not he makes the deed of covenant payment. The recipient charity receives an amount net of basic rate of tax of £77. Because the charity is not liable to income tax, it can reclaim the basic tax of £23 and increase the income to £100.
The effect of the Bill on charities will be different depending on whether the taxpayer is in England or in Scotland. An English taxpayer will pay, on £100, £77 to the charity and £23 tax. A Scots taxpayer will pay £103; £77 to the charity and £26 tax--£3 more. The charity in Scotland will receive only £100, not £103. The charity is prohibited from collecting the additional £3 which should, according to the underlying principle, be available to it.
The advantages of this amendment are that it is a logical application of a varied rate tax and makes certain that covenants and other such charges are outwith the income which will be subject to the Scottish variable rate. It will help to prevent charitable giving from
Lord Sanderson of Bowden: I support this line of thought. A real problem exists in this regard unless the Government look again at the way in which this extra income tax is to be raised. I suggest that they might look and see whether it would be better to incur the extra 3p in the pound as a straight levy on Scottish residents rather than as an extra burden on income tax.
My noble friend raised an important point in relation to charities and I am certain that the Government will not be backed if the charities in Scotland are seen to do worse than those south of the Border.
Lord Eatwell: Perhaps I may speak on the issue of charities, being the head of a charitable foundation; namely, Cambridge College. I resist the amendment for the extraordinary complexity it would introduce into charitable giving.
At the moment there is a straightforward relief related to the standard rate of income tax--23p throughout the UK; there is not relief for any other rate of income tax. For example, the higher rate of income tax is not relieved; it is only the 23p. The complexity introduced would arise if persons in Scotland gave to English charities. Is the Treasury then to provide the extra 3p to an English charity? If someone in Scotland gives to a Scottish charity, from where will the extra 3p in the £1 come? Is it to come from the Treasury or from the financial offices in Edinburgh? That confusion and complexity would do great damage to charitable giving and anyone supporting charities should resist the amendment.
Lord Sewel: Amendment No. 279C would delete from the Bill the provision which makes it clear that income from savings, investments, dividends and the like does not fall within the ambit of the Scottish tax power.
As the UK tax system currently stands such income is taxed only at the lower rate or the higher rate of income tax. It is not taxed at the basic rate and will not therefore be affected by the Scottish power. But that does not mean that the provision is superfluous. Obviously, things may change.
In the first place, considerable concern was expressed to us, as we formulated this power, that to include income from savings and distributions--basically dividends--within the power would be a real threat to the continuing health and vitality of financial institutions in Scotland. We listened to those concerns. To make it clear that the exclusion of savings income from the power was a matter of deliberate policy and did not happen by default, we made specific provision in the Bill.
But equally, the power is important for the future, so that if anything which is currently categorised as income from savings and distributions were, in the UK context, to be included within the basic rate at some stage, there would not be an automatic translation of that into the
Clause 69(3) is a provision which was sought by the Scottish financial and business community and which has been welcomed by them as a sensible policy which also provides certainty for the future. I agree with that assessment and, in the light of that explanation, I hope that the noble Lord may feel able to withdraw this amendment.
Perhaps I may refer to the example given by the noble Lord, Lord Mackay of Ardbrecknish, of someone whose income was dependent on savings income, someone whose income was dependent on an annuity and someone whose income was dependent on a pension. The noble Lord has got it right; there is no doubt about that. The person whose income is coming from savings would not be affected by the 3p variation; the person whose income was coming from an annuity would be caught by the 3p variation, as would the person whose income was coming from a pension.
However, differences already exist. That is the point. Those three sources of income are treated differently now in any case. There are differences between the rates at which those types of income are taxed and that is government policy; indeed, that was the policy introduced by the previous government in 1996. So we are accepting the policy differentiation which the previous government advocated. It was a differentiation clearly designed to encourage savings, and that is what we wish to encourage also. I hope that deals with the specific point raised by the noble Lord, Lord Mackay of Ardbrecknish.
I turn now to Amendments Nos. 280 and 281. I listened carefully to what the noble Lord, Lord Lyell, had to say and admired his weightlifting achievements. I am not, however, persuaded that these amendments are necessary or desirable. The effect of a tax-varying resolution would be only to provide that a different basic rate should apply to a particular class of UK taxpayers ("Scottish taxpayers"). This does not disapply the existing tax rules defining total income for tax purposes. Nor does it affect the entitlement of Scottish taxpayers to the personal allowance or to any other deduction which reduces their liability to income tax--a point raised also by the noble Lord, Lord Mackay of Ardbrecknish.
Any suggestion that the effect of the Bill is to deny Scottish taxpayers their personal allowance or any other allowance is entirely unwarranted. There is no intention to deny Scottish taxpayers any deductions or allowances currently available to them.
I turn to the point raised by the noble Lord, Lord Selkirk of Douglas, supported by other Members of the Committee. The government policy is that the tax relief on gifts to charities will be uniform across the United Kingdom, so the charities will not do worse. I can give the noble Lord an assurance that the point he raised will not arise. In any case, the amendment in his
There is therefore nothing between us in terms of the policy objectives identified by the noble Lord, Lord Selkirk. We simply arrive at the destination by a different route. I hope that on that basis the amendment will be withdrawn.
Lord Campbell of Croy: Perhaps I can say a word on dividends. The noble Lord, Lord Sewel, explained clearly and confirmed that dividends will be exempted from the extra 3p. But does the Minister accept that those who receive some of their income from dividends are, on average, likely to be better off than those whose income is entirely from their earnings? I raised all this over a year ago and I was told that the matter was much too complicated to try to include dividends. I am talking about them in general and not the savings of retired people only. I did see that it would be extremely complicated. Does the noble Lord foresee complaints in future about different treatment which means that on the whole the less well off will have to pay 3p on the part of their income that qualifies for the basic rate of tax whereas the better off will be excused that?
Baroness Carnegie of Lour: I asked the Minister whether he could define "distributions". It is not a technical point in which I have a remote interest in asking, but something that everyone in Scotland needs to know. What will be exempt? We understand about dividends and my noble friend has just asked questions about that. The Minister said that distributions are basically dividends, but what else are they? I do not believe that people in general know what it means because it is a word with which we are not familiar.
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