Finance Bill

Andrew Selous Excerpts

Tuesday 2nd July 2013 Commons Chamber

[Greg Clark]

I shall come to that. The hon. Gentleman professed not to recognise the problem that existed. As I have said, given the position that he enjoys, I would expect him to be aware of the long-standing damage to the competitiveness of an industry that employs people in his constituency. There are some very distinguished firms in his constituency. The Nottingham office of Brewin Dolphin has been there for 150 years, and I think that it is a vital component of our regional economy. These are valuable jobs, and they exist throughout the country.

The British investment management industry has a strong reputation internationally, yet—here we come to the reason for the reform—since 2000, countries such as Luxembourg and Ireland have increased their market share of domiciled funds dramatically in comparison with the United Kingdom. In fact, the UK’s share of EU domiciled funds has dwindled to less than half that of Luxembourg and has been overtaken by Ireland.

What is the reason for that? It cannot be because the reputation of British fund management has declined, as many of the funds domiciled elsewhere in Europe are in fact managed remotely by fund managers within the UK. It cannot be because the fundamental competitiveness of UK financial services has declined, because we have maintained, and very often increased, our market share in other parts of the financial services industry. For example, twice as many euros are traded in the UK than in the entire eurozone. One of the principal reasons for this competitive decline is a consequence—unintended, I am sure—of a change in the tax system that was made in 1999, and whose effect everyone agrees has been deleterious.

Schedule 19 to the Finance Act 1999 imposed a special stamp duty reserve tax—SDRT—on the investment management industry when fund managers match investors leaving a fund and surrendering their units with those joining the fund and purchasing the units. Because the fund manager is not buying any UK shares, no stamp duty reserve tax is payable, but schedule 19 imposes a tax of 0.5% on the fund manager, as if the shares have been bought. Of course, whenever a fund manager buys UK shares within a fund, full stamp duty is paid. As well as being complex and burdensome—requiring frequent tax calculations and returns to be sent to HMRC—there is a major flaw with schedule 19. Anyone who does not wish to pay schedule 19 can simply invest in otherwise identical funds, have them managed by a UK fund manager, but have them domiciled elsewhere, and that is what has happened in recent years. Such a non-UK fund could hold exactly the same equities as a UK fund, and that is happening in large numbers. It could be managed by a UK fund manager, but the investor would—by investing in a fund in Luxembourg or Ireland, for instance—not need to pay schedule 19.

Why should this matter? [Interruption.] I think the shadow Chief Secretary should take an interest, since he was not aware of the problem to which this is the solution. What are the advantages of having funds domiciled in the UK? First, there are advantages in terms of jobs, particularly in the regional economy. While fund managers can operate from anywhere, most jobs in fund management come from ancillary services and the professional services associated with them. These are high-value jobs in IT, legal services and accountancy support, and they are typically in the jurisdictions in which the funds are domiciled.

Secondly, there are advantages in terms of tax revenue. Although schedule 19 imposes SDRT on fund managers matching investors for UK funds, the Exchequer would be advantaged by having more funds domiciled in the UK, as that would involve the paying of income tax, national insurance, VAT, business rates and other taxes by people who would be employed here, rather than in Luxembourg, Ireland and other countries, and corporation tax by the companies supplying ancillary services.

Finally, who pays? It is pensioners who pay. Schedule 19 does not come out of the pay of fund managers. It is a cost of business that is invariably passed on to UK investors. It comes out of the returns and lessens the funds that are otherwise available.

[Andrew Selous (South West Bedfordshire) (Con)]

My right hon. Friend is making an excellent speech and I am listening with great interest. Is there not a further point in that, given that the Government have just started rolling out auto-enrolment, many lower paid workers across the country have a real interest in the health of the fund management industries for their pensions, and probably want their money managed in the UK rather than Luxembourg?

[Greg Clark]

My hon. Friend makes an excellent point. He is absolutely right. Already 81% of investors in UK funds are pension funds or insurers, meaning that people’s income in retirement is impaired and fewer funds are available for investment in the real economy. Two-thirds of individuals approaching retirement are contributing to a pension fund from where these charges are taken, and the introduction of automatic enrolment will mean that many more ordinary working people will be saving into a pension for the first time and will be affected.

So there is a double imperative to act now to correct this situation in which funds are moving from being domiciled by choice in this country to overseas. First, any continuing loss of competitiveness by the UK fund management industry risks destroying, possibly for ever, the critical mass and prominent global position that the industry has had. Secondly, we are on the cusp of a once-in-a-generation opportunity for the UK fund management industry, and, with it, the UK economy, because in July the EU’s alternative investment fund managers directive comes into force, creating a much more effective single market across Europe in fund management. It is estimated that €250 billion of funds may be available for the UK, and other competitors, to play host to. That is to say nothing of the significant growth shown in the emerging economies, where a burgeoning middle class is looking to make investments for which the EU is an attractive home.

--- Later in debate ---

[Tim Loughton]

So the mystery is why on earth it is not happening and the Prime Minister has not been able to say, “We back this amendment.” However, I trust what he has said. Those I do not trust are those who oppose the amendment, because those who oppose it as some sort of 1950s throwback are the ones who are being judgmental about how certain people choose to live their relationships. That view has been endorsed on many Labour party members’ blogs. Disgracefully, they seek, in effect, to pit working mums or dads against stay at home mums or dads, who are of course no less, and often more, hard-working.

My support for a transferable married couples tax allowance has never been based on some moral stance on types of relationship. My concern, as might be expected, is based on what is best for children. That is why I have suggested that it is limited in the first instance to families with children under the age of five. Two statistics say why. For a 15-year-old living at home with both birth parents, there is a 97% chance that those parents are married. For a five-year-old with parents at home, there is a one in 10 chance of those parents splitting up if they are married, but a one in three chance if they are not married. The cost of family breakdown is £46 billion and rising. That is what we need to attack.

Marriage accounts for 54% of births but only 20% of break-ups among families with children under five. We must recognise that in the tax system and we do not. That is what this modest amendment seeks to put in statute as a starting point to appreciate that.

[Andrew Selous]

My hon. Friend is making an excellent speech. Does he agree that we encourage many things in the tax system—for example, employees cycling to work? It is therefore no great surprise that we want to support marriage, given the number of families that split up each year.

[Tim Loughton]

And marriage was invented before bicycles, so why do we not support that, recognise it and value it, as we all do?

There are those who have come up with arguments against the figures, saying it is all about causation and effect. The millennium cohort research revealed that the poorest 20% of married couples are more stable than all but the richest 20% of cohabiting couples, so it is insulting to say that marriage is the preserve of the middle classes or better educated or better-off people.

This amendment alone will not solve all the problems that I have laid out. I am not naive enough to suggest that £150 or whatever the end result may be when this amendment becomes law in some form, as we hope, represents the difference between staying married or getting divorced, or getting married or cohabiting, but it does send a clear and strong message that we value families who take the decision to bring up their children within marriage. When I stood on our manifesto in 2010, and for many years before, my Front-Bench colleagues agreed with that. My amendment makes that a reality, beyond all doubt.