Finance Bill

Greg Clark Excerpts

Tuesday 2nd July 2013 Commons Chamber

[The Financial Secretary to the Treasury (Greg Clark)]

I think that the hon. Gentleman will find that I went to a comprehensive school in Middlesbrough, not to Eton.

[Geraint Davies]

I am sorry that the right hon. Gentleman no longer has any school friends. Those who have abandoned the communities from which they came have proposed legislation to punish the poorest and reward the richest, which is a great shame. It is not too late for the Minister to think again about what is fair and right in distributive economics.

The reality is that the marginal impact of this change on the competitiveness of the City of London is very small indeed; it is not a serious argument. I can imagine the greed-fuelled lobbyists who come here on behalf of the City to demand an extra £145 million being the sort of people who say, “Oh, well, we have got to give these people more money, because otherwise they will leave the country.” We have heard all that before. In any case, many of those individuals have all sorts of tax havens, about which the Government pay lip service to investigating.

At the same time as we hear alleged concerns about those rich people avoiding tax, the Government say to them, “I’ll tell you what; here’s another 5p off the income tax.” People sometimes ask why there has been a 64% increase in bonuses this year. Could it be because the Government have provoked it, as people move their income from a tax year where they pay 50p to a tax year where they pay 45p? It was completely predictable, and it was even factored into the Treasury figures in the form of behavioural changes. The perverse thing was to hear the argument, “Oh, well, we are going to move to 45p instead of 50p because more money can be raised that way. Look, we are going to encourage our mates to move all their money to save tax”—[Interruption.] That proves that it is an absolute farce.

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[Geraint Davies]

It is interesting to see that the hon. Gentleman has changed from his red braces to blue braces—and very nice, too! I obviously do not regard the whole City of London and the banking community as parasites, as they are a major engine for exports, growth and productivity in Britain. The issue is about managed capitalism and what is the acceptable face of capitalism. It seems to me that many people on the hon. Gentleman’s side are not at all concerned, as more and more money is given to people who have already acquired enormous pots of money.

The distribution of income has shifted massively since 2010. We have seen the incomes of a large number of people in the top 10% growing by 5.5% each year over the past two years—at a time when most people have had pay cuts or pay freezes, certainly in the public sector, or lost their jobs. We have heard the Government boasting—this is their latest creative thought—that an extra 1.2 million people are in jobs, yet that has been contradicted by the Office for National Statistics. Even if there were another million extra people in work, with no extra growth and no extra output in the economy, productivity is going down and things are not going well. Nevertheless, the answer from the Government is still to give more and more money to the richest people and less to the poorest, and that is supposed to get us out of the mess, but it does not.

This stamp duty on transactions is the tip of an iceberg. I am sorry, Mr Deputy Speaker, that I have come on to describe the entire iceberg rather than the tip at the top, which we are talking about. It is important for people to stand up and be counted on this issue. There is no justification for these extra few buckets of money being thrown in the direction of those who have most. There is a great need for a more balanced growth strategy, whereby there is investment in infrastructure across the piece and where the opportunities for tax and spend are more fairly spread, so that together we can build a future that works and a future that cares—a one-nation Britain of which we can all be proud. I do not think that this suggestion makes sense, so I am very much in favour of putting a halt to this £145 million handout to people who are already rich, as it will not make any appreciable difference to the competitiveness of the City of London.

[Greg Clark]

This has been an astonishing debate. I have a lot of time for the hon. Member for Nottingham East (Chris Leslie), but he must have been pretty dozy in recent months if he thinks that this is a Budget measure that has emerged by stealth having hitherto been hidden from view, because it was given considerable prominence in the Chancellor’s Budget speech. The Chancellor said, in the Chamber,

“I also want Britain to be the place where people raise money and invest. Financial services are about much more than banking. In places such as Edinburgh and London we have a world-beating asset management industry, but they are losing business to other places in Europe. We act now with a package of measures to reverse that decline, and we will abolish the schedule 19 tax, which is payable only by UK-domiciled funds.”—[Official Report, 20 March 2013; Vol. 560, c. 939.]

However, the measure did not only feature in the Chancellor’s Budget speech. It was the subject of a press conference, and received quite a lot of publicity on the money pages. I should have thought that the shadow Financial Secretary would be aware of that, and would know what a good reception the proposal was given in the very important financial services industry.

Many misconceptions need to be cleared up. The hon. Member for Swansea West (Geraint Davies) talked about banking, but this measure has nothing whatever to do with banking. A regrettable consequence of what has happened in recent years is that the financial services sector as a whole has too often been equated with the banking industry and associated with its frequently catastrophic misjudgments and regulatory failures, and people have been tainted unfairly by that association. Just as there are hundreds of thousands of ordinary working people employed by banks who bear no responsibility for—indeed, are sickened by—some of the misdeeds that were committed by those at the top before and during the crisis, there are people who work hard for a living elsewhere in financial services, who contribute to our national income, the taxes that pay for our public services and our foreign exchange earnings, and who have certainly not put taxpayers' funds at risk in the way that characterised the worst excesses of the banking industry.

The investment management industry in this country is a case in point. It employs 30,000 people across the United Kingdom, mostly in areas such as administration, IT and legal services. At least 10,000 of these people, who are directly employed in the sector—I am not talking about those who are ancillary to it—are based outside London and the south-east. A large number of them are concentrated in Scotland—I should have thought that the hon. Member for Dumfries and Galloway (Mr Brown) would be aware of that—and in the north-west and the north midlands. In fact, 12% of the asset management industry is in Scotland. I am amazed that the hon. Member for Nottingham East—not just as shadow Financial Secretary, but as a Nottingham Member of Parliament—did not recognise the important contribution made by investment management in his city. He should be aware that the professional services sector in Nottingham is an important component of the city’s economy.

[Chris Leslie]

The Financial Secretary is characterising the Opposition as if we were somehow denigrating the investment management community. Far from it. We are simply asking this question: where is the hardship that justifies £150 million of generosity from the taxpayer at this point in time?

[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.

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[Geraint Davies]

rose—

[Greg Clark]

I want to conclude now. I hope that the House will welcome, as commentators universally have, a significant boost to the competitiveness of a very important sector for jobs in every part of the United Kingdom. I hope that, having had the explanation, the hon. Member for Nottingham East will feel willing to withdraw the new clause and await the formal consultation, which will accompany next year’s Finance Bill.

[Chris Leslie]

You have to hand it to the Financial Secretary, because he managed to keep a straight face throughout that, but I can almost hear the thumping of those trading desks across the City of London as people are delighted at the largesse of a £150 million tax giveaway to those poor, downtrodden investment managers, who really need that helping hand just now. That £150 million is the same amount as the Government saved when they abolished the health in pregnancy grant—that was not a priority; making sure that they abolish stamp duty reserve tax on unit trust transactions is where that £150 million had to go. That is completely crazy. They cannot even agree to a distributional analysis because they know that it is the wealthiest in the society who benefit from this. Therefore, we shall be pushing new clause 11 to a Division.

Question put, That the clause be read a Second time.