Lords concerned that finance bill may put pensions savings at risk

The House of Lords Committee on the Finance Bill has said that proposed restrictions to relief for pensions contributions risk damaging pensions savings.

The annual Finance Bill enacts many of the measures announced in the Budget and encompasses all of the changes to be made to tax law for the year.

It is currently before a Commons Public Bill Committee.

In their report, the Lords Committee also expressed concern about the complexity of the debt cap rules for taxing foreign profits and recommends that their introduction be delayed unless the outstanding issues can be resolved.

They said the provisions on foreign profits were incomplete when they were introduced and criticised the failure to consult on two significant and contentious compliance measures, including naming and shaming of serious tax defaulters.

Lord Vallance, Chairman of the Committee, said:

“We are concerned that the Government has underestimated the risk that changing the long-standing rule that relief for pensions contributions should be given at an individual’s marginal rate may damage pensions savings.

“At a time when most people accept that we need to encourage greater pension saving, the proposed change may have a far wider effect than on the comparatively small number of people directly affected.

“We trust that the Government will give these issues serious consideration during the consultations that are promised before the substantive changes come into effect in 2011.

“We would also invite the Government to consider our views on the anti-forestalling provisions before the Finance Bill is debated again in the Commons and make suggestions as to how our concerns can be resolved.”

The main conclusions of the report are:

— While the Committee accepts that on pensions the Government has to be free to make the changes it sees fit, it points out that a wholly new regime for the taxation of pensions was introduced only three years ago.

To make significant changes so soon has undermined the simplicity, consistency and certainty needed and so risks a reduction in pension savings.

Although the number of individuals directly affected may be relatively small, they will be senior managers who will be influential in determining pensions policy for many company employees.

— The Committee accepts that the Government wants a level playing field between pension schemes. But it warns that a balance may be difficult to achieve and sees a risk of marginal rates of over 100% in some cases.

— The Committee questions whether the anti-forestalling provisions were necessary. It stresses the importance of ensuring that all individuals who have good reasons for making increased pensions contributions are not caught by the new rules.

— The Committee finds it difficult to assess the package of measures on foreign profits while it remains incomplete. Whilst the principle of the dividend exemption was widely welcomed, the Committee is concerned about the complexity of the legislation.

— The Committee accepts the need for some restriction of interest relief. But unless the outstanding issues can be resolved during the passage of the Finance Bill, the application of the debt cap rules, which are already due to take effect after the dividend exemption, should be delayed by a few months to allow for the possibility of further changes in next year’s Finance Bill.

— The Committee notes that development of real estate investment trusts (REITs) has not lived up to expectations, in particular in that there are no residential REITs or new ones not converted from property companies.

The report concludes that this is not wholly due to the current economic circumstances but that there are also structural defects: the provisions in the Bill, while welcome, do not go far enough.

The consultation which led to the introduction of REITs was excellent and the Committee recommends that advantage is taken of this to look again at proposals for change, especially in the light of international experience. In particular, the French experience may be helpful in so far as the State Aid rules have to be met.

— The Committee found the overall effect on competitiveness of the Finance Bill difficult to assess while it remained incomplete. But, if the outstanding issues on foreign profits could be resolved, the overall effect of the provisions might be slightly positive.