First Standing Committee on Statutory Instruments, &c.


Thursday 24 June 1993


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The Committee consisted of the following Members:


Ainsworth, Mr. Robert (Coventry, North-East)

Betts, Mr. Clive (Sheffield, Attercliffe)

Brown, Mr. Nicholas (Newcastle upon Tyne, East)

Cann, Mr. Jamie (Ipswich)

Chisholm, Mr. Malcolm (Edinburgh, Leith)

Denham, Mr. John (Southampton, Itchen)

Dorrell, Mr. Stephen (Financial Secretary to the Treasury)

Fabricant, Mr. Michael (Mid-Staffordshire)

Fenner, Dame Peggy (Medway)

Fishburn, Mr. Dudley (Kensington)

Hoon, Mr. Geoffrey (Ashfield)

MacKay, Mr. Andrew (Lords Commissioner to the Treasury)

Madel, Mr. David (Bedfordshire, South-West)

Martin, Mr. David (Portsmouth, South)

Page, Mr. Richard (Hertfordshire, South-West)

Peacock, Mrs. Elizabeth (Batley and Spen)

Porter, Mr. Barry (Wirral, South)

Steel, Sir David (Tweeddale, Ettrick and Lauderdale)

Mr. F. J. Reid, Committee Clerk

3 First Standing Committee on Statutory Instruments, &c. Thursday 24 June 1993

[MR. EDWARD O'HARA in the Chair]

Draft Debts of Overseas Governments (Determination of Relevant Percentage) (Amendment) Regulations 1993

10.30 am

The Financial Secretary to the Treasury (Mr. Stephen Dorrell): I beg to move That the Committee has considered the draft Debts of Overseas Governments (Determination of Relevant Percentage) (Amendment) Regulations 1993 It is my pleasant duty to welcome you to the Chair, Mr. O'Hara. I had to be quick to get that in before the hon. Member for Newcastle upon Tyne, East (Mr. Brown) stood up to say the same. I hope that we shall not prove to be too unruly under your direction. The effect of the amending regulations is to make some changes to the way in which the amount of relief allowable for tax purposes in respect of doubtful sovereign debt is calculated. Tax law allows relief for doubtful debt to the extent that it is estimated to be bad. While that works reasonably well for most debt, it proved very difficult to make accurate estimates of the amount of provision that should be made against sovereign debt. Large changes in estimates can have a significant effect on Exchequer receipts. The present system, introduced in Finance Act 1990, preserves the principles on which tax relief is based, but also gives certainty about tax deductions and phases the cost of large changes to the Exchequer. The system lays down rules for calculating the maximum amount of debt eligible for relief, and sets limits to the amount of relief allowable in any one year. When the rules were first introduced in 1990, they broadly followed the Bank of England guidelines to banks on what provisions that they should make on prudential grounds in their own accounts. Recently, the Bank of England has reviewed the operation of its matrix in the light of operating experience. It is to make changes to address specific problems that have arisen, to simplify the matrix and make it easier for banks to apply. The amendments to the regulations will bring the Treasury regulations into line with the revisions to the Bank of England matrix. I commend the regulations to the Committee.

10.32 am

Mr. Nicholas Brown (Newcastle-upon-Tyne, East): May I, too, welcome you to the Chair, Mr. O'Hara. You will be as pleased as I am that the Financial Secretary has arranged such exciting, interesting and entertaining business for us to peruse before we consider the Finance Bill in Committee this afternoon. As you will find when you Chair similar Committees, Mr. O'Hara, we can always rely on the Financial Secretary to keep us fully occupied. 4 The temptation to substitute the judgment of the parliamentary Opposition for the judgment of the Bank of England and the Inland Revenue on the matter was one that we considered carefully before the start of this morning's proceedings. The rules of the House, however, do not allow us to do any such thing; we must consider such matters as they are put to us by the Government. It is not open to us to amend the Bank of England matrix or to do anything other than to probe the judgments that the Bank of England and the Inland Revenue have made. I do not intend to oppose the principle of the adjustments that are being made, but I wish to ask the Financial Secretary several questions about the regulations. Does the hon. Gentleman consider that the rules that we are amending were too cautious and were acting as a drag on new lending? What estimate has been made of the revenue of debts to the changes that we are making today? Do the Government endorse the analysis that underlies the changes that are being made to the matrix by the regulations. It is my understanding that we are paralleling the Inland Revenue's construction. Given that the changes translate the changes to the Bank's matrix into new tax regulations, have those changes been fully translated into the new tax regulations? What assessment has been made of questions of political risk? It is also reasonable to ask what assessment foreign Governments make of their estimates of political risk in this country. Those are questions of detail, not substance. We are not trying to thwart the regulations.

10.36 am

Mr. Dorrell: The simplest question that the hon. Gentleman has asked is about the effect of the changes on the Exchequer revenues. We do not expect them to have any significant effect, because the purpose of the changes is to make the system easier to operate and more flexible, and not to affect substantially the level of provisioning required by the Bank of England on prudential grounds or allowed by the Revenue on tax allowance grounds. The Revenue effect will be broadly neutral. That answers the hon. Gentleman's first question about why the changes are being introduced—he asked whether it was because the old rules were too cautious. If the net effect on the level of provisioning is not very large, that reinforces the proposition that the changes are being introduced more for flexibility, administrative simplicity and certainty, rather than to alter the underlying economic effect of the matrix or the Revenue's supporting rules. There are two significant ways in which the Revenue rules and those operated by the Bank of England differ. The first relates to political risk, as described by the hon. Member for Newcastle upon Tyne, East. The Bank of England allows a bank to vary the level of provisioning—within quite a small margin, but to vary it none the less, according to that bank's estimate of the likely future course of events in the borrowing country. A bank can vary the total by plus or minus five reference points under the Bank's matrix. That element is not included in the Revenue matrix. The reason for that is that it is a basic principle of tax law that provisions and costs must reflect costs that have already been incurred and not reflect estimates of costs that may be incurred in the future. That is one sense in which the Revenue matrix differs from the Bank of England matrix. The other is in the treatment of the very lowest risk cases and the highest risk cases. We must remember that, in the case of the Bank of England, the 5 matrix requires the bank to make a provision. The Revenue determines the circumstances in which a bank may claim a tax allowance. Therefore, the circumstances in which the two matrices are operating is slightly different. The Bank of England does not require a bank to make a provision at all until a borrowing country scores 30 reference points on the matrix. The Revenue allows a provision of up to 5 per cent. when the country's score exceeds 10 on the matrix. At the other end of the scale, the Bank of England does not require a provision of more than 95 per cent of the value of the debt in any circumstances, whereas the Revenue allows, if the score justifies it, for 100 per cent of the debt to be written off for tax purposes. Those are the only two 6 respects in which the enforcement of the matrix from a Revenue point of view differs from the application of the matrix from a prudential management point of view through the banking authorities.

Question put and agreed to.

Resolved, That the Committee has considered the draft Debts of Overseas Governments (Determination of Relevant Percentage) (Amendment) Regulations 1993.

Committee rose at twenty-one minutes to Eleven o'clock.


O'Hara, Mr. Edward (Chairman)

Brown, Mr. Nicholas

Dorrell, Mr.

Fenner, Dame Peggy

Fishbum, Mr.

MacKay, Mr.

Peacock, Mrs.

Porter, Mr. Barry