Finance Bill

Public Bill Committee, 17 June 2003.

Standing Committee B

(Except clauses 1, 4, 5, 9, 14, 22, 42, 56, 57, 124, 130 to 135, 138, 139, 148 and 184 and schedules 5, 6, 19 and 25, and any new clauses and schedules tabled by Friday 9th May 2003 relating to excise duty on spirits or R&D tax credits for oil exploration.)

Nicholas Winterton (Conservative, Macclesfield)

May I welcome hon. Members to the penultimate sitting of the Committee on the Finance Bill 2003? I am convinced that we will remain good humoured and continue to make excellent progress, but I am aware that the Opposition Whip wishes to raise a point of order.

David Wilshire (Conservative, Spelthorne)

On a point of order, Sir Nicholas. I wish to raise two matters. First, I express my sorrow that no one was willing to join me in the all-night party, which would have been very brief, so that we could all be here on time this morning after the late sitting last night.

My other point is much more substantial. You will notice, Sir Nicholas, that my former opposite number, the hon. Member for Bradford, South (Mr. Sutcliffe), is not in his place this morning. I am not complaining that he is not here. He has been whisked away. If nothing else, Whips look after their own, and it would be very unkind of me not to congratulate him on his new post. The only sorrow in his elevation is that a man of such ability would better have been sent to do a job of work for a decent Government rather than the one to which he has been sent.

Nicholas Winterton (Conservative, Macclesfield)

I am extremely grateful to the hon. Member for Spelthorne (Mr. Wilshire). It was remiss of me not to congratulate the hon. Member for Bradford, South on his promotion, and we wish him well with his new responsibilities.

The hon. Member for Spelthorne also enables me to say that two or three people whom I bumped into this morning said that last night was like the good old times, but I suspect that views in the Committee on that matter may well be very mixed.

Dawn Primarolo (Labour, Bristol South)

Further to that point of order, Sir Nicholas. May I thank the hon. Member for Spelthorne for summing up the best wishes of the Committee to my hon. Friend the Under-Secretary of State for Trade and Industry, who was the Government Whip? I am sure that the Committee also wishes to congratulate my hon. Friend the Member for Gravesham (Mr. Pond) on his appointment as Under-Secretary of State for Work and Pensions. He is also unable to be with us this morning. We shall all miss him greatly, particularly me, but I am sure that, with your guidance, Sir Nicholas, we can proceed through the last stages of the Bill in the same way as our business has been conducted thus far.

Nicholas Winterton (Conservative, Macclesfield)

I am grateful to the Paymaster General for those remarks. I am sure that the Committee joins her in congratulating the hon. Member for Gravesham. I seem to be the only one who has not received promotion. [Hon. Members: ''Shame.''] I have lived with that for many years, and no doubt will continue to do so.Clause 143 PAYE on notional payments: reimbursement period

Clause 143 - PAYE on notional payments: reimbursement period

Stephen O'Brien (Conservative, Eddisbury)

May I, too, add my congratulations to the two hon. Gentlemen on their elevation? I thought that office did not come any higher than Chairman of the Procedure Committee, so I am not sure how your further promotion could be possible, Sir Nicholas. We meet this morning following a decent number of hours in yesterday's parliamentary sitting, and we are bright eyed and bushy tailed.

The stand part debate on clause 143 deals with the change that allows employees a further 60 days in which to reimburse their employers. The clause is deregulatory and more equitable, and thus attracts our support. We are glad that the Government have listened to representations on this matter, particularly from the Chartered Institute of Taxation.

One further caution still resides with the Institute of Chartered Accountants, which welcomes the change but has asked whether the Paymaster General would respond to the consideration that it will not necessarily overcome all the problems arising from what used to be called section 144A of the Income and Corporation and Taxes Act 1988. One solution when repayment is not made within the 90-day period would be to treat the unpaid amount as a loan. Alternatively, an amendment could have been inserted to extend the 90-day period in appropriate circumstances to such a longer period as the Revenue may allow. As the Paymaster General will note, we have not proposed such an amendment and wish to gauge reaction by placing the matter on the record.

The Institute of Chartered Accountants has also suggested for tidying up purposes that the Treasury might want to give consideration to consistency across the provisions of the 1988 Act. The period for reimbursement is 90 days, but the notification period for share options under the enterprise management incentive scheme is 92 days and a three-month period could create some standardisation, either at 90 or 92 days. Naturally, it has requested 92 days.

Dawn Primarolo (Labour, Bristol South)

I am grateful to the hon. Gentleman for welcoming the clause. His reaction has been very supportive. He asked two questions. The first one concerned whether the formal loan agreement is entered into so that the employee is obliged to repay PAYE to the employer. That will count as making good, so will remove the charge under section 222. Of course, if the loan is interest free, if interest is less than interest at the official rate or if the loan is subsequently waived, the beneficial loans and class 1A of the

national insurance legislation will apply. That is the clarification that he sought.

Secondly, he asked why the period was not 92 days. From the next tax year, if an employer makes a notional payment to an employee on 5 April, the 90-day period will expire before the employer's 6 July deadline for completing and submitting the taxable benefits form—P11D. That form can include details of amounts not reimbursed. The UK International Chamber of Commerce suggested that the 30-day deadline could be extended to 60 or 90 days, and the Confederation of British Industry also suggested 90 days.

Clause 143 shows that we accept those representations in full, and we believe that they fit well with the other legislation. The hon. Gentleman made a more general point about attitudes to legislation, and I would say that as always we keep such matters under review, and should it transpire that further changes would aid smooth operation, the Government would consider them. At present, the provisions are as far as we have been asked to go, and we believe that that is as far as it is necessary for us to go. I commend the clause to the Committee.

Question put and agreed to.

Clause 143 ordered to stand part of the Bill.

Clause 144 - PAYE: regulations and notional payments

Stephen O'Brien (Conservative, Eddisbury)

These new provisions have been discussed as part of the tax law rewrite. There is no further technical comment to make, but one point has been raised, and the Paymaster General may wish to reflect on it because it requires immediate attention. Six of the seven subsections are not concerned with notional payments, and as the clause is intended to update the vires for PAYE, the words ''and notional payments'' should be excluded from the heading. That might be an aid to clarification.

Michael Jack (Conservative, Fylde)

I welcome the clause. I hope that it does stand part of the Bill because it represents another important step forward for the tax law rewrite. Just in case we do not reach new clause 8 with sufficient time to discuss all its content, I should like to observe that the rewriting of the PAYE regulations was a derivative of the main tax law rewrite exercise. It became apparent that it was a necessary and proper area to rewrite, as the helpful explanatory note illustrates. There has been a certain amount of assumption in the way in which PAYE and its regulations have operated since it was first devised in 1943. The rewrite helps to move something that has operated to some degree on assumption into clarified and correctly written law.

However, I would say to the Paymaster General that that is an illustration of how the by-products of the tax law rewrite are now beginning to accumulate. She will know that, without fundamental changes to

the operation of PAYE, recommendations of a policy nature that have arisen from the rewrite exercise are now queueing up, as the regulations once did, for ministerial approval to move them forward into rewritten tax law. Will the Paymaster General, who has been a doughty supporter of the exercise, consider re-examining the issues that are being raised by the consultative and steering committees closely involved in the exercise? They are raising genuine questions on how not only PAYE but other parts of the tax law operate. I commend to her further thought on how the fruits of the labours of the exercise might be deployed more widely to help to improve the operation of the whole of the tax law, just as these rewritten regulations will make their contribution.

Dawn Primarolo (Labour, Bristol South)

I am grateful to the right hon. Member for Fylde (Mr. Jack), who committed a huge amount of time to the tax law rewrite when he was Financial Secretary in the Conservative Government. I have put on the record before that I am more than happy to follow in his footsteps in ensuring that the tax law rewrite receives support and encouragement from this Government. I undertake to bear in mind the points that he has made on the policy issues, which I will actively consider.

On the title of the clause, I hear what the hon. Member for Eddisbury (Mr. O'Brien) says, but it is really a matter for parliamentary counsel. His remarks are on the record and I am sure that they can be reflected on. As the right hon. Member for Fylde said, the whole purpose of the measure is to follow through the tax law rewrite with a clear and helpful writing of the legislation. Whenever we can achieve that, we will seek to do so. I commend the clause to the Committee.

Question put and agreed to.

Clause 144 ordered to stand part of the Bill.

Clause 145 - Payroll giving: extension of 10 per cent. supplement to 5th April 2004

Stephen O'Brien (Conservative, Eddisbury)

We welcome this extension to encourage charitable giving. It is particularly welcome at a time when charities need to optimise their encouragement of charitable giving, not least because many have suffered loss of income under the so-called pensions tax, when the ACT tax dividend credit was removed in this Chancellor's first Budget, and because of the pressures on charities caused by increased national insurance charges and the continuing bugbear of VAT. It would therefore be helpful if the Economic Secretary could confirm that he and his colleagues in the Treasury, including the Chancellor, are giving genuine consideration to putting the scheme on a permanent basis. Such a move should further increase the amount given to charities and provide certainty for charities, allowing them to plan for the longer term.

John Healey (Labour, Wentworth)

I am glad of the welcome that the hon. Gentleman has given to the clause. It extends for a further year, until April 2004, the 10 per cent.

supplement that we introduced in the Finance Bill 2000 on donations made to charity through payroll giving schemes. The intention in introducing a limited-term scheme was to provide a supplement to boost an underused method of giving, and it is achieving that purpose. The scheme is time limited. We do not have plans to make it permanent, and this extension is for one year.

Donations made in that way increased sharply from £37 million in 1999–2000, before the supplement was introduced, to £55 million in 2000–01 and £72.5 million in 2001–02. Provisional figures for 2002–03 suggest that there will be a further increase in that year.

The supplement has encouraged higher levels of giving, and extending it for one more year will allow charities to make the most of their fundraising by encouraging more employers to offer schemes and more employees to make continuing commitments to the charities of their choice through the payroll. Many people in the voluntary sector campaigned for an extension of the supplement, including, not surprisingly, the payroll giving forum of the Institute of Fundraising. Many fundraisers have welcomed the announcement, seeing the extra year as an opportunity to build on and consolidate their achievements so far. I commend the clause to the Committee.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful to the Economic Secretary. I welcome the extra year and know that it will be generally welcomed. I know from experience that it encourages employees to give and employers to facilitate that, and it creates a positive attitude to payroll giving. Perhaps consideration could be given to extending it beyond the further year.

Question put and agreed to.

Clause 145 ordered to stand part of the Bill.

Clause 146 ordered to stand part of the Bill.

Clause 156 - Life insurance policies and deferred annuity contracts

Nicholas Winterton (Conservative, Macclesfield)

The question is that clause 156 stand part of the Bill. I apologise to the Committee. I am keen that we should make progress, but I am slightly overstepping the mark, as I have selected an amendment to this clause.

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 245, in

clause 156, page 93, line 25, after 'other', insert

'(whether or not section 58(1) applies to the disposal).'.

Nicholas Winterton (Conservative, Macclesfield)

The hon. Member for Eddisbury took me by surprise by not rising on the previous clause.

Stephen O'Brien (Conservative, Eddisbury)

We should be grateful for small mercies, Sir Nicholas. Your pronouncement reminds me of ''Just a Minute''.

We come to a new part of the Bill dealing with chargeable gains. The amendment would provide clarity and avoid any inference that the reference to a disposal from one spouse to the other might be intended to link with the conditions in a technical provision in section 58(1) of the Taxation of

Chargeable Gains Act 1992. That section restricts the no-gain, no-loss treatment of disposals from one spouse to another while they are living together and during the residue of the current tax year after they separate, which could be as short as one day. It has been pointed out many times that that causes problems with financial arrangements on divorce, and proceedings are commonly not concluded for some time after that.

The Law Society and others have argued for an additional two years of assessments to be allowed, especially in view of recent trends in high-value divorce cases. Subsections (5) and (6) of the clause recognise, for the first time, the significance of post-marriage transfers in the limited context covered by the clause, and protects the spouse who receives a life or deferred annuity policy as part of the financial arrangements from being taxed on maturity of the policy. Were it not for subsection (5)(a), a negotiated divorce package would involve the actual consideration of whatever either party was disposing of. The actual disposal from one spouse to the other would generally not involve a chargeable gain on the disposal as a result of the revised section 210(2) and (3) of the 1992 Act. In those circumstances, section 58(1) and its question on whether they were living together or had been doing so within the tax year of the disposal would be immaterial.

The policy intention seems to be that the question is not intended to be relevant in the revised section 210, and that actual consideration given between spouses should be disregarded if the disposal is made at any time prior to the final dissolution of the marriage, irrespective of how recent or otherwise the separation is, and after then if the conditions in subsection (6) are satisfied. Subsection (5)(a) should, however, put it beyond doubt that that is how the provision is meant to work. That is the purpose behind amendment No. 245.

Dawn Primarolo (Labour, Bristol South)

The clause corrects two separate defects in the rules for taxing capital gains on second-hand life insurance policies. People have been exploiting the defects to avoid paying tax on their gains, and we are correcting those defects as part of our commitment to fairness in taxation.

The first defect in the current rules allows people to generate capital losses for tax purposes that could far exceed any economic loss that they have suffered. There is increasing evidence of schemes in which the whole purpose is to exploit that loophole.

The second defect allows capital gains to escape a charged tax simply because the person making the disposal received the policy as a gift. A classic example is when a husband buys a second-hand life insurance policy as an investment. In his hands, any capital gains on the policy would be liable to tax, but if he gives the policy to his wife, all capital gains that she realises are free of tax. The clause closes both loopholes and puts an end to the avoidance.

I have no quarrel with the intention behind amendment No. 245, but in my view it is entirely unnecessary, and I hope that when the hon.

Gentleman has heard my explanation, he will consider withdrawing it. As he said, the concern that prompts the amendment is that the provision that it is intended to clarify may apply only in cases in which the husband and wife are living together at some stage in the tax year in which one transfers the insurance policy to the other. I assure the Committee that that is not so. The provision applies to any transfer between husband and wife, irrespective of whether the couple are living together as man and wife, or have separated. The additional words that the amendment would insert are unnecessary and, as they add nothing to the legislation, it is better to omit them. There is no danger that people will misunderstand the scope of the provision. Its meaning is clear.

Having given that assurance, I hope that the hon. Gentleman will consider that his point has been answered and will withdraw his amendment, but if he does not, I ask my hon. Friends to oppose it.

Stephen O'Brien (Conservative, Eddisbury)

It will be helpful to have that exchange on the record. I am sure that those who have been concerned about the matter will find the Paymaster General's comments helpful when it comes to clarification. On the basis that the last thing that I would ever want to do is add otiose words, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 298, in

clause 156, page 93, line 41, leave out from beginning to end of line 10 on page 94.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss amendment No. 299, in

clause 156, page 94, line 43, at end insert—

'(1A) For each of sections 541(1)(a)(i), 541(1)(b)(i) and 541(1)(c)(i) of the Income and Corporation Taxes Act 1988 substitute—

''(i) in any case where, immediately before the chargeable event in question, the rights conferred by the policy or contract were vested in a person (other than the original policyholder) who had acquired those rights for a consideration in money or money's worth, the sums which would be allowable as a deduction for the purposes of computing a gain pursuant to Section 38 of the Taxation of Chargeable Gains Act 1992 and, in any other case, the total amount previously paid under the policy by way of premiums; and''.

(1B) For section 543(1)(a)(i) of the Income and Corporation Taxes Act 1988 substitute—

''(i) in any case where, immediately before the chargeable event in question, the rights conferred by the contract were vested in a person (other than the original policyholder) who had acquired those rights for a consideration in money or money's worth, the sums which would be allowable as a deduction for the purposes of computing a gain pursuant to Section 38 of the Taxation of Chargeable Gains Act 1992 and, in any other case, the total amount previously paid under the contract, whether by way of premiums or as a lump sum consideration, reduced in either case, if before the happening of the event one or more payments have been made on account of the annuity, by the capital element in that payment or payments, determined in accordance with Section 656; and''.'.

Stephen O'Brien (Conservative, Eddisbury)

This matter requires some concentration and is complex. Amendments Nos. 298 and 299 go together and are intended to deal with a

problem that I will now describe. I am indebted to the Association of Policy Market Makers, which has been in touch with the Treasury and the Inland Revenue about the point. I hope that members of the Committee will understand that we are discussing the active trade that has grown up over the past 15 years in second-hand life insurance policies. When the legislation to which clause 156 relates was framed, the growth of the market had not been anticipated. The amendments identify and, we hope, address that problem of legislation predating the growth of the secondary market.

The Association of Policy Market Makers, which represents the interests of the majority of companies that buy and sell second-hand life insurance policies, says that clause 156 proposes revisions to section 210 of the Taxation of Chargeable Gains Act 1992 to counter tax avoidance schemes that have exploited anomalies in the current rules. As the Paymaster General knows, all Members seek to ensure that the Revenue secures its due receipts. None of us seeks to promote tax avoidance schemes.

Subsection (3) of proposed new section 210 seeks to correct a defect in the current legislation, which allows a husband and wife to avoid capital gains tax on the disposal of a life insurance policy acquired in the secondary market as an investment—some of those issues were raised by the previous amendment. Subsections (7), (8) and (9) of proposed new section 210 seek to counteract an anomalous consequence of the application of sections 37 and 39 of the Taxation of Chargeable Gains Act 1992 on the disposal of certain types of life insurance policies under certain circumstances, which currently enables the creation of artificial capital losses by the acquisition and disposal of life insurance policies.

The problem does not, however, lie with sections 37 and 39, which are properly aimed at avoiding the double taxation of gains and the duplicated deduction of allowable expenditure. The chargeable event legislation, with which I am sure Members will be familiar—in particular, sections 541 and 543 of the Income and Corporation Taxes Act 1988—applies to purchases of second-hand or traded policies. The anomaly lies in the fact that the chargeable event legislation seeks to levy income tax on the disposal by an investor of a traded policy on an amount that is unrelated to the gain made by the investor. That mismatch should be corrected.

The APMM takes the view that the prevention of the creation of such artificial capital losses could be achieved more simply and effectively by amending sections 541(1) and 543(1) of the Income and Corporation Taxes Act 1988, which would treat the cause rather than the symptom. It therefore recommends that clause 156 should be amended by amendment No. 299.

If I can crave the Committee's indulgence, it might be helpful if I go through a worked example. I dare say that the Paymaster General will agree that the old situation was nonsense. The proposal in the Bill is also nonsense, but it is unquestionably in the Inland Revenue's favour. The alternative proposal contained in the amendments is not only better but reflects the

true position on tax and economic gain—we are, after all, dealing with chargeable gains.

Let us imagine a policy with a full market value of £100,000 that has been bought in the secondary market. To find out the gain for income tax one would, under the old system, take into account not only the premiums paid by the previous policyholder, but the premiums paid by the person who had subsequently bought it. If the lifetime premiums were £25,000, the gain for income tax purposes would be £75,000. If one keeps the £75,000 income gain in one's mind, one can examine the capital gains tax treatment.

If the market value of the policy were £100,000 and the premiums paid by the person who bought it second hand were £5,000, the investment price would be £70,000 because the £20,000 of premiums paid by the previous holder would not be computed. A loss of £70,000, which is the investment price, would therefore be computed for the capital gain. The allowable CGT loss under the old system was £70,000, which was patently nonsense because a loss would be created although there had been no genuine economic gain or loss.

Considering the same example under the proposal in the Bill, a policy with a market value of £100,000 would have the £25,000 of premiums paid deducted from it leaving a gain for income tax of £75,000—so far, there is no difference. On the capital gains tax treatment, however, the £100,000 of the market value and the £5,000 of premiums paid by the new secondary owner would be disregarded. The investment price of £70,000 would be deducted to show a capital gain of a loss of £70,000, which would leave an economic gain of £25,000. The Revenue would suddenly have an economic gain, which would not be the true gain, while the allowable CGT loss would, of course, have been reduced to nil.

The APMM proposal is an easier way to understand the problem and is therefore more elegant. Under it, the market value would be £100,000 and the investment price—what somebody paid for the policy—would be £70,000. Knocking off the investment price and the £5,000 of premiums paid by the secondary owner would leave a gain for income tax purposes of £25,000. For income tax purposes, the figure would be £25,000 under the APMM proposal and £75,000 under the previous two examples.

For the purposes of CGT, the £100,000 market value would be disregarded under the APMM proposal. The £5,000 premiums paid by the current owner would be knocked off the income, which we have dealt with. The investment price of £70,000 would also be disregarded leaving a capital gain of zero, which is exactly where the proposal in the Bill ends up. Those examples may bear further study by reading the record, because words are the currency of Hansard; it would have been easier if I could have put up a slide and gone through a presentation. The amendments are not only a genuine attempt to establish the true economic gain, but are a more elegant and simple way to achieve the same result. I admit that it was difficult to present the example, but I hope that the amendments will elicit a favourable response from the Paymaster General.

Rob Marris (Labour, Wolverhampton South West)

Can the hon. Gentleman explain how his example materially differs from that given in the explanatory notes?

Stephen O'Brien (Conservative, Eddisbury)

I could if I put the two documents together side by side. Example 2 in the explanatory notes shows what happens under the old system, and I described it in my first example. I described three columns of figures, and example 2 in the explanatory notes was my starting point. My second example concerned the proposal in the Bill. The old system would leave an allowable CGT loss of £70,000, which we all accept is not logically defensible. The proposal in the Bill would leave an economic gain of £25,000, which equally bears no relation to the true position underlying the transaction. The APMM proposal, in what is for various reasons an increasingly important and growing market, would reduce the gain to the true economic position. That would be a nil gain, with the normal things netted off, and the income tax would again be caught on the true income tax position. The Revenue would then achieve its aim of removing the artificial loss created in the original proposal, but would also have found a logical way of producing a calculation related to the true economic gain while not losing sight of the normal charging for income tax.

Dawn Primarolo (Labour, Bristol South)

I shall briefly refer to the example that the hon. Member for Eddisbury gave, then respond specifically to the group of amendments. In moving the amendment, he flagged up that this is a sophisticated and somewhat complex market.

On the hon. Gentleman's example, it should not be possible for someone to lose money on a second-hand life insurance policy but still have income tax to pay on a gain, as shown in a recent edition of Taxation. It is theoretically possible for an income tax charge to arise when no profit has been made, although the amendment does not satisfactorily address that. However, in practice, such cases do not arise in any great number. The commercial market is almost always a market for policies on which income charges do not arise. It is a sophisticated market, as the hon. Gentleman has acknowledged, and those involved in it are well aware of the tax rules. If an income tax charge might exceed the real profit, the financially astute investor will not lose out because he or she will adjust the purchase price accordingly.

As I have already said, the amendment does not work properly. It has long been recognised that the sale of life policies does not sit well in the regime for taxing life policy gains. That has been the case since those transactions were brought into charge in 1983. The amendment seeks to deal with some of the difficulties but would cover only assignments for consideration of all the rights under a policy. To work properly, it would also have to cover assignments for consideration of part of the rights under a policy. Getting the rules right for such transactions would involve changing the way in which all part withdrawals and assignments are dealt with.

Those rules are very complex and changes would only add to the complexity. They would probably involve getting rid of the present facility that allows withdrawals of up to 5 per cent. of premium without immediate tax consequences. Such a change would affect the hundreds of thousands of policyholders who make regular withdrawals from their life policies. It would be wrong to make such a change unless there were very good reasons for doing so.

So far, we have seen no compelling evidence that the accepted weaknesses caused by the 1983 change to the regime are causing serious difficulties, either by way of double tax charges or to the professional market in second-hand policies. However, if the hon. Gentleman has evidence that there are serious difficulties, I should be pleased to see it. That statement has also been made to those who have made representations on this matter. We would then need to consider whether and what changes might be necessary.

These are difficult and wide-ranging issues, and careful consideration of the impact of change would be needed. There is no question of changes this year, but if there is real evidence of difficulty, as opposed to the explaining of a theoretical possibility, I will examine it to see whether it would be appropriate to introduce some suitable measure next year. However, in the absence of real evidence, when only theoretical possibilities are being advanced, I see no grounds for accepting the amendment.

In summary, the case for change by showing the real effect has not been made. The amendment would not be effective to cover part assignments. We would need more fundamental change than the hon. Gentleman suggests. Insurers would not meet their obligations to the policyholders and, in the absence of a problem having been demonstrated in practice, change is not justified at this stage. I hope that the hon. Gentleman will therefore accept my offer—which is to him and to those who read the record—that if there are real examples of significant damage, I will happily consider them and review the position. What I will not do today is accept the amendment, because of the further implications for a complex market. Should he press it, I shall ask my hon. Friends to oppose it.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful to the Paymaster General for taking my points on an admittedly complex matter seriously. I have listened carefully as she has progressed through her arguments. I am cognisant that the old situation is nonsense—as I think we all accept—and the new proposals in the Bill therefore reflect the need for change. I think that we are at one that change is required. It would be unfair of me to say that the Paymaster General actually said this, but I felt that implicit in her remarks was the admission that the measure is the Revenue's and the Treasury's best attempt to put the situation right. There has been an admission that this matter is very complex, and an attempt to call on those who might have evidence of anything that needs to be further considered to produce that evidence.

In going through this complex market, it has been recognised that many matters can be worked out theoretically, and that has been addressed. I think that the APMM made a fair representation in giving worked examples to show why the measure in the Bill might not necessarily be a perfect and logical way of arriving at an economic gain, when that does not necessarily relate to the real world. That is the current position, a change from the previous nonsense position.

Having listened carefully, and accepted that the double taxation point has already been addressed, I shall not ask my right hon. and hon. Friends to vote on the amendments, as I think it important not to engage in gestures. The offer to keep the matter under review, listen to anyone who can produce evidence on the operation of the new proposals and address further issues, is constructive. What has been put on the record will be helpful to all concerned and, on that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 246, in

clause 156, page 94, line 44, leave out '9th' and insert '16th'.

This is a simple matter. It is clear why the Government have felt it necessary to make the changes. My only concern is that the clause does not take account of the fact that, whereas some second-hand policies of assurance have been acquired for tax planning purposes, many more have been acquired as perfectly ordinary investments. The application of the provisions might, therefore, be considered too wide.

In particular, we are concerned that if a second-hand life assurance policy is used as security for a loan, and a lender takes a charge over it, it would be treated as a disposal of an interest in the life assurance policy, notwithstanding an important, related part of tax law, section 26 of the Taxation of Chargeable Gains Act 1992. It is wrong in principle that the changes should apply from Budget day rather than the publication of the Finance Bill.

As Committee members will spot, the amendment would simply change the date from 9 to 16 April. The Budget day press release did not state with sufficient precision the manner in which the computational rules were to be altered to allow a taxpayer who made the disposable policy between Budget day and the publication of the Finance Bill to know how a loss on the disposable policy would be calculated. We propose to change the date to 16 April, which was the date of the publication of the Finance Bill. I am happy to be corrected if that was not the actual date. This is a point of detail and clarification. I hope that it would not have a major impact; I do not believe that it would, so I hope that it will find favour with the Paymaster General.

Dawn Primarolo (Labour, Bristol South)

I shall ask the Committee to reject amendment No. 246, which as the hon. Gentleman explained puts back by a week the date when clause 156 has effect. There are two grounds why I cannot agree to the delay that the amendment would create. First, I do not accept that the Budget note published by the Inland Revenue gave insufficient details of the proposed change. It contains simple but clear

statements of the two defects in the current rules and how each loophole is stopped by clause 156. It also explains the other changes that the clause makes.

The level of detail in the Budget note is standard for changes that are relatively straightforward, such as those in clause 156. There is no evidence that the information provided by the Inland Revenue was inadequate. It is quite usual for draft legislation relating to anti-avoidance measures that take effect from Budget day to be published for the first time in the Finance Bill.

The second reason for rejecting the amendment is that the people who have most to gain from any delay are those seeking to avoid tax by exploiting the loopholes that are closed by the clause. A delay could also cause some people to lose the benefit of the provision that prevents certain policies from becoming liable to a capital gains tax charge.

The hon. Gentleman went on to make two points. He said that clause 156 was too widely drafted, which was the point made by the Chartered Institute of Taxation. It is entirely right that capital gains made on ordinary investments should be liable to tax. Equally, there is no reason to allow losses for tax purposes that are greater than any economic loss. The clause does not deny relief for all losses. It has been drafted carefully to restrict tax losses to the amounts that people genuinely suffer. His second point regarded security for a loan. There is no disposal for capital gains tax purposes when someone uses an asset as security for a loan. No liability can arise because the second-hand life insurance policy is used as security in that way.

In short, there is no evidence that delaying the change made by clause 156 would help ordinary investors in second-hand life insurance policies. A delay could have the undesirable effect that I have mentioned of making certain policies liable. Therefore, I hope that the hon. Gentleman will consider withdrawing the amendment, but if he presses it to a vote, I shall ask my hon. Friend's to oppose it.

Stephen O'Brien (Conservative, Eddisbury)

This point of clarification is clearly being made for the sake of good order, and it would be wrong to detain the Committee by pressing the amendment to a vote. I have put the matter on the record, and the Paymaster General sought to defend the clarity of Revenue Budget note 30. I hope that those who have a need to refer to our proceedings will find the clarification that resulted from the exchange helpful. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 156 ordered to stand part of the Bill.

Clause 157 - Application of market value rule in case of exercise of option

Stephen O'Brien (Conservative, Eddisbury)

The clause deals with the application of the market value rule in case of exercise of option.

The Chartered Institute of Taxation has raised points about a matter of which the Paymaster General and the Revenue are aware. Therefore, I hope that simply mentioning it will elicit a response about the institute's concern that the provision will have unforeseen applications. We do not propose any amendments to the clause, but hope that clarification will be forthcoming from the Revenue. There is no need to detain the Committee further.

Dawn Primarolo (Labour, Bristol South)

The clause reverses the effect of a recent Court of Appeal decision about the way in which capital gains and losses are worked out when certain options are exercised and assets are acquired or disposed of as a result. The effect of the court's decision was, on the one hand, to create a capital loss where there was no economic loss for some taxpayers who exercised options, mainly those who exercised unapproved employee share options, while, on the other hand, to create an additional tax bill in excess of the sum that those who granted the options, mainly employee benefit trusts, received for granting and satisfying the option. The clause restores the law to that generally thought to apply before the court's judgment and removes the unintended loss and the additional tax bill.

On the questions put by the Chartered Institute of Taxation, it said at the time that the

''Chancellor has made a wise decision in reversing an unexpected ruling by the Courts over tax relief on share options.''

I understand that the institute has subsequently asked for clarification from the Revenue. I am happy to put on the record that a detailed response will be forwarded to it. If the hon. Member for Eddisbury feels that the response would be helpful to him, I shall ensure that he also receives a copy.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful to the Paymaster General for that offer and look forward to receiving the response.

Question put and agreed to.

Clause 157 ordered to stand part of the Bill.

Clause 158 - Reporting limits and annual exempt amount

Stephen O'Brien (Conservative, Eddisbury)

Clause 158 has attached to it schedule 28, which you will call separately, Sir Nicholas. The Chartered Institute of Taxation has welcomed the Revenue's continuing attempts to simplify the tax system, which were begun by the previous Conservative Government and have been maintained by this Government. We are at one on the importance of that progressing.

However, in the institute's opinion, the changes introduced by proposed new section 3A are disappointingly small. Taxpayers will still have to calculate their capital gains in order to know whether they fall within the exemption from detailed disclosure. The Law Society of Scotland also notes that in many cases there will still be a burden on the taxpayer to complete the necessary calculations to determine whether he falls within the reporting

exemption, even if the forms do not require to be submitted. Therefore, the only effort that taxpayers will be saved is that of transferring the results of their calculations to their self-assessment forms.

The Chartered Institute of Taxation seeks confirmation that the calculation to determine whether the aggregate consideration exceeds four times the annual exempt amount is to be performed in the same way for trustees as for individuals. That is quite an important point and would easily be dealt with by a note from the Revenue. I hope that the Paymaster General will confirm that that is likely to be forthcoming.

Certain representations from the Institute of Chartered Accountants in England and Wales reflected slightly stronger concerns. However, it might be better if those matters were dealt with in a Revenue note. I know that the points are with the Revenue and the Treasury, and I hope that we will get a commitment that they will be considered and that any clarification needed will be forthcoming.

John Baron (Conservative, Billericay)

I rise in support of my hon. Friend's point about simplification. The attempts to simplify the issue only go so far. I put it to the Paymaster General that simplification should be to the benefit of both the Inland Revenue and the taxpayer. There seems to be hardly any real benefit to taxpayers. As far as I can see, they will still have to incur the cost or the personal burden of performing the necessary computations to see whether they fall within the new rules. The only beneficiary from the so-called simplification appears to be the Inland Revenue, which will be relieved of a fair number of capital gains tax pages in the self-assessment returns. Will the Paymaster General address that point? It will be of interest to a good number of taxpayers.

Dawn Primarolo (Labour, Bristol South)

The clause cuts red tape. Few of those liable to pay capital gains tax will need to fill in the capital gains tax pages of the tax return. The clause will lead to a 15 per cent. cut in the number of those with no tax liability who need to fill in the capital gains tax pages. The main beneficiaries are likely to be taxpayers who do not employ professional advisers to complete their tax forms.

The hon. Members for Eddisbury and for Billericay (Mr. Baron) made a couple of brief points. The hon. Member for Eddisbury said that people still need to make the calculation. People will still need to work out whether they have a tax liability, but often it will be obvious from a rough sum that there is no tax to pay. As a result of the clause, there will be fewer cases in which precise calculation is needed to fill out the form. It will save people time and trouble.

The second point made by the hon. Gentleman, and echoed by his hon. Friend, was that the clause still leaves too many people filling in the capital gains tax forms. Obviously, the Government need to strike a balance. We need to protect the tax base, both from evasion and from honest mistakes, so the Inland Revenue needs to see forms from some people who think that they may have no tax liability. However,

under the clause those with simple affairs and modest disposal proceeds and gains will no longer have to fill in the capital gains tax pages of their tax return. As I said, that will benefit taxpayers who do not use agents to deal with their tax affairs. Such individuals are more highly represented among those with modest disposals.

On the point made by the hon. Member for Eddisbury about guidance for trustees, I confirm that the Revenue will provide clear guidance for trustees in the notes on tax returns.

The hon. Member for Billericay referred to simplification. The guidance notes will give simple explanations for taxpayers, although it would have been simple just to raise the level of disposable proceeds that trigger the need to fill in a form. The legislation is longer because we wanted to cut the number of forms further by taking account of the taper relief. We also wanted to ensure that the situation is clear for trustees as well as individuals—the hon. Member for Eddisbury referred to that. In balancing those priorities—the Committee will agree that they are correct—it is not always as straightforward as going just for the simplest option. We have struck a balance between the need to complete the capital gains tax sections of the self-assessment form and the need to reduce that requirement as much as possible, making the guidance as simple as possible. I hope that the Committee will welcome the clause on that basis.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful to the Paymaster General for her helpful explanation, and particularly the information that the notes will cover trustees as well as dealing with the points raised by my hon. Friend the Member for Billericay about simplification. That was a helpful exchange and we shall support the clause.

Question put and agreed to.

Clause 158 ordered to stand part of the Bill.

Schedule 28 agreed to.

Clause 159 - Taper relief: assets qualifying as business assets

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 247, in

clause 159, page 96, line 45, leave out 'or an eligible beneficiary'.

The clause is a welcome relaxation of the definition of business assets for the purpose of taper relief and yet another example of what I and the Chartered Institute of Taxation believe is the success of the co-operation between the Inland Revenue and the professional bodies on the CGT review group. However, the institute says that the resulting legislation is ''appallingly complex''. Saying that it is a success and appallingly complex sounds almost like an oxymoron. Surely the provisions could be made much simpler by providing that any asset used in a trade is a business asset, subject to exceptions. The institute suggests that the exceptions would apply in a limited number of situations in which the trader is a quoted company and that, as the exceptions would be so limited, thought should be given to providing that all assets used in a trade are business assets. The Paymaster General may have a view on where the de

minimis rule would cut off or may want to reflect on that.

Different implementation dates of definitions of business assets have led to the need for complex apportionment and to anomalous tax charges. The institute suggests that all current definitions of business assets should apply from the introduction of taper relief. If that is unacceptable, the institute suggests as an alternative that they should apply from 6 April 2000.

The Law Society has also considered the matter carefully and has come up with some amendments. We are discussing amendments Nos. 247 and 248 separately. Amendment No. 247 would simplify the interpretation of sub-paragraph (3)(a) in subsection (3) of the clause, which introduces new sub-paragraph 5(3) of schedule A1 of the Taxation of Chargeable Gains Act 1992. The Law Society suggests that sub-paragraph (3)(a) is wrong in referring to an ''eligible beneficiary''. As a matter of syntax, that could have one of two meanings. First, the reference could be to a trade carried on by an eligible beneficiary, but that is probably not the natural interpretation because it spans the paragraph break, but that would be covered by the new sub-paragraph (1A). Secondly, the reference could be to a company that is a qualifying company by reference to an eligible beneficiary. That is probably what is meant, but does not fit with paragraph 6 of schedule A1 because, even when the relevant conditions focus on an office or employment of an eligible beneficiary, the company still qualifies

''by reference to the trustees''.

For that, reference must be made to paragraphs 6(2) and 6(2A).

The meaning of the provision could be clarified simply by omitting the words ''or an eligible beneficiary''. I like to believe that our generosity in providing the opportunity for the Paymaster General to accept the amendment will enable that clarification to be forthcoming.

Dawn Primarolo (Labour, Bristol South)

The rules defining business assets other than shares for taper relief purposes have been rewritten with effect from 6 April 2004. Everything that is currently a business asset will remain so, but some assets used for trading purposes which do not currently qualify will begin to do so from that date. Unfortunately, I must disappoint the hon. Gentleman.

Stephen O'Brien (Conservative, Eddisbury)

Oh, not again.

Dawn Primarolo (Labour, Bristol South)

Yes. Life is tough. However, when the hon. Gentleman hears my explanation, he may decide that his amendment is a probing amendment.

The amendment would delete the reference to ''an eligible beneficiary'' in the revised version of paragraph 5 of schedule A1 to the Taxation of Chargeable Gains Act 1992. The reason for the amendment seems to be to delete what are considered to be unnecessary words that may give rise to confusion on the assumption that all companies that qualify by reference to an eligible beneficiary of a settlement are also qualifying companies by reference

to the trustees. Separate provision is made for those in the revised paragraph.

That assumption is not accurate. For example, a listed trading company that is a qualifying company by reference to a beneficiary solely because it is able to exercise 5 per cent. or more of its voting rights is not a qualifying company by reference to the trustees on account of the beneficial interest in it. If the amendment were to succeed, certain assets owned by trustees but used by companies for the purpose of their trade would cease to be business assets from 6 April 2004. Instead of extending the business asset taper relief, the amendment would curtail it. I am reasonably confident that that is not the objective that the hon. Member for Eddisbury is seeking to achieve. None the less, if he presses the amendment to a vote, I shall ask my hon. Friends to oppose it.

The hon. Gentleman raised two further points about backdating and apportionment. The purpose of the clause is to change the behaviour of landlords when they consider letting in future. The clause benefits landlords who have already let a property to unincorporated traders, but in such cases the taxpayer obtains no change in behaviour from the relief, so the costs are dead weight. We need to maximise the value for money of tax reliefs. However, we always consider whether there are reasons for backdating a change in definitions. For example, in the Finance Act 2001, we extended business asset taper relief to shares held by certain employees of non-trading companies, because savings in compliance cost justified the backdating. The cost of backdating the clause outweighs the benefits so has not been considered.

Apportionment is needed because the two tapers, business and non-business, are required to distinguish productive from passive investment. The Inland Revenue has clearly set out the rules that underpin apportionment in the leaflets and help sheets that accompany self-assessment tax returns.

I do not understand why there is confusion over the meaning of the legislation. It refers to a company that is

''a qualifying company by reference to the trustees of the settlement or an eligible beneficiary''.

The phrase ''by reference to'' must necessarily relate to the words that follow it, so a company is a qualifying company by reference to the trustees or by reference to an eligible beneficiary. Eligible beneficiaries carrying on a trade are covered elsewhere in the clause. With that rather full explanation, I hope that the hon. Gentleman will be able to suppress his disappointment that I cannot accept the amendment, and will consider withdrawing it. If he does not, I shall ask my hon. Friends to oppose it.

Stephen O'Brien (Conservative, Eddisbury)

Well, suppression may be the order of the day—we shall have to find out. I am grateful to the Paymaster General, who gave a fairly full explanation of the points raised. In particular, I am grateful for her clear statement on what is intended by the wording,

''a qualifying company by reference to . . . an eligible beneficiary''

Her confirmation that ''by reference to'' is to be interpreted according to the words that immediately follow it is important to have on the record.

On the basic assumptions, I am grateful for the various representations that have been received from the professional bodies on the matter, not least the Chartered Institute of Taxation and the Law Society. They will be able to test whether their assumptions in advising us are as laid out by the Paymaster General, particularly in relation to the 5 per cent. issue and to the trustees. The last thing that we intend is to curtail rather than extend a benefit. On that basis, and given the clarifications that have been forthcoming, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 248, in

clause 159, page 97, line 41, leave out '6th April 2004' and insert '9th April 2003'.

I fear that the Paymaster General may have addressed the issue raised by the amendment in her previous comments. I therefore rise with disappointment etched on my features, knowing her view already. This now seems an even more thankless task than usual. Nevertheless, I think that it would be right to make my point, given that not only the Law Society but the Institute of Chartered Accountants in England and Wales and the Law Society of Scotland have identified it. The amendment would change the commencement date.

Clause 159(5) states that the clause's provisions will not come into effect until 6 April 2004. Despite the Paymaster General's already well-flagged position, it seems unduly grudging to bring in this change in status only a year ahead, given the apportionment provisions that will apply where a property switches from non-business to business status at 6 April 2004. This deferral risks distorting investment decisions in the run up to that date. Intending investors will be anxious to avoid the risk of having to undertake complex computations following disposals in future as a result of a short period of non-business use prior to 6 April 2004. According to the Law Society, there is no reason why the provisions could not commence from Budget day—9 April—this year.

I note that the Paymaster General's flagged response is that the costs and benefits do not lead her to believe that the date can be brought forward. Perhaps on this occasion, however, she may wish to reflect on the potential distorting effect of the measure, which might be counterproductive for the marketplace and the Revenue. The amendment has been supported by others, who feel that the position is unnecessarily grudging. Anticipating what the reply will be, it is nonetheless with genuine intent that I move the amendment.

Nicholas Winterton (Conservative, Macclesfield)

I am sure that the Paymaster General can deal with the matter without repetition.

Dawn Primarolo (Labour, Bristol South)

When I referred briefly in the previous debate to the question of dead-weight cost, I did not refer to how much that would be. Perhaps I should do so now. The hon. Gentleman's amendment would bring forward the commencement date of the provision, which would entail significant cost to the Exchequer: some £35 million over five years. Most

importantly, there would be no payback or benefit. The Committee has discussed the point concerning benefits over and over again, and hon. Members have pressed Ministers on it.

The clause will encourage landlords to plan for the future. The hon. Gentleman said that to delay the process would be unduly grudging. We would like landlords to let their properties to unincorporated as well as incorporated traders. By announcing the measure now, landlords can let their properties to unincorporated traders, safe in the knowledge that when they finally sell their property it will qualify as a business asset from 6 April 2004.

The hon. Gentleman touched on an important point, which was the question of distortion in the market. Frankly, I would expect landlords with vacant properties, particularly in the current state of the property market, to prefer to let them sooner rather than later to ensure that they have an income stream for this year. By announcing the measure for next year, they can be assured that their property will be treated as a business asset for letting during the period from 6 April 2004. Where landlords earned from their assets for a longer time after 2003, any period of non-business use in 2003–04 will have only a small effect on the amount of the taper relief when they come to sell. I would expect prospective property investors to take many factors into account before they buy a property, not just their capital gains tax position.

We have announced the measure for implementation next year. That gives landlords and property investors certainty over their ultimate capital gains tax position, should they rent their property to an unincorporated trader. I see no justification at all for bringing in the proposals of the amendment, which would create costs for the Treasury with no obvious gain to the taxpayer. I therefore urge my hon. Friends to oppose the amendment should it be pressed to a vote.

Stephen O'Brien (Conservative, Eddisbury)

I have listened carefully to the Paymaster General and her position will reflect well on the record. The only point I would make relates to the amendment, and points raised on previous ones. The Paymaster General talks about a cost to the Revenue were the amendment to be accepted—in this case she cites a figure of £35 million—and she knows full well from our arguments that it is not our business to incur charges or costs to the Revenue that were not intended. On the contrary, we have continually maintained that it is right that the Revenue should seek to secure its proper dues.

I do not know whether there is a precedent for this—perhaps not—but calculations, or at least an estimation, that show how the £35 million had been arrived at would be very helpful in understanding the background to why the Paymaster General resists some amendments and why some arguments have not found favour with her.

Michael Jack (Conservative, Fylde)

I am grateful to my hon. Friend for pursuing that very interesting point. The Paymaster General qualified the figure by saying that it covered five years; therefore, the sum is £7 million. However,

does he agree that we have no indication as to whether the calculation took into account potential reinvestment by those whose tax liability would be lower in new economic activity that would thereby create further taxable opportunities?

Stephen O'Brien (Conservative, Eddisbury)

My right hon. Friend has made an exceptionally insightful and helpful point, which demonstrates the way in which he was very well prepared when roles on the Committee were reversed. He understood how such calculations were made.

I hope that my right hon. Friend supports my position, which is that it might be helpful for the purposes of our deliberations if we were to have, at least in summary, a breakdown of the way in which the calculations work. It would help not only those who make representations to us, but those in the Opposition who seek to scrutinise the Bill, to understand it in the fullest possible way and to come up with constructive and clarification points as well as genuine criticisms.

I do not know whether the Paymaster General wishes to respond now or on a future occasion, but it would be helpful to know the basis of the calculations. We have heard several defences against amendments using the argument of the potential costs to the Revenue. Having the calculations might well be the easiest way to clarify why some representations have not found favour and why on other occasions the arguments were revisited even though there was not necessarily agreement on the calculations. I shall be prepared to withdraw the amendment on that basis, but I sense that the Paymaster General wishes to say something further.

Dawn Primarolo (Labour, Bristol South)

I apologise. I have lost my voice.

John Healey (Labour, Wentworth)

And sense of timing.

Dawn Primarolo (Labour, Bristol South)

And my sense of timing. I apologise to the hon. Gentleman. I did not wish to distract him. I absolutely appreciate his point about the cost of Opposition amendments. How could he know the costs until we have seen the amendments and calculated the costs? I offered the explanation that the cost was one reason why I was not convinced by the amendment.

On implementation and costs, the hon. Gentleman will find an explanation of the costings in appendix A2 of the Red Book. However, let me say that I do not provide figures to put him at a disadvantage or to catch him out but as information for the Committee.

Stephen O'Brien (Conservative, Eddisbury)

That has been a helpful exchange. I shall look at appendix A2 of the Red Book. However, I believe that the calculations are important in understanding the background to the issues and the way in which the Treasury and the Revenue react to genuinely constructive suggestions that are put forward by way of amendments. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Nicholas Winterton (Conservative, Macclesfield)

I have received a request from the Opposition spokesman for a very brief stand part debate on the clause.

Question proposed, That the clause stand part of the Bill.

Stephen O'Brien (Conservative, Eddisbury)

An interesting point arose somewhat late in the process and, therefore, will not get the amendment treatment. As we know, clause 159 extends taper relief to assets that were business assets under the old regime. Clearly, that is welcome. However, woodlands have been neglected. There are many who would understand that they are very important. I accept that that may come as something of a bolt from the blue, and I am most grateful for a number of representations that we have received on it.

The number of trees planted in Britain fell in 2001, the last year for which figures are available, by more than 25 per cent. to 13,900 hectares—half the level of the late 1980s. That is a pretty devastating statistic. That happened in spite of the fact that the Government made an election pledge to increase the amount of woodland in Britain. Reading that, I find a political point that I had not picked up myself. I am most grateful to those who made representations.

Only 11.6 per cent. of the UK is wooded compared to 27.9 per cent. of France and 30.7 per cent. of Germany. Adding a capital gains tax disadvantage is hardly going to help. Those who are interested in the subject—I think that there are many who have an environmental agenda—might want to look more deeply into the matter. The Forestry Commission website is very helpful.

The Revenue has confirmed its view in a letter that business asset taper relief is not applicable to commercial woodlands. The letter states:

''I can confirm that the legislation on taper relief does not extend business assets taper relief to commercial woodlands for capital gains tax purposes. Paragraph 22 Schedule A1 of the TGCA 1992 interprets 'trade' to mean (subject to section 241(3) which deals with furnished holiday lettings) anything which:

a. is a trade, profession or vocation, within the meaning of the Income Tax Acts and

b. is conducted on a commercial basis and with a view to the realisation of profits.''

Commercial occupation of woodlands has historically never been within the meaning of trade. Up to 14 March 1998 the person occupying woodlands managed by him on a commercial basis and with a view to the realisation of profits would have been assessable under schedule B. It was, however, possible to make an election for the profits to be assessed under schedule D instead of B. This would, however, not alter the fundamental principle that the commercial occupation of woodlands was not a trade.

The fact that the commercial occupation of woodlands is not of itself a trade explains the reason why section 158, TCGA 1992, is required to extend rollover relief to the occupation of woodlands where these are managed by the occupier on a commercial basis and with a view to the realisation of profits. Without this provision such woodlands would not be within the scope of section 152. Section 165(9) is a parallel provision in respect of hold-over relief for gifts of business acts.''

It goes on to say:

''In order for woodlands to be brought within the taper relief regime for business assets, there would have to be a specific provision extending the relief to such woodlands. As this extension is not provided for then such woodlands do not qualify for business asset taper relief.''

It is important to recognise that the world has moved on in relation to woodlands. The extension would be sensible, and it is relevant to a stand part

debate. I hope that the Paymaster General will consider the point very carefully. It has been brought forward by several people, somewhat late. Whether a clever point has been spotted, or whether it is part of a growing campaign, at least I have been able to put the matter on the record.

I do not intend to vote against the clause, but I hope that the point will elicit some interest on the part of the Paymaster General. I hope that she will be fascinated enough to look into the matter to bring the desultory percentage of woodland in this country back up to the level of the late 1980s, on the basis that we are all great environmentalists.

Dawn Primarolo (Labour, Bristol South)

That was a fascinating point, but I am completely unaware of any representations that we have received on the woodlands issue. I congratulate the hon. Gentleman on branching out into new areas so dramatically.

Stephen O'Brien (Conservative, Eddisbury)

Root and branch.

Dawn Primarolo (Labour, Bristol South)

Indeed. The hon. Gentleman is scrutinising the legislation root and branch. Perhaps he has planted the germ of an idea—[Hon. Members: ''An acorn.''] Yes—great oaks and all that.

On the capital gains tax taper relief and property, I have to be honest and say that I have no idea from whom the hon. Gentleman has received those representations. I look forward to receiving them and, even in the complex area of taxation of woodlands, to considering whether there is a serious point buried in the undergrowth that should receive serious consideration from the Government in due course.

Stephen O'Brien (Conservative, Eddisbury)

The Paymaster General has clearly twigged the point. I hope that I will not leave any stone unturned.

Michael Jack (Conservative, Fylde)

Does my hon. Friend agree that now that the enormity of what he has put before the Committee is beginning to sink it, it would also be in the interests of the Paymaster General to join with the Economic Secretary, because of the implications of what he was saying for the Government's targets on CO?2? and the consequential reference to carbon sequestration?

Stephen O'Brien (Conservative, Eddisbury)

I am grateful to my right hon. Friend who is assiduous in his monitoring—

Dawn Primarolo (Labour, Bristol South)

Not deciduous?

Stephen O'Brien (Conservative, Eddisbury)

I was extraordinarily careful not to say deciduous. My right hon. Friend is assiduous in his monitoring of anything that relates to the internal and logical consistency of CO?2? emissions. We had the benefit of his earlier arguments on some of the motor issues.

I am glad that the Paymaster General's interest has been engaged. I will sit down before I come up with some further appalling pun.

Question put and agreed to.

Clause 159 ordered to stand part of the Bill.

Nicholas Winterton (Conservative, Macclesfield)

May I help the Committee? We have, if my arithmetic is correct, another four and a

half hours of debate. We have something like 57 clauses, schedules and new clauses to consider. I urge the Committee to follow the example of recent minutes, turn over a new leaf and make even faster progress where that can be done without leaving out important issues. Clearly, I will always allow a clause stand part debate if a member of the Opposition feels that that is absolutely necessary, but some of the new clauses are particularly relevant and important. I make those comments merely to help the Committee. I am here as the servant of the Committee.

David Wilshire (Conservative, Spelthorne)

On a point of order, I understand your point, Sir Nicholas. I hope, however, that you were not urging us to ignore matters of public interest that need to be debated properly. We have objected to the artificial timetable throughout.

Nicholas Winterton (Conservative, Macclesfield)

I made it perfectly clear that I wanted all matters of importance to be dealt with by the Committee. I was merely giving guidance from the Chair, because I believe that it is important that the Committee deals with all important matters. Some matters are clearly more important than others, but it is up to the Committee to make that decision and not up to the Chair. I can merely give guidance.

Clause 160 ordered to stand part of the Bill.

Clause 161 - Deferred unascertainable Consideration: election for treatment of loss

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 249, in

clause 161, page 100, line 18, after 'assessment', insert

'or accounting period as defined by the Corporation Tax Acts.

(8A) This section shall apply in computing the allowable losses accruing after 9th April 2003 to a company within the charge to corporation tax.'.

Having rapidly moved through clause 160, to help the Committee I should point out that I suspect that it will be detained over clause 162 and schedule 29.

Clause 161 deals with deferred unascertainable consideration and the election for treatment of loss. The Law Society of England and Wales has said that it generally welcomes the introduction of the relief to deal with the situation in which an asset is sold in exchange for a future right, which is treated as a separate asset for capital gains purposes, although in reality it comprises a second tranche of consideration for the original asset. That is the problem raised by the case of Marren v. Ingles. The clause ensures that any loss arising on that second asset can be utilised against any gain on the original asset, but the relief offered is more limited than that which the Law Society sought in the previous law reform memorandum or in discussions with the CGT review group. The Law Society understands that some aspects of what it has sought, such as aligning the taper relief status of the second asset with the original one and allowing the tax payments to match the receipts of cash, have been rejected as not being broadly cost neutral. However, it urges—which is why I am raising the matter—that those be borne in mind in any future, more general review.

This clause should ensure that losses suffered by companies as a consequence of the decision in Marren v. Ingles should be relieved in the same way as losses accruing to individuals. It is right in principle that companies, so long as they are taxed on chargeable gains computed similarly to those accruing to individuals, should be given relief for losses similar to that applying to individuals. It is not right that companies' gains in previous years, to the extent that they arise from the Marren v. Ingles rule, should not be eligible for an equivalent loss carry-back if less is realised from the second asset in due course than the value originally attributed to it.

That is the purpose of the amendment. It is not only put forward by the Law Society, but supported by the Chartered Institute of Taxation and the Institute of Chartered Accountants in England and Wales. I shall deal with the subsequent amendments separately.

Dawn Primarolo (Labour, Bristol South)

The purpose of the clause is to make life easier for people selling, for example, a business or land in some cases where all or part of the proceeds are to come in a later year and where the amount of those later proceeds cannot be worked out at the outset. Those people will be able to sell with the confidence that they will not later have losses that they cannot use. That means that valuing the disposal proceeds for the business or land will be less fraught.

Under the clause, a taxpayer may elect to carry losses arising on rights to deferred unascertainable consideration back to years when a taxable gain was made on the disposal of the original asset. Taxpayers must be within charge to capital gains tax. Individuals and trusts can thus benefit from a change, but companies within the charge to corporation tax cannot.

I understand the sentiment behind amendment No. 249, but I shall ask the Committee to reject it should it be pressed to a vote. I shall explain why I think that there is a more appropriate route for considering the issues. The clause addresses a specific problem raised in consultations with representative bodies, which is that some individuals might make a loss on the disposal of certain rights with no prospect of tax relief for that loss. The clause allows people who sell assets wholly or partly for that type of right to settle their capital gains tax liability on the sale, with an assurance that should things turn out worse than expected, there is the possibility of tax relief for a loss on the right. It offers practical help to people in such circumstances.

Companies are different. I appreciate that companies make deals where the consideration is wholly or partly in the form of one of those rights to deferred unascertainable consideration, but the tax rules for companies' capital profits are different from those for individuals, for example, where the rules for taxing loan relationships or intellectual property rights apply. The rules for allowing company losses also differ, for example, where a company is a member of a group.

We would have to consider the effects of those differences in practice before we could be sure that it

would be right for companies to have a similar tax treatment for losses on rights to deferred unascertainable consideration. The appropriate context for considering the tax treatment of capital gains and losses of companies, including how rights to unascertainable considerations are taxed, is the continuing consultation on the reform of corporation tax. The tax treatment of capital assets is an important strand of the overall reform programme, which is intended to respond to the changing business environment by reducing distortions and developing a modern, coherent and competitive tax system for companies.

A second consultation document on corporation tax reform will be published in the summer. If the amendment were accepted, companies might have to face two changes to the law on their rights in a relatively short period of time. Therefore, against the background of continuing consultation, it will be better for companies if we take forward an integrated and coherent reform of the tax regime, including the rules for capital assets. Extending clause 161 to companies would be, at best, a piecemeal change that may be no more than a temporary complication benefiting only a few companies in the short time that it lasted before a further change was made.

I appreciate the hon. Gentleman's point, but I hope that he will consider withdrawing the amendment so that people get a chance to make representations in the corporation tax reform consultation in the summer on the rights that are the subject of the clause. In that way, we can take forward the continuing reform of corporation tax in the context of a coherent and co-ordinated approach on which we have had time to consult business. However, if the hon. Gentleman is unable to withdraw the amendment, I shall ask my hon. Friends to oppose it, should it be pressed to a vote.

Stephen O'Brien (Conservative, Eddisbury)

On the basis of the Paymaster General's helpful and constructive comments, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 250, in

clause 161, page 104, line 5, after 'losses', insert

'but more than one notice satisfying the requirements of this section may be contained in a single document'.

The amendment would add a practical simplification. It is understandable that the consequences should be set out separately for different losses, as stated in proposed new subsection 279D(10), but it seems unnecessarily restrictive to preclude the details being provided in a single document, which would invalidate the claim for both losses.

The Law Society has helped with the suggestion that the provision be amended to provide that more than one notice satisfying the requirements of the section may be contained in a single document. The Chartered Institute of Taxation and the Institute of Chartered Accountants have also made similar representations. I look forward to hearing what the Paymaster General has to say.

Dawn Primarolo (Labour, Bristol South)

Amendment No. 250 is intended to make things a little easier for people who want to make two or more elections at the same time under clause 161. I fully support the sentiment behind the amendment, but I hope to show that it is not needed to achieve our common aim.

If a person incurs two or more losses and elects to carry them back to earlier tax years, clause 161 requires separate notices for each loss. The reason for the requirement is simple: it ensures that information about one loss is given separately from information about any other loss.

However, the requirement is only that the notice must be separate from any other notice. That does not mean that a separate letter, posted in its own envelope, must be sent to the Revenue for each loss. I assure the hon. Gentleman that a single letter would be satisfactory if it said, in effect, ''I am making two elections'' and gave all the details in the notice for the first election and then all the details for the second one.

Unfortunately, the amendment would create uncertainty. It casts doubt on current practice for other types of claim and election where similar words are not used. The Government have already made things as easy as possible. I hope that the hon. Gentleman is reassured that it is not our intention to cause duplication or more work. I hope that he is satisfied with my explanation, and is prepared to withdraw the amendment. If he does not, I shall ask my hon. Friends to oppose it.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful to the Paymaster General for putting on the record so clearly that she fully supports the sentiment and our common aim that a single document would be perfectly satisfactory provided that it states ''I am making two elections'' or words to that effect. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Nicholas Winterton (Conservative, Macclesfield)

I have received a request from the hon. Member for Billericay to have a clause stand part debate. As it relates to a matter not covered by the amendments I am happy to grant that.

Question proposed, That the clause stand part of the Bill.

John Baron (Conservative, Billericay)

I wish to raise two quick points with the Paymaster General and I would appreciate her feedback. The change implemented by the clause is welcome—that has been said before—but the provisions are somewhat over-complicated and perhaps unnecessarily restrictive. The clause spans five pages. Would the Paymaster General explain why it would not have been simpler to provide that where a loss arises on a right to honour ascertainable consideration it could be treated as arising in the year in which the right was acquired and carried forward? That would be a much simpler way of approaching the matter without resorting to five pages of provisions.

The restriction of the election to circumstances where a gain has arisen on the original disposal is also unnecessary and could be removed. I shall very briefly give an example for which I am grateful to the Institute

of Chartered Accountants. Mr. A acquires shares in a trading company for £100,000. He sells the shares for £50,000—an earn-out right valued at £40,000. He therefore makes an allowable capital loss of £10,000. He has gains on other assets of £50,000. Two years later the earn-out is calculated and amounts to only £10,000. He therefore realises a loss on the earn-out right of something like £30,000—£40,000 minus £10,000. However, the crucial point is that he has no other gains against which to set the loss. In other words, his real loss on the capital disposal is £40,000 but he has received relief for only £10,000.

The Paymaster General may suggest that that is a theoretical example, but I have been informed that such circumstances have arisen—perhaps not with those exact figures. I would appreciate the Paymaster General's feedback on why the legislation seems somewhat unfair in its treatment of taxpayers in those circumstances.

Dawn Primarolo (Labour, Bristol South)

I am a little perplexed by the hon. Gentleman's assertion that somehow the clause is unfair to taxpayers. The changes were welcomed, and the discussions with representative bodies were based on the question of allowing for a bigger change, which was the subject of the amendments, particularly with regard to companies.

The suggestion is that the effect is too complex, but in many cases it will be simple. There will be just one gain and one loss to consider, and the gain will absorb the whole of the loss. The provisions are inevitably lengthy because they have to take account of all the possible circumstances in which gains and losses may arise. A link must also be established between the loss and the gain on the original asset. The fundamental purpose of the clause is to allow the loss on a right to be set off against gains on the original asset in earlier tax years. Allowing the loss to be set off more widely would break the essential link between the loss and those gains. If the loss cannot be wholly used in that way, then the unused part can be offset against gains on an asset in the year in which the loss arose. Any remaining unused amount will be carried forward and set off against gains in later tax years under the normal rules.

The new carry-back of losses is intended to allow losses to be offset against gains on the original asset, as I have said. It is fair to allow that, because the gain and the later loss on the right to deferred consideration are linked. However, there is no case for allowing the carry-back of a loss on the disposal of a right where there are no gains on the original asset. In those circumstances, there can be no capital gains tax liability in respect of any gain on the original asset, so there is nothing against which the loss should be offset.

Although I am happy to look again at what the hon. Member for Billericay has said, in taxation matters, balances always have to be struck, in the objectives and operation, for the greatest number of taxpayers. I believe that the clause does that, and I commend it to the Committee.

Question put and agreed to.

Clause 161 ordered to stand part of the Bill.

Clause 162 - Transfers of value: attribution of gains to beneficiaries

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 208, in

clause 162, page 105, leave out lines 21 to 39.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following:

Amendment No. 209, in

clause 162, page 105, line 28, leave out 'that date' and insert '9th April 2003'.

Government amendment No. 297.

Stephen O'Brien (Conservative, Eddisbury)

I am afraid that having reached this clause, it is time to hold on to our hats. It is very complex and the way in which the selection, although I do not blame the committee of selection for it—

Nicholas Winterton (Conservative, Macclesfield)

Order. I say to the hon. Gentleman that the Chairman of the Committee is responsible for the selection of amendments and I know that there will be no criticism of me from him.

Stephen O'Brien (Conservative, Eddisbury)

I am sure that the fact that I referred to a committee rather than to you personally, Sir Nicholas, shows that I was mindful of that.

The clause is very complex and there are a number of proposed alternatives. The way in which we will debate for the help and efficiency of the Committee does not sit easily. Amendments Nos. 208 and 209 and Government amendment No. 297 contain alternatives if the Government are not prepared to accept our preferred position, which is new clause 4. That is the most obvious solution to the problem that I am going to outline and to the mischief that we think could be created by the Bill as currently drafted.

Furthermore, there are amendments to schedule 29, to which we shall come later: amendments Nos. 210, 212 and 211.

Nicholas Winterton (Conservative, Macclesfield)

Order. The hon. Gentleman has been extremely helpful to the Chair in explaining the problem as he sees it. I should be perfectly happy for new clause 4 to be grouped with the amendments that we are currently debating, but if that happens, it will not be my inclination to have a clause stand part debate. If I indicate from the Chair that in addition to the lead amendment No. 208 and amendments Nos. 209 and 297 we shall also debate new clause 4, that may be for the convenience of the Committee, and be a sensible debate. If the Committee is happy with that, I am perfectly happy that it should be the case.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful to you, Sir Nicholas. I should like to respond affirmatively to that offer. I think that it would be helpful to the Committee to take all those together.

Nicholas Winterton (Conservative, Macclesfield)

May I ask whether the Government agree?

Dawn Primarolo (Labour, Bristol South)

Yes, we do.

Stephen O'Brien (Conservative, Eddisbury)

I shall be completely honest. I have looked into this in extreme detail and tried to outline the problem in the simplest way, but I have ended up with six pages of closely typewritten notes. For the

purposes of the argument, I should place those on the record, but I am conscious of the need to make progress in Committee, so I shall try to be as brief as I can. I mention the caveat that, inevitably, the full range of arguments that I feel is important and supports my case will not, therefore, be put on the record. That said, if we get into a debate, I might come in rejoinder to some of the points that I shall now leave out. That will be part of the normal process of discussion.

The provisions on transfers of value and attribution of gains to beneficiaries are lengthy and very complicated, and have a much broader application than merely catching the apparent mischief. Connected with the various provisions in the clause is a concern that we are dealing with a number of shortcomings in the drafting of the present legislation.

It is clear from a Budget press release—Revenue Budget note 33—that clause 162 and schedule 29 are intended to counter schemes made possible by section 90(5)(a) of the Taxation of Chargeable Gains Act 1992. Accordingly—I am putting this at its simplest—a better approach would be simply to repeal the offending subsection. Instead, the approach taken is to amend existing legislation, schedule 4C to the TCGA, which is extremely poorly drafted. The predictable result is legislation that is broad and difficult to make sense of.

I have received representations from, as well as all those that are regularly cited in our proceedings, a range of individuals and professional firms, including lawyers and investment managers. They form the largest section in the file that I have on the whole Finance Bill. The measure is causing considerable anxiety and concern.

It is particularly concerning that innocent transactions not intended to be caught by schedule 4C will now fall within it. Conversely, these provisions are so complex that they will inevitably open up new avoidance opportunities, if we are completely honest about the real world. The schemes that the provisions are intended to catch should instead be stopped by repealing the provision that made them possible in the first place. In the longer term, it would seem appropriate to have consultation on replacing schedules 4B and 4C to the TCGA with provisions that counter artificial schemes without either catching innocent transactions or creating new loopholes.

New clause 4 is our preferred solution. It would leave out the offending provision, subsection 90(5), which I think would suit everybody. I do not like to make assumptions, because I feel that on this occasion the Paymaster General may feel an overwhelming spirit of generosity come upon her, but if that proposed, obvious solution is not adopted, one will have to look at alternatives. There are alternatives but they are not by any means as simple or satisfactory. Amendment No. 208 deals with the retrospective effect of the clause. As I am sure Committee members are aware from dealing with retrospection, it is incumbent on us when scrutinising legislation to consider whether someone who, in good faith on the basis of legislation passed by Parliament at the behest of a Government, may suddenly be caught for something that they

thought was proper and legal at the time. That is a major issue that can cause grievance and a feeling of unfairness among citizens.

I am concerned that new section 85A is retrospective in effect because of the reference to 21 March 2000. I am sympathetic to the Revenue's position, but it should have got the drafting correct when it was introduced. The retrospective effect of the provision will penalise those who have made arrangements that would be legal if it were not for the changes introduced by clause 162(4). Furthermore, the level of penalty is over and above that which they would have suffered had the arrangements not been entered into in the first place. In addition to the injustice, the penalty is punitive.

Dawn Primarolo (Labour, Bristol South)

Does the hon. Gentleman accept that the purpose of the schemes that the Government seek to close is to avoid a legitimate tax charge that has been in place since 1981? Those who play with fire must expect to have their fingers burned when the Government restore the legislation.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful for the Paymaster General's intervention, but it is our job as a Parliament to get the drafting of legislation right. It would be wrong of me to dispute that those who play with fire can expect to suffer fire, but it is our job to get legislation right, not least on taxation.

Dawn Primarolo (Labour, Bristol South)

What could be clearer than the Finance Act 1981, which stated that there should be a charge? If taxpayers have found a way of not paying that charge when the legislation clearly states that they should, they are playing with fire and can expect any Government to act.

Stephen O'Brien (Conservative, Eddisbury)

I shall not take issue with the Paymaster General on that because I would be misdirecting our concern. The provision should be amended to ensure that it will apply only when trustees have made transfers on or after Budget day and are expected to take the new legislation into account. Such an amendment would avoid the nonsense of schedule 4B and section 85A of the TCGA requiring settlements that had factually ceased to exist being regarded as continuing to exist. It is wrong in principle that anti-avoidance legislation should be backdated by a lengthy period to a time when taxpayers would have had no inkling of the legislation that would apply to them. That is bound to diminish respect for the law and discourage citizens from trying to ascertain and comply with the law, the terms of which cannot be known until long after the event.

The Paymaster General flagged that she is not minded to accept the amendment, but it seems that the backdating issues have become serious for a number of people. Not least, I note that there is no reference in the Government's amendment to the concern about retrospection. The clause seeks to catch any trusts that make a capital payment to beneficiaries after 9 April 2003. That is one level of retrospection. Even if the flip-flop tactic—the Committee will be familiar with flip-flop between tax periods—worked at the time of the transfer, it is now deemed not to have worked in

respect of any payments made after 9 April 2003. That is retrospectively closing a loophole created by poor drafting.

Michael Jack (Conservative, Fylde)

I am trying to follow my hon. Friend's careful argument in detail. Given that the April date to which he has just referred is effectively the beginning of the new tax year, can he explain how an element of retrospection would apply to a situation in which the taxpayer had not necessarily completed their return for the tax year 2003–04?

Stephen O'Brien (Conservative, Eddisbury)

I am grateful for my right hon. Friend's contribution because it gives me the opportunity to seek to explain the matter. He will recognise that the process of disentangling the complex representations on the clause—let alone the clause itself—is interesting.

The provisions apply only to transferred pools rather than normal pools in which there have been no flip-flop transfers. Any transfers between trusts in the period from 21 March 2000 to 9 April 2003 create a pool in the recipient trust to which the provisions apply in the absence of any other provisions. My right hon. Friend will appreciate that that is harsh given that anyone carrying out such a transfer in that period could not have known about the provisions. Although the provisions are backdated to April 2003, those conducting a flip-flop expected the provisions to apply after the date of the flop. The issue concerns the expectation of the carry-over on the tax periods.

Government amendment No. 297 will make the position worse, not better. Subsection (4) of proposed new section 85A states that the provisions of schedule 4C relating to capital payments to beneficiaries not chargeable to tax would not apply to a case within paragraph (b). The Government amendment will ensure that the provisions will not apply to payments to beneficiaries not chargeable to tax only where the payment was made before 9 April 2003. Thus if the transfer were made in the period from 21 March 2000 to 9 April 2003 and the payments were made today, payments to non-taxable beneficiaries would be ignored. That would happen because the relevant rules were not in force at the time of the transfer.

That deals with my concerns about Government amendment No. 297, but I have not addressed the problem of retrospection.

Rob Marris (Labour, Wolverhampton South West)

Following on from the point made by the right hon. Member for Fylde on retrospection, the Government are seeking to change the rules so that a transaction that has not yet crystallised—to use the hon. Gentleman's word—will become taxable. Somebody who would have flop-flipped back into the original pool because they anticipated that the measure would lead to a future tax saving will not do so because of the change in the legislation. There is therefore no actual retrospectivity. I understand that the rules apply to offshore trusts, and legislators in Parliament always place a question mark against those who use offshore trusts.

Stephen O'Brien (Conservative, Eddisbury)

I recognise the hon. Gentleman's point about flop-flipping as against flip-flopping. I also

recognise that somebody making their dispositions and arrangements must exercise a degree of judgment in deciding what will or will not take place in legislation. On the one hand that is a risk because they cannot know what will appear in legislation applying to a particular tax year. On the other hand a course of conduct and practice can become established.

The transactional arrangements on offshore trusts are clearly sensitive and are made under the public's gaze for various reasons of which we are all aware. However, offshore trusts exist and just because they are called offshore trusts does not mean that we should examine them with a sense of dark clouds and foreboding. Offshore trusts have existed for many years, for perfectly legitimate and proper reasons. We should not simply write them off as something to be condemned because they are offshore. They are not attractive to the Revenue because they are not within the tax net for the whole of the United Kingdom, which raises questions on what is a legitimate catch.

The comment on the clause has been interesting. In an article in Taxation on 5 June 2003, Emma Chamberlain argues that

''the Finance Bill seems to have gone further than is appropriate or justifiable . . . First, and most importantly, the clause is retrospective in effect . . . it completely rewrites the tax consequences of an event that has already occurred.''

The hon. Member for Wolverhampton, South-West (Rob Marris) made the point that the transaction had not crystallised—arrangements have to be put in place when one deals with offshore jurisdictions—but it has nevertheless occurred.

Rob Marris rose—

Mr. Jack rose—

Stephen O'Brien (Conservative, Eddisbury)

I suspect that the interventions are on related points, so I may give way twice.

Michael Jack (Conservative, Fylde)

I seek to understand the logic of my hon. Friend's argument and that of the article from which he has just quoted. Was the expectation of the taxpayer a 1981 event or an event that was subsequently invented because of a reinterpretation of the 1981 situation? Can he help me on that point?

Stephen O'Brien (Conservative, Eddisbury)

No. Does the hon. Member for Wolverhampton, South-West also want to intervene?

Rob Marris (Labour, Wolverhampton South West)

On a related point, I do not have the same knowledge of the matter as the hon. Gentleman, but I think that the retrospection issue relates to my point about crystallisation. I would characterise the transaction as not having crystallised, because when a sum has been flip-flopped from one settlement to another—which is crudely what the argument is about although there may be a chain of settlements—it is only when the distribution is made that the tax liability arises. If the clause is passed today and on Report, the distribution might not take place in the same way as it otherwise would have done, but that is not retrospection.

To trespass on your generosity, Sir Nicholas, is the situation not like my ordering a boiler because I believe that the Government will issue an energy efficiency grant, but finding when the boiler is

delivered that the grant is no longer available? That would not constitute retrospective withdrawal by the Government.

Stephen O'Brien (Conservative, Eddisbury)

The position in the example that the hon. Gentleman prays in aid to support his point would be, ''Tough.'' The point made by my right hon. Friend the Member for Fylde was helpful.

Rob Marris (Labour, Wolverhampton South West)

It was a probing intervention.

Stephen O'Brien (Conservative, Eddisbury)

The nature of the probe is such that I cannot make a judgment on what was in people's minds in 1981 or 2003. The point is that many people believe that they are genuinely affected and disadvantaged by the proposal. One could say that they have taken a risk and that, like the example of the hon. Gentleman's boiler, that is tough. There is a longer chain of setting up a transaction in taxation affairs; a greater degree of clarity and certainty is therefore required.

Rob Marris (Labour, Wolverhampton South West)

Another example, which happened under the Conservative Government, has occurred to me. How is the case that we are discussing different from the tapering and ultimate abolition of mortgage interest relief? When people bought houses on a 25-year mortgage, many of them expected—perhaps without really thinking about it—that mortgage interest relief at source would continue for the full term of the mortgage, but they found that that did not happen. That change was not characterised as being retrospective. The individual could have decided that the game was no longer worth a candle and sold their house.

Stephen O'Brien (Conservative, Eddisbury)

The hon. Gentleman has made his point. One can draw distinctions based on that example, but I shall not be drawn down that channel because the matter is complex enough without introducing MIRAS and tapered relief.

I have dealt with our preferred position on new clause 4, amendment No. 208 and Government amendment No. 297. Amendment No. 209 clarifies the meaning of subsection (4)(b)(ii) of proposed new section 85A. In case my more general amendment to remove retrospection is not adopted, although I very much hope that it will be, I should point out that the words ''that date'' at the end of clause 162(4)(b)(ii) could refer to 9 April 2003, which is mentioned in line 22, or 8 April 2003, which is mentioned in line 25. It would be clearer if 9 April 2003 were substituted for ''that date''. Amendment No. 209 is purely related to clarification and is therefore somewhat easier to deal with. However, it is relevant only if the Government do not accept new clause 4.

On the basis that we have dealt with the new grouping under your ruling, Sir Nicholas, I beg leave to move the amendments standing in my name and the new clause. I guess that it is for the Government to move their own amendments.

Nicholas Winterton (Conservative, Macclesfield)

Order. The hon. Gentleman merely needs to move the lead amendment—amendment No. 208—and he has already done that.

Michael Jack (Conservative, Fylde)

I listened to my hon. Friend the Member for Eddisbury with great care and I congratulate him on the precision with which he condensed six pages of

notes into a shorter presentation. Like the hon. Member for Wolverhampton, South-West, I have not studied the matter in detail, but some important principles have been raised by my hon. Friend's comments.

As I understood the point about retrospection that lay at the heart of my hon. Friend's remarks, taxpayers affected by the amendments and the clause are conducting their affairs in accordance with their understanding of the law as it is now. The Government see the law as taxpayers are interpreting it as an avoidance issue, so they seek to return to the 1981 status quo. If that is what the Government are saying, if the situation has not been challenged between the initiation in 1981 and now, and if the things that have enabled taxpayers to avoid tax have been maintained without challenge, there is an interesting question about the legitimate understanding of the tax code at the time. I pose that question to my hon. Friend.

If those involved in the flip-flopping activity thought, ''Ah yes, we have a mechanism that gets round the purpose in 1981,'' they were taking a risk. They would have said to themselves, ''Well, it's always open to the Treasury to stop it.'' Many avoidance schemes are marketed as a result of clever people considering the tax law and deciding that if they do something in a particular way, they can get round a provision, but it is always on the basis that they can do so only for the time being. Any measure that seeks to deviate from the original tax position as it would have been in 1981 is by definition an artificial construct. It does something different from what happened in 1981. I do not have much sympathy if the good times come to an end, which appears to be the situation that my hon. Friend described.

I do not want my hon. Friend to expose himself by justifying a tax avoidance mechanism when those who designed it knew full well that it was a change from the spirit and purpose of the 1981 legislation.

Stephen O'Brien (Conservative, Eddisbury)

For someone who says that he has not studied the area, my right hon. Friend has picked up the point exceptionally fast and well. The technicalities of the clause are unquestionably complex. We are dealing with some serious principles and fundamental ideas about the rights and wrongs of taxation in this area. Although I do not take issue with my right hon. Friend's description of what the Government are seeking to achieve, our approach in this case is not prompted by support for tax avoidance—it is not that we think that those who took risks from 1981 onwards were right in assessing those risks in the way that they did—nor do I want to expose myself—far from it. I have demonstrated that we are trying to be responsible.

With your indulgence, Sir Nicholas, as this is a long intervention, my argument is an analogy to the law of prescription such as when someone goes on to land. It has taken until 2003—22 years—to correct a 1981 risk, on which people have acted in course of conduct. There is a degree to which, by the normal principles of prescription, that we can deal with that.

Michael Jack (Conservative, Fylde)

I am grateful for your indulging my hon. Friend, Sir Nicholas, because his intervention has provided a legitimate reason why retrospection must be addressed in a slightly different way than if the Government had created a new tax law, then said that it applied to events that had occurred five years earlier under a previous code.

The Paymaster General must address my hon. Friend's point, because if something went unchallenged for a period of time, it is quite possible that the flip-floppers might have said, ''This is the way it is. Everyone has accepted the interpretation—the status quo—so we are doing nothing wrong.'' If they arranged their affairs on the basis that they had done nothing wrong because no one had challenged them, it is interesting to debate whether the Treasury should not say, ''Oh dear, we got it wrong in 1981, so we had better put it right for the future,'' and accept that what happened was a consequence of drafting in 1981 that was perhaps not the best. I look forward with keen interest to the Paymaster General's response.

Dawn Primarolo (Labour, Bristol South)

I do not deny that the combination of offshore trusts, capital gains tax and complex anti-avoidance schemes is a poor recipe for simple legislation. However, in practice, only those trustees, advisers and individuals who get involved in complicated artificial schemes should need to operate the new provisions. Anyone who engages in transactions that would avoid a charge that has been around since 1981 need not be surprised by the Government's acting to stop them or by the means by which the Government do so.

Let me deal with the question of retrospection before dealing with the amendments. The Finance Bill 2003 in no way extends the taxpayer population caught by the Finance Bill 2000 legislation on flip-flops. Let us remind ourselves briefly what a flip-flop is. It is a structure that is used to pay out a gain realised offshore so that the beneficiaries avoid tax on it. There is a question about whether anything has been done in the past 23 years. Governments have challenged flip-flops. Originally, they were challenged by the 1981 legislation, and the problem was readdressed in 2002. The 1981 legislation was designed to ensure that the beneficial charge was paid. The 2000 legislation returned to the matter because new ways had been found to get around the legislation. The new flip-flops that we now have to deal with return to the theme of how to get round the 1981 legislation. The 1981 legislation was put in place to tackle flip-flops and stood the test of time for a reasonably long period. In 2000, the Government returned to the matter, and now we are returning to it again. I beg your pardon, Sir Nicholas. I think I said 2000, but I meant 2002.

To pick up the point about articles on taxation, the Finance Act 2000 sought to eliminate investment flip-flops. An article in Money Management stated that

''tax planners found a loophole in the way that the rules were drafted which enabled them to continue to use flip flop transfers. Budget 2003 announced the Revenue's intention to bring to an end to flip flop transfers once and for all which duly happened on 9 April 2003.''

It went on to say:

''While the abolition of this option removes an advantageous planning tool, the numbers of trusts that could be affected are very small. The fees for arranging such a transfer are enormous and so this tool is only suitable for high or ultra high net worth investors.

According to estimates by Susan Johnson, senior tax consultant at Moore Stephens, the accountancy, trustee and barrister fees would amount to £80,000-£100,000.''

The article in Taxation magazine on 5 June was also referred to.

We have designed the legislation to cater for cases in which there has been a transfer of value before Budget day, but we have altered only the possible consequences of later transactions, not the tax effects of the transfer itself. To avoid retrospection we have limited clause 162 so that it can operate only where there is payment to a beneficiary on or after Budget day. No capital gains tax charge can arise unless such a payment is made. In most cases it is entirely up to trustees to decide whether, when, or in what amounts they make such payments.

I return to the amendments and the point of the 1981 legislation that introduced the beneficiary charge in order to set in motion the question of what we seek to do. The new provisions counter the latest flip-flop avoidance scheme designed to allow UK beneficiaries of offshore trusts to escape a capital gains tax charge when they have received payments from trustees for whom capital gains have arisen. It is right that in such circumstances there should be a tax charge—otherwise, UK individuals using offshore trusts would gain an unfair tax advantage. The charge that the new scheme is designed to avoid has been in place since 1981. We have previously legislated against devices that are designed to avoid the charge and I have made it clear in the past that we are determined

to clamp down on new sorts of avoidance, should they arise. The clause puts a stop to the second generation of flip-flops, and ensures that payments to UK beneficiaries are fairly charged to UK tax.

The clause contains two other rules to prevent further avoidance opportunities. First, it will prevent payments to non-chargeable beneficiaries being used to soak up capital gains, thus diluting or eliminating the charge on UK beneficiaries. It will do so only where transactions have been carried out that fall within the anti-flip-flop legislation introduced in the Finance Act 2000. The clause will ensure that the new measure interacts with the rules on temporary non-residents, both to avoid any double-charging and so that a UK beneficiary cannot escape the charge by going abroad for a year or so and receiving the payment while a non-resident.

The amendment No. 208 would appear to eliminate what is wrongly interpreted as a retrospective element of clause 162 and schedule 29. The new provisions are not retrospective. The charge that the scheme aims to avoid is known as the beneficiary charge, and that charge arise when a beneficiary receives payment from the trust. The new provisions apply only where such payments are made on or after Budget day. The new provisions do catch cases in which some but not all of the necessary steps for the avoidance to work have been carried out before Budget day, but that does not make the legislation retrospective. We have deliberately designed the provisions to catch such cases.

It being twenty-five minutes past Eleven o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Two o'clock.

Standing Committee B

(Except clauses 1, 4, 5, 9, 14, 22, 42, 56, 57, 124, 130 to 135, 138, 139, 148 and 184 and schedules 5, 6, 19 and 25, and any new clauses and schedules tabled by Friday 9th May 2003 relating to excise duty on spirits or R&D tax credits for oil exploration.) - Clause 162 - Transfers of value: attribution of gains to beneficiaries

Nicholas Winterton (Conservative, Macclesfield)

I remind the Committee that with this we are discussing the following:

Amendment No. 209, in

clause 162, page 105, line 28, leave out 'that date' and insert '9th April 2003'.

Government amendment No. 297.

I sense an air of excitement. We have rounded Tattenham corner and are on the long straight. I am sure that we shall complete the race.

Dawn Primarolo (Labour, Bristol South)

When we adjourned this morning, we were discussing amendments relating to flip-flops. The Finance Act 1981 introduced a beneficiary charge and the Finance Act 2000 introduced the first anti-avoidance measures. I was explaining to the Committee why I cannot accept the amendment tabled by the hon. Member for Eddisbury (Mr. O'Brien).

The new provisions catch cases in which some but not all of the steps necessary for the avoidance to work have been carried out before Budget day, but that does not make the legislation retrospective; we had a wide discussion about that. We designed the provision to catch those cases. Those who started to set up structures to avoid a tax charge that has been in place since 1981 should not be surprised when the Government take action to prevent them from achieving that end.

The amendment is defective and would not achieve its apparent aim of eliminating retrospection. It would have the opposite effect of making the legislation unacceptably retrospective. It would leave in place the commencement provisions applying the new legislation to transfers of value made on or after 21 March 2000, but delete the further commencement provision that ensures that the new legislation applies only to payments made to beneficiaries on or after Budget day. The suggested deletion would make it possible to apply the new legislation to payments made

to beneficiaries before Budget day. That would be unacceptably retrospective.

The aim of amendment No. 209 appears to be to clarify one of the commencement provisions. The amendment assumes that the words ''that date'' are unclear and would amend them to ''9th April 2003''. I have two points to make. First, the date to which ''that date'' refers is perfectly clear. It refers back to the date in line 25, so no amendment is necessary. Secondly, the correct date is not 9 April 2003 but 8 April 2003. That is because Budget day must be treated as the start of the new year of assessment and it follows that the previous date to which the amendment refers must be treated as the end of a year of assessment. The amendment is not only unnecessary, but defective. I conclude that amendments Nos. 208 and 209 are wrong in principle, could have a significant avoidance cost and are defective. I have no hesitation in asking the Committee to reject them if they are pressed to a vote.

Government amendment No. 297 is included in this group of amendments and I shall speak to it now and move it formally at the appropriate point. Clause 162 and schedule 29 introduce a new rule requiring payments to beneficiaries who are not domiciled and resident in the United Kingdom to be ignored when computing the amounts that may be charged on other beneficiaries under the new provisions. Beneficiaries who are not domiciled and resident in the UK are not charged on capital payments from offshore trustees. The rule prevents tax from being avoided on later payments made to chargeable UK beneficiaries. Amendment No. 297 clarifies the commencement provision for that rule. Our intention is for the new rule to come into effect in respect of payments to non-chargeable beneficiaries made on or after Budget day. The amendment puts that operative date beyond doubt and ensures that it is consistent with the main commencement provisions of clause 162 and schedule 29. At the appropriate time, I shall ask the Committee to support the amendment.

New clause 4, as the hon. Member for Eddisbury said in his opening comments on this group of amendments, attempts to tackle the new flip-flops in a different and apparently simpler way. We considered countering schemes in the way suggested in the new clause, but we came to the view that that would not be an effective way of preventing the avoidance and ensuring that payments to UK beneficiaries from offshore trustees are properly taxed. The new clause might work in simpler cases, but it would have the effect of leaving gains attached to a single settlement, so the risk of gains being stranded would remain. A range of avoidance opportunities would remain available for those who are determined to avoid the beneficiary charge. Furthermore, the change that the new clause would make would mean that cases would not be caught when some of the steps required to achieve the tax avoidance had been taken before Budget day and other steps remained to be undertaken. I have already explained at length why we chose our formula. There is evidence that substantial avoidance and significant amounts are

involved in such cases. I am satisfied that they should come within the new provisions.

In conclusion, although the new clause has simplicity to commend it, it is not a satisfactory way of clamping down on artificially contrived avoidance devices. I ask the Committee to oppose not only amendments Nos. 208 and 209, but new clause 4.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful to the Paymaster General for going through the amendments in detail and treating seriously the issues raised. I hope that the Committee agrees that our debate has been important and useful. We are dealing with an exceptionally complex and tricky area, one that from the point of view of the Inland Revenue and the Treasury inevitably creates a contest with some exceptionally knowledgeable and expert professionals. It is inevitable that those of us who seek to scrutinise the matter carefully must go into quite a lot of detail.

I am satisfied with the Paymaster General's very clear response, particularly on the issues raised in amendment No. 209 and Government amendment No. 297. Those who read our proceedings for further clarity will also appreciate her statements. We had an extraordinarily useful exchange on amendment No. 208. On new clause 4, I acknowledge with gratitude that the Paymaster General notes that it was a genuine attempt to introduce a measure that had the benefit of simplicity and clarity and had logic attached to it, in so far as it removed what had given rise to the initial problem.

I do not for one second wish to leave any impression that my colleagues in the official Opposition or I are at all focused on seeking to perpetuate a series of schemes that have operated over a protracted period of years from an original difficulty arising in 1981. It can be recognised that many of those involved, both individual taxpayers and the professionals who advise them—there is quite an industry—came into the situation post-1981 and thought that those schemes were a series of opportunities that one might describe as already cast in some form of precedent that was capable of being relied on. The key point that the Paymaster General made, which has genuinely influenced my thinking, is the interaction between that potential mindset on the part of those involved in the schemes that the Government are seeking to put right, and what was in the Finance Act 2000. She made the fair point that that part of the industry and those individuals—who might not have been familiar with the 1981 genesis of the schemes—have, in a sense, been put on notice.

It is accepted that the provisions in the 2000 Act did not get the arrangements right first time. This clause is an attempt to get them right now. We hope that the consultations that the Revenue and Treasury are no doubt having with professional bodies can be concluded very quickly, with a view to ensuring that the measure is well understood, clear and right. On the basis that this has been a genuinely important debate, I am happy not to press new clause 4, which we are conveniently considering with the rest of the group. I

beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Nicholas Winterton (Conservative, Macclesfield)

I should not be prepared to accept, even if the hon. Gentleman wanted it, a Division on new clause 4, as it is a straight alternative to clause 162.

Amendment made: No. 297, in

clause 162, page 105, line 32, leave out paragraph (d) and insert—

'(d) so much of Schedule 4C as amended as provides—

(i) that gains treated as accruing to beneficiaries who are not chargeable to tax are treated as outstanding section 87/89 gains, or

(ii) that gains in a settlement's Schedule 4C pool are not to be treated as accruing to such beneficiaries,

applies only in relation to capital payments made on or after 9th April 2003;'.—[Dawn Primarolo.]

Clause 162, as amended, ordered to stand part of the Bill.

Schedule 29 - Transfers of value:

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 210, in

schedule 29, page 354, line 16, at end insert—

'(3A) Where any outstanding section 87/89 gains of a settlement are brought into the settlement's Schedule 4C pool by virtue of any provision of this Schedule, they shall thereafter no longer be available for attribution to beneficiaries of that settlement under sections 87(4) or 89(2), nor shall they thereafter be outstanding trust gains of that settlement within the meaning of section 90(2) or (3) on any subsequent occasion to which section 90 might otherwise apply.'.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following:

Amendment No. 212, in

schedule 29, page 355, line 12, after 'the', insert 'available'.

Amendment No. 211, in

schedule 29, page 356, line 34, at end insert—

'(4) Where in any year gains are attributed under section 87(4) or section 89(2) to beneficiaries who are chargeable to tax within the meaning of paragraph 8(4), the amount so attributed shall in future years thereafter no longer form part of the Schedule 4C pool of any settlement which is a relevant settlement in relation to that pool.'.

Stephen O'Brien (Conservative, Eddisbury)

At the outset, it may assist the Committee to know that amendments Nos. 210 and 211 are alternatives and that No. 212 is a tidying-up amendment. Amendments Nos. 210 or 211 would prevent double counting of a beneficiary's gains that have been or might become chargeable to tax under existing provisions. Although various provisions in the schedule are designed to prevent double taxation by reference to the same gains or the same capital payments, there seems to be nothing to prevent a liability arising under schedule 4C to the Taxation of Chargeable Gains Act 1992 as amended by reference to the same gains that have already triggered the liability under one of the existing provisions. At the very least, an express provision should be included to remove them from the schedule 4C pool if they are taxed under sections 87 or 89.

I shall just give a brief example for the Committee's benefit. In 2003–04, trust A has a section 87 pool of £2 million, which is also a schedule 4C pool; and trust B is a relevant settlement in relation to the schedule 4C pool, which has no section 87 or section 89 pool of its own. I assume for simplicity that both trusts have substantial funds that remain in cash form and give rise to no further capital gains. Moving to 2005–06, beneficiary C receives a capital payment of £800,000 from trust A. Chargeable gains for that amount are attributed to him by section 87(4) and the section 87 pool is reduced to £1.2 million. Beneficiary C, although domiciled in the UK, is at that time not a UK resident and is therefore not charged to UK tax. For that reason the schedule 4C pool remains at £2 million. In 2007–08 beneficiary C returns to the UK and, because he was not away for five years, is taxed that year under section 10A on the £800,000 capital payment he received in 2005–06. Nothing in the legislation removes that £800,000 from the schedule 4C pool, which remains at £2 million. In 2008–09, beneficiary D, who is UK resident and domiciled, receives a capital payment of £2 million from trust B. That is matched against the £2 million gains in the schedule 4C pool, and beneficiary D is taxed accordingly on £2 million. The schedule 4C pool is extinguished accordingly.

Tax has thus been paid by reference to gains of £2.8 million when only £2 million of gains have been realised between the two trusts. Moreover, trust A still has a section 87 pool of £1.2 million, which could generate further liabilities and the making of further capital payments up to that amount to UK beneficiaries. At the end of the day, tax would have been payable on double the amount of the capital gains actually realised.

I do not believe that that is what the Treasury and the Revenue intend. I believe that our amendments address that, depending on the way in which the Paymaster General wishes to consider the matter. I hope that that has been as clear an explanation as I can give, albeit brief, of what is quite a complex area.

Rob Marris (Labour, Wolverhampton South West)

The hon. Gentleman has helpfully read out from the parliamentary brief from the Law Society of England and Wales. I am not sure if he attributed that example to the society. Does the hon. Gentleman actually understand it?

Stephen O'Brien (Conservative, Eddisbury)

The hon. Gentleman is right. I am grateful to Richard Williams, the chairman of the capital taxes sub-committee of the Law Society. He will be aware that I thought that the summary was particularly helpful. It is important to recognise that my experience in such matters would be much enhanced if I were a beneficiary of anything, let alone one of those trusts. I am not an expert, I have no prospects of being so, and I have had to try to understand the matter in theory. I believe that the example makes sense. I hope that the hon. Gentleman thinks that it makes sense. I thought that the numbers made a useful example. It is relevant to the schedule because it considers the transfers across tax years and the opportunities that that gives, which are by nature

of the flip-flop variety. I found the Law Society briefing helpful. As it happens, I have another six-page note that I wrote out for myself, but after I had put in all the work, I thought that the Law Society's explanation was briefer and better.

Amendment No. 212 is intended as a tidying-up exercise. It too comes from the Law Society. It would create consistency between new paragraph 8B(6) to schedule 4C to the 1992 Act and the closing words revised paragraph 8(2). Revised paragraph 8(2) introduces new paragraphs 8B and 8C and signposts those provisions. The first half of paragraph 8(2) appears to do no more than duplicate in slightly different language new paragraph 8B(6), which would be confusing enough if the language were consistent.

According to the Law Society, it is clear that the paragraph 8B rules are meant to be more detailed. If the first half of paragraph 8(2) is not to be omitted altogether, it should at least be made consistent with the other locations referred to. No doubt the Paymaster General will accept that amendment or give a cogent reason why she believes that the Law Society has not understood. I am sure that that is summary enough for the Paymaster General.

Dawn Primarolo (Labour, Bristol South)

The aim of amendments Nos. 210 and 211 is to prevent the potential for double charging by preventing gains from entering more than one gains pool. I have no objection to that aim in principle—in fact, I agree with it. Of course, it is undesirable for gains to go into more than one pool. However, the amendments are unnecessary because their intended effect is already achieved in the legislation. Subsection (2) of new section 85A of the Taxation of Chargeable Gains Act 1992, and new paragraph 1(2) of schedule 4C to the Act are the relevant provisions. Amendments Nos. 210 and 211 are correct in principle, but would duplicate what the published provisions already achieve and are therefore unnecessary. I ask the Committee to reject them should they be put to a vote.

The aim of amendment No. 212, as the hon. Gentleman explained, is to achieve consistency between the two parts of schedule 29 and to ensure that the capital payments can be charged only once. Again, the Bill already prevents that double charge. Paragraph 8(2) of schedule 4C as amended is meant to point the way to and not to duplicate the rule in paragraph 8B(6) of schedule 4C as amended, which ensures that only available capital payments can be used in attributing chargeable amounts to beneficiaries. The same gain cannot be simultaneously in a section 87 and 89 pool and in a schedule 4C pool. Once a gain goes into a schedule 4C pool, it cannot remain in a section 87 and 89 pool.

On that basis, I hope that the hon. Gentleman will accept that, although I think his aims are entirely laudable and agree with them in principle, the Bill already produces the desired result. I hope that when the Law Society has had time to study what I have said about cross-referencing, it will agree.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful again to the Paymaster General for setting that out. Those who raised the concern will be able to check it through. I hope that they feel equally satisfied. It would be wholly

inappropriate to push the amendment to a vote, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 29 agreed to.

Clause 174 - Payments to adopters

Howard Flight (Conservative, Arundel and South Downs)

We welcome the clause ensuring that payments of financial support to adopters are tax-exempt, but the arrangements present certain questions. First, they apply to England and Wales, but what about Scotland? Secondly, we want to know why in clauses 174 and 175 the Government have not included exemption from national insurance contributions. It seems to make sense to have an automatic exemption from class 4 NICs for those previously liable under cases I and II of schedule D, as if self-employed. Foster parents in particular could find themselves liable to penalties. There is a penalty in the order of £100 for failure to register.

We would have tabled an amendment, but there is a problem in that NICs are not to be dealt with through the Finance Bill procedure but should be part of social security legislation. However, I understand that the Treasury has a power under the Social Security Contributions and Benefits Act 1992 to make regulations for accepting class 2 earnings on such terms as it sees fit. I wonder whether the model for class 2 exemptions for adopters and fosterers might be found in the scheme that is available for volunteer development workers.

It would be worth understanding why the national insurance aspect has not been addressed. The solution that I just suggested should have the advantage that adopters and fosterers would have the option to pay class 2 contributions and accumulate benefits if they wished to do so. Crediting them with class 2 contributions would also be a matter for regulation under social security legislation. Generally, however, those credited would have to pay a minimum amount in addition to the amount credited in order to benefit from entitlements. There is a case for addressing that issue for adopters and fosterers, and I look forward to hearing what the Paymaster General has to say.

Dawn Primarolo (Labour, Bristol South)

The exemption of financial support payments to adopters in England and Wales follows the Adoption and Children Act 2002. Previously, adoption allowances were tax exempt by an Inland Revenue concession. The clause puts the arrangements on a statutory footing and exempts adoption allowances paid under the previous arrangements in England and Wales and the current arrangements in Scotland and Northern Ireland.

Exempting financial support from tax means that the payments are automatically excluded from national insurance. They are not earnings from employment, so they would never be liable to

employer or employee national insurance;, by exempting payments from tax, the legislation ensures that there will be no liability for class 4 national insurance, which is payable on taxable profits.

I believe that I have already covered the point about Scotland. The tax legislation will cover the whole of the United Kingdom, whereas new adoption legislation in particular, following the 2002 Act, now covers England and Wales. That is the purpose of the clause. I hope that the hon. Gentleman is satisfied that we did not forget about national insurance—it has been considered.

Howard Flight (Conservative, Arundel and South Downs)

I am delighted that the Minister has put the Government's position on the record. She will be aware that several bodies have asked about national insurance, and it is satisfying to find that the position is as we would wish it without the clauses actually saying it.

Question put and agreed to.

Clause 174 ordered to stand part of the Bill.

Clause 175 - Foster carers

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 290, in

clause 175, page 111, line 18, at end insert—

'(1A) The provisions of Schedule 36 have effect in relation to adult placement carers with the modifications specified in subsections (1B) to (1G) below.

(1B) References to the ''provision of foster care'' are to the provision of services under a placement agreement as an adult placement carer.

(1C) The expressions ''placement agreement'' and ''adult placement carer'' have the meanings given to them by subsection (1H) and (1J) below, and paragraph 4 does not apply.

(1D) References to a ''foster care arrangement'' are to arrangements by which an individual provides services under a placement agreement as an adult placement carer otherwise than as part of a trade, profession or vocation carried on by that individual.

(1E) References to ''foster care receipts'' and ''total foster care receipts'' are to receipts in respect of the provision of services under a placement agreement as an adult placement carer.

(1F) References to a child are to a service user under a placement agreement.

(1G) The weekly amount for a service user for the purposes of ascertaining the individual's limit is £270, and paragraph 8(2) does not apply.

(1H) A ''placement agreement'' is an agreement between a service user, an adult placement carer and the local authority or other agency that manages an adult placement scheme (see subsection (1K)), which makes provision for the terms under which the service user is to be accommodated, cared for or supported by the adult placement carer under the adult placement scheme.

(1J) An ''adult placement carer'' is a person approved by an adult placement scheme (see subsection (1K)) who provides short or long term accommodation, care or support in their home to vulnerable adults placed with them through and supported by the adult placement scheme.

(1K) An ''adult placement scheme'' is a scheme managed by a local authority or independent (profit or non-profit making) agency, and working to government guidelines and standards in England and Wales, Scotland and Northern Ireland, which is responsible:—

(a) for recruiting, assessing, training and supporting adult placement carers;

(b) for taking referrals, matching and placing service users with adult placement carers; and

(c) for supporting and maintaining the placement.'.

Clause 175 brings in parallel arrangements to ensure that financial support for foster parents is similarly free of income tax. Our question is why foster parents have not been made totally exempt from tax in this respect, as is the case with adopters. I understand that the arrangements have, to some extent, been requested by local authorities, which are in a rather unclear position at present. It is obviously necessary to tidy up the situation, but we cannot see that there will be any material tax revenue resulting, and there is some danger that the record-keeping burden that the arrangements impose will have a negative motivational effect in terms of stimulating the recruitment and retention of foster carers.

Currently, foster parents are regarded as realising a profit only to the extent that the local authorities identify such payments as a reward. It is that inexact arrangement that the clause tides up, but it replaces it with a kind of micro-management of the situation. As I understand it, if foster carers keep detailed records and can prove what they have been paid in excess of £10,000, there will not be any tax liability. The bottom-line question is why have any tax liability at all? People are hardly likely to make fortunes out of fostering children, and there remains a huge need for more foster parents to come forward.

The amendment would extend the arrangements for fosterers and adopters to carers for adults who are, essentially, in the same situation as the fosterers of children. There is a clear fairness case here. Quite often, adults who need a carer are individuals with considerable problems and just as much work is involved in caring for them as in fostering children. There are also practical issues. If a person being fostered reaches the age of 18, the foster parents potentially lose out on net income. The amendment is designed to cover Scotland and Northern Ireland as well as England and Wales.

We hope that the Government will look kindly on our objectives, even if for technical reasons they do not choose to adopt the amendment.

David Laws (Liberal Democrat, Yeovil)

We support the clause, which introduces a sensible new tax relief for foster carers, and the amendment, which the hon. Member for Arundel and South Downs (Mr. Flight) has explained clearly. It would extend the exemption that the Government propose for foster carers to adult placement workers. Covering a group of people who are in a similar position to that of foster carers seems a sensible extension of the Government's intention. As I understand it, the amendment has wide support from not only the Chartered Institute of Taxation but the Low Incomes Tax Reform Group and the National Association of Adult Placement Services. Those groups have asked whether the Government could consider extending the exemption in the clause, in identical terms, to adult placement workers, who fulfil a similar function to foster carers but in relation to disturbed or vulnerable adults.

The Low Incomes Tax Reform Group has also raised as a concern, if the Government's proposals

remain unamended, potential hardship if a foster carer continues to care for someone after his or her 18th birthday, when they presumably lose the favourable tax treatment accorded under the clause to those who care for children, rather than adults.

Meg Munn (Labour/Co-operative, Sheffield, Heeley)

I am listening very carefully to the points that the hon. Members for Arundel and South Downs and for Yeovil (Mr. Laws) are making, and I am a little confused at the equating of young people who have been in the care of local authorities and reach the age of 18, and are then entitled like any young person to go their own way in the world, and adults who are in placement schemes, perhaps because they have learning difficulties, mental health problems or physical disabilities, and are being cared for by someone in a home-like environment. It is a false and unhelpful comparison between a child in care, who has been looked after by the local authority and reaches the age of 18, and an adult in a placement scheme.

David Laws (Liberal Democrat, Yeovil)

I am grateful to the hon. Lady for her intervention, not least because she points out that the circumstances in which many vulnerable young people and individuals over the age of 18 find themselves are different. She can probably envisage circumstances in which a young person is in the care of a foster carer, whose tax position will be favourably affected by clause 175, but who then finds that after the young person turns 18 the relief for the foster carer is taken away. That concern has been raised by organisations such as the Low Incomes Tax Reform Group.

I want to raise two other issues with the Paymaster General in respect of amendments Nos. 290 and 175. First, will she state—I suspect that she will in her response to the debate—the cost of amendment No. 290, which would extend the provision to adult placement workers? Secondly—this point has been raised by some of the groups that have commented on clause 175—is it possible to simplify the supporting arrangements? They occupy 10 pages of schedule 36, which we will debate in a moment.

Clause 175 seems sensible, but surely the Government can consider not only the position of adult placement workers but whether the tax legislation could be introduced in a simplified form, particularly for people who will not have professionals to help them with their tax returns?

Dawn Primarolo (Labour, Bristol South)

I accept that the amendment is well intentioned. I am grateful for the opportunity to set on the record what the Government are doing about adult placement carers. I am sure we all greatly respect the tremendous service that those individuals provide and that we want to encourage and support them.

Individuals who provide accommodation and personal care to adults are in a similar position to foster carers and, like them, ought not to be taxed on any payments received that merely reimburse expenses. We intend to ensure that those individuals are treated fairly. The issue is one of means, not ends. I will share with the Committee how we want to proceed in respect of the problems.

The threshold system we have used for foster carers works because there is a reasonable degree of consistency in the type and amount of expenses that foster carers incur. From the evidence that we have seen to date, however, we are not convinced that such a simple arrangement would work for adult carers. There are fewer adult placement carers than foster carers, but their circumstances are much more varied. Where adults have been placed in care, it is because they have special needs.

The degree of personal care provided to the service user and the expenses incurred in providing that care range over a wide spectrum. At one end of the spectrum, adult placement carers can provide a limited degree of personal care to the service user. There is a thin dividing line between such schemes and supported lodging schemes, which in turn are similar to ordinary commercial lodging arrangements. The foster care relief would be too generous for such schemes. At the other end of the spectrum are adult placement carers who provide substantial physical or medical care or management of behaviour. For those carers, the foster care relief is unlikely to be generous enough, even at the rate suggested in the amendment. However, there is a further complexity in that the host family may not take on all care duties and day care is often provided separately.

The diversity of adult care is reflected in the regulatory framework. In England, individual adult placement carers who provide personal care are effectively regulated as care homes. In Scotland and Wales, the scheme is regulated rather than the carer. Northern Ireland has yet to decide; the legislation would allow either approach. The amendment defines ''adult placement carer'' without referring to the regulatory framework, which is unsatisfactory and would potentially include arrangements that do not merit a special relief. For those reasons, the Government do not believe that a statutory relief for adult carers would be appropriate.

Instead, the Inland Revenue is reviewing its treatment of adult carers under existing legislation. It is in discussion with the NAAPS about revised guidelines, which will enable carers to take credit for their full expenses with the minimum of record keeping for 2003–04. Those arrangements will address specific concerns that NAAPS has raised about short-term carers and young adults who cross over from foster care, which is an issue that has been raised in Committee. The Revenue expects to be able to reach an agreement on that shortly.

I hope that the Committee now understands that the Government must proceed with great care to ensure that the appropriate support is delivered to adult carers. Not only will an agreement be reached shortly, but I promise that we will keep this matter under review. If further evidence emerges indicating that a statutory approach for adult placement care would be workable, then I shall look at it very carefully and try to bring it forward in a subsequent Finance Bill.

I am grateful to the hon. Member for Arundel and South Downs for giving me the opportunity to put on the record my views on a service in our communities that we all value and support and that we all want to develop. I hope that he will accepts that the Government are proceeding in a sensible fashion and that we address the points that he has raised. On that basis, I hope that he will withdraw the amendment. If he does not do so, I would reluctantly have to ask my hon. Friends to vote against the amendment if he were to put it to the vote.

Howard Flight (Conservative, Arundel and South Downs)

I thank the Paymaster General for her response, which addresses the underlying issue. All I would add is that, given that clauses 174 and 175 contain several changes, it would be useful if clear and comprehensive guidance were issued to carers associations and local authorities covering the Revenue's solution on adult carers, which would allow everybody to have clear guidance on the arrangements. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 175 ordered to stand part of the Bill.

Schedule 36 - Foster carers

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 203, in

schedule 36, page 408, line 23, at end insert—

'(7) The Treasury may by order substitute, for the fixed amount in subparagraph (1), a higher figure in relation to a residence in a high-cost area designated by them for the purposes of this paragraph.'.

The amendment gives the Treasury the power to increase the fixed amount per resident, which is particularly relevant to high-cost areas. As the Bill stands, there is no specific recognition of the considerably different costs of living, and in particular of housing, in different parts of the country. I understand that the £10,000 figure has been determined at the highest possible level, but I am sure that the Paymaster General will agree that living costs are rising and, with an extra £27 billion of tax to pay, they will rise even faster. If the formula is to be used, it is appropriate to include provision for adjustment. I repeat my earlier point that the amount of tax generated will be tiny, if anything, and a lot of paperwork will produce little in tax revenues.

Will foster carers and adult carers be under any obligation to complete some form of return? I presume that it will not be an income tax return, as the money is not treated as income. Are they to report the money on a suitable form, or will they be assumed to come within the £10,000 threshold?

David Laws (Liberal Democrat, Yeovil)

Amendment No. 203 is interesting, not least in the light of the Government's policy, as set out in the Budget, of trying to respond more flexibly to regional pressures on prices, including house prices, and wages. Although I do not want to encourage the Paymaster General to go too wide of the amendment, the hon. Member for Arundel and South Downs was

helping to flush out whether the Government have any intention of following through on the logic of introducing greater flexibility to regional pay and house prices into the tax system. As long as I do not cause the Paymaster General to stray, will she say whether she has sympathy not only with the amendment, but with the idea of introducing some sensitivity to local pay and conditions into the tax system?

Jonathan Djanogly (Conservative, Huntingdon)

I support this important amendment. There is a general lack of carers and foster parents throughout the country, particularly in high-cost areas, and the problem is exacerbated in high-density areas. That makes it a particular problem for councils in the London area, where I have had first-hand experience of the problem. Although the problem is sometimes that there is a lack of willing people, it is more often that there is a lack of suitable housing. Such people generally need a bigger house for their children, but if they are in an inner-city area with high-cost housing, there is a lack of space. The amendment would help to address that problem.

Dawn Primarolo (Labour, Bristol South)

I accept that the amendment is well intentioned, but it is unnecessary. The fixed amount is intended broadly to represent the additional fixed expenses of providing foster care, including a larger house and car, domestic equipment and so on. Some of those expenses vary in price by area.

The figure was set at £10,000 per residence on the basis of data for the highest-cost areas. The amendment assumes mistakenly that regional variations have not been considered in fixing the amount, but the Department of Health research, on which the £10,000 limit was based, found that the capital cost of providing foster care in January 2002 was just under £9,000 a year in London. The average was £6,000 elsewhere, so the £10,000 limit is generous for the lower-cost areas. Although that is the case, we believed that it was preferable to have one fixed rate, rather than a multiplicity of rates that would introduce complexity and scope for disagreement about which areas should be designated high-cost areas. Given the valuable work done by foster carers and the difficulties in recruitment that the hon. Gentleman pointed out, we believed that the provision was the simplest and best way forward. Our intention is that any adjustment of the rates will be on the same basis.

The hon. Member for Arundel and South Downs asked about completion of tax returns. If foster carers are exempt, they will not have to complete the self-employment pages of a self-assessment tax return, unless they are required to do so for some other purpose. If they are required to fill in a tax return for other purposes, they will have to record in the self-assessment pages the fact that they are exempt. That will be explained in the Inland Revenue guidance and notes issued with the tax returns, which will be made as simple as possible.

The Inland Revenue intends to write shortly to carers who already receive returns to establish whether they continue to need to be part of the self-assessment system. On that basis, we have tried to go for reasonable cost. We recognise the pressures, want to remove complexity and hope to address the questions

raised by the hon. Member for Arundel and South Downs regarding completion of tax returns by removing them from the system if necessary. Given those observations, I hope that the hon. Gentleman will agree that we have struck the best balance that can be expected and will not press his amendment to the vote. If he does, I shall ask my hon. Friends to oppose it.

Howard Flight (Conservative, Arundel and South Downs)

I think that the Paymaster General said that the assessment was carried out for London in 2002, and that it was under £10,000. Since then, people living in London have had large council tax increases.

Dawn Primarolo (Labour, Bristol South)

I said that it was under £9,000.

Howard Flight (Conservative, Arundel and South Downs)

Since that time, if we add up council tax increases, congestion charges and cost of living increases, the Paymaster General might be surprised to find that there has been a big increase in the cost of living in London. The computation, if done today, would be pretty close to £10,000. If the arrangements are going to be on a single figure basis for the most expensive part of the country, what will be the arrangements to adjust that figure over time?

Even if, to keep things simple, the Government do not want to follow the route of having the power to specify different residents' sums for different areas—I can see the argument for that—the £10,000 limit is already not enough for London from a practical point of view. If it is not enough today, it certainly will not be enough in a year's time. Subject to some understanding as to how the limit will be adjusted to keep it adequate for more expensive areas, I will withdraw the amendment.

Dawn Primarolo (Labour, Bristol South)

We estimate that in 2003–04, more than 90 per cent. of foster carers will be exempt from income tax on their income for providing care, notwithstanding the hon. Gentleman's points. With regard to his comments on rising costs, I said that we would increase the single amount in line with the highest-cost areas. The annual process of ensuring that the amount keeps pace will be dealt with in the Budget. We hope that, at £10,000, it is set far enough ahead of the cost, as outlined by the Department of Health, to give us considerable room in the year of its introduction.

Howard Flight (Conservative, Arundel and South Downs)

I thank the Minister. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 36 agreed to.

Clause 176 ordered to stand part of the Bill.

Clause 177 - Loan relationships: amendments

Howard Flight (Conservative, Arundel and South Downs)

Clause 177 and schedule 37 are relatively technical and complex provisions that relate to company loan relationships. We understand from the introductory words of schedule 37 that it is designed to correct some technical defects on loan relationships in the Finance Act 1996. That relates also to clause 178, which makes changes to derivative

contract legislation that are intended to be in line with the changes made in schedule 37 on loan relationships.

Both procedures have a rule under which transactions between members of the same group are generally tax exempt; the arrangements are supposed to be tax neutral, and the intention is to ensure that the arrangements work and are even handed. I should probably deal with the specific points that I wish to raise once we come to schedule 37, but I have commented on clause 177 because we are concerned that the latter objective that I described is not entirely achieved by schedule 37 arrangements.

David Laws (Liberal Democrat, Yeovil)

The Paymaster General will probably be aware that the Law Society and others have criticised clause 177 and its associated schedule. It has been said that the information made available at the time of the Budget was insufficiently precise, particularly given that many individuals would have been immediately affected. The Law Society suggests that when tax changes are effective from Budget day rather than from some future date, the Government should consider immediate publication of the relevant clauses, so that those who are affected by them can manage their tax affairs immediately. Is it in the Government's mind to take that sort of approach in future?

Dawn Primarolo (Labour, Bristol South)

I shall leave comments on specific points until we reach the schedule. Our purpose is to make a number of corrections to the loan relationship rules in the Finance Act 1996. First, the provisions ensure that profits do not fall out of charge when contracts are transferred into a group. Secondly, they put beyond doubt the current tax treatment of contracts in inter-groups. Thirdly, they ensure that exchange differences are correctly recognised when contracts are transferred into a group. Fourthly, they prevent the loss of tax—perhaps up to £2 billion—on a technical defect in the transitional rules relating to changes that were made in the Finance Act 2002. Lastly, they would stop avoidance involving late paid interest and discounts owed to connected persons and participants, which involves something in the region of £50 million.

The direct answer to the hon. Member for Yeovil is that publication of the legislation followed normal practice by Governments of all political persuasions when publishing anti-avoidance procedures. We shall be able to discuss how the provisions will work when debating schedule 37. I do not accept that the material published on Budget day contained insufficient information. It simply explained simply what the measure does. There is no evidence to suggest that the information provided was inadequate. Indeed, the Inland Revenue received phone calls on and following Budget day from advisers who recognised that the anti-avoidance measure applied to their clients, and who sought confirmation that the view that they had formed from the Budget material was correct. Some of those comments, with which I shall deal, were from the Law Society, which felt that it had been targeted. That was not the case; it was an anti-avoidance measure. I

shall go into a little more detail when we discuss the amendments.

David Laws (Liberal Democrat, Yeovil)

Will the Paymaster General give way?

Dawn Primarolo (Labour, Bristol South)

No.

Perhaps we can deal with the matter when we get to the amendments. We followed the practice of all Governments in publishing anti-avoidance legislation and ensuring that details are explained. It will be much more helpful if we can pick up the points made by the Law Society in the context provided by the schedule.

Question put and agreed to.

Clause 177 ordered to stand part of the Bill.

Nicholas Winterton (Conservative, Macclesfield)

Before we move on to schedule 37, may I say that we have just under two and a half hours to complete some 47 clauses, schedules and new clauses. I merely draw that to the attention of the Committee.

David Wilshire (Conservative, Spelthorne)

On a point of order, Sir Nicholas.

Nicholas Winterton (Conservative, Macclesfield)

No. Hold on. I ask the hon. Gentleman to resume his seat. Because it is very hot, it is easy to lull oneself into an inaccurate sense of security about the progress that we are making. I am in the hands of the Committee. I have pointed out a fact. If the hon. Gentleman still wishes to intervene, he may.

David Wilshire (Conservative, Spelthorne)

Sir Nicholas, you rightly point out how much there is still to do. That further proves that the artificial deadline is unacceptable and stupid, and should not have been imposed.

Nicholas Winterton (Conservative, Macclesfield)

The Committee notes what the hon. Gentleman says. However, we are subject to a decision that has already been made by the House as a whole, and we have to implement what it has decided.Schedule 37 Loan relationships: amendments

Schedule 37 - Loan relationships: amendments

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 310, in

schedule 37, page 415, leave out lines 1 to 3 and insert—

'(4) The amendments made by this paragraph have effect in relation to loan relationships entered into on or after 9th April 2003'.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following:

Amendment No. 311, in

schedule 37, page 416, leave out lines 43 and 44 and insert—

'(4) The amendments made by this paragraph have effect in relation to relevant discounted securities issued on or after 9th April 2003'.

Amendment No. 322, in

schedule 37, page 417, leave out lines 28 and 29.

Howard Flight (Conservative, Arundel and South Downs)

As the Committee will be aware, amendments Nos. 310 and 311 have, in essence, been proposed by the Law Society. Paragraphs 2 and 5 of the schedule could affect private equity and venture capital transactions entered into on the basis of the law as it is. Such transactions are highly dependent on cash flow forecasts, and changes in paragraphs 2 and 5 could impact on the expected cash flows. The amendments would limit the affect of the new rules

to loan relationships entered into after 9 April 2003, to avoid the possibility of a retrospective impact. Amendment 322 seeks, as an alternative route, to remove the retrospective aspects of the schedule, backdating tax changes on the grounds of complexity where Government could not have been expected to have got it entirely right in 1996 and 2002. The equivalent change in clause 178, with the same motive and as set out in the explanatory notes, only takes effect from Budget day. Therefore, would it not be reasonable to knock out the retrospective element in the schedule, too, and allow taxpayers to rely on the Finance Act 2002? The amendment would also give the benefit of some group relief for a short period.

Dawn Primarolo (Labour, Bristol South)

I shall ask the Committee to reject amendments Nos. 310, 311 and 322. Amendments Nos. 310 and 311 would preserve the tax benefit of the loophole in the loan relationship legislation for those companies that entered into arrangements designed to exploit it before the Finance Act measure was announced on 9 April.

The loophole has been exploited to create an allowable deduction for interest in circumstances in which the legislation was intended to allow a company an interest deduction only when interest was paid or, as regards a discounted security, a deduction for discount when the security was redeemed. The measure has effect only for interest or discount that accrues on or after 9 April, and it is right that this change should apply to arrangements already in existence when announced. If existing arrangements were allowed to escape, the cost to the Exchequer would amount to tens of million of pounds.

Amendment No. 322 would prevent a Finance Bill measure originally announced on 30 September 2002 from correcting a defect in the loan relationship transitional rules in the Finance Act 2002. The amendment would cost the Exchequer hundreds of millions of pounds by delaying the start date of the original measure, which is intended to have effect for accounting periods beginning on or after 1 October 2002. The effect of the measure is to ensure that under the loan relationship legislation introduced in the Finance Act 2002 companies can continue to carry forward unutilised non-trade loan relationship deficits and correctly offset them against profits for later accounting periods, exactly as allowed under the old regime. It cannot be proper for some companies to benefit from such a loophole at a cost to the Exchequer and, ultimately, to other taxpayers.

As hon. Members know, the Bill has been certified as compatible with the European convention on human rights, so the clause and the schedule comply with human rights requirements. I make no apology for introducing legislation with immediate effect from 9 April 2003, the date on which it was announced. Such action to stop avoidance in its tracks has been standard practice by successive Governments, as I said. For example, provisions with a commencement date of Budget day, 26 November 1996, were ultimately included in the Finance Bill 1997, such as the leasing provision in schedule 12.

David Laws (Liberal Democrat, Yeovil)

I do not question the Paymaster General's right to introduce measures immediately

from Budget day. However, on behalf of the Law Society, which has made representations, I seek clarification as to whether in such cases it would useful, sensible and possible for the Government to release the detail of the clauses on the same day as the Budget, so that there would be greater certainty about the tax situation and people perhaps would not have to telephone the Treasury to establish what the rules are.

Dawn Primarolo (Labour, Bristol South)

I am in danger of repeating myself. For the third time, because the issue is anti-avoidance, it is the practice of Governments to announce measures on Budget day, and the clauses are provided in the Finance Bill. The matter is quite straightforward: the obligation on the Government is to ensure that their Budget day announcement on what is to be done is clear. That is what is happening in the present case. I understand that some take the view that the relevant provisions were targeted at the venture capital industry, but they were not. There are already discussions—

John Burnett (Liberal Democrat, Torridge and West Devon)

Will the Paymaster General give way?

Dawn Primarolo (Labour, Bristol South)

Could I just finish my sentence? That would be very helpful, thank you.

I have said that there have already been discussions on the Venture Capital Association's views on other aspects of the Bill. However, I can absolutely assure hon. Members that nothing about the measure was not clearly announced in the Budget release. I remain implacably committed to ensuring that anti-avoidance is dealt with swiftly and that the procedures laid down by the Government are followed. The provision in question does that, and I continue to ensure that the Government meet their obligations.

John Burnett (Liberal Democrat, Torridge and West Devon)

We are dealing with retrospective taxation, because we are talking about existing loan relationships entered into on or before 9 April. Will the Paymaster General tell us whether those existing loan relationships, which will now be caught, will be taxed in the new way—as it were, the exempt ones—from Budget day this year, or will they be taxed from last year?

Dawn Primarolo (Labour, Bristol South)

We dealt at length with retrospection. I shall not go over that ground again this afternoon. On the Government's behalf, I clearly laid out the difference between retrospection and ensuring that those who seek to use legislation in a way that was not intended cannot do so. I characterised the difference by saying that those who play with fire can expect to get their fingers burnt when the Government act.

There is no evidence to suggest that the tax break was critical to the pricing arrangements already entered into before 9 April. It is more likely that the party saw it as an extra bonus at the expense of the Treasury, and it would be unfair to allow this unjustified tax advantage to continue for a few at the expense of taxpayers in general. The measure affects only transactions that occur on or after, or amounts accruing in periods following, 9 April 2003—the date of the announcement. I commend the schedule to the Committee and recommend that my hon. Friends oppose the amendment.

Howard Flight (Conservative, Arundel and South Downs)

We will not press the matter to a vote. We are short of time, and to do so would be a waste of time. The Government would be wise to listen carefully to the venture capital industry, and I am glad that the Paymaster General acknowledged their concerns. She may find that the Law Society proposals in particular, as represented by amendments Nos. 310 and 311, are a better alternative to the possibility of some venture capital deals failing where the costs are not that great.

Dawn Primarolo (Labour, Bristol South)

I am sure that the hon. Gentleman will accept that the arrangement gives certainty to the vast majority of venture capital funds that the rule restricting relief for late paid interest does not apply to investments that they make.

Howard Flight (Conservative, Arundel and South Downs)

I thank the Paymaster General for putting that statement on the record. It will be appreciated.

I shall not enter into the retrospection argument, but I am still concerned that the Paymaster General will rightly consider matters from the Government's perspective, but the other perspective, especially of business circumstances, will be different. It will be: ''These are the arrangements. If the Government drafting got it wrong last time, hard luck.'' It is not always correct to use the language that the Paymaster General uses in that context. However, we have made our points. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 323, in

schedule 37, page 417, line 29, at end add—

'PART 3 OTHER AMENDMENTS

Definition of collective investment scheme

(1) The Finance Act 1996 is amended as follows.

(2) In section 103, in subsection (1) insert in the appropriate place:

''collective investment scheme'' means any arrangements which amount to a collective investment scheme for the purposes of section 235 Financial Services and Markets Act 2000 or any arrangements which would amount to a collective investment scheme for the purposes of that section but for being arrangements falling within paragraph 21 of the Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 (SI 2001/1062) as amended.

(3) In each of the following provisions, after the words ''collective investment scheme'', delete the words ''within the meaning of section 235 of the Financial Services and Markets Act 2000'';

section 87(5A);

section 87A(3);

paragraph 2(1B) of Schedule 9;

paragraph 18(1)(c) of Schedule 9;

paragraph 20(5) of Schedule 9;

paragraph 20(6) of Schedule 9'.

Howard Flight (Conservative, Arundel and South Downs)

The amendment is designed to put investee companies that are venture capital limited partnerships, which happen to be bodies corporate, in the same position as investee companies that are limited liability partnerships established under English law. Many people viewed the press release announcing schedule 37 as obscure, as my hon. Friend the Member for Huntingdon (Mr. Djanogly) said. There were

complaints, for better or worse, that it was not clearly understandable, especially in the venture capital industry. Under the Finance Act 2002, venture capital limited partnerships were not covered by the definition of collective investment schemes—for example, if they were established in the United States—and were excluded from the general arrangements. They benefited from the legislation only in obtaining some certainty of tax treatment of loans made to UK investee companies by making loans to a subsidiary of the company in which they held shares. Paragraphs 2 and 5 of schedule 37 close that arrangement. The amendment is therefore aimed at putting investee companies of VC partnerships that happen to be bodies corporate under the Finance Act—as it will be—in the same position as investee companies of limited partnerships established here in the UK. Surely, it cannot be wise to discourage US-based venture capital investment in the UK by putting them into a tax-disadvantaged position. The amendment also contains other measures that seek to address similar discrimination in other parts of the Finance Act 1997.

Dawn Primarolo (Labour, Bristol South)

I ask the Committee to reject amendment No. 323, which creates, for the purposes of loan relationship legislation, a new and potentially very wide definition of a collective investment scheme. The amendment primarily relates to the loan relationship avoidance measure that has already been discussed in the context of previous amendments. An exception already exists to that avoidance rule for limited partnerships that are also collective investment schemes within the definition of the Financial Services and Markets Act 2000. That exception was agreed with the British Venture Capital Association, in discussion with the Revenue, leading up to the changes to loan relationship rules introduced in the Finance Act 2002.

The Finance Bill measure has exposed a degree of uncertainty among some venture capital funds. In some cases of foreign limited partnerships, funds are unsure whether the Revenue will apply an overly narrow interpretation of the definition of collective investment schemes. The Revenue is already in discussions with the BVCA, with a view to resolving the problem through revised guidance.

More generally, the amendment goes much further than I consider reasonable in moving away from the more targeted Financial Services and Markets Act 2000 definition of a collective investment scheme. It creates a very wide definition, which would have the effect of treating most, if not all foreign limited partnerships as though they were collective investment schemes. It will take some time to consider all the possible implications of such a definition, and the consequent risk to the Exchequer. There is real concern that the amendment could lead to tax leakage. I hope that the hon. Gentleman will withdraw his amendment, but if he wishes to put it to a vote, I will ask my hon. Friends to oppose it, for the reasons that I have expressed.

Howard Flight (Conservative, Arundel and South Downs)

I think that I was comfortable with what the Paymaster General said. However, she did not say

that it is the Government's intention that investee companies that are venture capital limited partners and bodies corporate will be put in the same position under loan relationship tax law as investee companies and limited partnerships established under UK law. That position is unclear. The point at the bottom of the heap is simple. Are they to be treated in the same way under the Government's measures?

Dawn Primarolo (Labour, Bristol South)

As I explained, we are in discussions with the British Venture Capital Association. I need to see how those discussions go. It would be quite inappropriate for me to give a blanket undertaking of such a wide-ranging commitment. Where the BCVA believes that there is uncertainty, discussions on revised guidance will take place. I think that that is the best way to proceed.

Howard Flight (Conservative, Arundel and South Downs)

I accept that that is the best way to proceed. However, there is a very simple point to be made. It is not in the interests of the economy to give tax-privileged positions to domestic limited liability partnerships, at the expense of US ones. If we wish to attract their business, the tax rules should be broadly the same.

Dawn Primarolo (Labour, Bristol South)

The relief is available for any kind of limited partnership that is a collective investment fund as defined in section 235 of the Financial Services and Markets Act 2000. The use of that definition to determine who qualified for the relief was agreed between the Inland Revenue and the venture capital industry during the consultation process on the reforms introduced in the Finance Act 2002. I cannot see why that does not satisfy the hon. Gentleman.

Howard Flight (Conservative, Arundel and South Downs)

Times move on.

Dawn Primarolo (Labour, Bristol South)

This is only 2003.

Howard Flight (Conservative, Arundel and South Downs)

Yes, but times move on. That was agreed because that there was another mechanism, which I described a few minutes ago, involving a subsidiary company, by which foreign corporate limited partnerships achieved parity with UK limited partnerships. Parity worked by a different mechanism. I repeat that there is no commercial logic, or economic self-interest logic, in having foreign bodies that happen to have a slightly different legal structure placed at an advantage in comparison with domestic bodies. The Paymaster General said that discussions are proceeding. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 37 agreed to.

Clause 178 ordered to stand part of the Bill.

Clause 179 - Contributions to urban regeneration companies

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 315, in

clause 179, page 114, line 12, leave out

'any expenditure incurred by him in making'

and insert

'the amount or value of'.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following:

Amendment No. 305, in

clause 179, page 114, leave out lines 16 to 18 and insert—

'(2) Where any such contribution is made by an investment company, the amount or value of the contribution shall for the purpose of section 75 be treated as an expense of management if it would not otherwise be deductible in computing the company's profits.'.

Amendment No. 306, in

clause 179, page 114, line 19, leave out 'Subsection (1) above does' and insert

'Subsections (1) and (2) above do'.

Howard Flight (Conservative, Arundel and South Downs)

We welcome the status of urban regeneration companies, but we ask that the criteria for qualifying for that status be a little less restrictive than those that have been provided. They will exclude in many cases smaller organisations whose purpose may be to reduce unemployment in an area, generating training and job opportunities. Many smaller organisations are unlikely to meet the requirement in new section 79B(7)(b) of the Taxes Act 1988. For example, a community company that has the objective of training and employing people, sells what it produces and reinvests any profits for further training will be pretty unlikely to qualify. Many such companies exist, which do not qualify for charitable status, are limited by guarantee and are driven by some form of social ethic. Surely to exclude such organisations by focusing solely on the development of an area, rather than contributing to that development, would be to lose a desirable opportunity. We appreciate that safeguards are needed, but the legislation seems unnecessarily restrictive.

Amendment No. 315 would provide that the tax deduction should equal the amount of the asset. In essence, that is to cover donations in kind. The relevant new section allows a tax deduction for contributions whether they are made in cash or in kind, but the amount of the tax deduction is worded as

''any expenditure incurred by him in making the contribution''.

The Paymaster General will be aware that that point has been raised by the Law Society.

On amendment No. 306, new section 79B(2) gives a tax deduction to an investment company that makes a contribution in cash or kind to an urban regeneration company. As drafted, that applies to

''any expenditure allowable as a deduction under subsection (1) above''.

We question whether that drafting is correct, because subsection (1) gives a deduction only to

''a person carrying on a trade, profession or vocation''.

Amendment No. 305 would substitute for new section 79B(2):

''Where any such contribution is made by an investment company, the amount or value of the contribution shall for the purpose of section 75 be treated as an expense of management if it would not otherwise be deductible in computing the company's profits.''

The final two amendments are essentially Law Society points, and I trust that the Government have had time to focus on them.

Dawn Primarolo (Labour, Bristol South)

I understand that the amendments are intended to clarify the amount that qualifies for deduction when a business contributes in kind to an urban regeneration company. It may help if I briefly explain the purpose of the clause and the way in which it interacts with section 74 of the Taxes Act, which contains the general rule on deductions.

A business can deduct expenditure if it is revenue in nature and incurred wholly and exclusively for business purposes. Expenditure that falls within the general rule may still be excluded from the deduction by specific rules such as those for business entertainment and gifts. Expenditure by a business on a contribution to an urban regeneration company that is wholly or partly motivated by altruistic or public-spirited purposes would usually be excluded from deduction by the general rule, and the purpose of the clause is to ensure that such expenditure is not excluded. A contribution can be in cash or in kind. If it is in kind, the clause will allow the business a deduction on the expenditure incurred on making the contribution.

It may be helpful to provide some examples of what that expenditure includes. If the business seconds an employee, its deductible expenses will include the employee's wages. If it provides rent-free accommodation, its deductible expenses will include the rent actually paid, including the heating, lighting and so on, of that property. If the business donates a computer, the normal rules will generally allow a deduction equivalent to the market value at the time of the donation. That will all be made clear in Inland Revenue guidance.

Amendment No. 315 would allow a deduction on the amount or value of the contribution rather than on actual expenditure. In some cases, that would allow a deduction greater than would be allowable under the normal rules, which I assume is an unintended effect of the amendment. For example, the notional rental value of accommodation provided rent-free may be greater than the actual costs incurred by the donor. That would be too generous, as I hope that the hon. Gentleman would agree.

Amendment No. 305 would apply the same unacceptably generous rule to contributions by investment companies. In fact, the wording appears to go further than that and to allow a deduction in circumstances in which a deduction would have been denied under one of the specific rules. I hope that, considering the examples that I have given and the fact that the conditions will be spelled out in Inland Revenue guidance, the hon. Gentleman will accept that, while they are well intentioned, his amendments go further than intended and are unnecessary.

Howard Flight (Conservative, Arundel and South Downs)

It seems to me that the wording of proposed new section 79B(1) is wrong in referring to

''any expenditure incurred . . . in making the contribution''

rather than its value. If items in kind are contributed, there will not be any value, and only minimal expenditure will be associated with them. I cannot see how the Government square their stated intent to include items in kind with not treating them at a fair market value.

This is the Government's initiative; if they want it to work and get the best out of it, I cannot see why they would want to exclude investment companies or limit the parties to

''a person carrying on a trade, profession or vocation''.

Presumably, the objective is to achieve success by urban regeneration companies. The danger is that the provision will be used much less than hoped or intended if it includes those complexities and exclusions.

John Burnett (Liberal Democrat, Torridge and West Devon)

The hon. Gentleman will recall that on previous Finance Bills we discussed the philosophical problem of investment bad, trade good. He may also recall, as I do, the Paymaster General or another Minister saying that the whole tax philosophy is in the course of being changed. Surely, this Finance Bill provides the opportunity to get things right.

Howard Flight (Conservative, Arundel and South Downs)

I thank the hon. Gentleman for his comment. I also recollect that that principle was addressed in the review of corporation tax which the Treasury undertook last summer, albeit that some of its other conclusions seem to have gone a little off the rails.

The measure is not a major one, but I would have thought that it is silly, if the Government want regeneration companies to be successful, for the arrangements not to be straightforward. If people donate money or goods they should receive a fair tax deduction, and it does not matter what sort of business or party they are. However, I shall not press the amendment to a vote. If the Government want to damage their own initiative, that is their business. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 313, in

clause 179, page 114, line 21, after 'benefit', insert '(other than publicity)'.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following:

Amendment No. 314, in

clause 179, page 114, line 23, at end insert

'; and for the purposes of this subsection a person shall not be regarded as having received, or being entitled to receive, a benefit if it is a benefit provided by an urban regeneration company in the normal course of, or incidental to, discharging the criteria mentioned in subsection (7) below.'.

Amendment No. 312, in

clause 179, page 114, line 27, after 'benefit', insert '(other than publicity)'.

Howard Flight (Conservative, Arundel and South Downs)

Amendments Nos. 313 and 312 are designed to allow relief when a contribution is made as part of a sponsorship agreement or in return for publicity. The Minister will be aware that the matter was raised by the Law Society. The clause seems to rule out the possibility of a contributor entering into a sponsorship agreement with an urban regeneration company or making a contribution for part of which it receives publicity. What is the logic of that? If that is not the intention, perhaps the Minister could explain the position for the record.

Amendment No. 314 focuses on similar ground. What happens if the donor is a local business within the urban area that is being regenerated? As we understand it, it would receive tax relief on the donation only if the urban regeneration company was incompetent and provided no benefit to the locality. It would be strange to prevent local shopkeepers, for example, from clubbing together to sort out their neighbourhood.

Dawn Primarolo (Labour, Bristol South)

My earlier comments on the purpose and operation of the clause apply equally to the amendments. They are intended to ensure that a business will be entitled to a deduction on its expenditure on contributions to an urban regeneration company if the only benefit it receives in return from the company is publicity or the general benefit that it and others would derive from the normal activities of an urban regeneration company. There is no need for any such clarification.

Clause 179, with section 74 of the Taxes Act 1988, provides a business with a deduction in circumstances described in the amendments The anti-avoidance provision in subsection (3) of the clause prevents a deduction only in circumstances in which there is a clear, tangible, private or other non-business quid pro quo for the provision of the benefit. Inland Revenue guidance will make that clear. The same anti-avoidance rule is contained in sections 79 and 79A of the Taxes Act 1988 for contributions to bodies such as business links and has not caused any difficulties, so I see no reason why it should do so here. I hope, with that clarification, that the hon. Gentleman will agree that the amendment is not necessary and therefore withdraw it. If not, I shall ask my hon. Friends to oppose it.

Howard Flight (Conservative, Arundel and South Downs)

I think that what the Paymaster General said means that amendment No. 314 is not necessary. Could she make clear in simple language whether or not sponsorship arrangements with an urban regeneration company will qualify?

Dawn Primarolo (Labour, Bristol South)

The clause and the new section will provide a business with a deduction in the circumstances described in the amendments.

Howard Flight (Conservative, Arundel and South Downs)

I thank the Minister. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 179 ordered to stand part of the Bill.

Clause 180 ordered to stand part of the Bill.

Schedule 38 - Sale and repurchase of securities etc

Dawn Primarolo (Labour, Bristol South)

I beg to move amendment No. 300, in

schedule 38, page 419, line 42, at end insert—

9A In section 730A of the Taxes Act 1988 (treatment of price differential on sale and repurchase of securities), after subsection (8) insert—

''(8A) In this section references to the sale price are to be construed—

(a) in a case where the securities are bought back by the transferor or a person connected with him in compliance with a requirement imposed in consequence of the exercise of an

option acquired under the agreement to sell the securities or any related agreement, as references to what would otherwise be the sale price plus the amount of any consideration given for the option, and

(b) in a case where the securities are so bought back in the exercise of an option so acquired, as references to what would otherwise be the sale price less the amount of any consideration so given,

unless the consideration is brought into account under Schedule 26 to the Finance Act 2002 (derivative contracts).''.'.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following:

Government amendments Nos. 301 and 302.

Amendment No. 308, in

schedule 38, page 422, leave out lines 29 to 39 and insert—

'(2A) Where—

(a) a company has a relationship to which section 730BB of the Taxes Act 1988 applies (exchange gains and losses on sale and repurchase of securities), and

(b) the circumstances mentioned in subsection (1)(a) of that section are such that a money debt arises from the obligation mentioned in section 730A(1)(b)(i) of that Act or from the exercise of an option mentioned in section 730A(1)(b)(i) or (ii) of that Act,

the company shall not be regarded for the purposes of the Corporation Tax Acts as having, by reason of that money debt, a relationship to which this section applies, so far as relating to exchange gains and losses.'.

Government amendment No. 303.

Dawn Primarolo (Labour, Bristol South)

This set of technical Government amendments to the proposed tax changes for sale and repurchase agreements—repos for short—introduced by the Finance Bill clarify the tax treatment of option premiums in a repo, and they deal with two possible instances where there might otherwise be a double charge to tax or a double deduction arising from repos. Forgive me for saying so, but amendment No. 308 duplicates the effect of Government amendment No. 303. I thank the hon. Member for Arundel and South Downs for spotting that; I therefore invite him not to press his amendment, but to share in the reflected glory of the Government amendments.

Howard Flight (Conservative, Arundel and South Downs)

I am delighted to have confirmation that amendment No. 303 deals with the problem raised by the Law Society in amendment No. 308; it will save my having to explain what the amendment was about.

Amendment agreed to.

Amendments made: No. 301, in

schedule 38, page 420, line 1, at end insert—

'9B (1) Section 730A of the Taxes Act 1988 (treatment of price differential on sale and repurchase of securities) is amended as follows.

(2) In subsection (4) (adjustment of repurchase price) for ''this section and sections 737A and 737C'' substitute ''the excepted provisions specified in subsection (4A) below''.

(3) At the end of that subsection add as a second sentence—

''This subsection is subject to subsection (4B) below.''.

(4) After that subsection insert—

''(4A) The excepted provisions are—

(a) this section,

(b) section 730BB, apart from subsection (6A),

(c) section 737A, and

(d) section 737C.

(4B) Where section 730BB(6A) has effect (repurchase price to be treated as increased or reduced for certain purposes), subsection (4) above does not have effect for any purpose other than that of determining the amount that falls to be increased or reduced under section 730BB(6A).''.'.

No. 302, in

schedule 38, page 421, line 29, at end insert—

'(6A) Where a company has a relationship to which this section applies, the repurchase price shall be treated for the purposes of the Tax Acts (other than this section and sections 730A, 737A and 737C) and (in cases where section 263A of the 1992 Act does not apply) for the purposes of the 1992 Act—

(a) in a case where an exchange gain arises to the company by virtue of subsection (4)(a) above or an exchange loss arises to the company by virtue of subsection (5)(b) above, as increased by the amount by which the first sum exceeds the second sum, and

(b) in a case where an exchange gain arises to the company by virtue of subsection (4)(b) above or an exchange loss arises to the company by virtue of subsection (5)(a) above, as reduced by the amount by which the second sum exceeds the first sum.'.

No. 303, in

schedule 38, page 422, line 32, leave out from 'securities),' to the end of line 35 and insert—

'(b) in the case of that relationship the circumstances mentioned in section 730A(1)(b) of that Act are such as to give rise to a money debt, and

(c) the company stands, or has stood, in the position of a creditor or debtor as respects that money debt,'.—[Dawn Primarolo.]

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 309, in

schedule 38, page 423, line 18, at end insert—

'17A In Schedule 26 to the Finance Act 2002 after paragraph 4, insert—

''Contracts excluded by virtue of forming part of sale and repurchase agreement

4A A relevant contract is not a derivative contract for the purposes of this Schedule if it forms part of an arrangement falling within section 730A of the Taxes Act 1988.''.'.

I hope that the Government amendment No. 300 addresses the same point, but I am not entirely sure. The derivatives contracts legislation in the Finance Act 2002 needs to be amended to make it clear that the Bill does not apply to options over securities when the options form part of a repo. Amendment No. 309 would ensure that the Bill does not apply to options over securities.

Dawn Primarolo (Labour, Bristol South)

I am unable to accept the amendment, but I hope that I can help the hon. Gentleman. The amendment should not be necessary, because if a company follows the relevant accounting standards for a sale and repurchase agreement, there should be no question of an overlap with the derivative contract rules. In other instances, the amendment would go too far and take in transactions outside the scope of the derivative contract rules. However, I have asked officials to continue their dialogue with the professional bodies on the matter, in order to ensure that their interpretation is met. I invite the hon. Gentleman to withdraw the amendment while the dialogue continues, as I think that that offers the best way to resolve the matter.

Howard Flight (Conservative, Arundel and South Downs)

I am pleased to learn that the Government have taken the underlying point, and beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 307, in

schedule 38, page 423, leave out lines 26 and 27 and insert—

'(1) Paragraph 1 has effect where the agreement to sell securities falling within section 737A of the Taxes Act 1988 is entered into on or after 9th April 2003.'.

This is a further Law Society point. Paragraph 1 alters the amount of interest that the repurchaser of securities under repo is deemed to pay when section 737A of the Income and Corporation Taxes Act 1988 applies. In order to avoid disturbing existing repos, there is a fair argument that the amendment should apply only to sales that took place on or after 9 April. Amendment No. 307 would ensure that the provision in paragraph 1 would not apply to sales that occurred before Budget day.

Dawn Primarolo (Labour, Bristol South)

I am afraid that I cannot accept the amendment. If it were enacted it would mean that the Finance Bill change to end the tax losses from the anomaly would apply only to deals agreed after the announcement was made. A lot of the deals were deliberately arranged to run for a long time—20 to 30 years—to try to take advantage if the law were only changed for the future. If existing deals were allowed to escape, tax losses of at least £10 million annually would continue for many years until the deals ended. The deals also have built-in break clauses. Clearly the parties expected the Government to act, and took careful precautions against it. Market players have not complained, and a number have commented that they fully expected this provision; they were not at all surprised or caught out by the announcement. On that basis, I think that the change in the Bill is appropriate, and I ask my hon. Friends to oppose the amendment.

Howard Flight (Conservative, Arundel and South Downs)

The crucial point is whether the market would be damaged if people were taken by surprise. I have not heard huge wails of woe from the City of London, and I am, therefore, inclined to accept what the Paymaster General has said. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 38, as amended, ordered to stand part of the Bill.

Clause 181 ordered to stand part of the Bill.

Schedule 39 - Relevant discounted securities:

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 324, in

schedule 39, page 425, line 33, leave out from 'security' to end of line 37 and insert

'which is listed on a recognised stock exchange.'.

As the Committee will be aware, the schedule is concerned with strips. It seeks to shut down a previous planning scheme that used discounted securities to generate an artificial loss on which income tax relief could be claimed. In closing down that loophole, we are concerned that it may also catch horrible situations, for example listed zeroes, in which people,

for whom tax relief would be appropriate, are carrying genuine losses.

The schedule grandfathers listed zeroes were held on 27 March 2003, the date on which the Government announced that they were closing down this planning scheme. We are concerned that the schedule could distort the surviving market for zeroes, because it will create two classes of holders: those who bought before March 2003, who will get tax relief, and everybody else. As the Government accept that listed discount securities are not part of the naughty planning arrangements, which they seek to end, would it not be reasonable to consider continuing the tax relief facility for listed securities for the original commercial reasons? If not, the schedule goes further than closing a loophole by imposing a stealth tax on bondholders.

Dawn Primarolo (Labour, Bristol South)

An article in The Times on 7 April 2003 said:

''Accountants that deal with the affairs of the very rich concede the scheme was artificial.''

The schedule seeks to stop widespread and aggressive exploitation of the relevant discounted securities regime by high net-worth individuals using marketed schemes. The schedule's purpose is to put the taxation of relevant discounted securities on the same footing as the taxation of normal interest-bearing securities, and to ensure European Union capability by extending the special treatment of UK gilt strips to strips of overseas Government securities.

I shall ask the Committee to reject amendment No. 324, which seeks to preserve the existing tax treatment of relevant discounted securities listed on a recognised stock exchange for now and in the future. The first part of schedule 39 is aimed at stopping individuals from exploiting the relevant discounted security rules to create artificial income tax losses. It also ensures that relevant discounted securities will be taxed in broadly the same way as interest-bearing securities. It does so by removing the relief for losses and expenses from most relevant discounted securities from 27 March 2003—the date of the announcement.

However, where a relevant discounted security was held on 26 March and was listed on a recognised stock exchange, the existing rules will continue to apply until it is disposed of or redeemed. Although securities listed on a recognised stock exchange have not yet been seen in avoidance schemes, it cannot be ruled out as a possibility, in which case acceptance of the amendment will simply result in a new generation of avoidance schemes and further Exchequer losses. In addition the amendment will maintain the tax-favoured status of investors in relevant discounted securities over those investors who subscribe to securities that pay interest. Such investors will be entitled to both capital losses and finance costs, which is unfair. I hope that the hon. Gentleman accepts that the Government's approach is correct, but if he wants to press his amendment to the vote I will ask my hon. Friends to oppose it.

Howard Flight (Conservative, Arundel and South Downs)

I was at pains to set out that the schedule will close down a tax planning scheme. The Paymaster General did not answer my points about zeroes. Have the Government thought about how the market will operate when there are two different

classes of holders? I will ask the Government and the Revenue further to consult with the industry specifically on the issue of zeroes, which are not part of the tax planning scheme to which the Paymaster General and I have referred. My point is obscure, but it has not been adequately addressed. In the interests of time, however, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That this schedule be the Thirty-Ninth schedule to the Bill.

Howard Flight (Conservative, Arundel and South Downs)

May I just make one other point on the schedule, which was raised by the Law Society? The schedule is somewhat unhelpful to users, not least because the standard tax handbooks do not reproduce section 47 of the Finance Act 1942 to which it refers. The definition of ''strip'' should be replaced by a self-contained definition that does not cross-refer to another provision.

Dawn Primarolo (Labour, Bristol South)

The hon. Gentleman is making an observation about ensuring proper communication and drafting. I will certainly examine his point, which, as he rightly says, is rather obscure, but it will take a little time to do so.

Schedule 39 agreed to.

Clause 182 - Court common investment funds

John Burnett (Liberal Democrat, Torridge and West Devon)

Is this clause 183?

Nicholas Winterton (Conservative, Macclesfield)

No. Not for the first time the hon. Gentleman has jumped the gun.

John Burnett (Liberal Democrat, Torridge and West Devon)

May I say that at this end of the Room one cannot always hear what is going on at your end of the Room, Sir Nicholas?

Nicholas Winterton (Conservative, Macclesfield)

People often query what I say but not the volume at which I say it.

Question put and agreed to.

Clause 182 ordered to stand part of the Bill.

The rest of the debate is in Hansard.