Finance Bill

Public Bill Committee, 28 June 2005.

Finance Bill - Standing Committee B

Finance Bill

Nicholas Winterton (Conservative, Macclesfield)

I welcome all members of the Committee to the sitting. I hope that they had a good, restful and fruitful weekend, part of which was beautiful in respect of the weather. We now return to the rigour of the third Finance Bill of 2005.

Dawn Primarolo (Labour, Bristol South)

On a point of order, Sir Nicholas. I wish to clarify the Hansard record of our sitting last Thursday, which could be capable of a wider interpretation than I had intended. I fear that the problem is down to me, not the Hansard reporters. I stress that point. We were debating Opposition amendment No. 38 and controlled foreign companies. I referred to companies that have been unable to pass any of the exemptions under the controlled foreign company provisions and thus would be caught by the CFC legislation. I regret that, during what was quite a long day, the sentence

“In any case, there can be no justification for treating a CFC, which is by definition set up for tax avoidance purposes, more favourably than other companies”—[Official Report, Standing Committee B, 23 June 2005; c.141.]

potentially has a much wider interpretation.

I apologise to the Committee. I was not concentrating as much as I should have been on matters under discussion. I hope that the hon. Member for Runnymede and Weybridge (Mr. Hammond) will accept that that one tiny sentence does not fundamentally change a huge piece of legislation on controlled foreign companies. I am grateful to you, Sir Nicholas, for giving me the opportunity to put the record straight. I apologise to the Committee for my inadvertent slip.

Nicholas Winterton (Conservative, Macclesfield)

I am sure that the Committee is grateful to the Paymaster General for her clarification.

Philip Hammond (Conservative, Runnymede and Weybridge)

Further to that point of order, Sir Nicholas. I am grateful to the Paymaster General for her clarification. It was a very long and hot sitting on Thursday. It was with admirable foresight that you managed to arrange matters so that you would not be in the Chair, Sir Nicholas. Due mainly to the weather, it was not the most pleasant sitting. It is important that, when discussing a Finance Bill in particular, everything that is said is precise, and if it is capable of misinterpretation, that it is clarified at a later stage.

People outside the Room have suggested that two other issues referred to on Thursday afternoon require clarification. In answer to my hon. Friend the Member for Braintree (Mr. Newmark) about Inland Revenue pre-clearance, the Paymaster General said:

“The clearance is binding. If a company has approached the Revenue and gone through the clearance procedure in place as a result of the provisions, and if the HMRC makes a decision, that decision is binding.”—[Official Report, Standing Committee B, 23 June 2005; c.104.]

Lawyers expressed surprise at the expression, “The clearance is binding.” I am told that the al-Fayed case found that an agreement between the Inland Revenue and the taxpayer did not have the force of law and was not capable of enforcement by the taxpayer. I take it that the Paymaster General’s comment was not intended to rewrite the law and imply that a pre-clearance decision was binding—

Nicholas Winterton (Conservative, Macclesfield)

Order. I fully appreciate the hon. Gentleman’s argument, but we must not reopen that debate. I am permitting clarification of the report in Hansard. The Paymaster General was specific in her remarks, and that was extremely helpful. I hope that the hon. Gentleman can bring his point of order to a conclusion so that we can continue our debate on the Bill.

Philip Hammond (Conservative, Runnymede and Weybridge)

That is very helpful, Sir Nicholas. Perhaps I can make a suggestion. Clause 31 is the last clause in a chapter that deals with complex matters. The Paymaster General has heard my point of order. Perhaps it might be possible to tie up any loose ends in relation to the chapter in the stand part debate, to ensure that the record is clear.

Nicholas Winterton (Conservative, Macclesfield)

The answer to that is most certainly yes.

Dawn Primarolo (Labour, Bristol South)

Further to that point of order, Sir Nicholas. I cannot find the reference; it is not in column 140—[Interruption.] Sorry; it is column 104.

I was saying that the Revenue will consider itself bound by the decision. There is no question of inspection of the court case to which the hon. Gentleman refers. However, I am more than happy to write to every member of the Committee detailing how the Revenue will deal with applications from companies; how, having given its decision to those companies, the Revenue will consider itself bound by what it has said; and why that is perfectly in order with other decisions that have been taken in courts or elsewhere. That matter has been checked.

Nicholas Winterton (Conservative, Macclesfield)

I am sure that the Committee is grateful to the Paymaster General, and that it will appreciate the letter that she says she will write.

Clause 31 - Commencement

Philip Hammond (Conservative, Runnymede and Weybridge)

I beg to move amendment No. 49, in clause 31, page 28, line 10, leave out ‘16th March 2005’ and insert ‘31st July 2005’.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following amendments: No. 50, in clause 31, page 28, line 12, leave out ‘16th March 2005’ and insert ‘31st July 2005’.

No. 51, in clause 31, page 28, line 15, leave out ‘15th March 2005’ and insert ‘30th July 2005’.

No. 52, in clause 31, page 28, line 17, leave out ‘16th March 2005’ and insert ‘31st July 2005’.

No. 53, in clause 31, page 28, line 22, leave out ‘16th March 2005’ and insert ‘31st July 2005’.

No. 56, in clause 31, page 28, line 24, leave out subparagraph (a).

No. 54, in clause 31, page 28, line 24, leave out ‘16th March 2005’ and insert ‘31st July 2005’.

No. 55, in clause 31, page 28, line 26, leave out ‘31st August 2005’ and insert ‘31st December 2005’.

Philip Hammond (Conservative, Runnymede and Weybridge)

The clause deals with the commencement provisions for the chapter, which addresses the problem of avoidance through tax arbitrage. For things covered by the chapter, a tax charge is potentially accruing now, and has done from 16 March. However, the commencement clause creates opportunities for companies to unwind the arrangements that they have in place by 31 August. That date gives companies an unrealistically short period within which to comply.

When the Bill was first introduced, 31 August was some four and a half months after the date of introduction, but since then the chapter’s provisions have undergone a number of changes. Issues are still outstanding, and clarification is still being sought and received as we go forward. It would be inappropriate and potentially dangerous for companies to collapse structures to take advantage of the window that is deliberately being granted by the Government without knowing the final form of the legislation

I am sure that the Paymaster General will agree that it would pretty much be a disaster if a company underwent a complex restructuring exercise to take into account activities outside the scope of the arbitrage provisions only to find that they had fallen foul of the new rules because changes took place or because further amendments needed to be made. The essential proposal is to extend until the end of December the window of opportunity for things to be unravelled. Also, we want the commencement date of the accrual of liabilities to be changed to 31 July. I accept that that is an arbitrary date to select to replace 16 March. It is based on a comfortable view of when the legislation will achieve Royal Assent.

There are two issues to address. The first is to do with the requirement placed on companies. They should not incur liabilities while the situation is still in a state of flux and changes are being made to the legislation. The second is that companies must have an opportunity, from a standing start, to make the changes necessary to ensure that they can take advantage of the intended window of opportunity to unravel the arrangements.

Companies are telling us that the arrangements take time to unravel. Many of them will involve third party lenders and, for example, complex banking covenants. They cannot be collapsed overnight. Financial terms will have to be negotiated, as will the legal documentation that will be necessary and the legal processes that will have to be carried out to give effect to the required changes. Last week, we spoke to one company that has decided for commercial reasons to unravel one of these structures. It took that decision before the Budget, but even now it is doubtful whether it can complete that by 31 August simply because of the time that it has taken to renegotiate the necessary arrangements. It is important to give effect to what the Government both intend in the legislation and made clear is their intention in subsequent explanations, so that we have a later starting date and a later closing of the window for cessation of schemes.

I hope that the Paymaster General takes that on board and that she reassures the Committee that if the Government are unable to accept the amendments they will, by whatever means—perhaps by extra-statutory concession—give companies a little longer than the 31 August cut-off date to take advantage of the cessation provisions in clause 31(3).

Dawn Primarolo (Labour, Bristol South)

As the hon. Gentleman says, the clause deals with the commencement of the arbitrage rules in relation to both deduction and receipts cases. Provisions in any Finance Bill often take effect from the date of Royal Assent, thereby giving companies time to take them on board. However, in common with most anti-avoidance legislation, the relevant clauses have a Budget day start—in this case, 16 March 2005. The reasons for that are obvious; a Budget day start date removes the opportunity for companies to exploit any identified gap between the announcement and the commencement of the new rules. Allowing a gap between those dates could lead to additional loss of tax as, unfortunately, some companies might bring forward deductions or receipts so that they arise before the commencement date. These matters are always a challenge when considering anti-avoidance legislation, and it is difficult to strike the right balance.

Philip Hammond (Conservative, Runnymede and Weybridge)

The right hon. Lady makes a powerful point, and, perhaps, we have opened that window by suggesting 31 July as the date. Would her view be different if the amendment had suggested today as the commencement date?

Dawn Primarolo (Labour, Bristol South)

No, it would not. There would still be a possibility of companies having schemes ready that could be demonstrated to have been enacted before the clear statement in the Budget on 16 March and the final decision being taken on a commencement date. We face a real challenge.

I want to answer the hon. Gentleman’s concerns and explain what the Government have done in taking the proposal forward. I think that he appreciates that we cannot allow a gap. Anti-avoidance legislation is specific and the technical notes and the statements have to be produced at the time that it becomes effective to deal with that matter. Amendment Nos. 49 to 54 would, unfortunately, create such a gap by moving the start dates. I appreciate the hon. Gentleman’s point about complexity, but moving the start date from 16 March to 31 July would open up a significant opportunity because legislation, by virtue of stating where an avoidance opportunity will be closed, signposts where it is in the first place. It is a bit like taking out an advertisement. Why would any Government want to advertise how to avoid tax when they announce that they are to prevent such avoidance? That is why the start date is that of the Budget.

I recognise that the legislation was introduced in the first Finance Bill but subsequently dropped and that changes have been made to the guidance as a result of consultation in the interim. However, the hon. Gentleman’s argument overlooks a number of facts. First, the Government made it perfectly clear on Second Reading of the last Bill that the legislation would be reintroduced and that the original start date would be preserved—that was a clear statement made in Parliament. Secondly, the guidance has been amended to take on board the comments made by business. Thirdly, moving the commencement date to 31 July would give companies and their advisers an extra four and a half months of deductions under arbitrage avoidance schemes, which would increase the cost to the Exchequer. That runs counter to the Government’s objective, which is to establish a modern and competitive tax system that is also fair.

It is hard to see how giving avoidance schemes, in effect, a risk-free period in which to obtain a UK tax advantage and then unwind the scheme fits in with that objective. In addition, I have been informed that a number of companies—I think that I made reference to this in earlier debates—have already unwound their schemes to limit their exposure to the legislation. It would clearly be unfair to those companies then to move the goalposts and allow other companies to benefit from a later start date.

I know that the hon. Member for Runnymede and Weybridge considers this a serious matter. He needs to concentrate on the point that moving the start date to 31 July would give about five weeks from today for companies and their advisers to put in place short-lived schemes, which could produce huge deductions and major losses of corporation tax. The principle of a start date and a period to comply is standard and straightforward.

Amendments Nos. 55 and 56 would open up the transitional arrangements to the point where they will defer any impact of the provision until 2006. Before I go into detail, I shall say a little more about the transitional provisions that are in place. Clause 31(3) provides an exemption for schemes with unconnected parties that were in existence on 16 March, provided that they are wound up before 31 August 2005. The purpose of the exemption is to give companies that have entered into a transaction that constitute an arbitrage scheme with an unconnected party—typically, with an unrelated bank—the chance to unwind the transactions without triggering the legislation.

The exemption is restricted to transactions with unconnected parties, as it recognises that although transactions within the same group of companies can normally be unwound quickly, that process can take longer when third parties are involved. When the first Finance Bill was published, the transitional period lasted until 1 July 2005. As no statement was made on that specific point on Second Reading, the period has been extended to 31 August to take account of the election period and to give companies slightly longer to unwind their existing third party arrangements. Amendment No. 56 would remove the limitation to unconnected parties and amendment No. 55 would move the end of the exemption period from 31 August to 31 December. Together, the amendments would mean that all arbitrage schemes in existence on 16 March would be able to continue without penalty or challenge for another 10 and a half months.

We touched on this issue during our debates last week. Our proposals to close contrived avoidance schemes are a result of disclosures that have been made. I am sure that the hon. Gentleman understands that companies with existing schemes would have every incentive to bring forward and increase deductions under their schemes before the cut-off dates. I understand the point made by the hon. Gentleman: statements on the commencement date were made in Parliament. The moving of the transitional arrangements to take account of the election period is a reasonable step by the Government, but to accept the dates proposed in the amendments would leave the Exchequer unnecessarily open to potentially huge tax losses. I am not attracted to the hon. Gentleman’s amendments and cannot encourage my hon. Friends to support them.

Nicholas Winterton (Conservative, Macclesfield)

To ease the consciences of those who have already taken off their jackets, I should say to Committee members wearing jackets that if they wish to take theirs off to make themselves more comfortable and conscious of everything that we are debating, I am happy that they should do so.

Philip Hammond (Conservative, Runnymede and Weybridge)

On a point of order, Sir Nicholas.

Nicholas Winterton (Conservative, Macclesfield)

I am not sure whether there can be a point of order on that matter. However, I am happy to use my discretion and allow the hon. Gentleman to raise one.

Philip Hammond (Conservative, Runnymede and Weybridge)

May I suggest that you follow the example suggested by the Paymaster General? Those who have already sinned against the rule should not now be let off the hook by the rule being changed retrospectively.

Nicholas Winterton (Conservative, Macclesfield)

I could take that as criticism of the Chairman, but I shall not. I am grateful to the hon. Gentleman for that suggestion.

Rob Marris (Labour, Wolverhampton South West)

Thank you, Sir Nicholas, and thank you for your forbearance on sartorial matters.

I have two questions. First, will my right hon. Friend the Paymaster General say whether the changed guidance issued on 26 May, following the draft guidance issued on 16 March, was adverse to or favourable to arbitrageurs?

Secondly, the hon. Member for Runnymede and Weybridge has not moved an amendment on clause 31(4), which relates to the date for receipts cases. May I ask whether there is a particular reason for that, or is it merely an oversight, owing to the pressure of work?

Dawn Primarolo (Labour, Bristol South)

I shall answer first. The guidance was changed following consultation with business to clarify the intent of the legislation and ensure that it operated as had been announced by the Government in all of the statements. In that sense, by clarifying exactly where the Government envisage the legislation will bite and where it will not, the guidance errs on the side of those engaged in arbitrage, but not avoidance schemes; it does not change the intent or the content of the legislation

Philip Hammond (Conservative, Runnymede and Weybridge)

To answer my half of the questions asked by the hon. Member for Wolverhampton, South-West (Rob Marris), it was not an oversight but a conscious decision to focus on the deductions case, which I said last Thursday was the more important area because it has offered greater scope for manipulation. However, he could make the case that, in the interest of symmetry, the proposal should apply across both parts of the Bill.

In drafting amendments economy is all; unless we expect the Paymaster General instantly to accept or recommend amendments, we focus on an issue simply to get a response. She has made a perfectly coherent response that is, from her standpoint, logical; the problem is that she is always looking at this matter from the point of view of the offender—the company that is avoiding tax through arbitrage arrangements. I suspect that some of the heat in our debates is generated by the fact that we have an obligation to consider things from the point of view of those who are caught by the changes to legislation, who are not wicked, manipulative scheming tax offenders but people who have arrangements that have been in place for a long time, or arrangements that have been used over a long period and are well understood and well known to the Revenue.

I am advised that notwithstanding what the Paymaster General said last week, the Revenue has not become aware of these arbitrage arrangements as a result of disclosures under the Finance Act 2004. Some specific examples of schemes may have been disclosed to the Revenue—I am sure that they have—but the type of instrument that we are discussing is a well-established financing structure of which Revenue officials have been aware for a long time. Now, however, something that has been characterised over a long period as routine and acceptable tax planning is now being re-characterised as unacceptable tax avoidance.

I do not deny the Government’s right, as matters evolve, continually to examine the boundary between tax planning, which is accepted as legitimate, and tax avoidance, which is not. I am somewhat disappointed that, so far, we have not heard a clear recognition of the distinction between avoidance and planning. I am told that the long-standing and widely understood definition of tax avoidance refers to tax planning that is convoluted and has a legal form contrary to its substance. Those are its essential characteristics. In addition, avoidance includes transaction steps that have no commercial purpose other than the avoidance of tax.

Last Thursday, the Paymaster General mentioned her surprise that the Opposition were concerned about the impact on UK competitiveness of closing down some of these arrangements. Perhaps it will be helpful if I place clearly on the record that we support the systematic closing of avoidance opportunities, based on the definition that I have given. However, we also recognise that ordinary tax planning, whether or not the Government like it, is a normal and inoffensive part of business operations everywhere in the world.

We are discussing huge multinational corporations and complex hybrid structures, but let me make an analogy with personal taxation. Nobody suggests that somebody who every year carefully sells precisely the right amount of their modest personal shareholdings simply to use up their capital gains tax allowance, or somebody who every year invests right up to the limit of their tax-free individual savings account investment allowance, is engaged in tax avoidance. Of course they are not; they are engaged in proper tax planning.

The issue that we are addressing under clause 31 is what happens when the Government want to move something that has for a long time been acceptable tax planning into the category of being unacceptable tax avoidance. That is why we have dared to suggest a slightly more generous provision of time for arrangements to be shut down. I understand the Paymaster General’s reluctance to allow that to happen—we all understand the pressures that the Inland Revenue is under to raise the sums of cash that the Chancellor wants—but we feel that there is an issue in the way that these arrangements are being moved from one category to another. I hope that the Paymaster General now at least understands why we have put forward these proposals.

Brooks Newmark (Conservative, Braintree)

Would it not be helpful if the Paymaster General explained one point? My hon. Friend has continually highlighted the fact that tax is a key factor in decisions on where to invest. Given that fact and given the general shift among other countries toward lowering their taxes, it would be interesting to know whether the Paymaster General has done any analysis to discover the impact of the legislation in terms of reducing investment in this country.

Philip Hammond (Conservative, Runnymede and Weybridge)

My hon. Friend is right. That is our underlying theme throughout our consideration of the Bill.

I was a little disappointed that in last Thursday’s sitting the Paymaster General attempted to suggest that our argument made us the friend of the tax-avoider. That is certainly not our intention. I am also disappointed that she queried the relevance of a benign tax environment to international competitiveness.

I accept that there are difficult questions at the margin, but it is at the margin that our debates should be conducted. We will maintain our view that although the raising of revenue for the funding of public services is a critical activity of Government, it is ultimately self-defeating if doing so throttles the goose that lays the golden eggs by dissuading potential inward business investment and ultimately making the United Kingdom a poorer nation and reducing the Exchequer’s revenue flows.

In my opening remarks, I inadvertently did not speak specifically to amendments Nos. 55 and 56, but the Paymaster General has responded to those amendments none the less. Those amendments would remove the restriction for the escape clause, as I shall call it, which applies where arrangements are not at arm’s length. A number of people in the City are puzzled by that distinction. In relation to allowing companies with hybrid arrangements within group to unwind those arrangements and take advantage of the opportunity set out in clause 31(3), has the Paymaster General identified any danger that those companies could exploit the opportunity in a way that she considers to be further tax avoidance?

Word is getting back to us that that things are not as the Paymaster General described. She appeared to suggest that the approach was purely one of pragmatism, and that it was not so much a matter of denying the concession to companies with in-house arrangements as one of extending the period for companies with third party arrangements, on the basis that they would have to renegotiate those arrangements. I put it to the Minister that the practical experience is that even arrangements within group may still take time to unwind and to renegotiate. We must bear in mind that the new arrangements have to satisfy all the other anti-avoidance tests that are already in tax law. They have to be priced at arm’s length, and comply with the panoply of legislation already in place.

Outside the Treasury, it does not seem to be the view that companies involved in these relationships with external banks can necessarily collapse the arrangements without unintended or unfortunate—for them—consequences resulting from having to do things in that way. I do not know whether the Paymaster General will respond to that point. I was expecting her to say that there was a positive reason why that kind of arbitrageur could not be given more time. She appeared to say only that there was no positive reason why they should be given more time; however, that is not what we are hearing in the field.

I do not know whether the Paymaster General intends to speak again; it would be helpful to have an indication of whether she will. There being no indication—[Interruption.] Having more or less concluded my remarks, my intention was to beg leave to withdraw the amendments, in which case she would be unable to speak on them again. However, I see that the right hon. Lady wishes to speak and I am happy to give way to her.

Dawn Primarolo (Labour, Bristol South)

Good spot! It was good of the hon. Gentleman to make sure that I responded briefly to his points. On the question of—

Nicholas Winterton (Conservative, Macclesfield)

Order. Is this an intervention?

Dawn Primarolo (Labour, Bristol South)

It is an intervention to clarify the two points that the hon. Gentleman asked me to clarify. I shall do so briefly by speaking fast.

First, on the arrangements within group and for unwinding, those involved do not have to unwind; they simply have to make a disclaimer. That shows that we, too, recognise the challenges. Secondly, I come back to the fundamental point that I have made all the way through our discussions: where an arrangement involving arbitrage is set up for wholly commercial non-tax purposes, it will not be affected by the legislation.

The Bill is targeted at contrived avoidance schemes, so a balance has to be struck on the start dates and transitional periods. I think that the balance in the clause is fair. When we get to clause 37 and schedule 6, we can come back to that principal point, just to show how difficult it is for any Government, including the present one, to strike that balance.

Philip Hammond (Conservative, Runnymede and Weybridge)

I accept the Paymaster General’s assurance that the legislation is targeted at convoluted artificial arrangements; no one is suggesting that the Treasury set out to catch anything other than convoluted artificial arrangements. This Committee’s job is to ensure that the legislation does not inadvertently catch much more than that. The truth, as the Paymaster General has implicitly acknowledged, is that the original Bill would have done much more. The changes that were made to the Bill before its reintroduction are welcome in that they tighten the application. However, as she knows, concerns remain.

What the Paymaster General has just said, which was useful, is that no transaction that has a commercial purpose will be caught by the provisions; they will catch only artificially constructed transactions. I seek your indulgence, Sir Nicholas, to follow up that specific point. As we come to the end of this long, complex chapter, one question that was raised is still outstanding, although other questions might or might not have been answered.

The Paymaster General asked me last week to go away and read the record. She told me that I would see that she had answered all my questions. I have read the record and I have sent it to bodies outside this House and asked them to read it. Others are engaged in this work, not just myself. We are still not clear that the question has been answered. If an arrangement is the subject of a notice requiring a company to recompute its deduction for interest, is it the case that the comparator that it must use in order to identify the UK tax advantage that it has gained, and thus the amount of deduction that it has to disallow itself in order to eliminate the UK tax advantage under clause 25, is based on a comparison with what would have been the situation in the absence of the hybrid structure? If that is the case, would the company in the example that I gave last Thursday, which described a transaction that simply would not have gone ahead in the absence of the hybrid structure because the rate of return post-tax would have been so low that it could not be funded with plain vanilla bank debt that did not go through a hybrid structure, have to disallow itself the whole of its interest deduction on the ground that if the hybrid structure had not been in place, the loan would not have been made at all and therefore no interest would have been deducted?

To people who are following the debate about the Bill, that it would have to do so seems the inevitable logical conclusion. The provision there creates an entirely illogical and inequitable solution, because if the loan had not been made, the investment would not have been made, no revenues would have been generated and no tax would have been paid anyway. We are talking about a situation where an investment has gone ahead, tax has been paid on the income generated and the investor seeks, at operating company level, a deduction for the interest charged. Surely it cannot be the case that all that interest should be disallowed on the grounds that, had the hybrid structure not existed, the loan would not have been made because it would not have met the test of commercial viability that the investor had to apply?

I have looked at the record carefully and that seems to be the one major question that remains outstanding. I will not detain the Committee on this point, but there is another minor question: why on earth are the amounts chargeable under the provision being charged to case VI of schedule D? The Paymaster General says, “Because that is where they fit,” but the wide view of tax experts outside the House is that they do not fit in case VI of schedule D at all. However, that issue is not of burning importance, whereas the question I have just asked is significant and requires clarification.

Dawn Primarolo (Labour, Bristol South)

I am not at all surprised that those outside the House who do not support these mechanisms—there are some, as there are others who support it—are seeking to get the hon. Gentleman to ask me, as Minister, to give a tax ruling on particular elements of a scheme that could be designed for contrived avoidance within the arbitrage arrangements. As he put that point repeatedly to me, I answer it on the same basis.

First, I am not being drawn into giving tax advice on the record as a Minister. Secondly, as I have made clear repeatedly through my comments, arbitrage cases will be decided on their own facts and circumstances. The Government have put the mechanism in place to enable companies to seek informal clearance from the Revenue.

Philip Hammond (Conservative, Runnymede and Weybridge)

Although that point is clear and came over more clearly than it did in the heat of Thursday afternoon—I understand exactly the position that the Paymaster General is taking—unfortunately, it still leaves us with a lack of certainty at the centre of the arrangements. There is still the potential that companies with innocent arrangements—those that were not set up with no commercial purpose, but were standard commercially structured arrangements—will be caught and have to go through a clearance procedure that would be simply a hassle for new schemes, but could be a disaster for them.

Without wanting to go round in circles, I hope that the Paymaster General will understand why we keep coming back to this issue. She is anxious to ensure that every loophole is closed and we are anxious to ensure that unintended consequences do not arise, either by catching people whom the Government do not intend to catch, or by creating a climate of uncertainty that will damage the United Kingdom as an investment location. That is a legitimate issue for Opposition Members to pursue.

The Paymaster General has now placed on the record her position on both those matters and those outside the House will be able to hear what she has said. If, in due course, we feel that we need to ask further questions, we will find an opportunity to do so.

I am grateful to the Paymaster General and I beg to ask leave to withdraw the amendment.

Clause 32 - Temporary non-residents

John Healey (Labour, Wentworth)

This is the first of a series of clauses dealing with capital gains tax and common avoidance schemes.

In 1998 the Government introduced legislation to counter the widespread use of certain tax avoidance schemes that relied on the fact that in most circumstances the rules for capital gains tax did not generally impose a charge on people who had been non-UK resident for the entire tax year in which they disclosed financial information. Under the rule that was introduced in 1998 the gains of people who leave the UK temporarily are taxed; it applies only if they had a close connection with the UK before they left and they are absent for fewer than five complete tax years. However, some people took advantage of the interaction between the terms of some of our tax treaties and the capital gains tax rules in such a way that they could return to the United Kingdom before the stipulated five years had elapsed without having to pay any UK tax from gains realised while they were resident outside the UK.

The measure in clause 32 removes this avoidance opportunity. It stops the exploitation of our double taxation treaties and ensures that a charge to capital gains tax is imposed when the individual’s absence from the UK is of a temporary nature. It does that by ensuring that the tax treaties cannot have the effect of preventing the UK’s rules that were introduced in 1998 from applying.

The measure also deals with a situation in which the individual is regarded as resident in a foreign territory for tax treaty purposes, while simultaneously being resident in the UK. In such cases, the 1998 legislation will have no effect as the individual concerned will not have ceased to be resident in the UK. In certain circumstances, therefore, treaty non-residents could also be exploited by tax planners to enable people to avoid tax on capital gains; this measure closes that opportunity.

The Government are introducing the measure to put beyond doubt the question whether the terms of our tax treaties prevent the application of the 1998 temporary non-residence anti-avoidance rules. Her Majesty’s Revenue and Customs has changed its view on that. It no longer accepts that our tax treaties have that effect, but to avoid uncertainty it seems sensible, wise and reasonable for us to legislate in clause 32 so that everyone is clear and individuals cannot seek to avoid capital gains tax in that way. The effect of this measure is to ensure that an appropriate amount of tax is charged in respect of gains made while individuals are temporarily absent from the UK. Whenever foreign tax has been paid, the double taxation relief will be available in line with the normal rules.

Reaction to this clause has been relatively muted since we announced it in the Budget and published it in the first Finance Bill. Deloitte’s, for instance, has said:

“The measures proposed are an example of the closure of a specific tax avoidance idea which had been widely used to avoid capital gains tax by emigrating to certain treaty friendly jurisdictions”.

In tax-planning and advisory circles, that has become widely known and promoted as “the Belgian wheeze”.

The measure in clause 32 is targeted at avoidance—the avoidance that we are seeing. I suggest to the Committee that the measure is proportionate and fair, and I commend the clause to the Committee.

Richard Spring (Conservative, West Suffolk)

As we have heard from the Minister, clause 32 removes a loophole so that temporary non-residents cannot avoid UK capital gains tax by becoming treaty non-residents. Essentially, that is a legitimate response to an exploitation of treaties drafted before section 10A of the Taxation of Chargeable Gains Act 1992 came into force in 1998.

Although we accept the underlying force and rationale of the clause, we need to explore two important elements. The first is the jurisprudence of the European Court of Justice and the impact of the possible implications of EU law on our tax laws. Obviously, that is a huge issue and a thread that will underlie many of our considerations during the passage of the Bill.

The second point was made by my hon. Friend the Member for Braintree, and I absolutely agree with him. We live in an era of tax differentials, which are growing ever larger not only internationally but within the European Union, where there are substantial tax reductions at all sorts of levels in some of the member nations, while our tax structures remain somewhat ossified.

I should like to bring the Committee’s attention to the European Court of Justice case of Hughes de Lasteyrie du Saillant v. Ministere de l’Economie, des Finances et de l’Industrie. The Advocate General suggested that authorities could provide for taxation of taxpayers returning after a relatively short period of non-residence. There seems to be an indication in the Hughes de Lasteyrie case that the five-year period in section 10A of the Taxation of Chargeable Gains Act 1992 may not be construed as a relatively short period for that purpose. It would mean that the legislation was contrary to European Union law. The Hughes de Lasteyrie case involved a Frenchman who changed his tax residence to Belgium. France charges an exit tax on individuals who do so, being primarily a deemed disposal at market value of assets that they hold at the time. Monsieur de Lasteyrie successfully argued at the European Court of Justice that such a measure discriminated against his moving to another member state of the European Union and was hence contrary to the freedom of establishment and freedom of capital articles of the EU treaty. That will therefore impact on the existing equivalent measures under United Kingdom tax law, including clause 32.

We need to be satisfied that the five-year period under section 10A of the 1992 Act is in line with the Advocate General’s comments. There is, however, an acknowledged balance to be struck in that the aim of section 10A is to stop people briefly going non-resident for tax avoidance purposes, as the Financial Secretary has said, and a potential opening of the door to the sort of avoidance that section 10A was designed to stop. The Government genuinely need to satisfy themselves that we have proper, robust support that is safe from unexpected attack under EU rules.

Rob Marris (Labour, Wolverhampton South West)

I hope that the hon. Gentleman will forgive me if I was not following his argument closely enough, but was the Hughes de Lasteyrie case a decision of the European Court of Justice or did the Advocate General’s opinion inform the court?

Richard Spring (Conservative, West Suffolk)

The Advocate General made such a decision and the state of the matter in terms of its implication is still to be established. I hope that the hon. Gentleman will agree—I mean this dispassionately—that we have to deal with the potency of EU jurisprudence in our national law and our raising such an issue now is of huge importance.

Under EU law, anti-avoidance legislation must be specific and not aimed generally at all situations. It could be said that clause 32 catches all situations, including when the intention was not to avoid tax. It might, for example, catch a worker who moved to an EU country for up to five years to undertake employment in that country with no intention to avoid tax. A provision that interferes with one of the fundamental freedoms can be justified by a member state on the grounds that its aim is to tackle the avoidance of tax as long as it is sufficiently targeted. A rule such as section 10A seems to deem all emigration to be tax motivated, which, if considered too broadly targeted, opens it up to EU law attack. We must be sure that the Government are robust and clear about the impact of clause 32, in view of the jurisprudence and potential actions of the European Court of Justice.

Christopher Huhne (Liberal Democrat, Eastleigh)

I should like to ask the Financial Secretary a question because I am informed that another potential implication of the clause raises the issue of whether domestic legislation can override a tax treaty signed with another country. I gather that that is aimed particularly at residents moving to Belgium and availing themselves of the double taxation provisions under the treaty with that country. It would be interesting to hear the Minister’s comments on the status of domestic legislation.

John Healey (Labour, Wentworth)

I am grateful to the hon. Member for West Suffolk (Mr. Spring) for his description of the clause as a legitimate response to tax avoidance. He asked reasonable questions, and raised a concern—as did the hon. Member for Runnymede and Weybridge on Second Reading—about whether the measure could fall foul of European law. We are confident that it is compatible with our EU obligations and Community law.

The hon. Member for West Suffolk dwelt at length on the French case. I shall add a couple of points of explanation that may help make the point and draw the distinction between the French case and the provisions in clause 32. The hon. Gentleman is right that Community law prohibits a member state from imposing any unjustified restriction on the exercise of Community rights—such as, in this case, the right to free movement in the European Union. In March 2004, the French case that the hon. Gentleman cited imposed a tax charge on unrealised capital gains at the point when people depart from France to become resident in another member state. It was not the Advocate General but the European Court of Justice that held that that rule was incompatible with Community law. It may be helpful if I quote from the ECJ judgment. It stated that

“the French authorities could, for example, provide for the taxation of taxpayers returning to France after realising their increases in value during a relatively brief stay in another Member State.”

That is precisely what we propose to do under this measure. When leaving the UK, the tax position of an individual is neither improved nor impaired as a consequence of their move from the UK. Such a tax-neutral rule means that there is no restriction on either free movement or free establishment. In other words, our temporary non-residence provision is not an exit charge, so there should be no question of its falling foul of Community law. Indeed, we take considerable care to avoid such situations arising when we frame our domestic legislation.

The hon. Member for Eastleigh (Chris Huhne) asked whether this provision was a treaty override. The provision’s purpose is to close down an aggressive tax avoidance scheme that seeks to exploit the treaties that we have in place. Those treaties are designed to avoid double taxation; they are not designed to provide for non-taxation, which is the practical effect of the current situation. I think that the hon. Gentleman will accept that when tax treaties are abused in this way there is a danger of their being brought into disrepute. This measure will not lead to our infringing the taxing rights of any country with which we have taxation treaties, and, as I have said, the double taxation relief will be available to any taxpayer on whom the other country has imposed a charge. Furthermore, under this provision we will be taxing only UK residents.

This provision is not a treaty override, but it is intended to ensure that the treaties work as intended, and if there is any question of taxation in another country where a double taxation treaty is in place, the normal rules ensuring that that taxpayer gains relief in our country on any UK tax charge will come into play. On that basis, I hope that the hon. Members for Eastleigh and for West Suffolk will accept that this is an important measure, and that the Committee will agree.

Richard Spring (Conservative, West Suffolk)

I am grateful for the Financial Secretary’s comforting remarks. However, I shall simply point out that it was subsequent to the ECJ case that the Advocate General made his comment, which suggested that authorities could provide for taxation of taxpayers returning after a relatively short period of non-residence. With regard to the comfort that he has given, I say in a wholly dispassionate way to the Financial Secretary that I hope that our ability to frame our domestic anti-avoidance legislation will not be impaired. I ask him to monitor carefully the procedures that may be used in the European Court of Justice, and to ensure that our legislation means that we have control of the national level and that that is not impaired for reasons outside our control.

Clause 33 - Trustees both resident and non-resident in a year of assessment

John Healey (Labour, Wentworth)

The clause introduces an anti-avoidance measure to counter certain tax avoidance schemes that, in tax planning circles, are commonly known as sunset schemes. They have been used by some trustees and settlers of settlements to exploit the gap in our capital gains tax rules that allows trustees to avoid capital gains tax by arranging their affairs so that they are both resident and non-resident in the UK in any given tax year. Under the existing rules only gains arising to trustees if they are resident in the UK throughout the year or are non-resident throughout the year are taxed

The schemes take various forms but the common feature is that they exploit the terms of our tax treaties to ensure that no UK tax is chargeable on gains that would otherwise be taxable in the UK and little or no tax is payable on the gains elsewhere. The schemes rely on the broad proposition that at any given moment trustees are resident for capital gains tax purposes in the country where the majority of the trustees reside. It is usually a straightforward matter for trustees resident in one country to be replaced by trustees resident in another. That can be done quite straightforwardly on paper, and that, of course, makes residence for trust taxation purposes highly mobile.

In the simplest case, we start with a long-established settlement with trustees resident in a tax haven. Those arranging the tax avoidance have the trustees replaced by trustees resident in another foreign country with little or no tax on capital gains and a treaty with the UK that gives the foreign country sole taxing rights in respect of any gains. While resident in that country, the trustees realise the gains. Finally, the trustees are replaced by a further set of trustees resident in the UK for the rest of the tax year in which the gains are realised. The result of the interaction of the tax treaty and the existing tax rules means that the UK cannot tax the gains, so they are realised free of UK tax and, in many cases, free of any tax whatever.

As a Government, we have sought to negotiate protocols with our tax treaty partners to counter these schemes but with over 100 separate treaties, it is a slow process, as the Committee will appreciate. Also, as soon as we prevent schemes from making use of one country by amending the relevant treaty, the tax avoiders move on to another country. In other words, we are chasing avoidance around the world and never quite catching up with it, and all the while the tax avoiders are costing the UK Exchequer lost revenue. That is unacceptable and unfair to those who do not avoid the tax due to them.

The clause ensures that the avoidance device cannot work in respect of disposals made by trustees on or after Budget day. It does so by ensuring that if residence changes during the tax year the terms of our tax treaties do not interfere with our right to tax gains under our existing domestic legislation. It does not affect the foreign country’s right to tax that gain, and established mechanisms are in place to prevent double taxation of the trustees in a similar way to that which we discussed when the hon. Member for Eastleigh questioned me on clause 32.

The clause puts a stop to some highly artificial and tax-motivated avoidance schemes and I commend it to the Committee.

Richard Spring (Conservative, West Suffolk)

As we have heard, the clause prevents the UK from breaching any taxation treaties and ensures that in innocent cases, where there is a tax charge overseas, that can be credited against the UK tax bill arising on the same disposal. Hence the Bill seeks to prevent the rules from causing a tax penalty to arise when such a disposal is made in normal commercial circumstances.

The Government are right to highlight any possible abuse of so-called sunset schemes, but it has become general practice for anti-avoidance legislation to be introduced without prior notice. It is perhaps not surprising that the Bill contains clause 33 to counter a perceived mischief, whereby trustees change residence in order to obtain a tax advantage. It appears to be part of a general movement against what the Revenue considers to be a manipulation of residence. However, it is surprising that legislation has been introduced while the question of trust residence is still under debate. As is often the case, the measure appears to assume that all international movement takes place purely for tax reasons; it might therefore penalise trusts that make genuine disposals during a period of non-residence.

The prior notice point is still valid in that although we knew from the first Finance Bill of 2005 that the clause was likely to be included post-election, the effective date for the legislation remains at 16 March, so there was effectively no notice period for the change. The point about the outstanding issue of trust residence is also still valid, as draft legislation is not expected until spring 2006. We need clear reassurance that this anti-avoidance legislation, which we support in principle, will not catch innocent changes of residence. That point was made to us by outside, interested organisations and bodies. As a general point, we have been informed that the moving target of trust legislation under the modernisation review is making life extremely difficult for trustees, especially those who have primary interests in the interests of that trust.

Rob Marris (Labour, Wolverhampton South West)

I struggle with some of these issues, but I want to ask my hon. Friend the Financial Secretary a question. Given the complications of these cases, would it not be simpler to reintroduce capital transfer tax?

John Healey (Labour, Wentworth)

Perhaps I can take my hon. Friend’s point as an early Budget representation and leave it at that.

The hon. Member for West Suffolk pointed out—and, I think, accepted—that for many moves to counter tax avoidance it does not make sense to offer prior notice. The clause does not contain what I would regard as retrospective legislation. It takes effect from the Budget date on which it was announced. How it would work was clearly spelt out at that time in a Budget notice. We published the draft legislation in the first Finance Bill and prior to the election we made it clear that if we were re-elected, we would reintroduce the provision. We have done that.

The hon. Gentleman is concerned about trustees who might be caught, as he put it, for “innocent” actions. That follows on from what I have just said; the measure will apply only to disposals made by trustees on or after 16 March, which was Budget day. We have made our intention to proceed with the legislation clear. Therefore, trustees were in a position to know the potential effect of the measure if they changed residence after Budget day. I am sure that they accept, and take seriously, their responsibility to consider carefully any effects of their actions on the beneficiaries.

Although the hon. Gentleman was not very direct about it, I think that he referred to the general review of residence and domicile provision. Once again, we made that matter quite clear in the Budget. We are continuing that review and continuing to review the rules as they affect the taxation of individuals. We are keen to proceed on the basis of evidence and we will do so. We welcome further contributions to that process, including those from the sort of trustees with whom he might have been in contact. We plan to take the process forward with the publication of a consultation setting out the possible approaches for reform.

In the meantime, the measure does not pre-empt that review and it has provoked an interesting reaction from some of the specialists in the field. BDO Stoy Hayward remarked:

“These measures do not come as a surprise given that over the past couple of years the authorities have sought to renegotiate some relevant DTAs to give the UK taxing rights on gains.”

I have explained why that approach was too slow and allowed, in the meantime, those who were keen to continue their tax avoidance to switch their attentions to other countries. On that basis, I hope that the Committee accepts the clause.

Richard Spring (Conservative, West Suffolk)

I am grateful for the Minister’s explanation. We will wish to make a contribution to the review. I suggest that if he wants to get some excellent personal feedback and experience on trusts and their efficacy and ability—particularly offshore trusts—to help him reduce tax bills, he might wish to consult his noble Friend Lord Drayson, a Minister who appears to be expert beyond parallel in these matters.

Clause 34 - Location of assets etc

John Healey (Labour, Wentworth)

The clause brings into effect schedule 4. The clause and schedule together introduce a further anti-avoidance measure relating to capital gains tax by providing additional rules to determine where assets are situated for the purposes of tax on capital gains.

In most circumstances UK taxpayers are liable to tax on their capital gains regardless of where the asset in question is situated, but if individuals who live in the UK are domiciled abroad, their gains on disposals of assets situated outside the UK are liable to capital gains tax only if they remit the disposal proceeds to the UK. People who are resident abroad but carry on a business in this country are liable to tax on capital gains only in respect of disposals of business assets that are situated in the UK. The current tax rules for determining where assets are situated do not cover every circumstance. Where there is no specific rule in the tax code, the provisions and principles of common law apply to determine the situation of an asset. People have exploited some gaps in the tax rules to avoid tax on gains arising from the sale of assets abroad.

Nicholas Winterton (Conservative, Macclesfield)

Order. The Minister appears to be trespassing into the schedule as well as the clause. If he intends to do that, I am inclined to have the schedule taken formally when we come to discuss it. I hope that the Committee accepts that. I am happy that he should talk to the schedule, if he wishes.

John Healey (Labour, Wentworth)

I am grateful for your guidance, Sir Nicholas. I thought it sensible to combine the two matters, given that the clause simply gives effect to schedule 4 and given the substance at stake.

I was explaining how the avoidance practices mean that the taxes avoided on assets ought, in any reasonable view, to be regarded as UK assets and should attract a UK tax charge. The measure stops exploitation in two ways. First, shares in companies incorporated in the UK will generally be regarded as situated here. Secondly, unless an existing tax rule already specifies their location, intangible assets, such as options or rights over other assets, will now be treated as being situated in the UK for the purposes of tax and capital gains if they are subject to UK law at the time that they are created. The rules for futures and options that are not subject to UK law at the time they are created will take account of the location of the underlying subject matter.

The measure is designed to frustrate the schemes arising on the disposal of assets related to the UK outside the scope of UK tax on capital gains. It does not deal with assets that are unrelated to the UK—for example, shares in an overseas incorporated company that are registered abroad as UK assets—and it strikes a fair balance as it closes a lucrative avoidance scheme. I trust and hope that the Committee will accept it.

Richard Spring (Conservative, West Suffolk)

I am grateful to the Minister for his explanation. The measure is perfectly legitimate and sensible, and we are happy to support it.

Mark Field (Conservative, Cities of London and Westminster)

I accept that the measure is a sensible decision. However—I do not expect the Minister to go into any great detail on this—I hope that the Treasury is entirely aware of the situation in what is clearly and inevitably a fast-moving world. In particular, a large number of transactions take place over the internet and it is sometimes difficult to gauge the companies involved in such transactions and the legal rights of customers and companies.

It strikes me that we are talking about an area in which a great deal of detailed academic thinking will have to come into play, probably in the very near future but certainly within the next decade or two, if we are to ensure that there is a proper tax regime and that sufficient proceeds are coming through to the Treasury. My question is not what specifically is being done, but whether, in a more general sense, thought is going into the increasing amount of trade taking place over the internet. That might have an impact on a range of taxes—initially, obviously, sales tax, but potentially capital gains tax, too.

I represent the west end of London, where a number of our retailers have some woeful stories. I suspect that the problem is not only the congestion charge, but the fact that, increasingly, a great amount of their money is taken away because of the number of transactions and sales that take place over the internet. Is there some blue skies long-term thinking going on in the Treasury about the future nature of taxation and the taxation burden, especially for capital gains tax? We live in a world where the obvious boundaries of nation states are becoming far more blurred as far as such transactions are concerned, and I hope that something new is being done. I guess that any new measure will be supranational, involving the EU countries and, increasingly, the United States—which, as ever, is likely to be one step ahead of the game—to make sure that we close any loopholes before they become apparent to highly paid tax advisers.

Christopher Huhne (Liberal Democrat, Eastleigh)

Over many years, I have listened to interesting discussions between the Treasury and various non-UK domiciled communities in the UK. Periodically, the Chancellor of the Exchequer tries to clarify the situation and hears representations to the effect that doing so would lead to a substantial exodus from the UK. I gather that the provisions are mainly aimed at that non-UK domiciled but UK-resident community. In the Minister’s view, is the potential use of bearer shares in UK companies likely to be significant enough to precipitate such a move? We are dealing with a sanctified tax avoidance measure—that is, the use of non-domicile status—that has been on the UK statute book for many years. The Government are clarifying a rather small element of it, but is the Minister certain that the provision will not lead to a substantial group of people leaving the UK for other jurisdictions?

John Healey (Labour, Wentworth)

The hon. Member for Cities of London and Westminster (Mr. Field) made a number of telling points. As he said, we are indeed talking about a very fast-moving world and, as he would expect, we are giving careful thought to the sort of issues that he raised. It would not be responsible for the Treasury or Her Majesty’s Revenue and Customs to do otherwise. So I can in general terms give him some assurance on that. He is right to suggest that the provision is a targeted approach to a specific avoidance problem. In a sense, that addresses the concerns of the hon. Member for Eastleigh. The fears that he expressed are unlikely to arise because the provision is targeted.

We have targeted the provision in schedule 4 and clause 34 on the schemes that are promoted most commonly and aggressively, and that cost the Exchequer the most. With this set of provisions, we are not trying to craft a total solution to the general range of avoidance activities in relation to capital gains tax. To do so would clearly be complex, comprehensive and involve a huge amount of lengthy legislation, and that is not our purpose. Our purpose is to close down this sort of common and commonly promoted tax avoidance scheme.

One of the top 20 accountancy firms, the Tenon Group, caught the purpose very well when it commented:

“These changes will severely restrict the ability of non-domiciled individuals to avoid Capital Gains Tax on what are, in economic terms, UK assets.”

That goes to the heart of the matter: this is an avoidance scheme that avoids the tax charge on what, in any reasonable view, are UK economic assets. The purpose of the clause and the schedule is to change that.

Christopher Huhne (Liberal Democrat, Eastleigh)

I understand the purpose of the clause, and the Financial Secretary will be aware of the history of representations made, in particular, by the Greek shipowning community in London over many years and the various little pas de deux that have gone on between that community and the Treasury. What I asked was whether he thought that the provision was likely to lead to the exodus of any particular parties who might decide that, for the purposes of taking gains on UK assets, they would prefer to be resident in Piraeus rather than London.

John Healey (Labour, Wentworth)

The short answer to that is that we shall see. We do not expect the impact to be significant, but overriding everything is our principal purpose of closing down a tax avoidance scheme that is not legitimate and that allows taxpayers who ought to be subject to a UK capital gains tax charge on assets to avoid that charge. On that basis, we believe that this is a reasonable measure that strikes the right balance between the factors that we have had to take into account.

Clause 35 - Exercise of options etc

John Healey (Labour, Wentworth)

I seek your guidance, Sir Nicholas. The clause refers to schedule 5. Do you wish schedule 5 to be discussed now, or do you wish to have a specific debate on that schedule?

Nicholas Winterton (Conservative, Macclesfield)

I am in the hands of the Committee. What I do not want is for two debates to take place, one of which is a repetition of the other. If the Financial Secretary wishes to have a debate on clause 35 and the appropriate schedule, then so be it if that is also the wish of the Committee. [Interruption.] I have heard quietly the Committee’s view, and if its members wish to speak to schedule 5 during the debate on clause 35, I am happy for that to happen. However, I will then put the question on schedule 5 formally without debate.

John Healey (Labour, Wentworth)

I felt that I needed to be sure of my ground before offering the Committee a brief introduction to clause 35 and schedule 5, which I am happy to do.

The clause and the schedule introduce another anti-avoidance measure and correct a defect in the capital gains tax rules for assets that are bought or sold under options contracts. That loophole has been exploited to avoid tax, and we announced our intention to close it in the pre-Budget report of 2 December 2004. The defect in the rules might have allowed people to avoid tax on capital gains by using options to dispose of assets at uncommercial prices. For example, someone might want to transfer an asset worth £1 million to their family trust. If they transferred it directly to the trust, they would be taxed by reference to the value of the asset—£1 million. Instead, they could use an option that set the sale price at, say, £1,000. They would then be taxed by reference to the uncommercial option price of £1,000 and not on the true £1 million value of the asset. Using the option in that way would enable them to give away an asset effectively tax-free.

Companies could enter into similar option deals—for instance, they could transfer an asset at an uncommercially low option price to an overseas company in the same worldwide group of companies, because the asset would remain in the economic control of the group as a whole. The group would incur no economic loss.

People might also have been able to use options to buy an asset at an uncommercially high price from, for example, their offshore trust. The trustees would not be liable to capital gains tax because the trust would be offshore. The person who bought the assets from the trustees could sell them and create an artificial tax loss because of the unrealistically high price that they had paid. That, of course, would be used to compute the gain or loss arising on that sale.

Alternatively, if that person disposed of the asset after its value had increased, the full increase in value would not be taxed because the gain on the disposal would be computed using the artificially high price paid. The proposed measure puts such cases back on the correct footing.

Philip Hammond (Conservative, Runnymede and Weybridge)

I have not spent any time studying this part of the Bill, but is not the example of an asset purchase at an artificially high price already covered by existing transfer pricing legislation? Would such legislation not effectively eliminate, or capture the tax gain from, any advantage derived from that?

John Healey (Labour, Wentworth)

If it did, we would not need to introduce the clause. In the context of the operation of the capital gains tax rules, the transfer pricing mechanism does not cover the problem. Under these measures, the tax liability will be based on the value of the asset bought or sold, instead of on the uncommercial option price. The same position applies for assets given away or sold at an uncommercial price without using an option.

The measures are targeted at people who use that device to avoid tax. Companies and individuals who exercise options at arm’s length on normal commercial terms will not be affected and will face no additional compliance burden. Employees who participate in approved company share option plans will also be unaffected.

Richard Spring (Conservative, West Suffolk)

As we heard from the Minister, the provisions are anti-avoidance in nature and block a loophole caused by amending legislation passed in the Finance Act 2003. My hon. Friend the Member for Runnymede and Weybridge was right to raise his point, and I hope that the Minister was correct in his assertion.

The blocking mechanisms are fairly well targeted, if not extremely lengthy and comprehensive, to say the least. We are willing to accept them, but with a qualification about competence. Why are the Government having to amend something passed as recently as 2003? Is it because they introduced a tax avoidance structure rather than closed one down? This is all part of the culture of hideous micro-management, which is a characteristic of the taxation legislation of the Government.

Clause 36 - Notional transfers within a group

Richard Spring (Conservative, West Suffolk)

The clause tidies up existing legislation so that an existing relieving provision can be used by UK branches of overseas companies with capital losses. The context is the rules for offsetting capital gains and capital losses within a group of companies. There is no group relief as such for capital losses. Group relief gives scope for offsetting losses and profits only on trading losses, management expenses and so on. To offset capital losses, which in any case can only be offset against capital gains, traditionally the asset being disposed of had to be transferred to another group member so that the losses and profits could be realised within the same company. However, the Finance Act 2000 inserted what is now section 171A of the Taxation of Chargeable Gains Act 1992, which allows that transfer to happen notionally. Companies can elect for the transfer to be deemed to have happened and thus the capital loss and capital gain are suitably matched.

Clause 36 extends section 171A. It covers a branch situation and thus allows a notional transfer in a situation in which A and B are both 100 per cent. subsidiaries of C, B has a branch in the UK, A is about to dispose of an asset which will produce a chargeable capital gain, and B has capital losses in its UK branch. The provision in the clause will mean that A and B can make an election, deeming A’s asset to be used in B’s UK activities. While that is sensible, it once again begs the question of why group relief cannot simply be extended to capital losses, restricted to offset against capital gains in other group companies if necessary.

I have one further point. A number of other countries permit such a use of capital losses—for example, Belgium, Norway, Spain, Italy, Switzerland, Greece, Austria and most of eastern Europe. New Zealand and Hong Kong do not tax capital gains or losses at all. That comes back to the issue that underlies so much of our proceedings: the weight of taxation in this country versus that in other parts of the world with which we compete.

Nicholas Winterton (Conservative, Macclesfield)

We now come to another chapter. May I advise the Committee that clause 37 introduces schedule 6? Following what we have just experienced, it might be appropriate to debate that schedule with clause 37, or to have a very brief debate, if necessary, on clause 37 and to have a longer debate on the schedule. I am in the Committee’s hands. I am inclined to reverse what we have just done, and to have the debate on the schedule.

Mark Field (Conservative, Cities of London and Westminster)

Perhaps I might make a suggestion, Sir Nicholas? We are entering a new chapter, so all the rules that we have previously worked to go out of the window. Given that we will discuss two different groups of amendments on schedule 6, it might be more appropriate to have a stand part debate on schedule 6 after the amendments have been dealt with.

Nicholas Winterton (Conservative, Macclesfield)

I am perfectly happy to accept that.

Schedule 6 - Accounting practice and related matters

Philip Hammond (Conservative, Runnymede and Weybridge)

I beg to move amendment No. 114, in schedule 6, page 84, line 35, after ‘company’, insert

‘(such accounts being prepared in accordance with generally accepted accounting practice).’.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss amendment No. 115, in schedule 6, page 85, line 18, after ‘company’, insert

‘(such accounts being prepared in accordance with generally accepted accounting practice).’.

Philip Hammond (Conservative, Runnymede and Weybridge)

The amendments would confirm explicitly that the accounts referred to in the schedule must be prepared under United Kingdom generally accepted accounting practice. That would ensure that the schedule operates as intended and that the operation of section 836A of the Taxes Act 1988 and section 50 of the Finance Act 2004 is imported into the paragraph. In respect of the application of accounting standards to securitisation companies, it is important that regard be had to section 83(1) of the Finance Act 2005 for the provision to work properly.

The Paymaster General wants to prevent leakage of tax from the system. I am sure that her officials are aware that people in the big, wide world who specialise in such matters are already looking at using companies when local company law requires them to use particular accounting treatments that give a result, which is convenient to them from a tax point of view. It is considered appropriate therefore for there to be an explicit reference to the accounts being prepared in accordance with generally accepted accounting procedure.

Dawn Primarolo (Labour, Bristol South)

Before referring directly to the amendments, it would be helpful if I set certain matters in context as that would deal with the issues raised by the hon. Gentleman. The schedule will continue the work of adapting tax legislation to take account of the adoption by UK companies of international accounting standards and the new UK standards that follow the IAS closely, a point that will be important to bear in mind when I come to the amendments.

The schedule builds on the legislation that was included under the Finance Acts of 2005 and 2004. The IAS are developing all the time and, as companies are grappling with converting to those standards, it is not surprising that further tax issues keep emerging. To cope with the rapid change and to make sure that tax legislation keeps up with the demands of the growth economy and fast-changing competitiveness, the schedule continues the trend to include regulation-making powers to enable the Government to react quickly to changes and to consult about them outside the usual Finance Bill timetable. I have written to the Committee and have described the way in which we intend to use such powers. Reservations are always expressed about the use of regulations, but I hope that Opposition Members will accept that the use of regulations is necessary in a complex and evolving situation.

The schedule reacts also to representations about a late change made under the Finance Act 2005. The change was made to stop avoidance and to block unintended loopholes. However, some experts who are working closely with Her Majesty’s Revenue and Customs in such areas said that the change may inadvertently have gone too far. That returns to our earlier debate about how the Government try to strike a balance. Because the change may have gone too far, there was a possibility that it would inhibit some types of corporate rescue. The Government acted swiftly to relax the rule without destroying its original aim.

I mentioned the close working between HMRC and the experts. I pay tribute to those from business and the professions who engaged in the consultative groups that HMRC set up precisely to try to curb problems for both business and tax authorities in this rapidly changing environment. In the consultation process, the groups were particularly helpful in contributing to the designing of regulations dealing with the most complex technical parts of the changes. Six regulations were laid in December last year, but they dealt with only part of the story. There has been a continuing process of refining the draft regulations, modifying and extending the December regulations, so that they can deal with a lot of new issues that are coming to light. That process is in hand and there is a very close working relationship.

Having set the scene to show how the Government have put in place a process to deal with changing circumstances, I come to amendments Nos. 114 and 115. I recognise that the intention behind the amendments is to be helpful, but I reassure the hon. Gentleman that they are unnecessary. They seek to ensure that where the legislation being amended under the schedule refers to the “carrying value” of a loan relationship in a company’s accounts, the accounts are those prepared in accordance with generally accepted accounting practice. However, it is highly unlikely that the accounts of a company would not be prepared in that way.

The hon. Gentleman touched on what might be the one exception; a company, based in another country, using that country’s accounting standards. The loan relationships legislation already provides that if a company does not draw up accounts in accordance with UK generally accepted accounting practice, for tax purposes it must be assumed that it has used the UK generally accepted accounting practice. So, the amendments are unnecessary because the Bill already copes through its interaction with loan relationships legislation; that addresses the point that the hon. Gentleman made.

Having put that clearly on the record, I hope that the hon. Gentleman accepts that on this occasion the Government are trying to work closely with business to respond to international accounting standards, the new UK standards, and the transition from one to the other.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am grateful to the Paymaster General. It might be considered slightly optimistic to say that the schedule builds on the Finance Act 2005. In fact it corrects the defects in that Act, which necessarily went through the House at great speed; all stages were conducted in a single afternoon. That probably underpins the point that we have tried to make; there really is need for extensive consultation with business on these matters. The Paymaster General herself spoke of the benefit that such a consultative relationship can have.

The bottom line is that although it may be sometimes tempting to think that all people who plan corporate tax schemes are simply trying to do the Treasury down, the truth of the matter is that they are anxious to keep the line between permissible planning and unacceptable avoidance clear. Provided that the Government’s intentions are not grossly unreasonable, if they make their end target clear the industry and the specialists will rally round and try to help them to devise legislation that is as narrowly focused on the Government target as possible. After all, it is in the industry’s interests to do so.

The problem, to which the Paymaster General alluded, is that because there is an emotion that we can perhaps only describe as paranoia surrounding this whole process, there is no pre-consultation. Announcements are sometimes made immediately prior to the Budget, with Budget day as the date when they come into effect. That results in everyone running to catch up, rather than quietly discussing the issues, assessing what the Government’s real policy objective is and helping the Inland Revenue and Treasury officials to draft effective legislation.

Rob Marris (Labour, Wolverhampton South West)

Is the hon. Gentleman saying that the explanatory notes to schedule 6 are wrong? They state:

“A Working Group on the tax implications of IAS 39, composed of representatives of the professions, business and HM Revenue and Customs continues to meet. It is concentrating on two areas that have caused particular difficulty: the hedging of foreign currency risk, and the treatment of convertible and asset-linked securities.”

That seems to me to refer to consultation, and therefore directly contradicts what the hon. Gentleman has just said about a lack of consultation on these sorts of matters. Is he saying that that statement in the explanatory notes is incorrect?

Philip Hammond (Conservative, Runnymede and Weybridge)

In the context of the introduction of international financial reporting standards, there will be ongoing consultation with industry. I was making a more general point about hasty legislation and the temptation not to consult, which the Paymaster General referred to in her remarks on anti-avoidance legislation. The danger of that is that things might then be got wrong and have to be unwound later.

The Paymaster General also made some important points about the broader structure of schedule 6 and the regulations that will in due course be made under paragraphs 10 and 11. I anticipate that there will be a stand part debate, and it might be sensible for me to comment on the provision in general then. For now, I will confine my remarks to the two amendments. The Paymaster General has given a clear assurance that the concern that underlay those amendments is misplaced and that there are other legislative measures that will deal with it, and I am grateful to her for that. She has satisfied me that they are unnecessary. Therefore, I beg to ask leave to withdraw the amendment.

Philip Hammond (Conservative, Runnymede and Weybridge)

I beg to move amendment No. 113, in schedule 6, page 86, line 24, at end insert—

‘Spreading of adjustment on change of accounting policy 6A(1)In paragraph 19A of Schedule 9 to FA 1996 (loan relationships: adjustment on change of accounting policy), after sub-paragraph (5) insert— “(5A)Where there is a change of accounting policy in accordance with sub-paragraph (2)(a) above, then the company may in respect of its cumulative adjustments, elect that the adjustment shall be spread over six periods of account rather than being taxed in accordance with sub-paragraph (3) above. (5B)An election made in accordance with sub-paragraph (5A) must be made— (a)by notice in writing,

6A(1)In paragraph 19A of Schedule 9 to FA 1996 (loan relationships: adjustment on change of accounting policy), after sub-paragraph (5) insert—

“(5A)Where there is a change of accounting policy in accordance with sub-paragraph (2)(a) above, then the company may in respect of its cumulative adjustments, elect that the adjustment shall be spread over six periods of account rather than being taxed in accordance with sub-paragraph (3) above.

(5B)An election made in accordance with sub-paragraph (5A) must be made—

(a)by notice in writing,

(b)to the Commissioners,

(c)within twelve months of the end of the first accounting period to which the new basis applies.

(5C)If an election is made, then, in each of the six periods of account beginning with the first period for which the company prepares accounts in accordance with international accounting standards, an amount equal to one-sixth of the amount of adjustment is treated as arising and chargeable to tax.”.’.

The amendment is a pragmatic measure that deals with two issues. When other major changes have been made in the basic computation of taxable profits—for example, the change from realisation basis to market in 2002, and the introduction of the loan relationship rules in 1996—facilities were made available so that the gain or loss arising from the introduction of the legislation and the change that was therefore taking place could be spread over six years in order to ensure that taxpayers were not hit in a single period with what was effectively a windfall tax. Also, the legislation and the statutory instruments are still being laid around the whole subject of the implementation of IFRS and its impact on taxable profit calculations. As the Paymaster General said, and the hon. Member for Wolverhampton, South-West emphasised, there is an ongoing consultation process on how the detail of that would work.

It is unreasonable to expect taxpayers to have to pay any windfall tax arising from the introduction to the Revenue in a single period. One concern is that the rather generous, or reasonable, treatment that has been offered when there have been earlier structural changes to the way in which taxation is calculated appears not to be on offer this time. Perhaps we on the Conservative Benches are puzzling over the Red Book prediction that corporation tax receipts will rise by 28 per cent. next year, compared to this year. Many who are engaged in business and industry spend some time puzzling over that, too. Perhaps the Government expect that there will be a one-off windfall benefit from these changes that it is seeking to capture, which is why they have not allowed a more generous spreading treatment for the one-off change that has been allowed in the past.

Rob Marris (Labour, Wolverhampton South West)

The transitional aspects are difficult, but is not it the case, to quote explanatory note 35 to schedule C:

“In 2003 the DTI announced that the UK would take up an option in the”

European Union

Regulation to permit, but not require, all UK companies to use IAS to draw up their accounts, also from 2005.”

That is permissive but not mandatory, so surely it is a matter of whether a company finds one regime more favourable than the other and is not required to switch.

Philip Hammond (Conservative, Runnymede and Weybridge)

I might have to take advice from my hon. Friends on that. However, the point surely remains the same. The Government are committed to moving to international financial reporting standards. Surely it is appropriate for there to be a smoothing mechanism whenever any structural change is made. If the hon. Member for Wolverhampton, South-West does not mind, I should like to hear what the Paymaster General has to say about this; whether there is a principled argument, on this occasion, against allowing the impact of the change to be spread over a period of time, or whether it is simple expediency from a revenue-gathering point of view.

Dawn Primarolo (Labour, Bristol South)

Amendment No. 113 allows a company that adopts international accounting standards to elect to spread the transitional adjustment arising on the change of the accounting basis over an indeterminate period of between five and seven years. However, that only applies if the company does not exercise an election to international accounting standards to restate its previous year’s figures using UK generally accepted accounting procedures, or to its loan relationships, not its derivative contracts. It does not apply if the company changes one version of UK generally accepted accounting procedures to another.

I thought that the hon. Gentleman might say that amendment No. 111 was a probing amendment, so I should explain why it is not acceptable. I suspect that he knows, but I shall put it on the record anyway.

The change to international accounting standards throws up the possibility of big differences between the closing figures in a balance sheet using UK standards and the opening figures using international accounting standards. If nothing were done, those amounts, whether they were profits or losses, would all be effective for tax in 2005.

The businesses affected by that, particularly banks, asked for some form of alleviation from having to bring the amounts in at once. They pointed out that the figures were very large—an estimate of an extra £4 billion of losses on one issue for banks alone—and volatile. Some companies would be big winners and some would be big losers; some might net profits and some might have losses to be unaffected. As a result, we announced in December that most transitional adjustments would be deferred to 2006 pending detailed figures being available. When they are, the Government will decide how to proceed with the transitional adjustments.

The amendment, if passed, would at a stroke, subvert the policy. There is a potential for everything to happen that we are being told about—for very large losses and large profits swinging between different companies and businesses—and for a transition to be desirable. We need the figures in order to come to a sensible arrangement.

Philip Hammond (Conservative, Runnymede and Weybridge)

Will the Paymaster General give way?

Dawn Primarolo (Labour, Bristol South)

I would like to finish the point. I will cover everything and, if necessary, the hon. Gentleman can come back in.

The amendment seeks to substitute that careful examination of the figures and their effects on companies with a lottery in which only those companies showing a net profit on their debt assets and liabilities when they first adopt the international accounting standards can elect to spread the taxation of those profits, while those with losses on transition of their debt assets and liabilities, or those with transitional profits or losses arising in some different way, gain no greater degree of certainty. For example, adjustments on derivatives, which are not covered by the amendment, might run into hundreds of millions of pounds for some companies. That would not apply just for banks and other financial institutions, but also for oil companies, utilities and others that have derivatives embedded in purchase or supply contracts.

It has been virtually impossible for companies to predict the effect of the change on their balance sheets. Most of those companies that adopted the new standards on 1 January are still struggling to quantify the transitional profits or losses. Further regulations will be laid as soon as possible. They will set out how the transitional amounts, which have been temporarily deferred by the regulations, will be dealt with.

First, however, the Treasury and HMRC are endeavouring to obtain figures from the major companies on the size and direction of transitional adjustments in order to inform the policy. The hon. Gentleman is right to say that that is not new; where this type of situation has occurred, HMRC has a track record of negotiating with the companies to achieve a sensible transition.

I urge business to let their representative bodies have a decision as soon as possible. A decision will have to be made soon, and the more comprehensive the figures, the better the solution can be targeted to assist companies and to strike the right balance.

The amendment would allow companies to elect out of the regulations entirely, but it would be a one-way bet, because no company would elect to spread its losses under the amendment if they did not know what the revised regulations would say. The amendment covers only a narrow part of the issue. As I said, it does not deal with derivative contracts at all. It does not deal with the cases where the transitional adjustment arises as a prior period adjustment, whether under an international accounting standard or the new UK generally accepted accounting practice.

There are other drafting issues. The term “cumulative adjustments” is undefined and the spread proposed is over six periods of account—not six years, which is what I suspect was meant. Six periods of account could be longer than six years, especially if companies manipulated their periods to stretch out the transition. Furthermore, the language at the end of proposed new sub-paragraph (5C) is not suitable for the loan relationships legislation and makes little sense.

The amendment does not work; even if it did, it would not do so in an even-handed way on the differences in the accounts. The essential point is that when HMRC, having consulted with the representative bodies and the companies, is aware of the scale of the issue, discussion can take place about whether transitional arrangements are necessary—I tend to think that they will be—and about the time periods and the relevant arrangements.

That is a much better way to proceed. I hope that, given my assurances that that discussion will take place and that those arrangements will be made in a proper, balanced fashion with the information before us, the hon. Gentleman will not seek to press his amendment.

Philip Hammond (Conservative, Runnymede and Weybridge)

The best reassurance that the Paymaster General has given me is that she thinks that transitional arrangements “probably will be necessary”—I think that that was her phrase. Hopefully, that will give some comfort.

We are in a slightly strange situation. In the next three weeks, companies that adopted IFRS from 1 January make their first payments of tax under the IFRS standards. There is still the question of how the transitional sums will be dealt with. My understanding is that business would like to get this matter resolved.

Dawn Primarolo (Labour, Bristol South)

I do not know where the hon. Gentleman gets his information, but the position of HMRC has been confirmed to me again. HMRC understands the point about transitional arrangements, is trying to meet companies on that and wants companies to tell it the scale of the problem. Then it will open up the discussion so that that can be properly decided on. That has been said repeatedly to companies. In the absence of the information from the companies, it is difficult to make the arrangements. For the companies to complain that it has not been done because they have not provided the information is simply not reasonable.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am not sure whether I quite understood the Paymaster General’s point. I was trying to make the point that—if I understood her correctly—by changing their accounting standards, those transitional amounts will arise. Obviously, the companies themselves will not know what the tax treatment of those amounts will be. The Paymaster General is urging those companies to engage in discussions with the Revenue to present their arguments, I guess, for the most favourable transitional arrangements. That, I think, is what she is suggesting. I do not have any evidence, but perhaps I can infer from what she says that companies are not engaging in that process. I thought that she said earlier that they were, and that the consultation process was going well.

Dawn Primarolo (Labour, Bristol South)

Will the hon. Gentleman give way?

Philip Hammond (Conservative, Runnymede and Weybridge)

I shall, although the Paymaster General does not always offer me the same courtesy.

Dawn Primarolo (Labour, Bristol South)

The heat has not even risen yet; and the hon. Gentleman complained about barbed comments in our last sitting.

Philip Hammond (Conservative, Runnymede and Weybridge)

No, that was you.

Nicholas Winterton (Conservative, Macclesfield)

Order. This has been a measured and constructive debate, and I hope that it can continue that way.

Dawn Primarolo (Labour, Bristol South)

Discussion is going on with business. Business has been informed by HMRC that to progress the discussion on transitional arrangements the figures are required. HMRC is awaiting those figures. The hon. Gentleman said that businesses had wanted him to press the Minister in Committee to get the matter settled now. I was saying that the essential ingredient needed to finalise the matter was the information, which should be forthcoming from business. We are awaiting that information so that we can engage in a discussion on transition.

Philip Hammond (Conservative, Runnymede and Weybridge)

I do not think that we disagree on anything. I said—and I have not heard the Paymaster General disagree with the view—that I was sure that business would rather have the issue clarified sooner than later. She said that to get it clarified sooner we would need the information. I then said that I was not aware that there was a problem with the flow of information, because she had previously told the Committee that the consultation process was ongoing and working well. However, I infer from what she says that we are at a point now—let us call it a point—where that consultation is not stalled, perhaps, but is awaiting input from the companies concerned before the Treasury or the Revenue can make suggestions for a transitional regime.

Under the amendment, we have put down one option for a transitional regime. We have not sought to suggest that it is a perfect solution. The Paymaster General thought that I might have moved it as a probing amendment, whatever that means, but we did not draft it thinking that it was perfect in every respect and covered every aspect. But I guess I am somewhat reassured by the Minister saying that there will be a transitional regime. I hope that it will allow the spreading of any tax consequences over a longish period, as past changes have done, because companies that made the change without knowing what the tax treatment of the transitional amounts would be have taken a leap of faith. They have taken a leap in the dark, although in some cases they have not had a great deal of choice about it. They are dependent on the Treasury and the Revenue concluding on a sensible regime.

I guess—I do not know—that there is a contingent tax liability that such companies have to carry until the matter is clarified and the details of regulations for the transitional period are made available. I hope that the tax treatment will then become clear and that it will be spread in a way that does not create shocks for companies in the market; and I hope that it will not produce post-tax situations that are substantially worse than expected for any company or significant group of companies.

Rob Marris (Labour, Wolverhampton South West)

May I caution the hon. Gentleman? The Paymaster General said that negotiations were going on. To use a timely analogy, the tennis ball is in the companies’ court, from what she has said. Is the hon. Gentleman not worried that, if amendment No. 113 were passed, the companies—his friends in the City—could get a worse deal than the one that they might end up negotiating with the Treasury? The amendment might not do them any favours at all.

Philip Hammond (Conservative, Runnymede and Weybridge)

I hope that the people we are talking about are friends of us all; they create the wealth on which our public services and the prosperity of our people depend. It is not usually his style, but if the hon. Gentleman wants to play class warfare and try to provoke me into talking about his friends in the trade unions for whom he used to work and from whom, in his previous firm, he derived the large fees that he told the Committee about last week, I have to say that that is not a helpful way in which to proceed.

We are talking about some of the largest companies in the UK economy, the health of which is important to all of us. They, in turn, pay dividends after tax, which support all sorts of enterprises, such as private investors and collective investment funds. It must be important to us all that the system is treated properly and I am sure that the Paymaster General fully intends to ensure that that is the case. Despite our slightly ill-tempered exchange, I perceive no point of difference between us except that we want to define in advance how the transitional amounts will be handled, whereas she prefers to engage in a consultation process, which apparently has now been held up because information is awaited from the corporate side, but which will determine later how the amounts are to be dealt with. The hon. Member for Wolverhampton, South-West reinforced the Paymaster General’s argument that, as drafted, the amendment would not deal effectively with the loan relationships and the gains on derivatives, but I do not think that the right hon. Lady and I are millions of miles away from each other.

Rob Marris (Labour, Wolverhampton South West)

The hon. Gentleman suggested that I am not a friend of business. I was not raising the issue from one angle or the other. I merely pointed out a way that could be business friendly. To use the vernacular, the deal that the hon. Gentleman wants to put on the table with amendment No. 113 might be a worse option for business than the deal that might be available from the Treasury, which is currently under discussion.

Philip Hammond (Conservative, Runnymede and Weybridge)

Or not currently under discussion, given what the Paymaster General said. The hon. Gentleman might be right in that the right hon. Lady has pointed out the defect in the amendment. I accept that.

One of the themes to which we have returned continually during our debates is that the markets values certainty highly. As long as the transitional treatment is unclear, some element of uncertainty will be created and it will be helpful to remove that as soon as possible. I am sure that the Paymaster General is right to say that the ball is in business’s court. It was not clear that those to whom I have spoken regard themselves as holding the ball and holding up the process until they pass information back to the Revenue, but I shall take what the right hon. Lady said at face value. If people consider that there is an issue to be raised in response to her point, I am sure that it will come up in due course and we can return to the matter. For the moment, having aired the issues and heard the Paymaster General’s response, I beg to ask leave to withdraw the amendment.

Rob Marris (Labour, Wolverhampton South West)

I wonder whether the Paymaster General could, either now or by letter, explain paragraph 25 of the explanatory notes on schedule 6, which states:

“a company in a period of account beginning on or after 1 January 2005 is not permitted to adopt bifurcation treatment in its accounts for loan relationship assets containing embedded derivates (“relevant assets”) because it still uses “old UK GAAP”, it can elect for section 94A(1) to apply.”

That is supposed to be an explanatory note, but I struggle with it, so I ask for clarification. .

Mark Francois (Conservative, Rayleigh)

May I tell the hon. Gentleman that it is disconcerting for the whole Committee to hear his admission that he does not understand a key paragraph of the explanatory notes? Several of us thought that he wrote them. I am extremely alarmed and I wish to place that on the record before the Paymaster General replies to that unexpected inquiry.

Rob Marris (Labour, Wolverhampton South West)

Had I written the explanatory notes, I would have been moonlighting—and I do not approve of that—and I would have understood them completely. I mentioned one note, which I think is relatively minor, that I did not understand and I was hoping for an explanation. Apart from that one, the explanatory notes have been extremely helpful.

Stephen Hammond (Conservative, Wimbledon)

I wish to raise a point that was highlighted by the Chartered Institute of Taxation. I am sure that the Paymaster General is aware of it, but I hope that today she will give the Committee clarity on it. It deals with a problem that has arisen in relation to paragraph 5 of schedule 6, which deals with schedule 9 of the Finance Act 1996, where, in accordance with either international accounting standard 39 or financial reporting standard 26, a company uses a derivative contract as a fair value hedge of a loan that it has made.

A fair value hedge will arise where the company has lent money on fixed-rate terms and then entered into an interest rate swap to change the fixed-rate return on the loan for a floating-rate return. It seems to me, and to the Chartered Institute of Taxation, that the schedule, as drafted, would prevent companies from being able to use a derivative contract as a fair value hedge of a creditor loan. That is because when they account for it on an amortised cost basis or an accruals basis—I think that amortised cost is the new version of the accruals basis—they will be denied relief for any fall in the value of that loan.

Will the Paymaster General clarify that where a lender uses a derivative contract to hedge a fixed-rate loan, and the contract and loan are together designated as a fair value hedge for accounting purposes under either IAS 39 or FRS 26, the company will not be prevented from obtaining relief for debits arising on the loan relationship as a result of the revaluations attributable to the hedging relationship?

Brooks Newmark (Conservative, Braintree)

In commenting on the schedule, specifically on the Government’s intention to bring forward regulations to establish a permanent tax regime for securitisation specific purpose vehicles, I wish to reiterate a number of points.

First and foremost, all of us accept the need to balance casting the net of anti-avoidance legislation wide enough to prevent circumvention and maintaining a tax regime that does not prevent foreign investment, which would damage UK competitiveness. Secondly, we must be careful of unintended consequences, which is a theme that we have discussed throughout this Committee. We must avoid damaging jobs in the financial services and manufacturing sectors and ultimately losing the tax benefits that would accrue to the Exchequer. My third point is about the level of uncertainty, which was addressed by my hon. Friend the Member for Runnymede and Weybridge. The lack of clarity in the wording of the Bill, and specifically in the schedule, still risks putting off foreign investment in the UK and driving businesses into more favourable tax regimes.

None the less, I welcome the efforts the Government have made in respect of the schedule—specifically the fact that the Inland Revenue has listened to the securitisation industry and introduced appropriate changes to UK GAAP moratoriums for those companies with that profile. I also welcome that the Government intend to introduce regulations to establish a permanent tax regime for the securitisation SPVs. However, in a similar vein to my earlier argument with respect to real estate investment trusts, I urge the Government to accelerate the decision-making process to ensure certainty, not only because these vehicles will often be used for long-term borrowings, but because, as the Paymaster General said, we want to create in Britain a modern and competitive tax regime.

Dawn Primarolo (Labour, Bristol South)

I look forward with some enthusiasm to our discussions on clause 59 and schedule 7, because at that point I will be able to demonstrate how difficult it is for a Government to strike a balance on the anti-avoidance of tax by ensuring that measures are appropriately targeted and err on the side of the taxpayer, and I will also be able to describe the problems that can subsequently arise. I hope that when the arguments come back the other way, the hon. Gentlemen will not object because they will be able to see clearly what is going on. They will be able to reflect on whether all the comments they made today still hold true because of the behaviours of others, notwithstanding the good intentions underlying the speeches made in this Committee.

The hon. Member for Braintree has again made a point that is, rightly, repeatedly returned to in these debates: the importance of dealing with avoidance. I have to say to the hon. Gentleman, however, that certainty is not a one-way street. It is not just business that needs certainty from the tax system. Certainty is needed for taxpayers and for the Exchequer—the tax authorities should be able to make reasonable assumptions. That is the balance that we are seeking to strike.

It has not always been the view of Conservative Members of Finance Bill Committees—I will be able to provide illustrations of this point later—that aggressive avoidance where there is no question of commercial purposes should be dealt with. I mistakenly assumed that that previously expressed point of view would continue. I accept the statement made by the hon. Member for Runnymede and Weybridge that he is not seeking to defend avoidance. However, I say to the hon. Member for Braintree that avoidance works against fair tax competition if it distorts investment decisions. He knows that full well from his own experience.

Finance Bill - Standing Committee B

Finance Bill

Nicholas Winterton (Conservative, Macclesfield)

Before we start, I want to say that those hon. Members who wish to do so can take off their jackets to make themselves more comfortable. Those who have already done so clearly anticipated my remarks. I ask the Paymaster General to resume the speech that she was making to the Committee before we adjourned for lunch.

Schedule 6 - Accounting practice and related matters

Dawn Primarolo (Labour, Bristol South)

Before the Committee adjourned at 1 o’clock, I had just concluded my remarks about how avoidance causes economic distortion. In response to the hon. Member for Braintree (Mr. Newmark), I said that the corporate anti-avoidance provisions in the Finance Bill apply specifically to contrived schemes that are designed to decrease United Kingdom tax. Stopping that type of avoidance levels the playing field between compliant and non-compliant taxpayers, which is what we want to achieve.

The hon. Gentleman asked about securitisation companies. He expressed gratitude to the Government on behalf of that important industry for introducing a framework for the new tax regime for those companies under the Finance Act 2005. That is a good example of close collaboration between the Treasury, Her Majesty’s Revenue and Customs and the bodies in the area of international accounting standards. The hon. Gentleman then urged that progress be made in sorting out the new tax system. As he will know, the Finance Act 2005 allows regulations to be made. HMRC and the Treasury are studying a particular proposal that the industry has made in respect of the points he made, and expect to be in a position to respond soon to the industry’s suggestion.

I shall come back to my hon. Friend the Member for Wolverhampton, South-West (Rob Marris).

Rob Marris (Labour, Wolverhampton South West)

Oh, thank you. [Laughter.]

Dawn Primarolo (Labour, Bristol South)

I meant that in the nicest possible way.

The hon. Member for Wimbledon (Stephen Hammond) referred to the Chartered Institute of Taxation. He was concerned about schedule 9 of the Finance Act 1996 and asked whether it would stop a company from receiving relief for a drop in value of part of a loan relationship, when there is a derivative such as an interest rate swap acting as a cash-flow hedge of interest rate risk elements for the loan relationship. I checked matters over lunch, and my understanding is that officials from HMRC have discussed such issues with a leading tax practitioner at the CIOT and said that, in their view, the legislation will not have the effect that is feared, and the revised guidance that is being prepared on loan relationships and derivative contracts will make that clear. I am happy to make sure that the hon. Gentleman receives a copy of that draft in case he wants to return to it at some stage. The important point that he was making is the subject of discussion and I hope that it will be clearly resolved.

Finally, my hon. Friend the Member for Wolverhampton, South-West asked me to translate into English paragraph 25 of the explanatory notes on schedule 6. I have to say that it is rather a long translation so, to save the Committee’s time, I propose to circulate that to him and all Committee members. The Committee knows that any letter circulated by a Minister during proceedings on the Finance Bill is also deposited in the Library.

Paragraph 22 converts what are essentially pieces of accountancy jargon into what I was going to call a more readily usable description, although I am not quite sure it is that—but it is long and gives a clear explanation. I hope that my hon. Friend will accept, on this occasion, that that is the most sensible way to proceed.

Rob Marris (Labour, Wolverhampton South West)

Of course.

Dawn Primarolo (Labour, Bristol South)

I am grateful for my hon. Friend’s indulgence.

I have responded to the points that hon. Members have made. International accounting standards are a complex and important area, especially as companies move to meet them. Companies will want to move at different speeds to meet those standards and it is important that the regulations, having been fully discussed in draft and consultation, provide for those changes to be made and address the important question of transition when we have a better idea of what is appropriate, how long it should be and how it should work. I hope that the Committee will endorse the schedule.

Philip Hammond (Conservative, Runnymede and Weybridge)

I should like to make a few brief points. I am grateful to my hon. Friends the Members for Wimbledon and for Braintree for their contributions to this debate.

We are all aware that the change to the international financial reporting standards has long been planned; it has not just come up suddenly. I confess that I am still somewhat confused as to why we are discussing the transitional arrangements as the transition is occurring. However, I talked to one or two people during lunchtime and I am happy to say that I understand fully and concur with the Paymaster General’s view that the ball is in industry’s court. The Government are waiting for the information to return. That may give her some satisfaction, but it prompts the question why we were not able to start earlier on this process, for everybody’s benefit.

I was interested to hear what the right hon. Lady said about the speech of my hon. Friend the Member for Wimbledon, because there is clearly some difference between her understanding and that of her officials and the CIOT. As recently as Friday the CIOT believed that it would be appropriate to table an amendment dealing with loan relationships and derivatives which it believed would find favour at the Treasury, following discussions, which suggests that the CIOT’s end-view of those discussions was that an amendment was required, whereas officials ended the discussions with the view that such matters can be dealt with through guidance, rather than any further changes to the Bill.

The Paymaster General made it clear during the debate that there are some pretty big numbers involved in the transitional process. Clearly, all sides intend that there should be a smoothing, so that large amounts do not come into tax or get lost from it as a result of step changes in the accounting procedures that are followed. However, she continued and made it clear that the transitional regime has not yet been determined. Can she make it clear to the Committee whether it is the clear intention of the Government that the transitional regime be revenue neutral, so that for the period in which the changes are phased in there is, for tax purposes, neither a gain nor a loss? If that is not the intention, can she explain to the Committee how the corporation tax receipt figures in the Red Book will be calculated in future years, given that the transitional regime, which will apply to fairly large numbers, has not yet been determined? In my simple way, I would have thought that the length of the transitional regime would have an impact, as between years, on the total corporation tax receipts.

In fact, even if the sum arising from the transitional arrangements is zero overall, the phasing of receipts could be affected. The right hon. Lady mentioned a figure of £4 billion, but I am not sure whether that referred to a single bank or to the banking community. However, the numbers were significant; the phasing of them could make a big difference to the Chancellor’s cash flow—and of course, importantly, to whether he meets his golden rule on fiscal balance. Anything that the Paymaster General can say on that point will be extremely helpful.

The Paymaster General also mentioned the use of regulations and the greater ease that they would give the Treasury—and, by implication, business—so that, when necessary, it can legislate quickly in a fast-moving area, and I understand her point. However, the regulation-making powers given to the Treasury in paragraphs 9 and 10 of the schedule include the ability to delete primary legislation. That is quite a substantive power to put into a regulation-making measure. I understand the right hon. Lady’s concern that there be a mechanism for responding quickly to changes and, in particular, for dealing quickly with any problems or unforeseen consequences that arise. However, in future we will increasingly face the problem of the Government wanting regulation-making powers in place of primary legislation for practical reasons.

If we are to get away from the standard debate in which Opposition Members lament the use of regulations because there is no proper opportunity for parliamentary scrutiny of them, and in which Ministers advocate them for reasons of practical efficacy, the answer has to be a better parliamentary process for scrutinising regulations and statutory instruments in this place. If we had a better way of scrutinising what may be important statutory instruments—if we recognised that we have long since passed the time when SIs were simply the minor consequences of primary legislation, and that in some areas they make important changes to primary legislation—we Opposition Members would have less concern about how these things work. However, I am not suggesting that there is anything that the right hon. Lady can do about that.

Edward Balls (Labour, Normanton)

The hon. Gentleman referred to the importance of raising revenue to meet the golden rule. Does he support meeting the golden rule, or would he prefer a balanced Budget rule?

Philip Hammond (Conservative, Runnymede and Weybridge)

I am sure that you, Sir Nicholas, would not encourage me to stray down the path of debating the Chancellor’s rule on balancing the Budget over the cycle, as opposed to the European Central Bank’s rather tighter rule, which is not adhered to, of balancing the Budget or limiting the deficit within—

Nicholas Winterton (Conservative, Macclesfield)

Order. Not on this schedule.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am grateful for that guidance. Nonetheless, the point, which I hope that the hon. Member for Normanton (Ed Balls) takes, is that when the golden rule is examined—this is pertinent to the schedule, Sir Nicholas—it is not simply the aggregate of receipts that matters; it is the timing of those receipts. The transitional regime, moving the timing of receipts from one year to another, could be significant when the deficit is narrow and tight.

Edward Balls (Labour, Normanton)

On a point of order, Sir Nicholas.

Nicholas Winterton (Conservative, Macclesfield)

I am not sure whether a point of order can arise on that matter. If the hon. Gentleman wishes to intervene on the hon. Member for Runnymede and Weybridge (Mr. Hammond), he can, but if he insists on putting a point of order, I shall rule accordingly.

Edward Balls (Labour, Normanton)

I have a question for you, Sir Nicholas. As a new Committee member, I do not understand why the hon. Member for Runnymede and Weybridge is allowed to refer to the importance of raising revenue to meet the golden rule, but able not to respond to a point that I put to him about his answer. It is perfectly respectable to believe in a balanced Budget rather than a golden rule. I thought my question relevant to the hon. Gentleman’s speech.

Nicholas Winterton (Conservative, Macclesfield)

It is not for me to comment on the content of any hon. Member’s speech, as long as it is in order. The Opposition spokesman sought to remind

me that he was connecting matters relating to a balanced Budget to this schedule. I took

his word for it.

Edward Balls (Labour, Normanton)

Will the hon. Member for Runnymede and Weybridge give way?

Mr. Hammondindicated assent.

Edward Balls (Labour, Normanton)

If, as was the case under the previous shadow Chancellor, there had been a balanced Budget rule, would the hon. Member for Runnymede and Weybridge, in making his earlier point, have been more supportive of the measures proposed by the Paymaster General than he is under the golden rule, which he seems more circumspect about supporting?

Nicholas Winterton (Conservative, Macclesfield)

I am sure that the hon. Member for Runnymede and Weybridge will endeavour to respond to that helpful intervention.

Philip Hammond (Conservative, Runnymede and Weybridge)

The hon. Member for Normanton is getting the hang of this quickly. We all have to deal with the question how to circumvent the rules of order by rephrasing things quickly. If the hon. Gentleman’s question has become whether my point about the relevance of the timing of receipts would be as significant as it is under the so-called golden rule if there were a balanced Budget rule, the answer must be that it would be more significant, because the Exchequer would be even more sensitive to movements of receipts between years.

On the hon. Gentleman’s earlier point, he has been here long enough—five or six weeks—to have seen that questions do not always get answers. If he doubts that, I urge him to attend Prime Minister’s questions tomorrow—[Hon. Members: “And Treasury questions!”]—or Treasury questions. However, I say to my hon. Friends, who may not have had the chance to look at the listing for tomorrow’s Treasury questions on the Order Paper, that I anticipate that the hon. Member for Normanton’s former boss will answer some of those questions, but only those with the word “Africa” in them.

I think that I have dealt with the issues on schedule 6 stand part. If the Paymaster General is able to respond to any of my points, I will be interested to hear her remarks. If she is not able to, then I will not be.

Dawn Primarolo (Labour, Bristol South)

I shall answer the hon. Gentleman’s questions. His first point was about why we are discussing the transition now. I believe that I touched on that point, but I shall elaborate. The issues and amounts involved in the transition began to emerge only quite late in the process. I should like to put in a caveat at this point: I am not blaming companies, but merely stating the current position. Issues and amounts emerged quite late as companies themselves started to focus on the practicalities of the change. It was not until late 2004 that the full extent started to emerge.

The hon. Gentleman asked for an explanation about corporation tax receipts and the forecast. The simple answer to his inquiry is, no; regulations are already in place to defer the transitional payments until 2006. Therefore, they do not affect 2005-06 tax receipts. Future receipts have nothing to do with international accounting standards; the figures are not yet known, so there is nothing in the forecast on the transition. Therefore, I return to a point that I made to the hon. Gentleman in this morning’s sitting, in response to what I thought, from his hon. Friends’ contributions, was a stand part debate.

The last point the hon. Gentleman made was about repealing legislation in regulations. The regulations will replace section 84A of the Finance Act 1996, but the tax treatments will continue. I wrote to the Committee about this matter, setting out in detail what the regulations do. No one will be worse off or better off. I tried to anticipate queries by circulating information before we reached this point in our proceedings.

I commend the schedule to the Committee.

Clause 38 - Charges on income for the purposes of corporation tax

Philip Hammond (Conservative, Runnymede and Weybridge)

Clause 38 amends existing legislation so that annuities and annual payments are deductible as trading deductions or as expenses of management, rather than as charges on income, which is a concept that the Government are seeking to phase out. The change that the clause effects leaves qualifying donations to charity as the only remaining charges on income. Therefore, it seems that the days of charges on income are numbered.

The explanatory note is confusing. It paints the clause as simply a tidying-up exercise, but reference is made to avoidance schemes using charges on income as a tax avoidance loophole. Those payments will now be subject in non-trading companies to having a main purpose that is not tax avoidance.

We have no problem with what the Government are doing here, but if this is an anti-avoidance measure that has revenue implications, that is rather more than a tidying-up exercise. Can the Paymaster General confirm that this is an anti-avoidance measure, rather than simply a tidying-up move in the direction of fulfilling the Government’s general desire to remove charges on income from the tax system? After she has done that, can she say how much revenue will be involved?

Rob Marris (Labour, Wolverhampton South West)

Again, the hon. Gentleman reads the explanatory notes differently from me. As I read them, they do not suggest that this is merely a tidying-up measure. I refer him to note 15 to clause 38:

“Certain disclosures under Part 7 FA 2004 have shown that annual payments are being used in schemes to create an artificial deduction which is not matched by any taxable income.”

That suggests to me that the provision is slightly more than a tidying-up exercise, and that it is open about that.

Dawn Primarolo (Labour, Bristol South)

The clause prevents companies from using the charges-on-income regime to avoid corporation tax. To answer the questions of the hon. Member for Runnymede and Weybridge, yes it is an anti-avoidance measure, but it is about revenue protection and therefore does not score on the significance of the yield.

The clause emerges from the question of avoidance disclosure regimes introduced in the Finance Act 2004, which has revealed that the avoidance industry has been using annual payments in schemes to generate tax deductions matched by non-taxable income. The Finance Act 2005 blocked one category of the scheme involving foreign dividends, and it is clear that, unfortunately, one of the main attractions to the avoiders of the charges-on-income regime is that it does not contain any tax avoidance motive tests, such as the unallowable purpose test that applies to the management expenses and manufactured payments regimes.

The provision is both anti-avoidance and part of a tidying-up process that has been moving forward for some time. The Government decided to act to close the schemes by removing most remaining payments from the charges-on-income regime. Relief for genuine business expenses affected will continue to be available either as an expense of a trade, profession or property business or as a management expense. However, those expenses will have to satisfy the existing tax rules, thus eliminating amounts paid for the purposes of tax avoidance.

As the hon. Gentleman said, pending any final decision on the concept of charges on income, the scheme is being retained for qualifying donations and gifts to charities. Discussions had been proceeding on the reform of the corporation tax regime—and, as I have said, there have been a number of changes over the years—but having seen the disclosures, it seemed prudent to move on the basis of revenue protection, with the exception that the hon. Gentleman rightly identified.

Schedule 7 - Accounting practice and related matters

Philip Hammond (Conservative, Runnymede and Weybridge)

I beg to move amendment No. 116, in schedule 7, page 88, line 40, at beginning insert ‘In’.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following amendments: No. 117, in schedule 7, page 88, line 41, leave out from ‘years)’ to end and insert

‘at end insert “and where the main purpose, or one of the main purposes, of one or more of the parties to the finance agreement was a tax avoidance purpose.”.’.

No. 69, in schedule 7, page 89, line 5, leave out sub-paragraphs (5) and (6).

No. 118, in schedule 7, page 89, line 32, at end insert—

‘“tax advantage” has the meaning given by section 709(1) of the Taxes Act 1988;“tax avoidance purpose” in the case of any person, means any purpose that consists in securing a tax advantage (whether for the person or any other person).’.

Philip Hammond (Conservative, Runnymede and Weybridge)

This is a complex schedule, which, it is fair to say, is one of the two most controversial parts of the Bill.

Let me qualify what I mean by controversial. The objectives of schedule 7 are not controversial: the objective clearly stated by the Government is to close a number of tax avoidance loopholes that have been identified primarily through disclosures and the Finance Act 2004. The reason that it is controversial, like the arbitrage provisions that we debated last week, is that practitioners and industry representatives are concerned that several provisions in the schedule mean that the focus of the legislation is still too wide and in some cases will lead to uncertainty. The Bill will need to be clarified by guidance or rules issued by the Revenue, which do not have the force of law, and thus a less certain climate would be created than if the whole matter was dealt with in the primary legislation.

I emphasise again our support for revenue protection and anti-avoidance legislation. I do not know whether it will always be in schedule 7, but there will clearly be a system in future by which a catch-all schedule is attached to every Finance Bill, in which a raft of different schemes that have been disclosed have to be addressed. We are talking about a long and complex schedule that contains a large number of non-controversial things and a small number that are not controversial in their objective but which raise questions about the ability of the drafting to deliver what the Government intend. We will principally address ourselves to that latter set this afternoon.

At the risk of repeating what my hon. Friends and I have said before, our principal job is to ensure that while the Government close tax avoidance opportunities, we do not compromise a climate of clarity and certainty for the taxpayer, so that business investment decisions can go ahead in the normal way and taxpayers can know where they stand vis-à-vis the tax authorities.

Our approach to the schedule has been to focus amendments primarily on paragraphs 10, 18 and 24. They deal with shareholdings that are treated as loan relationships and with degrouping. I am sure that the Paymaster General will recognise that the majority of representations she has received from industry and the professional sector have been about those issues.

We have tabled other amendments, but, by and large, they seek clarification or minor changes to tighten definitions. Without doubt, the large debate in principle is about shareholdings as loan relationships and about degrouping. If we have a stand part debate, I will discuss other paragraphs to which amendments have not been tabled but about which comments are worth making or points worth probing. Across both the amendments that are tabled and the points raised later in a stand part debate, we will focus our remarks on two areas.

The first is the equity of what is being done. We will discuss where rules are being changed unfairly or in an unbalanced way against the taxpayer or, to put it slightly more neutrally, where there is a danger or concern that the interpretation of the words in the Bill could have that end effect. The second area is efficacy. We will raise issues where there is a danger, in our opinion, that unintended consequences could arise from the legislation, especially where they might reasonably be expected to damage the business environment.

The first group of amendments comprises Nos. 116 to 118, which my hon. Friends and I tabled, together with the amendment—I use the word in its deliberate singular sense—that the Liberal Democrats have tabled. That was amendment No. 69, and I will speak about it separately.

Sections 43A to 43G of the Income and Corporation Taxes Act 1988 apply to transactions entered into under rent factoring schemes after 20 March 2000. Rent factoring involves companies selling future rental income schemes to a bank for a capital sum, which is essentially a loan. The point is that the company obtains tax relief on repayments that, in reality, cover both income and capital elements.

The Government legislated to deal with the problem in 2000, but did not include non-tax-driven rent factoring schemes with a lifetime of 15 years or longer. They subsequently discovered that manufacturers of avoidance schemes were using the exemption for rent factoring schemes of more than 15 years’ duration to circumvent the rules and using longer-term rent factoring schemes as an opportunity to achieve the favourable tax status.

The Bill seeks to abolish the 15-year rule. That will deal with the tax avoiders all right; there is no question about that. However, in 2000, when first tackling this issue, the Government—I suspect that it was the Paymaster General, although I do not know as I do not have the transcript of the Committee proceedings—explained the 15-year exemption on the grounds that they did not want to catch bona fide commercial transactions that were properly entered into by companies for all sorts of commercial purposes.

Of course, we are bound to ask what has led the Government to conclude that, between 2000 and 2005, those using 15-year-plus rent factoring schemes as a bona fide commercial transaction have disappeared off the face of the earth, enabling the Paymaster General to feel comfortable scrapping the 15-year exemption. Can she say, with her hand on her heart, that the provision will not catch anyone involved in a bona fide commercial transaction, even though that was the rationale for the 15-year exemption as recently as 2000?

We understand the need to close down avoidance schemes using the 15-year exemption, so our amendments propose going down the other route: instead of scrapping the 15-year rule, we would introduce a motive test into the paragraph. Our three amendments do just that. That way, the 15-year rule will remain, but any rent factoring arrangement will be caught if it has been established for a tax avoidance purpose. Amendment No. 118 defines a tax avoidance purpose using section 709 of the Income and Corporation Taxes Act 1988.

I hope that the Minister will appreciate what we are trying to do. We are not saying that there is no problem. We are asking why we should smash rent factoring completely to solve the problem when there is another way of doing so? We could introduce a motive test and leave 15-year-plus rent factoring in place for those who wish to use it for a purely commercial purpose.

It should be noted that under the Bill, on inception of a deemed loan, there will be a deemed partial disposal of the underlying properties for capital gains tax purposes. That in itself may generate a tax charge. Will the Minister say anything about the Government’s approach to that deemed capital gain and how it will be handled?

I should tell the hon. Members for Eastleigh (Chris Huhne) and for Richmond Park (Susan Kramer) that when I first looked at the Liberal Democrats’ amendment No. 69, I rather gleefully lit upon the fact that—if I understand correctly—they forgot to remove sub-paragraphs (7) and (8), which would be necessary if their amendment were to work. However, I shall not make too much of that because, as I shall confess when we consider a later group, I have similarly forgotten to remove a sub-paragraph (7) and a sub-paragraph (8). That underscores the difficulty of producing amendments of any volume in Committee.

The Liberal Democrats address the same problem that we identified, but they would exclude existing transactions from the Bill. I say to the hon. Member for Richmond Park that we do not favour taking that route because there are tax avoidance schemes that exploit the 15-year rule. There are three options: the sledgehammer, effectively banning rent factoring altogether; the hon. Lady’s solution, which is to allow it where it is already in place, which would allow some fairly convoluted avoidance schemes to remain; and our option, which I might dare to call the third way, and which is to limit the scope of the schemes for avoiders by introducing a motive test so that, by including existing and future schemes, avoidance will be caught, but rent factoring for periods of more than 15 years, whether already in existence or being dreamed up by firms for future commercial purposes, would still be allowed. I look forward to hearing what the hon. Lady has to say and to the Paymaster General’s response.

Susan Kramer (Liberal Democrat, Richmond Park)

I shall speak briefly to the cluster of amendments and more specifically to amendment No. 69.

The hon. Member for Runnymede and Weybridge is apparently reliant on an intent test for the purposes that he wishes to achieve. We regard that as permanent employment for lawyers, and as we do not have a lawyer in our collection, we would rather find other ways to deal with the problems in the schedule.

As the hon. Gentleman made clear, paragraph 1 tackles rent factoring, the process by which the right to receive a stream of rentals for a period is sold in exchange for a lump sum. From the perspective of the Inland Revenue, as it was called at the time of the John Lewis case—it is now HM Revenue and Customs—it looks like a tax avoidance measure, an attempt to convert what would have been an income stream to a capital gain to be offset against capital losses.

I come to the clause with a background not as a tax accountant or a tax lawyer but as a banker who worked for many years in structured finance, though more in the United States than in Europe and not particularly in the UK. As a consequence, I am conscious that one of the breakthroughs in terms of expanding liquidity in the financial markets and options for businesses and Government to finance a range of transactions, was to achieve the goal of taking what had not been recognised as an asset—the right to receive a future income stream—and to recognise it as an asset and treat it as such.

The interesting part of the John Lewis case—I read the judgment from the Court of Appeal—was a recognition of the conversion of that perspective on a future rental stream, to see it as a right, or as attached to a right, which could be securitised and treated as any other asset. I gather from lawyers that the tree rather than the fruit of the tree is the ultimate test.

Philip Hammond (Conservative, Runnymede and Weybridge)

The hon. Lady said that she and her colleagues did not much like our intent test, as she called it. I call it the motive test. However, throughout our proceedings a motive test has been used to identify an avoidance purpose. Is the hon. Lady saying that the Liberal Democrats would eliminate the use of motive tests throughout the Bill and elsewhere?

Susan Kramer (Liberal Democrat, Richmond Park)

It is just that we have so many of those tests that if we could avoid one it would be to the general benefit. I would rather find a way to avoid one if we can, because their intent is so utterly blurred that we will spend the rest of our lives in the courts.

I am conscious that the principle that is involved with rent factoring, particularly when people get over a 15-year benchmark and are looking at the sale of a long-term rental stream, is similar to other sorts of financing and securitisation that I suspect the Government are considering and will be looking at in the near future. That includes the securitisation of fares, for example, proposed by Transport for London as a mechanism for funding infrastructure, and potentially even the securitisation of future tax streams, which Crossrail is considering as a mechanism that presumably taxes developer gains. The Government are perhaps looking for mechanisms to securitise those things. If they go back and look at the John Lewis case, they will see that essentially the same issues are all wrapped in with rent factoring.

Coming at the subject as a banker and considering it in a broader, more holistic sense, I would be interested to hear the Minister’s comments as to whether these actions compromise and restrict other forms of securitisation and liquidity that she and the Government will be seeking to achieve, particularly in respect of infrastructure projects in future.

In the narrow sense of clause 69, our objection to sub-paragraphs (5) and (6) is that they are retrospective, not retroactive, measures. It seems that anybody who entered into a rent-factoring stream for a period greater than 15 years could have done so by being reliant on the Finance Act 2000, in a straightforward, completely honest and non-controversial interpretation of the language in the Act, which says, in section 43C:

“(1) Section 43B shall not apply to a finance agreement if the term over which the financial obligation is to be reduced exceeds 15 years.”

That is remarkable clarity in a piece of legislation. Therefore to turn today to companies that relied on a straightforward, clear interpretation of a section in the 2000 Act and say to them that by behaving in accord with the law they are now contravening it is not an appropriate way to deal with businesses.

Rob Marris (Labour, Wolverhampton South West)

Has the hon. Lady read paragraph (1)(4) of the schedule, which says:

“The amendments made by this paragraph have effect in relation to finance agreements entered into on or after 16 March 2005”?

Susan Kramer (Liberal Democrat, Richmond Park)

The hon. Gentleman makes my point. If he reads the 2000 Act, he will see that it says that that shall not apply. In other words, the various constraints that would require rent factoring to be treated as income rather than as a capital gain specifically do not apply to any financial transaction of more than 15 years under the 2000 Act. Anybody looking for the current law after that Act came into effect would have read that section and behaved accordingly. Under those circumstances we will go round in circles. We are all getting exhausted. So why do not I just carry on and finish making a relatively brief point?

For companies that entered into transactions reliant on the 2000 Act, the lump sum or compensation that they received in exchange for the sale of future rents would have been based on the various tax protections and opportunities available to them in the relevant paragraph. Therefore to say that for the future, remaining years of the life of that transaction the sum has to be treated differently is a significant financial penalty. If that had been a devious reading of the various sections, one could understand it, but when it was a straightforward reading the measure is not justified.

Rob Marris (Labour, Wolverhampton South West)

Given her final remarks, either the hon. Lady is misreading the Bill or I am. Line 3 of page 89 states:

“The amendments made by this paragraph have effect in relation to finance agreements entered into on or after 16th March 2005.”

The mischief to which the hon. Lady referred about greater than 15-year agreements that were entered into, for example, two years ago, would not be caught under paragraph 1(4).

Susan Kramer (Liberal Democrat, Richmond Park)

I am sure that the Paymaster General will be delighted to clarify what I want to point out to the hon. Gentleman. I refer to the transactions entered into after the appropriate date in 2000. The remaining period for that transaction, which is after 16 March 2005, is caught by the provisions. Paragraph 1(5)(a) states that if

“a finance agreement was entered into on or after 20th March 2000 and before 16th March 2005...sub-paragraph (6) has effect.”

Having read that interpretation of the measure, which I assume is the intended interpretation, there is a retrospective action and that is outrageous.

I return to the basic principle, which is whether any measures in the paragraph are consistent with the Government’s intentions to use securitisation of future income streams for a wide range of finances, particularly infrastructure.

Nicholas Winterton (Conservative, Macclesfield)

Order. Interventions should be brief. I allowed that one so as to continue to be helpful to the Committee. I can only say to the hon. Lady that, if she wants to come back later in the debate, she has the right to do so. She could have spoken a second time.

Rob Marris (Labour, Wolverhampton South West)

I shall not go further down that route. I am sure that the Paymaster General will deal with the point in her usual competent way.

When we debated amendment No. 31 to clause 24, the hon. Member for Runnymede and Weybridge did not like the words

“or one of the main purposes”.

To my surprise, they now appear in amendment No. 117. Perhaps he will explain that later.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am happy to explain the reason now. We made our point about

“one of the main purposes”.

The Paymaster General rejected our argument and, to be consistent with the architecture of the Bill, we have now accepted

“the main purpose, or one of the main purposes”.

The problem with drafting amendments is, that if they are not accepted, we must return to the world as it was before and, when drafting later amendments, we can only speculate whether the Government will accept any of our earlier amendments. On the basis of past form, however, I have become a competent speculator on that subject.

Rob Marris (Labour, Wolverhampton South West)

I am obliged to the hon. Gentleman for his explanation.

Dawn Primarolo (Labour, Bristol South)

I do not know whether it is good or bad that, since 1997, I have spoken in debates on Finance Bills on behalf of the Government. I say to the hon. Member for Richmond Park that it is wise to check all finance legislation statements for references to particular types of avoidance, not only one type.

In answering amendment No. 69 and then amendment Nos. 116 to 118, I wish to make a couple of things clear about the schedule. It tackles avoidance schemes for individuals and companies under nine different categories. When the original Finance Bill was published, the measures were mainly accepted as well-targeted anti-avoidance provisions arising from disclosure. There have been significant comments about the measures that treat certain shares as debt for tax purposes and, in the light of representations, the measures have been amended to ensure that they focus more tightly on the avoidance that we aim to tackle. We can draw the comparison, as the hon. Member for Runnymede and Weybridge did. We had this discussion during the debate on arbitrage. At times, anti-avoidance legislation is highly specific and very targeted, because it deals with specific regimes. That is certainly the case in this schedule. The schedule is complex because the contrived schemes that it seeks to prevent are complex.

The Government continue to listen to the helpful and constructive points being made by business on these complex issues. However, I reaffirm to the Committee that I am determined that the measure should not be watered down in such a way as to reopen tax avoidance opportunities.

In 1997, when the law was changed to prevent financial concerns avoiding tax on profits from lending, I, as the Minister, gave a warning. That is related to the debate that we had on how far the Government go in their anti-avoidance legislation— whether they can afford to put down markers and say, “Avoidance is not going on beyond this point; we do not expect to see it beyond this point and if we do we will act on it.” The warning that I gave was on the record; I said that if attempts were made to get around the change, the Government would take action, possibly with retrospective effect back to 1997. There are many ways to try to deter—to encourage tax-avoiders not to do so— and one of the many methods is for Ministers, on the record, explicitly to give a warning that they will not tolerate that type of avoidance, and that the Government will act. However, it seems that that warning had little effect since, unfortunately, the schemes continue to proliferate.

Brooks Newmark (Conservative, Braintree)

I understand the spirit in which the Paymaster General approaches this issue, but I would like to raise a concern. Does she not believe that the changes that she proposes may cause an additional tax liability for at least some innocent transactions? Will she address that concern?

Dawn Primarolo (Labour, Bristol South)

No, I do not think that the legislation as targeted will affect innocent transactions. It specifically responds to the disclosures for schemes that are being marketed and it only responds to those marketed schemes through the disclosure. Therefore, if the schemes are not being used, that should not be the case. I shall continue, but I am happy to give way to the hon. Gentleman again if necessary.

This is the issue: if the avoidance industry continues to try to find ways around new rules, the Government must seriously consider what other ways might be adopted to stop those intent on avoiding their fair share of tax. We cannot—and, frankly, will not—continue to play a cat-and-mouse game with those seeking avoidance in the financial field.

I recall—I think that it was only last year—that in the debates in Committee on the Finance Bill, the then spokesperson for Her Majesty’s Opposition, the then Member for Arundel and South Downs, commented that the financial avoidance measures that were under consideration at that time were a fair cop for schemes that were simply designed to avoid tax and had no other commercial purpose. The measures in this schedule are the same. They are a fair cop against schemes that must be closed down, because they are specifically and only designed for avoidance purposes, not for any other commercial purpose.

Such schemes are costing hundreds of millions of pounds. It is vital to protect the Exchequer against artificial tax avoidance arrangements. Nobody has suggested a better way of doing that. In the overwhelming majority of cases, particularly those in which there is no intention to avoid tax, the rules will have no application, especially after the Government amendments that we will discuss. It is clear to the companies and individuals concerned that that will happen.

I fear that amendment No. 69, to which the hon. Member for Richmond Park spoke, is based on a misunderstanding, as my hon. Friend the Member for Wolverhampton, South-West pointed out, about when the clause becomes active. The hon. Lady referred to the commencement provisions in paragraph 1 of schedule 7. They have been carefully designed so as not to be retrospective in the proper sense of the word. There are two different types of rent factoring arrangements, and the hon. Lady referred to one, the lump sum assignment cases, such as the John Lewis case, which was litigated to the Court of Appeal. There is a single transaction completed when rents are assigned. Paragraph 1 applies only to those cases when the assignment takes place on or after Budget day. That is because to go back to an assignment in, say, 2001, and change the current tax treatment would be truly retrospective.

The other type of case is the interposed lease case. That removes the grant of the lease and then continuing rental payments over a future period. It is the rental payments that cause the tax loss here, because a large part of them represents the paying back of the principal of the loan. If the company or group had entered into a straightforward loan to finance its operations, instead of a complicated and contrived interposed lease rent factoring scheme, it would not have had any relief for the repayment of the principal.

Sub-paragraphs (5) and (6), to which the hon. Member for Runnymede and Weybridge referred, ensure that the principal elements of rents for the future are not allowed as a deduction in computing profit. That is not retrospective. “Retro” means “back”, and the paragraphs deal with the future, not the past. Nobody can have any expectation—this is not a feature regularly discussed in Finance Bills—that the law will not be changed in future in relation to transactions that have started but not yet finished. That is especially true of tax avoidance schemes. It would be ridiculous for an avoidance scheme to be designed for a very long period, and then to have no way to say that the scheme should not have been happening in the first place.

There is nothing in the complaint that the Government gave a signal in 2000 that anything over 15 years was acceptable. That comes back to the themes that we discussed this morning about what is reasonable when the Government do not deal with an issue because they believe that it is not subject to avoidance and might interfere with commerce.

Philip Hammond (Conservative, Runnymede and Weybridge)

Will the Minister give way?

Dawn Primarolo (Labour, Bristol South)

I shall deal with the issue of 15 years, and the hon. Gentleman can response and I shall answer his questions.

At the time it was thought impractical to contrive an arrangement involving a lease of more than 15 years. That was the advice given to us, and it was the understanding of HMRC, then the Inland Revenue. Unfortunately, experience of the ingenuity of tax avoiders has shown that that was wrong. I could mention the fact that the amendment does not go far enough to achieve its objective, because sub-paragraphs (7) and (8), which the amendment does not affect, makes no sense without sub-paragraphs (5) and (6).

Much more importantly, the amendment would cost the Exchequer £70 million in 2005-06, rising to £120 million in 2009-10. It would mean that tax avoiders could continue to milk the public purse. That cannot be a reasonable proposition. I therefore have no hesitation in saying that if the amendment is not withdrawn I will ask my hon. Friends to vote against it.

I turn now to amendments Nos. 116 to 118. When the Government introduced the rules in 2000, it was not thought that arrangements were likely to exceed 15 years, so the legislation did not apply to arrangements exceeding that period. The avoidance industry latched on to the exemption and we are now seeing cases involving 15 years and a bit, albeit not hugely longer. As the avoiders will apparently go to any lengths to achieve a tax benefit, the Government have proposed measures in this Bill to remove the 15-year rule.

The arrangements to which the rent factoring legislation applies are invariably tax avoidance arrangements, and I could not agree to the diluting of the effect of that legislation. Bona fide commercial arrangements will not be caught because there is an accounting test which keeps them out. There is no need for a motive test here either because the purpose of the motive test is to keep out the bone fide commercial cases. They are already removed on the basis I have described.

The amendments seek to retain the 15-year exemption for rent factoring cases involving assignment of rents unless one of the parties was seeking a tax advantage. Strangely, they do not seek to do the same for cases involving interposed leases. I am not really sure why. Do Opposition Members see some commercial motives in rent assignment arrangements in some cases but view all interposed leased cases as avoidance?

I have tried to explain clearly that rent factoring arrangements caught by the 2000 legislation are invariably tax avoidance. There is therefore no need for a tax motive test, much less one that does only half the job. I reiterate the point that I have made to the hon. Gentleman: bona fide cases will not be caught because they are dealt with within the accounting test which ensures that those arrangements are clear.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am grateful to the Paymaster General. Her last remark comes to the nub of the issue for us. Of course our concern is that the bona fide commercial arrangements that she identified in 2000 are not adversely affected by this. It may be that those are bona fide commercial arrangements—interposed leases already in place—in the sense that they were not motivated primarily, or in any major way, by the tax advantage that was to be available. But I am sure she will agree that they will have been priced to reflect the tax treatment that they would expect to get under the legislation at the time.

It is not clear whether she is saying that bona fide commercial 15-year-plus arrangements, be they lump sum or interposed leases, will not be affected by the change in treatment or that they will still be allowed to happen but will be subjected to what is effectively an apportionment of the amounts payable under them between principal and interest. If it is the latter case it is pretty cold comfort for someone who has entered into a long-term interposed lease arrangement. The Paymaster General has been generally reassuring about the issue. I look forward to hearing what experts outside the Room make of her response today. If we need to return to the issue, perhaps we shall do that on Report. I beg to ask leave to withdraw the amendment.

Nicholas Winterton (Conservative, Macclesfield)

I am in some difficulty, because I was going to give the hon. Member for Richmond Park the opportunity of coming back on her amendment.

Philip Hammond (Conservative, Runnymede and Weybridge)

If it helps the Committee, I shall beg to ask leave to withdraw my begging to ask leave to withdraw the amendment.

Nicholas Winterton (Conservative, Macclesfield)

I am happy to agree to that. The hon. Member for Richmond Park may make one or two comments about the Paymaster General’s response to her amendment.

Susan Kramer (Liberal Democrat, Richmond Park)

You are very kind, Sir Nicholas. I simply wanted to ask the Paymaster General for a response on the broader issue of the implications for similar securitisation transactions. She did not address that issue.

Dawn Primarolo (Labour, Bristol South)

I apologise to the hon. Lady for not having responded to that point.

For rent factoring to apply, the arrangements must be accounted for as a loan that the rents repay over a period. That would not be the case in securitisation or other types of arrangements. The connection that she believes exists does not, and her fears are unfounded.

Philip Hammond (Conservative, Runnymede and Weybridge)

I beg to ask leave to withdraw the amendment.

Nicholas Winterton (Conservative, Macclesfield)

It is now nearly a quarter to 6. I am roughly aware of where the usual channels would like us to get before we adjourn. It looks as if we shall not make that much progress by 7 o’clock, unless we move very much faster than at the moment. It will be my intention to adjourn for dinner at 7 o’clock and come back at 8 o’clock if that is satisfactory to the Committee. As the Chair, I have that discretion. I hope that that information has been helpful.

Philip Hammond (Conservative, Runnymede and Weybridge)

I beg to move amendment No. 119, in schedule 7, page 91, line 28, at end insert—

‘(8A)In section 768B(1)(a) after “capital” insert “and the main purposes or one of the main purposes, of the change of ownership was a tax avoidance purpose.”.’.

I am sure, Sir Nicholas, that you will now see how plodding carthorses can become racehorses, given a threat from the Chair.

The amendment seeks to introduce into paragraph 3 a motive test to ensure that it bites only when the main purpose, or one of the main purposes, of the change of ownership was a tax avoidance purpose. Paragraph 3, quite reasonably, seeks to block a company being sold for the value of its tax losses and thus closes an existing tax loophole. The paragraph works by amending the scope of section 768B of the Income and Corporation Taxes Act 1988.

Those rules to block the buying of companies specifically for the value of their tax losses apply so that they deny purchases of businesses—when the transaction is purely commercial—the benefit of the tax losses within non-trading companies of the acquired group whenever there is an injection of more than £1 million of capital post-transaction. That is a pretty small sum, which the purchaser of a failing business might reasonably expect to have to inject just to shore up the working capital base of the business.

Given that there are many such transactions and that making them more difficult or costly could cut off or reduce the supply of investment finance to struggling or failing businesses—with all the consequences that that could entail—this approach seems very draconian. The amendment therefore seeks to introduce a motive test into section 768B of ICTA. We believe that the intended purpose can be achieved, and, at the same time, the underlying provision of ICTA can be improved, by introducing this motive test, which will allow certain non-trading tax losses to be carried forward in companies where the change of ownership is for commercial purposes, and is not for a tax avoidance purpose. Therefore, the need for injection of new capital into a company following a change of ownership will not in itself create a disadvantageous tax treatment that might deter the completion of the transaction.

Dawn Primarolo (Labour, Bristol South)

The amendment would restrict the application of the law that prevents carrying forward certain tax deductions where there has been a change in ownership of a company with investment business. The Government are simply seeking to deal with an oversight where the legislation did not apply to non-trading loan relationship deficits. The amendment is completely unrelated to that change, but seeks to add a tax avoidance motive test to one small part of the legislation dealing with groups seeking to purchase unused tax reliefs.

Part of the anti-avoidance armoury, which goes much wider than the single section that the amendment seeks to change, has been in place for many years in various guises. The section that the amendment covers was introduced in 1995 by the Conservative Government. None of the sections referred to here has ever had a tax avoidance motive test because, as those who introduced them realised at the time, they do not need one. Plenty of other filters are built in to ensure that only appropriate cases are caught. If the factual circumstances described in the legislation are satisfied, the legislation applies to deny carrying forward the reliefs and deductions specified. Therefore, there is no need to inquire into the purpose of the parties involved. These measures have worked well over time in various guises. The legislation introduced in 1995 was good, and it should be left in place because the filters and the specific targets ensure that avoidance is operated against.

Philip Hammond (Conservative, Runnymede and Weybridge)

I did not hear the Paymaster General specifically say that no company that had entered into a bona fide purchase of another group for commercial purposes could be caught by this measure, but I think that that has to be the implication of what she is saying. If that is the case, we should go away and study this matter, because there is clearly no need for a motive test. I will take advice and not detain the Committee any longer at this stage. I beg to ask leave to withdraw the amendment.

Philip Hammond (Conservative, Runnymede and Weybridge)

I beg to move amendment No. 120, in schedule 7, page 95, line 24, at end insert—

‘(2A)Where credits representing any distribution in respect of the share are brought into account for the purposes of this Chapter, then this Chapter shall have effect for the accounting period of the issuing company in accordance with subsection (3) below as if—

(a)the shares were obligations under a debtor relationship of that company, and

(b)any distribution in respect of the share were not a distribution falling within section 209(2)(a) or (b) of the Taxes Act 1988, unless such a distribution is payable to a person who is not within the charge to income tax or corporation tax.’.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following amendments: No. 121, in schedule 7, page 95, line 26, leave out from “share” to end of line 27 and insert

‘shall be determined in accordance with those principles of generally accepted accounting practice which are applied in determining the company’s profit or loss for the accounting period’.

No. 122, in schedule 7, page 95, line 28, leave out sub-paragraph (4).

No. 123, in schedule 7, page 96, line 28, at end insert—

‘(11)This section shall not apply unless the purpose, or one of the main purposes, of the investing company holding the share in the circumstances described in subsection (1) above is a tax avoidance purpose.

(12)In this section “tax advantage” had the meaning given by section 709(1) of the Taxes Act 1988;“tax avoidance purpose” in the case of any company, means any purpose that consists in securing a tax advantage (whether for the company or any other person).’.

No. 124, in schedule 7, page 96, line 39, leave out “and”.

No. 125, in schedule 7, page 96, line 40, at end insert—

‘(d)the issuing company is not an associated company of the investing company, and

(e)the investing company’s purpose in acquiring the share is an unallowable purpose.’.

No. 127, in schedule 7, page 97, line 3, at end insert—

‘(2A)Where credits representing any distribution in respect of the share are brought into account for the purposes of this Chapter, then this Chapter shall have effect for an accounting period of the issuing company in accordance with subsection (3) below as if—

(a)the shares were obligations under a debtor relationship of that company, and

(b)any distribution in respect of the share were not a distribution falling within section 209(2)(a) or (b) of the Taxes Act 1988, unless such a distribution is payable to a person that is not within the charge to income tax or corporation tax.’.

No. 128, in schedule 7, page 97, line 5, leave out from “share” to end of line 6 and insert

‘shall be determined in accordance with those principles of generally accepted accounting practice which are applied in determining the company’s profit or loss for the accounting period.’.

No. 129, in schedule 7, page 97, leave out lines 7 to 12.

No. 126, in schedule 7, page 97, line 29, at end insert—

‘(8)For the purposes of this section, a share is acquired by the investing company for an unallowable purpose if the main purpose, or one of the main purposes, for which the company acquired the share is—

(a)the purpose of circumventing Section 95 of the Taxes Act 1988, or

(b)any other purpose which is a tax avoidance purpose.

(9)The main purpose, or one of the main purposes, for which the investing company acquired a share shall be taken to be the purpose of circumventing Section 95 of the Taxes Act 1988 (Taxation of Dealers in respect of distributions etc) if, at the time when the company acquired the share—

(a)a credit institution was an associated company of the investing company, and

(b)had the share been acquired by the credit institution, that institution would have held the share in circumstances such that Section 95 of the Taxes Act would have applied.

(10)In this section—“associated company”, in relation to any other company, means a company which, within the meaning given by section 413(3)(a) of the Taxes Act 1988, is a member of the same group of companies as that other company; “credit institution” means—

(a)a bank, within the meaning of section 840A of the Taxes Act 1988;

(b)a building society; or

(c)a person authorised by a licence under Part 3 of the Consumer Credit Act 1974 to carry on consumer credit business or consumer hire business within the meaning of that Act;

“tax advantage” has the meaning given by section 709(1) of the Taxes Act 1988;“tax avoidance purpose” in the case of any company, means any purpose that consists in securing a tax advantage (whether for the company or any other person).’.

Philip Hammond (Conservative, Runnymede and Weybridge)

I have to say that, with the best will in the world, it will take a little longer to deal with these amendments, as this is probably the key group. At the outset of my remarks, I should like to acknowledge the input of the Law Society in identifying issues that still need to be addressed.

The Paymaster General made the point that the part of the schedule that the amendments address has been extensively revised since the original legislation was published in March. Paragraph 10 introduces various new sections into the Finance Act 1996 that are intended primarily to counteract certain schemes that involve the creation of shares, the rights of which are designed to produce a return that is in practice equivalent to interest on a loan but is structured so that it is taxed either as a dividend or a capital gain on shares. Of course, we support the narrow purpose of this legislation—no one should be allowed to create a totally artificial arrangement that gives rise to a tax advantage—but there is still serious concern about the impact that it will have in some cases and the wider implications.

For the most part, the new provisions will tax holders of shares that are caught as if the shares were rights under loan relationships and the returns were interest for tax purposes. The Law Society believes that there remains a risk that the measures in the paragraph will extend well beyond the schemes that they are designed to counteract. Our amendments suggest an approach that limits the application of the provisions to cases where there is a genuine avoidance motive. In other words, we are not challenging in any way the policy intentions or the Government’s underlying objectives in this part of the legislation; we are simply probing whether the drafting of the Bill achieves that underlying objective and whether it inflicts any collateral damage.

Another point needs to be made is that we will first seek to narrow the scope of this legislation so that it does not inflict collateral damage, but if it turns out that the provisions are to have a wider application—if the Government resist all attempts to narrow them—another issue will need to be addressed, and that is proportionality and even-handedness when dealing with symmetry of treatment for investor and investee companies.

We all understand that where we are dealing with pure tax avoidance we do not need to worry too much about symmetry of treatment. However, where we are taking an approach that might catch some innocent or pretty innocent transactions, it is important that there be symmetry. Where items are denied for deduction for tax purposes, the corresponding income items have to be treated appropriately. There are implications with respect to double taxation of retained profits and the interaction between the rules in the Bill and the controlled foreign company legislation—and indeed with respect to foreign exchange gains and losses provisions.

The amendments have been grouped together because they all relate to paragraph 10, but there are several sub-themes, which I shall address those individually. I shall not detain the Committee by going through what each amendment does—I see that all members of the Committee are attentively reading the amendments in the amendment paper as I speak.

The first mini-group contains amendment No. 120, relating to new section 91A of the Finance Act 1996, and amendment No. 127, which deals with new section 91B of that Act. The mini-group aims to restore symmetry so that where the income on preference shares is taxed in the UK, a tax deduction arises for the dividends. That gets around the problem by which preference shares issued and held within groups would have their dividends taxed, with no corresponding deduction for the payment. In a moment, we shall suggest a different approach to the group problem. Amendment No. 127 would ensure the removal of the asymmetry in tax treatment under new section 91B, so that if both the payer and the recipient of the preference shares are UK taxable, the rules do not work to prevent the issuer from using preference shares as a legitimate means of raising finance.

The second mini-group contains amendment Nos. 121 and 128, which would remove the requirement that the shares must be accounted for on fair value accounting. That is necessary as some companies may hold them on an amortised cost or held-to-maturity basis for international accounting standard purposes. Hence the amendments ensure that the tax treatment follows the accounting treatment, which is the proper commercial basis on which the shares are held.

The third sub-group comprises amendments Nos. 122 and 129. I will use an example to illustrate the purpose involved. If a 5 per cent. 10-year preference share is held on a fair value basis and interest rates rise in the accounting period, the value of the preference share would reduce. That would cause a debit for that period, which sub-paragraph (4) might then disallow for no stated purpose, while a later corresponding credit for the inverse occurring may be taxed. The amendments would delete subsection (4) in both new section 91A and new section 91B on the grounds that there is no stated purpose—the hon. Member for Wolverhampton, South-West will have noted that there is no stated purpose in the explanatory notes. That is especially important because the preference shares held by an investor should normally generally generate credits.

Amendment No. 123 introduces a motive test so that new section 91A will apply only where there is a tax avoidance purpose. It defines that purpose to be a tax avoidance purpose not only for the benefit of the company itself but for the benefit of any person. That is because if there is no such purpose, there is no obvious reason why the long-established treatment of preference shares should be changed, with possible negative consequences for company financing arrangements. That is especially true because the issuer is foregoing a tax deduction for its borrowing cost by using preference shares; subscribers such as pension funds would be exempt on the income anyway.

Amendments No. 124 is simply a paving amendment. Amendment No.125 would ensure that new sections 91B to section 91G do not apply in a group situation. That is a different way of addressing what has been called the tiering problem. I see that the Paymaster General has a phenomenally complicated diagram on her table. I, too, have a few such diagrams, which show group structures relating to all sorts of companies in Luxembourg and the Netherlands and tiers of holding companies in the UK. I think it is understood outside the House that is that it is not the Government’s intention to catch multiple occasions transactions occurring within a group structure. If there is a need to tax something, it should be taxed only once where a group structure, all of which is subject to UK tax, is involved.

In fairness to the right hon. Lady, the Government have sought to alleviate business’s concerns about the way in which the measures would affect the multi-tiered holding company structure that is regularly, for reasons that will baffle most of us, used in such groups. The Government might believe that they have answered all the concerns expressed, but I fear that that is not correct. Residual concerns remain, although in a spirit of new-found generosity it is probably right to say that there is a recognition that the greatest concerns have been dealt with and that we are down to relatively small issues.

The Revenue has said that the proposal is not intended to tax payments of dividends within a group structure. We have sought to place that in the Bill and we suggest to the Paymaster General that it is appropriate to do so. The simplest way to do it, although I fully accept that it not the only way, is to exclude intra-group transfers altogether. We believe that the only reason why the Paymaster General would reject that approach is if she has examples of situations in which exempting intra-group transfers could create a new avoidance loophole. The advice that we have received is that it should not, but if she has that concern, she will undoubtedly share it with the Committee.

I have all sorts of examples of structures that businesses fear will still be caught by the most recent version of the Bill, but in view of your admonition about speed, Sir Nicholas, I will not read any of them out to the Committee. I strongly suspect that we will need to return to this point on Report, simply because there is still so much concern outside the House.

Amendment No. 126 defines, for the purpose of the rules, a tax avoidance purpose. The definition is deliberately targeted specifically to include what we understand is the main mischief at which the group of new sections to the Finance Act 1996 is aimed: that is, banks using subsidiaries to get around the rules taxing dividends as income. We have specifically addressed that in the amendment, so amendments Nos. 125 and 126 together effectively exclude intra-group and non-tax-avoidance transactions with the definition of avoidance defined to catch banks.

I hope that the Paymaster General will respond to the residual concern that exists in the world outside that new sections 91A to 91G, particularly 91B, are likely to catch transactions that are stated not to be in the Revenue’s target and that may require messy amending legislation in future.

In that context, I suppose that before I sit down I should say something about new section 91F, which gives the Revenue the power to vary or remove the conditions that need to be met for something to fall within the scope of new section 91B. I can understand why the Minister wants the Revenue to have that power, because it is clear from what I have said already that there will be unforeseen consequences for some companies. I guess that the intention is that the powers under new section 91F could be used to move quickly to address any problems that arise.

Although I am sure that that is welcome from the point of view of the businesses concerned, from the point of view of parliamentarians trying to scrutinise legislation, it is a pretty rum situation. We are asked to accept that the legislation is probably a little ragged round the edges and will hit a few innocent targets, but we are told not to worry as the Government are building a first-aid kit that will allow the Treasury to rush to the rescue and resuscitate any unintended victims without the need to trouble parliamentarians with any new primary legislation.

We have our usual concerns about that, which would be amenable to assuagement if there were a more rigorous scrutiny process. I could look this up in the Finance Act 1996, but can the Minister clarify whether regulations under new section 91F would be subject to the affirmative procedure so that we would at least have that additional assurance?

Nicholas Winterton (Conservative, Macclesfield)

Before I call the Minister, I should say that I have neither criticised nor admonished the Committee for the progress that it is making, I merely indicated that I had been advised that certain progress had been agreed through the usual channels. It seemed to me that we would not achieve that target by 7 o’clock, and if that were the case, I would adjourn for refreshment at that time. I further advise the Committee that if we are a little bit behind at 7 o’clock, I shall be happy to go on until about half-past. I hope that that is helpful to the Committee; we still have quite a lot of debates to hold before 7 o’clock.

Dawn Primarolo (Labour, Bristol South)

I say again that the scheme as drafted ensures that it captures a variety of avoidance schemes that have been disclosed under the rules introduced in the Finance Act 2004. It does not affect innocent transactions. Changes from the March Bill—the Government amendments—mean that the Bill is very closely targeted indeed.

The hon. Member for Runnymede and Weybridge raised the issue of group tiering; the Government amendments eliminate the problems to which he alluded, and representations from the banking sector indicate that it has accepted that that is the case. We are back to targeted measures against specific avoidance schemes and the need to take them forward.

I will try to respond briefly to the hon. Gentleman’s points, starting with amendments Nos. 120 to 123, which attempt to change, and unfortunately therefore emasculate, one of the two rules that treat certain shares as debt for tax purposes. New section 91A of the Finance Act 1996 applies where companies attempt to turn interest income into something else using arrangements over shares that have unpaid, non-commercial, third-party obligations artificially attached to them.

The rules seek to tax the investor on the full economic profit, but because it is outright avoidance no relief is given to the provider or payer, and since the provider agreed to the arrangements, it must therefore be assumed that it does not need the tax relief available had it simply paid interest or could get it anyway.

Amendment No. 120 would make the rule symmetrical and allow relief to the issuing company. I cannot agree to that proposal as it would inevitably lead to an open field day, with companies seeking to avoid, through arranging for their shares to come within the section.

Amendment No. 121 would change the method of bringing debits and credits into account in respect of the shares that are treated as a loan relationship. The legislation imposes fair value accounting for a good reason: the section taxes increases in the value of shares that are interest-like, and fair value will ensure that such increases are brought into account in each period as they accrue. Allowing any other accounting method would enable a company to defer taxation of such value increases to far in the future when the share was actually disposed of, if ever, as many of the schemes are circular; they go on and on feeding off each other.

Amendment No. 122 would remove the prohibition on debits from respective arrangements designed to frustrate the measure. I can confirm that the rule does not prohibit debits that reflect true economic loss, such as a fall in values through exchange differences, but it would open the floodgates to artificial transactions designed to siphon value out of the shares artificially to create fictitious losses. Therefore, I cannot agree to it.

Amendment No. 123 would insert a tax avoidance test into the section. It is an unnecessary condition. The section is so narrowly targeted on the specific type of avoidance device that no one has come forward with a single example of a commercial arrangement that comes within the wording of the legislation. Indeed, some representative bodies have said that they could not think of how one might use that type of arrangement for general, commercial reasons. I entirely accept that the hon. Gentleman is motivated by a desire to ensure that innocent transactions are not caught, but I am sure that he would accept that that is not the case here. Such a test is therefore unnecessary.

Amendments Nos. 124 to 129 seek to amend the second rule, which treats certain shares as debt for tax purposes. As the hon. Gentleman said, four of them mirror what amendments Nos. 120 to 123 seek to do to section 91A of the Finance Act 1996. For exactly the same reasons that I gave on the previous group of amendments, I shall ask my hon. Friends to vote against the amendment if the hon. Gentleman pushes it to a vote.

The new change—the first part of amendment No. 125—is an attempt to insert what I assume is meant to be a group of exemption tests into section 91B. That section applies only where one of the three conditions set out in sections 91C, 91D and 91E apply. Condition 2 in section 91D already has a group exemption in some cases and a tax motive test which will let out all normal group transactions. Condition 2 has a motive test because it applies to shares of a type that can be used for normal commercial purposes.

The other two conditions—condition 1 in section 91C and condition 3 in section 91E—do not have a motive test because it is not necessary. Those two conditions are narrowly targeted at avoidance arrangements that a company carrying out normal commercial activities will not stumble into by accident. They will know what they are doing if they are in these schemes. There is no reason to exempt condition 1 or 3 shares from the charge just because the issuing company is a member of the same group.

I have tried repeatedly to reassure the hon. Gentleman, because I understand that his motivation is to remove the possibility of innocent transactions being caught. I hope that I have reassured him that that cannot happen under the specifically targeted measures. Perhaps there is a fear that the Government might abuse the power and try to sneak anti-avoidance legislation through without parliamentary scrutiny. That that is not the case. They are targeted measures in response to schemes that have been disclosed. Every opportunity has been taken through the consultation to remove the possibility of any innocent transaction being caught. I hope that the hon. Gentleman will therefore not press his amendments.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am slightly surprised by what the Paymaster General said about symmetry. I am still not sure that I entirely understand it. Essentially the tax authorities are saying that they will look at the preference share and say that it is not really a preference share at all but a loan, and that they will treat it as a loan. However, they will treat it as a loan only for the purpose of taxing the income that attaches to it. They will not treat it as a loan for the purpose of dealing with the cost of servicing it, which the borrower meets. It seems entirely appropriate if one wants to look through the fiction of a preference share to the reality of a loan to create symmetry in the way one seeks to tax it.

There are, Sir Nicholas, one or two other points concerning paragraph 10, and I have been debating with myself whether to test your patience by squeezing them in here, or to leave them to what would, of necessity, have to be a short stand part debate. I think that it would be better to leave those points that are distinct from the amendments to a separate stand part debate. However, the Paymaster General has clearly said on the record, for which I am grateful, that there will be no risk to normal group commercial activities, and that only highly contrived arrangements will be caught by the legislation. I suspect that when we get into extremely complex financing structures for multinational groups, it is perhaps more difficult to know where that line will be drawn than the words of the Paymaster General suggest, although she has given some reassurance today.

I should like to be clear about one other matter. The Paymaster General said that she and her officials are convinced that nobody who is not intended to be caught will be caught by the legislation. Is that the position now, as the Bill is drafted, or the position that will be the case when the Inland Revenue’s revised and updated corporate finance manual is produced and issued? My understanding is that that will be an important document in terms of interpreting how the legislation will work in practice. It would be important to us to understand whether her remarks apply to the face of the Bill or that connection with the new corporate finance manual.

I do not know whether the Paymaster General wishes to respond briefly to those remarks, but if she is going to do so, and after she has done so, I shall then seek leave to withdraw the amendments. Perhaps she can do it by intervention.

Dawn Primarolo (Labour, Bristol South)

I can tackle that point in an intervention. On the manual, I do not base my comments on future publication of the manual, or not. I base them on what is in the Bill, as amended, assuming that the schedule is amended and that the Government amendments are carried. It does not require anything else, as it is in the legislation.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am extremely grateful to the Paymaster General. That is a clear message to anyone who is concerned about the scope of the measures. The only area for possible ambiguity now, given what the right hon. Lady has just said, is where the line is drawn to include normal group commercial activities. She said earlier that she does not want to be in a constant game of cat and mouse over tax avoidance, although I fear that that is the lot of Treasury Ministers. To be blunt about it, if major businesses were not operating fairly close to that line—but on the right side of it—they would find themselves conceding competitive advantage to those operating in other jurisdictions. That would not be of benefit to the United Kingdom, or even to the Government, so I am afraid that she is probably condemned to that game of cat and mouse for some time to come. I beg to ask leave to withdraw amendment No. 120.

Dawn Primarolo (Labour, Bristol South)

I beg to move amendment No. 78, in schedule 7, page 97, line 32, leave out

‘are not income producing but’.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following amendments: Government amendments Nos. 79 to 90.

Dawn Primarolo (Labour, Bristol South)

The amendments in this large group have been widely considered and Committee members are familiar with them, so I shall summarise the main changes that they make, to advance further the point that I was making in the previous debate.

The amendments arise from consultation and, as I said during the previous debate, they are targeted specifically to deal with contrived disclosed regimes. The 13 amendments in this group mostly narrow the scope of the conditions. However, two of them correct unintended let-outs that were included when the clauses from the original Bill were altered.

Amendments Nos. 78 to 82 would change section 91C, which relates to condition 1. They do three things to amend the income-producing asset test. First, they make it clear that to be let out, the assets of the issuing company have to be wholly, or substantially wholly, income producing. In other words, the company should not be tainted by the presence of a few non-income producing assets.

Secondly, the measure of assets is now by reference to their value rather than their book value. That prevents the accounting manipulation that uses a valuable non-income producing asset with a low book value to get round the test. Thirdly, the amendments add to the categories of income-producing assets to deal with the issue of multiple charges in chains of groups; we referred to the tiering point previously.

The group of amendments also makes changes to section 91D, which applies to redeemable shares designed to give an interest-like return. The amendments do three things. They ensure that when a public issue of shares is acquired by a company, the shares are subject to the charge if the company is using them to avoid tax on UK dividends. They change the test of when cases will be taken to be avoiding tax on UK dividends and hence having an unallowable purpose. The new test is narrowed to apply only to banking groups, requires that the acquiring company’s shares were acquired in the ordinary course of investment business and removes some redundant wording that asks the nonsensical question of whether the company was associated with itself.

Finally, amendment No. 90 changes condition 3 in section 91E. The amendment simply ensures that a share that by itself gives an interest-like return cannot come within condition 3. That means that condition 3 is mutually exclusive from conditions 1 and 2. We believe that to have been the case all along, but representations suggested that the wording of the original Bill could be read another way, so we thought it best to put the matter beyond doubt, otherwise the shares that gave an interest-like return but were not within condition 1 or 2—because there was no tax avoidance—might be dragged into condition 3 because of the presence of, say, a derivative, which would have nothing to do with the nature of the return on a share.

All these amendments arose from consultation and I commend them to the Committee.

Philip Hammond (Conservative, Runnymede and Weybridge)

By and large, these issues are not controversial, and the Paymaster General has circulated a note about them. I have questions only about two small sub-groups of Government amendments. Amendments Nos. 78 to 80 deal with a situation in which a company could stray into problems by having a very small amount of non-income-producing assets. That reflects commercial reality. It is about the substance of the underlying business, not whether some tiny asset gets caught. However, the amendments throw up the question of what happens if a company has all income-producing assets but they are producing artificially low amounts of income. That question has been posed to me and I cannot immediately see the answer to it. I guess that there is a solution in other legislation to deal with a situation in which the underlying assets were nominally income producing but had clearly been made artificially income producing, yielding, say, 0.1 per cent. per annum.

My second question for the Minister relates to Government amendments Nos. 83, 84 and 87, which will exclude publicly issued shares from the exemption from new section 91D if the reason for holding the publicly issued shares is to obtain a tax advantage. The Paymaster General might have anticipated that we would focus on this sub-group of amendments, because it widens the scope of the legislation to catch more transactions, whereas the other amendments are designed to narrow the legislation. Has the Inland Revenue identified schemes involving publicly issued shares? Is this in effect a broadening of the scope to identify a new disclosure that has been made since the original legislation was drafted?

I think it rather strange in new section 91D(4) to define a qualifying share in terms of the motive of the investor. The idea that the motive of the investor should define the underlying nature of the share seems to sit uncomfortably with the criteria that have been used otherwise, but I am sure that great thought has been given to it. I would appreciate any comments that the Paymaster General can make on these questions. Subject to the questions being cleared up, we have no fundamental problem with any of the amendments.

Dawn Primarolo (Labour, Bristol South)

I was asked two brief questions. The first was about a situation in which companies have all-income products. They do not come within the provision, because there is no tax avoidance. It depends what is going on. One might think that they might find themselves applying on the transfer pricing, but that would not be the case. Government amendments Nos. 78 to 80 are clear on that.

With regard to publicly issued shares, we are not extending the scope. In the Bill published after the Budget, there was no let-out for publicly issued shares. However, when we reintroduced the schedule in the current Bill, we had made a number of changes to meet representations. That included the publicly issued let-out, but the let-out was inadvertently applied to associates of banks who failed the unallowable purpose test. It was never the intention that banks should be able to rely on the let-out if they were avoiding tax. The measure simply corrects the Bill so that it operates in line with what has already been said.

Philip Hammond (Conservative, Runnymede and Weybridge)

I am grateful to the Paymaster General for her explanation, but she is saying that, if people wish to escape the conditions under proposed new section 91C, they can do so by making their non-income producing assets into tiny income-producing assets—they may or may not fall foul of other legislation, but they can escape proposed new section 91C by that relatively simple ruse? I am not sure whether such a procedure has wider ramifications, but I am sure that those who know about such matters will bring them to our attention.

Philip Hammond (Conservative, Runnymede and Weybridge)

I beg to move amendment No. 130, in schedule 7, page 100, line 29, leave out sub-paragraph (5).

Looking at the amendment, I notice that I made the point about the removal of proposed new section 91 earlier and said what I had to say about it then. I asked the Paymaster General whether the regulation-making procedure under new section 91F was affirmative or negative. If she could answer that point, I would be satisfied.

Dawn Primarolo (Labour, Bristol South)

As the hon. Gentleman said, we touched on the matter earlier. The regulations will be made under the negative procedure, but I reassured him that there is no intention for the Government to abuse the negative procedure and introduce new anti-avoidance rules without parliamentary scrutiny. The powers can be used only to modify existing rules. They cannot be used to invent a wholly new type of arrangement that is not covered under the existing provisions. I sought earlier to give the hon. Gentleman that assurance.

Nicholas Winterton (Conservative, Macclesfield)

I say to the Committee and to the hon. Gentleman that, if he did not want an answer to the question, which was perhaps not entirely relevant to the amendment, he could have decided not to move the amendment and we would not have had the debate.

Philip Hammond (Conservative, Runnymede and Weybridge)

I can assure you, Sir Nicholas, that my question was entirely relevant to amendment No. 130. It would remove proposed new section 91F, which introduces into the Finance Act 1996 the regulation-making power. It was the appropriate point at which to inquire about the nature of the regulation-making power. I accept what the Paymaster General said. Of course, we understand that it is not a wide regulation-making power, but it includes the power to repeal primary legislation, so it is an important regulation-making power. I am disappointed that any regulations will be subject to a negative resolution. We shall keep our eyes peeled when relevant motions are laid.

We understand why the right hon. Lady wants the power in place, but we will monitor whether changes are needed to the definition of non-qualifying shares to deal with the problems that we fear will occur—and which the Paymaster General has said will not occur. I hope that she will accept that that is the proper function of the Opposition, having heard a ministerial assertion that regulations needing to be made under the provision to correct unintended consequences of the current legislation will be an empty set. We will keep a close eye on that. I beg to ask leave to withdraw the amendment.

Philip Hammond (Conservative, Runnymede and Weybridge)

I beg to move amendment No. 131, in schedule 7, page 101, line 26, at end insert—

‘(2A)But subsection (2) above shall not apply to a share which meets the conditions in paragraphs (a) and (b) of subsection (3) below but does not meet the condition in paragraph (c) of that subsection.’.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following amendments: No. 132, in schedule 7, page 101, line 30, leave out ‘and’.

No. 133, in schedule 7, page 101, line 32, at end insert—

‘and

(c)the conditions in section 91A(1) and 91B(1) do not cease to be satisfied on or before 31st December 2005.’.

Philip Hammond (Conservative, Runnymede and Weybridge)

Our concern is about the element of retrospection in the arrangements. The amendments would remove the retrospective nature of the clauses, whereby preference dividends accrued but not paid at the date of introduction of the legislation are taxed retrospectively. The Bill will tax accrued income on the preference shares as capital gain—that is accrued and unpaid income—on 16 March. The amendment would treat the accrued element as dividend if the scheme was unwound by 31 December.

What seems to us to be wrong is that if a dividend had been paid on 15 March, no charge to tax would arise, but if the dividend accrued on 16 March it would be charged to tax as capital gain. I will be interested to hear the Paymaster General’s rationale for that and, although I do not want to anticipate anything, her rejection of our amendments.

Dawn Primarolo (Labour, Bristol South)

The amendments are an attempt to change the rules about the interaction of the regime with the capital gains regime both when shares first satisfy the condition to be treated as debt and then when they cease to satisfy those conditions.

The basic rule is that there is a deemed disposal for capital gains purposes when shares start to satisfy the conditions to be treated as debt, and another deemed disposal when they cease to satisfy those conditions. When the conditions are satisfied on Budget day, the gain arising at that date is held over until the shares cease to satisfy the condition. As a further measure of relief, to encourage companies to unwind schemes, where companies were first caught by the rules on Budget day but unwind before 1 January 2006, the heldover gain does not crystallise at the date of the unwind and will be held over until the shares are subject to further disposal. That is a generous treatment, given that we were dealing with pure tax avoidance.

The three amendments seem to be designed to relax further the capital gains treatment by doing two things. If the schemes were unwound before 1 January 2006, there would be no deemed disposal once they were seen to satisfy the conditions. That would raise the question of the future treatment when there was a final disposal of the shares, since the shares would have been deemed to be disposed of on satisfying the condition but would never have been treated as re-acquired for capital gains purposes. There is no mechanism in what the hon. Gentleman is suggesting to calculate the final capital gain. For schemes that are unwound after 31 December 2005, I assume that the aim is to carry forward the heldover gain until a final disposal of the shares occurs, but the amendments would not achieve that.

As arranged, the provisions could be considered generous given the circumstances in which the schemes are created. I say to the hon. Gentleman that they go far enough, and I do not believe that a case has been made for relaxing the system further and giving avoidance even longer to run.

Philip Hammond (Conservative, Runnymede and Weybridge)

The issue is simply the business climate and the degree of certainty that people have about arrangements when they enter into them. I can understand the Paymaster General’s reluctance to give people who she characterises as villains—people who, to use her language, are acting in an unfair way—any more time to enjoy the benefit of those arrangements, but I am taking a more pragmatic point of view. What really matters is the longer term climate for making business decisions. There are people out there who invested in preference shares before 16 March 2005 and, whether or not the Paymaster General likes what they have done, they did so on a perfectly lawful basis. They will have expected a return on those shares to take the form of dividends, which would not be subject to tax in their hands.

I accept the technical defect that the Paymaster General pointed out; we have not followed through our logic and put in place a regime for addressing such issues in future, although we propose not to create a taxable gain, but simply to continue the dividend treatment for shares in schemes that are unwound before the end of the year. I know that that represents a potential small loss of revenue on some of the schemes, but it also reassures the investor community that where they invest in something lawful, and where they price according to the tax treatment that the investment will receive under current law, they can expect that if the law changes they will be given an opportunity to unwind the arrangement without incurring any tax charge for which they had not budgeted. In other words—and this is what actually matters—their future pricing decisions do not have to include a risk premium for potential tax charges that they could not imagine, let alone calculate.

We come back to the conflict between equity and efficacy. I urge the Paymaster General to run with the head rather than the heart on a number of these issues, and to recognise that although tax avoidance may be unwelcome, damage to the UK investment climate would be even more unwelcome. However, I have heard what she has to say, and I shall not labour the point further. I therefore beg to ask leave to withdraw the amendment.

Philip Hammond (Conservative, Runnymede and Weybridge)

I beg to move amendment No. 134, in schedule 7, page 103, line 26, at end insert—

‘(iii)an intangible fixed asset within the meaning of Schedule 29 to the Finance Act 2002.’.

We are now emerging from the dense and impenetrable undergrowth of paragraph 10 into the slightly sunnier territory of paragraph 12. We want to provide a logical extension to paragraph 12 to ensure that it is as encompassing as the Government quite reasonably intend it to be. It might surprise the Minister to hear me say that the amendment would extend the provision’s scope. We want to do that because of the fear of unfair treatment for debt arising on disposal of one particular class of asset: intangible fixed assets. New section 100(1A)(e)(i) and (ii) of the Finance Act 1996 already exclude money debts arising on disposal of a loan relationship asset or a derivative contract, and it is understood that that exclusion is because those items of income will be taxed as income because of their accounting treatment. I must confess that I do not understand accounting treatment, but I am told—and it probably will not stretch the credulity of the Committee too far to believe this—that, logically, intangible fixed assets need to be treated in the same way. Therefore, a disposal of intangible fixed assets, or a money debt arising on the disposal of an intangible fixed asset, similarly needs to be excluded. For that purpose, we have inserted new paragraph e(iii) into the new subsection.

Dawn Primarolo (Labour, Bristol South)

Unfortunately, the amendment does not work properly. The hon. Gentleman has explained what he is trying to do about money debt in respect of an intangible fixed asset that falls within the ambit of the Finance Act 2002 regime. The tax treatment of discounting arises from disposal of an intangible fixed asset within the meaning of schedule 29 of the 2002 Act and depends on the accounting treatment. It is possible that without this measure the discount will not be taxed at all or will only be taxed as capital. Therefore, the hon. Gentleman is trying to insert into paragraph 12 the very thing that that paragraph is trying to prevent. That is unacceptable. I do not support the amendment, or the proposition that there is some flaw or problem in respect of intangible assets.

Philip Hammond (Conservative, Runnymede and Weybridge)

I hear what the Paymaster General says, but, as I have made clear, I am not an expert on the accounting treatment of disposals of intangible assets, so I am not in a position to respond to her remarks, other than to say that I am sure that she is well advised.

Dawn Primarolo (Labour, Bristol South)

We did introduce the legislation.

Philip Hammond (Conservative, Runnymede and Weybridge)

Being well advised is not necessarily the same thing as having introduced the legislation, but the right hon. Lady says that as if there is some necessary link between the two. I will wait and see whether those who suggested that the amendment was necessary have any comments to make on the right hon. Lady’s remarks. I beg to ask leave to withdraw the amendment.

Philip Hammond (Conservative, Runnymede and Weybridge)

I beg to move amendment No. 135, in schedule 7, page 105, leave out line 29 and insert

‘investing in a creditor relationship, with comparable risk and liquidity, issued by an independent party.’.

This is a probing amendment, which simply addresses the matter of the correct comparable being used. New subsection (3A)(a) refers to a rate

“that is reasonably comparable to the rate that the company could obtain by placing on deposit the money it invested in the asset”.

It is suggested that “placing on deposit” is neither a term that is immediately clear, nor one that reflects the risk that would be taken in investing in the asset. The correct pricing must be identified for a deposit on similar risk to the investment that is actually being made. That will partly be the counter-party risk, depending on who the deposit is made with and who is the counter-party in the transaction that is being attacked.

We seek to delete the words

“placing on deposit the money it invested in the asset,”

and to insert in their place, “investing in a creditor relationship, with comparable risk and liquidity, issued by an independent party.” The Paymaster General might say that that is implicitly the same thing; if so, our concern might be answered. However, the term “placing on deposit” is too narrow and does not say whether we are talking about placing on deposit with a prime clearing bank in London, or doing so with a rather higher-paying, slightly more rickety bank in somewhere like—I hesitate to say it—the Cayman Islands. There must be some factoring in of risk. I look forward to what the right hon. Lady has to say.

Dawn Primarolo (Labour, Bristol South)

The amendment would change the comparator when it is necessary to determine whether the interest rate that a company obtains on its interest in one of the avoidance cases is a commercial rate. I appreciate the difficulties of tabling and ensuring that amendments are correct—I have said this before, so there is no implied criticism—but on this occasion the amendment is fundamentally flawed in a number of ways.

At the moment the comparison is made with what the rate would be if a company deposited the same amount of money as it put into the avoidance scheme—in other words, if it did an equivalent commercial transaction to earn interest. The amendment makes a comparison with the rate that a company would have achieved if it had invested in a debt asset comparable with the shares that it had acquired as part of the avoidance scheme. That, however, is not so much a comparison as looking at the possibilities of a comparison. The nature of the avoidance schemes is that they tend to deal with what might be considered funny shares.

There are no comparables. It seems that the hon. Gentleman’s amendment says “Compare it with another avoidance scheme, assuming that they might have got away with it.” That is not acceptable. Furthermore, as hon. Members will be aware, the interest rate that can be earned depends on the amounts of money to be invested: the more money that is available, the more bargaining power the investor has. The amendments say nothing about how much is invested in the comparable debt asset. Apart from the drafting of the amendment being flawed, the way it would deal with what is comparable is flawed. It cannot be right to allow a company to select another avoidance scheme, but that is what the amendment would do. That is clear enough in the arrangements identified in terms of the interest that would accrue. The hon. Gentleman’s amendment is unnecessary and undesirable.

Philip Hammond (Conservative, Runnymede and Weybridge)

The Paymaster General is characterising the shares issued under the scheme as some kind of dodgy paper issued by dubious companies. The element of risk attaching to them would, in most cases, be fairly limited or the people who set the scheme up would not be interested in putting their money into them. Although there are complex schemes, I would have thought that it is fairly clear that there is a measurable risk and the entity being invested in is capable of a credit rating, just as banks or alternative comparable deposit receivers are capable of credit rating.

The right hon. Lady has mischaracterised what we are seeking to do. We are not suggesting that the comparables should be the investment in an alternative scheme caught within the sections of the Finance Act 1996, but we need to have something that tells us a little bit more about what the comparable is to be, other than something saying that it is a deposit on a commercial rate of interest.

I do not intend to die at the stake over this matter, and having heard the right hon. Lady’s comments, I beg to ask leave to withdraw the amendment.

Philip Hammond (Conservative, Runnymede and Weybridge)

I beg to move amendment No. 143, in schedule 7, page 105, line 42, at end insert—

‘Capital redemption policies—capital loss treatment 13A(1)Section 210 of the Taxation of Chargeable Gains Act 1992 is amended as follows— (2)After subsection (12) insert— “(12A)Where a person makes a disposal of a capital redemption policy, within the meaning of Chapter 2 of Part 13 of the Taxes Act 1988, then no allowable loss shall accrue to that person.”.’. The Chairman: With this it will be convenient to discuss the following amendments: No. 141, in schedule 7, page 105, line 43, leave out from beginning to end of line 36 on page 106.

13A(1)Section 210 of the Taxation of Chargeable Gains Act 1992 is amended as follows—

(2)After subsection (12) insert—

“(12A)Where a person makes a disposal of a capital redemption policy, within the meaning of Chapter 2 of Part 13 of the Taxes Act 1988, then no allowable loss shall accrue to that person.”.’.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following amendments: No. 141, in schedule 7, page 105, line 43, leave out from beginning to end of line 36 on page 106.

No. 142, in schedule 7, page 111, line 18, leave out from beginning to end of line 30.

Philip Hammond (Conservative, Runnymede and Weybridge)

Amendment Nos. 141 and 142 delete paragraph 14 and paragraph 20 respectively in their entirety and insert in their place the words of amendment No. 143. The stated purpose of the changes in paragraphs 14 and 20 is to stop the use of capital redemption bonds to manufacture artificial capital losses. The proposal changes the tax treatment of all capital redemption bonds held by companies, whether they are involved in such arrangements or not. Our proposal addresses the specific problem that the Government have identified, without including capital redemption bonds in the loan relationships regime.

Paragraphs 14 and 20 change the treatment of CRBs held by companies, but not by individuals, by including them in the loan relationship regime, which taxes as income annual movements of certain money debts. By including capital redemption bonds as loan relationships, they will no longer be taxable under the normal chargeable events rules like other products sold by life insurers. That is the concern of the insurers. That approach will hit the counter-party rather than the person generating the capital loss.

The Association of British Insurers supports the Government in stopping avoidance, but feels that there are more appropriate ways of achieving that, such as our proposal to exclude CRBs from the capital gains regime by amending section 210 of the Taxation of Chargeable Gains Act 1992. I am sure the Paymaster General is aware that the insurance industry is opposed in principle to the change in the tax treatment of CRBs held by companies, which will mean that they are treated differently from similar life products sold by insurers. The proposals are unfair to corporate investors who have chosen to invest through the medium of a capital redemption contract, not necessarily for tax avoidance purposes. In particular, they will mean that companies not involved in avoidance will lose their ability to take small surrenders of such policies without an immediate tax liability.

If the Paymaster General rejects the amendments, it is important that arrangements are made for transitional relief for companies holding capital redemption bonds on 10 February that are in deficit due to withdrawals. If that is not done, the corporate investor will receive no benefit for those deficiencies. Had the assignment not been deemed to take place at the time when the CRB falls within the loan relationship regime, with the passage of time it would have been hoped that performance would wipe out any such deficiency on a later termination.

The industry’s best estimate is that the proposal will have an impact on at least 600 cases where no avoidance took place, amounting to deficits of about £43 million on 10 February. If the Paymaster General intends to reject the amendments, will she tell us what proposals the Government have for a transitional relief scheme that relates to the 600 or so companies that hold capital redemption bonds that are in deficit, and are not holding them primarily for tax avoidance purposes? What will she do to ensure that they do not suffer an unjustified and unexpected tax charge?

Dawn Primarolo (Labour, Bristol South)

The amendments would remove paragraphs in the schedule that deal with capital redemption bonds, as the hon. Gentleman said, and replace them with a new rule in the Taxation of Chargeable Gains Act 1992. The ABI has indeed written to Committee members about the paragraphs on capital redemption bonds. The argument that the Government attempted to use CRBs as artificial capital losses is wrong. Amendment No. 143 would go beyond what the Government are proposing and deny anyone capital losses, regardless of whether the CRB in question is held by a company or an individual. That is not necessary or desirable.

The hon. Gentleman concentrated his remarks on the next two amendments, Nos. 141 and 142. The ABI’s central objection to the paragraph is that it requires CRBs held by companies to be taxed as loan relationships. That means that companies do not receive the benefit of the special relaxations applying to life assurance policies. CRBs are more like bonds that are issued by banks and building societies, the only difference being that they are issued by insurance companies. However, they are not life assurance policies. No element of contingency on human life is contained in them and there is no reason why they should not be taxed like their direct comparables. The aim is apparently to gain access to life assurance policy regimes when CRBs are clearly not part of such a regime.

I cannot help the hon. Gentleman with details of the 600 companies because although the ABI has been asked to give details, it has not done so. If the question was more specific, we would respond to it, but it is not possible to do so until there is a wider disclosure of information. It is impossible for officials to draft relief to a problem that is not being explained because they do not know the ABI’s target or its solution. If the ABI proves willing to bring forward a proposal or certain details to be considered, we shall request officials to respond accordingly, but in the absence of anything except, “Here is a problem. We want relief.”, without detailing such matters and enabling that relief to be targeted properly, I do not see what else the officials could have done. Assuming that the ABI will come forward with certain details, I hope that hon. Gentleman will withdraw his amendment.

Philip Hammond (Conservative, Runnymede and Weybridge)

I hear what the right hon. Lady says, as will the ABI. I shall find out its thoughts. Perhaps it has a specific proposal to be tabled on Report. I wonder whether the real problem is that the right hon. Lady is asking for information, which it would be improper for the ABI to disclose. If she asking for information about individual counter parties to policies that it has issued, I imagine that it would have the same kind of confidentiality regime as the Inland Revenue and which the right hon. Lady has spoken about. [Interruption.]

It is no good dismissing such matters. Clearly, there are areas especially in financial services when it is difficult for people to discuss their worries with the Inland Revenue, while not breaching the confidentiality that they owe to their clients. I shall take the right hon. Lady’s comments on board and see what the ABI has to say about them. I am sure that she will hear that in due course either during our discussions on Report or probably on Thursday morning in a letter that has landed on her desk from the ABI. In the meantime, I beg to ask leave to withdraw the amendment.

Philip Hammond (Conservative, Runnymede and Weybridge)

I beg to move amendment No. 136, in schedule 7, page 109, line 9, leave out from beginning to end of line 23.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following amendments: No. 137, in schedule 7, page 109, line 10, at end insert—

‘(2A)Where two or more associated companies cease to be members of a group at the same time, sub-paragraph (2) does not have effect in relation to a transfer between those companies.

(2B)But where—

(a)a company (“the transferee”) that has ceased to be a member of a group of companies (“the first group”) has been assigned an asset or liability from another company (“the transferor”) which was a member of that group at the time of the transfer, and

(b)sub-paragraph (3) applies in relation to the transferee’s ceasing to be a member of the first group so that sub-paragraph (2) does not have effect, and

(c)the transferee subsequently ceases to be a member of another group of companies (“the second group”), and

(d)there is a relevant connection between the two groups (see sub-paragraph (5)),

sub-paragraph (2) has effect in relation to the transferee’s ceasing to be a member of the second group as if it were the second group of which both companies had been members at the time of the transfer.

(2C)For the purposes of sub-paragraph (4) there is a relevant connection between the first group and the second group if, at the time when the transferee ceases to be a member of the second group, the company which is the principal company of that group is under the control of—

(a)the company that is the principal company of the first group or, if that group no longer exists, was the principal company of that group when the transferee ceased to be a member of it; or

(b)any person or persons who control the company mentioned in paragraph (a) or who have had it under their control at any time in the period since the transferee ceased to be an member of the first group; or

(c)any person or persons who have, at any time in that period, had under their control either—

(i)a company that would have been a person falling within paragraph (b) if it had continued to exist, or

(ii)a company that would have been a person falling within this paragraph (whether by reference to a company that would have been a person falling within paragraph (b) or by reference to a company or series of companies falling within this provision).

(2D)The provisions of section 416(2) to (6) of the Taxes Act 1988 (meaning of control) have effect for the purposes of sub-paragraph (5) as they have effect for the purposes of Part 11 of that Act.But a person carrying on a business of banking shall not be regarded for those purposes as having control of a company by reason only of having, or of the consequences of having exercised, any rights in respect of loan capital or debt issued or incurred by the company for money lent by that person to the company in the ordinary course of that business.’.

No. 138, in schedule 7, page 117, line 37, leave out from beginning to end of line 8 on page 118.

No. 139, in schedule 7, page 117, line 38, at end insert—

‘(2A)Where two or more associated companies cease to be members of a group at the same time, sub-paragraph (2) does not have effect in relation to a transfer between those companies.

(2B)But where—

(a)a company (“the transferee”) that has ceased to be a member of a group of companies (“the first group”) has been assigned an asset or liability from another company (“the transferor”) which was a member of that group at the time of the transfer,

(b)sub-paragraph (3) applies in relation to the transferee’s ceasing to be a member of the first group so that sub-paragraph (2) does not have effect,

(c)the transferee subsequently ceases to be a member of another group of companies (“the second group”), and

(d)there is a relevant connection between the two groups (see sub-paragraph (5)),

sub-paragraph (2) has effect in relation to the transferee’s ceasing to be a member of the second group as if it were the second group of which both companies had been members at the time of the transfer.

(2C)For the purposes of sub-paragraph (4) there is a relevant connection between the first group and the second group if, at the time when the transferee ceases to be a member of the second group, the company which is the principal company of that group is under the control of—

(a)the company that is the principal company of the first group or, if that group no longer exists, was the principal company of that group, when the transferee ceased to be a member of it; or

(b)any person or persons who control the company mentioned in paragraph (a) or who have had it under their control at any time in the period since the transferee cease to be a member of the first group; or

(c)any person or persons who have, at any time in that period, had under their control either—

(i)a company that would have been a person falling within paragraph (b) if it had continued to exist, or

(ii)a company that would have been a person falling within this paragraph (whether by reference to a company that would have been a person falling within paragraph (b) or by reference to a company or a series of companies falling within this provision).

(2D)The provisions of section 416(2) to (6) of the Taxes Act 1988 (meaning of control) have effect for the purposes of sub-paragraph (5) as they have effect for the purposes of Part 11 of that Act.But a person carrying on a business of banking shall not be regarded for those purposes as having control of a company by reason only of having, or of the consequences of having exercised, any rights in respect of loan capital or debt issued or incurred by the company for money lent by that person to the company in the ordinary course of that business.’.

No. 140, in schedule 7, page 119, line 12, at end insert—

‘Degrouping: principal company becoming member of another group 24A(1)Paragraphs 18 and 24 do not apply where a company ceases to be a member of a group by reason only of the fact that the principal company of the group becomes a member of another group (“the second group”). (2)But if, in a case where paragraphs 18 and 24 would have applied but for sub-paragraph (1) above, after the assignment and before the end of the period of six years after the date of the assignment— (a)the transferee ceases to satisfy the condition that it is both a 75% subsidiary and an effective 51% subsidiary of one or more members of the second group (“the qualifying condition”), and (b)at the time at which the transferee ceases to satisfy that condition, the relevant loan relationship or derivative contract is held by the transferee or another company in the same group,

24A(1)Paragraphs 18 and 24 do not apply where a company ceases to be a member of a group by reason only of the fact that the principal company of the group becomes a member of another group (“the second group”).

(2)But if, in a case where paragraphs 18 and 24 would have applied but for sub-paragraph (1) above, after the assignment and before the end of the period of six years after the date of the assignment—

(a)the transferee ceases to satisfy the condition that it is both a 75% subsidiary and an effective 51% subsidiary of one or more members of the second group (“the qualifying condition”), and

this Schedule has effect as if the transferee, immediately after the assignment to it of the relevant loan relationship or derivative contract, had realised the loan relationship or derivative contract for its market value at that time and immediately reacquired the asset at that value.

(3)The adjustments required to be made in consequence of sub-paragraph (2), by the transferee or a company to which the relevant loan relationship or derivative contract has been subsequently assigned, in relation to the period between—

(a)the assignment of the relevant loan relationship or derivative contract to the transferee, and

(b)the transferee ceasing to satisfy the qualifying condition,

shall be made by bringing the aggregate net credit or debit into account as if it had arisen immediately before the transferee ceased to satisfy the qualifying condition.

(4)For the purposes of section 82 of this Finance Act 1996 (Method of bringing amounts into account) and paragraph 14 of Schedule 26 to the Finance Act 2002 (Method of bringing amounts into account), credits or debits brought into account by virtue of this paragraph take their character from the purposes for which the relevant loan relationship or derivative contract was held by the transferee immediately after the assignment.’.

Philip Hammond (Conservative, Runnymede and Weybridge)

These are very long amendments, which would insert alternative wording into paragraphs 18 and 24, which deal with degrouping in the case of loan relationships and derivative contracts. I do not intend to go through the detail of the amendments, other than to say that they follow the legislation in schedule 29 of the Finance Act 2002 on the degrouping rules following the transfer of intangible assets between companies within a group, with some importation of language from section 179 of the Taxation of Chargeable Gains Act 1992.

Turning from the architecture of these long amendments to the purpose behind them, our aim is to ensure that the degrouping rules work fairly. The amendments match the degrouping rules for intangible assets. While the degrouping rules for loan relationships and financial derivatives have been introduced to stop tax avoidance and therefore have no motive test, they are wide in scope. Through the amendments we seek to ensure that the degrouping rules do not apply when the transferor and transferee leave the group at the same time, in which case the tax planning, which is subject to attack, would not be in question.

We seek also to deal with problems of definition of capital gains tax group, which gives rise to amendment No. 140. We also seek to ensure that the degrouping rules work to create both gains and losses, so that in commercial situations in which the degrouping rules are triggered, the tax impact is fair and not a penalty on genuine commercial transactions.

As before, I say to the Paymaster General that unless a measure is so narrowly targeted that we can be absolutely certain that only blatant tax avoidance will be hit—that will usually be where there is a test—it is important that there is some symmetry in the imposition of tax, so that where a commercial transaction is caught, it is treated fairly, with deductions as well as charges on gains arising.

Degrouping charges already apply in both capital gains tax and intangibles rules. They were originally introduced many years ago to prevent the tax planning technique of transferring an asset into a group company, then selling the group company rather than transferring the asset itself, and in that way avoiding a capital gain arising.

A degrouping charge can create a loss as well as a gain, and for capital gains tax and intangibles purposes the purchaser picks up the gain but can agree with the vendor that the vendor picks up the charge. Typically, there is an exemption where the transferor and transferee leave the group at the same time—that is, as part of the same transaction on the sale of a sub-group. That exemption exists to allow genuine sales of sub-groups without there being a deemed tax charge on a gain that has not yet been realised. I hope that the Paymaster General will give serious consideration to these points arising in relation to degrouping in situations in which there has been a replacement of a party to a loan relationship or a derivative contract.

Dawn Primarolo (Labour, Bristol South)

The amendments would change the anti-avoidance degrouping charge for loan relationships. Given the history of debates on earlier amendments, it will not surprise the Committee to hear me say that these ones would not work. The aim of the rule is to prevent companies from taking profits on assets that are loan relationships and which would be taxed as income, and converting them into capital gains in the form of profit on shares using corporate envelopes. The rule applies only if the loan relationship is standing at a profit, because if there is a potential loss, a company might try to engineer an artificial degrouping to crystallise the loss.

The first effect of the amendments would be to allow losses as well as profits to arise on a degrouping, which would defeat the purpose of the rule. As the hon. Gentleman has been told, there is one circumstance in which a loss is allowed—when there is a hedging relationship between a derivative contract and a loan relationship that produced a profit on one and an equal and opposite loss on the other. That is a reasonable approach and as far as we want to go on losses.

Amendment No. 137 would add a new rule that there is no charge if a loan relationship is transferred between two companies that leave a group at the same time. That has an equivalent in the capital gains degrouping rules, but after making the amendment it would be necessary to import another page of complex anti-avoidance legislation to prevent manipulation of the two-company exemption. It is ironic that at this point in the Committee’s discussions the Government are accused of enacting complex anti-avoidance measures, given that Opposition Members, by their amendments, seek to allow a wholly inappropriate relief from a rule, which would involve adding greatly to the complexity of the legislation.

The reason why the capital gains degrouping charge involves an exemption where two companies leave a group at the same time is that, in such circumstances, there is no avoidance of tax. The capital gain inherent in the transferred asset is matched by the capital gain arising on the shares sold, but allowing the same rule in this respect would entirely defeat the objective of the measure. That is because any profit on disposal of a loan relationship is charged to tax as income, not as a capital gain. Allowing an exemption where two companies left a group at the same time would simply allow an alternative way of converting income into capital.

Amendments Nos. 138 and 139 would do exactly the same for the derivative contracts degrouping charge as amendments Nos. 136 and 137 do for the equivalent loan relationships degrouping charge.

Amendment No. 140 would add further complexity to the degrouping charge for loan relationships and derivative contracts. It is similar in its approach to a rule in the capital gains degrouping legislation that prevents the capital gains degrouping rule from applying in a case in which a company leaves a group only because the group is acquired by another company or group. However, as I explained in relation to the previous amendments on the degrouping charge, the loan relationships and derivative contracts rules are very different from the capital gains rules. Many loan relationships and derivative contracts will not be affected by the degrouping charge, because they will be accounted for on a fair value basis. That is increasingly the case, particularly under international accounting standards and new United Kingdom generally accepted accounting practice. In many other cases, any profit arising on a deemed disposal on leaving a group will not give rise to a large gain. Normal loans, especially floating-rate ones, often vary very little in fair value. In capital gains cases, however, there can be a very large gain and it would arguably be unfair to tax the gain in the circumstances mentioned in the amendment. There is another problem with the amendment: it just would not work properly at a technical level. In any case, I am not convinced that the problem is serious enough to warrant more pages of complex legislation. It would have to be at least twice as long as the amendment.

Instead, although I take the view that there are no issues relating to degrouping, I propose—just in case—to ask HMRC officials to keep the point under consideration and follow the matter carefully. Given the complexities of a number of different sets of rules coming together, that would be prudent. I give the hon. Gentleman that assurance, although I do not accept his amendments.

Philip Hammond (Conservative, Runnymede and Weybridge)

I hope that, at the end of the day, the right hon. Lady has enjoyed the opportunity comprehensively to trash a set of amendments—both the principle behind them and the drafting of them. However, I am grateful for what she has said, which I take as an indication that she recognises at least that there is an issue to which one needs to be alert, even if she thinks that there is no cause for the concern that we have expressed.

Given what the right hon. Lady has said about their drafting and effects, I shall not seek to press the amendments. I beg to ask leave to withdraw the amendment.

Clause 41 - Intangible fixed assets

Mark Francois (Conservative, Rayleigh)

rose—

Nicholas Winterton (Conservative, Macclesfield)

I welcome the hon. Member for Rayleigh (Mr. Francois) for the first time in this Committee.

Mark Francois (Conservative, Rayleigh)

Thank you, Sir Nicholas. I spoke on clauses 11 and 69 in the House, but as this is my first formal contribution in Committee, I take this opportunity to reciprocate and welcome you, Sir Nicholas, to the Chair. I also thank you for your good-humoured chairmanship. You have demonstrated that light-touch regulation often works best.

Clause 41 deals with intangible fixed assets such as goodwill, customer lists, patents and certain quota payments. In 2002, the Government introduced a new regime for dealing with those, and that allowed companies to obtain corporation tax deductions for certain intangibles. The Government sought to amend the regime in 2003, to close what they believed were a number of loopholes; clause 41 is a development of that process.

The Conservatives do not object specifically to the provisions in clause 41, but we have a particular question about the treatment of single farm payments, which are due to begin in the UK around February 2006—within the current tax year. Subsection (4) is designed to prevent capital gains being rolled over into payment entitlements under the single farm payments scheme. However, there has been considerable confusion over the proposed tax treatment of those payments.

I raised that issue at Environment, Food and Rural Affairs questions on 9 June and was told by the Under-Secretary of State for Environment, Food and Rural Affairs, the hon. Member for South Dorset (Jim Knight), that a dedicated tax bulletin on the proposed tax treatment of the single farm payment was due to be issued before the end of June to give farmers and their advisers time to plan. I therefore take this opportunity to inquire of the Minister whether that bulletin has yet been issued.

Ivan Lewis (Labour, Bury South)

It is good to get some exercise, Sir Nicholas; I am freed from the risk of deep vein thrombosis. Having sat in the Committee so long, I am certainly beginning to feel the effects of jet lag.

I congratulate the hon. Member for Rayleigh on his debut in this Committee and I thank him for the way in which he presented his question and for giving me a little advance notice. I shall give him a very concise answer. As I understand it, the guidance that he asked about has not yet been issued, although our intention is to issue it as soon as possible. However, there may be some confusion about what guidance we are speaking about, so I shall try to clarify that.

On 22 March, an order was issued that was specifically about adding the entitlement to single farm payments to the list of business assets eligible for capital gains roll-over relief. Was that the guidance that the hon. Gentleman was seeking? Basically, an explanatory memorandum was issued with that order back in April. If the hon. Gentleman’s question was on that specific point, then I think that I have taken care of it; but if it was a more general question about guidance and SFP, then I can tell him that the more general guidance has not yet been issued and it is our intention to issue it as quickly as possible. I hope that that answers his question.

Mark Francois (Conservative, Rayleigh)

To clear up the question as quickly as possible, at Environment, Food and Rural Affairs questions on 9 June I asked what the status of the issue was. The DEFRA Minister replied:

“Tax issues are of course a matter for my right hon. Friend the Chancellor of the Exchequer rather than this Department, but I am sure that the hon. Gentleman will be pleased to hear that a dedicated tax bulletin on the single payment scheme will be published on 24 June, and I trust that it will answer his questions.”—[Official Report, 9 June 2005; Vol.434, c.1382.]

That, specifically, is what we are talking about. I think that that clarifies the matter.

Ivan Lewis (Labour, Bury South)

I would never contradict a DEFRA Minister, and therefore I can tell the hon. Gentleman that the guidance has not yet been issued. I shall chase it up, and as soon as I find out when it will be published I will inform the hon. Gentleman.

Schedule 9 - Insurance companies etc

Christopher Huhne (Liberal Democrat, Eastleigh)

I beg to move amendment No. 104, in schedule 9, page 131, leave out lines 1 to 12.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following amendments: No. 105, in schedule 9, page 131, line 1, leave out from beginning to end of line 12.

No. 106, in schedule 9, page 131, line 5, at end insert—

‘(3A)Where the Treasury by order amend any of the provisions indicated in subsection (3)(a), (b) or (c), such that an amount which has not been recognised in regulatory surplus and without the regulations would not have been treated as attributable to basic life assurance and general annuity business, has been treated as fully attributable to basic life assurance and general annuity business, and treated for the purposes of section 89 of the Finance Act 1989 within the shareholders’ share of the relevant profits (Amount (“C”)) then on a subsequent transfer of shareholders’ excess assets, the company shall be entitled when computing the Case I profits, defined in section 89(7) of the Finance Act 1989, to deduct an amount equal to the amounts (“C”) that in any accounting period following the introduction of the order, have not been recognised in regulatory surplus, that have been treated as fully attributable to basic life assurance and general annuity business, and have been treated for the purposes of section 89 of the Finance Act 1989 within the shareholders’ share of the relevant profits, and for which no corresponding deduction has already been claimed.

(3B)Where the Treasury by order amend any of the provisions indicated in subsection 3(a) (b) or (c), such that an amount which has not been recognised in regulatory surplus and without the regulations would not have been treated as attributable to basic life assurance and general annuity business, has been treated as fully attributable to basic life assurance and general annuity business, and treated for the purposes of section 89 of the Finance Act 1989 within the policyholders’ share of the relevant profits (Amount (“D”)), then on a subsequent transfer of shareholders’ excess assets, the company shall be entitled when computing the Case I profits, defined in section 89(7) of the Finance Act 1989, to deduct an amount equal to the sum of amounts (“D”) multiplied by the lower rate of tax, and then divided by the mainstream rate of corporation tax, that have not been recognised in regulatory surplus, that have been treated as fully attributable to basic life assurance and general annuity business, and have been treated for the purposes of section 89 of the Finance Act 1989 within the shareholders’ share of the relevant profits for which no corresponding deduction has already been claimed.

(3C)For the purposes of subsections (3A) and (3B), “shareholders’ excess assets” means—

(a)the amount of assets shown in a non-participating fund of the company attributed to the interests of the shareholders of the company as a result of a reattribution exercise, less

(b)the amount of assets used to provide support to the with-profits fund of the same company.’.

I now call Chris Huhne.

Christopher Huhne (Liberal Democrat, Eastleigh)

Thank you, Sir Nicholas. It is normally pronounced “hewn”, as in rough-hewn, but you gave an alternative pronunciation. [Interruption.] I see that many of us will probably be rejoicing in a different nomenclature by the end of this Standing Committee.

The amendment would have the somewhat radical effect of deleting the powers given to the Treasury under the Bill to amend by order any of the key provisions governing the taxation of life insurance companies. Why do I suggest anything quite so radical? Let us go back a little to the story of how the provisions in the Bill were first formulated. This seems to be a classic case of a rather desperate Treasury casting about for an easy hit in the corporate sector. For many years, the Treasury has eyed enviously the surplus built up by life insurers over and above what their regulator, now the Financial Services Authority, believes to be the appropriate level of assets needed to meet their obligations to their customers. Such surplus assets could be taxed at a higher rate than a shareholder’s funds than they would if they were to be left undisturbed.

Those surplus assets are clearly defined by the FSA in respect of with-profits business, and they were flagged up as a potential tax base in the pre-Budget report, with draft regulations and a letter on 2 December last year. Now, however, the whole basis of the proposals has changed. Instead of taxing the FSA-defined surplus assets in one part of the life insurance business, Ministers are proposing to tax surplus assets in another part of the business entirely, namely those in non-profit funds. Moreover, the proposal is to do so where the company concerned has taken steps towards a court scheme, separating its own shareholders’ funds from those accruing to its customers. That brainwave has evidently come pretty late, because it only emerged in draft regulations on 17 June.

Please note, Sir Nicholas, that the entire basis of the proposed tax on life insurers therefore changed between December and June. Please note, too, that Ministers have not claimed—because they cannot do so—that these proposals involve any closing of loopholes or abolition of tax avoidance. There is no tax avoidance under the current rules, which are of long standing. There is no scheme involved that has been revealed through tax scheme disclosure. In that respect, I disagree with the remarks made by the hon. Member for Runnymede and Weybridge on Second Reading; he appeared to imply that there might be a little jiggery-pokery on the avoidance front. Not so. All we have is a blameless part of the corporate landscape, innocently tilling its furrows in the savings field, suddenly being set on for an estimated £30 million to £35 million by an evidently indigent Treasury.

Indeed, Ministers were sufficiently embarrassed by that expedient that they introduced a sunset clause on their powers. They can have a go at life insurers’ profits on whatever basis they please, but the blank cheque is to be genteelly constrained to between 1 January 2005 and 1 October 2006, unless they manage to wrest back their scruples and extend the period to 1 October 2007 as allowed by new section 431A(5). If the powers to introduce such a fundamental change in the taxation of life insurers are to go, the sunset clause can go too.

Edward Balls (Labour, Normanton)

Given that the Liberal Democrats would not raise the £35 million revenue identified as they oppose the provision, how would they instead fill the gap? Would they choose to apply their proposal for a new top rate of tax, or has that been withdrawn since the general election?

Christopher Huhne (Liberal Democrat, Eastleigh)

I am delighted that the hon. Gentleman has asked me that, because I will come to it later. If he does not get full satisfaction, he will no doubt intervene again. However, I hope that he will first allow me to make a little progress in criticising the Government’s proposals.

The provisions would represent a remarkable raid if it were not for another feature of the HMRC’s enthusiasm, which is the damage that the rules are likely to do to the sound commercial judgment of the market’s main participants. AXA, Legal and General, and Britannic will all be hit as they have separated out such surplus assets and taken steps towards a court scheme. Aviva had intended to do that on sound commercial ground, but if the provision enters into law grounds, but I can safely predict that it will have no intention of doing so. Such a taxation measure will introduce adverse incentives to responsible behaviour that would otherwise crystallise that part of assets owing to shareholders and that part to customers of the concerned companies.

The HMRC has implicitly admitted that the measures are arbitrary and ill thought out, through not just through the application of a sunset clause but in its admission with the draft regulations earlier this month. It said in effect that it was

“intended to replace the temporary rules made by the regulations with a new substantive scheme for apportioning the income and gains of a life assurance company, designed to make the whole system fairer and more in tune with the way that companies operate”.

So there we have it: on the HMRC’s own admission, the regulations are less fair than they could be and are not ideally in tune with the way companies operate, which is why I have said that I will propose more substantive measures in future. The provisions are arbitrary, short term and ill thought out. They introduce the wrong incentives and are sufficiently embarrassing to Ministers to make them promise their disappearance within two years. Considering those qualities, we should encourage their disappearance even earlier: before they ever reach the statute book.

I come now to the point raised by the hon. Member for Normanton—

The rest of the debate is in Hansard.