Finance (No.2) Bill

Public Bill Committee, 23 May 2006.

Standing Committee A

Clause 56

Paul Goodman (Conservative, Wycombe)

I beg to move amendment No. 92, in page 43, line 20 [Vol I], leave out ‘shall' and insert

‘may at the election of the charity'.

Edward O'Hara (Labour, Knowsley South)

With this it will be convenient to discuss amendment No. 93, in page 43, line 26 [Vol I], leave out ‘shall' and insert

‘may at the election of the charity'.

Paul Goodman (Conservative, Wycombe)

It is a pleasure to see you in the Chair this morning, Mr. O’Hara. When we considered clause 54, the Paymaster General was keen to say that she would be happy to examine any examples of difficulties caused by these clauses to charities or institutions. I have been given such an example, upon which amendment No. 92 hangs. I shall put it to the Paymaster General to hear her response.

The clause as drafted requires the primary purpose and non-primary purpose of a charity to be divided into two separate traits. One might reasonably infer from that division that the expenditure apportioned to the non-primary purpose would be non-charitable expenditure. However, the argument has been put to me that such expenditure might be for the charity’s benefit—not simply for tax avoidance—without being exclusively for the charity’s purposes.

I come to the example. Let us suppose that a university college seeks to mitigate losses on its primary purpose trade—providing services to students—by undertaking catering and conferencing. Unless the amendment is accepted, colleges in which catering and conferencing are small-scale—that is, colleges that do not trade through a wholly-owned subsidiary—and many smaller and less financially sophisticated charities might find themselves at risk of challenge by a tax inspector. I should be interested to hear the Paymaster General’s response to the amendment.

Dawn Primarolo (Labour, Bristol South)

Good morning, Mr. O’Hara. The amendments would allow a charity to opt for the rules that it wants to operate within. It was interesting that the hon. Gentleman picked a university and mentioned the line between being a business and having a charitable educational objective, because that area of tax law is quite complex.

Although I appreciate the hon. Gentleman’s example, I do not know whether it is a real or theoretical one. As he knows, the boundaries between charitable and business objectives—particularly in universities—and the issue of which set of rules therefore applies are quite an interesting challenge already. I can give the hon. Gentleman a straight answer on the Government’s view. Allowing businesses to opt, so that a charity could decide whether it is charitable or partly charitable, would mean that a small number of cases could be kept in. I am still not convinced. I think that he needs to find another example that does not involve universities, because that is a complex area of tax for lots of reasons.

Paul Goodman (Conservative, Wycombe)

Will the right hon. Lady give way?

Dawn Primarolo (Labour, Bristol South)

Just a minute. I will finish the first point and then the hon. Gentleman can come back. The amendment would create a hugely complex set of rules about when charities may or may not opt in or out. It would do so for all charities and so would cause a problem for all of them. That is what I seek to avoid. In earlier amendments the hon. Gentleman probed by suggesting that it would be difficult if there were extra record keeping, yet here he proposes that all charities should face that. Therefore I am not attracted to the amendments.

Neither amendment fits very well with charity law and the definition that it uses to permit charities to conduct limited non-primary purpose changes. Not only is the hon. Gentleman adding more complexity in amendment No. 92, but amendment No. 93 appears to be disadvantageous to charities. While I appreciate his point about universities and the complex relationship between their business and charitable status, I am sure that they are not conducting the type of misuse of charities at which the clause is targeted. Therefore I am still of the view that the rules are entirely proportionate. I ask the hon. Gentleman to withdraw his amendment on that basis.

Paul Goodman (Conservative, Wycombe)

We will have to come back to this and I shall explain why. I understand why the Paymaster General does not like the amendment. She understands that it is essentially a probing amendment in relation to the example that I gave. She said that this was a complex area and that I would have to find another example. But it was precisely to establish what the clause will mean in relation to complex areas such as universities that I tabled the amendment.

I note that the Paymaster General did not address my example directly and say whether a university in that situation would find itself unexpectedly open to tax. She asked whether it was a real life example: it was given to me by a university that was worried that carrying out some catering and conference trading as a secondary objective would leave it open to tax. The Paymaster General has not really addressed that point. I shall not press the amendment to a vote because it was a probing amendment and a very blunt instrument, but I give her notice that we need to return to this matter in the light of what she has said and, more significantly, what she has not said. I beg to ask leave to withdraw the amendment.

Clause 57

Dawn Primarolo (Labour, Bristol South)

I beg to move amendment No. 71, in page 43 [Vol I], leave out line 36.

Edward O'Hara (Labour, Knowsley South)

With this it will be convenient to discuss Government amendment No. 72.

Dawn Primarolo (Labour, Bristol South)

May I place on the record my thanks to the Law Society? Members of the Committee will have noticed in the briefing on the Bill that it has suggested that the clause would have some unintended effects. It would prevent a company from benefiting from gift aid where a charity owned shares in it. That is not the intention and I am happy to move these amendments to clarify that point. I hope that the Committee will therefore accept them.

David Gauke (Conservative, South West Hertfordshire)

I shall make two brief points. I am grateful to the Paymaster General for her comments on the Law Society. In the Committee of the whole House on another topic she was a little dismissive of law firms and professional advisers and questioned whether such advisers would know more than Treasury officials. In this case, it has emerged that they do.

I should declare an interest: the Law Society’s recommendations and comments were produced by the law firm Travis Smith. The lawyer who noticed the error in the drafting of the Bill was one Mrs. Rachel Gauke, who is my wife. I wish to place on the record the fact that during the Committee stage, one member of the Gauke family has managed to persuade the Government to change the Bill.

Dawn Primarolo (Labour, Bristol South)

On that point, perhaps there is a lesson for the Opposition in how to approach debates and be constructive.

Clause 58

Paul Goodman (Conservative, Wycombe)

I beg to move amendment No. 95, in page 44, line 11 [Vol I], at end insert—

‘(3A) After subsection (3E) insert—

“(3F) Reliefs under this section shall be as follows—

(a) for donations not exceeding £100, 25 per cent. of the gift;

(b) for donations exceedings £100 but not exceeding £1000, £25; and

(c) for donations exceeding £1000, 2.5 per cent. of the gift up to a maximum of £2500.”.'.

I am sorry that my attention has been distracted from the amendment for a moment by the Paymaster General’s remark to my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) about the lesson that the Opposition should learn. I am still mulling over what that lesson should be, since we cannot all be married to Mrs. Gauke.

Dawn Primarolo (Labour, Bristol South)

The hon. Gentleman could, but it would be illegal. That is the point of some of the amendments. [Interruption.]

Paul Goodman (Conservative, Wycombe)

I shall pass over that interjection, in case it finds its way into Hansard, which I fear it has. I do not know whether the Paymaster General was suggesting that the amendment would be illegal, but I can understand her impatience as I am about to tax her again with one of the examples that I have a way of raising. I hope that she will address it more directly than she did the previous example.

The clause will extend restrictions on gift aid payments by close companies to non-close companies. The argument has been put to me that it is likely to hurt charities that run substantial corporate benefactor schemes and that the maximum benefit of £250 is minimal and will discourage companies from entering into such schemes. An example was given to me by, needless to say, the Charities’ Tax Reform Group. Let us suppose that the National Trust were trying to raise £500,000 to repair a property and a corporate benefactor agreed to donate £250,000. The National Trust might begin to raise the rest by holding a fundraising dinner, selling tickets at £100 a head. The corporate benefactor might be given a free table in recognition of its generosity and to encourage other substantial contributions. If the benefit to the benefactor exceeded £250, the charity would lose gift aid on the whole £250,000 donation. The argument put to me was that if the Government are unwilling to delete clause 58, at the very least the upper limit should be raised from £250 to £2,500 to allow charities to devise effective corporate benefactor schemes and to encourage companies to be generous in entering them.

Dawn Primarolo (Labour, Bristol South)

Company gift aid is a tax relief specifically designed for gifts to charities, not for payments that convey potential, substantial benefits on the donor company and those running it. In the Government’s view, the existing benefit limits are sufficient for charities to express their gratitude for a donation. We are talking about the benefits conveyed to the donor company by the charity when it says thank you for a donation. I say to the hon. Gentleman that there is no evidence to suggest that ensuring that donations to charities benefit principally the charity and not the giver—that is precisely what the clauses before us will do—will harm corporate giving.

A balance needs to be struck to ensure that companies do not benefit if they make a payment to charity with the aim of benefiting principally themselves and not the charity. The limit is there to prevent the glorious events that are designed to benefit those attending, but have little charitable benefit. That goes to the heart of the purpose of gift aid. I hope therefore that, given the narrow focus of the limit, the hon. Gentleman will accept that it is appropriate.

I remind the Committee that this series of clauses will deal with the misuse of charitable status by those who would put pressure on charities, or use them in order to benefit themselves, but not the charity. I want to reinforce that point. I hope that the hon. Gentleman will accept that explanation of why amendment No. 95 is unattractive and why I do not want the Committee to pursue it.

Paul Goodman (Conservative, Wycombe)

In short, the Paymaster General argued that the Treasury accepts the principle of a limit because charities might benefit from the relief given to the donor, such as in the example that I gave. However, given that a higher limit might actually benefit the charities, she did not justify why the level should be £250 rather £2,500. I was not satisfied with her explanation so I am inclined to press the amendment to a vote.

Clause 59

Rob Marris (Labour, Wolverhampton South West)

The Government introduced the regime to change the way in which company cars are taxed several years ago. I think that I am right in saying that the majority of new cars bought in the United Kingdom are still company cars. The Government have had huge success with the regime. It has really changed the way in which company cars are bought, and the CO2 emissions of the company car fleet have been falling year on year in contrast to the CO2 emissions of private average cars, which have been increasing in the past couple of years.

My hon. Friend the Financial Secretary to the Treasury would probably term what I am about to say as an early bid for next year. I welcome the proposals under clause 59 at the lower end of the scale so that, when the 3 per cent. diesel supplement is dropped, some cars will drop to a 10 per cent. valuation for company car tax purposes. However, having had such success with changing buying plans for company cars in recent years, the Government have missed a major opportunity by not greatly increasing the figure at the upper end of the scale. I urge my hon. Friend to take such action next year.

Helen Goodman (Labour, Bishop Auckland)

The hon. Gentleman was certainly right about the lower end of the scale. Will the Financial Secretary comment on the remarks of Stewart Whyte, the director of the Association of Car Fleet Operators, about the clause? He said:

“Generally, it is a broadly neutral budget for the fleet industry with no major changes. However, the further tightening of company car tax in 2008-09 is a minor disappointment. It is clear that vehicle manufacturers are having some difficulty in driving through the technological changes that will see a significant rise in the number of very low CO2-emitting cars on sale.”

We certainly explored that issue in the debate on vehicle excise duty. He went on:

“We hope that all parties will work together to ensure that the typical car becomes much more fuel- and CO2-efficient—and therefore tax-efficient—so that the impact on drivers of the tax change is neutral. We cannot have a company car tax system which takes no account of the technical realities of the vehicles available and, as a result, penalises company car drivers through no fault of their own.”

John Healey (Labour, Wentworth)

Clause 59 is a further step in the reforms that we put in place in 2002 to base the company car tax system on carbon dioxide emissions as a contribution to meeting the challenge of climate change. My hon. Friend the Member for Wolverhampton, South-West (Rob Marris) is right to say that it has been a success. Our first stage evaluation demonstrated that the average emissions of company cars in 2004 were some 15 g per kilometre lower than they would have been had we not put the reforms in place. On his point about top rates, he is nothing if not consistent. He made the same point in relation to top rates of vehicle excise duty in earlier discussions on the Bill. He is right that I will not accept the argument at this stage in the debate on this clause, but I will take it as an early Budget representation for 2007.

We are making two changes to reinforce the environmental effect of the company car tax regime. First, the clause reduces the level of carbon dioxide emission qualifying for the lower threshold by 5 g per kilometre to 135 g per kilometre from 6 April 2008. That will provide a continuing incentive for company car drivers and their employers to choose more fuel-efficient cars. It will also encourage manufacturers to produce cars with lower carbon dioxide emissions.

The hon. Member for Wycombe (Mr. Goodman), is right to quote Stewart Whyte, and Mr. Whyte was right to say that the measure is broadly neutral for the industry. It is also neutral for the Exchequer. We do not anticipate an impact on revenues from the company car tax regime when the changes come in in 2008-09. If the hon. Member for Wycombe has discussed it with him, Mr. Whyte will also have pointed out that the industry was expecting the Government to move in this direction. We have been discussing it for some time, and did so again in the run-up to the Budget. The point about setting the rates three years in advance is that that is not just advantageous for companies that make cars available to their employees for private use; it is also a useful long-term signal for car designers and manufacturers about the policy direction of the Government.

The clause’s second incentive for company car drivers and their employers to choose more fuel-efficient vehicles is the introduction of a new 10 per cent. rate for company cars with carbon dioxide emissions of 120 g per kilometre or below. Setting the levels now for 2008-09 gives drivers a degree of certainty about how much their company cars will cost them for the next three years. Because company cars are typically held for three or four years, setting the threshold for that period in this Finance Bill enables businesses to plan ahead sensibly for their car fleets and company car drivers to calculate the full cost of company cars that will be reviewed in the next three years. On that basis, I hope that the Committee will accept the clause.

Clause 60

Mark Francois (Conservative, Rayleigh)

May I, too, welcome you to the Chair, Mr. O’Hara? The most controversial part of chapter 5 of the Bill, which deals with personal taxation, is undoubtedly clause 61, which paves the way for the abolition of the popular home computing initiative, a decision that is still very much to be regretted, but that we dealt with in some detail in the Committee of the whole House. Clause 60 is an associated though less immediately controversial issue. Essentially, it seeks to limit to one phone any tax reallocation of mobile phone use by an employer to an employee. It was covered by the same regulatory impact assessment as clause 61, to which I shall refer shortly.

There are two areas in which it would be helpful to have clarification from the Paymaster General on the intended operation of the clause.

To begin with, there appears to be a residual ambiguity as to the permitted degree of personal use—if any—of the one mobile phone to which the clause refers, and on the tax implications, because there are differences between what is said in the Bill and the explanatory notes on the one hand and in the subsequent regulatory impact assessment on the other.

On clause 61, the Government now say that people who are provided by their employer with a computer at home for business purposes will not be taxed on that computer as a benefit in kind, provided that any personal use of it is not significant. After debate, the Paymaster General offered to consult employers to define the term “not significant,” and I understand that that work is ongoing. However, I should like to know the parallel position under clause 60 in relation to mobile phones that are provided for business purposes.

The explanatory notes initially implied that there was to be no attempt to regulate the extent of such private use for the purposes of identifying a taxable benefit in kind. Paragraph 1 of the notes states, fairly clearly:

“This clause replaces the exemption for employer provided mobile telephones in section 319 Income Tax (Earnings and Pensions) Act 2003. It provides that no tax will be due when employers make only one mobile telephone available for private use and removes the availability to family or household tax-free.”

Paragraph 16 of the notes then says:

“The clause re-focuses the relief provided by the exemption, keeping administrative burdens for employers to a minimum where a mobile telephone is provided for business use and private use is also made.”

Furthermore, when one looks at the clause, one sees that new section 319(1) to be inserted in the Income Tax (Earnings and Pensions) Act 2003 says:

“No liability to income tax arises by virtue of section 62 (general definition of earnings) or Chapter 10 of Part 3 (taxable benefits: residual liability to charge) in respect of the provision of one mobile telephone for an employee without any transfer of property in it.”

So far, so good. However, the associated regulatory impact assessment, which was signed by the Paymaster General on 24 April—a fortnight or so after the changes made by clause 60 came into effect—observes that there are now some 50 million mobile phones in use in the United Kingdom. That is a very large number. The RIA does not attempt to break it down into phones provided primarily for business purposes and those that are for personal purposes, but at paragraph 41 it states:

“Employers will still be able to benefit from the deregulatory objectives behind the mobile phone exemption when only one mobile telephone is made available for private use or where a mobile phone is provided for business purposes and there is insignificant private use.”

However, paragraph 23 of the RIA, entitled “Implementation and Delivery Issues,” states more explicitly:

“Where additional mobile phones are made available for private use or where private use of a business mobile phone is significant it will be liable to a tax charge and Class 1A National Insurance in the same way as any other benefit in kind.”

So a literal reading of the RIA implies that there could be a benefit in kind in certain circumstances of provision of an individual mobile phone. If that were the case, employers might be expected to define for taxation purposes the amount of personal use of that mobile phone, even if they had provided only that one mobile phone to their employee. There might be a considerable compliance burden for companies that sought legitimately to remain on the right side of the line. The regulatory impact assessment acknowledges the potential compliance burden at paragraph 54:

“Compliance costs would arise from employers having to report to HMRC the benefits in kind that would be subject to tax and Class 1A NICs under these proposals, the potential need for records to be kept and the implementation of extra coding notices for employees.”

The length of that process might be considerable. For example, if a mobile phone were provided primarily for business use, employees and employers might have to spend hours trawling through mobile phone bills to identify incidental private use and establish whether it was significant. That decision would in itself be subjective, and it might lead to unnecessary disputes between employers and employees, and then, indeed, employers and HM Revenue and Customs.

If, as is often the case in this day and age, the employer paid a fixed monthly amount and call charges were free up to a certain limit, how would “significant” be determined? How should the employee quantify the additional cost to reimburse his or her employer in order to avoid a tax charge? Put another way, assuming that the employee does not or cannot identify the cost of private calls, how should the employer compute the taxable amount in order to remain on the right side of the line?

The Institute of Chartered Accountants in England and Wales considered the issue, and it made the following point about this clause:

“If significant private use of mobile telephones is to be taxable once again, we suggest that there should be a flat rate charge, as was the case before it was abolished from 6 April 1999. This proposal will avoid the need for complex benefit calculations resulting from the availability of a wide variety of payment plans.”

For clarification, will the Paymaster General confirm exactly how the new regime is intended to operate? Specifically, will there be a tax charge for a benefit in kind even on one employer-provided mobile phone if the private use of such a phone is deemed significant? Can we expect new guidelines to define insignificant as opposed to significant personal use? We will be given guidelines in relation to home computers, for instance, and paragraph 73 of the regulatory impact assessment implies that guidelines will apply to both.

If we are going to receive guidelines relating to mobile phones, when are they likely to be made available, given that the measure is already supposed to be in force? Who will be involved in drawing up such guidelines, and what consultation, if any, will take place? There appears to be a dichotomy, so will the Paymaster General clarify the issue for the Committee before we allow the clause to stand part of the Bill?

There is an associated point that requires clarification. It concerns BlackBerrys. They are becoming increasingly common in business—and in this place, too. I thought that in making this point, I had best declare a personal interest, if only for safety’s sake. In a post-Budget note on employer-provided mobile telephones, Deloitte and Touche called for clarification of the status of BlackBerrys, as did KPMG. In addition, in a recent tax alert note on the subject, Ernst and Young pointed out the following:

“No guidance has been given from HM Revenue and Customs to employers about how to determine whether a device’s primary purpose is a mobile phone or whether the mobile phone capability should be considered a secondary feature.”

Subsection (4) of proposed new section 319 defines a mobile telephone as “telephone apparatus”, which means,

“wireless telegraphy apparatus designed or adapted for the primary purpose of transmitting and receiving spoken messages and used in connection with a public electronic communications service.”

The key phrase is “primary purpose”. BlackBerrys usually also encompass a mobile telephone capability. However, arguably, they are not designed primarily for that purpose. Therefore, they appear to be in a grey area as they can also be used for transmitting messages such as e-mail and for obtaining information from the internet. The more modern BlackBerrys allow us to surf the world wide web.

Brooks Newmark (Conservative, Braintree)

I must confess to having an interest. Although I do not own a BlackBerry, I own a Palm Treo, which has the same impact as a BlackBerry. My hon. Friend makes an excellent point about non-verbal communication. What may be helpful is the fact that all my bills, and I believe all of his, when they are telephonic are itemised. Therefore, any tax inspector of the Revenue can see clearly what is for business and what is for personal use. Perhaps we should be considering that as well, because those devices are for both written and verbal communication.

Mark Francois (Conservative, Rayleigh)

I am grateful to my hon. Friend for that intervention, which serves to amplify my point. BlackBerrys have a multi-functionality. The question for tax purposes is, which functionality will be taxed in that instance? Will the Paymaster General confirm whether the clause will define BlackBerrys as computers rather than mobile phones? If so, it would presumably be possible to have one of each without incurring an additional tax charge as a benefit in kind. Following the associated changes to clause 61, that is assuming that any personal use of the BlackBerry, if it were a computer, is deemed not to be significant.

To clear up the ambiguity, can the Paymaster General clarify exactly how clause 60 is intended to operate in practice? Are there any circumstances in which there could still be a tax benefit in kind for a single employer-provided mobile phone? If so, what are they? Can the right hon. Lady say how BlackBerrys are to be categorised for the purposes of the Bill? Are they excluded from clause 60? If so, they will presumably be dealt with under clause 61 instead. It would be helpful if that matter were clarified, too.

Jeremy Wright (Conservative, Rugby and Kenilworth)

I wish to ask the Paymaster General to clarify one matter. I am sure that she will easily be able to answer my question. Under the old system, multiple mobile phones could be provided by the employer without incurring tax liability. If replacement multiple phones are provided now by an employer, will they come under the old regime or will they be caught by the new regime?

Dawn Primarolo (Labour, Bristol South)

I am in some difficulty in answering the questions that I have been asked because most of them have nothing to do with clause 60. I shall deal first with that clause. I shall then take your guidance, Mr. O’Hara, on the other points.

Clause 60 replaces the tax exemption that prior to6 April enabled an employer to make available a mobile phone for private use. Business use is separate. It is in a different part of the tax Acts and is not affected by the clause. The mobile phone is for private use of the employee and, as it turns out, members of the employee’s family and household. The clause will give exemption to one mobile phone per employee for private use. There is no need for significant private use, business use and so on. The mobile phone is for private use and always was.

The clause limits the tax exemption so that only one mobile phone can be made available to each employee tax free, but it excludes the employee’s family and household. The clause also makes it easier for employers to provide that mobile phone, as prior to 6 April, a tax charge arose on the provision of a non-cash voucher or credit token to make mobile phones available for private use. They were often used by smaller employers who found it easier to give employees credit tokens to go to a mobile phone shop and buy the relevant phone. The clause has nothing to do with requirements in respect of business and business use, which are quite different.

The hon. Member for Rayleigh (Mr. Francois) asked one other relevant question, about BlackBerrys and personal digital assistants. Last year, sustained lobbying from the home computer initiative providers and accountants persuaded the HMRC that the functions of the new generation of PDAs and BlackBerrys made it more appropriate to include them in the exemption under computer equipment. Therefore, they are not covered by the clause.

The hon. Gentleman raised the matter of a commitment to upgrading mobile phones every 18 months or where there is an interaction with the Consumer Credit Acts and arrangements should have been made on transfer at the time. If an employer and an employee have entered into a salary sacrifice arrangement that entitles the employee to the private use of a mobile phone—I am talking about private use only—and extends for more than 18 months, the agreement is covered by the consumer credit legislation. Guidance has already been given and if employers found themselves in difficulty, the HMRC would take that into consideration and so would the Office of Fair Trading.

There is always discussion about which side of 6 April the arrangement was entered into. The employer will have to show the HMRC that, prior to 6 April 2006, it was in the process of setting up a scheme that involved making mobile phones available to its employees for private use, and the arrangement would then roll forward; it is quite a well used measure. My advice is that in each case if there is a renewal or if arrangements have been entered into but have not quite been completed, they will be covered as long as the employer can demonstrate that to the HMRC.

The questions about significant private use and business use are not relevant to the clause, but I can answer them briefly if you think it would be helpful, Mr. O’Hara. I can tell the hon. Gentleman that in respect of business mobile phones, where an employer makes more than one mobile phone available—for example, if an employee is travelling and goes into different world tariff zones, it is easier to have more than mobile phone—there is a rule, which has been in force since before 1999, that where there was significant private use, or where the private use was insignificant but the phone was given for business purposes, the private use would not be counted and would not be taxed. As a result of changes to clause 61, there have been requests for a restatement in guidance of what was operational before.

Discussions are taking place between the HMRC and a number of different organisations such as the CBI, the Institute of Chartered Accountants in England and Wales and the Chartered Institute of Taxation. That will lead to published guidance so that there is no doubt about the provision of business phones for private use. The provision of a private phone, tax free, simply for private use was supposed to help employers with the divide between business and private use. This provision is about a mobile phone given to an employee for private use tax free and the clause simply restricts it to one phone per employee instead of the entire family. That is entirely appropriate.

Mark Francois (Conservative, Rayleigh)

I am grateful to the Paymaster General for that clarification. There appears to have been some confusion, including among some professional accounting firms, about what the Government were trying to do. The whole purpose of going through the Bill clause by clause is to clarify those matters. I am glad that we have had an opportunity to do that this morning.

I do not want to transgress the border between clauses 60 and 61, but as the Paymaster General referred to the guidelines on the definition of clause 61, which will affect the definition of significant personal use of a business mobile phone—I understand the distinction that she made—could I with your indulgence, Mr. O’Hara, ask her to give us some idea of when she believes those discussions will be complete and when those guidelines will be made available? All members of the Committee would be interested in an approximate timing if she can provide that before we move on to the next clause.

Dawn Primarolo (Labour, Bristol South)

The guidance will be produced as soon as it is possible. First, there is the consultation. Then the draft guidance will be issued to ensure that it covers all the points made and then it will be released. I hope that those who have made comments will have time to look at the guidance before it is issued. There is always a difficult balance to strike here. If people want to comment on the draft they will have to do so speedily because it is intended that the guidance will be ready by the end of July so that it runs in sync with the Bill and its final stages. I hope that hon. Members will appreciate that if we get a last-minute comment, we will need to look at it very carefully.

Clause 63

Rob Marris (Labour, Wolverhampton South West)

I apologise for not welcoming you to the Chair when I spoke earlier, Mr. O’Hara.

Will my right hon. Friend explain a technical drafting matter? We have had debates on mobile phones and, under clause 62, we did not have the debate on eye test vouchers. Why are those matters in primary legislation whereas, in clause 63, vouchers for benefits in kind are to be covered by Treasury regulations? In one case, we are using primary legislation and, in the other, we are broadening the net by requiring regulations under proposed new subsection 96A of the Income Tax (Earnings and Pensions) Act 2003, as set out in clause 63. What was the guiding principle on the matter?

Dawn Primarolo (Labour, Bristol South)

The principle was to give us the flexibility to ensure that employment-related benefits that would otherwise be exempt from tax will remain so. A series of benefits are recognised as being employment related, which I am sure that no hon. Member would dispute. When we examined the issue of eye tests and corrective glasses for VDU users, it became clear that it was more sensible to have a regulation-making power to enable their provision. That will give us the opportunity to respond far more quickly to issues on benefits generally agreed to be work related.

Clause 64

Mark Francois (Conservative, Rayleigh)

I rise to voice briefly our approval of the clause. In doing so, I declare for completeness an interest as a member of the Conservative Friends of Israel.

The clause exempts from tax payments by UK and foreign banks and building societies to holocaust victims and to their heirs for dormant accounts. The issue is sensitive and I do not think that it needs to be rehearsed at length here. It seems that the consultations on it have been successful, and we welcome the clause.

Celia Barlow (Labour, Hove)

May I say to my right hon. Friend that the clause is very welcome in Hove and Portslade where there is a large Jewish population, many of whom moved here in the 1930s and 1940s or are the children of the people who did so. Many local families fled central Europe, and some of them still remember the horrors.

It is reassuring that the clause was drafted after negotiations with the Association of Jewish Refugees. I realise that the provision already existed as an extra-statutory concession, but enshrining it in law will give victims of Nazi persecution and their heirs the security of knowing that their family money can be retrieved without loss. That is why I support the clause wholeheartedly.

Brooks Newmark (Conservative, Braintree)

I join my hon. Friend the Member for Rayleigh in welcoming the clause. We do not often congratulate the Paymaster General on her written ministerial statements, but it was heartening to see the intention that she expressed on 19 July last year carried into effect in the Bill.

The numbers involved are small, both in terms of the assets involved and the people who stand to receive them. The Times estimates that since 1998 claimants in the UK have shared nearly £7.5 million from the Claims Resolution Tribunal, which handles claims on deposits in dormant Swiss accounts. The average award has been approximately £74,000. The Guardian is, unfortunately, a little more parsimonious, stating that the Government estimate that those affected in the UK are owed an average of £31,000 and that around 1,000 people will benefit from the clause. The Exchequer cost is also minimal if we accept the Government’s estimate of between £5 million and £10 million.

The principle of the clause is important. Payments under Restore UK to those who are eligible should be indistinguishable from compensation under comparable international schemes such as the Claims Resolution Tribunal. That has not been the case under the existing extra-statutory concession, which in applying only to the domestic scheme has introduced an unwanted distortion into the taxation of compensation payments.

David Rothenberg, treasurer and vice-chairman of the Association of Jewish Refugees, has responded positively to the proposals and the thorough consultation that preceded them. He said:

“We are delighted that the Government has responded positively to our request to introduce this important extension to Holocaust victims and their families of the concessions which applied to compensation from British banks so that the families of Holocaust victims will receive the full benefit from their compensation awards.”

I also welcome the fact that the tax exemption will be given a statutory footing rather than being couched as an extra-statutory concession. It is important that the tax exemption should carry the weight of parliamentary approval rather than bearing the stigma of being perceived as a Revenue fiddle. HMRC describes extra-statutory concessions as necessary

“when strict application of the law would create a disadvantage, or the effect would not be the one intended.”

We would argue the toss whether a simple and equitable tax system should need such concessions to unintended consequences, but there is a consensus that the exemption of compensation payments from taxation is morally right. That being so, I think that we would all agree that a clause in the Finance Bill dedicated to that purpose is preferable to the Revenue backhander that has persisted for the past six years.

It is good to see the Government taking a clear lead on the issue, and I congratulate them. Elsewhere in Europe, those who suffered from national socialist persecution still face an uphill battle to receive the compensation to which they are justly entitled. For example, the Austrian general settlement fund, a£210 million compensation fund created in 2001, is still experiencing problems administering claims. As of last November, not a single claim had been paid out. For once, the Government are in a position to lead by example. Let us hope that other countries catch on.

Dawn Primarolo (Labour, Bristol South)

I am sure that any Member of this House occupying my role in Government would take the clear view that the restoration of accounts to their original owners or heirs stems from a very dark episode in global history. As all Committee members who have spoken acknowledge, it was considered only right and proper to make provision in the clause for the exemption.

I am grateful for hon. Members’ comments. Rarely is a clause in any Finance Bill so welcomed. The words “morally right” are not often attached to considerations of taxation, but they could apply anywhere. They might apply to other points, but they definitely apply to the clause’s objectives. I commend it to the Committee.

Clause 65

John Healey (Labour, Wentworth)

Clauses 65 to 68 deal with the status of activities relating to the Olympics. As part of London’s bid for the 2012 Olympic Games and Paralympics, the Government gave an undertaking to introduce the necessary legislation to exempt the London Organising Committee of the Olympic Games from corporation tax. Clauses 67 and 68 would do the same for the International Olympic Committee and for non-UK resident competitors and support staff. That is a recent innovation by the IOC, and all bid cities were required to give such tax undertakings.

Clause 65 and the supplementary provisions in its sister clause 66 will provide the exemptions required for the London organising committee as well as powers to enable that exemption, where appropriate, to be extended or restricted as the committee’s plans and arrangements for delivering the Olympics in 2012 become clear.

That is an essential part of a major event, not just for London, but the country, and to which I think that we are all looking forward. The exemptions are important also so that the committee can deliver the best ever Olympics, and do so in London.

Theresa Villiers (Conservative, Chipping Barnet)

I welcome you, Mr. O’Hara, to the Chair. I shall speak briefly to clause 65, and not trouble the Committee by referring to the clauses linked to it. I shall take this opportunity also to put on the record my congratulations to the London bid team for its remarkable achievement in bidding successfully for the 2012 games. Given, as we have heard, that the provisions in the clauses were a requirement for the bid to have been made, there is no question but that the Government should honour the undertakings made in it.

Will the Financial Secretary tell us whether the clauses are expected to cost a significant amount? One would not necessarily expect the London organising committee or the IOC to raise significant revenue, but it would be useful to hear any information that he might have on that.

Will the Minister comment also on the points raised by the Institute of Chartered Accountants about whether the model for the exemption could be useful for charities as well? A number of complications with charities in general might make the model inapplicable, but I thought that it was a constructive idea from the institute, and I would welcome his thoughts on the matter.

I realise that it is not strictly related to the clause, but may I urge the Treasury to keep a watchful eye on the overall cost of the Olympics? I have raised that point with the Financial Secretary on the Floor of the House; it is of particular concern to my constituents in Chipping Barnet, who are London council tax payers who will pick up the bill for cost overruns, along with the lottery.

The budget for the London organising committee has increased already from £1.46 billion, envisaged last year when the London Olympics Bill went through the House, to around £2 billion, as confirmed by the Minister for Sport in Westminster Hall last week. He indicated that the increase was due to inflation, presumably over the period until the games in 2012. However, that increase would put inflation at 33 per cent. over that 6-year period.

Furthermore, the heightened security needed following events on 7 July must surely have an impact on the overall cost of the games and could presumably drive it up further. I believe that the funding package on security is about £220 million, which was set before the 7 July attacks. The Government have said plainly that they will not meet the cost of overruns and that those must be shared by the lottery and London council tax payers. However, the Minister must be aware that if the games go badly over budget, there will be pressure on the Government to step in. For the sake of London council tax payers and to guard against future demands on the Exchequer, I urge the Government to do all that they can to ensure that the highest standards of procurement are applied to Olympic projects so as to avoid the cost overruns that have dogged many previous games.

If Olympic construction projects are late, we cannot just shift events to Cardiff, as we can the FA cup. I hope that we can learn lessons from Wembley and public procurement disasters such as the Scottish Parliament. I am told that the residents of Montreal are still paying for the games that it held over 30 years ago. Sydney’s budget was £1 billion, but its games ended up costing £2.8 billion, I believe. The Athens Olympics overran massively, with costs spiralling from £1 billion to £5 billion, much of which was due to security considerations, which of course will be more significant in London. I appeal to the Ministers here, as representatives of the Treasury and guardians of the public purse, to ensure that that sort of overrun does not happen in 2012.

Celia Barlow (Labour, Hove)

I welcome my right hon. Friend’s assertion that the Olympics will have a major effect on the whole country. However, I seek clarification of paragraph 13 of the explanatory note to the clause, which states that

“The International Olympic Committee included a requirement in the bid process for the 2012 Olympic Games and Paralympic Games that tax in the host country should not have a significant impact on the Games. As a result of the successful London bid the Government is committed to providing certain tax exemptions, including: LOCOG would be exempt from corporation tax; Withholding tax would not be levied on royalties, and other annual payments made to LOCOG.”

With regard to the regulations for LOCOG, competitors and staff, the receipt of tax relief gives the organisers a responsibility to ensure that these are not just London Olympics, but games for the whole of the United Kingdom.

The Olympic games will be held not only in London but in other parts of the country, as will training camps—the city of Brighton and Hove, of which my constituency is part, is hoping to play host to some teams. We need to ensure that the games are embraced by all the people of the United Kingdom, so these clauses must not be thought of as enabling the Government to provide subsidies for the capital from those who live outside London.

Will my hon. Friend clarify that the tax relief that is rightly to be given to those concerned with the Olympics, and which was part of the London bid, will apply also to providers situated outside London, such as sports venues in my area?

John Healey (Labour, Wentworth)

My hon. Friend the Member for Hove (Ms Barlow) makes some important points about the role of the Olympics and their potential benefit not just for London but for the whole country. The body is, of course, the London organising committee but, as she rightly says, the games are for the whole UK and they must—and I hope will—be embraced by the whole UK. I wish Brighton and Hove all the best in its bid to host some of the teams that will be competing in the Olympics and Paralympics. Rotherham in South Yorkshire is hoping to do the same—[Interruption.]—and Bristol, too, the Paymaster General informs me. Clearly, there is a lot of interest across the UK in the prospect of the Olympics. The associated activities will reach well beyond the Greater London area, and the organising committee is well aware of that.

On the comments of the hon. Member for Chipping Barnet (Mrs. Villiers), it is difficult to estimate the tax cost in terms of potential revenue forgone. Secondly, the potential yield has not been factored in to the forecasts because if we had not won the bid for the games, there would be no potential tax yield from Olympic-associated activities. Without the exemptions that we are considering, the bid would not have been successful; they were a requirement of the bid application. On the more general costs, the hon. Lady is right. I can assure her that the Treasury will keep a close eye both on the general costs that concern her and on the standards of procurement throughout the run-up to 2012. I have no doubt that the Opposition will help with the scrutiny of the costs and the standards of procurement, as will the National Audit Office and Parliament as a whole.

There are two points about provision for charities. First, LOCOG is not a charity, so it does not benefit from the wide range of tax exemptions available to charities. Secondly, we need to appreciate the unique nature of the Olympic event. That is why we are putting in place unique tax arrangements. It is a once-in-a-lifetime opportunity for a country such as ours to host the games. To that extent, our provisions for the Olympics cannot be generalised to other events, nor are they appropriate for charities generally. I hope that on that basis, the Committee will allow the clause to stand part of the Bill.

Clause 68

Colin Breed (Liberal Democrat, South East Cornwall)

In the explanatory notes on the background to the clause, paragraph 9 states that

“athletes not resident in the UK will not pay income tax on any income arising from their performance at the Games”.

Does that include sponsorship, advertising, media appearances—in fact, all the income that is sometimes somewhat more than that arising from their performance in the games? Sometimes income is more to do with their performance in television adverts and such like.

John Healey (Labour, Wentworth)

I can broadly confirm the supposition that the hon. Member for South-East Cornwall (Mr. Breed) makes. The current tax system for non-UK resident performers includes income earned in the UK from a range of activities. In the case of a sports star, for example, it may include the winnings in a tournament and media earnings from associated appearances. The provision is designed for the specific purpose of making a special time-limited exemption on such earnings for individual competitors, performers and support staff directly related to the delivery of the Olympics. That is the basis of the proposal, and I stress its time-limited nature.

Colin Breed (Liberal Democrat, South East Cornwall)

Will the Financial Secretary explain the time limit? Is it the three weeks in which the Olympic games take place, or is it a longer period, including that prior to the games when performers are training in this country?

John Healey (Labour, Wentworth)

No, it will be a longer period than that. The IOC suggested in the host-city contract that we consider a period of 120 days leading up to the opening ceremony, and an additional 60 days after the closing ceremony. We will work through the detail. The clause contains the power to make such requirements in regulation, which is obviously more appropriate than making them in the Bill. Nevertheless, that is the period we are considering: several weeks around the Olympic games and the Paralympic games proper.

Helen Goodman (Labour, Bishop Auckland)

I understand what the Financial Secretary says about what is going on, but he has not explained why we are providing that massive tax exemption.

John Healey (Labour, Wentworth)

Perhaps my hon. Friend the Member for Bishop Auckland (Helen Goodman) missed it, but when we started talking about this group of clauses at the outset, I explained that as an innovation, the IOC required of any bid city its preparedness to make tax arrangements to ensure that the successful city’s delivery of the Olympics was not affected by tax. Therefore, clauses 65 to 67 include a range of organisations—not only the London Organising Committee but the International Olympic Committee—and clause 68 covers the competitors and support staff.

The short answer is that the IOC wanted and required the provision as part of the bid. We gave an undertaking to create it as part of the successful London bid, and clause 68 will honour that undertaking.

Clause 69

Helen Goodman (Labour, Bishop Auckland)

I beg to move amendment No. 103, in page 54, line 10 [Vol I], at end insert—

‘(2D) Arrangements where the tax advantage arises due to the creation or utilisation of an allowable loss shall not be treated as arrangements for the purposes of Part VII of the Finance Act 2004.

(2E) Where an allowable loss accrues to a company in circumstances that are not disqualifying circumstances, then for the purposes of the Tax Acts it should be assumed that the Promoter and the company did not wish that the element of the arrangements that secured a tax advantage not to be disclosed to any other promoter or Her Majesty's Revenue and Customs.”'.

Edward O'Hara (Labour, Knowsley South)

With this it will be convenient to discuss amendment No. 104, in page 54, line 4 [Vol I], after ‘enforceable)', insert

‘but arrangements shall not include any election undersection 24, 161 or 171A and shall not apply to either the whole or part of the loss to the extent that the allowable loss corresponds to an equivalent economic loss suffered by the company'.

Helen Goodman (Labour, Bishop Auckland)

We turn from the breathless excitement of the Olympics to the somewhat more arid territory of anti-avoidance clauses. [Interruption.] I am certain that they will not fail to engage the attention of the hon. Member for Wolverhampton, South-West. Judging from the noises coming from the back, I think that his party hopes that they will engage his attention more favourably than the clauses on the Olympics.

Clause 69 is a brief but important clause. It is essentially a mini general anti-avoidance clause relating particularly to disclosure, and it takes us deep into tax planning and what advisers should and should not disclose to HMRC. It will establish an anti-avoidance rule disallowing any capital losses to companies arising from arrangements whose main purpose is a tax advantage. It is an extension of previous disclosure rules introduced, as the Paymaster General will tell us in due course, in the Finance Act 2004.

The question is one of balance and fairness. Obviously, we deplore the exploitation of different tax rates in order to abuse them. In the Government’s favour, it is perhaps worth knowing that Deloitte welcomes the revised clauses:

“The amendments set out in the revised legislation and HMRC guidance notes provide welcome clarification in certain areas and also amend some of the unintended consequences of the proposed new legislation.”

However—there is always a “however”—one of the difficulties is that the Government have doubled the size of UK tax legislation in eight years. By doing so, they have created more opportunities for avoidance and more gaps that must be plugged, creating in turn yet more opportunities for avoidance. It is worth testing with amendments the complexity and uncertainty of the system, and whether the changes will increase or reduce that complexity and uncertainty.

Amendments Nos. 103 and 104 are essentially probing amendments, although amendment No. 105, which relates to the imposition of a possiblepre-clearance regime, is rather less probing. I shall be interested to hear what the Paymaster General has to say about that. We want to hear her response before deciding whether to press the amendments to a vote.

Amendment No. 103 would introduce two further additions to section 8(2) of the Taxation of Chargeable Gains Act 1992, which the clause will add to and amend. The first part of the amendment seeks to remove capital loss planning from the proposed disclosure rules. The argument runs that if an allowable loss can be used only where obtaining a tax advantage is not the main purpose for creating that tax loss, it is unreasonable for the Government to impose a disclosure regime to prevent the utilisation of such losses, which by their nature must be real economic losses and not paper losses. The amendment would remove capital loss planning from the scope of the disclosure rules by excluding it from the relevant definitions in the statute that introduced those rules.

The second part of the amendment deliberately echoes the wording of the statutory instrument that, from 1 July 2006, will put into effect key changes to the disclosure rules. HMRC’s old regime required that a scheme should be disclosed if it could warrant a premium fee, or if it were confidential in the sense that the tax adviser would not want the idea to be known to the wider tax community. The new regime goes wider: it requires confidentiality in the sense that the adviser would not want the scheme to be known to HMRC.

The statutory instrument requires the promoter—the lawyer, accountant or bank—to disclose the scheme if

“(i) it might reasonably be expected that a promoter would wish the way in which an element of those arrangements secures a tax advantage not to be disclosed to any other promoter; and

(ii) the promoter does not wish to disclose to Her Majesty’s Revenue and Customs the way in which that element secures that advantage”.

The second part of the amendment is intended to bring about a debate on the contents of the statutory instrument, and in particular on what is meant by the word “wish”, and how that wish will be perceived. We also want to consider the reason for not dealing with amendments to the disclosure rules by way of primary legislation, and the reason why Ministers are seeking to impose limits on discussions that are themselves legal and which may have arisen because of deficient drafting of tax legislation—although I am sure that that latter point was covered in the debate on the 2004 Bill.

Amendment No. 104 seeks to clarify the proposed disclosure rules and to enshrine in law an important comment contained in the explanatory notes—the comment that clause 69 will not apply to economic losses. Thankfully, amendment No. 105 is a bit less dry—

Edward O'Hara (Labour, Knowsley South)

Order. We have not yet reached that amendment.

Dawn Primarolo (Labour, Bristol South)

I was moving on with the hon. Member for Wycombe. As he rightly identified, the clauses deal with three specific anti-avoidance measure. They have their origin in disclosures made under the regime that was introduced in 2004. At the time, Mr. Flight—the then hon. Member for Arundel and South Downs—spoke about disclosures on behalf of the Opposition and said:

“At the heart of the issue, as far as we see it, is the fact that reporting of the tax avoidance schemes being marketed is in essence a no-brainer. People know when they are marketing them, and when such a scheme is being marketed to them.”

He continued:

“The objective is that the Revenue should at least be much more quickly aware of what is being marketed. That is sensible.”—[Official Report, Standing Committee A, 22 June 2004; c. 701-704.]

That fits specifically with the wider point made by the hon. Member for Wycombe about complexity and avoidance. Unfortunately, whatever Governments do—much of the legislation that is being exploited is legislation that was in place under the previous Government—the same old things are tried: creating a loss or getting a capital allowance or a deduction or converting one form of income into another to have it taxed under a different regime. This goes to the heart of how our tax system works. While I am happy to engage with the hon. Gentleman in that debate, it is somewhat fruitless, at least on these clauses.

As I said, these measures result from information specifically provided under the disclosure regime and are specifically targeted to deal with that. Indeed, the comments made at the time of the announcement and the observations on the draft clauses from a whole range of organisations and accountancy firms, such as KPMG, Ernst and Young and Deloitte and Touche to name but three, clearly acknowledged that this is precisely how the clauses are operating.

Clause 69 denies tax relief for capital losses where their existence or amount has been contrived, that is, where the losses that arise do not reflect commercial reality. The clause prevents relief for capital losses where there is either no underlying economic loss, or there has been no commercial disposal of an asset by a company or its group and the main purpose, or one of the main purposes, of the arrangements was to secure a tax advantage.

These measures were first published in draft in the pre-Budget report and they are all effective from that date. In the pre-Budget report, HMRC also published draft guidance on the new measures, with a statement setting out why they are necessary and the principles that underpin them. That approach, which clearly sets out what the measures are seeking to achieve, has been well received by the accountancy and legal professions and their clients.

There are two identifiable classes of transaction that this legislation will affect. The first is transactions structured so that the tax outcome does not reflect economic reality. These are cases where a large capital loss is created for tax purposes but where there is no, or only a very much smaller, commercial loss. The second class of transaction targeted is one where there is a contrived sale or other disposal of an asset and that sale gives rise to a real commercial loss but there has been no effective, or real commercial disposal of the asset. There is therefore no change in the economic ownership of the asset because either the company, or the group, still retains ownership. Since there has been no real “disposal”, the clause will act to disallow the capital loss.

Amendment No. 103 is aimed at excluding from the scope of the disclosure regime any arrangements that obtain an allowable capital loss. That is a very wide exclusion indeed, covering all arrangements that involve capital losses. The main purpose of the disclosure regime is to ensure that HMRC receives early information about potential tax avoidance schemes so as to inform current and future anti-avoidance legislation policy. The disclosure regime, as the then hon. Member for Arundel and South Downs pointed out, provides the information to ensure that if steps are necessary, they are specific and targeted to move away from what had been the practice of successive Governments of a more blanket approach to some anti-avoidance legislation, without having the clarity of the disclosure regime to pinpoint specifically the transactions that are required to be in order. The disclosure regime helps to identify schemes that may well meet the letter of the law, but which use it in a way that was not intended and, at times, in an abusive way. They do so by requiring disclosure of schemes falling within certain descriptions contained in the regulations. Those descriptions are carefully targeted at the schemes that have a high risk of being avoidance.

It seems absurd therefore, as the amendment proposes, to exclude from the scope of the disclosure regime a scheme that complies with that particular tax rule, but which could have other avoidance aspects that have nothing to do with capital losses. It is precisely those schemes that meet the letter of the law—but in the way that was never intended—that the disclosure regime is designed to detect. That was the debate when we approached the clauses in Committee in 2004. If the logic applying to the amendment were to be applied across the board, the disclosure regime would be rendered worthless. There would be no point in it and the objective of the effective operation of disclosure regimes that the Opposition agreed that the Government should seek would be undermined. It is no surprise to the hon. Gentleman that I believe that amendment No. 103 strikes at the purpose of what we are trying to achieve under the regulations. I am not attracted to it. I do not know whether the amendment is probing, but I shall take it as such at the moment.

Amendment No. 104 would do two things. First, it would prevent the clause from being applied when arrangements include certain claims or elections made under other provisions of the Taxation of Chargeable Gains Act 1992. It also undermines the purpose of the clause by allowing a capital loss even though there has been no real commercial disposal of an asset. In the majority of cases, the clause will have no impact on companies making claims or elections under other sections of the Act, for example, when a company claims a loss because an asset has become of negligible value. I go back to the point made by the then hon. Member for Arundel and South Downs in 2004, which is that people know when they are marketing avoidance schemes and others know when such a scheme is being marketed at them. HMRC’s additional published guidance specifically addresses the points of which companies need to be aware. It states that the making of such an election will not in itself be regarded as an arrangement to which the clause applies.

However, giving carte blanche to all arrangements that use particular claims or elections, as the amendment would do, undermines the effectiveness of the clause. It is possible that the claims or elections could be part of larger arrangements that have been contrived to produce a loss. I touched on that point when I covered amendment No. 103. The legislation must be capable of deterring such behaviour because, again during our discussions on the Finance Act 2004, it was clear from contributions made by all members of the Committee that it was the presence of the disclosure regime to deter people, in the first place, from engaging in those activities that was of particular importance.

The second effect of amendment No. 104 would be worse, in that it would completely undermine the principles that underpin the clause by giving relief for losses on assets that have not actually changed economic ownership. In extreme cases, it would mean that companies could create large capital losses, even though an asset might only temporarily have fallen in value and there had been no change in economic ownership of the asset.

As if the other bit of damage was not bad enough, the amendment would also have wider implications for the corporate capital gains system. Companies’ capital gains and losses are taxed or relieved on a realisation basis. If we were to give relief for losses when there is no real economic disposal, we would be allowing a mismatch in the treatment of gains and losses, as losses would effectively be relieved as they accrued whereas gains would continue to be taxed on realisation.

Taken as a whole, amendment No. 104 seriously undermines clause 69 to the extent that any additional revenue from preventing avoidance schemes currently in use would, in all likelihood, be lost. The estimate is something like £260 million for the tax years 2006-07 to 2008-09 with a continuing £150 million a year thereafter.

Amendment No. 103 would exclude several potential avoidance schemes from the disclosure regime and amendment No. 104 would seriously undermine clause 69. I hope, therefore, that the hon. Gentleman has probed the intention of the Government enough and will want to reflect on what has been said before he decides whether to pursue the matter further.

Helen Goodman (Labour, Bishop Auckland)

When tabling these amendments and those to clauses 70 and 71, I thought that reference might be made to the former hon. Member for Arundel and South Downs, Mr. Howard Flight. Although I have not gone back through the 2004 debates to read every remark he made or to follow entirely the flow of his thought, I suspected that he might have dealt with such clauses.

The Paymaster General’s reply was a little reliant on extreme cases when she referred to amendment No. 104. She acknowledged that some innocent arrangements might be caught by the provision. However, in the light of the long consideration given to the proposals during the consultation process that she referred to and my not wanting to explain to her where we would plug a£260 million gap in finances, I beg to ask leave to withdraw the amendment.

Helen Goodman (Labour, Bishop Auckland)

I beg to move amendment No. 105, in page 54, line 10 [Vol I], at end insert—

‘(2D) Subsection (2)(b) above shall not apply where, before the end of the accounting period in which the allowance loss accrues, the Board have on the application of the company notified the company that the Board are satisfied that the disposal or deemed disposal does not accrue in disqualifying circumstances.

(2E) Subsection (2D) shall be subject to the same procedures contained within section 138(2) to (5).”'.

Edward O'Hara (Labour, Knowsley South)

With this it will be convenient to discuss amendment No. 101, in clause 71, page 62,line 47 [Vol I], at end insert—

‘(5A) Subsection (2)(b) above shall not apply where, before the end of the accounting period in which the allowable loss accrues, the Board have on the application of the company notified the company that the Board are satisfied that the disposal or deemed disposal does not accrue in disqualifying circumstances.

(5B) Subsection (2)(b) shall be subject to the same procedures as those contained in section 138(2) to (5).'.

Helen Goodman (Labour, Bishop Auckland)

As the Paymaster General and I both anticipated, we come to amendment No.105. It is more straightforward than the previous amendments in that it would introduce a pre-clearance regime to the proposed rules on disclosure. Given that HMRC already has a relationship with companies by way of the disclosure arrangement, there is a case for introducing a pre-clearance regime that sets the dialogue on a more formal basis. Capital gains tax frequently arises on major business transactions, a classic example of which would be the sale of a property or business, so large amounts of money may be at stake. Capital gains by their nature tend to relate to substantial decisions by companies, hence the risk that an adverse tax change could deter businesses from making commercial decisions.

A pre-clearance regime would mean that HMRC would make policy clearances publicly available in order to provide greater certainty to taxpayers. Such regimes are widely used abroad, for example in Australia and New Zealand. My recollection is that in countries where they are not used—for example, the Republic of Ireland—the tax regime is a good deal simpler. I suspect that the Paymaster General will argue that it will be difficult to staff the regime, or that the arrangement might be administratively inconvenient, but since in this and other clauses the Government are seeking in effect to enter into further discussions about tax affairs with businesses, there seems no obvious reason why a tax clearance regime should not form part of those discussions.

Furthermore, there is a genuine debate to be had about whether the Government should, on the one hand, spend more time tinkering with the tax system in the light of the greater complexity caused by the expansion of tax legislation since 1997, or, on the other, simply opt for a pre-clearance regime.

Jeremy Wright (Conservative, Rugby and Kenilworth)

I rise briefly to support amendment No. 105, tabled by my hon. Friend the Member for Wycombe. The difficulty is that companies that have to make delicate commercial decisions about how to manage their losses want clarity about what they are and are not permitted to do while staying legitimately within the tax regime. For example, they may have to decide whether to move losses from one business period to another or make other arrangements that will benefit them commercially. I hope that the Paymaster General will surprise my hon. Friend and me and say that the amendment is a good idea, but I fear she will not. In that case, I would ask her to think again, because there is a huge advantage to be gained in companies being able to contact HMRC for clarification of what they are permitted to do. Certainly, that would be desirable.

As my hon. Friend said, although there may be some additional administrative inconvenience for HMRC in providing clarification, there would be greater benefits for the company concerned and for the economy generally. I therefore ask the Minister to consider the amendment very carefully. It is a good idea that will assist companies in knowing exactly what they are permitted to do in an important area that is growing increasingly complex and difficult to manage.

Brooks Newmark (Conservative, Braintree)

The added benefits for HMRC are time and money, which are limited assets. Greater clarity upfront on these issues would benefit the constituent involved and save HMRC time and money in chasing up matters later.

Jeremy Wright (Conservative, Rugby and Kenilworth)

My hon. Friend is right; prevention is better than cure. The consequences of the amendment should be that HMRC will be able, perhaps very simply, to tell a company whether an arrangement would be legitimate for tax purposes. I go back to what the Paymaster General said earlier about remarks that were made in the 2004 Finance Bill debate: if it is clear what is and is not a permissible arrangement, it will not take long for HMRC to answer questions. If, by having their questions answered, companies can stay within the limits of the tax regime, in the long run, as my hon. Friend says, we will save ourselves and them a great deal of time and money.

Dawn Primarolo (Labour, Bristol South)

Before I comment on the amendments, let me address the issue of statutory clearance. That concerns the additional burdens on business and a great deal more that the hon. Gentlemen, conveniently, did not touch on. The clauses deal with tax avoidance. They have been disclosed as regimes under disclosure, and therefore legislated for, and will apply only where one of the main purposes of a transaction or arrangement is tax avoidance. They will not apply to the vast majority of companies or to wholly commercial transactions. The principle behind the measure is that companies should be able to claim and use capital losses only where there is both a genuine economic loss and a genuine commercial disposal. That is the absolute bedrock. The hon. Gentlemen have spoken about complexity, but business is complex. Assuming that they do not propose taking capital losses out of the tax system completely, they are over-egging their comments about the tax system and the way in which legislation is phrased.

Although the amendments affect two separate clauses, clauses 69 and 71, they are grouped together because they deal with the same principle. They seek to introduce a statutory clearance procedure for both clauses, and I consider that to be unnecessary. The majority of companies do not need to use the clearance procedure, but could be forced to do so. Once that is in place all sorts of other things come into consideration, such as whether they have been properly advised, and indemnities for accountants and lawyers. That does not apply to most companies because the scheme is specifically about the misuse of losses, and in any case they will know whether they are using it. To say that they will not is to ignore commercial practice, as has been acknowledge in this Committee on a number of occasions and in debates on different Finance Acts about the nature of avoidance.

The disqualifying circumstances with which clause 69 is concerned are those in which companies have entered into arrangements whose main purpose is to enable them to secure a tax advantage. In short, that is tax avoidance, and that is what the measures are aimed at. Companies will know whether they are doing it. There is no question that they need statutory clearance. The effect on all other companies will be the reverse of what is being advocated. It will not give speedy resolution, but will drive them to feel that they should seek statutory clearance—presumably before the transaction takes place and therefore putting pressure on it—whereas they will not need it in the first place because they are not engaged in the activities covered by the clause.

Jeremy Wright (Conservative, Rugby and Kenilworth)

Surely the Paymaster General cannot have it both ways. If she is right—I do not think that she is—that this is a straightforward area, it will always be obvious to companies what is tax avoidance and what is not. Surely if there is a clearance procedure, and they ask whether an arrangement is tax avoidance or not, they will get a very simple, straightforward and quick answer from HMRC, which will not cost much time or money. So what is the problem with the procedure?

Dawn Primarolo (Labour, Bristol South)

First, we are not talking about commercial transactions. The clauses deal with very narrow and specific avoidance mechanisms. That is all that we are talking about. We have put that clearly in legislation and guidance notes. The idea that those who design such schemes, knowing what they are designed to achieve, should seek clearance before they start marketing them, is simply unattractive—to put it mildly.

Brooks Newmark (Conservative, Braintree)

Will the Paymaster General give way?

Dawn Primarolo (Labour, Bristol South)

No, I will not. I am going to answer the question, and then the hon. Gentleman can come back. It is a complex area, and I am not able to get one set of answers on the record before the next set comes forward. The hon. Gentleman can make his points later.

Clause 69, as I said, is aimed at those companies that specifically use that type of scheme; those schemes are caught by the clause. They do not happen by accident or incident; they are the result of highly contrived circumstances when transactions are undertaken. It is very simple. If there is no clearance, companies should not engage in such schemes. The schemes are carried out in a particular way, primarily to achieve a desired tax effect rather than general commercial purposes, and companies will know that. For that reason,clause 69 does not need a safety blanket of a statutory, pre-clearance procedure wrapped around it. It is quite clear what it is aiming at.

The schemes at which clause 71 is aimed are just as artificial as those targeted by clause 69. They seek to turn an income stream into a capital gain, or to contrive a linked income deduction, effectively turning a capital loss into an income one. In each case, capital losses are used to shelter tax liabilities on the contrived capital gain. The relief for capital losses is given against income profits only in very limited circumstances, when Parliament intends that to happen. Schemes have been devised to circumvent that intention and to obtain relief at will, and clause 71 stops that. However, clause 71 is targeted at more complex schemes, so there may be more uncertainty about whether the legislation applies. HMRC has instigated an informal clearance scheme for the clause, which businesses may use if they wish. That has the advantage of providing help to people who want it, without adding any unnecessary layer of bureaucracy to those who do not. It provides the practical certainty that businesses want. HMRC will be bound by its decision, with regard to clause 71, provided that businesses disclose all the relevant facts when the application is sought. Furthermore, the rules that the clause introduces will apply to companies only if the notice to that effect is issued by the board of HMRC. That will further comfort compliant companies.

Both the amendments make reference to a clearance procedure used for share exchanges, but they would not adapt the legislation to make it relevant to the clauses, so they would not actually work. They would also provide for statutory clearances to be applied for before the transaction takes place. They would be requested and, presumably, granted on the basis of planned or hypothetical transactions. That cannot possibly make sense. The amendments contain no requirement that an applicant is contemplating carrying out the proposed transaction. There is a danger that the clearance procedure will be used by tax professionals to tweak and perfect schemes that they then implement and market to their clients. I am sure that members of the Committee can understand why I am not attracted to that idea.

If companies are unsure about the application of clauses 69 and 71, they need only look at the comprehensive guidance issued by HMRC in December 2005 and at the statement of principles that underpins the measures. Furthermore, there is the option of making an application to HMRC under the code of practice 10 procedure if a company is unsure of the interpretation of the wording of the law. There is also the informal clearance procedure in clause 71, as I have pointed out. The Government believe that those measures will provide the clarity and certainty needed. The capital loss package was the subject of consultation with business and its advisers, and there was no suggestion that the application of either clause was unclear.

If there were a formal clearance procedure, directors of compliant companies might feel compelled to use it. Lawyers and accountants could find that their professional indemnity insurance would be invalid if they failed to use the statutory clearance procedure. They might then decide to require applications for clearance in all cases in which they are advising on transactions that might result in a capital loss, such as the liquidation of a failed subsidiary or a capitalisation scheme such as the sale or leaseback of property, even when there is clearly no tax avoidance purpose and despite clear HMRC guidance. The only effect of the amendments would be potentially thousands of pointless clearance applications, costing businesses additional fees for their advisers, and delays in commercial life due to the need for applications.

The amendments would add none of the certainty that business seeks. The clear targeting of clause 69 and the guidance, code and informal clearance procedure in clause 71 provide that certainty without creating an unwieldy statutory clearance system that would not benefit anybody except the advisers who would be paid fees.

Helen Goodman (Labour, Bishop Auckland)

The Paymaster General dealt convincingly with the previous group of amendments, but I am not convinced that she has dealt quite so convincingly with this group. I take her point about the additional burden that a pre-clearance regime might place on business. However, although I hear what she said about Howard Flight’s contribution in 2004, I do not entirely accept that there is a stark, clear line between anti-avoidance arrangements and other arrangements.

Obviously, if someone is framing an avoidance scheme they know that they are doing so. However, the Paymaster General said that this is a complex area. She then looked ahead at clause 71 and said, if I heard her correctly, that there would be extra arrangements to help businesses drawing up schemes to know whether they are in breach of the law. That sounds more complex than what the Paymaster General set out.

We cannot simply impose a pre-clearance regime on the Treasury. However, passing the amendment would be a rather stark course of action to take, although we will want to return to the matter in due course. As we go through clauses 70 and 71, we might find that where businesses stand with Her Majesty’s Revenue and Customs and its tax arrangements is far less clear than the Paymaster General made out. I beg to ask leave to withdraw the amendment.

Brooks Newmark (Conservative, Braintree)

I have learned in the past year to study not only the Bill itself, but the explanatory notes, which are great at giving clarity. I shall read paragraph 2 of the summary of clause 69 in the explanatory notes because it has a bearing on a point that I shall make in a moment. As the Paymaster General said, it is very clear:

“The clause is based upon the principle that relief for corporate capital losses should only be available where a group or company has suffered a genuine commercial loss and has made a real commercial disposal of an asset. The rule will only apply where arrangements produce a loss that is greater than the real underlying economic loss or where arrangements entail the asset upon which a loss is claimed to have arisen remaining within the economic ownership of the company or the group.”

That is a fair point, which looks clear to me.

I remain concerned, however, when august institutions such as the Chartered Institute of Taxation write not only to me but, I believe, the Paymaster General. I am sure that she has seen the institute’s briefing. On clause 69, it said:

“In our comments on the draft legislation we said that what is now clause 69 will result in the taxation of arithmetical differences that do not correspond to actual gains. We gave the following example.

Suppose that a company has an asset with a base cost of 100, but with a market value of 40. It sells the asset for 40 and subsequently re-acquires it for 40. Some time later it sells the asset to an unconnected third party for 90. The loss on the first sale is not allowable, but the original base cost is not reinstated. Therefore a chargeable gain of 50 arises on the second sale, even though a real loss of 10 has been sustained.”

Rob Marris (Labour, Wolverhampton South West)

Will the hon. Gentleman explain why the loss on the first sale is not allowable?

Brooks Newmark (Conservative, Braintree)

Will the hon. Gentleman clarify his question? It was rather short and abrupt.

Rob Marris (Labour, Wolverhampton South West)

The hon. Gentleman read out an example given by the CIT:

“The loss on the first sale is not allowable”.

I am simply asking the hon. Gentleman, who prays in aid of that example, to explain to the Committee why the loss on the first sale is not allowable.

Brooks Newmark (Conservative, Braintree)

I confess that I am not a tax expert—[Interruption.]—but I certainly understand the mathematics to which the institute referred. If the CIT—a far more august institution than many to which we might belong—has expressed a concern about the arithmetic behind the expected impact of losses and gains in respect of this clause, I am merely sharing that concern. I should like to ask the Paymaster General, who has received the same document, why neither the Institute nor I should be concerned about the issue.

David Gauke (Conservative, South West Hertfordshire)

I am afraid that I cannot throw any light on why the loss in the first transaction will not count, but if the example given by the CIT is incorrect because of the assumption that the hon. Member for Wolverhampton, South-West mentioned, perhaps the Paymaster General should confirm whether the assumption is correct.

Brooks Newmark (Conservative, Braintree)

I thank my hon. Friend for that intervention, which reflects the point that I made a couple of minutes ago. I want to touch on the second concern raised by the CIT. It says:

“We also mentioned that draft s184a disallows a loss arising on a degrouping deemed disposal (eg where another person acquires more than 25 per cent. of the chargeable company), but does not exempt any gain arising on a similar deemed disposal. We cannot discern the rationale for this and would appreciate an explanation. However, it seems to us to be another case ofthe principles applying only where it suits the Government. The above comments apply to the provisions as included in the Finance Bill, which are the same as the draft provisions.”

Finally it says:

“It is disappointing that there has been no change in the draft legislation.”

I am sure that the Paymaster General has seen the document. I respect the CIT, so I shall be interested to hear her comments on the two concerns that it has raised in respect of clause 69.

Dawn Primarolo (Labour, Bristol South)

It will be more fruitful for me to write to the CIT to explain why its concerns are not relevant than it will be for me to answer the hon. Member for Braintree (Mr. Newmark), who has read out what it says but is not sure how it works. I would pray in aid a number of responses that we received as a result of publishing the draft clauses in December, including one from Ernst and Young, which says:

“The whole or main purpose test has been used extensively in recent legislation”.

That is to say that people are familiar with it. The author continues:

“I agree with the guidance notes. Purely commercial transactions should not be caught by this test.”

That is the case; they are not. The CIT put forward the example that we have heard. Let me paraphrase my reply. First, this is an anti-avoidance provision. It will catch only transactions undertaken with tax avoidance either as their main purpose or as one of several purposes. That is a well used concept in our tax system. The institute makes a general argument, whereas we are talking about anti-avoidance, which already has a narrow “target”. The principle behind the provision is that losses will be allowed only when they are matched by a commercial disposal. That has been made very clear, and has been acknowledged by the accountancy press and professional bodies with regard to this clause and the arrangements in it.

If a group still tries to avoid tax by crystallising a loss without matching it with a commercial disposal, it will not be surprised if it loses access to that loss. Should it go on to pay tax on the real commercial disposal after attempting to avoid tax, it will have to accept that consequence. That is the response to the CIT, however it is dressed up as company A doing this, company B doing that and some money exiting en route.

Clause 69 is specifically targeted; it is anti-avoidance and its purpose and intent are acknowledged to be clear. I am sure that the CIT will be grateful to receive a slightly longer and more detailed response from me, but those are the basic principles.

Clause 70

Helen Goodman (Labour, Bishop Auckland)

I beg to move amendment No. 106, in page 57, line 10 [Vol I], at end insert—

‘184DA Sections 8, 184A and 184B: meaning of “main purpose”

For the purposes of sections 8, 184A and 184B “main purpose” means a purpose without which the underlying commercial transaction would not have occurred.'.

Edward O'Hara (Labour, Knowsley South)

With this it will be convenient to discuss the following amendments: No. 107, in page 60, line 4 [Vol I], at end insert—

‘(4A) At the end of section 176, add—

“(10) This section shall not apply to companies for disposals accruing after 5th December 2005.”'.

No. 108, in page 60, line 6 [Vol I], leave out from ‘212)' to end of line 13 and add

‘subsections (8H) and (8I) shall cease to have effect.'.

No. 109, in page 60 [Vol I], leave out lines 25 to 28.

No. 110, in page 60, line 29 [Vol I], leave out from beginning to end of line 2 on page 61.

Helen Goodman (Labour, Bishop Auckland)

The clause bundles together a series of anti-avoidance proposals in order to amend the Taxation and Chargeable Gains Act 1992. Before I go through the amendments in detail, I want to return to the point about the clarity of the legislation. In the debate on the amendments to clause 69, I quoted Deloitte’s general welcome for the provision. However, it is worth noting that the firm Norton Rose recognises greater ambiguity and difficulty for business in these arrangements than the Paymaster General allows. It said:

“The guidance notes state that the provisions do not apply where there is a genuine commercial transaction that gives rise to a real commercial loss as a result of a real commercial disposal. However, debate is likely to continue as to the meaning of these phrases. HMRC have rejected calls for a clearance procedure and have also rejected requests for mitigation of this rule in circumstances where companies seek to recognise capital losses on assets before a real commercial disposal takes place."

The context of amendment No. 106 is that proposed new section 184A in clause 70 will place restrictions on companies buying other companies with losses. New section 184B will place restrictions on companies buying other companies with gains. The crucial section, which relates to the previous two, is new section 184D which defines "tax advantage" in relation to the other sections.

Amendment No. 106 is a probing amendment, which would insert a new section 184DA in order to place in law a definition of the main purpose of a company when that main purpose is to avoid paying tax. There is currently no interpretation of main purpose within UK tax statute. The definition in the amendment is a case-law definition given as obiter dicta. In case any members of the Committee do not know what that is, I looked it up, although not through the medium ofMrs. Gauke, and found that obiter dicta are the remarks of a judge which are not necessary to reaching a decision, but are made as comments, illustrations or thoughts. The hon. Member for Wolverhampton, South-West knew that already, but other Committee members did not necessarily know. Some of them might have.

Amendment No. 107 deals with sections 176 and 177 of the 1992 Act, which disallow capital losses where there is tax planning to generate an unreasonable loss. Following the changes to section 8 of the 1992 Act approved in clause 69, there is arguably no reason for section 177 to remain in existence for corporate bodies. The amendment seeks to establish whether the Treasury intends to duplicate a piece of legislation unnecessarily.

Amendment No. 108 would remove the whole of clause 70(5)(a) and (b). The argument supporting it relates again to the unnecessary duplication of legislation and runs as follows. The measures relate to life assurance businesses. Specific rules prevent life assurance companies from deferring capital gains on their holdings of equities by holding them via a captive collective investment vehicle such as a unit trust. The rules work by deeming the assurance company to have sold all such unit trusts at the end of each accounting period. The net amount of capital gains or allowable losses arising from the total deemed disposals is spread for tax purposes over seven accounting periods, including the current one. Typically, a net loss can be carried back against spread gains arising in the previous six periods.

Subsections (8A) to (8I) of section 213 of the 1992 Act were introduced to deal with an anomaly. Capital gains and losses are particular to the company in which they arise. Therefore, if life assurance business was transferred to a new company, provisions allowed net spread amounts not yet taxed to transfer with the business. However, if the stock market then plummeted, the transferee could not carry back the losses against gains already taxed to the transferor, even though the gains and losses arose to the same policyholders.

Subsections (8A) to (8I) of section 213 were introduced to allow a two-year carry-back by election where the transferor and transferee were in the same group. Unfortunately, in the opinion of some, subsections (8H) and (8I) were included so that the election could be reduced by the effect of the pre-entry gain rules. It was argued that that was unnecessary, as the rules required that the transferee did not carry on long-term business before the transfer. Hence, gains and losses must relate to the same policyholders.

Clause 70 seeks to introduce a new restriction following the abolition of the pre-entry gain rules. General anti-avoidance rules now apply to the creation of capital losses, and specific anti-avoidance rules apply to the purchase and sale of companies for their capital losses or gains. Also, rules exist to prevent shareholders from using their losses against policyholder gains and vice versa. It is argued that given those measures, there is no need for subsections (8A) to (8I) to remain in force.

Amendments Nos. 109 and 110 propose to delete everything between line 25 of page 60 to the end of line 1 of page 61. It is argued that the measures that would be deleted are retrospective, and that UK tax law should not usually be retrospective. I look forward to the Paymaster General’s response on those points.

Dawn Primarolo (Labour, Bristol South)

As with the measures in clause 69 that we discussed, this clause will apply only to companies that enter into arrangements with one of the main purposes being to obtain a tax advantage. It will provide protection against the practice of buying and selling companies not for their inherent business worth or for access to their assets but for access to their tax potential. It also introduces new rules to tackle tax avoidance and repeals the original gain buying rules.

There has been increasing evidence in recent years of tax avoidance involving capital losses and capital gain buying, as a number of groups of companies have accumulated large amounts of capital losses—more than they need to set against their gains. Some of those groups have been seeking ways to create a value for those losses. The clause will prevent companies from benefiting from the losses of other companies or groups when entering into an arrangement one of the main purposes of which is to obtain a tax advantage. If the conditions set out are met, the use of losses will be restricted so that the company or group is stopped from setting off another group’s losses against its own gains.

Amendment No. 106 defines in fairly narrow terms what arrangements should be regarded as having a “main purpose” of avoiding tax. There are many examples of the main purpose test in UK tax avoidance legislation, and by necessity the matter can be determined only on a case-by-case basis with reference to the facts and circumstances of the taxpayer concerned. The test is well used, and HMRC has issued detailed guidance, which it continues to update, to provide as much certainty as possible to business. The system is working. The main purpose test is included not only in clauses 69 to 71 but in a lot of other places. The phrase is well understood by business and its advisers, and guidance and support is given by HMRC.

The definition in the amendment is much narrower than the natural meaning of “main purpose” or “one of the main purposes”. The amendment would mean that no transaction with a commercial purpose could form part of a tax avoidance arrangement, however minor or irrelevant it was to that arrangement. Unless the tax advantage was the only purpose of the transaction, the rules could therefore not take effect. Planners would simply ensure that some connection was made, however tiny. The amendment would severely weaken the clause and mean that companies could easily undermine the application of the rules.

On amendment No. 107, I cannot quite see the link between clause 70 and section 176 of the 1992 Act. The latter deals with the calculation of capital gains and losses on the sale of company shares when sales or transfers of assets under value have reduced the value of the company: that is called a depreciatory transaction. The hon. Gentleman wants to repeal section 176, which covers some common ground with, for example, clause 69. It can be used to combat avoidance involving the artificial creation of losses. Its remit, however, is wider than just anti-avoidance.

Standing Committee A

Clause 70

John Butterfill (Conservative, Bournemouth West)

I remind the Committee that with this we are discussing the following amendments:No. 107, page 60, line 4 [Vol I], at end insert—

‘(4A) At the end of section 176, add—

“(10) This section shall not apply to companies for disposals accruing after 5th December 2005.”'.

No. 108, page 60, line 6 [Vol I], leave out from ‘212)' to end of line 13 and add

‘subsections (8H) and (8I) shall cease to have effect.'.

No. 109, page 60 [Vol I], leave out lines 25 to 28.

No. 110, page 60, line 29 [Vol I], leave out from beginning to end of line 2 on page 61.

Dawn Primarolo (Labour, Bristol South)

Good afternoon, Sir John, and welcome to this afternoon’s sitting. When we broke for lunch, I was responding to amendments Nos. 106 to 110, which were tabled by the hon. Member for Wycombe (Mr. Goodman). His points on amendment No. 107 related to section 176 of the Taxation of Chargeable Gains Act 1992, which covers some of the same ground as clause 69 in that it could be used to combat avoidance involving the artificial creation of losses. Section 176’s remit, however, is wider than just avoidance.

Section 176 covers purely commercial situations that would otherwise produce an unfair result for tax purposes. For example, if a company pays a distribution out of pre-acquisition profits prior to being sold, section 176 ensures that the correct amount of capital loss is recognised on the sale. To pay the dividend might well be a normal commercial judgment, but it is still appropriate to apply section 176. It has no purposive anti-avoidance test; rather, it is an objective test that is well understood and respected.

Like amendment No. 107, amendment No. 108 has nothing to do with the rest of the clause but touches on something else. It does not touch on the targeted anti-avoidance rules, but would remove a rule that applies only to life insurance companies with holdings in unit trusts and open-ended investment companies. Because they are charged tax on movements in the value of such holdings and not just on disposals, there is a unique relieving rule that allows them to carry back losses to the two previous periods. No other type of company is allowed to carry back capital losses. When an insurance company changes group, the current law prevents carry-back except where the losses arose on the assets that the company held before joining the new group. That is in line with the general thrust of the loss and gain buying rules.

The Bill will update legislative references and provide a minor relaxation of the restrictions on carry-back of losses. I am not sure what prompted amendment No. 108. The hon. Member for Wycombe said that it was probing and not directly relevant. On that basis, I do not accept it. However, because the point that he raises could none the less be advanced, I shall say to him that Her Majesty’s Revenue and Customs has recently issued a consultation document on taxation of life insurance companies. That is the right place to raise such issues regarding future intentions. I do not think that his point is necessarily relevant here.

Amendment No. 110 is strange. It would remove a transitional rule included in the Bill as a result of representations from companies and their advisers. It is strange to want to remove that. Subsections (9) and (10) are intended to provide additional relief for companies that have undertaken certain transactions prior to the pre-Budget report that do not involve gain or loss buying but that could have been subject to restrictions on their use of capital losses. They have been included because companies asked that the draft legislation include improved targeting in that specific area. The Government recognised that the original draft could be improved and responded accordingly. I cannot see any good reason why the amendment should stand, although I hope that the hon. Gentleman will accept my explanation. In effect, amendmentNo. 109 would remove from the scope of the clause any tax-driven purchase of a company that occurred before the pre-Budget report. If we were to accept that amendment, the subsection that it would remove would be unnecessary. However, as I do not believe that the amendment would have that effect, amendmentNo. 110 should also be rejected.

I hope the hon. Gentleman will accept those explanations of how the clause works and why this large group of amendments would not be necessary.

Stewart Hosie (Scottish National Party, Dundee East)

I have listened carefully to the Paymaster General. Throughout her speech, she made continual reference to the fact that the provision is designed to tackle specific tax avoidance measures and schemes. However, as yet, I am not wholly convinced of that. She has said repeatedly that there was an HMRC informal procedure in which schemes, deals or trades could be checked to determine whether they were legal when companies were buying losses or whether they would fall foul of the provision. That runs the risk, I think, of companies being in a de facto starting position for almost every significant commercial transaction.

When a company may acquire another that has losses, the starting point will be to go to the HMRC to determine whether it will be a legitimate commercial transaction or whether it will fall foul of the new rules. That will run the risk of adding time delays, additional cost and uncertainty to the process of acquisition. That is important.

We should look at the various forms of purchase and the reasons for them in relation to amendment No.106. Companies may buy to extend their market share; as part of a pre-agreed growth strategy; to extend their geographic reach; to extend the development and production of sales capacity; or to gain new technology, expertise or skills. They may buy as part of a self-financed growth strategy or as part of planned use of investment cash from elsewhere—for example, from investors or one of the markets. They may buy or, indeed sell, as part of a takeover defence strategy or to position themselves after a disposal to take over another company. They may do so to avoid breaching monopoly and other fair trade rules. Companies may buy or sell to maximise shareholder value and fulfil their fiduciary duty. They may buy simply to diversify to protect themselves in the case of a business that had been too narrowly focused for the time being. They may also sell loss-making parts of the business to shore up the remainder or as part of a strategy to focus on core activity. They may sell in order to invest elsewhere.

Those companies that buy particularly to extend their geographic reach or increase turnover may well find that the best value they can achieve is to buy what are, at the moment, loss-making concerns. A judgment might be that the savings could, in the future, be made centrally through enhanced purchasing muscle and so on and so forth. They may feel that the name of the company and the reputation of its brand could turn what was a loss-making purchased company into a profit-making arm. All those decisions are legitimate and valid.

My worry is that the changes will add uncertainty, delay and cost to what should be a normal commercial transaction. I will concentrate on the consequences of the delay and uncertainty. They could be huge. If a company were unable to buy a loss-making concern, to put on muscle or perhaps reduce its value as a takeover defence mechanism and if it had to go to the HMRC to identify in advance if that was a legitimate transaction, it could be extremely worrying. Companies that sell may find that there is no longer a market there if they are trying to divest themselves of a loss-making arm. If there is a delay in doing that and if the cash is not brought in quickly, they may end up carrying costs that they did not anticipate, which may put the rest of the business at risk.

I recognise the Paymaster General’s earlier concerns, and amendment No. 106 seems to suggest that if companies purchased a loss in any of the ways I cited and part of the transaction was defined by the HMRC as legitimate, they could mask a purchase of the loss for the purpose of tax avoidance, which she referred to earlier. I am not convinced that I would vote for the amendment if it were pressed to a vote, but I would like her to address these legitimate concerns. If we are not satisfied today, we may have to return to clause 70 and related clauses at a later stage.

Dawn Primarolo (Labour, Bristol South)

To help the hon. Gentleman, we are dealing with a series of clauses: clauses 69, 70 and 71. I referred to the informal clearance procedure when we discussed amendments Nos. 105 and 101. Those were grouped under clause 69, but amendment No. 101 is relevant. It is the same type of amendment becauseit would include a statutory clearance procedure in clause 71. It was included in that group because all the amendments dealt with the same subject matter.

I agree absolutely with the hon. Gentleman’s general points, which I also made, on why a statutory clearance procedure was not desirable for the reasons he gave. Such a procedure was unsuitable for clause 69 because that clause is specific, clear and targeted, and it is accepted as such. The informal procedure I referred to in response to amendment No. 101 relates to clause 71. I went on to say that despite the fact that it was an anti-avoidance measure, it was far more complex than that. Additional points were necessary, which is why I raised the informal clearance procedure, the guidance and other supports that the HMRC would put in place for companies that sought that certainty. I concur with the hon. Gentleman regarding the undesirability of statutory clearance requirements in these clauses.

The hon. Gentleman’s second point relates to clause 70, which introduces new provisions to deal with capital losses and capital gain buying. Again, it only applies when the main purpose—or one of the main purposes—of the arrangements in place was obtaining a tax advantage. Before the Committee started, you and I reflected on this matter, Sir John, and on the existing legislation that already dealt with it, so it is not a new subject or an exclusion that companies might not be aware of—they are aware of it. The legislation was designed to stop companies exploiting losses in the ways that we have discussed.

Unfortunately, ways have been found around the legislation, which has been in place for quite a long time. It pre-dates this Government. Clause 70 will repeal the old bits of the legislation—the gain buying rules that have been repealed—and includes the anti-avoidance measures. It leaves the old loss-buying rules, because they still have a purpose. That was the point of the exchange between myself and the hon. Member for Wycombe about the amendments that he tabled.

All the fears that the hon. Member for Dundee, East (Stewart Hosie) suggested would not apply at this point. There is not an informal clearance requirement and the clause is straightforward. Therefore, I can confidently reassure him that some of his examples would not occur. I hope that that clarifies things, because the three clauses interact.

Paul Goodman (Conservative, Wycombe)

It is good to see you in the Chair, Sir John. If I may interact withthe Paymaster General about her response to the amendments as follows—

Dawn Primarolo (Labour, Bristol South)

How interesting.

Paul Goodman (Conservative, Wycombe)

I am gratified that the Paymaster General says it is interesting, because I was not convinced that she would necessarily think that was the case—[Interruption.] At last, a Government Back Bencher is paying even closer attention to the detail of the Committee’s procedure than they have to date. They will turn with interest to what the Paymaster General said about amendment No. 108. What she said about a consultation in relation to the point that I raised about life assurance was welcome, because it was put to me that the rule changes could hurt policyholders and deter life assurance companies from commercial mergers. If we are talking about life, that issue will be relevant to the consultation.

On amendment No. 106, where we have a stab at writing into law a definition of what the “main purpose” of a company is when that main purpose is to avoid paying tax, the Paymaster General made the point that the definition would be a narrow one. I accept that, so I beg to ask leave to withdraw the amendment.

Clause 71

John Butterfill (Conservative, Bournemouth West)

I have been advised that the hon. Member who was to move amendment No. 99 and speak to the group of amendments would prefer notto move that amendment or speak to amendmentsNos. 111 and 102. He simply wishes to move amendmentNo. 100. Is that correct?

Paul Goodman (Conservative, Wycombe)

That is correct, Sir John.

I beg to move amendment No. 100, in page 61[Vol I], leave out lines 31 to 44.

The reason for that change is as follows: as the Committee will be aware from listening to the Paymaster General’s response to the amendments that were tabled to clause 69, clauses 69 and 71 are closely related. In the debate on clause 69 she dealt with the arguments in the three amendments that I do not wish to discuss.

However, amendment No. 100 is discrete. The lines it proposes to delete refer to an arrangement of notices. It is a probing amendment, seeking to explore the regime of notices that the clause would write into the Bill. The clause does not impose a tax system that Her Majesty’s Revenue and Customs may challenge in the formal manner if it disagrees with the self-assessment. It would instead allow HMRC to issue a notice, which arguably represents issuing a notice by diktat. We should be grateful to hear a reason for the measure, particularly because the tax planning that would trigger the issue of the notice would probably have to be disclosed to HMRC under the disclosure of tax avoidance scheme rules, which are being extended in their remit. So HMRC should not be ignorant of the planning undertaken. There also seems to be nothing in the clause that enables a company to appeal against such a notice. It could be argued that that gives tothe Executive considerable powers that they shouldnot have.

Dawn Primarolo (Labour, Bristol South)

I shall refer to the question of issuing a notice, which amendment No. 100 covers. Issuing of notices is a general part of the disclosure requirement regime. HMRC would issue the notice when it believed that the conditions of the clause were met; however, companies need not be concerned by the provisions unless they receive a notice. That is the first step. The notice would be a possibility if conditions were met. Obviously, HMRC must be consistent when issuing notices, and such issuing must be based on cases to which it reasonably believes that the conditions of the legislation apply. The conditions requirement means the exercise of judgment, but that is inevitable for what is a purposive test. There is nothing unusual in that, and such judgment is called for in many other areas of tax law.

HMRC has also issued guidance, to which I referred when we discussed amendment No. 101 and clause 69. HMRC has issued guidance on how it will exercise judgment in relation to the legislation. We were discussing the informal clearance procedure, and HMRC has also offered clearance on an either pre or post-transaction basis. Clearly, however, if a company takes its own view during its self-assessment, and ultimately disagrees with the decision, it will be referred to a special commissioner for ruling before going through the normal processes. I am not sure that I made this point this morning, so I should add that having given that informal clearance, HMRC will be bound by it—as long as all relevant facts about the arrangement had been disclosed in the first place. I hope that that explains the procedures. The hon. Member for Wycombe asked, if a company nevertheless disagrees, can it challenge? The answer is yes.

Paul Goodman (Conservative, Wycombe)

I think that the Paymaster General is saying that, in effect, there is an appeal system after the notice is issued. That being so, I beg to ask leave to withdraw the amendment.

Clause 75

Theresa Villiers (Conservative, Chipping Barnet)

Clause 75 deals with film tax partnerships, and the Opposition broadly support it. Film tax issues have already been discussed by the Committee at length, but the avoidance scheme on which the clause focuses is one of the latest of many that have sought to exploit loopholes in film tax laws. As I stated in the debate on chapter 3, we have reservations about certain aspects of the proposed film tax structure, but we believe that the Government are right to close the loopholes, and we agree that the complex system of sale and leaseback contracts should not continue, because it is not yielding sufficient value for money for the taxpayer.

It seems strange to remark on specific legislation concerning this particular scheme, given that the regime that makes such schemes possible is about to be abolished. I have some sympathy with the position of the Law Society, which has questioned whether

“it is worth introducing a provision of such complexity and narrowness on the statute book, particularly when film tax reliefs are being refocused”.

However, I acknowledge that the particular scheme that we are debating has long been a target for the Revenue—even from before the decision to opt for wholesale film tax revision, although I have never understood why the Government want to focus on it so much. For some years, the plain vanilla sale of leasebacks had been tolerated by the Revenue if it resulted only in a deferral of tax. However, the structure we are discussing goes further—it seeks to achieve tax reduction by converting taxable income into permanently tax-free income. The scheme has an opaque and complex structure that involves both a film partnership and an investment partnership.

The clause restricts the amount of tax relief on interest borne by loans whose purpose is the funding of investment in a film partnership. Instead of 100 per cent. deduction being permitted, a film partner will be able to deduct only 40 per cent. of paid interest, which will ensure that at least some film income ends up being taxable. The Revenue believes that the 40 per cent. figure will leave the investor in a similar tax position to that for a plain vanilla sale and leaseback structure, in which benefits are only deferred. However, the Law Society pointed out that the 40 per cent. figure seems fairly arbitrary, so will the Paymaster General indicate how the Treasury made that calculation? Other than on that point, the Opposition have no objection to the stand part motion.

Dawn Primarolo (Labour, Bristol South)

I agree with the hon. Lady that the need for the provision is regrettable. That is particularly so given that the Bill also contains tax credit provisions that she has acknowledged are better suited in directing money to those engaged in production, rather than to high-value individuals who are not connected to production and who are simply looking for a tax-saving scheme.

The change was needed because the schemes were particularly aggressive: sale and leaseback occurred over a 15-year period and it was necessary to ensure that tax was paid over the rest of the period. Her Majesty’s Revenue and Customs became aware that the schemes were being marketed aggressively and the likely exposure, had we not taken steps, would have been substantial. I am sure that the hon. Member for Chipping Barnet (Mrs. Villiers) can imagine my delight in finding that I had to have yet another arrangement under the Finance Bill in respect of films. It has been challenging for all hon. Members who want to assist particular technological abilities and the developments in the film industry for such matters to be based in the United Kingdom where we have great skills. There also comes a point when we must question for what the tax relief is providing.

As for the question posed by the Law Society, 40 per cent. is not an arbitrary figure. HMRC approached the matter by undertaking a detailed study of standard sale and leaseback structures. It gave it a reasonable approximation of the position that investors would be in had they invested in such structures in a straightforward way. The figure of 40 per cent. was therefore chosen as a proportionate response to that particular type of aggressive tax plan. It was simply trying to squeeze out aggressive tax planning. Such matters will never be an exact science, but it was an attempt to deal with the avoidance while not hitting other forms of sale and leaseback. I hope that hon. Members are satisfied by my clarification of matters.

Schedule 6

John Butterfill (Conservative, Bournemouth West)

With this it will be convenient to discuss Government amendments Nos. 67 to 70.

Mark Hoban (Conservative, Fareham)

I wish to raise some worries that the Chartered Institute of Taxation had about the original paragraph 6 that the amendment would delete and I wish to clarify whether those worries have been addressed by the amendments tabled by the Paymaster General. The institute is worried about the way in which the measures relate to sub-participations in loans and how they are dealt with. For the sake of clarity, I shall set out how matters work. What usually happens in respect of a funded sub-participation is that the originator would derecognise part of its assets for accounting purposes. Let us suppose that a loan of £100 is originated, of which 40 per cent. is sub-participated. The originator only shows a loan of £60 on its balance sheet, the profit and loss account only shows income of £60 and nothing is recorded for the remaining 40 per cent. asset or the 40 per cent. liability under the sub-participation agreement.

The Chartered Institute of Taxation believed that, under the original paragraph 6, the proposed new section 85C of the Finance Act 1996 will now require an originator to recognise income on the full £100 of the loan asset. When the sub-participation agreement is a loan relationship under proposed new section 85C, the originator will, in addition to taxing the debits and credits on the whole £100 of the loan asset, be able to recognise the debits and credits on the loan liability of £40, so the net result is that it still shows an asset of£60 and it shows the income of £60 on its profit and loss account.

The Chartered Institute of Taxation’s worry about the matter and the Government’s original proposals was that, when the sub-participation agreement is not a loan relationship under proposed new section 85C, the originator seems to be taxed on the income of£100 from the loan asset, but there is no mechanism to give relief to the amounts paid away on the sub-participation agreement. Therefore, it would be taxed on £100 in its profit and loss account, but it would have no relief on the interest it pays on the 40 per cent. ithas given away—as it were—to someone involvedin sub-participation, unless of course the “fairly represent” provision in section 84 of the FinanceAct 1996 overrides that position. I should be grateful if the Paymaster General would say whether she believes that the “fairly represent” provision in section 84 does override the treatment of the sub-participation where there is not a loan relationship in accordance with proposed new section 85C.

There are a couple of other issues to do with this relationship that I ought to go through. Under proposed new section 85C, there are potential consequences for originators in relation to what might happen where the underlying asset is impaired. Proposed new section 85C requires the originator to recognise the entire loss. The originator would also be entitled to recognise the gain under the sub-participation agreement. There should be no impact overall in respect of this, unless one of two conditions are met. Either the section 209 “results dependent” provision of the Income and Corporation Taxes Act 1988 applies to deny interest deductions, or the sub-participant is a connected party. Section 209

“could apply wherever the sub-participation counterparty is not within charge to corporation tax (eg neither a UK bank nor a UK branch)”

and that would then deny the interest deductions required to balance out the interest of £100 on this sub-participation.

Rob Marris (Labour, Wolverhampton South West)

I am perhaps becoming forgetful, but could the hon. Gentleman remind me what section 209 of the Income and Corporation Taxes Act 1988 actually says?

Mark Hoban (Conservative, Fareham)

I am not going to go into that because it distracts from our purpose. A problem I have detected with our adumbrations is that sometimes too much detail gets in the way of the thrust. It is important for those outside this debate to have their minds focused on the essence of the argument, rather than be distracted by the hon. Member for Wolverhampton, South-West (Rob Marris) down the highways and byways of the voluminous legislation that underpins our proceedings today.

That deals with section 209. [Interruption.] Letme come back to the second issue, where the sub-participation is to a connected party. There are some issues around the timing of interest payments and whether that is a timing difference, and there are some issues around transfer payments, but in the view of the Chartered Institute of Taxation that is neither here nor there. However, there is a concern that where a connected party is involved there may be no relief available for impairments due to the denial of connected party impairments. Its belief is that in the original drafting this appears to be unintentional; I would be grateful if the Paymaster General were to confirm that that is indeed the case—or that her Government amendments Nos. 66 to 70 address this concern.

David Gauke (Conservative, South West Hertfordshire)

In a similar spirit, may I just raise a couple of points that the Law Society has highlighted in respect of schedule 6, and ask whether the new wording introduced by the Paymaster General will address those concerns? The first relates to basic principles of loan relationship legislation. I assure the House that the Law Society guidance was not produced by my wife, although it was produced by my former law firm—I stress the “former”, so I have no financial interest to declare. According to the Law Society brief,

“The general rule is that the items that are brought into account and the timing of any tax charge or relief are determined in accordance with the company’s accounting treatment”,

but the view is that the original wording of schedule 6 undermined that principle. The Law Society states:

“The effect is that once a company has determined the relevant profits and losses on its loan relationships that are reflected in its accounts, it will have to consider separately whether those credits and debits ‘fairly represent’ its profits and losses”.

The Law Society’s concern is about the degree of uncertainty, because there does not appear to be any guidance on how a firm should make that assessment.

My second point is similar to one mentioned by my hon. Friend the Member for Fareham (Mr. Hoban). It is about whether the new provision will catch all forms of intra-group lending. The Law Society does not believe that that is the intention, but perhaps clarification would be helpful.

John Butterfill (Conservative, Bournemouth West)

I hope that the Paymaster General will not be tempted to respond to the question asked by the hon. Member for Wolverhampton, South-West, because I have just checked, and the relevant section covers no fewer than five pages.

Dawn Primarolo (Labour, Bristol South)

Thank you, Sir John; I shall be brief, then. First, as the hon. Member for Fareham (Mr. Hoban) identifies, amendment No. 66 relates to a measure dealing with avoidance schemes that rely on accounting rules to cause profits on loan relationships to be de-recognised, and so fall out of tax charges. He is quite right that concern was expressed about the original drafting, which would have meant that the measure applied to certain types of normal, commercial transactions such as hedging arrangements and sub-participations entered into by banks. The Government listened very carefully to representations and accepted that the original drafting may have gone too far. Amendment No. 66 has effectively rewritten the measure so that it is more narrowly focused on the avoidance scheme at which it is aimed, and ensures that it does not catch commercial activities.

As for the hon. Gentleman’s two points on certain banking sub-participations, the measure will not affect the banking sub-participation market. The complaint was in connection with the application of the connected party rules on impairment losses, but the measure will not make banks and their associates any worse off. The hon. Gentleman made a further point about connected party bad debt rules. The anti-avoidance measure in the Bill does not actually deal with that, and if there is a problem, this is not the place in the Bill in which to try to solve it. I say to the hon. Gentleman and those who read our deliberations that if banks consider there to be a serious problem on that issue, I will ensure that my officials discuss those issues with the banking industry very quickly. I do not believe that the matter is specifically connected to the clause, but if that subject is being raised as an issue, the industry needs to come forward formally with it in discussions. We would be happy to hear what it has to say.

Amendments Nos. 67 to 70 make small but important changes that modify the shares as debts rules introduced last year. I think that they are straightforward, and perhaps I do not need to reflect on them. The hon. Member for South-West Hertfordshire (Mr. Gauke) asked about loan relationships, and I touched on that under contracts.

As I said, having listened carefully, the Government are undertaking in the amendments to put beyond doubt what they believe the position always has been in respect of this matter. Most commentators now accept it, but a few have argued that tax computational laws, which rely on accounting recognition of profits, override the basic requirement that amounts brought in to charge for tax are those that fairly represent profits and gains arising to companies.

The measure does not undermine the principles of the two regimes—that is the important message. In fact, it supports them by basing the tax measure of income on normal commercial accounting, which we would expect fairly to represent accruals profits and gains arising to the company, so there is no need for uncertainty. That is the long answer. Basically, we listened to the points that were made and amended the legislation accordingly.

There seems to be one further point in respect of connected party bad debt rules, which was not part of the submissions from others. It would not be dealt with in the schedule anyway, as it is not relevant. However, as I said, if there are particular issues outstanding, I would be more than happy to ensure that they are passed on, and to arrange for officials to meet the industry to discuss them.

Mark Hoban (Conservative, Fareham)

I wish to raise some issues about schedule 6 that have been brought to my attention, principally by the Law Society. The first is a change introduced in the Budget and proposed in paragraph 4 to the rules concerning mandatory convertible securities and the deemed disposal of those securities on 2 March 2006. There is concern that intra-group reorganisations or transfers might lead to a tax charge being payable, despite the fact that the group had not sold the security.

I shall go into more detail. As the Bill stands, a company that holds the benefit of a mandatory convertible security on 22 March 2006 is treated as making the disposable security at its market value on that date. The resulting gain or loss is brought into charge to tax when the company ceases to hold the security. The provision would bring the deferred gain or loss into charge to tax on any disposal in paragraph 4(6)—even on an intra-group transfer or reorganisation, when a company, or group of which it is a member, has not realised any economic benefit from the disposal.

Will the Paymaster General confirm that in such circumstances the deferred gain or loss would actually be deferred, and that no tax would be payable until there was a real economic disposal of the mandatory convertible security? I understand that such an approach would be consistent with that adopted for money debts that were chargeable assets when the loan relationship rules under the Finance Act 1996 were introduced. That is my first point.

Paragraph 5 is the subject of my second point, on which my hon. Friend the Member for South-West Hertfordshire may have touched during the debate on Government amendment No. 66. Again, the concern is that the paragraph, which looks relatively innocuous, states that

“Section 85A of FA 1996...is amended as follows...In subsection (1) (amounts to be brought into account are those recognised in determining company’s profit or loss) after “Subject to the provisions of this Chapter” insert “(including, in particular, section 84(1))”.

The Paymaster General touched on the issue during her response on the last group of amendments. The concern is that the paragraph seems to change the basis on which interest and other aspects of the loan relationship are treated. Historically, they have been treated in accordance with accounting principles. There is concern that paragraph 5 changes that so that when companies have drawn up their accounts in line with generally accepted UK accounting practice, they have to work out what “fairly represent” means, without having the guidance to enable them to do so. There is concern that if there is such a change, more guidance ought to be provided to taxpayers to help them understand what “fairly represent” means in the circumstances and why it overrides general UK accounting practice.

My third point relates to paragraph 10 of the schedule and to intra-group lending. I think that my hon. Friend touched on the issue earlier; perhaps the Paymaster General does not need to refer to that point, but I should be grateful for her thoughts on the treatment of deemed disposals on mandatory convertible securities.

Dawn Primarolo (Labour, Bristol South)

The transitional rules work in a fair way. When a mandatory convertible is first brought within the loans relationship regime, a capital gain is calculated by reference to fair value at that time. However, that gain is not taxed until the company disposes of the convertible. Any amount of tax under the loan relationship rules cannot be brought into accounting in any other way, so it cannot be included in the working out of capital gain; it is not clear how it is thought that there would be a problem.

As most mandatory convertibles appear to be used for tax avoidance purposes, there is unlikely to be any commercial reason why they should need to be subject to a group reorganisation and there is no reason for a more generous regime than is in the Bill. I dealt with the hon. Gentleman’s second point in answering his hon. Friend the hon. Member for South-West Hertfordshire. It is the Government’s view that the measures before us are a fair representation of what we always believed was the case. However, some commentators argued to the contrary, so the change will put the matter beyond doubt. The measures will reassert the Government’s view on how the rules should work.

I remind the hon. Member for Fareham that we are trying to deal with avoidance. A great deal of care has been taken to consider specifically how to target and deter avoidance without causing problems for legitimate commercial relationships. I hope that he will accept that.

Clause 78

Dawn Primarolo (Labour, Bristol South)

I hope that the Committee will bear with me as I introduce clause 78. It is important that I put some points on the record to assist everybody using our deliberations and the Government’s clarifications.

Clause 78 deals with controlled foreign company legislation and is designed to prevent UK companies from diverting profits to low-tax regimes. It is important to remember that the only companies that face a charge under CFC legislation are those that divert profits from the UK to avoid UK tax. Unfortunately, CFC legislation is constantly under attack from those who seek to avoid Parliament’s intentions. This Government and previous Governments have had to add additional anti-avoidance rules to ensure that it remains fit for purpose.

Clause 78 will block a loophole in one such piece of anti-avoidance legislation, section 90 of the Finance Act 2002. The particular mischief that concerned the Government then and now was that companies can artificially migrate to another country simply to avoid the effect of the CFC rules by using the provisions of a double taxation treaty.

It was widely accepted at the time that such migrations might have become possible as a consequence of the exemption from corporation tax of companies’ chargeable gains from substantial shareholdings, which came into effect on 1 April 2002. The exemption was welcomed by business, which was also fully involved in developing section 90. Companies that migrated before 1 April 2002 were excluded from section 90, not least because they did not have the benefit of the substantial shareholdings exemption when they migrated.

The Government have since become aware that some excluded companies are being used in tax avoidance schemes, and clause 78 seeks to counter such schemes. We have targeted the clause as tightly as possible to avoid leaving open unacceptable risks of continued avoidance on one hand and, on the other, to continue to exclude companies not involved in tax avoidance. The clause does so by focusing mainly on the type of company used in marketed tax avoidance schemes.

Condition A focuses on companies that have never owned any subsidiaries and are available to use as special purpose vehicles in avoidance schemes. If we left it there, we suspect that, such is the ingenuity of tax planners’ imaginations, it would not be long before companies that happened to own a subsidiary or two were used instead, so condition B aims to forestall all such manipulation.

Condition B is designed specifically not to catch migrated companies that are already the parent of multinational groups and continue to act as the parent of the same group. Such companies are outside the scope of the clause and will not be affected by it when the group makes acquisitions, including sizeable acquisitions, within its own sector in the normal course of its business. Any company that is in doubt as to how the clause will apply should seek clarification from HMRC, but I hope that I have put clearly on the record what is outside the scope of the clause and that no further clarification will be required.

The changes introduced in the clause ensure that from 22 March 2006 the position is returned to that intended in 2002. The clause will prevent tax avoidance and ensure greater consistency between companies that became non-resident at any date. I commend the clause to the Committee.

David Gauke (Conservative, South West Hertfordshire)

I am grateful for the Paymaster General’s comments and particularly her comment that the controlled foreign companies law is constantly under attack from those seeking to undermine Parliament’s will. She will be aware of an attack on that law in the current Cadbury Schweppes case, which is proceeding through the European Court of Justice. The Advocate-General has already determined against the Government. I merely ask whether anything in the clause anticipates a judgment in that case and, if not, what is the likelihood of the legislation having to be reformed next year or the year after in consequence of an adverse judgment from the ECJ. Has the Treasury reached an estimate of the likely cost of the Cadbury Schweppes case if the ECJ finds against the Government?

John Butterfill (Conservative, Bournemouth West)

Order. I do not think an estimate of the cost of the Cadbury Schweppes case is relevant to the clause.

David Gauke (Conservative, South West Hertfordshire)

I am grateful, Sir John. I withdraw that question and have no further comments.

Philip Dunne (Conservative, Ludlow)

I was interested to note that the Paymaster General referred specifically to acquisitions abroad within the sector of operation of the UK resident company or parent entity. I shall be grateful if she could clarify whether she is ruling out international diversification as a means of tax avoidance when there may be a bona fide reason for a UK-based company to acquire a company in a different sector but with some similarities. Is that intended to be caught by the measure?

Mark Hoban (Conservative, Fareham)

I shall briefly make one or two points. I am grateful to the Paymaster General for her clarification of the clause. I know that people outside the House will appreciate her comments and clarity. I want to be clear about one point. She suggested that companies should seek advice before entering into one of those transactions, but I was not clear whether that was a form of pre-clearance mechanism or a form of guidance that they could receive from the HMRC prior to entering into a transaction. I would be grateful for clarification from her on that.

The Paymaster General referred to examples, and although I do not wish to ask for specific examples, will she state how many companies migrated offshore prior to 1 April 2002? That will tell us whether she is addressing a small problem or trying to close a large loophole.

As my hon. Friend the Member for South-West Hertfordshire said, we are conscious of the issue relating to the threat posed to CFC legislation by European Court judgments. He referred to the Cadbury Schweppes case. There appears potentially to be an issue when the UK-incorporated company has migrated to within the European economic area: the loophole that the Paymaster General is trying to plug will not be plugged if the judgment goes against the UK Government, whereas companies outside the EEA will find the loophole being closed down. I would be grateful if she would address the issues relating to the ECJ and its thoughts on the CFC legislation. To what extent can protection be gained to prevent more companies from trying to avoid tax by locating outside the EEA?

Dawn Primarolo (Labour, Bristol South)

I shall deal first with the question on the Advocate-General’s opinion. As the hon. Gentleman knows better than I do, it is an opinion; it advises the Court and it is not a final judgment. I am sure that he would not expect me to go any further. He will have seen from the Advocate-General’s opinion that CFC rules were considered to be compatible with the treaty freedoms and that compliance with such regimes does not represent, in the Advocate-General’s view, an unacceptable burden on companies. However, I have made it clear that that is his opinion and it would be unwise for me to go any further until we have a judgment from the Court.

On the specific points, I do not have a figure in respect of migrated companies—I am unsure whether one exists. It would be substantial, and we can see that in the flows. I wonder whether the hon. Gentleman would find it acceptable for me to write to him, members of the Committee and to you, Sir John, to outline the scope of the problem. We believed that it was not insignificant and a potentially difficult issue.

The hon. Gentleman made a point about clearance. I was not suggesting a statutory clearance procedure in my opening remarks on the clause: I was saying exactly what we thought was outside. If companies wished still to seek clarification from the HMRC on a case in this area, they could do so and the HMRC would consider itself bound, as is normal, by what it then advised.

Let me turn to the other questions. Bona fide acquisitions are not caught. Diversifications are not ruled out, but they can be complex. The hon. Member for Fareham will understand from my opening remarks the specific points that we are trying to address. I do not want this to be a cumbersome process, because it is no good for the companies either. They are taking decisions on this matter and need to do so at a relatively fast rate. However, if a company were in any doubt, the offer relating to the seeking of clearance and advice in the informal procedures, to which I referred, would be open and the same points would stand with regard to the advice given.

We have tried to return the legislation to the 2002 intent. It is difficult, given the ingenuity of tax planners, but at every opportunity we must recognise legitimate activities and place them outside the scope of the clause. When that is not clearly done, I suggest that companies speak directly to the HMRC to get its response to their particular case.

Schedule 7

George Young (Conservative, North West Hampshire)

I just wanted to press the Paymaster General on what appears in schedule 7 regarding conditions A and B.

The schedule deals with the transfer of assets abroad. I have no time for those who transfer their assets abroad with a view to avoiding tax and I welcome the initiatives that the Government are taking in the Bill to stop that practice. However, there are legitimate reasons why assets might be transferred abroad—the establishment of a business, for example. The bit that caught my eye is in paragraph 3, where we come across conditions A and B. The provision is referred to in the explanatory notes as a revised purpose test, designed to discover the motive behind the transaction. I would be grateful if the Paymaster General would let me know whether the conditions appear in other tests of tax avoidance.

As I understand it, if there is a dispute between the Revenue and an individual as to whether a certain activity is taxable, it goes before the courts at the end of the day, and they would consider all the circumstances of the case and come down on one side or the other. If one goes down the condition A and condition B route, the taxpayer would not just have to show that, on balance, his interpretation was correct, but that the interpretation the Inland Revenue had put on it was unreasonable. It would be interesting if the Revenue planned to introduce this test in schedule 7, but extended it broadly to apply to other cases in which there was a dispute between the individual and the Revenue. If it did, the terms of trade between the Revenue and the individual would be tilted towards the Revenue.

I have some questions for the Paymaster General when she winds up the debate. Is there any precedent for the conditions; why do not they apply, as I understand they do not, in other tests of tax avoidance; and are they the beginning of a series of new tests designed to shift the balance away from the individual and towards the Revenue?

Mark Hoban (Conservative, Fareham)

I shall raise several concerns, particularly from the Law Society, about the operation of schedule 7. Some of them touch on the points that my right hon. Friend the Member for North-West Hampshire (Sir George Young) made. The Institute of Chartered Accountants in England and Wales has also expressed some concerns about the operation of schedule 7.

Schedule 7 amends the exemptions for bona fide transactions from sections 739 and 740 of the Income and Corporation Taxes Act 1988. However, representations from the Law Society suggest that in several respects the schedule goes too far, narrowing unnecessarily the scope of the exemption and imputing on to the taxpayer the motives of the tax adviser.

My right hon. Friend referred to the two tests—conditions A and B. The Institute of Chartered Accountants in England and Wales would welcome some guidance on the circumstances in which HM Revenue andCustoms believes that condition A would be satisfied. Paragraph 60 of the consultation document, “Transfer of Assets Abroad—Technical Notes on Draft Clause”, sets out the Revenue’s view that the new provisions will require all relevant circumstances of the case to be considered, including the

“actual objective outcome of the transactions”.

The purpose of the amendments is to move away from a subjective test of what happens when assets are transferred abroad, to a more objective test of the motives behind it.

If the objective outcome of the transactions is no reduction in the amount of UK tax payable, arguably there will be no need for the Revenue to invokethe provisions in section 739 of the 1988 Act, thus rendering the exemption of proposed new section 741A redundant. The ICAEW requests clarification about whether the Revenue envisages any scenarios in which the objective outcome of the transaction results inthe reduction of UK tax, but the exemption under proposed new section 741A(1)(a) is still allowed, by virtue of condition A being satisfied.

Condition B is a broader test of the transactions. It requires all transactions to be commercially valid, and requires that the steps in the transaction are no more than incidentally designed to avoid the liability for tax. Subsections (5) and (6) of this schedule then give further details of the definition of commercial transactions.

The Law Society believes that transactions by individuals are unlikely to benefit from the exemption in condition B. In a clear example, it shows that if a transferor transfers assets into a trust for investment, the transfer will not be at arm’s length, and it will therefore fall outside the exemption. Indeed, that would be true if an individual invested directly into an overseas fund, since although the fund would meet the conditions of subsection (5), the personal investor would not.

Furthermore, the Law Society is concerned that subsection (6) is overly focused on the structure of the transaction. It provides that

“the making and managing of investments...is not a trade or business except to the extent that—

(a) the person by whom it is done, and

(b) the person for whom it is done,

are independent”.

For that purpose, independent means that the persons concerned are not connected within the meaning of section 839 of the 1988 Act. The provision puts to one side whether transactions are done on an arm’s length basis, and it focuses on whether the people involved are connected.

The person for whom the investment is done can be the transferor or the person who receives the benefit of the investment, or the offshore entity, or the fund itself, because the investment manager will often be contracted by or on behalf of the fund rather than the investment. One can imagine a situation, particularly in a corporate structure, in which the investment manager could be connected with the offshore fund.

The Law Society believes that it would be difficult for a transaction to satisfy the independence element of subsection (6) of this schedule. It suggests that the real test should not be about the structure of the transaction, because that is likely to result in subsection (6) not applying in a huge range of circumstances. Instead, it suggests asking whether the transaction between investor and manager is at arm’s length. Will the Paymaster General comment on that? Because if the criterion is one of structure rather than an arm’s length test, the exemption may be redundant.

Philip Dunne (Conservative, Ludlow)

I should like to give an example to elaborate on that point. It would be helpful if the Paymaster General would clarify whether the provision is intended to catch investment managers who seed a hedge fund offshore. Somebody may set up a hedge fund based in the UK that seeks to have its centre of operations in a jurisdiction such as the Cayman Islands, or another offshore jurisdiction attractive to other foreign investors who are looking to invest in that fund and who would not be subject to UK taxation. To get the fund off the ground the individual—possibly a sole trader—could make an investment in a special-purpose vehicle that would be set up in an offshore jurisdiction. That might be classified as a connected trade, because there would be no third party and it might take some time for the individual to establish the business—it often takes months if not years to get such investment vehicles running. It surely cannot be intended that such a situation be caught.

Mark Hoban (Conservative, Fareham)

My hon. Friend’s point leads me to a similar one made by the Institute of Chartered Accountants about setting up a new business. An individual resident in the UK may establish a foreign company to trade outside the UK—possibly in a country with higher corporation tax rates than the UK—and he may decide that it is commercially sound to provide finance or assets to the company on favourable terms from his own resources, because he may consider it worthwhile to subsidise his company to enable it to generate revenue. The institute is concerned that that situation might be caught.

Those situations concern different types of business, but the issue remains how to demonstrate the value of assets that have been transferred overseas, and whether they were transferred at a commercial rate, and in both situations there could be an impact on the business economics. A more equitable approach in both situations may therefore be to consider the commerciality of a transaction as a factor to be taken into account in determining whether it was more than incidentally designed for the purpose of avoiding tax liability.

Subsection (4) of the schedule concerns the imputation of tax advisers’ motives to their clients. It says:

“The intentions and purposes of any person who, whether or not for consideration,—

(a) designs or effects the relevant transactions or any of them, or

(b) provides advice in relation to the relevant transactions or any of them

are to be taken into account in determining the purposes for which those transactions or any of them were effected.”

I am concerned that a tax adviser may decide to structure a particular transaction in a way that minimises tax but the taxpayer might not be aware of that. The clause would mean that taxpayers, even if they did not know, ought to have borne in mind the fact that the tax adviser may have tried to structure the transaction in a particular way.

I suspect that the Paymaster General will say—as she did on an earlier clause when we were debating an amendment tabled by my hon. Friend the Member for Wycombe—that we are talking about legislation targeted at particular schemes that have been marketed to individuals in an aggressive fashion, and cases in which both the taxpayer and the adviser know the exact purpose of the scheme, which is to reduce tax. Could the Paymaster General comment a little further on subsection (4), and say whether she thinks thatthe terms have been drawn so widely that there may be situations in which innocent taxpayers—someone setting up a business overseas, for example—are inadvertently caught by that subsection?

Rob Marris (Labour, Wolverhampton South West)

I do have some sympathy with thehon. Gentleman’s point, and I think that it has also been made by the Law Society of England and Wales, of which I am a member, but I caution him about picking up other people’s briefs, because I am almost certain from what he has read that he is referring to subsection (4) of proposed new section 741A, which is to be inserted into the Act. That is at the bottom of page 193. It is not a subsection (4) to the schedule. If I have got it wrong, and he is not referring to the final two lines on page 193 and the first lines on page 194, perhaps he will tell us so, but if he is referring to those lines, I caution him about the way in which he takes his briefs.

Andy Reed (Labour, Loughborough)

There is no answer to that.

Mark Hoban (Conservative, Fareham)

There is indeed no answer to that, and it is indeed proposed new section 741A that relates to subsection (4) on line 39, page 193. One of the issues in dealing with a Bill such as this one is that outside bodies are interested in it, and raise concerns about the scope of the changes and their impact on lawyers, accountants, taxpayers and so on.

The Law Society also has concerns about whether the provisions would allow inquiries into the purposes of the adviser, and it also raises issues around legal privilege and the confidentiality of clients’ information. I am not a member of the Law Society of England and Wales—and I am, at times, profoundly grateful for that. My hon. Friends and the hon. Member for Wolverhampton, South-West may wish to comment on that aspect of the Law Society’s brief, but that is a concern that it has, and it is important that the issues that it raises are aired on its behalf, as there are so few solicitors in this House who can speak up in its defence.

May I just comment on subsection (9) on page 194? It says:

“The jurisdiction of the Special Commissioners on any appeal includes jurisdiction to review any decision taken by an officer of the Board in exercise of the officer’s functions under this section.”

I should be grateful to hear from the Paymaster General whether that gives the special commissioners the power to amend or vary the decisions taken; I suspect that it probably does, but I should be grateful for that clarification.

I also want to raise the thorny issue of clearance, which has popped up in debates along the way. As I understand it, any application for exemption under section 741 is dealt with under a self-assessment system, so that a company entering into a transaction such as establishing a foreign company—something that my hon. Friend the Member for Ludlow (Mr. Dunne) referred to—would claim the exemption in its 2007 tax return. Assuming that the taxpayer were to submit his return before the 31 January 2008 deadline and full disclosure were made, HMRC would have until 31 January 2009 to open an inquiry into the tax return. In effect, the taxpayer would not know for certain whether he has a UK tax liability in respect of the company’s income until almost three years after the company was established. That will create uncertainty in the minds of taxpayers.

We discussed how exemptions could put into question some transactions. One solution that would deal with the uncertainty and provide a clearer picture for the taxpayer earlier than up to three years after he establishes the business would be a formal clearance procedure. An alternative is the informal route that the Paymaster General referred to under clause 78, whereby a taxpayer could seek guidance from HMRC which would then be binding.

I understand that advisers and professional bodies have been in discussion with HMRC about the issue and that at present the Government are not proposing a clearance system but are prepared to consider, in the light of further evidence, whether such assistance might be necessary. I understand that people are trying to determine whether there is sufficient evidence to justify taking the matter back to the Treasury. I should be grateful for the Paymaster General’s views on whether any informal clearance will be offered to people who wish to set up such transactions.

This is not a straightforward schedule—I have ploughed through it—and people outside this House are interested in following through some important issues around the extent of the exemptions. Theywant to ensure that bona fide, genuine commercial transactions will not inadvertently fall within the scope of the Bill, and they are particularly concerned about how conditions A and B and subsections (5) and (6) will operate.

Jeremy Wright (Conservative, Rugby and Kenilworth)

I have three concerns about what is proposed in subsection (4) of proposed new section 741A of the Income and Corporation Taxes Act 1988. As we have already discussed, the proposed new subsection deals with the intentions and purposes of the designers of transactions, and of tax advisers.

The first concern arises because of a potential difficulty with legal privilege. I should make it clear that I am a lawyer but not a member of the Law Society. It is right, of course, that some of the advisers that the schedule refers to will be tax lawyers—any member of the Gauke family, for example—and under such circumstances a difficulty with legal privilege may arise. I wonder whether the Paymaster General can comment on that.

The second difficulty is a practical one. Transactions will be permissible although they avoid tax liability if they were incidentally designed to avoid tax. It is difficult to envisage circumstances in which it will be possible clearly to establish how an adviser explained to his client that a particular transaction would only incidentally avoid tax, rather than primarily avoid it.

My hon. Friend the Member for Fareham referred to the third difficulty, which seems to be the key problem. Surely it is the intention of the taxpayer, not the adviser, that the Government are keen to explore. Those two things are not necessarily the same. It is right and logical that the client—the taxpayer—goes to an adviser because the adviser has more knowledge of such matters than the client does; otherwise, the advice would scarcely be necessary. It is therefore conceivable that the adviser understands far more about the avoidance of tax than the client does, and only if that intention to avoid tax is communicated to a client does a problem arise.

Dawn Primarolo (Labour, Bristol South)

Is the hon. Gentleman seriously suggesting that if a professional adviser knowingly advises on tax avoidance and the client simply does not ask because they are happy to take the money, there is no responsibility?

Jeremy Wright (Conservative, Rugby and Kenilworth)

No. I am suggesting that a tax adviser might advise a client on a sensible measure to take to order his financial affairs, which that tax adviser understands far better than the client. If that measure were taken incidentally to avoid tax, it would be perfectly acceptable under the Government’s proposed legislation, but if it were taken primarily to avoid tax, it would not be. That distinction might in some circumstances cause clients difficulty.

The measures are entirely superfluous. If the Government are seeking to penalise those taxpayers who understand that they are avoiding tax, surely the taxpayer’s intention and not the tax adviser’s is significant. If a taxpayer came to understand from his tax adviser that what he was going to sign off on was tax avoidance, he would rightly be penalised for it. But why is it necessary to include in consideration the intention of the tax adviser rather than what he has communicated to his client? That seems to be the difficulty created by the clause.

Dawn Primarolo (Labour, Bristol South)

Clause 79 and schedule 7 will amend legislation on the transfer of assets abroad. They are important anti-avoidance provisions that were enacted in 1936, an important date in our understanding of how the rules should operate.

The rules introduced in 1936 aimed to prevent UK-resident individuals from avoiding UK income tax by putting assets in offshore structures in such a way that they retain control of the income arising from those assets. The changes announced in the pre-Budget report closed a loophole exploited by tax planners to avoid tax.

The provisions in schedule 7 will recast the exemption test for post-PBR transactions. All relevant circumstances, including the objective outcome of the transaction, must be taken into account when deciding whether there was a tax avoidance purpose. The intention of advisers must also be considered. I shall return to that point.

The right hon. Member for North-West Hampshire asked whether the question of purpose and reasonableness was new. The straightforward answer is no. It is elsewhere in the legislation—in section 741 of the Income and Corporation Taxes Act 1988, for example. Will the proposed measures shift the balance toward HMRC? No. That is how HMRC operates currently.

Perhaps I should give a slightly longer answer. The provisions are based on the existing purpose test in section 741 of the 1998 Act. The Government’s view is that section 741A strikes a fair balance. Its aim is a reasonable conclusion test to ensure that all circumstances are taken into account when deciding whether an individual had avoidance purpose. It is right to take all relevant factors into account and draw a reasonable conclusion.

The courts and commissioners have full power to consider HMRC decisions and replace them if they decide that the taxpayer met the terms for exemption under the reasonableness test. There is no doubt that special commissioners’ jurisdiction under the provisions will necessarily include a power to vary or set aside HMRC’s decisions, not just to review them. That has always been the case under current legislation, which has virtually the same wording.

On the question of legal professional privilege, I disagree with the point that the hon. Member for Rugby and Kenilworth (Jeremy Wright) made. The aim of subsection (4) is to ensure that the professional advice obtained is taken into account as one of the circumstances of the case and not disregarded as irrelevant. If an individual asserts that they did not have the subjective purpose of avoiding tax, it is reasonable to see whether the advice they were acting on was consistent with that claim. That is all that is being required.

The new provision does not override advisers’ legal privilege. There is no compulsion under subsection (4) to disclose advice given to clients. However, in practice, using the example that the hon. Gentleman gave, it may be in the taxpayer’s interest if advisers do provide advice and waive that privilege, assuming that the advice given is consistent with the claim that there is no subjective purpose of avoiding tax. Otherwise, there is a complete mismatch; people would say, “I didn’t have the knowledge, they just happened to get a good deal for me.” That is ridiculous and that connection has to be made.

There is no reason why transactions involving innocent offshore structures, such as family trusts, could not qualify under condition A; likewise for ordinary investment transactions on arm’s length terms in commercially run offshore entities. In such cases, conditions for a section 739 charge might apply. However, the taxpayer could potentially show that an exemption was due.

The approach for condition B mirrors that of the old purpose test in section 741. It strikes a reasonable balance in allowing some element of avoidance in commercial cases, provided that they are no more than incidental, but that is an essential part of the test and the case must be genuinely commercial and not driven by tax avoidance.

I disagree with the idea that subsection (5) is too restrictive. It is needed to prevent the abuse of non-resident personal trusts for avoidance purposes by UK residents. Generally, in cases where individuals make ordinary investment transactions in entities independently managed by commercial concerns on arm’s length terms, condition A in section 741A will be satisfied. There may be exceptional cases in which it is appropriate to use section 739 against particular marketed retail investment projects.

I shall not even attempt to answer the point made by the hon. Member for Ludlow; what he says shows the complexity of the issues. Given that the legislation has been in place for rather a long time—over 70 years—it would be foolish to respond specifically to his point. I am sure that he would not expect me to, without the full facts before me, and a summary of what might happen to hedge funds is not sufficient. Nor—before the hon. Gentleman rises to repeat his question—shall I indulge in giving tax advice. I am not a solicitor. I am not an accountant. There is a vast Department called HMRC that provides that advice, and it is the appropriate point for advice.

Philip Dunne (Conservative, Ludlow)

Will the right hon. Lady give way?

Dawn Primarolo (Labour, Bristol South)

No, I shall conclude my points; then the hon. Gentleman can make his.

On the guidance that HMRC could give on the operation of the legislation and in response to the issues raised by the hon. Gentleman, I should say that a drafting of guidance is in hand. HMRC aims to show that guidance to representative bodies so that the agreed version can be published at about the time of Royal Assent. The guidance will have examples of how the rules will work in a number of different cases.

The final point was about the pre-transaction clearance system. I shall make clear what is going on in discussions with HMRC. HMRC has already written to the representative bodies explaining Government decisions in respect of the schedule and why it thinks that a clearance is not necessary. Nevertheless, as one would expect, the Department has indicated a willingness to consider, without commitment, any further supporting evidence showing why a clearance system is necessary.

Section 739 has existed for 70 years without clearance. The changes under the Bill should make the law clearer and remove doubt about how the purpose test is intended to apply. There is now potentially less, not more, need for a clearance system. As I said, HMRC will provide guidance on the new provision. The representative bodies will need to get over a rather high hurdle, given that something that has existed for 70 years and did not need clearance apparently cannot be understood now and needs it. As I said, there is no commitment, but if those bodies come forward to say why the system should change, the Department will be prepared to consider that.

Jeremy Wright (Conservative, Rugby and Kenilworth)

Will the Paymaster General deal with my point about intention? I did not hear her deal with that. My point was that, on section 741A(4), I would entirely understand if the Government’s case was that it is important to know what advice a taxpayer has received in deciding whether that taxpayer intended to avoid tax. The difficulty is that subsection (4) does not say that; it deals with the “intentions and purposes” of the adviser, not the advice given.

Helen Goodman (Labour, Bishop Auckland)

I am interested in the hon. Gentleman’s argument. Will he try to reconcile this? Many of us have listened to the shadow Attorney-General use up hours of time on the Floor of the House discussing intention in respect of terrorism legislation. He said that maintaining intention in that legislation was vital.

Jeremy Wright (Conservative, Rugby and Kenilworth)

I shall try to assist the hon. Lady. I am worried not about the fact of intention, but whose intention we are talking about. I am talking about the intention of the taxpayer. When it comes to the avoidance of tax, the Government ought at the very least be concerned about whether the taxpayer intends to avoid tax. My concern is that, although I understand the logic of wanting to know what advice a taxpayer has received, I am not clear about why the legislation deals with the “intentions and purposes” of the adviser rather than with the advice given. I invite the Paymaster General to deal with that specific point.

Dawn Primarolo (Labour, Bristol South)

I dealt with that point. I made it clear that if an individual asserted in their defence that they did not have the subjective purpose of avoiding tax—that their intention was not to avoid tax—the Government would not consider it unreasonable, if the specific avoidance that HMRC seeks to close off was indicated, to see whether the advice on which the individual was acting was consistent with that claim. This is a responsibility of the taxpayer.

Therefore, as I have said, I do not believe that any taxpayer would not understand their intention or the type of advice they had been given, or that their legal advice or professional advice in any other way would have left them ignorant of the purpose. This is another test to discover whether the claim made by a taxpayer is sustained by the professional advice that they then acted on—they signed forms, they acted on it.

Mark Hoban (Conservative, Fareham)

I thank the Paymaster General for what she has said in response to the points I and my colleagues made on this schedule. She has set out clearly the Government’s position on a range of issues, and she has added some welcome clarity, particularly on the operations of condition A and condition B, for which we are grateful. Given that this legislation seems to have remained relatively untouched for 70 years, I would like to think that we will not revisit it in the next 70 years, but I fear that our hopes and aspirations of not doing so will be dashed as I am sure we will examine it again at some point in the future.

The Paymaster General referred to the ongoing consultations on the guidance. They are welcome, and the guidance should flesh out some issues; it might not go so far as to address Cayman Islands hedge funds, but I hope it might address matters such as businesses being set up overseas where a transfer of assets has taken place at less than commercial value with a view to setting up the business.

Finally, I am grateful for the confirmation that the power to review includes set aside and vary. The Paymaster General confirmed that in such a way that it seemed an obvious point, but it was not obvious to some of the people who have commented on this measure.

Clause 80

Theresa Villiers (Conservative, Chipping Barnet)

The Opposition have considerable sympathy with the Government’s efforts to target the particular type of reverter to settlor double trust arrangements that are the primary focus of the clause. However, we have certain reservations about the clause, which I should express in the context of our views on the pre-owned assets regime as a whole. If I take the Committee through a couple of those general points on the regime, I can then go on to deal with clause 80 with some rapidity.

As far back as 1986, rules have existed to prevent people from opting out of inheritance tax by transferring title to their homes to their adult children while continuing to live in them. These have been colloquially described to me by some experts as

“having your cake and eating it arrangements”.

From 1986 onwards, the gift-with-reservation rules looked through such transfers and treated the house as part of the estate of the parent on death for inheritance tax purposes; hence, a Conservative Government made the first move against such arrangements. Therefore, there is clearly a degree of common ground in all parts of the House in respect of seeking to prevent people from avoiding inheritance tax using this type of scheme.

However, the Government’s pre-owned assets rules, which were an addition to the gift-with-reservation rules and which came into effect in April 2005, have provoked considerable controversy and anxiety amongst those affected by them. As veterans of the Committee may recall, in both 2004 and 2005 the Opposition expressed serious concerns about the pre-owned assets regime on the grounds that there was a risk that it would lead to double taxation and that the rules were drafted in such a way as to penalise a number of innocent transactions between family members. In respect of the first point on double taxation the key anxiety was that the arrangements that had to be dismantled as a result of the new pre-owned asset rules might be hit with a double inheritance tax charge. I acknowledge that the Government have heeded the warnings given on the matter by the Opposition and professionals, and I am grateful that they have moved to deal with the double taxation problem via secondary legislation. However, it is worth drawing to the attention of the Paymaster General and the Committee the fact that there are serious concerns whether the regulations published in December can deal effectively with the problem. Taking into account the impact of schedule 20, the Government appear to have provided in the regulations a relief that nobody can use. I illustrate that as follows.

The most serious double taxation problem under the pre-owned assets regime concerned the so-called home loan schemes, which involved an IOU held by the second of the two trusts that made up the scheme. Members who were on the Committee last year will recall that more than 30,000 people have entered such schemes, so it was and remains a significant issue for many. To unravel such a scheme in order not to fall into the POA regime or go back into inheritance tax—the Paymaster General acknowledged that that was entirely in order, even desirable, for those who have entered a trust—the second trust must release the IOU, the debt that was part of the original avoidance schemes targeted by the POA legislation.

After various representations, the Paymaster General agreed that there was a problem of double taxation in such cases. The December regulations specifically provide that double charges relief will be available for inheritance tax purposes if the debt is released. The aim of the regulations was to ensure that if someone died within seven years of having entered a home loan scheme, the IHT charge would not be levied on the same economic value twice.

The problem occurs as a result of schedule 20 to the Bill. If the schedule is accepted unamended—I hope that it will not be—it will treat the release of the debt as an addition to the trust and an immediate 20 per cent. inheritance tax charge will be levied if the debt exceeds the inheritance tax nil rate band, which I am told it will in many cases. So people are getting relief from one inheritance tax charge as a result of the Paymaster General’s welcome December regulations, but it seems that they run into another because of schedule 20. We must bear in mind that many people did not unwind their schemes before the Budget because they had been waiting for the double charges regulations that came out in late December, and not all their arrangements and paperwork had been completed by March.

It would be welcome if the Paymaster General were prepared to look into the matter to see whether schedule 20 will have the impact that I have described. It seems odd that, having issued regulations to prevent double charging as a result of the release of the debt in a home loan scheme, the Treasury now seeks to impose an additional charge on the release of that debt. I hope that, having stated clearly that double taxation should not occur in the cases in question, the Paymaster General might consider amending either schedule 20 or the December regulations to ensure that they have the effect that I believe she wants.

The Opposition’s second reservation with the pre-owned assets rules is that there are a number of situations in which the ownership of property is transferred between family members without tax being the motivation. Those transfers could be caught by the pre-owned asset rules, which were so widely drafted as to cover all disposals of land and could therefore penalise such innocent transactions. Examples that have been brought to my attention include a situation in which one cohabitant gives money to her partner, who uses it to pay for the purchase of the house in which they both live. Even if they later marry, the donor cohabitant is caught by the pre-owned assets charge. Cohabitants would be well advised to re-examine all such transactions as far back as 1986, in case there is a danger of an unexpected pre-owned assets charge.

I acknowledge the Revenue’s willingness to move on the matter when representations have been made to it in the past to try to exclude such innocent transactions, but problems remain. A particular difficulty is caused if family members make arrangements that fall foul of the rules without having any idea of the tax consequences. They might require the informal arrangements that do not involve taking specialist tax advice on the pre-owned assets regime.

In an age in which pensioners are increasingly asset rich and cash poor, we must bear in mind that their children might well want to help them to realise some of their wealth by buying a share of the equity in their parents’ homes. If such arrangements are entered into by a parent and a bank, there is no problem, but if that kind of equity-release arrangement is set up between family members, it triggers the POAT rules. It does not matter if the sale was at a commercial price, because the pre-owned asset tax still applies on the cash element, even if it will attract inheritance tax on the parent's death.

If the Government wish to stop people from giving away cash raised by equity release, they could easily provide for that. It seems odd that where two members of a family live together and one gives the other a share in the house, the donor is not caught by the reservation of benefit rules or the POAT rules. However, if the donor has insufficient resources to make the gift and instead sells the interest to the other person living there, whether or not at full value, the transaction is subject to the pre-owned asset rules. Those are our reservations about the framework as a whole.

I turn to the clause itself. I can see why the Revenue would want to target the double trust reverter to settlor trusts that are the focus of clause 80, as such schemes were clearly aimed at getting around the IHT rules. I certainly prefer the more targeted approach in the clause to the broad-ranging attack in schedule 20 on a whole range of trusts, most of which have nothing to do with tax. As I made plain in my opening for the official Opposition on Second Reading, we are prepared to work constructively with the Government in their efforts to target artificial schemes that may use trusts to avoid tax, as long as the legislation is specifically targeted on such artificial schemes.

The majority of trusts hit by the clause seem to fall into that category, so we approach it with a degree of sympathy, but we have some concerns. First, the clause has a retrospective effect in that it applies to existing arrangements. That point is not as serious in this case as it is in relation to schedule 20, because one would think that those entering into such schemes probably had an idea that they were likely to attract the attention of the Revenue at some point. None the less, it is still a concern that this will be one of a number of occasions on which the Government have introduced legislation that is, in effect, retrospective.

Our second and more serious concern is about the scope of the provision. As with the overall pre-owned asset regime structure, there seems to be at least some evidence that the width of the drafting could catch some innocent transactions. I would be grateful if the Paymaster General considered the point made by the Institute of Chartered Accountants, which states:

“The mischief at which the clause is aimed is where property is part of an individual’s estate as a result of section 49 IHTA 1984 but will revert to a settlor when that interest comes to an end on death.”

The institute goes on to recommend that the clause should be more specifically aimed because it currently denies

“the benefit of the relief where an individual has the relevant property in his estate even where the revertor to settlor exemption is not available.”

The Chartered Institute of Taxation has expressed similar concerns. Having spoken to its representatives, I know that, in essence, its worry is as follows. Let us take an example in which H sets up a trust for his wife for life, into which he puts an interest in a house. He might have done that some years ago—perhaps in the late 1980s—for various reasons, some of which might involve tax and some of which might not. It might have been part of an arrangement to make provision for the wife as part of a matrimonial settlement. So, the wife initially has an interest in possession. Subsequently, she dies and the property reverts back to H. No IHT would be payable at that point because of the spouse exemption. H takes a qualifying interest in possession and the property is part of his estate for the purposes of section 49 of the Inheritance Tax Act 1984. On his death, IHT would be payable in the normal way, because there is no double trust arrangement that gives rise to the reverter to settlor exemption in section 54.

The settlement was set up by H and no one else, so no loophole is being used. In essence, the value of the house is subject to normal inheritance tax charges. However, under clause 80, H would, from 5 December, be liable to the pre-owned assets tax, because the new paragraph 11(11) to schedule 15 of the FinanceAct 2004 has been breached. This property was once part of his estate and he now has an interest in possession in it again. The net result of this rather complicated arrangement is that both the pre-owned assets regime and inheritance tax apply and we have a double taxation situation.

I do not have enough empirical knowledge to know how common these trusts might be, but I hope that the Paymaster General will agree to look at this area as it is clearly not the Government’s intention to inflict both the pre-owned assets tax and inheritance tax on the same arrangement. I hope that the Government will consider amending the clause or looking at it again to ensure that it targets only the double trust reverterto settler arrangements, which are specifically designed to exploit the loophole in section 54, and not the type of situations that I have described. Certainly as the Chartered Institute of Taxation points out, the scope of the clause seems to go rather beyond the press release in the Budget report. Perhaps it would be possible to tighten up the drafting in order to ensure that it focuses on the artificial schemes that I believe the Paymaster General has in mind.

John Butterfill (Conservative, Bournemouth West)

At this point, may I say to hon. Members that I hope that this will not turn into a debate on schedule 20? It would be rather premature to have that debate.

Dawn Primarolo (Labour, Bristol South)

Indeed, Sir John. I should point out to the hon. Lady that, whatever she might think, the changes contained in the clause are completely unrelated to the issue she referred to. This is a free-standing clause directed at artificial trust arrangements that are designed to get round both IHT gift with reservation rules and the pre-owned asset income tax charge. The problem when professional bodies write complex examples is that it is difficult to know whether they are giving real examples or are seeking to punch a hole in the legislation by describing a theoretical position. I have seen little evidence that her examples refer to common behaviour.

Let us take the example of the person who provided cash so that his mother could buy a house. The mother dies and leaves the house, interest and possession to her son who is then caught by the income tax charge. Let us look at how unlikely that would be. It would require the person in question to make a significant gift to somebody else to purchase an asset, only to have it resettled upon them under the person’s will within seven years and then take up occupation and receive an imputed benefit of more than the de minimis limit of £5,000 per annum. The amendments that we have made to the election provision would enable the person to elect out of the income tax charge. The relationships that have been suggested seem somewhat unlikely, but even so the answer is for the person to elect out of the income tax charge if their interest also forms part of their estate for IHT purposes.

The hon. Lady gave a further example and I am aware that representations have been made to the HMRC about it. It is in connection with elderly parents being caught if they do not have enough property to be liable for IHT. They sell their house and give money to their children to convert part of their house into a granny flat. I believe that that was discussed during the debates on pre-owned assets. I have asked the HMRC, under those circumstances, to monitor the situation so that we can see whether that is an issue and whether it will create difficulties with the pre-owned assets. Should that be the case, I would be prepared to reconsider the matter.

I remind the Committee, however, that the pre-owned asset rules are targeted at those who use contrived structures to avoid paying inheritance tax—that still stands. I was amazed at some of the examples in defence of the individuals who claimed that they were not trying to avoid inheritance tax. Often that paves the way to a clear indication that that is exactly what they were trying to do.

The hon. Lady also said that innocent cases could be caught by the provisions. With the exception of the case that I flagged up in which there is discussion with representative bodies and which I am asking the HMRC to monitor carefully—the legislation was not intended to apply to such a case—the truth is that it is incredibly unlikely—it still has not been asserted—that innocent cases will be affected by the pre-owned assets regulations, even in the cases that she mentioned.

Great care is always necessary in such matters, but the fact is that the reason for the exemptions, and hence for the clause, is to ensure that individuals do not sidestep income tax or the IHT charges and do not avoid income tax charged to the pre-owned assets or the inheritance tax. I see you smiling, Sir John, but given the arguments that were advanced in the introduction of the pre-owned assets, I am sure that you understand that I am not particularly attracted to such action.

I am sure that we will have a lot of time to discuss the matter during consideration of later clauses, but I can assure the hon. Lady that care is taken over the interaction of the legislation. If she is seeking an assurance from me that I shall continue to do that in the course of this Finance Bill, I can give her that assurance. However, perhaps some of the points that she made today would be more appropriately explored at a later stage.

Theresa Villiers (Conservative, Chipping Barnet)

I acknowledge that that issue is separate from schedule 20, which is why I did not seek to advance issues on schedule 20 apart from where I felt that there might be a difficulty with its interaction with some of the pre-owned asset regimes. I refute the suggestion that I was seeking to punch a hole in the legislation. I made it plain that I was not seeking to defend the double trusts reverter to settlor arrangements.

Dawn Primarolo (Labour, Bristol South)

I was not suggesting for a minute that the hon. Lady was seeking to punch a hole in the legislation. If I thought that that was the case, I would have been much clearer and said it to her directly. I was referring to the examples constructed, which often inadvertently have that effect. So unless she dreamed them up herself, I am not accusing her of such a thing.

Theresa Villiers (Conservative, Chipping Barnet)

Turning to those examples, I think that the Paymaster General referred to one given by the professional bodies to which I do not think that I referred. I did not refer to any of the examples in which a parent passed a property to a child and the child then sets up a trust. I referred to one example in which an individual sets up a trust for his spouse. Again, I emphasise that I acknowledge that there are significant problems when a property is transferred to a child and a trust is set up. They seem to be at the heart of the double trust situations, which the clause is targeting. As I have said on several occasions, I can understand why the Government want to target them. The situation that I described is subtly different. There is no double trust and no attempt to exploit the loophole that is provided by section 54. That can be done by setting up a double trust. It would be useful for the Paymaster General to bear that in mind.

Lastly, I welcome the Paymaster General’s indication that she is prepared to monitor situations where, for example, an elderly parent sells a share in the equity of their home. As I said, she and the Revenue have shown a welcome degree of flexibility in trying to remove innocent transactions from the scope of these proceedings. I know that there was a particular concern about loans between family members triggering the pre-owned assets regime. I gather that, through extra statutory mechanisms, it looks like that anxiety is being averted. I am pleased to hear that that approach, which tries to ensure that innocent transactions stay out of a very penal pre-owned asset regime, is continuing in relation to some of the examples that I mentioned.

I sign off by saying that, in the complicated example I raised, the real problem was the double taxation charge. Regardless of what one thinks about the motivation for setting up a trust, I hope that the Paymaster General would agree that one of the things we do not want to come out of this measure is that people end up in the pre-owned assets regime and pay inheritance tax. It should be one or the other.