Finance Bill

Public Bill Committee, 17 May 2007.

(Except clauses 1,3,7,8,12,20,21,25,67 and 81 to 84, schedules 1, 18, 22 and 23, and new clauses relating to microgeneration) - Clause 27

Mark Hoban (Conservative, Fareham)

I beg to move amendment No. 31, in clause 27, page 17, line 28, at end insert—

‘(A1) The purpose of this section is that relief for allowable losses shall not be granted where a person deliberately and knowingly enters into complex arrangements intended to avoid liability to capital gains tax, income tax or corporation tax.

(A2) This section shall be construed purposively in line with the principles set out in the statement of principles issued by Her Majesty’s Revenue and Customs on 6 December 2006.’.

I welcome you to the Chair, Mr. Illsley. I also welcome the return of the hon. Member for Wolverhampton, South-West, who was sadly missing on Tuesday. I know of his keen interest in all matters environmental, so he would have enjoyed the debate that we had about zero-carbon homes. Perhaps he has already caught up with it.

The clause introduces a targeted anti-avoidance regime for capital losses, and it might assist the Committee if I make some general remarks about it to give some context to the amendment and the other amendments to the clause. It is fair to say, from conversations and from representations that have been made to members of the Committee by outside bodies, that no one questions the fact that capital losses are being used as part of tax avoidance schemes, so we do not oppose the clause in principle. However, there are issues about its operation to which it is important to draw the Committee’s attention and on which it is important for Ministers to comment.

The clause is relatively short, just a page in length, but its provisions are broad and could capture a large number of fairly standard transactions. Proposednew section 16A(1), “Restrictions on allowable losses”, states:

“For the purposes of this Act, ‘allowable loss’ does not include a loss accruing to a person if—

(a) it accrues to the person directly or indirectly in consequence of, or otherwise in connection with, any arrangements, and

(b) the main purpose, or one of the main purposes, of the arrangements is to secure a tax advantage.”

That is broadly drafted and could capture a large number of transactions. One transaction that the Institute of Chartered Accountants believes it could capture is a fairly straightforward tax planning scheme whereby if someone has a significant capital gain on, say, a property, they could decide to realise a loss on shares and that capital loss could be offset against the gain, reducing the tax payable.

Such schemes could be caught by the clause and we know from the guidance notes that accompany it that they will not be. However, the casual reader of the Bill would not appreciate that there are guidance notes underpinning the clause. There is no reference to them in the clause, but there are 10 pages of guidance setting out 14 examples that will help taxpayers steer their way through the breadth of the clause. It is inappropriate for guidance to be used as a substitute for effective primary or secondary legislation.

I shall set out the concerns of the Chartered Institute of Taxation as they were expressed to Her Majesty’s Revenue and Customs. The institute said:

“We are unhappy that our concerns as to the scope of the legislation have been dismissed”.

That is in response to a consultation that took place at the time of the pre-Budget report.

John Healey (Labour, Wentworth)

Carefully considered.

Mark Hoban (Conservative, Fareham)

But in the eyes of the CIOT the concerns were none the less dismissed. The CIOT continued that it was also unhappy with

“the assertion that the position can be clarified through guidance. There is no reference in the legislation to either the statement of principle or the guidance and, therefore, no guarantee that the legislation will be interpreted in this context. Furthermore, guidance has no statutory authority and can be changed without consulting Parliament. A taxpayer can only challenge it through judicial review. As such, the enactment of the legislation as it stands represents an unacceptable delegation to HMRC of the power of the legislative.”

Its budget briefing amplified its concern, stating:

“We consider that guidance notes are a poor substitute for proper legislation, especially where the guidance notes correct flaws in the legislation. We appreciate that some guidance notes will always be necessary in order to avoid immense Finance Acts.”

I suppose that some people might appreciate less immense Finance Acts. The briefing goes on to state:

“Such guidance should tie in and complement the legislation, rather than ‘untax’ it.”

Therefore, we have a set of guidance notes that narrows the scope of the legislation as it is drafted. However, would it not be better to have more tightly defined legislation that gives taxpayers greater certainty about what falls within and without the scope of the clause?

In its representations, the Institute of Chartered Accountants states:

“Taxpayers should be taxed on the basis of clear legislation.”

It continues:

“In the absence of a clearance procedure, it is not right to produce deficient legislation that appears to catch many more transactions than intended, on the basis that such transactions can then be taken out by way of HMRC guidance. HMRC guidance has no statutory authority and cannot be taken into consideration in court.”

That is bad enough, but given that guidance notes are so important, it would be helpful if they were clear and reflected some principles. Again, however, the CIOT expresses concern about the clarity of the notes. In one of the examples in the revised guidance notes, the CIOT wrote to HMRC saying that

“we agree that these situations should not be caught by the legislation, but we cannot see that the conclusion that they are not caught is justified from an analysis of the legislation, or indeed, that this view is constantly reflected in some of the later examples in the revised guidance.”

The letter goes on to make the statement:

“The guidance lacks a consistent logic that can be applied to determine when the legislation applies and when it does not. There appears to be an unwritten test, whereby a situation is caught if it crosses the boundary between what is considered by HMRC to be acceptable and unacceptable behaviour. This causes great uncertainty for the taxpayers.”

At a later stage, I will quote from the principles underpinning the guidance to highlight why the CIOT might make such comments about the uncertainty and lack of clarity in the guidance. With that in mind, I have tabled four groups of amendments to increase the protection that is available to taxpayers and to give greater clarity to the Bill. That will give taxpayers and advisers a much clearer idea about the transactions that are caught both inside and outside the scope of those rules.

Amendment No. 31 would insert in clause 27 a new section 16A. It states, in line with the approach adopted by the tax law rewrite project, that there should be an introduction to the new legislation at the start of the clause to set out the purpose and rationale behind the changes. The amendment seeks to set out that purpose in subsection(1) and make explicit reference in subsection(2) to the principles that were set out by the HMRC at the time of the pre-Budget report.

We would like all the amendments to be accepted by the Government. I do not know whether the Economic Secretary or the Finance Secretary will reply. The Economic Secretary may be full of generosity in the light of last night’s news and accept all of the amendments with alacrity and without any questioning. It is important to say that all the amendments in the different groups should form part of the package to give much clearer signals to taxpayers.

If Amendment No. 31 is accepted in isolation, it would be contradict the rather sweeping terms of the rest of the clause. It may well be of some assistance to ensure that courts and tribunals interpret legislation purposively, thus limiting the full rigour of the legislation as it currently applies. Amendment No. 31 would narrow the interpretation of the clause to ensure that transactions, in which a loss is deliberately usedto offset a gain—such as in the example I gave earlier—would not be caught, but transactions that include more aggressive tax planning schemes would be. I commend the amendments to the Committee.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

I will not go over what the hon. Gentleman has just been through, but I do not think that there is any opposition to what the clause tries to achieve, in targeting the anti-avoidance and capital losses. However, there are concerns about exactly how widely drawn the clause is and whether it has sufficiently captured the differences between the approach of companies and individuals, and whether it can reflect those differences.

Furthermore, there are concerns, as the hon. Member for Fareham has said, about exactly how appropriate it is to contain so much detail in the guidance, especially if the guidance contradicts much of the substance of the legislation in trying to exclude specific groups. There are also concerns that, because the guidance is not in the Bill, it can be changed and it would not stand up to the test in a court of law.

I think that amendment No. 31 is trying to establish a motive test, which would be very helpful. My concern is exactly how easy, or impossible, it might be to assess against that motive. So I can see where the hon. Gentleman is trying to go with the amendment; I am sympathetic to what he is trying to achieve. I just have concerns about exactly how the amendment would make a difference, in terms of trying to establish a motive test. On that basis, we broadly support the hon. Gentleman, but we would be interested to hear what the Economic Secretary has to say about this issue.

Brooks Newmark (Conservative, Braintree)

I am delighted to see that the hon. Member for Wolverhampton, South-West is here. He will know, better than I, that there are all sorts of offences connected to cheating the Revenue, and the boundary between tax avoidance and tax evasion is at least as permeable as the one between tax planning and tax avoiding—I was not, of course, casting any aspersions about the hon. Gentleman.

That being the case, does it not make sense to have some statement from the Economic Secretary relating to intent of the clause? If someone is deliberately and knowingly entering into complex arrangements, it is easier to think them culpable than if they had stumbled into them. After all, as we all know, the complexity of the tax code is at a record high. It might even be said that anyone who interacts with the system at all is entering into “complex arrangements”.

Edward Balls (Labour, Normanton)

It is a pleasure to serve under your chairmanship, Mr. Illsley, and I thank you for your guidance. I will try to remain perked up, without my coffee, throughout the debate.

The hon. Member for Fareham has set the debate on this amendment in the wider context of the clause. So that we can deal with each of these four groups of amendments in that context, with your permission, Mr. Illsley, I will respond by also establishing a wider context at the start of the debate on amendment No. 31. In part, that is because I hope that we will then not need to have a clause stand part debate at the end of the discussion on these groups of amendments. I want to explain why we do not think that the amendments are necessary or desirable, but I want to do so in a way that I hope will show that we appreciate the concerns expressed by hon. Members.

Clause 27 is a targeted anti-avoidance rule, known as a TAAR, to counter tax avoidance schemes that make use of contrived capital losses. It builds on a rule that was introduced last year for companies, by extending that rule to individuals, trustees and personal representatives, and it is designed to prevent tax losses through avoidance schemes that create or use capital losses in ways unintended by the legislation.

The rule for companies was the subject of similar concerns to those that have been raised this year but, a year on from the introduction of the companies legislation, it is our view that it is working well and as intended. As we work through the amendments, I hope that we can reassure the Committee that the concerns that have prompted these amendments have been addressed and will be addressed by the way in which the legislation will operate.

As hon. Members said, the overall objective of the clause is widely supported. The Institute of Chartered Accountants in England and Wales has said:

“we support the Government’s aim of countering the use of artificially created losses to avoid capital gains tax.”

Similarly, the Chartered Institute of Taxation, the Law Society and the Society of Trust and Estate Practitioners do not disagree with the broad policy objective. Importantly, there has been extensive consultation on the draft legislation and the guidance with all the representative bodies. Indeed, there have been substantial changes since the consultation on the draft guidance, which began with the pre-Budget report at the end of last year, and HMRC is working with representative bodies to improve the guidance further.

Clause 27 denies tax relief for capital losses where the existence or amount of the losses has been contrived—in other words, where the taxpayer has entered into arrangements of which one of the main purposes is to secure a tax advantage, so that the tax losses that arise do not reflect economic reality. The key principle set out in the statement issued by HMRC on 6 December is that relief for capital losses should be available only where a person has suffered a genuine commercial loss on a real disposal.

The legislation will apply only where one of the main purposes of the arrangements is to secure a tax advantage. It will not apply to genuine economic transactions, so the vast majority of disposals—a wide range of innocent transactions—will be unaffected. We need to draw the rule widely enough to prevent further loss-creation schemes, but as I said, the rule will apply only to arrangements of which one of the main purposes is to gain a tax advantage.

I should tell the hon. Member for Braintree that highly skilled, intelligent people in the City and our wider financial services community come up with quite complex ways of trying to gain a tax advantage. It is not our intention to get in the way of proper tax planning, but when the complexity and ingenuity of schemes moves from tax planning to tax avoidance, the Government must respond to protect the taxpayer.

Mr. Newmark rose—

Edward Balls (Labour, Normanton)

The hon. Gentleman might want to reflect a little more on the reality of tax policy making before he gives us another of his lectures on complexity.

Brooks Newmark (Conservative, Braintree)

But would not the Economic Secretary acknowledge that the tax system that the Government have created over the past decade has indeed become very complex and that everybody might therefore fall under his definition of entering into complex arrangements as they try to understand it?

Edward Balls (Labour, Normanton)

I do not think that the hon. Gentleman was listening to my remarks. Instead, he was just reading out his prepared brief. The point that I was making—[ Interruption. ]

Eric Illsley (Labour, Barnsley Central)

Order.

Edward Balls (Labour, Normanton)

The point that I was making is that the global corporate tax system has become very complex. Many skilled and ingenious people are coming up with complex ways to avoid tax, and the Government must counter the resulting complexity. The hon. Gentleman might want to reflect a little further on that.

There are four groups of amendments to the clause. The first—amendment No. 31—would apply additional conditions to the anti-avoidance rule so that it would apply only where a person had deliberately and knowingly entered into complex arrangements that were intended to avoid tax liability. The second group of amendments would introduce a new clearance regime. The third would narrow the scope of the rule by providing thatit would apply only where, taking the arrangements as a whole, someone had the single main purpose of avoiding tax. The final amendment would introduce a de minimis limit. All the amendments would restrict the scope of the clause and, as I will argue, they are not necessary. Indeed, we believe that they would make it harder for us to deal with genuine avoidance and to protect people engaged in proper tax planning.

James Duddridge (Conservative, Rochford and Southend East)

Perhaps the Economic Secretary will explain in a bit more detail what will happen if an individual makes a large capital gain and owns shares on which there is a loss, which they decide to sell at some point in the year in which they made the capital gain, to reduce their overall taxation. Where would that situation fit under current legislation?

Edward Balls (Labour, Normanton)

I shall deal with that example in a moment, after I have dealt with amendment No. 31.

The clause already contains a main purpose test, which means that the rule disallows losses only when the person has entered into arrangements with the main purpose of securing a tax advantage. The amendment provides that, in addition to having that main purpose, the person must have entered into complex arrangements deliberately and knowingly, with the intention of avoiding liability to tax. The only effect of the amendment would be to limit the effectiveness of the rule.

The types of schemes that are caught by the clause do not happen by accident; they are the result of contrived circumstances in which transactions are undertaken in a particular way, primarily to achieve a desired tax effect, rather than for a genuine commercial or economic purpose. The danger of adding extra conditions such as “deliberately and knowingly” is that a person who wishes to avoid tax may claim to have acted unintentionally or to have followed advice without being aware of the consequences. Similarly, introducing the condition that the anti-avoidance rule can apply only where the arrangements into which the person has entered are complex can lead only to uncertainty for taxpayers and agents. More fundamentally, if the arrangements have a main purpose of avoiding tax, it is entirely right that they should be caught by the rule, regardless of their complexity.

The addition to the clause’s comprehensive, familiar definition of tax advantage of the uncertain words “intended to avoid liability” would lead to confusion and the creation of a loophole in the rule, and would add to the complexity that we always seek to avoid. It is essential that we use the definition of tax advantage that is used in the long-standing rules against avoidance of tax on income, which has regular and common currency, and which was recently reintroduced without opposition in the Income Tax Act 2007. That definition was also used without opposition in the Finance Act 2006, in the rules against avoidance by companies using capital losses.

The meaning of “tax advantage” is set out in the clause; it is based on existing anti-avoidance rules. The effect of modifying that well-understood wording by introducing avoidance of liability as a condition of the application of the TAAR would be that schemes that generate a repayment of tax, rather than a reduction in tax liability, would not be stopped. Such a loophole could be exploited by existing tax avoidance schemes that have been seen by HMRC.

The amendment also proposes to include a new statement that the clause is to be

“construed purposively in line with the statement ofprinciples issued by Her Majesty’s Revenue and Customs on6 December 2006”,

which is unnecessary, particularly as all legislation is now interpreted purposively. As I have said, the TAAR arrangements do not affect normal tax planning. HMRC guidance makes it clear that the rules of the TAAR will affect only contrived arrangements that attempt artificially to realise capital losses to gain a tax advantage. Normal tax planning, such as the decision to sell shares before the gain becomes greater than the annual exempt amount so that no tax will paid on the gain, is not affected by the clause.

Although much tax avoidance involves complex arrangements, it is quite possible to make non-complex tax-avoiding arrangements. The key question is whether the main purpose of the arrangements is to avoid tax. If so, it is right to disallow the losses. In response to the hon. Member for Rochford and Southend, East, if the pursuit of normal tax planning—his example was the selling of shares—means that no tax is paid, that will be acceptable. If, however, the main purpose is to avoid taxation, and the arrangements are contrived, the arrangements in the Bill will apply.

In summary, amendment No. 31 would hinder the clause. The amendment is unnecessary, it would not provide additional certainty for taxpayers, and we fear that it would introduce new loopholes and complexity to the tax system. However, I can reassure Committee members that consultations have been detailed and that they are ongoing. I hope that the industry will take reassurance from the example of the introduction of such methods for companies and capital losses one year ago, and recognise that if they are implemented properly, we can avoid the concerns that hon. Members have raised.

Rob Marris (Labour, Wolverhampton South West)

It is a pleasure to be back from Lithuania, and I note that, despite my absence, on Tuesday evening the Committee sat until 7.30 pm. Clearly, the extended sittings are nothing to do with my presence or absence.

I should like a little latitude on amendment No. 31, because it must be put in context. I am a member of the Law Society of England and Wales, and in its brief it says that while supporting the principle behind the legislation—namely, to deny the use of artificial or contrived capital losses—the Law Society, together with the Chartered Institute of Taxation, the Society of Trust and Estate Practitioners and the Institute of Chartered Accountants in England and Wales tax faculty, have expressed significant concerns that the drafting of proposed new section 16A does not meet this policy objective.

The Chartered Institute of Taxation says in paragraph 9.3 of its brief that the guidance notes need to be clarified since the examples conflict with each other and, for the reasons outlined in the paper, it also considers that the legislation is flawed. As it set out in its previous paper, it thinks that some of the examples in the guidance should be corrected.

I ask my hon. Friend to look again at the guidance. He addressed some of the issues in his previous remarks, but when such august and knowledgeable bodies say, “We like the idea, but we are not sure that you have got it right in the legislation and/or the guidance,” it behoves the Treasury to look again, in particular at the guidance, to ensure that it is not contradictory, that it embodies examples that do not conflict, and that it embodies that which the Government seek to do.

Certainly, Labour Members wish to prevent tax avoidance by the rich, which is what the provision is about when we get down to it. There is nothing wrong with being well-to-do, but I notice that most Conservative amendments thus far have been about capital gains and capital losses. The vast majority of my constituents—albeit in a middle-class constituency—do not juggle capital gains and losses all the time. It is important to some people, but not to the vast majority of people.

In terms of the purposeful or purposive—whatever adjective my hon. Friend used—interpretation that is put on legislation, amendment No. 31 is worth considering, but I am not convinced by its wording, particularly by the adjective “complex”, which as he pointed out is somewhat vague. However, the targeted anti-avoidance rule for capital losses uses similar wording, so it appears in one measure, but not in the Bill. I urge my hon. Friend to reconsider the Bill to ensure that we do not have contradictory methods.

Mark Hoban (Conservative, Fareham)

We have had a brief but useful debate, and I welcome many of the remarks that the Economic Secretary made, particularly those about the consultation being ongoing. It is important that when the guidance notes are finalised, they give clear, logical and consistent guidance to practitioners and advisers about what falls within and without the scope of the clause. The Economic Secretary’s own remarks indicated the need for clarity.

My hon. Friend the Member for Rochford and Southend, East used the example of someone who deliberately realises a loss on shares that they hold to offset a gain on another asset. That could be seen as being contrived, because they have triggered a loss to offset a gain, but the guidance notes say that such a transaction is part of normal tax planning and is acceptable. That is part of the problem with the clause. How does one define what is within and without it? The guidance notes are important in helping one to do that, but I would be much happier if clause 27 were much more tightly worded and we will discuss detailed amendments on that point. The Economic Secretary used the words “contrived” and “economic loss”, but they do not feature in the Bill, which makes it more difficult for people to understand the scope of the measures.

On the comments of the hon. Member for Falmouth and Camborne, I agree that the amendment is not perfect. That is why I said that it should be seen in the context of other amendments that we will discuss later. It would be better if the amendments were agreed as a package rather than accepted by the Government on a piecemeal basis. However, there is no indication that the Economic Secretary will accept any of our amendments.

The hon. Member for Wolverhampton, South-West recognised some of the comments made by professional bodies about the scope of the clause. I agree with him that many of the provisions are targeted at those who can afford expensive tax planning schemes, but many people who have modest gains or losses may well wonder whether they are caught by the measures. Perhaps that is one reason why an amendment that we will discuss later seeks to introduce a de minimis rule: to separate people with relatively small losses from those with large losses.

I do not propose to press the amendment to a Division. I am reassured by the Economic Secretary’s remarks about the ongoing consultation, and I know that he will live up to his commitment. I look forward to receiving some sense from various institutes that the process is going well and that it will achieve the desired outcome for the Revenue, taxpayers and their advisers.

Edward Balls (Labour, Normanton)

I would like briefly to reassure my hon. Friend the Member for Wolverhampton, South-West and Opposition Members. Since the pre-Budget report, there has been consultation on the draft guidance, and extended guidance was published on Budget day. Consultation on the guidance is ongoing and, after the Bill is enacted, we will publish final guidance that will reflect the results of the consultation, the views expressed by representative bodies and our debates. We want to provide clarity and reassurance on the record where we can.

I will give two examples to clarify our intentions and to further reassure Opposition Members. A straightforward example of a loss that would not be affected by this measure is a simple arm’s length sale of FTSE 100 shares that have genuinely gone down in value. The fact that someone who realises such a loss might be able to set it off against gains that he or she has made on other investments in the year would not mean that the loss would be disallowed by this measure. Similarly, if a husband transfers to his wife, on a no-profit, no-loss basis, shares that are standing at a loss, it is perfectly acceptable for her to sell those shares and set the loss against a gain that she intends to realise on some other asset. Those are examples of normal tax planning that would not be captured by the measures.

In the real world of tax policy making and, with respect to the hon. Member for Braintree, in the real world of business, the best way to provide clarity is not always to make legislation more complex or restrictive. Indeed, adding such complexity can undermine the best efforts of both sides to find a sensible way forward. That is why consultation on guidance, rather than restriction and legislation, can often be a better was to proceed in tax policy making. I urge him to reflect on that point a little further.

Mark Hoban (Conservative, Fareham)

I beg to ask leave to withdraw the amendment.

Mark Hoban (Conservative, Fareham)

I beg to move amendment No. 34, in clause 27, page 17, line 29, at beginning insert ‘Subject to section 16B below,’.

Eric Illsley (Labour, Barnsley Central)

With this it will be convenientto discuss the following amendments: No. 36, in clause 27, page 17, line 34, at end insert ‘; and

(c) the arrangements, taken as a whole, are not genuine commercial arrangements.’.

No. 35, in clause 27, page 18, line 12, at end insert—

‘16B Clearance procedure

(1) Section 16A shall not affect the operation of section 135 or 136 in any case where, before the issue is made, the Board have, on the application of either company mentioned in section 137(1), notified the Company that the Board are satisfied that the exchange, reconstruction or amalgamation will be effected for bona fide commercial reasons and will not formpart of any such scheme or arrangements as are mentioned in section 137(1).

(2) Any application under subsection (1) above shall be in writing and shall contain particulars of the operations that are to be effected; and the Board may, within 30 days of the receipt of the application or of any further particulars previously required under this subsection, by notice require the applicant to furnish further particulars for the purpose of enabling the Board to make their decision; and if any such notice is not complied with within 30 days or such longer period as the Board may allow, the Board need not proceed further on the application.

(3) The Board shall notify their decision to the applicant within 30 days of receiving the application or, if they give a notice under subsection (2) above, within 30 days of the notice being complied with.

(4) If the Board notify the applicant that they are not satisfied as mentioned in subsection (1) above or do not notify their decision to the applicant within the time required by subsection (3) above, the applicant may within 30 days of the notification or of that time require the Board to transmit the application, together with any notice given and further particulars furnished under subsection (2) above, to the Special Commissioners; and in that event any notification by the Special Commissioners shall have effect for the purposes of subsection (1) above as if it were a notification by the Board.

(5) If any particulars furnished under this section do not fully and accurately disclose all facts and considerations material for the decision of the Board or the Special Commissioners, any resulting notification that the Board or Commissioners are satisfied as mentioned in subsection (1) above shall be void.’.

Mark Hoban (Conservative, Fareham)

I want to deal with amendments Nos. 34 and 35 together. The main thrust of amendment No. 35 is to introduce a clearance procedure into the clause. Given the breadth of the clause, such a procedure would give taxpayers greater confidence; they would be able to have some certainty about the treatment of a particular transaction to ensure that it is not being caught under the clause.

The Economic Secretary referred to this as a targeted anti-avoidance rule during his remarks on the previous group of amendments. Some might argue that it is not particularly targeted and that it is more akin to a general anti-avoidance rule—GAAR. Often when such rules have been introduced in other jurisdictions, the necessary corollary of introducing a GAAR is establishing effective clearance procedures, allowing taxpayers the opportunity to establish with certainty whether or not arrangements are caught. That allows them to assess their own tax position correctly.

The Economic Secretary might argue that the guidance notes will give the taxpayer sufficient information to enable them to determine the right course of action. The final version to be published once the Bill is enacted might well give the degree of clarity that means that they do not need a clearance procedure. However, I shall cite the CIOT’s response to example 10 in the revised guidance published at the time of the Budget in order to give a flavour of where the uncertainty lies. The response states:

“The conclusion that the transaction is not being caught does not appear consistent with the explanation of where the legislation applies, given in paragraphs 7 to 14 of the revised guidance...We would stress that we agree with the conclusion reached in example 10 of the revised guidance that loss should be allowable as a matter of principle...but on the basis of the actual legislation suggest it is not and that the revised guidance is unclear, as the explanatory paragraphs do not lead one to the conclusion set down in example 10.”

Example 10 happens to relate to where shares are sold to fund investment in an enterprise investment scheme when there is an income tax relief to be gained from such investment.

The fact that the CIOT can see why a transaction should not be caught but that it is not clear from the guidance indicates the need for a clearance procedure. In its representations, the Institute of Chartered Accountants in England and Wales said:

“In the absence of a clearance procedure, it is not right to produce deficient legislation that appears to catch many more transactions than intended, on the basis that such transactions can then be taken out by way of HMRC guidance.”

I think that HMRC and the Treasury recognise the complexity, which is why the Government have partly conceded the point by introducing a post-transaction clearance procedure for trustees in the final year of settlement. In a way, by producing that clearance procedure, they have conceded part of the argument that these rules are complex and that trustees might find it difficult to navigate their way through them. Does that procedure apply to the tax year 2006-07?

On amendment No. 36, the statement of principle and the guidelines indicate that the legislation is not intended to apply to genuine commercial transactions. The amendment seeks to ensure that that objective is met in the Bill. The revised guidance states:

“This legislation will not apply where there is a genuine commercial transaction that gives rise to a real...loss as a result of a real commercial disposal. In these circumstances there will be no arrangements with a...purpose of securing a tax advantage.”

I suppose that, in a way, that argument underpins the Economic Secretary’s response to the example quoted in the previous debate about shares being sold to offset a gain on another disposal, and that there must be an actual economic loss from a genuine commercial transaction.

Amendment No. 36 would ensure that taxpayers could see an important principle in the Bill rather than having to rely on guidance notes, which, as I said in the earlier debate, have no status in a court of law.

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

Again, I shall not repeat the hon. Gentleman’s remarks, but I want to emphasise that this is perceived to be more of a mini general anti-avoidance rule rather than a targeted ruling, precisely because it sets out broad definitions and then seeks in the guidance to exclude certain transactions. If it were targeted, one would imagine that it would be the other way round and that the Bill would state who the intended target is to be.

The hon. Gentleman raised the fact that there is a post-transaction clearance system for trustees, but I have received representations from organisations such as the Institute of Chartered Accountants, which, because it sees it as a mini general anti-avoidance rule, is keen to have a pre-clearance system as a way of establishing certainty about whether it falls into the circumstances outlined in the clause.

Following on from the Economic Secretary’s remarks about amendment No. 31, I, too, was reassured by what he said about the guidance. The problem is that we will not have an opportunity in this place to see the impact that the consultation discussions will have had, so we will end up with guidance without having had the opportunity of discussing how far it addresses our concerns. Those concerns about trying to set out the exclusions in the guidance rather than trying to define tightly who is targeted in the Bill remain. I sympathise with many of the concerns that this group of amendments raises.

Edward Balls (Labour, Normanton)

Before explaining why we do not propose to accept the amendments, may I say that the representative bodies’ detailed input into the consultation and into briefing Committee members, and the substantive and detailed way in which this debate is being conducted are very helpful? I appreciate that because it gives us the opportunity to respond to some of the concerns on the record.

There is a balance to be struck between clarity in primary legislation and flexibility to respond in a timely way to the concerns of the industry and practitioners. We must strike the right balance between making our objective clear in legislation and allowing the guidance to operate outside the detail of primary legislation. We are trying to get that balance right. I am happy to ensure that all hon. Members are sent a copy of the final guidance so that they can reflect on it. We are not in any way seeking to prevent that debate in Committee, but we need to be flexible in the operation of the tax system.

In response to the hon. Lady, I point out that the operation on the company’s side of this approach has been successful so far. We are not attempting to introduce a general anti-avoidance measure. It is targeted on contrived avoidance, which is very much the context of these discussions.

Amendments Nos. 34 and 35, tabled by the hon. Member for Fareham, seek to introduce a clearance procedure. The Government fear that that would lead to greater compliance cost and bureaucracy, but that it would do little to protect the majority of taxpayers, who in any case will not be affected by clause 27. The amendments are unnecessary because the clause contains a main purpose test, which means that it will apply only when a person has entered into arrangements that have the main purpose of securing a tax advantage, which is to say tax avoidance. Such schemes do not happen by accident. They are the result of contrived circumstances in which transactions are undertaken or carried out primarily to achieve a desired tax effect, as opposed to a genuine economic purpose, as the hon. Gentleman acknowledged.

The equivalent rule for companies, which was introduced last year, does not have a clearance procedure. HMRC has had no indication that companies are unsure about the operation of the rule. As I explained, the consultation is ongoing. Indeed, having consulted HMRC officials, the Government will be able to produce the final, detailed guidance before Report. Remaining concerns about the measure can be raised then. The consultations are yet more advanced than I anticipated in my earlier remarks.

The clearance system is intended primarily to benefit taxpayers, but it is important to bear in mind that the rule operates by reference to the main purpose of arrangements. That main purpose may be inferred from the actions of the parties to the arrangements, but it is best understood by the person making the arrangements. It is therefore not necessary to set up a clearance regime when the person best placed to judge whether the rule applies is the person who makes a clearance application.

Furthermore, it is likely that taxpayers and their advisers would end up using a formal clearance procedure when it was clear that there was no need to do so. Lawyers and accountants would be concerned that their professional indemnity insurance would be at risk if they failed to use an available statutory clearance procedure. It is highly likely that they would make applications for clearance in all cases in which they were advising on transactions that might result in capital losses, even when it was clear that there was no tax avoidance purpose and despite clear HMRC guidance. The only effect of the measure would be that thousands of wasteful applications for clearance would be made, all of which would increase costs to the taxpayer, administrative burdens for HMRC and complexity. There could be delays and inflexibility, which is not what anybody intends.

If, however, taxpayers are unsure how to interpret the wording of the new rule, they may, under the code of practice 10 procedure, approach HMRC. The experience of the equivalent law for companies suggests that there will be little need for the measure suggested in the amendment. The HMRC guidanceis intended to provide the clarity and certainty thatwe seek.

The hon. Member for Fareham raised the issue of the clearance procedure for trusts. The procedure will simply extend an existing informal procedure that gives certainty to trustees to enable them to wind up a trust and to distribute its assets to beneficiaries. That is HMRC’s way of ensuring that no further inquiries will be made into the trust’s tax affairs unless there is evidence that reforms are incomplete or incorrect. In answer to his question, I reassure him that those arrangements will apply in 2006-07.

The hon. Gentleman also raised the question of the guidance being concessionary. The guidance is not concessionary, as alleged by the CIOT. It explains things in a way that is easier for someone who is not a lawyer to understand that the targeted anti-avoidance rule will only affect losses arising from arrangements whose main purpose is to secure a tax advantage. The Government accept that there is scope to improve the guidance. We will be working with the CIOT and other bodies to improve the guidance before Report.

Amendment No. 36 would add to the main purpose test the requirement that the rule can only apply only when the arrangements taken as a whole are not genuine commercial transactions. The Government believe that such a measure would limit the effectiveness of the anti-avoidance rule. The risk is that even though particular steps in a series of arrangements might be objectionable and artificial, the persons involved could point to an overall commercial objective for the arrangements, and seek to escape the application of the rule. As I have said, the new rule would apply only when one of the main purposes of the arrangements was to secure tax advantage, and would not apply to genuine economic transactions. If the main purpose of arrangements is to avoid tax, it is right that they should be caught, regardless of whether the arrangements as a whole also achieve some other commercial end. Amendment No. 36 would undermine that principle.

Mark Hoban (Conservative, Fareham)

I thank the Economic Secretary for his full response to amendments Nos. 34 and 36. As to his remarks about the clarity of the guidance, it is only when the final guidance is published that we shall know how clear it is and whether in that context a clearance procedure is needed. I shall, on the next group of amendments, quote from the revised guidance from the time of the Budget, suggesting the lack of current clarity on the issue of the main purpose.

The Economic Secretary said that the guidance is not concessionary. This may not be the appropriate forum, but I should quite like him, given the comments of the CIOT, to explain why the CIOT and HMRC have very different views on the status of guidance. Guidance is an issue that has cropped up before in these debates. Last year, we debated the withdrawal of cash lump sums from pension funds; the clause was broad and people were untaxed as a consequence of guidance. It would be helpful to understand why he and professional bodies differ in their opinion of the status of the guidance.

I beg to ask leave to withdraw the amendment.

Mark Hoban (Conservative, Fareham)

I beg to move amendment No. 30, in clause 27, page 17, line 33, leave out ‘, or one of the main purposes,’.

Eric Illsley (Labour, Barnsley Central)

With this it will be convenientto discuss the following amendments: No. 29, in clause 27, page 17, line 34, after ‘arrangements’, insert ‘taken as a whole’.

No. 27, in clause 27, page 17, line 34, leave out ‘secure a tax advantage’ and insert

‘avoid a liability to capital gains tax, corporation tax or income tax’.

No. 32, in clause 27, page 17, line 34, at end insert ‘; and

(c) the arrangements are not prescribed arrangements.’.

No. 26, in clause 27, page 17, line 38, leave out from ‘enforceable),’ to end of line 7 on page 18.

No. 33, in clause 27, page 17, line 38, leave out ‘and’ and insert—

‘ “prescribed” means set out in regulations made by the Commissioners for Her Majesty’s Revenue and Customs.’.

No. 28, in clause 27, page 18, line 11, leave out ‘tax advantage is secured for’ and insert

‘avoidance of liability to taxation relates to’.

Mark Hoban (Conservative, Fareham)

I suspect that the Economic Secretary will, in this debate, pray in aid the arguments that he has used previously—that the guidance will be clarified. However, it is worth highlighting some areas of concern.

A quotation from the guidance may suggest the possible lack of clarity for taxpayers in assessing the main purpose. The Economic Secretary said in his remarks on the previous group of amendments that the person conducting a transaction should know its purpose, and that the guidance should help. Paragraph 12 of the guidance states that

“the existence of a tax advantage, such as obtaining a deduction for tax purposes, is not enough in itself to show that the arrangements have a main purpose of obtaining a tax advantage.”

Paragraph 13 gives three different examples, suggesting the complexity of the issue:

“For instance, where there is evidence that a person considered two ways to achieve a commercial objective and chose on commercial grounds to pursue one of them, the fact that there was a beneficial difference in tax treatment for the chosen route would not meet the main purpose test”.

I think that that is very clear. It goes on:

“Where the potential tax treatment was a factor in choosing between alternative arrangements, then it would still be necessary that securing a tax advantage was a main purpose to the arrangements. There may be situations where the tax advantage secured through undertaking one arrangement rather than another is so significant that this indicates that achieving a tax advantage was a main purpose. This is unlikely to be the case where the arrangements chosen do not involve additional, complex or costly steps included solely to secure or enhance a tax advantage.”

As the Economic Secretary suggested in discussing earlier amendments, there could be very simple schemes that would give rise to tax advantage, so the use of the word “complex” is perhaps not helpful in the context. It shows a grey area when taxpayers would have to make judgment in the absence of clearance procedure about whether their transactions falls into that category and what weight should be given in their thought processes to the amount of tax advantage to be gained from choosing to structure one or another route. I am not sure that such a decision is straightforward.

The third example is the polar opposite of the first example and concerns a person who has entered a marketed tax avoidance scheme. That would be taken as an indicator that securing a tax advantage was the main purpose of the arrangements. I can understand that and see exactly where the main purpose test was satisfied. I can see why it was not satisfied in the first example when the tax difference happens to be a by-product of the choice of structuring. However, it is when the tax difference starts to become more significant that the grey area appears and the fact that arrangements might be complex does not necessarily mean that there is an issue. There are some simple tax avoidance schemes.

Rob Marris (Labour, Wolverhampton South West)

The hon. Gentleman referred twice to complex versus simple tax avoidance schemes. Why did he not include the word “complex” in amendment No. 31?

Mark Hoban (Conservative, Fareham)

One of the benefits of our proceedings is the learning process. Matters are scrutinised and we listen carefully to the Economic Secretary who puts forward some eloquent arguments.

John Healey (Labour, Wentworth)

He always does.

Mark Hoban (Conservative, Fareham)

The Financial Secretary says that the Economic Secretary always does. I am not sure that that is always the case, and he knows that. Some tax avoidance arrangements could be simple, but why in paragraph 13 was “complex” used, given that it was a good argument for not accepting my amendment.

Rob Marris rose—

Mark Hoban (Conservative, Fareham)

However, I shall not go into the realms of consistency and inconsistency although the hon. Member for Wolverhampton, South-West might be about to do so.

Rob Marris (Labour, Wolverhampton South West)

The hon. Gentleman seems to be strongly implying to the Committee that he was convinced by what was said about simplicity and complexity, but he seems to be reading from a script that was typed prior to this sitting.

Mark Hoban (Conservative, Fareham)

Actually, I am reading from the HMRC guidance that was published on 21 March, so by necessity it was typed before today’s sitting. I am surprised that the hon. Gentleman does not have a copy of it.

I have dealt with the complexity of the issue and I am sure that the revised guidance will shine new and fresh light on the matter. Perhaps there will be a new paragraph 13. It might be being typed as we speak and reflect more carefully on how we distinguish between complexity and simplicity. There is a spectrum of arrangements from a relatively straight forward tax planning matter, which we established earlier was acceptable, to the marketed tax schemes, which are not. If we are putting the onus on taxpayers to work their way through the guidance note, as the Economic Secretary suggested, it is important that the spectrum has more clarity.

Amendment No. 30 would remove the phrase

“or one of the main purposes”.

That reflects part of the problem in paragraph 13. It may be difficult for someone to determine how significant a tax benefit might be in moving something from a subsidiary to a main purpose. It would restrict the scope of clause 27, as the Economic Secretary said all the amendments would do, but I hope that it would give greater clarity so that when a tax benefit flows from a structured route, unless it is really the driving force, it should not be counted as one of the main purposes.

Amendment No. 29 would insert the phrase

“taken as a whole”.

It would ensure that the HMRC would need to look at the transaction scheme as a whole rather than individual elements. As the legislation stands, if the purpose of any single transaction in the overall arrangements is to gain a tax advantage, the legislation applies, even if the arrangements as a whole have a genuine commercial purpose and give rise to real disposals. Under the amendment, HMRC would have to demonstrate that the purpose of the arrangements as a whole was to secure a tax advantage.

Amendments Nos. 32 and 33 would introduce safe-harbour provisions to give the commission of the HMRC the power to set out prescribed—not proscribed—arrangements. Doing so would highlight areas in which the use of statutory relief is straightforward and would make it clear that the use of such relief does not bring the relevant arrangements within the scope of the clause. HMRC’s guidance gives examples of the types of relief that would not be affected, and the Minister referred to no-gain, no-loss transactions between spouses or civil partners under section 58 of the Taxation of Chargeable Gains Act 1992. The amendments would therefore give taxpayers much greater certainty.

Let me quote the CIOT on this issue. It says:

“We agree that these situations should not be caught by the legislation, but we cannot see that the conclusion that they are not caught is justified from an analysis of the legislation, or indeed, that this view is consistently reflected in some of the later examples in the revised guidance.”

Again, that suggests that setting out prescribed arrangements would help to provide the clarity that is perhaps lacking in the guidance as currently drafted, but which might be in a later clause.

The CIOT raised the issue at the Finance Bill open day, and it is fair to say that it recognises some of the issues that arise from safe-harbour provisions. It has said:

“We appreciate that, at the...Open Day, it was indicated that it would be difficult for safe harbours to be drawn up in a fair way, and that they could be used by serious avoiders to ‘leap from one safe haven to another’. However, we do consider that, because the legislation is so widely drawn, and especially if no de minimis threshold is set, consideration should be given to instituting some safe harbours, to cover very ordinary transactions not intended to be caught by the proposals.”

In a way, the proposals are an alternative to the clearance procedure that the Minister rejected under a previous group of amendments—they are a different way of achieving the same goal.

Amendments Nos. 26, 27 and 28 would replace the wide definition of tax advantage with the words

“avoid a liability to”

taxation. Again, the amendments should be seen in the context of the subjectivity that I highlighted in relation to paragraphs 12 and 13 of the revised guidance, where the relationship between different routes for a transaction and each one’s tax benefits becomes more difficult. The amendments would help to focus the clause on decisions that were deliberately made to avoid tax, such as marketed tax avoidance schemes, rather than call into question the legitimate structuring of transactions to minimise tax.

Brooks Newmark (Conservative, Braintree)

I have several points to make. On amendments Nos. 27 and 28, I am nervous that the guidance notes start talking about a kind of abstracted, average investor who makes investment decisions without proper regard to tax advantages. In my book, that is a bad investor. All investors look for tax advantages, but the majority do not do seek illegitimate means to avoid paying tax. There is a fundamental difference.

It would be easy to make the case that there are tax advantages, for example, to having children—with five children, I plead guilty as charged. However, it would be somewhat more difficult to suggest that saving tax was a good justification for having children. It would not even be the main the reason—in my case, the TV might have gone on the blink. [Laughter.]

Eric Illsley (Labour, Barnsley Central)

Order.

Brooks Newmark (Conservative, Braintree)

There is now a tax advantage to be had by building an eco-home, but I doubt that the Economic Secretary is suggesting that that constitutes avoidance. If he were, it would be a quick clampdown even by his standards. Let us use the word avoidance, which is not in itself particularly clear or helpful, but does at least have a fine provenance.

On amendment No. 30, I am uneasy about the use of the term “main purpose” in any context concerning tax avoidance, because it reeks of over-simplification to say that any single commercial decision has a main purpose except perhaps that of making money. However, the clause does at least refer to “the” main purpose rather than “a” main purpose, which crops up in Budget note 30 and in HMRC guidance. I do not wish to be pedantic, but the presence of the definite article seems to imply that there must be a single overarching purpose and intention to avoid tax. Unfortunately, proposed new section 16A(1)(b) immediately spoils the effect by introducing the possibility of other, competing main purposes.

The amendment would clear up some of that confusion by making it clear that there is but one main purpose. It has the ring of a creed to it. I am concerned that as it stands, the clause sows the seeds for a test case about how much a taxpayer needs to be motivated by nefarious intent for his or her actions to qualify as a main purpose. If there were just one main purpose it would still be a difficult call to make, but if there are many possible main purposes I think that the determination will become almost impossible.

If there are three main purposes for undertaking a transaction, which has priority? Will we end up with an absurd litigation calculus in which it is necessary to ascribe an arbitrary value to each, with HMRC officers arguing the toss between the intention to avoid tax and other, legitimate, commercial purposes? It would be far simpler to do away with the idea of different main purposes and give the words their common meaning—that a main purpose is the one that eclipses all others instead of competing with them.

To go a little wider, there are further problems with the whole business of a main purpose forming the basis of a test for behaviour. If I understand paragraph 12 of the HMRC guidance correctly, making use of a statutory relief is not sufficient to demonstrate a main purpose and fall foul of the clause. Apparently, something stronger is needed—that the intention to avoid tax is so significant that it must be the main purpose. That is somewhat self-referential. Saying that something is a main purpose merely by dint of its being really significant does not help us much. It is also not particularly robust, because all the decisions involve value judgments being made about individual cases by individual officers. The determination of whether something is “main”, “genuine” or “straightforward”—all words that appear in the clause or the notes, is essentially a matter of personal choice and will lead to inconsistencies in outcome with even the best of guidance.

There is something a little strange about the Revenue’s insistence in paragraph 8 of its guidance that the definition of “arrangements” is

“in general a question of fact.”

It is not, and even that short statement contains a caveat. Determining the interface between legitimate tax planning and avoidance is a matter of judgment and discretion, which is why the Taxes Management Act 1970 originally gave the Revenue a discretionary power to grant extra-statutory concessions in difficult and unforeseen situations.

There needs to be more recognition in the Bill that none of those judgments are cut and dried. The question of “main purpose” needs a simple answer: a purpose that is so overwhelming that no rational person could doubt that it was the motivation behind a transaction. It does not need to be the only purpose, just the predominant one. Amendment No. 30 would simply introduce a little more clarity, and I hope that the Economic Secretary will support it.

On Amendments Nos. 32 and 33, the criticism that the clause has received from the Institute of Chartered Accountants in England and Wales is focused on one principle: that the clause is not as focused as it should be. The ICAEW goes as far as to say that it amounts to a general anti-avoidance rule instead of a targeted one, and that the reliance on external guidance instead of a tight focus sows the seeds of confusion. It does not help that so much of the language surrounding anti-avoidance legislation is morally loaded and open to interpretative whimsy.

The Revenue has accepted that its officers and, almost as an afterthought, the general public and their professional advisers need some form of guidance, but the status of that guidance seems to be equivocal, at least as far as the professional advisers are concerned. In its submission to the Committee, the Chartered Institute of Taxation cited its 2005 paper, “Taxed by Law, Untaxed by Concession”. I confess that I have not read the paper, but its title makes for a good little aphorism that the Economic Secretary could frame and put on his wall. It is drawn from a judgment in the late 1970s which aimed to address the law of unintended consequences where the commissioners of the Revenue wished to depart from the letter of the law to prevent a perceived inequity. It also confronts, pithily, the culture of extra-statutory concessions, which the Revenue relies on as a fiddle to get around awkward situations. Perhaps the Economic Secretary will confirm the current status of extra-statutory concessions.

The House of Lords seems to have thrown the cat among the pigeons by deciding in the Wilkinson case of 2005 that extra-statutory concessions could not run counter to explicit parliamentary intention or deal with a matter that Parliament could easily have addressed but did not. The ICAEW is of the opinion that the guidance provided by HMRC has the effect of narrowing the scope of the clause as presently drafted to the point that it changes the intention of clause and, therefore, interferes with the intention of Parliament. It contains undertakings that the clause will not be used in certain situations where it would be inequitable for it to be applied and, as such, is verging on being an extra-statutory concession.

A very helpful summary of the Wilkinson case appeared in The Independent—not that I read that paper very often.

Eric Illsley (Labour, Barnsley Central)

The telly was on the blink.

Brooks Newmark (Conservative, Braintree)

The telly was not working andno comic books were available, so I read The Independent—The Guardian was not available either. It noted that the judgment said that the regime of extra-statutory concessions gave the Revenue the

“discretion to formulate policy in the interstices of the tax legislation”.

I am sure that that is derived from the Latin. [Interruption.] It is legalese, and I am not a lawyer. Perhaps the hon. Member for Wolverhampton, South-West can tell me what it means. The article continued:

“dealing pragmatically with minor or transitory anomalies, cases of hardship at the margins or cases in which a statutory rule is difficult to formulate or its enactment would take up a disproportionate amount of Parliamentary time.”

We are in the middle of taking up a disproportionate amount of parliamentary time—I include myself in that, so I shall quickly come to the end of my remarks—but we are in the fortunate position of being able to confront the issue head on.

Removing nebulous guidance and replacing it with regulations that set out what is a prescribed arrangement for the purposes of the clause would be one way of bringing certainty into this area. More importantly, taxpayers could rely on them before the courts.

The HMRC website contains a glossary which defines an extra-statutory concession as applicable

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

However, it would be easier for the Minister to be clear now about the effect that is intended by ensuring that the clause is less widely drawn.

All anti-avoidance measures are

“at the interstices of the tax legislation”

precisely because the boundary between legitimate tax planning and outright avoidance is difficult to pin down, but I question whether it is good enough to deal with that boundary with the even murkier solution of non-statutory guidance, which cannot be relied on by taxpayers or their advisers to hold true over time. Even if the Revenue has good intentions, the Minister must admit that different officers will be capable of construing even the clearest guidance in different ways. Such differences of opinion will cause difficulties for taxpayers, who will not then have an easy remedy against the Revenue.

I hope that the Minister will support the amendments or allow some redrafting so that Parliament’s clear intention has a statutory footing and is not left lurking in departmental guidance.

Philip Dunne (Conservative, Ludlow)

I will make a relatively brief contribution in support of the amendments, which were well set out by my hon. Friend the Member for Fareham.

It is important to provide some definition in the tax code, rather than leaving discretion for all capital transactions when losses occur in the hands of HMRC, which will allow it to rule in each individual case on whether a contrivance for capital losses was involved.

The focus is on the definition of “arrangements”, which includes, as I understand it, any

“agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable).”

That effectively means that any transaction in which a capital loss occurs can be construed by the Revenue as an arrangement. Although the Economic Secretary, when introducing the clause, indicated that it is not the Government’s intention to capture every transaction in which a capital loss occurs, it allows the Revenue to make that interpretation should it so wish. It is not good enough to leave it to the Revenue’s discretion and in guidance notes. It must be properly defined in the Bill.

Clause 27 relates to the new definition of tax advantage, which could be another unfortunate extension of the Revenue’s powers to imply some kind of nefarious activity by individuals who seek quite properly, as the Economic Secretary conceded in his introductory remarks, to take advantage of, for example, annual exemptions for capital gain. It seems entirely appropriate to revert to language that is well understood in tax law, on avoidance of individual aspects of losses instead of the new concept of tax advantage, which could set an unfortunate precedent.

Edward Balls (Labour, Normanton)

The seven amendments would limit the scope of the targeted anti-avoidance rule in three different ways, and I shall take them in three groups.

Amendments Nos. 30 and 29 would alter clause 27so that the anti-avoidance rule would apply onlywhen a person has entered arrangements with thesingle main purpose of securing a tax advantage. Amendment No. 29 would alter the clause by adding conditions so that the rule would apply only when the arrangements, taken as a whole, have the main purpose of securing a tax advantage. Altering the clause’s main purpose test so that the rule applies only if there is a single main purpose would limit the effectiveness of this anti-avoidance rule. The type of schemes that are caught by the clause do not happen by accident, but are, as I explained to hon. Members, especially the hon. Member for Ludlow, the result of contrived circumstances in which transactions are undertaken or carried out in a particular way primarily to achieve a desired tax effect rather than for a genuine commercial or economic purpose.

If the arrangements have a main purpose of avoiding tax, it is right that they should be caught by the rule, regardless of whether the avoidance of tax is their only main purpose. If amendment No. 29 were accepted, there would be considerable scope for debate about whether a particular set of arrangements had a main purpose of avoiding tax, even if the taxpayer had clearly entered into highly artificial tax avoidance schemes. We do not want to introduce that sort of ambiguity into primary legislation.

Adding to the clause’s main purpose test the requirement that the rule can apply only when the arrangements are taken as a whole risks weakening the rule. There is a risk that even if particular steps in a series of arrangements are objectionable and artificial, the persons involved could point to an overall commercial objective and therefore side-step the rule. That would even allow people to add avoidance schemes to normal commercial transactions safe in the knowledge that, as tax avoidance is not the main purpose of the arrangements, when taken as a whole, they could side-step the targeted anti-avoidance rule.

Adam Afriyie (Conservative, Windsor)

Is the Economic Secretary suggesting that there could be no overall commercial objective to a series of transactions, each of which might, in its own right, appear to be an avoidance scheme, but the overall scheme achieves a commercial objective?

Edward Balls (Labour, Normanton)

No, of course not.

Amendments Nos. 27, 26 and 28 would replace a familiar definition of what constitutes a tax advantage with a less specific reference to avoiding liability. The definition of a tax advantage has not been plucked out of thin air. It is, in all essentials, the same as the definition used in the long-standing rules against avoidance of tax on income, and was reintroduced recently, without opposition, in the Income Tax Act 2007. The definition was also used, again without opposition, in the Finance Act 2006 rules against avoidance by companies using capital losses. In contrast, there is no certain or generally agreed understanding of what constitutes avoidance of liability to tax.

A second reason for rejecting the amendments is that they would create a loophole in the rule. Changing the reference to securing a tax advantage to one of avoiding a liability to tax would mean that some highly artificial schemes that generate a repayment of tax rather than a reduction in tax liability would not be stopped. Avoiding a liability to tax is a more limited concept than securing a tax advantage. It is undesirable to introduce such a loophole. To make that change would mean running the risk of limiting effectiveness and allowing potential avoidance schemes to move ahead.

Finally, amendments Nos. 32 and 33 together seek to alter the clause to exclude from the anti-avoidance rule arrangements prescribed arrangements, which are defined as arrangements

“set out in regulations made by the Commissioners for Her Majesty’s Revenue and Customs.”

It is not clear exactly what those regulations are expected to cover, as clause 27 will apply only when one of the main purposes of arrangements is to secure a tax advantage. It will not apply to genuine transactions or when a taxpayer simply makes use of statutory relief.

If the purpose behind the amendments is to ensure that such simple actions are outside the scope of the rule, it is unnecessary, because that is made explicit in the guidance. Adding in regulations a list of safe transactions that are not caught by the rule could have one of two negative effects. First, it could permit people who are attempting to avoid tax to get around the rule by using an acceptable transaction as one stage in a longer series of transactions. Secondly, it would be of no practical benefit to compliant taxpayers because it would have to be hedged round with conditions to the effect that the transactions would be prescribed transactions only if they were not part of a longer series of transactions that were intended to avoid tax.

Paragraph 13 of HMRC guidance stresses that all the circumstances of a case have to be taken in the round when deciding what is the main purpose of arrangements. There will be a small minority of cases in which the main purpose is unclear, but the guidance will provide as much clarity as possible.

The hon. Member for Braintree said that the guidance was an afterthought. I did not understand that point, because it was published with the pre-Budget report before the Bill. I have never heard of a pre-emptive afterthought before. He also tried to introduce greater complexity into tax legislation.

(Except clauses 1, 3, 7, 8, 12, 20, 21, 25, 67 and 81 to 84, schedules 1, 18, 22 and 23, and new clauses relating to microgeneration) - Clause 27

Roger Gale (Conservative, North Thanet)

I remind the Committee that with this we are discussing the following amendments: No. 29, in clause 27, page 17, line 34, after ‘arrangements’, insert ‘taken as a whole’.

No. 27, in clause 27, page 17, line 34, leave out ‘secure a tax advantage’ and insert

‘avoid a liability to capital gains tax, corporation tax or income tax’.

No. 32, in clause 27, page 17, line 34, at end insert

‘; and

(c) the arrangements are not prescribed arrangements.’.

No. 26, in clause 27, page 17, line 38, leave out from ‘enforceable),’ to end of line 7 on page 18.

No. 33, in clause 27, page 17, line 38, leave out ‘and’ and insert—

‘“prescribed” means set out in regulations made by the Commissioners for Her Majesty’s Revenue and Customs.’.

No. 28, in clause 27, page 18, line 11, leave out

‘tax advantage is secured for’

and insert

‘avoidance of liability to taxation relates to’.

Edward Balls (Labour, Normanton)

We are pleased to have you back in the Chair, Mr. Gale. You missed a most illuminating and lengthy sitting this morning. I hope that we can reach a swifter conclusion on this clause, not least because of the turnout so far on the Opposition Benches.

Several points were raised this morning, and I hope to give the Committee further reassurance on a couple of points of detail. At the end of the sitting, I was explaining the importance, which paragraph 13 of the guidance stresses, of considering all the circumstances in the round. I explained two examples in which a fall in the value of FTSE 100 shares gives rise genuinely to a loss, which can be offset elsewhere on gains, where the tax advantages are incidental but the transactions are genuine. I also explained the straightforward way in which statutory tax relief can be passed between husband and wife in a way that allows a loss to be set against a gain. The clause does not interfere with that normal tax practice and planning.

There was much discussion about whether the guidance provides sufficient clarity. As I said this morning, Her Majesty’s Revenue and Customs is working with the representative bodies on improving the guidance, and we will publish revised guidance before Report. However, it is important to remember that for the vast majority of people, the guidance will not be relevant, as they will not be caught by clause 27, which contains a targeted anti-avoidance rule to counter tax-avoidance schemes that make use of contrived capital losses.

The legislation was first published in draft with the pre-Budget report. At the same time, HMRC also published a statement setting out why it was necessary and the key principles that underpinned it. The key principle is that relief for capital losses should be available only if a person has suffered a genuine commercial loss and a real disposal.

As was recognised this morning, there is always a grey area, a question of debate, in dealing with tax avoidance. The HMRC statement of principle and guidance makes that area for debate as narrow as possible. It is necessary to do that in guidance in order that we have flexibility. These things cannot all be tied down in the Bill. However, as I said this morning, the person entering into the arrangements is best placed to decide whether gaining a tax advantage was a main purpose of the arrangements. The sort of arrangements that the clause is aimed at are not entered into by accident. People know when they are setting out to avoid tax, and the clause is intended to catch them if they are.

The amendments, taken together, would simply weaken the targeted anti-avoidance rule in the clause. They would introduce uncertainty for those who do not seek to avoid tax and would leave loopholes for those who seek to avoid paying the right amount of tax, while introducing unnecessary regulation-making powers for HMRC. I therefore ask the Committee to reject the amendments, and I reaffirm my commitment to providing all members of the Committee with the detailed and updated guidance before Report, which I am sure will make for interesting reading for all, but especially for the hon. Member for Braintree and Mrs. Newmark in case there is nothing decent to watch on telly.

Mark Hoban (Conservative, Fareham)

It is a pleasure to see you in the Chair this afternoon, Mr. Gale. I am sure that Mrs. Hoban and I will find something much more interesting than the guidance to read, regardless of what is on television during the recess. However, I thank the Economic Secretary for his comments on the guidance, because it had crossed my mind that it would be helpful for the guidance to be available before Report, so that if we felt that it was still not quite right, we would have the opportunity to probe further on Report. In a sense, the withdrawal of my amendments this morning was predicated on the adequacy of the guidance, so the present approach is an appropriate way to try to resolve the problems before Report. It will give us and the representative bodies the opportunity to think again and consider whether there are further areas of doubt or ambiguity about which we want to probe the Government’s intentions.

The debate on “main purpose” had some interesting elements. I had always thought that there could only be one “main purpose” until I got involved in Finance Bills. However, the Economic Secretary mentioned earlier that there can be many main purposes. Clearly, therefore, the rules of grammar and of English usage are suspended somewhat when it comes to finance legislation.

The Economic Secretary said also that he did not wish there to be any ambiguity in the drafting of legislation. That is a fair comment, but it is important that ambiguity is not introduced in the guidance either, so we want to ensure that that guidance is clear. In mentioning the avoidance of tax liability, he made a point that had eluded me in my remarks on the earlier amendments; he mentioned schemes that would give rise to repayment, and his argument was I think correct.

In the eager expectation of the revised guidance becoming available, I beg to ask leave to withdraw the amendment.

Roger Gale (Conservative, North Thanet)

Before we proceed, it might be helpful to say that I do not propose to have a stand part debate on the clause, given the copious debate that took place on it under the guise of earlier amendments, and given also that we are about to debate amendment No. 37.

Mark Hoban (Conservative, Fareham)

I beg to move amendment No. 37, in clause 27, page 17, line 34, at end insert—

‘(1A) This section does not apply where the aggregate of a person’s allowable losses does not exceed £25,000 in the year of assessment.’.

I am disappointed that we shall not have a stand part debate, Mr. Gale, but I shall bear my disappointment manfully. In his remarks on the previous group of amendments, the Economic Secretary said that there was an expectation that very few people would be caught by the clause. That is absolutely right; one hopes that taxpayers will not need to have resort to an understanding either of the clause or of the guidance notes, and the details to which we have applied ourselves. However, bearing in mind the breadth of the clause, it might be helpful to taxpayers—particularly those with small capital losses—if we introduced a de minimis limit. The amendment would introduce such a limit, thereby disapplying the clause in cases where the aggregate of a person’s losses in any one year did not exceed £25,000.

The Economic Secretary indicated earlier, and we concurred, that much of the focus of the clause is on expensive, marketed, tax avoidance schemes. I assume that the cost of most such schemes, and the fees that people pay to tax advisers to implement them, means that they relate to fairly significant amounts of money and to the generation of fairly significant capital losses. I assume that someone whose losses were less than £25,000 would not adopt such a scheme—whether it be contrived and complex, or simple—and the intention of the amendment is to make it clear that, in the case of relatively small losses, taxpayers need not bother to understand the details of the clause or of the guidance.

In its comments on the clause, the Chartered Institute of Taxation said:

“At the Open Day, HMRC stated that, if a transaction was caught by the rules, it would be incorrect to then exempt it due to it being less than a de minimis amount. However, we consider that, in view of the uncertainty as to how the rules will be implemented, and that a wide range of ordinary transactions could potentially be caught, giving rise to a significant administrative burden, a de minimis amount should be applied per person, below which losses are not disallowed.”

The institute suggested a de minimis amount of £100,000. I have been somewhat less generous, but I should be grateful if the Economic Secretary would comment on the proposal.

Rob Marris (Labour, Wolverhampton South West)

I wish to make a comment in passing, and I will be interested to hear what my hon. Friend the Economic Secretary says about it. The hon. Member for Fareham rightly pointed out that the CIOT suggested a de minimis limit of 100,000, but I say to my hon. Friends that the amendment and the way in which he carefully moved it indicate the different worlds in which we live, particularly those of us from parts north of Watford.

This morning the hon. Gentleman referred to “relatively small” losses and he used the same term this afternoon when moving the amendment. He also mentioned “small capital losses”. I say to him and his hon. Friends that I have had the great good fortune for most of my working life to be a higher-rate taxpayer, along with less than 10 per cent. of the population. That said, the concept of £25,000 being a relatively small loss is beyond my financial ken, as it would be for the vast majority of my constituents.

I understand the concept of a de minimis limit and how it might help in certain circumstances. However, to point out to the Committee the different ways in which Members from different parties view such things, if I were to suffer a capital loss of £25,000, or £20,000, I would regard it not as a relatively small or a small capital loss but as pretty catastrophic. Fortunately, because I am not a speculator and do not play the casino economy on the stock market, I am unlikely to suffer any such capital loss. If I did, it would not be relatively small to me, and it would not be to my constituents or to most of those who vote Labour.

Edward Balls (Labour, Normanton)

I note my hon. Friend’s comments on the—how can one put it?—rather elastic concept of middle England that is sometimes employed in these tax debates. I fear that you might rule me out of order, Mr. Gale, so I shall come to the detail of the amendment. It would alter clause 27 by prohibiting the anti-avoidance rule from applying in any tax year in which a person’s loss does not exceed £25,000. The intention behind the amendment, as the hon. Member for Fareham set out, is to make things simpler for the majority of individuals who do not use avoidance schemes involving capital losses, by allowing them to ignore the new rule in the clause if their losses are modest. It is a reasonable aim, with which we sympathise.

The hon. Gentleman is right that the overwhelming majority of individuals are likely to have no capital losses in any one year and that most of those engaged in such schemes have losses substantially in excess of £25,000, but there will be a small number of individuals who fall in the middle. I understand his desire to see whether something can be done to simplify matters for that group of people but, having examined the amendment in detail, our conclusion is that it is rather unattractive. It would allow contrived losses of £25,000 to be manufactured and then rolled up each year. That could let a tax avoider stock up tax losses for use when the opportunity arose. For instance, after four years of careful planning, it would be possible to accumulate £100,000-worth of artificially contrived losses to set off against a properly taxable gain made in a later year.

I should warn the Committee that one avoidance scheme of which HMRC is aware could easily be adapted for the mass market and used to generate losses of £25,000 per user per year. That loss could be set against income, giving a maximum income tax saving of up to £10,000 per annum for a higher-rate payer. Such a scheme would clearly have a serious impact on the Exchequer, potentially costing millions or even billions of pounds. We would then be into difficult territory and I am sure that we would be forced to revisit the de minimis limit.

There are a small number of individuals for whom there is a question whether losses below £25,000 are contrived or not. Given the potential for the amendment to be abused and marketed in the contrived way that I have set out, at substantial Exchequer cost, our conclusion is that it would introduce an unjustified loophole to tax avoidance. I hope that, given that explanation, the hon. Gentleman will understand why we propose to reject the amendment.

Mark Hoban (Conservative, Fareham)

I will not go into the semantics of what relatively small losses are and what their impact is on various Members’ constituents, because I think that that is a slightly pointless route to go down.

Looking back at the way that the debate has unfolded, the Conservatives have sought to stick to the principle, which we support, of clamping down on contrived capital losses, while at the same time ensuring that, for people who perhaps have relatively small share portfolios, a second property or some other assets, there is a relatively straightforward way for them to navigate these rules.

I made the point that we have a broadly written clause and people are untaxed through the guidance. What we have sought to do is to provide greater clarity in the clause, to ensure that taxpayers—relatively straightforward taxpayers—can work their way through all the provisions and not feel obliged to seek the professional advice of my former colleagues in the accountancy profession. I am always keen to ensure that people do not have to pay compliance costs if they are unnecessary.

I sense that the Minister understands those concerns and he has tried to allay some of them by refining the guidance, and I am grateful for that. However, I sense that those taxpayers who will incur modest losses will still need to go through the full rigour of the procedure, and they will need to understand what their transactions are doing. I am not sure that we have made any real progress in trying to alleviate those burdens for taxpayers with relatively small losses.

Although we have made some progress, we have not made substantial progress. Having said that, in the context of the de minimis limit, I am intrigued by the concept of a mass market capital losses avoidance scheme. It certainly would not be of much use in Wolverhampton, South-West and if it does not meet the market needs in Wolverhampton, South-West, where will it meet market needs?

I understand the Minister’s concern about how the de minimus limit could be abused. On that basis, I shall ask the Committee’s leave to withdraw the amendment. However, I would hope that the Minister might consider, between now and Report, whether we can take any other practical steps to reduce the burden on people with relatively small capital losses who wish to take responsibility for their own affairs without having to be burdened by understanding complex statements of principle and guidance.

I beg to ask leave to withdraw the amendment.

Clause 28

Mark Hoban (Conservative, Fareham)

Again, this is one of those areas where I think that there is consensus, not just between the Opposition and the Government, but between the various professional bodies, too. The consensus is that there are schemes that misuse life insurance and the practice of rebating commission to create an untaxed gain.

I want to ask the Minister two questions about the clause. As we both know, and welcome, most financial advisers are moving away from commission-based remuneration towards fee-based remuneration. That might be achieved by an adviser rebating the commission back to his customer, who would then pay a fee instead. Alternatively, the adviser may augment the amount that is being reinvested on behalf of his client. Does the Economic Secretary believe that such a course might slow down the shift from commission-based to fee-based remuneration? Might it act as a barrier?

The anti-fragmentation rule asks people to see whether the total value of three years’ life assurance policies exceeds £100,000. There has been some concern about how easy that will be to administer. Will the Economic Secretary confirm whether the £100,000 de minimis limit—depending on how it crops up in successive clauses—will apply only to life policies for which commission has been waived? Or will it apply to all life policies that an individual might have?

Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)

I shall be brief, because there is consensus on this matter. The Association of British Insurers welcomes the clause as a targeted anti-avoidance measure that has been introduced after it was informally consulted. The Chartered Institute of Taxation said that the proposed changes appear reasonable, and the Institute of Chartered Accountants for England and Wales said:

“We understand and support measures to counter tax avoidance”.

There is a recurring theme of concerns about the complexity of the provisions, however. Both the Chartered Institute of Taxation and the Institute of Chartered Accountants for England and Wales suggested that the complexity reflects the wider need for a process of corporation tax reform. In particular, the ICAEW said:

“It would have been more comprehensible to have made a fresh start and for the existing legislation to be replaced by a better targeted alternative, preferably in Tax Law Rewrite style. We would welcome a commitment that these provisions are reworked at an earlier stage to make them more comprehensible.”

I wonder whether the Economic Secretary has any comments in response to those suggestions.

During the consultation process and at the Finance Bill open day, the Chartered Institute of Taxation highlighted circumstances in which genuinely commercial transactions could be caught, such as those in which commission has been waived or where there is a professional obligation not to take commission. HMRC agreed to examine cases of individuals who have taken out a policy with the intention of drawing down not more than 5 per cent, but whose circumstances have changed with regard to their care, for example, and whose costs have increased by more than 5 per cent. They then suddenly find themselves having to draw down more than 5 per cent. The question is whether there should be a motive test to distinguish people who try to avoid tax from those who may inadvertently be caught in such a situation.

Rob Marris (Labour, Wolverhampton South West)

For the sake of completeness, I should say that I am shortly going to a dinner of the Association of British Insurers, although that will principally be to discuss the effects on the insurance industry of climate change. It is worth underlining what the hon. Lady said: the ABI, which represents 400 insurers, covering 94 per cent. of domestic insurance, said that it broadly welcomes the clause as drafted.

I want to give the Government a pat on the back. All too often, for understandable reasons, we sit in the Committee with submissions from various bodies that have concerns about the import of certain measures or the way that they are introduced. This measure is broadly welcomed, however, and the ABI has taken the trouble to circulate—to all members of the Committee, I suspect—a message to the Government saying, “Well done.”

Edward Balls (Labour, Normanton)

As we have heard, clause 28 is an anti-avoidance measure that tackles schemes marketed to wealthy investors who seek to avoid tax on savings. Under a typical scheme, the investor takes out a large, short-term life insurance policy, which is cash-based to guarantee investment performance. The avoidance arises because the financial adviser, who arranges the investment, rebates to the policyholder a significant proportion of the commission on the policy, so that in effect all or virtually all the investment return on the policy is made up of commission that is passed on to the policyholder, free of income tax, by the adviser. The hon. Members for Fareham and for Falmouth and Camborne, and my hon. Friend the Member for Wolverhampton, South-West, all reflected an industry consensus that that is an abuse of the system. Indeed, Money Marketing magazine—regular evening reading in our household for us and our three kids—states:

“This change can hardly be a surprise, but the sector must hang its head in shame. To take such a wide view of the commission taxation rules could only lead to this kind of reaction from HMRC.”

Another tax adviser from a senior accounting firm said that that amendment

“ratifies what people have thought for a long period of time, which is that it was abusing a tax concession.”

Therefore, there is a consensus for acting. Some concern was expressed, which I think was allayed in discussions with the industry, the ABI and others, that this part of the clause might also apply to ordinary commission reinvestment arrangements in which the adviser agrees to take a lower level of commission in return for the insurer enhancing the investor’s policy. The clause would not apply in those circumstances, nor is it the intention for it to do so.

In ordinary commission reinvestment arrangements of this type, the value of the policy is enhanced, but there is no increase in the premium. Also, the adviser would not have a strict entitlement to the commission that they forgo; they are not rebating any commission to which they would be entitled, and so the clause would not apply. The outcome is that the full amount of premium paid by the policyholder remains allowable in computing any taxable gain, just as it has always been. It would not have to be reduced by the amount of commission that the adviser had forgone and the policy holder would therefore not be taxed on a gain that they have not realised. I hope that that provides a final reassurance on some of those concerns.

The clause also includes the power to change the premium limit and minimum holding period through regulations. That will enable the targeting of the rules to be changed quickly if new schemes are devised in an attempt to side-step the current criteria—for instance, if schemes become economic for premiums below £100,000. I hope that that also reassures the hon. Member for Fareham. A lot of change is happening in the advisory world and a distribution review is being conducted by the Financial Services Authority. There is no desire through this legislation to slow down or impede shifts from commission to fee-based remuneration schemes. It is our intention that ordinary arrangements, and the kind that I have just set out, would apply in this case. Once again, I hope that that gives some reassurance.

The hon. Member for Fareham also asked about the £100,000 de minimis limit. Arguably, people should know the premium levels that they are paying, especially in a situation in which £100,000 or thereabouts is involved. The aim of the measure is to stop the abuse of commission arrangements that offer a tax-free return on investment over a short period, and it is targeted carefully at the type of policy that is used in those arrangement. As I have said, the measure includes the power to change the premium limit if avoidance schemes become economic for premiums below £100,000.

As I explained, it is not our intention to catch innocent taxpayers who did not take out a policy for avoidance motives but cashed them in early for an unforeseen reason. The clause provides a clear objective test to identify and target the largest short-term policies used in the commission rebate schemes.

Mark Hoban (Conservative, Fareham)

I was not quite clear—perhaps that is my fault and not the hon. Gentleman’s—whether the £100,000 limit included all premiums paid by an individual or only those premium-related policies in which the entitlement has been waived.

Edward Balls (Labour, Normanton)

I will reflect carefully on that.

Rob Marris (Labour, Wolverhampton South West)

May I remind my hon. Friend of paragraph 28 of the explanatory notes on the clause, which states:

“Broadly, this measure affects policies where the premiums paid exceed £100,000 in a year and the policy is not held for at least three complete tax years”?

Edward Balls (Labour, Normanton)

Those explanatory notes; do not you just love them, Mr. Gale? I am grateful to my hon. Friend the Member for Wolverhampton, South-West for taking us back to the notes. I confirm that the answer to the hon. Gentleman’s question is all premiums. I am sure that my right hon. Friend the Paymaster General would want me to give him that reassurance and clarification.

Reaction to the measure has been positive, and the general view is that it is a proportionate and targeted response.

Schedule 5

Edward Balls (Labour, Normanton)

I beg to move amendment No. 68, in schedule 5, page 109, line 10, at end insert—

‘Loan relationships: amounts not fully recognised for accounting purposes

Roger Gale (Conservative, North Thanet)

With this it will be convenient to discuss Government amendments Nos. 69 to 74.

Edward Balls (Labour, Normanton)

The amendments will make a slight extension to the scope of one of the anti-avoidance provisions in schedule 5 to stop avoidance scheme promoters introducing even more contrived arrangements to circumvent the effect of the measure.

Paragraph 15 of the schedule is aimed at schemes that create artificial losses from a company’s holdings in offshore funds or similar collective investment schemes. The losses are generated by the scheme making an investment that is bound to decline in value. Shortly after the Bill was published, disclosure was made to HMRC of a scheme that attempts to get round the provisions by arranging for the collective investment scheme to take on a liability for the same purpose, ensuring that the value of the fund declines. The amendments will frustrate such an attempt by broadening paragraph 15 so that it refers to a liability as well as to an investment. The rule in paragraph 15 as a whole will have effect from 6 March, when the measure was announced, but the extension brought about by the amendments will apply from 9 March.

If it is appropriate to do so, Mr. Gale, I want to make a further remark about the broad scope of the schedule. The purpose of the clause and schedule is to close down a number of marketed avoidance schemes of a type for which disclosure is required under the avoidance disclosure regime, and to ensure the comprehensive working of certain anti-avoidance provisions. The total tax protection of the measures is estimated as being in the low billions of pounds.

The schedule tackles avoidance schemes mainly used by companies, which fall under 10 different categories. It also amends the structured finance arrangement rules that were introduced last year to prevent schemes that might stop the rules working. There is also a relaxation of the conditions for obtaining capital gains tax exemption on assets that are sold under structured finance arrangements.

Draft legislation, as I have mentioned, and detailed explanatory commentary, were published with the pre-Budget report and on 6 March. Publication before the Budget was intended to give business an opportunity to comment on whether the draft measures could affect legitimate business transactions. In the event, reaction has been low key, and respondents have not identified any instances in which the provisions might affect legitimate transactions. I have, however, identified the need for the Government amendments, which deal with one particular matter that arose in consultation.

The Government are committed to ensuring that we tackle systematic tax avoidance, and the amendments and schedule will help to ensure that companies that engage in tax avoidance do not enjoy an unfair advantage.

Roger Gale (Conservative, North Thanet)

In view of the Economy Secretary’s remarks I propose to take the debate on the schedule with debate on the amendments.

Theresa Villiers (Conservative, Chipping Barnet)

I am grateful for your guidance, Mr. Gale. I, too, hoped to deal with the schedule in that way.

Schedule 5 seems to me to be a pretty accurately targeted measure, focusing on what are, as the Economic Secretary said, highly complex and artificial transactions undertaken solely with tax avoidance in mind. It seems to the Opposition entirely reasonable for HMRC to move against those schemes. As ever, it is worth pointing out that there will be yet more complicated legislation, but I must concede that, in that context, it will be difficult to come up with simple legislation to deal with the problem. My research has not managed to expose any significant technical flaws that would concern the Committee, and like the schedule, the amendments that the Economic Secretary has proposed seem to be similarly targeted, so we will not oppose them.

Consequently, I have for the Economic Secretary just a couple of questions about the schedule. First, in the explanatory notes to paragraphs 9 and 16, HMRC does not think that the respective schemes, which the paragraphs target, work anyway. Essentially, the new legislation before us is only a caution. I should be interested to find out whether that means that the Government do not have the same certainty about the transactions targeted in the rest of the schedule. Are they holding their hands up or are they still challenging those transactions?

Secondly, I have a question about paragraph 18, which is intended to extend the anti-avoidance provisions in paragraph 26 of schedule 26 to the Finance Act 2002 in order to cover all relevant situations in which a company fails to exercise in full all its rights under an option, rather than just the situation in which it abandons an option. There have been attempts to circumvent paragraph 26 of schedule 26 to the 2002 Act, which bites on the abandonment of an option by utilising schemes that involve partial exercise.

Is not that situation also covered by paragraph 23 of schedule 26 to the 2002 Act, which denies tax relief for debits related to an “unallowable purpose”? I should be grateful if the Economic Secretary could explain whether the situation covered by the further legislation that we are considering—paragraph 18 of schedule 5 to the Bill—is actually already covered by paragraph 23 of schedule 26 to the 2002 Act. Is paragraph 18 yet more precautionary legislation?

Rob Marris (Labour, Wolverhampton South West)

In relation to the amendments and to the debate on the schedule, may I again gently point out to my hon. Friend the horrible drafting? In amendment No. 68, proposed new paragraph 10A(5) starts with “But”. Similarly, in amendment No. 74, proposed new paragraph 15(7) of schedule 5 starts with “But”. In the schedule itself, paragraphs 2(3), 9(3), 11(5), 12(5), 14(3), 15(5) and 17(3) all start with “But”. Please could he have a word with the draftspersons and have them stop using that word? In almost all those cases, as far as I can tell, it is not only grammatically erroneous, but completely redundant.

Kitty Ussher (Labour, Burnley)

Perhaps this is not a crucial point, but is my hon. Friend aware that The Economist style guide authorises the use of “But” at the beginning of a sentence?

Rob Marris (Labour, Wolverhampton South West)

I shall not engage in a long discussion. I am aware that many journalists use it; it does not make it right.

Edward Balls (Labour, Normanton)

I was tempted to intervene on the hon. Member for Chipping Barnet to ask her whether she thought paragraph 23 of schedule 26 to the 2002 Act is framed in the most apposite way, or whether she had any suggestions about the way in which it might, in retrospect, have been better drafted.

Theresa Villiers (Conservative, Chipping Barnet)

My point was that paragraph 23 of schedule 26 to the 2002 Act is very well drafted, which means that paragraph 18 of schedule 5 to the Bill may not be needed. Its provisions are already covered by the drafting of paragraph 23.

Edward Balls (Labour, Normanton)

I understood the hon. Lady’s point, but perhaps not as well as she does. The answer to her wider question is that the measure is not an over-reaction—there is tax risk. We have been persuaded to act by the number of avoidance schemes that have come to our attention. In the judgment of HMRC, most schemes are covered by paragraph 23. However, the judgment of HMRC experts is that that measure does not cover all potential schemes or those that are already in operation. The Bill gives us confidence that we will cover all such schemes in the future. We are ensuring that the gaps in paragraph 23 are well and truly closed. Most schemes hit by the schedule are being challenged in court, but not all. Whether we litigate will depend on legal advice. The changes will mean that any gaps in paragraph 23 will be comprehensively closed.

Theresa Villiers (Conservative, Chipping Barnet)

I want to clarify my remarks: they should not be taken to suggest that schedule 5 is an over-reaction. I was merely seeking to ascertain whether HMRC was still challenging the schemes under the old legislation. It might have a good case for doing so, and a good chance of success in court.

Schedule 6

Theresa Villiers (Conservative, Chipping Barnet)

I beg to move amendment No. 67, in schedule 6, page 115, line 5, leave out ‘paragraph 41(8) of that Schedule’ and insert

‘section 577 of the Capital Allowances Act 2001’.

Roger Gale (Conservative, North Thanet)

With this it will be convenient to discuss amendment No. 66, in schedule 6, page 115, line 11, after ‘2006’, insert—

‘but where either the predecessor or the successor has no principal company as therein provided (because it is itself a principal company) it shall be deemed for the purposes of this section to be its own principal company’.

Theresa Villiers (Conservative, Chipping Barnet)

The provisions in clause 30 and schedule 6 are largely uncontroversial, as are a number of the matters that we will look at this afternoon. The two exceptions to that are highlighted in amendments Nos. 67 and 66. They would make changes to the definitions in proposed new section 343A of the Income and Corporation Taxes Act 1988, which concerns company reconstructions involving a business leasing plant or machinery.

Amendment No. 66 relates to the definition of the concept of the “principal company” contained in proposed new section 343A. The measure is designed to prevent companies from undermining the provisions in schedule 10 to the Finance Act 2006. Hon. Members may recall the debate on that—it dealt with avoidance involving the sale of leasing businesses. The schedule aims to counter a scheme that sought to use the tax-neutral transfer provisions in section 343(2) of the 1988 Act. Those provisions were intended to cover transfers within a group and to counter the schemes that sought to use them for transfers out of a group.

The proposed new section will prevent thesection 343(2) tax-neutral transfer from applying in certain situations in which a company reconstruction involves the leasing of plant or machinery, which is to say the transfer of leased assets between companies. Schedule 6 will essentially disapply the carry-over of capital allowances under 343(2) from one company to another unless certain conditions are met—the companies are called the “predecessor” and the “successor” respectively in the Bill. One of the conditions is set out in proposed new section 343A(2)(a), which provides that the principal company and the predecessor immediately before the transfer must be the same as the principal company of the successor immediately after the transfer.

That is not controversial, and does not cause problems that I am aware of in which one subsidiary transfers its leasing business to another subsidiary of the same parent. However, the section does not seem to work effectively where a subsidiary transfers its leasing business to its parent, as defined in paragraphs 11 and 12 in schedule 10 to the 2006 Act. That is because the provisions of the schedule that we are considering do not provide for any company to be its own principal company.

The best way to look at the issue is by an example. Adopting the terminology used in schedule 10 to the 2006 Act, where company B is the principal of company A, because A is B’s qualifying 75 per cent. subsidiary, if A hives up its leasing business to B, the condition contained in paragraph (a) of the new section 343A(2) is not met, because company B has no principal because it is itself the principal. The same problem would occur if a parent company hived down its leasing business to its own subsidiary. Horizontal transfers within the group are fine, and can use the tax-neutral provision in proposed section 343A(2), but vertical ones are not, and cannot use that tax-free transfer provision.

It seems to me that the legislation goes beyond the intent of preventing the transfer of a leasing portfolio out of the group, while still managing to use the tax-free transfer provisions in section 343A(2). That is the mischief that it is designed to address, but it goes beyond that. As well as targeting transfers out of the group, it also seems to prevent upstream or downstream transfers within a group from being tax-neutral. Thus, under the guise of preventing avoidance, the current drafting prevents a tax-neutral reorganisation within a group, even where there is no change in the ultimate beneficial ownership, when no tax advantage is being sought, and no economic profits being made.

There seems to be no rational reason that I can see to disapply the carry-over contained in proposed section 343A(2) in the vertical transfer situations, if the Government are prepared to apply it in the horizontal transfer situations. There may possibly have been a drafting error, which amendment No. 66 would correct, by amending the definition of “principal company” to provide that where the predecessor or successor has no principal company at the time of the transaction, it is deemed to be its own principal company. That minor change would ensure that hiving up a leasing business to a parent, or down to a subsidiary will be treated in the same way as transfers between subsidiaries in a group.

If the Chief Secretary is not happy to accept the amendment, perhaps he could explain why these two different types of transactions should be treated differently. It is a particularly important issue at present, because changes to the capital allowances regime in respect of leased assets have removed the requirement for lessor groups to have a number of subsidiaries with accounting periods spread throughout the year. As a result, many leasing groups are currently in the proves of rationalising their corporate structures to hide their leasing trades into two or three companies, having had a significant number before.

Some of those restructurings have already taken place, and some are under way at present, or took place between the effective date of the legislation, and the publication of the detailed rules. I am told that considerable disruption could be caused by the arbitrary distinction that the legislation seems to draw between vertical and horizontal transfers within the group. I would be grateful if the Chief Secretary could address that point.

Amendment No. 67 seeks to amend the definition of market value contained in subsection (5) of proposed new section 343A. It does not quite have the urgency and significance of the previous amendment, but it is important to give the Committee the opportunity to test the reasons behind the choice of definition contained in subsection (5) of the proposed new section 343A.

The relevance of the definition is contained insubsection (4), which provides that, where a carry-over in section 343A(2) is disapplied, the leasing business shall be treated as having been sold by the predecessor company to the successor for an amount equal to its market value on the day of the transfer. The definition of “market value” that is contained in subsection (5) of proposed new section 343A refers to paragraph 41(8) of schedule 10 to the Finance Act 2006, which is similar but not identical to the definition in section 70YI of the Capital Allowances Act 2001. Both are predicated on the idea of a notional disposal of the assets in the leasing portfolio by the absolute owner, free of any leases or encumbrances. So the focus is on the hypothetical market value of the underlying asset. However, realistically, that value could be difficult to determine.

Arguably, when one is considering leased assets, it is artificial to focus on the theoretical underlying value of the base assets, free of leasehold interest. The property in question here is the leased interest, not the absolute interest free of encumbrances. Arguably, the more appropriate definition of “market value” is contained in section 577 of the 2001 Act, which focuses on the price that the book of leased assets would fetch on the open market. Thus, amendment No. 67 would remove the reference to section 41(8) of the 2006 Act and replace it with a reference to section 577 of the 2001 Act, which would value the portfolio being transferred at its actual worth, rather than at a hypothetical base asset value. To deem assets to have different values for tax purposes than their actual value always risks creating anomalies and unfairness. I would be interested to hear the Chief Secretary’s rationale for choosing the definition from section 41(8) of the 2006 Act rather than the one from section 577(1) of the 2001 Act.

I close by emphasising that the leasing industry is a significant industry for the UK economy, therefore it is vital that we get this issue right and, in respect of these two amendments, if we do not, it could cause some disruption to the restructuring that is already under way.

Stephen Timms (Labour, East Ham)

I too welcome you back to the Chair, Mr. Gale.

Before setting out the background to clause 30 and schedule 6, I should like to acknowledge the point made by the hon. Lady about the importance of the leasing industry and the importance, therefore, of getting these matters right. As she told the Committee, schedule 6 introduces anti-avoidance legislation in response to disclosures that we have received about avoidance schemes being used that are designed to get round measures in the Finance Act 2006 to combat the loss of tax from the sale of companies leasing out plant or machinery.

In the early years of a profitable lease, lessor companies generated losses but in the later years the situation reversed: the lease became profitable, but tax was being lost because groups were selling lessor companies to loss-making groups at just the time that the leasing transaction was about to become tax-profitable. The relevant provisions in the 2006 Act prevent a loss of tax when a lessor company leaves a profit-making group and becomes a member of a loss-making group by bringing into charge an amount that prevents the loss of tax when a lessor company is sold.

The disclosures that we received indicated that groups were avoiding the rules in two ways. One type of scheme was using legislation that enables a group to transfer leasing businesses without tax effect, rather than selling the lessor company and the other manipulated the balance sheet value of leased assets in a way that would reduce or eliminate the charge that should be brought into account to prevent the loss of tax.

Schedule 6 stops both types of scheme. First, it makes changes to the rules allowing groups to transfer businesses without tax effect; those rules are in section 343 of the Income and Corporation Taxes Act 1988. Changes to section 343 will mean that only transfers of assets between subsidiaries of the same parent company—and certain transfers involving consortium companies and partnerships—will benefit from tax neutrality. Where the new rules apply so that a transfer falls outside the existing section 343 provisions, the disposal of the assets of the business is treated as taking place at a value equal to the value of the asset unencumbered by the lease: that is, as if the lease did not exist. That creates a charge broadly equivalent to the effect of schedule 10 to the Finance Act 2006.

Secondly, the schedule adds two new paragraphs to schedule 10 on the sale of lessors. New paragraph 38A requires a company to ignore the consequences of arrangements entered into to secure a tax advantage, and new paragraph 38B requires a company to ignore liabilities when determining the value of its assets. Those changes will ensure that the sale of lessors legislation works as intended.

The hon. Lady’s two amendments are directed at the first of those anti-avoidance measures introduced by the schedule on the action that limits tax-neutral transfers. Amendment No. 66, as she explained, seeks to preserve tax neutrality for transfers between a subsidiary and its ultimate parent company—a group’s principal company. I shall explain why I shall ask the Committee to reject it, but I assure her that it is not because of any drafting error.

I suggest that the amendment is unnecessary. In the vast majority of cases, leasing businesses are conducted via wholly-owned subsidiaries, and I am certainly not aware of any pressing commercial reasons for transferring a leasing business to a principal company. In contrast, the transfer of leasing businesses to a principal company increases the risk of tax avoidance for two reasons. First, while we are aware that some leasing is conducted through principal companies, we know that transfers of businesses to holding companies have featured, not uncommonly, in tax-motivated arrangements enabling groups to utilise tax losses more efficiently.

Secondly, the transfer of a leasing business to a principal company could dilute the leasing business so that the holding company would not be treated as a lessor company. If that were to happen, the sale of lessors legislation would not apply and the business could be transferred from the principal company without triggering the anti-avoidance rules. The amendment does not provide any protection against abuses along those lines.

The issue that the hon. Lady has raised was raised by us with the industry. We asked it in January to provide evidence that the restriction that is being introduced here on transfers to and from principal companies will hinder normal commercial transactions. No such evidence has been provided to us.

There are real worries about tax avoidance, and I shall give an example. For some foreign banking groups, the principal company is the main bank, and the UK branches are, not infrequently, loss making. Some such groups have purchased lessor companies, but rather than transferring the business to existing leasing subsidiaries, they transfer it to the branch so as to use its accumulated tax losses against the leasing profits. I have not seen any evidence that those transfers are anything other than tax motivated, and I do not think it would be right to preserve what are, in such instances, clearly tax avoidance opportunities. I have certainly not seen any evidence that transfers to and from holding companies are necessary for the commercial operation of a business, but in contrast, there is evidence that such transfers have offered and could continue to offer potential for avoidance. On those grounds, I hope that the Committee will reject the amendment.

Amendment No. 67 would, as the hon. Lady explained, change the value at which plant or machinery is treated as transferred for tax purposes, and the asset would be treated as transferred at the price it would fetch on the open market, encumbered by the lease, rather than the value of the asset unencumbered by the lease, which is the value provided for by the schedule as it stands. Those values are often similar, but the crucial problem is that it is possible that the value of the asset encumbered by a lease could be manipulated in a way that would reduce or even eliminate the impact of the anti-avoidance measure, whereas the market value unencumbered by the lease cannot be manipulated in that way. That is why we wanted that to be the value to which the legislation refers.

The amendment could, inadvertently, mean that the measure does not meet its aim. I hope that, given that explanation, the hon. Lady will feel able to withdraw it, but if not I will certainly ask the Committee to reject it.

Theresa Villiers (Conservative, Chipping Barnet)

I will ask leave to withdraw the amendment and I am grateful to the Chief Secretary for his exposition of the reasoning behind the schedule. I would consider coming back to the amendments on Report, perhaps after consideration of the evidence that he said he has not been supplied with. I may want to reflect on that, but in the light of what he has said it would not be appropriate to press the amendment to a vote. I beg to ask leave to withdraw the amendment.

Rob Marris (Labour, Wolverhampton South West)

Although there is broad consensus for schedule 6, it seems that we now have three and a half more pages of tax legislation prompted by the fact that some bright sparks have already found a way around the measures that were passed in, I think, schedule 10 to the Finance Act 2006. I pay tribute to their inventiveness, and it is part of the innovation that we salute in this country, in one sense, although I would rather it were channelled into scientific endeavour rather than finding tax loopholes. While the Opposition understandably frequently raise concerns about the length of what they now call the tax code—the number of pages in Tolley’s tax guide and so on—this is a classic example of how, within less than six months of passing fairly lengthy legislation, a loophole is found and we then have to pass another three and a half pages of loophole-closing legislation.

Stephen Timms (Labour, East Ham)

I very much agree with my hon. Friend that some very fine brains have sadly been misapplied, but I commend the schedule to the Committee.

Clause 31

Stephen Timms (Labour, East Ham)

I beg to move amendment No. 79, in clause 31, page 23, line 7, leave out ‘and’.

Roger Gale (Conservative, North Thanet)

With this it will be convenient to discuss the following: Government amendment No. 80

Amendment No. 83, in clause 31, page 23, line 34, leave out ‘that date’ and insert ‘5th December 2005’.

Government amendment No. 81

Stephen Timms (Labour, East Ham)

The main purpose of clause 31 is to close another tax avoidance scheme that has been disclosed to Her Majesty’s Revenue and Customs and that could be used to defeat the aim of a targeted anti-avoidance rule introduced in the Finance Act 2006. That rule stops tax avoidance schemes that seek to secure a tax advantage, whereby a company is sold from one group to another primarily to transfer the benefit of capital losses between the two groups, and so reduce tax. We have also taken the opportunity to relax a provision of the 2006 legislation that affects only a small number of groups of companies that realised capital losses before the legislation came into effect.

We now realise that the softening of the targeted anti-avoidance rule provided by the clause goes a little too far, and would result in the rule failing to prevent all cases of loss buying involving those protected losses, hence the need for the Government amendments.

Amendments Nos. 79 and 80 make the necessary changes to the text of the clause. They remove the protection that the losses enjoy from the effects of the loss buying targeted anti-avoidance rule where the parent company in the group is taken over as part of a loss-buying scheme. The clause still allows relief for the losses within the original group of companies if the takeover is for commercial purposes. It prevents relief only where one of the main purposes of the takeover is to secure a tax advantage from the losses for the new group.

Amendment No. 81 provides that the changes apply only to assets disposed of on or after 9 May this year, the date when the amendments were laid. The amendments have also been published on the Treasury website.

There are three reasons why I will urge my hon. Friends to resist what is proposed in amendment No. 83, but I look forward to hearing the case that the hon. Member for Chipping Barnet makes for it.

Theresa Villiers (Conservative, Chipping Barnet)

The Opposition broadly welcome clause 31 and its underlying intention. The additional anti-avoidance provisions in subsections (1) to (3) do not appear to cause any obvious problems and none have been brought to my attention. The further tweaks to the anti-avoidance regime provided in Government amendments Nos. 79 to 81 broadly appear to hit an appropriate target, so we will not be opposing those.

The relief granted by subsections (5) and (6) is welcome as far as it goes. I tabled amendment No. 83 to highlight a concern relating to the extent of the relief that those subsections provide.

Subsections (5) and (6) are aimed at correcting a problem with the anti-avoidance rules introduced by section 70 of the Finance Act 2006, which inserted sections 184A to 184F of the Taxation of Chargeable Gains Act 1992. An incidental effect of those rules was that they caught groups that had crystallised losses via de-grouping transactions taking place prior to the announcement of the 2006 Act measures in December 2005. Such de-grouping transactions are undoubtedly controversial, but they were considered acceptable at that time. The legislation could thus have operated retroactively to apply to transactions already undertaken prior to the announcement of the new measures.

Transitional measures were therefore included in the 2006 Act to prevent the rules from operating in that way and having that retroactive effect. In particular, the transitional arrangements were intended to cover the technique in use before December 2005 that allowed a group to crystallise loss on an asset that had fallen in value without actually selling the asset.

However, those transitional rules have since proved to be unduly restrictive. They included the condition that company B, which left the group as part of the relevant crystallising transaction, had to continue to be controlled by the principal company of the group that it had left. That denied relief under the transitional provisions in a number of cases, including when the company leaving the group had been sold to another group in an ordinary commercial transaction. It also denied relief where the company in question had been liquidated.

Another situation that was excluded from transitional relief was where the principal company of the original group was taken over or involved in a merger. Clause 31 amends the transitional arrangements in the 2006 Act so that they provide relief in a wider range of circumstances. They appear to be effective in extending the transitional provisions in the 2006 Act to capital losses crystallised prior to December 2005, and the Opposition broadly welcome that move.

However, it had been expected that the extension of the transitional arrangements and the relief that they provide would allow relief in all affected cases since December 2005. Instead, clause 31(9) provides that the relaxation of the rules takes place with effect only from 21 March 2007. Therefore, any gains realised between 5 December 2005 and 20 March 2007 will not receive relief under clause 31.

Amendment No. 83 would remedy that problem by providing that the changes made in subsections (5) and (6) of clause 31 applied in relation to disposals made on or after 5 December 2005, rather than just to those made on or after 21 March 2007.

I shall refer to an example that would be an issue in these circumstances. A group entered into a crystallising transaction prior to 5 December 2005, with the result that company B within the group carried a loss. The group then made a capital gain between 5 December 2005 and 20 March 2007. Clause 31 would not allow the group to use the losses crystallised in company B to offset that gain, because it occurred prior to the implementation of the relaxation of the transitional arrangements. Amendment No. 83 would permit the crystallised losses to be used in relation to gains after 5 December 2005, rather than only those made after 20 March 2007.

I acknowledge that that is not a wide-ranging point—only a few companies would be affected—but it would be useful if the Minister considered whether the relief granted by the clause should be extended in the very limited way proposed by amendment No. 83.

I would like to make a further point on the clause and add a few final words on the amendment of section 184B of the Finance Act 2006. The Opposition believe that it would have been useful to have further clarification in statute of the test set out in subsection (1)(c) of section 184B regarding the main purpose, or one of the main purposes, of the relevant arrangement. We had an extensive debate on the main purpose test this morning, and I highlight the matter only to indicate yet another context where the test is used and questions must be answered.

I recall, in particular, that the Economic Secretary indicated that the Opposition had never previously raised concerns about the main purpose test, but I recall my hon. Friend the Member for Wycombe having raised similar concerns on the main purpose test last year, and I believe that it may have been considered on other occasions. The test is of concern to the Opposition. We see that in this context, just as we saw it in the context of this morning’s discussion.

Stephen Timms (Labour, East Ham)

I am grateful to the hon. Lady for welcoming the Government amendments, but, as I indicated, I have a number of difficulties with the amendment that she proposes.

First, the amendment is technically defective as it would insert a repetition of the phrase

“unless the gains accrue to the company on a disposal of a pre-change asset”

in section 184A(2) of the 1992 Act. Secondly, and perhaps more substantially, it would remove a relief that is of value for some companies. A change made by subsection (5) removes references to section 184B of the 1992 Act from section 70 of the Finance Act 2006. Section 184B is about gain buying and the references in section 70 provide relief to some companies that allows them to use capital losses against certain gains.

The references are being removed because they are needed only on a transitional basis, unlike the equivalent rule for losses—unused losses can be carried forward to later years, but gains are taxed in the year that they arrive. An undesirable effect of the amendment would be to remove the ability to set off losses against gains for a few affected companies and to remove that relief retrospectively.

Thirdly, and perhaps most significantly, the amendment could create an opportunity for tax avoidance of the type that the Government amendments are aimed at preventing. The Government amendments apply from 9 May this year. If the Opposition amendment was not technically defective, it would mean that the tax treatment of transactions in the 18 months from December 2005 onwards could be revisited. That would give a small number of companies an opportunity to try to obtain relief where they had bought losses from other groups. Given those three difficulties, I hope that I have persuaded the hon. Lady not to press the amendment to a vote.

I would like to comment on the point about the main purpose test, which the hon. Lady raised at the end of her remarks. Revenue and Customs has published extensive guidance that incorporates examples of arrangements that are likely to be caught by the legislation. In addition, the guidance, which was well received, has been extended and clarified as a result of discussion with business and professional advisers. Therefore, I hope that it is not going to cause difficulty.

The Government amendments extend protection to encompass a small number of groups holding capital losses that the targeted anti-avoidance rule might not otherwise affect, and ensure that we retain a high level of protection against some rather aggressive tax avoidance, whereby one group of companies seeks to reduce its tax liability by buying the capital losses of another. I commend those amendments to the Committee.

Clause 32

Edward Balls (Labour, Normanton)

I beg to move amendment No. 75, in clause 32, page 24, line 15, after ‘premium’ insert ‘or other consideration’.

The clause adds a new section to the special tax rules dealing with corporate members of the Lloyd’s insurance market. It aims to counter a loss-buying scheme reported to Revenue and Customs under the avoidance scheme disclosure rules. The scheme involves companies buying tax losses from loss-making corporate members of the Lloyd’s insurance market, thus ceasing their underwriting activities. The clause will close that window by requiring that the group relationship between a corporate member and company that claims group relief to exist from the last day of the year in which the insurance business was written to the first day of the year in which the claim to group relief is made. The rule is narrowly targeted and will apply only to losses of a corporate member’s final year of writing insurance business. The rule will restore the usual group relief principle that relief for losses incurred in a year will be available only to companies related to the corporate member in that same year, but it will not affect ordinary commercial acquisitions in reorganisations when the newly created group relationship is part of ongoing economic activity.

The amendment arose from discussions with Lloyd’s. It will refine the definition of “reinsurance to close premium” so that it includes “other consideration”. “Reinsurance to close” is the mechanism by which a Lloyd’s syndicate closes its account. The commercial definition of “reinsurance to close” has evolved over time and the amendment will ensure that the tax rule will reflect the definition in Lloyd’s own rule.

I hope, Mr. Gale, that you do not mind that I have put the amendment in the broader context of the clause. It has been part of a wider consultative exercise on tax matters that we have had with Lloyd’s and with representatives of the wholesale insurance market over the past six months. Representatives of the Lloyd’s market will not be surprised that we have proposed bringing Lloyd’s syndicates into line with other companies. Industry commentators agree that the provision is narrowly targeted and not unreasonable. It was discussed with Lloyd’s experts in advance of the publication of the detailed clauses.

As I have said, the provision is part of a wider context under the auspices of the high-level group on City competitiveness, which has discussed a number of tax measures and wider market reforms aimed at enhancing the competitiveness of the Lloyd’s market—an important part of the City of London. I am therefore grateful for the work of the Lloyd’s market and particularly to Lord Levene for his leadership on that issue and for wider co-operation over the past eight months or so. Within the context of that productive work to enhance competitiveness, the change is necessary to bring the Lloyd’s market into line with our wider approach to taxation in that area and the amendment will close a loophole to ensure that the legislation is properly effective. On that basis, I commend the amendment and the clause to the Committee.

Roger Gale (Conservative, North Thanet)

As there is only one amendment to the clause, I propose to take the stand part debate with it.

Mark Hoban (Conservative, Fareham)

I want to say two things. First, I welcome the work that Lord Levene is leading on improving competitiveness of the Lloyd’s insurance market. That market has been under pressure in recent years—we have seen a number of wholesale reinsurers relocate from the UK to Bermuda. It is therefore important to take appropriate action to protect and strengthen that market. Secondly, with regard to the amendment, I ask the Minister what “other consideration” might include?

Rob Marris (Labour, Wolverhampton South West)

I shall make my usual type of complaint during stand part debates. Line 10 uses the word “premiums”. I am shocked that no amendment has been proposed to change that to “premium”.

Edward Balls (Labour, Normanton)

The definition in the original clause 32 was based on one already in use in tax legislation specific to Lloyd’s, which we had no reason to suspect was not operating as had been intended. The change in Lloyd’s rules to that definition only came to light during consultation with industry representatives on the financial clauses and was made in response to comments from Lloyd’s and other industry representatives.

The answer to the hon. Member for Fareham’s question is that “other consideration” applies to anything other than money. The existing definition to which I have referred was in section 107 of the Finance Act 2000 and will be repealed by schedule 11 to clause 41 of the Bill. Therefore, there is no need for a further change in definition.

Mark Hoban (Conservative, Fareham)

I think that I am grateful to the Minister for his clarification. I think that he is saying that one of the considerations that can be part of the reinsurance to close process is non-monetary. Having worked in the insurance market prior to coming to the House, I am still at a loss as to what that consideration might be as part of a normal insurance transaction.

Edward Balls (Labour, Normanton)

I was rather hoping that my hon. Friend the Member for Wolverhampton, South-West, in his normal diligent manner, might have found some drafting irregularity in the explanatory notes that he could have drawn to our attention.

The hon. Member for Fareham is quite right that when I said “anything other than money”, I was referring to something that is non-monetary. It is true that “non-monetary” is a slightly more technical way of saying it, but they are probably the same. I apologise for slipping away from the complexity of tax jargon to a more colloquial way of saying the same thing. [Laughter.] Who writes these things?

The answer is that the measure follows the Lloyd’s byelaw and future-proofs the legislation in case anybody comes along with some other consideration of a non-monetary or anything-other-than-money nature, which might cause a difficulty.

I am struggling because we are discussing a currently unforeseeable case. Given that, we want to ensure that were such an unforeseeable circumstance to transpire, we would have pre-empted it. Pre-empting a currently unforeseeable circumstance is not easy to define other than in the most general of terms—hence, the phrase “other consideration”. It says here that that could be anything, such as the assignment of rights. I am sure that the hon. Gentleman will understand that perfectly, given his declared expertise in this area. I hope that I have provided sufficient clarity to the Committee for it to move forward.

Clause 33

Theresa Villiers (Conservative, Chipping Barnet)

The Opposition support the principles underlying the clause. In the circumstances, and given the wording of existing legislation, it seems to be a reasonable and proportionate measure. I will therefore mention only a few queries and background points so that the Committee has the opportunity to debate the policy objective behind the clause and how best to bring that about.

I will raise two points. The legislation at issue is schedule 24 to the Finance Act 2003 and sections 38 to 44 of the Income Tax (Trading and Other Income) Act 2005. Although introduced by the current Government, those Acts built on an approach first established by Nigel Lawson when introducing provisions to crack down on “potential emoluments”—deferred bonuses and benefits—in the Finance Act 1989.

There is, therefore, some common ground between our parties on the principles at stake. Like the 2003 Act that succeeded it and will be amended today, the 1989 Act sought to ensure that an employer gets a tax deduction on a payment or benefit provided to an employee only when they receive it in a form that constitutes employment income. In other words, the employer gets the deduction only when the employee has got the benefit. In effect, the point of the 1989 Act was to prevent employers from obtaining the corporation tax benefit of paying out a large bonus before the employee had paid the tax on it. I understand that the Government introduced schedule 24 to the 2003 Act out of concern that certain planning schemes involving employee trusts were being marketed as a means of circumventing the 1989 Act and accelerating the corporation tax deduction in the unacceptable way that I have outlined.

Clause 33 tackles some of the more recent schemes that have emerged since the 2003 Act. The clause appears to be appropriately targeted at those schemes, which would be fairly described as aggressive tax planning. I have received no representations that would indicate that any collateral damage would be caused to transactions that are not motivated exclusively by tax considerations.

I understand that some schemes have been developed to exploit the fact that the 2003 Act only catches situations where the employer transfers assets or makes payment to a third party. Attempts have been made to circumvent the anti-avoidance provisions by having the employer who wishes to make the deferred payment declare themselves a trustee over certain assets or money. In this case, there is no transfer of legal ownership to a third party. Alternative arrangements sought to get around the rules by increasing the value of existing trust assets and arguing that no payment or benefit had been transferred into the trust. Consequently, it was at least arguable that the 2003 Act did not bite in such cases.

Clause 33 would make it plain that such situations would be caught, and that is one of the reasons why we welcome it, although I want the Chief Secretary to consider two points. First, why have we ended up in this situation? Why has it proved necessary to have yet more legislation—and clause 33? If the Chancellor had not decided to meddle with the law in 2003, the Government might well have been successful in arguing in court that the original 1989 Act covered these latest avoidance schemes anyway.

I have in mind the very robust approach taken by the House of Lords in the Dextra case, which was decided under the 1989 Act. In it, their lordships seemed to signal clearly that they would have limited patience with those who put forward hair-splitting interpretations of the statute to seek to get round the clear objective of the law: not to allow the employer to accelerate the deduction before the employee has received the payment. Assuming a consistent approach from the courts, the Revenue might well have been able to challenge these new schemes in court as contrary to the intention that Parliament made plain in introducing the 1989 Act.

I should put it on the record that the Dextra judgment seems to make it clear that the 1989 Act was an effective statute that achieved the policy goal of catching deferred payments through employee trusts. It probably would have caught the schemes that clause 33 seeks to close down, so the scope for these new avoidance schemes was only created because the Government decided to junk perfectly good legislation introduced by Nigel Lawson. The revised form of wording that they chose in the 2003 Act was narrower than the wording in the 1989 Act, and room was thus created for the aggressive tax advisers to move in.

Rob Marris (Labour, Wolverhampton South West)

I sat on the 2003 Finance Bill Committee, and, although this may be due to my memory, I do not recall the hon. Lady’s party raising the issue of the schedule being a narrowing of the 1989 legislation. Did her party raise it then?

Theresa Villiers (Conservative, Chipping Barnet)

I cannot answer that because I was not in the House then, so I did not take part in that Committee. That issue is a concern, and I can certainly check Hansard to see whether or not we raised it. If we did not do so, we should have done.

We have frequently made the point that the Government’s anti-avoidance legislation has often been used as a sledgehammer to crack a nut—in some cases, the Chancellor takes a sledgehammer to miss a nut. We support their efforts to shut down these schemes, but feel that the clause would not have been necessary were it not for the changes to the legislation made in 2003.

Secondly, I briefly want to ask about the interaction between schedules 23 and 24 to the 2003 Act, which are crucial in how the anti-avoidance schemes work. Although, as I have said, I very much support the intention behind the 2003 Act, it is not a problem-free piece of legislation. My question is about the distinct difference between the two schedules’ treatment of share-based and cash-based remuneration.

Tax deductions under schedule 23, which covers share-based remuneration, are determined by the value at receipt at the hands of the employee. If an employer funds a trust to acquire shares to be awarded to employees at a later date and the shares have gone up in value by the time the deduction takes place, the deduction for the employer becomes larger, so the value during the deferment is given to the employer. If, on the other hand, the shares have gone down in value, the employer has made a bad bet and only a reduced deduction can be claimed when it is eventually due, when the employee receives the benefit.

Deductions under schedule 24, however, which broadly covers anything that is not share based or to do with pensions, are based on the value on contribution by the employer, so that when the employer finally gets the deduction at the appropriate time, when the benefit gets into the employee’s hands, they are denied any growth in value during the deferral period, even if the employee is taxed on the higher amount. Does the Chief Secretary agree that different approaches are being taken? If so, why does the law treat those different types of benefit differently? The lack of neutrality between those approaches disadvantages employers such as mutual societies that cannot forward shares to their employees. It would be useful to hear him explain why the deferred benefit is treated differently in those cases.

Rob Marris (Labour, Wolverhampton South West)

I think that I understand the first limb of the hon. Lady’s argument—that the 1989 legislation covers the mischief that developed after 2003 and that is addressed in clause 33. However, I am at a loss to understand why she has not tabled an amendment to go back to the status quo ante the 1989 position if she thinks that that would cover the mischief. That would, presumably, produce the simplification and shortening of tax legislation that she and her party want.

Theresa Villiers (Conservative, Chipping Barnet)

That is certainly an interesting idea, which I shall consider for next year. As I have said, clause 33 deals with the problem, but we have had to go around the houses with yet more tax legislation to do so.

Stephen Timms (Labour, East Ham)

The hon. Lady has correctly set out the aim of the clause, and I am grateful to her for supporting what we seek to do. There have been a number of attempts to use employee benefit trusts as a means of avoiding tax—another example, sadly, of very bright people misapplying their talents—and legislation was, as she said, introduced in 2003 to deal with the abuse.

The hon. Lady has a point when she says that there is a sound case for arguing that what was being done was illegal anyway, but the Dextra case that she mentioned was won in 2004, after the change in the legislation. It was thought to be appropriate to put the matter beyond doubt, and those moves were successful in stopping much of the avoidance that was going on and being attempted. However, there is evidence of a recent increase in the marketing and take-up of schemes to get around the legislation, which is why we need to take action again to stop the abuse.

Employee benefit trusts are used quite properly by employers to provide remuneration and other benefits to employees through, for example, share-ownership trusts, which the Government have encouraged to good effect. From the mid-1990s, however, the trusts have been used as a mechanism for obtaining deductions from taxable profits that would not otherwise be due. Such usage has often been coupled with other kinds of avoidance.

The Finance Act 2003 restricted the deduction available to employers. As a result of those changes, an employer can only deduct the amount that is paid out of the trust to employees in a form on which income tax and national insurance are due within nine months of the end of the accounting period. There is no impact on genuine users of employee benefit trusts.

The new avoidance schemes, known as “employer self trust schemes”, attempt to avoid the restrictions introduced in 2003. The employer declares a trust over assets that he already holds. It is claimed that the action does not amount to making a payment or transferring an asset into a trust and therefore the existing anti-avoidance legislation does not apply. They seek to allow employers to manufacture deductions artificially without the need to provide real benefits to employees.

The Government do not accept that employer self trust schemes bypass the existing anti-avoidance legislation that was put in place in 2003. However, given the scale of activity in that area, we have decided to clarify the position and put it beyond doubt that employers are not entitled to a deduction under such schemes. I think that the hon. Lady will accept that, if we can do that in a reasonably straightforward way and avoid several cases of litigation, it will probably be in everyone’s interests.

The clause extends the existing legislation to include any act or omission that results in money or assets being held for the benefit of employees or in an increase in the value of those assets. It makes sure that the same restrictions apply to all trusts that are used as vehicles for employee remuneration, regardless of whether the trust is administered by a third party or by the employer. An employer will be able to make a deduction for the contribution to that trust only to the extent that it is actually paid to employees in a taxable form within nine months of the end of the relevant accounting period. The clause will apply to any act or omission, including a declaration of trust, made on or after 21 March. That will prevent not only those schemes we are aware of, but further attempts to use a similar method to sidestep the legislation.

The hon. Lady asked about the interaction of schedules 23 and 24 in the Finance Act 2003. Schedule 23 seeks to promote share ownership; schedule 24 is anti-avoidance legislation. I hope that I have outlined the difference that she wanted clarified.

The clause strengthens existing legislation to counter a further abusive avoidance scheme that uses employee benefit trusts to obtain a tax deduction not otherwise due. The Government will continue to tackle avoidance of that sort to make sure that all employers pay their fair share of tax. I commend the clause to the Committee.