Finance Bill
Public Bill Committee, 24 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 58
Edward Balls (Labour, Normanton)
On a point of order, Mr. Illsley. Following exchanges in the Committee on Tuesday about the circulation of courtesy letters concerning amendments, the Treasury has looked into the matter and the shadow Chief Secretary has received a letter from the Chief Secretary on this matter. Our investigations show that in recent years it has not been our practice to circulate courtesy letters giving advance notice of the tabling of amendments to all members of the Committee. However, following your guidance, Mr. Illsley, we will do so in future and we have circulated all such letters for this Bill to hon. Members, both electronically and in hard copy. I regret any inconvenience that the confusion has caused you or any member of the Committee.
Mark Francois (Conservative, Rayleigh)
Further to that point of order, and very briefly, Mr. Illsley. I am grateful to the Economic Secretary for having looked into the matter. He has dealt with it correctly, we are grateful for what he has said and we need not detain the Committee any longer on that point. Perhaps we can now crack on and concentrate on the Bill.
Eric Illsley (Labour, Barnsley Central)
I think that draws a line under that episode.
Theresa Villiers (Conservative, Chipping Barnet)
It is a pleasure to welcome you to the Chair, Mr. Illsley, on this sunny morning for our last sitting before the Whitsun recess.
I welcome clause 58 and the extension of the provisions of the Finance Act 2005, which enables securitisation companies to continue to use UK generally accepted accounting practice to draw up their accounts on an interim and temporary basis. Were they to shift to international financial reporting standards, as required by European Union regulation, their trading securities would have to be accounted for on a market-to-market basis. That would lead to significant volatility, which could undermine their credit ratings, which are so critical for such companies.
I do not propose to repeat the remarks that I made last year on the extension—very similar to this one—provided by the Finance Act 2006, save to reiterate that we are talking about a business that is worth trillions of pounds. The health of the securitisation sector is vital in maintaining a competitive edge for the City of London. It is also critical for securing financial market liquidity and keeping down the cost of business borrowing and finance. Therefore it is vital that the Committee takes care of this clause and gets the issue right. The measure extends a temporary regime, pending the adoption of a permanent framework for the taxation and accounting systems to be used by securitisation companies.
Last year, I asked the Paymaster General when she expected that long-term regime to be in place. Her response was that that was expected by January of this year. I was, therefore, pleased to note that the Taxation of Securitisation Companies Regulations 2006 were adopted by the House in December. However, the extension of the temporary regime features in the Bill because not all securitisation companies are covered by the 2006 regulations. Given the critical importance of securitisation and, in particular, of its international mobility—it could easily head offshore—I urge the Economic Secy, as I did last year, to complete the job of establishing a full regime for the accounting and taxation of securitisation companies. It would be useful if he could update the Committee on progress. How extensive is the coverage of the regulations that put in place a permanent regime for certain securitisation companies? What proportion of the securitisation market is still outside the scope of the permanent regime and thus covered by the clause?
The regulations seem only to cover companies with exclusively financial assets. When will the Government deal with other types of securitisation companies that include rental streams in their portfolios and other non-financial assets? Are the Government looking at plans to meet the needs of the insurance industry whose securitisation vehicles certainly fall outside the December regulations? I am not even sure that they are inside the temporary regulations. Will the Economic Secretary confirm the current status of insurance-related securitisation vehicles?
Proposed new subsection (7B) permits the Government to take a different approach to various types of securitisation companies. Given the importance of the issue, it would be useful if the Economic Secretary could explain how the Government propose to deal with the different types of company and how they will be divided up for the purposes of both the temporary rules and hopefully the new permanent ones? Will he set out the rationale for the differential treatment of the various types of securitisation company and explain the operation of the payments condition that determines whether a company can qualify to use the regime provided for in the December 2006 regulations?
Edward Balls (Labour, Normanton)
The hon. Lady is right. We are discussing an important sector of our financial services industry. It is also part of the industry that is exposed to international competition and developments, so it is important that we get the provision right and do so in a way that is flexible and meets the needs of particular parts of the industry, given their different needs and concerns.
As the hon. Lady said, the regulations that we introduced for companies in December 2006 apply to the securitisation of financial assets. Those regulations were warmly welcomed by the capital markets industry. A further set of regulations will be needed for particular types of securitisation, such as insurance and property. Her Majesty’s Revenue and Customs is in discussion with interested parties in the insurance and other sectors and, subject to satisfactorily identifying the issues that need to be addressed in each case, we expect to lay regulations for those sectors by the end of the year.
The fact is that different types of securitisation present particular issues. With the securitisation of financial assets, the volatility is caused by accounting standards. With insurance securitisation, there is the interaction between the tax rules and life insurance companies, and with the special regulatory regime for insurance companies. They are relatively complicated matters and it is appropriate that, in some cases, rules are dedicated to particular types of securitisation. Indeed, that is what the industry asked us to do in the consultations.
As the hon. Lady knows, the Finance Act 2005 was necessarily widely drawn to ensure that companies that had entered into securitisations were not affected adversely by changes to accounting standards. It remains our intention to devise appropriate permanent rules for companies engaged in securitisations. However, some companies need special rules and have particular group structures or other characteristics, which made it difficult for them to fit into the first set of regulations that were introduced in December and widely welcomed.
When the first set of regulations was laid in December, the Government gave an undertaking that the interim regime would continue as long as necessary. That is the case and that is what the industry is asking us to do. The interim regime expires on 1 January 2008 and regulations made under the clause will allow the regime to be extended for those companies for which it is necessary. As with all the work on such types of companies, the regulations will be developed in consultation with the capital markets sector. The consultation is ongoing, so while we have moved where we can on the timetable set by the Paymaster General last year, we are responding to the concerns of the industry in the particular areas where we need to do more work. We hope to lay regulations for those areas by the end of the year. In the meantime, we shall be extending the temporary regime in response to requests.
To allow the work to continue, the powers under which the regulations are made need to be amended to cater for a wider range of incidental and consequential amendments. We might need to reconsider the interaction of capital gains tax laws in the case of securitisation involving real estate, for example. In addition, the interim regime under which securitisation companies are taxed in accordance with former accounting standards will need to be continued for companies for which permanent regulations have not been made, in a manner that is tailored to the needs of those companies. The clause allows for the extension of that interim regime. They are small, technical changes, but as the hon. Lady said, they are of particular importance to the industry.
The hon. Lady asked how the payments condition will work. All cash must be paid out within 18 months, which is similar to the rules for accounts under UK GAAP, to ensure that companies are not cash money boxes. Extensive HMRC guidance will be placed in the public domain to help people through that technical area. I hope that she and the Committee are satisfied that our consultation will be sensitive to the needs of particular sectors and with the differential way in which we will try to move to a permanent regime, and that we are working in full consultation with the industry.
Clause 59
Mark Francois (Conservative, Rayleigh)
I welcome you to the Chair this morning, Mr. Illsley. Last year, we discussed in some detail the application of gift aid to museums and properties that give to their supporters free or discounted access to their facilities. This year, we find ourselves discussing the application of gift aid to charities that give their donors other benefits in recognition of their support.
Gift aid was introduced by the then Chancellor John Major in his 1990 Budget to encourage gifts to charities. It has been successful. According to a recent written answer from the Secretary, Cabinet Office, the hon. Member for Doncaster, North (Edward Miliband), it is worth £750 million per annum to the approximately 300,000 charities in the United Kingdom. The clause is designed further to encourage charitable giving by allowing charities to increase the benefits that they give to their supporters while remaining in the gift aid scheme.
HMRC’s guidance on gift aid includes the following explanation:
“A benefit is: any item or service provided by the charity or a third party to the donor or a person connected with the donor in consequence of making of the donation.”
The guidance goes on to give generic examples of a theatrical charity giving its supporters a ticket discount, and a medical charity giving its supporters a magazine, a pen and even a dinner for two. In essence, those charities wish to give to their supporters incentives to continue their support. Under clause 59(1)(a), the allowed fringe benefit to the donor as a result of his gift to charity will increase from 2.5 per cent. to 5 per cent. of the value of the donation. That will mean that someone who gives £10,000 will be able to receive a £500 incentive, instead of the original £250, without jeopardising gift aid status.
In its reaction to the Budget, the law firm Harbottle and Lewis explained:
“It is often difficult to quantify a benefit received by a donor from a charity so the increased limit will give charities more room for manoeuvre without jeopardising the availability of Gift Aid.”
Clearly, we welcome that. The Chartered Institute of Taxation has also welcomed the changes. According to its evaluation, they might be of particular help to amateur sports clubs. It has a query about thresholds, however, which I should like to raise with the Economic Secretary. The institute has highlighted the fact that although the upper limit has been extended, that extension applies only to those who donate £1,000 or more a year. For donations below £1,000, the limit remains at 2.5 per cent. As the CIOT has pointed out:
“It seems strange that only some of the limits, originally set in 1990, have been altered, and that smaller donors are still subject to 1990 values. The effect of the proposed change will be to allow a donor who makes a donation of £1,001 to receive a benefit of £50.05 yet a donor who makes a donation of £1,000 may only receive a benefit of £25.”
That seems strange indeed. That bias against small donors seems to echo the bias against small companies in the Budget. I should therefore be interested to hear the Economic Secretary’s rationale for the decision to raise the higher bracket but leave the basic threshold unchanged.
There is also a practical point on the operation of gift aid. The Royal Aeronautical Society has written to me with a suggestion. The letter came from its chief executive, Keith Mans. As I am sure you will recall, Mr. Illsley, he is also a former Member of this place. His letter highlights the problem of gift aid donations as they relate to second-hand goods and charity shops. To summarise the problem succinctly, if an individual donates a gift to a charity shop, the charity can claim gift aid on the article only after it has been sold and after it has subsequently contacted the donor to ask if the donor is happy for gift aid to apply.
Mr. Mans comments:
“In practice, of course, it is almost impossible to do this as it would mean that when any article is sold the donor has to be contacted.”
His suggested solution is quite straightforward. He says:
“My suggestion is this rule is modified so that there is a presumption at the time the goods are donated (provided that at that point the donor signs a gift aid form) that when the goods are sold the donor wishes the proceeds of the sale to remain with the charity and not to be returned to the donor.
This would mean in practice that, provided an inventory is kept by the Charity Shop of the names of the donors and the goods they have donated, it would be a simple matter when articles are sold, for gift aid to be claimed back.
In my view, this does not constitute a change in the law but is simply a re-interpretation of the rules, to ensure that the original intention of the Treasury to allow the recovery of gift aid, on articles donated to Charities, can be done in a practical way.”
I look forward to hearing the Minister’s response to that suggestion in his winding-up remarks.
Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)
I very much sympathise with the hon. Gentleman’s argument. Is it not the case, however, that people who make charitable donations must record those donations in their tax returns? Consent might be given in the charity shop, but there must still be a way of informing individuals so that they can include the relevant information in their tax returns.
Mark Francois (Conservative, Rayleigh)
I take the hon. Lady’s point. It would depend on whether the individual was determined to include the information in their tax return at year end. I suspect that in most cases they would not necessarily be highly motivated to do that, but that they would be more concerned that the charity should get the gift aid. The suggestion is a practical one that comes from another source and I hope that the Minister will consider it. The hon. Lady is technically correct, but the Government might want to consider the proposal from the practical point of view.
Finally, Budget changes to the gift aid rules might have a further effect on charities that the clause will go only a little way to addressing. There has now been wide press comment that buried in the detail of the Budget is a likely knock-on effect whereby the Chancellor’s proposed changes in the basic rate of income tax will cost charities up to £70 million. There has been such concern in the charitable sector about the possible effect that eight heads of major charities wrote to The Times on 23 March to express their concern. The letter said:
“Sir, Gordon Brown’s tax cuts will mean that UK charities are likely to lose more than £70 million in income.
Under the Government’s Gift Aid scheme, charities can reclaim the tax paid on donations by UK taxpayers. With the reduction in the basic rate of tax from 22 to 20 per cent., Gift Aid income will be reduced by more than 10 per cent. We urge the Government to consider compensating charities for this significant reduction in income.”
I shall not read out all the signatures, but they included those of Professor Alex Markham, the chief executive of Cancer Research UK, Kevin Cahill, the chief executive of Comic Relief, and Keith Hickey, the chief executive of the Charities Finance Directors Group.
The challenge for charities is compounded by the pressure on lottery funding on which many charities now rely, and by the additional £675 million of lottery money that was recently reallocated by the Government to the financing of the 2012 Olympics on top of the £750 million that the lottery was already providing for that event. That money will no longer be available to charitable good causes, which will result in further intensification of the pressure on charities in the United Kingdom.
The clause is a welcome move to amend the gift aid rules to allow donors to receive greater fringe benefits from supporting charities, while still remaining in the gift aid scheme. To that extent, we support it. However, in discussing gift aid I should like to press the Minister on three points.
First, what is the Minister’s view on the Chartered Institute of Taxation’s point about thresholds and why were those for more wealthy donations increased while the others were left unchanged? Secondly, would he at least think about the practical point in relation to gift aid and charity shops and does he have any initial view on it? I say this without irony: if he wants to consider that, he can write to me about it. Thirdly, given the potential double whammy that charities will suffer from the reallocation of lottery funding to the Olympics and from changes in the basic rate of income tax, what further measures, if any, are the Government considering to the gift aid regime to account for that?
Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)
I do not intend to repeat the arguments that the hon. Gentleman has just made. I shall simply add my welcome to the extension of the benefits to community amateur sports clubs. I can think of many examples of clubs in my constituency that will benefit hugely from that. I have only one question. Is anything being done to make sure that such sports clubs are aware of their new entitlement? The people whom I have in mind will not necessarily be paying particularly close attention to the proceedings of this Bill.
I should also like to reiterate briefly the comments that have been made about the asymmetry of treatment between larger and smaller donors. Is that an intentional change? Some comments on that would be welcome. There are also concerns more widely about gift aid and how vulnerable it is to changes in the income tax system and other changes more generally. Representatives from a museum came to me last year because they were concerned about some gift aid forms that they had produced to try to maximise their benefit. Because they had not required visitors to give their postcode, however, the forms were invalid and they could not claim gift aid. That represented a huge loss of expected income.
Gift aid is a complicated system. I am therefore concerned that, as was reflected in the exchange between my hon. Friend the Member for Romsey (Sandra Gidley) and the Secretary, Cabinet Office, the hon. Member for Doncaster, North (Edward Miliband), £70 million of income will be lost overall when the income tax changes kick in next year. That highlights how vulnerable charities are to changes on the periphery that can have a major impact on their income. Perhaps it is time for the Treasury to look again at the gift aid system to see whether it can be insulated against such changes, and whether a system can be created that is clear, well defined and not subject to the changes and uncertainty in the years ahead.
Edward Balls (Labour, Normanton)
As hon. Members have said, the clause will increase the limits on the value of benefits that can be received by individuals and corporations who make qualifying donations to charity. The adjustments will increase the cap on the benefits that donors can receive in a year in response to gift aid donations from £250 to £500. In addition, the percentage limit for benefits received in return for donations over £1,000 will be increased from 2.5 per cent. to 5 per cent. Those benefit limits allow charities to build sustained relationships with donors by offering them a gesture of recognition.
The limits have been unchanged since the introduction of gift aid in 1990 and we believe that the changes in the Bill will help to encourage increased philanthropy, as appropriate levels of benefits can increase scope for institutions to build up lasting relationships with donors. As the hon. Member for Falmouth and Camborne highlighted, for the purpose of gift aid donations by individuals, community amateur sports clubs are treated as charities and so will also benefit from the increase in benefit limits.
As the hon. Member for Rayleigh said, reaction to this change has been positive. He asked me three questions. First, he asked why we were only increasing the threshold limit for larger donations. As he said, these changes have been welcomed by the Chartered Institute of Taxation and the London Society of Chartered Accountants. The benefit limits have not been increased since 1990. It was sensible to review them. For larger donations, we understand that the current limits constrain charities when making gestures of recognition to reflect the scale of donation. That therefore restricts their ability to deal with and develop relationships with large donors.
We feel that the existing limits for smaller donations are already generous. For example, if a donor makes a gift of up to £100, a charity may thank them with items or services worth up to £25, which in that case would be 25 per cent., rather than 2.5 per cent. The changes were specifically intended to increase scope for charities to recognise larger donations and develop relations with their wealthy donors. It was in that area, rather than on smaller donations, that we perceived there to be a problem. That is why we have acted in this way, but if the sector makes further representations, we can consider those in due course. The representations that were made concerned larger donations.
On the second point, the representation from the Royal Aeronautical Society and the former Member of this House, Mr. Keith Mans, I am happy to commit the Treasury to consider the matter. I cannot give the hon. Member for Rayleigh an answer today. It is not an issue on which he has tabled an amendment. On this occasion, I had no advance notice of the detailed point, so I am not in a position to respond to it outside the scope of the clause. I will, however, examine the matter. We will be happy to meet Mr. Mans—on the ground rather than in the sky—and I will happily commit the Treasury to writing to the hon. Gentleman about the matter, and to meeting Mr. Mans.
On the point that the hon. Member for Falmouth and Camborne raised in passing about awareness, we have explicitly flagged the extra benefit limits to the Community Amateur Sports Clubs forum as well as the Central Council for Physical Recreation. We will endeavour to ensure the widest awareness.
That brings me on to the third point about the impact of Budget changes. When we make changes to the tax system, they have an impact more widely. Those impacts are considered in making Budget decisions. At the same time, however, we always work with the sector to try to ensure that we increase awareness and opportunity. Although the amount of gift aid repayable to charities is affected by the change to the basic rate of tax, we believe that there is significant scope for the charitable sector to increase the proportion of donations that enjoy gift aid tax relief.
The Charities Aid Foundation has stated that an additional £700 million of gift aid tax relief could potentially be claimed. The consultation that we announced in the Budget is aimed at trying to find particular ways to raise awareness and to change the regulations so that we can increase the amount of charitable giving that benefits from the tax relief. We hope that in the coming years, the strong upward trend in donations will continue, and the upward trend in donations receiving tax relief will continue. I remind the Committee that in 1996-97, the amount of basic rate gift aid to charities was £134 million. By 1998-99 that had risen to £306 million. By 2005-06, the amount had risen to £750 million. There has been a substantial rise in the amount of tax relief for gift aid, but this is one of those occasions on which the Treasury would like the cost to the Exchequer to go up, not down.
Clause 60
Clause 61
David Gauke (Conservative, South West Hertfordshire)
The clause relates to the benefits code. My understanding is that there are something like 155 sections in the Income Tax (Earnings and Pensions) Act 2003 that apply to the taxation of benefits other than shares. Clearly, this is a hugely complicated area of the law; indeed, that is presumably the cause of the anomaly that the clause seeks to eradicate. Given that, may I ask what consideration the Treasury is giving to simplifying this area of the tax code?
Edward Balls (Labour, Normanton)
As the hon. Gentleman says, the purpose of the clause is to legislate an extra-statutory concession that was introduced in 2004 to ensure that an employee who earn less than £8,500 per annum does not incur a treble tax charge when he is provided with a car and car fuel paid for by his employer with a credit card, non-cash voucher or cheque. Such cases are rare, but there should not be a double charge simply because the benefit of a car and fuel has been paid for by those means.
The extra-statutory concession was published by HMRC in July 2004 on the understanding that it would be formalised through legislation at the earliest opportunity. That is what we are doing with the clause. As the hon. Gentleman said, we are repealing subsections 219(5) and (6) of the 2003 Act. The clause removes the value of non-cash vouchers and credit tokens used to provide car or fuel benefits when calculating whether an employee earns less than £8,500 per annum. The clause legislates the concessionary treatment that applies in the circumstances I described.
As the hon. Gentleman said, the issues are complex and the 2003 Act was a complex piece of legislation. The Government do not have a particular process for review of the Act, but we keep all aspects of the tax system under review at all times, and we are always happy to receive representations from hon. Members or outside organisations when they feel that there are issues that need to be addressed. That is what happened in this case. We received representations, and we are acting. I commend the clause to the Committee.
Clause 63
Mark Francois (Conservative, Rayleigh)
I would like to make some brief comments on clause 63. The operational allowance was first announced by the Secretary of State for Defence on 10 October 2006. It is paid as a tax-free sum of £2,240 for a six-month operational deployment. I am sure that I speak for all members of the Committee in paying tribute to our armed forces and the wonderful way in which they do a difficult and dangerous job on behalf of our country.
Field Marshal Viscount Slim, the British commander who won the war in Burma, and a notable authority on the motivation of fighting men, described the morale of his men as consisting of three elements: spiritual, intellectual and material. Of the material element, he stated:
“(a) The man must feel that he will get a fair deal from his commanders and from the army generally, (b) He must, as far as humanly possible, be given the best weapons and equipment for his task, (c) His living and working conditions must be made as good as they can be.”
That still holds good today. Crucially, the operational allowance will, I hope, help with retention of trained personnel, too many of whom are now, unfortunately, leaving the forces often because of pressures on family life after several unaccompanied tours in close succession.
The allowance is, then, a welcome development, which we have supported and will support again today. However, given the importance of pay and conditions to operational morale, as well as the impact that the funding may have on other parts of the Ministry of Defence budget, I want to raise some points with the Financial Secretary about how the allowance is intended to operate in practice. I have five questions.
First, how long is the operational allowance intended to last? Is it now to be regarded as an established part of the armed forces remuneration package and is it intended in principle to apply to any new deployments, beyond those that are currently envisaged? Secondly, according to a Ministry of Defence press release of 1 March 2007, some £35 million had been paid to that date to 31,000 members of the Royal Navy, Army and Royal Air Force. As the payments began prior to Christmas 2006, but we are discussing the facilitating legislation today, can the Financial Secretary confirm whether qualifying troops who have been given the allowance have been paid it gross or net to date?
Thirdly, from which departmental budget is the allowance intended to come? I understand from previous pronouncements by the Secretary of State for Defence that the new allowance represented some £60 million per annum of new money provided by the Treasury, in addition to the MOD’s existing budget. Is it the Treasury’s intention that that practice should continue, or is it felt that it should be absorbed by the MOD budget in future years? That is an important point with respect to MOD budgeting, and it would be helpful to know the Treasury’s intentions.
Fourthly, to which deployments will the allowance apply and who will qualify? The clause states that qualifying deployments can be decided by order of the Secretary of State for Defence. Air Chief Marshal Sir Jock Stirrup, the Chief of the Defence Staff, said in an MOD press release of 1 March 2007 that the bonus is to be paid at present to
“those serving in Iraq, Afghanistan and the Balkans.”
What criteria will be used to judge whether future deployments will qualify? For instance, why were the Balkans included but not Sierra Leone?
Fifth and finally, how is the allowance intended to interact with other benefits and service allowances? For instance, as I understand it, the operational allowance has been excluded for the calculation of tax credits, by statutory instrument, but what about the new longer separation allowance, which is also meant to be tri-service? Is there any overlap in qualifying criteria and, if so, is one reduced at any point to take account of another?
The Financial Secretary may recall the Government’s embarrassment last year prior to the deployment of 3 Commando Brigade to Afghanistan, when it was revealed, just as they were deploying, that the Royal Marines were to receive less in overseas allowances than had been originally anticipated. That caused quite a row at the time and was raised at Prime Minister’s questions. Vice-Admiral Adrian Johns, the Second Sea Lord, was quoted at the time as saying:
“This unfortunate error could not have materialized at a worse time.”
What is the interaction, if any, between the operational allowance and other military allowances, including the LSA?
I reiterate that we support the new allowance in principle but that we should like some reassurances from the Financial Secretary about how it is likely to operate in practice.
John Healey (Labour, Wentworth)
The clause establishes special provision for the tax charge that would otherwise relate to the newly introduced operational allowance, payable to members of the armed forces in certain circumstances. In October, the Secretary of State for Defence announced the introduction of the new operational allowance, which will apply to members of the armed forces serving in specified operational locations such as Iraq, Afghanistan and the Balkans from 6 April 2006. The purpose of the allowance is to recognise the increased and enduring danger in operational locations over and above that which is already compensated for in a service person's salary.
The qualifying areas will be regularly reviewed by the Secretary of State for Defence on advice from the Commander, Joint Operations. That assessment will depend on a review of the nature of the danger to armed forces personnel who are deployed on operations. Any change to the qualifying locations will be approved by Ministers.
The hon. Member for Rayleigh asked me four other questions. The first was how long the allowance would last. It is part of the remuneration package that we judge is appropriate for our armed forces. I explained how the judgment about qualifying areas will be arrived at and that is how it will operate in future.
The hon. Gentleman’s second question was about the exemption—whether the operational allowance is taxed. I can confirm that the exemption will apply retrospectively, and HMRC will not collect tax from any payment of the operational allowance. The third question was about how the Ministry of Defence would treat the allowance in budgeting terms. For the current period after the introduction, the funding comes from the reserve. The MOD Budget is being set for the longer term as part of the comprehensive spending review, and it will form part of those discussions and negotiations.
Mark Francois (Conservative, Rayleigh)
I am grateful for what the Financial Secretary has said so far. He talked about the current period; could he explain what is the outer end of the envelope for which the Treasury have guaranteed that the money will be additional to the MOD budget? When does that guarantee run out? I accept that it will be part of the CSR.
John Healey (Labour, Wentworth)
The hon. Gentleman has answered his own question. It is part of the comprehensive spending review preparations. He cannot expect me to share that with the Committee, even if I was in a position to do so.
The hon. Gentleman also asked about the interaction with some of the other allowances that are rightly paid to our armed forces. The new allowance will be paid separately from the other allowances, such as the longer separation allowance. In relation to tax credits, he is right; from this year onwards the tax credit regulations have been amended to disregard the allowance as income for tax credit purposes. Prior to that, any operational allowance paid to the armed forces in these circumstances will not reduce the entitlement to tax credits because, as he knows as well as anyone, part of our reforms to the tax credits allow a disregard of income rises up to £25,000.
The hon. Gentleman did not ask me about it but, as he mentioned the interaction with other allowances, he might be interested to know that regulations have been introduced that mean that no national insurance contributions are paid on the operational allowances. Finally, the hon. Gentleman asked how many people are benefiting from the allowance, and the answer is about 12,000.
Clause 65
Theresa Villiers (Conservative, Chipping Barnet)
I beg to move amendment No. 211, in clause 65, page 42, line 28, at end insert—
‘(1A) Paragraph 21 of Schedule 15 to the Finance Act 2004 shall be amended by leaving out subparagraph (1)(b).
(1B) Paragraph 22 of Schedule 15 to the Finance Act 2004 shall be amended by leaving out subparagraph (1)(b).’.
Eric Illsley (Labour, Barnsley Central)
With this it will be convenient to discuss the following: Amendment No. 119, in clause 65, page 42, line 35, at end insert—
‘(4) Any purported election made on the appropriate form or before the regulations prescribing the form of election came into effect shall be deemed always to have been made in the prescribed manner under subparagraph (2) above.’.
Amendment No. 212, in clause 65, page 42, line 35, at end insert—
‘(4) An appeal shall lie to the Special Commissioners against a refusal to allow making an election at a date after the relevant filing date and the Special Commissioners shall allow such an appeal where the refusal to permit a late election was unreasonable.’.
Clause stand part.
New clause 1—Charge on benefits received by former owner of property
‘(1) Paragraph 11 of Schedule 15 to the Finance Act 2004 is amended as follows.
(2) At the end of sub-paragraph (9)(a)(i), there is inserted “or the property from time to time representing such property which has been disposed of,”.
(3) In sub-paragraph (11), at the beginning, there is inserted “Subject to sub-paragraph (12A),”.
(4) After sub-paragraph (12) there is inserted—
“(12A) Sub-paragraph 12 shall not apply if in the taxable period both the following conditions are satisfied:
(a) the person in whose estate the relevant property is comprised for the purposes of IHTA 1984 as a result of section 49(1) of that Act (treatment of interests in possession) is the settlor of the relevant property which has become comprised in the settlement and he has a qualifying interest in possession in such relevant property; and
(b) the relevant property is held directly by the trustees and is the settled property in which the settlor has a qualifying interest in possession,
and if the above conditions are both satisfied in only part of the taxable period sub-paragraph (12) shall not apply to that part of the year of assessment in which they are not so satisfied;
and “settlor” shall have the meaning given to it by section 44 IHTA 1984 and “qualifying interest in possession” shall have the meaning given to it by section 59 IHTA 1984’.
Theresa Villiers (Conservative, Chipping Barnet)
By way of background, I point out that the pre-owned tax assets regime contained in the Finance Act 2004 applies to certain transfers of assets where the original owner continues to benefit from them after the change of ownership—for example, where someone transfers the title to a home to someone else but continues to live in it. Where the POAT charge applies, an income tax charge is levied that is linked to the use value of the asset transferred.
The rules were adopted to prevent people from avoiding inheritance tax. Although the Opposition certainly support measures to prevent such avoidance, we have always had significant reservations about how the POAT regime operates in practice. Partly because of the controversy associated with the regime, the Government have said that people caught within its scope have the option to elect out of the regime and back into the inheritance tax rules. The result of such an election is that no POAT income tax charge is payable. Instead, the asset in question is treated as part of the original owner’s estate for IHT purposes and taxed on his death in the normal way.
However, a time limit was placed on elections. As the draft guidance notes helpfully circulated by the Chief Secretary confirm, the deadline was 31 January 2007 for those caught in 2005-06, the first year in which the POAT regime operated. Thenceforth, as the explanatory notes tell us, the deadline for election has been the self-assessment deadline for the year in which the person first became liable to the charge. The original legislation, in paragraph 23 of schedule 15 to the 2004 Act, allowed elections after the deadline, but only in limited circumstances. Late elections could be accepted only where the taxpayer could show a reasonable excuse for failing to make the election before the relevant filing date. Clause 65 will give HMRC greater discretion in accepting late elections by deleting the requirement to show a reasonable excuse.
The Opposition welcome the change, but we feel that it does not answer all the concerns expressed about elections under the POAT regime. For a start, clause 65 fails to address the problems surrounding the procedure for making a valid election. Amendment No. 119 would cover that point. It was tabled in response to concerns expressed by a number of professional bodies including the Law Society, the Chartered Institute of Taxation and the Society of Trust and Estate Practitioners.
Paragraph 23(2) of schedule 15 to the Finance Act 2004 requires the election to be made in “the prescribed manner”, which in turn is defined in schedule 15(1) as “prescribed by regulations”. However, no regulations have been adopted, meaning that it is impossible to make a valid election. The Treasury has allowed the 31 January deadline to expire without adopting regulations to enable people to make an election, and clause 65 does not address that point. No election already made appears to be valid, and no future election will be valid until the regulations are in force.
The situation provides a clear and pressing reason to take a liberal approach to allowing late elections, as it was not legally possible to make an election before the prescribed the deadline. Amendment No. 119 would remove the problem by ensuring that any elections made before the regulations came into force are deemed valid. It is essential to adopt the amendment if the Government are to allow the election that they promised.
The second concern is that even with the increased flexibility given by clause 65, the scope for late elections is still too narrow. The draft guidance notes seem more relevant to the old test, with its requirement that a “reasonable excuse” be shown. The provisions for late election due to events beyond the taxpayer’s control seem only to repeat the guidance already in force in relation to the unamended rules.
The provisions on other circumstances in the draft guidance seem to be new, and they are welcome. They provide that a late election will be accepted where the taxpayer can show that they were
“unaware and could not reasonably have been aware that they were liable to an income tax charge under this section, and elected within a reasonable time of becoming so aware”.
That is welcome, but the requirement to prove a negative in the last line of page 2 of the draft guidance could be difficult to satisfy in practice.
The Opposition believe that a much clearer assurance is needed in relation to some specific cases. As STEP and the CIOT have pointed out, there are significant interpretive problems with the POAT regime. To compare something with the Schleswig-Holstein question has become a tired parliamentary clichÃ(c), but it would not be an exaggeration to say that the number of people who fully understand the POAT regime could probably be counted on the fingers of one hand. I do not know which Minister is responding, but, given its complexity, I do not suppose that there was a rush to take this matter over from the Paymaster General. These provisions are highly complex and controversial, and a significant number of people may be unwittingly and unknowingly caught by the regulations and have no clue that that is so. There is a pressing case for being flexible in allowing late elections.
Particular problems have arisen in relation to those entering into so-called reversion release schemes. In guidance published in March 2006, HMRC stated that such schemes were caught by the reservation of benefit rules, which predate POAT. Where those rules operate, they keep the asset within the inheritance tax regime. POAT is therefore not payable, since the asset remains part of the original owner’s estate and will be subject to IHT on death. However, on 29 January this year, HMRC reversed its stated view on these schemes and declared that the reservation of benefit rules did not apply and POAT did. That announcement came just three days before the expiry of the 31 January deadline. Very few people are likely to have seen the announcement in time to make the necessary election, even setting aside the problems with the legality of such elections in the absence of regulations. Many people will already have self-assessed on the basis that no POAT was due.
The Paymaster General would say, if she were here, that those entering into reversion release arrangements had tax avoidance in mind. Her response might be, “If you play with fire, you may get burned.” Certainly, we would not wish to defend such schemes and the Government are justified in taking action against them. However, POAT is controversial and, some would say, harsh in operation, and the Government have always sought to mitigate the concern that they provoked by allowing people involved with such schemes to opt out of POAT and back into IHT. In a sense, POAT is meant as a deterrent, not as a tax in the ordinary sense of the word.
If the Government are going to make good on their promise to allow elections, they have to be flexible on timing, given the confusion caused by their own complicated legislation and their last minute change of mind on these schemes. It would be useful to have a clear statement from the Minister that people affected by reversion release schemes will be permitted to make a late election, where they submitted their tax return thinking that they did not need to pay POAT because HMRC guidance told them that they fell within the IHT regime instead. It would be unfair to penalise people for not being in a position to make an election in the three days between the announcement by HMRC that its original guidance was incorrect and the expiry of the deadline. I am told that the official HMRC guidance was not even corrected until February this year, after the deadline had expired.
Further problems arise in relation to section 80 of the Finance Act 2006. Even by the standards of POAT, section 80 and the changes it made to the Finance Act 2004 are difficult to understand. Few lawyers, even specialists, will know that someone is potentially caught by section 80, the stated goal of which was to apply the POAT regime to so-called reverter-to-settlor trusts, which had been used as part of an IHT and POAT avoidance scheme. Again, the objective of shutting down those schemes is sensible and the Opposition would not dissent from it. However, as I mentioned to the Committee last year during the debate on the clause that became section 80, defects in drafting mean that it goes beyond the stated goal and hits other trusts that have nothing to do with IHT avoidance. Indeed, I am informed by those who understand such matters better than I that some avoidance schemes may end up falling outside the scope of section 80, while other arrangements, where there is no tax planning involved, end up liable to a double whammy of both POAT and IHT. There is a risk that few people will be aware of the need to make an election, which is another vital reason to give flexibility on late elections.
The Law Society set out the situation as follows:
“Clause 65 introduces a right for a taxpayer to make a late election without having to show a reasonable excuse—but only at the discretion of HMRC.”
The background to that is thought to be the official acknowledgement, in response to representations, that the changes made by section 80 had a wider effect than the policy to which they sought to give effect, leading to advice from HMRC that many, but not all, of the innocent cases caught by the excessively wide legislation could be resolved without practical consequences by submitting an election under paragraph 21 or 22 of schedule 15.
That advice was provided, and published via STEP and the CIOT, only weeks before the deadline for the first elections on 31 January 2007. In responding to the concerns expressed by STEP, the CIOT and the Law Society about section 80, HMRC has stated that problems caused by the section can be dealt with by electing out of the POAT regime via an election.
If election is considered to be a solution, we need a clear commitment from the Minister that, given the difficulty in ascertaining their legal position in time for the 31 January deadline, those inadvertently caught by section 80 will be able to make a late election. Even if such a clear commitment is forthcoming, however, it will still be only a sticking-plaster solution because, as the CIOT points out, the effects of an election are not always straightforward, and what about situations in which the POAT problem comes to light only after the death of the settlor? Because an election cannot be made by personal representatives, neither the original paragraph 23 of schedule 15 nor the version amended by clause 65 would assist in that situation. If the Government were to accept new clause 1, they would solve the underlying problem with section 80 that prompted the Law Society to describe the provision as “excessively wide”.
STEP and the CIOT have expressed grave concern that a clause that was introduced to deal with reverter-to-settlor trusts should be used as a way of imposing POAT liabilities on a property that is already subject to inheritance tax. They have also expressed disappointment that the Finance Bill takes no steps to correct the error in section 80 that I pointed out to the Paymaster General in last year’s debate.
The problem is that section 80 inadvertently catches many settlor-interested trusts in which the settlor had a life interest so would be subject to IHT on the assets on his death anyway. That is because section 80 bites where property has left a settlor’s estate and then comes back to him. That could happen in a number of circumstances that are not related to reverter-to-settlor trusts or to tax planning at all.
Contrary to the objective of the POAT regime, in some cases section 80 hits trusts that do not avoid IHT and were not set up to do so. It actually imposes a POA charge even where IHT is already payable, leading to potential double taxation. The CIOT suggests
“that the legislation should be retroactively amended so as to catch only the intended target.”
Few settlors will have been made aware of the need to make an election, because the issue was published by the CIOT and the Institute of Chartered Accountants in England and Wales only in January 2007.
New clause 1 seeks to bring that about by amending paragraph 11 of schedule 15 to the Finance Act 2004 to correct the defective drafting in section 80. It would insert a new sub-paragraph (12A) in paragraph 11 to ensure that the provisions will not apply where it is the settlor who has the life interest in the property. My reasons for tabling the new clause are as follows. Looking at the background to section 80, the press notice that announced the measure in the pre-Budget report 2005 is headed “Pre-Owned Assets...and Reverter to Settlor trusts”. The term “reverter-to-settlor” is generally used to describe a trust in which the trust property reverts to the settlor or his spouse after termination of another beneficiary’s interest in possession.
The text of the pre-Budget report press notice on section 80 is consistent with that definition of a reverter-to-settlor trust. It specifically refers to sections 53 and 54 of the Inheritance Tax Act 1984, which are the sections that exempt the trust from inheritance tax otherwise payable on termination of another beneficiary’s life interest. The drafting error is that the changes made by section 80 apply not only to trusts in which the life tenant is another beneficiary, but also to those in which the life tenant is the settlor himself. Where section 80 applies, it removes the exemption from the pre-owned asset charge otherwise applicable where the taxpayer is treated as beneficially entitled to the relevant property for the purposes of IHT.
The trusts affected include a number of old-style marriage settlements, some of which could date back as far as the late 1980s. The most common problem would arise where a settlor has given assets to a family member but for some unexpected reason, perhaps a bereavement, the assets return to his estate. The CIOT described section 80 as incurring “an absurd result”, saying:
“The whole point of pre-owned asset tax is to tax assets which a settlor or donor enjoys despite them not being in his estate for IHT purposes. By definition, it is not a tax on property to which a settlor or donor is treated as beneficially entitled, as such property is fully subject to inheritance tax in their hands”.
HMRC has stated that the CIOT’s fears are exaggerated, because section 80 does not apply if the life interest of the settlor has existed at all times since the inception of the trust. That interpretation provides a degree of comfort, and it would be useful if the Minister could confirm it on the record today. However, I do not think that it will save those settlements that started as discretionary trusts and where the settlor was granted a life interest at a later date.
Accepting new clause 1 would provide a much clearer and firmer protection than merely relying on HMRC’s interpretation of the words “at any subsequent time” in sub-paragraph 11 of schedule 15. It would also remove many concerns about late elections. I urge the Minister to consider it seriously—if not today, then for next year’s Finance Bill.
Amendment No. 211 was prompted by a concern expressed by the Law Society, which felt that people should have the option to elect out of the pre-owned asset tax in future years. They might choose to pay the tax initially, their financial circumstances might change and the commitment to pay pre-owned asset tax might become more difficult. The flexibility to opt out in future years and back into the IHT regime would be useful. It would not affect liability for tax in the early years, and it could increase the range of assets available to be taxed under IHT on the death of the relevant person.
Amendment No. 212 follows on from another suggestion by the Law Society, which is concerned that HMRC’s powers in such matters are not subject to review or appeal. The Law Society feels that it should be possible to appeal against a decision by HMRC to refuse a late election. Again, we feel that that is a common-sense proposal that the Government would do well to consider.
On clause stand part, I shall address two important points. The first concerns timing. Subsection (2) provides that clause 65 is deemed to have come into force on 21 March 2007. Are elections made between 31 January 2007 and 21 March 2007 governed by the old rules or the new? Will they be subject to the test in the present statute or the amended test? Arguably, they remain late after the 21 March deadline. Therefore, if HMRC has not yet made any decision on them, they should be subject to the new, amended criteria rather than the unamended provisions in statute.
It is particularly important to take into account late elections made between the 31 January deadline and 21 March because of the timing problems that I described in relation to reversionary leases and the changes made to the HMRC guidance. It would be useful to have the Minister’s guidance on the status of late elections made before 21 March 2007.
My last point is another highlighted by STEP and the COIT. It is a matter of concern that the Government have not used this Finance Bill to correct another significant flaw in the POAT regime, one to which I drew the Committee’s attention last year. It concerns equity release. Where, for example, a parent sells half a house to one of their children, it will result in a POAT charge on the deemed rental income. That is the case even where the proceeds of sale are kept by the parent and subject to inheritance tax on their death. However, no such charge arises where an identical transaction is carried out with a bank or other commercial provider of equity release schemes.
The CIOT says:
“We remain unconvinced that such a transaction is a suitable target for anti-avoidance legislation and believe that this will catch many ‘ordinary hard-working families’ where the parent is trying to raise funds for an equity release and does not want to go to a commercial provider, some of whom do not have a good financial reputation.”
I am aware that the Treasury does not consider that that would cause significant problems, presumably on the grounds that it believes that equity release arrangements are fairly uncommon—particularly as informal arrangements within families. However, the Minister is, I know, well aware of the expected increase in the use of equity release. The Economic Secretary himself has emphasised its importance when debating a new regulatory structure before the relevant Delegated Legislation Committee.
In an era of a growing pensioner population, the need to find ways to unlock and use the equity in the family home without having to sell is likely to increase. Given the potentially high charges and interest rates that can be levied on equity release transactions by commercial providers it would not be surprising for a number of families to seek to solve the problem between themselves, without necessarily using a bank or other commercial provider. Sales of the whole of the property—100 per cent. of the equity—are exempt from POA, and therefore it seems odd and arbitrary to treat sales of part of the property differently.
There is real concern that people might undertake such arrangements and go to an ordinary solicitor with no understanding or awareness of the possibility of a POA problem. If HMRC is worried about the possibility of avoidance, and the proceeds of the equity release being given away and passing out of the relevant person’s estate, it would surely be possible to draft provisions that would ensure that the POA charge would still apply in such a case.
In conclusion, the POAT regime remains highly controversial and, as has been pointed out, could apply in a range of situations in which those involved were not motivated by a wish to avoid inheritance tax and were wholly unaware of the possibility of a POA charge. Its complex nature means that even seasoned professionals find it difficult to understand—even Ministers of the Crown may sometimes have a problem working out what it means. An average high street solicitor is very unlikely to have the expertise needed to advise people on whether there is a POAT risk in transactions that may be no more than attempts to give financial assistance to parents or simply an incidental effect of family living arrangements.
There is a real risk that people will stumble into the regime unknowingly and accidentally. Clause 65 is an inadequate response to the serious problems with schedule 15 of the Finance Act 2004 and I hope that the Government will consider more wide- ranging reforms in future, as well as the Opposition amendments.
Eric Illsley (Labour, Barnsley Central)
Before I call the hon. Member for Falmouth and Camborne, may I remind the Committee that, difficult as it is to resist the temptation, the use of electronic devices such as mobile telephones in Committee, even for texting, is forbidden?
Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)
I am sure that the Committee will be pleased to know that I shall not repeat the arguments about double taxation or validity.
David Gauke (Conservative, South West Hertfordshire)
Shame.
Julia Goldsworthy (Liberal Democrat, Falmouth and Camborne)
The hon. Gentleman says “Shame”, but I see no point in repeating arguments that have already been made, and detaining the Committee unnecessarily. However, I have a few points to make, and I will be brief.
There were warnings during consideration of last year’s Finance Bill that people would be caught inadvertently and that the legislation was too wide. Broadly, clause 65 is intended to narrow the definition so that people will not be caught in that way. It has been generally welcomed. I note the change from reasonable excuse to the discretion of HMRC. On that basis, will HMRC publish guidance about how and in what situations it would exercise discretion? Will there be an appeals process if the late election is refused?
Finally, I want to draw attention to the question of changes in circumstances. What happens if the circumstances of the individual change? The circumstances of someone who initially elected to pay income tax might change so that they could not afford to do so. What scope would there be for that individual to opt into the inheritance tax system simply because their income could not sustain the payments that they would be expected to make?
Clearly, in all such cases, we are talking about assets that are above the inheritance tax threshold. My concern is what happens when someone inadvertently falls into the inheritance tax threshold after the point at which the asset has been transferred. They may not initially be eligible, but they may fall into such circumstances. At what point are they expected to make the election?
Edward Balls (Labour, Normanton)
As the hon. Member for Chipping Barnet said, this is a complex area. I am grateful to her for setting out, eloquently and comprehensively, the issues, which have helped me to focus my remarks more effectively than I would otherwise have done. I will not go through the background to the clause, as that has already been done at length. As the hon. Lady said, and as members of the Committee will now therefore be aware, the Government have received representations from professional groups that are concerned about individuals who did not realise that they were liable to the POAT charge or the deadline for making an election for the asset in question to be treated as if it were subject to inheritance tax. In such situations, taxpayers will unknowingly build up arrears of income tax.
Although the representations have provided no firm evidence of a significant problem, the Government recognise the concerns. The clause will allow HMRC to use its discretion to accept elections for inheritance tax treatment in cases that would otherwise be too late. The change has been welcomed by tax professionals and representatives of other groups, and I commend the clause to the Committee.
Opposition amendment No. 211 seeks to provide that a taxpayer may initially pay the POAT charge but decide in a later year to elect for inheritance tax treatment going forward. The original provisions allow people sufficient time to decide how they want to deal with existing arrangements, including whether to make an election. Anyone knowingly entering a new scheme is able to make a fully informed decision. Clause 65 allows HMRC to use its discretion to accept elections after the prescribed time limit where the taxpayer was unaware that they were liable to the POAT charge.
In our view, amendment No. 211 would give people who have entered into arrangements to avoid inheritance tax an each-way bet. If they initially chose to pay the POAT charge but then found that their circumstances had changed, it would enable them to elect instead for inheritance tax treatment. In those circumstances, we do not think that there is good reason to enable arrangements to be revisited. That is why we urge the Committee to reject the amendment.
On amendment No. 119, the POAT rules provide that an election must be made in a manner prescribed by regulations. No such regulations have yet been made, which we regret. That is an oversight on the part of HMRC. However, HMRC has consulted its lawyers about the validity of elections that it has already received. The advice that it has been given is that all timeous elections received—whether using the form that HMRC provided or simply giving all the necessary information—can be accepted as validly made.
HMRC will update its guidance accordingly, and intends that regulations will be made shortly to prescribe the form of elections for future use.
Theresa Villiers (Conservative, Chipping Barnet)
Will the Minister give way?
Edward Balls (Labour, Normanton)
In a moment. Although that oversight was regrettable, it is our intention to ensure that it will not have a detrimental effect on taxpayers. I shall explain our views on amendment No. 119, then take the intervention.
Opposition amendment No. 119 seeks to address the matter by providing that any election already made shall be deemed to have been made in the prescribed manner. We have consulted our lawyers, and I think that I have now made our position on the matter clear. We have explained to representative groups that have raised the issue with us that we shall update our guidance accordingly, and make regulations shortly. We do not think that it would be sensible to accept the amendment as currently set out by the hon. Lady.
Theresa Villiers (Conservative, Chipping Barnet)
I want to press the Minister. When the law of the land says that a valid election must be in accordance with the regulations, if there are no regulations, how can anyone make a valid election?
Edward Balls (Labour, Normanton)
I think that I just explained it to the hon. Lady. I did not take the intervention because I wanted to set out the position. HMRC has consulted lawyers about the validity of elections and their advice is that all elections received, whether people are using the form provided by HMRC or simply giving all necessary information, can be accepted as validly made. I have said that I regret this oversight and that it will be addressed. Indeed, we have already published the draft guidance. We need to get the position on the regulations sorted out, but in our judgment we do not need to complicate the position unnecessarily, given that a number of people have already made elections.
Adam Afriyie (Conservative, Windsor)
The Economic Secretary used the words “can be accepted”. That sounds slightly ambiguous. Will he put on the record now that all such elections will be accepted?
Edward Balls (Labour, Normanton)
Well, as I said, whether elections are made on the form provided by HMRC or by giving all the necessary information, they will be accepted as valid. On that basis, our legal advice is that we do not need to accept the amendment.
Opposition amendment No. 212 would introduce an appeal route to the special commissioners if HMRC were to refuse to accept an election outside the prescribed time limit. When introducing POAT in 2004, the Government recognised that a taxpayer may have a reasonable excuse for not making their election on time. That is why the original provisions allowed HMRC to accept late elections in those cases. The draft guidance that has been produced in connection with clause 65 makes it clear that it will continue to do so.
This year, we have gone further by proposing, in clause 65, to allow HMRC to accept late elections from taxpayers, but as the guidance also explains, HMRC will not accept a late election from a taxpayer who has knowingly decided neither to make an election on time nor to declare a benefit from a pre-owned asset. Those are not the sorts of cases that should properly be subject to an appeal to the special commissioners and beyond. That is why the amendment is not appropriate.
New clause 1 would provide an exemption from POAT where the assets in question are effectively back in the taxpayer’s inheritance tax estate by virtue of their having acquired an interest in possession. Committee members may remember that the Government amended the rules last year to prevent schemes that were being used to exploit existing exemptions to avoid both POAT and inheritance tax charges. Some of those schemes were being used to resurrect avoidance schemes that were caught by the POAT charges when they were first introduced.
We are aware of representations received by HMRC suggesting that the amendments to section 80 of last year’s Finance Act may apply more widely than that. Those concerns do not generally arise in connection with the disposals made on or after 26 March 2006 because of the changes to IHT rules for trusts, which were also introduced last year. Moreover, HMRC has already made it clear to representative bodies that there is no effect on a range of innocent transactions where taxpayers have put assets into trust for their own benefit before that date.
It has also been suggested that a small number of cases may have been caught that involve complex arrangements put in place by non-UK domiciliaries to avoid paying UK IHT that would otherwise arise on UK property. The effect of new clause 1 in those cases would be that neither an income tax charge nor a UK inheritance tax charge would ever arise. It would not be appropriate to introduce such special treatment for such cases. To the extent that they are now subject to the income tax charge, it has been open to those affected to elect instead that the assets in question should be subject to inheritance tax. Furthermore, if they were unaware of their liability and the need to make an election before January 2007, they can benefit from the provisions in the clause. Therefore, a further provision is not appropriate. We ask the Committee to reject the new clause.
I should just like to answer some questions asked by the hon. Member for Chipping Barnet. The clause would give HMRC discretion, from 21 March, to consider any election that should have been made by 31 January, but which was not, whether or not there is reasonable excuse. That would be the case under the new rules, not the old rules, so late elections made prior to 21 March will be accepted. As I have explained, we do not need to amend the provisions to allow the previous requirement for elections to be removed because we have made our legal position clear on the legality of those elections. Therefore, for HMRC to accept all late elections would be both wrong and unnecessary.
I was asked by the hon. Member for Chipping Barnet whether I could give guidance on when we would accept late elections. As I have said, we have already published draft guidance on that matter. The hon. Lady stressed the complexity of the POA rules. She is right about that. As we have seen from her speech, that complexity is driven by the inventiveness of people trying to use the provisions for avoidance. Most people will therefore know when they are benefiting from assets that are subject to charge, but there are some people who have rearranged their affairs without aiming to avoid inheritance tax. At the same time, they may not be aware of the deadlines. That is why we have introduced this discretion through the clause.
Representative bodies such as STEP say there are interpretive problems, according to the hon. Lady. That is why we have worked with those bodies which have an interest in those matters, including the Chartered Institute of Taxation and the Low Incomes Tax Reform Group, to provide revised guidance on the internet. I am aware that representations have been made, asking for changes to the tax return itself. I understand that HMRC has responded positively to those representations and that the return will in future make specific reference to the charge and direct taxpayers to the relevant parts of the guidance. I am sure that that will be welcomed.
The hon. Lady asked whether we are unwittingly catching taxpayers with the changes to reverter-to-settlor trusts in the Finance Act 2006. We are aware that a small number of cases may have been caught, but they mainly involve complex arrangements. However, as I said, those were the non-UK domiciliaries, and we do not think that it would be appropriate to exempt them from the provisions of the Finance Bill.
The hon. Member for Chipping Barnet asked what happens if a taxpayer dies before realising that the pre-owned assets charge applies. Should their personal representatives be able to make the election in their place?
Theresa Villiers (Conservative, Chipping Barnet)
I did not say that.
Edward Balls (Labour, Normanton)
Well, if she had asked that. She asked many questions.
Theresa Villiers (Conservative, Chipping Barnet)
I commented on the issue of personal representatives being able to make an election on the basis that they cannot make such an election. In fact, I think that there would be significant problems if they were entitled to make an election. The reason that I referred to that issue was to say that we need to solve the underlying problems with section 80 because not all of the problems can be solved by election. There may be instances in which the problem only comes to light after the death of the settlor.
Edward Balls (Labour, Normanton)
As I understand it, the hon. Lady asked me to confirm whether section 80 applies. The answer to that is that it does. Given that she did not ask me about that, I will not answer it.
The hon. Lady asked about reversionary lease schemes. HMRC has just changed the tax rules so that people will not have had time to elect. Those schemes will benefit from the provisions for late elections in clause 65.
The hon. Member for Chipping Barnet asked me about the particular example of the sales of houses, which we discussed at length last year. As she knows, the original rules provide an exemption for the owner of an asset who sells their whole interest in the asset on arm’s length terms and continues to enjoy it. Subsequent regulation extended that exemption to certain sales of a part-interest: for example, part-sales at arm’s length. In general, it is not appropriate to provide exemption for sales of a part-interest, which are made in ways other than at arm’s length. If one member of a family needs to raise cash and another member is willing and able to provide it, there are other and more straightforward ways of structuring that to an equity-release transaction.
Theresa Villiers (Conservative, Chipping Barnet)
I emphasise that new clause 1 does not operate in the way that the Economic Secretary suggested. It would leave the relevant assets subject to inheritance tax. I am pleased that the Economic Secretary said that
“late elections made prior to 21 March will be accepted.”
I suspect that that is a slightly more radical statement than he intended to make. However, if it is true, it is certainly very welcome. I welcome his specific assurances on the position of late elections in relation to reversionary lease schemes. I emphasise that I will withdraw the amendment that heads the group, but I would like a vote on amendment No. 119 because I continue to be concerned that the Government have failed to address a number of important problems for the POAT regime.
Edward Balls (Labour, Normanton)
I am sure that what I said about late elections was fully consistent with the guidance and the clause. Therefore, I am sure that I got it right.
Theresa Villiers (Conservative, Chipping Barnet)
I beg to ask leave to withdraw the amendment.