(Except clauses 11, 18, 40, 43, 44 and 69 and schedule 8) - Clause 12 - Employee securities: anti-avoidance

Finance Bill – in a Public Bill Committee am ar 21 Mehefin 2005.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Question proposed [this day], That the clause stand part of the Bill.

Question again proposed.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 4:30, 21 Mehefin 2005

It is not my intention to stray into the important debates on amendments to schedule 2, but there has been some discussion about the scope of the proposal on employment-related securities in clause 12 and schedule 2, about which I spoke briefly to the hon. Member for Runnymede and Weybridge (Mr. Hammond). These arrangements are devised to deal with the minority of cases where there are complex, contrived arrangements to avoid paying income tax and national insurance on employment rewards. The Government have made clear their intention to close that activity down permanently.

There has been some debate about whether small businesses are caught by the provisions, so I am grateful to have the opportunity to offer small businesses some reassurance.

A change being made to chapter 4 of the Income Tax (Earnings and Pensions) Act 2003 will remove, where avoidance is involved, the provision that automatically exempts benefits received in connection with securities from a full income tax and national insurance charge, if income tax has been paid elsewhere. I am aware, from representations made directly to me and my Department, that professionals have expressed concern about the possible scope of the change. I want to make it clear that this change does not bring all benefits derived from securities into a tax and national insurance charge. A reference to benefits in the context of the schedule means the employment reward—the passing of value to an employee in return for the employee's labour. Where investors are carrying out their normal investment transaction, this charge will not affect them.

The purpose test introduced in section 447 of the 2003 Act has been carefully designed to target complex, contrived avoidance arrangements that are used mainly to disguise cash bonuses. If taxpayers use contrived arrangements to get round anti-avoidance legislation—to avoid paying the proper amount of tax and national insurance—they cannot expect to be excluded from the charge. However, it will be absolutely clear from what I say about the purpose test that this measure will not affect the taxation of those small businesses that do not use contrived schemes to disguise remuneration to avoid tax and national insurance.  

There is no connection between the changes proposed in this clause and schedule to tackle contrived avoidance schemes and last December's discussion paper on the taxation of small business, which focuses on the strategic issues relating to the taxation and treatment of the legal forms used by small businesses. Taxation of small businesses is a live issue that is being considered as part of our ongoing discussions with small businesses and their advisers. The provisions before the Committee today are not intended to address those points. Any proposals coming out of the discussion paper and further consideration will be brought before the House in the normal way.

I am grateful to you, Sir Nicholas, for allowing me to spell that out. There has been some confusion, and many inquiries have been made about that point. I was asked to explain the purpose of clause 12 and schedule 2 at the beginning of the debate on them. Clause 12 and schedule 2 contain important and necessary measures, which I should address on a point-by-point basis in our discussions on the amendments to the schedule.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

The Paymaster General is being extremely helpful. Will she confirm that what she is saying is that, with the exception of companies that fall within the scope of Inland Revenue 32, there is no intention to limit the ability to take profits in dividends within a business and to impute remuneration that is of another kind where profits are being taken as dividends?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I was trying to be as clear as possible. Unless a scheme falls within the category of schemes contrived specifically to avoid income tax and national insurance on employment remuneration for an employee, it is not within the scope of clause 12 or schedule 2. There are matters to be discussed, but that will take a long time. I know that this topic has caused a great deal of interest, and I thought it would be helpful to provide to the Committee at the beginning of our deliberations as clear an idea as possible of the precise, narrow and targeted aim of schedule 2 and clause 12, and thereby to put to rest concerns that have been generated in some quarters.

Photo of Nicholas Winterton Nicholas Winterton Ceidwadwyr, Macclesfield

I have to make it clear that the Paymaster General was speaking in general terms to clause 12, but I felt it was worth her while doing so before we reached the nitty-gritty contained in the amendments to schedule 2.

Question put and agreed to.

Clause 12 ordered to stand part of the Bill.