(Except clauses 11, 18, 40, 43, 44 and 69 and schedule 8) - Clause 24 - Deduction cases

Finance Bill – in a Public Bill Committee am ar 23 Mehefin 2005.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Amendment proposed [this day]: No. 15, in clause 24, page 21, line 4, leave out from 'the' to 'that' in line 5 and insert

'Special Commissioners find, on the balance of probability, following an application by the Commissioners for Her Majesty's Revenue and Customs'.—[Mr. Philip Hammond.]

Question again proposed, That the amendment be made.

Photo of Frank Cook Frank Cook Llafur, Stockton North 2:00, 23 Mehefin 2005

I remind the Committee that with this we are taking the following amendments: No. 16, in clause 24, page 21, line 5, leave out 'or may be'.

No. 31, in clause 24, page 21, line 18, leave out

'or one of the main purposes'.

No. 30, in clause 24, page 21, line 20, leave out from 'question' to end of line 21 and insert

'is significantly greater than it would have been if the relevant transaction was part of a qualifying scheme.'.

No. 17, in clause 24, page 21, line 23, after second 'the', insert 'Special'.

No. 18, in clause 24, page 21, line 26, at beginning insert 'Special'.

No. 19, in clause 24, page 21, line 30, after 'the', insert 'Special'.

No. 20, in clause 26, page 24, line 5, leave out from 'the' to 'that' in line 6 and insert

'Special Commissioners find, on the balance of probability, following an application by the Commissioners for Her Majesty's Revenue and Customs,'.

No. 21, in clause 26, page 24, line 6, leave out 'or may be'.

No. 22, in clause 26, page 25, line 5, after second 'the', insert 'Special'.

No. 23, in clause 26, page 25, line 8, at beginning insert 'Special'.

No. 24, in clause 28, page 25, line 37, leave out from 'the' to 'give' in line 38 and insert 'Special Commissioners'.

No. 25, in clause 28, page 26, line 5, at beginning insert 'Special'.

No. 26, in clause 28, page 26, line 9, at beginning insert 'Special'.

No. 27, in clause 28, page 26, line 12, after 'the', insert 'Special'.

No. 28, in clause 28, page 26, line 23, after third 'the', insert 'Special'.  

No. 29, in clause 28, page 26, line 24, leave out 'have been reasonably' insert 'reasonably have been'.

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

At the end of the morning sitting, I was explaining the effect of the amendments and why they are therefore not acceptable to the Government. An important aspect of the arbitrage legislation is that it does not set out an all-or-nothing approach. If a company receives a notice under the legislation, it must consider first whether the legislation applies to it and, if it does, how great an effect the legislation has on its self-assessment. The company takes its own view of both matters in its self-assessment. If there is a disagreement between Her Majesty's Revenue and Customs and the company, and it cannot be resolved, the matter can proceed to the special commissioners, who will be able to consider not only whether the legislation applies at all, but the extent of its effect.

The amendments would bypass the self-assessment stage. Instead, the matter would proceed directly to a hearing at the special commissioners to determine whether a notice should be issued. That unprecedented approach would require the special commissioners, who are established as a body to hear appeals, to apply legislation directly in the first instance. It is not clear how an appeal against the special commissioners' view would proceed. As I said this morning, there is no advantage in the huge increase in bureaucracy and costs that the amendments would impose.

There is already a right of appeal when the parties disagree, and there is nothing to be gained by requiring a hearing irrespective of whether disagreement exists. I hope that my explanation has dealt with the worries of the hon. Member for Runnymede and Weybridge (Mr. Hammond), but I shall be happy to give him further reassurance. HMRC has said in published guidance that companies may make what are referred to as a point of principle referral to special commissioners on aspects of the arbitrage legislation. A point of principle referral allows a point to be considered separately from other self-assessment matters and can be heard as soon as the relevant facts have been established.

Unlike the special commissioners' referral in the amendments, the point of principle referral would include the extent of the effect of the legislation as well as whether it applied at all. I hope that the hon. Gentleman is reassured that the issuing of the notice supported in the guidance notes with the point of principle referral gives sufficient opportunities, without the additional bureaucracy and possible cost, for the matter to be considered. It would also leave in place the special commissioners' role to hear any subsequent appeals.

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

I might have misunderstood the Paymaster General. I am grateful to her for what she said, but she seems to be outlining the existing procedure for resolving a dispute about a company's return or its assessment after it has responded to a notice. We want to provide a mechanism for appealing against the issue of a notice when it was not appropriate to have issued a notice. I do not think that anything she has said would allow an appeal against the issue of a notice; it   would only allow an appeal against the Revenue's view of what the outcome would have been.

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

I repeat what I said about the working of the point of principle referral. That allows a point to be considered separately from other self-assessment matters, so it can be heard as soon as the relevant facts are known. The point of principle referral will therefore include the extent of the effect of the legislation as well as whether it applied at all. That mechanism, with the referral once the self-assessment processes have been completed, establishes an appeal procedure. The amendments would remove all of that: the issue of every notice would go automatically to the special commissioners, even when there is not a dispute. That would force many claims to be considered and, therefore, much more administration and legal work.

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

The Paymaster General says that the amendment would remove all of that. With respect, it would do no such thing. All of what she has just set out is in the guidance notes rather than in the Bill. We are seeking to put a mechanism on the face of the Bill. Does she accept that that is the purpose of these amendments?

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

I have said that there is no need to appeal the notice because all the notice does is tell the company that it needs to consider the legislation; that is all that it requires. It is then up to the company to decide whether to take any further action. The hon. Gentleman is putting too much emphasis on the issuing notices.

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

No, they are not fishing expeditions. The hon. Gentleman has said that before. The legislation is clear about the tests. All—not nearly all, but all—of conditions A to D have to be met.

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

I shall come to that point later. The notice is issued if the Revenue is of the opinion that it should be, and the notice requires that the company takes the legislation into consideration.

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

I know that the right hon. Lady is taking the line that the issue of a notice does not really matter—that what happens next is what matters, but is she saying that there is no mechanism by which a notice could be rescinded, even if an appeal on a point of principle was made and the Revenue lost? If that happened, would the notice be rescinded or would it remain in force? Taxpayers need protection against fishing expeditions. They need to be able to demonstrate that the Revenue was wrong to issue a notice. That is the point of having a mechanism by which notices may be rescinded or overturned.

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

The issue of the notice to the company only requires the company to take the legislation into consideration. If the company receiving the notice believes that HMRC was wrong and that the conditions are not met, it will make a self-assessment on the basis that the arbitrage legislation does not apply. If HMRC agrees, that will be the end of the matter. If HMRC does not agree and the matter   cannot be resolved by discussion and agreement, it can proceed to the special commissioners for a decision. That is consistent with the special commissioners' usual role, which is to hear appeals. In that way, the notice is issued if the conditions are satisfied in the view of HMRC.

The notice requires the company specifically to take note of the legislation. It is a signpost that reads, ''Take note of the arbitrage legislation when completing your self-assessment''. In our system, the company takes note; if it believes that the conditions do not apply, it makes its self-assessment on that basis and the normal processes within the tax system proceed from there. HMRC will decide whether it agrees with the company's self-assessment.

Photo of Rob Marris Rob Marris Llafur, Wolverhampton South West

The application on the point of principle is set out in the guidance notes. Will the notice issued to the company also signpost the fact that such an application may be made? That is not in the Bill; it would be helpful if it were signposted to companies when they received the notice that that avenue was open to them.

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

Discussions with companies and the consultation with companies and a wider group of interested parties on the guidance notes has ensured that the notes are clear on a range of issues, including the point of principle. There is no indication that that point of principle provision needs to be in the Bill; the interaction between the legislation and the guidance notes is established and fully understood. If, within the procedures that I have set out, the special commissioners decided, there would be no need to rescind a notice. They would have decided, and that would also be the end of the matter.

Photo of Brooks Newmark Brooks Newmark Ceidwadwyr, Braintree

I should like to clarify one point. I appreciate the detail with which the right hon. Lady has gone into this issue, but I am still not clear. If clearance were given, would that be a binding commitment? If it were not binding, I suggest that that would still leave the degree of uncertainty that we are concerned about.

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

The clearance is binding. If a company has approached the Revenue and gone through the clearance procedure in place as a result of the provisions, and if the HMRC makes a decision, that decision is binding. However, we shall come to that in more detail when we reach other amendments and clauses. Perhaps the hon. Gentleman will pursue his question then about the difference between the statutory clearance and the clearance procedures now in place. [Interruption.] Perhaps we could save that for the debate on clearance, when I shall be happy to give way to the hon. Gentleman.

Photo of Frank Cook Frank Cook Llafur, Stockton North

Order. Perhaps hon. Members could make their comments through the Chair. On several occasions today, a kind of verbal shuttlecock has been going on. That is against the rules; comments should be made through the Chair, please.

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

In his opening remarks, the hon. Member for Runnymede and Weybridge described the second set of amendments as sub-group two. Amendments Nos. 30 and 31 are not directly   concerned with the issuing of notices. They relate to the conditions that determine when the legislation applies. The legislation sets out conditions A to D. Condition D limits the legislation to cases in which tax deductions arising from the scheme are of more than a minimal amount. Amendment No. 30 would replace condition D with a new one based on a comparison of tax effects with or without the arbitrage system. Condition C already requires that the main purpose, or one of the main purposes, of the scheme is to achieve a UK tax advantage.

As explained in the guidance, that condition requires a comparison to be drawn between tax deductions that arise under the scheme and those that would have arisen in the absence of the scheme. It appears that amendment No. 30 is intended to make the same comparison. If that is its intention, I am happy to give reassurance that condition C already requires a comparison to be drawn, but the same result is not achieved by the amendment as drafted. Let me explain why.

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

Perhaps, through you, Mr. Cook, I could explain why the amendment does not give the deduction. When I have completed that I will give way to the hon. Gentleman.

The amendment requires the question to be asked whether tax deductions would have been less if a transaction had not been included in a scheme, but it appears to assume that the transaction itself stays the same. On that basis, it is hard to see why tax deductions would have been different. It appears that the amendment would cause the legislation to have no effect. It does not address the key question of whether the existence or nature of a transaction is changed because of the arbitrage scheme. The amendment seeks to draw a comparison without reference to the purpose of the scheme. That is at odds—putting it politely—with the aim of the legislation, which is to tackle tax avoidance. Condition C identifies avoidance through a purpose test and the use of comparison arises naturally from that test, so I am satisfied that the intention of the amendment is served by condition C and that nothing further is required in terms of the comparison.

Like amendment No. 30, amendment No. 31 alters one of the conditions that must be met for the legislation to apply. It would limit the scope of the legislation so that condition C would be met only if the main purpose of the scheme was to achieve a UK tax advantage; it would not be met if that was one of the main purposes of the scheme. That would severely weaken the legislation and lead to unfair results, because schemes can have mixed purposes. Apart from the practical difficulties of determining which is the main purpose in such cases, it would be unfair if legislation applied differently to different schemes with mixed purposes compared with those with a single purpose.  

I will give an example. Let us suppose that 51 per cent. of a loan is used for a wholly commercial purpose, such as acquiring new business premises, but the other 49 per cent. is used for an entirely artificial tax avoidance purpose. On the basis of the amendment, the avoidance would go unchecked. Without the amendment the clause would leave tax deductions in place for the 51 per cent. of the business use of a loan. Only that relating to the tax avoidance purpose would be identified. That is right and it will give the right result. It would be wholly unfair if, as a result of the amendment, tax avoidance was left unchecked where there is a mixture of purposes. I hope that I have been able to give the hon. Member for Runnymede and Weybridge the assurances he seeks. We oppose and reject the group of amendments.

The hon. Gentleman discussed amendment No. 29, would omit ''have been reasonably'' and insert ''reasonably have been''. Such an alteration does not change the legislation. I accept that he prefers the grammatical construction. If it is possible to remove amendment No. 29 from the group and deal with it separately, I have no objections to it, but the remaining amendments in the group are unacceptable. If the hon. Gentleman chooses to put them to a vote, I will ask my hon. Friends to oppose them.

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

I am grateful to the hon. Lady for throwing me that small crumb so early in the proceedings. She might not know, because she has been a Treasury Minister for a long time and I have not served on a Finance Bill Committee since 1998, that I usually like to find something that is uncontroversial enough for Ministers to agree to and it usually has something to do with the grammar or architecture of Bills.

I should say for the record that I wanted to intervene on the Paymaster General when she was using precious breath to denounce amendment No. 30 to tell her that I entirely agree with her. I said in my opening remarks that I did not intend to speak to that amendment because it is otiose and would not do anything to the Bill. That probably reflects the fact that this is such a complex part of the Bill that, even after spending time with specialists who understand this stuff and producing amendments, on returning to the amendments the night before a sitting or early in the morning to consider the points one will make in the debate, one sometimes finds that they are not as good as they first appeared.

The Paymaster General's answer to amendment No. 31 is superficially appealing. This is a complicated subject and I am afraid that in the two minutes I have had to think about it I cannot digest her answer fully, but I accept what she says and will go back to others who have commented on the matter and see whether her comments satisfy their concerns.

I shall return to a couple of points that the Paymaster General made earlier, on which I intervened but did not get a specific answer. She said that the rules would apply only where a company sought to exploit contrived arbitrage arrangements. I asked whether that means that the rules would always not apply where the arbitrage arrangement was not   contrived—for example, where it was necessary because of a regulatory issue, such as the separation of regulatory capital into a separate entity. Is she saying that as long as that test is complied with, the arrangement is not a contrived arbitrage arrangement and will always fall outside the rules?

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

I apologise for not dealing with that issue. I am happy to reassure the hon. Gentleman. The matter is covered in the guidance published by HMRC alongside the publication of the Bill. The issue arises in the context of what is referred to as tier 1 regulatory capital and bands. It is unlikely that the arbitrage legislation will apply to tier 1 capital, because it applies only to schemes that are achieving, as the hon. Gentleman said, a UK tax advantage. I have met organisations that are particularly interested in the matter and I have made that point directly to them.

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

I am grateful to the Paymaster General for making that clear, and I know that the others outside this Room will be pleased, too.

The Paymaster General, in responding to something that I apparently said—that the amount of revenue at stake was modest—said that the loss was not small because, to use her words, two thirds of all investment in the UK comes via hybrids. I still do not quite understand the significance of that point. She is, presumably, not suggesting that all hybrids will be caught by this legislation. Even if one accepts her argument, there does not seem to be any logical connection between the proportion of investment in the UK that comes via hybrids and the size of the loss.

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

Obviously I did not make the point very well. The hon. Gentleman knows the figures for the revenue. Personally, I do not consider £200 million to be a minor sum, or small beer, as I think he said, especially as it adds up to £600 million over three years. I was using the two thirds example to demonstrate the potential risk to the Exchequer. I was not saying—I went on to make this clear in my comments about arbitrage—that all such investment was therefore suspect, but that there are potential risks in those very complex arrangements. If I muddied the waters by using that example, I apologise for misleading the hon. Gentleman.

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

I am grateful to the Paymaster General for clarifying that. It is probably useful for everyone that that point is on the record.

The right hon. Lady acknowledged that there is nothing wrong with arbitrage per se, but she said that its use has led to distortion of taxpayer behaviour. No specific examples of that have been given in Committee, although I am aware of some cases. It is important to make it clear that the legislation is not an attack on arbitrage arrangements across the board. It is also important that when the Paymaster General speaks of distortion of taxpayer behaviour, it is clear that she is not talking about standard financing structures that have been in place for many years, some of which may now fall foul of this legislation, as far as I can see. I hope that the right hon. Lady can confirm that she is looking into only the most aggressive use of hybrids—their use in a way that has not been part of the mainstream conventional   financing route. In that way, she will reassure large and long-established companies in the United Kingdom, including some that are American-owned. I do not want to name names because people are sensitive about these things, but I have spoken to several large US-owned corporations, long-established in the UK, that are very large employers, and that have used arrangements that may appear to fall within the ambit of this legislation. It is important to reassure them and send them a message that this is not an attack on their financing structures.

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

I am happy to give the hon. Gentleman that reassurance and to restate what I said at the beginning of the debate. Under the disclosure regime that is in place for detecting any unrevealed avoidance in the tax system, the rules will apply only in cases where there is a tax advantage. That is what we are responding to. I know that the hon. Gentleman will not want to go into detail—I understand, as I have heard the same detail myself—but I think that I can give him the reassurance that he seeks.

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

I am sure that the right hon. Lady and I heard the detail from the same people. She says that the rules apply if a tax advantage arises. We keep coming back to that phrase, and the best place to deal with it is probably under clause 25. The nub of the test will be how that tax advantage is defined in practice, and how the necessary comparison is carried out.

I asked the Paymaster General whether she could give an idea of the number of notices that the Revenue expects might be issued, so that we would know what it is gearing up to do. I think that the answer I received was that, in an ideal world, she would hope to issue no notices. That suggests that the wide scope of the legislation is intended to have a deterrent effect, possibly across a broad sweep. That would be unfortunate, but I know that she is very keen on deterrents. Clearly, my obsession with fishing expeditions will become difficult to sustain if she envisages a couple of dozen notices being issued each year, but if she envisages a couple of hundred, I am on firmer ground. Therefore, it would be helpful if she could say something about the assessed scale of the problem.

Let me explain why I am pursuing this line. The Paymaster General also told the Committee that she had identified two multinational groups that were unwinding arrangements because they would fall within the scope of the legislation, and that they would, in aggregate, have produced an additional £150 million of taxable profits—that is, all else being equal, £45 million of UK corporation tax payable. That is an interesting amount, because the Government's own figures suggest that the total yield from this tax will be less than £200 million. If £45 million will be raised from just two corporate groups, that suggests that this piece of legislation might be targeted at a small number of arrangements that are already known to the Treasury or the Revenue, and which are operated by a small number of parties.

Can the Paymaster General tell us where the £200 million figure comes from? I appreciate that it is   difficult to make an exact estimate, but an estimate of £200 million has been made. I think that that sum includes arbitrage and financial arrangements that are caught by schedule 7; the Paymaster General will correct me if I am wrong on that. Let me try to put this in the right context; there are two groups of companies with £45 million extra to pay, and an overall yield of £200 million extra. Perhaps that helps us to get an idea of how many notices there might be—of whether the target group is narrow or wide.

I am grateful to the Paymaster General for her response. I will not press the amendment to a Division, as I am largely happy with what she has said, and we can address matters about which I was less happy on later occasions. However, in view of what she has said, I would like to ask for a separate vote on amendment No. 29. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury 2:30, 23 Mehefin 2005

I beg to move amendment No. 58, in clause 24, page 21, line 32, at end insert—

'(8A) No notice may be issued pursuant to this section in respect of any transaction which is subject to the operation of any anti-avoidance provision already in force at the date of coming into force of this chapter.

(8B) For the purposes of subsection (8A), anti-avoidance provisions include but are not limited to Chapter II of Part VI of ICTA, Part XVII of ICTA, and paragraph 13 of Schedule 9 to the FA 1996.'.

Photo of Frank Cook Frank Cook Llafur, Stockton North

With this it will be convenient to discuss amendment No. 59, in clause 26, page 25, line 18, at end add—

'(14) No notice may be issued pursuant to this section in respect of any transaction which is subject to the operation of any anti-avoidance provision already in force at the date of coming into force of this chapter.

(15) For the purposes of subsection (14), anti-avoidance provisions include but are not limited to Chapter II of Part VI of ICTA, Part XVII of ICTA, and paragraph 13 of Schedule 9 to the FA 1996.'.

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

Amendment No. 58 deals with clause 24 on the deductions case, and amendment No. 59 deals with clause 26 on the receipts case. They would make a transaction that is already subject to the transfer pricing, thin capitalisation or general anti-avoidance rules in the Income and Corporation Taxes Act 1988, the Finance Act 1996 and other generic legislation not subject to a notice. In other words, when the transaction is already caught by legislation that is already in force, the Revenue should not be able to issue a notice under the Bill. There is a worry that the body of tax law is growing at a frightening pace. In 1997, the standard tax experts' guide comprised two volumes. It is now four volumes. Tax statutes are growing at an alarming rate. It is partly the scale and complexity of the tax code that allows people to devise and develop complex loopholes. We and others are concerned that, each time the Revenue has a new idea for closing a particular loophole, the approach taken is to layer a new tier of legislation with wide applicability on top of what already exists. That is the wrong approach.

The amendments would establish a priority for the application of different provisions, and that would be   appropriate. They would reduce an unnecessary compliance burden on business by limiting the circumstances in which the Revenue could issue a notice. We want to draw attention to the fact that, in its present form, the vast majority, if not all, of the legitimate targets that could be hit by the Bill are covered already by thin capitalisation transfer pricing and the loan relationship rules under paragraph 13 of schedule 9 to the Finance Act 1996.

The Paymaster General has come armed. She has diagrams in front of her, so perhaps she can give the Committee an example of a scheme that will be properly caught by the application of the deductions rule, but not caught by the application of those other well established tax rules. The correct route to follow is first to identify the mischief that is being attacked. I am still not sure whether we know clearly what that mischief is. Secondly, the existing legislation must be checked to see whether it applies and works. Incidentally, if it does not work and does not have wider applicability, let us get rid of it so that tax law is just not layered on top of tax law. Thirdly, after proper consultation, new legislation can be introduced that deals with the problem.

The measures have given rise to concern and uncertainty in the business community, members of which naturally assume that, when the Government swing into action and legislate, there is a new target that is not caught by the existing rules. Although the Government have made reassuring noises about the narrow focus that is intended under the Bill, it is not easy to ascertain a target that is not already caught by existing legislation and that could, within the scope outlined outside the Bill, be hit by the new provisions. Will the Paymaster General clarify who gets hit under the Bill who is not already hit under existing legislation?

Photo of Brooks Newmark Brooks Newmark Ceidwadwyr, Braintree

I suggest that we apply a fourth test that concerns the estimated reduction in investment in the United Kingdom as a result of the Bill and the number of jobs that will be lost. In addition, the additional revenue that could be lost should be taken into account.

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

My hon. Friend makes a powerful point. On a more general point, one of the concerns that has been expressed—I hope the Paymaster General will recognise how this arises—is that the Revenue has a job to do. It is charged with ensuring that it collects all the tax that it is supposed to collect, closes the tax gap and closes tax loopholes. It is very focused on collection.

Any Chancellor—I am not making a political point—has a need for a certain amount of cash and the order goes out to the Revenue that an extra so much is needed next year. The question is whether there is ministerial or official oversight at an appropriate level that joins up that agenda with other important aspects of Government policy, such as the promotion of economic growth, job creation and a stable economic environment. It is important that short-term tax gain is not allowed to drive an agenda that could be to the detriment of the medium to long-term health of the UK economy. My hon. Friend makes a good point.  

Photo of Frank Cook Frank Cook Llafur, Stockton North

It might be as well if I were to inform the Committee that as we have discussed every runner on the deduction case racecard, the Chair is not well disposed to any suggestion of a clause stand part debate. Members should say anything that they need to say on this matter now.

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

Let me start by reminding the Committee that this legislation is designed to stop contrived avoidance structures that are set up specifically to exploit the arbitrage opportunities in order to obtain a UK tax advantage. HMRC is aware that that is going on—we have not dreamed it up—through disclosure of schemes to achieve exactly that result. The legislation responds to those disclosure regimes.

When the hon. Member for Runnymede and Weybridge touches on the competitiveness and fairness of the UK economy, perhaps he would also like to address the question of whether the situation is fair to those taxpayers who comply, do not use those contrived schemes and make their contribution according to Parliament's decisions. Damage to competitiveness when some companies can use the schemes and others cannot is unacceptable.

I cannot believe that the Opposition are suggesting that the UK's competitiveness should be predicated on the ability of companies to avoid paying UK tax. That cannot be sensible. If that is not the case, the question of competitiveness arises on the basis of whether the tax system is modern and fair and whether it has appropriate rules that respond to the challenges that it faces in order to discharge the responsibility to all taxpayers to ensure fairness in the system. As we have heard in the debate so far, that is precisely what the clauses seek to achieve.

The Opposition keep going round the houses, but they have to address the question. Disclosure schemes show that those contrived avoidance schemes are being marketed. In previous debates, I have explained that legislation is not necessarily the route; one could make an assessment or use litigation. However, in these cases, legislation was necessary. Although it is absolutely right to probe that legislation, to question whether it should exist—in the sure knowledge that schemes have been disclosed that would achieve the very outcome that the clauses seek to prevent—is a dereliction of the duty of this Parliament to all its taxpayers.

Photo of Brooks Newmark Brooks Newmark Ceidwadwyr, Braintree 2:45, 23 Mehefin 2005

I draw the Paymaster General's attention to a very practical quote that I used during the original Finance Bill. Professor J. K. Galbraith, an old professor of mine, said:

''Politics is not the art of the possible. It consists in choosing between the disastrous and the unpalatable.''

Unfortunately, those of us who live in the real world have to accept facts. I fully appreciate the direction in which the Paymaster General is going; there is a need to balance the casting of the net of anti-avoidance legislation wide enough to prevent circumvention with the need to maintain a competitive economy. Notwithstanding that, I remain very concerned; those of us who have worked in the real world fear   that Britain's competitive advantage today will be lost if the right hon. Lady continues in that direction.

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

The hon. Gentleman has made exactly the point that I posed to him. He says that competitiveness is predicated on allowing some to avoid tax; that is not acceptable. If he looks at any assessment of the UK economy's competitiveness, he will see—and I know that he knows this—that it is highly competitive.

If the hon. Gentleman is saying that one should not be complacent about competitiveness and that it always has to be part of the consideration, I agree with him entirely. However, we come back to the central question, which I shall address. When the tax authorities and the Government have been notified of schemes being marketed that are unfair and contrived avoidance schemes that use particular methods to reduce or eradicate UK tax payments, the Government and the authorities have to act. That is what we are doing here.

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

On the point about competitiveness, the Paymaster General cannot afford to be complacent because she knows that, under this Government, the UK has slipped in the international competitiveness league from fourth to 11th place. There are certainly no grounds for complacency there.

Of course, we accept the principle of what she is saying about identified avoidance cases. I have asked her for an example of a case that would be caught by this legislation and would not be caught by existing legislation. Well qualified observers in the real world fear that this is a belt-and-braces approach and that there are few, if any, cases falling within the deductions case of clause 24 that could not be dealt with effectively by the loan relationships legislation, the thin capitalisation rules and other anti-avoidance provisions.

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

That point does not stand up; it is totally illogical. If that were the case, why would schemes be sold at exorbitant cost and be on the market? If companies structure themselves in such ways, they will reduce their taxes.

I will not start giving tax advice to multinationals in this Committee or discussing complicated financial structures. The information comes from disclosure; the consultation on the guidance notes has been quite clear; and the examples in the guidance notes have also been consulted on. The companies that I have met have concerns about the operation of the rules—some of which we have addressed and others that we will deal with during the course of discussion—as they always do with new procedure. However, a number of those companies have accepted that there are issues and it is right for the Government to act on that basis.

There is no need for the hon. Gentleman's amendment. The overlap between different anti-avoidance rules is commonplace and is generally a good thing, because it stops transactions deliberately taking advantage of the unintended gaps. In practice, the overlap does not lead to problems. That is not just the experience of the UK tax authorities, but is   common practice in those of the industrialised economies.

Photo of Brooks Newmark Brooks Newmark Ceidwadwyr, Braintree

Exactly addressing the issue of our international competitiveness and what goes in the EU—our arrangements with the EU countries and the United States—can the Paymaster General confirm that these clauses will not, for investment to and from the rest of the EU, be contrary to the freedom of capital and establishment articles of the treaty of Rome? Will she confirm also in respect of inward investment from the United States that the clauses will not be contrary to the non-discrimination article of the US-UK taxation treaty so carefully negotiated a few years ago?

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

Yes, I can give the hon. Gentleman that confirmation.

The amendments would undoubtedly open large loopholes in the legislation that could undermine the whole impact of what we are proposing. I shall give an example that the hon. Gentleman touched on. Take the transfer pricing rules—I am sure that Committee members think of nothing else—that are contained in part 17 of the Income and Corporation Taxes Act 1988 and are included in the list of anti-avoidance rules in the amendments. All transactions between connected persons are subject to transfer pricing rules, so the amendments would exclude all connected party transactions from the scope of the arbitrage legislation, which is unacceptable.

I note that the phrase ''subject to'' is not defined in the amendment, but even if it were limited to cases where other anti-avoidance legislation had some effect, the amendments would still lead to unacceptable limitations on the scope of the legislation. For example, it would be a simple matter for a company to ensure that the transfer pricing legislation had a small effect to ensure that the arbitrage legislation did not apply at all. That cannot be allowed.

There may be overlap between the arbitrage legislation and other anti-avoidance rules and, in some cases, all the anti-avoidance resulting from an arbitrage scheme may be cancelled by other laws, in which case the arbitrage legislation would have no further effect and no notice would need to be issued. In other cases, part of the avoidance may be cancelled by other rules, but a notice is still required to cancel the avoidance that results from arbitrage.

It is important to emphasise that there is no possibility of the arbitrage legislation applying in such a way as to introduce some sort of double charge on the company concerned, because its effect is limited to cancelling tax avoidance and it rules out any risk of double charge. The amendments are therefore unnecessary and potentially damaging to the legislation. I ask my hon. Friends to oppose the amendment, should the hon. Gentleman decide to press it to a Division.

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

The Paymaster General says that there is no danger of a double dip for the tax authorities. As she has raised the subject, perhaps I should start by asking her about a point that I wanted   to come to much later. Is there no circumstance in which a deduction would be disallowed because the amount was also deductible in another jurisdiction, but where that deduction was offset because the corresponding income was also being taken into account in that other jurisdiction—for example, in a US tax consolidation? I do not know whether I have explained that sufficiently well for her to respond to it, but that is a concern that I wanted her to clarify. Is there any possibility of that happening through the other half of the double deduction being offset by the consolidation of a matching and offsetting item of income?

I rise again because you have suggested that you do not intend to allow a stand part debate, Mr. Cook. There are a few other issues of general application to this clause that I wanted to raise with the Paymaster General, and one or two quotes that I wanted to read into the record to help to set the overall scene. I emphasise that, as has become the practice for many Bills, we are dealing under the first clause of a chapter with many of the generic issues that will perhaps arise repeatedly throughout the chapter. I can assure you that I do not intend to raise those general issues that apply to the whole chapter again, Mr. Cook. In challenging clause 24, I am effectively seeking to allow the clause to stand for the whole chapter.

I particularly want to focus on the fact that, as the Paymaster General acknowledged, almost all US investment in the UK—and much UK investment overseas—is funded through some kind of hybrid entity. I am told that hundreds of billions of pounds of UK inward investment is held in that type of entity. The Paymaster General has made it very clear that it is not the Government's intention to hit all that inward investment. That gives rise to the question: how have the Government calculated the figure of £200 million? What computation have they done? Is it simply an arithmetical addition of the amounts that are estimated to be avoided under the disclosed schemes of which the Government received notice under the Finance Act 2004, or have they entered into some more complex calculation?

We have come back several times to the question of how a UK tax advantage is to be calculated, and one of our main concerns is that condition C in clause 24 is a subjective test. The condition

''is that the main purpose, or one of the main purposes'' is the creation of ''a UK tax advantage''. I have already made the point that that is a very difficult test for companies to deal with, because tax will always be a relevant and important consideration in deciding on any investment opportunity, and therefore in looking at the structure that will be used for that investment.

I note in that context that, in the draft guidance, paragraph 27 says, in essence, that the company will be okay if ''the sole purpose'' of a scheme is

''to obtain an overseas tax advantage''.

Will the Paymaster General explain the asymmetry? Why is it not okay if the main advantage is the obtaining of an overseas tax advantage? The provision, as drafted, seems too harsh. She will know that, in the case of US investors and the so-called   check-the-box approach that they will adopt, the obtaining of an overseas tax advantage will be the primary consideration in many of these transactions and the structurings that are used for them.

We spoke about the damage that the legislation could inflict on US entities because hybrids are used in straightforward debt funding of foreign investment by many US companies to take advantage of incentives that are deliberately inserted in the US tax code. According to people in the US, companies in other jurisdictions are able to access those incentives without the use of hybrids. However, because of the way the US tax code works, it is essential for those US investors, if they are to be competitive, to have access to the use of hybrids. That is essential for their ability to make continued substantial investment in the UK.

This proposal has caused bewilderment and concern among US investors. I shall quote from one or two sources. The National Foreign Trade Council in the United States wrote to the United States Treasury Secretary and said:

''The NFTC is writing to you, as a matter of urgency, to express our members' concern about proposed legislation in the United Kingdom . . . Many of our members invest in the UK, owning many hundreds of billions of dollars of assets and employing tens of thousands of employees . . . our members believe that the legislation as currently drafted might, if read broadly, affect longstanding straightforward debt-financing into the UK. Our members are already subject to agreements with the UK tax authorities on the allowable amount of debt.''

That refers to the transfer pricing and thin capitalisation rules that we discussed earlier. The letter continued:

''Any further reductions of debt below these agreed limits - which this legislation could bring about - will result, effectively, in increased UK tax.''

It goes on to explain why hybrid entities are necessary for US investors to put them on a level playing field with other international investors. It concludes:

''This measure will adversely affect the position of US investors in the UK. Our members tell us that this legislation may affect future investment in the UK by US corporations. They also tell us that it may affect current investment, with a potential effect on UK employment.''

What discussions have the Treasury had with the United States Treasury in drafting and then redrafting this legislation? My hon. Friend the Member for Braintree (Mr. Newmark) referred to the relatively recently negotiated tax treaty between the US and the UK. In her reply, the Paymaster General was clear in saying that this proposal was totally compliant with it and did not raise any problems in relation to it.

Patricia Brown, the acting US Treasury international tax counsel, speaking at an American Bar Association meeting in May, took a slightly different view. Beyond concerns over the broad base of these new UK rules, there was a separate issue involving the etiquette of the Inland Revenue's approach to addressing the problem. She said:

''A unilateral approach like this is a little inconsistent.''

That referred to the dialogue between the UK and the US, which is outlined in the notes to the bilateral tax treaty. There is an issue about how much transatlantic   consultation and co-operation there has been on these matters.

I understand that the check-the-box entities that US multinationals regularly use in these financing arrangements are—the Paymaster General will tell me if this is not the case—necessarily defined as hybrid entities under this legislation. It is essential for US companies to use such entities to permit interest on borrowings incurred to finance non-US activities to be deductable against US consolidated taxable income, while leaving the UK tax base wholly unaffected, compared with the situation without the check-the-box structure.

I hope that the Paymaster General can confirm for the record that the use of a plain vanilla financing structure for debt, but using check-the-box, will not in any circumstances give rise to a company being subject to a notice under these procedures. It is clearly important to US investors that the opportunity to offset tax in the United States is not lost to them, and what happens in the US should not be a huge concern to the UK tax authorities.

I have an example for the Paymaster General that goes to the essential question that we have identified so far in this debate of how one identifies a UK tax advantage and whether that definition, which appears so simple, could have the unintended consequence of catching US hybrid entities that the Government do not intend to capture. For example, if an American decided to build a factory and create jobs in the UK, he could get bank finance for that transaction that would attract tax relief in relation to the interest paid to the bank. However, he may find that the numbers do not add up and meet his threshold return and he cannot go ahead with that investment in the UK—building a factory and creating jobs. So, he sharpens his pencil, goes back to work and finds that by financing the investment by lending from his US parent company and using US tax planning, he is able to get what amounts to a subsidy from the American taxpayer for his investment in the UK. UK tax relief would be completely unchanged—it does not alter the UK position at all—and the only difference would be that the American taxpayer would be helping to finance the investment in the UK and creating British jobs.

The new legislation and Her Majesty's Revenue and Customs guidance says that, in such a case, the UK tax relief would be denied, because without the subsidy from the US taxpayer—without the use of the hybrid entity—the investment would not be viable: a straightforward bank loan would not have worked and the investment would not have gone ahead. Such a company in the UK would receive a notice from the Revenue and would need to compute what its deduction would have been in the absence of the hybrid structure. If it were honest about the audit trail of that transaction, it would have to disclose that it considered using plain bank debt and that the numbers did not stack up, so the investment would not have gone ahead and there would have been no loan interest to deduct. In those circumstances, it seems that the whole deduction must be disallowed as attributable to   the existence of the qualifying scheme—the hybrid structure.

That is the nub of the problem. We are beginning to find a way through the broad sweep of things. However, there is still a serious, niggling concern that in defining the UK tax advantage, a company will be left with no other conclusion than that the whole deduction is disallowable if the honest answer to the question of what would have been its alternative structure is that there would have been no alternative structure. I would be grateful if the Paymaster General could clarify that point, and, perhaps, offer reassurance to US investors who might be concerned about that issue. We all wish to minimise uncertainty in the system, or eliminate it if that is possible.

The Paymaster General stated that the UK was not trying to act as the world's policeman, but she went on to say that we cannot build our competitiveness on tax advantage.

Dawn Primarolo indicated dissent.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury 3:00, 23 Mehefin 2005

I heard the right hon. Lady say tax advantage, but it does not actually matter whether she said that or tax avoidance. The point is that she can make a moral case if she wishes, but we have to face practical issues in the real world, such as that different jurisdictions offer different incentives to investors, and we simply cannot afford to make the UK a less attractive jurisdiction because of some high-minded objection to certain practice.

The US looked into changing its tax legislation with regard to the use of hybrids, and it rejected going down that route for sound business and economic reasons. I also understand that the Netherlands moved in that direction, but that it is now moving back in the other direction because it saw the damage that it was doing to its economy.

There has been a lack of consultation on this measure. I understand the Paymaster General's point about the Inland Revenue usually being wary about consulting on avoidance matters, but I ask her to think again about that position in light of the regime that we now have. We have a disclosure regime, so the avoidance schemes we are addressing were disclosed under the Finance Act 2004. Therefore, it is not as if she has to be alarmed about the information getting out. There is no secrecy; the people who do the tax planning, those who sell these schemes, and the people in the big four firms that are key to this are all aware of the schemes in question. The Paymaster General is not prepared to reveal them to the Committee—perhaps out of respect for the marketing structures of the firms in question—but there is no doubt that the people who need to know about these things will know about them.

The Inland Revenue also has a well established press release system, which sets down a marker for the date that legislation will come into effect. With those two defence mechanisms in place, I suggest that it would be perfectly possible to consult widely on measures after a press notice has been issued, safe in the knowledge that most of the people who will be   interested will already know about the schemes in question in any case.

Let us consider this Bill. In its original form in March this year, it would have been little short of a disaster. It has been significantly redrafted, and, by universal agreement, significantly improved. However, that happened because of a piece of luck. Because of the election, consideration of the legislation was delayed, and that allowed the Government to go back to the drawing board and the specialists in this field to make their case to the Treasury.

I recently met a company that believes that, under the Bill as originally drafted, it alone would have had to pay more than the entire £200 million that the Government say they are seeking to raise under this chapter. Fortunately, because of the redrafting, that company no longer faces that challenge. The Government's original disclosure rules were substantially rewritten when they sat down with experts from the private sector and explained to them what they sought to achieve. The Government worked with those experts to develop an effective regime. We now have a regime that works; the Paymaster General has referred to it throughout our debate today.

I shall ask the Paymaster General a couple of final questions. I think that I have already asked her my first, but I should like to be sure.

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

I have not had an answer, but, to be fair to the Paymaster General, she has not had an opportunity to give one. Will she confirm that when double relief is claimed, the legislation will look across time and not just at a single period? In that way, it will not inadvertently catch taxpayers simply because the matching receipt has been taken into account in a different period from that of one or other of the reliefs.

I should like the Paymaster General to confirm something else, so that I understand it in case the sun has been getting to me. Paragraph 24 of the guidance note mentions a loan being used

''to convert debt to equity''.

Will she confirm that that is meant to say ''to convert equity to debt''? If it does not, perhaps I have misunderstood what the guidance note is trying to say.

We are trying to get at the cumulative impact of this legislation on US investor sentiment. Poor drafting, repeated changes and lack of clarity of purpose mean that there is residual uncertainty about the extent to which the recognised investment structures used by US firms for many years and encouraged by the US check-the-box tax regime will be caught. On top of that, there is the somewhat arbitrary regime for the imposition of the notices.

Photo of Brooks Newmark Brooks Newmark Ceidwadwyr, Braintree

My primary concern above and beyond the excellent points the Paymaster General has made on this matter and on its anti-avoidance nature, is about a double whammy. The financial services sector of UK plc has an enormous competitive advantage, but there is still a high risk of damage to employment in that sector because of the lack of   inward investment and the current wording of the legislation. There are also the issues about the manufacturing sector raised perfectly legitimately this morning by the hon. Member for Bishop Auckland (Helen Goodman).

We want to encourage businesses that do not necessarily have a negative impact on UK plc to come to this country. Jobs in the manufacturing sector still need to be created in this country. Would you not agree—

Photo of Frank Cook Frank Cook Llafur, Stockton North

Order. No questions are to be put directly to Committee members. I say yet again that they should be put through the Chair.

Photo of Brooks Newmark Brooks Newmark Ceidwadwyr, Braintree

I apologise, Mr. Cook; I am new. Would my hon. Friend not agree that we still risk the double whammy of damage to employment in the financial services sector and damage to employment in our manufacturing sector as a knock-on effect or unintended consequence of the provision?

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

My hon. Friend is exactly right. Whatever Government Committee members might think, we do not make such points for the good of our health. Although the Paymaster General may think that she has dealt with all the issues raised and although her officials may tell her that those concerns and fears have been dealt with, the message that we are still getting from the outside world—from specialist advisers and from industry—is that there are still real concerns about this legislation.

Beyond that, there is still a perception in the US that the UK has now taken a distinctive turn. It has moved in a direction that international investors find uncomfortable and, as I have said, there is a cumulative impact on the international—particularly the US—perception of the investment climate in the UK. I share my hon. Friend's concern that the Government need to think hard about such matters.

We know that there is a need for revenue and that the Government have targeted a certain amount to be raised by such measures. However, have they carried out a real analysis of what the reaction of the corporate sector of the international investment sector will be? Surely the Government do not think that everything will remain the same and that the only thing that will happen is that UK corporate tax receipts will increase by £200 million and all corporations will act precisely as they have done in the past. That is not the real world.

In practice, international investors will adjust their models to deal with the position that they fear in the UK. Multinational corporations may look again at where they locate their European headquarter operations or at the base from which they undertake their outward investment. Over time, there will be an adjustment in the behaviour of the sector that takes full account of what the Government are doing. That is the nature of an internationally competitive business environment and, whether the Paymaster General likes it or not, part of that internationally competitive business environment is the tax environment. She might prefer all businesses and investors to consider pre-tax returns as the basis of their investment, but   they do not—and they will not in the future. There will be a second-order consequence.

Perhaps it will not matter to the Paymaster General or her boss, but experts in the field genuinely believe that the end result of such a decision three , four or five years down the line will be that any revenue gain to the UK Exchequer in the short term will be offset by the negative effect on UK growth from the declining attractiveness of the UK as an investment destination. I still believe that the best solution would be for the Government to withdraw chapter 4, go out to consultation, think again about it, make sure that it is redrafted to reflect only those narrow purposes that the Government say that they have in mind and reintroduce it at a later stage.

I seek your guidance, Mr. Cook. Would it terminate the debate if I sought to ask leave to withdraw amendment No. 58, and give the Paymaster General no opportunity to reply?

Photo of Frank Cook Frank Cook Llafur, Stockton North

There are still hon. Members seeking to engage in debate.

Photo of Rob Marris Rob Marris Llafur, Wolverhampton South West

A stand part debate on the clause seems to have been rolled together with the amendments. The hon. Member for Braintree talked about living in the real world. Conservative Members sometimes have difficulty with that, so let me spell it out. Even in his terms, lots of Labour Members live in the real world. I started out as a teenager helping to run a family business. Years later, I ended up as a partner in a partnership with a turnover of tens of millions of pounds. I appreciate that that had nothing to do with international high financing, but that was the real world.

The hon. Gentleman prayed in aid his old professor, J. K. Galbraith. Well, he will probably know better than me that J. K. Galbraith was born in about 1910 and attended the Ontario Agricultural college in Guelph where he started training as an agricultural economist. Some of the problems that he grappled with at that stage in his career were precisely the sort of things dealt with by this chapter. Canada—the land of his birth, where he was educated initially—was then, as it is now, a branch plant economy in terms its domination by the United States of America.

Canada introduced the first anti-monopolies legislation in the world in the 1890s, because of the activities of multinational corporations, which were border hopping and trying to play off one tax regime and one jurisdiction against another. Those are precisely the things that J. K. Galbraith would have grappled with as an economist in his career.

I have not had the pleasure of meeting J. K Galbraith, although the hon. Gentleman has, but I suspect that J. K. Galbraith—based on his views and experience—would be with the Government on the broad thrust of this chapter entitled ''Avoidance Involving Tax Arbitrage'', followed by clause 24, and so on. The title of the chapter is important—it refers to the thrust of the mischief that this Government, through this Bill, are seeking to address.  

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

On a point of order, Mr. Cook, would I be right in thinking that, far from what the hon. Gentleman says, the title does not form part of the Bill?

Photo of Frank Cook Frank Cook Llafur, Stockton North

Not for the purpose of being part of the Bill, but I am interested in how the hon. Member for Wolverhampton, South-West (Rob Marris) develops his thesis. I am still waiting to discover the pertinence that I am looking for.

Photo of Rob Marris Rob Marris Llafur, Wolverhampton South West

If you will extend me a little more latitude—

Photo of Rob Marris Rob Marris Llafur, Wolverhampton South West

Well, Mr. Cook, I prefaced my remarks by saying that I was addressing the stand part debate, because you have, in your wisdom, rolled it into the debate on the amendments. I appreciate that my remarks do not refer directly to amendments Nos. 58 and 59.

I stress the word ''avoidance''. Explanatory note number 2 on clause 24 says:

''The legislation will apply from 16 March 2005, to companies that use schemes involving certain types of hybrid entities or instruments, for UK tax avoidance purposes, but only if HM Revenue and Customs issue a notice to that company, directing that the legislation applies.''

I stress the words ''certain types''. The legislation will not apply to all hybrid entities or all instruments, only certain types, and only where HMRC issues a notice. We are dealing with large multinationals with access to all kinds of tax advice, rich lawyers and accountants, and so on; if they do not agree the notice they can go through the appellate procedure, which we discussed earlier, and apply to set it aside. They can afford it.

The hon. Member for Runnymede and Weybridge talks about the United Kingdom not being the world tax cop, and in one sense he is right. However, we have to take cognisance of the fact that the United States of America, to which he referred quite a lot in his most recent speech, has had unusual tax regimes going back many years. He may remember what we called the international sales corporations in the 1960s, which in the late 1960s President Nixon turned into the domestic international sales corporations—conveniently acronymed as DISCs—and he may remember the tax breaks that they got to enable them to compete unfairly around the world. What we are talking about—and what clause 24 and the subsequent clauses are designed to address—is competition between double-dipping multinationals versus domestic companies and single-dipping multinationals.

The hon. Gentleman was just giving an example of an American company owner coming here, sharpening his pencil, and so on. I will not repeat all that. However, his little homily failed to consider that if the American company thinking of investing in the United Kingdom gets an unfair tax advantage, that is to the disadvantage of a UK-based company that would be seeking to borrow money here at a higher rate.

Photo of Brooks Newmark Brooks Newmark Ceidwadwyr, Braintree

I believe that the hon. Gentleman misunderstands the concept of return on capital in a tax-neutral environment. My hon. Friend the Member for Runnymede and Weybridge gave a tax-neutral   example, but one in which there would be a negative, devastating effect on the company's economic decision as to whether to invest in this country. That is where the confusion arises in the hon. Gentleman's example.

Photo of Rob Marris Rob Marris Llafur, Wolverhampton South West 3:30, 23 Mehefin 2005

That is not at all how I understand the example given by the hon. Member for Runnymede and Weybridge. He talked about a company from the States that wished to set up in the United Kingdom and could not afford to do so if it borrowed money, but could if it got a tax dodge and borrowed money from the USA. In those circumstances a United Kingdom-based company would be disadvantaged, as would be a multinational that was only single dipping.

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

What UK-based company? This morning, the hon. Member for Bishop Auckland gave an example of inward investment in her constituency by a European multinational corporation, Electrolux. Does the hon. Gentleman imagine that there is a UK manufacturer of domestic devices desperately disappointed this week because he could not hire that work force and buy that factory in Bishop Auckland? Of course not. That is a net gain to UK plc.

Photo of Rob Marris Rob Marris Llafur, Wolverhampton South West

It is not necessarily a net gain if a UK company that wished to invest found that it could not do so because it was being forced to compete unfairly; it is as simple as that to me. The issue is not just about minimising uncertainty, about which the opposition have banged on a lot; it is about a level playing field. It is not a question of the Government seeking to raise £200 million, or whatever is the sum, for tax revenues. As I understand the figures, that figure relates to what they think the side-effect of the measures will be if they are brought in. These are indeed policing measures. They are designed to ensure a level playing field to prevent tax avoidance, and I support them.

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

I shall answer the questions raised and will not be tempted to engage in the wider discussion that the hon. Member for Runnymede and Weybridge began. However, I must say to the Committee that if the hon. Gentleman cannot see that avoidance is not good for an economy, I really cannot help him.

The basic principle that we are observing is that the counteraction of UK tax avoidance is a matter for our law and not for other countries'. That is precisely why we have Finance Bills and why we defend our taxation rights. When the hon. Gentleman reads his remarks, he may feel that, in the implications of what he said, he drifted rather far from his party's current policy with regard to the supremacy of the UK in making its tax laws.

I shall deal briefly and succinctly with the hon. Gentleman's questions. First, yes of course the UK has ongoing discussions with the US, but a matter of UK law is a matter of UK law; it is not a matter for negotiation with anybody. I remind him that the US introduced similar reverse hybrid rules in 2002 without any discussion with the UK—and, of course, was absolutely correct to do so. It is for each country to address the avoidance in its own tax regime.  

The hon. Gentleman mentioned check-in-the-box and double deduction. Where there is a double deduction and one of those deductions is in the UK, if that deduction is part of a contrived avoidance scheme and is aimed at achieving a UK tax advantage, it is right to deny that UK deduction. As I explained, the UK is not acting as a global policeman. In fact, the hon. Gentleman was almost suggesting that we should announce how we might act and then consult widely, particularly with the US, before doing so, as though there should be some co-operation. As I have repeatedly said, it is not our intention to act as a global policeman. It would be inappropriate for us to consider the treatment of the deduction in another state—in the US or anywhere else. If we were to do so, we would be acting as a policeman for the world.

The hon. Gentleman quoted from a letter and referred to a lecture or an address, too. The letter was based on a misunderstanding of the provisions of the first Finance Bill. If the election had not intervened, we would be discussing that Bill now; there would have been as much time to consider and amend that Bill as there is to discuss the current one. In the Finance Bill we are now discussing—as opposed to the one that was withdrawn and then reproduced in two halves, one before the election and the other after it—the Government added a disclaimer to make it clear that only UK tax advantage deductions are denied. Since that happened, all the concerns expressed in the quotes that the hon. Gentleman read out and elsewhere appear to have gone away, because no further suggestions have been made to HMRC.

Many companies invest in the UK via what are called check-the-box structures, and, as I said this morning, not all those structures will be caught. That is because we are not aiming at all those structures. The legislation is not an attack on arbitrage; it is a response to contrived structures designed to obtain a UK tax advantage, as revealed by disclosure.

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

I am going to respond to the hon. Gentleman's points. He spoke for a long time and put a lot of questions on the record, and it would be good if I were to provide answers to them now.

The hon. Gentleman raised the question of double relief. Rule A addresses a deduction that has been, or may be, deducted. It will prevent the double dips that sit in different time periods, which is what it is designed to achieve. The hon. Gentleman also asked about commercial purpose. The application of the legislation does not depend on whether there is a commercial purpose. It depends on whether there is a main purpose of achieving a UK tax advantage.

I congratulate the hon. Gentleman on a good spot with regard to an earlier draft of the guidance note; as he suggested, it should have referred to equity to debt rather than debt to equity. That has already been changed. That is the beauty of having guidance notes in consultation, which they still are—discussions are still taking place with business.

There is no possibility of the arbitrage legislation applying in such a way as to introduce a double   charge. Its effect is limited to cancelling tax avoidance. On that basis, the fears that the hon. Gentleman described are unfounded, and if he wishes to press the amendment to a Division, I will ask Labour Committee members to oppose it.

Mr. Philip Hammond rose—

Photo of Frank Cook Frank Cook Llafur, Stockton North

Before you start, Mr. Hammond, do you still intend to seek the Committee's leave to withdraw the amendment?

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

I shall be in a moment, Mr. Cook. However, I wish to respond to the Paymaster General's remarks first.

I am grateful to the right hon. Lady for her comments. However, I do not think she answered my key question: can we be assured that there is no danger of a company finding itself within the scope of the legislation because the comparator by which it has to measure its UK tax advantage is the outcome of no deal being done, and therefore 100 per cent. of the UK deduction is deemed inadmissible because the company must conclude that in the absence of the hybrid structure it would not have been able to finance the investment at an acceptable rate of return using ordinary bank debt? That is the nub of the debate. If the Paymaster General does not want to deal with that question now, it could appropriately be returned to in relation to clause 25.

The right hon. Lady talked about avoidance through the double dip and adopted a high moral tone. She said that the issue is one of UK tax loss. Based on that argument, where a double dip occurs, if the other jurisdiction changes its legislation so that no deduction arises in that jurisdiction, her objection is totally removed, even though there would be no change to UK revenues because the UK deduction would remain. It would no longer be challengeable because there would be no US or other jurisdiction deduction. There would be no change to the UK revenue, yet the Paymaster General's argument collapses. If ever there was a definition of acting as a world policeman, rather than as acting simply as the policeman for the UK Exchequer, that fulfils it.

Perhaps I did not make an earlier question clear. The Paymaster General addressed specifically a question that I asked when I was talking about double deduction. However, she has not answered the important question about what happens when a double deduction takes place but there is also a double counting of the income. In other words, there is a deduction in the UK for the interest paid by the UK subsidiary company and a deduction in the US for the interest that has been paid. That is because there has been a full consolidation with the US parent company through a check-the-box type structure and the income of the UK subsidiary has also been taken into account in the total tax calculation of the US parent company. In those cases where there is income that offsets that second deduction, can the Paymaster General confirm that that would not be treated as a double dip? That seems like common sense, but the answer is not obvious to me from the Bill or from what has been said today. I do not know whether the Paymaster General   can to clarify that point now, but I will be grateful if she does.

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

I have answered the hon. Gentleman's question, but he does not seem to appreciate what the answer is. Perhaps he would like to reflect on the matter when he reads Hansard. If he is still not happy, I am sure that there will be mechanisms that will allow him to return to the matter. I have specifically addressed his point and have done so clearly and succinctly.

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

It is interesting that the Paymaster General has just spent 45 seconds confirming that she has addressed my point, but chose not to tell us whether the answer was a yes or a no. I will have a look at the record.

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

The Paymaster General says this is pathetic. If she wants to degenerate into those kinds of remarks, so be it. I have studied the right hon. Lady's technique and I am not surprised that she is standing up and telling me that she has already answered my question and that the problem is that I am too dumb to have understood the answer. If that is the way she wants to conduct the debate, that is fine by me. I will read Hansard, as she requested.

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

This afternoon, just about every comment that the hon. Gentleman has made has been laced with barbs. I have ignored them because we are here to discuss the Finance Bill on the basis of the points raised and to try to answer them. I am trying to save time by not repeating what I have already said. I assure him that I have answered all his questions and I hope that we can therefore proceed with the other points that he wants to make.

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

I hear what the Paymaster General says. If I am too stupid to have understood the answer, a simple yes or no would have been helpful. We will leave it for now. I will look at the record in due course and am sure that I will be greatly enlightened.

I shall urge my hon. Friends to vote against clause 24 stand part, but I beg leave to withdraw amendment No. 58.

Amendment, by leave, withdrawn.

Question put, That the clause stand part of the Bill:—

The Committee divided: Ayes 12, Noes 7.

Rhif adran 2 Nimrod Review — Statement — (Except clauses 11, 18, 40, 43, 44 and 69 and schedule 8) - Clause 24 - Deduction cases

Ie: 12 MPs

Na: 7 MPs

Ie: A-Z fesul cyfenw

Na: A-Z fesul cyfenw

Question put and agreed to.

Clause 24 ordered to stand part of the Bill.