Schedule 3 lists the deductions rules for arbitrage, which apply where there is a qualifying scheme. They do not cover all possible instances of arbitrage, but instead concentrate on certain instances of the scheme that are likely to give rise to the greatest risk. The schedule defines a qualifying scheme as one that contains either a hybrid entity or has a hybrid effect. A hybrid entity is recognised for tax purposes as a person in its own right, but for some reason is also recognised as part of a separate person under a different tax code, be that a UK tax code or a foreign one. Any scheme including such an entity will be a qualifying scheme for the purposes of the arbitrage rule.

Amendments Nos. 46 and 47 would amend the definition of hybrid entity so that the profits of a capital nature are excluded. Those changes would create a considerable risk that items classified as capital under one system but not under another will no longer be caught by the legislation. That deliberate exploitation of the differences in classification in order to gain a UK tax advantage is precisely the sort of thing that gives rise to the mischief that the Government are trying to counter, so we cannot accept the amendments. For the reasons that I have given, if the hon. Gentleman wants to press the amendments to a vote, I will ask my hon. Friends to oppose them.