Clause 35 - Exercise of options etc

Finance Bill – in a Public Bill Committee am 11:45 am ar 28 Mehefin 2005.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Question proposed, That the clause stand part of the Bill.

Photo of John Healey John Healey The Financial Secretary to the Treasury

I seek your guidance, Sir Nicholas. The clause refers to schedule 5. Do you wish schedule 5 to be discussed now, or do you wish to have a specific debate on that schedule?

Photo of Nicholas Winterton Nicholas Winterton Ceidwadwyr, Macclesfield

I am in the hands of the Committee. What I do not want is for two debates to take place, one of which is a repetition of the other. If the Financial Secretary wishes to have a debate on clause 35 and the appropriate schedule, then so be it if that is also the wish of the Committee. [Interruption.] I have   heard quietly the Committee’s view, and if its members wish to speak to schedule 5 during the debate on clause 35, I am happy for that to happen. However, I will then put the question on schedule 5 formally without debate.

Photo of John Healey John Healey The Financial Secretary to the Treasury 12:00, 28 Mehefin 2005

I felt that I needed to be sure of my ground before offering the Committee a brief introduction to clause 35 and schedule 5, which I am happy to do.

The clause and the schedule introduce another anti-avoidance measure and correct a defect in the capital gains tax rules for assets that are bought or sold under options contracts. That loophole has been exploited to avoid tax, and we announced our intention to close it in the pre-Budget report of 2 December 2004. The defect in the rules might have allowed people to avoid tax on capital gains by using options to dispose of assets at uncommercial prices. For example, someone might want to transfer an asset worth £1 million to their family trust. If they transferred it directly to the trust, they would be taxed by reference to the value of the asset—£1 million. Instead, they could use an option that set the sale price at, say, £1,000. They would then be taxed by reference to the uncommercial option price of £1,000 and not on the true £1 million value of the asset. Using the option in that way would enable them to give away an asset effectively tax-free.

Companies could enter into similar option deals—for instance, they could transfer an asset at an uncommercially low option price to an overseas company in the same worldwide group of companies, because the asset would remain in the economic control of the group as a whole. The group would incur no economic loss.

People might also have been able to use options to buy an asset at an uncommercially high price from, for example, their offshore trust. The trustees would not be liable to capital gains tax because the trust would be offshore. The person who bought the assets from the trustees could sell them and create an artificial tax loss because of the unrealistically high price that they had paid. That, of course, would be used to compute the gain or loss arising on that sale.

Alternatively, if that person disposed of the asset after its value had increased, the full increase in value would not be taxed because the gain on the disposal would be computed using the artificially high price paid. The proposed measure puts such cases back on the correct footing.

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

I have not spent any time studying this part of the Bill, but is not the example of an asset purchase at an artificially high price already covered by existing transfer pricing legislation? Would such legislation not effectively eliminate, or capture the tax gain from, any advantage derived from that?

Photo of John Healey John Healey The Financial Secretary to the Treasury

If it did, we would not need to introduce the clause. In the context of the operation of the capital gains tax rules, the transfer pricing mechanism does not cover the problem. Under these measures, the tax liability will be based on the value of   the asset bought or sold, instead of on the uncommercial option price. The same position applies for assets given away or sold at an uncommercial price without using an option.

The measures are targeted at people who use that device to avoid tax. Companies and individuals who exercise options at arm’s length on normal commercial terms will not be affected and will face no additional compliance burden. Employees who participate in approved company share option plans will also be unaffected.

Photo of Richard Spring Richard Spring Shadow Minister, Treasury

As we heard from the Minister, the provisions are anti-avoidance in nature and block a loophole caused by amending legislation passed in the Finance Act 2003. My hon. Friend the Member for Runnymede and Weybridge was right to raise his point, and I hope that the Minister was correct in his assertion.

The blocking mechanisms are fairly well targeted, if not extremely lengthy and comprehensive, to say the least. We are willing to accept them, but with a qualification about competence. Why are the Government having to amend something passed as recently as 2003? Is it because they introduced a tax avoidance structure rather than closed one down? This is all part of the culture of hideous micro-management, which is a characteristic of the taxation legislation of the Government.

Question put and agreed to.

Clause 35 ordered to stand part of the Bill.

Schedule 5 agreed to.