Clause 31 - Commencement

Finance Bill – in a Public Bill Committee am 10:30 am ar 28 Mehefin 2005.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury 10:30, 28 Mehefin 2005

I beg to move amendment No. 49, in clause 31, page 28, line 10, leave out ‘16th March 2005’ and insert ‘31st July 2005’.

Photo of Nicholas Winterton Nicholas Winterton Ceidwadwyr, Macclesfield

With this it will be convenient to discuss the following amendments: No. 50, in clause 31, page 28, line 12, leave out ‘16th March 2005’ and insert ‘31st July 2005’.

No. 51, in clause 31, page 28, line 15, leave out ‘15th March 2005’ and insert ‘30th July 2005’.

No. 52, in clause 31, page 28, line 17, leave out ‘16th March 2005’ and insert ‘31st July 2005’.

No. 53, in clause 31, page 28, line 22, leave out ‘16th March 2005’ and insert ‘31st July 2005’.

No. 56, in clause 31, page 28, line 24, leave out subparagraph (a).

No. 54, in clause 31, page 28, line 24, leave out ‘16th March 2005’ and insert ‘31st July 2005’.

No. 55, in clause 31, page 28, line 26, leave out ‘31st August 2005’ and insert ‘31st December 2005’.

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

The clause deals with the commencement provisions for the chapter, which addresses the problem of avoidance through tax arbitrage. For things covered by the chapter, a tax charge is potentially accruing now, and has done from 16 March. However, the commencement clause creates opportunities for companies to unwind the arrangements that they have in place by 31 August. That date gives companies an unrealistically short period within which to comply.

When the Bill was first introduced, 31 August was some four and a half months after the date of introduction, but since then the chapter’s provisions have undergone a number of changes. Issues are still outstanding, and clarification is still being sought and received as we go forward. It would be inappropriate and potentially dangerous for companies to collapse structures to take advantage of the window that is deliberately being granted by the Government without knowing the final form of the legislation

I am sure that the Paymaster General will agree that it would pretty much be a disaster if a company underwent a complex restructuring exercise to take into account activities outside the scope of the arbitrage provisions only to find that they had fallen foul of the new rules because changes took place or because further amendments needed to be made. The essential proposal is to extend until the end of December the window of opportunity for things to be unravelled. Also, we want the commencement date of the accrual of liabilities to be changed to 31 July. I accept that that is an arbitrary date to select to replace 16 March. It is based on a comfortable view of when the legislation will achieve Royal Assent.

There are two issues to address. The first is to do with the requirement placed on companies. They should not incur liabilities while the situation is still in a state of flux and changes are being made to the legislation. The second is that companies must have an opportunity, from a standing start, to make the changes necessary to ensure that they can take advantage of the intended window of opportunity to unravel the arrangements.

Companies are telling us that the arrangements take time to unravel. Many of them will involve third party lenders and, for example, complex banking covenants.   They cannot be collapsed overnight. Financial terms will have to be negotiated, as will the legal documentation that will be necessary and the legal processes that will have to be carried out to give effect to the required changes. Last week, we spoke to one company that has decided for commercial reasons to unravel one of these structures. It took that decision before the Budget, but even now it is doubtful whether it can complete that by 31 August simply because of the time that it has taken to renegotiate the necessary arrangements. It is important to give effect to what the Government both intend in the legislation and made clear is their intention in subsequent explanations, so that we have a later starting date and a later closing of the window for cessation of schemes.

I hope that the Paymaster General takes that on board and that she reassures the Committee that if the Government are unable to accept the amendments they will, by whatever means—perhaps by extra-statutory concession—give companies a little longer than the 31 August cut-off date to take advantage of the cessation provisions in clause 31(3).

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

As the hon. Gentleman says, the clause deals with the commencement of the arbitrage rules in relation to both deduction and receipts cases. Provisions in any Finance Bill often take effect from the date of Royal Assent, thereby giving companies time to take them on board. However, in common with most anti-avoidance legislation, the relevant clauses have a Budget day start—in this case, 16 March 2005. The reasons for that are obvious; a Budget day start date removes the opportunity for companies to exploit any identified gap between the announcement and the commencement of the new rules. Allowing a gap between those dates could lead to additional loss of tax as, unfortunately, some companies might bring forward deductions or receipts so that they arise before the commencement date. These matters are always a challenge when considering anti-avoidance legislation, and it is difficult to strike the right balance.

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

The right hon. Lady makes a powerful point, and, perhaps, we have opened that window by suggesting 31 July as the date. Would her view be different if the amendment had suggested today as the commencement date?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 10:45, 28 Mehefin 2005

No, it would not. There would still be a possibility of companies having schemes ready that could be demonstrated to have been enacted before the clear statement in the Budget on 16 March and the final decision being taken on a commencement date. We face a real challenge.

I want to answer the hon. Gentleman’s concerns and explain what the Government have done in taking the proposal forward. I think that he appreciates that we cannot allow a gap. Anti-avoidance legislation is specific and the technical notes and the statements have to be produced at the time that it becomes effective to deal with that matter. Amendment Nos. 49 to 54 would, unfortunately, create such a gap by moving the start dates. I appreciate the hon.   Gentleman’s point about complexity, but moving the start date from 16 March to 31 July would open up a significant opportunity because legislation, by virtue of stating where an avoidance opportunity will be closed, signposts where it is in the first place. It is a bit like taking out an advertisement. Why would any Government want to advertise how to avoid tax when they announce that they are to prevent such avoidance? That is why the start date is that of the Budget.

I recognise that the legislation was introduced in the first Finance Bill but subsequently dropped and that changes have been made to the guidance as a result of consultation in the interim. However, the hon. Gentleman’s argument overlooks a number of facts. First, the Government made it perfectly clear on Second Reading of the last Bill that the legislation would be reintroduced and that the original start date would be preserved—that was a clear statement made in Parliament. Secondly, the guidance has been amended to take on board the comments made by business. Thirdly, moving the commencement date to 31 July would give companies and their advisers an extra four and a half months of deductions under arbitrage avoidance schemes, which would increase the cost to the Exchequer. That runs counter to the Government’s objective, which is to establish a modern and competitive tax system that is also fair.

It is hard to see how giving avoidance schemes, in effect, a risk-free period in which to obtain a UK tax advantage and then unwind the scheme fits in with that objective. In addition, I have been informed that a number of companies—I think that I made reference to this in earlier debates—have already unwound their schemes to limit their exposure to the legislation. It would clearly be unfair to those companies then to move the goalposts and allow other companies to benefit from a later start date.

I know that the hon. Member for Runnymede and Weybridge considers this a serious matter. He needs to concentrate on the point that moving the start date to 31 July would give about five weeks from today for companies and their advisers to put in place short-lived schemes, which could produce huge deductions and major losses of corporation tax. The principle of a start date and a period to comply is standard and straightforward.

Amendments Nos. 55 and 56 would open up the transitional arrangements to the point where they will defer any impact of the provision until 2006. Before I go into detail, I shall say a little more about the transitional provisions that are in place. Clause 31(3) provides an exemption for schemes with unconnected parties that were in existence on 16 March, provided that they are wound up before 31 August 2005. The purpose of the exemption is to give companies that have entered into a transaction that constitute an arbitrage scheme with an unconnected party—typically, with an unrelated bank—the chance to unwind the transactions without triggering the legislation.

The exemption is restricted to transactions with unconnected parties, as it recognises that although transactions within the same group of companies can normally be unwound quickly, that process can take longer when third parties are involved. When the first Finance Bill was published, the transitional period lasted until 1 July 2005. As no statement was made on that specific point on Second Reading, the period has been extended to 31 August to take account of the election period and to give companies slightly longer to unwind their existing third party arrangements. Amendment No. 56 would remove the limitation to unconnected parties and amendment No. 55 would move the end of the exemption period from 31 August to 31 December. Together, the amendments would mean that all arbitrage schemes in existence on 16 March would be able to continue without penalty or challenge for another 10 and a half months.

We touched on this issue during our debates last week. Our proposals to close contrived avoidance schemes are a result of disclosures that have been made. I am sure that the hon. Gentleman understands that companies with existing schemes would have every incentive to bring forward and increase deductions under their schemes before the cut-off dates. I understand the point made by the hon. Gentleman: statements on the commencement date were made in Parliament. The moving of the transitional arrangements to take account of the election period is a reasonable step by the Government, but to accept the dates proposed in the amendments would leave the Exchequer unnecessarily open to potentially huge tax losses. I am not attracted to the hon. Gentleman’s amendments and cannot encourage my hon. Friends to support them.

Photo of Nicholas Winterton Nicholas Winterton Ceidwadwyr, Macclesfield

To ease the consciences of those who have already taken off their jackets, I should say to Committee members wearing jackets that if they wish to take theirs off to make themselves more comfortable and conscious of everything that we are debating, I am happy that they should do so.

Photo of Nicholas Winterton Nicholas Winterton Ceidwadwyr, Macclesfield

I am not sure whether there can be a point of order on that matter. However, I am happy to use my discretion and allow the hon. Gentleman to raise one.

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

May I suggest that you follow the example suggested by the Paymaster General? Those who have already sinned against the rule should not now be let off the hook by the rule being changed retrospectively.

Photo of Nicholas Winterton Nicholas Winterton Ceidwadwyr, Macclesfield

I could take that as criticism of the Chairman, but I shall not. I am grateful to the hon. Gentleman for that suggestion.

Photo of Rob Marris Rob Marris Llafur, Wolverhampton South West

Thank you, Sir Nicholas, and thank you for your forbearance on sartorial matters.

I have two questions. First, will my right hon. Friend the Paymaster General say whether the changed guidance issued on 26 May, following the draft guidance issued on 16 March, was adverse to or favourable to arbitrageurs?

Secondly, the hon. Member for Runnymede and Weybridge has not moved an amendment on clause 31(4), which relates to the date for receipts cases. May I ask whether there is a particular reason for that, or is it merely an oversight, owing to the pressure of work?

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

I shall answer first. The guidance was changed following consultation with business to clarify the intent of the legislation and ensure that it operated as had been announced by the Government in all of the statements. In that sense, by clarifying exactly where the Government envisage the legislation will bite and where it will not, the guidance errs on the side of those engaged in arbitrage, but not avoidance schemes; it does not change the intent or the content of the legislation

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

To answer my half of the questions asked by the hon. Member for Wolverhampton, South-West (Rob Marris), it was not an oversight but a conscious decision to focus on the deductions case, which I said last Thursday was the more important area because it has offered greater scope for manipulation. However, he could make the case that, in the interest of symmetry, the proposal should apply across both parts of the Bill.

In drafting amendments economy is all; unless we expect the Paymaster General instantly to accept or recommend amendments, we focus on an issue simply to get a response. She has made a perfectly coherent response that is, from her standpoint, logical; the problem is that she is always looking at this matter from the point of view of the offender—the company that is avoiding tax through arbitrage arrangements. I suspect that some of the heat in our debates is generated by the fact that we have an obligation to consider things from the point of view of those who are caught by the changes to legislation, who are not wicked, manipulative scheming tax offenders but people who have arrangements that have been in place for a long time, or arrangements that have been used over a long period and are well understood and well known to the Revenue.

I am advised that notwithstanding what the Paymaster General said last week, the Revenue has not become aware of these arbitrage arrangements as a result of disclosures under the Finance Act 2004. Some specific examples of schemes may have been disclosed to the Revenue—I am sure that they have—but the type of instrument that we are discussing is a well-established financing structure of which Revenue officials have been aware for a long time. Now, however, something that has been characterised over a long period as routine and acceptable tax planning is now being re-characterised as unacceptable tax avoidance.

I do not deny the Government’s right, as matters evolve, continually to examine the boundary between tax planning, which is accepted as legitimate, and tax   avoidance, which is not. I am somewhat disappointed that, so far, we have not heard a clear recognition of the distinction between avoidance and planning. I am told that the long-standing and widely understood definition of tax avoidance refers to tax planning that is convoluted and has a legal form contrary to its substance. Those are its essential characteristics. In addition, avoidance includes transaction steps that have no commercial purpose other than the avoidance of tax.

Last Thursday, the Paymaster General mentioned her surprise that the Opposition were concerned about the impact on UK competitiveness of closing down some of these arrangements. Perhaps it will be helpful if I place clearly on the record that we support the systematic closing of avoidance opportunities, based on the definition that I have given. However, we also recognise that ordinary tax planning, whether or not the Government like it, is a normal and inoffensive part of business operations everywhere in the world.

We are discussing huge multinational corporations and complex hybrid structures, but let me make an analogy with personal taxation. Nobody suggests that somebody who every year carefully sells precisely the right amount of their modest personal shareholdings simply to use up their capital gains tax allowance, or somebody who every year invests right up to the limit of their tax-free individual savings account investment allowance, is engaged in tax avoidance. Of course they are not; they are engaged in proper tax planning.

The issue that we are addressing under clause 31 is what happens when the Government want to move something that has for a long time been acceptable tax planning into the category of being unacceptable tax avoidance. That is why we have dared to suggest a slightly more generous provision of time for arrangements to be shut down. I understand the Paymaster General’s reluctance to allow that to happen—we all understand the pressures that the Inland Revenue is under to raise the sums of cash that the Chancellor wants—but we feel that there is an issue in the way that these arrangements are being moved from one category to another. I hope that the Paymaster General now at least understands why we have put forward these proposals.

Photo of Brooks Newmark Brooks Newmark Ceidwadwyr, Braintree 11:00, 28 Mehefin 2005

Would it not be helpful if the Paymaster General explained one point? My hon. Friend has continually highlighted the fact that tax is a key factor in decisions on where to invest. Given that fact and given the general shift among other countries toward lowering their taxes, it would be interesting to know whether the Paymaster General has done any analysis to discover the impact of the legislation in terms of reducing investment in this country.

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

My hon. Friend is right. That is our underlying theme throughout our consideration of the Bill.

I was a little disappointed that in last Thursday’s sitting the Paymaster General attempted to suggest that our argument made us the friend of the tax-avoider. That is certainly not our intention. I am also disappointed that she queried the relevance of a benign tax environment to international competitiveness.

I accept that there are difficult questions at the margin, but it is at the margin that our debates should be conducted. We will maintain our view that although the raising of revenue for the funding of public services is a critical activity of Government, it is ultimately self-defeating if doing so throttles the goose that lays the golden eggs by dissuading potential inward business investment and ultimately making the United Kingdom a poorer nation and reducing the Exchequer’s revenue flows.

In my opening remarks, I inadvertently did not speak specifically to amendments Nos. 55 and 56, but the Paymaster General has responded to those amendments none the less. Those amendments would remove the restriction for the escape clause, as I shall call it, which applies where arrangements are not at arm’s length. A number of people in the City are puzzled by that distinction. In relation to allowing companies with hybrid arrangements within group to unwind those arrangements and take advantage of the opportunity set out in clause 31(3), has the Paymaster General identified any danger that those companies could exploit the opportunity in a way that she considers to be further tax avoidance?

Word is getting back to us that that things are not as the Paymaster General described. She appeared to suggest that the approach was purely one of pragmatism, and that it was not so much a matter of denying the concession to companies with in-house arrangements as one of extending the period for companies with third party arrangements, on the basis that they would have to renegotiate those arrangements. I put it to the Minister that the practical experience is that even arrangements within group may still take time to unwind and to renegotiate. We must bear in mind that the new arrangements have to satisfy all the other anti-avoidance tests that are already in tax law. They have to be priced at arm’s length, and comply with the panoply of legislation already in place.

Outside the Treasury, it does not seem to be the view that companies involved in these relationships with external banks can necessarily collapse the arrangements without unintended or unfortunate—for them—consequences resulting from having to do things in that way. I do not know whether the Paymaster General will respond to that point. I was expecting her to say that there was a positive reason why that kind of arbitrageur could not be given more time. She appeared to say only that there was no positive reason why they should be given more time; however, that is not what we are hearing in the field.

I do not know whether the Paymaster General intends to speak again; it would be helpful to have an indication of whether she will. There being no   indication—[Interruption.] Having more or less concluded my remarks, my intention was to beg leave to withdraw the amendments, in which case she would be unable to speak on them again. However, I see that the right hon. Lady wishes to speak and I am happy to give way to her.

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

Good spot! It was good of the hon. Gentleman to make sure that I responded briefly to his points. On the question of—

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

It is an intervention to clarify the two points that the hon. Gentleman asked me to clarify. I shall do so briefly by speaking fast.

First, on the arrangements within group and for unwinding, those involved do not have to unwind; they simply have to make a disclaimer. That shows that we, too, recognise the challenges. Secondly, I come back to the fundamental point that I have made all the way through our discussions: where an arrangement involving arbitrage is set up for wholly commercial non-tax purposes, it will not be affected by the legislation.

The Bill is targeted at contrived avoidance schemes, so a balance has to be struck on the start dates and transitional periods. I think that the balance in the clause is fair. When we get to clause 37 and schedule 6, we can come back to that principal point, just to show how difficult it is for any Government, including the present one, to strike that balance.

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

I accept the Paymaster General’s assurance that the legislation is targeted at convoluted artificial arrangements; no one is suggesting that the Treasury set out to catch anything other than convoluted artificial arrangements. This Committee’s job is to ensure that the legislation does not inadvertently catch much more than that. The truth, as the Paymaster General has implicitly acknowledged, is that the original Bill would have done much more. The changes that were made to the Bill before its reintroduction are welcome in that they tighten the application. However, as she knows, concerns remain.

What the Paymaster General has just said, which was useful, is that no transaction that has a commercial purpose will be caught by the provisions; they will catch only artificially constructed transactions. I seek your indulgence, Sir Nicholas, to follow up that specific point. As we come to the end of this long, complex chapter, one question that was raised is still outstanding, although other questions might or might not have been answered.

The Paymaster General asked me last week to go away and read the record. She told me that I would see that she had answered all my questions. I have read the record and I have sent it to bodies outside this House and asked them to read it. Others are engaged in this work, not just myself. We are still not clear that the question has been answered. If an arrangement is the subject of a notice requiring a company to recompute its deduction for interest, is it the case that the comparator that it must use in order to identify the UK tax advantage that it has gained, and thus the amount   of deduction that it has to disallow itself in order to eliminate the UK tax advantage under clause 25, is based on a comparison with what would have been the situation in the absence of the hybrid structure? If that is the case, would the company in the example that I gave last Thursday, which described a transaction that simply would not have gone ahead in the absence of the hybrid structure because the rate of return post-tax would have been so low that it could not be funded with plain vanilla bank debt that did not go through a hybrid structure, have to disallow itself the whole of its interest deduction on the ground that if the hybrid structure had not been in place, the loan would not have been made at all and therefore no interest would have been deducted?

To people who are following the debate about the Bill, that it would have to do so seems the inevitable logical conclusion. The provision there creates an entirely illogical and inequitable solution, because if the loan had not been made, the investment would not have been made, no revenues would have been generated and no tax would have been paid anyway. We are talking about a situation where an investment has gone ahead, tax has been paid on the income generated and the investor seeks, at operating company level, a deduction for the interest charged. Surely it cannot be the case that all that interest should be disallowed on the grounds that, had the hybrid structure not existed, the loan would not have been made because it would not have met the test of commercial viability that the investor had to apply?

I have looked at the record carefully and that seems to be the one major question that remains outstanding. I will not detain the Committee on this point, but there is another minor question: why on earth are the amounts chargeable under the provision being charged to case VI of schedule D? The Paymaster General says, “Because that is where they fit,” but the wide view of tax experts outside the House is that they do not fit in case VI of schedule D at all. However, that issue is not of burning importance, whereas the question I have just asked is significant and requires clarification.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 11:15, 28 Mehefin 2005

I am not at all surprised that those outside the House who do not support these mechanisms—there are some, as there are others who support it—are seeking to get the hon. Gentleman to ask me, as Minister, to give a tax ruling on particular elements of a scheme that could be designed for contrived avoidance within the arbitrage arrangements. As he put that point repeatedly to me, I answer it on the same basis.

First, I am not being drawn into giving tax advice on the record as a Minister. Secondly, as I have made clear repeatedly through my comments, arbitrage cases will be decided on their own facts and circumstances. The Government have put the mechanism in place to enable companies to seek informal clearance from the Revenue.

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

Although that point is clear and came over more clearly than it did in the heat of Thursday afternoon—I understand exactly the position that the Paymaster General is taking—unfortunately, it still leaves us with a lack of certainty at the centre of the arrangements. There is still the potential that companies with innocent arrangements—those that were not set up with no commercial purpose, but were standard commercially structured arrangements—will be caught and have to go through a clearance procedure that would be simply a hassle for new schemes, but could be a disaster for them.

Without wanting to go round in circles, I hope that the Paymaster General will understand why we keep coming back to this issue. She is anxious to ensure that every loophole is closed and we are anxious to ensure that unintended consequences do not arise, either by catching people whom the Government do not intend to catch, or by creating a climate of uncertainty that will damage the United Kingdom as an investment location. That is a legitimate issue for Opposition Members to pursue.

The Paymaster General has now placed on the record her position on both those matters and those outside the House will be able to hear what she has said. If, in due course, we feel that we need to ask further questions, we will find an opportunity to do so.

I am grateful to the Paymaster General and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 31 ordered to stand part of the Bill.