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

Clause 38 amends existing legislation so that annuities and annual payments are deductible as trading deductions or as expenses of management, rather than as charges on income, which is a concept that the Government are seeking to phase out. The change that the clause effects leaves qualifying donations to charity as the only remaining charges on income. Therefore, it seems that the days of charges on income are numbered.

The explanatory note is confusing. It paints the clause as simply a tidying-up exercise, but reference is made to avoidance schemes using charges on income as a tax avoidance loophole. Those payments will now be subject in non-trading companies to having a main purpose that is not tax avoidance.

We have no problem with what the Government are doing here, but if this is an anti-avoidance measure that has revenue implications, that is rather more than a tidying-up exercise. Can the Paymaster General confirm that this is an anti-avoidance measure, rather than simply a tidying-up move in the direction of fulfilling the Government’s general desire to remove charges on income from the tax system? After she has done that, can she say how much revenue will be involved?

Again, the hon. Gentleman reads the explanatory notes differently from me. As I read them, they do not suggest that this is merely a tidying-up measure. I refer him to note 15 to clause 38:

“Certain disclosures under Part 7 FA 2004 have shown that annual payments are being used in schemes to create an artificial deduction which is not matched by any taxable income.”

That suggests to me that the provision is slightly more than a tidying-up exercise, and that it is open about that.

The clause prevents companies from using the charges-on-income regime to avoid corporation tax. To answer the questions of the hon. Member for Runnymede and Weybridge, yes it is an anti-avoidance measure, but it is about revenue protection and therefore does not score on the significance of the yield.

The clause emerges from the question of avoidance disclosure regimes introduced in the Finance Act 2004, which has revealed that the avoidance industry has been using annual payments in schemes to generate tax deductions matched by non-taxable income. The Finance Act 2005 blocked one category of the scheme involving foreign dividends, and it is clear that, unfortunately, one of the main attractions to the avoiders of the charges-on-income regime is that it does not contain any tax avoidance motive tests, such as the unallowable purpose test that applies to the management expenses and manufactured payments regimes.

The provision is both anti-avoidance and part of a tidying-up process that has been moving forward for some time. The Government decided to act to close the schemes by removing most remaining payments from the charges-on-income regime. Relief for genuine business expenses affected will continue to be available either as an expense of a trade, profession or property business or as a management expense. However, those expenses will have to satisfy the existing tax rules, thus eliminating amounts paid for the purposes of tax avoidance.

As the hon. Gentleman said, pending any final decision on the concept of charges on income, the scheme is being retained for qualifying donations and gifts to charities. Discussions had been proceeding on the reform of the corporation tax regime—and, as I have said, there have been a number of changes over the years—but having seen the disclosures, it seemed prudent to move on the basis of revenue protection, with the exception that the hon. Gentleman rightly identified.

Question put and agreed to.

Clause 38 ordered to stand part of the Bill.

Clause 39 ordered to stand part of the Bill.