Schedule 7 - Accounting practice and related matters

Finance Bill – in a Public Bill Committee am 4:30 pm ar 28 Mehefin 2005.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury 4:30, 28 Mehefin 2005

I beg to move amendment No. 116, in schedule 7, page 88, line 40, at beginning insert ‘In’.

Photo of Nicholas Winterton Nicholas Winterton Ceidwadwyr, Macclesfield

With this it will be convenient to discuss the following amendments: No. 117, in schedule 7, page 88, line 41, leave out from ‘years)’ to end and insert

‘at end insert “and where the main purpose, or one of the main purposes, of one or more of the parties to the finance agreement was a tax avoidance purpose.”.’.

No. 69, in schedule 7, page 89, line 5, leave out sub-paragraphs (5) and (6).

No. 118, in schedule 7, page 89, line 32, at end insert—

‘“tax advantage” has the meaning given by section 709(1) of the Taxes Act 1988;“tax avoidance purpose” in the case of any person, means any purpose that consists in securing a tax advantage (whether for the person or any other person).’.

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

This is a complex schedule, which, it is fair to say, is one of the two most controversial parts of the Bill.

Let me qualify what I mean by controversial. The objectives of schedule 7 are not controversial: the objective clearly stated by the Government is to close a number of tax avoidance loopholes that have been identified primarily through disclosures and the Finance Act 2004. The reason that it is controversial, like the arbitrage provisions that we debated last week, is that practitioners and industry representatives are concerned that several provisions in the schedule mean that the focus of the legislation is still too wide and in some cases will lead to uncertainty. The Bill will need to be clarified by guidance or rules issued by the Revenue, which do not have the force of law, and thus a less certain climate would be created than if the whole matter was dealt with in the primary legislation.

I emphasise again our support for revenue protection and anti-avoidance legislation. I do not know whether it will always be in schedule 7, but there will clearly be a system in future by which a catch-all schedule is attached to every Finance Bill, in which a raft of different schemes that have been disclosed have to be addressed. We are talking about a long and complex schedule that contains a large number of non-controversial things and a small number that are not controversial in their objective but which raise questions about the ability of the drafting to deliver what the Government intend. We will principally address ourselves to that latter set this afternoon.

At the risk of repeating what my hon. Friends and I have said before, our principal job is to ensure that while the Government close tax avoidance opportunities, we do not compromise a climate of clarity and certainty for the taxpayer, so that business investment decisions can go ahead in the normal way and taxpayers can know where they stand vis-à-vis the tax authorities.

Our approach to the schedule has been to focus amendments primarily on paragraphs 10, 18 and 24. They deal with shareholdings that are treated as loan relationships and with degrouping. I am sure that the Paymaster General will recognise that the majority of representations she has received from industry and the professional sector have been about those issues.

We have tabled other amendments, but, by and large, they seek clarification or minor changes to tighten definitions. Without doubt, the large debate in principle is about shareholdings as loan relationships and about degrouping. If we have a stand part debate, I will discuss other paragraphs to which amendments have not been tabled but about which comments are worth making or points worth probing. Across both the amendments that are tabled and the points raised later in a stand part debate, we will focus our remarks on two areas.

The first is the equity of what is being done. We will discuss where rules are being changed unfairly or in an unbalanced way against the taxpayer or, to put it slightly more neutrally, where there is a danger or concern that the interpretation of the words in the Bill could have that end effect. The second area is efficacy. We will raise issues where there is a danger, in our opinion, that unintended consequences could arise from the legislation, especially where they might reasonably be expected to damage the business environment.

The first group of amendments comprises Nos. 116 to 118, which my hon. Friends and I tabled, together with the amendment—I use the word in its deliberate singular sense—that the Liberal Democrats have tabled. That was amendment No. 69, and I will speak about it separately.

Sections 43A to 43G of the Income and Corporation Taxes Act 1988 apply to transactions entered into under rent factoring schemes after 20 March 2000. Rent factoring involves companies selling future rental income schemes to a bank for a capital sum, which is essentially a loan. The point is that the company obtains tax relief on repayments that, in reality, cover both income and capital elements.

The Government legislated to deal with the problem in 2000, but did not include non-tax-driven rent factoring schemes with a lifetime of 15 years or longer. They subsequently discovered that manufacturers of avoidance schemes were using the exemption for rent factoring schemes of more than 15 years’ duration to circumvent the rules and using longer-term rent factoring schemes as an opportunity to achieve the favourable tax status.

The Bill seeks to abolish the 15-year rule. That will deal with the tax avoiders all right; there is no question about that. However, in 2000, when first tackling this issue, the Government—I suspect that it was the Paymaster General, although I do not know as I do not have the transcript of the Committee proceedings—explained the 15-year exemption on the grounds that they did not want to catch bona fide commercial transactions that were properly entered into by companies for all sorts of commercial purposes.

Of course, we are bound to ask what has led the Government to conclude that, between 2000 and 2005, those using 15-year-plus rent factoring schemes as a bona fide commercial transaction have disappeared off the face of the earth, enabling the Paymaster General to feel comfortable scrapping the 15-year exemption.   Can she say, with her hand on her heart, that the provision will not catch anyone involved in a bona fide commercial transaction, even though that was the rationale for the 15-year exemption as recently as 2000?

We understand the need to close down avoidance schemes using the 15-year exemption, so our amendments propose going down the other route: instead of scrapping the 15-year rule, we would introduce a motive test into the paragraph. Our three amendments do just that. That way, the 15-year rule will remain, but any rent factoring arrangement will be caught if it has been established for a tax avoidance purpose. Amendment No. 118 defines a tax avoidance purpose using section 709 of the Income and Corporation Taxes Act 1988.

I hope that the Minister will appreciate what we are trying to do. We are not saying that there is no problem. We are asking why we should smash rent factoring completely to solve the problem when there is another way of doing so? We could introduce a motive test and leave 15-year-plus rent factoring in place for those who wish to use it for a purely commercial purpose.

It should be noted that under the Bill, on inception of a deemed loan, there will be a deemed partial disposal of the underlying properties for capital gains tax purposes. That in itself may generate a tax charge. Will the Minister say anything about the Government’s approach to that deemed capital gain and how it will be handled?

I should tell the hon. Members for Eastleigh (Chris Huhne) and for Richmond Park (Susan Kramer) that when I first looked at the Liberal Democrats’ amendment No. 69, I rather gleefully lit upon the fact that—if I understand correctly—they forgot to remove sub-paragraphs (7) and (8), which would be necessary if their amendment were to work. However, I shall not make too much of that because, as I shall confess when we consider a later group, I have similarly forgotten to remove a sub-paragraph (7) and a sub-paragraph (8). That underscores the difficulty of producing amendments of any volume in Committee.

The Liberal Democrats address the same problem that we identified, but they would exclude existing transactions from the Bill. I say to the hon. Member for Richmond Park that we do not favour taking that route because there are tax avoidance schemes that exploit the 15-year rule. There are three options: the sledgehammer, effectively banning rent factoring altogether; the hon. Lady’s solution, which is to allow it where it is already in place, which would allow some fairly convoluted avoidance schemes to remain; and our option, which I might dare to call the third way, and which is to limit the scope of the schemes for avoiders by introducing a motive test so that, by including existing and future schemes, avoidance will be caught, but rent factoring for periods of more than 15 years, whether already in existence or being dreamed up by firms for future commercial purposes, would still be allowed. I look forward to hearing what the hon. Lady has to say and to the Paymaster General’s response.

Photo of Susan Kramer Susan Kramer Shadow Minister, Treasury, Shadow Spokesperson (Business, Innovation and Skills), Liberal Democrat Spokesperson (Business, Innovation and Skills) 5:00, 28 Mehefin 2005

I shall speak briefly to the cluster of amendments and more specifically to amendment No. 69.

The hon. Member for Runnymede and Weybridge is apparently reliant on an intent test for the purposes that he wishes to achieve. We regard that as permanent employment for lawyers, and as we do not have a lawyer in our collection, we would rather find other ways to deal with the problems in the schedule.

As the hon. Gentleman made clear, paragraph 1 tackles rent factoring, the process by which the right to receive a stream of rentals for a period is sold in exchange for a lump sum. From the perspective of the Inland Revenue, as it was called at the time of the John Lewis case—it is now HM Revenue and Customs—it looks like a tax avoidance measure, an attempt to convert what would have been an income stream to a capital gain to be offset against capital losses.

I come to the clause with a background not as a tax accountant or a tax lawyer but as a banker who worked for many years in structured finance, though more in the United States than in Europe and not particularly in the UK. As a consequence, I am conscious that one of the breakthroughs in terms of expanding liquidity in the financial markets and options for businesses and Government to finance a range of transactions, was to achieve the goal of taking what had not been recognised as an asset—the right to receive a future income stream—and to recognise it as an asset and treat it as such.

The interesting part of the John Lewis case—I read the judgment from the Court of Appeal—was a recognition of the conversion of that perspective on a future rental stream, to see it as a right, or as attached to a right, which could be securitised and treated as any other asset. I gather from lawyers that the tree rather than the fruit of the tree is the ultimate test.

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

The hon. Lady said that she and her colleagues did not much like our intent test, as she called it. I call it the motive test. However, throughout our proceedings a motive test has been used to identify an avoidance purpose. Is the hon. Lady saying that the Liberal Democrats would eliminate the use of motive tests throughout the Bill and elsewhere?

Photo of Susan Kramer Susan Kramer Shadow Minister, Treasury, Shadow Spokesperson (Business, Innovation and Skills), Liberal Democrat Spokesperson (Business, Innovation and Skills) 5:15, 28 Mehefin 2005

It is just that we have so many of those tests that if we could avoid one it would be to the general benefit. I would rather find a way to avoid one if we can, because their intent is so utterly blurred that we will spend the rest of our lives in the courts.

I am conscious that the principle that is involved with rent factoring, particularly when people get over a 15-year benchmark and are looking at the sale of a long-term rental stream, is similar to other sorts of financing and securitisation that I suspect the Government are considering and will be looking at in the near future. That includes the securitisation of fares, for example, proposed by Transport for London as a mechanism for funding infrastructure, and potentially even the securitisation of future tax   streams, which Crossrail is considering as a mechanism that presumably taxes developer gains. The Government are perhaps looking for mechanisms to securitise those things. If they go back and look at the John Lewis case, they will see that essentially the same issues are all wrapped in with rent factoring.

Coming at the subject as a banker and considering it in a broader, more holistic sense, I would be interested to hear the Minister’s comments as to whether these actions compromise and restrict other forms of securitisation and liquidity that she and the Government will be seeking to achieve, particularly in respect of infrastructure projects in future.

In the narrow sense of clause 69, our objection to sub-paragraphs (5) and (6) is that they are retrospective, not retroactive, measures. It seems that anybody who entered into a rent-factoring stream for a period greater than 15 years could have done so by being reliant on the Finance Act 2000, in a straightforward, completely honest and non-controversial interpretation of the language in the Act, which says, in section 43C:

“(1) Section 43B shall not apply to a finance agreement if the term over which the financial obligation is to be reduced exceeds 15 years.”

That is remarkable clarity in a piece of legislation. Therefore to turn today to companies that relied on a straightforward, clear interpretation of a section in the 2000 Act and say to them that by behaving in accord with the law they are now contravening it is not an appropriate way to deal with businesses.

Photo of Rob Marris Rob Marris Llafur, Wolverhampton South West

Has the hon. Lady read paragraph (1)(4) of the schedule, which says:

“The amendments made by this paragraph have effect in relation to finance agreements entered into on or after 16 March 2005”?

Photo of Susan Kramer Susan Kramer Shadow Minister, Treasury, Shadow Spokesperson (Business, Innovation and Skills), Liberal Democrat Spokesperson (Business, Innovation and Skills)

The hon. Gentleman makes my point. If he reads the 2000 Act, he will see that it says that that shall not apply. In other words, the various constraints that would require rent factoring to be treated as income rather than as a capital gain specifically do not apply to any financial transaction of more than 15 years under the 2000 Act. Anybody looking for the current law after that Act came into effect would have read that section and behaved accordingly. Under those circumstances we will go round in circles. We are all getting exhausted. So why do not I just carry on and finish making a relatively brief point?

For companies that entered into transactions reliant on the 2000 Act, the lump sum or compensation that they received in exchange for the sale of future rents would have been based on the various tax protections and opportunities available to them in the relevant paragraph. Therefore to say that for the future, remaining years of the life of that transaction the sum has to be treated differently is a significant financial penalty. If that had been a devious reading of the various sections, one could understand it, but when it was a straightforward reading the measure is not justified.

Photo of Rob Marris Rob Marris Llafur, Wolverhampton South West

Given her final remarks, either the hon. Lady is misreading the Bill or I am. Line 3 of page 89 states:

“The amendments made by this paragraph have effect in relation to finance agreements entered into on or after 16th March 2005.”

The mischief to which the hon. Lady referred about greater than 15-year agreements that were entered into, for example, two years ago, would not be caught under paragraph 1(4).

Photo of Susan Kramer Susan Kramer Shadow Minister, Treasury, Shadow Spokesperson (Business, Innovation and Skills), Liberal Democrat Spokesperson (Business, Innovation and Skills)

I am sure that the Paymaster General will be delighted to clarify what I want to point out to the hon. Gentleman. I refer to the transactions entered into after the appropriate date in 2000. The remaining period for that transaction, which is after 16 March 2005, is caught by the provisions. Paragraph 1(5)(a) states that if

“a finance agreement was entered into on or after 20th March 2000 and before 16th March 2005...sub-paragraph (6) has effect.”

Having read that interpretation of the measure, which I assume is the intended interpretation, there is a retrospective action and that is outrageous.

I return to the basic principle, which is whether any measures in the paragraph are consistent with the Government’s intentions to use securitisation of future income streams for a wide range of finances, particularly infrastructure.

Photo of Nicholas Winterton Nicholas Winterton Ceidwadwyr, Macclesfield

Order. Interventions should be brief. I allowed that one so as to continue to be helpful to the Committee. I can only say to the hon. Lady that, if she wants to come back later in the debate, she has the right to do so. She could have spoken a second time.

Photo of Rob Marris Rob Marris Llafur, Wolverhampton South West

I shall not go further down that route. I am sure that the Paymaster General will deal with the point in her usual competent way.

When we debated amendment No. 31 to clause 24, the hon. Member for Runnymede and Weybridge did not like the words

“or one of the main purposes”.

To my surprise, they now appear in amendment No. 117. Perhaps he will explain that later.

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

I am happy to explain the reason now. We made our point about

“one of the main purposes”.

The Paymaster General rejected our argument and, to be consistent with the architecture of the Bill, we have now accepted

“the main purpose, or one of the main purposes”.

The problem with drafting amendments is, that if they are not accepted, we must return to the world as it was before and, when drafting later amendments, we can only speculate whether the Government will accept any of our earlier amendments. On the basis of past form, however, I have become a competent speculator on that subject.

Photo of Rob Marris Rob Marris Llafur, Wolverhampton South West

I am obliged to the hon. Gentleman for his explanation.

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

I do not know whether it is good or bad that, since 1997, I have spoken in debates on Finance Bills on behalf of the Government. I say to the   hon. Member for Richmond Park that it is wise to check all finance legislation statements for references to particular types of avoidance, not only one type.

In answering amendment No. 69 and then amendment Nos. 116 to 118, I wish to make a couple of things clear about the schedule. It tackles avoidance schemes for individuals and companies under nine different categories. When the original Finance Bill was published, the measures were mainly accepted as well-targeted anti-avoidance provisions arising from disclosure. There have been significant comments about the measures that treat certain shares as debt for tax purposes and, in the light of representations, the measures have been amended to ensure that they focus more tightly on the avoidance that we aim to tackle. We can draw the comparison, as the hon. Member for Runnymede and Weybridge did. We had this discussion during the debate on arbitrage. At times, anti-avoidance legislation is highly specific and very targeted, because it deals with specific regimes. That is certainly the case in this schedule. The schedule is complex because the contrived schemes that it seeks to prevent are complex.

The Government continue to listen to the helpful and constructive points being made by business on these complex issues. However, I reaffirm to the Committee that I am determined that the measure should not be watered down in such a way as to reopen tax avoidance opportunities.

In 1997, when the law was changed to prevent financial concerns avoiding tax on profits from lending, I, as the Minister, gave a warning. That is related to the debate that we had on how far the Government go in their anti-avoidance legislation— whether they can afford to put down markers and say, “Avoidance is not going on beyond this point; we do not expect to see it beyond this point and if we do we will act on it.” The warning that I gave was on the record; I said that if attempts were made to get around the change, the Government would take action, possibly with retrospective effect back to 1997. There are many ways to try to deter—to encourage tax-avoiders not to do so— and one of the many methods is for Ministers, on the record, explicitly to give a warning that they will not tolerate that type of avoidance, and that the Government will act. However, it seems that that warning had little effect since, unfortunately, the schemes continue to proliferate.

Photo of Brooks Newmark Brooks Newmark Ceidwadwyr, Braintree

I understand the spirit in which the Paymaster General approaches this issue, but I would like to raise a concern. Does she not believe that the changes that she proposes may cause an additional tax liability for at least some innocent transactions? Will she address that concern?

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

No, I do not think that the legislation as targeted will affect innocent transactions. It specifically responds to the disclosures for schemes that are being marketed and it only responds to those marketed schemes through the disclosure. Therefore,   if the schemes are not being used, that should not be the case. I shall continue, but I am happy to give way to the hon. Gentleman again if necessary.

This is the issue: if the avoidance industry continues to try to find ways around new rules, the Government must seriously consider what other ways might be adopted to stop those intent on avoiding their fair share of tax. We cannot—and, frankly, will not—continue to play a cat-and-mouse game with those seeking avoidance in the financial field.

I recall—I think that it was only last year—that in the debates in Committee on the Finance Bill, the then spokesperson for Her Majesty’s Opposition, the then Member for Arundel and South Downs, commented that the financial avoidance measures that were under consideration at that time were a fair cop for schemes that were simply designed to avoid tax and had no other commercial purpose. The measures in this schedule are the same. They are a fair cop against schemes that must be closed down, because they are specifically and only designed for avoidance purposes, not for any other commercial purpose.

Such schemes are costing hundreds of millions of pounds. It is vital to protect the Exchequer against artificial tax avoidance arrangements. Nobody has suggested a better way of doing that. In the overwhelming majority of cases, particularly those in which there is no intention to avoid tax, the rules will have no application, especially after the Government amendments that we will discuss. It is clear to the companies and individuals concerned that that will happen.

I fear that amendment No. 69, to which the hon. Member for Richmond Park spoke, is based on a misunderstanding, as my hon. Friend the Member for Wolverhampton, South-West pointed out, about when the clause becomes active. The hon. Lady referred to the commencement provisions in paragraph 1 of schedule 7. They have been carefully designed so as not to be retrospective in the proper sense of the word. There are two different types of rent factoring arrangements, and the hon. Lady referred to one, the lump sum assignment cases, such as the John Lewis case, which was litigated to the Court of Appeal. There is a single transaction completed when rents are assigned. Paragraph 1 applies only to those cases when the assignment takes place on or after Budget day. That is because to go back to an assignment in, say, 2001, and change the current tax treatment would be truly retrospective.

The other type of case is the interposed lease case. That removes the grant of the lease and then continuing rental payments over a future period. It is the rental payments that cause the tax loss here, because a large part of them represents the paying back of the principal of the loan. If the company or group had entered into a straightforward loan to finance its operations, instead of a complicated and contrived interposed lease rent factoring scheme, it would not have had any relief for the repayment of the principal.

Sub-paragraphs (5) and (6), to which the hon. Member for Runnymede and Weybridge referred, ensure that the principal elements of rents for the future are not allowed as a deduction in computing profit. That is not retrospective. “Retro” means “back”, and the paragraphs deal with the future, not the past. Nobody can have any expectation—this is not a feature regularly discussed in Finance Bills—that the law will not be changed in future in relation to transactions that have started but not yet finished. That is especially true of tax avoidance schemes. It would be ridiculous for an avoidance scheme to be designed for a very long period, and then to have no way to say that the scheme should not have been happening in the first place.

There is nothing in the complaint that the Government gave a signal in 2000 that anything over 15 years was acceptable. That comes back to the themes that we discussed this morning about what is reasonable when the Government do not deal with an issue because they believe that it is not subject to avoidance and might interfere with commerce.

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

I shall deal with the issue of 15 years, and the hon. Gentleman can response and I shall answer his questions.

At the time it was thought impractical to contrive an arrangement involving a lease of more than 15 years. That was the advice given to us, and it was the understanding of HMRC, then the Inland Revenue. Unfortunately, experience of the ingenuity of tax avoiders has shown that that was wrong. I could mention the fact that the amendment does not go far enough to achieve its objective, because sub-paragraphs (7) and (8), which the amendment does not affect, makes no sense without sub-paragraphs (5) and (6).

Much more importantly, the amendment would cost the Exchequer £70 million in 2005-06, rising to £120 million in 2009-10. It would mean that tax avoiders could continue to milk the public purse. That cannot be a reasonable proposition. I therefore have no hesitation in saying that if the amendment is not withdrawn I will ask my hon. Friends to vote against it.

I turn now to amendments Nos. 116 to 118. When the Government introduced the rules in 2000, it was not thought that arrangements were likely to exceed 15 years, so the legislation did not apply to arrangements exceeding that period. The avoidance industry latched on to the exemption and we are now seeing cases involving 15 years and a bit, albeit not hugely longer. As the avoiders will apparently go to any lengths to achieve a tax benefit, the Government have proposed measures in this Bill to remove the 15-year rule.

The arrangements to which the rent factoring legislation applies are invariably tax avoidance arrangements, and I could not agree to the diluting of the effect of that legislation. Bona fide commercial arrangements will not be caught because there is an accounting test which keeps them out. There is no need for a motive test here either because the purpose of the   motive test is to keep out the bone fide commercial cases. They are already removed on the basis I have described.

The amendments seek to retain the 15-year exemption for rent factoring cases involving assignment of rents unless one of the parties was seeking a tax advantage. Strangely, they do not seek to do the same for cases involving interposed leases. I am not really sure why. Do Opposition Members see some commercial motives in rent assignment arrangements in some cases but view all interposed leased cases as avoidance?

I have tried to explain clearly that rent factoring arrangements caught by the 2000 legislation are invariably tax avoidance. There is therefore no need for a tax motive test, much less one that does only half the job. I reiterate the point that I have made to the hon. Gentleman: bona fide cases will not be caught because they are dealt with within the accounting test which ensures that those arrangements are clear.

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

I am grateful to the Paymaster General. Her last remark comes to the nub of the issue for us. Of course our concern is that the bona fide commercial arrangements that she identified in 2000 are not adversely affected by this. It may be that those are bona fide commercial arrangements—interposed leases already in place—in the sense that they were not motivated primarily, or in any major way, by the tax advantage that was to be available. But I am sure she will agree that they will have been priced to reflect the tax treatment that they would expect to get under the legislation at the time.

It is not clear whether she is saying that bona fide commercial 15-year-plus arrangements, be they lump sum or interposed leases, will not be affected by the change in treatment or that they will still be allowed to happen but will be subjected to what is effectively an apportionment of the amounts payable under them between principal and interest. If it is the latter case it is pretty cold comfort for someone who has entered into a long-term interposed lease arrangement. The Paymaster General has been generally reassuring about the issue. I look forward to hearing what experts outside the Room make of her response today. If we need to return to the issue, perhaps we shall do that on Report. I beg to ask leave to withdraw the amendment.

Photo of Nicholas Winterton Nicholas Winterton Ceidwadwyr, Macclesfield

I am in some difficulty, because I was going to give the hon. Member for Richmond Park the opportunity of coming back on her amendment.

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

If it helps the Committee, I shall beg to ask leave to withdraw my begging to ask leave to withdraw the amendment.

Photo of Nicholas Winterton Nicholas Winterton Ceidwadwyr, Macclesfield

I am happy to agree to that. The hon. Member for Richmond Park may make one or two comments about the Paymaster General’s response to her amendment.

Photo of Susan Kramer Susan Kramer Shadow Minister, Treasury, Shadow Spokesperson (Business, Innovation and Skills), Liberal Democrat Spokesperson (Business, Innovation and Skills)

You are very kind, Sir Nicholas. I simply wanted to ask the Paymaster General for a response on the broader issue of the implications for similar securitisation transactions. She did not address that issue.

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

I apologise to the hon. Lady for not having responded to that point.

For rent factoring to apply, the arrangements must be accounted for as a loan that the rents repay over a period. That would not be the case in securitisation or other types of arrangements. The connection that she believes exists does not, and her fears are unfounded.

Amendment, by leave, withdrawn.

Photo of Nicholas Winterton Nicholas Winterton Ceidwadwyr, Macclesfield

It is now nearly a quarter to 6. I am roughly aware of where the usual channels would like us to get before we adjourn. It looks as if we shall not make that much progress by 7 o’clock, unless we move very much faster than at the moment. It will be my intention to adjourn for dinner at 7 o’clock and come back at 8 o’clock if that is satisfactory to the Committee. As the Chair, I have that discretion. I hope that that information has been helpful.

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

I beg to move amendment No. 119, in schedule 7, page 91, line 28, at end insert—

‘(8A)In section 768B(1)(a) after “capital” insert “and the main purposes or one of the main purposes, of the change of ownership was a tax avoidance purpose.”.’.

I am sure, Sir Nicholas, that you will now see how plodding carthorses can become racehorses, given a threat from the Chair.

The amendment seeks to introduce into paragraph 3 a motive test to ensure that it bites only when the main purpose, or one of the main purposes, of the change of ownership was a tax avoidance purpose. Paragraph 3, quite reasonably, seeks to block a company being sold for the value of its tax losses and thus closes an existing tax loophole. The paragraph works by amending the scope of section 768B of the Income and Corporation Taxes Act 1988.

Those rules to block the buying of companies specifically for the value of their tax losses apply so that they deny purchases of businesses—when the transaction is purely commercial—the benefit of the tax losses within non-trading companies of the acquired group whenever there is an injection of more than £1 million of capital post-transaction. That is a pretty small sum, which the purchaser of a failing business might reasonably expect to have to inject just to shore up the working capital base of the business.

Given that there are many such transactions and that making them more difficult or costly could cut off or reduce the supply of investment finance to struggling or failing businesses—with all the consequences that that could entail—this approach seems very draconian. The amendment therefore seeks to introduce a motive test into section 768B of ICTA. We believe that the intended purpose can be achieved, and, at the same time, the underlying provision of   ICTA can be improved, by introducing this motive test, which will allow certain non-trading tax losses to be carried forward in companies where the change of ownership is for commercial purposes, and is not for a tax avoidance purpose. Therefore, the need for injection of new capital into a company following a change of ownership will not in itself create a disadvantageous tax treatment that might deter the completion of the transaction.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 5:45, 28 Mehefin 2005

The amendment would restrict the application of the law that prevents carrying forward certain tax deductions where there has been a change in ownership of a company with investment business. The Government are simply seeking to deal with an oversight where the legislation did not apply to non-trading loan relationship deficits. The amendment is completely unrelated to that change, but seeks to add a tax avoidance motive test to one small part of the legislation dealing with groups seeking to purchase unused tax reliefs.

Part of the anti-avoidance armoury, which goes much wider than the single section that the amendment seeks to change, has been in place for many years in various guises. The section that the amendment covers was introduced in 1995 by the Conservative Government. None of the sections referred to here has ever had a tax avoidance motive test because, as those who introduced them realised at the time, they do not need one. Plenty of other filters are built in to ensure that only appropriate cases are caught. If the factual circumstances described in the legislation are satisfied, the legislation applies to deny carrying forward the reliefs and deductions specified. Therefore, there is no need to inquire into the purpose of the parties involved. These measures have worked well over time in various guises. The legislation introduced in 1995 was good, and it should be left in place because the filters and the specific targets ensure that avoidance is operated against.

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

I did not hear the Paymaster General specifically say that no company that had entered into a bona fide purchase of another group for commercial purposes could be caught by this measure, but I think that that has to be the implication of what she is saying. If that is the case, we should go away and study this matter, because there is clearly no need for a motive test. I will take advice and not detain the Committee any longer at this stage. 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

I beg to move amendment No. 120, in schedule 7, page 95, line 24, at end insert—

‘(2A)Where credits representing any distribution in respect of the share are brought into account for the purposes of this Chapter, then this Chapter shall have effect for the accounting period of the issuing company in accordance with subsection (3) below as if—

(a)the shares were obligations under a debtor relationship of that company, and

(b)any distribution in respect of the share were not a distribution falling within section 209(2)(a) or (b) of the Taxes Act 1988, unless such a distribution is payable to a person who is not within the charge to income tax or corporation tax.’.

Photo of Nicholas Winterton Nicholas Winterton Ceidwadwyr, Macclesfield

With this it will be convenient to discuss the following amendments: No. 121, in schedule 7, page 95, line 26, leave out from “share” to end of line 27 and insert

‘shall be determined in accordance with those principles of generally accepted accounting practice which are applied in determining the company’s profit or loss for the accounting period’.

No. 122, in schedule 7, page 95, line 28, leave out sub-paragraph (4).

No. 123, in schedule 7, page 96, line 28, at end insert—

‘(11)This section shall not apply unless the purpose, or one of the main purposes, of the investing company holding the share in the circumstances described in subsection (1) above is a tax avoidance purpose.

(12)In this section “tax advantage” had the meaning given by section 709(1) of the Taxes Act 1988;“tax avoidance purpose” in the case of any company, means any purpose that consists in securing a tax advantage (whether for the company or any other person).’.

No. 124, in schedule 7, page 96, line 39, leave out “and”.

No. 125, in schedule 7, page 96, line 40, at end insert—

‘(d)the issuing company is not an associated company of the investing company, and

(e)the investing company’s purpose in acquiring the share is an unallowable purpose.’.

No. 127, in schedule 7, page 97, line 3, at end insert—

‘(2A)Where credits representing any distribution in respect of the share are brought into account for the purposes of this Chapter, then this Chapter shall have effect for an accounting period of the issuing company in accordance with subsection (3) below as if—

(a)the shares were obligations under a debtor relationship of that company, and

(b)any distribution in respect of the share were not a distribution falling within section 209(2)(a) or (b) of the Taxes Act 1988, unless such a distribution is payable to a person that is not within the charge to income tax or corporation tax.’.

No. 128, in schedule 7, page 97, line 5, leave out from “share” to end of line 6 and insert

‘shall be determined in accordance with those principles of generally accepted accounting practice which are applied in determining the company’s profit or loss for the accounting period.’.

No. 129, in schedule 7, page 97, leave out lines 7 to 12.

No. 126, in schedule 7, page 97, line 29, at end insert—

‘(8)For the purposes of this section, a share is acquired by the investing company for an unallowable purpose if the main purpose, or one of the main purposes, for which the company acquired the share is—

(a)the purpose of circumventing Section 95 of the Taxes Act 1988, or

(b)any other purpose which is a tax avoidance purpose.

(9)The main purpose, or one of the main purposes, for which the investing company acquired a share shall be taken to be the purpose of circumventing Section 95 of the Taxes Act 1988 (Taxation of Dealers in respect of distributions etc) if, at the time when the company acquired the share—

(a)a credit institution was an associated company of the investing company, and

(b)had the share been acquired by the credit institution, that institution would have held the share in circumstances such that Section 95 of the Taxes Act would have applied.

(10)In this section—“associated company”, in relation to any other company, means a company which, within the meaning given by section 413(3)(a) of the Taxes Act 1988, is a member of the same group of companies as that other company; “credit institution” means—

(a)a bank, within the meaning of section 840A of the Taxes Act 1988;

(b)a building society; or

(c)a person authorised by a licence under Part 3 of the Consumer Credit Act 1974 to carry on consumer credit business or consumer hire business within the meaning of that Act;

“tax advantage” has the meaning given by section 709(1) of the Taxes Act 1988;“tax avoidance purpose” in the case of any company, means any purpose that consists in securing a tax advantage (whether for the company or any other person).’.

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

I have to say that, with the best will in the world, it will take a little longer to deal with these amendments, as this is probably the key group. At the outset of my remarks, I should like to acknowledge the input of the Law Society in identifying issues that still need to be addressed.

The Paymaster General made the point that the part of the schedule that the amendments address has been extensively revised since the original legislation was published in March. Paragraph 10 introduces various new sections into the Finance Act 1996 that are intended primarily to counteract certain schemes that involve the creation of shares, the rights of which are designed to produce a return that is in practice equivalent to interest on a loan but is structured so that it is taxed either as a dividend or a capital gain on shares. Of course, we support the narrow purpose of this legislation—no one should be allowed to create a totally artificial arrangement that gives rise to a tax advantage—but there is still serious concern about the impact that it will have in some cases and the wider implications.

For the most part, the new provisions will tax holders of shares that are caught as if the shares were rights under loan relationships and the returns were interest for tax purposes. The Law Society believes that there remains a risk that the measures in the paragraph will extend well beyond the schemes that they are designed to counteract. Our amendments suggest an approach that limits the application of the provisions to cases where there is a genuine avoidance motive. In other words, we are not challenging in any way the policy intentions or the Government’s underlying objectives in this part of the legislation; we are simply probing whether the drafting of the Bill achieves that underlying objective and whether it inflicts any collateral damage.

Another point needs to be made is that we will first seek to narrow the scope of this legislation so that it does not inflict collateral damage, but if it turns out that the provisions are to have a wider application—if the Government resist all attempts to narrow them—another issue will need to be addressed, and that is proportionality and even-handedness when dealing with symmetry of treatment for investor and investee companies.

We all understand that where we are dealing with pure tax avoidance we do not need to worry too much about symmetry of treatment. However, where we are taking an approach that might catch some innocent or pretty innocent transactions, it is important that there be symmetry. Where items are denied for deduction for tax purposes, the corresponding income items have to be treated appropriately. There are implications with respect to double taxation of retained profits and the interaction between the rules in the Bill and the controlled foreign company legislation—and indeed with respect to foreign exchange gains and losses provisions.

The amendments have been grouped together because they all relate to paragraph 10, but there are several sub-themes, which I shall address those individually. I shall not detain the Committee by going through what each amendment does—I see that all members of the Committee are attentively reading the amendments in the amendment paper as I speak.

The first mini-group contains amendment No. 120, relating to new section 91A of the Finance Act 1996, and amendment No. 127, which deals with new section 91B of that Act. The mini-group aims to restore symmetry so that where the income on preference shares is taxed in the UK, a tax deduction arises for the dividends. That gets around the problem by which preference shares issued and held within groups would have their dividends taxed, with no corresponding deduction for the payment. In a moment, we shall suggest a different approach to the group problem. Amendment No. 127 would ensure the removal of the asymmetry in tax treatment under new section 91B, so that if both the payer and the recipient of the preference shares are UK taxable, the rules do not work to prevent the issuer from using preference shares as a legitimate means of raising finance.

The second mini-group contains amendment Nos. 121 and 128, which would remove the requirement that the shares must be accounted for on fair value accounting. That is necessary as some companies may hold them on an amortised cost or held-to-maturity basis for international accounting standard purposes. Hence the amendments ensure that the tax treatment follows the accounting treatment, which is the proper commercial basis on which the shares are held.

The third sub-group comprises amendments Nos. 122 and 129. I will use an example to illustrate the purpose involved. If a 5 per cent. 10-year preference share is held on a fair value basis and interest rates rise in the accounting period, the value of the preference share would reduce. That would cause a debit for that period, which sub-paragraph (4) might then disallow for no stated purpose, while a later corresponding   credit for the inverse occurring may be taxed. The amendments would delete subsection (4) in both new section 91A and new section 91B on the grounds that there is no stated purpose—the hon. Member for Wolverhampton, South-West will have noted that there is no stated purpose in the explanatory notes. That is especially important because the preference shares held by an investor should normally generally generate credits.

Amendment No. 123 introduces a motive test so that new section 91A will apply only where there is a tax avoidance purpose. It defines that purpose to be a tax avoidance purpose not only for the benefit of the company itself but for the benefit of any person. That is because if there is no such purpose, there is no obvious reason why the long-established treatment of preference shares should be changed, with possible negative consequences for company financing arrangements. That is especially true because the issuer is foregoing a tax deduction for its borrowing cost by using preference shares; subscribers such as pension funds would be exempt on the income anyway.

Amendments No. 124 is simply a paving amendment. Amendment No.125 would ensure that new sections 91B to section 91G do not apply in a group situation. That is a different way of addressing what has been called the tiering problem. I see that the Paymaster General has a phenomenally complicated diagram on her table. I, too, have a few such diagrams, which show group structures relating to all sorts of companies in Luxembourg and the Netherlands and tiers of holding companies in the UK. I think it is understood outside the House that is that it is not the Government’s intention to catch multiple occasions transactions occurring within a group structure. If there is a need to tax something, it should be taxed only once where a group structure, all of which is subject to UK tax, is involved.

In fairness to the right hon. Lady, the Government have sought to alleviate business’s concerns about the way in which the measures would affect the multi-tiered holding company structure that is regularly, for reasons that will baffle most of us, used in such groups. The Government might believe that they have answered all the concerns expressed, but I fear that that is not correct. Residual concerns remain, although in a spirit of new-found generosity it is probably right to say that there is a recognition that the greatest concerns have been dealt with and that we are down to relatively small issues.

The Revenue has said that the proposal is not intended to tax payments of dividends within a group structure. We have sought to place that in the Bill and we suggest to the Paymaster General that it is appropriate to do so. The simplest way to do it, although I fully accept that it not the only way, is to exclude intra-group transfers altogether. We believe that the only reason why the Paymaster General would reject that approach is if she has examples of situations in which exempting intra-group transfers could create a new avoidance loophole. The advice that we have   received is that it should not, but if she has that concern, she will undoubtedly share it with the Committee.

I have all sorts of examples of structures that businesses fear will still be caught by the most recent version of the Bill, but in view of your admonition about speed, Sir Nicholas, I will not read any of them out to the Committee. I strongly suspect that we will need to return to this point on Report, simply because there is still so much concern outside the House.

Amendment No. 126 defines, for the purpose of the rules, a tax avoidance purpose. The definition is deliberately targeted specifically to include what we understand is the main mischief at which the group of new sections to the Finance Act 1996 is aimed: that is, banks using subsidiaries to get around the rules taxing dividends as income. We have specifically addressed that in the amendment, so amendments Nos. 125 and 126 together effectively exclude intra-group and non-tax-avoidance transactions with the definition of avoidance defined to catch banks.

I hope that the Paymaster General will respond to the residual concern that exists in the world outside that new sections 91A to 91G, particularly 91B, are likely to catch transactions that are stated not to be in the Revenue’s target and that may require messy amending legislation in future.

In that context, I suppose that before I sit down I should say something about new section 91F, which gives the Revenue the power to vary or remove the conditions that need to be met for something to fall within the scope of new section 91B. I can understand why the Minister wants the Revenue to have that power, because it is clear from what I have said already that there will be unforeseen consequences for some companies. I guess that the intention is that the powers under new section 91F could be used to move quickly to address any problems that arise.

Although I am sure that that is welcome from the point of view of the businesses concerned, from the point of view of parliamentarians trying to scrutinise legislation, it is a pretty rum situation. We are asked to accept that the legislation is probably a little ragged round the edges and will hit a few innocent targets, but we are told not to worry as the Government are building a first-aid kit that will allow the Treasury to rush to the rescue and resuscitate any unintended victims without the need to trouble parliamentarians with any new primary legislation.

We have our usual concerns about that, which would be amenable to assuagement if there were a more rigorous scrutiny process. I could look this up in the Finance Act 1996, but can the Minister clarify whether regulations under new section 91F would be subject to the affirmative procedure so that we would at least have that additional assurance?

Photo of Nicholas Winterton Nicholas Winterton Ceidwadwyr, Macclesfield 6:00, 28 Mehefin 2005

Before I call the Minister, I should say that I have neither criticised nor admonished the Committee for the progress that it is making, I merely indicated that I had been advised that certain progress had been agreed through the usual channels. It seemed   to me that we would not achieve that target by 7 o’clock, and if that were the case, I would adjourn for refreshment at that time. I further advise the Committee that if we are a little bit behind at 7 o’clock, I shall be happy to go on until about half-past. I hope that that is helpful to the Committee; we still have quite a lot of debates to hold before 7 o’clock.

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

I say again that the scheme as drafted ensures that it captures a variety of avoidance schemes that have been disclosed under the rules introduced in the Finance Act 2004. It does not affect innocent transactions. Changes from the March Bill—the Government amendments—mean that the Bill is very closely targeted indeed.

The hon. Member for Runnymede and Weybridge raised the issue of group tiering; the Government amendments eliminate the problems to which he alluded, and representations from the banking sector indicate that it has accepted that that is the case. We are back to targeted measures against specific avoidance schemes and the need to take them forward.

I will try to respond briefly to the hon. Gentleman’s points, starting with amendments Nos. 120 to 123, which attempt to change, and unfortunately therefore emasculate, one of the two rules that treat certain shares as debt for tax purposes. New section 91A of the Finance Act 1996 applies where companies attempt to turn interest income into something else using arrangements over shares that have unpaid, non-commercial, third-party obligations artificially attached to them.

The rules seek to tax the investor on the full economic profit, but because it is outright avoidance no relief is given to the provider or payer, and since the provider agreed to the arrangements, it must therefore be assumed that it does not need the tax relief available had it simply paid interest or could get it anyway.

Amendment No. 120 would make the rule symmetrical and allow relief to the issuing company. I cannot agree to that proposal as it would inevitably lead to an open field day, with companies seeking to avoid, through arranging for their shares to come within the section.

Amendment No. 121 would change the method of bringing debits and credits into account in respect of the shares that are treated as a loan relationship. The legislation imposes fair value accounting for a good reason: the section taxes increases in the value of shares that are interest-like, and fair value will ensure that such increases are brought into account in each period as they accrue. Allowing any other accounting method would enable a company to defer taxation of such value increases to far in the future when the share was actually disposed of, if ever, as many of the schemes are circular; they go on and on feeding off each other.

Amendment No. 122 would remove the prohibition on debits from respective arrangements designed to frustrate the measure. I can confirm that the rule does not prohibit debits that reflect true economic loss, such as a fall in values through exchange differences, but it   would open the floodgates to artificial transactions designed to siphon value out of the shares artificially to create fictitious losses. Therefore, I cannot agree to it.

Amendment No. 123 would insert a tax avoidance test into the section. It is an unnecessary condition. The section is so narrowly targeted on the specific type of avoidance device that no one has come forward with a single example of a commercial arrangement that comes within the wording of the legislation. Indeed, some representative bodies have said that they could not think of how one might use that type of arrangement for general, commercial reasons. I entirely accept that the hon. Gentleman is motivated by a desire to ensure that innocent transactions are not caught, but I am sure that he would accept that that is not the case here. Such a test is therefore unnecessary.

Amendments Nos. 124 to 129 seek to amend the second rule, which treats certain shares as debt for tax purposes. As the hon. Gentleman said, four of them mirror what amendments Nos. 120 to 123 seek to do to section 91A of the Finance Act 1996. For exactly the same reasons that I gave on the previous group of amendments, I shall ask my hon. Friends to vote against the amendment if the hon. Gentleman pushes it to a vote.

The new change—the first part of amendment No. 125—is an attempt to insert what I assume is meant to be a group of exemption tests into section 91B. That section applies only where one of the three conditions set out in sections 91C, 91D and 91E apply. Condition 2 in section 91D already has a group exemption in some cases and a tax motive test which will let out all normal group transactions. Condition 2 has a motive test because it applies to shares of a type that can be used for normal commercial purposes.

The other two conditions—condition 1 in section 91C and condition 3 in section 91E—do not have a motive test because it is not necessary. Those two conditions are narrowly targeted at avoidance arrangements that a company carrying out normal commercial activities will not stumble into by accident. They will know what they are doing if they are in these schemes. There is no reason to exempt condition 1 or 3 shares from the charge just because the issuing company is a member of the same group.

I have tried repeatedly to reassure the hon. Gentleman, because I understand that his motivation is to remove the possibility of innocent transactions being caught. I hope that I have reassured him that that cannot happen under the specifically targeted measures. Perhaps there is a fear that the Government might abuse the power and try to sneak anti-avoidance legislation through without parliamentary scrutiny. That that is not the case. They are targeted measures in response to schemes that have been disclosed. Every opportunity has been taken through the consultation to remove the possibility of any innocent transaction being caught. I hope that the hon. Gentleman will therefore not press his amendments.

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

I am slightly surprised by what the Paymaster General said about symmetry. I am still not sure that I entirely understand it. Essentially the tax authorities are saying that they will look at the   preference share and say that it is not really a preference share at all but a loan, and that they will treat it as a loan. However, they will treat it as a loan only for the purpose of taxing the income that attaches to it. They will not treat it as a loan for the purpose of dealing with the cost of servicing it, which the borrower meets. It seems entirely appropriate if one wants to look through the fiction of a preference share to the reality of a loan to create symmetry in the way one seeks to tax it.

There are, Sir Nicholas, one or two other points concerning paragraph 10, and I have been debating with myself whether to test your patience by squeezing them in here, or to leave them to what would, of necessity, have to be a short stand part debate. I think that it would be better to leave those points that are distinct from the amendments to a separate stand part debate. However, the Paymaster General has clearly said on the record, for which I am grateful, that there will be no risk to normal group commercial activities, and that only highly contrived arrangements will be caught by the legislation. I suspect that when we get into extremely complex financing structures for multinational groups, it is perhaps more difficult to know where that line will be drawn than the words of the Paymaster General suggest, although she has given some reassurance today.

I should like to be clear about one other matter. The Paymaster General said that she and her officials are convinced that nobody who is not intended to be caught will be caught by the legislation. Is that the position now, as the Bill is drafted, or the position that will be the case when the Inland Revenue’s revised and updated corporate finance manual is produced and issued? My understanding is that that will be an important document in terms of interpreting how the legislation will work in practice. It would be important to us to understand whether her remarks apply to the face of the Bill or that connection with the new corporate finance manual.

I do not know whether the Paymaster General wishes to respond briefly to those remarks, but if she is going to do so, and after she has done so, I shall then seek leave to withdraw the amendments. Perhaps she can do it by intervention.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 6:15, 28 Mehefin 2005

I can tackle that point in an intervention. On the manual, I do not base my comments on future publication of the manual, or not. I base them on what is in the Bill, as amended, assuming that the schedule is amended and that the Government amendments are carried. It does not require anything else, as it is in the legislation.

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

I am extremely grateful to the Paymaster General. That is a clear message to anyone who is concerned about the scope of the measures. The only area for possible ambiguity now, given what the right hon. Lady has just said, is where the line is drawn to include normal group commercial activities. She said earlier that she does not want to be in a constant game of cat and mouse over tax avoidance, although I fear that that is the lot of Treasury Ministers. To be   blunt about it, if major businesses were not operating fairly close to that line—but on the right side of it—they would find themselves conceding competitive advantage to those operating in other jurisdictions. That would not be of benefit to the United Kingdom, or even to the Government, so I am afraid that she is probably condemned to that game of cat and mouse for some time to come. I beg to ask leave to withdraw amendment No. 120.

Amendment, by leave, withdrawn.

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

I beg to move amendment No. 78, in schedule 7, page 97, line 32, leave out

‘are not income producing but’.

Photo of Nicholas Winterton Nicholas Winterton Ceidwadwyr, Macclesfield

With this it will be convenient to discuss the following amendments: Government amendments Nos. 79 to 90.

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

The amendments in this large group have been widely considered and Committee members are familiar with them, so I shall summarise the main changes that they make, to advance further the point that I was making in the previous debate.

The amendments arise from consultation and, as I said during the previous debate, they are targeted specifically to deal with contrived disclosed regimes. The 13 amendments in this group mostly narrow the scope of the conditions. However, two of them correct unintended let-outs that were included when the clauses from the original Bill were altered.

Amendments Nos. 78 to 82 would change section 91C, which relates to condition 1. They do three things to amend the income-producing asset test. First, they make it clear that to be let out, the assets of the issuing company have to be wholly, or substantially wholly, income producing. In other words, the company should not be tainted by the presence of a few non-income producing assets.

Secondly, the measure of assets is now by reference to their value rather than their book value. That prevents the accounting manipulation that uses a valuable non-income producing asset with a low book value to get round the test. Thirdly, the amendments add to the categories of income-producing assets to deal with the issue of multiple charges in chains of groups; we referred to the tiering point previously.

The group of amendments also makes changes to section 91D, which applies to redeemable shares designed to give an interest-like return. The amendments do three things. They ensure that when a public issue of shares is acquired by a company, the shares are subject to the charge if the company is using them to avoid tax on UK dividends. They change the test of when cases will be taken to be avoiding tax on UK dividends and hence having an unallowable purpose. The new test is narrowed to apply only to banking groups, requires that the acquiring company’s shares were acquired in the ordinary course of investment business and removes some redundant wording that asks the nonsensical question of whether the company was associated with itself.

Finally, amendment No. 90 changes condition 3 in section 91E. The amendment simply ensures that a share that by itself gives an interest-like return cannot come within condition 3. That means that condition 3 is mutually exclusive from conditions 1 and 2. We believe that to have been the case all along, but representations suggested that the wording of the original Bill could be read another way, so we thought it best to put the matter beyond doubt, otherwise the shares that gave an interest-like return but were not within condition 1 or 2—because there was no tax avoidance—might be dragged into condition 3 because of the presence of, say, a derivative, which would have nothing to do with the nature of the return on a share.

All these amendments arose from consultation and I commend them to the Committee.

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

By and large, these issues are not controversial, and the Paymaster General has circulated a note about them. I have questions only about two small sub-groups of Government amendments. Amendments Nos. 78 to 80 deal with a situation in which a company could stray into problems by having a very small amount of non-income-producing assets. That reflects commercial reality. It is about the substance of the underlying business, not whether some tiny asset gets caught. However, the amendments throw up the question of what happens if a company has all income-producing assets but they are producing artificially low amounts of income. That question has been posed to me and I cannot immediately see the answer to it. I guess that there is a solution in other legislation to deal with a situation in which the underlying assets were nominally income producing but had clearly been made artificially income producing, yielding, say, 0.1 per cent. per annum.

My second question for the Minister relates to Government amendments Nos. 83, 84 and 87, which will exclude publicly issued shares from the exemption from new section 91D if the reason for holding the publicly issued shares is to obtain a tax advantage. The Paymaster General might have anticipated that we would focus on this sub-group of amendments, because it widens the scope of the legislation to catch more transactions, whereas the other amendments are designed to narrow the legislation. Has the Inland Revenue identified schemes involving publicly issued shares? Is this in effect a broadening of the scope to identify a new disclosure that has been made since the original legislation was drafted?

I think it rather strange in new section 91D(4) to define a qualifying share in terms of the motive of the investor. The idea that the motive of the investor should define the underlying nature of the share seems to sit uncomfortably with the criteria that have been used otherwise, but I am sure that great thought has been given to it. I would appreciate any comments that the Paymaster General can make on these questions. Subject to the questions being cleared up, we have no fundamental problem with any of the amendments.

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

I was asked two brief questions. The first was about a situation in which companies have all-income products. They do not come within the provision, because there is no tax avoidance. It depends what is going on. One might think that they might find themselves applying on the transfer pricing, but that would not be the case. Government amendments Nos. 78 to 80 are clear on that.

With regard to publicly issued shares, we are not extending the scope. In the Bill published after the Budget, there was no let-out for publicly issued shares. However, when we reintroduced the schedule in the current Bill, we had made a number of changes to meet representations. That included the publicly issued let-out, but the let-out was inadvertently applied to associates of banks who failed the unallowable purpose test. It was never the intention that banks should be able to rely on the let-out if they were avoiding tax. The measure simply corrects the Bill so that it operates in line with what has already been said.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury 6:30, 28 Mehefin 2005

I am grateful to the Paymaster General for her explanation, but she is saying that, if people wish to escape the conditions under proposed new section 91C, they can do so by making their non-income producing assets into tiny income-producing assets—they may or may not fall foul of other legislation, but they can escape proposed new section 91C by that relatively simple ruse? I am not sure whether such a procedure has wider ramifications, but I am sure that those who know about such matters will bring them to our attention.

Question put and agreed to.

Amendment agreed to.

Amendments made: No. 79, in schedule 7, page 97, line 39, at end insert—

‘(1A)But Condition 1 is not satisfied if the whole or substantially the whole by fair value of the assets of the issuing company are income producing.’.

No. 80, in schedule 7, page 97, line 43, at end insert—

‘(aa)any share as respects which Condition 1 above is satisfied or would, apart from subsection (1A) above, be satisfied;’.

No. 81, in schedule 7, page 97, line 45, at end insert

‘or would, apart from subsection (1)(c) of that section (excepted shares), be satisfied’.

No. 82, in schedule 7, page 98, line 4, at end insert—

‘(e)rights under a repo in relation to which section 730A of the Taxes Act 1988 applies;

(f)any share in a company the whole or substantially the whole by fair value of whose assets are assets within paragraphs (a) to (e) above.’.

No. 83, in schedule 7, page 98, line 30, leave out ‘subsection (4)’ and insert ‘subsections (4) and (4A)’.

No. 84, in schedule 7, page 98, line 40, at end insert—

‘(4A)But a share is not a qualifying publicly issued share for those purposes if the investing company’s purpose in acquiring the share is an unallowable purpose by virtue of subsection (8)(a) below.’.

No. 85, in schedule 7, page 99, line 5, leave out ‘of the investing company’.

No. 86, in schedule 7, page 99, line 17, leave out ‘of the investing company’.

No. 87, in schedule 7, page 99, line 25, leave out

‘except where the share is a qualifying publicly issued share,’.

No. 88, in schedule 7, page 99, line 33, leave out from ‘if’ to end of line 39 and insert

‘the investing company was an associated company of a bank (see subsection (10)) at the time when the investing company acquired the share, unless the investing company shows that—

(a)immediately before that time, some or all of its business consisted in making and holding investments, and

(b)it acquired the share in the ordinary course of that business.’.

No. 89, in schedule 7, page 99, line 45, leave out from beginning to end of line 2 on page 100 and insert—

‘“bank” has the meaning given by section 840A of the Taxes Act 1988;’.

No. 90, in schedule 7, page 100, line 17, at end insert—

‘(1A)But Condition 3 is not satisfied if—

(a)Condition 1 in section 91C above is satisfied as respects the share or would, apart from subsection (1A) of that section (income producing assets), be so satisfied, or

(b)Condition 2 in section 91D above is satisfied as respects the share or would, apart from subsection (1)(c) of that section (excepted shares), be so satisfied.’.—[Dawn Primarolo.]

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

I beg to move amendment No. 130, in schedule 7, page 100, line 29, leave out sub-paragraph (5).

Looking at the amendment, I notice that I made the point about the removal of proposed new section 91 earlier and said what I had to say about it then. I asked the Paymaster General whether the regulation-making procedure under new section 91F was affirmative or negative. If she could answer that point, I would be satisfied.

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

As the hon. Gentleman said, we touched on the matter earlier. The regulations will be made under the negative procedure, but I reassured him that there is no intention for the Government to abuse the negative procedure and introduce new anti-avoidance rules without parliamentary scrutiny. The powers can be used only to modify existing rules. They cannot be used to invent a wholly new type of arrangement that is not covered under the existing provisions. I sought earlier to give the hon. Gentleman that assurance.

Photo of Nicholas Winterton Nicholas Winterton Ceidwadwyr, Macclesfield

I say to the Committee and to the hon. Gentleman that, if he did not want an answer to the question, which was perhaps not entirely relevant to the amendment, he could have decided not to move the amendment and we would not have had the debate.

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

I can assure you, Sir Nicholas, that my question was entirely relevant to amendment No. 130. It would remove proposed new section 91F, which introduces into the Finance Act 1996 the regulation-making power. It was the appropriate point at which to inquire about the nature of the regulation-making power. I accept what the Paymaster General said. Of   course, we understand that it is not a wide regulation-making power, but it includes the power to repeal primary legislation, so it is an important regulation-making power. I am disappointed that any regulations will be subject to a negative resolution. We shall keep our eyes peeled when relevant motions are laid.

We understand why the right hon. Lady wants the power in place, but we will monitor whether changes are needed to the definition of non-qualifying shares to deal with the problems that we fear will occur—and which the Paymaster General has said will not occur. I hope that she will accept that that is the proper function of the Opposition, having heard a ministerial assertion that regulations needing to be made under the provision to correct unintended consequences of the current legislation will be an empty set. We will keep a close eye on that. 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

I beg to move amendment No. 131, in schedule 7, page 101, line 26, at end insert—

‘(2A)But subsection (2) above shall not apply to a share which meets the conditions in paragraphs (a) and (b) of subsection (3) below but does not meet the condition in paragraph (c) of that subsection.’.

Photo of Nicholas Winterton Nicholas Winterton Ceidwadwyr, Macclesfield

With this it will be convenient to discuss the following amendments: No. 132, in schedule 7, page 101, line 30, leave out ‘and’.

No. 133, in schedule 7, page 101, line 32, at end insert—

‘and

(c)the conditions in section 91A(1) and 91B(1) do not cease to be satisfied on or before 31st December 2005.’.

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

Our concern is about the element of retrospection in the arrangements. The amendments would remove the retrospective nature of the clauses, whereby preference dividends accrued but not paid at the date of introduction of the legislation are taxed retrospectively. The Bill will tax accrued income on the preference shares as capital gain—that is accrued and unpaid income—on 16 March. The amendment would treat the accrued element as dividend if the scheme was unwound by 31 December.

What seems to us to be wrong is that if a dividend had been paid on 15 March, no charge to tax would arise, but if the dividend accrued on 16 March it would be charged to tax as capital gain. I will be interested to hear the Paymaster General’s rationale for that and, although I do not want to anticipate anything, her rejection of our amendments.

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

The amendments are an attempt to change the rules about the interaction of the regime with the capital gains regime both when shares first satisfy the condition to be treated as debt and then when they cease to satisfy those conditions.

The basic rule is that there is a deemed disposal for capital gains purposes when shares start to satisfy the conditions to be treated as debt, and another deemed disposal when they cease to satisfy those conditions. When the conditions are satisfied on Budget day, the   gain arising at that date is held over until the shares cease to satisfy the condition. As a further measure of relief, to encourage companies to unwind schemes, where companies were first caught by the rules on Budget day but unwind before 1 January 2006, the heldover gain does not crystallise at the date of the unwind and will be held over until the shares are subject to further disposal. That is a generous treatment, given that we were dealing with pure tax avoidance.

The three amendments seem to be designed to relax further the capital gains treatment by doing two things. If the schemes were unwound before 1 January 2006, there would be no deemed disposal once they were seen to satisfy the conditions. That would raise the question of the future treatment when there was a final disposal of the shares, since the shares would have been deemed to be disposed of on satisfying the condition but would never have been treated as re-acquired for capital gains purposes. There is no mechanism in what the hon. Gentleman is suggesting to calculate the final capital gain. For schemes that are unwound after 31 December 2005, I assume that the aim is to carry forward the heldover gain until a final disposal of the shares occurs, but the amendments would not achieve that.

As arranged, the provisions could be considered generous given the circumstances in which the schemes are created. I say to the hon. Gentleman that they go far enough, and I do not believe that a case has been made for relaxing the system further and giving avoidance even longer to run.

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

The issue is simply the business climate and the degree of certainty that people have about arrangements when they enter into them. I can understand the Paymaster General’s reluctance to give people who she characterises as villains—people who, to use her language, are acting in an unfair way—any more time to enjoy the benefit of those arrangements, but I am taking a more pragmatic point of view. What really matters is the longer term climate for making business decisions. There are people out there who invested in preference shares before 16 March 2005 and, whether or not the Paymaster General likes what they have done, they did so on a perfectly lawful basis. They will have expected a return on those shares to take the form of dividends, which would not be subject to tax in their hands.

I accept the technical defect that the Paymaster General pointed out; we have not followed through our logic and put in place a regime for addressing such issues in future, although we propose not to create a taxable gain, but simply to continue the dividend treatment for shares in schemes that are unwound before the end of the year. I know that that represents a potential small loss of revenue on some of the schemes, but it also reassures the investor community that where they invest in something lawful, and where they price according to the tax treatment that the investment will receive under current law, they can expect that if the law changes they will be given an   opportunity to unwind the arrangement without incurring any tax charge for which they had not budgeted. In other words—and this is what actually matters—their future pricing decisions do not have to include a risk premium for potential tax charges that they could not imagine, let alone calculate.

We come back to the conflict between equity and efficacy. I urge the Paymaster General to run with the head rather than the heart on a number of these issues, and to recognise that although tax avoidance may be unwelcome, damage to the UK investment climate would be even more unwelcome. However, I have heard what she has to say, and I shall not labour the point further. I therefore beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

I beg to move amendment No. 134, in schedule 7, page 103, line 26, at end insert—

‘(iii)an intangible fixed asset within the meaning of Schedule 29 to the Finance Act 2002.’.

We are now emerging from the dense and impenetrable undergrowth of paragraph 10 into the slightly sunnier territory of paragraph 12. We want to provide a logical extension to paragraph 12 to ensure that it is as encompassing as the Government quite reasonably intend it to be. It might surprise the Minister to hear me say that the amendment would extend the provision’s scope. We want to do that because of the fear of unfair treatment for debt arising on disposal of one particular class of asset: intangible fixed assets. New section 100(1A)(e)(i) and (ii) of the Finance Act 1996 already exclude money debts arising on disposal of a loan relationship asset or a derivative contract, and it is understood that that exclusion is because those items of income will be taxed as income because of their accounting treatment. I must confess that I do not understand accounting treatment, but I am told—and it probably will not stretch the credulity of the Committee too far to believe this—that, logically, intangible fixed assets need to be treated in the same way. Therefore, a disposal of intangible fixed assets, or a money debt arising on the disposal of an intangible fixed asset, similarly needs to be excluded. For that purpose, we have inserted new paragraph e(iii) into the new subsection.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 6:45, 28 Mehefin 2005

Unfortunately, the amendment does not work properly. The hon. Gentleman has explained what he is trying to do about money debt in respect of an intangible fixed asset that falls within the ambit of the Finance Act 2002 regime. The tax treatment of discounting arises from disposal of an intangible fixed asset within the meaning of schedule 29 of the 2002 Act and depends on the accounting treatment. It is possible that without this measure the discount will not be taxed at all or will only be taxed as capital. Therefore, the hon. Gentleman is trying to insert into paragraph 12 the very thing that that paragraph is trying to prevent. That is unacceptable. I   do not support the amendment, or the proposition that there is some flaw or problem in respect of intangible assets.

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

I hear what the Paymaster General says, but, as I have made clear, I am not an expert on the accounting treatment of disposals of intangible assets, so I am not in a position to respond to her remarks, other than to say that I am sure that she is well advised.

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

We did introduce the legislation.

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

Being well advised is not necessarily the same thing as having introduced the legislation, but the right hon. Lady says that as if there is some necessary link between the two. I will wait and see whether those who suggested that the amendment was necessary have any comments to make on the right hon. Lady’s remarks. 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

I beg to move amendment No. 135, in schedule 7, page 105, leave out line 29 and insert

‘investing in a creditor relationship, with comparable risk and liquidity, issued by an independent party.’.

This is a probing amendment, which simply addresses the matter of the correct comparable being used. New subsection (3A)(a) refers to a rate

“that is reasonably comparable to the rate that the company could obtain by placing on deposit the money it invested in the asset”.

It is suggested that “placing on deposit” is neither a term that is immediately clear, nor one that reflects the risk that would be taken in investing in the asset. The correct pricing must be identified for a deposit on similar risk to the investment that is actually being made. That will partly be the counter-party risk, depending on who the deposit is made with and who is the counter-party in the transaction that is being attacked.

We seek to delete the words

“placing on deposit the money it invested in the asset,” and to insert in their place, “investing in a creditor relationship, with comparable risk and liquidity, issued by an independent party.” The Paymaster General might say that that is implicitly the same thing; if so, our concern might be answered. However, the term “placing on deposit” is too narrow and does not say whether we are talking about placing on deposit with a prime clearing bank in London, or doing so with a rather higher-paying, slightly more rickety bank in somewhere like—I hesitate to say it—the Cayman Islands. There must be some factoring in of risk. I look forward to what the right hon. Lady has to say.

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

The amendment would change the comparator when it is necessary to determine whether the interest rate that a company obtains on its interest in one of the avoidance cases is a commercial rate. I appreciate the difficulties of tabling and ensuring that amendments are correct—I have said this before, so   there is no implied criticism—but on this occasion the amendment is fundamentally flawed in a number of ways.

At the moment the comparison is made with what the rate would be if a company deposited the same amount of money as it put into the avoidance scheme—in other words, if it did an equivalent commercial transaction to earn interest. The amendment makes a comparison with the rate that a company would have achieved if it had invested in a debt asset comparable with the shares that it had acquired as part of the avoidance scheme. That, however, is not so much a comparison as looking at the possibilities of a comparison. The nature of the avoidance schemes is that they tend to deal with what might be considered funny shares.

There are no comparables. It seems that the hon. Gentleman’s amendment says “Compare it with another avoidance scheme, assuming that they might have got away with it.” That is not acceptable. Furthermore, as hon. Members will be aware, the interest rate that can be earned depends on the amounts of money to be invested: the more money that is available, the more bargaining power the investor has. The amendments say nothing about how much is invested in the comparable debt asset. Apart from the drafting of the amendment being flawed, the way it would deal with what is comparable is flawed. It cannot be right to allow a company to select another avoidance scheme, but that is what the amendment would do. That is clear enough in the arrangements identified in terms of the interest that would accrue. The hon. Gentleman’s amendment is unnecessary and undesirable.

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

The Paymaster General is characterising the shares issued under the scheme as some kind of dodgy paper issued by dubious companies. The element of risk attaching to them would, in most cases, be fairly limited or the people who set the scheme up would not be interested in putting their money into them. Although there are complex schemes, I would have thought that it is fairly clear that there is a measurable risk and the entity being invested in is capable of a credit rating, just as banks or alternative comparable deposit receivers are capable of credit rating.

The right hon. Lady has mischaracterised what we are seeking to do. We are not suggesting that the comparables should be the investment in an alternative scheme caught within the sections of the Finance Act 1996, but we need to have something that tells us a little bit more about what the comparable is to be, other than something saying that it is a deposit on a commercial rate of interest.

I do not intend to die at the stake over this matter, and having heard the right hon. Lady’s comments, 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

I beg to move amendment No. 143, in schedule 7, page 105, line 42, at end insert—

‘Capital redemption policies—capital loss treatment 13A(1)Section 210 of the Taxation of Chargeable Gains Act 1992 is amended as follows— (2)After subsection (12) insert— “(12A)Where a person makes a disposal of a capital redemption policy, within the meaning of Chapter 2 of Part 13 of the Taxes Act 1988, then no allowable loss shall accrue to that person.”.’. The Chairman: With this it will be convenient to discuss the following amendments: No. 141, in schedule 7, page 105, line 43, leave out from beginning to end of line 36 on page 106.

13A(1)Section 210 of the Taxation of Chargeable Gains Act 1992 is amended as follows—

(2)After subsection (12) insert—

“(12A)Where a person makes a disposal of a capital redemption policy, within the meaning of Chapter 2 of Part 13 of the Taxes Act 1988, then no allowable loss shall accrue to that person.”.’.

Photo of Nicholas Winterton Nicholas Winterton Ceidwadwyr, Macclesfield

With this it will be convenient to discuss the following amendments: No. 141, in schedule 7, page 105, line 43, leave out from beginning to end of line 36 on page 106.

No. 142, in schedule 7, page 111, line 18, leave out from beginning to end of line 30.

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

Amendment Nos. 141 and 142 delete paragraph 14 and paragraph 20 respectively in their entirety and insert in their place the words of amendment No. 143. The stated purpose of the changes in paragraphs 14 and 20 is to stop the use of capital redemption bonds to manufacture artificial capital losses. The proposal changes the tax treatment of all capital redemption bonds held by companies, whether they are involved in such arrangements or not. Our proposal addresses the specific problem that the Government have identified, without including capital redemption bonds in the loan relationships regime.

Paragraphs 14 and 20 change the treatment of CRBs held by companies, but not by individuals, by including them in the loan relationship regime, which taxes as income annual movements of certain money debts. By including capital redemption bonds as loan relationships, they will no longer be taxable under the normal chargeable events rules like other products sold by life insurers. That is the concern of the insurers. That approach will hit the counter-party rather than the person generating the capital loss.

The Association of British Insurers supports the Government in stopping avoidance, but feels that there are more appropriate ways of achieving that, such as our proposal to exclude CRBs from the capital gains regime by amending section 210 of the Taxation of Chargeable Gains Act 1992. I am sure the Paymaster General is aware that the insurance industry is opposed in principle to the change in the tax treatment of CRBs held by companies, which will mean that they are treated differently from similar life products sold by insurers. The proposals are unfair to corporate investors who have chosen to invest through the medium of a capital redemption contract, not necessarily for tax avoidance purposes. In particular, they will mean that companies not involved in avoidance will lose their ability to take small surrenders of such policies without an immediate tax liability.

If the Paymaster General rejects the amendments, it is important that arrangements are made for transitional relief for companies holding capital redemption bonds on 10 February that are in deficit due to withdrawals. If that is not done, the corporate investor will receive no benefit for those deficiencies. Had the assignment not been deemed to take place at   the time when the CRB falls within the loan relationship regime, with the passage of time it would have been hoped that performance would wipe out any such deficiency on a later termination.

The industry’s best estimate is that the proposal will have an impact on at least 600 cases where no avoidance took place, amounting to deficits of about £43 million on 10 February. If the Paymaster General intends to reject the amendments, will she tell us what proposals the Government have for a transitional relief scheme that relates to the 600 or so companies that hold capital redemption bonds that are in deficit, and are not holding them primarily for tax avoidance purposes? What will she do to ensure that they do not suffer an unjustified and unexpected tax charge?

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

The amendments would remove paragraphs in the schedule that deal with capital redemption bonds, as the hon. Gentleman said, and replace them with a new rule in the Taxation of Chargeable Gains Act 1992. The ABI has indeed written to Committee members about the paragraphs on capital redemption bonds. The argument that the Government attempted to use CRBs as artificial capital losses is wrong. Amendment No. 143 would go beyond what the Government are proposing and deny anyone capital losses, regardless of whether the CRB in question is held by a company or an individual. That is not necessary or desirable.

The hon. Gentleman concentrated his remarks on the next two amendments, Nos. 141 and 142. The ABI’s central objection to the paragraph is that it requires CRBs held by companies to be taxed as loan relationships. That means that companies do not receive the benefit of the special relaxations applying to life assurance policies. CRBs are more like bonds that are issued by banks and building societies, the only difference being that they are issued by insurance companies. However, they are not life assurance policies. No element of contingency on human life is contained in them and there is no reason why they should not be taxed like their direct comparables. The aim is apparently to gain access to life assurance policy regimes when CRBs are clearly not part of such a regime.

I cannot help the hon. Gentleman with details of the 600 companies because although the ABI has been asked to give details, it has not done so. If the question was more specific, we would respond to it, but it is not possible to do so until there is a wider disclosure of information. It is impossible for officials to draft relief to a problem that is not being explained because they do not know the ABI’s target or its solution. If the ABI proves willing to bring forward a proposal or certain details to be considered, we shall request officials to respond accordingly, but in the absence of anything except, “Here is a problem. We want relief.”, without detailing such matters and enabling that relief to be targeted properly, I do not see what else the officials could have done. Assuming that the ABI will come forward with certain details, I hope that hon. Gentleman will withdraw his amendment.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury 7:00, 28 Mehefin 2005

I hear what the right hon. Lady says, as will the ABI. I shall find out its thoughts. Perhaps it has a specific proposal to be tabled on Report. I wonder whether the real problem is that the right hon. Lady is asking for information, which it would be improper for the ABI to disclose. If she asking for information about individual counter parties to policies that it has issued, I imagine that it would have the same kind of confidentiality regime as the Inland Revenue and which the right hon. Lady has spoken about. [Interruption.]

It is no good dismissing such matters. Clearly, there are areas especially in financial services when it is difficult for people to discuss their worries with the Inland Revenue, while not breaching the confidentiality that they owe to their clients. I shall take the right hon. Lady’s comments on board and see what the ABI has to say about them. I am sure that she will hear that in due course either during our discussions on Report or probably on Thursday morning in a letter that has landed on her desk from the ABI. In the meantime, 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

I beg to move amendment No. 136, in schedule 7, page 109, line 9, leave out from beginning to end of line 23.

Photo of Nicholas Winterton Nicholas Winterton Ceidwadwyr, Macclesfield

With this it will be convenient to discuss the following amendments: No. 137, in schedule 7, page 109, line 10, at end insert—

‘(2A)Where two or more associated companies cease to be members of a group at the same time, sub-paragraph (2) does not have effect in relation to a transfer between those companies.

(2B)But where—

(a)a company (“the transferee”) that has ceased to be a member of a group of companies (“the first group”) has been assigned an asset or liability from another company (“the transferor”) which was a member of that group at the time of the transfer, and

(b)sub-paragraph (3) applies in relation to the transferee’s ceasing to be a member of the first group so that sub-paragraph (2) does not have effect, and

(c)the transferee subsequently ceases to be a member of another group of companies (“the second group”), and

(d)there is a relevant connection between the two groups (see sub-paragraph (5)), sub-paragraph (2) has effect in relation to the transferee’s ceasing to be a member of the second group as if it were the second group of which both companies had been members at the time of the transfer.

(2C)For the purposes of sub-paragraph (4) there is a relevant connection between the first group and the second group if, at the time when the transferee ceases to be a member of the second group, the company which is the principal company of that group is under the control of—

(a)the company that is the principal company of the first group or, if that group no longer exists, was the principal company of that group when the transferee ceased to be a member of it; or

(b)any person or persons who control the company mentioned in paragraph (a) or who have had it under their control at any time in the period since the transferee ceased to be an member of the first group; or

(c)any person or persons who have, at any time in that period, had under their control either—

(i)a company that would have been a person falling within paragraph (b) if it had continued to exist, or

(ii)a company that would have been a person falling within this paragraph (whether by reference to a company that would have been a person falling within paragraph (b) or by reference to a company or series of companies falling within this provision).

(2D)The provisions of section 416(2) to (6) of the Taxes Act 1988 (meaning of control) have effect for the purposes of sub-paragraph (5) as they have effect for the purposes of Part 11 of that Act.But a person carrying on a business of banking shall not be regarded for those purposes as having control of a company by reason only of having, or of the consequences of having exercised, any rights in respect of loan capital or debt issued or incurred by the company for money lent by that person to the company in the ordinary course of that business.’.

No. 138, in schedule 7, page 117, line 37, leave out from beginning to end of line 8 on page 118.

No. 139, in schedule 7, page 117, line 38, at end insert—

‘(2A)Where two or more associated companies cease to be members of a group at the same time, sub-paragraph (2) does not have effect in relation to a transfer between those companies.

(2B)But where—

(a)a company (“the transferee”) that has ceased to be a member of a group of companies (“the first group”) has been assigned an asset or liability from another company (“the transferor”) which was a member of that group at the time of the transfer,

(b)sub-paragraph (3) applies in relation to the transferee’s ceasing to be a member of the first group so that sub-paragraph (2) does not have effect,

(c)the transferee subsequently ceases to be a member of another group of companies (“the second group”), and

(d)there is a relevant connection between the two groups (see sub-paragraph (5)), sub-paragraph (2) has effect in relation to the transferee’s ceasing to be a member of the second group as if it were the second group of which both companies had been members at the time of the transfer.

(2C)For the purposes of sub-paragraph (4) there is a relevant connection between the first group and the second group if, at the time when the transferee ceases to be a member of the second group, the company which is the principal company of that group is under the control of—

(a)the company that is the principal company of the first group or, if that group no longer exists, was the principal company of that group, when the transferee ceased to be a member of it; or

(b)any person or persons who control the company mentioned in paragraph (a) or who have had it under their control at any time in the period since the transferee cease to be a member of the first group; or

(c)any person or persons who have, at any time in that period, had under their control either—

(i)a company that would have been a person falling within paragraph (b) if it had continued to exist, or

(ii)a company that would have been a person falling within this paragraph (whether by reference to a company that would have been a person falling within paragraph (b) or by reference to a company or a series of companies falling within this provision).

(2D)The provisions of section 416(2) to (6) of the Taxes Act 1988 (meaning of control) have effect for the purposes of sub-paragraph (5) as they have effect for the purposes of Part 11 of that Act.But a person carrying on a business of banking shall not be regarded for those purposes as having control of a company by reason only of having, or of the consequences of having exercised, any rights in respect of loan capital or debt issued or incurred by the company for money lent by that person to the company in the ordinary course of that business.’.

No. 140, in schedule 7, page 119, line 12, at end insert—

‘Degrouping: principal company becoming member of another group 24A(1)Paragraphs 18 and 24 do not apply where a company ceases to be a member of a group by reason only of the fact that the principal company of the group becomes a member of another group (“the second group”). (2)But if, in a case where paragraphs 18 and 24 would have applied but for sub-paragraph (1) above, after the assignment and before the end of the period of six years after the date of the assignment— (a)the transferee ceases to satisfy the condition that it is both a 75% subsidiary and an effective 51% subsidiary of one or more members of the second group (“the qualifying condition”), and (b)at the time at which the transferee ceases to satisfy that condition, the relevant loan relationship or derivative contract is held by the transferee or another company in the same group,

24A(1)Paragraphs 18 and 24 do not apply where a company ceases to be a member of a group by reason only of the fact that the principal company of the group becomes a member of another group (“the second group”).

(2)But if, in a case where paragraphs 18 and 24 would have applied but for sub-paragraph (1) above, after the assignment and before the end of the period of six years after the date of the assignment—

(a)the transferee ceases to satisfy the condition that it is both a 75% subsidiary and an effective 51% subsidiary of one or more members of the second group (“the qualifying condition”), and this Schedule has effect as if the transferee, immediately after the assignment to it of the relevant loan relationship or derivative contract, had realised the loan relationship or derivative contract for its market value at that time and immediately reacquired the asset at that value.

(3)The adjustments required to be made in consequence of sub-paragraph (2), by the transferee or a company to which the relevant loan relationship or derivative contract has been subsequently assigned, in relation to the period between—

(a)the assignment of the relevant loan relationship or derivative contract to the transferee, and

(b)the transferee ceasing to satisfy the qualifying condition, shall be made by bringing the aggregate net credit or debit into account as if it had arisen immediately before the transferee ceased to satisfy the qualifying condition.

(4)For the purposes of section 82 of this Finance Act 1996 (Method of bringing amounts into account) and paragraph 14 of Schedule 26 to the Finance Act 2002 (Method of bringing amounts into account), credits or debits brought into account by virtue of this paragraph take their character from the purposes for which the relevant loan relationship or derivative contract was held by the transferee immediately after the assignment.’.

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

These are very long amendments, which would insert alternative wording into paragraphs 18 and 24, which deal with degrouping in the case of loan relationships and derivative contracts. I do not intend to go through the detail of the amendments, other than to say that they follow the legislation in schedule 29 of the Finance Act 2002 on the degrouping rules following the transfer of intangible assets between companies within a group, with some importation of language from section 179 of the Taxation of Chargeable Gains Act 1992.

Turning from the architecture of these long amendments to the purpose behind them, our aim is to ensure that the degrouping rules work fairly. The amendments match the degrouping rules for intangible assets. While the degrouping rules for loan relationships and financial derivatives have been introduced to stop tax avoidance and therefore have no motive test, they are wide in scope. Through the amendments we seek to ensure that the degrouping rules do not apply when the transferor and transferee leave the group at the same time, in which case the tax planning, which is subject to attack, would not be in question.

We seek also to deal with problems of definition of capital gains tax group, which gives rise to amendment No. 140. We also seek to ensure that the degrouping rules work to create both gains and losses, so that in commercial situations in which the degrouping rules are triggered, the tax impact is fair and not a penalty on genuine commercial transactions.

As before, I say to the Paymaster General that unless a measure is so narrowly targeted that we can be absolutely certain that only blatant tax avoidance will be hit—that will usually be where there is a test—it is important that there is some symmetry in the imposition of tax, so that where a commercial transaction is caught, it is treated fairly, with deductions as well as charges on gains arising.

Degrouping charges already apply in both capital gains tax and intangibles rules. They were originally introduced many years ago to prevent the tax planning technique of transferring an asset into a group company, then selling the group company rather than transferring the asset itself, and in that way avoiding a capital gain arising.

A degrouping charge can create a loss as well as a gain, and for capital gains tax and intangibles purposes the purchaser picks up the gain but can agree with the vendor that the vendor picks up the charge. Typically, there is an exemption where the transferor and transferee leave the group at the same time—that is, as part of the same transaction on the sale of a sub-group. That exemption exists to allow genuine sales of sub-groups without there being a deemed tax charge on a gain that has not yet been realised. I hope that the Paymaster General will give serious consideration to these points arising in relation to degrouping in situations in which there has been a replacement of a party to a loan relationship or a derivative contract.

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

The amendments would change the anti-avoidance degrouping charge for loan relationships. Given the history of debates on earlier amendments, it will not surprise the Committee to hear me say that these ones would not work. The aim of the rule is to prevent companies from taking profits on assets that are loan relationships and which would be taxed as income, and converting them into capital gains in the form of profit on shares using corporate envelopes. The rule applies only if the loan relationship is standing at a profit, because if there is a potential loss, a company might try to engineer an artificial degrouping to crystallise the loss.

The first effect of the amendments would be to allow losses as well as profits to arise on a degrouping, which would defeat the purpose of the rule. As the hon. Gentleman has been told, there is one circumstance in which a loss is allowed—when there is a hedging relationship between a derivative contract and a loan relationship that produced a profit on one and an equal and opposite loss on the other. That is a reasonable approach and as far as we want to go on losses.

Amendment No. 137 would add a new rule that there is no charge if a loan relationship is transferred between two companies that leave a group at the same time. That has an equivalent in the capital gains   degrouping rules, but after making the amendment it would be necessary to import another page of complex anti-avoidance legislation to prevent manipulation of the two-company exemption. It is ironic that at this point in the Committee’s discussions the Government are accused of enacting complex anti-avoidance measures, given that Opposition Members, by their amendments, seek to allow a wholly inappropriate relief from a rule, which would involve adding greatly to the complexity of the legislation.

The reason why the capital gains degrouping charge involves an exemption where two companies leave a group at the same time is that, in such circumstances, there is no avoidance of tax. The capital gain inherent in the transferred asset is matched by the capital gain arising on the shares sold, but allowing the same rule in this respect would entirely defeat the objective of the measure. That is because any profit on disposal of a loan relationship is charged to tax as income, not as a capital gain. Allowing an exemption where two companies left a group at the same time would simply allow an alternative way of converting income into capital.

Amendments Nos. 138 and 139 would do exactly the same for the derivative contracts degrouping charge as amendments Nos. 136 and 137 do for the equivalent loan relationships degrouping charge.

Amendment No. 140 would add further complexity to the degrouping charge for loan relationships and derivative contracts. It is similar in its approach to a rule in the capital gains degrouping legislation that prevents the capital gains degrouping rule from applying in a case in which a company leaves a group only because the group is acquired by another company or group. However, as I explained in relation to the previous amendments on the degrouping charge, the loan relationships and derivative contracts rules are very different from the capital gains rules. Many loan relationships and derivative contracts will not be affected by the degrouping charge, because they will be accounted for on a fair value basis. That is increasingly the case, particularly under international accounting standards and new United Kingdom generally accepted accounting practice. In many other cases, any profit arising on a deemed disposal on leaving a group will not give rise to a large gain. Normal loans, especially floating-rate ones, often vary very little in fair value. In capital gains cases, however, there can be a very large gain and it would arguably be unfair to tax the gain in the circumstances mentioned in the amendment. There is another problem with the amendment: it just would not work properly at a technical level. In any case, I am not convinced that the problem is serious enough to warrant more pages of complex legislation. It would have to be at least twice as long as the amendment.

Instead, although I take the view that there are no issues relating to degrouping, I propose—just in case—to ask HMRC officials to keep the point under consideration and follow the matter carefully. Given the complexities of a number of different sets of rules   coming together, that would be prudent. I give the hon. Gentleman that assurance, although I do not accept his amendments.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury 7:15, 28 Mehefin 2005

I hope that, at the end of the day, the right hon. Lady has enjoyed the opportunity comprehensively to trash a set of amendments—both the principle behind them and the drafting of them. However, I am grateful for what she has said, which I take as an indication that she recognises at least that there is an issue to which one needs to be alert, even if she thinks that there is no cause for the concern that we have expressed.

Given what the right hon. Lady has said about their drafting and effects, I shall not seek to press the amendments. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 7, as amended, agreed to.