Avoidance involving financial arrangements

I beg to move amendment No. 68, in schedule 5, page 109, line 10, at end insert—

10A (1) Section 85C of FA 1996 (amounts not fully recognised for accounting purposes) is amended as follows.

(2) In subsection (1)—

(a) in paragraph (c), for the words from “has at any time” to “liability”)” substitute “an amount (a “relevant capital contribution”) has at any time been contributed to the company which forms part of its capital (whether share or other capital)”, and

(b) in paragraphs (d) and (e), for “relevant accounting liability” substitute “relevant capital contribution”.

(3) In subsection (2)—

(a) for “or relevant accounting liability of the company” substitute “of the company or any relevant capital contribution made to the company”, and

(b) for “or liability” (in both places) substitute “or contribution”.

(4) The amendments made by this paragraph have effect in relation to periods of account ending on or after 9th May 2007.

(5) But, in relation to periods of account beginning before that date, amounts are to be brought into account for the purposes of Chapter 2 of Part 4 of FA 1996 as a result of those amendments only if the amounts relate to any time on or after that date.’.

With this it will be convenient to discuss Government amendments Nos. 69 to 74.

The amendments will make a slight extension to the scope of one of the anti-avoidance provisions in schedule 5 to stop avoidance scheme promoters introducing even more contrived arrangements to circumvent the effect of the measure.

Paragraph 15 of the schedule is aimed at schemes that create artificial losses from a company’s holdings in offshore funds or similar collective investment schemes. The losses are generated by the scheme making an investment that is bound to decline in value. Shortly after the Bill was published, disclosure was made to HMRC of a scheme that attempts to get round the provisions by arranging for the collective investment scheme to take on a liability for the same purpose, ensuring that the value of the fund declines. The amendments will frustrate such an attempt by broadening paragraph 15 so that it refers to a liability as well as to an investment. The rule in paragraph 15 as a whole will have effect from 6 March, when the measure was announced, but the extension brought about by the amendments will apply from 9 March.

If it is appropriate to do so, Mr. Gale, I want to make a further remark about the broad scope of the schedule. The purpose of the clause and schedule is to close down a number of marketed avoidance schemes of a type for which disclosure is required under the avoidance disclosure regime, and to ensure the comprehensive working of certain anti-avoidance provisions. The total tax protection of the measures is estimated as being in the low billions of pounds.

The schedule tackles avoidance schemes mainly used by companies, which fall under 10 different categories. It also amends the structured finance arrangement rules that were introduced last year to prevent schemes that might stop the rules working. There is also a relaxation of the conditions for obtaining capital gains tax exemption on assets that are sold under structured finance arrangements.

Draft legislation, as I have mentioned, and detailed explanatory commentary, were published with the pre-Budget report and on 6 March. Publication before the Budget was intended to give business an opportunity to comment on whether the draft measures could affect legitimate business transactions. In the event, reaction has been low key, and respondents have not identified any instances in which the provisions might affect legitimate transactions. I have, however, identified the need for the Government amendments, which deal with one particular matter that arose in consultation.

The Government are committed to ensuring that we tackle systematic tax avoidance, and the amendments and schedule will help to ensure that companies that engage in tax avoidance do not enjoy an unfair advantage.

In view of the Economy Secretary’s remarks I propose to take the debate on the schedule with debate on the amendments.

I am grateful for your guidance, Mr. Gale. I, too, hoped to deal with the schedule in that way.

Schedule 5 seems to me to be a pretty accurately targeted measure, focusing on what are, as the Economic Secretary said, highly complex and artificial transactions undertaken solely with tax avoidance in mind. It seems to the Opposition entirely reasonable for HMRC to move against those schemes. As ever, it is worth pointing out that there will be yet more complicated legislation, but I must concede that, in that context, it will be difficult to come up with simple legislation to deal with the problem. My research has not managed to expose any significant technical flaws that would concern the Committee, and like the schedule, the amendments that the Economic Secretary has proposed seem to be similarly targeted, so we will not oppose them.

Consequently, I have for the Economic Secretary just a couple of questions about the schedule. First, in the explanatory notes to paragraphs 9 and 16, HMRC does not think that the respective schemes, which the paragraphs target, work anyway. Essentially, the new legislation before us is only a caution. I should be interested to find out whether that means that the Government do not have the same certainty about the transactions targeted in the rest of the schedule. Are they holding their hands up or are they still challenging those transactions?

Secondly, I have a question about paragraph 18, which is intended to extend the anti-avoidance provisions in paragraph 26 of schedule 26 to the Finance Act 2002 in order to cover all relevant situations in which a company fails to exercise in full all its rights under an option, rather than just the situation in which it abandons an option. There have been attempts to circumvent paragraph 26 of schedule 26 to the 2002 Act, which bites on the abandonment of an option by utilising schemes that involve partial exercise.

Is not that situation also covered by paragraph 23 of schedule 26 to the 2002 Act, which denies tax relief for debits related to an “unallowable purpose”? I should be grateful if the Economic Secretary could explain whether the situation covered by the further legislation that we are considering—paragraph 18 of schedule 5 to the Bill—is actually already covered by paragraph 23 of schedule 26 to the 2002 Act. Is paragraph 18 yet more precautionary legislation?

In relation to the amendments and to the debate on the schedule, may I again gently point out to my hon. Friend the horrible drafting? In amendment No. 68, proposed new paragraph 10A(5) starts with “But”. Similarly, in amendment No. 74, proposed new paragraph 15(7) of schedule 5 starts with “But”. In the schedule itself, paragraphs 2(3), 9(3), 11(5), 12(5), 14(3), 15(5) and 17(3) all start with “But”. Please could he have a word with the draftspersons and have them stop using that word? In almost all those cases, as far as I can tell, it is not only grammatically erroneous, but completely redundant.

Perhaps this is not a crucial point, but is my hon. Friend aware that The Economist style guide authorises the use of “But” at the beginning of a sentence?

I shall not engage in a long discussion. I am aware that many journalists use it; it does not make it right.

I was tempted to intervene on the hon. Member for Chipping Barnet to ask her whether she thought paragraph 23 of schedule 26 to the 2002 Act is framed in the most apposite way, or whether she had any suggestions about the way in which it might, in retrospect, have been better drafted.

My point was that paragraph 23 of schedule 26 to the 2002 Act is very well drafted, which means that paragraph 18 of schedule 5 to the Bill may not be needed. Its provisions are already covered by the drafting of paragraph 23.

I understood the hon. Lady’s point, but perhaps not as well as she does. The answer to her wider question is that the measure is not an over-reaction—there is tax risk. We have been persuaded to act by the number of avoidance schemes that have come to our attention. In the judgment of HMRC, most schemes are covered by paragraph 23. However, the judgment of HMRC experts is that that measure does not cover all potential schemes or those that are already in operation. The Bill gives us confidence that we will cover all such schemes in the future. We are ensuring that the gaps in paragraph 23 are well and truly closed. Most schemes hit by the schedule are being challenged in court, but not all. Whether we litigate will depend on legal advice. The changes will mean that any gaps in paragraph 23 will be comprehensively closed.

I want to clarify my remarks: they should not be taken to suggest that schedule 5 is an over-reaction. I was merely seeking to ascertain whether HMRC was still challenging the schemes under the old legislation. It might have a good case for doing so, and a good chance of success in court.

Amendment agreed to.

Amendments made: No. 69, in schedule 5, page 111, line 15, after ‘investment’ insert ‘or liability’.

No. 70, in schedule 5, page 111, line 16, after ‘made’ insert ‘, or the liability was incurred,’.

No. 71, in schedule 5, page 111, line 19, after ‘investment’ insert ‘or liability’.

No. 72, in schedule 5, page 111, line 26, at beginning insert

‘In the case of amounts relating to investments,’.

No. 73, in schedule 5, page 111, line 28, after ‘But’ insert ‘in that case’.

No. 74, in schedule 5, page 111, line 30, at end insert—

‘(6) In the case of amounts relating to liabilities, those amendments have effect in relation to accounting periods ending on or after 9th May 2007.

(7) But in that case, in relation to accounting periods beginning before that date, amounts are to be left out of account as a result of those amendments only if they relate to any time on or after that date.’.—[Ed Balls.]

Schedule 5, as amended, agreed to.

Clause 30 ordered to stand part of the Bill.