Clause 23 - Loan relationships: debts becoming held by connected company

Finance Bill – in a Public Bill Committee am 4:45 pm ar 12 Mehefin 2012.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Nigel Mills Nigel Mills Ceidwadwyr, Amber Valley 4:45, 12 Mehefin 2012

I beg to move amendment 13, in clause 23, page 14, line 36, leave out subsections (8) to (12).

Photo of Peter Bone Peter Bone Ceidwadwyr, Wellingborough

With this it will be convenient to discuss clause stand part.

Photo of Nigel Mills Nigel Mills Ceidwadwyr, Amber Valley

I am sure that you have never been welcomed to the Chair as often as you have been today, Mr Bone. I tabled this amendment to secure a debate on the Government’s use of retrospective taxation measures. The Select Committee on the Treasury noted that there were potentially four such measures in the Bill, of which this is the most significant, in terms of revenue raised. I would not like anyone to think that when I tabled the amendment, I was motivated in any way by sympathy for Barclays bank, which entered into aggressive tax avoidance arrangements. Given the esteem in which banks are held in this country and the way that they have been bailed out, Barclays was remarkably badly advised to have gone down the line of aggressive tax planning. If any body were not justified in tax planning, a bank would be top of that list.

Nevertheless, Government and Parliament should be careful about where we seek to use retrospective legislation. It is a pretty fundamental point of the rule of law that individual citizens or subjects should know what the law is and be entitled to plan their affairs based on the law. If the Government realise that that law is not appropriate or is not correct, then that law can clearly be changed, but that change should apply only from the point at which notice is given of the change. We could find numerous examples in the Bill where the Government have announced changes or the intention to introduce a change. Perhaps the detail will come along later, but clearly all taxpayers can understand that there is a potential change coming. What we have in this clause is a backdated change that effectively cancels the effect of a measure that may or may not have been in compliance with the tax code; the Government were clearly not entirely confident in the tax situation.

There is a real principle here about whether the Government should use retrospective taxation effectively to change the law to make it apply in a way that is different from how the person thought it would apply when they entered into a transaction. I suspect that in any field other than taxation, we would be very concerned. I do not think we would like to see the criminal law  being amended retrospectively to make something we did yesterday a crime when it would not have been a crime then, based on the law as it stood. Not that all retrospective legislation is inappropriate; I think in the last Session both Houses of Parliament quite happily passed a retrospective bail law to put the situation back to what both the Government and most defendants thought it was. The clear point there was that that was restoring a situation that everyone had thought pertained, as opposed to creating a situation that perhaps one side wished was the case but may not have been.

It is important that the Government now set out when they are prepared to use retrospective legislation and when they are not. We have obviously had the Rees doctrine in place for a long time. My right hon. Friend the Member for Charnwood (Mr Dorrell) set out the principle when he was a Treasury Minister:

“Where it is discovered that the tax law does not have the effect that the Government and taxpayers generally thought it had, there are circumstances in which it is right to introduce legislation to restore the position retrospectively to what it was thought to be.”—[ Official Report, 29 June 1992; Vol. 210, c. 378-79W.]

The key point is the effect that the Government and taxpayers generally thought a measure had, not simply the effect that the Government might have wished it had.

Those of us concerned about the use of retrospective legislation are in pretty good company. In 1987, the former Prime Minister, Tony Blair, said:

“Parliament should oppose retrospective legislation, for a number of reasons. The principal democratic reason is that people are perfectly entitled to do whatever the law permits them to do and that it is wrong afterwards to make it unlawful.”—[Official Report, 15 July 1987; Vol. 119, c. 1179.]

Who are we to disagree with Tony Blair? For those not convinced by what the former Prime Minister said, the Exchequer Secretary to the Treasury himself said the following in debate four years ago:

“For investors, the idea that UK tax law is likely to be changed retrospectively is unattractive, and the UK is, for various reasons, acquiring a reputation for having an uncertain and unstable tax system, which is bad for the UK economy.”––[Official Report, Finance Public Bill Committee, 22 May 2008; c. 367.]

He was entirely right four years ago.

I accept that sometimes compromises have to be made in government. Clearly, if there are large amounts of tax at stake as a result of aggressive tax schemes, there may be a need to close those promptly to protect the Exchequer, especially in the current situation. However, we must be careful that we do not create the impression of a tax regime in which people cannot plan their affairs based on what the law is, and in which there is a risk that the situation regarding what they may quite reasonably do today, thinking it legal, could somehow change retrospectively, with unfortunate tax results.

We may accept that where people are engaging in predominantly aggressive tax avoidance, that is fair game, but the risk is that people undertaking innocent transactions may get caught up in the crossfire. There is also the general reputational risk of a tax regime where that can happen. People might think, “I am not sure I want to invest there and expose myself to those vagaries.” They want the Government to set things out, because they want a certain, stable and predictable tax regime in which people can invest with certainty and know what the situation will be. A combination of the use of  retrospective legislation and having a general anti-abuse rule, which I know the Government are consulting on today, creates quite a poisonous mix. It is hard to know exactly what the law is that we are being expected to comply with. It can be changed by legislation, or it can be effectively changed by a tax inspector in the course of their job.

I am not the only one who is concerned. In paragraph 89 of its excellent report on the Budget, the Treasury Committee raised concerns. I am sure that the hon. Member for Bassetlaw was keenly involved in that. It asked the Government to set out a policy on when retrospective legislation should be used. I hope the Minister can do that.

On the rule on taxing a release of debt, I can see the logic; if there is a UK lender and a UK borrower, and the loan is impaired and written off, the UK lender gets a tax deduction. It is right that the borrower, who now owes a lot less, should get taxed on that effective profit. That symmetry is entirely reasonable in the tax regime, but the rule causes huge complexity for struggling companies that face insolvency, because if they enter a formal insolvency procedure, there is no tax on the waiver of the loan. If we try to apply this structure outside a formal process, that tax liability is triggered.

I was practising a few years ago and the insolvency issue used to come up. We had insolvent companies, and we tried to find a way to rescue the trade and make it viable, and to protect the jobs. We did not really want to go down the formal administration process, with all its costs and various horrors. This provision could make that quite hard. If someone goes down the administration route, they avoid the tax, so what people were trying to do was get into that situation without the full administrative procedure. I do not pretend that that is what the people we are talking about here were worried about. This is not perhaps an area where there is no commercial reason at all for concern about the operation of the rules, which is why I am a little concerned about why the Government decided that of all the tax avoidance issues that they have chosen to legislate on, this was the one that justified the full retrospective effect of backdating a change to before the Government announced that there might be some change.

It would be useful if the Minister set out the Government’s policy on the use of retrospective legislation—when they think it is appropriate, and what criteria they use to decide that it is necessary—so that we can be sure that it is used only in exceptional circumstances where there is really abusive behaviour and significant amounts are at stake, and that it does not creep into being a general approach to tax policy for this Government.

Photo of John Mann John Mann Llafur, Bassetlaw 5:00, 12 Mehefin 2012

The Government Whip is not keen on Labour Members speaking in these debates. He wants to get through the business a lot quicker and to get votes through. That is his prerogative, but if he really wanted to do that, he would have a word with the Ministers, who have tabled more than 200 amendments. It is a bit rich for a Government Whip who is trying to manage business to kick off and say that we are not getting through business fast enough when they do not have Ministers who can schedule  business properly. They have to keep amending the Bill—as I say, they have more than 200 amendments, unless they are withdrawing them. The Government Whip turned up late to one sitting; I would be more than happy to stay late tonight to debate the issues with him.

Photo of Richard Harrington Richard Harrington Ceidwadwyr, Watford

The hon. Gentleman is very experienced in parliamentary matters—far more so than I. From memory, can he tell me how many amendments the Labour Government tabled in such Bill Committees?

Photo of John Mann John Mann Llafur, Bassetlaw

As the hon. Gentleman might recall from pre-recess days, I was never invited to sit on a Finance Bill Committee, because of the Government Whips. That is why I was put on the Information Committee and Unopposed Bill Committees, as the hon. Member for Amber Valley will find out.

Photo of Nigel Mills Nigel Mills Ceidwadwyr, Amber Valley

I have already had the pleasure of two years on the Administration Committee; I am not sure what else the Government could do to me.

Photo of John Mann John Mann Llafur, Bassetlaw

I suspect that the Government saw the hon. Gentleman coming and thought, “Here’s someone who wants to speak for the country—someone independent-minded who will point out obvious flaws in Government business.” So far, he is the only one on the Government Benches prepared to do that, but I can see others thinking that there are flaws that they wish to address. That is one good reason for supporting his amendment. A second good reason is the articulate way in which he introduced it. Who could not be convinced by his arguments? He has convinced me.

Photo of Richard Harrington Richard Harrington Ceidwadwyr, Watford

Again, I would like to record how grateful I am to the hon. Gentleman for giving way. His time is usually taken up by his own erudition. I would like to use this opportunity to ask whether one of the Ministers can tell us at some stage how many times the Labour Government tabled amendments to Finance Bills, and how many amendments there were. He has made the serious allegation that the Government are tabling a lot of amendments to take up our time. As one new to this parliamentary activity, I would be pleased to learn whether the number is far more or less than it used to be.

Photo of John Mann John Mann Llafur, Bassetlaw

Well, we will all await with interest the response to that intervention, myself included.

There are two good reasons to support the amendment. The hon. Member for Amber Valley, my would-be future neighbour, cited the most compelling one: Tony Blair, as a young MP in 1987, seeing democracy emerging before him, felt that it was appropriate to point out that retrospective legislation is a bad thing, and who are we to disagree with such an outstanding Prime Minister? I am virtually convinced for that reason alone.

The hon. Member for Amber Valley has had the courage to table the amendment. It strikes me that his proposal is sound and that the Government are unsound. Given that at least two Members present are on the  Treasury Committee, deliberated on the issue and reached consensus, I know that he is looking forward to at least two votes in support of his amendment: one from me, and a second from a Member on the Government Benches. It is only right that we members of the Treasury Committee show consistency in our wisdom in criticising the Bill. I suspect that the Government feel that the amendment is so well worded that they have to accept it. I look forward to hearing that.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Education)

I wish not so much to comment on the amendment of the hon. Member for Amber Valley, although I join my hon. Friend the Member for Bassetlaw in commending him for tabling it, but to seek clarification on the clause, which affects debts held by connected companies and has retrospective effect from 1 December 2011. Before the legislation, profits made as a result of such arrangements were not taxable, and companies would regularly seek to exploit the tax loophole. The clause addresses such aggressive avoidance measures, as the Minister states, ensuring payment of more than £500 million in tax, protecting further billions of pounds in tax from being lost, and maintaining fairness in the tax system—laudable aims. As the impact note states, the measure could bring in as much as £385 million in the first year, although subsequent declines in revenue are anticipated as the schemes increasingly fall out of use.

Turning to the origins of clause 23, Barclays bank, which was revealed as the bank involved in that tax avoidance measure, disclosed its use of the two schemes to HMRC in February this year, prompting the Government to introduce the legislation and to take the unusual step of giving it retrospective effect so as to cover arrangements entered into as far back as 1 December 2011 and up to 27 February 2012, when the decision was taken. It has been widely documented that Barclays was surprised by HMRC’s reaction to the two schemes, which it believed were in line with those employed by other banks. Barclays has subsequently voiced its concerns quite publicly. The hon. Member for Amber Valley has put on record his concerns about the use of retrospective tax avoidance action by the Government, and I shall be interested to hear the Minister’s comments on the amendment.

I would like some clarity on the impact of the measures in the clause, given the importance of the matter. Is HMRC aware of any other companies or British banks entering into such arrangements? If so, is it intending to come to any settlement with them? Has HMRC investigated or at least estimated how many such schemes are being used, and how many will close as a result of the clause? Turning to the retrospective nature of the legislation, how was the date—1 December 2011—decided on, and what does HMRC intend to do about schemes in place before that date? If the scheme and the determination of its abusive nature came to light before the announcement was made in February, why in particular was the 1 December date chosen? Finally, as there have been no tax information and impact notes since the Budget, what are the confirmed revenue numbers for the closure of the scheme?

Photo of Nigel Mills Nigel Mills Ceidwadwyr, Amber Valley

It would be useful to the Committee if the hon. Lady could set out the Opposition’s view on the use of retrospective legislation. Labour used it occasionally while in government—is that something  the Opposition now regret and wish they had not done, or is it something that they would like to see used more often?

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Education)

I had reached the end of my comments, and it would be useful at this stage to hear from the Minister with the Government’s response to the hon. Gentleman’s amendment. A particular decision was taken in this case to apply the legislation retrospectively. That is what is encapsulated in my questions—why was 1 December 2011 chosen?

Photo of Charlie Elphicke Charlie Elphicke Ceidwadwyr, Dover

Let me put two points to the hon. Lady. First, did not the previous Government use retrospective legislation time and again? Secondly, when there is egregious tax avoidance by a large financial institution, should we not stop it—and stop it quickly—to safeguard taxpayers’ interests?

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Education)

I absolutely agree with the hon. Gentleman’s second point. The point I am making is that the legislation is backdated to 1 December. If the tax avoidance scheme had come to light on 1 December, why did it take until February to take appropriate action to close it down?

The Government’s use of retrospective tax avoidance action depends very much on each case, and we have discussed at length the circumstances in which tax avoidance is abusive, aggressive and egregious. All those matters need to be discussed at length, so I hope that the legislation on the general anti-avoidance rule that will be dealt with in the coming year will make things clearer. The hon. Member for Amber Valley raised valid points, and companies need to know where they stand with the law. Retrospective action is not ideal, but when circumstances mean that it is necessary, I agree with the hon. Member for Dover that action must be taken.

Photo of David Gauke David Gauke The Exchequer Secretary

Clause 23 amends legislation that applies to debts that are held by a connected company. It introduces a targeted anti-avoidance rule and a retrospective provision in relation to arrangements designed to work around existing rules. During my remarks, I will address the amendment tabled by my hon. Friend the Member for Amber Valley.

It may help the Committee if I say a word or two about the background. Normally, a company is taxed on the commercial profit that arises when it must pay back less than the amount that it borrowed, but special rules apply to connected companies. In such cases, a tax charge arises when a company connected to the borrower buys the debt, or when debt is held between companies that become connected. Those rules were amended in the Finance Act 2010 to block schemes under which banks bought back their own issued debt that was trading at a discount in the market. In other words, they could buy their own debt for less than the amount they originally borrowed without paying tax on the difference.

At the time, the Government made it clear in two written ministerial statements that they expected such profits to be subject to corporation tax. Despite those clear statements, a bank entered into a scheme using contrived arrangements that, again, sought to ensure that the profit on the buy-back of its own debt was not subject to corporation tax, and a substantial amount of  tax—around £300 million—was avoided. In a written ministerial statement on 27 February, I announced amendments to the rules so that companies cannot get round the legislation in the future.

The measure will take effect retrospectively to 1 December 2011 to ensure that banks and any other company that use this or a similar scheme after that date will be taxed on the transaction as it should be. The hon. Member for Newcastle upon Tyne North asked why the specified date was 1 December. That is essentially the first date on which HMRC was aware that the scheme or similar schemes were being used. The hon. Lady said that the scheme was notified on 1 December, but that is not the case. It was notified in February, but its use dated back to 1 December, so that is the date in the clause.

We did not take this action lightly. The scheme involves a large potential tax loss. There is a history of abuse of debt buy-back, as is shown by the written ministerial statements, and the bank in question has adopted the code of practice on taxation of banks, under which it commits not to engage in such tax avoidance schemes.

Photo of Ian Mearns Ian Mearns Llafur, Gateshead 5:15, 12 Mehefin 2012

I am interested in the figures that the Minister cites. He said that something like £300 million involved just one bank. Has HMRC or the Treasury investigated how much could be recoupable from banks that use this mechanism?

Photo of David Gauke David Gauke The Exchequer Secretary

HMRC is not aware of other examples of similar avoidance in this area. Of course, under disclosure of tax avoidance schemes legislation, it is necessary for a taxpayer to notify in such circumstances. Considerable attention has been placed on such schemes, so the current assessment is that HMRC is not aware of other taxpayers who have made use of the mechanism.

Photo of Ian Swales Ian Swales Democratiaid Rhyddfrydol, Redcar

Will the Minister clarify whether the connected companies have to be UK companies, or is this intended to catch arrangements made overseas? There are some well documented cases of debt being held by related companies in countries such as Luxembourg, which is clearly designed to avoid UK tax.

Photo of David Gauke David Gauke The Exchequer Secretary

This relates only to UK connected companies, if that provides clarification. For the reasons I have outlined, the Government believe that this is a wholly exceptional circumstance in which action to change legislation with full retrospective effect is justified.

I appreciate the points raised by my hon. Friend the Member for Amber Valley. It is right to make it clear that retrospection should be used only in wholly exceptional circumstances. He asked if I could set out in more detail the Government’s position on retrospection. We set out our position in the protocol on unscheduled announcements of changes in tax law, which was published in “Tackling tax avoidance” at Budget 2011. The protocol makes it clear that the deterrent effect of making changes with immediate effect needs to be balanced against the need to maintain the UK tax system’s reputation for predictability, stability and simplicity. It states:

“In particular, changes to tax legislation where the change takes effect from a date earlier than the date of announcement will be wholly exceptional.”

As we said in our announcement of 27 February 2012, we believe this is a wholly exceptional circumstance and that retrospective action is therefore justified. In this case, a very large amount was at stake, a part of the tax code that had been repeatedly exploited was involved, and the bank was in breach of its obligations under the banking code of practice. For fullness of disclosure, I should add that the Chancellor made it clear in his 2012 Budget statement that we are ready to take retrospective action if there are continued attempts to avoid stamp duty land tax, but I put on record that we will take that step only in wholly exceptional circumstances.

My hon. Friend the Member for Amber Valley brought his experience to bear on a point about a restriction of the use of debt buy-backs preventing company rescues. This measure would not prevent company rescues. HMRC has made clear in draft guidance that none of the current exceptions to the tax charge that arises on the acquisition of debt by connected companies have changed. The arrangements under which HMRC gives clearances in company rescue situations, such as debt equity swaps, will continue to apply. The retrospective legislation combats specific avoidance arrangements that were designed to avoid a tax charge that would otherwise have arisen and, as statements made when the legislation was last amended made clear, that should have arisen. The new provision will tax the full economic profit that a group makes when impaired debt of a debtor company becomes held by a connected company and is then released.

To return to the clause, in general it makes three changes to the existing legislation. First, when companies with existing debt become connected, the calculation of the deemed release is amended to prevent avoidance. In response to comments on the draft legislation, published on 27 February, clause 23 also amends the wording of the current legislation to iron out a feature that sometimes gives rise to queries about its application in the context of the loan relationships rules on connected companies.

Secondly, it introduces a targeted anti-avoidance rule, to prevent future tax avoidance in this area. Thirdly, to ensure that the particular avoidance scheme would not succeed, it introduces a retrospective provision to counter the contrived arrangements used by the scheme. This an appropriate point for me to address, in detail, the amendment that would remove subsections (8) to (12) of the clause, which introduce the retrospective element.

I have referred to the protocol on unannounced tax changes, and the Government have set out their policy on the area. The present case is an exceptional one, and, for the three reasons that I have outlined, we believe that it is justifiable to use retrospective legislation.

The Government are clear that aggressive tax avoidance schemes are unacceptable. The use of retrospective legislation demonstrates that we will not tolerate aggressive attempts by companies to abuse the tax system with contrived arrangements, to avoid paying their fair share. I therefore hope that my hon. Friend the Member for Amber Valley will be persuaded—having probed very effectively and shown all the diligence that one would expect, which no doubt he will demonstrate on the Information Committee in years to come—to withdraw his amendment. I hope that the clause will stand part of the Bill.

Photo of Nigel Mills Nigel Mills Ceidwadwyr, Amber Valley

I am grateful to the Minister for that clarification. I think that we can all see that, given the example of a bank signing the agreement and entering into a scheme with the amounts of tax in question at stake, if any case was going to be in the line of acceptability for retrospective legislation, this would be it. Therefore I am happy in this situation to withdraw the amendment. I was trying to get the Government to clarify what they perceived as acceptable use, and we have had some progress on that, for which I am grateful.

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 23 ordered to stand part of the Bill.