Clause 31 - Tax treatment of financing costs and income

Finance Bill – in a Public Bill Committee am 5:45 pm ar 12 Mehefin 2012.

Danfonwch hysbysiad imi am ddadleuon fel hyn

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

Photo of Peter Bone Peter Bone Ceidwadwyr, Wellingborough

With this we may consider schedule 5 stand part.

Photo of Rachel Reeves Rachel Reeves Shadow Chief Secretary to the Treasury

It is a pleasure to serve under your chairmanship this afternoon, Mr Bone. Hon. Members will be aware that the debt cap rules that we are debating under clause 31 came into effect on 1 January 2010. They overhaul the taxation of multinationals and restrict the UK tax deduction for interest costs of UK companies that form part of a larger group. The rules are designed so that the aggregate UK corporation tax deductions—the financing costs—do not exceed the group’s external financing costs globally. They are aimed at cash-rich UK-based groups with upstream loans into the UK from abroad, as well as non-UK parented groups that fund their UK operations via the route of debt finance.

Clause 31 represents a number of changes to those measures that were introduced in January 2010 and included in the Finance Bill that was considered last year by hon. Members. I understand that clause 31 arose from discussions with industry groups. I would like to ask the Minister a number of questions in relation to the clause. Will the Minister confirm that those discussions with industry groups referred to meetings of the debt cap working group, or did they refer to other industry group meetings on the issues raised by the clause?

Various questions were raised at the time of last year’s Finance Bill that I am not sure have been fully addressed, which is why I ask the question about the meetings with various parties over the past year. Is the Minister confident that the changes we are debating in relation to clause 31 will ensure that the system that will stand in place if the Bill is passed will work effectively? If not, does the Minister envisage further changes or improvements in future Finance Bills, or is he confident that the changes set out in this Finance Bill to change what we discussed last year in Committee will complete the issue in hand?

In the Bill Committee on last year’s Finance Bill, the Minister gave hon. Members an assurance and said:

“The cost of the changes in the debt cap legislation are negligible for both businesses and HMRC”—[Official Report, Finance (No.2) Bill Committee,26 October 2010; c. 73.]

Has that proved to be the case, and will the changes before us today affect that in any way? In other words, what are the financial implications of the changes that we are discussing today for tax revenues and the turnover or profits of the businesses that will be affected by these changes?

I also have some specific questions about financial service companies and whether they are captured. I do not think that they are. If not, why not? Is it still the case that HMRC, the Treasury and the Minister consider that clause 31 is unworkable in respect of financial service companies? What progress have the Government made on applying similar rules to financial service companies if, indeed, that is being looked at? If it is not being looked at, will the Minister set out why those rules would not be appropriate for those sorts of companies?

Can any mitigating measures be taken so that at least the spirit of clause 31 would be applicable to all companies, not just non-financial service companies? It is particularly important to consider this issue at a time when bank lending to small businesses in all our constituencies is drying up. Bank of England lending figures from May showed that net lending to British businesses has fallen year on year in every month since May 2010. With British businesses struggling in this double-dip recession—we saw the numbers for manufacturing this morning—we know that small businesses in our constituencies face difficult times. It is clear that we need to consider the issue of bank regulation extremely carefully.

Photo of Steve Barclay Steve Barclay Ceidwadwyr, North East Cambridgeshire 6:00, 12 Mehefin 2012

I am a little puzzled as to why the hon. Lady took the data from 2010, not 2008. Was it not a former Chancellor’s understandable risk-averse requirements around capital for banks and his concern about taxpayer liability that changed those capital requirements and impacted on the banks’ ability to lend?

Photo of Rachel Reeves Rachel Reeves Shadow Chief Secretary to the Treasury

A number of things are impacting on the banks’ ability to lend. It is partly down to the changes in capital requirements, but they are obviously a good thing, as banks will hopefully be less reliant on taxpayers if they get into difficulty in future.

Another thing that affects the banks’ ability to lend is the continuing payouts of large bonuses and, in some cases, dividends. It is also about the lending targets and  the framework that the Government set. After the current Government came to power, they set the Project Merlin agreements with the banks to get them lending again. With net lending falling, that clearly has not been the case, and that is one reason why we have argued for more robust and tougher arrangements not just for banks that have been bailed out by the taxpayer but for banks that have relied on quantitative easing and the insurance schemes that were put in place by both the current and the previous Government.

Photo of Steve Barclay Steve Barclay Ceidwadwyr, North East Cambridgeshire

I thank the hon. Lady for giving way for a second time. I note that she did not address the question regarding the material change in capital requirements for banks happening in 2008, not 2010. However, on bonuses, does she regret the guaranteed bonuses that were allowed by the regulatory regime under the last Government? It was those bonuses that meant that, even after the financial crash, banks were legally compelled to pay massive bonuses irrespective of their performance, because the previous Government allowed guaranteed bonuses to be decoupled from bank performance.

Photo of Rachel Reeves Rachel Reeves Shadow Chief Secretary to the Treasury

I did address the hon. Gentleman’s first point in my response. Having higher capital requirements of course affects the banks’ ability to lend, but it is not the only thing affecting that ability. It is right that banks are being made to put aside more capital, because one reason why they had to rely on taxpayer bailouts in the face of the financial crisis is that they did not have the buffers of capital that would have been put aside had they been more prudent. I welcome higher capital ratios and the fact that banks must put more aside—although there are issues with it working in practice, to which the hon. Gentleman is perhaps alluding.

Bonuses should be just that. They should be awarded for exceptional performance, and it is right that the regulators—the Financial Services Authority and now the Bank of England—have more robust procedures for the regulation of remuneration packages. I would like shareholders to have much more say over the remuneration of top people in firms, which is why it is extremely disappointing that the Government are considering watering down shareholder responsibilities, perhaps with a three-year review rather than an annual review. Pay, bonuses and remuneration are set every year, and it is therefore right that shareholders should vote every year, not every three years. [Interruption.] If the hon. Gentleman wants to make another intervention, I am more than happy for him to do so.

Photo of Peter Bone Peter Bone Ceidwadwyr, Wellingborough

Order. I might be being unusually thick, but I really cannot quite see how this argument is relevant to the clauses that we are supposed to be discussing. However, I am sure that I should be informed more.

Photo of Rachel Reeves Rachel Reeves Shadow Chief Secretary to the Treasury

I am happy to continue with the text, but when we talk about the changes to the way in which the debt cap rules are applied, it is important to consider that these rules do not apply to financial service companies. Such companies are a large part of the UK economy—part  of the economy responsible for some of our current troubles, so it is right that we take time to focus on their tax treatment as well.

To go back to the specific issues in clause 31, members of the Committee will also be aware of the tax arrangements of Vodafone, which were revealed over the weekend, and of the fact that Vodafone pay little or no corporation tax in this country despite doing huge amounts of business here and making large profits in this country. The revelations were described as

“a series of legal accounting manoeuvres involving a complex net of offshore companies”.

Part of clause 31 relates to companies in this country that are often financed by debt finance and are part of large multinational groups. Will the Minister confirm whether schemes such as the one set up by Vodafone, which has caused such an outcry over the past few days, will fall under the rubric of this amendment and whether its tax affairs would be changed in any way by the debt cap changes that we are debating under this clause? Specifically, what steps is he taking to consider passive income, which is income generated by multinational foreign subsidiaries from UK assets that are artificially located offshore for tax reasons? Furthermore, would any part of these debt cap rules apply to such circumstances?

Photo of Ian Mearns Ian Mearns Llafur, Gateshead

My hon. Friend poses an important question. All of our constituents share the desire to ensure that those in high echelons of business, who are making significant profits, pay their share of the country’s tax burden. The way in which this Bill Committee and this House deal with such issues will determine how we are judged by the ordinary citizens of this country. We must ensure that large companies pay the right tax.

Photo of Rachel Reeves Rachel Reeves Shadow Chief Secretary to the Treasury

Part of the reason why these debt cap rules were put in place at the beginning of 2010 was to stop companies that are part of large groups from using offshore arrangements to avoid paying corporation tax in the UK by artificially moving income so that they can minimise their tax payments, thereby depriving the Exchequer of valuable income. It is particularly important to address such arrangements at this time when ordinary families and businesses are struggling with their tax burdens—whether it be the increase in VAT and national insurance contributions, the loss of working tax credits, or some of the new VAT changes. Despite some of the U-turns that we have seen, VAT will still be applied to things that were not previously subject to it.

In those circumstances and in that environment, it is even more important that all businesses, especially big businesses, are seen to, and do, pay their fair share of tax. That is why these debt cap rules were originally introduced at the beginning of 2010 and why the Government should go back, as they did in the previous Finance Bill and as they are doing this year, to ensure that those rules are working effectively. I hope that these changes will bring in more money for the Exchequer, and I look forward to hearing whether the Minister agrees with that.

Even now, despite efforts by the previous Government and by this Government to crack down on tax avoidance, companies such as Vodafone are still getting out of paying their fair share of tax. I therefore share my hon. Friend’s frustrations, and those of his constituents who  get particularly annoyed when they see their taxes going up yet some of the richest people not paying their fair share.

If Vodafone is not affected by these changes, how many of the estimated 1,800 companies or groups that I think fall under the rubric of clause 31 and the debt rules for large groups does the Minister think will be affected? How does he expect their tax liabilities to be changed because of the rules? How much money did the debt cap rules raise previously, and how much does he expect them to raise in the remaining years of this Parliament and beyond? Will some companies see their tax liabilities fall because of these changes, or will tax liabilities only increase? Are specific types of company likely to see their tax liabilities increase more than others? Will the rules affect larger groups or those with more offshore arrangements? Will particular industries be affected by specific changes to the rules? I hope that the Minister will clarify some of those important points on the debt cap rules because it is in the interest of all of us in the House that the measures work effectively for our constituents, small businesses and families.

Photo of Ian Mearns Ian Mearns Llafur, Gateshead

Some hon. Members will be aware that I am currently doing a fellowship with the Industry and Parliament Trust that involves working with small and medium-sized enterprises, as well as some larger companies. I think there is a measure of incredulity among the owners of small and medium-sized enterprises, as well as some large businesses, when they see companies such as Vodafone not paying what everyone would regard as their share of this country’s tax burden.

Photo of Rachel Reeves Rachel Reeves Shadow Chief Secretary to the Treasury

I pay tribute to my hon. Friend for his work with the Industry and Parliament Trust. Those of us who have an association with the trust will know the excellent work that it does to ensure that Members on both sides of the House are in touch with industry and understand some of its concerns, and it is valuable to bring those experiences to the House and to Bill Committee such as this. My hon. Friend makes the point that small businesses, as well as many medium-sized and large businesses, try to do the right thing, invest, employ people, grow their businesses and pay their fair share of tax, and they want to see that everybody is doing that, not only them.

The businesses that I talk to in my constituency of Leeds West get frustrated because they do not have a choice about what taxes they pay. They cannot afford fancy lawyers and accountants to do the paperwork for them; they have to pay the taxes that they know they need to pay, and they cannot work the system to reduce their tax bill. It is therefore right to close loopholes, which is what the clause seeks to do. I welcome that and look forward to the Minister’s response on the specific points that I have raised.

Photo of Nigel Mills Nigel Mills Ceidwadwyr, Amber Valley

I shall speak briefly on this clause. While I was still in practice, I had the misery—it was an incredible misery—of trying to interpret how such rules would affect various groups of companies that were doing nothing remotely aggressive or making any attempt to avoid tax, but merely had a normal commercial level of debt and happened to be a subsidiary of a foreign group. The rules, I think, were an attempt to tackle some tax abuse that was clearly out there, but from  memory I do not think that they were the Revenue’s first choice from a menu of options to try and tackle that abuse, although all the other options were too difficult or could not be done. It was, therefore, left with this option, which was not even the second choice.

The calculations required to weave the legislation through the EU compliance the Minister spoke about earlier are incredibly complicated. They are trying to prove an incredibly bizarre concept. The UK group is allowed debt of up to the same amount as the worldwide group. If a worldwide group has £1 billion turnover and £500 million debt, a UK group with a £10 million turnover is okay as long as its debt does not exceed £500 million. The bizarre concept clearly catches a load of large groups—the hon. Lady quoted 1,800. The vast majority will have no adjustment.

Looking back over the three years since the measure was introduced, does the Minister think that it was a very sensible measure? Was it a sledge hammer to crack a nut? Is the combination of all the other rules that tackle excessive debt and debt taken on for an allowable purpose or the new controlled foreign company rules sufficient to tackle the abuse? If it is not sufficient, will the general anti-abuse rule he wants to introduce be enough? Can the whole worldwide debt cap now be consigned to history as a badly conceived idea that was very hard to implement and very hard to comply with?

The amendments are largely sensible. There are some anti-avoidance ones, but also some that take out a few of the real anomalies in the calculations. Some groups that effectively have no net debt somehow have a disallowance, because they got some debt created by some very strange calculations that had to be done. I welcome the amendments, but I ask the Minister to see whether the tax that is really raised is sufficient to justify the compliance burden. There is a huge amount of other rules that could be used to tackle the abuse sufficiently, which I wholeheartedly agree needs to be tackled. Is this is one area of tax simplification that we could manage and so lose the rules completely?

Photo of Fabian Hamilton Fabian Hamilton Llafur, Leeds North East 6:15, 12 Mehefin 2012

It is a pleasure to serve under your chairmanship this afternoon, Mr Bone. I want to make a few comments on the clauses. They generally attempt to close down abuses and tighten up on tax avoidance. If I may, I want to refer to some points that my hon. Friend the Member for Leeds West made and some points that my hon. Friend the Member for Gateshead made in his interventions. I also want to refer to points that I made when we discussed corporation tax.

A number of Members this afternoon have made mention of the situation regarding Vodafone. My hon. Friend the Member for Leeds West especially drew attention to it, but we would all be highly concerned at a large multinational corporation continuing not to pay tax as it should in this country by arrangement through legitimate, and it seems legal, avoidance measures. Companies, such as the one I used to run and the many thousands of small businesses that are the seedcorn of job creation and economic growth, as my hon. Friend said, are forced to pay the taxes that they are required  and asked to pay, because they cannot afford the accountants and lawyers who might use existing and legitimate legal avoidance measures.

Clause 32 extends the definition of “normal commercial loan” to include loans that carry a right to conversion into shares or securities in quoted companies that are not connected to the company that issues the loan. That means that such loans will be within the definition of normal commercial loans and the holders of such loans will not be treated as equity holders.

Photo of Peter Bone Peter Bone Ceidwadwyr, Wellingborough

Order. Sorry to interrupt the hon. Gentleman, but we have not quite got to clause 32. We are still on clause 31.

Photo of Fabian Hamilton Fabian Hamilton Llafur, Leeds North East

I apologise, Mr Bone, you are right. I am looking at the wrong notes, but I think that the points I made still apply. I want to make a general point, but when we debate clause 32, I will come back to what I was about to say. My point is generally valid. [ Interruption. ] Thank you, I aim to entertain this afternoon.

Members of the general public will be baffled when they see some of the techniques that huge multinational corporations, which are making big profits not just in this country but in other countries throughout the world, are using to avoid paying the tax that smaller companies making similar profits would have to pay in this country. Clauses 31, 32 and 33 aim to close down those abuses, but the question is whether they do so accurately and whether it is in a way that most members of the public are able to comprehend. I know that my constituents, like the constituents of every hon. and right hon. Member in this room, will be completely baffled as to why some can get away with it and others cannot.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

My hon. Friend is making a powerful case about what the general public would see as fair and reasonable. Does he, like me, welcome the fact that the Government are apparently going to take some action on stamp duty avoidance? If it is right to do it on the avoidance of stamp duty, it is also right to do it in the context of companies such as Vodafone.

Photo of Fabian Hamilton Fabian Hamilton Llafur, Leeds North East

I entirely agree with my hon. Friend. The impression and feeling that I get from my constituents and from others whom I meet is that nobody likes to pay more tax than they have to, but people do not object to paying tax if they believe that it is fair and equitable and that everybody pays the same, according to the rules that are laid down, and that no one is treated separately or with any sort of favour. The problem we have is that companies such as Vodafone—there are others—are treated separately. They have a privileged position, which undermines the views of most members of the public, who want to pay the tax that they believe that they should pay or they deserve to pay or need to pay. It must be fair and equitable. Anything that tightens up the rules that ensure that all companies and all organisations pay their fair share should be welcomed.

Photo of Ian Mearns Ian Mearns Llafur, Gateshead

My hon. Friend is making a powerful point. This all underpins the credibility or otherwise of this House to legislate for fairness. If ordinary citizens  and taxpayers out there do not feel that what is being done on their behalf—in their name—is fair, it calls into question whether they can find ways of dodging the tax system as well. We all like to think that the taxes that we raise are fair and are used to fund the public services that we all need and want to have. It undermines the system, however, if people do not believe that the whole system is credible.

Photo of Fabian Hamilton Fabian Hamilton Llafur, Leeds North East

I thank my hon. Friend for that very good point. It is not only that the public have to feel that paying tax is fair and that everybody pays their fair share but, if we are seen not to be ensuring—I hope that the clause will help this—that each company, each corporation, each business and each individual pays their fair share, that undermines this House too. We know that these days politicians are held in fairly low esteem, but if we can show the public that no one gets away without paying their fair share, that might do something to lift the reputation of hon. and right hon. Members from across the House.

When my hon. Friend the Member for Gateshead talks about fair taxation, I think about the documentary programmes and the knowledge that I have of that wonderful small country, Norway. When we look at the Norwegian system and listen to what earners at all levels say about the tax that they pay—in many cases, their tax burden is considerably higher than ours—they say that they are happy to pay that tax because they can see, openly and transparently, how it is spent on the services that they want. They can openly see that it is fair and that everybody pays their fair share according to what they can afford, and they can take advantage of the public services offered. It seems to me that we have a fair way to go before members of the public in this country feel the same way about our tax system.

Photo of Julie Hilling Julie Hilling Llafur, Bolton West

Does my hon. Friend agree that that sentiment is also shared by other Scandinavian countries, including Finland and Sweden, where the people want to contribute to the tax system because of the benefits that they receive back?

Photo of Fabian Hamilton Fabian Hamilton Llafur, Leeds North East

Yes, my hon. Friend is absolutely right. The Nordic countries offer a model for how taxation can be fairly collected and fairly spent in an open and transparent way that we perhaps have yet to achieve fully. I will add to her examples. In two weeks’ time, I will be privileged to take a group of hon. Members to Iceland. It is a small country. [ Interruption. ] It is not a junket. [ Laughter. ] We know the reputation that Iceland has unfortunately had owing to the crisis in 2008, with the collapse of Icesave, Landsbanki and other Icelandic banks. We know also that in a referendum the Icelandic people refused to collectively pay back the amount of money that had been lost. However, the action taken by the Central Bank of Iceland has been exemplary. Iceland has turned its economy around, so that now its proportion of debt to GDP—it is obviously a much smaller country than the United Kingdom—has reduced considerably. Its percentage unemployment has gone down and it is turning the whole thing around very rapidly. That is a lot easier in a small country, but we would do well to consider the lessons that the governor of the Central Bank of Iceland can offer our  Government on how to turn these things around—how to pay debt off and how to ensure that everybody pays their fair share.

In conclusion, and perhaps we can refer to Iceland and the other Nordic countries soon—

Photo of Richard Harrington Richard Harrington Ceidwadwyr, Watford

I am listening very carefully to what the hon. Gentleman has to say and I am very sorry that I shall not be able to join him on that visit to Iceland. It seems that he is suggesting that the Government’s economic policy to sort out our problems should be to default on our debts and then say that we are restructuring everything. Did I misunderstand the hon. Gentleman, because that is exactly what happened in Iceland?

Photo of Fabian Hamilton Fabian Hamilton Llafur, Leeds North East

I am sorry that the hon. Gentleman misinterprets what I am trying to say. What is impressive is that the Icelandic Government and the people of Iceland, while refusing to sign up to the referendum proposition that was put to them, have said that they will pay. The governor of the Central Bank of Iceland, who we will meet in two weeks’ time, said to us last year that every individual who has lost money through the collapse of Icelandic banks will be repaid. It will not happen next year, but they will be repaid. As a nation and as a public, they are determined not to default on their debts. They will do that, but they want to be given time so that they can grow their economy sufficiently to ensure that that is done.

I hope to catch your eye as we go through the later clauses, Mr Bone.

Photo of Aidan Burley Aidan Burley Ceidwadwyr, Cannock Chase

Before the hon. Gentleman finishes, I wish to say that I agree with the principle of what he is saying. Will he extend his argument about everybody paying their fair share of tax to civil servants who set up companies to avoid being on the payroll and to BBC presenters, some of whom are paid on the BBC payroll and some of whom set up their companies and are paid off the payroll? Will he extend that principle to everybody being paid on the payroll? Should the practice that grew up under the previous Government of highly paid civil servants, such as the head of the Student Loans Company, being paid through their private company rather than the payroll, be abolished as well? Is that the Labour party’s position?

Photo of Peter Bone Peter Bone Ceidwadwyr, Wellingborough

Order. Clause 31, “Tax treatment of financing costs and income”, can in no way be referenced to personal service contracts. Will the hon. Gentleman finish his speech?

Photo of Fabian Hamilton Fabian Hamilton Llafur, Leeds North East

Thank you, Mr Bone. I presume, therefore, that I may not answer.

Photo of Fabian Hamilton Fabian Hamilton Llafur, Leeds North East

Okay. Well, I will not. I will just thank the hon. Gentleman for his intervention and conclude by saying that I hope that clause 31 and the subsequent two clauses will do their bit to ensure that avoidance measures are tightened up so that everybody, from large corporations to small individuals, pays their fair share of tax openly and transparently.

Photo of David Gauke David Gauke The Exchequer Secretary

Clause 31, for it is clause 31, makes a number of changes to the debt cap legislation and ensures that debt cap rules are simpler to apply and eliminate situations in which the rules apply unfairly. It also introduces schedule 5. Let me provide a little bit of background for Committee members. As we heard, the debt cap legislation was introduced in the Finance Act 2009. The debt cap rules restrict the amount of interest that large groups can deduct for the purposes of corporation tax. The restriction is made by comparing net UK financing expenses of the group with the amounts shown for finance costs in the consolidated accounts of the worldwide group. The debt cap rules apply only to 1,800 large groups. The majority of the changes are being made to ensure that the rules operate as intended, and their cost is nil. I hope that that answers one of the questions raised by the hon. Member for Leeds West.

Photo of Rachel Reeves Rachel Reeves Shadow Chief Secretary to the Treasury 6:30, 12 Mehefin 2012

So the benefit to the Exchequer from these changes will be zero: they will not bring in any additional revenue.

Photo of David Gauke David Gauke The Exchequer Secretary

The intention is to ensure that the rules apply fairly. We do not expect this to be a revenue-raising measure. The financial implications of the debt cap changes are negligible, the changes will ensure that the rules work fairly, and we do not expect them to have an impact on business.

Photo of David Gauke David Gauke The Exchequer Secretary

I will, but before I do, I should say that the changes will apply to all groups that have to submit debt cap computations for their accounting periods ending after the date of Royal Assent. Until those groups submit their tax computations, we cannot know how many of the 1,800 companies will be affected by the changes. Overall, we think that the measure will be neutral. Some groups will benefit from the relieving provisions, such as changes to the de minimis and some will have extra tax to pay, for example, if they are within the anti-avoidance rules. At the moment we have to make an assessment, which is that it is neutral. This is not a revenue-raiser. There will be a cost for some companies and a benefit for others.

Photo of Rachel Reeves Rachel Reeves Shadow Chief Secretary to the Treasury

For what reasons would a company pay less tax? Although the Minister does not know yet what the tax implications will be, what is his and the Treasury’s estimate of how many of the 1,800 companies will end up paying more, and how many will pay less?

Photo of David Gauke David Gauke The Exchequer Secretary

I refer the hon. Lady to the comments that I made a moment ago.

One relieving provision contained in the Bill relates to the de minimis rules and may result in companies having to pay less tax. We will have to wait until the tax computations come in to find out about the number of companies involved. This is a complex area and the number of companies concerned will depend on their circumstances. Our assessment is that the measure is neutral.

Photo of Seema Malhotra Seema Malhotra Llafur, Feltham and Heston

Will the Minister clarify why he is proposing the changes and what was not fair about the previous arrangement?

Photo of David Gauke David Gauke The Exchequer Secretary

If I may continue, I shall perhaps be able to answer the hon. Lady’s question.

In the broadest terms, the changes make the debt cap operate more fairly. The consultation process was well received. The Law Society, the Chartered Institute of Taxation and Deloitte’s all commented favourably on the engagement by HMRC and the Government in respect of this matter. The key issue raised by accountancy firms, law firms and representative bodies was the proposed form of the de minimis election, to which we have made changes as a result of the consultation. The election will not be backdated to 2010 because that would have meant increased compliance burdens and uncertainty for business, as tax returns for 2010 based on the old rules would already have been submitted to HMRC. Those changes were warmly welcomed and the measure was announced in Budget 2011. The changes being made deal with areas that created real difficulty for businesses, which were raised during consultation.

I will try to pick up some of the additional points that were raised during the debate. First, the debt cap rules commenced on 1 January 2010, so they were first applied to groups’ accounting periods ending on 31 December 2010. As a result, HMRC is only just starting to see returns for that period and later ones. As a result, the amounts that the debt cap has brought in during this year cannot be fully quantified until later this year.

Photo of Nigel Mills Nigel Mills Ceidwadwyr, Amber Valley

Perhaps it would be helpful if the Minister explained how easy it has been to roll out training for HMRC inspectors on that point. Has he any idea how many inquiries have been launched so far on that topic? My understanding is that the training process has taken some time, and I am not sure whether any inquiries have been launched.

Photo of David Gauke David Gauke The Exchequer Secretary

I am not able to give my hon. Friend an answer for the moment, but I will ponder further while I speak and see whether inspiration arrives.

The hon. Member for Leeds West asked about the consultation process. I confirm that there were meetings with the debt cap working group, which represents large groups, and their advisers. There were 16 responses to the consultation and seven to the draft legislation, and the main respondents were accountancy firms, law firms and representative bodies.

The issue was raised about whether the clause applies to financial services companies, and why the rules were not being applied to such companies. Financial services companies are specifically excluded from the debt cap, because the application of the debt cap rules on banks’ ordinary trading assets and liabilities would have had a disproportionate effect on their debt cap computations.

Having thought further about the number of inquiries on the debt cap—[Laughter.]—I can tell the Committee that evidence so far suggests that most groups are applying the debt cap rules correctly, so few inquiries have been made so far. Why that piece of information escaped me earlier I do not know, and I apologise to the Committee for not being on top of that.

A question was also asked about Vodafone. The hon. Member for Leeds West should not be surprised by the fact that I cannot comment on the affairs of individual taxpayers, and I would not have thought that she would expect me to do so. The tax affairs of the UK’s largest businesses are dealt with by dedicated teams in HMRC who routinely risk-assess the returns of the companies they deal with. Those returns will include the debt cap computations, where the rules will apply to all relevant companies in exactly the same way.

Photo of Fabian Hamilton Fabian Hamilton Llafur, Leeds North East

On the last point, can the Minister reassure us that the rules are genuinely applied equitably to the companies that fall within that special group in HMRC and to all the other companies that HMRC has to deal with?

Photo of David Gauke David Gauke The Exchequer Secretary

Yes, HMRC seeks to deal with all taxpayers fairly, and to ensure that taxpayers pay the tax that is due under the law.

Photo of Steve Barclay Steve Barclay Ceidwadwyr, North East Cambridgeshire

Is it not the case that the deal with Vodafone, which was reached in July 2010 and which has caused concern to the Public Accounts Committee, was reached under procedures set up for the Department by the previous Government and was reached by officials without Ministers seeing the detail, because Ministers are excluded from seeing individual taxpayers’ deals? If there are concerns in the House about this issue, they should be addressed to the officials responsible for that deal.

Photo of David Gauke David Gauke The Exchequer Secretary

It is right, both as a correct assessment of the current situation and right in the sense that it is the right principle that Ministers are not involved in the affairs of individual taxpayers. I hope that principle—that it is not for Ministers to make decisions on the individual liability of a taxpayer—retains the support of all parts of this Committee.

With regard to the specific high-profile cases, my hon. Friend, who is a member of the Public Accounts Committee, will of course be aware of the work that Sir Andrew Park has been doing in making assessments of some of them. I understand that Sir Andrew, or the National Audit Office, will set out conclusions in the near future.

Photo of Fabian Hamilton Fabian Hamilton Llafur, Leeds North East

The Minister is absolutely correct—of course Ministers should not have a say or have any sight of any tax arrangements that are made. In that case, does he agree that it is utterly irrelevant which Government are in power, and if Government Ministers cannot influence a case—as they should not—why mention the fact that it happened to be the last Government under which the arrangements were made?

Photo of David Gauke David Gauke The Exchequer Secretary

I am not attempting to make any party political point on this particular issue. It is for HMRC to administer the tax law. I believe that it seeks to do so and does so in a way that is fair and reasonable. I think that all parts of this House want to ensure that the correct amount of tax is collected, and that is the task for HMRC.

Photo of Ian Mearns Ian Mearns Llafur, Gateshead

I know that the Minister will not comment on the tax affairs of an individual company, but there are some well advertised and documented cases where it seems to the man on the No. 53 Saltwell Park omnibus that some large organisations are not paying—from the perspective of the ordinary taxpayer—what would be a fair share of the overall tax burden. The problem is, and it is a problem for us all, is that that brings into question the legitimacy of the taxation arrangements that we come to as a Parliament.

Photo of David Gauke David Gauke The Exchequer Secretary

The hon. Gentleman raises a number of interesting points. I will not spend long doing so, but let me make two points. First, it is of course right that everybody should pay the right amount of tax. The right amount of tax is, of course, what we determine by way of the law and taxpayers have a duty to comply with the tax law. I do not think that anyone would disagree with that and it is the role of HMRC to ensure that the right amount of tax is collected in accordance with the law.

Secondly, the hon. Gentleman makes an important point about legitimacy. There is a balance to be struck between scrutiny—ensuring that companies pay the right amount of tax—and recognising that there is sometimes a great deal of complexity in these matters. Very often, multinational companies have profits from a number of different countries and there is a question of which jurisdiction the tax should be paid in, as opposed to whether tax is paid at all. Sometimes companies have losses that they can use to set off against future profits, and very often these are quite complicated matters.

There is also a responsibility for all of us, in terms of the legitimacy of the tax system, to ensure that we choose our words carefully. Sometimes it seems to me that there have been some press reports where the allegations have been perhaps stronger than the evidence suggested.

Photo of Ian Swales Ian Swales Democratiaid Rhyddfrydol, Redcar

I will return to a point I raised earlier because it is more relevant to this clause. Does the Minister believe that these provisions will make it less likely that essentially UK-based companies will move their debt to jurisdictions such as Luxembourg, thereby lowering their tax bill through interest payments to what is actually a related company, with the interest receipts being taxed at the lower level in the country concerned? That practice has been highlighted in the media recently.

Photo of David Gauke David Gauke The Exchequer Secretary 6:45, 12 Mehefin 2012

My hon. Friend is taking me into technical measures when he asks whether the clause will have that effect. The Government’s overall approach, as with previous Governments, has been to ensure that the right amount of tax, a fair amount of tax, is paid. The way that interest accountability operates is complex, so I do not want to be drawn too much on particular circumstances, although he raises an important point.

Photo of Charlie Elphicke Charlie Elphicke Ceidwadwyr, Dover

I thank my hon. Friend for giving way. He is generous in taking interventions and in not making party political points, which is a generosity that I do not share.

Having what the lawyers call a policy/operational dichotomy is fundamentally right. Ministers set the policy and the civil servants do the operations. Ministers cannot handle individual taxpayer cases because of the risk that they might do something that is arbitrary or unfair. That is the key principle: a separation of policy from the operations of individual taxpayers.

Nevertheless, there seems to be a lot of disquiet concerning the Vodafone and Goldman Sachs cases, and no doubt other cases, that the policy set by the previous Government seems to have been unduly lenient and allowed the Revenue to make some disgusting, cosy deals. The previous Labour Government allowed big business to rip off the tax system, and it seems to me that the policy should be reviewed. The coalition should not slavishly follow Labour’s policy.

Photo of Peter Bone Peter Bone Ceidwadwyr, Wellingborough

Order. Interventions are supposed to be short; they are not supposed to be speeches.

Photo of David Gauke David Gauke The Exchequer Secretary

All I will say is that Sir Andrew Park has been considering some of the high-profile cases, but there are circumstances in which it makes sense for HMRC to reach a settlement with a taxpayer, rather than going through the full process of litigation. That process, which has been in operation since 2007, has resulted in revenues that were not previously possible. Greater light will be shed on some of the individual cases in the near future. Clause 31 and schedule 5 ensure that the debt cap rules operate simply and fairly, and I hope that they may stand part of the Bill.

Question put and agreed to.

Clause 31 accordingly ordered to stand part of the Bill.

Schedule 5 agreed to.