Clause 75 - Relationship between rules prohibiting and allowing deductions

Finance Bill – in a Public Bill Committee am 3:15 pm ar 11 Mehefin 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

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

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

Clause 75 introduces targeted anti-avoidance rules to the provisions that govern the relationship between rules prohibiting and allowing deductions, after the Government became aware of a marketed avoidance scheme that sought to generate artificial loss release from a property business with the intention that users of the scheme could offset the losses against their corporation tax-liable profits. The Government’s move to close down the scheme is, of course, welcome, but I would be grateful if the Minister would clarify the following issues. How did the Government become aware of the scheme? Were they notified via Labour’s disclosure of tax avoidance schemes provisions, which have protected a significant amount of revenue for the Exchequer? The total amount of revenue protected by DOTAS had reached £12.5 billion by March 2012. It would be useful to have an update on that figure and on the number of schemes that have been identified through the DOTAS provisions.

When did HMRC become aware of the scheme? It would be useful for the Committee to get a sense of how long it took the Government to act once they became aware of the scheme and the avoidance activity. Do the Government know to how many organisations the scheme was being marketed, and whether it was targeted at any particular geographical regions? The Treasury press release states that closing down the scheme

“will protect the Exchequer from potential losses of tens of millions of pounds” and the tax information and impact note indicates that doing so

“is expected to increase receipts by approximately £10 million per annum”,

which is a significant sum. How many individuals or businesses have used the scheme to date, and over what time period? How much is thought to have been lost to the Exchequer as a result of the loophole? What attempts  did HMRC make to challenge the use of the scheme before the changes took effect on 21 December 2012? The Treasury press release of the same date states:

“The Government will introduce a new General Anti-Abuse Rule (GAAR) next year. The GAAR will give additional, general protection for the Exchequer against abusive arrangements of this kind.”

Will the Minister clarify whether, despite the fact that—we assume—the GAAR will come into existence on the passing of the Bill, if the GAAR had been in place when this avoidance scheme was identified, it would have dealt with that scheme and that that would therefore do away with the need to legislate for the targeted anti-avoidance rule? If he could answer those points, that would be beneficial to the Committee.

Photo of David Gauke David Gauke The Exchequer Secretary 3:30, 11 Mehefin 2013

The clause makes changes to ensure that the rules allowing and disallowing deductions for trade and property businesses cannot be exploited for avoidance purposes. Towards the end of last year, the Government became aware of avoidance activity intended to exploit the rules that allow statutory deductions for certain types of business expenditure. That avoidance relied on the creation of artificial costs that companies would have deducted from their profits chargeable to tax. An announcement was made on 21 December 2012 that legislation would be introduced with immediate effect to counter that avoidance involving statutory deductions.

The changes made by the clause will introduce targeted anti-avoidance rules for both income tax and corporation tax purposes. They will deny a statutory deduction, which would otherwise be allowed, where the deduction arises from avoidance arrangements. The measure will affect only persons seeking to use tax avoidance schemes or arrangements; it will not impact on other tax payers. That action will protect substantial amounts of tax.

To turn to the questions raised by the hon. Member for Newcastle upon Tyne North, perhaps I may begin by addressing the general anti-abuse rule, given that this is a targeted anti-avoidance rule, and whether that will be dealt with by the GAAR. It is worth saying that the GAAR is targeting all abusive tax-avoidance schemes, but we have also made it clear that we will continue to take firm action against all forms of tax avoidance to protect the Exchequer from attempts to bend the rules of the tax system to try to gain tax advantages that Parliament never intended. In other words, there is still a place for targeted anti-avoidance measures even if it may well be that the general anti-abuse rule will apply.

At this point, it is probably not helpful to speculate on whether particular arrangements will fall inside or outside the general anti-abuse rule. There are a number of elements to the general anti-abuse rule and, indeed, guidance produced by an independent body and so on, so I do not want to second guess what will be produced in this area. It is worth underlining, however, that in future there will be a place both for GAARs and for TAARs within our tax system.

On how the Government became aware of the scheme, the hon. Lady is correct to say that it was a notification under the disclosure of tax-avoidance schemes rules. She knows that my view is that DOTAS is a useful tool for the Government, but we need to reform it and improve it; that is something that the Government are engaged in.

The hon. Lady asked how many companies, and of what type, this scheme was marketed to, how many used it and over what period of time. The information on the number and type of companies is not available to us. The data on how many used the scheme will become known to HMRC with a fair degree of confidence only when returns are made, so that information may come to light subsequently.

On the hon. Lady’s question about tax lost, we do not believe that the scheme worked as such, and HMRC will challenge the use of the scheme pre-dating 21 December, so we do not believe there has been any tax lost. The introduction of the targeted anti-avoidance rule will prevent repeated use of the scheme and an escalation through similar schemes. It is good to remove any uncertainty, but that does not mean that HMRC believes that the scheme works as such.

In conclusion, the Government are committed to tackling tax avoidance, and this measure clearly demonstrates that we will not hesitate to take rapid action to close down avoidance schemes as we become aware of them. I hope that the clause will stand part of the Bill.

Question put and agreed to.

Clause 75 accordingly ordered to stand part of the Bill.