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

With this it will be convenient to discuss that schedule 27 be the Twenty-seventh schedule to the Bill.

The clause and schedule are related to the previous clause and are introduced to simplify the tax treatment of manufactured payment dividends for corporation tax purposes and all manufactured payments for income tax purposes. I think the Minister has already responded to the concerns that I have noted about the clause, in particular the 100 firms mentioned as being involved in the area, and how many are understood to have been pursuing avoidance schemes. Will the Minister clarify in relation to this particular measure whether the same response applies: that there has been one company since 2011 avoiding tax of around £50 million a year?

Will the Minister also comment on how widespread the abuse of complex existing manufactured payments rules has been? How widespread has the abuse of the general rule been? What has been the impact on the Exchequer overall of the use of those rules, given that the tax information and impact note suggests that it will help to close down avoidance opportunities that have arisen due to the very complex nature of the existing rules?

The clause and the schedule make changes to the tax rules for manufactured payments to simplify the legislation and reduce opportunities for tax avoidance. The existing rules are extremely complex and have been the subject of numerous avoidance schemes. It might be helpful again if I describe the background to the changes.

Manufactured payments are made to and by holders of shares that are lent out under stock lending or repo arrangements. Such arrangements are vital features of the UK and global financial system. On 15 September 2011, the Government announced changes with immediate effect to block the latest in a series of avoidance schemes involving manufactured overseas dividends. At the same time, it was announced that we would consult on proposals to make wider changes to the tax rules on manufactured payments as part of the programme of reviewing high risk areas of the tax system.

The consultation document, “Proposed changes to tax rules on manufactured payments”, was issued on 27 March 2012, with a closing date for comments of 22 June 2012. Following the responses to the consultation, the Government are legislating all the changes proposed in the consultation document, with a commencement date of 1 January 2014. The measure simplifies the legislation by abolishing the rules that currently require deduction of tax from payments, and gives tax credits to the recipient of payments. An exception will be made only where foreign tax has been suffered to ensure that UK companies will not lose out on double taxation relief that is genuinely due.

The changes made by the clause and the schedule will affect three areas of the tax system. First, corporation tax: there will be no special rules for taxing and relieving manufactured dividends paid and received by financial traders. For non-traders, receipts of manufactured dividends will be treated as the real dividends of which they are representative, and payments of manufactured dividends will not be deductible. No changes are being made to the rules for payments representative of interest.

Secondly, income tax: the recipient of a manufactured payment will be treated as receiving the real dividend or interest of which the payment is representative. A payer of a manufactured payment will obtain a deduction for the payment only if it is made for the purposes of a trade. Thirdly, on the deduction of tax from payments of manufactured overseas dividends, as a result of the abolition of the rules requiring deduction of tax from MODs, the recipient will lose any corresponding entitlement to double tax relief. This will not affect any entitlement arising where foreign tax has actually been deducted from the MOD. Only companies and others that enter into stock loans and repos of shares and securities and that pay and receive manufactured payments will be affected. We estimate that there are around 100 businesses that do that.

The Government launched a consultation in March last year aimed at simplifying the tax rules on MODs and manufactured payments generally, with a view to making avoidance more difficult in future. The responses were overwhelmingly supportive of our proposals. The main issue raised was that double taxation relief should be given for any foreign tax deducted from manufactured payments, and that was incorporated into draft legislation published for consultation in December last year. We have  also made one minor change to ensure that life insurance companies will, where appropriate, be able to continue to claim relief for manufactured dividends paid.

The hon. Member for Newcastle upon Tyne North asked about the number companies involved and the scale of abuse. The clause is a general measure aimed at simplification rather than at avoidance alone, but it will protect against loss of tax. To give a sense of the significant sums that may be involved, one scheme that was legislated against in the Finance Act 2011 involved about £490 million of revenue per year. The clause and schedule simplify the rules for manufactured payments by abolishing deduction of tax from payments and tax credits on receipts, which reduces the opportunities for avoidance.

Question put and agreed to.

Clause 74 accordingly ordered to stand part of the Bill.

Schedule 27 agreed to.