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5.15 pm

The clause is broadly defined, and there is some danger that the innocent may be caught with the guilty. I hope that the Minister can assure us about the way in which the scheme will be enforced. The scheme may affect company reorganisations and will create another layer of complex fiscal detail. Fiscal detail is sometimes necessary, but we should be careful not to indulge in the creation of fiscal detail for the sake of it, and full explanations will be needed from the Treasury. Companies will have to contend with complex provisions when they arrange their corporate financial affairs as a result of the schedule. It will provide income for lawyers and accountants, but may in effect frustrate many bona fide financial engineering projects within the City.

Mr. Tim Smith: What point is the hon. Gentleman trying to make? Who is he saying should decide whether a "financial engineering project"--as he described it--is bona fide or not?

Mr. O'Brien: My point relates to the provisions contained in section 703 of the Taxes Act 1988, which allowed the Inland Revenue to deal with issues of tax avoidance. The Revenue can look at particular

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mechanisms and ask whether they are geared towards tax avoidance or towards dealing with genuine commercial arrangements with a practical benefit. Why did the Government not get the Inland Revenue to look at whether the arrangements were bona fide? There may well be good reasons for that, but it remains to be seen whether the Minister can provide a justification for the course that has been taken. The House has a right to hear such a justification.

The Government have provided exemptions to clause 68 but have not sought to distinguish between bona fide operations and any abuse of the exemptions. Why do the Government believe that those in the City who, in a sense, abuse the current system will not abuse the proposed system by, for example, exploiting the exemptions for preference shares and pre-sale distributions? I hope that the Minister can reassure us on that.

The amendment denies the benefit of the exemptions to transactions that do not have commercial justification. Each case would be considered on its merits, and the Inland Revenue would be able to exercise discretion. Where the Inland Revenue and taxpayers agree, both would have recourse to the courts which would decide on the facts and the law in each case. The Red Book forecasts that the Government will save £200 million in 1997-98, rising to £400 million in 1998-99 and 1999-2000. The amendment might provide a little extra help for the taxpayer by increasing resources. It is difficult to gauge precisely how much will be raised, but ensuring that the exemptions are used only for bona fide purposes seems to be a good way to proceed.

I have a series of questions to which I hope the Minister can give me some answers. Why have the Government taken so long to tackle the problem? They knew about the special dividend issue when it arose in bids for several electricity companies back in 1995, as well as in the Lloyds-TSB merger. Surely the Minister could have acted to deal with the matter in the 1995 Budget. Why did it take a further year to take the necessary action? Surely the Treasury must have thought about it during the intervening period, so why did a subsequent complication arise as a result of the various press releases that were issued? That complication had a detrimental effect not only on Ginsters and Samworth Brothers, but various other people have complained to their accountants that they did not realise what would happen.

Even if action was not taken in the 1995 Budget, the Chancellor was aware of the abuse. Why was it not possible to use the powers in sections 703 to 709 of the Taxes Act 1988 to challenge the tax advantages from special dividends in takeovers? The respected Stephen Edge of Slaughter and May wrote an article in The Tax Journal on 10 October 1996 in which he questioned whether the current changes were necessary. He thought that section 703 of the 1988 Act enabled the Inland Revenue to act. Will the Minister clarify the position with regard to that section and explain why it was impossible to use it to deal with the issues that arose in various takeovers?

Why is schedule 7 so widely drawn? Why has it not been possible better to target the abuses? Accountants and lawyers will do very well as they work out the meaning of paragraph 1(3)(a), especially the meaning of

"was . . . referrable (in some way and to any extent) to, or to the carrying out of, a transaction in securities".

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Is it the intention that United Kingdom tax exempts should never qualify for ACT refund on share buy-backs? Are we not left with a complex schedule with an uncertain meaning? Will the Minister confirm that the legislation requires to say on the dividend voucher whether the distribution is affected by that legislation? That may prove difficult.

The schedule may create uncertainty because the scope of the wording is too complex and difficult to understand. It requires that companies should prejudge the outcome of any difficulty or complexity before they can issue any dividend. A company is prevented from paying up and arguing later with the Inland Revenue about whether it is covered by the schedule. If that is so, it is likely that mistakes will be made.

Are we not in danger of creating an extra burden on businesses, many of which are not large but may still be affected by the terms of the schedule? Should we not have dealt with the issue of complexity with more care?

A judgment must be made about the dividend voucher before the dividend is issued. What is the penalty for getting it wrong? I have been unable to discover it, but perhaps the Minister can let us know.

The Labour party strongly supports action to tackle the abuse of share buy-backs and special dividends for the purposes of tax avoidance. My hon. Friend the Member for Dudley, West deserves credit for repeatedly warning the Treasury about that abuse. We are concerned about the Government's failure to act earlier and the complexity of the method used to tackle the problem. The schedule adds yet a further layer of complexity to an already complex system of corporation tax. It follows other fundamental changes to the imputation system, which have been passed in recent years, such as the decoupling of ACT and the basic rate of income tax and the introduction of foreign income dividends.

The system will become yet more complex because of the schedule and because the income tax and corporation tax structures have changed significantly since the introduction of the imputation system in 1993. Is it not therefore time to consider whether we can simplify that complex system as soon as possible?

I should like to ask the Minister a few questions of a more technical nature, although I accept that he may be unable to answer them immediately. If so, perhaps he can write to me and ensure that those answers are published because the current proposals have led to a number of confusions. Can the Minister confirm that foreign recipients will not be able to claim tax credit repayments on the double taxation agreements? If so, can the Minister explain why such shareholders would be affected in that way?

Can the Minister say whether the words "made to" in paragraph 1(3) in relation to the scope of special rules for trustees referred to in sub-paragraph (4) mean that the provisions apply to bear trusts and not to just to qualifying distributions belonging to the trustees? As for the meaning of payment, can he explain whether the term "payment" in paragraph 1(2) covers payments in kind as well as payments in cash? That uncertainty might create an opportunity for abuse, so I hope that the Minister can clarify that.

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As for the meaning of arrangements in paragraph 6(2), can the Minister explain whether the word "arrangement" means any agreement or understanding whether or not it is legally enforceable? On the extent of transactions in securities, can the Minister explain whether the phrase "transaction in securities" in paragraph 1(3)(a) could include the payment of the dividend? Can he clarify the meaning of the words "by virtue of which" and "made referrable to" in paragraph 1(3), which seem to add to the confusion? Can the Minister cite some examples to illustrate the strength or laxity of those important connecting words?

On the scope of exclusion for pre-sale dividends, can the Minister explain the basis of the 14-day limitation in paragraph 6? Why should a dividend that is paid more than 14 days before a sale be regarded as more offensive than one that is paid within that 14-day window? That difference may be academic, but we are here to clarify such details. It is important that we do so because a lot of people will read the answers in Hansard.

The Financial Secretary to the Treasury (Mr. Michael Jack): We will be here all night.

Mr. O'Brien: I hope not.

The schedule also has the odd effect that the longer the time the dividend is paid prior to sale, the more likely it is to be safe. It will not be referrable to the later sale. As the time lapse shortens, the risk gradually increases, until at 14 days it suddenly drops to nil. That does not seem logical. I appreciate that the Minister may not be able to deal with all those questions, but I want to place them on record so that answers are given to aid those who will have to deal with the issue later.

Can the Minister advise us whether for the purposes of relief as set down in paragraph 6, it is necessary that the sale should have been completed by the end of the 14 days?

We have sought to clarify the meaning of a complex set of provisions. We also want to strengthen them. The Government are tackling the right issue, but we have doubts about their methods. The Minister must answer some important questions about the effects of the press releases. The points that were raised by the hon. Member for Beaconsfield (Mr. Smith) are important and I hope that the Minister will be able to deal with them. He must deal with those problems--and not just in terms of retrospective legislation. There is also the question of the press releases and whether or not the Inland Revenue properly clarified what it intended to do.

If the Committee wishes, I shall later move amendment No. 9 formally and seek to commend it as one that will add strength and clarity to the schedule.

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