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5.45 pm

I am not sure what planet the Chancellor was on when he claimed that the Government moved quickly. Eighteen months previously, it was quite well known in the financial community that such arrangements were an abuse of the tax system. One could talk to any corporate financiers of repute about the issue and they would say, "Well, yeah, it probably is an abuse of the tax system, but we're allowed to get away with it." They all thought that it was a loophole and one that would certainly be closed--not in this Budget, but in the one before.

I shall now consider amendment No. 10, which I support. It should be clear from my remarks that I do not approve of share dividends and share buy-backs being used as a tax wheeze; however, I do believe that retrospection of taxation is an important issue and one that the Minister should address. I hope that he will take the amendment seriously--indeed, I understand that he might do so.

It is not only one prominent company in Cornwall that will be affected by the proposal. A company called The Birmingham Guild Ltd., which is based in Netherton--which is not in my constituency, but which I hope, with boundary changes and after a short general election campaign, will fall comfortably within it--wrote to me about tax-saving measures in respect of companies buying their own shares or paying special dividends. The letter says:

"Our Company, The Birmingham Guild Limited, has over the past few months been involved in certain transactions for bona fide commercial reasons. These transactions have involved the purchase of the Company's own shares from Trustees of family Accumulation and Maintenance Settlements. We have been advised in these transactions by Messrs Coopers and Lybrand who applied for tax clearances on 13 and 24 September 1996"--

before the Chancellor's announcement--

"and such clearances were duly received in October 1996. The retrospective nature of the legislation adversely affects the transactions we have entered into in good faith and in the light of the legislation prevailing at the time."

The company is clearly being penalised as a result of proposed legislation that was rather woollily outlined on 8 October and only inadequately clarified in December.

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The letter goes on to quote a number of reputable sources and highlights the interest shown by the chairman of Coopers and Lybrand and by Deloitte and Touche, which has also contacted the Inland Revenue in respect of this issue. The letter concludes by saying:

"I hope you will agree that the retrospective nature of the proposed legislation is quite unacceptable in breaking as it does a long established principle and is absolutely contrary to natural justice. Your help in addressing this matter will be appreciated."

I wanted to read that because it is important for the Committee to realise that the Bill affects real businesses in the black country as well as in Cornwall. We should therefore consider accepting amendment No. 10.

Amendment No. 9 seeks to withdraw the allowance made in paragraphs 4, 5, 6 and 10 of schedule 7 if transactions are not carried out for bona fide commercial reasons. The Minister must look seriously at this matter. It was clear to me when I sought to amend sections 703 to 706 of the Income and Corporation Taxes Act 1988 last year that those sections could not easily be used to stop streaming. That may be why the Government have adopted such an approach in schedule 7 rather than making a simple alteration to that Act.

However, it is a clear principle--I suspect that the Minister will use it as a reason for opposing the amendment--that "bona fide commercial reasons" is an accepted term in law and is referred to in sections 703 to 709 of the 1988 Act. That Act relates directly to schedule 7, as it provides that if a

"transaction or transactions were carried out either for bone fide commercial reasons or in the ordinary course of making or managing investments, and that none of them had as their main object, or one of their main objects, to enable tax advantages to be obtained",

tax advantages gained can be counteracted. I hope that that is clear.

The amendment is similarly clear about how we would expect it to operate in law. Section 703 of the 1988 Act could apply to a takeover bid involving the offer of a special dividend but that would depend on two further requirements: first, the obtaining of a tax advantage and, secondly, the absence of a bona fide commercial defence.

In the case of Shepphard and another, trustees of the Woodland Trust, v. Commissioners of the Inland Revenue, members of a family who were also trustees of a charitable trust decided that the trust should be financed by dividends. The company issued bonus shares, which were announced in favour of the trust. The family then renounced the right to a dividend in favour of the trust, and the company paid the dividend to the trust. As a non-taxpayer, the trust was able to claim back the advance corporation tax paid by the company on the distribution. The Inland Revenue sought to deny the claim for repayment, relying principally on section 703 of the 1988 Act, and said that the right to claim repayment of the advance corporation tax was a tax advantage.

That was accepted in the High Court, where Mr. Justice Aldous held that the ability to claim the advance corporation tax paid by the company on the making of the distribution at a later stage on appeal was not a "tax advantage" for the purpose of the provisions, having regard to the statutory definition. He said:

"The whole idea of a tax advantage is that the taxpayer has done something which allows him to resist an assessment and the Inland Revenue can point to something which alters his position to his advantage."

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That ruling followed the words of Lord Wilberforce. It is significant to amendment No. 9, which refers to "bona fide commercial reasons" and


"the obtaining of a tax advantage".

I was not surprised that the Government rejected the amendment that I sought to table last year to sections 703 to 706 of the Income and Corporation Taxes Act 1988, but I am surprised that they have not sought to go down that route themselves in their rather complicated schedule 7. I support the principles behind the schedule, but remain to be convinced whether it is effectively drawn. I suspect that clever tax accountants will still find ways to get round it.

The schedule misses the target of special dividend shares that do not require consolidation, and does not establish a level playing field for takeovers. Will the Minister clarify that, because it is an accepted principle that there should be a level playing field for takeovers in terms of the tax system. Whereas the old system offered corporate raiders a tax advantage by allowing them to make a special dividend payment from the target company on a successful takeover, schedule 7 will shift the bias from favouring the bidder to favouring the target company, which will be able to take account of certain tax advantages not available to the bidding company. I suspect that, for that reason and many others, we shall return to the matter in future Finance Bills.

I support amendments Nos. 9 and 10 and hope that the Minister will consider them favourably.

Mr. Stephen Timms (Newham, North-East): I wish briefly to put three specific questions to the Minister. First, why have the Government taken so long to stop this abuse? The original announcement of the proposals on 8 October last appeared to be linked to Reuters' proposed special dividend, but the Government could have acted much earlier. Special dividends were used in the bids for a number of electricity companies in 1995 and by Lloyds bank when it merged with the Trustee Savings bank. The Chancellor could have taken action before the 1995 Budget. My hon. Friend the Member for Dudley, West (Mr. Pearson) tabled an amendment to the Finance Bill following that, and the Government did not act. If those bids were not enough, Granada's bid for Forte should have made the Chancellor sit up and take action no later than January 1996.

My hon. Friend the Member for Dudley, West mentioned what Graham Searjeant said in The Times on 22 January 1996. The problem was well known more than a year ago, so I want to know why the Government are taking so long to deal with the abuse.

Secondly, why did the Inland Revenue not use existing anti-avoidance legislation to tackle the problem? As a number of hon. Members have said, the powers in sections 703 to 709 of the Income and Corporation Taxes Act 1988 exist to allow the Inland Revenue to cancel tax advantages from certain types of transactions in securities. The growth in the use of special dividend and buy-back schemes was probably prompted by the Revenue's apparent unwillingness to use those existing powers.

Stephen Edge wrote in The Tax Journal on 10 October, referring to the proposal that we are debating:

"This is probably an unnecessary change if the provisions of s703 were applied properly and it is somewhat puzzling that the Inland Revenue has not responded to the press clamour by saying that it already had adequate weapons to deal with this abuse."

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Thirdly, why has the schedule been so widely drawn? Why does it not target the problem that has been identified? As it is drawn, it could catch almost any dividend, as Stephen Edge noted in The Tax Journal. The schedule is riddled with complexity and uncertainty, and clever people will probably find ways around it.

Those are my three questions to the Minister: why did the Government wait so long, why was the existing legislation not used by the Inland Revenue, and why has the schedule been drawn so wide?

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