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Session 1997-98
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Standing Committee Debates
Finance (No. 2) Bill

Finance (No. 2) Bill

Standing Committee E

Thursday 4 June 1998


[Part II]

[Mr. John Butterfill in the Chair]

Finance (No. 2) Bill

(Except Clauses 1, 7, 10, 11, 25, 27, 30, 75, 119 and 147)

[Continuation from column 568]

Clause 87

Personal portfolio bonds

Amendments made: No. 199, in page 72, line 5, leave out "553A" and insert "553B".

No. 200, in page 72, line 7, leave out "553B. (1)" and insert "553C. (1)". [ Mr. Geoffrey Robinson.]

Mr. Heathcoat-Amory: I beg to move amendment No. 171, in page 72, line 10, after "546(4))", insert

    "in cases where a holder acquired a personal portfolio bond with the sole or main object of avoiding tax".

My observations on the clause will not stray outside the terms of the amendment because they are on the theme of legitimate and illegitimate measures to counter tax avoidance. The Treasury and, I regret to say, the Inland Revenue have been shown in a most unfavourable light. They have gone a long way beyond the legitimate and understandable actions provided by successive Finance Bills to counter tax avoidance where the wishes of Parliament are clearly being circumvented and the loss of revenue is on an unacceptable scale.

The measures before us to counter tax avoidance are disproportionate to the problem identified or described to the Committee, unless the Paymaster General can give us better particulars. What has especially annoyed ordinary taxpayers who hold personal portfolio bonds is the terms of the Inland Revenue tax notice which says:

    "This type of bond is designed primarily for tax avoidance purposes".

The bonds in question are a particular type of product. They are marketed to those people living and working overseas who wish to build a significant fund for their retirement in lieu of the normal pension arrangements that might have been open to them had they been UK residents throughout their working lives. Under the present tax statutes, they cannot avail themselves of the normal tax-exempt pension plans and savings products available to those who work in this country. They find that particularly galling.

6.15 pm

It seems to those people that the Government have a deep suspicion of anyone who is, or who has been, an expatriate. That became apparent during our debate on the foreign earnings deduction clause earlier this week, when the Government made clear their view that most expatriates work abroad primarily to avoid paying tax. However, in the experience of Opposition Members, such people work overseas not only in the legitimate pursuit of a career objective but often to advance this country's interests.

On publication the clause achieved a certain notoriety in the press. Since then I have received a number of letters from people who took out personal portfolio bonds not to avoid tax, but in good faith as a normal savings plan that they assumed to be in line with the Government's wishes. The Government frequently speak of the need to build up personal savings as a long-term insurance against state dependency. Such people are therefore acting responsibly and, moreover, entirely legally.

However, the Inland Revenue fought a long campaign against personal portfolio bonds, which it finally lost in the House of Lords. The route to the House of Lords was peppered with a number of unpleasant observations by officers of the Revenue, which suggested that anyone who persisted in buying and holding such bonds would be taken to endless appeals. It is not surprising that many taxpayers of modest means capitulate when they are thus confronted by the Revenue.

The special investigation section of the Revenue said that anyone who successfully appealed to the special commissioners would in turn be appealed to the High Court and eventually to the House of Lords. That did in fact happen, but the Revenue comprehensively lost. That outcome owes much to the courage and perseverance of Professor Willoughby, a man of unimpeachable integrity who was not to be browbeaten. On receiving his OBE from Christopher Patten in Hong Kong, the citation made reference to

    "the immense contribution you have made in the fields of taxation and the law."

Here is a man who, in addition to working legally overseas, contributed to the field of public policy and taxation. That may be why he was able to take on the Revenue and win comprehensively. In delivering the Law Lords' judgment, Lord Nolan described the fallacy that was at the heart of the commissioners' case. This was not a mere technicality. The judgment, which is extremely long and which I have no intention of quoting from at length, outlines the Inland Revenue case and subsequently demolishes it comprehensively. Lord Nolan describes what he calls the attack that the Revenue launched on Professor and Mrs. Willoughby and other Royal Life bond holders. Lord Nolan observed:

    "I am unable to follow the reasoning of the commissioners."

He concludes that Parliament's intentions were not circumvented by Professor Willoughby or the other bond holders. But the Inland Revenue now asserts that it lost only on a narrow point, which is a grotesque description of what Lord Nolan and other Law Lords said.

Despite losing a case in the highest court in the land, this clause is being introduced to overturn that judgment and to continue what can only be called the persecution of many hundreds I do not know the exact number of people who took out such bonds in good faith.

Mr. Geoffrey Clifton-Brown (Cotswold): Will my hon. Friend concede that the most serious aspect of the clause is that although the Bill sets the framework, the[Mr. Geoffrey Clifton-Brown] mechanics are governed by secondary legislation? If the Revenue subsequently loses a court case in the House of Lords, it need only return with a different piece of secondary legislation to overturn that judgment, which poses an extreme danger to the taxpayer.

Mr. Heathcoat-Amory: My hon. Friend makes an extremely good point. It is outrageous that, having lost in the House of Lords, the Revenue should get Parliament to change the law to give effect to what it would have liked to have been the case. That will not be achieved by primary legislation but by regulation, which may never be debated or scrutinised by the House. The Paymaster General must explain that.

I am afraid that we are becoming used to the growing abuse whereby important taxation matters are not debated, do not appear in the Bill and are related to regulation. But in this case it is an extreme abuse.

The Chairman: Order. The right hon. Gentleman is going rather wide, as he indicated that he might, of the amendment. It will be my intention to allow a fairly wide debate on the amendments, with a view to dispensing with a stand part debate.

Mr. Heathcoat-Amory: I am grateful, Mr. Butterfill. That would be a suitable arrangement. But I believe that my remarks apply fairly specifically to amendment No. 171, which would confine the clause to those arrangements and bonds that have the sole or main object of avoiding tax. Opposition Members recognise that such bonds can be used as part of tax avoidance schemes, which are beyond Parliament's original intentions. If the Government had introduced a targeted measure to address identified abuses, they would have had our support. But they are continuing a campaign against people whom the House of Lords have ruled not to be avoiding tax but to have taken out bonds in good faith, as part of a legitimate savings plan. We regard that as oppressive.

You have just indicated, Mr. Butterfill, that there will be debates on other amendments, and I have no wish to stray any further at present. I want, however, to make one final point. The Government are compounding what I can only describe as a fiscal crime by not simply subjecting future bond holders to a more stringent tax regime, but subjecting existing bond holders to a penal levy by taxing a notional gain at 15 per cent.

Unit trusts or a portfolio of shares can go up or down year by year. You, Mr. Butterfill, would be outraged, as would any hon. Member, if the Inland Revenue were to tax you at a compound 15 per cent., year upon year, simply because it had lost a case in the House of Lords that had proved that you were not avoiding tax. It is an outrage. I hope that the Paymaster General will see the force of our argument and will agree at least to reconsider the matter.

Mr. Edward Davey (Kingston and Surbiton): I strongly support the amendment. It may be unusual for me to be so fulsome in my praise for the right hon. Member for Wells, but he put his case extremely well. We are debating a matter of principle. The Government are going against the rule of law in what they seek. Having read the House of Lords judgment, the right hon. Gentleman could have put it even more starkly, because the Lords ruled that offshore bonds do not involve the avoidance of tax. The Inland Revenue should be put in its place, but it felt the need to use a draconian approach to get rid of its pet hatreds.

The key issue is how people have used personal portfolio bonds. Are they a tax avoidance scam for offshore investors, or are they a legitimate saving device? I realise that some people may have used them as a tax avoidance device, but many have not. They have put their lifetime savings into that mechanism, and it is completely wrong and unjust indeed, it is immoral to change the rules of the game.

Mr. David Ruffley (Bury St. Edmunds): Would the hon. Gentleman concede that income tax is paid on income and on gains made on onshore bonds if there is a chargeable event at the higher rate for higher rate payers? That is one example of individuals with such onshore bonds being hit by the provision. It is not merely a question of offshore bonds being hit; the whole shooting match, including onshore bonds, where tax is paid if there is a chargeable event, is hit by this preposterous clause.


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