| Finance (No. 2) Bill
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Mr. Fallon: The Paymaster General is a changed man. This morning he brushed aside any inquiries about the clauses with which he was charged. We have now received a detailed general exposition of everything that lies behind this clause and we heard of his willingness to consider the merits of the next group of amendments. The Paymaster General outlined at length some of the general principles behind the schedule. I and at least one of my hon. Friends will want to discuss those in detail when we reach the stand part debate. However, I shall concentrate on his response to amendments Nos. 203 and 208. He suggested, with that sleight of hand to which we have become accustomed, that there was consultation but that it was a bit late in the day. The plain fact is that no proper consultation took place with the insurers before the Bill was published. The right hon. Gentleman will concede that once it was published, it came as a considerable shock to the insurance industry. We are glad to have it on the record that the Treasury accepts that the regulatory constraints on that industry condition the way in which it does business. I want to deal with the principle of the amendment moved by my right hon. Friend the Member for Wells. It was not clear whether the Paymaster General met all his concerns. Is there no need to apply the rules unless there is a substantive loss to the Exchequer? In other words, is he saying that where the net effect of the transaction is nil or likely to be nil, the rules will not be applied? Mr. Robinson: The rules will be applied. Opposition Members are trying to determine when they will apply or disapply. No one is able to predict with a degree of certainty the outcome of a transaction. We will not know at the time of a transaction whether the net effect of the tax in the two trading entities will be neutral or not. If Conservative Members reflect for a moment, they will see that to be the case and understand why we cannot accept the amendment on those terms. We do not think that that will happen in many instances, but where it does, there will be an additional compliance burden, such that one company will levy a charge on the other to let it out. In addition, the amendment is totally technically deficient, although it does raise a substantive point, on which we shall table an amendment in due course. Amendment negatived. Mr. Heathcoat-Amory: I beg to move amendment No. 204, in page 256, line 15, leave out from "arising" to "include". The Chairman: With this we may discuss the following amendments: No. 205, in page 256, line 17, after "(a)" insert
No. 206, in page 256, line 20, after "(b)" insert
No. 207, in page 256, line 22, after "companies" insert--
No. 209, in page 256, line 30, at end insert--
Mr. Heathcoat-Amory: Although the Paymaster General did dilate a little on the more general provisions of the schedule in his response to earlier amendments, I would ask you to allow a wider debate later, Mr. Butterfill. The Chairman: Order. Of course it is my present intention to allow a stand part debate, but that will depend on the discipline of the Committee in confining remarks fairly narrowly to the amendments under discussion. Mr. Heathcoat-Amory: I shall show extreme discipline by speaking briefly and concisely to the amendments in this group. Although the language of the schedule and the amendments is opaque, a matter to which we shall return, the intention behind the group of amendments is simple: to relieve companies of the burden imposed by the schedule, if it is clear that their structure and pricing arrangements do not have tax avoidance motives. The essential amendment is amendment No. 207, which would ensure that the rules would not apply provided that the company was following "normal commercial practice" and its purpose was not the avoidance of tax. I am aware of the problem of introducing motive tests into legislation. Nevertheless, I believe that it is worth exploring that approach in view of the fact that, both in this provision and elsewhere in the Bill--and the Government have signalled their intention to go further next year--there is a general drive against tax avoidance. It would be useful to know whether the Government think that motive tests are realistic or workable, especially as, in this case, such a test would relieve a significant section of the British service industry from having onerous and complex rules applied--and all because a perfectly legitimate structure has come under review. As I have explained already, for regulatory and business efficiency reasons a structure may appear to avoid tax, even though that is not its motive and there are genuine commercial reasons for it. Indeed, the Paymaster General has just conceded that point. Therefore, I hope that he will look sympathetically on the group of amendments. He gave us some hope by saying that he was minded to accept at least some of our amendments, so perhaps we are in luck. Mr. Geoffrey Robinson: I suspect that the right hon. Gentleman may not know where he has struck lucky-- Mr. Fallon: On amendment No. 209.
5 pmMr. Robinson: The hon. Gentleman is spot on. We are prepared to acknowledge the point raised by amendment No. 209, which is the result of consultation. In due course we would have tabled a similar amendment, and I propose that we should do that on Report. I shall take what is a unique opportunity to congratulate the Opposition on being quick off the mark with amendment No. 209. However, that is regrettably little on which to congratulate them. We have a lot of ground still to cover, and purely in the interests of making progress I am trying to create a spirit of good will among Committee members. As they stand, the rules allow a consequential adjustment to be claimed as long as both parties are within the charge to UK corporation tax and not entitled to exemption from that tax on the profit arising from the transactions in question. The amendment would change the rules so that a claim may be made so long as the profits are within the charge to corporation tax, irrespective of whether they, or any part thereof, are then subject to exemption. An insurance company may have elements of income, such as that arising from pension business, which are exempt from corporation tax. The existence of such exempt income will not of itself prevent a company from claiming a consequential adjustment in respect of its income that is not so exempted. However, an adjustment cannot be claimed where a share of the income from activities that are relevant to a transfer pricing adjustment relates to exempt activities. We recognise that there may be circumstances in which an insurance company wishes to make a claim for a consequential adjustment in respect of such partially exempt income. For that reason the Government accept that the amendment is in principle fair, and we will table an amendment to that effect on Report. That is the one element that the Government feel is in need of attention. We sympathise with the life insurance industry, which should not be disadvantaged in any way by falling within the too narrow respects of the transfer pricing regime. Such measures are necessary to prevent tax avoidance. I am sure that Committee members are anxious that the process that they in many ways initiated should be continued constructively and effectively. For that reason, the Government cannot accept the other amendments. However, we are minded to accept the intention behind amendment No. 209, which has highlighted the genuine possibility that persons might be penalised unnecessarily, albeit unintentionally. We shall therefore table an appropriate amendment on Report. Mr. Fallon: We have struck a schedule in which the Paymaster General is taking an undue interest. He is being extremely helpful, and we have struck gold on amendment No. 209. Perhaps because he was overwhelmed by that concession, he has not been able to comment directly on the motive test that we sought to introduce through amendment No. 207. It would be helpful if he could say why a motive test is inappropriate. It is now understood that the insurance industries concerned are influenced by the regulatory measures by which they have to abide, rather than by a desire to avoid tax. Any concession for service companies does not necessarily apply to others such as fund management subsidiaries which, however innocuous, will now be subject to the same level of scrutiny. Without wishing to tempt his good will too far this evening, perhaps he could explain why a motive test is inappropriate in this case. Mr. Robinson: There are many established parts of taxation law where a motive test works very well. We shall come to one such area--that of controlled foreign companies--in a moment. That is an area where we have improved matters, but without in any way changing the motive test. Motive tests are difficult to introduce to tax law. Normally it is better that the legislation stands in its own right, and that the transactions are judged similarly. I am not asking to reverse the position; I ask the hon. Gentleman merely to reflect on it. There must be a positive reason for a motive test if it is to be introduced into tax law. I would normally be responsive to the idea and say, "That is the issue, what is the intention?". In tax law, however, it is far better to deal with the situation as it is, and to reserve the motive test for exceptional cases. Unless the hon. Member for Sevenoaks (Mr. Fallon) can point to anything in particular, I see nothing exceptional in tax law terms to make a motive test particularly relevant or attractive. Such a test should be kept for those situations--we shall come to them later in our debate--in which it clearly has a role to play. That is a better way of protecting the integrity and relevance of the test, which has a limited role in tax law.
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