Standing Committee H
Thursday 15 June 2000
[Dr. Michael Clark in the Chair]
(Except clauses 1, 12, 30, 31, 59, 102 and 113)
Clause 93 ordered to stand part of the Bill.
Clause 94 ordered to stand part of the Bill.
Payments by trustees to non-resident companies
Question proposed, That the clause stand part of the Bill.
Mr. David Heathcoat-Amory (Wells): The clause is another anti-avoidance measure. It came into effect on 21 March 2000, which, apart from being my birthday, was Budget day. The clause is enacting a measure that will have a retrospective effect. The Chartered Institute of Taxation said that the measure was not announced in the Budget speech or by way of press release at the time. It would be objectionable if we were engaging in retrospective legislation and I should like to know whether the provision was announced by way of press release on 21 March. If not, might it not be preferable to enforce such a change from the date of Royal Assent of the Bill?
The Paymaster General (Dawn Primarolo): I am sorry if the Budget spoiled the right hon. Gentleman's birthday. May I take this opportunity belatedly to wish him many happy returns. If only I had known! I shall make a note in my diary about it and perhaps we can arrange a surprise for him next year.
We are ensuring that the existing anti-avoidance provisions are effective. I do not think that it will happen in reality, I have little sympathy for anyone engaged in such transactions between Budget day and the date on which the Finance Bill was published, thus the provision will take effect as the clause suggests.
Mr. Heathcoat-Amory: I thank the hon. Lady for her retrospective good wishes for my birthday. I can confirm that the Budget spoiled it comprehensively. However, she did not say whether the measure was announced on Budget day. It might be that the activity that the clause is designed to prevent is objectionable, but that does not excuse retrospective legislation. An activity that has been legal for decades suddenly being made illegal retrospectively is a bad move in principle. Unless I missed something, will she confirm that no announcement was made on the day and that the clause could catch some objectionable, but also some innocent, transactions retrospectively? What efforts were made on 21 March, or before that date, to warn people that such transactions would be outlawed in the Finance Bill?
Dawn Primarolo: The clause is a technical aspect of the changes in the preceding clauses, which, as in the case of clause 89, for instance, were announced in the pre-Budget report. The provision ensures that the special rules to impose a charge on UK beneficiaries of a trust when companies that they control receive payment from the trustees cannot be circumvented by including non-resident persons in the group of people that controls the company. It reinforces all the other clauses. As far as I recollect, it was not covered in a Budget press release or specifically announced individually on Budget day. It is a minor measure that covers a technical aspect. It refers back to all the other clauses that were announced, and, as was made clear, became effective, on Budget day. My response to the right hon. Gentleman's point about the clause being retrospective is that it does not stand in its own right but is a consequence of preceding clauses.
Mr. Heathcoat-Amory: I shall not make too much of the matter, as the clause is comparatively short, but in this country we do not have legislation by declaration or intent. We proceed on the basis of an action's being either legal or illegal by Act of Parliament, and examine the statute involved. It is not a defence to say that this Government or the previous one intended to prevent such payments.
We have found an example of sloppy procedure, whereby a proposal should have been announced on Budget day but was not. I simply put down a marker that it should not happen again. I do not expect the hon. Lady to admit it publicly, but she should have a quiet word with her officials to ensure that, for future Finance Bills, all provisions that are subsequently enacted or make an activity unlawful and refer back to a Budget day or beyond should be announced at the time. Specialist practitioners are interested in what will be lawful and unlawful as a result of the Finance Bill. It is for good order and smooth relations with the taxpaying public and their advisers that those established rules should be observed.
Dawn Primarolo: I do not agree with the right hon. Gentleman's point about clause 95, but I listened carefully to his general point, and I note it. As I said, clause 95 is a consequence of preceding clauses, which were announced. I listened carefully to his comments on the matter.
Question put and agreed to.
Clause 95 ordered to stand part of the Bill.
Mr. Oliver Letwin (West Dorset): On a point of order, Dr. Clark. I request your guidance before we move on to clause 96. I should like to debate schedule 27 in some detail. I have no intention of provoking debate on the Government's amendments, which are all to the good. However, I would not like the fact that they were moved formally to remove the possibility of a stand part debate on schedule 27. Would you like me to ask to debate clause 96, or schedule 27?
The Chairman: When we reach schedule 27, which I hope will be in a moment or two, we shall debate the Government amendments if that is necessary. If it is not, when I rise to say that schedule 27 should stand part of the Bill, if you rise, you may have your debate.
Clause 96 ordered to stand part of the Bill.
Group relief in case of non-resident
Amendments made: No. 337, in page 482, leave out lines 10 to 22.
No. 338, in page 482, line 42, leave out from beginning to 'provisions' in line 43 and insert
'Paragraph 9 has effect wherever the enactment amended by that paragraph falls to be construed, so far as it applies'.--[Dawn Primarolo.]
Question proposed, That this schedule, as amended, be the Twenty-seventh schedule to the Bill.
Mr. Letwin: I am rather annoyed, Dr. Clark, because I was intending to wax eloquent on the deficiencies of lines 11 to 22 on page 482 of the Bill, until I came to the Committee this morning.
The Chairman: Mr. Letwin, is it an option? Are you able to wax uneloquent?
Mr. Letwin rose--
Dawn Primarolo: On a point of order, Dr. Clark. I cannot comment on that, but I am sure that the hon. Member for West Dorset (Mr. Letwin) will put his views in his own distinctive way.
Mr. Letwin: I sure that I can find witnesses to the truth of the statement that I can wax ineloquent on many occasions. However, on this occasion I was going to wax eloquent. My subject would have been the egregious problems of lines 11 to 22 on page 482. I then discovered that the Government had managed to spot the problem before I had anything to say about it, and had cured it with amendment No. 337. I shall therefore desist from pursuing that tack.
Mr. Barry Gardiner (Brent, North): All that for nothing.
Mr. Letwin: I know; it is tragic.
I want to discuss some other points about the schedule. I shall preface that by saying that the basic thrust of schedule 27, as indicated by our not seeking to debate the underlying clause, is welcome. In fact, it is necessary. As a result of ICI v. Colmer some generalisation was required, and it is to the tremendous credit of the Government that it has been done on a global basis rather than merely on a European one. Such an adoption could be more widely applied by the Government in many other domains. It is an approach to which the Conservative party is wedded. We have nothing but a welcome for schedule 27 in general. Group companies should be able to claim group relief across global holding structures.
However, one lacuna remains. We have not tabled an amendment on the matter, because I do not know the best solution. I am sure that the Treasury's ingenuity and skill in drafting such an amendment would be greater than ours. I hope that I can gain some consensus on the need to address the matter, and perhaps the Government will do so on Report. The matter to which I refer is the problem of the link company, especially the problem of the EU-based link company. I doubt that you spend your time investigating group relief before you go to bed at night, Dr. Clark. If you did so on a regular basis, which, conceivably, you might do simply to amuse yourself, you would note--
The Chairman: Mr. Letwin, would you care to rephrase what you said about my habits of group relief before I go to bed at night?
Mr. Letwin: I think that by far the safer course of action would be to desist from talking about your propensities, Dr. Clark, and instead reflect on the fact that other members of the Committee may be so acquainted with group relief that they frequently reflect on the problem of the link company. In case the Government Whip is not chuntering too much to hear--and as I know that he will not be acquainted with group relief--it might be an advantage if I mention that the link company lies between the holding company and the companies that are trying to benefit from group relief by swapping losses between them. As I understand it, schedule 27 makes it perfectly clear that if the link company is a United Kingdom resident company, no problem ensues. If it is a non-UK resident company, however, there is a problem.
Unfortunately, it is not possible to draw diagrams in the Committee. However, I shall give an example in which section 406 relief cannot be claimed. It involves a UK-resident parent, which owns an EU--or extra-EU--subsidiary, which, in turn, owns a 100 per cent. subsidiary that is a UK-resident company. Let us suppose that another UK parent holds 50 per cent. of its own UK subsidiary, but also buys 50 per cent. of the UK sub of the EU or extra-EU company. We would end up with a UK parent down to an EU subsidiary that holds 50 per cent. of the UK subsidiary at the third level and another UK parent holding another 50 per cent. of that subsidiary and holding another UK subsidiary. Will section 406 relief apply to the two level three companies--the two UK subsidiaries? It should apply. For the purposes of ICI v. Colmer, it needs to apply because it cannot be the case that having an EU parent or parent outside the EU, even if it were an intermediate parent, becomes the cause of group relief not applying to two UK subs.
I may be mistaken, however, because such waters are dangerous for amateurs, and Inland Revenue officials understand them much better than I do. People who have talked to the Revenue say that it is currently the view that relief would not apply in such a case. If that were the true interpretation, there is an error in the Bill that needs amending. I do not intend to suggest how it should be cured. That is something that the Treasury must attend to on Report.
I now come to a serious matter. It could turn into a quibble, but the provisions that we shall discuss later under schedule 30 lead me to worry about it slightly. I refer to line 24 on page 476. Under paragraph 4 of the schedule, the prohibition on pertaining relief applies not to tax that has been deducted, but to tax that is deductible. In other words, it applies not to tax that was shielded, but 749 750 to tax that might have been shielded. The implication is that, if the Inland Revenue is cleverer than the particular company that is being taxed about what could have been deducted in a foreign jurisdiction, it will disallow the relief. That is a wrong principle and I am not sure whether that is the Govemment's intention. I hope that it is not, and that an amendment is tabled on Report so that the provision refers to the actual deduction rather than a potential deduction.
Finally, I come to a much more important matter. If we can resolve it, we will assist taxpaying companies for a long time. I do not mean to be unkind to the parliamentary draftsmen, because the drafting of a Finance Bill is an incredibly arduous task, which I certainly would not like to undertake. However, on page 477 of the Bill, under subsection (6) of the proposed new section 403D of the Income and Corporation Taxes Act 1988, is a masterpiece of ambiguity. I am sure that it can be cleared up by a clear reference to Pepper v. Hart by the Paymaster General. That alone would justify our entire proceedings. It might be said to constitute the only justification for our proceedings to date, as I do not think that we have changed ministerial minds yet.
I shall read out the sentence in question and explain its ambiguity. It is:
So much of the law of any territory outside the United Kingdom as for the purposes of any foreign tax makes the deductibility of any amount dependent on whether or not it is deductible for tax purposes in the United Kingdom shall be disregarded for the purposes of this section.
That is not what I would regard as the most pellucid English. More important is the systematic ambiguity. In case the Committee believes that I am imagining it, I should say that the Law Society agrees with me, or rather, I agree with it.
There are two interpretations. One is that if another country's deductibility clause makes deductions dependent on a UK non-deductibility, the whole of it should be ignored. The second possibility is that one should simply disregard the fact that an overseas country's deductibility clause makes deduction dependent on the UK's non-deductibility. Those are crucially different interpretations.
I find it extraordinarily difficult to put the matter clearly. I kept trying to, and have written it down in the form that I hope will be most pellucid. I apologise; I shall read it out. If the sentence has the first meaning, I think that things are okay, as the UK company would receive group relief in the UK if the other country allowed the same deduction but restricted it to cases for which the UK had no deductibility. All would then be well, and I think that that is the intention.
If one takes the second interpretation, which is at least equally plausible as an interpretation of the words, there is an infinite regress. A UK company cannot receive group relief here because, in the absence of any reference to deductibility in the UK, it could be deductible overseas, but the UK company cannot receive deductibility overseas because the other country has a parallel clause referring back to here and so forth. The UK company would end up without a deduction anywhere, which I cannot imagine is the intention.
It so happens that the case of Pepper v. Hart, to which we constantly refer as illustrating the importance of ministerial dictums, is a case of a tax inspector versus a teacher, if I remember correctly. It is especially relevant that we should appeal to its doctrine and ask the Paymaster General to confirm that the first interpretation is correct and that the law will be applied in the right and rational way. That would clarify the matter. I think that the Financial Secretary has prohibited me from ever using the term rational.
Apart from the problem in lines 11 to 22 of page 482, which has been magnificently amended, I have no further problems with the schedule.