Mr. Flight: It is ironic that we have just been considering a clause that widens business relief beyond trading companies, and the argument appears to have been accepted that economically and morally there is no logic for having separate categories of tax relief. What, therefore, is the logic of arguing so strongly for separate categories in this territory?
Mr. Jack: My hon. Friend summarises the situation well. I shall therefore cease speaking. I look forward to hearing the Paymaster General's response.
Dawn Primarolo: In discussing provisions in last year's Finance Bill, provisions that were specifically designed to prevent substantial loss of tax to the Revenue through tax avoidance, the hon. Member for Arundel and South Downs (Mr. Flight) asked me to consider several points about a possible unintended effect, particularly on charities and pension funds. He supported the principle that anti-avoidance steps should be taken and did not dispute the fact that substantial avoidance was occurring.
It is important that Committee members remember exactly what the legislation addressed. It was a targeted and proportionate measure to deal with the significant amounts of tax that we were losing. The hon. Gentleman referred to ``the Belgian wheeze'', but many other schemes were employed, all of which focused on abuse of tax treaty exemptions. They all involved companies in which trustees were participators. The rules introduced by section 94 of the Finance Act 2000 were designed to ensure that such complex arrangements involving trusts did not pay and that there was no point to them. The rules went no wider than was absolutely necessary to stop tax avoidance. In a previous debate, the hon. Member for West Dorset talked about the balance between simplicity and equity, and we talked about the cliff edge, who is caught and the fairest way to proceed. This point falls squarely into that debate.
It has been suggested that people were not aware of the consultation, but I must be firm on that. The Revenue approached everyone who raised points on last year's legislation and all the main representative bodies. It assures me that the views of anyone who had shown an interest in the subject were taken fully into account, even if they came after the stated consultation programme.
The right hon. Member for Fylde referred to Grosvenor Estates. Again, the Revenue tells me that it was in contact with the company and its advisers from the start of and throughout the consultation process. I think that I am correct in saying that we have received no further representations since the Bill's publication. Let us be clear: the amendment is designed to change an anti-avoidance provision, on which there was agreement last year. The undertaking is specifically to consider the points that the hon. Gentleman raised.
Amendment No. 36 would remove many more UK residents from the scope of the legislation at section 13. It would do so by taking out those participants with an interest of 25 per cent. or less in gain rather than the 10 per cent. that the Government propose.
The clause as drafted represents the Government's considered judgment. I understand that representative bodies believe that there should be a substantial increase; we have doubled the current limit to 10 per cent., which is substantial by any standards. We can do that without creating any new opportunities for avoidance or seriously jeopardising the tax revenues. The review has produced some refinements and some benefits. It should also bring some welcome compliance savings for investors. However, it is not right to go further; it is a matter of judgment, but an increase beyond 10 per cent. would seriously risk providing opportunities for UK residents to avoid tax on their investments.
We are not talking about what companies do and whether their activities are legitimate but about tax planning or avoidance opportunities, which we are closing off. Anyone holding an interest of 10 per cent. or more in a company has a substantial stake in it and may be able to influence its activities and there is scope for unconnected people to band together to avoid the tax charge. The hon. Member for Arundel and South Downs was correct in what he said about the normal size for a closed company; we settled on 10 per cent. rather than 25 per cent. We have given an inch but the Opposition want to take a mile, which would undermine our purpose. I ask the Committee to reject the amendment as the clause as drafted is a reasonable relaxation.
The purpose of amendment No. 37 is to replace the present exclusion for gains on assets used in overseas trade with an exclusion for gains on assets which were acquired for bona fide commercial reasons and not as part of an avoidance scheme. We covered that ground extensively in last year's debate when I made it clear why such a motive test was not appropriate in this area. Section 13 of the Taxation of Chargeable Gains Act 1992 as amended by the clause, is targeted solely on investment gains made by a non-resident, closely controlled company from which UK residents may benefit. It is absolutely right that those gains should be charged on UK residents as they arise in situations where there has been considerable avoidance activity in the past. It is right that those gains should be charged, irrespective of the motive for establishing the company. I cannot make the position clearer.
It is difficult to see how a motive test, which the hon. Gentleman is right to say exists in several parts of our tax legislation, could be made to work in this respect without rendering ineffective legislation that is tightly drawn and specifically to deal with avoidance. I am not persuaded by the arguments for such a motive test. I clearly explained the position to the Committee last year in the debate on the control of foreign companies.
The purpose of amendment No. 38
Mr. Jack: For the sake of those who read the debate, and to understand where the Paymaster General is coming from, will she tell us how much tax would be at risk if the motive tests proposed in amendment No. 37 were enacted?
Dawn Primarolo: I do not have the specific figure to hand. The anti-avoidance provisions last year resulted in substantial revenuesextremely large figures. We do not believe that a motive test is necessary. If a motive test were included, it would offer an opportunity to plan again and would completely undermine our attempts last year. Our arrangements would be nullified by the creation of different routes to avoid tax, and a similar amount of revenue would be at risk. Specifically, we are discussing a gain that should be taxed.
I know that I do not have an indication of the amount in the papers that I have with me, but if there is some way of quantifying itI doubt itI will let the right hon. Gentleman know. He has been robust and clear both in Committee and when he was Financial Secretary in the previous Government that avoidance is unacceptable. Anti-avoidance is a tool that the Government must use.
The purpose of amendment no. 38 is to increase the period in which the distribution of a gain can be made after the gain arises, in order for credit to be given for tax charged on the gain against the tax charged on the later distribution. The amendment seeks to increase the period from three to six years from the end of the accounting period in which the gain accrued. The amendment is another example of where we give the Opposition an inch and they want a mile.
In our view, the relaxationit is a relaxationthat we are proposing hits the right balance. It goes further than the recommendations that were made in the Government's review. For example, the CBII believe that Opposition Members would accept that it is a group that represents businesssuggested two years from the end of the accounting period of a non-resident company. We think that that might be a little tight in some cases and propose to take it further. To my knowledge, the only specific representation that was made about the number of years actually requested only two years; we are providing three.
Mr. Flight: On the issue of time period repatriation, there is neither an avoidance nor a tax cost issue. To the extent that there is a time value of money, if people cannot repatriate their money for six years, it is worth less than after three years. The CBI made a straight from the pen suggestion. If there is a tax issue involved in the difference between three and six years, let us hear what it is. If there is not, I cannot see the point of the three-year rule.
Dawn Primarolo: I would turn the point around on the hon. Gentleman. We write tax legislation to respond to Government policy in shaping direction and intentions. We also respond to practitioners and to the industry, where they specifically identify problems. What we do not do with tax legislation is think up a theoretical position and then write the legislation accordingly. We have consulted, points have been made to us with regard to the accounting period, and we have responded to that. The hon. Gentleman advances the case without telling us that there is a problem. It is not unreasonable for the Government and the tax authorities to work on the basis of the information supplied to us and our knowledge of operating the tax system, rather than saying, ``wouldn't it be nicer if'' and having no reason for such action. So, we have clearly consulted on the matter, we are not receiving representations, and we are not aware of specific issues in that area. Should any come to our attention, we would be prepared to consider them.
In response to the amendments, I have tried to explain the specific points that the Government sought to deal with last year. On Opposition points about consultation, we believe that there can be some relaxation, and every indication is that it is sufficient to solve the problems that were identified. Therefore I ask the Committee to reject the amendments on the basis that they would either destroy the original intent of Government legislation or make provisions that are not required. The Bill's amended provisions are a reasonable and measured response by the Government to the fair points made last year by the hon. Member for Arundel and South Downs.
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