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Dawn Primarolo: Perhaps my remarks on the new clause, specifically on anti-avoidance legislation, will answer the hon. Gentleman's questions.

Unfortunately, one of the simplest ways to avoid capital gains tax on the sale of assets, such as shares in a UK company, is to hold them in an offshore company, which then realises the assets outside the UK tax jurisdiction. Specific anti-avoidance rules introduced in 1965 counter that. They apply to companies that are closely controlled, and it is whether or not they are closely controlled that determines the attribution of the gain. The new clause would amend the key provisions.

Reference has been made by some hon. Members to whether the new clause concerns a particular company. I want to state on the record that I do not know whether

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that is the case. I shall refer not to that company but to the principles in the Bill and to what we seek to achieve. There have been discussions and representations on this matter, as there are on every aspect of the tax system. However, I would be extremely grateful—it would be most helpful—if hon. Members who want to contribute further to the debate did so without referring to any particular company.

Key provisions would prevent UK residents from disposing of investments tax-free through an overseas company that is closely controlled. That anti-avoidance rule ensures that UK resident participants in the company are taxed on their share of the gains. I cannot support new clause 10, but it will be helpful to set it in context and give a brief account of the current position.

The hon. Member for Arundel and South Downs (Mr. Flight) has returned to this issue on several occasions. In the Finance Act 2000, we tightened a series of regulations to remove a loophole that enabled people to exploit provisions in some of our double taxation treaties. The problem was the result of the interaction between a number of aspects of the tax system. Following a constructive debate in Committee on that legislation, led by the hon. Gentleman, and another on Report, we agreed to look again at the legislation to see whether we could remove some of the rougher edges that inevitably occur.

We made a series of changes to improve the position. We also looked long and hard at various proposals on how to ease the position of property investment companies, and the House debated those proposals at length. One of the proposals would have excluded companies that had been resident outside the UK for more than five years. That was not acceptable because it would have given the green light to long-term tax avoidance—it would be crazy to say, "Okay, do it for five years." Another proposal would have raised the 10 per cent. threshold to 25 per cent. That was not acceptable because it would have let out people who were in a position to exercise a degree of control over the actions of the company.

Another proposal would have imposed a motive test and excluded companies that invest in land commercially from the scope of the anti-avoidance rule. We could not accept that because we could not see how it would operate in practice. Regardless of the motive for establishing the non-resident company, if the effect is to enable a UK resident to enjoy the benefits of gains without paying tax, those arrangements have to be considered in the same light as those constructed with a clear avoidance motive.

The whole point of our system is to ensure that UK residents who enjoy the benefits of the gain do not escape the tax that they should pay in the UK. That is perfectly reasonable. It is what every Member of Parliament does and what we expect every citizen of this country to do. If we all pay our fair share, we will not be asked to pay more than our fair share. Those who do not pay their fair share ensure either that there is less money to invest in public services, or that the rest of us pay more. That is the heart of the provisions.

New clause 10 would exclude gains on property investment except where the property in question is let to a person connected with the company. We are not attracted to that proposal because we are firmly wedded to the principle that gains should be taxed if the person who gains is a UK resident. That is not unreasonable. The previous Government were also firmly wedded to that principle, and quite rightly. It is a question of fairness.

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The holding and letting of property is an investment activity. We accept that there is a wide range of property investment, stretching from the holding and active management of a wide portfolio of properties to passive investment in a single residence. However, it is difficult to see how a provision could be devised that drew a clear distinction between the one and the other without giving rise to serious problems at the boundary. That is precisely the difficulty in determining the matter, as, in fairness, the hon. Member for Arundel and South Downs recognises.

11.30 pm

The new clause does not even attempt to address those problems. It would allow United Kingdom residents to escape tax on their property investment by holding the properties in an overseas company, which is simply unacceptable. However, the problems with the new clause do not stop there. It would also allow gains on shares in trading or property investment companies to escape UK tax where the shares are held through an overseas company that is closely controlled by a UK resident. I assume that the hon. Gentleman does not intend that to happen, but the clause would achieve that result as well.

That makes my point—the boundary issue is extremely complex and difficult. The Government have struck the best balance that they could. Even though the hon. Gentleman is very good at identifying problems and has tabled some amendments to this Bill in which he found solutions that we were prepared to accept, he has not found such a solution on this occasion and the new clause does not work. However, I do not complain to the House about his persistence in trying to find a way through the matter and I hope that it will eventually result in success. I wish him luck in his attempt, and if he manages to achieve his purpose before we do, I will graciously accept his proposals. However, I regret that, on this occasion, his new clause makes matters worse, so I ask him not to press it to a vote.

Mr. Flight: I thank the Paymaster General for her comments and her implicit assurance that she understands the complicated point that I have been banging on about all this time, even at this time of night. I said that I did not think that the new clause would necessarily work. As she will be aware, other attempts have been made to find a way through, and it is important that there is an issue that should, in justice, be addressed. I gained the impression that because it was a difficult issue, it had fallen to the bottom of the pile, so I have been endeavouring to ensure that it moves up towards the top. If this attempt does not work, I will not pursue it, but I may wish to return to the matter informally if the tax barrister who assisted me in drafting the proposal has a way of making it work. I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

New Clause 11

Expensive cars

'.—(1) In the Capital Allowances Act 2001:
(a) in section 74(2)(b), for "£12,000", substitute "£24,000";
(b) in section 75(1), for "£3,000", substitute "£6,000";

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(c) in section 76(2) and section 76(4), for "£3,000" substitute "£6,000";
(d) in section 76(3)(a), for "£12,000", substitute "£24,000".
(2) In section 578A of the Income and Corporation Taxes Act 1988, in subsections (2)(b) and (3), for "£12,000", substitute "£24,000".
(3) This section has effect for accounting periods commencing on or after 1st April 2002.'.—[Mr. Flight.]

Brought up, and read the First time.

Mr. Flight: I beg to move, That the clause be read a Second time.

This is an especially dry clause to deal with when the time is getting on for midnight, but it represents proposals made by the Chartered Institute of Taxation in one of its "quick wins" papers on tax simplification, going back to last autumn. I thought that the proposals had been discussed with the Inland Revenue, which had welcomed them. The new clause is intended simply to update some definitions that have become rather out of date. The net effect is not a tax cost and may even be a tax gain.

For capital allowance purposes, there are different rules for so-called expensive and non-expensive cars. An expensive car is one that costs more than £12,000. The limit was last raised in 1992 from £8,500 to £12,000. When a car is expensive, instead of being able to claim 25 per cent. of the balance of expenditure every year, the allowance is restricted to £3,000. Separate tax records must be kept for all expensive cars; that can lead to a tedious amount of administration.

Since 1992, car prices have increased in nominal money terms and it is unrealistic to define an expensive car as one that costs more than £12,000. I suggest that £24,000 is a more realistic definition of what is supposed to be an expensive car. The Capital Allowances Act 2001, which replaces the 1990 measure, describes the cars as over the cost threshold rather than expensive. That is an example of a bit of spin, which has confused the original intention.

The tax system does not allow any deductions for depreciations or amortisation. Instead, capital allowances—the tax man's equivalent of depreciation—are given. The system requires careful consideration of whether expenditure falls into qualifying categories and precise calculations of the allowances that are due.

The capital allowance computed replaces depreciation in the tax computation as a deduction from profits in calculating tax. Whether the process is efficient and whether it achieves anything is a wider question. In the past, there have been restrictions on what is allowable. In many ways, capital allowances have been used as investment incentives. However, the system is being improved, notably in the Finance Bill, with a system of reliefs, not via capital allowances but through generally permitting a deduction for whatever is charged in the accounts for intangibles.

Surely we are approaching a stage where businesses should simply be allowed to deduct depreciation. That happens in, for example, Germany in computing taxable profits. If there is a need to give special incentives, for example, for computer equipment that small businesses buy, they can be provided through an enhanced deduction in the same way as research and development relief.

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Plant and machinery constitute key allowances for business. In general, all purchases that fall into that category are pooled and written down en bloc at a rate of 25 per cent. on a reducing balance basis. There are some exceptions for long-life items.

The new clause deals with a limited simplification of the system and is aimed at administrative savings. It has been tabled for efficiency and applies to cars that are bought or leased by businesses for use in their activities. They are treated as plant and machinery. A requirement to run a pool for cars that is distinct from the general pool was abolished in 2000.

The capital allowances system continues to restrict allowances on so-called expensive cars. The system operates by requiring the business that holds any expensive cars to write them down separately, with separate records, as I have described. Given that the majority of cars that businesses run cost more than £12,000, the restriction causes substantial extra administration, to which I referred. The new clause would double the limit for an expensive car for current accounting periods.

The Inland Revenue might argue that it needs some protection against chairmen deciding to run Rolls-Royces on the business. Although the business may regard that as a legitimate expense, it could be questioned. However, the new clause would remove, at a stroke, the need for a great deal of record keeping; the argument against the new clause is that would cost the Exchequer significant sums of money. That is unlikely—it may even make money for the Exchequer given the interaction in the change of methods in the sale of a vehicle.

It is perhaps necessary to appreciate what happens when a business disposes of an expensive car. The disposal proceeds are compared with tax value that is written down. That will normally produce a balancing item and an extra allowance for the business. If the new clause is accepted, the business would get a modest allowance on the car in the first year and so on thereafter. There would be no balancing allowance because the expenditure would be lost in the pool of plant and machinery assets.

The bottom line is that the use of company cars is declining dramatically anyway. There is a complexity in the rules that incurs costs to administer and, in terms of tax gains or losses to the Revenue, this measure would probably produce a tax gain. There is a generally accepted case for simplification and, while we certainly would not press this matter to a vote, we hope that the Minister will respond that the Revenue is looking at this measure or a variant of it—we understand this to be the case—to simplify something that can easily be simplified at low tax loss.

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