Finance Bill

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Mr. Flight: May I just ask whether, under the arrangements in clause 41, the Minister sees any other way in which totally innocent transactions that would otherwise have been caught under the six-year rule can escape being treated unfairly? The logic of leaving the six-rule year, which is why a six-year period is taken, shows that the intention of the clause is finally to tidy up all unfair or problematic issues that existed before.

Ruth Kelly: I hope that the hon. Gentleman accepts the principle that companies should not be able to restructure in order to avoid legitimate tax being paid. It is right in principle to collect that tax regardless of the time period involved. The six-year rule is a reasonable balance between the competing tensions of the need to collect tax and minimising compliance burdens on business. It does not inhibit commercial transactions because it is about providing companies with greater flexibility.

As I said, businesses need to keep tax records for that length of time. Significant technological advances mean that it is easier than in the past to keep records and track asset transfers, and that that not a significant burden on companies. If companies come to us with evidence that it is a significant burden, we shall obviously think of ways in which to reduce the compliance burden further. However, I do not see it as an impediment to business.

Mr. Flight: As I said at the outset, we are generally happy with the clause, as is business. I was pleased to hear the Economic Secretary's comment that the Government will keep the issue under review. The crucial issue concerns what is sufficient to counteract the envelope scheme arrangements.

Question put and agreed to.

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Clause 41 ordered to stand part of the Bill.

Clause 42 ordered to stand part of the Bill.

Schedule 7 agreed to.

Clause 43

Exemptions for disposals by companies

with substantial shareholding

Mr. Flight: As is evident, most of the points that we wish to raise are covered in amendments to schedule 8. The clause seeks to achieve something on which there has been extensive consultation with business over a number of years. Again, we give the clause a tick in principle, but there are quite a lot of outstanding concerns about schedule 8.

The clause contains a wide-ranging anti-avoidance provision, the meaning of which is unclear. If the provision were enacted, it would create substantial uncertainty and could exclude from the exemption a broad category of transactions that we are assured it is not intended to exempt. Most of the forthcoming amendments relate to that, but I want to put on record that in principle we welcome the objective of the clause and the constructive approach to addressing that territory.

Ruth Kelly: I thank the hon. Gentleman for his words of welcome. There has indeed been very extensive consultation on the clause. It was announced in Budget 2000 that the Government would consult on the possibility of introducing a roll-over relief for gains on substantial shareholdings held by companies. In June of that year, the Inland Revenue issued a technical note outlining possible roll-over relief. In November, another technical note was issued outlining the form of the roll-over relief and raising the possibility of an exemption as an alternative to that. In the following Budget there was an announcement that the exemption for company gains would be examined in the context of wide-ranging consultation on the direction of company tax reform. That was followed in June by a substantial consultative document on large business taxation, which discussed both roll-over relief and exemption in a wider context. At around the same time, draft clauses were published for comment in the pre-Budget report. In March this year the Chancellor confirmed that exemption would be introduced from 1 April and the final draft legislation was published. The provision has been welcomed by the business community and is an integral part of our programme for modernising company taxation. The new regime will enable United Kingdom companies to restructure rapidly and flexibly in response to emerging global opportunities without being constrained by the tax system.

Question put and agreed to.

Clause 43 ordered to stand part of the Bill.

Schedule 8

Insurance and mutual trading companies

Mr. Edward Davey (Kingston and Surbiton): I beg to move amendment No. 82, in page 151, line 37, leave out paragraph 5.

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I, too, welcome you to the Chair, Mr. Benton. I also welcome the thrust of clause 43 and schedule 8, as did the hon. Member for Arundel and South Downs. There has been a huge amount of consultation on the provisions, which have been widely welcomed by business and the tax profession. Their objective, which I am sure all Committee members share, is to ensure that the UK remains a competitive place for the location of holding companies of multinationals. The Government's approach to the matter has been exemplary. They ensured that significant consultation took place and that the draft legislation was available for consultation.

I prefaced my comments with that welcome so that the Committee realises that the aim of amendment No. 82 and subsequent amendments to the schedule was to be constructive. We have listened to outside bodies that have read the Bill and are pleased with the thrust of it but see the need, even at this late stage, for improvement so that it meets the Government's objectives.

Amendment No. 82 was suggested to me by the Confederation of British Industry, which wrote to all Committee members. When it approached me, I listened to what it had to say, read its background briefing and was convinced that there is a case for the Government to look again at the anti-avoidance measures that they are introducing with the new exemption. Paragraph 5 of new schedule 7AC to the Taxation of Chargeable Gains Act 1992, which schedule 8 introduces and the amendment would remove, is widely drawn. The general nature of the anti-avoidance provisions has caused concern. Some of the meaning of that paragraph is unclear to many experts, who have put hot towels on their heads and tried to work out what lies behind it. I shall give some examples.

Line 44 on page 151 refers to ''substantial''. That must be clarified. I understand that the Inland Revenue intends it to mean 20 per cent. rather than 10 per cent., but that must be made clear. Concern has also been expressed about the phrase, ''represents untaxed profits'' in line 45, because a strict reading of those words by the courts might exclude many transactions that the Inland Revenue had assured business it intended to exempt. There is lack of clarity there.

Line 1 of page 152 refers to

    ''arrangements from which the sole or main benefit that could be expected to arise . . . is that the gain on the disposal would, by virtue of this Schedule, not be a chargeable gain.''

The word ''arrangements'' is defined in line 20 to include

    ''any scheme, agreement or understanding, whether or not legally enforceable''.

That definition is very vague in terms of previous tax legislation. It would cause some concern to tax advisers who believe that the test is too vague, as they would not feel certain when they advised companies. I want to focus on that uncertainty, because it is a problem.

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11 am

If we are creating a general anti-avoidance mechanism, about which there is a lack of clarity and certainty, the benefits from the overall policy will not be so easily realised. The situation may arise where companies have been advised that a disposal would be exempt, but it turns out not to be. Significant business decisions might be made that are later found to incur a huge tax penalty, whereas if that had been known beforehand, those changes would not have been made.

If Labour Members feel that we are making a point that is too technical, or that may not be valid because there is certainty in the legislation, they should consider the Inland Revenue's response to business concerns. The Inland Revenue has, quite properly, consulted business about its concerns and has said that it will publish guidance and a statement of practice. I suggest that that is not the best way forward. I am told that statements of practice are highly complicated, do not get away from uncertainty andóof most concernócould be overridden by the courts. If there were a challenge, the courts would not necessarily have to abide by the statement of practice. They would look at the legislation, and might give a strict interpretation of the words therein.

That raises the question of why the Inland Revenue has decided to take that approach. I understand that it was concerned that the new exemption could be abused. All those who are concerned about securing the Exchequer and supporting the taxpayer should be concerned about that too. When challenged, the Inland Revenue has not managed to come up with convincing examples of the types of schemes that the general anti-avoidance measure is designed to catch. I am told it has come up with a complex, theoretical idea based on the use of financial derivatives, but those lawyers who have looked at the Revenue's example have said that that would be covered by case law. No example suggests that such wide-ranging anti-avoidance power is needed.

If Labour Members are concerned that such anti-avoidance measures are needed, they should rest assured because other anti-avoidance measures would apply in this case. There are existing requirements on trading activity and there are minimum holding periods in the Bill. Section 179 of the Taxation of Chargeable Gains Act 1992 contains other relevant anti-avoidance measures, as does the control of foreign companies legislation. All of that provides a framework of anti-avoidance legislation that would assist the Government's purpose as set out in new schedule 7AC (5).

If the Government want some sort of extra anti-avoidance provision over and above the measures that I have described, rather than going down a general route, they could engage business in a final round of consultationóI know there has been an extensive period of consultationóbefore Report to see whether a slightly less draconian, more satisfactory and more targeted approach can be taken to meet the concerns that officials and Ministers may have. If the Government do not accept amendment No. 82óI guess that they probably will notówill Ministers at least assure us that before Report they will continue

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the welcome practice they have shown throughout the legislation and give an undertaking to the Committee to meet business, in the form of the CBI and possibly other representatives, one more time to see whether the concerns of both the Government and business could be met and answered in some other way?

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