Finance Bill

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Dawn Primarolo: I do not agree with the hon. Gentleman's amendment, and I shall ask my hon. Friends to oppose it if he presses it to a vote this evening. He mentioned a rough and ready formula, but he well knows that it is not unreasonable for the Government to continue to ensure that relief goes where it was intended to go.

Under the present laws, as the hon. Gentleman rightly says, staff expenditure of less than 20 per cent. does not count and the company is not able to get the credit. At one end, that has proved to be unfair to the companies that are excluded and denied the opportunity to grow and to dedicate more and more of their expenditure to R and D. At the other end, once companies spend 80 per cent., they simply say that it was 100 per cent. That was allowed to simplify the rules, and it goes to the nub of our earlier discussion.

Something may be easy to operate, but does it deliver the objective? We intended the rule as a simplification. However, with practical experience of the R and D tax credit and the consultation that took place during the past year, it became clear that some small companies in particular were missing out completely because they simply were not spending enough at that time. It is right to change that.

Mr. Laws: Does the Paymaster General believe that that particular aspect of the relief was abused by some businesses in which people spent only a proportion of their time on R and D but were illegitimately claiming the full allowance?

Dawn Primarolo: They were not illegitimately claiming the allowance. We said that a company could round up to 100 per cent. once it got to 80 per cent.­it did not have to go beyond that. This is not a question of abuse but of what was allowed in the legislation, which was arrived at with the support of the Liberal Democrats after extensive consultation on where we should strike the balance between simplicity and fairness.

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To draw in those companies spending less than 20 per cent., we had to consider how much more the relief would cost the Government, but the hon. Member for Arundel and South Downs wants both ends. He wants companies that spend up to 80 per cent. to be able to claim the 100 per cent., but he also wants changes at the lower end, which would be dropped much lower. Our view is that that cannot be delivered. I can understand that companies would still wish to retain the 80 per cent. rule, as that gives them tax credit beyond what they spend, but it is clear that the simplest and fairest approach is the one that we have adopted. Although the rules are slightly more complicated than they were originally, they are fairer to the majority of taxpayers. As the R and D tax credit develops, we shall continually monitor whether it delivers the intended outcomes.

Mr. Flight: I thank the Paymaster General for her response. I am simply proposing that the position stays as it is, ignoring the 20 per cent. and rounding the 80 per cent. up. I understand the issues. I do not want to go back down the track, as in the picture painted by the hon. Member for Yeovil, but there is a problem, particularly for small companies. In trying to make the system fair and effective, the more complex we make it the greater the possibility that it will not work and will not be used.

Dawn Primarolo: The hon. Gentleman and his party are always telling us that we should listen to business. Does he agree that the Government have listened to business, particularly small businesses, and this is what we are saying would help them? There is a conflict in his argument. One minute he is saying that we should listen and now he is saying that we should not.

Mr. Flight: I do not think I have said that we should listen to business, but I certainly believe it. The Paymaster General knows that that is not what the debate is about. Business will always push for whatever it can get and as much as it can get. I am well aware of the argument­I raised the point on the Floor of the House­that the R and D incentives in Canada and in some EU countries are still more generous than ours. There is also the argument about being competitive, and on and on we go. However, if we are not careful, we will end up with a lot of specific incentives that are used for tax avoidance and that we must draw tighter and tighter if they are to deliver. I am in the process of studying all the schemes that have been introduced since 1997 to see what they have delivered and whether they have met expenditure forecasts. The work so far supports the free market argument that many items have not worked out as they were supposed to.

In the interests of time, this is not an issue that I wish to put to the vote: the argument is debatable either way. However, if there is an overwhelming case for such incentives, we want them to be as simple as possible. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 31 agreed to.

Clause 168 ordered to stand part of the Bill.

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Schedule 32

Tonnage tax: restrictions on capital allowances for lessors of ships

Question proposed, That this schedule be the Thirty-Second schedule to the Bill.

Mr. Jack: I am intrigued that the schedule makes changes to the tonnage tax, because we were told when it was introduced that it was one the most consulted on measures. Can the Minister enlighten me as to why, if all aspects that should have been covered were so closely gone over, the problems encountered with operating leases, for which the measure now seeks to curtail tax relief, were not noticed at the time?

7.45 pm

Dawn Primarolo: When the tonnage tax was established, certain shipping, particularly luxury cruise liners and large gas tankers, should not have had access to tonnage tax relief. The Standing Committee discussed the question of tax authorities going too far or being too draconian in trying to cover every possible avoidance. However, a new device was developed, which would have led to a massive loss of tax, which we did not intend, and the Government announced last year that we would move to prevent that. We consulted with the industry to ensure that we were closing only that device and not weakening the tonnage tax, and that is what we have done.

Mr. Jack: Is the Paymaster General putting on the record that the Inland Revenue was unaware that vessels of the types that she described could be operated under an operating rather than a finance lease? My information is that that was known.

Dawn Primarolo: No, I am not saying that we did not have knowledge of that. I am referring to the specific avoidance mechanism that the provision seeks to deal with and only that. That is the point of the provision. I was not suggesting that the leases are devices; I was saying that the mechanism that gave a route for payment through the tonnage tax was a new tax planning device, which we have now closed.

Mr. Flight: That demonstrates yet again the inevitability of measures such as the original tonnage tax, which create a major cliff edge between fully taxable activities outside the regime and those within the rules, opening opportunities for taxpayers.

I want to raise a couple of matters that the Law Society has raised. The schedule inserts new paragraph 89A into schedule 22 of the Finance Act 2000 which sets out exceptions to the quantitative restriction on capital allowances for lessors of ships in paragraphs 94 to 102 of that schedule. Clarification is sought concerning the operation of paragraph 89A(4) in two circumstances. First, leases commonly contain sales agency provisions allowing the lessee to sell the ship at the end of the period of charter as agent for the lessor. Confirmation is sought that such arrangements do not fall within paragraph 89A(4)(c) in respect of whether they expressly preclude the lessee or person connected with the lessee from acquiring the vessel. Secondly, confirmation is sought that the condition in paragraph 89A(4)(c) will be satisfied provided there are no relevant arrangements when the charter is entered

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into and that the conditions would not be breached if arrangements came into existence subsequent to the charter being entered into.

The Paymaster General may not be able to answer those questions now, but they are outstanding technical issues.

Dawn Primarolo: With regard to paragraph 89A(4)(c), unless there is an express preclusion of the ship being sold to the lessor or any connected party, the existence of such a clause would amount to arrangements under which they might acquire the ship. New paragraph 89A(4)(c) will apply, but there is no problem in paragraph 89A(4)(c) applying where the lessee acts as sales agent for the ship's lessor in a sale to a third party at open market value who receives an arm's length commission for his or her actions as agent. The hon. Gentleman might want to study that in the record.

The second question on paragraph 89A(4)(c) relates to whether a charter is entered into. The answer is no. The condition must apply throughout the term of the lease if paragraph 89A or C is to be satisfied. With that clarification I hope that the hon. Gentleman's questions have been dealt with.

Question put and agreed to.

Schedule 32 agreed to.

Clause 169

Insurance companies

Question proposed, That the clause stand part of the Bill.

John Healey: Clause 169 and schedule 33 make a number of significant changes to the taxation of life assurance companies. They are designed to stop avoidance and close loopholes, but they also make some changes that the industry has been seeking for some time. The provisions stopping avoidance and closing loopholes cover three main areas: case 1 or trading profits, capital gains and transfers of business. I shall explain those areas in more detail when we debate schedule 33 and related amendments shortly.

I should explain the process of consultation and detailed work that lies behind the clause and the schedule. On 23 December last year, the Inland Revenue issued a detailed press release setting out the Government's proposals. That was followed in January by draft clauses and detailed explanatory notes on those clauses. Since the publication of the press release and the clauses there has been extensive consultation between Revenue and Treasury officials, with representatives of the industry and individual companies. As a result of those discussions, a number of significant changes have been made to the draft clauses.

The main thrust of the changes has been to reduce the compliance burden on all companies while retaining the effectiveness of the anti-avoidance measures that are intended to apply to the few companies that have sought to exploit the loopholes. Clause 169 and schedule 33 strike a fair balance between stopping avoidance and closing loopholes,

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and making a modest reduction in the tax taken from the business. I commend the clause to the Committee.

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