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Dawn Primarolo: I look forward to the right hon. Gentleman's comments on avoidance and the way in which to deal with it. It is incorrect that clause 118 specifically tackles the exploitation of the reliefs that we introduced. It deals with the use of the tax system in ways that were never intended. Such provisions had existed in the tax system previously and were unconnected with the film industry. The clause is therefore not connected with the reliefs that we have given.
Mr. Jack: I am glad that the Paymaster General used the words "in ways that were never intended." That almost goes to the heart of the challenge of dealing with tax avoidance. The Revenue is the expert on tax in this countryor is it? It is clear that the purveyors of avoidance products or ideas have great resources and much expertise. As clause 118 shows, they noticed something in the relevant part of the tax code that the drafters did not. Avoidance happens partly because people can interpret the words that are written. We do not express our tax law as an academic or scientific formula, but as a set of words. It is expressed in the English language and is therefore interpretable.
We must consider whether sufficient good advice is available to examine drafting tax law more carefully. That is why I made a point about complexity. In July
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1999, Mr. Edward Troup, who works for the City law firm of Simmons and Simmons as head of tax strategy, wrote a piece in the Financial Times about general tax avoidance. He argued that
"the aim of government should"
"do its best to ensure that the 'return' from tax planning is as low as possible . . . a simpler tax system, with fewer reliefs and exemptions and discontinuities would, in the long term, frustrate most of the tax avoiders' ploys."
"But behind the easy macho rhetoric of being tough on tax avoidance, successive chancellors have consistently failed to understand the inevitable nature of avoidance as a reaction to complexity and have ended up addressing its symptoms and not its causes."
One of the problems in assessing clause 290 of the Bill is that we have to do so almost in a vacuum. The House has not been presented with any kind of analysis of the weaknesses in our present tax code. For example, we do not know where the weaknesses are in the avoidance schemes that have either been marketed or have been detected by the Inland Revenue's mechanisms. We do not know how much money has been put at risk. There are an awful lot of "don't knows", yet we are being asked to adopt a new law under which, instead of the Inland Revenue relying on its expertise and surveillance, it will effectively have to ask people to put their hands up before the act is committed, and to declare what they are going to do in marketing or in finding ways to avoid tax. I return to what the Paymaster General has just said. The reason that we have avoidance is that, in a complex tax system, people see loopholesin other words, things that were never intended.
"Tax avoidance is paying less tax than Parliament would have wanted."
That brings us to the question of whether we know what legislation we are passing. Do we know what we really want when we pass tax legislation? I hope that the Bill will receive adequate scrutiny this year, so that Mr. Troup's point can be addressed. He goes on to say:
"Avoidance is where Parliament got it wrong, or didn't foresee all possible combinations of circumstance."
If these avoidance laws are to be implemented, will the Minister tell us what is being done to strengthen the work of the Inland Revenue through both the drafting of tax law and the development of its perceptiveness into how tax law operates? What has the Inland Revenue learned from all the tax avoidance schemes that are currently marketed? Is there a theme running through them which shows a weakness in the way in which our tax law is draftedor must we accept that, because we draft it in such language and form, it will, by definition, always be testable, and that there will therefore always be potential weaknesses?
Those of us who have served in the Treasury understand the need to protect the Inland Revenue from the sharp minds in the financial community. One could argue that if we had much lower marginal rates and a much clearer tax system, there would not be the inducement to want to avoid paying tax. However, we have not had a debate on the motivations behind the natural desire of any taxpayer to save or to avoidas
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opposed to evading, which is clearly illegalthe payment of tax. Mr. Troup gives us some further perspectives:
"The problem of tax avoidance is reduced to the problem of finding an answer to the question of what parliament intended and making sure that this is complied with. I would not pretend this is a simple task. But recognising this as the issue and dealing with it equitably and constitutionally would be a significant step on the way to tackling avoidance effectively."
"As drafted at present, any thought which reduces tax (although not National Insurance contributions) which passes through anyone's head who is involved in any way with tax services becomes a 'notifiable proposal' once that thought is expressed to another person, whatever the circumstances in which it is expressed. Anyone who has any input, however small, into the idea also makes himself a promoter liable to disclose the idea, if nobody else does. However, much of the detail is left to the scope of regulations yet to be made."
"In this Part 'notifiable arrangements' means any arrangements which . . . fall within any description prescribed by the Treasury by regulation".
When I looked at the Government's website to try to obtain more information on what the clause was all about, I was directed to Treasury press notice 29/04, which was issued on 18 March. It told me that all kinds of new information would be made available to me. I discovered that the Treasury's permanent secretary had had a meeting on that day to discuss all this with business leaders. By the time I had read what was already in the public domain, I had established that full details of all this lot would be made available on the publication of the Bill. "Full details" and a regulation yet to be published do not strike me as a full and final disclosure.
"he is to an extent responsible for the design of the proposed arrangements".
Could one not almost say that the draftsmanthe designer of the original legislation, which then became subject to avoidanceproduced part of the design of the tax avoidance scheme? I hope that the Paymaster General will able to explain exactly how the proposals will work.
An interesting case has arisen in the context of the sale by Aberdeen Asset Management of a loss-making activity called the Aberdeen Preferred Income Trust. In the newspapers it was reported that when those who had invested in the organisation sought to get their money back, they were disappointed by the financial returns they received. An article in The Times on 3 April stated:
"But it has emerged that it is not only the 7,200 Abpref shareholderswho lost 99 per cent. of their moneywho should feel cheated. Their misery will help a private company to lower its tax bill, costing the Treasury tens of millions of pounds.
The use of tax losses in business to offset taxable profits is nothing new, but in the context of that transaction, would it be caught by clause 290? Clearly someone has looked carefully at a tax-loss situation, taken professional advice and designed a scheme enabling him to buy up the losses of the Aberdeen Preferred Income Trust. The poor investora Mr. Davieswho put £7,000 into this duff investment activity got £1.96 in return for his endeavours. As a result of the sale of the tax losses, there is a potential avoidance of £45 million. That is a currently accepted use of tax losses, but is it a product or a case of someone seeing an opportunity? It will be interesting, in considering clause 290, to try to differentiate between the opportunistic exploitation of existing legitimate functions of the tax system and the deliberate creation of functions by reinterpretation of the current tax law. We all want a proper amount of tax sold, but I think that there will be some testing times.
To give a flavour of the views of the accountancy profession, when probed on the matter, a spokesman for Ernst and Young commented that there are more sellers of tax losses than buyers, so the shares are not easy to sell. He would not be drawn on the ethics of selling tax loss, but insisted that it was in the best interests of all parties. He said:
"The only reason that investors are getting anything back at all is because we made a deal to sell the company."
On the question of savings, I want simply to reinforce the comments that have been made. At a time when individuals' endowment policies are under great pressure, and their pension funds are not yielding the expected amounts, the time was not right for the Government to cut back on individual savings account allowances. They should have looked at more coherent methods of promoting savings, to enable people at least to try to make up for some of the losses that they are suffering on their endowments.
I conclude with some observations on those two parts of the Finance Bill that deal with the Government's assault on small businesses. We heard the points made by my hon. Friend the Member for Arundel and South Downs (Mr. Flight) on the question of incorporation, and on the operation of section 660A. I shall not go into detail on those matters, but there is a stark contrast in relation to the example that I have just given. While the Government are seeking to deal with general tax avoidance, they ought on the other hand to encourage the retention of moneys in small business. However, with IR35, section 660A, and now other elements of the Finance Bill, they seem to be hammering hard on these small engine room businesses for the British economy. Why does that group seem to have been singled out for particular treatment, when a more considered review might have been the best way forward? Such people are the entrepreneurs of the future and the engine rooms of the service economy, yet they seem to be getting a bad deal in the Finance Bill.
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