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Question put and agreed to.
Bill ordered to be brought in by Mr. Ian Liddell-Grainger, Mrs. Angela Browning, Mr. Adrian Flook, Mr. Bill Wiggin, Mr. Andrew Robathan, Mr. Peter Atkinson, Angela Watkinson, Mr. Paul Goodman and Mr. Kevan Jones.
Mr. Liddell-Grainger accordingly presented a Bill to promote the extension of high-speed broadband connectivity in rural areas, to encourage private investment in essential engineering; and for connected purpose: And the same was read the First time; and ordered to be read a Second time on Friday 15 October, and to be printed [Bill 97].
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Orders of the Day
Finance Bill
(Clauses Nos. 4, 5, 20, 28, 57 to 77, 86, 111 and 282 to 289 and Schedules Nos. 1, 3, 11, 12, 21 and 37 to 39).
Considered in Committee [Progress 27 April].
[Sir Michael Lord in the Chair]
Clause 86
Question proposed, That the clause stand part of the Bill.
12.43 pm
The Paymaster General (Dawn Primarolo): This clause prevents tax avoidance by married couples who own shares in a close company together. Existing anti-avoidance provisions prevent people from saving tax by diverting their income to someone who pays tax at a lower rate, or not at all. These provisions specifically prevent people from saving tax by arranging for income to be received by someone else as dividends on shares in a close company. At the moment, married couples who own shares in a close company can side-step the anti-avoidance provisions by exploiting section 282A of the Income and Corporation Taxes Act 1988.
Section 282A of the 1988 Act was introduced to simplify the way married couples are taxed, and it treats income from the property that they hold in joint names as being shared equally between them. But when this rule applies to shares in a close company, it can divert income for tax purposes from one spouse to another, allowing them to make an unfair tax saving. Clause 86 ensures that where a husband and wife own shares in a close company together, they will be taxed in accordance with their actual ownership of the shares, rather than half and half. Each couple gets taxed on the income that it receives, and I am sure that the House would agree that that is clearly the right result. The vast majority of married couples will not be affected by clause 86, but now that the loophole is well understood, without it, the loss of tax would grow sharply, so I commend the clause to the Committee.
Mr. Howard Flight (Arundel and South Downs) (Con): May I first welcome you, Sir Michael, to chairing our deliberations today?
We object in principle to the Government's attack on the established principles of independent taxation and specifically on the tax position of husband-and-wife jointly owned businesses, which is represented by both clause 86 and the surprise attack on husband-and-wife businesses launched last April through the obscure settlements legislation contained in section 660A, with which clause 86 interrelates. As accountants pointed out to their clients, the section 660A attack could be
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defended by using the provisions of section 282A, to which the Paymaster General referred, and opting for joint ownership with 50:50 taxation, which clause 86 is designed to block.
Section 282A dates from the introduction of independent taxation in 1989 and 1990, when provision was explicitly made for the income from jointly owned assets to be split equally between spouses for tax purposes—unless each chose to split the income in accordance with the ownership. We see no argument for changing the position. Indeed, doing so amounts to a further stealth tax introduced under the guise of alleged anti-avoidance, which seeks to unravel the basis of independent taxation.
The section 660A attack on husband-and-wife owned businesses relies on being able to identify the way in which the shares are owned—namely, separately—as arrangements that create a settlement. The section 660 attack is the subject of litigation, which is set to be heard by the special commissioners this June. A joint statement has been issued by the Chartered Institute of Taxation, the Tax Faculty Institute of Chartered Accountants in England and Wales, the Institute of Chartered Accountants of Scotland, the Association of Chartered Certified Accountants, the Association of Taxation Technicians, the Federation of Small Businesses, the Society of Trust and Estate Practitioners and the non-Inland Revenue members of the Working Together group. The statement strongly criticises the Revenue's new position on section 660A, characterising it as a secret husband-and-wife tax.
In her references yesterday to my raising the matter on Second Reading, I fear the Paymaster General was misled in not appreciating that it was the heads of the UK's leading tax and accountancy bodies who were objecting to the Government's new disguised owner-manager husband-and-wife tax. If left unchallenged, the Revenue's controversial interpretation of section 660A will leave thousands of small owner-manager businesses facing entirely unexpected and significant tax bills, from which, if clause 86 were enacted, they could not protect themselves in the future by moving to joint ownership.
The above professional bodies assess that there are many more than the Revenue's 30,000 owner-manager husband-and-wife businesses at risk, which was the estimate. The Revenue's new interpretation of section 660A dates from 2001, but was then advanced only in an obscure tax manual. Yet it is seeking to apply that new interpretation for at least the last six years.
As the president of the Chartered Institute of Taxation commented, the Revenue has a legal and moral obligation to inform taxpayers of how legislation is going to be applied, and its current approach is a breach of human rights. What are the issues here? By way of illustration, where a couple has set up a business, jointly managed, and one spouse runs it with the other doing a limited amount of unpaid work for the company, and where the net profit of the company after the husband's pay is then distributed equally to the two shareholders as dividends with each having the same
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shareholding, the Revenue is seeking to claim that the dividends paid to the unpaid spouse should be treated as the husband's income and subject to tax at his higher rate, backdated six years.
Mr. John Burnett (Torridge and West Devon) (LD): What the hon. Gentleman is saying is of considerable interest to my colleagues and me. Is he saying that the tax treatment envisaged by the Revenue will not reflect the equitable ownerships in the shares?
Mr. Flight: Indeed, that is what I am saying. However, if the hon. Gentleman will be patient, I shall point out that the matter was debated at length in 1989, when independent taxation was introduced. At that time, a Labour amendment contained proposals similar to what the Government are trying to do in this Bill. The then Chancellor made it clear that the amendment would contradict the principles of independent taxation.
A husband and wife can each own shareholdings. The wife's shareholdings may have been given to her by her husband, and I shall refer to a specific quotation in relation to such gifts.
There is a blatant and unacceptable stealth tax where husband and wife assume the same risk on their equity investment. It is wrong for the Revenue to argue that the non-salaried spouse's equity investment is wholly or mainly a right to income. The ownership of a share does not represent just a right to an income.
There was a debate in Parliament on this matter when the 1989 Finance Bill was being discussed. I understand that the matter was also discussed by the Prime Minister of the day. Also, the Budget press release relating to what became section 660A made it clear that the intention was to make the rules for settlements operate in a way consistent with independent taxation and that the income arising from outright gifts between husband and wife should be taxed as the income of the recipient spouse and not of the person making the gift.
In response to a Labour amendment, which would have rewritten what is now section 660A and which was designed to achieve roughly what the Government are now trying to achieve, the then Chancellor said that it would undermine the very basis of independent taxation, and that people should be free to arrange their affairs as they wished. He said specifically that independent taxation was bound to mean that some couples would transfer assets between them with the result that their total tax bill would be reduced. He said that that was an inevitable and acceptable consequence of taxing husbands and wives separately.
Such is the Government's deviousness that neither the recent Budget notes nor the explanatory notes to this Bill provide any explanation of what clause 86 is really about. They give no clue as to the clause's relationship to the section 660A attack.
Most small business owner-manager couples are as yet unaware of the Government's attempt to undermine their tax position as clearly set out when independent taxation was introduced, and to unravel the principles of independent taxation established in 1989.
I am sure that the special commissioners will come to a just conclusion in relation to the section 660A attack in the case that will come up in June. However, we oppose
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clause 86, as it undermines the established principles of independent taxation relating to the assets of businesses jointly owned by husbands and wives.
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