| Previous Section | Index | Home Page |
Mr. Burnett: May I, too, begin by welcoming you, Sir Michael, to our proceedings?
Originally, my intention was to reiterate what Liberal Democrat Members had said in earlier debates—that we considered clause 86 to be a sensible anti-avoidance measure. However, if the hon. Member for Arundel and South Downs (Mr. Flight) is right, we will have to reconsider our position.
I hope that the Paymaster General will be able to answer a fairly straightforward question about the settlement provisions in income tax legislation with respect to income deemed to be that of the settlor. It should always be the rule that married couples should be able to organise their affairs in such a way that they can legally mitigate tax. The proposed change will be unacceptable if, when a husband decides to gift shares in a company to his spouse in a way that allows for an equality of shareholding, all the tax will fall on him.
I hope that the Paymaster General will put our minds at rest on this matter. If the thrust of clause 86 is an attack on the independent taxation of spouses, as the hon. Gentleman claims, we will oppose it. Liberal Democrats believe in the principle of independent taxation, and I hope that the Government will not erode that principle. Spouses should always be able to alter their equitable interests in property, free of capital gains tax and inheritance tax. Subsequent to that alteration, they should be taxed according to the equitable interests that they own. If clause 86 alters that, we will have to reconsider our view of the matter.
I listened carefully to the list of eminent bodies recited by the hon. Gentleman. It is a compelling list.
I hope that the Paymaster General can enlighten us on two matters. First, clause 86 refers specifically to "close company". That suggests that the rule is not intended to apply to joint holdings in non-UK resident companies. I refer the Paymaster General to section 414 of the Income and Corporation Taxes Act 1988. It excludes companies that are not resident in the UK from the definition of "close company".
Secondly, will she clarify why the words "equal or" are included in proposed new section 282A(4A)(b) to the 1988 Act? It is difficult to see what form of ownership in joint names of close company shares is not covered by the existing provisions.
Dawn Primarolo: I shall begin by dealing with the question of independent taxation. I hope that I will be able to reassure the hon. Members for Torridge and West Devon (Mr. Burnett) and for Arundel and South Downs (Mr. Flight). I think that they might be misreading the scope of clause 86.
The hon. Member for Arundel and South Downs is right to refer to the debates in 1990, when independent taxation was established. The approach settled on by the Government of the day ensured that, where property and incomes were jointly owned by spouses, the simplest
28 Apr 2004 : Column 894
and most straightforward way to apply taxation was on the basis of a 50:50 allocation. I shall come on to explain the target of clause 86 in respect of close companies, but I assure the hon. Gentleman that there is nothing in the clause to disturb that principle.
Mr. Burnett: For the sake of completeness, will the Paymaster General confirm that it was open to taxpayers to elect otherwise and to choose to be taxed according to their equitable interests in shares or other property?
1 pm
Dawn Primarolo: I will come to that point because it is at the heart of this set of proposals, but first I want to reassure Members on the questions of the principle of independent taxation, and then explain exactly how the provisions in the clause will affect the avoidance that has been identified with regard to close companies.
Let us deal with the first proposition that the hon. Member for Arundel and South Downs asserted. There is no attack on the principle of independent taxation. Independent taxation is untouched by the amendment in the clause. The change simply stops couples manipulating the rules to save tax in a way not intended by Parliament when independent taxation was introduced; when married couples genuinely hold shares in close companies in joint names, the present provisions will continue to apply. The hon. Gentleman said that section 660A was an attack on husband and wife businesses, and that is absolutely—
Mr. Flight: The new interpretation of it, not the section itself.
Dawn Primarolo: I am grateful for that clarification. I am saying that it is a long-standing principle that people should not be able to direct income to people who are liable to a lower rate of tax or no tax at all, and that is what section 660A deals with.
Mr. Richard Bacon (South Norfolk) (Con) rose—
Dawn Primarolo: It is important to keep focused for the moment on the question of independent taxation and close companies; afterwards I shall be happy to pick up on other points.
Mr. Bacon: When the Paymaster General says "to people", is she saying that that long-standing principle includes spouses?
Dawn Primarolo: Yes. I am referring to the operation of independent taxation and transfers between spouses. The amendment in clause 86 simply ensures that anti-avoidance legislation is fully effective, as it had always been intended to be. We think that it is right, as I am sure the Committee will agree, that spouses should be taxed fairly and according to their income. Those who do not attempt to avoid those rules will not be affected.
The hon. Member for Arundel and South Downs also said that there had been legal challenges with regard to small businesses about the Inland Revenue's application
28 Apr 2004 : Column 895
of settlements legislation, but I say to him that there have been no successful challenges. The tax system is challenged quite a lot.
The amendment plugs a loophole whereby a person who is liable to tax at higher rates avoids tax by transferring his or her income to a spouse who is liable at a lower rate or not at all. It is not a stealth tax; it has nothing to do with section 282A and clause 86, which simply taxes husbands and wives on the income they are entitled to and according to their declarations. I want to come to that point, because it is about the use of the declaration in these circumstances. It also has nothing to do with gifts between husbands and wives; husbands and wives are still free to arrange their affairs as they choose, but they should not be able—I think that we would all agree—to manipulate by legal arrangements, by declaration, in order to avoid tax.
It may help if I explain exactly how the clause works. The settlements legislation exists to stop tax avoidance by means of the transfer of income from a higher-rate taxpayer to someone liable at lower rates or not at all. It is possible to side-step the legislation by transferring property into joint ownership, then declaring that most or all of the income belongs to one person only. The settlements legislation does not apply, because there has been no transfer of income, and section 282A of the Income and Corporation Taxes Act 1988 provides that income from property owned jointly by husbands and wives is taxed at 50:50—the settlement agreed in 1990 on the introduction of independent taxation. So, a person who is entitled to the whole of the distribution from a close company is taxed on only half of it, which was not the intention in 1990, and the clause provides that husbands and wives are taxed on the income to which they are entitled.
I would stress that, in the avoidance that we are seeking to prevent, the husband and wife, having had the joint ownership, produce a legal declaration to apportion not on a 50:50 basis but on a 100:0 basis or 90:10 or whatever, so the taxpayers themselves are declaring that the situation is not 50:50 but something else. They are transferring to the partner—the spouse—who has taxable allowances to use up.
Let us be clear about what the clause does. Its concern is close companies and only close companies—nothing else is affected here—that are jointly owned by a married couple, but where the company is really or mainly owned by one spouse and the married couple make a declaration to that effect. So, they tell us in that declaration that the ownership is not 50:50. Section 660A ensures that husbands and wives are taxed on their proper share in the income from the company.
By making a legal declaration—I should stress that we are using their legal declaration, which is voluntarily provided to the tax authorities—that the ownership is not 50:50, and that the income actually belongs to the partner who is really entitled to it, husbands and wives are trying to neutralise section 660A. That allows section 282A to kick in, attributing income equally even though the taxpayers have told us in the declaration
28 Apr 2004 : Column 896
that, truly, it is not equally apportioned. We are trying to get the right result following the declaration that the taxpayer has provided to us about the true nature of the income and assets.
Clause 86 gets us back to the right result. If the legal declaration is an accurate reflection of the ownership of the income—and it must be, because the husband and wife have signed it and declared it as a legal document—the husband and wife will be taxed on that basis. There is no need to look to the special rule that was provided in section 282A to work out their liability, because they have told us what their liability is and the tax consequences follow from that.
| Next Section | Index | Home Page |