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Mr. Howard Flight (Arundel and South Downs) (Con): On the face of it, these two anti-avoidance clauses are perfectly reasonable and, indeed, a fair cop. I would, however, make the point that we have had 180 and more new clauses and amendments tabled for Report, which has left quite insufficient time for the various professionals to pore over them in detail to ensure that there are no unintended effects. I note that the Paymaster General mentioned that the guidance notes would only be published today, so there is clearly no chance to review those guidance notes ahead of reviewing the two new clauses. It also struck me that the measures being blocked by new clause 9 are, to some extent, a reaction to what have been seen as retrospective changes in the tax position relating to sales and lease-backs.

As to the territory of new clause 10, the key issue is how the unallowable purpose rules will work. The Paymaster General is quite right to say that people will know when they are doing things essentially to avoid taxation. There are many circumstances—the use of swaps, forward sells and various other financial instruments—where sound commercial purpose may go hand in hand with paying less rather than more tax. The unallowable purpose rule is yet to be tested either here or in loan relationship legislation.

We have not spotted anything in the two measures that would have unintended effects. There are many other avoidance measures in the Bill where unintended effects have not been adequately dealt with, but these new clauses appear to be perfectly practical measures. It is good to see the Revenue spotting these measures, which it might have done more diligently in other respects. If it had, we would not have needed the somewhat over-heavy reporting of anti-avoidance tax planning, which we will deal with later in the Bill.

Mr. David Laws (Yeovil) (LD): We support the two new clauses. The only question for the Paymaster
 
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General—I hope I did not miss the point in her earlier comments—is how the Treasury identified these abuses, particularly when she indicated in respect of new clause 9 that the abuses seem to have arisen very recently, even since the Finance Bill was first drafted. Will she say a little more about that?

Mr. Quentin Davies (Grantham and Stamford) (Con): I start by endorsing the hon. Gentleman's last suggestion. It would be helpful if, when the Government bring forward last-minute measures to deal with tax-avoidance schemes, they could describe in more concrete detail what the schemes actually consist of.

I have no problem in principle with new clause 9. I must say, however, that I am surprised. I have learned to my surprise this afternoon that, at the present time and until we change the position by passing the new clause, revenues that a company generates by selling its entitlement to lease rentals are not taken into account for the purpose of computing tax liabilities. In other words, those revenues do not feature in the computation of taxable profits. That seems very surprising. Usually, if a company discounts or factors its receivables, the amount of money that it receives from those receivables is a revenue and if the costs of generating those revenues mean less profit, the profit is taxable in the normal way. I am surprised that this particular anomaly should have arisen in the first place. It would all be less surprising if the Paymaster General were a little more explicit in telling the House about the type of scheme that she or her officials have identified and targeted.

I believe that we should not allow new clause 10 to slip by without any comment. Once again, we see the introduction of a general anti-avoidance rule—no, perhaps not a general anti-avoidance rule because that would be general, but an anti-avoidance rule. It is becoming an ever more frequent feature of our taxes legislation. There are similar examples in the current Finance Bill where the Government have had recourse to a specific anti-avoidance rule. In this instance, the anti-avoidance rule is in new clause 10(5).

At some point, we need the Government to make a clear statement of their views on anti-avoidance rules. Otherwise, we will find that, through adopting the anti-avoidance rule approach in a large number of individual cases, we have introduced a general anti-avoidance rule by the back door. At the end of the day, we will have an anomalous tax system in which anti-avoidance rules apply to certain activities, but not others. It will be unclear to the public and to Parliament—it is certainly unclear to me—on what principles it has been decided that certain types of transactions, trades, professions or businesses encounter anti-avoidance rules, but not others. It is a major philosophical point, and it must be dealt with—if not now, at some other stage—by the Government. There is an increasing lack of clarity on the matter, as the Government have recourse to more and more of these rules in specific cases.

The second issue raised by the anti-avoidance rule approach is the classic one of unfairness. Great unfairness can arise in individual cases precisely because of the subjectivity of a tax inspector saying that someone acted not for commercial but for anti-avoidance purposes. The taxpayer might respond by denying that.
 
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It may be clear and a fair cop in some cases, but not in others. A tax inspector may decide to apply the rule in good faith, but perhaps the taxpayer resists with equal good faith on the basis of the facts. Those matters will have to be resolved by jurisprudence, by the commissioners or the courts. Will the Paymaster General say what guidance is being given to tax inspectors on the application of the rule? That is an extremely important matter. Information about the guidance should be in the public domain, as there is no point in cluttering up the commissioners or the courts with disputes that could be avoided. I am sure that, like everyone else, the Paymaster General would not want unfairness to arise as a result of the application of the rules.

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The third point is another classic problem raised by anti-avoidance rules. What provision has been made for pre-transaction rulings? If a company feels that it might fall foul of the anti-avoidance rule, equity demands that it have the opportunity to clear a transaction with the Revenue in advance. That company might want to adopt a certain course of action, with a perfectly honest commercial purpose in mind. It would not want to be hit, retrospectively, with an anti-avoidance rule. It would be neither satisfactory nor fair for the Revenue to say subsequently that the company should have done X rather than Y, and then clobber it accordingly. That is not a transparent tax system.

When the Government introduce anti-avoidance rules, they should make it clear that a pre-transaction ruling facility will be available. I hope that the Paymaster General, when she replies to the debate, will confirm that that will be the case. Such a facility must be available to taxpayers in a reasonable time, so that businesses that might fall foul of the rule can clear the position, in anticipation, with the Revenue.

Dawn Primarolo: I shall begin by dealing with the series of questions posed by the hon. Member for Grantham and Stamford (Mr. Davies), who wanted to know whether these proposals amounted to the introduction of a general anti-avoidance rule. I assure him that they do not. The rule is targeted at a narrow area of tax in which abuse, unfortunately, is rife. I shall then move to the question, raised by the hon. Member for Yeovil (Mr. Laws), of when and how the Revenue became aware of two specific schemes.

Mr. Davies: I hope that the Paymaster General does not proceed on a false premise. I said in my remarks that this is not a general anti-avoidance rule, as such a rule would apply, by definition, to all transactions. However, with this new clause—and the same thing happens elsewhere in the Bill—the Government seem to want have recourse to individual anti-avoidance rules. As a result, a series of anti-avoidance rules is being built up in the tax system in a pretty haphazard fashion.

There seems to be no rhyme, reason or principle to determine which transactions qualify under the rule. I said that that raises philosophical problems and policy issues, and that practical difficulties would arise. I would be grateful for a statement about the Government's
 
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attitude to a general anti-avoidance rule before we get halfway there by the back door as a result of a build-up of specific anti-avoidance rules.

Dawn Primarolo: I remind the hon. Gentleman that the Government consulted in 1998 or 1999 about whether a general anti-avoidance rule should be introduced, with the pre-clearance mechanism that he rightly says would be necessary. The consultation was generated by the frustration—also experienced by the previous Government—that ever more complex avoidance schemes give rise to ever more complex legislation to counter them. The clauses under discussion are examples of our approach.

Extensive consultation was held on whether a general anti-avoidance rule was needed or whether what is called a "mini-GAR" would be sufficient. Another question was whether the Government should deal with avoidance by measures that were specifically targeted, as the previous Conservative Government did.

The result of the consultation showed that businesses did not want the general anti-avoidance rule, although respondents were divided on the matter. Businesses did not want a mini-GAR either. At that time, the Government were dealing with an anti-avoidance method in respect of value-added tax. We decided not to go with a general anti-avoidance rule in that case, but we said that we would keep the matter under review.

The hon. Member for Grantham and Stamford will be aware that the Bill contains clauses on the disclosure of information. The Government are still valiantly trying to achieve a principled position in the matter, and I hope that the hon. Gentleman will agree with our approach. He was right to say that this is a grey area. Our aim is to target avoidance, without affecting reasonable commercial transactions. A general anti-avoidance rule can be a very blunt instrument.

New clause 10 deals with manufactured dividends, a point raised by the hon. Member for Yeovil. Officials made it clear to me in May that such dividends were a possibility. I regret that I cannot be more specific about the date. I agree that we need an arrangement to deal with the matter, and that we need to allow enough time for proper consideration.

On further investigation, it became clear that a great deal of revenue was at stake. A number of schemes, in various stages of development, were identified. They are very complex, and I am sure that the hon. Member for Yeovil will excuse me if I do not read them into the record. However, I should be happy to send him two examples of the main form that those schemes take.

As always, my officials and I looked to achieve consistency across the tax system. Our approach was to establish how the previous Government had responded to the problems that they encountered. That Government introduced the unallowable purpose rule—even though they said in 1996 that no such rule would be brought in—and it has worked. It is part of the system now, and it deals with specific problems that arise in connection with manufactured dividends. Although I cannot predict what tax planners will do in the future, the unallowable purpose rule also seeks to preserve transactions that are not undertaken for the purposes of tax avoidance.
 
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In Standing Committee, the Government's view was made clear that the disclosure methods contained in the Bill would put the Inland Revenue in a better position to be aware of schemes as they are being developed, rather than only when they have been used. The Inland Revenue guidance in respect of the unallowable purpose provision is well used and understood. It is used by tax inspectors, and it is also published for the benefit of companies and their advisers.

I turn to new clause 9. Clause 134 seeks to prevent avoidance, and the need for the clause was generally accepted in Committee. Subsequently, schemes have been designed to negate clause 134. That is the bind we are in: the Government consult and publish a Bill, and while it is making progress through the various stages, other people are planning how to negate it. Therefore, clause 134 would not protect the revenue that it was designed to protect. New clause 9 would ensure that the scheme designed to negate clause 134—which has not even been used yet, because clause 134 has not come into force—would not be effective.

I feel the same frustration as other Members at the need for Treasury Ministers to act in that way, but such is the problem of the creativity of a small number of accountants, tax planners, legal professionals and companies. If they are not held in check, they are capable of ensuring that the Treasury loses vast amounts of revenue. That is why we needed the ways and means resolutions earlier and that is why I was unable to introduce the new clauses in Committee as I should have preferred. A responsible Minister must protect the Treasury and all honest taxpayers, and that is what new clauses 9 and 10 seek to do.

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