Finance Bill

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Dawn Primarolo: I am talking about the transitional period that is provided in the clause on penalties, which we shall come to, to give a period for companies to adjust. I have confirmed that the Inland Revenue deals with such matters carefully at present, and if the hon. Gentleman is trying to tease me down the route

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of saying that it might relax the transfer pricing rules, the answer is no. If the transfer pricing rules apply, they apply on an arm's-length principle and the company, having crossed the threshold, will be required to comply with them.

The point of the penalties and, therefore, their relaxation for that period is the sensitive approach that the hon. Gentleman is seeking. The transitional period of moving from a small or medium-sized company to a large company is a separate point, and I have already dealt with that. To be honest, I find incredible the hon. Gentleman's suggestion that an already quite large company might not realise that its profit had increased dramatically, it was employing more people and its turnover had greatly increased. Somehow that is supposed to have come as a great surprise, and its forecasts did not show those things. Under those circumstances, I do not see his point.

3.45 pm

Mr. Burnett: It can happen. Having spent most of my time in the private sector, I know that a company can, completely innocently, and without knowing anything about the transfer pricing regulations, make a bonanza profit in a year and find itself in a vulnerable position.

Dawn Primarolo: We are talking about transfer pricing, transfer between companies, and how that profit is moved around within a group. We are not talking about individual companies. We are now moving a long way away from the point, which relates to transfer pricing, the arm's-length principle and ensuring that profit is taxed in the appropriate place. It is not unreasonable, given all the guidance and information that is available—such as the specialist advice those companies will already be receiving from their advisers—to assume that companies know about the transfer pricing requirements. The Government are doing all they can to ease the transition and recognise that we need to provide for it. Exemption from transfer pricing, if it applies, is not one of the exemptions that we are about to provide for.

Mr. Prisk: This has been an instructive and surprisingly extended debate, but nevertheless a useful one. The Paymaster General has been persuasive on the question of takeovers of companies. She rightly highlighted that, and I entirely concur with what she said—without wanting to encroach on the territory of the hon. Member for Torridge and West Devon in making the most ingratiating remarks to a Minister. I am less persuaded of the argument relating to natural growth, but it has been a useful debate.

Mr. Burnett: I do not want to extend the debate any longer than usual. I have an up-and-down relationship with the Paymaster General. Sometimes it goes terribly well, and sometimes not quite so well. Does the hon. Gentleman take the point that I made in my last intervention on her, that I was not seeking to avoid the transfer pricing rules coming into play, but the penalty regime? A small group of companies exporting could

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make a bonanza profit and fall under the regime. We have to take her point—transfer pricing rules come into play—but what about the penalties? Does the hon. Gentleman agree that an innocent getting into the transfer pricing rules regime should not attract untoward penalties?

Mr. Prisk: I concur with the hon. Gentleman, but we are coming to clause 33, which deals specifically with penalties, and we shall be able to consider that matter more closely. I would not wish to get in the way of the relationship of the Paymaster General and the hon. Gentleman, and we are getting much further away from the issue of transfer pricing than you would like, Sir John. However, having listened to the arguments and learned of the apparent relationships, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

Mr. Prisk: I shall not detain the Committee for very long. I have one simple point that I was not able to raise in the context of an amendment. It relates to the question—and I put in no more strongly than that—whether the clause would adversely affect charities. I suspect that several members of the Committee have received, as I have, representations from charities, including the Charities Tax Reform group. I hope that the Paymaster General will be able to clarify the purpose of the clause in her response, because the concern is that it is in danger of affecting those charities that work in consortiums, purchasing services or using agency personnel. The concern is that in those circumstances they might inadvertently get caught up in the provisions.

I received a very late offer of a potential amendment, but it arrived too late and I was not able to table it. I hope that the Minister will be able to clarify the matter for the peace of mind of those charitable groups concerned.

Dawn Primarolo: I am happy to reassure the hon. Gentleman. The Inland Revenue recently issued guidance on the matter, which I hope will set hon. Members' minds at rest. Where a charity is acting in the normal way and pursuing its charitable objectives, it is not acting as an enterprise and so is outside the scope of the transfer pricing rules, which apply only to enterprises.

Only in exceptional circumstances, in which a charity is engaging in commercial activity with a view to profit or gain, would it cross the line and become an enterprise. Re-charging of expenses for the purposes of offsetting costs would not fall into that category. The guidance sets that out in greater detail and it is now available on the Inland Revenue website. I became aware of some concerns yesterday evening, and I hope that that absolute reassurance will put minds at rest. I hope that for those concerned I have provided clarification on the record, and I urge them to see the detail on the website, which they will find very helpful.

Question put and agreed to.

Clause 31 ordered to stand part of the Bill.

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Clause 32

Special applications of paragraph 6 of

schedule 28aa to the taxes act 1988

Dawn Primarolo: I beg to move amendment No. 73, in

    clause 32, page 30, line 33, leave out '6(3)(a)' and insert '6(2)(a)'.

The Chairman: With this it will be convenient to discuss Government amendment No. 74.

Dawn Primarolo: The amendments make detailed corrections to the numbering in the clause of two cross-references to existing provisions in the Income and Corporation Taxes Act 1988. The first amendment ensures that the transfer pricing rules work appropriately where trading stock is transferred from one company to an associated person at less than an arm's-length price. The amendment corrects the problem by altering the existing paragraph 6(3)(a) to paragraph 6(2)(a) of schedule 28AA to the 1988 Act, to which new paragraph 6A should have referred.

The second amendment corrects a similar cross-reference to the controlled foreign company rules by changing the reference in new paragraph 6B(1)(c) to section 747(3) of the 1988 Act, which is the relevant part of the controlled foreign company rules.

Unfortunately those errors have only just been identified. They must be corrected in order for the clause to have its intended effect, and I apologise to hon. Members for the need to amend the Bill as published. It needed to be done immediately, as they were straight errors, and I hope that with the indulgence of the Committee the amendments will be accepted.

Mr. Prisk: I accept the Paymaster General's apology. I am sure that errors of that nature do occur, and having examined the potential impact of the amendment prior to our deliberations, we fully accept that the purpose is solely to correct errors.

Amendment agreed to.

Amendment made: No. 74, in

    clause 32, page 31, line 12, leave out '747(4)' and insert '747(3)'.—[Dawn Primarolo.]

Clause 32, as amended, ordered to stand part of the Bill.

Clause 33

Provision not at arm's length:

temporary relaxation of liability to penalty

Mr. Prisk rose—

The Chairman: Order. The hon. Gentleman was slow to rise, and we nearly agreed to the clause formally. I do not have supernatural powers and I cannot anticipate what people want to do unless they indicate it to me.

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

Mr. Prisk: Thank you, Sir John. You can see why I would not make a good contestant on ''University Challenge''—my starter for 10 would obviously not make it at all.

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Mr. Pound: That is only one reason.

Mr. Prisk: I thank the hon. Gentleman for highlighting many of my failings. He is very kind.

Clause 33 relates to what we were discussing earlier regarding those affected, and the temporary relaxation of penalty liabilities. During the consultation on the issue—it is fair to say that it was a thorough consultation—everybody accepted that the relaxation identified here was welcome. We certainly add our support to that.

The crucial requirement here is for clarity. The Paymaster General rightly highlighted the need for clarity in previous debates. Although much of the clause is somewhat convoluted, there is one particular aspect that I would appreciate her confirmation of. After several attempts to read it, I am still unclear about what it means. I refer to subsection (2). It starts:

    ''In this section 'records relating to an arm's length provision' means such records as might have been requisite for the purpose of making and delivering a correct and complete return,''

which may seem clear, but it goes on:

    ''so far as relating to the determination of the provision asserted to be the arm's length provision for the purposes of Schedule 28AA to the Taxes Act 1988 in a case where that Schedule applies.''

I confess that, having read that for the eighth time, I am not entirely sure that I am any clearer about what it means. I would appreciate it if the Paymaster General could guide us through that. If the clause is to provide any benefit, it must be crystal clear. The question as to which documents and records are included must be clear. Given that, and given the related information offered in the guidance to taxpayers, will she put firmly on the record which documents are included and which are not?

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