Finance Bill

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Mr. Jack: On a point of order, Mr. McWilliam. I have listened with interest to the debate on the clause. The Financial Secretary said on several occasions in her remarks on the amendments that the matter is one of tax avoidance. I was surprised that she did not in even a sentence or two explain some of the deficiencies in the drafting of the original legislation. What was wrong in the first place?

The hon. Lady has assured us of the correctness of the Government's position in rebutting the line of argument put forward by my hon. Friend the Member for Hertford and Stortford in favour of his amendments, on the grounds of her absolute certainty that everything in the clause is right, and therefore my hon. Friend's amendments are wrong. However, I am sure that that line was adopted when the original legislation was put to the House, so I am doubtful about how right it is. She has not told us what went wrong in the first place or why we now have several pages of legislation to fix it. My hon. Friend sought to improve the provisions through his amendments, yet the Financial Secretary tells us that

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she is as certain now as she was when the original legislation was passed.

The Chairman: Order. The right hon. Gentleman was not present for the debate on amendments Nos. 183 and 182, so he did not have the benefit of listening to the Minister. We are dealing with the clause stand part, not the amendments, which have been disposed of.

Question put and agreed to.

Clause 119 ordered to stand part of the Bill.

Clause 120 ordered to stand part of the Bill.

Clause 121

Charge to income tax

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

Mr. Prisk: I do not intend to detain the Committee too long—[Interruption.] I hear sounds of disappointment.

The clause concerns the tax charge for individuals exiting a partnership. As the Financial Secretary is aware, the tax law rewrite project, which has support from across the House, has as one of its aims a reduction in the number of charges, so it is quite clear that that is Government policy. Would it therefore not make more sense if in this clause the charge to tax was under case I of schedule D and not under case VI? I have received a number of representations on this point and although I do not profess to be an expert on the tax law rewrite project, it seems to be a prima facie point to raise. What is the Government's view?

Ruth Kelly: The clause is part of the same anti-avoidance measure as clause 120. It sets out when a charge to tax can arise under the measure and how to calculate the amount that is chargeable to tax. In calculating the amount to be charged, the clause makes clear the link between the losses relieved against income tax and the amount received, and ensures that tax is charged at the same rate as the rate of relief for the earlier trading losses. It is normal practice for anti-avoidance charges to be made under case VI so that the charge to tax is fully effective and not reduced by other losses or reliefs. If we changed the basis to case I, which is a charge for trading profits, it would, for example, allow the partnership to set up a new scheme, under which the losses might be restricted by clause 119, and then claim the balance of those losses against the exit charge. That would defeat the Bill's intention and allow yet more avoidance. For that reason, I hope that the hon. Gentleman will support the clause.

Question put and agreed to.

Clause 121 ordered to stand part of the Bill.

Clauses 122 to 124 ordered to stand part of the Bill.

Clause 125

Companies in partnership

Mr. Prisk: I beg to move amendment No. 190, in

    clause 125, page 109, line 10, at beginning insert 'relevant'.

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The Chairman: With this it will be convenient to discuss the following:

Amendment No. 191, in

    clause 125, page 109, line 32, after 'include', insert 'any chargeable gains or'.

Government amendments Nos. 184 to 187.

Government new clause 12—Relationship with chargeable gains.

Mr. Prisk: I am aware that there may be some overlap between the Government amendments and those in my name, not least because of the order in which they were tabled.

Amendments Nos. 190 and 191 seek to limit the clause to those circumstances in which arrangements have been put in place to divert income to non-taxable persons. I am particularly grateful to members of the Law Society, who have highlighted some of the issues. The new rules in the clause are intended to counteract the particular scheme under which a UK corporate taxpayer gets an excess in their capital withdrawals, which results from an arrangement under which they are not allocated a proportion of the income profits to a partnership which they would have otherwise have received. Where that occurs, a charged tax under schedule D6 is imposed on the UK taxpayer which cannot be mitigated by using capital losses. In addition, no credit is given for that charge against a tax that may arise because the increased capital has been allocated to that partner.

I appreciate that the Inland Revenue may not believe that that is double taxation. The worry for others is that the provisions written in the legislation are what they have to go by, and they are concerned that no distinction has been made on that basis. I hope that the Financial Secretary can assure us on the following point, which causes the worry: it is quite possible that a UK corporate taxpayer may be taxed under the provisions by reference to income, but they are also taxed while the income is with another UK resident partner. That is the essential problem, which causes the worry.

The purpose of the amendments is to narrow the clause. To avoid inadvertently catching bona fide arrangements, the provisions should be limited to circumstances in which income has been allocated—other than in accordance with partnership capital—to partners who are not liable to be taxed on that income. It is a complicated point, and I must confess that I am not sure I am any more expert on it than I was a few weeks ago. I confirm that the amendment's purpose is to probe the Government's intention.

Ruth Kelly: I shall ask the Committee to reject the amendment, but it may help if I first explain the intention behind the clause. Clauses 125 and 126 tackle certain avoidance schemes used by companies. The schemes use a partnership structure to convert taxable profits into untaxed increases in a partnership capacity. They allocate partnership profit shares in different proportion to partnerships' capital shares; for example, a company may give up all rights to income in return for a greater share of capital, then withdraw its increased capital from the partnership with little or no tax to pay.

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Clause 125 returns the position to what it would have been if profits had been allocated in proportion to partnership capital. When the company realises the increase in capital, it will pay corporation tax on the profits that it would have earned with reference to its partnership share. Those schemes threaten to cost the Exchequer a significant amount of corporation tax each year and the Government are determined to tackle them to protect the interests of genuine businesses and the majority of taxpayers who pay their fair share.

Mr. Jack: For the avoidance of doubt, will the Financial Secretary put on record how much tax is at risk, and how many partnerships were investigated to determine that number?

Ruth Kelly: I shall deal with the precise figures later in my contribution. First, I turn to amendment No. 190, which would add the word ''relevant'' so that ''profit'' becomes ''relevant profit''. Our advice from parliamentary counsel is that the meaning is clear without the amendment. Relevant profit is clearly defined and the later reference to profit in the same sentence can only be a reference to the relevant profit mentioned earlier in the sentence. There is no need for further qualification.

Mr. Prisk: Is the Financial Secretary saying that there are no circumstances in which the profit would be irrelevant?

3.30 pm

Ruth Kelly: I am saying that the definition is clear in that ''profit'' refers to the relevant profit mentioned earlier in the sentence. I hope that the hon. Gentleman will be reassured on that point and that he will withdraw his amendment.

Amendment No. 191 would have no practical effect. It seeks to exclude from the meaning of ''relevant profit'' any chargeable gains arising from partnership of assets. However, the term ''relevant profit'' involves considering the shares of partnership profits allocated between the members of a partnership and refers to the partnership's commercial profits, not to the profits for tax purposes. In contrast, chargeable gains are purely a taxation concept. Excluding them from the business profits of a partnership makes no sense, as they are not part of those profits in the first place. I therefore hope that the hon. Gentleman will not press his amendments. If he does, I will ask my hon. Friends to reject them.

The Government amendments and new clause correct technical points that were raised in representations on the Bill. Their purpose is to ensure that new world rules interact correctly with the rules for computing chargeable gains. They ensure that there is an appropriate link to the rules for chargeable gains. The majority of schemes do not involve assets that might give rise to a chargeable gain, but, where they do, the amendments and the new clause will ensure that there is no double charge to tax. I know that the hon. Gentleman is concerned about that. That is achieved, first, by ensuring that the amount charged under clause 125 reads through correctly to the chargeable gains rule and, secondly, by deducting any amount that is charged to

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corporation tax by the clause. Those schemes cost at least £75 million annually, but we believe that more such schemes could be brought into play if the loophole were not closed. So the potential loss to the Exchequer is much greater than £75 million, and revenue would be put at risk.

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