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Mr. Hammond: My right hon. Friend is absolutely right. As he knows, many jurisdictions already have general anti-avoidance regimes—some of the provisions in the Bill are so widely drawn that it looks as though we are moving in that direction—but they typically have strong pre-clearance regimes, which allow taxpayers to establish their position precisely and with a statutorily protected degree of certainty. That is certainly one of the issues that we shall want to explore in Committee. If taxpayers are to be subject to the wide discretionary powers that are proposed not only in relation to tax arbitrage but in other parts of the Bill, the provisions will have to be matched with a strong pre-clearance regime to give taxpayers real certainty over a defined period of time that is not left to the Revenue's discretion.

I come now to clause 39, which introduces schedule 7. It is an anti-avoidance measure, as the Paymaster General said, aimed at complex financial instruments, and it is largely a response to schemes that have come to the Revenue's attention through the disclosure rules introduced by the Finance Act 2004, which often involve attempts to convert income receipts into capital form to exploit the wide difference between capital gains tax rates and corporate income tax rates. Although some changes have been made since March, experts remain concerned that the Bill is still too wide in scope, that it is poorly and widely drafted and that it will still catch too many innocent commercial activities that it is not intended to catch.

We accept the need to address that type of sophisticated tax avoidance, but in Committee we shall want to look closely at the provisions' retroactive effect and at the powers granted to the Revenue under this schedule. We shall also seek concrete assurances that rapid action will be taken if any of the provisions, once in operation, impose additional tax liabilities on innocent commercial transactions.

Stephen Hesford (Wirral, West) (Lab): I am listening to the hon. Gentleman with care, but I am somewhat confused. On the one hand, he says that the Opposition understand what the Government are about in respect of tax avoidance, but on the other, he lists a raft of measures to which he takes exception. Will he say whether the Opposition will agree later tonight to the Bill getting a Second Reading?

Mr. Hammond: I can tell the hon. Gentleman that I shall not ask my hon. Friends to vote against the Bill this evening. We accept the principle that the Government must constantly maintain their armoury against the evolution of tax avoidance and tax planning practices. However, as I said earlier, it is a question of balancing the desire to protect the revenue with the need to maintain our international business competitiveness. Our contention is that although the principles on which the Bill is based are sound, the Government have got the balance wrong in the drafting. The arbitrariness of the powers to be given to the Revenue and the wide scope of
 
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many of the provisions in the Bill have created a climate of business uncertainty. Ultimately, that damages the UK economy.

Schedule 7 is a long, detailed and incredibly complex catalogue of measures. Ten minutes with it is worth about half a dozen Mogadon tablets, so I shall not go into the detail now. However, I advise the House that we shall go into great detail when we consider the Bill in Standing Committee.

John Bercow: Will my hon. Friend give way?

Mr. Hammond: If my hon. Friend will allow me, I want to make a little more progress.

Clause 40 and schedule 8 are designed to prevent businesses owned by private equity and venture capital organisations from obtaining what the Revenue regards as excessive tax deductions for loans made from overseas. Typically, in the venture capital and private equity model, the UK acquisition vehicle is funded with debt, and the tax deduction for interest on that debt shelters the corporation tax liability arising in the business acquired. There are real concerns in the City about whether the measures are based on a proper understanding of the private equity business. Moreover, there is strong resentment about how the changes have been badged as anti-avoidance, when private equity financing traditionally has followed a model agreed with the Revenue.

As drafted, the Bill will catch a wider range of transactions than the Treasury appears to have envisaged. For example, bank debt raised by acquired companies will be caught, which will increase uncertainty and inevitably affect the pricing of transactions. The provision could also catch financing structures under the private finance initiative, so I hope that the Financial Secretary will say how the proposals in clause 40 and schedule 8 are expected to affect the Government's PFI funding programme.

As a result of the proposed measures, the UK will become less attractive at a time when our European competitors are attempting to expand their share of inward private equity investment and to promote themselves as bases for private equity houses. As the British Venture Capital Association has urged the Chancellor, there is a need to reconsider the proposals in their entirety if we are not to damage an important sector of the UK economy.

Clause 42 and schedule 9 deal with life assurance companies. They have retroactive effect and have caused at least two companies to issue profit warnings. However, I am sure that the House will be more concerned about the possible impact on policyholders, including pension fundholders, who are already being clobbered by the Government's annual tax raid of £5 billion.

Disconcertingly, paragraph 3 of schedule 9 would allow a fundamental change in the way that life assurance companies are taxed, to be introduced by means of statutory instrument. This area of specialist taxation is highly complex and the agenda is being driven by one or two senior Revenue officials who, no doubt, are committed to increasing revenue yield. Perhaps they are on performance-related pay. However, they are not in the best position to balance the revenue-
 
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raising imperative against the wider issues raised by the pensions crisis. In such a specialist area, it is difficult to be confident of effective peer review within the Revenue or, dare I say, of adequate ministerial oversight of the policy agenda.

The intention, as I understand it, is to change the treatment of income arising on certain assets within the life assurance companies' funds which, on the basis of current actuarial assessments, are deemed to be surplus to what is required for the protection of policyholders. Life assurance companies face a complex regime that taxes policyholders at 20 per cent. on the funds invested to support their life and general annuity policies and 0 per cent. on funds invested to support their pensions, and taxes profits made by shareholders of the company, quite properly, at the full corporation tax rate of 30 per cent. The Government's proposal is to insist that surplus funds are treated as shareholders' funds so that income on them is taxed at the higher rate. As we understand it at the moment, that proposal will apply, absurdly, even to mutual insurers that have no shareholders, but will still be taxed at the shareholder rate.

We accept that there is scope for tax avoidance where genuinely surplus funds are allowed to roll up at a lower rate of deduction and then potentially transferred out to the benefit of shareholders at a later date. However, the recent history of pension funds and life assurance companies in this country should lead us to be very careful about taking any short-term view as to what constitutes surplus assets that may be required to support future liabilities, and thus can be treated as shareholders' funds subject to the higher rate of tax. I hope that the Financial Secretary will acknowledge the extraordinary complexity of this area and the special dangers that arise when very few people genuinely understand the issues. I hope that he will agree that in such circumstances it is all the more important that in Committee we scrutinise the proposals in schedule 9 very carefully.

Finally, can Ministers explain why, at a time when all building societies, most banks and most investment product providers fall under the compulsory jurisdiction of the financial ombudsman service, with rules set by the Financial Services Authority, the Government propose, in clause 69, that the statutory adjudicator for national savings should be abolished in favour of the voluntary jurisdiction of the financial ombudsman service? At a time when the Chancellor's fiscal deficit means a greater role for national savings and the consequent need to enhance consumer confidence in national savings products, and at a time when other providers are increasingly subject to compulsory regimes, that seems to us like a case of, "Do as I say, not as I do" by the Government.

It will be clear to the House that the Bill deals with complex matters. There is a very real concern that a substantial share of the burden of this legislation will fall on some of the most dynamic sectors of the UK corporate economy—UK headquartered multinational groups, fast-growing venture capital and private-equity-backed businesses and UK-based investment houses. As a result of its very wide drafting, UK multinationals potentially face higher costs of investment in overseas markets than their competitors; growing UK businesses will potentially find it more difficult to attract investment by international, and particularly US-based,
 
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venture capital and private equity funds; London will potentially become a less attractive base for international investment business; and the UK will become a more expensive location for internationally mobile investment.

We recognise the anti-avoidance driver behind much of this legislation, but in Committee we must ensure that the correct balance is restored between drafting anti-avoidance legislation widely enough to ensure that it is not circumvented and maintaining a regime that is sufficiently clear, certain and fair not to deter investment in the UK or by UK businesses abroad. We cannot act as the world's policeman. If the UK Government do not like international tax practices, they must address them by negotiation and by treaty. To try to tackle them unilaterally will not solve the problem—it will simply disadvantage British business to the benefit of our competitors. However tempting the shortcut, we must maintain the distinction between Parliament making our tax laws and the Revenue enforcing them.

Since 1999, Britain's position in the international competitiveness league has fallen from fourth to 11th place. Our trade has gone from a surplus to a record deficit and a million manufacturing jobs have been lost. Productivity growth is down by a third, as is the savings ratio, and average take-home incomes for families have fallen for the first time in 15 years. At the same time, the burden of corporate tax is growing faster than the growth rate of the economy.

Back in 2001, in response to those emerging trends, the Chancellor announced his intention to make the UK tax regime more modern, more competitive and fairer, and to remove tax distortions that impact on commercial decisions. What he has delivered is a projected huge increase in the corporate tax burden in the coming year and, on top of that, a raft of widely drafted new anti-avoidance legislation which, if we are not careful, will further erode the long-term competitiveness of British business in the short-term pursuit of extra revenue to fill his fiscal black hole.

We accept the principle that there is a need constantly to update anti-avoidance legislation, but the Government do not have the balance right in the Bill. As I said to the hon. Member for Wirral, West (Stephen Hesford), I shall not ask my hon. Friends to vote against the Bill tonight, but I can tell the Paymaster General that in Committee we shall seek further to limit the scope of some of the measures, to reduce the potential for collateral damage and unintended consequences and to increase certainty for taxpayers. We shall seek to reduce the scope for arbitrary decision making by officials and, as my right hon. Friend the Member for Charnwood (Mr. Dorrell) suggested, increase the opportunity for taxpayers to achieve certainty through rigorous pre-clearance processes.

The Bill before us today is better than the one published in March, thanks to our insistence on an opportunity for further scrutiny. With a constructive engagement on both sides of the House to digest and analyse the huge volume of input from outside experts and interested parties, I hope that the Bill will be still further improved by the time it completes its parliamentary passage, to the benefit of British business as a whole.
 
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4.37 pm

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