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Chris Huhne: I beg to move amendment No. 2, in page 17, line 39, at end insert
'for the purpose of avoiding any tax.'.
I too will attempt to be very brief. This is a modest amendment, which I should like to advocate. We discussed this issue in a Committee of the whole House and I put various points to the Economic Secretary, to
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which I hoped that he would respond with, perhaps, a Government amendment. Such an amendment has not been forthcoming so far, and it would be very pleasant to have from him an assurance about the problem created for qualified investor schemes by the current wording of subsection (3). Unfortunately, it is possible that an entirely blameless, taxpaying investor, through no fault of his own, could find that an institutional investor, or some other large investor, has left him with 10 per cent. of the qualified investor scheme. That blameless person would then be subject to the taxation regime set out in clause 18(3).
That cannot have been the Treasury's intention, as the clause contains various careful exemptions designed to make sure that smaller investors are not caught by the problem. I hope that the Economic Secretary will address that matter, and try to get qualified investor schemes up and running. They have cross-party support, and would be an adornment to our financial services industry.
6.15 pm
Mr. Ivan Lewis: I cannot accept the amendment, but I want to reassure the hon. Member for Eastleigh (Chris Huhne) about some of his reasonable concerns. First, he will accept that a purpose test needs careful consideration to ensure that it hits the right target and can be effectively enforced. The amendment would pre-empt the further discussion and work required before such a test could be introduced. The wording of the amendment restricts the application of the rule to situations in which the investor's only purpose in owning 10 per cent. or more of a fund is tax avoidance.
That would make it simple for investors to get around the rule. It is almost always possible to find some other reason, however trivial or irrelevant, for owning 10 per cent. or more of a fund. To prevent sidestepping other-purpose rules, the Bill stipulates that tax avoidance must be the main purpose, or one of the main purposes, behind entering into transactions. Without such protection, it is unlikely that the different tax treatment rule would ever be applied.
To police a combined 10 per cent. and purpose test would inevitably lead to greater compliance costs for the industry, investors and HMRC than would be incurred by a straightforward rule that applies a different tax treatment based simply on percentage ownership of a fund. The experience from other-purpose tests is that proving that tax avoidance was the only purpose is difficult and time consuming. It also leads to uncertainty for the investor while the position is resolved.
I hope that the hon. Gentleman finds the next bit helpful. We recognise that some investors may end up owning 10 per cent. or more of a fund inadvertently. For example, that might happen if a substantial investor redeemed his units. To ensure that investors who find themselves over the limit unwittingly are not affected adversely, the regulations will provide a period of grace for matters to be reversed. I have said that before, but I am happy to repeat it today.
As with all the regulations planned for authorised investment funds, officials will continue to consult stakeholders on the detail of how the relaxation in respect of the sort of inadvertent breach that I have outlined will operate. We believe that the 10 per cent. rule is a simple
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percentage rule that applies a different tax treatment to investors who meet or exceed it. Qualified investor schemes are restricted to sophisticated investors who will know when that different treatment will apply to them. Such investors will also know exactly what the consequences will be if they meet or exceed the limit. To add a second leg that requires a subjective test of motive would remove those certainties.
I hope that my response goes some way towards answering the concerns voiced by the hon. Member for Eastleigh in respect of those people who might find themselves to be inadvertent victims of the proposals. We are making it very clear, on the record, that the regulations will be sensitive to investors' circumstances. Given what I have said, I hope that the hon. Gentleman will feel able to withdraw the amendment.
Chris Huhne: On the basis of the reassurances given by the Economic Secretary, I am pleased to beg to ask leave to withdraw the amendment.
Amendment by leave, withdrawn.
Schedule 9
Mr. Mark Field : I beg to move amendment No. 5, in page 131, line 14, at end insert
' ; but no order under this section shall be made unless a draft has been laid before and approved by resolution of the House of Commons.'.
Mr. Deputy Speaker (Sir Michael Lord): With this it will be convenient to discuss amendment No. 6, in page 131, line 43, at end insert—
'(8) No order under this section shall be made unless a draft of it has been laid before and approved by a resolution of the House of Commons.'.
Mr. Field: As the Economic Secretary will appreciate, the amendment covers some of the ground that was cantered over in Committee, but that is unavoidable. We are attempting to ensure that statutory instruments are required for the inserted section 431A of the Income and Corporation Taxes Act 1988 that appears in schedule 9. One of those SIs would be to ensure that as life assurance company taxation is driven off regulatory returns, the tax rules can be altered where necessary where there is a change in the regulatory rules that has a consequential effect. The second is set out in paragraph 3 of schedule 9, which we debated at some length in Committee and is fundamental to how such companies are taxed. It effectively allows the Inland Revenue to alter the tax sections that determine either the rate of tax on which a life assurance company pays its profit or the allocation of investment return between non-taxable pension business and taxable life assurance. Life assurance companies are subject to a tax charge that combines two factors, one being a charge on the shareholder profit that the company makes and the other a charge on the investment return on the assets that are backing life assurance companies. That is effectively then charged to the policyholder.
As the Economic Secretary will be aware, there are no limits on what the Treasury can include in the secondary legislation, and we believe—the amendment tabled by
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the Liberal Democrats suggests that they agree—that that gives far too much power to the Inland Revenue and too little potential protection to the taxpayer. We argued in Committee that there should be, as a matter of course, parliamentary scrutiny as to whether the proposed changes should be introduced by statutory instrument and the limitations placed on what should be contained in that instrument.
There is also a concern that a double charge might inadvertently arise following the implementation of the statutory instrument, in one of two ways. Either the investment return on the attributed estate could be included in the pension business computation and taxed as proposed in an earlier draft SI as taxable life business—the latest SI, released as recently as 17 June—indicated that the regulations would be written so that that would be the case. We would like the Minister to confirm that. Alternatively, any investment return on attributed estate that is now taxed would be taxed again when taken to shareholders' funds. That is an obvious double charge that remains, which is why we tabled an amendment in Committee, which was discussed at length.
In Committee, the Economic Secretary said:
"The context is that the industry and the Government have had an ongoing dialogue in an attempt to reach a satisfactory agreement and conclusion. In the context of those negotiations, that consultation and that debate, significant agreement has been reached between the industry and the Government on a practical and realistic way forward. Given the discussions between the industry and the Government, it is slightly surprising that in Committee we should find that the industry is in a sense encouraging the Opposition to challenge an agreement that it made with the Government. There has genuinely been a listening process and a two-way dialogue."—[Official Report, Standing Committee B, 30 June 2005; c. 252–53.]
Without querying the Government's good faith, I have to say that the insurance industry does not regard that as a fully accurate statement. I am sure that it was not intended to mislead, but the industry feels that although there have been discussions and some of the more outlandish proposals, such as taxing mutuals as having shareholder profit, have been dropped—it appreciates that there has been some movement—it does not regard the final outcome as entirely satisfactory. The industry rightly considers that such amendments should be made by way of primary legislation and should not be introduced in what is effectively—partly because this is the second Finance Bill this year—in a rush. The industry also believes that the Government should be even-handed and ensure that life assurance companies will not be taxed on more than 100 per cent. of their investment return, which is the potential downside of the double charging to which I have referred. In the view of the industry, the regulations remain in a draft state. The Inland Revenue has known about the tax planning in question for almost a decade, so it cannot reasonably claim that the rules have to be introduced in a rush.
The Economic Secretary also claimed that there could be no double charge under the proposed regulations as the investment returns on a non-profit fund cannot be deferred through the use of an investment reserve. Two specific points arose from the insurance industry briefing. First, the industry feels that non-profit funds
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can have investment returns and, in years of high investment return, should maintain them as a matter of reasonable actuarial prudence. Secondly, the income on such attributed estates may need to be maintained in the longer-term fund due to agreements that may be made with the regulator, which leaves open the possibility of a double charge, to which we referred. I hope that issue can be addressed in the final form of the regulations.
I do not want to go over old ground and repeat the arguments, as I am sure that the Minister is fully aware of all of them. Given the continued uncertainty, however, many experts in the insurance industry remain unconvinced of the necessity to enact the change in the current year, rather than awaiting the outcome of a proper review of the apportionment system. We hope, therefore, that he will give serious consideration to taking on board the amendments that we have tabled. In any event, we shall be interested to hear what he has to say, although I appreciate that he may want to reply relatively briefly as many of the issues of principle were debated at great length in the Standing Committee.
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