Finance (No. 2) Bill
Ms Barlow: My hon. Friend made some reference to those areas, and indeed has done so today. It is only right and proper to send a clear signal that we will not accept tax avoidance by those who have more than enough money to pay their fair share. It is a question of fairness, common sense and justice for all.
Mr. Philip Dunne (Ludlow) (Con): On the subject of fairness, does the hon. Lady agree that the wording of subsection 5 in particular appears to be open-ended? She used the words alleged retrospection. It is clear from my reading that the drafting of subsection 5 applying the measures to
an option acquired before that date
namely, 2 December 2004
where something is done on or after that date
is very wide-ranging. My question relating to fairness is whether she or the Paymaster General interprets that as potentially applying to years that have already been closed off by the Inland Revenue. Will those limits continue to apply?
Ms Barlow: The indication was clear. I shall read out my notes on that issue. On 2 December 2004, the Paymaster General made a statement setting out how the Government would deal with future tax avoidance schemes, warning that any counter-measures would be backdated to 2 December 2004 if necessary. Despite that warning and the Finance Act 2005, schemes continued to be promoted that sought to avoid income tax and NICs on employment reward using securities. Indeed, some employers have continued to engage in those
Dawn Primarolo: Let there be no mistake about it; the clause has a retrospective effect, potentially back to 2 December 2004, the date of the statement. It is not for accounts that are closed off, but a clear line was drawn for money that is still trying to cascade through the many and varied schemes. Indeed, Opposition Members have been very supportive of the need for such action.
We are talking about payments, bonuses and forms of employment remuneration that are disguised, and successive Governments have tried to deal with them. It started in 1991 with unit trusts; in 1993 it was gold bullion and other tradeable commodities, and in 1994 it was diamonds and fine wines. In 1995, there was anti-avoidance legislation on tradeable assets and vouchers, and in 1996 grants of share options in third party companies had to be dealt with, as did company share awards and options. In 1997 there was more on vouchers; and in 1998 it was conditional shares. Again in 1998, we dealt with readily convertible assets and with convertible shares; and in 1999 we dealt with the exercise of options.
The relentless march against those who seek to take employment remuneration without it being properly taxed continues. The evidence is that by 2003 £1.4 billion was going through those known schemes. Interestingly, the spokespersons for Her Majestys Opposition have supported such action. For instance, when discussing last years Finance Bill in Committeeit is a mirror imagethe hon. Member for Cities of London and Westminster (Mr. Field) said:
No one on the Opposition Benches will defend the payment in wine, gold or in other ways that was clearly an abuse of the system.[Official Report, Standing Committee B, 21 June 2005; c. 44.]
The hon. Member for Runnymede and Weybridge(Mr. Hammond) said
No Conservative Member would defend highly contrived arrangements.[Official Report, Standing Committee B, 21 June 2005; c. 47.]
I could go on, but I utterly agree with them. In 2003, as we were wading through complex anti-avoidance legislation, the hon. Member for Yeovil (Mr. Laws), then spokesperson for the Liberal Democrats, said:
The question is not only how much money has been lost how much tax avoidance there has been
that is bad enough
but why we continue to have legislation year after year to deal with such avoidance schemes...surely we must consider whether we can introduce legislation specifically to address avoidance of income tax and national insurance contributions on remuneration in a way that will deal with the matter once and for all.[Official Report, Standing Committee A, 24 June 2004; c. 757.]
When I made the statement in December 2004, a clear line was being drawn.
I understand the points that the hon. Gentleman makes, but I must tell him in the gentlest possible way that the amendments will restrict the will of Parliament and not delivering the taxation that Parliament clearly wants for such remuneration. The amendments open up the possibility for remuneration in one form or
Julia Goldsworthy: In order to catch schemes that try to avoid what clause 92 attempts to overcome, does the right hon. Lady think it would be appropriate to have a pre-clearance scheme, so that HMRC could establish whether such schemes fell foul of the rules before they were introduced?
Dawn Primarolo: I have said it before: why should we give tax avoiders a pre-clearance scheme on how to get round the tax system? The law is clear, as is the statement, so there would be absolutely no point.
To deal with the two points that the hon. Member for Fareham raised, there is an issue with regard to phantom option plans and what are called the put options. The matter has been brought to the attention of my officials by some in the accountancy and legal professions, and HMRC officials have already made it clear on the website that, following the new legal advice, typical phantom option plans are not within the definition of securities options. Put options are rare but are sometimes used in takeover situations. Officials have examined the typical commercial situation and have confirmed that the put options used therein do not deliver employment reward. The Department therefore anticipates no adverse impact from their retention as securities.
Those inquiries have not identified any adverse impact on genuine commercial share option plans. However, if companies had concerns regarding the use of options in commercial circumstances not involving avoidance, they could seek a ruling from HMRC officials under the usual code of practice 10 procedure, as we have discussed before. In those circumstances where, as the hon. Gentleman mentioned, there is legitimate use that might be inadvertently caught, the position is quite clear. The operation of the code of practice 10 procedure means that once all the facts are put on the table and made clear to HMRC and an opinion has been given on that, companies are bound by that opinion.
The hon. Gentleman has sought to deal with those concerns, but unfortunately amendments Nos. 135 to 137 place a severe limit on the clauses effectiveness in dealing with tax and national insurance avoidance. They would lead only to further revenue loss and provide opportunities for further exploitation of the legislation. To make it quite clear, the statement to Parliament in December 2004 drew the line and said, That is the end. Whatever happens, you cannot use the schemes, hence the backdating.
Amendments Nos. 135 and 136 have the admirable intention of simplifying the clause. However, the clause makes it clear that all options, other than those that are a right to acquire securities and were not acquired with the main purpose of avoiding tax or national insurance contributions, are within the normal charging provisions for securities and hence subject to existing anti-avoidance measures. Amendments Nos. 135 and 136, far from simplifying the clause, would therefore remove the clarity
Amendment No. 137 seeks to narrow the effect of the clause by restricting its application to income tax and national insurance only. That would be an unacceptable weakening of the proposals.
My statement of 2 December made it clear that
This Government are determined to ensure that all employers and employees pay the proper amount of tax and NICs on the rewards of employment, however those rewards are delivered.[Official Report, 2 December 2004; Vol. 428, c. 44WS.]
The phrase however those rewards are delivered in that sentence is crucial to the schemes that are devised. Avoidance schemes are being marketed to engineer a corporation tax deduction on employment reward, without a commensurate matching income tax charge on the employee. The schemes defer taxation indefinitely or until a considerable time after the employee has received the employment reward. I cannot see that using a wholly uncommercial option is anything other than avoidance, depriving the Exchequer of the proper amount of tax and national insurance and employment reward. I gave fair warning on 2 December 2004 that we would no longer accept that.
Amendments Nos. 138 and 139 attempt to prevent retrospective PAYE and seek to transfer from employers to employees the obligation to pay HMRC the tax arising, by virtue of clause 92, on earnings received prior to the date of Royal Assent for the Bill, thereby removing any obligation on the employer to account for the tax under PAYE. Since it is the employer who decides to pay earnings in such contrived ways, it is only right that, in accordance with the existing underlying principle of PAYE and national insurance, the employer should be held to account to pay the tax and national insurance. Amendments Nos. 138 and 139 would undermine the principle of PAYE and negate the timely payment of tax to the Exchequer by those who have chosen to pay earnings in a manner expressly intended to avoid a liability.
Amendment No. 140 would limit the backdating of the clause to the date of the Budget22 March 2006when the provisions were announced and published. That would undermine not only the clear warning that I gave on 2 December 2004, but future Government action to tackle avoidance. It would also give entirely the wrong signal to those who abuse security options to avoid tax and national insurance by allowing them to keep some of the tax and national insurance that they have avoided.
Let me dispel the notion that uncertainty prevails among practitionerssome of whom, I am sorry to say, perhaps supplied the amendments that we are discussingby quoting from a post-Budget publication, issued by a firm of active advisers, appropriately called the Tax Planning Newsletter. It states:
The main problem area for our clients would have been for those...who used one of the schemes which enabled bonuses to be taken from companies tax free. We had been warned by Dawn Primarolo that there was a danger of retrospective legislation in this area and we passed that warning on to clients. For some, however, it was a risk worth taking but it now appears that she meant what she said.
Absolutely; I meant what I said. If clause 92 were only made effective from the date of the Budget, it would return us to the cat and mouse games of the past, where there was always a window of opportunity to manufacture and use an avoidance scheme before remedial legislation could be enacted.
We are determined that we will not return to these types of games around employment reward and that they should end. Avoiders will no longer have such an unfair advantage over those who have paid their fair share of tax and national insurance. The effect of the clause is clear: it applies only if security options are acquired or something is done to existing security options on or after 2 December 2004 that is part of an avoidance arrangement. The avoiders know exactly what they are doing, as Opposition Members have acknowledged at each point when we have discussed the various schemes over the years. Those who do not attempt to avoid paying the proper amount by participating in complex and contrived avoidance arrangements will have the certainty that these provisions do not apply to them.
Parliament is clear. It expects employment remuneration to be properly taxed. That is exactly the intention of the clause and it is regrettable that some people sought to test whether I meant what I said on behalf of the Government about a retrospective effect. I meant it and I hope that they take the lesson now and that a line has finally been drawn.
Mr. Hoban: I am sure that readers of the Tax Planning Newsletter will take note of the Paymaster Generals comments. If they were uncertain, they must be certain now.
I want to make it clear that we support measures to tackle tax avoidance. The list of abuses that the Paymaster General read out included measures that we closed down when we were in Government, so we are cognisant of the risk of tax avoidance and the way in which people seek to hide remuneration through schemes that are dressed up as share option schemes and so on. People are always inventive and I am sure that they are even now looking at the Bill and wondering what measures the Government are introducing that they can use to their own advantage. As the Bill has progressed, various changes have been made to schemes introduced by the Government that have been used for tax avoidance.
I welcome the Paymaster Generals clarification of phantom share option schemesit is good to have that clarification in the Committee as well as on the Customs and Excise websiteand put options.
I will leave to another day how the code-of-practice-10 process for clearance of schemes differs from the pre-clearance scheme mentioned by the hon. Member for Falmouth and Camborne, but the fact that the process exists for those with legitimate schemes is welcome. Those who use that process should recognise the important words used by the Paymaster General when she referred to full disclosure of the facts of those schemes. That is important.
On retrospection and clarity, I do not wish to relive in gory detail the Report stage and Third Reading of the National Insurance Contributions Bill[Hon. Members: Go on!]despite the temptation from my hon. Friends who are egging me on. Before this debate, I checked to
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 92 ordered to stand part of the Bill.
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