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
schemes. I support the Government’s uncompromising stance and
urge all Members to support the clause in its unamended
form.
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 Majesty’s Opposition
have supported such action. For instance, when discussing last
year’s Finance Bill in Committee—it is a mirror
image—the 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
another not to be taxed. I am sure that he does not intend that, but I
want to explain why that would happen. 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.
5.30
pm 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 clause’s 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
and lead to uncertainty, since the rules would be silent on the position
of an option that was neither a securities option nor acquired with the
main purpose of avoiding tax or national insurance contributions, such
as an option that was a right to sell securities. 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
Budget—22 March 2006—when 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
practitioners—some of whom, I am sorry to say, perhaps supplied
the amendments that we are discussing—by 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 General’s
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 General’s clarification of phantom share option
schemes—it is good to have that clarification in the Committee
as well as on the Customs and Excise website—and 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
see whether I said anything that I might regret and
I am pleased to say that I said nothing then that I regret now. In
response to the hon. Member for Hove (Ms Barlow), the import of the
Paymaster General’s statement on 2 December 2004 was
not clear to a number of people and we discussed it on Report and Third
Reading. Some advisers did not read her comments as broadly as they
turned out to be. Today’s debate has emphasised the breadth of
those comments, but for a number of people the statement on 2 December
2004, in conjunction with the Government’s later actions, came
as a surprise and any doubts they may have had have been dispelled. I
am sure that that will be reinforced in subsequent
debates. 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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