Finance Bill

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Standing Committee B

Tuesday 21 June 2005

(Afternoon)

The Committee consisted of the following Members:

Chairmen: †Sir Nicholas Winterton, Frank Cook

†Austin, Mr. Ian (Dudley, North) (Lab)

†Balls, Ed (Normanton) (Lab)

†Field, Mr. Mark (Cities of London and Westminster) (Con)

†Flello, Mr. Robert (Stoke-on-Trent, South) (Lab)

†Francois, Mr. Mark (Rayleigh) (Con)

†Goodman, Helen (Bishop Auckland) (Lab)

†Hammond, Mr. Philip (Runnymede and Weybridge) (Con)

†Hammond, Stephen (Wimbledon) (Con)

†Healey, John (Financial Secretary to the Treasury) (Lab)

†Huhne, Chris (Eastleigh) (LD)

†Kramer, Susan (Richmond Park) (LD)

†Lewis, Mr. Ivan (Economic Secretary to the Treasury) (Lab)

†Lucas, Ian (Wrexham) (Lab)

†Marris, Rob (Wolverhampton, South-West) (Lab)

†McCarthy, Kerry (Bristol, East) (Lab)

†McFadden, Mr. Pat (Wolverhampton, South-East) (Lab)

†Morden, Jessica (Newport, East) (Lab)

†Newmark, Mr. Brooks (Braintree) (Con)

†Primarolo, Dawn (Paymaster General) (Lab)

†Ruffley, Mr. David (Bury St. Edmunds) (Con)

†Spring, Mr. Richard (West Suffolk) (Con)

†Tami, Mark (Alyn and Deeside) (Lab)

†Watson, Mr. Tom (Lord Commissioner of Her Majesty's Treasury) (Lab)

†Williams, Stephen (Bristol, West) (LD)

Frank Cranmer, Nerys Welfoot, Committee Clerks

† attended the Committee

[Sir Nicholas Winterton in the Chair]

Finance Bill

(Except clauses 11, 18, 40, 43, 44 and 69 and schedule 8)

Clause 12

Employee securities: anti-avoidance

Question proposed [this day], That the clause stand part of the Bill.

4.30 pm

Question again proposed.

The Paymaster General (Dawn Primarolo): It is not my intention to stray into the important debates on amendments to schedule 2, but there has been some discussion about the scope of the proposal on employment-related securities in clause 12 and schedule 2, about which I spoke briefly to the hon. Member for Runnymede and Weybridge (Mr. Hammond). These arrangements are devised to deal with the minority of cases where there are complex, contrived arrangements to avoid paying income tax and national insurance on employment rewards. The Government have made clear their intention to close that activity down permanently.

There has been some debate about whether small businesses are caught by the provisions, so I am grateful to have the opportunity to offer small businesses some reassurance.

A change being made to chapter 4 of the Income Tax (Earnings and Pensions) Act 2003 will remove, where avoidance is involved, the provision that automatically exempts benefits received in connection with securities from a full income tax and national insurance charge, if income tax has been paid elsewhere. I am aware, from representations made directly to me and my Department, that professionals have expressed concern about the possible scope of the change. I want to make it clear that this change does not bring all benefits derived from securities into a tax and national insurance charge. A reference to benefits in the context of the schedule means the employment reward—the passing of value to an employee in return for the employee's labour. Where investors are carrying out their normal investment transaction, this charge will not affect them.

The purpose test introduced in section 447 of the 2003 Act has been carefully designed to target complex, contrived avoidance arrangements that are used mainly to disguise cash bonuses. If taxpayers use contrived arrangements to get round anti-avoidance legislation—to avoid paying the proper amount of tax and national insurance—they cannot expect to be excluded from the charge. However, it will be absolutely clear from what I say about the purpose test that this measure will not affect the taxation of those small businesses that do not use contrived schemes to disguise remuneration to avoid tax and national insurance.
 
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There is no connection between the changes proposed in this clause and schedule to tackle contrived avoidance schemes and last December's discussion paper on the taxation of small business, which focuses on the strategic issues relating to the taxation and treatment of the legal forms used by small businesses. Taxation of small businesses is a live issue that is being considered as part of our ongoing discussions with small businesses and their advisers. The provisions before the Committee today are not intended to address those points. Any proposals coming out of the discussion paper and further consideration will be brought before the House in the normal way.

I am grateful to you, Sir Nicholas, for allowing me to spell that out. There has been some confusion, and many inquiries have been made about that point. I was asked to explain the purpose of clause 12 and schedule 2 at the beginning of the debate on them. Clause 12 and schedule 2 contain important and necessary measures, which I should address on a point-by-point basis in our discussions on the amendments to the schedule.

Mr. Philip Hammond (Runnymede and Weybridge) (Con): The Paymaster General is being extremely helpful. Will she confirm that what she is saying is that, with the exception of companies that fall within the scope of Inland Revenue 32, there is no intention to limit the ability to take profits in dividends within a business and to impute remuneration that is of another kind where profits are being taken as dividends?

Dawn Primarolo: I was trying to be as clear as possible. Unless a scheme falls within the category of schemes contrived specifically to avoid income tax and national insurance on employment remuneration for an employee, it is not within the scope of clause 12 or schedule 2. There are matters to be discussed, but that will take a long time. I know that this topic has caused a great deal of interest, and I thought it would be helpful to provide to the Committee at the beginning of our deliberations as clear an idea as possible of the precise, narrow and targeted aim of schedule 2 and clause 12, and thereby to put to rest concerns that have been generated in some quarters.

The Chairman: I have to make it clear that the Paymaster General was speaking in general terms to clause 12, but I felt it was worth her while doing so before we reached the nitty-gritty contained in the amendments to schedule 2.

Question put and agreed to.

Clause 12 ordered to stand part of the Bill.

Schedule 2

Employee securities: anti-avoidance

Mr. Mark Field (Cities of London and Westminster) (Con): I beg to move amendment No. 1, in schedule 2, page 63, line 13, after 'is', insert

'entered into as part of a scheme or arrangement the main purpose (or one of the main purposes) of which is the avoidance of tax or national insurance contributions and is'.

 
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The Chairman: With this it will be convenient to discuss the following amendments: No. 2, in schedule 2, page 63, line 22, at end insert—

'(d) any contract of insurance offered by a company whose business includes the business of selling insurance policies where the contract is offered on substantially the same terms in the ordinary course of that insurance business.''.'.

No. 3, in schedule 2, page 63, line 36, leave out from beginning to end of line 3 on page 64 and insert—

'(8) This paragraph has effect on and after 2nd December 2004 and applies in relation to rights under contracts of insurance acquired on or after that date.'.

Mr. Field: If we took at face value the Paymaster General's warm words it would be pointless having the debate that I suspect we shall have over the next hour or so. I accept that this is a complex area and that the Treasury has received many representations on it. The anti-avoidance proposals are set out in detail in schedule 2, which deals with employment remuneration. However, for our part, it is difficult to avoid the conclusion that many of the anti-avoidance proposals are driven by an increasingly desperate Treasury desire to fill its revenue black hole without regard to the damaging effect that it will have on the development of start-up ventures, and, indeed, of some bona fide remuneration schemes.

I am amused that there is such amusement coming from you, Sir Nicholas. I suspect it has nothing to do with what I have said—at least I hope that that is the case.

The Chairman: No, it was something I said that caused a certain flutter of the eyelids. I leave it on record that I find what has been said in no way offensive.

Mr. Field: Notwithstanding the Paymaster General's warm words of a few moments ago, I believe that where these proposals do most damage is in the inadvertent bias against smaller companies and entrepreneurs, who will perhaps be unable to take the necessary complex accounting advice in setting up their employment security schemes. There is therefore a risk that they will come under the banner of being ''contrived''.

The arbitrary, uncertain and subjective nature of many of the proposals in schedule 2 betrays the sense that the all-important determination of whether a scheme is subject to capital gains tax, and therefore a 10 per cent. charge, or income tax, with a 41 per cent. charge, hinges on the random outcome of which tax office or officer is dealing with the file.

We have learned that the Inland Revenue, as part of its clearance process, has in the past given smaller companies assistance in determining pay-as-you-earn liabilities and consideration on sale, but we understand that this may soon be discontinued. I hope that the Paymaster General will provide guidance on that.

We would like assurances that in analysing the operation of the schedule proper attention will be paid to the entrepreneurial set ups that the much-vaunted capital gains tax regime was supposed to benefit most. We fear that these small operations have most to lose from the arbitrary element, which places the taxpayer at the whim of the Inland Revenue inspector, who can
 
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decide whether moneys earned, and therefore liable for tax charge, are considered as remuneration or as a return on investment.

We need to stress that, without falling foul of the Treasury's accusation of contrivance, it is inevitable that many smaller businesses will, from day one, structure themselves so as to have an exit strategy in sight. That is not wilful tax avoidance but the practical reality of commercial life. I ran a small business for seven years before I entered Parliament, and I remember that at the end of each tax year, when we went to see our accountant, we would consider the pot of moneys left in the company and determine whether we should take it out as some sort of dividend. We considered those issues—issues of, at one level, tax avoidance—fundamentally and from first principles. I do not think that those discussions with our accountant were contrivance in any way. None the less, I suspect that they would run the risk of falling foul of a clear definition, unless we are assured to the contrary by the Minister. If we are not, those schemes would no longer be seen as providing proper dividends, but would be subject immediately to the rather higher charge of income tax.

It seems that the Government remain determined to close tax planning, rather than just tax contrivance, which reduces the PAYE and national insurance charge paid on salaries. Most measures have in the past been aimed at bonus payment structures, most visibly those implemented by large investment banks. 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.

We are concerned that the impact may well cover securities issued by employee-controlled companies. There are concerns that there will be fewer fiscal incentives to reward employees in much smaller operations in ways that align their interests with employers. That simply cannot be the intention of what is being proposed under the schedule.

Most of the structures being closed are being shut down following the introduction of the disclosure of tax avoidance schemes legislation. A main cause of these changes is the result of the Government having made capital gains tax treatment for individuals so much more attractive than income tax receipts by introducing the business asset taper relief in 1998.

I come to the specifics of the first three amendments, Nos. 1 to 3, which relate to insurance contracts. On amendment No. 1, the Government claim that the measures relating to insurance contracts in paragraph 2 of schedule 2 are needed to counteract wilful tax avoidance. If that is so, it should not be objectionable to have a motive test—in other words, one that would look at the main purpose. It would have to be shown that the main purpose was the avoidance of taxation, and that is set out in our first amendment.

These amendments seek to ensure that the new rules do not apply to contracts issued by insurance companies, who sell such contracts in the normal course of their business to the general public—that is set out in amendment No. 2—or to existing insurance
 
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contracts that were in place on 2 December last year. That is our third amendment.

The definition of securities in part 7 of the Income Tax (Earnings and Pensions) Act is widened to include certain instruments to prevent the Bill from being used to pay tax-free bonuses. They include rights under certain insurance contracts as well as redeemable shares, to which we shall return.

4.45 pm

The schedule already introduces a purposive test under paragraph 4(3). Accordingly, there seems little reason why the Government should object to the insertion of a main purpose test for insurance contracts. Naturally, the main problem with a main purpose test is the element of subjectivity. Inevitably, that leads to a potential for uncertainty, about which I am sure the Paymaster General will wax lyrical—at least, until the time comes to deal with paragraph 4(3).

The purpose of amendment No. 2 is to exclude from the definition of employment-related securities contracts of insurance that are provided to employees by their employers, when those employers are insurance companies and provide contracts on the same terms to members of the public. As the Paymaster General will be aware, part 7 of the Income Tax (Earnings and Pensions) Act contains charges that relate to employment-related securities to charge to income tax gains from securities that are awarded to employees by reason of their employment. Employment-related securities include such items as shares and loan stock. We are worried—a concern that has been reiterated by the insurance business—that tax is being avoided by entering into similar arrangements with insurance contracts. We believe that there should be an additional exemption to protect employees from being offered insurance contracts by their employers, when those employers would offer those contracts to the public on the same terms.

We tabled amendment No. 3 to prevent an unanticipated national insurance and PAYE liability for employers. As the Paymaster General is aware, the restricted securities regime came into place just more than two years ago on 16 April 2003. Under that regime, charges to income tax under PAYE and national insurance can arise when restrictions cease to apply to securities or when restricted securities are disposed of. Securities were not restricted by reason only, although they could be redeemed on payment of an amount. From last December—the reason why we set the date in the amendment—the exemption for redeemable securities is to be removed for securities that were issued before that date as well as on or after it. Our worry is that that is likely to lead inadvertently to a national insurance and PAYE liability for employers. The Association of British Insurers has been in touch with the Treasury about the issue and I hope that it will take account of what the association said. I should like the Paymaster General to give us some guidance on such matters and I look forward to hearing her comments.
 
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Prepared 21 June 2005