|
The Chairman: I note what the hon. Gentlemen says, but normally I would permit a vote only on the lead amendment.
Mr. Field: We will do that.
The Chairman: I am grateful to for that guidance.
5.45 pm
Question put, That the amendment be made:—
The Committee divided: Ayes 6, Noes 15.
Division No. 1]
AYES
Field, Mr. Mark
Francois, Mr. Mark
Hammond, Stephen
Newmark, Mr. Brooks
Ruffley, Mr. David
Spring, Mr. Richard
NOES
Balls, Ed
Goodman, Helen
Healey, John
Huhne, Chris
Kramer, Susan
Lewis, Mr. Ivan
Lucas, Ian
McCarthy, Kerry
McFadden, Mr. Pat
Marris, Rob
Morden, Jessica
Primarolo, Dawn
Tami, Mark
Watson, Mr. Tom
Williams, Stephen
Question accordingly negatived.
Column Number: 060
Mr. Field: I beg to move amendment No. 8, in schedule 2, page 65, leave out lines 27 to 40 and insert—
'(3) Where subsection (1) does not apply by virtue of subsection (2) the market value of the employment-related securities is to be determined in each case as if they were immediately and fully convertible.'.
The Chairman: With this it will be convenient to discuss amendment No. 9, in schedule 2, page 66, line 16, at end insert—
'(3B) (a) This subsection applies where subsection (2) of section 437 of this Act applies. (b) If on a chargeable event the amounts charged under the provisions referred to in section 437(1) because of the application of subsection (2) of section 437 and the amounts computed under this section (the ''original amounts'') exceed the amounts that would have been charged under section 437(1) and under this section had section 437(2) not applied, the associated person shall be charged on the lower of such amounts and any amounts overpaid shall be refunded, provided that if, on a later chargeable event, such amounts do not exceed the original amounts, the original amounts shall be due on the dates on which such sums were due and payable as if this provision had not applied.'.
Mr. Field: I am glad that we had a close run battle on the last vote. This group of amendments deals with convertible securities. In summary we want to ensure that taxpayers who receive convertible are not ultimately taxed on a greater value than the true value.
The purpose of the convertible securities regime is to charge—to tax—convertible securities, but the basis of the regime is that the initial acquisition of convertible securities acquired by reason of employment should be charged on the assumption that they were not convertible. On conversion, therefore, it is effectively the value of the conversion right that is charged, and the market value of the securities into which the securities are converted is deducted from the market value of those securities before conversion, ignoring any conversion right. Also deducted is any consideration that might be paid for the conversion. It is to be treated as income and not capital in the first place.
The regime has been used in the past, as the Paymaster General will be aware, for avoidance purposes. Accordingly a provision is to be introduced under which, if avoidance motives are present, the right to convert will not be ignored, but instead the convertible securities will be assumed to be immediately convertible. That will inevitably lead to a higher tax charge on the acquisition of those securities. However, we believe that it will be wrong for taxpayers to lose out if the notional calculation values prove to be above the conversion value ultimately, when any conversion takes place.
The proposal for an amount to be repaid to the associated person may perhaps be argued to be objectionable, as the provision applies in the case of tax avoidance. However, we believe that by the time conversion occurs the purpose of the provision will have been served. The main purpose of the amendments is to clarify the proposed changes to section 437 of the Income Tax (Earnings and Pensions) Act and to amend the charge under section 440.
We accept that the method is somewhat cumbersome, but it is surely better than the present method of creating taxable income gain, followed by
Column Number: 061
an unutilisable capital loss. Section 437 taxes the securities as though they had the market value that they would have had if they were not convertible. That is turned off if the convertible factor is intended for tax avoidance. Securities must be taxed as though they were immediately and fully convertible.
I hope that we have made that case fairly clear. It was brought to us by a number of the professional bodies that are concerned about the regime for convertible securities. We look forward to hearing what the Paymaster General says about the amendment and about those aspects of convertible securities, as set out in the schedule.
Dawn Primarolo: I would not want to suggest for one minute that the Conservatives are siding with avoiders. I accept entirely that the purpose of the amendment is to probe the Government and to seek clarity, wherever possible, of our intention and how the legislation will operate. I have tried to give such clarity in laying out the objectives. Although I am speaking to the schedule, I say that because of the frustration to which the challenge we face gives rise, given the repeated actions by this Government and the previous Government to close a great deal of avoidance in a small area.
I will not be able to give the hon. Gentleman any comfort on this group of amendments. It is difficult to phrase amendments to the Finance Bill, but these amendments add complexity and, unfortunately, are in danger of rewarding avoidance.
Amendment No. 8 has the admirable intention of replacing 11 lines of text with three. Unfortunately, the shorter wording will not work as intended. It could give rise to ambiguity and open the door to avoiders. The rules must cater for a variety of ways in which convertible securities can be used, in order to counteract avoidance schemes effectively. The rules are based on the notification schemes that are already in place.
Amendment No. 9 is intended to allow those who have sought to avoid, using convertible securities, to pay the same tax as they would have paid if they had not used the avoidance scheme. I am not prepared to guarantee that avoiders using highly contrived arrangements will enjoy the same tax treatment as that given to genuine convertible securities. The avoiders have only themselves to blame if the consequence of attempting the avoidance in the first place is that they leave themselves liable to income tax and national insurance, and are unable to gain access to arrangements that would have otherwise been available had they arranged their affairs properly.
Otherwise, the situation would be unfair on taxpayers who arrange their affairs according to the legislation. The hon. Gentleman is asking, in effect, for those who get caught out on avoidance to be able to say, ''Okay, we'll do it properly—now will you give us the relief?'' The answer is no. To paraphrase the eminent Lord Greene, those who play with fire should not complain when they get their fingers burnt. Perhaps it is best not to play with fire, but to follow
Column Number: 062
the legislation. I hope that the hon. Gentleman will not want to pursue his amendments. This is a fundamental point, and if he should do so I will ask my hon. Friends to oppose them. Avoiders have a clear choice. They can comply with the legislation, but if they do not, there are consequences. They cannot say, ''Well, we tried not to comply'' and when it does not work say, ''Can we pretend that we did it the right way?'' That is not acceptable.
Mr. Field: It has been an interesting, albeit brief, debate on the issue. On the related matter of debt relief to third world countries, I would have a lot of sympathy with the Paymaster General's comments. I have doubts about these matters for the same reason: the issue of moral hazard, about which a very forceful argument was made. That is why she does not want those trying to avoid tax, as she would put it—perhaps I would say those who organise their affairs in a way that is unwound by the Inland Revenue—to have a second bite of the cherry and to benefit in the way that she mentioned. There is an issue of moral hazard and that argument has been made relatively powerfully.
I am sorry that in our attempts to précis the lead amendment by reducing it from 11 to three lines we decided to leave out the wrong eight lines.
Dawn Primarolo: Better luck next time.
Mr. Field: Such is life, unfortunately.
I beg to ask to leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Mr. Field: I beg to move amendment No. 10, in schedule 2, page 67, line 12, at end insert—
'(3) Subsections (1) and (2) shall not apply if the loan is repaid, in which case within one month after the repayment has been notified to the Inland Revenue any tax and national insurance paid shall be repaid.'.
I am always worried when I read through my notes, which are written a few days before, and I start by referring to the straightforward purpose of the amendment. I hope that in articulating the amendment, the purpose will seem straightforward.
Our idea is to avoid what we would regard as a potential disproportionate tax charge for employees who receive loans from employers. Section 446S contains the provisions on loans to employees, which were set out two years ago when the regime was put in place. Those provisions provide for a tax charge equivalent to the benefit of the loans and the benefit of the interest if it is interest-free. There is a charge if the loan is released or written off, and the charges cease if a loan is repaid. That provision was introduced initially 30 years ago.
New section 446UA would, if enacted, provide that if a loan is made where one of the main purposes is the avoidance of income tax or national insurance, the employee would be charged to tax on the value of the loan. Although there is an immediate income tax charge where previously a notional loan would have arisen, now the loan remains so that the employee remains liable to repay it. That raises the concern that, save any relieving provisions, it risks creating a high marginal tax rate for employees, with additional national insurance due for employers as well.
Column Number: 063
I hope that we have made a straightforward case on the amendment. We simply wish to avoid the potential for a disproportionate tax charge for employees who receive loans from employers that end up falling foul of the provisions.
| 
