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Dawn Primarolo: Schedule 2 makes a change to section 446 of part 7 of the ITEPA to block a loophole that was being used to disguise remuneration as an instrument that purported to be taxable as a loan rather than employment income. The new section 446UA will apply only if a loan is provided to an employee via employment-related securities that form part of an avoidance arrangement. Under the new section, the employee will be charged to tax on the full value of the securities or acquisition. If in attempting to avoid full tax and national insurance, the promoter or user of an avoidance scheme has employed an unusual form of payment that has its own tax consequences, facing those consequences is part of the price that they must pay for indulging in avoidance activities.
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To accept the amendment would be to condone—inadvertently, perhaps—avoidance activities. Those who are concerned about the application of the new section need take only one simple action: do not use avoidance arrangements. That has been my consistent attitude: I have explained clearly to Opposition Members the Government's determination to attempt to deal with this issue. If the hon. Gentleman wishes to press his amendment to a Division, I will ask my hon. Friends to oppose it.
Stephen Williams (Bristol, West) (LD): I would like the Paymaster General to clarify something she just said because, unless I misheard her, I think she made an important statement about tax planning or tax avoidance. She said that the price that someone should pay if they go down that route is, effectively, to have to pay their tax twice, which is what this amendment seeks to avoid. Surely, the point of legislation should be to make people pay the tax that would be due if they were to follow the route the Government wish them to follow under the legislation, rather than to pay tax twice? Will she clarify her position on that?
Dawn Primarolo: Yes. We touched on that point in our discussion of the previous group of amendments. I made it clear that it would be wrong to allow avoiders who had been caught to say, ''Actually, we would like to do it legitimately, and by the way can we have access to the reliefs?'' They should have thought about that before they engaged in the activity, and in the sure knowledge of what that activity was. If there is more than one charge as a disguised remuneration passes through its convoluted arrangements, so be it. Those who play with fire cannot complain if they get burned. How can the hon. Gentleman justify a situation in which someone is found to have been engaged in an avoidance scheme, and instead of charging them tax and national insurance, which is what should happen, we say, ''Okay, we will pretend you didn't do it and give you the reliefs''? Before they enter into those arrangements, they must clearly understand the consequences; otherwise, it is simply not fair on taxpayers who comply with the law.
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Mr. Field: The Paymaster General's view is, ''Woe betide any taxpayer who dares to try to avoid tax; the risk of double-charge will be there.''
Dawn Primarolo: With the greatest respect, that is incorrect, and it is an unfair comment. We are talking about between £1½ billion and £2 billion in bonuses that are paid to high-earning people who have consistently since the middle period of the previous Government tried not to pay tax and national insurance on employment-related income. That is the only group of people we are talking about, and I think that all Committee members would agree that that employment-related income should be subject to income tax and national insurance. As it is that narrow group that we are talking about, I think that the hon. Gentleman's comments are unfair.
Ed Balls (Normanton) (Lab): My right hon. Friend should not let them off the hook.
Mr. Field: I am not let off the hook at the best of times, I am sure.
Let me explain our concern about this clause. We are referring to loans, rather than highbrow, highly contrived, employment-related schemes along the lines that the Paymaster General set out earlier. We do not condone avoidance of a crass nature—or any nature.
Ed Balls: What avoidance do you mean?
Mr. Field: Avoidance and evasion are two quite separate things. Legal avoidance is part and parcel of the tax system. One of the reasons we have ever-larger Finance Bills on a year-by-year basis is that we try to foresee ever more possibilities for avoidance. We have a concern in relation to loans: it is often employees who will suffer most if, having received what they thought was a loan on a preferential basis, they suddenly find that it falls foul of the legislation. However, it is not something we are going to die in a ditch for and I am happy to ask leave to withdraw the amendment. But if there is to be serious consideration in the future, representations related to injustices would have to be made to ensure that employees innocently taking up a loan, who then discovered that they had a large tax burden, would not be considered to be the evil tax avoiders towards which much of the Bill is geared. On that basis, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Mr. Field: I beg to move amendment No. 11, in schedule 2, page 67, line 38, at end insert—
'(5) Where subsection (4) applies, then the taxable amount determined in accordance with subsection (2) shall be reduced, where otherwise an amount may be subject to tax more than once, to such an amount to ensure that no part of the benefit is subject to tax more than once.''.'.
I hope that the debate will be even shorter than the last one. The amendment was tabled to avoid the potential for a double charge. We appeal to the Minister's good heart for a belt-and-braces provision in this highly technical sphere on the risk of a double charge to tax. Under this Bill, certain amounts may be taxed more than once, hence our proposal to add this little subsection to take account of that possibility.
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Dawn Primarolo: Let me try again to make it absolutely clear that the changes in chapter 4 are carefully designed to deal with the contrived arrangements that use employment-related securities to deliver what is in reality a bonus—a reward for employment—but without paying the appropriate tax and national insurance. Commonly, these complex avoidance schemes extract the bonuses in the legal form of a dividend which is subject to a lower rate of tax and no national insurance. The changes that the Government propose would mean that the bonus is subject to income tax and national insurance as an employment reward, but also because the avoidance scheme features remain liable to income tax as a dividend. That will provide a large disincentive to engage in avoidance; accepting the amendment would negate the purpose of the change and there would be no detriment at all.
As I said—I keep trying to focus on these highly complex schemes—if the promoters or users employ other forms of payment that have their own tax consequences they must accept those consequences. I am happy to reassure those who do not use avoidance schemes to avoid tax or national insurance that they will not be at risk of charge to income tax and national insurance under more than one heading, which is entirely appropriate. But I cannot concede the hon. Gentleman's point with regard to those who then still want to access those reliefs. It is fair that tax and national insurance contributions should be paid at the same rate on earnings whether they are paid using cash or employment-related securities. It is a complex arrangement that involves the use of unusual forms of payment, which would have their own tax consequences elsewhere as a result of the changes. The hon. Gentleman has not answered the question, ''Well, why should the avoider be allowed access?'', so if he does not want to withdraw the amendment, I shall ask my hon. Friends to oppose it.
Mr. Field: I think that I have received as much satisfaction as I am likely to receive from the Minister on the matter, so I beg to ask leave to withdraw the amendment.
The Chairman: One of the best speeches.
Amendment, by leave, withdrawn.
Mr. Field: I beg to move amendment No. 12, in schedule 2, page 67, line 42, at beginning insert—
'(1) After section 447 ITEPA 2003 insert—
''447A (1) Section 447 shall not apply where the employee shows that the benefit arose from an ordinary investment transaction.
(2) An 'ordinary investment transaction' means any transaction in securities regularly traded on an EEA exchange (being a market which appears on the list drawn up by an EEA State pursuant to Article 16 of EU Council Directive No 93122/EEC on investment services in the securities field) and any transaction in securities not so regularly traded where the following circumstances are present:
(a) the securities were acquired for an amount (or the acquirer is charged to income tax on all or part of such amount under Chapter 1 of part 3) which was not less than their market value (as determined for the purposes of the Taxation of Chargeable Gains Act 1992), provided that in the information a purchaser may require there shall be included (if this would not otherwise be the case) any known or reasonably projected returns on the securities and any value the securities might acquire through the conversion or
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alteration of rights of those or other securities, always having regard to the possibility or otherwise of such conversion or alteration occurring;
(b) other than the provisions in the constitution of the body issuing the securities, giving the holder the right to transfer if a majority decide to transfer their securities, there are no arrangements which give the holder a right to transfer his securities;
(c) at the date of the acquistion there is no certainty that the holder of the securities will necessarily recover the amount invested in the securities, and there is not at any time any guarantee or indemnity from any third party of the amount invested in the securities or any income therefrom; and
(d) the securities are securities acquired in a trading company or the holding company of a trading group (as defined in Schedule A1 of the Taxation of Chargeable Gains Act 1992).
(3) Where in pursuance of this subsection a person furnishes to the Board particulars of a transaction relating to employment-related securities acquired or to be acquired by him or of any benefit anticipated or received by him in relation to any employment-related securities which may give rise to a charge under section 447, the following shall apply:—
(a) if the Board are of the opinion that the particulars, or any further information furnished in pursuance of this paragraph, are not sufficient for the purposes of this section, they shall within 30 days of the receipt notify to that person what further information they require for tax purposes and unless that information is furnished to the Board within 30 days from the notification, or such further time as the Board may allow, they shall not be required to proceed further under this subsection;
(b) subject to paragraph (a) above, the Board shall within 30 days of the receipt of the particulars, or where that paragraph has effect, of all further information required, notify that person whether or not they are satisfied that the circumstances of the aquisition were or will be such, or that the circumstances giving rise to the receipt of any benefits were or will be such that any benefits anticipated or received ought not to be subject to the charge to income tax contained in section 447(1).
(c) if the particulars, and any further information given under subsection 447A(4) with respect to any acquistion and benefit are not such as to make full and accurate disclosure of all facts and considerations which are material to be known to the Board, any notification given by the Board under this section shall be void.
(d) if the Board notify the person that they are satisfied that the circumstances of the acquistion or receipt of benefits are such that any benefits anticipated or received ought not to be subject to the charge to income tax contained in section 447(1), section 447 shall not apply to that person in relation to those benefits.
(e) if the Board notify the person that they are not so satisfied, the person may within 30 days of such notification appeal to the Special Commissions against such decision. Save for a notification by the Board referred to under paragraph (d), in no event shall the giving of a notification under this section prevent section 447 applying to a person in relation to any benefits received.''.'.
Obviously, telling good jokes runs in the family, Sir Nicholas.
We hope that the amendment would provide the taxpayer with some certainty by excluding ordinary investments from the scope of the provision. It would introduce a clearance procedure, which we believe to be of key importance. Given our earlier discussions and the replies that we have received from the Paymaster General, I am slightly intrigued to know, on what basis does she think that there should ever be a clearance procedure? If it is her view that the only people who would wish to adopt such a procedure are those who are engaging themselves in tax avoidance,
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the argument becomes circular. Presumably, there would be no benefit in having a clearance procedure.
However, we are keen on the amendment. We consider that paragraph 18 widens substantially the scope of the already wide benefits provision under section 447 of ITEPA. That was derived from a provision that was introduced in 1988. It was known originally as the ''special benefits provision'', the purpose of which was to charge to income tax benefits derived from shares that might be connected to employment, such as a deeply discounted rights issue on shares that are held by employees. The provision was widened in 2003 to cover benefits by virtue of the ownership of employment-related securities and has been deployed to charge to tax circumstances that, despite the breadth of chapters 2, 3, 3A and 3B of part 7, may fall beyond the scope of that which the Inland Revenue considers ought to be taxed. For example, there are ratchet arrangements whereby value passes into an employee's shares or shares decrease in value. The application of the provision to such circumstances has been subject to some doubt. We worry that the revised wording is much wider than before. Indeed, it is so wide that it appears to render redundant in many respects provisions that relate to restricted or convertible securities and capital gains tax for employment-related securities.
The Law Society has prepared an example in its documentation. When articulating such examples, we can give an idea of what we are trying to achieve. Let us consider a business angel who, at some point in the past, has put money into a company and takes, say, 20 per cent. of the share capital. He also becomes a director and protects his interest by agreeing that his shares have class rights, and that his dividend and return of capital rights cannot be taken away from him unless he agrees. A decade or so down the line, the person sells the shares. The exemption under section 449 of ITEPA does not apply, so he has to be asked whether he has received a benefit in connection with employment-related securities. The phrase appears to be of such width as to cover the receipts gained from the sale in the example as well as receipts gained by reason of ownership.
If it is for ordinary taxpayers, the breadth of the provision needs to be controlled in two ways. Surely there should be some sort of clearance procedure, particularly in this relatively fast changing area, and especially for those who have held shares for a considerable time. We believe also that there needs to be an exemption from the charge for ordinary investments when the securities concerned are employment-related.
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We understand that the Revenue is extremely reluctant to incorporate clearance procedures in legislation, but given the background of self-assessment explained earlier, it would appear to be a reasonable step in the face of such legislation.
In summary, we seek through amendment No. 12 to provide safe havens for the taxpayer, but particularly those taxpayers who are entrepreneurs, people who
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could play an important role in developing from scratch those businesses that had struggled earlier or are still at the fledgling stage. We are not after safe havens for all taxpayers, but for a specific class for whom ordinary transactions might otherwise be caught by the provision. It surely is not the Treasury's intention that the taxpayer in the example should be subject to the sort of punitive charge that would otherwise be put in place. I hope that the Paymaster General has some thoughts on the matter, or at least some guidance more generally on the clearance procedure.
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