Finance Bill

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Dawn Primarolo: I have answered the hon. Gentleman's question, but he does not seem to appreciate what the answer is. Perhaps he would like to reflect on the matter when he reads Hansard. If he is still not happy, I am sure that there will be mechanisms that will allow him to return to the matter. I have specifically addressed his point and have done so clearly and succinctly.

Mr. Hammond: It is interesting that the Paymaster General has just spent 45 seconds confirming that she has addressed my point, but chose not to tell us whether the answer was a yes or a no. I will have a look at the record.

Dawn Primarolo: This is pathetic.

Mr. Hammond: The Paymaster General says this is pathetic. If she wants to degenerate into those kinds of remarks, so be it. I have studied the right hon. Lady's technique and I am not surprised that she is standing up and telling me that she has already answered my question and that the problem is that I am too dumb to have understood the answer. If that is the way she wants to conduct the debate, that is fine by me. I will read Hansard, as she requested.

Dawn Primarolo: This afternoon, just about every comment that the hon. Gentleman has made has been laced with barbs. I have ignored them because we are here to discuss the Finance Bill on the basis of the points raised and to try to answer them. I am trying to save time by not repeating what I have already said. I assure him that I have answered all his questions and I hope that we can therefore proceed with the other points that he wants to make.

Mr. Hammond: I hear what the Paymaster General says. If I am too stupid to have understood the answer, a simple yes or no would have been helpful. We will leave it for now. I will look at the record in due course and am sure that I will be greatly enlightened.

I shall urge my hon. Friends to vote against clause 24 stand part, but I beg leave to withdraw amendment No. 58.

Amendment, by leave, withdrawn.

3.45 pm

Question put, That the clause stand part of the Bill:—

The Committee divided: Ayes 12, Noes 7.

Division No. 2]

Austin, Mr. Ian Balls, Ed Flello, Mr. Robert Goodman, Helen Healey, John McCarthy, Kerry
McFadden, Mr. Pat Marris, Rob Morden, Jessica Primarolo, Dawn Tami, Mark Watson, Mr. Tom

Francois, Mr. Mark Hammond, Mr. Philip Huhne, Chris Newmark, Mr. Brooks
Ruffley, Mr. David Spring, Mr. Richard Williams, Stephen
Column Number: 126

Question put and agreed to.

Clause 24 ordered to stand part of the Bill.

Schedule 3

Qualifying Scheme

Mr. Philip Hammond: I beg to move amendment No. 46, in schedule 3, page 69, line 18, at end insert

    'in so far as it applies to profits or gains not of a capital nature'.

The Chairman: With this it will be convenient to discuss amendment No. 47, in schedule 3, page 69, line 19, after third 'tax', insert

    'in so far as it applies to profits or gains not of a capital nature'.

Mr. Hammond: The amendments would clarify the definition of schemes involving hybrid entities. Schedule 3 deals with the definition of qualifying schemes. The words in the amendments would be inserted after the reference to corporation tax. The purpose of the definition of a hybrid is to define entities that are characterised by different treatment in different jurisdictions. Because of the widely differing treatment of capital gains or corporations in different jurisdictions, the amendments aim merely to achieve standardisation by defining relevant taxes more tightly for the purposes of the legislation—to include corporation tax only in so far as it applies other than to capital gains.

Dawn Primarolo: Schedule 3 lists the deductions rules for arbitrage, which apply where there is a qualifying scheme. They do not cover all possible instances of arbitrage, but instead concentrate on certain instances of the scheme that are likely to give rise to the greatest risk. The schedule defines a qualifying scheme as one that contains either a hybrid entity or has a hybrid effect. A hybrid entity is recognised for tax purposes as a person in its own right, but for some reason is also recognised as part of a separate person under a different tax code, be that a UK tax code or a foreign one. Any scheme including such an entity will be a qualifying scheme for the purposes of the arbitrage rule.

Amendments Nos. 46 and 47 would amend the definition of hybrid entity so that the profits of a capital nature are excluded. Those changes would create a considerable risk that items classified as capital under one system but not under another will no longer be caught by the legislation. That deliberate exploitation of the differences in classification in order to gain a UK tax advantage is precisely the sort of thing that gives rise to the mischief that the Government are trying to counter, so we cannot accept the amendments. For the reasons that I have given, if the hon. Gentleman wants to press the amendments to a vote, I will ask my hon. Friends to oppose them.

Mr. Hammond: I am a little puzzled by the Paymaster General's brief reply. I assure her that the amendments were not designed as wrecking amendments, which is more or less the inference I draw from her comments. Rather than to cut through the heart of the Bill, they were intended to ensure comparable treatment in different jurisdictions because of the strange ways in which capital gains are treated in corporate tax regimes in different jurisdictions.
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I confess to the Committee that the amendments are not the product of my original thought. Others who have expressed concerns will undoubtedly read what the Paymaster General has said and consider her views. If there are issues that need to be further explored, I am sure that we will have an opportunity on a later occasion. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr. Philip Hammond: I beg to move amendment No. 48, in schedule 3, page 69, line 25, at end insert

    'and the instrument, shares, securities or debt instrument involved is not of a class of instrument, share, security or debt instrument which is traded upon a recognised stock exchange or upon a recognised investment exchange within the meaning of section 841 of ICTA,'.

Paragraph 4 of schedule 3 deals with schemes that achieve the hybrid effect by the use of convertible debt instruments. The purpose of including such instruments in the rules is that although they are an equity-type investment in terms of their risk and return, the coupon is deductible interest and not dividend from the UK company's tax perspective. The amendment, which I stress is probing, would provide an exclusion for publicly listed instruments.

I am assured that similar provisions exist in relation to UK group relief rules so that quoted instruments—listed instruments—cannot be treated as quasi-equity by the Revenue for the purpose of arguing a dilution of percentage shareholdings and thus denying group relief to a taxpayer. Our aim is to narrow the scope and limit the legislation to clearly contrived schemes, which I suggest would not use listed instruments. The amendment uses the definition of recognised stock exchange in the section 841 of the Income and Corporation Taxes Act 1988.

I accept that the amendment may be slightly widely drawn, in that it refers to any instrument that is listed on a recognised stock exchange, and I accept that there may be an argument that some such instruments could be used in such a scheme. However, will the Paymaster General address the substance of the argument? Would the fact that an instrument is listed—she might like to tighten the wording to ''actively traded''—be a reason for not applying the definition in paragraph 4, rather than simply a material consideration in determining an individual case? I realise that the question of whether or not the instrument is traded will be a material consideration in determining the case, but I hope that she can say that in certain circumstances it will be apparent in advance, where an instrument is listed or perhaps traded, that it does not come under the legislation. That would give us more certainty and clarity.

Dawn Primarolo: I shall respond to the hon. Gentleman's probing amendment and try to give him the reassurance he seeks. First, I shall explain why the Government will not accept amendment No. 48. The amendment would change the part of schedule 3 that deals with schemes having a hybrid effect. Schemes will have a hybrid effect for the purpose of the arbitrage rules if they include a hybrid instrument or a defined type of share interest. Schedule 3 is, in effect, a list of those instruments. The amendment would exclude from the range of instruments identified,
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those of a type that are traded on a recognised exchange. The Government cannot accept the restriction of the definition for two reasons. First, the list of instruments having a hybrid effect covers the kind of instruments that have been shown to lend themselves to use in schemes designed to avoid UK tax. Many of those instruments are traded on a recognised stock exchange, but that does not mean that they cannot be used for tax avoidance. The automatic exclusion of a traded instrument, as proposed by the amendment, would simply mean that avoidance could continue through the simple expedient of listing instruments on any recognised stock exchange. That is probably not what the hon. Gentleman wants to happen.

The Government's second concern is that the wording of the amendment does not even require the instrument to be traded itself—it refers simply to a class of such instruments. The effect of the amendment would be to remove most hybrid instruments from the scope of the provisions, even though they form part of a scheme that is designed to give rise to a UK tax advantage. Consequently, that could be rather expensive, as I am sure the hon. Gentleman will accept.

I assure the hon. Gentleman that the genuine placement of an instrument into the market will not normally be caught by the arbitrage deduction rules, as the instrument is unlikely to be part of a scheme that had a main purpose of obtaining a UK tax advantage. Further details on the issue can be found in the guidance issued by HMRC. I appreciate from earlier comments by the hon. Gentleman about an error in the guidance that he will want to check that—it is draft guidance that is still under discussion.

For the reasons that I have set out, I hope that the hon. Gentleman will understand why the Government will not accept the amendment and go down that route—he said that it is a probing amendment so he will no doubt not push for a vote. I hope that he accepts my reassurance that the provision is not a blanket approach but is fairly specific to avoidance within the arbitrage regime.

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