Finance Bill

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Mr. Hammond: I accept what the Minister says. It may not have been my thought when I originally tabled the amendment, but I hoped that the amendment would give her the opportunity to say something about traded instruments in general. She has done that, which I am grateful for, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That this schedule be the Third schedule to the Bill.

4 pm

Mr. Philip Hammond: I have a question to put to the Minister on paragraph 3. For clause 24 to bite, four conditions have to be met, including condition A, which is that the scheme is a qualifying scheme as defined in schedule 3. The schedule is then broken down into different parts dealing with hybrid entities, schemes involving hybrid effect and schemes involving hybrid effect through connected persons.

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In paragraph 3(1), an entity is defined as hybrid if,

    ''under the tax law of any territory, the entity is regarded as being a person''.

It has been suggested to me that that is clearly intended to mean ''under the tax law of any relevant or pertinent territory''—that is, a territory in which the entity is taxed because it is resident there or a territory that taxes the members of the entity because they reside there.

Given how the paragraph is drafted, it is arguable that regard should be had to the tax law of every territory in the world to ascertain whether an entity is regarded as a person. Clearly, that would be an almost impossible test to fulfil and would introduce huge uncertainty. Taxpayers would have to keep an eye on the changing tax laws of remote territories and emerging countries that have legislation that is not widely scrutinised in this country. It has been suggested to me that if that were the correct interpretation, every entity would be a hybrid entity, including all UK companies, as it would not be possible to conclude confidently that either A or B were not satisfied where it is known that B or A is satisfied.

I hope that the Minister can confirm—I am sure that she can—that the paragraph is intended to mean ''under the tax law of any pertinent or relevant territory'', which in this case would mean territory in which the entity is resident or in which any of the partners in the entity are resident and are taxed. We have not tabled any amendments to this effect, but will she consider whether clarification is needed to make it clear that the paragraph does not mean any territory whatever, anywhere in the world?

Dawn Primarolo: My answer to the hon. Gentleman's first concern is yes, it means any relevant territory. On his second point—that I should reflect on whether that needs to be spelt out in greater detail—I should say that it has not been raised with us as a problem of interpretation. It seems clear from the presentations, the open day and the submissions received by the Department, that the paragraph is understood to mean ''relevant'' territory.

If for any reason there is confusion outside the House or clarification is sought as a result of scrutiny of today's Hansard, I will be happy to consider the hon. Gentleman's suggestion. However, I am not minded to commit myself to doing something when there does not appear to be a problem. However, I shall reflect on his point in case the issue is raised.

Question put and agreed to.

Schedule 3 agreed to.

Clause 25

Rules relating to deductions

Mr. Philip Hammond: I beg to move amendment No. 32, in clause 25, page 22, line 3, leave out 'no amount is' and insert 'an amount'.
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The Chairman: With this we may discuss the following: Amendment No. 33, in clause 25, page 22, line 4, after 'Acts', insert 'is reduced'.

Government amendments Nos. 70 and 71.

Amendment No. 34, in clause 25, page 22, line 10, at end insert—

    'and to the extent that the entitlement to such deduction or allowance had arisen as a result of a scheme the main purpose of which is to achieve a UK tax advantage.'.

Amendment No. 35, in clause 25, page 22, line 11, leave out subsections (4) and (5).

Government amendments Nos. 72 to 74.

Mr. Hammond: I shall address the amendments in two sub-groups and then make passing comments on the Government's amendments, which the Minister will no doubt explain in greater detail.

On amendments Nos. 32, 33, 34 and 35, as the Bill is drafted, the taxpayer has two options on receipt of a notice. Either he can disclaim part or all of the deduction that he is claiming, or he can apply the rules in clause 25 to his self-assessment, which would mean the disallowance of the whole of the interest deduction to the extent that a deduction had been made. We are arguing that the taxpayer who chooses not to disclaim should not be penalised, but should be required to make a proportionate reduction of the claimed allowance or deduction as he would if he disclaimed, so that he is placed in the same position as he would have been had he disclaimed part or all of the allowance.

We suggest that equity requires that the amount disallowed under subsection (3) should be the amount attributable purely to the UK tax advantage delivered as a result of the qualifying scheme and nothing more. I hope that the Minister accepts that principle. No doubt she will have something to say about the amendment itself, but if she can accept the principle, and explain, if she does not think that the amendment is necessary, why not, that would be helpful.

Amendment No. 35 seeks to omit subsections (4) and (5), because they raise the possibility of an amount being treated as deducted or otherwise allowed, where it is not actually so allowed, as a result of the operation of a rule similar to that used in an overseas jurisdiction. That could give rise to a double hit on the taxpayer if he is deemed to be operating a double deduction and the amount in question in the overseas jurisdiction is not allowed to be deducted. I can see no reason why, if the deduction in an overseas jurisdiction is not allowed, the requirements for falling within the scope of this legislation should not be deemed to have failed. Again, an equitable interpretation would be that if the taxpayer, for any reason, does not get the double deduction, he should not be penalised. If I have missed something here, no doubt the Minister will tell me in due course.

Government amendments Nos. 70 to 72 look, on the face of it, to be harmless tidying-up exercises. We are slightly more interested in Government amendment No. 73, which seems to make a substantive change. It turns the subsection in question from providing a limiting definition of
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reduction of liability to adding circumstances of liability. That is a rather big turnaround in what it is intended to do. I shall wait to hear what the Minister says about the Government amendments and then question her further on them.

Dawn Primarolo: Clause 25 sets out how the legislation restricts the amount of deductions allowable for corporation tax purposes with deduction rules, where all the conditions in clause 24 are met. The clause contains two rules that can reduce or deny deductions. The first of those—rule A—applies if two deductions are available for the same expense, and limits the amount of the deduction for corporation tax to an amount that is not allowed or deducted elsewhere. Rule A also applies where there would be double deduction but for the fact that another country has similar legislation. As drafted, the rule makes no identification as to the person to whom the deduction rules arise. However, the context of rule A could be construed as requiring that both the deductions must arise in the same country. That is clearly not how rule A should operate and it is not in keeping with the published guidance.

Government amendments Nos. 71 and 72 put the matter beyond doubt by making it clear that the additional deductions can arise for another person. Rule A also refers to the same expense, although it does not directly link that reference to the deduction that is the subject of the rule.

Parliamentary counsel advised on the tabling of amendment No. 70. The advice was provided to the Government on the basis that there was an ambiguity which needed to be removed. As drafted, amendment No. 70 does that.

The second rule—rule B—applies when a payment gives rise to a tax deduction but the matching receipt is not taxable and the receipt is normally taxable on its income or gains. However, where rule B applies, it will reduce the amount of the UK tax deduction to the extent that the recipient is not taxable. Rule B will not apply, however, where the recipient is exempt from tax due to a statutory exemption—for example, charities and pension funds.

The draft guidance issued by HMRC on 16 March 2005 made it clear that rule B also applies where the recipient has reduced their liability by using tax credits or other deductions that may arise under the scheme. The clause as drafted covers that, but it also includes a paragraph that clarifies how the clause will operate in the case of deductions. I give credit to the Law Society, which was very helpful in pointing out to the Government that the explanatory paragraph could be read as restricting the intended operation of the clause. Amendments Nos. 73 and 74 therefore ensure that the clause continues to operate as intended and in accordance with the guidance already issued. I hope the Committee accepts that the Bill has benefited from our discussions and that the Government amendments improve it. I commend them to the Committee.

The Opposition amendments would alter rule A, which, as I explained, denies the deduction to the extent that it is available under another tax code, often referred to as double dips because two deductions are
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obtained for just one expense. It appears that amendments Nos. 32 to 34 are intended to limit the effect of rule A in two ways. First, to restrict the extent to which the rule cancels deductions to no more than is necessary to cancel the tax avoidance and, secondly, to restrict the application of the rule to cases in which the UK tax advantage represents the main purpose, excluding cases where that is one of the main purposes.

The first of those two changes is not necessary because subsections (14) to (16) allow a company to make an adjustment to its self-assessment in order to cancel out that part of the deduction that relates to tax avoidance purposes. That prevents the clause from having any further effect while ensuring that the UK tax avoidance has been effectively cancelled out. That approach ensures that the legislation is properly targeted on avoidance of UK tax.

The second change would limit rule A to cases where UK tax avoidance is the main purpose of a scheme, excluding cases where it is one of the main purposes. I have explained why such an amendment is inappropriate in the context of clause 24; we had a long debate about it. The same reasons for rejecting such an amendment apply in this case and I will not repeat them.

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Putting that aside, the amendments would not be effective in limiting the scope of rule A, because amendment No. 34 refers to all the deductions arising from the scheme. By contrast, as I mentioned, the clause already goes further than that by limiting the scope of the rule so that it only goes as far as is necessary to counteract tax avoidance.

Amendment No. 35 would remove the subsection relating to the interaction of the arbitrage rule with any equivalent provision enacted elsewhere. It is rather strange for the Opposition to try to link our tax system and make it consequential on tax systems outside the UK. As it stands, the clause ensures that the legislation applies where there is UK tax avoidance. The amendment would mean that the deduction provisions would become dependent on laws passed in other countries, and so UK deductions intended to gain a UK tax advantage would not be restricted if another country passed legislation similar to that introduced in the UK. That is clearly not acceptable—not even, I would have thought, to the Opposition. The counteraction of UK tax avoidance is a matter for our own law, not that of other countries. It is a matter for us to decide, and that is provided for in the rules.

In summary, amendments Nos. 32 to 34 are unacceptable as they would weaken the clause, and amendment No. 35 is not acceptable because it would make the counteraction of UK tax avoidance dependent on other countries' laws. I commend the Government amendments to the Committee, and if the hon. Gentleman seeks to press his amendment to a Division, I shall ask my hon. Friends to oppose it.

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