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Standing Committee B
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)
†Huhne, Chris (Eastleigh) (LD)
†Kramer, Susan (Richmond Park) (LD)
†Lewis, Mr. Ivan (Economic Secretary to the Treasury)
Lucas, Ian (Wrexham) (Lab)
†McCarthy, Kerry (Bristol, East) (Lab)
†McFadden, Mr. Pat (Wolverhampton, South-East) (Lab)
†Marris, Rob (Wolverhampton, South-West) (Lab)
†Morden, Jessica (Newport, East) (Lab)
†Newmark, Mr. Brooks (Braintree) (Con)
†Primarolo, Dawn (Paymaster General)
†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)
†Williams, Stephen (Bristol, West) (LD)
Frank Cranmer, Nerys Welfoot, Committee Clerks
† attended the Committee
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Tuesday 28 June 2005
(Afternoon)
[Sir Nicholas Winterton in the Chair]
(Except clauses 11, 18, 40, 43, 44 and 69 and schedule 8)
4.30 pm
The Chairman: Before we start, I want to say that those hon. Members who wish to do so can take off their jackets to make themselves more comfortable. Those who have already done so clearly anticipated my remarks. I ask the Paymaster General to resume the speech that she was making to the Committee before we adjourned for lunch.
Schedule 6
Accounting practice and related matters
Question proposed [this day], That this schedule be the Sixth schedule to the Bill.
Question again proposed.
The Paymaster General (Dawn Primarolo): Before the Committee adjourned at 1 o’clock, I had just concluded my remarks about how avoidance causes economic distortion. In response to the hon. Member for Braintree (Mr. Newmark), I said that the corporate anti-avoidance provisions in the Finance Bill apply specifically to contrived schemes that are designed to decrease United Kingdom tax. Stopping that type of avoidance levels the playing field between compliant and non-compliant taxpayers, which is what we want to achieve.
The hon. Gentleman asked about securitisation companies. He expressed gratitude to the Government on behalf of that important industry for introducing a framework for the new tax regime for those companies under the Finance Act 2005. That is a good example of close collaboration between the Treasury, Her Majesty’s Revenue and Customs and the bodies in the area of international accounting standards. The hon. Gentleman then urged that progress be made in sorting out the new tax system. As he will know, the Finance Act 2005 allows regulations to be made. HMRC and the Treasury are studying a particular proposal that the industry has made in respect of the points he made, and expect to be in a position to respond soon to the industry’s suggestion.
I shall come back to my hon. Friend the Member for Wolverhampton, South-West (Rob Marris).
Rob Marris (Wolverhampton, South-West) (Lab): Oh, thank you. [Laughter.]
Dawn Primarolo: I meant that in the nicest possible way.
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The hon. Member for Wimbledon (Stephen Hammond) referred to the Chartered Institute of Taxation. He was concerned about schedule 9 of the Finance Act 1996 and asked whether it would stop a company from receiving relief for a drop in value of part of a loan relationship, when there is a derivative such as an interest rate swap acting as a cash-flow hedge of interest rate risk elements for the loan relationship. I checked matters over lunch, and my understanding is that officials from HMRC have discussed such issues with a leading tax practitioner at the CIOT and said that, in their view, the legislation will not have the effect that is feared, and the revised guidance that is being prepared on loan relationships and derivative contracts will make that clear. I am happy to make sure that the hon. Gentleman receives a copy of that draft in case he wants to return to it at some stage. The important point that he was making is the subject of discussion and I hope that it will be clearly resolved.
Finally, my hon. Friend the Member for Wolverhampton, South-West asked me to translate into English paragraph 25 of the explanatory notes on schedule 6. I have to say that it is rather a long translation so, to save the Committee’s time, I propose to circulate that to him and all Committee members. The Committee knows that any letter circulated by a Minister during proceedings on the Finance Bill is also deposited in the Library.
Paragraph 22 converts what are essentially pieces of accountancy jargon into what I was going to call a more readily usable description, although I am not quite sure it is that—but it is long and gives a clear explanation. I hope that my hon. Friend will accept, on this occasion, that that is the most sensible way to proceed.
Rob Marris: Of course.
Dawn Primarolo: I am grateful for my hon. Friend’s indulgence.
I have responded to the points that hon. Members have made. International accounting standards are a complex and important area, especially as companies move to meet them. Companies will want to move at different speeds to meet those standards and it is important that the regulations, having been fully discussed in draft and consultation, provide for those changes to be made and address the important question of transition when we have a better idea of what is appropriate, how long it should be and how it should work. I hope that the Committee will endorse the schedule.
Mr. Philip Hammond (Runnymede and Weybridge) (Con): I should like to make a few brief points. I am grateful to my hon. Friends the Members for Wimbledon and for Braintree for their contributions to this debate.
We are all aware that the change to the international financial reporting standards has long been planned; it has not just come up suddenly. I confess that I am still somewhat confused as to why we are discussing the transitional arrangements as the transition is occurring. However, I talked to one or two people
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during lunchtime and I am happy to say that I understand fully and concur with the Paymaster General’s view that the ball is in industry’s court. The Government are waiting for the information to return. That may give her some satisfaction, but it prompts the question why we were not able to start earlier on this process, for everybody’s benefit.
I was interested to hear what the right hon. Lady said about the speech of my hon. Friend the Member for Wimbledon, because there is clearly some difference between her understanding and that of her officials and the CIOT. As recently as Friday the CIOT believed that it would be appropriate to table an amendment dealing with loan relationships and derivatives which it believed would find favour at the Treasury, following discussions, which suggests that the CIOT’s end-view of those discussions was that an amendment was required, whereas officials ended the discussions with the view that such matters can be dealt with through guidance, rather than any further changes to the Bill.
The Paymaster General made it clear during the debate that there are some pretty big numbers involved in the transitional process. Clearly, all sides intend that there should be a smoothing, so that large amounts do not come into tax or get lost from it as a result of step changes in the accounting procedures that are followed. However, she continued and made it clear that the transitional regime has not yet been determined. Can she make it clear to the Committee whether it is the clear intention of the Government that the transitional regime be revenue neutral, so that for the period in which the changes are phased in there is, for tax purposes, neither a gain nor a loss? If that is not the intention, can she explain to the Committee how the corporation tax receipt figures in the Red Book will be calculated in future years, given that the transitional regime, which will apply to fairly large numbers, has not yet been determined? In my simple way, I would have thought that the length of the transitional regime would have an impact, as between years, on the total corporation tax receipts.
In fact, even if the sum arising from the transitional arrangements is zero overall, the phasing of receipts could be affected. The right hon. Lady mentioned a figure of £4 billion, but I am not sure whether that referred to a single bank or to the banking community. However, the numbers were significant; the phasing of them could make a big difference to the Chancellor’s cash flow—and of course, importantly, to whether he meets his golden rule on fiscal balance. Anything that the Paymaster General can say on that point will be extremely helpful.
The Paymaster General also mentioned the use of regulations and the greater ease that they would give the Treasury—and, by implication, business—so that, when necessary, it can legislate quickly in a fast-moving area, and I understand her point. However, the regulation-making powers given to the Treasury in paragraphs 9 and 10 of the schedule include the ability to delete primary legislation. That is quite a substantive power to put into a regulation-making measure. I understand the right hon. Lady’s concern
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that there be a mechanism for responding quickly to changes and, in particular, for dealing quickly with any problems or unforeseen consequences that arise. However, in future we will increasingly face the problem of the Government wanting regulation-making powers in place of primary legislation for practical reasons.
If we are to get away from the standard debate in which Opposition Members lament the use of regulations because there is no proper opportunity for parliamentary scrutiny of them, and in which Ministers advocate them for reasons of practical efficacy, the answer has to be a better parliamentary process for scrutinising regulations and statutory instruments in this place. If we had a better way of scrutinising what may be important statutory instruments—if we recognised that we have long since passed the time when SIs were simply the minor consequences of primary legislation, and that in some areas they make important changes to primary legislation—we Opposition Members would have less concern about how these things work. However, I am not suggesting that there is anything that the right hon. Lady can do about that.
Ed Balls (Normanton) (Lab): The hon. Gentleman referred to the importance of raising revenue to meet the golden rule. Does he support meeting the golden rule, or would he prefer a balanced Budget rule?
Mr. Hammond: I am sure that you, Sir Nicholas, would not encourage me to stray down the path of debating the Chancellor’s rule on balancing the Budget over the cycle, as opposed to the European Central Bank’s rather tighter rule, which is not adhered to, of balancing the Budget or limiting the deficit within—
The Chairman: Order. Not on this schedule.
Mr. Hammond: I am grateful for that guidance. Nonetheless, the point, which I hope that the hon. Member for Normanton (Ed Balls) takes, is that when the golden rule is examined—this is pertinent to the schedule, Sir Nicholas—it is not simply the aggregate of receipts that matters; it is the timing of those receipts. The transitional regime, moving the timing of receipts from one year to another, could be significant when the deficit is narrow and tight.
Ed Balls: On a point of order, Sir Nicholas.
The Chairman: I am not sure whether a point of order can arise on that matter. If the hon. Gentleman wishes to intervene on the hon. Member for Runnymede and Weybridge (Mr. Hammond), he can, but if he insists on putting a point of order, I shall rule accordingly.
Ed Balls: I have a question for you, Sir Nicholas. As a new Committee member, I do not understand why the hon. Member for Runnymede and Weybridge is allowed to refer to the importance of raising revenue to meet the golden rule, but able not to respond to a point that I put to him about his answer. It is perfectly
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respectable to believe in a balanced Budget rather than a golden rule. I thought my question relevant to the hon. Gentleman’s speech.
The Chairman: It is not for me to comment on the content of any hon. Member’s speech, as long as it is in order. The Opposition spokesman sought to remind
me that he was connecting matters relating to a balanced Budget to this schedule. I took
his word for it.
Ed Balls: Will the hon. Member for Runnymede and Weybridge give way?
Mr. Hammond indicated assent.
Ed Balls: If, as was the case under the previous shadow Chancellor, there had been a balanced Budget rule, would the hon. Member for Runnymede and Weybridge, in making his earlier point, have been more supportive of the measures proposed by the Paymaster General than he is under the golden rule, which he seems more circumspect about supporting?
The Chairman: I am sure that the hon. Member for Runnymede and Weybridge will endeavour to respond to that helpful intervention.
Mr. Hammond: The hon. Member for Normanton is getting the hang of this quickly. We all have to deal with the question how to circumvent the rules of order by rephrasing things quickly. If the hon. Gentleman’s question has become whether my point about the relevance of the timing of receipts would be as significant as it is under the so-called golden rule if there were a balanced Budget rule, the answer must be that it would be more significant, because the Exchequer would be even more sensitive to movements of receipts between years.
On the hon. Gentleman’s earlier point, he has been here long enough—five or six weeks—to have seen that questions do not always get answers. If he doubts that, I urge him to attend Prime Minister’s questions tomorrow—[Hon. Members: “And Treasury questions!”]—or Treasury questions. However, I say to my hon. Friends, who may not have had the chance to look at the listing for tomorrow’s Treasury questions on the Order Paper, that I anticipate that the hon. Member for Normanton’s former boss will answer some of those questions, but only those with the word “Africa” in them.
I think that I have dealt with the issues on schedule 6 stand part. If the Paymaster General is able to respond to any of my points, I will be interested to hear her remarks. If she is not able to, then I will not be.
Dawn Primarolo: I shall answer the hon. Gentleman’s questions. His first point was about why we are discussing the transition now. I believe that I touched on that point, but I shall elaborate. The issues and amounts involved in the transition began to emerge only quite late in the process. I should like to put in a caveat at this point: I am not blaming companies, but merely stating the current position.
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Issues and amounts emerged quite late as companies themselves started to focus on the practicalities of the change. It was not until late 2004 that the full extent started to emerge.
The hon. Gentleman asked for an explanation about corporation tax receipts and the forecast. The simple answer to his inquiry is, no; regulations are already in place to defer the transitional payments until 2006. Therefore, they do not affect 2005-06 tax receipts. Future receipts have nothing to do with international accounting standards; the figures are not yet known, so there is nothing in the forecast on the transition. Therefore, I return to a point that I made to the hon. Gentleman in this morning’s sitting, in response to what I thought, from his hon. Friends’ contributions, was a stand part debate.
The last point the hon. Gentleman made was about repealing legislation in regulations. The regulations will replace section 84A of the Finance Act 1996, but the tax treatments will continue. I wrote to the Committee about this matter, setting out in detail what the regulations do. No one will be worse off or better off. I tried to anticipate queries by circulating information before we reached this point in our proceedings.
I commend the schedule to the Committee.
Question put and agreed to.
Schedule 6 agreed to.
Clause 38
Charges on income for the purposes of corporation tax
Question proposed, That the clause stand part of the Bill.
Mr. Philip Hammond: Clause 38 amends existing legislation so that annuities and annual payments are deductible as trading deductions or as expenses of management, rather than as charges on income, which is a concept that the Government are seeking to phase out. The change that the clause effects leaves qualifying donations to charity as the only remaining charges on income. Therefore, it seems that the days of charges on income are numbered.
The explanatory note is confusing. It paints the clause as simply a tidying-up exercise, but reference is made to avoidance schemes using charges on income as a tax avoidance loophole. Those payments will now be subject in non-trading companies to having a main purpose that is not tax avoidance.
We have no problem with what the Government are doing here, but if this is an anti-avoidance measure that has revenue implications, that is rather more than a tidying-up exercise. Can the Paymaster General confirm that this is an anti-avoidance measure, rather than simply a tidying-up move in the direction of fulfilling the Government’s general desire to remove charges on income from the tax system? After she has done that, can she say how much revenue will be involved?
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Rob Marris: Again, the hon. Gentleman reads the explanatory notes differently from me. As I read them, they do not suggest that this is merely a tidying-up measure. I refer him to note 15 to clause 38:
“Certain disclosures under Part 7 FA 2004 have shown that annual payments are being used in schemes to create an artificial deduction which is not matched by any taxable income.”
That suggests to me that the provision is slightly more than a tidying-up exercise, and that it is open about that.
Dawn Primarolo: The clause prevents companies from using the charges-on-income regime to avoid corporation tax. To answer the questions of the hon. Member for Runnymede and Weybridge, yes it is an anti-avoidance measure, but it is about revenue protection and therefore does not score on the significance of the yield.
The clause emerges from the question of avoidance disclosure regimes introduced in the Finance Act 2004, which has revealed that the avoidance industry has been using annual payments in schemes to generate tax deductions matched by non-taxable income. The Finance Act 2005 blocked one category of the scheme involving foreign dividends, and it is clear that, unfortunately, one of the main attractions to the avoiders of the charges-on-income regime is that it does not contain any tax avoidance motive tests, such as the unallowable purpose test that applies to the management expenses and manufactured payments regimes.
The provision is both anti-avoidance and part of a tidying-up process that has been moving forward for some time. The Government decided to act to close the schemes by removing most remaining payments from the charges-on-income regime. Relief for genuine business expenses affected will continue to be available either as an expense of a trade, profession or property business or as a management expense. However, those expenses will have to satisfy the existing tax rules, thus eliminating amounts paid for the purposes of tax avoidance.
As the hon. Gentleman said, pending any final decision on the concept of charges on income, the scheme is being retained for qualifying donations and gifts to charities. Discussions had been proceeding on the reform of the corporation tax regime—and, as I have said, there have been a number of changes over the years—but having seen the disclosures, it seemed prudent to move on the basis of revenue protection, with the exception that the hon. Gentleman rightly identified.
Question put and agreed to.
Clause 38 ordered to stand part of the Bill.
Clause 39 ordered to stand part of the Bill.
Schedule 7
Accounting practice and related matters
Mr. Philip Hammond: I beg to move amendment No. 116, in schedule 7, page 88, line 40, at beginning insert ‘In’.
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The Chairman: With this it will be convenient to discuss the following amendments: No. 117, in schedule 7, page 88, line 41, leave out from ‘years)’ to end and insert
‘at end insert “and where the main purpose, or one of the main purposes, of one or more of the parties to the finance agreement was a tax avoidance purpose.”.’.
No. 69, in schedule 7, page 89, line 5, leave out sub-paragraphs (5) and (6).
No. 118, in schedule 7, page 89, line 32, at end insert—
‘“tax advantage” has the meaning given by section 709(1) of the Taxes Act 1988;“tax avoidance purpose” in the case of any person, means any purpose that consists in securing a tax advantage (whether for the person or any other person).’.
Mr. Hammond: This is a complex schedule, which, it is fair to say, is one of the two most controversial parts of the Bill.
Let me qualify what I mean by controversial. The objectives of schedule 7 are not controversial: the objective clearly stated by the Government is to close a number of tax avoidance loopholes that have been identified primarily through disclosures and the Finance Act 2004. The reason that it is controversial, like the arbitrage provisions that we debated last week, is that practitioners and industry representatives are concerned that several provisions in the schedule mean that the focus of the legislation is still too wide and in some cases will lead to uncertainty. The Bill will need to be clarified by guidance or rules issued by the Revenue, which do not have the force of law, and thus a less certain climate would be created than if the whole matter was dealt with in the primary legislation.
5 pm
I emphasise again our support for revenue protection and anti-avoidance legislation. I do not know whether it will always be in schedule 7, but there will clearly be a system in future by which a catch-all schedule is attached to every Finance Bill, in which a raft of different schemes that have been disclosed have to be addressed. We are talking about a long and complex schedule that contains a large number of non-controversial things and a small number that are not controversial in their objective but which raise questions about the ability of the drafting to deliver what the Government intend. We will principally address ourselves to that latter set this afternoon.
At the risk of repeating what my hon. Friends and I have said before, our principal job is to ensure that while the Government close tax avoidance opportunities, we do not compromise a climate of clarity and certainty for the taxpayer, so that business investment decisions can go ahead in the normal way and taxpayers can know where they stand vis-à-vis the tax authorities.
Our approach to the schedule has been to focus amendments primarily on paragraphs 10, 18 and 24. They deal with shareholdings that are treated as loan relationships and with degrouping. I am sure that the Paymaster General will recognise that the majority of representations she has received from industry and the professional sector have been about those issues.
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We have tabled other amendments, but, by and large, they seek clarification or minor changes to tighten definitions. Without doubt, the large debate in principle is about shareholdings as loan relationships and about degrouping. If we have a stand part debate, I will discuss other paragraphs to which amendments have not been tabled but about which comments are worth making or points worth probing. Across both the amendments that are tabled and the points raised later in a stand part debate, we will focus our remarks on two areas.
The first is the equity of what is being done. We will discuss where rules are being changed unfairly or in an unbalanced way against the taxpayer or, to put it slightly more neutrally, where there is a danger or concern that the interpretation of the words in the Bill could have that end effect. The second area is efficacy. We will raise issues where there is a danger, in our opinion, that unintended consequences could arise from the legislation, especially where they might reasonably be expected to damage the business environment.
The first group of amendments comprises Nos. 116 to 118, which my hon. Friends and I tabled, together with the amendment—I use the word in its deliberate singular sense—that the Liberal Democrats have tabled. That was amendment No. 69, and I will speak about it separately.
Sections 43A to 43G of the Income and Corporation Taxes Act 1988 apply to transactions entered into under rent factoring schemes after 20 March 2000. Rent factoring involves companies selling future rental income schemes to a bank for a capital sum, which is essentially a loan. The point is that the company obtains tax relief on repayments that, in reality, cover both income and capital elements.
The Government legislated to deal with the problem in 2000, but did not include non-tax-driven rent factoring schemes with a lifetime of 15 years or longer. They subsequently discovered that manufacturers of avoidance schemes were using the exemption for rent factoring schemes of more than 15 years’ duration to circumvent the rules and using longer-term rent factoring schemes as an opportunity to achieve the favourable tax status.
The Bill seeks to abolish the 15-year rule. That will deal with the tax avoiders all right; there is no question about that. However, in 2000, when first tackling this issue, the Government—I suspect that it was the Paymaster General, although I do not know as I do not have the transcript of the Committee proceedings—explained the 15-year exemption on the grounds that they did not want to catch bona fide commercial transactions that were properly entered into by companies for all sorts of commercial purposes.
Of course, we are bound to ask what has led the Government to conclude that, between 2000 and 2005, those using 15-year-plus rent factoring schemes as a bona fide commercial transaction have disappeared off the face of the earth, enabling the Paymaster General to feel comfortable scrapping the 15-year exemption.
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Can she say, with her hand on her heart, that the provision will not catch anyone involved in a bona fide commercial transaction, even though that was the rationale for the 15-year exemption as recently as 2000?
We understand the need to close down avoidance schemes using the 15-year exemption, so our amendments propose going down the other route: instead of scrapping the 15-year rule, we would introduce a motive test into the paragraph. Our three amendments do just that. That way, the 15-year rule will remain, but any rent factoring arrangement will be caught if it has been established for a tax avoidance purpose. Amendment No. 118 defines a tax avoidance purpose using section 709 of the Income and Corporation Taxes Act 1988.
I hope that the Minister will appreciate what we are trying to do. We are not saying that there is no problem. We are asking why we should smash rent factoring completely to solve the problem when there is another way of doing so? We could introduce a motive test and leave 15-year-plus rent factoring in place for those who wish to use it for a purely commercial purpose.
It should be noted that under the Bill, on inception of a deemed loan, there will be a deemed partial disposal of the underlying properties for capital gains tax purposes. That in itself may generate a tax charge. Will the Minister say anything about the Government’s approach to that deemed capital gain and how it will be handled?
I should tell the hon. Members for Eastleigh (Chris Huhne) and for Richmond Park (Susan Kramer) that when I first looked at the Liberal Democrats’ amendment No. 69, I rather gleefully lit upon the fact that—if I understand correctly—they forgot to remove sub-paragraphs (7) and (8), which would be necessary if their amendment were to work. However, I shall not make too much of that because, as I shall confess when we consider a later group, I have similarly forgotten to remove a sub-paragraph (7) and a sub-paragraph (8). That underscores the difficulty of producing amendments of any volume in Committee.
The Liberal Democrats address the same problem that we identified, but they would exclude existing transactions from the Bill. I say to the hon. Member for Richmond Park that we do not favour taking that route because there are tax avoidance schemes that exploit the 15-year rule. There are three options: the sledgehammer, effectively banning rent factoring altogether; the hon. Lady’s solution, which is to allow it where it is already in place, which would allow some fairly convoluted avoidance schemes to remain; and our option, which I might dare to call the third way, and which is to limit the scope of the schemes for avoiders by introducing a motive test so that, by including existing and future schemes, avoidance will be caught, but rent factoring for periods of more than 15 years, whether already in existence or being dreamed up by firms for future commercial purposes, would still be allowed. I look forward to hearing what the hon. Lady has to say and to the Paymaster General’s response.
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