New Clause 3
Treasury consent
'Sections 765, 765A, 766 and 767 of ICTA shall cease to have effect from 1st September 2005.'. —[Mr. Philip Hammond.]
Brought up, and read the First time.
5 pm
Mr. Philip Hammond: I beg to move, That the clause be read a Second time.
The Chairman: With this it will be convenient to discuss amendment No. 57, in schedule 11, page 155, line 27, at end insert—
'Income and Corporation Taxes Act 1988
Section 765
Section 765A
Section 766
Section 767'.
Mr. Hammond: I am delighted to return to the fray and I see that you share my view, Mr. Cook. New clause 3 would take out of effect sections 765, 765A, and 767 of the Income and Corporation Taxes Act 1988. Section 765 requires UK groups to write to HM Treasury and seek specific permission to subscribe to shares or debentures in overseas companies and to write for specific permission to sell shares or debentures in overseas companies. HM Treasury has issued general consents so that, if particular patterns of facts apply in any case, groups can treat themselves as having a deemed consent.
When a specific consent is required, usually for the sales of shares in an overseas subsidiary or a group reorganisation of an overseas sub-group, it is a criminal offence not to have obtained specific Treasury consent beforehand. For large multinationals that might have significant numbers of overseas subsidiaries, that causes considerable administrative burden backing the movements of the overseas entities that they ultimately control.
Section 765A of ICTA removes the Treasury consent conditions for transactions between companies in different member states of the EU. It was a provision that was inserted to make the original section 765 compliant with EU law. Although it removes those companies from the scope of section 765, it still has a notification requirement so there is still a compliance burden on companies. Section 766 of ICTA 1988 determines the offences and penalties for failing to comply with sections 765 and 765A so
Column Number: 318
logically, if we are removing sections 765 and 765A, we need to remove section 766. Section 767 deals with interpretation and commencement.
The sections are an anachronism—a hangover from the pre-1979 world of foreign exchange controls. The Treasury consents were originally part of the foreign exchange control structure but were maintained when the rest of the foreign exchange control regime was scrapped to serve as an early warning system for the Inland Revenue in respect of particular types of tax planning and, to some extent, to act as a deterrent to those types of tax planning. That was a legitimate objective at the time. Now, the sections impose an additional compliance burden on companies and slow down the progress of commercial transactions. It causes great worry in the business world that, almost uniquely, the sections provide for criminal penalties, rather than civil penalties, for failure to comply with what are essentially reporting requirements, which is reminiscent of the original framework of exchange control legislation where provisions originate.
We drafted the new clause because we believe that those pieces of anachronistic legislation no longer have a purpose in relation to exchange control—the exchange control regime having been swept away—or in relation to advance warning of tax avoidance. There has been a considerable number of changes, some of which we have discussed in this Committee and not the least of which is the disclosure regime in the Finance Act 2004 that requires people who are developing and promoting tax avoidance schemes involving financial instruments to report them to the Revenue. The Revenue therefore has its early warning system in place through much more modern legislation.
Schedule 7 to the Bill contains measures such as the tax arbitrage rules that enable the Revenue to issue a notice and the substantial shareholdings exemption, which, although not creating a notification process, exempt gains on the sale of shares of trading companies and hence create a situation in which there is no tax to pay and thus no tax avoidance to worry about. We have made the point consistently in this Committee that when new compliance burdens—new legislation—is created, we need to clean the stable as we go. We cannot keep piling one more burden on top of another. I suggest to the Paymaster General that when the Bill is enacted, there will be sufficient procedures in place to negate the type of tax planning for which specific Treasury consent acted as an early warning system. If such procedures did not eliminate those areas of tax planning, they would at least, when combined with the Finance Bill 2004, provide all the armoury of early warning devices that the Treasury and Inland Revenue reasonably need to have proper advance warning of any tax planning schemes.
In the light of the present regime, the Treasury consent rules are wholly unnecessary and unnecessarily burdensome to business and can safely be eliminated without any risk to the Revenue. We seek to reduce unnecessary bureaucracy and make a tiny counterbalancing reduction in the volume of the UK statute book as this Bill is enacted.
Column Number: 319
Dawn Primarolo: I shall respond first to a few points that the hon. Gentleman made when moving the new clause, then respond on the detail of the clause.
By way of background, I remind the hon. Gentleman that section 765 was never only about exchange controls. The then Conservative Government realised that and concluded that it should be retained following their abolition of exchange controls in 1979. The section was introduced to counter tax avoidance; it has done that successfully and should not be repealed, as it protects a great deal of revenue.
I am familiar with those in the corporate sector who do not like Treasury consents. I have had the benefit, as the hon. Gentleman may have done, of discussing with such people what they think about the consents. The same people probably spoke to the hon. Gentleman and me about the arbitrage regime—they did not like that either. The hon. Gentleman is praying the arbitrage regime in aid now, but when we discussed it previously, he sought to emasculate it so that it did not do its job.
Mr. Hammond: The Paymaster General is right, but we have to deal with the Bill as it is progressing. Our arguments were defeated during the discussion of the arbitrage clauses: she now has her arbitrage provisions as she originally presented them. What we are probing is whether the Treasury consent rules remain necessary in the light of the success that the hon. Lady has enjoyed.
Dawn Primarolo: It would be presumptuous of me to assume at this stage that the arbitrage provisions have gone through. Returning to the matter of Treasury consents, I suppose that the hon. Gentleman is saying that the Government must be consistent throughout the Bill in advancing our arguments but the Opposition does not have to be.
The hon. Gentleman talked about criminal penalties being disproportionate, which is an important point. Criminal sanctions are not unprecedented; there are examples elsewhere. In relation to section 765, Treasury consents do not stand out as the only ones.
In responding to the general thrust of the hon. Gentleman's argument, I have to say that the Government cannot accept the new clause at this time as to do so would open up opportunities for tax avoidance, but he makes a very fair point. Section 765 came into being when tax avoidance was tackled very differently from the way that the Government now prefer. As the hon. Gentleman said, it can create difficulties for companies but even companies and their advisers agree that the section is effective in deterring aggressive tax avoidance and how it is administered.
The hon. Gentleman was right to say that there is an overlap between section 765 and some of the provisions in the Bill, especially in clauses 24 to 31. I have already touched on avoidance schemes and arbitrage. As I explained when we debated those provisions, sometimes there is an overlap between different anti-avoidance rules. That is commonplace, and it helps to ensure that avoidance schemes do not
Column Number: 320
manage to get through unintended gaps between the rules.
More fundamentally, not all tax avoidance involves arbitrage. Section 765 provides the Exchequer with protection against tax avoidance in circumstances where clauses 24 to 31 do not, therefore section 765 remains an important defence against avoidance. It is too early to assess the impact of the introduction of the provisions on avoidance through arbitrage and other provisions. However, the Government will closely monitor the interaction over the coming months. If anti-avoidance legislation ever rendered section 765 redundant, the Government would reconsider the matter.
I can go further and confirm to the hon. Gentleman that the Government will consider section 765 in the context of work on the wider international context of the corporation tax system and, more specifically, in the current review of powers of the merged Department or HMRC, which has already been announced and is up and running. With the advisory committee, it is the appropriate body to advise the Government—I will share that with the House—and to ensure that we have appropriate coverage for anti-avoidance. However, the power was created in a different era, as the hon. Gentleman said at the beginning of his speech, and it is right and proper that it should be under the spotlight now.
Mr. Hammond: The right hon. Lady is making an interesting and constructive speech in response to our proposals. Can she give us an idea of the time scale for the review? It will, of course, be an ongoing review, but it would be helpful if she gave some reassurance to those who are concerned about the measures continuing.
Dawn Primarolo: I can certainly do that. However, I do not know whether consideration of section 765 will be concluded; that will depend on how the consultation goes. When the Bill for the merger to create HMRC was confirmed on the Floor of the House and in Committee, it was said that we hoped that the first sets of recommendations would be available for the 2006 Finance Bill—that is on the record, although I cannot give a specific Hansard reference—but I cannot give an assurance that one of them will be about section 765.
The hon. Gentleman is right that such a review, which examines powers and what is appropriate and what should be done, will not be conducted in one year and appear in a single Finance Bill. As the Revenue and Customs merge, it will be important to make sure that everything is considered. I am afraid that the case is not made now for the abolition of the provision, but I accept some of his detailed points on how the provision operates and I hope that, given that it is under consideration within the wider review on corporate tax reforms, he will withdraw his new clause at this stage, and await the consultation.
| 
