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4.36 pm

The Financial Secretary to the Treasury (John Healey): I beg to move, That the clause be read a Second time.

New clause 5 introduces a targeted anti-avoidance rule that tackles the use of tax avoidance schemes designed to generate deductions in respect of “expenses of management” under section 75 of the Income and Corporation Taxes Act 1988. If left unchecked, those schemes would cost the UK Exchequer—the public
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purse—£1 billion a year. Section 75 of the 1988 Act provides “companies with investment business” relief for the expenses of managing that investment business. The rules were introduced way back in 1915 and originally applied only to pure investment companies and to insurance companies.

The rules remained largely unchanged until the Finance Act 2004. The changes that we made three years ago widened the range of companies able to obtain relief for expenses of management. They also specifically excluded capital expenditure and introduced an unallowable purpose rule in relation to investments not held for a business or commercial purpose. The unallowable purpose rule made no explicit reference to tax avoidance purposes. It was believed at the time that that rule and a tough approach to the construction of the phrase “expenses of management” derived from case law would be sufficient to stop any abuse. Sadly, the appetite of some for tax avoidance has proved us wrong. In the past two or three years, the disclosure of tax avoidance schemes rules and other inquiries have shown us that there are already a number of avoidance schemes that create deductions for relief as expenses of management which are both substantial and contrived.

The latest scheme is an attempt to circumvent other anti-avoidance legislation introduced in the Finance Act 2004. It creates a wholly artificial deduction for management expenses in return for the receipt of a dividend to which the UK company was already entitled before the scheme was put in place. These payments—treated by the companies as management expenses—are made to overseas companies, which are usually located in tax havens and therefore usually outside the UK tax net. The group of companies as a whole suffers no economic loss as the money is effectively flowing in a circular fashion—the loss is actually borne by the UK Exchequer. That happens when the holding company gets relief for the artificially manufactured management expenses. That sort of scheme is relatively easy to implement and we calculate that—if effective—it has already put at risk more than £240 million to the public purse. Without urgent action, many more groups of companies are likely to adopt the scheme.

Her Majesty’s Revenue and Customs does not accept that the schemes are in accordance with existing legislation. Given the potential cost to the Exchequer and the uncertain outcome of litigation, we are taking action now, to put the issue beyond doubt. The new clause confirms that assets held for a tax avoidance purpose are not held for a business or commercial purpose of the company, and ensures that the scope of the provisions is as wide as possible. We believe that the changes deal with the known schemes and also go appropriately wider, countering any other schemes that might try to secure relief of contrived management expenses.

The sheer size of the potential cost requires immediate action. I therefore regret that, in those circumstances, it has not been possible to consult on the new clause. However, the measure will not affect compliant companies. It affects only those that are involved in tax avoidance. The new clause tackles artificial schemes and will not therefore affect commercial transactions. I commend it to the House.


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Mr. Mark Hoban (Fareham) (Con): I thank the Financial Secretary for his explanation of the circumstances that lie behind the new clause. It elaborates on the letter that he sent to my hon. Friend the Member for Chipping Barnet (Mrs. Villiers) and other members of the Committee last week. In the letter, the Financial Secretary said that the estimated cost approached £1 billion, but in his remarks he said that it was £240 million. I appreciate that the Treasury likes to round things up from time to time, but that appeared to be a large rounding up. Will he be a little clearer about the basis of both the figure in his letter and the cost that he cited in his speech?

My broader concern is that the new clause is drafted widely, as the Financial Secretary acknowledged. We held several debates in Committee about the breadth of anti-avoidance legislation. We had a long debate about the way in which broadly framed legislation was subsequently narrowed through guidance. I was therefore disappointed, given the circumstances that gave rise to the new clause, that the provision was not more tightly drawn to attack the specific abuses that he highlighted of group companies, the use of dividends and so on as a means of generating management expenses. I wonder why he feels the need to phrase the new clause so widely. Are not we in danger of creating uncertainty among taxpayers and their advisers through the breadth of the provision? Cannot we have a more specific provision to tackle the abuse that he mentioned?

John Healey: I thank the hon. Gentleman for the measured way in which he at least implied that he and his party would support the step that we are taking.

In a sense, I covered the reason for our framing the new clause in such a way in my speech. It covers the known schemes and our anticipation of the way in which other contrived schemes—those that try to take advantage of management expenses relief—may be constructed.

We calculate that what Her Majesty’s Revenue and Customs has already examined under the system of notification has put at risk £246 million to the Exchequer. If left unchecked, the schemes would put at risk approximately £1 billion to the Exchequer and the public purse. I hope that that helps to explain the two figures that I used this afternoon and the one figure that I cited in my letter to the hon. Member for Chipping Barnet (Mrs. Villiers).

Question put and agreed to.

Clause read a Second time, and added to the Bill.

New Clause 13


Updating references to standing committees

‘(1) In section 1(4)(b) of the Provisional Collection of Taxes Act 1968 (c. 2) (circumstances in which a resolution affecting income tax etc ceases to have effect), for “Standing Committee” substitute “Public Bill Committee”.

(2) In section 50(2)(a) of FA 1973 (corresponding provision for stamp duty), for “Standing Committee” substitute “Public Bill Committee”.’.— [John Healey.]

Brought up, and read the First time.


25 Jun 2007 : Column 44

John Healey: I beg to move, That the clause be read a Second time.

Madam Deputy Speaker (Sylvia Heal): With this it will be convenient to discuss new clause 1— Amendment of Provisional Collection of Taxes Act 1968—

‘(1) The Provisional Collection of Taxes Act 1968 (c. 2) is amended as follows.

(2) In subsection (4)(b), for the words “Standing Committee” there are substituted the words “Public Bill Committee”.’.

4.45 pm

John Healey: We are making very good progress. No doubt, that will not last, but let us enjoy it while we can. Perhaps the House will enjoy the fact that Government new clause 13 will be considered alongside new clause 1, which was tabled by the Opposition, as, happily, they have been grouped together.

New clause 1 proposes what, in principle, is a valid change, but when I studied the way in which it was framed I found that the detail of the drafting did not quite live up to the intention. I therefore determined to table new clause 13 in the same spirit—it has the same aims as the Opposition’s provision, but it is more comprehensively drafted. Both measures have the same purpose, and I hope that hon. Members on both sides of the House will join together in support of the inclusion of new clause 13 in the Bill.

Mr. David Gauke (South-West Hertfordshire) (Con): I do not intend to detain the House and impede the speedy progress that we have achieved so far. I am grateful for the Financial Secretary’s comments about new clause 1 and the fact that he accepts the principle behind it. Indeed, in his letter to my hon. Friend the Member for Chipping Barnet (Mrs. Villiers), he acknowledged that it was a valid change. I do not wish to have a row about whose drafting is better; I fully accept new clause 13. I do not know whether it is a sign of a new, listening Government or whether it is a sign of a new, listening Treasury. None the less, new clause 13 is welcome, and consequently the Opposition have no intention to press new clause 1 further.

Julia Goldsworthy (Falmouth and Camborne) (LD): It is interesting to see that the new consensus between the two parties is so broad that it extends to section 1(4)(b) of the Provisional Collection of Taxes Act 1968. It is only a shame that the hon. Member for Wolverhampton, South-West (Rob Marris) is not here to relish the improvements to the Bill’s drafting.

John Healey: I welcome the welcome from both Opposition spokespeople. May I remind the hon. Member for South-West Hertfordshire (Mr. Gauke) that, during his short experience as a Front-Bench spokesman, we have faced each other twice: this afternoon and in Standing Committee—or Public Bill Committee, as we should refer to it if new clause 13 becomes part of the Bill. On both occasions, I listened carefully to his arguments, which I have been willing to accept in principle, proposing amendments in light of them. I hope that he has a long and distinguished career as an Opposition spokesman, but he will not always find the going as easy.

Question put and agreed to.

Clause read a Second time, and added to the Bill.


25 Jun 2007 : Column 45

New Clause 2


Principles of good practice for retrospective taxation legislation

‘(1) A Minister in charge of a Bill must, before Second Reading of the Bill—

(a) make a statement to the effect that, in his view, any retrospective taxation provisions of the Bill are compatible with either of the relevant principles of good practice (“a statement of compatibility”); or

(b) make a statement to the effect that, although he is unable to make a statement of compatibility, the government nonetheless wishes the House to proceed with the Bill.

(2) A statement under subsection (1) must be in writing and be published in such a manner as the Minister making it considers appropriate.

(3) In this section, “retrospective taxation provisions” means provisions which—

(i) introduce any new tax, levy, impost or duty, or increase the rate or extend the incidence of any existing tax, levy, impost or duty; and

(ii) take effect on a date earlier than the date on which the relevant enactment enters into force.

(4) For the purpose of subsection (3) it is immaterial whether a Minister gives notice, whether in Parliament or otherwise, of his intention to introduce a retrospective taxation provision which takes effect on a date after the giving of that notice.

(5) In subsection (3)(i) “extend the incidence of any existing tax, levy, impost or duty” includes the removal or attenuation of any relevant relief or drawback.

(6) In subsection (3)(ii) “take effect” includes the creation of a liability or obligation to account for any increased charge to tax resulting from a provision of the kind mentioned in subsection (3)(i), whether or not the date on which the increased charge falls due for payment precedes the date on which the relevant enactment is expressed to enter into force; and in this subsection “account for” includes any decision by a company or business undertaking to absorb or pass on in the form of higher customer prices or charges the additional costs to that company or business undertaking arising from the increased charge to tax.

(7) “The relevant principles of good practice” mentioned in subsection (1) are—

(i) that it appears, whether as a result of a judgment given by a court or otherwise, that some part of the law relating to taxation no longer conforms to the reasonable expectations about its effect previously held by taxation practitioners and that it is necessary to restore the position retrospectively in order to protect the interests of the general body of taxpayers;

(ii) that HMRC becomes aware of a new tax avoidance scheme and it is necessary, in order to prevent a significant loss of tax revenue, to amend the law retrospectively.

(8) In subsection (7) “taxation practitioners” includes the Treasury, HMRC, the accountancy profession, professional tax advisers and groups representing the interests of taxpayers; and “tax avoidance scheme” has the meaning given in the Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2004 or the Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2006.

(9) A taxation provision introduced under the Provisional Collection of Taxes Act 1968 is not to be treated as having retrospective effect for the purposes of this section unless the date on which the relevant resolution of the House of Commons under either section 1 or section 5 of that Act is expressed to take effect is a date earlier than the date on which the resolution under section 1 or, as the case may be, section 5 is passed.— [Mr. Goodman.]

Brought up, and read the First time.


25 Jun 2007 : Column 46

Mr. Paul Goodman (Wycombe) (Con): I beg to move, That the clause be read a Second time.

Madam Deputy Speaker: With this it will be convenient to discuss the following: Amendment No. (a), line 2, leave out ‘(a)’.

Amendment No. (b), in paragraph (a), leave out ‘either of’.

Amendment No. (c), in paragraph (a), leave out from ‘compatibility’ to end of paragraph (b).

New clause 7— Limitation on use of retrospective taxation legislation

‘(1) It is the duty of a Minister of the Crown to refrain from bringing retrospective taxation legislation before Parliament unless one of the conditions mentioned in subsection (2) is satisfied.

(2) The conditions mentioned in subsection (1) are—

(i) that it appears, whether as a result of a judgement given by a court or otherwise, that some part of the law relating to taxation no longer conforms to the reasonable expectations about its effect previously held by taxation practitioners and that it is necessary to restore the position retrospectively in order to protect the interests of the general body of taxpayers;

(ii) that HMRC becomes aware of a new tax avoidance scheme and it is necessary, in order to prevent a significant loss of tax revenue, to amend the law retrospectively.

(3) In subsection (2) “taxation practitioners” includes the Treasury, HMRC, the accountancy profession, professional tax advisers and groups representing the interests of taxpayers; and “tax avoidance scheme” has the meaning given in the Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2004 or the Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2006.

(4) In this section “retrospective taxation legislation” means legislation which—

(i) introduces any new tax, impost or duty, or increases the rate or extends the incidence of any existing tax, levy, impost, or duty; and

(ii) takes effect on a date earlier than the date on which the relevant enactment enters into force.

(5) For the purposes of subsection (4) it is immaterial whether a Minister gives notice, whether in Parliament or otherwise, of his intention to introduce a retrospective taxation provision which takes effect on a date after the giving of that notice.

(6) In subsection (4)(i) “extends the incidence of any existing tax, levy, impost or duty” includes the removal or attenuation of any relevant relief or drawback.

(7) In subsection (4)(ii) “takes effect” includes the creation of a liability or obligation to account for any increased charge to tax resulting from a provision of the kind mentioned in subsection (4)(i), whether or not the date on which the increased charge falls due for payment precedes the date on which the relevant enactment is expressed to enter into force; and in this subsection “account for” includes any decision by a company or business undertaking to absorb or pass on in the form of higher customer prices or charges the additional costs to that company or business undertaking arising from the increased charge to tax.

(8) A taxation provision introduced under the Provisional Collection of Taxes Act 1968 is not to be treated as having retrospective effect for the purposes of this section unless the date on which the relevant resolution of the House of Commons under either section 1 or section 5 of that Act is expressed to take effect is a date earlier than the date on which the resolution under section 1 or, as the case may be, section 5 is passed.’.

Mr. Goodman: We have been proceeding so far on the amiable basis of consensus. I hope that we can go further and hear shortly that the Financial Secretary accepts the new clause. It aims to forestall and prevent
25 Jun 2007 : Column 47
creeping retrospection from polluting the Government’s finance legislation. I intend to speak to it, as well as to the amendments tabled by my hon. Friend the Member for Christchurch (Mr. Chope) and others, and to his new clause 7.

New clause 2 arises directly from the debate in the Committee of the whole House about air passenger duty in relation to clause 12. I do not intend to repeat the debate that we had on 1 May, but as the new clause deals with retrospection and as retrospection was present in clause 12, I must necessarily set the context that gives rise to the amendment. The definitive statement on retrospection in relation to clause 12 was made by the Treasury Committee as follows:

It is worth noting that two separate though related ideas of retrospection are described by the Select Committee in that context. It concluded:

The Financial Secretary subsequently offered two precedents—the supplementary charge on North sea oil announced in the 2005 pre-Budget report, which was introduced with effect for accounting periods from 1 January 2006, and the increase in fuel duty announced in the 2006 pre-Budget report and implemented from midnight. However, the House of Commons Library said that


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