Clause
26
Restrictions
on trade loss relief for
partners
Question
proposed, That the clause stand part of the
Bill.
Mrs.
Villiers:
The Opposition have grave concerns about the
provisions in schedule 4, which is implemented by the clause. I shall
address my remarks to that schedule in due course, but I wanted to put
it on record that the fact that we shall not vote against the clause is
not a reflection of our concerns, as we are very concerned about the
matters
raised.
Question
put and agreed to.
Clause 26 ordered to stand
part of the
Bill.
Schedule
4
Restrictions
on trade loss relief for partners
Mrs.
Villiers:
I beg to move amendment No. 62, in
schedule 4, page 98, line 34, leave
out from beginning to end of line 34 on page
100.
The
Chairman:
With this it will be convenient to discuss
amendment No. 63, in schedule 4, page 99,line 11, leave out
‘£25,000’ and insert
‘£100,000’.
Mrs.
Villiers:
As I have just said, we have grave concerns
about schedule 4. The amendment would delete proposed new section 103C
of the IncomeTax Act 2007, which is proposed in paragraph 1 of
schedule 4. In so doing, the amendment would remove the
Government’s restriction on sideways loss relief for non-active
partners, as proposed in the schedule. Sideways loss relief allows a
partner to set off partnership losses against other income. I
understand that it has been part of our tax system for more
than50 years. Sideways loss relief is designed to give relief
in the early years of a partnership, when losses might be high, as they
often are with a start-up business.
In schedule 4, the Government
propose a two-stage restriction on sideways loss relief. Proposed
newsection 113A of the 2007 Act would disallow any sideways
loss relief for arrangements, where one of the main purposes of
entering the transaction was tax avoidance. That might not have caused
an enormous amount of controversy. There would have been issues to
explore around the purpose test and the scope of the proposals, but
they would not have caused huge concerns. However, the Treasury
proposes to go much further with new section 103C. That will impose
significant restrictions on ordinary commercial ventures that are not
motivated by tax avoidance. To obtain full sideways loss relief under
the proposals in schedule 4, a partner will have to spend 10 hours a
week working personally on the partnership’s business. For those
partners who do not devote 10 hours a week to the venture, the sideways
loss relief that they can claim is limited by the schedule to
£25,000.
As the
Institute of Chartered Accountants has pointed
out:
“The
measure is not targeted solely at tax avoidance schemes...The
result is that the measure will impact upon many small businesses being
set up with substantial investment in the early
years.”
The London
Society of Chartered Accountants has expressed concern that schedule 4
means that many deserving investment projects will now never see the
light of day. It urges the Government to reconsider, and so do the
Opposition.
That is
why I tabled amendment No. 62 to delete the 10-hour condition and the
£25,000 cap. Amendment No. 63, to which I shall come at the end
of my remarks, is proposed as a compromise alternative to raise the cap
from £25,000 to £100,000, although in our view it would
be preferable to opt for amendment No. 62 and the complete deletion of
proposed new section
103C.
I point out also
that the Committee will soon have the opportunity to consider
amendments Nos. 64 and 65, which form a key part of a package of
proposals that the Opposition suggest in relation to schedule 4. They
would restrict sideways loss relief to those ventures that can pass a
demanding threshold designed to show that they are commercially
motivated ventures, not artificial tax-avoidance schemes. We recognise
that some of the schemes that have utilised sideways loss relief have
caused problems in terms of revenue leakage from the Treasury. We do
not oppose efforts by the Government to shut down abusive and
artificial
schemes that are motivated only by tax avoidance and that do not involve
genuine commercial risk. However, we are worried that vital commercial
ventures will be hammered by the Government’s attempts to shut
down problematic tax-avoidance
schemes. The package
comprising amendments Nos. 62,64 and 65 is aimed at giving Her
Majesty’s Revenue and Customs the power to shut down abusive
schemes, but without clobbering genuine enterprise and investment. The
Opposition fear that, unless those amendments are adopted, schedule 4
will have a very damaging effect on high-risk investment and small
business
start-ups.
The first
point to make about schedule 4 centres on the way in which the changes
were announced on Friday 2 March this year. They were rushed out right
at the end of the financial year, when many people had made their plans
on the basis that the reliefs would be available. The changes will
impact on many ventures in respect of which investments have already
been committed on the basis of the existing tax system. Now, investors
have had the rug pulled from under their feet, and they find themselves
at risk for large amounts of money with no prospect of relieving
potential losses in the way in which they had
envisaged.
I have
received protests on that point from many people, including
Mr. Wood of Morgans Independent Advisers, Jeff Moores of
Moores Warren, and Richard Grant of Pantheon Financial Management. They
point out that the legislation impacts unfairly in treating partners in
the same arrangement differently according to whether they contributed
earlier or later in the tax year, even if both investments were made
before these provisions came into effect. That might not be such a huge
problem if the only arrangements hit by the changes were dubious and
artificial tax-avoidance schemes, but as I have said, that is not the
case. The retroactive nature of schedule 4 adds to the concern of the
Opposition about the measures and their impact on ventures and
contracts agreed on the basis that sideways loss relief was
available.
The
Committee may be aware that there was a rapid U-turn when the proposals
were initially announced. They were initially due to cover film tax
reliefsunder section 42 of the Finance (No. 2) Act 1992 and
section 48 of the Finance (No. 2) Act 1997. Within, I think, three
working days, there was a rapid about-turn, and the Treasury decided
that section 42 and section 48 reliefs would not be restricted. That
certainly seemed to make sense, because only a few weeks before that
the Treasury had announced a temporary extension of those reliefs. The
assumption seems to be that, the section 42 and section 48 problem
having been solved, this sorts out the film industry, but that is not
the case.
No doubt the
Minister will quote back at me statements that suggest that not
everyone in the film industry is worried about the remaining provisions
in the Bill on sideways loss relief, but I have received a number of
very concerned representations on that issue. The film industry has
found sideways loss relief so important because of the high degree of
risk involved in a film project. It is very difficult to predict in
advance whether a film will be successful. Hence, investment proposals
are often based around investing
in a number of films. The assumption is that, if one backs 20 films,
there is a chance that one of them might make money and offset some of
the losses from the others. That becomes impossible with the abolition
of sideways loss
relief. 6.45
pm
Sebastian
Speight of Ingenious Media has told me that two high-profile UK films,
“St. Trinian’s” and “Brideshead
Revisited”, had seen their private investment withdrawn as a
result of the announcement in schedule 4. These films were relying for
up to a third of their funds on investors expecting to be able to
reduce the risk of the investment by using sideways relief. Those films
were rescued by the Film Council, but it remains a concern as to how
other films will find funding in the absence of sideways relief.
Mr. Speight put the problem as
follows:
“The
new film tax credit will provide 20 per cent. of the cost of making a
film. However, for larger projects, it is difficult to see where the
remaining finance will come from beyond a few national and local
grants. Big films need a critical mass of investment before they can be
undertaken and this restriction makes it much harder to
get.”
The
issue here is that part of film funding which is not covered by the
film tax credit. Sideways loss relief reduces the high risks for
investors who are asked to provide the 80 per cent. of funds that are
not covered by the tax credit. The Government’s film tax credit
will not work if projects find it impossible to raise the other 80 per
cent. of funds that they need. Restricting sideways relief makes that
much more
difficult.
Variety
magazine said that scrapping sideways loss relief would “gut
British film production”. Patrick McKenna, a film investment
expert, has pointed out that films such as “Vera Drake”
or “Girl with a Pearl Earring” would not have been made
without sideways loss relief. He told me that many films that are
already in production or about to go into production may not now be
made. He
said:
“The
Revenue have taken a very blunt instrument to deal with this. It has
not discriminated between bona fide investment and tax
abuse.”
Mr.
Timms:
I have listened to the hon. Lady’s argument
with interest. She has acknowledged that the new film tax relief will
provide 20 per cent. of funding for films, but she is saying that that
is not enough. I presume that she is saying that the public purse
should provide a still higher proportion. What proportion does she
think should come from the public purse towards the cost of producing a
film?
Mrs.
Villiers:
I am saying that the Government should not
abolish sideways loss relief, because that relief is reducing the risk
that investors face when they go into a film project.
Coupled with restrictions on
venture capital trusts, these measures could cause significant problems
for the film industry, and the problems for the film sector are
replicated in other areas of the creative industries. As with a film
project, predicting how the public will respond to a new computer game,
for example, is much more difficult than, say, developing a new soap
powder or shampoo. Again, sideways relief allowed investors to take a
punt on risky proposals for new games,
knowing that at least they had the protection of being able to set
losses off against other income. I would like to ask the Minister if
the Treasury has conducted any research whatsoever on the impact that
schedule 4 would have on the hugely important computer games
industry. It would be
wrong, however, to think of this issue as a film tax issue, or to think
that the creative industries are the only ones that will be affected.
The Chancellor has often referred to the “funding gap”,
in other words the difficulty that many start-ups have with raising
finance. We have always been a nation of inventors and innovators, but
far too often we have had difficulty turning those ideas into
commercial reality. Sideways loss relief has been one of the few useful
mechanisms for bridging that funding gap, and now the Treasury wants to
scrap it.
A number of
distinguished academics have indicated serious concern about the impact
of schedule 4 on scientific research, which is also something that the
Chancellor has repeatedly said that he wants to encourage. Professor
Ian Swingland, founder of the Durrell Institute of Conservation and
Ecology and Emeritus Chair in Conservation Biology at the University of
Kent, has said:
“At least 10 per cent.
of high-risk research will be destroyed by this aggressive move against
collective investment, and probably more. Many investors will be
dissuaded from funding key environmental projects rather than use other
existing highly bureaucratic mechanisms. If environmental research and
development is to grow in the UK, it is essential that sideways loss
relief continues to be available for high-risk and innovative
ventures.”
He expanded on
those concerns in a letter published in the Financial Times this
morning.
The impact
of schedule 4 on crucial emerging markets for environmental technology
has been raised with me by a number of people. Martin King, who leads
the Silver Planet consortium of investors in environmental technology,
told me:
“I and
a number of colleagues have organised high risk venture funding via
Business Angels using the sideways relief that was available to offset
failed investments...The changes proposed...in the draft
Finance Bill mean that partnerships will not now invest in high risk
ventures and in particular research which has been particularly
targeted by Treasury. Already we have had to turn down over 20 projects
that were of a very high risk nature...Obviously we have informed
all those organisations that they cannot be funded in this traditional
way and I assume they will have to look overseas for their
funding...HMRC have suggested that funding could be switched to
State approved schemes such as EIS and VCT but most business angels
find the bureaucracy and severe limitations these schemes have to be a
real deterrent... Equally the HMRC suggestion that Banks will
replace this kind of funding is
ludicrous.”
Tony
Blakey, founder of Ethical Trading and Marketing, contacted me to
express his grave concern about the impact of schedule 4 on projects to
develop technology that is effective in tackling climate change. He is
involved with a number of revolutionary projects in areas such as tidal
energy, applied accelerated tree-growth technology, accelerated
community biomass technology and environmentally-friendly biodiesel
production. He believes that if such projects prove successful, the
technology that they harness could produce low-cost renewable ways to
cover a significant proportion of the world’s energy needs. He
tells me that up until 2 March, the UK had a very significant share of
that developing market,
but now all the projects are likely to go offshore as a result of
schedule 4 to Germany, Pakistan, Brazil and other countries. Funds
dried up as soon as the 2 March announcement on sideways relief was
made. Mr Blakey told
me:
“The
abolition of sideways loss relief has significantly reduced the number
of investors willing to risk early stage research
funding...Partnerships currently fund vital environmental projects like
tidal energy, biodiesel, and accelerated tree growth...These
projects cannot now be completed using partnership
funding...Foreign investors will benefit as the projects will no
longer be controlled or owned by the
UK.”
The
problem is that no one knows which research will yield results. Of 50
projects to accelerate tree growth to produce cheap
environmentally-friendly energy, 49 might fail. Before now, investors
at least had the cushion of sideways relief to soften the impact of the
losses. The Government propose to remove that cushion, so the risk
becomes higher and the funds more difficult to obtain.
Chris Dodson
of Torftech Ltd has also written to me about a range of environmental
energy projects that are being shifted overseas as a result of the
changes proposed in the Bill. The Chartered Institute of Taxation has
told me that schedule 4 is jeopardising projects to make use of the
special capital allowances introduced by the Chancellor himself in 2003
to encourage environmental technology.
Rupert Lywood, to whom I
referred on Second Reading, is an investor in a partnership pursuing
research and development work on lung and bowel cancer vaccines. He is
concerned about the impact of schedule 4 on existing and future medical
research projects. He commented:
“Investment in private
medical research is very high risk, projects such as cancer vaccines
research and development couldn’t be contemplated without the
availability sideways loss relief...These proposals have a
retroactive effect on existing projects and will undoubtedly jeopardise
potentially life-saving medical research and the opportunity for UK
businesses to lead in important fields of research and profit from
international exploitation of newly developed
technologies.”
Mr.
Lywood tells me that important existing projects on cancer, HIV and
multiple sclerosis have already been put in jeopardy by schedule
4.
The proposed
10-hour limit is fundamentally unsuited to this kind of project. Many
of the business angels hit by schedule 4 will have investments in a
wide spread of high-risk projects. They need to take that approach to
spread their risk, and they cannot possibly find 10 hours in every week
to devote to each project. The restriction simply misunderstands how
such investment projects
work.
Nor can
HMRC’s approved investment schemes plug the gap left by the
abolition of sideways loss relief. HMRC’s response to the
concerns expressed about schedule 4 is that those affected should use
one of the Government’s state-approved arrangements, such as the
enterprise investment scheme or venture capital trusts. Such schemes
simply will not take up the slack, because the amounts that can be put
into them are limited and, in many ways, they can be bureaucratic,
inflexible and expensive to
run.
Rupert Lywood has
said:
“Everyone
supports measures to counteract tax avoidance, but that’s not
what these proposals do. What they do, is to create
powerful disincentives for individuals wishing to invest in bona fide
commercial enterprises which would enhance the UK’s
competitiveness and wealth-creation. The Government has reneged on its
promise not to use these provisions to disadvantage business. The
incentives delivered through the Enterprise Investment Schemes and
Venture Capital Trusts have been steadily eroded over recent years to
the point where they are now, in practical terms, almost irrelevant as
a source of serious capital for new or developing businesses. Sideways
loss relief was the last real practical incentive available to
encourage private investment is growing enterprises, its removal is
completelyat odds with the Government’s objective to
encourageenterprise” The
Institute of Chartered Accountants has expressed concern about the
impact of schedule 4 on start-up businesses that source finance from
family and friends who become non-active or sleeping partners, and it
has given a number of examples of micro-business start-ups involving
family members that could be hit. Those micro-businesses already face
increasing corporation tax rates and possibly problems with the MSC
regime, and they are thumped again by the loss of sideways relief that
would have provided assistance in the difficult early years of any
enterprise.
Amendment
No. 63 would increase the cap on sideways relief from £25,000 to
£100,000. Of course, if amendment No. 62 were adopted, the need
for that change would fall away with the deletion of the cap. I tabled
amendment No. 63 for two reasons. First, it is a compromise. If the
Government were not able to accept the complete deletion, they might
mitigate the damage of section 103 by raising the cap. Secondly, it
allows the Committee to probe the Government’s rationale for the
£25,000 cap. In making a similar request, the Institute of
Chartered Accountants points out that no justification has been given
for the imposition of the £25,000 limit—the figure seems
to have been plucked out of the air, so I should like the Minister to
explain why that figure was
chosen.
In conclusion,
the Chancellor says that he wants to plug the funding gap, but he is
ripping away one of the few measures that helped to do that. In his
Budget statement, he said that he wanted the UK to be a world leader in
the discovery and development of new energy technologies, yet in the
very same Budget, he was proposing to abolish a key tool in driving
forward that discovery and development. Schedule 4 would damage the
film industry, damage enterprise and investment and damage many
projects vital to tackling climate change. I urge the Chief Secretary
to think again about schedule 4 and to consider accepting the
amendments that I have put
forward.
Mr.
Philip Dunne (Ludlow) (Con):
At the risk
of trying your patience, Mr. Ilsley, and that of other
members of the Committee, I wish to contribute at this late hour to the
debate on this amendment, because of all the aspects of the Bill, this
schedule is the one that will cause most damage to the structure of
enterprise in this country and to innovative investment. It is the
measure on which I have received the most comments from outside this
place, and the one on which I urge the Chief Secretary, whom I know to
be a reasonable man, to take note of the arguments that have been so
well put by my hon. Friend the Member for Chipping Barnet. He should
think again about its impact and what it will do to the
growing entrepreneurial and innovative investment climate that has been
cultivated in part under his Government—let me give credit where
it is due.
The measure
will have a major impact in driving investment offshore and shutting
down a large proportion of high-risk investment in this country. I
should remind the Committee that I am a partner in two partnerships, a
farming partnership and an investment partnership. Although they have
been going for a long time—they are not new partnerships, so the
measure would not directly apply to them—I have experience of
investing in partnerships. I know that they provide a valuable
structure, not for tax avoidance but for suitable flexible equity
involvement in a business by both active partners and those who retire
or become less active, as I did when I came into this place. We are at
risk of diverting investment activity out of a good structure that
exists for positive reasons into sole trading or individual investment,
or into a corporate structure in which the ability to offset losses
against other kinds of income is not currently threatened. The measure
will divert business activity in an entirely unintended
way.
7
pm
The ministerial
statement of 2 March from the Paymaster General sought to clarify why
the clause was being introduced. She
stated:
“The
capital contributions to be excluded will be those paid by non-active
partners on or after 2 March 2007 where the main purpose, or one of the
main purposes, for contributing the capital to the partnership is for
the partner to obtain a reduction in tax liability by means of sideways
loss relief.”—[Official Report, 2 March 2007; Vol.
457, c. 105WS.]
That is an
appropriate measure to deal with tax avoidance, and the Conservative
amendments seek to achieve the Government’s precise objective.
Their measures will restrict all sorts of other bona fide commercial
activity.
Let me pick
up on one other point. Thought has clearly been given to what types of
activity will be affected. The ministerial statement specifically
carved out high-risk underwriting at Lloyds as an activity that should
be exempted from the clause, and it is exempt under proposed new
section 103C(8). As my hon. Friend said, there was a U-turn over the
film industry, as a special exemption was sought for qualifying
expenditure for films, which can now be found in proposed new section
103C(6). However, the ministerial statement referred to professional
firms as exempt, but that does not appear in the Bill. Why has the
Chief Secretary had a change of heart? Where is the logic behind that
decision? If special pleading by a particular industry has found favour
in the Treasury and in the Chief Secretary’s deliberations, will
he think too about the special pleading on behalf of
investors—business angels of the type described by my hon.
Friend?
Time is
pressing and hon. Members will wish to move on, but I have two more
questions. The measure is designed to get at losses generated from the
early stages of a partnership. When the Chief Secretary sums up, will
he confirm that the provisions will not apply to partnerships that have
existed for some time but where losses might legitimately arise as a
result of the business getting into difficulty a year or two later?
That is not clear from the explanatory notes.
As far as the two limits on
working hours and the amount of money that can be invested are
concerned, it seems extraordinary that the drafting should apply in
such a way that in order to qualify for sideways relief, individuals
will be compelled to spend 10 hours a week—presumably the
Government will not encourage them to breach the working time
directive, so that is25 per cent. of their working
time—committed to a project. Most people who invest in high-risk
projects and wish to benefit from sideways loss relief are doing so
because they are entrepreneurial investors with other activities. They
do not necessarily have the relevant skills to work for 10 hours a week
in the business.
My
hon. Friend referred to individuals who had engaged in biotech
research. They might well be entrepreneurs with a commitment to
developing new vaccines or environmental energy projects, but they
might not necessarily be scientific boffins who could spend the time
doing so, and, because of their other activities, they might not have
the time to promote the business. There is a lack of logic to the
10-hour limit and an equal lack of logic to the £25,000 limit.
If the amendment is put to a vote and not accepted, I urge the Chief
Secretary to go away and come back on Report with a more considered
clause.
Mr.
David Gauke (South-West Hertfordshire) (Con): I should
like briefly to pursue one of the points that my hon. Friend the Member
for Chipping Barnet made about film tax relief. She described how the
Treasury’s original proposals appeared to rule out section 42
and section 48 film tax relief.
From my limited experience of
the Committee this year and last year, as well as from my experience of
a Committee on a statutory instrument, the Treasury devotes a fair
amount of attention to film tax. In passing a lot of legislation in
such an important and sensitive area, it has no doubt developed a
highly skilled team, with much expertise in the field. I should
therefore be grateful if the Chief Secretary could tell the Committee
whether the Treasury’s film tax experts were consulted on the
original proposals on sideways loss relief, and if not, why not. If
they were, did they spot the difficulties that became apparent after
the original proposals were announced? The Treasury appeared to do a
U-turn in three working days, which is fairly quick. I have some
experience of seeing the Treasury do U-turns on film tax, but they
usually take a matter of months, not days.
The Treasury seems to be
particularly sensitive to film tax and to ensuring that the burden does
not drive films offshore. I assume that the reason for that is that the
film industry is highly mobile, as well as highly innovative and high
risk, as my hon. Friend mentioned. If the tax burden were greater,
fewer films would be made and the Treasury’s tax revenue would
therefore be reduced. I suspect that my hon. Friend the Member for
Braintree would describe that as a perfect example of the Laffer curve
in operation.
However, could the same
principle apply to other sectors? My hon. Friend the Member for
Chipping Barnet gave some examples of sectors that perhaps do not have
such a well-developed lobbying capability and to which the Government
are perhaps not always as sympathetic as they appear to be to the film
industry. In the light of the difficulties that emerged with the film
industry, as a consequence of the abolition of sideways loss relief, has
the Treasury given any consideration to whether any other sectors would
be adversely affected by the
proposals?
Mr.
Breed:
Once again, we seek through tax
avoidance schemes to distinguish between organisations that are genuine
commercial enterprises and those that are set up purely to avoid tax.
The Chartered Institute of Taxation suggested that the Government
consider introducing a motive test, which might have made a
contribution, so I should be grateful if the Minister could say whether
that proposal was feasible or
not.
Adam
Afriyie:
The schedule seems to reflect a
fundamental misunderstanding of the investment environment. It confuses
working for an enterprise for 10 hours a week with providing finance
for risky ventures, and thereby plugging what is clearly a seedcorn
finance problem for many creative industries. I therefore urge the
Government to rethink the schedule.
Mr.
Timms:
I do not want to try to the Committee’s
patience unduly, but I certainly do want to respond to some of the
points that Opposition Members have
made.
The
schedule changes the rules for offsetting the trading loss of a
non-active or limited partner in a trading partnership against their
other income and capital gains, which is known as sideways loss relief,
as we have heard. The Exchequer has incurred significant and growing
losses from the misuse of sideways loss relief by wealthy people who
participate in partnerships not in anticipation of an investment gain,
but purely to access losses—frequently highly contrived in
nature rather than real—to reduce their tax on income or capital
gains.
The
new rules have been targeted specifically to halt that form of
avoidance while preserving access to a significant degree of sideways
loss relief for people who are not seeking to avoid tax. On a number of
occasions, Opposition Members talked about the abolition or removal of
sideways loss relief, but that is not correct. There is a limit in the
schedule to the amount of sideways loss relief available, and the vast
majority of sideways loss relief that is not motivated by tax avoidance
falls within that limit. We are not withdrawing
it.
Mr.
Gauke:
Will the Chief Secretary give
way?
I want to
make very clear the Government’s position in response to the
points that have been made. We have a responsibility to block schemes
for tax avoidance. The argument that some ancillary benefit arises from
the scheme is not a justification for retaining the ability to
establish such schemes. We have introduced a number of measures to
encourage productive investment, such as the new film relief measures,
and the research and development tax credit, which if I remember
rightly, Opposition Members want to abolish. Ours is the proper way to
encourage investment.
The claim that some tax
avoidance schemes may lead to investment that would not otherwise have
occurred is not a justification for leaving tax loopholes in place,
and the claims for the amount of investment that may take place are
often grossly exaggerated. At the very least, tax avoidance schemes are
a deeply inefficient use of public money. Sideways loss relief is not
an efficient use of taxpayer funds for promoting the investment that we
have heard about; it is deeply inefficient. Committee members are perfectly
entitled to believe that there is a need to use taxpayers’ money
to promote investment in a part of the economy, and they are at liberty
to propose measures to help, along the lines of the film relief or
research and development tax credits. However, let us reject the
argument that scams should be left in place because this or that
incidental benefit arises from
them.
It is very
important that we are not naive about what is going on. FT.com on 10
March explained that the
schemes
“work by
generating trading losses in the first year which high net worth
individuals have been able to offset against their earned income for
tax purposes using sideways loss relief.”
It quoted Martin Churchill, editor of
“Tax Efficient Review”, who said:
“Snipping the sideways
loss relief has really choked up these
schemes.”
The piece went
on:
“He
believes that £2 billion would have been poured into those
schemes between
now”—
10
March—
“and April
5”.
Mr.
Churchill was quoted further:
“Everyone was gearing up
to put significant amounts of money into these schemes. Bonuses gets
paid in February and people don’t tend to do anything until the
run up to the end of the tax
year”.
We can
get an idea of the impact of the change resulting from the announcement
through published data on limited liability partnerships. In 2005-06,
about 40 per cent. of the total number of partners in avoidance
partnerships, which are set up for an avoidance purpose, were recruited
after 1 March and before 6 April—just in time for the end of the
tax year. In 2006-07, the most recent financial year, only 1.1 per
cent. were recruited following the announcement.
The hon. Member for Chipping
Barnet explained that amendment No. 62 would completely remove the
proposed annual limit on sideways loss relief while amendment No. 63
would increase it to £100,000. We are dealing with a
particularly aggressive form of avoidance whereby schemes consistently
adapt their arrangements to get around the rules. It has become very
clear that a purpose test alone will not deter
it.
In response to the
hon. Member for South-East Cornwall, there is a purpose test in the
Bill, but there is also a limit. We need an annual limit to provide an
additional deterrent to the purpose test and to make it uneconomic to
challenge the intention of the legislation. An annual limit of
£25,000 will achieve that deterrent, comparing the relief gained
with the fees required to set up a scheme. A limit of £100,000
would not do so. It would provide a significant incentive to continue
to use those schemes to avoid tax, even after allowing for the quite
considerable promoters’ fees and for other costs.
In practice, more than 90 per
cent. of losses incurred by people in the partnership population who
are not motivated by tax avoidance are lower than £25,000. The
vast majority of losses that arise to those who are motivated by tax
avoidance exceed £25,000. An annual limit of £25,000
strikes the right balance between allowing non-avoiders access to
sideways loss relief, while preventing avoiders from abusing
it.
7.15
pm
The cost of the
more modest of these two amendments—raising the limit to
£100,000—would be at least £150 million per year.
Given behaviour changes on the part of the avoiders, in due course it
would quite likely reach the full £400 million score against
this measure in the Red Book. It could be more, but we have scored it
at £400 million. Of course if the limit were £100,000,
and it was economic to avoid tax still by this route, people would set
up a whole string of these arrangements so they could continue to avoid
tax in this way. I hope that I have explained the purpose of the annual
limit and the reason that it is set at £25,000. I hope that the
hon. Lady will agree to withdraw her amendments. If not, I shall
certainly urge ask my hon. Friends to oppose them.
I should finally like to make a
couple of points on films. The hon. Lady quoted a couple of remarks by
people in the film industry. Let me just quote Andrew Eaton, co-founder
of Revolution Films, who
said:
“Everyone
has been aware that there have been funds that have been able to make
quite a lot of money out of tax schemes and haven’t always been
putting money back into the business. There was a very strong sense
across the industry that at some point those funds were going to be
stopped.”
Indeed, a
number of people in the film industry have made the point that what
they want is a sustainable industry. It is ludicrous for the hon. Lady
to say that the taxpayer must provide not only the 20 per cent. that
the tax relief now pays, but the rest of the 80 per cent. cost of
producing films too. The film industry is a commercial business like
every other. It is in the interests of the industry that it should be
viable and
commercial.
Finally, I
do not accept for a moment——and I did see the letter in
the Financial Times this morning——that there will
be a huge impact on investment in research and development companies.
Since the announcement at the beginning of March, we have received just
two specific responses from research and development interests to that
publication of the technical note. We considered both those
representations carefully, and we are confident that the rationale for
the change remains sound. If hon. Members have evidence of actual loss
of bona fide investment not motivated by tax avoidance, I invite them
to submit it and I will look at it with great
interest.
As I said,
more than 90 per cent. of the sideways loss relief claims in the past
couple of years that have not been motivated by avoidance have been
below £25,000, so they will not be affected by the change. I
urge the Committee to reject the
amendment.
Mrs.
Villiers:
The Chief Secretary seems deliberately to have
misunderstood what I was saying and failed to read the amendments. We
are not concerned about the scams as the amendments are deliberately
designed to
allow HMRC to shut down those scams. What we are concerned about are the
genuine, bona fide commercial arrangements that will be shut down by
schedule
4.
Mr.
Timms:
I put it to the hon. Lady that her amendments
under-estimate the ingenuity of the people responsible for these
schemes, who would quickly get round the arrangements that she suggests
should be left in place.
Mrs.
Villiers:
The very demanding tests set out in the
amendment in the next group would enable HMRC to shut down those
schemes. No matter how ingenious the efforts to use sideways loss
relief for an abusive purpose, there is a way to ensure that the
genuine commercial enterprises are not hit by schedule 4 while at the
same time giving the Government the power to shut down the abusive
schemes.
I would like
to correct the Chief Secretary. I was not saying that the taxpayer
should stump up the extra80 per cent. of film funding. I was
saying that withdrawal of an important way of reducing the risk of
investing would have a significant negative impact on the film
industry. The Chief Secretary also said that he would be willing to
look at evidence that research projects are being damaged. I believe
that I presented such evidence to the Committee and would be only too
happy to provide further details of those projects that are going to
the wall or going overseas as a result of his proposed changes. I would
like to press amendment No. 62 to the
vote.
Question
put, That the amendment be
made:—
The
Committee divided: Ayes 8, Noes
18.
Division
No.
5
]
Question
accordingly negatived.
The
Chairman:
Before we come to the next group of amendments,
I have to tell the Committee that I am prepared to go on for a little
longer if we can achieve a suitable point in the Government’s
programme before adjourning, otherwise we have to adjourn for a dinner
break and come back
afterwards.
Mrs.
Villiers:
I beg to move amendment No. 64, in
schedule 4, page 101, line 12, leave
out from ‘if’ to the end of line 14 and insert
‘it is made in connection with any
arrangement which is not a qualifying arrangement under section
103E.’.
The
Chairman:
With this it will be convenient to discuss
amendment No. 65, in schedule 4, page 104, line 23, at end
insert—
‘103E Meaning of
“qualifying
arrangement”
(1) For the
purposes of this chapter, an arrangement is a qualifying arrangement
if—
(a) the individual
as a partner in a firm or as member of an LLP carries on a trade which
is conducted on a commercial basis and with a view to the realisation
of profits and involves genuine financial risk;
and
(b) before the individual
commences carrying on such trade, the Commissioners for Her
Majesty’s Revenue and Customs have on the application of the
firmor LLP notified the firm or LLP that the Commissioners are
satisfied that the arrangement is being entered into for genuine
commercial reasons and not as part of a scheme or arrangement of which
the sole or main expected benefit is the obtaining of a reduction in
tax liability by means of sideways relief or capital gains
relief.
(2) An application
under subsection (1) shall be in writing and shall contain particulars
of the arrangements.
(3) If the
Commissioners for Her Majesty’s Revenue and Customs consider
that the particulars or any further information provided under
subsection (1) of this subsection are insufficient for the purposes of
this section, they must notify the applicant as to what further
information they require for those purposes within 30 days of receiving
the particulars or
information.
(4) If any such
further information is not provided within30 days from the
notification, or such further time as the Commissioners allow, they
need not proceed further on the
application.
(5) The
Commissioners for Her Majesty’s Revenue and Customs shall notify
their decision to the applicant within30 days of receiving the
application under subsection (1)(b) or, if they give notice under
subsection (3) above, within 30 days of the notice being complied
with.
(6) If the Commissioners
for Her Majesty’s Revenue and Customs notify the applicant that
they are not satisfied as mentioned in subsection (1)(b) above or do
not notifytheir decision to the applicant within the time
required by subsection (3) above, the applicant may within 30 days of
the notification of that time require the Commissioners to transmit the
application, together with any notice given and further particulars
furnished under subsection (3) above, to the Special Commissioners; and
in that event any notification by the Special Commissioners shall have
effect for the purposes of subsection (1) above as if it were a
notification by the
Commissioners.
(7) If any
particulars furnished under this section do not fully and accurately
disclose all facts and considerations material for the decision of the
Commissioners for Her Majesty’s Revenue and Customs or the
Special Commissioners, any resulting notification that the
Commissioners or Special Commissioners are satisfied as mentioned in
subsection (1)(b) above shall be
void.
(8) The Commissioners for
Her Majesty’s Revenue and Customs may by regulations provide
that any activities of a specified description shall be precluded from
being qualifying arrangements for the purpose of this section, where
specified means specified in the
regulations.
(9) The
regulations under subsection (8) above
may—
(a) make provision
having retrospective
effect,
(b) contain incidental,
supplemental, consequential and transitional provisions and savings,
and
(c) make different
provisions for different cases or
purposes.
(10) No regulations
may be made under this section unless a draft of them has been laid
before and approved by a resolution of the House of
Commons.’.
Mrs.
Villiers:
I can be very brief on amendmentNo.
64.
The amendments put
into practice the entirely responsible approach that the Opposition has
taken on sideways loss relief to ensure that the dire consequences
predicted by the Chief Secretary would not happen. The conditions set
out in the amendments would enable abusive schemes to be shut down
while ensuring that genuine commercial enterprise could continue.
Critical to our proposal is that schemes and transactions should
qualify for sideways relief only where the venture involves genuine
financial risk. Tax-motivated schemes generally do not involve that
risk, so this is a key
divider.
Proposed
section 103E would add to the safeguards by providing that an
arrangement would not qualify for sideways relief where the sole or
main expected benefit was the reduction of tax. There is even a further
safeguard in that only HMRC-approved schemes could obtain relief from
the package that the Opposition is putting forward, which gives HMRC
ample scope to crack down on those ingenious avoiders that the Chief
Secretary is so worried about. Proposed subsection (8) would provide
yet more protection in that it would allow HMRC to prohibit the use of
sideways relief in sectors in which there are significant concerns.
Such concerns have arisen in areas such as property development, hotels
and residential care homes, which are not generally associated with the
high-risk sectors that we have been
discussing.
Lastly,
I come to proposed subsection (9), which I was not sure whether to
include, because it is quite draconian. It would give the Treasury the
power to adopt regulations with retrospective effect to close down
abusive and problematic schemes. Retrospective legislation must always
be approached with extreme care and should be used only when there are
genuinely special circumstances to justify that approach. In this case,
I would use it to give the Chief Secretary the reassurance that he
needs. I regret that the Government do not accept the
Opposition’s entirely cautious and responsible approach, which
would help to save the high-risk enterprises that are, sadly, being put
in jeopardy by the
schedule.
Mr.
Timms:
I certainly agree that what the
hon. Lady proposes is draconian. The amendment would ensure that in
every case in which an individual partner proposed to commence business
in a trading partnership or, indeed, enter into an arrangement in
connection with the business, that partner would have to seek advance
clearance from Revenue and Customs. If HMRC was not satisfied or did
not notify its decision within 30 days, the case would be referred to
the special commissioner.
That would mean that if an
individual partner did not seek advance clearance from HMRC before
starting a partnership, they would never be able to claim sideways loss
relief or capital gains relief for any losses that they made as a
limited partner or non-active partner in that partnership. I simply
cannot believe that
the hon. Lady really intends to impose such an enormous bureaucratic
burden on potential investors. It would simply be unworkable. It is also worth considering
who would want to seek a clearance and why. The avoidance arrangements
that are caught by the measure are not entered into accidentally.
People who use a scheme to create a contrived loss will know that a
main purpose of the scheme is to create a loss and gain a tax
advantage. It could certainly be expected that avoiders would, as they
have frequently done, attempt to dress up avoidance schemes as
commercial transactions and would seek clearance through the procedure
that the hon. Lady proposes before investing in a scheme.
Conversely, a
genuine investor would not anticipate making a loss, or, at least, the
existence of sideways loss relief would not be the decisive factor in
the investment, so they would have no reason to seek pre-transaction
clearance. It is, therefore, clear that a clearance regime would not be
appropriate. It would not provide any benefit to the non-avoiding
population, but would impose disproportionate and unworkable
administrative burdens on them. I hope that with that explanation the
hon. Lady will withdraw the amendment. If not, I ask my hon. Friends to
oppose
it.
Mrs.
Villiers:
I shall not press the amendment, as the
Committee has had ample opportunity to vote on this issue already. I
beg to ask leave to withdraw the
amendment.
Amendment,
by leave,
withdrawn.
Question
put, That this schedule be the Fourth schedule to the
Bill.
The
Committee divided: Ayes 18, Noes
6.
Division
No.
6
]
Question
accordingly agreed to.
Schedule 4 agreed
to.
Further
consideration adjourned.—[Kevin
Brennan.]
Adjourned
accordingly twenty-eight minutes toEight o’clock till
Thursday 17 May at Nine
o’clock.
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