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Session 2006 - 07 Publications on the internet General Committee Debates Finance Bill |
Finance Bill |
The Committee consisted of the following Members:David
Doig, Hannah Weston, Committee
Clerks
†
attended the Committee
Public Bill CommitteeThursday 17 May 2007(Morning)[Mr. Eric Illsley in the Chair]Finance Bill(Except clauses 1,3,7,8,12,20,21,25,67 and 81 to 84, schedules 1, 18, 22 and 23, and new clauses relating to microgeneration)Clause 27Extension
of restrictions on allowable capital
losses
9
am
Mr.
Mark Hoban (Fareham) (Con): I beg to move amendment No.
31, in
clause 27, page 17, line 28, at
end insert—
‘(A1) The
purpose of this section is that relief for allowable losses shall not
be granted where a person deliberately and knowingly enters into
complex arrangements intended to avoid liability to capital gains tax,
income tax or corporation
tax.
(A2) This section shall be
construed purposively in line with the principles set out in the
statement of principles issued by Her Majesty’s Revenue and
Customs on 6 December
2006.’.
I
welcome you to the Chair, Mr. Illsley. I also welcome the
return of the hon. Member for Wolverhampton, South-West, who was sadly
missing on Tuesday. I know of his keen interest in all matters
environmental, so he would have enjoyed the debate that we had about
zero-carbon homes. Perhaps he has already caught up with
it.
The clause
introduces a targeted anti-avoidance regime for capital losses, and it
might assist the Committee if I make some general remarks about it to
give some context to the amendment and the other amendments to the
clause. It is fair to say, from conversations and from representations
that have been made to members of the Committee by outside bodies, that
no one questions the fact that capital losses are being used as part of
tax avoidance schemes, so we do not oppose the clause in principle.
However, there are issues about its operation to which it is important
to draw the Committee’s attention and on which it is important
for Ministers to
comment.
The clause is
relatively short, just a page in length, but its provisions are broad
and could capture a large number of fairly standard transactions.
Proposednew section 16A(1), “Restrictions on allowable
losses”,
states:
“For
the purposes of this Act, ‘allowable loss’ does not
include a loss accruing to a person
if—
(a)
it accrues to the person directly or indirectly in consequence of, or
otherwise in connection with, any arrangements,
and
(b) the
main purpose, or one of the main purposes, of the arrangements is to
secure a tax advantage.”
That is broadly drafted and could capture
a large number of transactions. One transaction that the Institute of
Chartered Accountants believes it could capture is a fairly
straightforward tax planning scheme whereby if someone has a
significant capital gain on, say, a property, they could decide to
realise a loss on shares and that capital loss could be offset against
the gain, reducing the tax
payable.
Such schemes
could be caught by the clause and we know from the guidance notes that
accompany it that they will not be. However, the casual reader of the
Bill would not appreciate that there are guidance notes underpinning
the clause. There is no reference to them in the clause, but there are
10 pages of guidance setting out 14 examples that will help taxpayers
steer their way through the breadth of the clause. It is inappropriate
for guidance to be used as a substitute for effective primary or
secondary
legislation.
I shall
set out the concerns of the Chartered Institute of Taxation as they
were expressed to Her Majesty’s Revenue and Customs. The
institute
said:
“We are
unhappy that our concerns as to the scope of the legislation have been
dismissed”.
That is in
response to a consultation that took place at the time of the
pre-Budget
report.
Mr.
Hoban:
But in the eyes of the CIOT the concerns were none
the less dismissed. The CIOT continued that it was also unhappy
with
“the assertion that
the position can be clarified through guidance. There is no reference
in the legislation to either the statement of principle or the guidance
and, therefore, no guarantee that the legislation will be interpreted
in this context. Furthermore, guidance has no statutory authority and
can be changed without consulting Parliament. A taxpayer can only
challenge it through judicial review. As such, the enactment of the
legislation as it stands represents an unacceptable delegation to HMRC
of the power of the
legislative.”
Its budget
briefing amplified its concern,
stating:
“We
consider that guidance notes are a poor substitute for proper
legislation, especially where the guidance notes correct flaws in the
legislation. We appreciate that some guidance notes will always be
necessary in order to avoid immense Finance
Acts.”
I suppose that
some people might appreciate less immense Finance Acts. The briefing
goes on to
state:
“Such
guidance should tie in and complement the legislation, rather than
‘untax’
it.”
Therefore, we have a
set of guidance notes that narrows the scope of the legislation as it
is drafted. However, would it not be better to have more tightly
defined legislation that gives taxpayers greater certainty about what
falls within and without the scope of the clause?
In its representations, the
Institute of Chartered Accountants states:
“Taxpayers should be
taxed on the basis of clear legislation.”
It continues:
“In the absence of a
clearance procedure, it is not right to produce deficient legislation
that appears to catch many more transactions than intended, on the
basis that such transactions can then be taken out by way of HMRC
guidance. HMRC guidance has no statutory authority and cannot be taken
into consideration in court.”
That is bad enough, but given that
guidance notes are so important, it would be helpful if they were clear
and reflected some principles. Again, however, the CIOT expresses
concern about the clarity of the notes. In one of the examples in the
revised guidance notes, the CIOT wrote to HMRC saying
that
“we agree that these
situations should not be caught by the legislation, but we cannot see
that the conclusion that they are not caught is justified from an
analysis of the legislation, or indeed, that this view is constantly
reflected in some of the later examples in the revised
guidance.”
The letter
goes on to make the
statement:
“The
guidance lacks a consistent logic that can be applied to determine when
the legislation applies and when it does not. There appears to be an
unwritten test, whereby a situation is caught if it crosses the
boundary between what is considered by HMRC to be acceptable and
unacceptable behaviour. This causes great uncertainty for the
taxpayers.”
At
a later stage, I will quote from the principles underpinning the
guidance to highlight why the CIOT might make such comments about the
uncertainty and lack of clarity in the guidance. With that in mind, I
have tabled four groups of amendments to increase the protection that
is available to taxpayers and to give greater clarity to the Bill. That
will give taxpayers and advisers a much clearer idea about the
transactions that are caught both inside and outside the scope of those
rules.
Amendment No.
31 would insert in clause 27 a new section 16A. It states, in line with
the approach adopted by the tax law rewrite project, that there should
be an introduction to the new legislation at the start of the clause to
set out the purpose and rationale behind the changes. The amendment
seeks to set out that purpose in subsection(1) and make explicit
reference in subsection(2) to the principles that were set out by the
HMRC at the time of the pre-Budget report.
We
would like all the amendments to be accepted by the Government. I do
not know whether the Economic Secretary or the Finance Secretary will
reply. The Economic Secretary may be full of generosity in the light of
last night’s news and accept all of the amendments with alacrity
and without any questioning. It is important to say that all the
amendments in the different groups should form part of the package to
give much clearer signals to taxpayers.
If Amendment No. 31 is accepted
in isolation, it would be contradict the rather sweeping terms of the
rest of the clause. It may well be of some assistance to ensure that
courts and tribunals interpret legislation purposively, thus limiting
the full rigour of the legislation as it currently applies. Amendment
No. 31 would narrow the interpretation of the clause to ensure that
transactions, in which a loss is deliberately usedto offset a
gain—such as in the example I gave earlier—would not be
caught, but transactions that include more aggressive tax planning
schemes would be. I commend the amendments to the
Committee.
Julia
Goldsworthy (Falmouth and Camborne) (LD): I will not go
over what the hon. Gentleman has just been through, but I do not think
that there is any opposition to what the clause tries to achieve, in
targeting the anti-avoidance and capital losses. However, there are
concerns about exactly how widely drawn the clause is and whether it
has sufficiently
captured the differences between the approach of companies and
individuals, and whether it can reflect those differences.
Furthermore, there are
concerns, as the hon. Member for Fareham has said, about exactly how
appropriate it is to contain so much detail in the guidance, especially
if the guidance contradicts much of the substance of the legislation in
trying to exclude specific groups. There are also concerns that,
because the guidance is not in the Bill, it can be changed and it would
not stand up to the test in a court of law.
I think that amendment No. 31
is trying to establish a motive test, which would be very helpful. My
concern is exactly how easy, or impossible, it might be to assess
against that motive. So I can see where the hon. Gentleman is trying to
go with the amendment; I am sympathetic to what he is trying to
achieve. I just have concerns about exactly how the amendment would
make a difference, in terms of trying to establish a motive test. On
that basis, we broadly support the hon. Gentleman, but we would be
interested to hear what the Economic Secretary has to say about this
issue.
Mr.
Brooks Newmark (Braintree) (Con): I am delighted to see
that the hon. Member for Wolverhampton, South-West is here. He will
know, better than I, that there are all sorts of offences connected to
cheating the Revenue, and the boundary between tax avoidance and tax
evasion is at least as permeable as the one between tax planning and
tax avoiding—I was not, of course, casting any aspersions about
the hon. Gentleman.
That being the case, does it
not make sense to have some statement from the Economic Secretary
relating to intent of the clause? If someone is deliberately and
knowingly entering into complex arrangements, it is easier to think
them culpable than if they had stumbled into them. After all, as we all
know, the complexity of the tax code is at a record high. It might even
be said that anyone who interacts with the system at all is entering
into “complex arrangements”.
The
Economic Secretary to the Treasury (Ed Balls):
It is a
pleasure to serve under your chairmanship, Mr. Illsley, and
I thank you for your guidance. I will try to remain perked up, without
my coffee, throughout the debate.
The hon. Member for Fareham has
set the debate on this amendment in the wider context of the clause. So
that we can deal with each of these four groups of amendments in that
context, with your permission, Mr. Illsley, I will respond
by also establishing a wider context at the start of the debate on
amendment No. 31. In part, that is because I hope that we will
then not need to have a clause stand part debate at the end of the
discussion on these groups of amendments. I want to explain why we do
not think that the amendments are necessary or desirable, but I want to
do so in a way that I hope will show that we appreciate the concerns
expressed by hon. Members.
Clause 27 is
a targeted anti-avoidance rule, known as a TAAR, to counter tax
avoidance schemes that make use of contrived capital losses. It builds
on a rule that was introduced last year for companies, by extending
that rule to individuals, trustees and personal representatives,
and it is designed to prevent tax losses through
avoidance schemes that create or use capital losses in ways unintended
by the legislation.
The rule for companies was the
subject of similar concerns to those that have been raised this year
but, a year on from the introduction of the companies legislation, it
is our view that it is working well and as intended. As we work through
the amendments, I hope that we can reassure the Committee that the
concerns that have prompted these amendments have been addressed and
will be addressed by the way in which the legislation will
operate.
9.15
am
As hon. Members
said, the overall objective of the clause is widely supported. The
Institute of Chartered Accountants in England and Wales has
said:
“we support the
Government’s aim of countering the use of artificially created
losses to avoid capital gains
tax.”
Similarly,
the Chartered Institute of Taxation, the Law Society and the Society of
Trust and Estate Practitioners do not disagree with the broad policy
objective. Importantly, there has been extensive consultation on the
draft legislation and the guidance with all the representative bodies.
Indeed, there have been substantial changes since the consultation on
the draft guidance, which began with the pre-Budget report at the end
of last year, and HMRC is working with representative bodies to improve
the guidance
further.
Clause 27
denies tax relief for capital losses where the existence or amount of
the losses has been contrived—in other words, where the taxpayer
has entered into arrangements of which one of the main purposes is to
secure a tax advantage, so that the tax losses that arise do not
reflect economic reality. The key principle set out in the statement
issued by HMRC on 6 December is that relief for capital losses
should be available only where a person has suffered a genuine
commercial loss on a real disposal.
The legislation will apply only
where one of the main purposes of the arrangements is to secure a tax
advantage. It will not apply to genuine economic transactions, so the
vast majority of disposals—a wide range of innocent
transactions—will be unaffected. We need to draw the rule widely
enough to prevent further loss-creation schemes, but as I said, the
rule will apply only to arrangements of which one of the main purposes
is to gain a tax advantage.
I should tell the hon. Member
for Braintree that highly skilled, intelligent people in the City and
our wider financial services community come up with quite complex ways
of trying to gain a tax advantage. It is not our intention to get in
the way of proper tax planning, but when the complexity and ingenuity
of schemes moves from tax planning to tax avoidance, the Government
must respond to protect the taxpayer.
Ed
Balls:
The hon. Gentleman might want to reflect a little
more on the reality of tax policy making before he gives us another of
his lectures on complexity.
Mr.
Newmark:
But would not the Economic Secretary acknowledge
that the tax system that the Government have
created over the past decade has
indeed become very complex and that everybody might therefore fall under
his definition of entering into complex arrangements as they try to
understand it?
Ed
Balls:
I do not think that the hon. Gentleman was
listening to my remarks. Instead, he was just reading out his prepared
brief. The point that I was
making—[
Interruption.
]
Ed
Balls:
The point that I was making is that the global
corporate tax system has become very complex. Many skilled and
ingenious people are coming up with complex ways to avoid tax, and the
Government must counter the resulting complexity. The hon. Gentleman
might want to reflect a little further on that.
There are
four groups of amendments to the clause. The first—amendment No.
31—would apply additional conditions to the anti-avoidance rule
so that it would apply only where a person had deliberately and
knowingly entered into complex arrangements that were intended to avoid
tax liability. The second group of amendments would introduce a new
clearance regime. The third would narrow the scope of the rule by
providing thatit would apply only where, taking the
arrangements as a whole, someone had the single main purpose of
avoiding tax. The final amendment would introduce a de minimis limit.
All the amendments would restrict the scope of the clause and, as I
will argue, they are not necessary. Indeed, we believe that they would
make it harder for us to deal with genuine avoidance and to protect
people engaged in proper tax
planning.
James
Duddridge (Rochford and Southend, East) (Con): Perhaps the
Economic Secretary will explain in a bit more detail what will happen
if an individual makes a large capital gain and owns shares on which
there is a loss, which they decide to sell at some point in the year in
which they made the capital gain, to reduce their overall taxation.
Where would that situation fit under current
legislation?
The clause
already contains a main purpose test, which means that the rule
disallows losses only when the person has entered into arrangements
with the main purpose of securing a tax advantage. The amendment
provides that, in addition to having that main purpose, the person must
have entered into complex arrangements deliberately and knowingly, with
the intention of avoiding liability to tax. The only effect of the
amendment would be to limit the effectiveness of the rule.
The types of
schemes that are caught by the clause do not happen by accident; they
are the result of contrived circumstances in which transactions are
undertaken in a particular way, primarily to achieve a desired tax
effect, rather than for a genuine commercial or economic purpose. The
danger of adding extra conditions such as “deliberately and
knowingly” is that a person who wishes to avoid tax may claim to
have acted unintentionally or to have followed advice without being
aware of the consequences. Similarly, introducing the condition that
the anti-avoidance rule can apply only where the
arrangements into which the person has entered are complex can lead only
to uncertainty for taxpayers and agents. More fundamentally, if the
arrangements have a main purpose of avoiding tax, it is entirely right
that they should be caught by the rule, regardless of their
complexity.
The addition
to the clause’s comprehensive, familiar definition of tax
advantage of the uncertain words “intended to avoid
liability” would lead to confusion and the creation of a
loophole in the rule, and would add to the complexity that we always
seek to avoid. It is essential that we use the definition of tax
advantage that is used in the long-standing rules against avoidance of
tax on income, which has regular and common currency, and which was
recently reintroduced without opposition in the Income Tax Act 2007.
That definition was also used without opposition in the
Finance Act 2006, in the rules against avoidance by companies
using capital losses.
The meaning of “tax
advantage” is set out in the clause; it is based on existing
anti-avoidance rules. The effect of modifying that well-understood
wording by introducing avoidance of liability as a condition of the
application of the TAAR would be that schemes that generate a repayment
of tax, rather than a reduction in tax liability, would not be stopped.
Such a loophole could be exploited by existing tax avoidance schemes
that have been seen by
HMRC.
The amendment
also proposes to include a new statement that the clause is to
be
“construed
purposively in line with the statement ofprinciples issued by
Her Majesty’s Revenue and Customs on6 December
2006”,
which is
unnecessary, particularly as all legislation is now interpreted
purposively. As I have said, the TAAR arrangements do not affect normal
tax planning. HMRC guidance makes it clear that the rules of the TAAR
will affect only contrived arrangements that attempt artificially to
realise capital losses to gain a tax advantage. Normal tax planning,
such as the decision to sell shares before the gain becomes greater
than the annual exempt amount so that no tax will paid on the gain, is
not affected by the clause.
Although much
tax avoidance involves complex arrangements, it is quite possible to
make non-complex tax-avoiding arrangements. The key question is whether
the main purpose of the arrangements is to avoid tax. If so, it is
right to disallow the losses. In response to the hon. Member for
Rochford and Southend, East, if the pursuit of normal tax
planning—his example was the selling of shares—means that
no tax is paid, that will be acceptable. If, however, the main purpose
is to avoid taxation, and the arrangements are contrived, the
arrangements in the Bill will apply.
In summary, amendment No. 31
would hinder the clause. The amendment is unnecessary, it would not
provide additional certainty for taxpayers, and we fear that it would
introduce new loopholes and complexity to the tax system. However, I
can reassure Committee members that consultations have been detailed
and that they are ongoing. I hope that the industry will take
reassurance from the example of the introduction of such methods for
companies and capital losses one year ago, and recognise that if they
are implemented properly, we can avoid the concerns that hon. Members
have raised.
Rob
Marris (Wolverhampton, South-West) (Lab): It is a pleasure
to be back from Lithuania, and I note that, despite my absence, on
Tuesday evening the Committee sat until 7.30 pm. Clearly, the extended
sittings are nothing to do with my presence or absence.
I should like a
little latitude on amendment No. 31, because it must be put in context.
I am a member of the Law Society of England and Wales, and in its brief
it says that while supporting the principle behind the
legislation—namely, to deny the use of artificial or contrived
capital losses—the Law Society, together with the Chartered
Institute of Taxation, the Society of Trust and Estate Practitioners
and the Institute of Chartered Accountants in England and Wales tax
faculty, have expressed significant concerns that the drafting of
proposed new section 16A does not meet this policy
objective.
The
Chartered Institute of Taxation says in paragraph 9.3 of its brief that
the guidance notes need to be clarified since the examples conflict
with each other and, for the reasons outlined in the paper, it also
considers that the legislation is flawed. As it set out in its previous
paper, it thinks that some of the examples in the guidance should be
corrected.
I ask my
hon. Friend to look again at the guidance. He addressed some of the
issues in his previous remarks, but when such august and knowledgeable
bodies say, “We like the idea, but we are not sure that you have
got it right in the legislation and/or the guidance,” it behoves
the Treasury to look again, in particular at the guidance, to ensure
that it is not contradictory, that it embodies examples that do not
conflict, and that it embodies that which the Government seek to
do.
Certainly,
Labour Members wish to prevent tax avoidance by the rich, which is what
the provision is about when we get down to it. There is nothing wrong
with being well-to-do, but I notice that most Conservative amendments
thus far have been about capital gains and capital losses. The vast
majority of my constituents—albeit in a middle-class
constituency—do not juggle capital gains and losses all the
time. It is important to some people, but not to the vast majority of
people.
In terms of
the purposeful or purposive—whatever adjective my hon. Friend
used—interpretation that is put on legislation, amendment No. 31
is worth considering, but I am not convinced by its wording,
particularly by the adjective “complex”, which as he
pointed out is somewhat vague. However, the targeted anti-avoidance
rule for capital losses uses similar wording, so it appears in one
measure, but not in the Bill. I urge my hon. Friend to reconsider the
Bill to ensure that we do not have contradictory
methods.
Mr.
Hoban:
We have had a brief but useful debate, and I
welcome many of the remarks that the Economic Secretary made,
particularly those about the consultation being ongoing. It is
important that when the guidance notes are finalised, they give clear,
logical and consistent guidance to practitioners and advisers about
what falls within and without the scope of the clause. The Economic
Secretary’s own remarks indicated the need for
clarity.
9.30
am
My
hon. Friend the Member for Rochford and Southend, East used the example
of someone who deliberately
realises a loss on shares that they hold to offset a gain on another
asset. That could be seen as being contrived, because they have
triggered a loss to offset a gain, but the guidance notes say that such
a transaction is part of normal tax planning and is acceptable. That is
part of the problem with the clause. How does one define what is within
and without it? The guidance notes are important in helping one to do
that, but I would be much happier if clause 27 were much more tightly
worded and we will discuss detailed amendments on that point. The
Economic Secretary used the words “contrived” and
“economic loss”, but they do not feature in the Bill,
which makes it more difficult for people to understand the scope of the
measures.
On the
comments of the hon. Member for Falmouth and Camborne, I agree that the
amendment is not perfect. That is why I said that it should be seen in
the context of other amendments that we will discuss later. It would be
better if the amendments were agreed as a package rather than accepted
by the Government on a piecemeal basis. However, there is no indication
that the Economic Secretary will accept any of our
amendments.
The
hon. Member for Wolverhampton, South-West recognised some of the
comments made by professional bodies about the scope of the clause. I
agree with him that many of the provisions are targeted at those who
can afford expensive tax planning schemes, but many people who have
modest gains or losses may well wonder whether they are caught by the
measures. Perhaps that is one reason why an amendment that we will
discuss later seeks to introduce a de minimis rule: to separate people
with relatively small losses from those with large losses.
I do not propose to press the
amendment to a Division. I am reassured by the Economic
Secretary’s remarks about the ongoing consultation, and I know
that he will live up to his commitment. I look forward to receiving
some sense from various institutes that the process is going well and
that it will achieve the desired outcome for the Revenue, taxpayers and
their advisers.
Ed
Balls:
I would like briefly to reassure my hon. Friend the
Member for Wolverhampton, South-West and Opposition Members. Since the
pre-Budget report, there has been consultation on the draft guidance,
and extended guidance was published on Budget day. Consultation on the
guidance is ongoing and, after the Bill is enacted, we will publish
final guidance that will reflect the results of the consultation, the
views expressed by representative bodies and our debates. We want to
provide clarity and reassurance on the record where we can.
I will give
two examples to clarify our intentions and to further reassure
Opposition Members. A straightforward example of a loss that would not
be affected by this measure is a simple arm’s length sale of
FTSE 100 shares that have genuinely gone down in value. The fact that
someone who realises such a loss might be able to set it off against
gains that he or she has made on other investments in the year would
not mean that the loss would be disallowed by this measure. Similarly,
if a husband transfers to his wife, on a no-profit, no-loss basis,
shares that are standing at a loss, it is perfectly acceptable for her
to sell those shares and set the loss against a gain that she intends
to realise on some other
asset. Those are examples of normal tax planning that would not be
captured by the measures.
In the real world of tax policy
making and, with respect to the hon. Member for Braintree, in the real
world of business, the best way to provide clarity is not always to
make legislation more complex or restrictive. Indeed, adding such
complexity can undermine the best efforts of both sides to find a
sensible way forward. That is why consultation on guidance, rather than
restriction and legislation, can often be a better was to proceed in
tax policy making. I urge him to reflect on that point a little
further.
Amendment, by leave,
withdrawn.
Mr.
Hoban:
I beg to move amendment No. 34, in
clause 27, page 17, line 29, at
beginning insert ‘Subject to section 16B
below,’.
The
Chairman:
With this it will be convenientto
discuss the following amendments: No. 36, in
clause 27, page 17, line 34, at
end insert ‘; and
(c) the
arrangements, taken as a whole, are not genuine commercial
arrangements.’.
No.
35, in
clause 27, page 18, line 12, at
end insert—
‘16B Clearance
procedure
(1) Section 16A shall
not affect the operation of section 135 or 136 in any case
where, before the issue is made, the Board have, on the application of
either company mentioned in section 137(1), notified the
Company that the Board are satisfied that the exchange, reconstruction
or amalgamation will be effected for bona fide commercial reasons and
will not formpart of any such scheme or arrangements as are
mentioned in section
137(1).
(2) Any application
under subsection (1) above shall be in writing and shall contain
particulars of the operations that are to be effected; and the Board
may, within 30 days of the receipt of the application or of any further
particulars previously required under this subsection, by notice
require the applicant to furnish further particulars for the purpose of
enabling the Board to make their decision; and if any such notice is
not complied with within 30 days or such longer period as the Board may
allow, the Board need not proceed further on the
application.
(3) The Board
shall notify their decision to the applicant within 30 days of
receiving the application or, if they give a notice under subsection
(2) above, within 30 days of the notice being complied
with.
(4) If the Board notify
the applicant that they are not satisfied as mentioned in subsection
(1) above or do not notify their decision to the applicant within the
time required by subsection (3) above, the applicant may within 30 days
of the notification or of that time require the Board to transmit the
application, together with any notice given and further particulars
furnished under subsection (2) 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 Board.
(5)
If any particulars furnished under this section do not fully and
accurately disclose all facts and considerations material for the
decision of the Board or the Special Commissioners, any resulting
notification that the Board or Commissioners are satisfied as mentioned
in subsection (1) above shall be
void.’.
Mr.
Hoban:
I want to deal with amendments Nos. 34 and 35
together. The main thrust of amendment No. 35 is to introduce a
clearance procedure into the clause.
Given the breadth of the clause, such a procedure would give taxpayers
greater confidence; they would be able to have some certainty about the
treatment of a particular transaction to ensure that it is not being
caught under the
clause.
The Economic
Secretary referred to this as a targeted anti-avoidance rule during his
remarks on the previous group of amendments. Some might argue that it
is not particularly targeted and that it is more akin to a general
anti-avoidance rule—GAAR. Often when such rules have been
introduced in other jurisdictions, the necessary corollary of
introducing a GAAR is establishing effective clearance procedures,
allowing taxpayers the opportunity to establish with certainty whether
or not arrangements are caught. That allows them to assess their own
tax position correctly.
The Economic Secretary might
argue that the guidance notes will give the taxpayer sufficient
information to enable them to determine the right course of action. The
final version to be published once the Bill is enacted might well give
the degree of clarity that means that they do not need a clearance
procedure. However, I shall cite the CIOT’s response to example
10 in the revised guidance published at the time of the Budget in order
to give a flavour of where the uncertainty lies. The response
states:
“The
conclusion that the transaction is not being caught does not appear
consistent with the explanation of where the legislation applies, given
in paragraphs 7 to 14 of the revised guidance...We would stress
that we agree with the conclusion reached in example 10 of the revised
guidance that loss should be allowable as a matter of
principle...but on the basis of the actual legislation suggest it
is not and that the revised guidance is unclear, as the explanatory
paragraphs do not lead one to the conclusion set down in example
10.”
Example 10 happens
to relate to where shares are sold to fund investment in an enterprise
investment scheme when there is an income tax relief to be gained from
such investment.
The
fact that the CIOT can see why a transaction should not be caught but
that it is not clear from the guidance indicates the need for a
clearance procedure. In its representations, the Institute of Chartered
Accountants in England and Wales said:
“In the absence of a
clearance procedure, it is not right to produce deficient legislation
that appears to catch many more transactions than intended, on the
basis that such transactions can then be taken out by way of HMRC
guidance.”
I
think that HMRC and the Treasury recognise the complexity, which is why
the Government have partly conceded the point by introducing a
post-transaction clearance procedure for trustees in the final year of
settlement. In a way, by producing that clearance procedure, they have
conceded part of the argument that these rules are complex and that
trustees might find it difficult to navigate their way through them.
Does that procedure apply to the tax year 2006-07?
On amendment No. 36, the
statement of principle and the guidelines indicate that the legislation
is not intended to apply to genuine commercial transactions. The
amendment seeks to ensure that that objective is met in the Bill. The
revised guidance
states:
“This
legislation will not apply where there is a genuine commercial
transaction that gives rise to a real...loss as a result of a real
commercial disposal. In these circumstances there will be no
arrangements with a...purpose of securing a tax
advantage.”
I suppose that, in a way, that argument
underpins the Economic Secretary’s response to the example
quoted in the previous debate about shares being sold to offset a gain
on another disposal, and that there must be an actual economic loss
from a genuine commercial
transaction.
Amendment
No. 36 would ensure that taxpayers could see an important principle in
the Bill rather than having to rely on guidance notes, which, as I said
in the earlier debate, have no status in a court of
law.
Julia
Goldsworthy:
Again, I shall not repeat the hon.
Gentleman’s remarks, but I want to emphasise that this is
perceived to be more of a mini general anti-avoidance rule rather than
a targeted ruling, precisely because it sets out broad definitions and
then seeks in the guidance to exclude certain transactions. If it were
targeted, one would imagine that it would be the other way round and
that the Bill would state who the intended target is to
be.
The hon. Gentleman
raised the fact that there is a post-transaction clearance system for
trustees, but I have received representations from organisations such
as the Institute of Chartered Accountants, which, because it sees it as
a mini general anti-avoidance rule, is keen to have a pre-clearance
system as a way of establishing certainty about whether it falls into
the circumstances outlined in the
clause.
Following
on from the Economic Secretary’s remarks about amendment No. 31,
I, too, was reassured by what he said about the guidance. The problem
is that we will not have an opportunity in this place to see the impact
that the consultation discussions will have had, so we will end up with
guidance without having had the opportunity of discussing how far it
addresses our concerns. Those concerns about trying to set out the
exclusions in the guidance rather than trying to define tightly who is
targeted in the Bill remain. I sympathise with many of the concerns
that this group of amendments
raises.
Ed
Balls:
Before explaining why we do not propose to accept
the amendments, may I say that the representative bodies’
detailed input into the consultation and into briefing Committee
members, and the substantive and detailed way in which this debate is
being conducted are very helpful? I appreciate that because it gives us
the opportunity to respond to some of the concerns on the
record.
There is a
balance to be struck between clarity in primary legislation and
flexibility to respond in a timely way to the concerns of the industry
and practitioners. We must strike the right balance between making our
objective clear in legislation and allowing the guidance to operate
outside the detail of primary legislation. We are trying to get that
balance right. I am happy to ensure that all hon. Members are sent a
copy of the final guidance so that they can reflect on it. We are not
in any way seeking to prevent that debate in Committee, but we need to
be flexible in the operation of the tax system.
In response
to the hon. Lady, I point out that the operation on the
company’s side of this approach has been successful so far. We
are not attempting to introduce a general anti-avoidance measure. It is
targeted on contrived avoidance, which is very much the context of
these discussions.
9.45
am
Amendments Nos.
34 and 35, tabled by the hon. Member for Fareham, seek to introduce a
clearance procedure. The Government fear that that would lead to
greater compliance cost and bureaucracy, but that it would do little to
protect the majority of taxpayers, who in any case will not be affected
by clause 27. The amendments are unnecessary because the clause
contains a main purpose test, which means that it will apply only when
a person has entered into arrangements that have the main purpose of
securing a tax advantage, which is to say tax avoidance. Such schemes
do not happen by accident. They are the result of contrived
circumstances in which transactions are undertaken or carried out
primarily to achieve a desired tax effect, as opposed to a genuine
economic purpose, as the hon. Gentleman acknowledged.
The equivalent rule for
companies, which was introduced last year, does not have a clearance
procedure. HMRC has had no indication that companies are unsure about
the operation of the rule. As I explained, the consultation is ongoing.
Indeed, having consulted HMRC officials, the Government will be able to
produce the final, detailed guidance before Report. Remaining concerns
about the measure can be raised then. The consultations are yet more
advanced than I anticipated in my earlier remarks.
The clearance system is
intended primarily to benefit taxpayers, but it is important to bear in
mind that the rule operates by reference to the main purpose of
arrangements. That main purpose may be inferred from the actions of the
parties to the arrangements, but it is best understood by the person
making the arrangements. It is therefore not necessary to set up a
clearance regime when the person best placed to judge whether the rule
applies is the person who makes a clearance
application.
Furthermore,
it is likely that taxpayers and their advisers would end up using a
formal clearance procedure when it was clear that there was no need to
do so. Lawyers and accountants would be concerned that their
professional indemnity insurance would be at risk if they failed to use
an available statutory clearance procedure. It is highly likely that
they would make applications for clearance in all cases in which they
were advising on transactions that might result in capital losses, even
when it was clear that there was no tax avoidance purpose and despite
clear HMRC guidance. The only effect of the measure would be that
thousands of wasteful applications for clearance would be made, all of
which would increase costs to the taxpayer, administrative burdens for
HMRC and complexity. There could be delays and inflexibility, which is
not what anybody intends.
If, however, taxpayers are
unsure how to interpret the wording of the new rule, they may, under
the code of practice 10 procedure, approach HMRC. The experience of the
equivalent law for companies suggests that there will be little need
for the measure suggested in the amendment. The HMRC
guidanceis intended to provide the clarity and certainty
thatwe seek.
The hon. Member for Fareham
raised the issue of the clearance procedure for trusts. The procedure
will simply extend an existing informal procedure that gives certainty
to trustees to enable them to wind up a trust
and to distribute its assets to beneficiaries. That is HMRC’s way
of ensuring that no further inquiries will be made into the
trust’s tax affairs unless there is evidence that reforms are
incomplete or incorrect. In answer to his question, I reassure him that
those arrangements will apply in 2006-07.
The hon. Gentleman also raised
the question of the guidance being concessionary. The guidance is not
concessionary, as alleged by the CIOT. It explains things in a way that
is easier for someone who is not a lawyer to understand that the
targeted anti-avoidance rule will only affect losses arising from
arrangements whose main purpose is to secure a tax advantage. The
Government accept that there is scope to improve the guidance. We will
be working with the CIOT and other bodies to improve the guidance
before Report.
Amendment No.
36 would add to the main purpose test the requirement that the rule can
only apply only when the arrangements taken as a whole are not genuine
commercial transactions. The Government believe that such a measure
would limit the effectiveness of the anti-avoidance rule. The risk is
that even though particular steps in a series of arrangements might be
objectionable and artificial, the persons involved could point to an
overall commercial objective for the arrangements, and seek to escape
the application of the rule. As I have said, the new rule would apply
only when one of the main purposes of the arrangements was to secure
tax advantage, and would not apply to genuine economic transactions. If
the main purpose of arrangements is to avoid tax, it is right that they
should be caught, regardless of whether the arrangements as a whole
also achieve some other commercial end. Amendment No. 36 would
undermine that principle.
Mr.
Hoban:
I thank the Economic Secretary for his full
response to amendments Nos. 34 and 36. As to his remarks about the
clarity of the guidance, it is only when the final guidance is
published that we shall know how clear it is and whether in that
context a clearance procedure is needed. I shall, on the next group of
amendments, quote from the revised guidance from the time of the
Budget, suggesting the lack of current clarity on the issue of the main
purpose.
The Economic
Secretary said that the guidance is not concessionary. This may not be
the appropriate forum, but I should quite like him, given the comments
of the CIOT, to explain why the CIOT and HMRC have very different views
on the status of guidance. Guidance is an issue that has cropped up
before in these debates. Last year, we debated the withdrawal of cash
lump sums from pension funds; the clause was broad and people were
untaxed as a consequence of guidance. It would be helpful to understand
why he and professional bodies differ in their opinion of the status of
the guidance.
I beg
to ask leave to withdraw the amendment.
Amendment, by leave,
withdrawn.
Mr.
Hoban:
I beg to move amendment No. 30, in
clause 27, page 17, line 33, leave
out ‘, or one of the main
purposes,’.
The
Chairman:
With this it will be convenientto
discuss the following amendments: No. 29, in
clause 27, page 17, line 34, after
‘arrangements’, insert ‘taken as a
whole’.
No. 27, in
clause 27, page 17, line 34, leave
out ‘secure a tax advantage’ and insert
‘avoid a liability to capital
gains tax, corporation tax or income
tax’.
No. 32,
in
clause 27, page 17, line 34, at
end insert ‘; and
(c) the
arrangements are not prescribed
arrangements.’.
No.
26, in
clause 27, page 17, line 38, leave
out from ‘enforceable),’ to end of line 7 on page
18.
No. 33, in
clause 27, page 17, line 38, leave
out ‘and’ and
insert—
‘ “prescribed”
means set out in regulations made by the Commissioners for Her
Majesty’s Revenue and
Customs.’.
No.
28, in
clause 27, page 18, line 11, leave
out ‘tax advantage is secured for’ and insert
‘avoidance of liability to
taxation relates
to’.
Mr.
Hoban:
I suspect that the Economic Secretary will, in this
debate, pray in aid the arguments that he has used
previously—that the guidance will be clarified. However, it is
worth highlighting some areas of concern.
A quotation
from the guidance may suggest the possible lack of clarity for
taxpayers in assessing the main purpose. The Economic Secretary said in
his remarks on the previous group of amendments that the person
conducting a transaction should know its purpose, and that the guidance
should help. Paragraph 12 of the guidance states
that
“the existence of a
tax advantage, such as obtaining a deduction for tax purposes, is not
enough in itself to show that the arrangements have a main purpose of
obtaining a tax
advantage.”
Paragraph 13
gives three different examples, suggesting the complexity of the
issue:
“For
instance, where there is evidence that a person considered two ways to
achieve a commercial objective and chose on commercial grounds to
pursue one of them, the fact that there was a beneficial difference in
tax treatment for the chosen route would not meet the main purpose
test”.
I think that that
is very clear. It goes
on:
“Where the
potential tax treatment was a factor in choosing between alternative
arrangements, then it would still be necessary that securing a tax
advantage was a main purpose to the arrangements. There may be
situations where the tax advantage secured through undertaking one
arrangement rather than another is so significant that this indicates
that achieving a tax advantage was a main purpose. This is unlikely to
be the case where the arrangements chosen do not involve additional,
complex or costly steps included solely to secure or enhance a tax
advantage.”
As
the Economic Secretary suggested in discussing earlier amendments,
there could be very simple schemes that would give rise to tax
advantage, so the use of the word “complex” is perhaps
not helpful in the context. It shows a grey area when taxpayers would
have to make judgment in the absence of clearance procedure about
whether their transactions falls into that category and what weight
should be given in their thought processes to the amount of tax
advantage to be gained from choosing to structure one or another route.
I am not sure that such a decision is
straightforward.
The
third example is the polar opposite of the first example and concerns a
person who has entered a marketed tax avoidance scheme. That would be
taken
as an indicator that securing a tax advantage was the main purpose of
the arrangements. I can understand that and see exactly where the main
purpose test was satisfied. I can see why it was not satisfied in the
first example when the tax difference happens to be a by-product of the
choice of structuring. However, it is when the tax difference starts to
become more significant that the grey area appears and the fact that
arrangements might be complex does not necessarily mean that there is
an issue. There are some simple tax avoidance
schemes.
Rob
Marris:
The hon. Gentleman referred twice to
complex versus simple tax avoidance schemes. Why did he not include the
word “complex” in amendment No.
31?
Mr.
Hoban:
One of the benefits of our proceedings is the
learning process. Matters are scrutinised and we listen carefully to
the Economic Secretary who puts forward some eloquent
arguments.
Mr.
Hoban:
The Financial Secretary says that the Economic
Secretary always does. I am not sure that that is always the case, and
he knows that. Some tax avoidance arrangements could be simple, but why
in paragraph 13 was “complex” used, given that it was a
good argument for not accepting my
amendment.
Mr.
Hoban:
However, I shall not go into the realms of
consistency and inconsistency although the hon. Member for
Wolverhampton, South-West might be about to do
so.
Rob
Marris:
The hon. Gentleman seems to be strongly implying
to the Committee that he was convinced by what was said about
simplicity and complexity, but he seems to be reading from a script
that was typed prior to this
sitting.
Mr.
Hoban:
Actually, I am reading from the HMRC guidance that
was published on 21 March, so by necessity it was typed before
today’s sitting. I am surprised that the hon. Gentleman does not
have a copy of it.
I
have dealt with the complexity of the issue and I am sure that the
revised guidance will shine new and fresh light on the matter. Perhaps
there will be a new paragraph 13. It might be being typed as we speak
and reflect more carefully on how we distinguish between complexity and
simplicity. There is a spectrum of arrangements from a relatively
straight forward tax planning matter, which we established earlier was
acceptable, to the marketed tax schemes, which are not. If we are
putting the onus on taxpayers to work their way through the guidance
note, as the Economic Secretary suggested, it is important that the
spectrum has more
clarity.
Amendment No.
30 would remove the
phrase
“or one of the
main purposes”.
That reflects part of the problem in
paragraph 13. It may be difficult for someone to determine how
significant a tax benefit might be in moving something from a
subsidiary to a main purpose. It would restrict the scope of clause 27,
as the Economic Secretary said all the amendments would do, but I hope
that it would give greater clarity so that when a tax benefit flows
from a structured route, unless it is really the driving force, it
should not be counted as one of the main
purposes.
Amendment
No. 29 would insert the
phrase
“taken as a
whole”.
It
would ensure that the HMRC would need to look at the transaction scheme
as a whole rather than individual elements. As the legislation stands,
if the purpose of any single transaction in the overall arrangements is
to gain a tax advantage, the legislation applies, even if the
arrangements as a whole have a genuine commercial purpose and give rise
to real disposals. Under the amendment, HMRC would have to demonstrate
that the purpose of the arrangements as a whole was to secure a tax
advantage.
10
am
Amendments Nos.
32 and 33 would introduce safe-harbour provisions to give the
commission of the HMRC the power to set out prescribed—not
proscribed—arrangements. Doing so would highlight areas in which
the use of statutory relief is straightforward and would make it clear
that the use of such relief does not bring the relevant arrangements
within the scope of the clause. HMRC’s guidance gives examples
of the types of relief that would not be affected, and the Minister
referred to no-gain, no-loss transactions between spouses or civil
partners under section 58 of the Taxation of Chargeable Gains
Act 1992. The amendments would therefore give taxpayers much greater
certainty.
Let me
quote the CIOT on this issue. It says:
“We agree that these
situations should not be caught by the legislation, but we cannot see
that the conclusion that they are not caught is justified from an
analysis of the legislation, or indeed, that this view is consistently
reflected in some of the later examples in the revised
guidance.”
Again, that
suggests that setting out prescribed arrangements would help to provide
the clarity that is perhaps lacking in the guidance as currently
drafted, but which might be in a later clause.
The CIOT raised the issue at
the Finance Bill open day, and it is fair to say that it recognises
some of the issues that arise from safe-harbour provisions. It has
said:
“We
appreciate that, at the...Open Day, it was indicated that it would
be difficult for safe harbours to be drawn up in a fair way, and that
they could be used by serious avoiders to ‘leap from one safe
haven to another’. However, we do consider that, because the
legislation is so widely drawn, and especially if no de minimis
threshold is set, consideration should be given to instituting some
safe harbours, to cover very ordinary transactions not intended to be
caught by the proposals.”
In a way, the proposals are an
alternative to the clearance procedure that the Minister rejected under
a previous group of amendments—they are a different way of
achieving the same goal.
Amendments Nos. 26, 27 and 28
would replace the wide definition of tax advantage with the
words
“avoid a liability
to”
taxation. Again, the
amendments should be seen in the context of the subjectivity that I
highlighted in relation to paragraphs 12 and 13 of the revised
guidance, where the relationship between different routes for a
transaction and each one’s tax benefits becomes more difficult.
The amendments would help to focus the clause on decisions that were
deliberately made to avoid tax, such as marketed tax avoidance schemes,
rather than call into question the legitimate structuring of
transactions to minimise
tax.
Mr.
Newmark:
I have several points to make. On amendments Nos.
27 and 28, I am nervous that the guidance notes start talking about a
kind of abstracted, average investor who makes investment decisions
without proper regard to tax advantages. In my book, that is a bad
investor. All investors look for tax advantages, but the majority do
not do seek illegitimate means to avoid paying tax. There is a
fundamental difference.
It would be easy to make the
case that there are tax advantages, for example, to having
children—with five children, I plead guilty as charged. However,
it would be somewhat more difficult to suggest that saving tax was a
good justification for having children. It would not even be the main
the reason—in my case, the TV might have gone on the blink.
[Laughter.]
Mr.
Newmark:
There is now a tax advantage to be had by
building an eco-home, but I doubt that the Economic Secretary is
suggesting that that constitutes avoidance. If he were, it would be a
quick clampdown even by his standards. Let us use the word avoidance,
which is not in itself particularly clear or helpful, but does at least
have a fine
provenance.
On
amendment No. 30, I am uneasy about the use of the term “main
purpose” in any context concerning tax avoidance, because it
reeks of over-simplification to say that any single commercial decision
has a main purpose except perhaps that of making money. However, the
clause does at least refer to “the” main purpose rather
than “a” main purpose, which crops up in Budget note 30
and in HMRC guidance. I do not wish to be pedantic, but the presence of
the definite article seems to imply that there must be a single
overarching purpose and intention to avoid tax. Unfortunately, proposed
new section 16A(1)(b) immediately spoils the effect by introducing the
possibility of other, competing main
purposes.
The
amendment would clear up some of that confusion by making it clear that
there is but one main purpose. It has the ring of a creed to it. I am
concerned that as it stands, the clause sows the seeds for a test case
about how much a taxpayer needs to be motivated by nefarious intent for
his or her actions to qualify as a main purpose. If there were just one
main purpose it would still be a difficult call to make, but if there
are many possible main purposes I think that the determination will
become almost impossible.
If there are three main
purposes for undertaking a transaction, which has priority? Will we end
up with an
absurd litigation calculus in which it is necessary to ascribe an
arbitrary value to each, with HMRC officers arguing the toss between
the intention to avoid tax and other, legitimate, commercial purposes?
It would be far simpler to do away with the idea of different main
purposes and give the words their common meaning—that a main
purpose is the one that eclipses all others instead of competing with
them.
To
go a little wider, there are further problems with the whole business
of a main purpose forming the basis of a test for behaviour. If I
understand paragraph 12 of the HMRC guidance correctly, making use of a
statutory relief is not sufficient to demonstrate a main purpose and
fall foul of the clause. Apparently, something stronger is
needed—that the intention to avoid tax is so significant that it
must be the main purpose. That is somewhat self-referential. Saying
that something is a main purpose merely by dint of its being really
significant does not help us much. It is also not particularly robust,
because all the decisions involve value judgments being made about
individual cases by individual officers. The determination of whether
something is “main”, “genuine” or
“straightforward”—all words that appear in the
clause or the notes, is essentially a matter of personal choice and
will lead to inconsistencies in outcome with even the best of
guidance.
There is
something a little strange about the Revenue’s insistence in
paragraph 8 of its guidance that the definition of
“arrangements”
is
“in general a question
of fact.”
It is not, and
even that short statement contains a caveat. Determining the interface
between legitimate tax planning and avoidance is a matter of judgment
and discretion, which is why the Taxes Management Act 1970 originally
gave the Revenue a discretionary power to grant extra-statutory
concessions in difficult and unforeseen
situations.
There
needs to be more recognition in the Bill that none of those judgments
are cut and dried. The question of “main purpose” needs a
simple answer: a purpose that is so overwhelming that no rational
person could doubt that it was the motivation behind a transaction. It
does not need to be the only purpose, just the predominant one.
Amendment No. 30 would simply introduce a little more clarity, and I
hope that the Economic Secretary will support
it.
On Amendments Nos.
32 and 33, the criticism that the clause has received from the
Institute of Chartered Accountants in England and Wales is focused on
one principle: that the clause is not as focused as it should be. The
ICAEW goes as far as to say that it amounts to a general anti-avoidance
rule instead of a targeted one, and that the reliance on external
guidance instead of a tight focus sows the seeds of confusion. It does
not help that so much of the language surrounding anti-avoidance
legislation is morally loaded and open to interpretative
whimsy.
The Revenue
has accepted that its officers and, almost as an afterthought, the
general public and their professional advisers need some form of
guidance, but the status of that guidance seems to be equivocal, at
least as far as the professional advisers are concerned. In its
submission to the Committee, the Chartered Institute of Taxation cited
its 2005 paper, “Taxed by Law, Untaxed by Concession”. I
confess that I have not
read the paper, but its title makes for a good little aphorism that the
Economic Secretary could frame and put on his wall. It is drawn from a
judgment in the late 1970s which aimed to address the law of unintended
consequences where the commissioners of the Revenue wished to depart
from the letter of the law to prevent a perceived inequity. It also
confronts, pithily, the culture of extra-statutory concessions, which
the Revenue relies on as a fiddle to get around awkward situations.
Perhaps the Economic Secretary will confirm the current status of
extra-statutory concessions.
The House of Lords seems to
have thrown the cat among the pigeons by deciding in the Wilkinson case
of 2005 that extra-statutory concessions could not run counter to
explicit parliamentary intention or deal with a matter that Parliament
could easily have addressed but did not. The ICAEW is of the opinion
that the guidance provided by HMRC has the effect of narrowing the
scope of the clause as presently drafted to the point that it changes
the intention of clause and, therefore, interferes with the intention
of Parliament. It contains undertakings that the clause will not be
used in certain situations where it would be inequitable for it to be
applied and, as such, is verging on being an extra-statutory
concession.
A very
helpful summary of the Wilkinson case appeared in The
Independent
—not that I read that paper very
often.
Mr.
Newmark:
The telly was not working andno comic
books were available, so I read The Independent—The
Guardian was not available either. It noted that the judgment said
that the regime of extra-statutory concessions gave the Revenue
the
“discretion to
formulate policy in the interstices of the tax
legislation”.
I am sure
that that is derived from the Latin.
[Interruption
.
] It is legalese, and I am not a
lawyer. Perhaps the hon. Member for Wolverhampton, South-West can tell
me what it means. The article
continued:
“dealing
pragmatically with minor or transitory anomalies, cases of hardship at
the margins or cases in which a statutory rule is difficult to
formulate or its enactment would take up a disproportionate amount of
Parliamentary time.”
We
are in the middle of taking up a disproportionate amount of
parliamentary time—I include myself in that, so I shall quickly
come to the end of my remarks—but we are in the fortunate
position of being able to confront the issue head on.
Removing nebulous guidance and
replacing it with regulations that set out what is a prescribed
arrangement for the purposes of the clause would be one way of bringing
certainty into this area. More importantly, taxpayers could rely on
them before the courts.
10.15
am
The HMRC
website contains a glossary which defines an extra-statutory concession
as applicable
“when
strict application of the law would create a disadvantage, or the
effect would not be the one intended.”
However, it would be easier for the
Minister to be clear now about the effect that is intended by ensuring
that the clause is less widely drawn.
All anti-avoidance measures
are
“at the interstices
of the tax
legislation”
precisely
because the boundary between legitimate tax planning and outright
avoidance is difficult to pin down, but I question whether it is good
enough to deal with that boundary with the even murkier solution of
non-statutory guidance, which cannot be relied on by taxpayers or their
advisers to hold true over time. Even if the Revenue has good
intentions, the Minister must admit that different officers will be
capable of construing even the clearest guidance in different ways.
Such differences of opinion will cause difficulties for taxpayers, who
will not then have an easy remedy against the
Revenue.
I
hope that the Minister will support the amendments or allow some
redrafting so that Parliament’s clear intention has a statutory
footing and is not left lurking in departmental
guidance.
Mr.
Philip Dunne (Ludlow) (Con): I will make a relatively
brief contribution in support of the amendments, which were well set
out by my hon. Friend the Member for
Fareham.
It is
important to provide some definition in the tax code, rather than
leaving discretion for all capital transactions when losses occur in
the hands of HMRC, which will allow it to rule in each individual case
on whether a contrivance for capital losses was
involved.
The focus is
on the definition of “arrangements”, which includes, as I
understand it,
any
“agreement,
understanding, scheme, transaction or series of transactions (whether
or not legally
enforceable).”
That
effectively means that any transaction in which a capital loss occurs
can be construed by the Revenue as an arrangement. Although the
Economic Secretary, when introducing the clause, indicated that it is
not the Government’s intention to capture every transaction in
which a capital loss occurs, it allows the Revenue to make that
interpretation should it so wish. It is not good enough to leave it to
the Revenue’s discretion and in guidance notes. It must
be properly defined in the
Bill.
Clause 27
relates to the new definition of tax advantage, which could be another
unfortunate extension of the Revenue’s powers to imply some kind
of nefarious activity by individuals who seek quite properly, as the
Economic Secretary conceded in his introductory remarks, to take
advantage of, for example, annual exemptions for capital gain. It seems
entirely appropriate to revert to language that is well understood in
tax law, on avoidance of individual aspects of losses instead of the
new concept of tax advantage, which could set an unfortunate
precedent.
Ed
Balls:
The seven amendments would limit the scope of the
targeted anti-avoidance rule in three different ways, and I shall take
them in three
groups.
Amendments
Nos. 30 and 29 would alter clause 27so that the anti-avoidance
rule would apply onlywhen a person has entered arrangements
with thesingle main purpose of securing a tax advantage.
Amendment No. 29 would alter the clause by adding conditions so that the
rule would apply only when the arrangements, taken as a whole, have the
main purpose of securing a tax advantage. Altering the clause’s
main purpose test so that the rule applies only if there is a single
main purpose would limit the effectiveness of this anti-avoidance rule.
The type of schemes that are caught by the clause do not happen by
accident, but are, as I explained to hon. Members, especially the hon.
Member for Ludlow, the result of contrived circumstances in which
transactions are undertaken or carried out in a particular way
primarily to achieve a desired tax effect rather than for a genuine
commercial or economic purpose.
If the arrangements have a main
purpose of avoiding tax, it is right that they should be caught by the
rule, regardless of whether the avoidance of tax is their only main
purpose. If amendment No. 29 were accepted, there would be considerable
scope for debate about whether a particular set of arrangements had a
main purpose of avoiding tax, even if the taxpayer had clearly entered
into highly artificial tax avoidance schemes. We do not want to
introduce that sort of ambiguity into primary legislation.
Adding to the clause’s
main purpose test the requirement that the rule can apply only when the
arrangements are taken as a whole risks weakening the rule.
There is a risk that even if particular steps in a series of
arrangements are objectionable and artificial, the persons involved
could point to an overall commercial objective and therefore side-step
the rule. That would even allow people to add avoidance schemes to
normal commercial transactions safe in the knowledge that, as tax
avoidance is not the main purpose of the arrangements, when taken as a
whole, they could side-step the targeted anti-avoidance
rule.
Adam
Afriyie (Windsor) (Con): Is the Economic Secretary
suggesting that there could be no overall commercial objective to a
series of transactions, each of which might, in its own right, appear
to be an avoidance scheme, but the overall scheme achieves a commercial
objective?
Amendments
Nos. 27, 26 and 28 would replace a familiar definition of what
constitutes a tax advantage with a less specific reference to avoiding
liability. The definition of a tax advantage has not been plucked out
of thin air. It is, in all essentials, the same as the definition used
in the long-standing rules against avoidance of tax on income, and was
reintroduced recently, without opposition, in the Income Tax Act 2007.
The definition was also used, again without opposition, in the Finance
Act 2006 rules against avoidance by companies using capital losses. In
contrast, there is no certain or generally agreed understanding of what
constitutes avoidance of liability to
tax.
A
second reason for rejecting the amendments is that they would create a
loophole in the rule. Changing the reference to securing a tax
advantage to one of avoiding a liability to tax would mean that some
highly artificial schemes that generate a repayment of tax rather than
a reduction in tax liability would not be stopped. Avoiding a liability
to tax is a more limited concept than securing
a tax advantage. It is undesirable to introduce such a loophole. To make
that change would mean running the risk of limiting effectiveness and
allowing potential avoidance schemes to move ahead.
Finally, amendments Nos. 32 and
33 together seek to alter the clause to exclude from the anti-avoidance
rule arrangements prescribed arrangements, which are defined as
arrangements
“set out in
regulations made by the Commissioners for Her Majesty’s Revenue
and Customs.”
It is not
clear exactly what those regulations are expected to cover, as clause
27 will apply only when one of the main purposes of arrangements is to
secure a tax advantage. It will not apply to genuine transactions or
when a taxpayer simply makes use of statutory relief.
If the purpose behind the
amendments is to ensure that such simple actions are outside the scope
of the rule, it is unnecessary, because that is made explicit in the
guidance. Adding in regulations a list of safe transactions that are
not caught by the rule could have one of two negative effects. First,
it could permit people who are attempting to avoid tax to get around
the rule by using an acceptable transaction as one stage
in a longer series of transactions. Secondly, it would be of no
practical benefit to compliant taxpayers because it would have to be
hedged round with conditions to the effect that the transactions would
be prescribed transactions only if they were not part of a longer
series of transactions that were intended to avoid tax.
Paragraph 13 of HMRC guidance
stresses that all the circumstances of a case have to be taken in the
round when deciding what is the main purpose of arrangements. There
will be a small minority of cases in which the main purpose is unclear,
but the guidance will provide as much clarity as possible.
The hon. Member for Braintree
said that the guidance was an afterthought. I did not understand that
point, because it was published with the pre-Budget report before the
Bill. I have never heard of a pre-emptive afterthought before. He also
tried to introduce greater complexity into tax
legislation.
It
being twenty-five minutes past Ten o’clock,
The
Chairman
adjourned the Committee without Question put,
according to the Standing Order.
Adjourned till this day at
One
o’clock.
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