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Session 2006 - 07 Publications on the internet General Committee Debates Finance Bill |
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The Committee consisted of the following Members:David
Doig, Hannah Weston, Committee
Clerks
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attended the Committee
Public Bill CommitteeThursday 17 May 2007(Afternoon)[Mr. Roger Gale 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
Amendment
proposed [this day]: No. 30, in clause 27, page 17, line 33, leave
out ‘, or one of the main
purposes,’.—[Mr.
Hoban.]
1
pm
Question
again proposed, That the amendment be
made.
The
Chairman:
I remind the Committee that with this we are
discussing 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’.
The
Economic Secretary to the Treasury (Ed Balls):
We are
pleased to have you back in the Chair, Mr. Gale. You missed
a most illuminating and lengthy sitting this morning. I hope that we
can reach a swifter conclusion on this clause, not least because of the
turnout so far on the Opposition
Benches.
Several
points were raised this morning, and I hope to give the Committee
further reassurance on a couple of points of detail. At the end of the
sitting, I was
explaining the importance, which paragraph 13 of the guidance stresses,
of considering all the circumstances in the round. I explained two
examples in which a fall in the value of FTSE 100 shares gives rise
genuinely to a loss, which can be offset elsewhere on gains, where the
tax advantages are incidental but the transactions are genuine. I also
explained the straightforward way in which statutory tax relief can be
passed between husband and wife in a way that allows a loss to be set
against a gain. The clause does not interfere with that normal tax
practice and
planning.
There was
much discussion about whether the guidance provides sufficient clarity.
As I said this morning, Her Majesty’s Revenue and Customs is
working with the representative bodies on improving the guidance, and
we will publish revised guidance before Report. However, it is
important to remember that for the vast majority of people, the
guidance will not be relevant, as they will not be caught by clause 27,
which contains a targeted anti-avoidance rule to counter tax-avoidance
schemes that make use of contrived capital
losses.
The
legislation was first published in draft with the pre-Budget report. At
the same time, HMRC also published a statement setting out why it was
necessary and the key principles that underpinned it. The key principle
is that relief for capital losses should be available only if a person
has suffered a genuine commercial loss and a real
disposal.
As
was recognised this morning, there is always a grey area, a question of
debate, in dealing with tax avoidance. The HMRC statement of principle
and guidance makes that area for debate as narrow as possible. It is
necessary to do that in guidance in order that we have flexibility.
These things cannot all be tied down in the Bill. However, as I said
this morning, the person entering into the arrangements is best placed
to decide whether gaining a tax advantage was a main purpose of the
arrangements. The sort of arrangements that the clause is aimed at are
not entered into by accident. People know when they are setting out to
avoid tax, and the clause is intended to catch them if they
are.
The amendments,
taken together, would simply weaken the targeted anti-avoidance rule in
the clause. They would introduce uncertainty for those who do not seek
to avoid tax and would leave loopholes for those who seek to avoid
paying the right amount of tax, while introducing unnecessary
regulation-making powers for HMRC. I therefore ask the Committee to
reject the amendments, and I reaffirm my commitment to providing all
members of the Committee with the detailed and updated guidance before
Report, which I am sure will make for interesting reading for all, but
especially for the hon. Member for Braintree and Mrs.
Newmark in case there is nothing decent to watch on
telly.
Mr.
Mark Hoban (Fareham) (Con): It is a pleasure to see you in
the Chair this afternoon, Mr. Gale. I am sure that
Mrs. Hoban and I will find something much more interesting
than the guidance to read, regardless of what is on television during
the recess. However, I thank the Economic Secretary for his comments on
the guidance, because it had crossed my mind that it would be helpful
for the guidance to be available before Report, so that if we felt that
it was still not quite right,
we would have the opportunity to probe further on
Report. In a sense, the withdrawal of my amendments this morning was
predicated on the adequacy of the guidance, so the present approach is
an appropriate way to try to resolve the problems before Report. It
will give us and the representative bodies the opportunity to think
again and consider whether there are further areas of doubt or
ambiguity about which we want to probe the Government’s
intentions.
The
debate on “main purpose” had some interesting elements. I
had always thought that there could only be one “main
purpose” until I got involved in Finance Bills. However, the
Economic Secretary mentioned earlier that there can be many main
purposes. Clearly, therefore, the rules of grammar and of English usage
are suspended somewhat when it comes to finance legislation.
The Economic
Secretary said also that he did not wish there to be any ambiguity in
the drafting of legislation. That is a fair comment, but it is
important that ambiguity is not introduced in the guidance either, so
we want to ensure that that guidance is clear. In mentioning the
avoidance of tax liability, he made a point that had eluded me in my
remarks on the earlier amendments; he mentioned schemes that would give
rise to repayment, and his argument was I think
correct.
In the eager
expectation of the revised guidance becoming available, I beg to ask
leave to withdraw the amendment.
Amendment, by leave,
withdrawn.
The
Chairman:
Before we proceed, it might be helpful to say
that I do not propose to have a stand part debate on the clause, given
the copious debate that took place on it under the guise of earlier
amendments, and given also that we are about to debate amendment No.
37.
‘(1A) This
section does not apply where the aggregate of a person’s
allowable losses does not exceed £25,000 in the year of
assessment.’.
I
am disappointed that we shall not have a stand part debate,
Mr. Gale, but I shall bear my disappointment manfully. In
his remarks on the previous group of amendments, the Economic Secretary
said that there was an expectation that very few people would be caught
by the clause. That is absolutely right; one hopes that taxpayers will
not need to have resort to an understanding either of the clause or of
the guidance notes, and the details to which we have applied ourselves.
However, bearing in mind the breadth of the clause, it might be helpful
to taxpayers—particularly those with small capital
losses—if we introduced a de minimis limit. The amendment would
introduce such a limit, thereby disapplying the clause in cases where
the aggregate of a person’s losses in any one year did not
exceed £25,000.
The Economic Secretary
indicated earlier, and we concurred, that much of the focus of the
clause is on expensive, marketed, tax avoidance schemes. I assume that
the cost of most such schemes, and the fees that people pay to tax
advisers to implement them, means that they relate to fairly
significant amounts of money and to the generation of fairly
significant capital losses. I assume that someone whose losses were
less than
£25,000 would not adopt such a scheme—whether it be
contrived and complex, or simple—and the intention of the
amendment is to make it clear that, in the case of relatively small
losses, taxpayers need not bother to understand the details of the
clause or of the guidance.
In its comments on
the clause, the Chartered Institute of Taxation
said:
“At the
Open Day, HMRC stated that, if a transaction was caught by the rules,
it would be incorrect to then exempt it due to it being less than a de
minimis amount. However, we consider that, in view of the uncertainty
as to how the rules will be implemented, and that a wide range of
ordinary transactions could potentially be caught, giving rise to a
significant administrative burden, a de minimis amount should be
applied per person, below which losses are not
disallowed.”
The
institute suggested a de minimis amount of £100,000. I have been
somewhat less generous, but I should be grateful if the Economic
Secretary would comment on the proposal.
Rob
Marris (Wolverhampton, South-West) (Lab): I wish to make a
comment in passing, and I will be interested to hear what my hon.
Friend the Economic Secretary says about it. The hon. Member for
Fareham rightly pointed out that the CIOT suggested a de minimis limit
of £100,000, but I say to my hon. Friends that the amendment and the way
in which he carefully moved it indicate the different worlds in which
we live, particularly those of us from parts north of
Watford.
This morning
the hon. Gentleman referred to “relatively small” losses
and he used the same term this afternoon when moving the amendment. He
also mentioned “small capital losses”. I say to him and
his hon. Friends that I have had the great good fortune for most of my
working life to be a higher-rate taxpayer, along with less than 10 per
cent. of the population. That said, the concept of £25,000 being
a relatively small loss is beyond my financial ken, as it would be for
the vast majority of my
constituents.
I
understand the concept of a de minimis limit and how it might help in
certain circumstances. However, to point out to the Committee the
different ways in which Members from different parties view such
things, if I were to suffer a capital loss of £25,000, or
£20,000, I would regard it not as a relatively small or a small
capital loss but as pretty catastrophic. Fortunately, because I am not
a speculator and do not play the casino economy on the stock market, I
am unlikely to suffer any such capital loss. If I did, it would not be
relatively small to me, and it would not be to my constituents or to
most of those who vote
Labour.
Ed
Balls:
I note my hon. Friend’s comments on
the—how can one put it?—rather elastic concept of middle
England that is sometimes employed in these tax debates. I fear that
you might rule me out of order, Mr. Gale, so I shall come to
the detail of the amendment. It would alter clause 27 by prohibiting
the anti-avoidance rule from applying in any tax year in which a
person’s loss does not exceed £25,000. The intention
behind the amendment, as the hon. Member for Fareham set out, is to
make things simpler for the majority of individuals who do not use
avoidance schemes involving capital losses, by allowing them to ignore
the new rule in the clause if their losses are modest. It is a
reasonable aim, with which we sympathise.
The hon.
Gentleman is right that the overwhelming majority of individuals are
likely to have no capital losses in any one year and that most of those
engaged in such schemes have losses substantially in excess of
£25,000, but there will be a small number of individuals who
fall in the middle. I understand his desire to see whether something
can be done to simplify matters for that group of people but, having
examined the amendment in detail, our conclusion is that it is rather
unattractive. It would allow contrived losses of £25,000 to be
manufactured and then rolled up each year. That could let a tax avoider
stock up tax losses for use when the opportunity arose. For instance,
after four years of careful planning, it would be possible to
accumulate £100,000-worth of artificially contrived losses to
set off against a properly taxable gain made in a later year.
I should warn the Committee
that one avoidance scheme of which HMRC is aware could easily be
adapted for the mass market and used to generate losses of
£25,000 per user per year. That loss could be set against
income, giving a maximum income tax saving of up to £10,000 per
annum for a higher-rate payer. Such a scheme would clearly have a
serious impact on the Exchequer, potentially costing millions or even
billions of pounds. We would then be into difficult territory and I am
sure that we would be forced to revisit the de minimis
limit.
There
are a small number of individuals for whom there is a question whether
losses below £25,000 are contrived or not. Given the potential
for the amendment to be abused and marketed in the contrived way that I
have set out, at substantial Exchequer cost, our conclusion is that it
would introduce an unjustified loophole to tax avoidance. I hope that,
given that explanation, the hon. Gentleman will understand why we
propose to reject the
amendment.
1.15
pm
Mr.
Hoban:
I will not go into the semantics of what relatively
small losses are and what their impact is on various Members’
constituents, because I think that that is a slightly pointless route
to go down.
Looking
back at the way that the debate has unfolded, the Conservatives have
sought to stick to the principle, which we support, of clamping down on
contrived capital losses, while at the same time ensuring that, for
people who perhaps have relatively small share portfolios, a second
property or some other assets, there is a relatively straightforward
way for them to navigate these rules.
I made the point that we have a
broadly written clause and people are untaxed through the guidance.
What we have sought to do is to provide greater clarity in the clause,
to ensure that taxpayers—relatively straightforward
taxpayers—can work their way through all the provisions and not
feel obliged to seek the professional advice of my former colleagues in
the accountancy profession. I am always keen to ensure that people do
not have to pay compliance costs if they are unnecessary.
I sense that
the Minister understands those concerns and he has tried to allay some
of them by refining the guidance, and I am grateful for that. However,
I sense that those taxpayers who will incur modest losses will
still need to go through the full rigour of the procedure, and they will
need to understand what their transactions are doing. I am not sure
that we have made any real progress in trying to alleviate those
burdens for taxpayers with relatively small
losses.
Although we
have made some progress, we have not made substantial progress. Having
said that, in the context of the de minimis limit, I am intrigued by
the concept of a mass market capital losses avoidance scheme. It
certainly would not be of much use in Wolverhampton, South-West and if
it does not meet the market needs in Wolverhampton, South-West, where
will it meet market needs?
I understand the
Minister’s concern about how the de minimus limit could be
abused. On that basis, I shall ask the Committee’s leave to
withdraw the amendment. However, I would hope that the Minister might
consider, between now and Report, whether we can take any other
practical steps to reduce the burden on people with relatively small
capital losses who wish to take responsibility for their own affairs
without having to be burdened by understanding complex statements of
principle and
guidance.
I beg to ask
leave to withdraw the
amendment.
Amendment,
by leave,
withdrawn.
Clause
27 ordered to stand part of the
Bill.
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