Clause
28
Life
policies etc: effect of rebated or reinvested
commission
Question
proposed, That the clause stand part of the
Bill.
Mr.
Hoban:
Again, this is one of those areas where I think
that there is consensus, not just between the Opposition and the
Government, but between the various professional bodies, too. The
consensus is that there are schemes that misuse life insurance and the
practice of rebating commission to create an untaxed gain.
I want to ask
the Minister two questions about the clause. As we both know, and
welcome, most financial advisers are moving away from commission-based
remuneration towards fee-based remuneration. That might be achieved by
an adviser rebating the commission back to his customer, who would then
pay a fee instead. Alternatively, the adviser may augment the amount
that is being reinvested on behalf of his client. Does the Economic
Secretary believe that such a course might slow down the shift from
commission-based to fee-based remuneration? Might it act as a
barrier?
The
anti-fragmentation rule asks people to see whether the total value of
three years’ life assurance policies exceeds £100,000.
There has been some concern about how easy that will be to administer.
Will the Economic Secretary confirm whether the £100,000 de
minimis limit—depending on how it crops up in successive
clauses—will apply only to life policies for which commission
has been waived? Or will it apply to all life policies that an
individual might
have?
Julia
Goldsworthy (Falmouth and Camborne) (LD): I shall be
brief, because there is consensus on this matter. The Association of
British Insurers welcomes
the clause as a targeted anti-avoidance measure that has been introduced
after it was informally consulted. The Chartered Institute of Taxation
said that the proposed changes appear reasonable, and the Institute of
Chartered Accountants for England and Wales
said:
“We
understand and support measures to counter tax
avoidance”.
There
is a recurring theme of concerns about the complexity of the
provisions, however. Both the Chartered Institute of Taxation and the
Institute of Chartered Accountants for England and Wales suggested that
the complexity reflects the wider need for a process of corporation tax
reform. In particular, the ICAEW
said:
“It would
have been more comprehensible to have made a fresh start and for the
existing legislation to be replaced by a better targeted alternative,
preferably in Tax Law Rewrite style. We would welcome a commitment that
these provisions are reworked at an earlier stage to make them more
comprehensible.”
I wonder
whether the Economic Secretary has any comments in response to those
suggestions.
During the
consultation process and at the Finance Bill open day, the Chartered
Institute of Taxation highlighted circumstances in which genuinely
commercial transactions could be caught, such as those in which
commission has been waived or where there is a professional obligation
not to take commission. HMRC agreed to examine cases of individuals who
have taken out a policy with the intention of drawing down not more
than 5 per cent, but whose circumstances have changed with regard to
their care, for example, and whose costs have increased by more than 5
per cent. They then suddenly find themselves having to draw down more
than 5 per cent. The question is whether there should be a motive test
to distinguish people who try to avoid tax from those who may
inadvertently be caught in such a
situation.
Rob
Marris:
For the sake of completeness, I should say that I
am shortly going to a dinner of the Association of British Insurers,
although that will principally be to discuss the effects on the
insurance industry of climate change. It is worth underlining what the
hon. Lady said: the ABI, which represents 400 insurers,
covering 94 per cent. of domestic insurance, said that it broadly
welcomes the clause as drafted.
I want to give the Government a
pat on the back. All too often, for understandable reasons, we sit in
the Committee with submissions from various bodies that have concerns
about the import of certain measures or the way that they are
introduced. This measure is broadly welcomed, however, and the ABI has
taken the trouble to circulate—to all members of the Committee,
I suspect—a message to the Government saying, “Well
done.”
Ed
Balls:
As we have heard, clause 28 is an anti-avoidance
measure that tackles schemes marketed to wealthy investors who seek to
avoid tax on savings. Under a typical scheme, the investor takes out a
large, short-term life insurance policy, which is cash-based to
guarantee investment performance. The avoidance arises because the
financial adviser, who arranges the investment, rebates to the
policyholder a significant
proportion of the commission on the policy, so that in effect all or
virtually all the investment return on the policy is made up of
commission that is passed on to the policyholder, free of income tax,
by the adviser. The hon. Members for Fareham and for Falmouth and
Camborne, and my hon. Friend the Member for Wolverhampton, South-West,
all reflected an industry consensus that that is an abuse of the
system. Indeed, Money Marketing magazine —regular
evening reading in our household for us and our three
kids—states:
“This
change can hardly be a surprise, but the sector must hang its head in
shame. To take such a wide view of the commission taxation rules could
only lead to this kind of reaction from
HMRC.”
Another
tax adviser from a senior accounting firm said that that
amendment
“ratifies what
people have thought for a long period of time, which is that it was
abusing a tax concession.”
Therefore, there is a consensus for
acting. Some concern was expressed, which I think was allayed in
discussions with the industry, the ABI and others, that this part of
the clause might also apply to ordinary commission reinvestment
arrangements in which the adviser agrees to take a lower level of
commission in return for the insurer enhancing the investor’s
policy. The clause would not apply in those circumstances, nor is it
the intention for it to do so.
In ordinary commission
reinvestment arrangements of this type, the value of the policy is
enhanced, but there is no increase in the premium. Also, the adviser
would not have a strict entitlement to the commission that they forgo;
they are not rebating any commission to which they would be entitled,
and so the clause would not apply. The outcome is that the full amount
of premium paid by the policyholder remains allowable in computing any
taxable gain, just as it has always been. It would not have to be
reduced by the amount of commission that the adviser had forgone and
the policy holder would therefore not be taxed on a gain that they have
not realised. I hope that that provides a final reassurance on some of
those concerns.
The
clause also includes the power to change the premium limit and minimum
holding period through regulations. That will enable the targeting of
the rules to be changed quickly if new schemes are devised in an
attempt to side-step the current criteria—for instance, if
schemes become economic for premiums below £100,000. I hope that
that also reassures the hon. Member for Fareham. A lot of change is
happening in the advisory world and a distribution review is being
conducted by the Financial Services Authority. There is no desire
through this legislation to slow down or impede shifts from commission
to fee-based remuneration schemes. It is our intention that ordinary
arrangements, and the kind that I have just set out, would apply in
this case. Once again, I hope that that gives some
reassurance.
The hon.
Member for Fareham also asked about the £100,000 de minimis
limit. Arguably, people should know the premium levels that they are
paying, especially in a situation in which £100,000 or
thereabouts is involved. The aim of the measure is to stop the abuse of
commission arrangements that offer a tax-free return on investment over
a short period, and it is targeted carefully at the type of policy that
is used in those arrangement. As I have said, the measure
includes the power to change the premium limit if
avoidance schemes become economic for premiums below
£100,000.
As
I explained, it is not our intention to catch innocent taxpayers who
did not take out a policy for avoidance motives but cashed them in
early for an unforeseen reason. The clause provides a clear objective
test to identify and target the largest short-term policies used in the
commission rebate
schemes.
Mr.
Hoban:
I was not quite clear—perhaps that is
my fault and not the hon. Gentleman’s—whether the
£100,000 limit included all premiums paid by an individual or
only those premium-related policies in which the entitlement has been
waived.
Ed
Balls:
I will reflect carefully on
that.
Rob
Marris:
May I remind my hon. Friend of paragraph 28 of the
explanatory notes on the clause, which states:
“Broadly, this measure
affects policies where the premiums paid exceed £100,000 in a
year and the policy is not held for at least three complete tax
years”?
1.30
pm
Ed
Balls:
Those explanatory notes; do not you just love them,
Mr. Gale? I am grateful to my hon. Friend the Member for
Wolverhampton, South-West for taking us back to the notes. I confirm
that the answer to the hon. Gentleman’s question is all
premiums. I am sure that my right hon. Friend the Paymaster General
would want me to give him that reassurance and clarification.
Reaction to the measure has
been positive, and the general view is that it is a proportionate and
targeted
response.
Question
put and agreed to.
Clause 28 ordered to stand
part of the Bill.
Clause 29 ordered to stand
part of the
Bill.
Schedule
5
Avoidance
involving financial
arrangements
Ed
Balls:
I beg to move amendment No. 68, in
schedule 5, page 109, line 10, at
end insert—
‘Loan
relationships: amounts not fully recognised for accounting
purposes
10A (1) Section 85C
of FA 1996 (amounts not fully recognised for accounting purposes) is
amended as follows.
(2) In
subsection (1)—
(a) in
paragraph (c), for the words from “has at any time” to
“liability”)” substitute “an amount (a
“relevant capital contribution”) has at any time been
contributed to the company which forms part of its capital (whether
share or other capital)”,
and
(b) in paragraphs (d) and
(e), for “relevant accounting liability” substitute
“relevant capital
contribution”.
(3) In
subsection (2)—
(a) for
“or relevant accounting liability of the company”
substitute “of the company or any relevant capital contribution
made to the company”,
and
(b) for “or
liability” (in both places) substitute “or
contribution”.
(4) The amendments made by this
paragraph have effect in relation to periods of account ending on or
after 9th May 2007.
(5) But, in
relation to periods of account beginning before that date, amounts are
to be brought into account for the purposes of Chapter 2 of Part 4 of
FA 1996 as a result of those amendments only if the amounts relate to
any time on or after that
date.’.
The
Chairman:
With this it will be convenient to discuss
Government amendments Nos. 69 to 74.
Ed
Balls:
The amendments will make a slight extension to the
scope of one of the anti-avoidance provisions in schedule 5 to stop
avoidance scheme promoters introducing even more contrived arrangements
to circumvent the effect of the measure.
Paragraph 15 of the schedule is
aimed at schemes that create artificial losses from a company’s
holdings in offshore funds or similar collective investment schemes.
The losses are generated by the scheme making an investment that is
bound to decline in value. Shortly after the Bill was published,
disclosure was made to HMRC of a scheme that attempts to get round the
provisions by arranging for the collective investment scheme to take on
a liability for the same purpose, ensuring that the value of the fund
declines. The amendments will frustrate such an attempt by broadening
paragraph 15 so that it refers to a liability as well as to an
investment. The rule in paragraph 15 as a whole will have effect from 6
March, when the measure was announced, but the extension brought about
by the amendments will apply from 9
March.
If it is
appropriate to do so, Mr. Gale, I want to make a further
remark about the broad scope of the schedule. The purpose of the clause
and schedule is to close down a number of marketed avoidance schemes of
a type for which disclosure is required under the avoidance disclosure
regime, and to ensure the comprehensive working of certain
anti-avoidance provisions. The total tax protection of the measures is
estimated as being in the low billions of pounds.
The schedule tackles avoidance
schemes mainly used by companies, which fall under 10 different
categories. It also amends the structured finance arrangement rules
that were introduced last year to prevent schemes that might stop the
rules working. There is also a relaxation of the conditions for
obtaining capital gains tax exemption on assets that are sold under
structured finance arrangements.
Draft
legislation, as I have mentioned, and detailed explanatory commentary,
were published with the pre-Budget report and on 6 March. Publication
before the Budget was intended to give business an opportunity to
comment on whether the draft measures could affect legitimate business
transactions. In the event, reaction has been low key, and respondents
have not identified any instances in which the provisions might affect
legitimate transactions. I have, however, identified the need for the
Government amendments, which deal with one particular matter that arose
in consultation.
The
Government are committed to ensuring that we tackle systematic tax
avoidance, and the amendments and schedule will help to ensure that
companies that engage in tax avoidance do not enjoy an unfair
advantage.
The
Chairman:
In view of the Economy Secretary’s
remarks I propose to take the debate on the schedule with debate on the
amendments.
Mrs.
Theresa Villiers (Chipping Barnet) (Con): I am grateful
for your guidance, Mr. Gale. I, too, hoped to deal with the
schedule in that way.
Schedule 5 seems to me to be a
pretty accurately targeted measure, focusing on what are, as the
Economic Secretary said, highly complex and artificial transactions
undertaken solely with tax avoidance in mind. It seems to the
Opposition entirely reasonable for HMRC to move against those schemes.
As ever, it is worth pointing out that there will be yet more
complicated legislation, but I must concede that, in that context, it
will be difficult to come up with simple legislation to deal with the
problem. My research has not managed to expose any significant
technical flaws that would concern the Committee, and like the
schedule, the amendments that the Economic Secretary has proposed seem
to be similarly targeted, so we will not oppose them.
Consequently, I have for the
Economic Secretary just a couple of questions about the schedule.
First, in the explanatory notes to paragraphs 9 and 16, HMRC does not
think that the respective schemes, which the paragraphs target, work
anyway. Essentially, the new legislation before us is only a precaution. I
should be interested to find out whether that means that the Government
do not have the same certainty about the transactions targeted in the
rest of the schedule. Are they holding their hands up or are they still
challenging those transactions?
Secondly, I have a question
about paragraph 18, which is intended to extend the anti-avoidance
provisions in paragraph 26 of schedule 26 to the Finance Act 2002 in
order to cover all relevant situations in which a company fails to
exercise in full all its rights under an option, rather than just the
situation in which it abandons an option. There have been attempts to
circumvent paragraph 26 of schedule 26 to the 2002 Act, which bites on
the abandonment of an option by utilising schemes that involve partial
exercise.
Is not that
situation also covered by paragraph 23 of schedule 26 to the 2002 Act,
which denies tax relief for debits related to an “unallowable
purpose”? I should be grateful if the Economic Secretary could
explain whether the situation covered by the further legislation that
we are considering—paragraph 18 of schedule 5 to the
Bill—is actually already covered by paragraph 23 of schedule 26
to the 2002 Act. Is paragraph 18 yet more precautionary
legislation?
Rob
Marris:
In relation to the amendments and to the debate on
the schedule, may I again gently point out to my hon. Friend the
horrible drafting? In amendment No. 68, proposed new paragraph 10A(5)
starts with “But”. Similarly, in amendment No. 74,
proposed new paragraph 15(7) of schedule 5 starts with
“But”. In the schedule itself, paragraphs 2(3), 9(3),
11(5), 12(5), 14(3), 15(5) and 17(3) all start with
“But”. Please could he have a word with the draftspersons
and have them stop using that word? In almost all those cases, as far
as I can tell, it is not only grammatically erroneous, but completely
redundant.
Kitty
Ussher (Burnley) (Lab): Perhaps this is not a crucial
point, but is my hon. Friend aware that The Economist style
guide authorises the use of “But” at the beginning of a
sentence?
Rob
Marris:
I shall not engage in a long discussion. I am
aware that many journalists use it; it does not make it
right.
Ed
Balls:
I was tempted to intervene on the hon. Member for
Chipping Barnet to ask her whether she thought paragraph 23 of schedule
26 to the 2002 Act is framed in the most apposite way, or whether she
had any suggestions about the way in which it might, in retrospect,
have been better drafted.
Mrs.
Villiers:
My point was that paragraph 23 of schedule 26 to
the 2002 Act is very well drafted, which means that paragraph 18 of
schedule 5 to the Bill may not be needed. Its provisions are already
covered by the drafting of paragraph 23.
Ed
Balls:
I understood the hon. Lady’s point, but
perhaps not as well as she does. The answer to her wider question is
that the measure is not an over-reaction—there is tax risk. We
have been persuaded to act by the number of avoidance schemes that have
come to our attention. In the judgment of HMRC, most schemes are
covered by paragraph 23. However, the judgment of HMRC experts is that
that measure does not cover all potential schemes or those that are
already in operation. The Bill gives us confidence that we will cover
all such schemes in the future. We are ensuring that the gaps in
paragraph 23 are well and truly closed. Most schemes hit by the
schedule are being challenged in court, but not all. Whether we
litigate will depend on legal advice. The changes will mean that any
gaps in paragraph 23 will be comprehensively
closed.
Mrs.
Villiers:
I want to clarify my remarks: they should not be
taken to suggest that schedule 5 is an over-reaction. I was merely
seeking to ascertain whether HMRC was still challenging the schemes
under the old legislation. It might have a good case for doing so, and
a good chance of success in court.
Amendment agreed
to.
Amendments
made: No. 69, in schedule 5, page 111, line 15, after
‘investment’ insert ‘or
liability’.
No.
70, in
schedule 5, page 111, line 16, after
‘made’ insert ‘, or the liability was
incurred,’.
No.
71, in
schedule 5, page 111, line 19, after
‘investment’ insert ‘or
liability’.
No.
72, in
schedule 5, page 111, line 26, at
beginning insert
‘In the
case of amounts relating to
investments,’.
No.
73, in
schedule 5, page 111, line 28, after
‘But’ insert ‘in that
case’.
No. 74,
in
schedule 5, page 111, line 30, at
end insert—
‘(6) In the case
of amounts relating to liabilities, those amendments have effect in
relation to accounting periods ending on or after 9th May
2007.
(7) But in that case, in
relation to accounting periods beginning before that date, amounts are
to be left out of account as a result of those amendments only if they
relate to any time on or after that date.’.—[Ed
Balls.]
Schedule
5, as amended, agreed to.
Clause 30 ordered to stand
part of the Bill.
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