Clause
33
Employee
benefit
contributions
Question
proposed, That the clause stand part of the
Bill.
Mrs.
Villiers:
The Opposition support the principles underlying
the clause. In the circumstances, and given the wording of existing
legislation, it seems to be a reasonable and proportionate measure. I
will therefore mention only a few queries and background points so that
the Committee has the opportunity to debate the policy objective behind
the clause and how best to bring that
about.
I
will raise two points. The legislation at issue is schedule 24 to the
Finance Act 2003 and sections 38 to 44 of the Income Tax
(Trading and Other Income) Act 2005. Although introduced by the current
Government, those Acts built on an approach first established by Nigel
Lawson when introducing provisions to crack down on “potential
emoluments”—deferred bonuses and benefits—in the
Finance Act
1989.
There is,
therefore, some common ground between our parties on the principles at
stake. Like the 2003 Act that succeeded it and will be amended today,
the 1989 Act sought to ensure that an employer gets a tax
deduction on a payment or benefit provided to an employee only when
they receive it in a form that constitutes employment income. In other
words, the employer gets the deduction only when the employee has got
the benefit. In effect, the point of the 1989 Act was to prevent
employers from obtaining the corporation tax benefit of paying out a
large bonus before the employee had paid the tax on it. I
understand that the Government introduced schedule 24 to the
2003 Act out of concern that certain planning schemes involving
employee trusts were being marketed as a means of circumventing the
1989 Act and accelerating the corporation tax deduction in the
unacceptable way that I have outlined.
Clause 33 tackles some of the
more recent schemes that have emerged since the 2003 Act. The clause
appears to be appropriately targeted at those schemes, which would be
fairly described as aggressive tax planning. I have received no
representations that would indicate that any collateral damage would be
caused to transactions that are not motivated exclusively by tax
considerations.
I
understand that some schemes have been developed to exploit the fact
that the 2003 Act only catches situations where the employer transfers
assets or makes
payment to a third party. Attempts have been made to circumvent the
anti-avoidance provisions by having the employer who wishes to make the
deferred payment declare themselves a trustee over certain assets or
money. In this case, there is no transfer of legal ownership to a third
party. Alternative arrangements sought to get around the rules by
increasing the value of existing trust assets and arguing that no
payment or benefit had been transferred into the trust. Consequently,
it was at least arguable that the 2003 Act did not bite in such
cases.
Clause
33 would make it plain that such situations would be caught, and that
is one of the reasons why we welcome it, although I want the Chief
Secretary to consider two points. First, why have we ended up in this
situation? Why has it proved necessary to have yet more
legislation—and clause 33? If the Chancellor had not decided to
meddle with the law in 2003, the Government might well have been
successful in arguing in court that the original 1989 Act covered these
latest avoidance schemes anyway.
I have in
mind the very robust approach taken by the House of Lords in the Dextra
case, which was decided under the 1989 Act. In it, their lordships
seemed to signal clearly that they would have limited patience with
those who put forward hair-splitting interpretations of the statute to
seek to get round the clear objective of the law: not to allow the
employer to accelerate the deduction before the employee has received
the payment. Assuming a consistent approach from the courts, the
Revenue might well have been able to challenge these new schemes in
court as contrary to the intention that Parliament made plain in
introducing the 1989 Act.
I should put it on the record
that the Dextra judgment seems to make it clear that the 1989 Act was
an effective statute that achieved the policy goal of catching deferred
payments through employee trusts. It probably would have caught the
schemes that clause 33 seeks to close down, so the scope for these new
avoidance schemes was only created because the Government decided to
junk perfectly good legislation introduced by Nigel Lawson. The revised
form of wording that they chose in the 2003 Act was narrower than the
wording in the 1989 Act, and room was thus created for the aggressive
tax advisers to move in.
Rob
Marris:
I sat on the 2003 Finance Bill Committee, and,
although this may be due to my memory, I do not recall the hon.
Lady’s party raising the issue of the schedule being a narrowing
of the 1989 legislation. Did her party raise it
then?
Mrs.
Villiers:
I cannot answer that because I was not in the
House then, so I did not take part in that Committee. That issue is a
concern, and I can certainly check Hansard to see whether or not
we raised it. If we did not do so, we should have done.
We have frequently made the
point that the Government’s anti-avoidance legislation has often
been used as a sledgehammer to crack a nut—in some cases, the
Chancellor takes a sledgehammer to miss a nut. We support their efforts
to shut down these schemes, but feel that the clause would not have
been necessary were it not for the changes to the legislation made in
2003.
2.30
pm
Secondly, I
briefly want to ask about the interaction between schedules 23 and 24
to the 2003 Act, which are crucial in how the anti-avoidance schemes
work. Although, as I have said, I very much support the intention
behind the 2003 Act, it is not a problem-free piece of legislation. My
question is about the distinct difference between the two
schedules’ treatment of share-based and cash-based
remuneration.
Tax
deductions under schedule 23, which covers share-based remuneration,
are determined by the value at receipt at the hands of the employee. If
an employer funds a trust to acquire shares to be awarded to employees
at a later date and the shares have gone up in value by the time the
deduction takes place, the deduction for the employer becomes larger,
so the value during the deferment is given to the employer. If, on the
other hand, the shares have gone down in value, the employer has made a
bad bet and only a reduced deduction can be claimed when it is
eventually due, when the employee receives the benefit.
Deductions under schedule 24,
however, which broadly covers anything that is not share based or to do
with pensions, are based on the value on contribution by the employer,
so that when the employer finally gets the deduction at the appropriate
time, when the benefit gets into the employee’s hands, they are
denied any growth in value during the deferral period, even if the
employee is taxed on the higher amount. Does the Chief Secretary agree
that different approaches are being taken? If so, why does the law
treat those different types of benefit differently? The lack of
neutrality between those approaches disadvantages employers such as
mutual societies that cannot forward shares to their employees. It
would be useful to hear him explain why the deferred benefit is treated
differently in those
cases.
Rob
Marris:
I think that I understand the first limb of the
hon. Lady’s argument—that the 1989 legislation covers the
mischief that developed after 2003 and that is addressed in clause 33.
However, I am at a loss to understand why she has not tabled an
amendment to go back to the status quo ante the 1989 position if she
thinks that that would cover the mischief. That would, presumably,
produce the simplification and shortening of tax legislation that she
and her party want.
Mrs.
Villiers:
That is certainly an interesting idea, which I
shall consider for next year. As I have said, clause 33 deals with the
problem, but we have had to go around the houses with yet more
tax legislation to do so.
Mr.
Timms:
The hon. Lady has correctly set out the aim of the
clause, and I am grateful to her for supporting what we seek to do.
There have been a number of attempts to use employee benefit trusts as
a means of avoiding tax—another example, sadly, of very bright
people misapplying their talents—and legislation was, as she
said, introduced in 2003 to deal with the abuse.
The hon. Lady has a point when
she says that there is a sound case for arguing that what was being
done was illegal anyway, but the Dextra case that she mentioned
was won in 2004, after the change in the legislation. It was thought to
be appropriate to put the matter beyond doubt, and those moves were
successful in stopping much of the avoidance that was going on and
being attempted. However, there is evidence of a recent increase in the
marketing and take-up of schemes to get around the legislation, which
is why we need to take action again to stop the abuse. Employee benefit trusts are
used quite properly by employers to provide remuneration and other
benefits to employees through, for example, share-ownership trusts,
which the Government have encouraged to good effect. From the
mid-1990s, however, the trusts have been used as a mechanism for
obtaining deductions from taxable profits that would not otherwise be
due. Such usage has often been coupled with other kinds of
avoidance.
The Finance
Act 2003 restricted the deduction available to employers. As a result
of those changes, an employer can only deduct the amount that is paid
out of the trust to employees in a form on which income tax and
national insurance are due within nine months of the end of the
accounting period. There is no impact on genuine users of employee
benefit trusts.
The
new avoidance schemes, known as “employer self trust
schemes”, attempt to avoid the restrictions introduced in 2003.
The employer declares a trust over assets that he already holds. It is
claimed that the action does not amount to making a payment or
transferring an asset into a trust and therefore the existing
anti-avoidance legislation does not apply. They seek to allow employers
to manufacture deductions artificially without the need to provide real
benefits to
employees.
The
Government do not accept that employer self trust schemes bypass the
existing anti-avoidance legislation that was put in place in 2003.
However, given the scale of activity in that area, we have decided to
clarify the position and put it beyond doubt that
employers are not entitled to a deduction under such schemes. I think
that the hon. Lady will accept that, if we can do that in a reasonably
straightforward way and avoid several cases of litigation, it will
probably be in everyone’s
interests. The clause
extends the existing legislation to include any act or omission that
results in money or assets being held for the benefit of employees or
in an increase in the value of those assets. It makes sure that the
same restrictions apply to all trusts that are used as vehicles for
employee remuneration, regardless of whether the trust is administered
by a third party or by the employer. An employer will be able to make a
deduction for the contribution to that trust only to the extent that it
is actually paid to employees in a taxable form within nine months of
the end of the relevant accounting period. The clause will apply to any
act or omission, including a declaration of trust, made on or after 21
March. That will prevent not only those schemes we are aware of, but
further attempts to use a similar method to sidestep the
legislation.
The hon.
Lady asked about the interaction of schedules 23 and 24 in the Finance
Act 2003. Schedule 23 seeks to promote share ownership;
schedule 24 is anti-avoidance legislation. I hope that I have outlined
the difference that she wanted clarified.
The clause strengthens existing
legislation to counter a further abusive avoidance scheme that uses
employee benefit trusts to obtain a tax deduction not otherwise due.
The Government will continue to tackle avoidance of that sort to make
sure that all employers pay their fair share of tax. I commend the
clause to the
Committee.
Question
put and agreed
to.
Clause 33
ordered to stand part of the
Bill.
Further
consideration adjourned.—[Kevin
Brennan.]
Adjourned
accordingly at twenty-one minutes toThree o’clock until
Tuesday 22 May at half-pastTen
o’clock.
| 
