Finance Bill

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Clause 60

Enterprise management incentives: excluded activities
Amendments made: No. 159, in clause 60, page 41, line 5, leave out ‘19(4)’ and insert ‘19’.
No. 160, in clause 60, page 41, line 6, after ‘fees)’ insert ‘—
(a) in sub-paragraph (4),’.
No. 161, in clause 60, page 41, line 9, leave out from ‘company’ to end of line 10 and insert
‘throughout a period during which it created the whole or greater part (in terms of value) of the intangible asset.”, and
(b) after sub-paragraph (7) insert—
“(8) If—
(a) the relevant company acquired all the shares (“old shares”) in another company (“the old company”) at a time when the only shares issued in the relevant company were subscriber shares, and
(b) the consideration for the old shares consisted wholly of the issue of shares in the relevant company,
references in sub-paragraph (4) to the relevant company include the old company.”’.
No. 162, in clause 60, page 41, line 11, leave out ‘amendment made by subsection (1) has’ and insert
‘amendments made by subsection (1) have’.
No. 163, in clause 60, page 41, line 13, leave out ‘It also has’ and insert ‘They also have’.
No. 164, in clause 60, page 41, line 30, leave out ‘amendment’ and insert ‘amendments’.—[John Healey.]
Clause 60, as amended, ordered to stand part of the Bill.

Clause 61

Benefits code: Whether employment is “lower-paid employment”
Question proposed, That the clause stand part of the Bill.
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Mr. David Gauke (South-West Hertfordshire) (Con): The clause relates to the benefits code. My understanding is that there are something like 155 sections in the Income Tax (Earnings and Pensions) Act 2003 that apply to the taxation of benefits other than shares. Clearly, this is a hugely complicated area of the law; indeed, that is presumably the cause of the anomaly that the clause seeks to eradicate. Given that, may I ask what consideration the Treasury is giving to simplifying this area of the tax code?
Ed Balls: As the hon. Gentleman says, the purpose of the clause is to legislate an extra-statutory concession that was introduced in 2004 to ensure that an employee who earn less than £8,500 per annum does not incur a treble tax charge when he is provided with a car and car fuel paid for by his employer with a credit card, non-cash voucher or cheque. Such cases are rare, but there should not be a double charge simply because the benefit of a car and fuel has been paid for by those means.
The extra-statutory concession was published by HMRC in July 2004 on the understanding that it would be formalised through legislation at the earliest opportunity. That is what we are doing with the clause. As the hon. Gentleman said, we are repealing subsections 219(5) and (6) of the 2003 Act. The clause removes the value of non-cash vouchers and credit tokens used to provide car or fuel benefits when calculating whether an employee earns less than £8,500 per annum. The clause legislates the concessionary treatment that applies in the circumstances I described.
As the hon. Gentleman said, the issues are complex and the 2003 Act was a complex piece of legislation. The Government do not have a particular process for review of the Act, but we keep all aspects of the tax system under review at all times, and we are always happy to receive representations from hon. Members or outside organisations when they feel that there are issues that need to be addressed. That is what happened in this case. We received representations, and we are acting. I commend the clause to the Committee.
Question put and agreed to.
Clause 61 ordered to stand part of the Bill.
Clause 62 ordered to stand part of the Bill.

Clause 63

Armed forces: the Operational Allowance
Question proposed, That the clause stand part of the Bill.
Mr. Francois: I would like to make some brief comments on clause 63. The operational allowance was first announced by the Secretary of State for Defence on 10 October 2006. It is paid as a tax-free sum of £2,240 for a six-month operational deployment. I am sure that I speak for all members of the Committee in paying tribute to our armed forces and the wonderful way in which they do a difficult and dangerous job on behalf of our country.
Field Marshal Viscount Slim, the British commander who won the war in Burma, and a notable authority on the motivation of fighting men, described the morale of his men as consisting of three elements: spiritual, intellectual and material. Of the material element, he stated:
“(a) The man must feel that he will get a fair deal from his commanders and from the army generally, (b) He must, as far as humanly possible, be given the best weapons and equipment for his task, (c) His living and working conditions must be made as good as they can be.”
That still holds good today. Crucially, the operational allowance will, I hope, help with retention of trained personnel, too many of whom are now, unfortunately, leaving the forces often because of pressures on family life after several unaccompanied tours in close succession.
The allowance is, then, a welcome development, which we have supported and will support again today. However, given the importance of pay and conditions to operational morale, as well as the impact that the funding may have on other parts of the Ministry of Defence budget, I want to raise some points with the Financial Secretary about how the allowance is intended to operate in practice. I have five questions.
First, how long is the operational allowance intended to last? Is it now to be regarded as an established part of the armed forces remuneration package and is it intended in principle to apply to any new deployments, beyond those that are currently envisaged? Secondly, according to a Ministry of Defence press release of 1 March 2007, some £35 million had been paid to that date to 31,000 members of the Royal Navy, Army and Royal Air Force. As the payments began prior to Christmas 2006, but we are discussing the facilitating legislation today, can the Financial Secretary confirm whether qualifying troops who have been given the allowance have been paid it gross or net to date?
Thirdly, from which departmental budget is the allowance intended to come? I understand from previous pronouncements by the Secretary of State for Defence that the new allowance represented some £60 million per annum of new money provided by the Treasury, in addition to the MOD’s existing budget. Is it the Treasury’s intention that that practice should continue, or is it felt that it should be absorbed by the MOD budget in future years? That is an important point with respect to MOD budgeting, and it would be helpful to know the Treasury’s intentions.
Fourthly, to which deployments will the allowance apply and who will qualify? The clause states that qualifying deployments can be decided by order of the Secretary of State for Defence. Air Chief Marshal Sir Jock Stirrup, the Chief of the Defence Staff, said in an MOD press release of 1 March 2007 that the bonus is to be paid at present to
“those serving in Iraq, Afghanistan and the Balkans.”
What criteria will be used to judge whether future deployments will qualify? For instance, why were the Balkans included but not Sierra Leone?
Fifth and finally, how is the allowance intended to interact with other benefits and service allowances? For instance, as I understand it, the operational allowance has been excluded for the calculation of tax credits, by statutory instrument, but what about the new longer separation allowance, which is also meant to be tri-service? Is there any overlap in qualifying criteria and, if so, is one reduced at any point to take account of another?
The Financial Secretary may recall the Government’s embarrassment last year prior to the deployment of 3 Commando Brigade to Afghanistan, when it was revealed, just as they were deploying, that the Royal Marines were to receive less in overseas allowances than had been originally anticipated. That caused quite a row at the time and was raised at Prime Minister’s questions. Vice-Admiral Adrian Johns, the Second Sea Lord, was quoted at the time as saying:
“This unfortunate error could not have materialized at a worse time.”
What is the interaction, if any, between the operational allowance and other military allowances, including the LSA?
I reiterate that we support the new allowance in principle but that we should like some reassurances from the Financial Secretary about how it is likely to operate in practice.
The Financial Secretary to the Treasury (John Healey): The clause establishes special provision for the tax charge that would otherwise relate to the newly introduced operational allowance, payable to members of the armed forces in certain circumstances. In October, the Secretary of State for Defence announced the introduction of the new operational allowance, which will apply to members of the armed forces serving in specified operational locations such as Iraq, Afghanistan and the Balkans from 6 April 2006. The purpose of the allowance is to recognise the increased and enduring danger in operational locations over and above that which is already compensated for in a service person's salary.
The qualifying areas will be regularly reviewed by the Secretary of State for Defence on advice from the Commander, Joint Operations. That assessment will depend on a review of the nature of the danger to armed forces personnel who are deployed on operations. Any change to the qualifying locations will be approved by Ministers.
The hon. Member for Rayleigh asked me four other questions. The first was how long the allowance would last. It is part of the remuneration package that we judge is appropriate for our armed forces. I explained how the judgment about qualifying areas will be arrived at and that is how it will operate in future.
The hon. Gentleman’s second question was about the exemption—whether the operational allowance is taxed. I can confirm that the exemption will apply retrospectively, and HMRC will not collect tax from any payment of the operational allowance. The third question was about how the Ministry of Defence would treat the allowance in budgeting terms. For the current period after the introduction, the funding comes from the reserve. The MOD Budget is being set for the longer term as part of the comprehensive spending review, and it will form part of those discussions and negotiations.
Mr. Francois: I am grateful for what the Financial Secretary has said so far. He talked about the current period; could he explain what is the outer end of the envelope for which the Treasury have guaranteed that the money will be additional to the MOD budget? When does that guarantee run out? I accept that it will be part of the CSR.
John Healey: The hon. Gentleman has answered his own question. It is part of the comprehensive spending review preparations. He cannot expect me to share that with the Committee, even if I was in a position to do so.
The hon. Gentleman did not ask me about it but, as he mentioned the interaction with other allowances, he might be interested to know that regulations have been introduced that mean that no national insurance contributions are paid on the operational allowances. Finally, the hon. Gentleman asked how many people are benefiting from the allowance, and the answer is about 12,000.
Question put and agreed to.
Clause 63 ordered to stand part of the Bill.
Clause 64 ordered to stand part of the Bill.

Clause 65

Charge on benefits received by former owner of property: late elections
Mrs. Villiers: I beg to move amendment No. 211, in clause 65, page 42, line 28, at end insert—
‘(1A) Paragraph 21 of Schedule 15 to the Finance Act 2004 shall be amended by leaving out subparagraph (1)(b).
(1B) Paragraph 22 of Schedule 15 to the Finance Act 2004 shall be amended by leaving out subparagraph (1)(b).’.
The Chairman: With this it will be convenient to discuss the following: Amendment No. 119, in clause 65, page 42, line 35, at end insert—
‘(4) Any purported election made on the appropriate form or before the regulations prescribing the form of election came into effect shall be deemed always to have been made in the prescribed manner under subparagraph (2) above.’.
Amendment No. 212, in clause 65, page 42, line 35, at end insert—
‘(4) An appeal shall lie to the Special Commissioners against a refusal to allow making an election at a date after the relevant filing date and the Special Commissioners shall allow such an appeal where the refusal to permit a late election was unreasonable.’.
Clause stand part.
New clause 1—Charge on benefits received by former owner of property
‘(1) Paragraph 11 of Schedule 15 to the Finance Act 2004 is amended as follows.
(2) At the end of sub-paragraph (9)(a)(i), there is inserted “or the property from time to time representing such property which has been disposed of,”.
(3) In sub-paragraph (11), at the beginning, there is inserted “Subject to sub-paragraph (12A),”.
(4) After sub-paragraph (12) there is inserted—
“(12A) Sub-paragraph 12 shall not apply if in the taxable period both the following conditions are satisfied:
(a) the person in whose estate the relevant property is comprised for the purposes of IHTA 1984 as a result of section 49(1) of that Act (treatment of interests in possession) is the settlor of the relevant property which has become comprised in the settlement and he has a qualifying interest in possession in such relevant property; and
(b) the relevant property is held directly by the trustees and is the settled property in which the settlor has a qualifying interest in possession,
and if the above conditions are both satisfied in only part of the taxable period sub-paragraph (12) shall not apply to that part of the year of assessment in which they are not so satisfied;
and “settlor” shall have the meaning given to it by section 44 IHTA 1984 and “qualifying interest in possession” shall have the meaning given to it by section 59 IHTA 1984’.
Mrs. Villiers: By way of background, I point out that the pre-owned tax assets regime contained in the Finance Act 2004 applies to certain transfers of assets where the original owner continues to benefit from them after the change of ownership—for example, where someone transfers the title to a home to someone else but continues to live in it. Where the POAT charge applies, an income tax charge is levied that is linked to the use value of the asset transferred.
The rules were adopted to prevent people from avoiding inheritance tax. Although the Opposition certainly support measures to prevent such avoidance, we have always had significant reservations about how the POAT regime operates in practice. Partly because of the controversy associated with the regime, the Government have said that people caught within its scope have the option to elect out of the regime and back into the inheritance tax rules. The result of such an election is that no POAT income tax charge is payable. Instead, the asset in question is treated as part of the original owner’s estate for IHT purposes and taxed on his death in the normal way.
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However, a time limit was placed on elections. As the draft guidance notes helpfully circulated by the Chief Secretary confirm, the deadline was 31 January 2007 for those caught in 2005-06, the first year in which the POAT regime operated. Thenceforth, as the explanatory notes tell us, the deadline for election has been the self-assessment deadline for the year in which the person first became liable to the charge. The original legislation, in paragraph 23 of schedule 15 to the 2004 Act, allowed elections after the deadline, but only in limited circumstances. Late elections could be accepted only where the taxpayer could show a reasonable excuse for failing to make the election before the relevant filing date. Clause 65 will give HMRC greater discretion in accepting late elections by deleting the requirement to show a reasonable excuse.
The Opposition welcome the change, but we feel that it does not answer all the concerns expressed about elections under the POAT regime. For a start, clause 65 fails to address the problems surrounding the procedure for making a valid election. Amendment No. 119 would cover that point. It was tabled in response to concerns expressed by a number of professional bodies including the Law Society, the Chartered Institute of Taxation and the Society of Trust and Estate Practitioners.
The situation provides a clear and pressing reason to take a liberal approach to allowing late elections, as it was not legally possible to make an election before the prescribed the deadline. Amendment No. 119 would remove the problem by ensuring that any elections made before the regulations came into force are deemed valid. It is essential to adopt the amendment if the Government are to allow the election that they promised.
The second concern is that even with the increased flexibility given by clause 65, the scope for late elections is still too narrow. The draft guidance notes seem more relevant to the old test, with its requirement that a “reasonable excuse” be shown. The provisions for late election due to events beyond the taxpayer’s control seem only to repeat the guidance already in force in relation to the unamended rules.
The provisions on other circumstances in the draft guidance seem to be new, and they are welcome. They provide that a late election will be accepted where the taxpayer can show that they were
“unaware and could not reasonably have been aware that they were liable to an income tax charge under this section, and elected within a reasonable time of becoming so aware”.
That is welcome, but the requirement to prove a negative in the last line of page 2 of the draft guidance could be difficult to satisfy in practice.
The Opposition believe that a much clearer assurance is needed in relation to some specific cases. As STEP and the CIOT have pointed out, there are significant interpretive problems with the POAT regime. To compare something with the Schleswig-Holstein question has become a tired parliamentary clichÃ(c), but it would not be an exaggeration to say that the number of people who fully understand the POAT regime could probably be counted on the fingers of one hand. I do not know which Minister is responding, but, given its complexity, I do not suppose that there was a rush to take this matter over from the Paymaster General. These provisions are highly complex and controversial, and a significant number of people may be unwittingly and unknowingly caught by the regulations and have no clue that that is so. There is a pressing case for being flexible in allowing late elections.
Particular problems have arisen in relation to those entering into so-called reversion release schemes. In guidance published in March 2006, HMRC stated that such schemes were caught by the reservation of benefit rules, which predate POAT. Where those rules operate, they keep the asset within the inheritance tax regime. POAT is therefore not payable, since the asset remains part of the original owner’s estate and will be subject to IHT on death. However, on 29 January this year, HMRC reversed its stated view on these schemes and declared that the reservation of benefit rules did not apply and POAT did. That announcement came just three days before the expiry of the 31 January deadline. Very few people are likely to have seen the announcement in time to make the necessary election, even setting aside the problems with the legality of such elections in the absence of regulations. Many people will already have self-assessed on the basis that no POAT was due.
The Paymaster General would say, if she were here, that those entering into reversion release arrangements had tax avoidance in mind. Her response might be, “If you play with fire, you may get burned.” Certainly, we would not wish to defend such schemes and the Government are justified in taking action against them. However, POAT is controversial and, some would say, harsh in operation, and the Government have always sought to mitigate the concern that they provoked by allowing people involved with such schemes to opt out of POAT and back into IHT. In a sense, POAT is meant as a deterrent, not as a tax in the ordinary sense of the word.
If the Government are going to make good on their promise to allow elections, they have to be flexible on timing, given the confusion caused by their own complicated legislation and their last minute change of mind on these schemes. It would be useful to have a clear statement from the Minister that people affected by reversion release schemes will be permitted to make a late election, where they submitted their tax return thinking that they did not need to pay POAT because HMRC guidance told them that they fell within the IHT regime instead. It would be unfair to penalise people for not being in a position to make an election in the three days between the announcement by HMRC that its original guidance was incorrect and the expiry of the deadline. I am told that the official HMRC guidance was not even corrected until February this year, after the deadline had expired.
Further problems arise in relation to section 80 of the Finance Act 2006. Even by the standards of POAT, section 80 and the changes it made to the Finance Act 2004 are difficult to understand. Few lawyers, even specialists, will know that someone is potentially caught by section 80, the stated goal of which was to apply the POAT regime to so-called reverter-to-settlor trusts, which had been used as part of an IHT and POAT avoidance scheme. Again, the objective of shutting down those schemes is sensible and the Opposition would not dissent from it. However, as I mentioned to the Committee last year during the debate on the clause that became section 80, defects in drafting mean that it goes beyond the stated goal and hits other trusts that have nothing to do with IHT avoidance. Indeed, I am informed by those who understand such matters better than I that some avoidance schemes may end up falling outside the scope of section 80, while other arrangements, where there is no tax planning involved, end up liable to a double whammy of both POAT and IHT. There is a risk that few people will be aware of the need to make an election, which is another vital reason to give flexibility on late elections.
The Law Society set out the situation as follows:
“Clause 65 introduces a right for a taxpayer to make a late election without having to show a reasonable excuse—but only at the discretion of HMRC.”
The background to that is thought to be the official acknowledgement, in response to representations, that the changes made by section 80 had a wider effect than the policy to which they sought to give effect, leading to advice from HMRC that many, but not all, of the innocent cases caught by the excessively wide legislation could be resolved without practical consequences by submitting an election under paragraph 21 or 22 of schedule 15.
That advice was provided, and published via STEP and the CIOT, only weeks before the deadline for the first elections on 31 January 2007. In responding to the concerns expressed by STEP, the CIOT and the Law Society about section 80, HMRC has stated that problems caused by the section can be dealt with by electing out of the POAT regime via an election.
If election is considered to be a solution, we need a clear commitment from the Minister that, given the difficulty in ascertaining their legal position in time for the 31 January deadline, those inadvertently caught by section 80 will be able to make a late election. Even if such a clear commitment is forthcoming, however, it will still be only a sticking-plaster solution because, as the CIOT points out, the effects of an election are not always straightforward, and what about situations in which the POAT problem comes to light only after the death of the settlor? Because an election cannot be made by personal representatives, neither the original paragraph 23 of schedule 15 nor the version amended by clause 65 would assist in that situation. If the Government were to accept new clause 1, they would solve the underlying problem with section 80 that prompted the Law Society to describe the provision as “excessively wide”.
STEP and the CIOT have expressed grave concern that a clause that was introduced to deal with reverter-to-settlor trusts should be used as a way of imposing POAT liabilities on a property that is already subject to inheritance tax. They have also expressed disappointment that the Finance Bill takes no steps to correct the error in section 80 that I pointed out to the Paymaster General in last year’s debate.
The problem is that section 80 inadvertently catches many settlor-interested trusts in which the settlor had a life interest so would be subject to IHT on the assets on his death anyway. That is because section 80 bites where property has left a settlor’s estate and then comes back to him. That could happen in a number of circumstances that are not related to reverter-to-settlor trusts or to tax planning at all.
Contrary to the objective of the POAT regime, in some cases section 80 hits trusts that do not avoid IHT and were not set up to do so. It actually imposes a POA charge even where IHT is already payable, leading to potential double taxation. The CIOT suggests
“that the legislation should be retroactively amended so as to catch only the intended target.”
Few settlors will have been made aware of the need to make an election, because the issue was published by the CIOT and the Institute of Chartered Accountants in England and Wales only in January 2007.
The text of the pre-Budget report press notice on section 80 is consistent with that definition of a reverter-to-settlor trust. It specifically refers to sections 53 and 54 of the Inheritance Tax Act 1984, which are the sections that exempt the trust from inheritance tax otherwise payable on termination of another beneficiary’s life interest. The drafting error is that the changes made by section 80 apply not only to trusts in which the life tenant is another beneficiary, but also to those in which the life tenant is the settlor himself. Where section 80 applies, it removes the exemption from the pre-owned asset charge otherwise applicable where the taxpayer is treated as beneficially entitled to the relevant property for the purposes of IHT.
The trusts affected include a number of old-style marriage settlements, some of which could date back as far as the late 1980s. The most common problem would arise where a settlor has given assets to a family member but for some unexpected reason, perhaps a bereavement, the assets return to his estate. The CIOT described section 80 as incurring “an absurd result”, saying:
“The whole point of pre-owned asset tax is to tax assets which a settlor or donor enjoys despite them not being in his estate for IHT purposes. By definition, it is not a tax on property to which a settlor or donor is treated as beneficially entitled, as such property is fully subject to inheritance tax in their hands”.
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HMRC has stated that the CIOT’s fears are exaggerated, because section 80 does not apply if the life interest of the settlor has existed at all times since the inception of the trust. That interpretation provides a degree of comfort, and it would be useful if the Minister could confirm it on the record today. However, I do not think that it will save those settlements that started as discretionary trusts and where the settlor was granted a life interest at a later date.
Accepting new clause 1 would provide a much clearer and firmer protection than merely relying on HMRC’s interpretation of the words “at any subsequent time” in sub-paragraph 11 of schedule 15. It would also remove many concerns about late elections. I urge the Minister to consider it seriously—if not today, then for next year’s Finance Bill.
Amendment No. 211 was prompted by a concern expressed by the Law Society, which felt that people should have the option to elect out of the pre-owned asset tax in future years. They might choose to pay the tax initially, their financial circumstances might change and the commitment to pay pre-owned asset tax might become more difficult. The flexibility to opt out in future years and back into the IHT regime would be useful. It would not affect liability for tax in the early years, and it could increase the range of assets available to be taxed under IHT on the death of the relevant person.
Amendment No. 212 follows on from another suggestion by the Law Society, which is concerned that HMRC’s powers in such matters are not subject to review or appeal. The Law Society feels that it should be possible to appeal against a decision by HMRC to refuse a late election. Again, we feel that that is a common-sense proposal that the Government would do well to consider.
On clause stand part, I shall address two important points. The first concerns timing. Subsection (2) provides that clause 65 is deemed to have come into force on 21 March 2007. Are elections made between 31 January 2007 and 21 March 2007 governed by the old rules or the new? Will they be subject to the test in the present statute or the amended test? Arguably, they remain late after the 21 March deadline. Therefore, if HMRC has not yet made any decision on them, they should be subject to the new, amended criteria rather than the unamended provisions in statute.
It is particularly important to take into account late elections made between the 31 January deadline and 21 March because of the timing problems that I described in relation to reversionary leases and the changes made to the HMRC guidance. It would be useful to have the Minister’s guidance on the status of late elections made before 21 March 2007.
My last point is another highlighted by STEP and the COIT. It is a matter of concern that the Government have not used this Finance Bill to correct another significant flaw in the POAT regime, one to which I drew the Committee’s attention last year. It concerns equity release. Where, for example, a parent sells half a house to one of their children, it will result in a POAT charge on the deemed rental income. That is the case even where the proceeds of sale are kept by the parent and subject to inheritance tax on their death. However, no such charge arises where an identical transaction is carried out with a bank or other commercial provider of equity release schemes.
The CIOT says:
“We remain unconvinced that such a transaction is a suitable target for anti-avoidance legislation and believe that this will catch many ‘ordinary hard-working families’ where the parent is trying to raise funds for an equity release and does not want to go to a commercial provider, some of whom do not have a good financial reputation.”
I am aware that the Treasury does not consider that that would cause significant problems, presumably on the grounds that it believes that equity release arrangements are fairly uncommon—particularly as informal arrangements within families. However, the Minister is, I know, well aware of the expected increase in the use of equity release. The Economic Secretary himself has emphasised its importance when debating a new regulatory structure before the relevant Delegated Legislation Committee.
In an era of a growing pensioner population, the need to find ways to unlock and use the equity in the family home without having to sell is likely to increase. Given the potentially high charges and interest rates that can be levied on equity release transactions by commercial providers it would not be surprising for a number of families to seek to solve the problem between themselves, without necessarily using a bank or other commercial provider. Sales of the whole of the property—100 per cent. of the equity—are exempt from POA, and therefore it seems odd and arbitrary to treat sales of part of the property differently.
There is real concern that people might undertake such arrangements and go to an ordinary solicitor with no understanding or awareness of the possibility of a POA problem. If HMRC is worried about the possibility of avoidance, and the proceeds of the equity release being given away and passing out of the relevant person’s estate, it would surely be possible to draft provisions that would ensure that the POA charge would still apply in such a case.
In conclusion, the POAT regime remains highly controversial and, as has been pointed out, could apply in a range of situations in which those involved were not motivated by a wish to avoid inheritance tax and were wholly unaware of the possibility of a POA charge. Its complex nature means that even seasoned professionals find it difficult to understand—even Ministers of the Crown may sometimes have a problem working out what it means. An average high street solicitor is very unlikely to have the expertise needed to advise people on whether there is a POAT risk in transactions that may be no more than attempts to give financial assistance to parents or simply an incidental effect of family living arrangements.
There is a real risk that people will stumble into the regime unknowingly and accidentally. Clause 65 is an inadequate response to the serious problems with schedule 15 of the Finance Act 2004 and I hope that the Government will consider more wide- ranging reforms in future, as well as the Opposition amendments.
The Chairman: Before I call the hon. Member for Falmouth and Camborne, may I remind the Committee that, difficult as it is to resist the temptation, the use of electronic devices such as mobile telephones in Committee, even for texting, is forbidden?
Julia Goldsworthy: I am sure that the Committee will be pleased to know that I shall not repeat the arguments about double taxation or validity.
Mr. Gauke: Shame.
Julia Goldsworthy: The hon. Gentleman says “Shame”, but I see no point in repeating arguments that have already been made, and detaining the Committee unnecessarily. However, I have a few points to make, and I will be brief.
There were warnings during consideration of last year’s Finance Bill that people would be caught inadvertently and that the legislation was too wide. Broadly, clause 65 is intended to narrow the definition so that people will not be caught in that way. It has been generally welcomed. I note the change from reasonable excuse to the discretion of HMRC. On that basis, will HMRC publish guidance about how and in what situations it would exercise discretion? Will there be an appeals process if the late election is refused?
Finally, I want to draw attention to the question of changes in circumstances. What happens if the circumstances of the individual change? The circumstances of someone who initially elected to pay income tax might change so that they could not afford to do so. What scope would there be for that individual to opt into the inheritance tax system simply because their income could not sustain the payments that they would be expected to make?
Clearly, in all such cases, we are talking about assets that are above the inheritance tax threshold. My concern is what happens when someone inadvertently falls into the inheritance tax threshold after the point at which the asset has been transferred. They may not initially be eligible, but they may fall into such circumstances. At what point are they expected to make the election?
Ed Balls: As the hon. Member for Chipping Barnet said, this is a complex area. I am grateful to her for setting out, eloquently and comprehensively, the issues, which have helped me to focus my remarks more effectively than I would otherwise have done. I will not go through the background to the clause, as that has already been done at length. As the hon. Lady said, and as members of the Committee will now therefore be aware, the Government have received representations from professional groups that are concerned about individuals who did not realise that they were liable to the POAT charge or the deadline for making an election for the asset in question to be treated as if it were subject to inheritance tax. In such situations, taxpayers will unknowingly build up arrears of income tax.
Although the representations have provided no firm evidence of a significant problem, the Government recognise the concerns. The clause will allow HMRC to use its discretion to accept elections for inheritance tax treatment in cases that would otherwise be too late. The change has been welcomed by tax professionals and representatives of other groups, and I commend the clause to the Committee.
Opposition amendment No. 211 seeks to provide that a taxpayer may initially pay the POAT charge but decide in a later year to elect for inheritance tax treatment going forward. The original provisions allow people sufficient time to decide how they want to deal with existing arrangements, including whether to make an election. Anyone knowingly entering a new scheme is able to make a fully informed decision. Clause 65 allows HMRC to use its discretion to accept elections after the prescribed time limit where the taxpayer was unaware that they were liable to the POAT charge.
In our view, amendment No. 211 would give people who have entered into arrangements to avoid inheritance tax an each-way bet. If they initially chose to pay the POAT charge but then found that their circumstances had changed, it would enable them to elect instead for inheritance tax treatment. In those circumstances, we do not think that there is good reason to enable arrangements to be revisited. That is why we urge the Committee to reject the amendment.
HMRC will update its guidance accordingly, and intends that regulations will be made shortly to prescribe the form of elections for future use.
Mrs. Villiers: Will the Minister give way?
Ed Balls: In a moment. Although that oversight was regrettable, it is our intention to ensure that it will not have a detrimental effect on taxpayers. I shall explain our views on amendment No. 119, then take the intervention.
Opposition amendment No. 119 seeks to address the matter by providing that any election already made shall be deemed to have been made in the prescribed manner. We have consulted our lawyers, and I think that I have now made our position on the matter clear. We have explained to representative groups that have raised the issue with us that we shall update our guidance accordingly, and make regulations shortly. We do not think that it would be sensible to accept the amendment as currently set out by the hon. Lady.
Mrs. Villiers: I want to press the Minister. When the law of the land says that a valid election must be in accordance with the regulations, if there are no regulations, how can anyone make a valid election?
10.15 am
Ed Balls: I think that I just explained it to the hon. Lady. I did not take the intervention because I wanted to set out the position. HMRC has consulted lawyers about the validity of elections and their advice is that all elections received, whether people are using the form provided by HMRC or simply giving all necessary information, can be accepted as validly made. I have said that I regret this oversight and that it will be addressed. Indeed, we have already published the draft guidance. We need to get the position on the regulations sorted out, but in our judgment we do not need to complicate the position unnecessarily, given that a number of people have already made elections.
Adam Afriyie (Windsor) (Con): The Economic Secretary used the words “can be accepted”. That sounds slightly ambiguous. Will he put on the record now that all such elections will be accepted?
Ed Balls: Well, as I said, whether elections are made on the form provided by HMRC or by giving all the necessary information, they will be accepted as valid. On that basis, our legal advice is that we do not need to accept the amendment.
This year, we have gone further by proposing, in clause 65, to allow HMRC to accept late elections from taxpayers, but as the guidance also explains, HMRC will not accept a late election from a taxpayer who has knowingly decided neither to make an election on time nor to declare a benefit from a pre-owned asset. Those are not the sorts of cases that should properly be subject to an appeal to the special commissioners and beyond. That is why the amendment is not appropriate.
New clause 1 would provide an exemption from POAT where the assets in question are effectively back in the taxpayer’s inheritance tax estate by virtue of their having acquired an interest in possession. Committee members may remember that the Government amended the rules last year to prevent schemes that were being used to exploit existing exemptions to avoid both POAT and inheritance tax charges. Some of those schemes were being used to resurrect avoidance schemes that were caught by the POAT charges when they were first introduced.
We are aware of representations received by HMRC suggesting that the amendments to section 80 of last year’s Finance Act may apply more widely than that. Those concerns do not generally arise in connection with the disposals made on or after 26 March 2006 because of the changes to IHT rules for trusts, which were also introduced last year. Moreover, HMRC has already made it clear to representative bodies that there is no effect on a range of innocent transactions where taxpayers have put assets into trust for their own benefit before that date.
It has also been suggested that a small number of cases may have been caught that involve complex arrangements put in place by non-UK domiciliaries to avoid paying UK IHT that would otherwise arise on UK property. The effect of new clause 1 in those cases would be that neither an income tax charge nor a UK inheritance tax charge would ever arise. It would not be appropriate to introduce such special treatment for such cases. To the extent that they are now subject to the income tax charge, it has been open to those affected to elect instead that the assets in question should be subject to inheritance tax. Furthermore, if they were unaware of their liability and the need to make an election before January 2007, they can benefit from the provisions in the clause. Therefore, a further provision is not appropriate. We ask the Committee to reject the new clause.
I should just like to answer some questions asked by the hon. Member for Chipping Barnet. The clause would give HMRC discretion, from 21 March, to consider any election that should have been made by 31 January, but which was not, whether or not there is reasonable excuse. That would be the case under the new rules, not the old rules, so late elections made prior to 21 March will be accepted. As I have explained, we do not need to amend the provisions to allow the previous requirement for elections to be removed because we have made our legal position clear on the legality of those elections. Therefore, for HMRC to accept all late elections would be both wrong and unnecessary.
I was asked by the hon. Member for Chipping Barnet whether I could give guidance on when we would accept late elections. As I have said, we have already published draft guidance on that matter. The hon. Lady stressed the complexity of the POA rules. She is right about that. As we have seen from her speech, that complexity is driven by the inventiveness of people trying to use the provisions for avoidance. Most people will therefore know when they are benefiting from assets that are subject to charge, but there are some people who have rearranged their affairs without aiming to avoid inheritance tax. At the same time, they may not be aware of the deadlines. That is why we have introduced this discretion through the clause.
Representative bodies such as STEP say there are interpretive problems, according to the hon. Lady. That is why we have worked with those bodies which have an interest in those matters, including the Chartered Institute of Taxation and the Low Incomes Tax Reform Group, to provide revised guidance on the internet. I am aware that representations have been made, asking for changes to the tax return itself. I understand that HMRC has responded positively to those representations and that the return will in future make specific reference to the charge and direct taxpayers to the relevant parts of the guidance. I am sure that that will be welcomed.
The hon. Lady asked whether we are unwittingly catching taxpayers with the changes to reverter-to-settlor trusts in the Finance Act 2006. We are aware that a small number of cases may have been caught, but they mainly involve complex arrangements. However, as I said, those were the non-UK domiciliaries, and we do not think that it would be appropriate to exempt them from the provisions of the Finance Bill.
The hon. Member for Chipping Barnet asked what happens if a taxpayer dies before realising that the pre-owned assets charge applies. Should their personal representatives be able to make the election in their place?
Mrs. Villiers: I did not say that.
Ed Balls: Well, if she had asked that. She asked many questions.
Mrs. Villiers: I commented on the issue of personal representatives being able to make an election on the basis that they cannot make such an election. In fact, I think that there would be significant problems if they were entitled to make an election. The reason that I referred to that issue was to say that we need to solve the underlying problems with section 80 because not all of the problems can be solved by election. There may be instances in which the problem only comes to light after the death of the settlor.
Ed Balls: As I understand it, the hon. Lady asked me to confirm whether section 80 applies. The answer to that is that it does. Given that she did not ask me about that, I will not answer it.
The hon. Lady asked about reversionary lease schemes. HMRC has just changed the tax rules so that people will not have had time to elect. Those schemes will benefit from the provisions for late elections in clause 65.
The hon. Member for Chipping Barnet asked me about the particular example of the sales of houses, which we discussed at length last year. As she knows, the original rules provide an exemption for the owner of an asset who sells their whole interest in the asset on arm’s length terms and continues to enjoy it. Subsequent regulation extended that exemption to certain sales of a part-interest: for example, part-sales at arm’s length. In general, it is not appropriate to provide exemption for sales of a part-interest, which are made in ways other than at arm’s length. If one member of a family needs to raise cash and another member is willing and able to provide it, there are other and more straightforward ways of structuring that to an equity-release transaction.
Mrs. Villiers: I emphasise that new clause 1 does not operate in the way that the Economic Secretary suggested. It would leave the relevant assets subject to inheritance tax. I am pleased that the Economic Secretary said that
“late elections made prior to 21 March will be accepted.”
I suspect that that is a slightly more radical statement than he intended to make. However, if it is true, it is certainly very welcome. I welcome his specific assurances on the position of late elections in relation to reversionary lease schemes. I emphasise that I will withdraw the amendment that heads the group, but I would like a vote on amendment No. 119 because I continue to be concerned that the Government have failed to address a number of important problems for the POAT regime.
Ed Balls: I am sure that what I said about late elections was fully consistent with the guidance and the clause. Therefore, I am sure that I got it right.
Mrs. Villiers: I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendment proposed: No. 119, in clause 65, page 42, line 35, at end insert—
‘(4) Any purported election made on the appropriate form or before the regulations prescribing the form of election came into effect shall be deemed always to have been made in the prescribed manner under subparagraph (2) above.’.—[Mrs. Villiers.]
Question put, That the amendment be made:—
The Committee divided: Ayes 9, Noes 14.
Division No. 8 ]
Afriyie, Adam
Duddridge, James
Francois, Mr. Mark
Gauke, Mr. David
Goldsworthy, Julia
Goodman, Mr. Paul
Hoban, Mr. Mark
Newmark, Mr. Brooks
Villiers, Mrs. Theresa
Balls, Ed
Brennan, Kevin
Cunningham, Mr. Jim
Engel, Natascha
Flello, Mr. Robert
Healey, John
Johnson, Ms Diana R.
Keeble, Ms Sally
Lucas, Ian
McCarthy-Fry, Sarah
McGovern, Mr. Jim
Marris, Rob
Ussher, Kitty
Wright, Mr. Iain
Question accordingly negatived.
It being after twenty-five minutes past Ten o’clock, The Chairman adjourned the Committee without question put, pursuant to the Standing Order.
Adjourned till Tuesday 5 June at half-past Ten o’clock.
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