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.
9.30
am
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 also asked about the interaction with some of the other
allowances that are rightly paid to our armed forces. The new allowance
will be paid separately from the other allowances, such
as the longer separation allowance. In relation to tax credits, he is
right; from this year onwards the tax credit regulations have been
amended to disregard the allowance as income for tax credit purposes.
Prior to that, any operational allowance paid to the armed forces in
these circumstances will not reduce the entitlement to tax credits
because, as he knows as well as anyone, part of our reforms to the tax
credits allow a disregard of income rises up to
£25,000. 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.
9.45
am
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.
Paragraph
23(2) of schedule 15 to the Finance Act 2004 requires the election to
be made in “the prescribed manner”, which in turn is
defined in schedule 15(1) as
“prescribed by regulations”. However, no regulations have
been adopted, meaning that it is impossible to make a valid election.
The Treasury has allowed the 31 January deadline to expire
without adopting regulations to enable people to make an election, and
clause 65 does not address that point. No election already made appears
to be valid, and no future election will be valid until the regulations
are in force. 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.
New
clause 1 seeks to bring that about by amending paragraph 11 of schedule
15 to the Finance Act 2004 to correct the defective drafting in section
80. It would insert a new sub-paragraph (12A) in paragraph 11 to
ensure that the provisions will not apply where it is the settlor who
has the life interest in the property. My reasons for tabling the new
clause are as follows. Looking at the background to section 80, the
press notice that announced the measure in the pre-Budget report 2005
is headed “Pre-Owned Assets...and Reverter to Settlor
trusts”. The term “reverter-to-settlor” is
generally used to describe a trust in which the trust property reverts
to the settlor or his spouse after termination of another
beneficiary’s interest in
possession.
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”.
10
am
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.
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.
On amendment No. 119, the POAT
rules provide that an election must be made in a manner prescribed
by regulations. No such regulations have yet been made, which we regret.
That is an oversight on the part of HMRC. However, HMRC has consulted
its lawyers about the validity of elections that it has already
received. The advice that it has been given is that all timeous
elections received—whether using the form that HMRC provided or
simply giving all the necessary information—can be accepted as
validly made. 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.
Opposition
amendment No. 212 would introduce an appeal route to the special
commissioners if HMRC were to refuse to accept an election outside the
prescribed time limit. When introducing POAT in 2004,
the Government recognised that a taxpayer may have a reasonable excuse
for not making their election on time. That is why the original
provisions allowed HMRC to accept late elections in those cases. The
draft guidance that has been produced in connection with clause 65
makes it clear that it will continue to do so. 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
]
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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