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Session 2007 - 08
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Finance Bill

Finance Bill

The Committee consisted of the following Members:

Chairmen: Frank Cook, Mr. Jim Hood, † Sir Nicholas Winterton
Atkins, Charlotte (Staffordshire, Moorlands) (Lab)
Blackman-Woods, Dr. Roberta (City of Durham) (Lab)
Blizzard, Mr. Bob (Waveney) (Lab)
Bone, Mr. Peter (Wellingborough) (Con)
Breed, Mr. Colin (South-East Cornwall) (LD)
Browne, Mr. Jeremy (Taunton) (LD)
Cable, Dr. Vincent (Twickenham) (LD)
Chapman, Ben (Wirral, South) (Lab)
Eagle, Angela (Exchequer Secretary to the Treasury)
Efford, Clive (Eltham) (Lab)
Field, Mr. Mark (Cities of London and Westminster) (Con)
Gauke, Mr. David (South-West Hertfordshire) (Con)
Greening, Justine (Putney) (Con)
Hall, Patrick (Bedford) (Lab)
Hammond, Mr. Philip (Runnymede and Weybridge) (Con)
Hands, Mr. Greg (Hammersmith and Fulham) (Con)
Hesford, Stephen (Wirral, West) (Lab)
Hoban, Mr. Mark (Fareham) (Con)
Hosie, Stewart (Dundee, East) (SNP)
Joyce, Mr. Eric (Falkirk) (Lab)
Kennedy, Jane (Financial Secretary to the Treasury)
Morden, Jessica (Newport, East) (Lab)
Newmark, Mr. Brooks (Braintree) (Con)
Palmer, Dr. Nick (Broxtowe) (Lab)
Penrose, John (Weston-super-Mare) (Con)
Pound, Stephen (Ealing, North) (Lab)
Pugh, Dr. John (Southport) (LD)
Sharma, Mr. Virendra (Ealing, Southall) (Lab)
Simon, Mr. Siôn (Birmingham, Erdington) (Lab)
Thornberry, Emily (Islington, South and Finsbury) (Lab)
Todd, Mr. Mark (South Derbyshire) (Lab)
Ussher, Kitty (Economic Secretary to the Treasury)
Viggers, Peter (Gosport) (Con)
Wright, David (Telford) (Lab)
Alan Sandall, James Davies, Committee Clerks
† attended the Committee

Public Bill Committee

Tuesday 13 May 2008


[Sir Nicholas Winterton in the Chair]

Finance Bill

(Except clauses 3, 5, 6, 15, 21, 49, 90 and 117 and new clauses amending section 74 of the Finance Act 2003)

10.30 am
The Chairman: I welcome all hon. Members to this further sitting of the Finance Bill Committee. It is another very pleasant day, and we had a wonderful weekend, so I hope that everyone feels duly rested and recharged for the political conflicts ahead.
We are making steady but not over-rapid progress on this important Bill, and we are still on schedule 3. I understand from the Clerk that we had hoped to complete consideration of the schedule on Thursday but, sadly, that did not happen and we have three groups of amendments to discuss this morning. I have selected amendment No. 26 to schedule 3 in the name of Her Majesty’s Opposition. I am not sure which member of the Opposition team will leap to his feet, but I shall take a gamble on it being Mr. Philip Hammond.

Schedule 3

Entrepreneurs’ relief
Mr. Philip Hammond (Runnymede and Weybridge) (Con): I beg to move amendment No. 26, in schedule 3, page 121, line 36, after ‘possession’, insert
‘, including a defeasible life interest,’.
I am pleased to hear that you had a good weekend, Sir Nicholas, although I learnt from my television screen on Sunday afternoon that it seemed to be more rainy in the north-west than the weather that we were enjoying in southern England. It might not have been so in Macclesfield, but it certainly was in Wigan.
The Committee will be pleased to know that the debate will be short, unless the Minister has something startling to say. The amendment is a simple probing amendment, and I make no claim to authorship. It would clarify a small technical point to which an outside professional body has drawn attention and make it clear that an interest in possession otherwise than for a fixed term could include a defeasible life interest. I have no great axe to grind one way or the other on whether a defeasible life interest is included in the Bill, but I understand from outside professional bodies that its drafting leaves them in some doubt whether a defeasible life interest is included or excluded. We therefore considered that it would be helpful to have definitive clarification from the Minister. I do not in all honesty believe that the Bill needs to be amended if the right hon. Lady can simply clarify the point for the benefit of the professionals who are interested.
The Financial Secretary to the Treasury (Jane Kennedy): Well, here goes! Amendment No. 26 operates on the part of the schedule that determines when entrepreneurs relief is available to trustees. It seeks, in particular, to make it clear that a beneficiary with a defeasible life interest in an interest in possession trust may qualify for relief. I hope that I can demonstrate that the amendment is unnecessary, although I appreciate the spirit in which it has been moved. I am aware of the debate among interested parties about whether a defeasible life interest would be considered an interest for a fixed term and, hence, excluded from the entrepreneurs relief. I assure the Committee that the fact that a defeasible interest may be terminated at some point does not render it an interest for a fixed term. More fundamentally, the amendment does not provide a definition of defeasible life interest, so it would fail to provide the degree of clarification that it may be intended to achieve.
I hope that I have provided the help that the hon. Gentleman was seeking and that, having heard my remarks, he will withdraw his amendment.
Mr. Hammond: I am grateful to the right hon. Lady for taking the amendment in the spirit in which it was moved. She has now placed on the record the Government’s definitive view on what the drafting means. I accept that the amendment is unnecessary and so beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
The Chairman: For the information of the Committee, the weather in Macclesfield on Sunday was brilliant. We had blue skies over Macclesfield, as is appropriate. I took part in a seven-mile sponsored walk and it did me the power of good. I ended up with a pint of beer, which was very refreshing indeed.
Mr. Hammond: I beg to move amendment No. 27, in schedule 3, page 122, line 31, leave out ‘as part of’ and insert ‘subsequently to’.
The Chairman: With this it will be convenient to discuss amendment
No. 28, in schedule 3, page 122, leave out lines 37 to 39 and insert
‘date of the disposal referred to in subsection (3)’.
Mr. Hammond: Clearly, Macclesfield and Wigan are miles apart, Sir Nicholas.
Amendments Nos. 27 and 28 address a more substantive issue than the previous amendment. They would amend the wording of new section 169K of the Taxation of Chargeable Gains Act 1992, which deals with the associated disposal of assets that have been used in connection with the business of a partnership or a company, the interest in which is being disposed of by the individual. In order for an associated disposal to be eligible for entrepreneurs relief, two conditions have to be met. I particularly want to draw the Committee’s attention to condition B, which will be inserted by new section 169K(3), which states:
“Condition B is that the individual makes the disposal as part of the withdrawal of the individual from participation in the business carried on by the partnership or by the company or (if the company is a member of a trading group) a company which is a member of the trading group.”
That has been described as the lock, stock and barrel approach to the disposal of associated assets. The assets must be disposed of as part of the individual’s withdrawal from participation in the business.
My first point, which I hope the Minister will begin to clarify and to which we might return later, is that the definition is rather vague. What does “withdrawal from the business” mean? Presumably it does not mean simply the sale of the shares or of the partnership share, or ceasing to be employed in the business, because if it did it would say so. It has to be a more complex concept, and there is concern that it is not clearly defined. The point of withdrawal from the business will be important in determining whether the proceeds of the sale of an associated asset are eligible for taper relief, so I suspect that that will be the source of some future legal clarification in the courts if we do not get it right and make absolutely clear the precise meaning of withdrawal of the individual from participation in the business. Does it mean on the same day, in the same month or in the same year? Does it mean that at the time the individual undertook the first action, he was planning in his mind the second action as some kind of package concept? Is it a motive test? Those are important questions.
My understanding of the Bill is that an individual could not withdraw from the business, whether it is a company or a partnership, and dispose of the asset at a later date, because that would not be part of his withdrawal from the business. The Minister might tell us that there are certain cases in which withdrawing from the business and disposing of an asset at a later date would constitute part of the withdrawal from the business, but we need some clarity on what those circumstances will be.
I shall suggest a couple of examples. Let us suppose that somebody owned farm land that was farmed by a partnership of which he was a partner or by a company in which he was a shareholder, and that he chose to dispose of his interest in that partnership or company. He made that known to his partners or co-shareholders and they were unable to raise the financial wherewithal to buy his interest in the asset—the farm land—that is used in association with the business—so he allowed them to continue to use the asset, perhaps while they tried to raise the finance to buy him out.
One can envisage many similar scenarios, for example a GP in a GP partnership who wished to retire and cease to take an active role in the partnership, but whose partners were unable at that time to buy out his interest in the separately held asset—the premises in which the partnership operated. Partners in a small accountancy firm might be in the same position. One can think of many examples where the interest in the property will be retained until either a new partner joins the partnership or a new shareholder brings capital into the company, or the existing partners and shareholders are able to raise the capital to buy out the associated asset.
We have debated whether any business asset should be eligible for entrepreneurs relief and the Minister made it clear that as a matter of policy that was not the Government’s intention. I do not seek to reopen that debate. The group of amendments requires that the disposal be made subsequent to the individual’s withdrawal from the business. That would not cover a situation wherein somebody continuing the business could sell the asset and benefit from taper relief, but it would cover a situation wherein somebody who is withdrawing from the business can retain the asset, allow it to continue to be used in the business and then obtain taper relief on its subsequent sale.
It is tempting to think of the asset always as land or buildings, but it might be plant and machinery, or intellectual property. The individual who is exiting might own the patent upon which a manufacturing business is built, or a brand name which the company will continue to use in trading. It is not uncommon that a business needs to establish continuity by continuing under a trade name or a brand image, even if it will not be allowed to do so indefinitely.
The qualifying requirement in subsection (4) is also amended to require that when the asset is disposed of, it has been in use during the preceding year for the purposes of the business. It will need to be owned by the individual claiming the entrepreneurs’ relief and to have been in use in the business, but the individual himself will not need to have been engaged in that business. That is the soft exit provision, which will allow a partner who is retiring in circumstances where his partners cannot buy out the asset to avoid cratering the business by insisting on a third-party sale. There are real practical reasons for such a provision and I hope that the Minister can clarify what the Government’s intentions are and how in practice we can avoid some of the pitfalls that I have outlined.
10.45 am
Stewart Hosie (Dundee, East) (SNP): My contribution will be brief, and it follows on from the points made by the hon. Member for Runnymede and Weybridge. Where a partner withdraws completely and can dispose of every asset immediately and fully, one would imagine that they would be able to benefit from the release. However, in the case that within the same financial year—this is not uncommon in small businesses—the business runs into difficulty and the individual is called back on a paid or consultant basis, have they breached the rules? Have they fully withdrawn, and will they still receive the relief that they initially anticipated receiving on withdrawal, although they have been called back in extremis? That is an important point. People have contractual obligations not to re-engage with another firm, but they may be called back to assist the partnership. Would the relief still apply in those circumstances?
Jane Kennedy: The hon. Member for Dundee, East makes a fair point, which I shall address in a moment. I can confirm that on Sunday afternoon, Liverpool, Wavertree, was deluged with what appeared to be a mini tornado, which was so serious that it interrupted the broadcast of a particular event that was taking place in Wigan, much to the consternation of my best beloved and eldest son, who was not engaged in gardening as I was, it being otherwise good weather.
Amendments Nos. 27 and 28 would alter the rules governing the disposal of assets associated with a business. In particular, they would remove the requirement for associated disposals to be made alongside the withdrawal of an individual from the business in question. As such, they would dilute the targeting of entrepreneurs relief.
The amendments are unnecessary. In constructing schedule 3, the Government have deliberately focused entrepreneurs relief on individuals who are disposing of all or part of their business.
The hon. Member for Runnymede and Weybridge asked what “withdrawal from the business” means. I invite him to look at page 122, line 32, which uses the expression,
“withdrawal... from participation in the business”.
That does not answer the point made by the hon. Member for Dundee, East, which I shall come to in a moment, but the expression means just what it states. There is no specific time limit—[Interruption]. I will explain: there will be opportunities for a case to be made on a case-by-case basis.
Asset disposal occurs as part of the overall process of withdrawal, either before or after the material disposal of shares or partnership interests. We have not imposed intentional barriers to entrepreneurs relief—that was never our objective. What we have deliberately focused on, however, is the provision of relief to individuals who withdraw from participation in a business. The eligibility criteria are not meant to replicate criteria for the old taper relief. It depends on the facts of the case, but it is possible for someone to withdraw from a business and make an associated disposal at a later date. If the disposal is linked to the withdrawal from participation, the individual may receive relief. We need to take a fair view of the case based on the facts.
Mr. Hammond: What the right hon. Lady says sounds reasonable in general terms: there will be an opportunity for a case to be made, case by case, and the outcome will depend on the case. However, she is saying that no one will ever be sure. Will there be a pre-clearance regime, whereby someone intending to make a disposal and a subsequent associated disposal can obtain Her Majesty’s Revenue and Customs pre-clearance, so that that the disposal, in the circumstances that have been defined, will be eligible for entrepreneurs relief? There was a pre-clearance authorisation procedure under taper relief.
Jane Kennedy: I do not believe that to be the case. Clearly, an application for relief would be made. The case would have to be presented as I have described. There will be occasions when the facts of the case merit relief and other occasions when they do not. It is not fair for someone effectively to convert a business asset into an investment by holding on to an asset after leaving the business. The rules are flexible, as cases vary, so they need to cater for that. The key point, however, is that asset disposal—the disposal of shares or shares in a partnership—where relevant in the cessation of the business is all part of one overall event or process. I have accepted that the disposal does not have to take place all at one immediate moment.
Mr. Hammond: The right hon. Lady said a moment ago that it would be unfair for a retiring partner or shareholder to be able to convert an asset into an investment asset and then secure taper relief on it. That will not happen, because of the provision that the payment of rent disqualifies someone from entrepreneurs relief. My examples were deliberately constructed to present examples where the partner, out of consideration as it were for the other partners or his co-shareholders, was prepared to leave an asset in the business, rather than destroy the business by insisting on selling it to a third party. He would not receive rent, so it would not be an investment because of the Bill’s provisions on rent.
Jane Kennedy: I believe that I am right in saying that the hon. Member for Gosport raised that issue when we began to debate entrepreneurs relief, and we will discuss it in greater detail in the next group of amendments—I hope that I will then have something to say that gives some comfort to the hon. Member for Runnymede and Weybridge. The key point is how and why the assets are being disposed of. In response to the hon. Member for Dundee, East, if a partner withdrew and sold everything, but was called back in the circumstances he described—I accept that that is not uncommon—they could still qualify for relief, if the facts of the case merited it. If a partner came back as an employee or consultant, that, too, would not prevent application for relief. There is some scope in the arrangements for the kind of case described and for application to HMRC.
The amendments would allow some individuals to withdraw from active participation in a business, but to continue providing assets to the business. As I said at the outset, I believe that that dilutes the targeting of the relief and is therefore undesirable. We do not believe that such a scenario is a desirable target for the benefits of entrepreneurs relief in general. The amendments would have the perhaps unintended consequence of restricting entitlement in cases where a business ceases trading, but the individual only disposes of their share of the business at a later date. Under the current rules, an associated disposal may qualify at the time that the business ceases, and the amendments would prevent relief from being due in such cases.
One final point on the clearance procedure, about which the hon. Member for Runnymede and Weybridge asked, may help. There is no clearance procedure beyond the normal procedures for engaging with the tax office. The facts cannot be determined in advance, but the issue was not a problem with retirement relief. There is no reason to think that it would be a practical problem now.
Jane Kennedy: I hear what the hon. Gentleman says, and I want to think carefully about his remarks and examples. I believe that the advice that I have been given is correct, but I want to test it against his remarks. I do not believe that the amendments are necessary for the reasons that I have explained. They would dilute the targeting of entrepreneurs relief. We will discuss a related issue under the next group of amendments, when we will examine this matter further, so I hope that he will withdraw the amendment.
Mr. Hammond: I am not merely disappointed, but quite alarmed by what the Financial Secretary has said. I thought that she would explain how somewhere in the obscurity of the schedule, it was perfectly clear that a disposal at a later date in the circumstances that I outlined would be eligible for entrepreneurs relief. In fact, she has left me more concerned than I was at the beginning of the debate. She says that she is confident that her advice is right, but it is not clear what that advice is. I still have not heard whether a disposal a year or two years after an individual withdraws from a business, in the circumstances that I have set out, would be eligible for entrepreneurs relief.
We must avoid two things in this Committee. First, we must avoid creating more uncertainty in our tax system. The eight months since the pre-Budget report and the changes to the capital gains tax regime have been characterised by lack of certainty and clarity, which is hugely damaging to business interests. The thought of introducing complicated provisions, which are clouded with uncertainty as to what would, and would not, be allowed, and in what circumstances, and which apparently are not capable of being subject to a pre-clearance regime, fills me with horror.
I may be wrong, but I anticipate that on leaving the room after this sitting, I will hear from various professional bodies that they feel the same way. They will agree that there is a degree of uncertainty, which is becoming greater as the Financial Secretary attempts to answer the questions that are raised. I am very concerned about this issue. She has rightly observed that the next group of amendments touches on a similar area, but it is in this area that I wish to stand in the ditch. The next group of amendments merely pushes the envelope still further.
Will the Financial Secretary consider the following proposal and perhaps clarify the issue in the next debate? If there is no pre-clearance regime, if the provision is woolly because decisions will be made on a case-by-case basis, and if she cannot answer specific questions at the Dispatch Box about whether or not the examples I have given will qualify, for the sake of clarity will she consider giving an assurance that HMRC will publish specific guidance, with examples, showing cases where it would normally be expected that a disposal of an associated asset, after the withdrawal of an individual from that business, would be eligible for entrepreneurs relief?
11 am
Secondly, we must avoid inadvertently—I assume that this has been done through inadvertence, not malice—creating a situation in which the withdrawal of an individual from a business leads to the collapse of that business, because the other individuals are not in a position to acquire an asset that he holds and which is used in association with the business. That is not an uncommon structure, and it would be a disaster if we inadvertently created such a situation.
Jane Kennedy: The hon. Gentleman talks about a pre-clearance procedure. I understood that there was no general pre-clearance procedure. Assuming that the Bill receives Royal Assent, guidance will be published shortly. I want to think carefully about the hon. Gentleman’s remarks, particularly given the importance he attaches to this group of amendments, which is clearly based on his interface with those groups that have been talking to him about their impact.
Mr. Hammond: While I fully accept that some of the amendments I have tabled to this schedule overtly seek to extend the envelope of eligibility, in amendment No. 27, I am trying to prevent our sleepwalking into excluding a group of situations which I do not think anyone wants to exclude. Because the Minister has engaged with that point, I shall seek leave to withdraw the amendment, but I give her notice that we will have to return to this point. I hope that she will consider carefully the examples that have been offered.
If I have missed something, and if the architecture of the Bill provides a perfectly clear answer, and the danger that I have highlighted does not exist—this is not a party political point—I will happily accept that. But if that danger does exist I hope that the Government are prepared to do something to address it. In that spirit, may I ask the Financial Secretary whether she would be prepared to give the Committee an undertaking that the guidance will be made available in draft before Report so that we can understand how the Government expect this to work?
Jane Kennedy: I give that undertaking, and I will make all due effort to ensure that that happens.
Mr. Hammond: I am grateful to the Minister.
Emily Thornberry (Islington, South and Finsbury) (Lab) rose—
The Chairman: Order. Before the hon. Lady makes her intervention, I must say that I take a slightly dim view of the fact that someone who has just come into the Committee and not heard the argument should seek to intervene. However, she has a right to do so, and I am quite happy to call her to speak. I merely make that observation to the Committee.
Emily Thornberry (Islington, South and Finsbury) (Lab): I fully intended to apologise to the Committee for missing part of the debate. The point I am about to make may already have been clarified, but I am keen to make it, because in certain quarters of my constituency, perhaps surprisingly, it causes some concern. In amendment No. 27, which I believe we are debating at the moment, I understand that after the word “possession”, the Opposition wish to insert “defeasible life interest”. I do not know whether that is still the position.
The Chairman: Order. The hon. Lady used the right amendment number, but the wording to which she refers was from the previous amendment, with which we have dealt.
Emily Thornberry: I am glad that matter has been dealt with, as it is a matter of concern. It seems to amount to the same thing.
Mr. Hammond: In response to your earlier comment, Sir Nicholas, QED is the appropriate answer. If the hon. Lady reads the Official Report she will find that the Minister has replied very helpfully in respect of amendment No. 26, and clarified the point. I am genuinely grateful to the Minister. I hope that we can agree that no one is seeking to create a class of unintended losers. Goodness knows, this Government have understood that that is not a sensible thing to do. I look forward to seeing what the right hon. Lady brings forward, and I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Mr. Hammond: I beg to move amendment No. 33, in schedule 3, page 125, line 41, at end insert
‘in respect of any period commencing on or after 6th April 2006’.
The Chairman: With this it will be convenient to discuss the following amendments: No. 35, in schedule 3, page 126, line 7, at end insert ‘and’.
No. 34, in schedule 3, page 126, line 13, leave out from ‘business’ to end of line 17.
No. 37, in schedule 3, page 126, line 24, at end insert ‘and’.
No. 36, in schedule 3, page 126, leave out lines 28 to 31.
Mr. Hammond: New section 169P of the TCGA 1992 deals with the restriction imposed in respect of the disposal of an associated asset that has not been used entirely for business purposes throughout the period of ownership, or where rent has been received for the use of that asset. Although I touched on the provision in relation to the previous group of amendments, in this case, the situation is one where the asset during the period prior to cessation of or withdrawal from the business has been used not wholly for business purposes, or where rent has been received. The classic example used in such tax cases of an asset used not wholly for business purposes is that of a farm with a residential farm house on it. There can be no issue in principle that where an asset is used partly for non-business purposes, some form of apportionment must be made. That is a fair approach.
The problem is that there is no starting date for the period over which apportionment must be made. The wording appears to apply to a period beginning with the date when the asset is first acquired. That means that relief will be denied in some cases where common sense suggests that it should be available. The amendment suggests a start date—not quite plucked at random—of two years before the start of this tax year. Therefore, previous use of an asset would be disregarded provided that it has been in business use for the past two years and remains so until the point of disposal. The two years mirror the taper relief regime requirement. The measure is not susceptible to manipulation or avoidance strategies, as it is dependent on what happened in a previous period—the last two years. For the purpose of the clause, there is nothing that anybody can do now to change the status of an asset to claim some advantage. I hope that the Minister will respond to that substantive point.
The second problem in proposed new section 169P, is found on page 126 of the Bill, where four tests are set out. Tests (a) and (b) are defined by reference to the period in which the asset is in the ownership of the individual. Tests (c) and (d) are defined by reference to the period that the asset has been in use in the business. They are different tests, and it is easy to envisage—again, using the farm land example—an asset that may have been in use in a business for many years, but that may have been owned by the individual in question, perhaps through inheritance, for a significantly shorter period. There is an issue about those two different tests.
If, for any part of the period that the asset has been in use in the business, the individual has not been involved in the carrying on of the business, or if for any period rent has been received, relief is proportionately denied. For example, in a farming business where the land is owned separately, if the individual inherits land but the land has been in use in the business for a longer period, entrepreneurs relief will be partially disallowed. It appears that even if the asset has always been used in the business, he will only be entitled to relief for the fraction of the gain that represents the fraction of his period of involvement in the business out of the total period of use of the asset in the business.
Let us put this into numbers. Let us say that a piece of farm land has been used by a farming business for a hundred years; if the current generation or individual inherited the land and became involved with the farming business five years ago, he would be entitled only to five one-hundredths of the gain eligible for entrepreneurs relief—that is how I and others outside the House read the Bill. I cannot believe that Ministers intend that. If there is some obscure provision that makes good this problem, I am sure that the Minister will tell us. Again, we need to hear what is policy and what is potentially a query or question mark around the drafting. Is it really the Government’s policy that if farm land has been used for a hundred years in association with a business, but the individual currently making the disposal has only been involved in the business for five years, only five one-hundredths of the gain are eligible?
There are also a couple of issues in relation to amendment No. 34, which would deal with the rental issue by deleting reference to receipt of rental as a disqualifying characteristic. We understand that a property letting business is not in itself a trading business, but where the asset is used for the purpose of an associated trading business, it appears to be different. As the Minister will know, the acquisition of assets from outside the business to be used in conjunction with the business was positively encouraged by the taper relief regime, which allowed taper relief for such assets. An asset that is acquired and financed separately and let to a company or a partnership is a vital part of the financing strategy of many small businesses. It allows flexibility if partners change or if not all practising partners are able to invest in the asset.
The problem with the proposed new section is that its impact is retrospective. Even if the arrangements were changed and rent stopped being paid now, the lack of a start date, which I referred to earlier, means that that asset will forever be caught by the provisions. That needs to be considered very carefully in the context of how it undermines the financing arrangements that are often used in small businesses and of how it introduces added complexity.
11.15 am
In the document published to support the Budget note “Capital Gains Tax: Relief on Disposal of a Business (Entrepreneurs’ Relief)”, example 6 set out an a situation in which Mr. R has been a member of a trading partnership for several years. He leaves the partnership and disposes of his interest, realising gains of £125,000, all of which qualify for entrepreneurs relief. He also sells the partnership office building, which he owned outright but let to the partnership, realising a gain of £37,000. I hope that the Minister picks up on that point, because it is from the Treasury’s note. The note states:
“The disposal of the office building is ‘associated’ with Mr. R’s withdrawal from the partnership business, and the £37,000 gain therefore also qualifies for entrepreneurs’ relief (assuming there is no restriction on the amount of gain qualifying for relief as a result of non-qualifying use).”
The phrase in brackets suggests that the non-qualifying use is the payment of rent, but I suggest to the Financial Secretary that the term “let to the partnership” ordinarily implies that it was let for rent. The example given in the Budget note is at the very least extremely confusing, because it states that where the building has been let to the partnership, relief will be available unless there is a non-qualifying use, but the Bill states that any letting in the normal sense—for rent—will disqualify that asset entirely. Perhaps the Minister will consider those points and our concern about how that provision will distort and undermine financing structures commonly used in small businesses and once again, leave us with the tax system driving the business structure, which I think we all agree is not the optimum situation.
Jane Kennedy: The group of amendments would relax the conditions under which entitlement to entrepreneurs relief for associated disposals may be restricted. Those restrictions apply where an asset was only partly deployed for business use or where the asset or individual was involved in the business for only part of the qualifying period. Amendment No. 33 would apply those restrictions by reference to the situation after 6 April 2006, effectively disregarding anything that happened earlier. The hon. Member for Runnymede and Weybridge argues that we should effectively write off everything that happened before April 2006. However, where an asset was only partly in business use, we believe that it is right to restrict the relief, and that is part of how the relief is targeted. I shall address his point about rent received in the past shortly.
Amendments Nos. 34 to 37 would remove one of the restrictions entirely so that receiving rent for the use of an asset would not prejudice entitlement to entrepreneurs relief on that asset. When considering the extent to which an asset was used for business purposes, it is right to restrict the relief if the conditions for an associated disposal were only partly met. Where an individual receives rent for the use of an asset, the amount of entrepreneurs relief should be restricted. Where an individual is receiving rent in exchange for the use of an asset by a business, that is more akin to an arm’s-length investment and is not an appropriate target for relief.
However, the restrictions involve looking back over the entire period of ownership of an asset, which could involve substantial periods before the introduction of entrepreneurs relief in April 2008, as the hon. Gentleman has pointed out, and I acknowledge that that is considered by some to have overtones of retrospection. Amendment No. 33 seeks to mitigate that element by taking out of account that period of ownership before 6 April 2006.
The restriction in cases where rent was paid for use of the asset has also attracted adverse comment for a second reason. Receipt of rent, whether at a market rate or otherwise, did not result in any restriction on the availability of business asset taper relief on disposal of the asset in question. I acknowledge the concerns voiced by the hon. Gentleman. I am aware that the approach under the Bill differs from the taper relief treatment of assets provided in exchange for rent. The amendments would deal with that point by removing the restrictions altogether, but that approach is not appropriate.
As I said, the hon. Gentleman has touched on a legitimate concern regarding the receipt of rent, so although I do not believe that his amendments are the right way forward, I undertake to consider his case for disregarding rent received before April 2008 when assessing entitlement to entrepreneurs relief. The hon. Gentleman asked if guidance will be available. It will be, and I shall invite HMRC to publish draft guidance for consideration before we discuss the matter on Report, or sooner if possible.
Mr. Mark Field (Cities of London and Westminster) (Con): I thank the Minister for making that concession in relation to the amendments, but I want to know the Government’s thinking. Part of our confusion arises from the fact that we do not quite understand the Government’s intentions, given the various changes in taper relief and the desire to simplify the capital gains tax and related regime. What is their thinking in introducing the additional level of complication caused by working out the reliefs? Can the right hon. Lady explain in a couple of sentences why the Government are trying to drive forward such a complicated proposal?
Jane Kennedy: As I said in my opening comments, our intention was to consider the individual at the point at which the claim for relief was sought. The involvement of that individual was the focus of the work on the proposals. However, I acknowledge the criticism that the hon. Member for Runnymede and Weybridge made of the example in the explanatory note. I will seek to clarify the matter for consideration on Report. The purpose of the proposal was to make sure that entrepreneurs relief was targeted in the appropriate way as intended when we set out the reasoning behind it. I shall return on Report to the genuine concerns expressed by the hon. Gentleman today. I hope that he accepts my response in the spirit in which it is intended and acknowledges that it would not be helpful at this stage to press the amendment to a Division.
Mr. Hammond: What I am hearing from the Minister is that, as a matter of principle, she wishes to exclude assets when rent is being received, but that she might be persuaded that the retrospection implied in the drafting of the Bill would be unfair and unreasonable, at least in some cases. I am grateful to her for taking that on board. I just hope that when we discuss the Bill on Report, other matters will not drown out consideration of such important details and that we shall have a proper opportunity to scrutinise the Government’s proposals.
Detailed points arising from other Bills are often dealt with extremely well by our colleagues in the other place. It hardly needs to be said that one of the great problems with Finance Bills is that we do not have the luxury of taking a high-level view and allowing detailed issues to be resolved up there, so we have to get it right on the first go, but in view of what the right hon. Lady said, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
The Chairman: I have received representations relating to a stand part debate on schedule 3, and I am persuaded that a short stand part debate would be appropriate.
Question proposed, That this schedule be the Third schedule to the Bill.
Mr. Hammond: As we have had several debates on schedule 3, I would not rise at this stage if it were not that some issues have arisen since amendments were tabled. I would like to run through those five—or perhaps six—points now, in the hope that the Minister will be able to comment on them.
There is an overall concern that entrepreneurs relief has been lifted from the old retirement relief. That system had become complex and, at the time it was abolished, had begun to throw up problems. It appears that some of those problems have been imported into the entrepreneurs relief. May I ask the Minister to consider whether the restriction on personal companies is appropriate in a world where the limited liability partnership is available as an alternative business structure, and is not subject to any such restrictions? Are the Government pushing entrepreneurs towards the limited liability partnership route? That would be the effect of the different treatment of partnerships and companies. People who expect to have equitable interests below 5 per cent. would be strongly advised to go down that route, where they would not be subject to a disqualification—which they would be in a company—for holding less than 5 per cent. That seems inequitable. Unless the Minister says that there is a deliberate strategy to encourage certain types of business to go down that route, it looks like a careless failure to update the dusted-off retirement relief to reflect that alternative business structure, which was not available when retirement relief was operating.
Then there is the whole or part of a business test for a disposal, which is distinct from taper relief, where all business assets were eligible. That test, which also applied in retirement relief, is difficult and problematic and is likely to lead to complex disputes and probably litigation.
The second issue is transitional relief. Why did the Government set their face against at least a transitional—perhaps five years—lifting of the many restrictions on reliefs? Instead, they forced a mad scramble for the exit door, with sub-optimal outcomes for both the economy and individuals, which left many aggrieved. Would be vendors who could not get it done in time for the abolition of taper relief are yet another group looking forward to the opportunity to give the Government a good kicking in a general election.
The third point relates to proposed new section 169I(6)(b) on page 120, line 42. The requirement to be an officer or an employee is iniquitous because it does not mirror the provisions in respect of limited liability partnerships. The Government should reconsider that. If they have a principled objection to investors who are not involved in the day-to-day running of the business benefiting from entrepreneurs relief, the provisions for the disposal of interests in limited liability partnerships are defective. The practical effect is that an investor taking a role in a limited liability partnership will be entitled to entrepreneurs relief on the disposal of his interest, while an investor in shares in a company, if he is not an officer or employee of that company, will not be entitled to entrepreneurs relief.
11.30 am
Mr. Field: I am following with great interest what my hon. Friend says. Does he not think that the measure runs entirely counter to the Government’s intention in the Legal Services Act 2007? Limited partners, for example, have a number of outside investors coming into law firms who are seeking to develop their business overseas and have an outside investment. My hon. Friend’s point is not simply an academic issue—it is something that is likely to have practical relevance in very short order.
Mr. Hammond: My hon. Friend is right, and he has much more knowledge than I in that field of legislation. A theme is developing. The Minister has not been particularly forthcoming in clarifying matters, but I am seeking to understand why on the one hand there is a clear Government policy decision to encourage one type of behaviour and discourage another, while on the other, what we actually have is vague drafting, a lack of clarity or the use of provisions from old, redundant legislation, which will give rise to unintended consequences. If we know that the Government intend a consequence and we do not like it, we can have a political debate, but I suspect that in many areas, it is not that the Government have deliberately set their face against an outcome, but have inadvertently created a trap into which some classes of entrepreneurs may accidentally fall.
The Opposition do not advocate nominal directorship, and I have said so already in the course of our proceedings. It would be bad legislation if we created an environment that drove people who are passive investors to become notional employees or officers of a company, simply for tax relief purposes. I would like confirmation that that is also the Government’s view. At present, there is no provision to allow the sale of an asset used in a business before the individual withdraws. We have discussed in relation to one of the amendments a circumstance in which the asset is sold after the individual has withdrawn from the business. What about the real-world scenario, where an asset is sold before the individual withdraws? For example, a farmer who is merrily farming his 100 acres is made an unrefusable offer by a developer who wants to buy four acres for an enormous sum of money. That is probably unlikely in present market substances, but let us imagine another day when the sun is shining. Having made the decision to sell that piece of his holding, the farmer decides that he can retire and wishes to sell the remainder of the farm. In those circumstances, he would not be entitled to relief on the initial sale of the land, which may be by far the more valuable asset with a bigger capital gain, but will be entitled to relief only on the subsequent sale of the remainder of the farm. Perhaps the Minister will confirm that that is the case, and whether she thinks that it is proper. I draw attention to proposed new section 169I(8)(b), because if that farm was operated by a partnership, the partners would be able to dispose of that land and obtain the benefit of entrepreneurs relief. Sole traders, however, are once again disadvantaged.
A point made by the Law Society—I am not an expert on trusts—is that many trustees carry on business. There are strong reasons why trustees, particularly those controlling trusts that comprise farmland, may wish to continue business. Under the Bill, trustees are eligible for entrepreneurs relief only if the asset is used by a beneficiary of the trust in the carrying-on of a business by the beneficiary. There are also very tough restrictions on the ability of trustees to obtain entrepreneurs relief on the disposal of shareholdings. Why is entrepreneurs relief not routinely available to trustees when carrying on a business in their own right?
Jane Kennedy: I had hoped to have a very brief debate on schedule 3 stand part, if any. The hon. Gentleman has raised some new matters, but I do not accept that entrepreneurs relief is simply a rehash of retirement relief. It shares some of the same features, but it differs in a number of important respects. For example, there is a shorter and simpler qualifying period and there is no minimum age for qualification.
In earlier debates on the schedule, we discussed why there were no transitional provisions. A period of notice of the changes was given when the announcement was made at the pre-Budget report, although I accept that entrepreneurs relief was not announced until January. There has been a period of consultation, and people had time to act if they wished to do so. The hon. Member for Runnymede and Weybridge asked why there was an officer or employee requirement, and said that that would unfairly influence behaviour in an unwelcome way. I reiterate that relief is targeted at people who have a full stake in the business. Partners have that stake. External investors in companies do not participate in the same way, and so are subject to an extra employee or officer test. It is not our intention to encourage the creation of artificial partnerships. As I have said, I will monitor the progress of entrepreneurs relief. The hon. Gentleman asked whether passive investors will simply become officers of the company. The officer or employee test is a pragmatic way to check active participation in a business. As I have said, passive investors have other tax advantage options open to them, such as the enterprise investment scheme.
The hon. Gentleman asked why we should have personal company rules, and whether all new businesses will be set up as limited liability partnerships as a result. Businesses will continue to be set up in a variety of ways for a variety of commercial reasons. Tax, including the availability of entrepreneurs relief, will be just one factor that people can take into account in deciding on the business structure that is right for them. The differences between the capital gains tax rules for partnerships and companies reflect their different natures. As far as entrepreneurs relief in companies is concerned, the requirement to hold at least a 5 per cent. stake in the company strikes a fair balance.
The hon. Gentleman asked why there is a test on the disposal of all or part of the business. That is part of the targeting of relief on people who withdraw from a business. Entrepreneurs relief is not intended to replicate the taper relief. As I have said repeatedly, entrepreneurs relief is aimed at entrepreneurs. If relief is to be extended to trustees who hold shares in the same company, it is right that the individual beneficiary should have a direct stake in the company, as well as being directly involved in the business as an officer or employee of the company.
We have discussed the definition of “withdrawal from participation”. I do not think that it is difficult to define. I am sure that the hon. Gentleman is right about lawyers seeking to argue the case, but the provisions in the schedule complement the simplified capital gains tax regime with focused tax relief for entrepreneurs. Taken together, that major reform of the capital gains tax regime will deliver a system that is more sustainable and straightforward for taxpayers, while remaining internationally competitive. Having answered as many of the hon. Gentleman’s questions as I can, I hope that he will allow schedule 3 to go forward under a fair wind.
Mr. Hammond: The genesis of entrepreneurs relief took place in the panic reaction to the tidal wave of anger that followed the announcements in the PBR. If Treasury Ministers have learnt one thing over the past seven or eight months, they should be trying to soothe people who are angry. The Minister has just told the Committee that people had a satisfactory period of notice, because they knew what the new rules were since the PBR last year. However, they did not know what the new rules were at all, because Downing street was briefing within 24 hours that there would be some kind of U-turn on the announcement in the pre-Budget report. No one knew where they stood until January. Even then, the level of trust in Government announcements was so eroded that people were still not confident that they understood the system. The right hon. Lady said that people had had the opportunity to act if they wanted to, but I can tell her that that statement will provoke anger among many people who have tried and failed to exit businesses before the cut-off date for taper relief, having had to wait until January to see what the final shape of the regime would be.
The Minister told us that the structure of the relief was designed to reflect the fact that shareholders enjoy full participation in a business, and that investors in a company do not. I am afraid that that just reinforces the prejudice among Conservative Members about the Government not understanding how smaller and medium businesses work. In practice, limited liability partnerships and limited companies are now alternative structures, which can be used in most cases for the same purposes in setting up a business. There is no difference in fact, and now a clear tax advantage is being given to the limited liability partnership, which in itself sends a signal.
I am disappointed with the Minister’s response in the stand part debate. She has said that she will return to schedule 3 on Report, and I am grateful that she will do so. We are happy to engage in any discussions between now and Report, so I shall not ask my hon. Friends to vote against schedule 3 at this stage of the Bill’s proceedings.
Question put and agreed to.
Schedule 3 agreed to.
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