The
Chairman: Order. Before I call the Minister to respond, I
should point out that it would be convenient to have the stand part
debate at the same time as the debate on the
amendment.
Jane
Kennedy: The ICA wrote to us with several detailed
requests for changes, but I do not want to be drawn into those as they
are outside the scope of the clause. However, I would be happy to write
to the hon. Gentleman with details of the consideration that is being
given to those proposals and circulate that correspondence to members
of the Committee. The
clause does not affect the entitlement to credit for any foreign tax
paid before 6 April 2008, so it does not have the retrospective effect
that the hon. Gentleman fears. It re-establishes a rule for foreign tax
credit that has always been the accepted method prior to recent case
law. I shall explain that in more detail in a moment. This is the
internationally accepted method for calculating credit relief, and
there has never been any basis for believing that the UK Government
should allow unrestricted foreign tax credit. In that context, there is
no justification for a change that would add substantial complexity and
uncertainty to the rule. That is what the amendment would do, although
I appreciate that it was tabled in a slightly probing
fashion.
The
Government have done nothing to encourage people to plan on the
assumption that high rates of foreign tax will be subsidised by the
Exchequer. We have always made it clear that the purpose of foreign tax
credit is to eliminate double taxation and not to go any further than
that. The clause merely restores that long-established view of how the
law on tax credits applies. The case that has been mentioned involved
Legal and General; it was a corporation tax case heard in 2006. The
corporation tax position was restored by legislation in 2005, and the
clause makes a parallel change for income tax. There is no
justification for delaying the implementation of the clause, as the
amendment proposes. That would introduce considerable complexity and
uncertainty whereby different rules would apply to different
foreign tax payments. The amendment would mean that for assets or
contracts that fell outside the scope of the clause, foreign tax credit
would be unrestricted, putting at risk tax due from wholly UK-based
activities. 9.45
am I will give
some background to the clause, since we will have, as you have
indicated, Mr. Hood, the main debate now. The effect of the
clause is to restore the way of calculating foreign tax credit that was
generally accepted before the recent case law. The rule that the clause
re-establishes is endorsed by the OECD and overwhelmingly used by those
countries that give foreign tax credit against foreign earnings. The
clause amends how the maximum credit for foreign tax is calculated,
when the foreign tax is paid on trade or professional income of an
individual. The purpose of the clause is to ensure that the credit that
we give for foreign tax is sufficient to eliminate double taxation,
which is a risk. It does not go any
further. In
particular, the clause prevents foreign tax credit being set against
income tax due on UK earnings. For example, if a musician earns income
from a performance abroad, he or she is likely to have to pay foreign
tax on those earnings. The foreign tax can be set against the UK tax
due in respect of the same earnings—those attributable to the
foreign performance—but should not be set against income tax due
on earnings from performances in the UK during the same tax year. The
clause enables the year’s income to be subdivided, so that each
activity that gives rise to foreign income is ring-fenced from other
activity for the purpose of calculating credit due for foreign tax
paid. The clause also ensures a result that is fair to the taxpayer,
while placing a necessary constraint on credit for foreign tax to
prevent it from spilling over into other activity, including wholly
UK-based parts of the
trade. The
amendment would require separate identification of the foreign tax paid
by an individual in respect of contracts, arrangements, assets and so
on, entered into or acquired before 12 March—Budget
day—this year. That foreign tax would be given as a credit
against income tax no matter how much or how little UK tax arose out of
the contract or asset. That would mean that foreign tax would reduce UK
tax on other earnings unrelated to the foreign tax payment, including
wholly UK-based activity.
The amendment adds complexity
and is unjustified. I appreciate that it was moved in a probing and
questioning way. Nobody should expect the Exchequer to subsidise rates
of foreign tax that exceed its own, or to allow foreign tax to reduce
income tax arising on UK earnings. That is a reasonable position, and I
hope that the hon. Member for South-West Hertfordshire will accept it
and withdraw the amendment. If he does not, we will have to
resist.
Mr.
Gauke: With respect to the Financial Secretary, there is
an element of retrospectivity here, in that transactions entered into
under one arrangement will be treated differently now, under the
provision. That is not the clearest or most obvious example of
retrospectivity—we will come to one in a moment. None the less,
I recognise her argument. She referred to the Legal and General case of
2006, which she said had been dealt with as far as corporation tax was
concerned
in 2005. It appears that the Treasury was at least prescient in 2005. I
imagine that those were various stages of the
action.
Jane
Kennedy: It was exactly that. Clearly, Her
Majesty’s Revenue and Customs was aware of that, and the dispute
arose some time before. The law was fixed, and would have always been
so, because it was never intended to work as was
implied.
Mr.
Gauke: I am grateful for that. It raises a concern that we
will come back to in a
moment.
Mr.
Hammond: Will my hon. Friend reflect on what the Financial
Secretary has just said? As I understand it, she said that a court case
was in progress with Legal and General, a pretty powerful organisation.
HMRC obviously realised that the law was defective because in 2005 the
Government amended the law to close the defect. If I understand her
correctly, the Government allowed the case to be pursued through the
courts at public expense, only to be defeated in a way in which they
knew they would be defeated. If they did not know that, they would not
have changed the law in 2005. Does my hon. Friend agree that that is a
perverse course of action for the Government to have
followed?
Mr.
Gauke: I think two points have been raised. First, my hon.
Friend has raised the point about the interrelationship between
specific cases in case law and statutes. We will return to that point
in a moment. The Committee may want to reflect on the Padmore case of
1987, which provoked a change in the law. At least that change in
statute was without prejudice to judicial decisions being made in the
matter before the change in law was announced. It seems a rather
strange position to change the statute in the middle of a case. It goes
against certain aspects of the rule of
law. Another point
worth noting, which we will also come back to, is that it appears that
this matter was on the radar of HMRC and the Treasury in 2005. Given
the way in which these cases tend to work over several years, it was
probably on their radar in 2004, if not earlier. If that is the case,
why are we bringing in this legislation that has an element of
retrospectivity in
2008? Mr.
Mark Field (Cities of London and Westminster) (Con): Does
this exchange of views not sum up the concerns that my hon. Friend has
put forward about retrospection? If a statute is changed halfway
through a case, one can understand it if it is aimed to overcome
loopholes in future. In such an instance, it is all the more important
that there is no sense of retroactive intent for the very reasons that
my hon. Friend has set
out.
Mr.
Gauke: There are concerns about retrospective legislation.
I do not take an absolutist line on the issue, but to minimise those
concerns it is at least reasonable to expect the Treasury to produce
legislation at the earliest opportunity. It is not reasonable to fail
to address an issue and to leave some ambiguity within the law for
three or four years, knowing that one can come back to it at a later
date.
This measure is not the worst
example because, to be fair, it talks about income received after 6
April 2008. My concern is that some transactions will have been entered
into before that time. A transaction could have been entered into
between the conclusion of the Legal and General case and 6 April on an
understanding that that case had set the law. The interested parties
would then find that the Government have come back and said that the
law will be different and any income received as a consequence of the
transaction will be treated
differently. This is a
mere forerunner of our debate on clause 55. The amendment has
successfully flushed out the issues. However, the Financial Secretary
acknowledged that I recognised in my opening remarks that the amendment
would create complexity and two parallel systems that would be far from
ideal. Therefore, having put on record our concerns about how the
Government have addressed the issue, I beg to ask leave to withdraw the
amendment. Amendment,
by leave,
withdrawn. Clause
54 ordered to stand part of the
Bill.
Clause
55UK
residents and foreign
partnerships Mr.
Colin Breed (South-East Cornwall) (LD): I beg to move
amendment No. 132, in clause 55, page 27, line 31, leave out
subsection
(4).
The
Chairman: With this it will be convenient to discuss the
following amendments: No. 134, in
clause 55, page 27, line 31, leave
out ‘are treated as always having had effect’ and
insert ‘shall have
effect from 6th April
2008’. No. 135,
in
clause 55, page 27, line 33, leave
out subsections (5) and
(6).
Mr.
Breed: I say at the outset that we accept entirely the
need for the Government to legislate against tax avoidance. We
appreciate that the provision is designed to prevent tax avoidance by
United Kingdom taxpayers on income from foreign partnerships using Isle
of Man or Channel Islands partnerships. It is based on an
interpretation of the 1987 rule that was introduced following the
Padmore
case. We
support the Government’s efforts to deal with tax avoidance, but
we still believe that, in principle, tax changes should apply
prospectively and not retrospectively as set out under the measure. It
has been the theme not only of some clauses this morning—it has
been growing over the previous two Finance Bills, whereby the
Government are making a determined effort to use retrospectivity as a
tool for tax avoidance. While it was implemented in respect of a few
things to begin with, it now seems to be creeping in in a new way. We
are worried particularly by the effect of subsection (4), which will
treat the new provisions as “always having had
effect”. As
a result of the change, established tax law that has been on the
statute book since 1970 has instantaneously
been rewritten. Rewriting of legislation in such a way does not meet the
legitimate expectation test. It sends out a damaging signal about the
stability of the UK tax system, whereby business transactions made
under one set of laws can then become subject to a different tax
outcome at a later date due to the retrospective change in the rules.
It is for that reason that the amendment would remove the
measure. Although we
understand that the clause is directed primarily at transactions
involving Isle of Man or Channel Islands partnerships, the European
Union law principle of legitimate expectation needs to be respected.
Taxpayers are entitled to understand the implications of a transaction
that they enter into. Treating the provision as “always having
had effect” runs contrary to Parliament’s intent over the
past 30 years, which is to lay down rules whereby the tax effect of
particular transactions can be changed or advance warning can be given
of a change in the tax treatment in clearly identified
circumstances. In
the late 1980s, an approach was adopted to counter a legal decision
that had gone against the Revenue and which the Government wished to
reverse. Although the new law was stated to “always having had
effect”, it did not influence judicial decisions made before the
new law was announced. A more recent approach was the statement made by
the then Paymaster General to the effect that legislation would be
introduced and be effective from 2 December 2004 in relation to what
the Government consider to be unreasonable tax-avoidance schemes
involving employment
income. Following
that, in one of its report, the Treasury Committee said:
“The Inland Revenue
should, without jeopardising their position, publish a paper setting
out their thinking on the principles which will guide the way they
implement” the then
Paymaster General’s announcement. Such a paper has never been
published, but we believe that the philosophy underlying retrospective
or retroactive legislation should now be examined in conjunction with
the current move to introduce principle-based legislation. If the
underlying purpose behind legislation or an area of tax law is
articulated clearly, a taxpayer who respects that purpose should have
certainty about the tax outcome of their particular transaction. If the
underlying policy is to be changed, then any change should have effect
only in relation to future transactions.
In summary, the application of
the legitimate expectation test to this provision should be that any
amendment applies only from the date that the change was
announced—Budget day 2008. In respect of periods before that
date, if HMRC believes that these interpretations are based on a wrong
view of the law, they should be challenged through the courts. We
believe an appropriate modus operandi should be agreed by the Treasury,
HMRC and the representative bodies and then published for the benefit
of all
taxpayers. 10
am My
hope—and the other amendments in this group have a similar
theme—is that the Government will live up to some of their
promises, particularly in respect of the then Paymaster
General’s announcement that we would get a paper of principles.
It would enable us to
understand this policy of retrospectivity, which commenced a few years
ago and is almost going full steam ahead without that paper. The
purpose of the amendment is to bring the matter to a head so that by
the time we get to Report the paper that was announced a few years ago
will have been published. We will then be able to judge the resultant
clauses that the Government want to introduce in this Bill against that
set of published
principles. Mr.
Gauke: Whereas on the previous clause we made our points
in a probing manner, we do so here with much greater force. I associate
myself with the remarks of the hon. Member for South-East Cornwall. The
retrospective nature of the clause is deeply troubling. We fully share
the Government’s concern about the issue that it is trying to
address. There is a problem with the arrangements and it is perhaps
more than just a kink in the system, as the Economic Secretary put it.
Trading profits derived from UK land are being received tax free by UK
residents and domiciled individuals because of schemes involving the
establishment of offshore trusts, specifically in the Isle of
Man. The existing
legislation appears to deal with the issue where the UK residents or
domiciled individuals are partners in the relevant offshore funds, but
it does not seem to work where the partners are trusts and the UK
individuals are benefiting from the arrangement. There is not a problem
with trying to address that point, but there is a point of principle
here. The proposal essentially states that the amendments contained in
the clause are to be treated as always having had effect. Either the
law exists or it does not. It is troubling when the Government state
that the law in the past is something because that is what they say it
is now. That is essentially what subsection (4) states.
This is partly an issue of
simple democracy. It raises issues about EU law and legitimate
expectations. I shall not pursue that point, but the hon. Member for
South-East Cornwall is right to raise it. In part, it cuts to the
question of the certainty and stability of the UK tax system. For
investors, the idea that UK tax law is likely to be changed
retrospectively is unattractive, and the UK is, for various reasons,
acquiring a reputation for having an uncertain and unstable tax system,
which is bad for the UK
economy. This
clause is but one example, but it has attracted considerable attention.
Indeed, one leading tax expert described it as unprecedented. The
Minister smiles, but I would be grateful if she gave some examples. She
may seek to give the example of the 1987 case, but distinctions can be
drawn with that. The 1987 provision, with regard to section 62 of the
Finance Act 1987, seeks to reverse the Padmore case, to which we have
referred. It says that the measure is deemed to have an effect except
in relation to any judicial decision made before the amending
legislation was announced. That is an important carve-out. It benefited
not only Mr. Padmore, but a number of other individuals who
had entered into arrangements and waited for the conclusion of the
judicial proceedings relating to Mr. Padmore. In doing so,
they benefited from that
carve-out. None
the less, concerns were raised, and understandably so. I think that
there was a certain amount of nervousness from the relevant Minister at
the time—Norman Lamont, now Lord Lamont—but it may well
be worth pointing
out the comments made by the Labour spokesman about what was then clause
62. He
said: “Parliament
should oppose retrospective legislation, for a number of reasons. The
principal democratic reason is that people are perfectly entitled to do
whatever the law permits them to do and that it is wrong afterwards to
make it unlawful.”—[Official Report, 15 July 1987;
Vol. 119, c. 1179.] That
spokesman—
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