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
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 earningsthose attributable to the foreign performancebut should not be set against income tax due on earnings from performances in the UK during the same tax year. The clause enables the years 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 MarchBudget daythis 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 retrospectivitywe 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
Jane Kennedy: It was exactly that. Clearly, Her Majestys 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. 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.
UK 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 Governments 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 morningit 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
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 Parliaments 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 Generals 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 announcedBudget 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.
My hopeand the other amendments in this group have a similar themeis that the Government will live up to some of their promises, particularly in respect of the then Paymaster Generals announcement that we would get a paper of principles. It would enable us to
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 Governments 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 timeNorman Lamont, now Lord Lamontbut it may well be worth pointing
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.]
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