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Session 2007 - 08 Publications on the internet General Committee Debates Finance |
Finance Bill |
The Committee consisted of the following Members:Alan
Sandall, James Davies, Committee
Clerks † attended the
Committee Public Bill CommitteeThursday 22 May 2008(Afternoon)[Mr. Jim Hood 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)Amendment
proposed [this day]: No. 132, in
clause 55, page 27, line 31, leave
out subsection (4).—[Mr.
Breed.] 1
pm Question
again proposed, That the amendment be
made.
The
Chairman: I remind the Committee that with this we are
discussing 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).
The
Financial Secretary to the Treasury (Jane Kennedy): Before
our break, I was explaining the impact of the court’s decision
in December 1986 and how that decision came as a surprise, not to say a
shock, to the Inland Revenue, to other tax authorities around the world
and to most tax advisers. The problem was not confined to the UK-Jersey
tax treaty. Parliament acted at the next available
opportunity—in the 1987 Finance Bill—to make it clear
that the UK’s treaties did not give, and never had given, tax
exemption to a UK member’s share of a foreign
partnership’s income. During the debate on the 1987 Bill, there
was an exchange between the then Financial Secretary to the Treasury,
now Lord Lamont of Lerwick, and my party’s spokesman, Tony
Blair. If I may quote more widely from the Committee’s debate
than did the hon. Member for South-West Hertfordshire (Mr.
Gauke)—it is always good to make what was said clearer and not
to draw on too narrow a quotation—the then Financial Secretary
said: “The
hon. Member for Sedgefield has made some good and telling
points—he always does in Committee.”
Tony Blair then
said: “I
believe that the right hon. Gentleman has put as good a case as
possible in defence of the retrospection within this
clause”, although he
doubted whether the same argument would stand in other examples. The
then Financial Secretary observed that although the provisions had
caused him “considerable concern”, he had concluded that
the clause should apply with retrospective effect. He noted that that
did not involve the “type
of retrospection on which the House has normally looked with
disfavour”
as all that it did was
to “restore the general
understanding of the law to what it was before a decision of the High
Court.” —[Official Report, 15 July 1987; Vol. 119,
c. 1180-87.]
Mr.
Colin Breed (South-East Cornwall) (LD): Will the Minister
tell the Committee how many years back that retrospection
went?
UK individuals and companies
have been artificially routeing their income through offshore trusts
and partnerships and claiming that one of the UK’s many double
taxation treaties exempts them from tax. That is in wilful
contravention of the purpose of the treaty and the 1987 legislation. A
fundamental purpose of the clause is to put it beyond doubt that a
wholly artificial avoidance scheme designed to frustrate legislation
passed by Parliament in 1987 to prevent such avoidance does not work,
and never has. Some taxpayers were awaiting the outcome of litigation
in the expectation that it would clarify their affairs. The legislative
change in the clause will result in the necessary certainty, not
litigation, thus enabling tax returns to be finalised.
Many
descriptive terms have flowed in the discussions that I have had about
this avoidance scheme, one of which is “an egregious
case”. In such a case, the Government consider that the law
already defeats the scheme and that it is clear to all concerned that
the scheme is in defiance of Parliament’s intent. Used in such a
context, retrospection preserves the expectation that tax will be
applied fairly and consistently. That will build confidence and trust
in the law. Nobody could seriously think that the clause is unfair to
the people who will be affected by it. Users of the scheme have
deliberately tried to frustrate the will of Parliament, and they will
have been aware that Parliament had closed down similar schemes 20
years ago with retrospective effect. My understanding is that that
retrospectivity was unlimited, in effect, until the end of the second
world war.
The Committee
might not be aware of the scale of the risk to the Exchequer as a
result of this avoidance scheme. HMRC is aware of more than 2,000
scheme users, and it involves tax of £50 million a year—a
not insubstantial sum. Given the increasing numbers using the scheme,
the rapidly growing amount of tax at risk and the wilful attempt to
circumvent the clear purpose of the legislation and of the UK’s
tax treaties, we consider it appropriate to legislate to provide
retrospective clarification and to put the matter beyond doubt. HMRC
has learned that the large number of taxpayers who have been using the
scheme has suddenly started to grow; I shall explain why in a
moment.
Mr.
David Gauke (South-West Hertfordshire) (Con): I
acknowledge that the number seems suddenly to have increased, but will
the Financial Secretary clarify when HMRC first became aware that such
schemes were being
created?
The
scheme is similar to the Padmore scheme except that UK taxpayers set up
offshore trusts as well as partnerships. The trusts are for their own
benefit, and
the trustees become members of the partnership. UK taxpayers agree to
work for the partnership, so that once a scheme is set up, their UK
income thereafter becomes payable to the partnership and, through the
trust, it is paid straight back to them in the UK. They assert that
such an arrangement circumvents the 1987 legislation so that the income
is tax-free. HMRC does not believe that the scheme works, but we have
taken into account its scale and the wilful attempt to flout the law
that retrospectively clarified how tax treaties work. The Government
have developed our approach on the detail of the legislation
on anti-avoidance rules generally to ensure that they are effective and
properly targeted. Business welcomes that approach, and it has led to
better legislation.
Let me respond to the point
raised by the hon. Member for South-East Cornwall. In 2004, the then
Paymaster General gave a warning in relation to a particular abuse. Her
statement gave no reassurance about use of retrospection on other
matters, and certainly did nothing to suggest that the Government would
act differently in relation to treaty abuse than they did in
1987. The Government
do not accept that the clause changes the meaning of the law. The law
already applies to partnership profits, and we interpret that as
including profits enjoyed through a trust. The measure clarifies rather
than amplifies the scope of the 1987 legislation and puts beyond doubt
what most people understand it to mean. We recognise and acknowledge
the difficulties inherent in such legislation. Although the clause is
strictly retrospective, as was the case in 1987, it does not change
what is generally understood to be the meaning of the law but merely
clarifies it. The
hon. Member for Gosport is not in his seat at the moment, but I should
put it on record that HMRC guidance merely noted that some tax planners
suggested that circumventions were possible. HMRC did not accept that
view of the law, and it does not accept it now. It did not see evidence
that such schemes were being used until 2001. However, their use has
increased sharply in the past year, which is why we are acting now. The
discourager regime provides HMRC with early information on tax
avoidance. In many cases, it will respond to the information by
challenging the avoidance in the courts. In some cases, it will be
appropriate for the Government to legislate to prevent future use of a
scheme or new variants on it. In rare cases, such as those we see
today, it will be appropriate for us to act retrospectively to ensure
that abusive schemes are closed down by legislation rather than
litigation. There are no cases of litigation at the
moment.
Mr.
Mark Field (Cities of London and Westminster) (Con): We
all accept that Parliament’s desire should hold sway, but the
issue is surely one of clarification. The correct place to clarify the
law is in the courts—it should not be done merely by ministerial
assertion or Treasury diktat. That is the Conservative objection to the
measure. Clarification must come through the proper legal
process.
Subject to an exception relating
to judicial decisions made before 17 March 1987, the legislation
applied retrospectively. Therefore, the provision did not apply to
Mr. Padmore or to a few other taxpayers. In relation to the
scheme, some taxpayers were awaiting the outcome of litigation in the
expectation that it would clarify their own tax affairs, but no
litigation has ever commenced. The change in legislation provided by
the clause will provide the necessary certainty instead of litigation
and enable tax returns to be
finalised.
Mr.
Gauke: The Minister says that in the opinion of HMRC, the
clause merely clarifies the existing law, and that there has been no
litigation. That is presumably because HMRC has not pursued litigation.
If HMRC is so confident that the measure merely clarifies the
law—I am not making a case one way or the other—why is it
not bringing litigation against the users of the
scheme?
Jane
Kennedy: Because the opportunity arises to deal with the
matter through legislation and to make it clear that, as HMRC already
believes, the scheme does not work. The change that we are making has
already had an impact on the number of notifications of the scheme. As
I said, there is a risk to the Exchequer on the scale of millions of
pounds.
Mr.
Peter Bone (Wellingborough) (Con): I have been listening
to the debate and I am not quite sure why the measure must be
retrospective to save money for the Exchequer. If the Bill is enacted
and taken forward, will that not save money? I must have missed
something.
Jane
Kennedy: As I understand it, a number of people are
proposing to use the scheme and some tax advisers will recommend the
use of it unless we act to make it clear that the scheme does not work.
The legislation will end the doubt about
that.
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