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Session 2007 - 08
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General Committee Debates

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

Thursday 22 May 2008


[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?
Jane Kennedy: I will seek to answer that later, but the retrospection was extensive.
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?
Jane Kennedy: I will do that in a moment, if the hon. Gentleman will allow me.
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.
Jane Kennedy: The hon. Gentleman and I will clearly have a disagreement on that.
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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