Finance Bill

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Mr. Bone: I think the Minister is making my point: if we enact the measure now, there is not a problem going forward—I agree with her entirely. However, I do not understand why we have to throw back the measure.
Jane Kennedy: I hope I get this right. It is because HMRC has not consistently made the case throughout the time period that the scheme does not work, that it is a deliberate and wilful avoidance scheme that flouts the 1987 legislation, and that it would be challenged.
Mr. Philip Hammond (Runnymede and Weybridge) (Con): The Minister has said that HMRC regards the scheme as a wilful flouting of the law, but apparently it has never brought a case. When she answers the question of my hon. Friend the Member for Wellingborough about why it cannot simply be a prospective proposal, can she say how much back tax—disputed tax—rides on the retrospectivity aspect of the measure?
Jane Kennedy: That is a fair question, to which I have not immediately got an answer. I hope to have the answer, but if I do not, I will certainly write to the Committee.
It is not right to say that HMRC turned a blind eye to the scheme, did nothing and waited until legislation became necessary. HMRC’s early challenges around the scheme—although not litigation—did meet with some success. It strongly believes that this is an exceptional circumstance and that none of the scheme users could have been in any doubt that they were deliberately flouting the clear intention of the 1987 legislation.
Mr. Mark Todd (South Derbyshire) (Lab): My understanding is that if one did not make the measure retrospective, one would implicitly be saying that there was some validity in the evasion technique, and that that is the answer to the point made by the hon. Member for Wellingborough.
Jane Kennedy: My hon. Friend is right. Looking back, the sum is around £200 million. As I have said repeatedly, in HMRC’s view, someone not would have used the scheme without knowing exactly what they were doing. Early scheme users did concede to HMRC arguments and the usual preliminary steps were taken towards litigation. However, the growing use of the scheme had begun seriously to threaten revenues, which led to unacceptable uncertainty. This was thought to be by far the most appropriate way of dealing with it. It was signalled well in advance that such a step would be taken.
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I have received one or two representations on the matter, but I understood that there was broad acceptance that the Government were expected to take this step. The hon. Member for South-East Cornwall says that that is not the case, but I have seen only one or two representations, and I was not aware of that concern being widespread. I was about to speak about the Rees rules, but I happily give way.
Mr. Gauke: I shall read again what some public bodies have said. The Chartered Institute of Taxation says, “extreme and unjustified”. The Law Society says, “wrong in principle”. The Institute of Chartered Accountants in England and Wales says,
“it sends out a very damaging signal about the stability of the UK tax system”.
At the HMRC and Treasury open day for the Finance Bill, a long list of representations were made by those bodies and others, including KPMG and the Institute of Chartered Accountants of Scotland. All were expressing great concern, not about closing the loophole but about the retrospective element.
Jane Kennedy: I will reassure myself that my understanding is accurate. I shall consider the point made by the hon. Gentleman, because I want to be absolutely sure. However, given what I understand of the scheme, such representations are surprising to me. When we change the law to combat clearly abusive avoidance arrangements, we may exceptionally—very exceptionally—do so with retrospective effect.
Mr. Hammond: I have not studied the subject like my hon. Friend the Member for South-West Hertfordshire, but does the Minister accept that there is a difference between a court making it clear that the HMRC interpretation is correct and that the taxpayer interpretation is incorrect and the Government then moving to legislate retrospectively, effectively in order to implement the court’s decision and what she is doing now? The Minister is merely asserting that the taxpayer is wrong and that HMRC is right without being prepared to let the courts test that view.
Jane Kennedy: We regularly legislate in Parliament, and the legislation is often tested in court. If Parliament’s view of the law is found to be unjustified by a court and if Parliament believes that its view should carry, it is perfectly proper for the Government to revisit the matter—
Mr. Hammond: That is what we are saying, but after the court hearing.
Jane Kennedy: In 1987, a court judged the law to be deficient. As I said, the judgment was a complete surprise to everyone in the field; there was thought to be universal acceptance that the legislation was right. It was based on long-used double taxation treaty legislation. As one would expect, the court’s decision required a study of what had gone wrong and of where the law was deficient. I am happy and content, given the advice that I have received, that the decision I am asking the Committee to make today is right.
I am not going to dwell on the point, but it is a point worth making. We are engaged in discussions about a taxpayers charter, and have invited representations. The Chartered Institute of Taxation submitted suggestions of what such a charter might do. Section 13 includes this statement:
“Where we change tax law to combat clearly abusive avoidance arrangements, we may exceptionally do so with retrospective effect.”
I am not asking the Committee to do something absolutely outlandish and outwith the expectation of the industry, although I accept the point made by the hon. Member for South-West Hertfordshire about the number of representations that he has seen and will seek to reassure myself about the advice that I have had.
Mr. Field: I confess that I was unimpressed by the Minister’s answer to the earlier intervention by my hon. Friend the Member for Runnymede and Weybridge. A set mechanism is in place. In so far as the scheme can be challenged in the courts, she is absolutely right to say that the Government have an opportunity to come back and make new law to close any loopholes, but she is arguing that there is no loophole that the Government recognise. Does she not see our perspective? We fear that down that road—although, admittedly, a fair way down it—lies tyranny.
The Rees rules do not govern all possible situations in which the Government might introduce retrospective legislation; they apply where the Government seek to close down a scheme with immediate effect. There are a few exceptional cases, such as this one, where closure with immediate effect would not be adequate to counteract the avoidance in question.
Tax avoidance is unfair to the great majority of taxpayers who pay their fair share. We discussed the nature of avoidance earlier. I can understand that people want to reduce their liability, but where a scheme is in clear and deliberate breach of the law, Parliament has a duty to act to protect the Exchequer. None of the scheme’s users was entitled to artificially avoid paying their fair share of tax at the expense of others. They ought to have been aware of the likely consequences of their wilful attempt to flout the law. The 1987 decision to tackle treaty abuse with retrospective effect was a clear signal. I hope that the amendments will not be pressed to a vote. If they are, I hope that my hon. Friends will resist them and that clause 55 will join the rest of the Bill.
Mr. Gauke: I do not think that the Minister has reassured Conservative Members at all. There is an essential contradiction in what she said. She said that HMRC is confident that the clause merely reasserts existing law, that it is not a change in law and that the schemes are in clear breach of the law, yet she suggests that some £200 million in back tax is at risk. If the law is as she says—I have no reason to doubt it—that sum is not at risk, because all that is required is for HMRC to litigate. It prompts the question why HMRC will not litigate. Why is it not prepared to take the matter to court?
It relates to the point made by my hon. Friend the Member for Cities of London and Westminster. The Government are saying, essentially, that they will pass new law if they think that the law is in some way flawed or there is an alternative interpretation of it that they do not like. Rather than allowing the courts to interpret that law, they will rewrite it retrospectively so that it says what they wanted it to say in the first place. Such an approach gives individuals and businesses no reassurance that the law is what they think it is, as it is written down and what has been passed by Parliament. The impression is that it is something that can be changed if not at a whim, at the discretion of the Government retrospectively.
Mr. Hammond: Does my hon. Friend agree, that for the purpose of clarifying the law and sending out signals about it to the business community, the Government should have legislated to correct any confusion or doubt in the law as soon as they became aware of it? The Minister implied that the reason behind the need to move now is that the use of the avoidance technique has suddenly increased significantly. She should take on board the lesson that the way to avoid being in such an embarrassing situation is to legislate as soon as a defect is spotted. Everyone will then have a clear picture of what is going on.
Mr. Gauke: My hon. Friend takes me to my second point. However, I must say first that certainty in the taxation system is important. We have a well-developed legal system that should work on the basis of laws being interpreted on the grounds of what they say, not what the Government want them to say—even if that is not what they said at the time.
Jane Kennedy: Is the hon. Gentleman asking us to believe that his party, and to some degree the party of the hon. Member for South-East Cornwall, believe that aggressive tax-avoidance schemes such as that under discussion, which are widely seen as abusive, should be allowed to continue during litigation at risk to the Exchequer, and that there should be no circumstances in which he would do what his party did in government, which was to legislate and to apply it retrospectively?
Mr. Gauke: A Government should pursue and litigate on the basis of the existing law. When they identify an abuse, they should issue a warning and announce that they will change the law at the first opportunity, and then do so. That takes me to the point made by my hon. Friend the Member for Runnymede and Weybridge. The Minister said that HMRC was first aware of the schemes in 2001, but they were not pursued widely because the warnings given by HMRC proved to be sufficient. None the less, there was an awareness at that time by HMRC of some ambiguity in the wording of the 1987 legislation.
Notwithstanding the fact that the schemes were not being pursued, why were such measures not introduced under the Finance Act 2001 or subsequent Acts? There has been plenty of them. Given that there were two Finance Acts in 2005, there have probably been about eight. The matter causes great concern, and the Government’s approach should be to pursue it rigorously and to litigate if there is some doubt about the law. In the meantime, warnings should be given and legislation should be made. The Government have not done that. They have sat on the matter, have come back subsequently some years later and taken action when the scheme started to develop, having been aware of the ambiguity under the 1987 legislation.
In response to the hon. Member for South Derbyshire, I must say that, if the Government fail to make the measure retrospective, it is an admission that the previous legislation was defective. Indeed, I am more inclined to interpret the proposal to make it retrospective as an admission that the 1987 Act does not do what the Government said it does. That is not based on a legal analysis but, if they were so confident that the 1987 legislation prohibits the behaviour that we are talking about, why on earth have they not litigated on the matter?
For those reasons I am more convinced than ever that the retrospective nature of the clause is unacceptable. Should the hon. Member for South-East Cornwall wish to press his amendment to a vote, we will support him.
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Mr. Breed: We are somewhat in danger of this aspect moving from retrospection to repetition. At the end of the day, I am not certain, although there has been much repetition, whether it has made any great difference. To begin with, we talked about reasonable expectation. I am a fairly reasonable chap, and I know that the Minister is a reasonable Minister. I thought that there was a reasonable expectation that the Government might accept the powerful arguments—made not only by Opposition Members, but by a huge number of interested bodies—about the central concern.
We all agree that we want to stop the tax avoidance. There is not much disagreement on that at all. The central concern is how the Government have decided to achieve that—first, not to go through the court situation, to clarify and confirm their thinking anyway, but then the wide nature of the wording in subsection (4). It cannot be beyond the experience, knowledge, skill and such of those who draft legislation to draft a subsection to bring about a tighter situation, clearly concerned with the tax avoidance that the Government wish to close down and clarify straightaway. The current wording is so wide—that is our concern and that of many others.
Some time ago now, we talked about whether the measure would be subject to human rights legislation. The Minister said that it would be fair, proportionate and in the public interest. It is difficult to think that undertaking such wide application of the subsection is fair or proportionate—it might well be in the public interest, in terms of the money derived for the Revenue, but one out of three is probably not good enough. No reference has been made to the whole principle of the method, although I understand that the taxpayers charter will refer to retrospection. As the Treasury Committee pointed out some time ago, it would be extremely helpful to have a real paper, so that we understand the principles of any potential future retrospection in any such legislation, so that we can see clearly how such retrospection might be applied and so that we do not have such wide drafting as we have in the subsection.
I am happy to indicate that we would support a clause, subsection or some other drafting that narrowly defined the retrospection to this particular tax avoidance scheme, so that there can be no doubt whatsoever that it applies only to that, which is what the Minister has said on a number of occasions. That is what we would be happy to support. I hoped that, even at this late stage, that might be the sort of thing that would be forthcoming, together perhaps with a draft paper on the principles of retrospection. In the absence of that, I feel that we have no option but to press the amendment to a vote.
Question put, That the amendment be made:—
The Committee divided: Ayes 7, Noes 13.
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