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.
1.15
pm 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.
Jane
Kennedy: No. The hon. Gentleman will remember that the
court decision led to the legislative decision in 1987, which related
to the abuse of partnerships and the arrangements concerning them.
We now see the scheme developing in a way that HMRC believes strongly
will not work. I ask the Committee to agree to clause 55 because the
Government are absolutely clear that the view taken by Parliament in
1987 was the right view. Even though it was taken by a different party,
we stand by that decision. I believe that we can pass the clause with a
clear conscience. 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.
1.30
pm
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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