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Division
No.
6]
Question
accordingly negatived.
Clause 55 ordered to stand
part of the
Bill. Clauses
56 and 57 ordered to stand part of the
Bill. Dr.
Nick Palmer (Broxtowe) (Lab): On a point of order,
Mr. Hood. Could we be updated on the health of the gentleman
who had a problem on Tuesday? Will you consider sending him a card on
behalf of the Committee saying that we look forward to seeing him again
soon?
The
Chairman: I appreciate the hon. Gentleman’s
concern. I expressed my concern and that of the Committee this morning.
I am assured that the gentleman is recovering and resting, and that it
will not be long before he is back at
work.
Schedule
21Restriction
on loss relief for non-active
traders
Mr.
Hammond: I beg to move amendment No. 136, in
page 274, line 22, at end insert ‘,
and (c) the trade is carried on with the
intention of generating a loss for tax avoidance
purposes.’. I
am sure that all hon. Members are delighted at the spurt of progress
that we have just enjoyed and which I now intend to stop dead in its
tracks. The schedule deals with restrictions on trade loss relief for
individuals. That was not mentioned in the Budget speech, but was
buried away in Budget note 63. It is effectively retrospective, not in
quite the way that we have discussed in relation to previous clauses,
but in the sense that it will impact on the treatment of decisions made
before the measure was known
about. A
significant step is being taken. The provision is being introduced
under the guise of an anti-avoidance measure, so the Government, using
their own principles, avoided extensive consultation on it. It removes
what is in effect the oldest form of encouragement for enterprise in
the tax code. I should be grateful if the Minister would tell us the
scale of the mischief—I use the word again—that we are
addressing. I understand that in conversation senior officials at HMRC
indicated that HMRC has no idea of the extent of any
“avoidance” through the use of sideways loss relief by
individuals, no idea whether it is costing the Exchequer money, and
thus no idea of what the relief is worth. That makes this look like a
fishing expedition. We on these Benches are concerned that the
Government are proposing legislation that will impact on not just the
incentive to take business risks, but on individuals’ ability to
take on risk, and that
they are doing so without any clear idea of the loss to the
Exchequer—if they believe that there will be a loss—or of
how much they will gain from the
measures. Under
current legislation, an individual who carries on a trade can offset
losses arising in that trade against other income and gains. That is
known as sideways loss relief. There is a provision, in section 66 of
the Income Taxes Act 2007 in its most recent incarnation, which denies
any such relief if the trade is not operated on a commercial basis.
That is a perfectly reasonable restriction to impose and it ought to be
sufficient to ensure that the measure cannot be used for the purposes
of artificial
avoidance. A
fundamental issue is at stake here; individuals are taxed overall on
their total income—certainly within any of the particular silos
by which income is taxed. The Government are effectively seeking to
introduce a sort of mini-scheduler approach within trading income, so
that an individual is taxed separately on their income from different
trades. That would have a significant effect. We are all aware that the
Finance Act 2007 introduced provisions restricting the ability of
partners in a partnership who were not actively engaged in the business
of that partnership to obtain sideways loss relief. That was introduced
to prevent artificial constructions that allowed individuals to take
advantage of the losses generated in
partnerships. Schedule
21 provides for similar restrictions to be applied where an individual
carries on a sole trade in a so-called “non-active
capacity”. That raises different issues. Under the measure,
where the trader is defined as a “non-active trader”, the
amount of sideways loss relief is limited to £25,000 annually,
unless the trade relates to film expenditure, in which case there will
be no such restriction. Amendment No. 136 inserts a motive test into
that through a provision that means section 74A will apply only if the
trade has been carried on with the intention of generating a loss for
tax avoidance purposes.
In my humble opinion, my
amendment is redundant—that may sound like a slightly strange
thing to say—because section 66 of the Income Taxes Act 2007
already requires business be carried on for a commercial purpose, that
is, for the purpose of making a profit. The amendment has been tabled
to draw attention to that problem and to probe the Minister on the
extent of the catchment of the clause by highlighting how a motive test
would narrow it
down. What problems do
we see in relation to the provision? According to schedule 21, an
individual is thought to devote sufficient time to a trade for him to
be considered an active participant, if
he “spends an average of
at least 10 hours a week personally engaged in activities of the trade
and those activities are carried on...on a commercial basis,
and...with a view to the realisation of
profits”. 1.45
pm The
10-hour rule is an arbitrary and unsatisfactory way of defining an
individual’s contribution to a business. It does not begin to
address many of the real world situations in which people find
themselves. It will also create a bureaucratic nightmare, which is the
antithesis of the entrepreneurial spirit that the Government say they
want to foster. Imagine an enthusiastic entrepreneur engaged in
starting up a part-time business. When he
gets home from his hard day’s work in employment and goes out to
his garage, where he is in the process of creating the next Hewlett
Packard, he will presumably need to clock on and record on his time
sheet the hours he is committing to that new venture in order to
produce records to satisfy HMRC that he is committed to that enterprise
for more than the requisite 10 hours a week averaged over the tax
year. If we really
want to foster a culture of entrepreneurship in this country, not only
is that requirement patently absurd and unenforceable, but even the
thought that entrepreneurs should be encouraged to think in that way
about the hours that they put in to developing start-up businesses is
depressing. There are many wholly commercial reasons why an individual
might not spend 10 hours a week personally engaged in a trade. Having
taken the risk of establishing a business and built it up by the sweat
of his own labour, an individual might be in a position to employ
others to run it while he is engaged on the next venture, and I would
have thought that the Government would want to encourage such serial
entrepreneurship. The hard-working entrepreneur who, having built up a
restaurant, small guest house, pub or hotel business, wants to move on
and devote his time and energy to building up another venture will fall
foul of these rules unless he goes back and spends 10 hours
a week pulling pints at the bar in order to qualify under the tests
that the Government are imposing.
Many
individuals start up businesses while still in employment—a
point to which I have already alluded. That is a sensible way of
probing the viability of a new business venture without sacrificing the
security of a regular income. Many people work full time or part time
for an employer while conducting a part-time business, and sometimes
more than one. Indeed, I remember meeting a constituent of mine shortly
after I was elected who was employed in the catering department in the
House of Commons—I can tell this story because he no longer
works here—and who very enterprisingly was conducting a business
as well, manufacturing and distributing hand-cooked vegetable chips,
and very delicious they were too. He eventually left the employment of
the House of Commons and has, I am sure, prospered elsewhere. That is
not an unusual case. Hon. Members will know of many people who have
tested the water with a new business project while retaining the
security of their existing employment.
Some businesses are seasonal,
such as furnished lettings, and there are also smallholding
agricultural businesses, which people might not be able to turn into a
viable full-time occupation. That is less part of the culture of this
country than it is of some of our European neighbours, where part-time
agriculture is a common business occupation. We believe that there
could be a serious impact on start-ups and on the fostering of
entrepreneurship, especially in the wake of the Government’s
decision to abolish taper relief and the negative signals that that
sent to those engaged in establishing new business
enterprises. I am
afraid that it gets worse because new section 74A(6) provides that if
an individual has received sideways loss relief in his capacity as a
partner in a partnership, that amount has to be deducted from the cap
that this measure proposes. That would be a further reduction in the
capacity to absorb losses across the boundaries of different
trades.
I have a number of other points
to make on schedule 21. As I have gone this far, it might be better for
me to complete my remarks, unless you indicate otherwise Mr.
Hood. The Minister could then respond to the amendment and to the more
general remarks, rather than have a separate debate on the
schedule.
The
Chairman: Order. I have no objection to the hon. Gentleman
discussing other parts of the schedule, but we will not then
have a separate debate on the
schedule.
Mr.
Hammond: That was exactly my thinking, Mr.
Hood. It is precisely because I fear that I may already have strayed
into some of the more general points that I suggested that I carry
on. The
Government say that these measures are aimed at tackling contrived
arrangements. We have no problem with that, but the legislation is very
widely drafted. It is our contention that it will also catch some
wholly commercial arrangements. A normal, industrious trader who seeks
to establish a new business, or businesses, could be inadvertently
caught in this trap. New section 74B(3) and (4) provides that no relief
will be available where loss arises as a result of relevant tax
avoidance arrangements. That is fine, but the relevant tax avoidance
arrangements are widely defined. When claiming sideways loss relief,
will an individual have to prove that he had no expectation at the
outset that such a loss could be relieved? In other words, it appears
that one can benefit from sideways loss relief only if one is not aware
that one could benefit from it. Perhaps the Minister would clarify that
point. Could somebody
be caught by these provisions as the result of a negative decision? I
return to my earlier example of somebody who has established a business
that is running quite successfully. He has employees who are running it
for him and he wishes to devote his attention to his next business
venture. He is a classic serial entrepreneur. Could HMRC treat his
failure to incorporate that first business as an act that was seeking
to exploit the possibility of the use of sideways loss
relief? We are in
uncharted territory. It has always been understood that people with an
established line of business that is generating profits can, with the
security of that profit income, invest in a new business activity or
trade, and that any losses in that new trade can be offset against
their income from the existing trade. By definition, one might think
that asking them not to devote their full energy to the new trade, and
to take a chunk of their working time and attention and continue to
focus it on existing trade, to satisfy HMRC’s requirements in
the test that is introduced by the legislation, would make the chance
of incurring a loss in the early years of the new trade rather
greater, because of the reduced attention and focus given to
it. The Budget day
news release dealt with the purpose of the provisions, and said that
the “Government made
clear that avoiding tax through the use of sideways loss relief is
unacceptable.” However,
the provisions mean that genuine traders may not be able to claim
statutory relief, which could lead to individuals being taxed on more
than 100 per cent.
of the net result of the profits and losses on all their business
activities, where losses and profits cannot be offset. A particular case that could
arise is one in which someone who was setting up a new business was
taking advantage of the annual capital allowance to invest in it but,
because that new business had no profits, they would seek to offset the
value of the capital allowance against the existing profit stream from
their established business or businesses. That will now no longer be
allowed beyond the £25,000 limit. In discussions on the matter,
it has been suggested that investment in plant and equipment up to the
annual investment allowance could be exempt when calculating the loss
for the purposes of applying the cap. Otherwise there is a danger of
hindering investment in plant and equipment in the new
business. Perhaps the
Minister could give the Committee some examples of the contrived
arrangements that, presumably, she fears, so that we can distinguish
them from the normal trading arrangements that we fear will be caught
by the wide scope of the legislation, with all the damage that that
will do. The effect of paragraph 6 of schedule 21 is to make the
provisions retrospective. If a loss arises in a basis period ending
after 12 March 2008, that loss will be time-apportioned between the
periods before and after that date, and the proportion deemed to arise
after 12 March will be subject to the loss restriction, even though the
loss may have arisen before 12 March.
I should like to return to the
definition of a non-active capacity. In the modern world, where many
businesses of all descriptions are pushing the boundaries and frontiers
in technology and the way in which business is done, simply to use a
test of the number of hours of direct personal involvement is
simplistic. An individual might have specialist knowledge, for example,
or some unique reputational value to the business that would mean that
his presence—even his name on its letterhead—had a
significant impact on its prospects. Someone might be absolutely
essential to the functioning of the business, yet might not spend, or
need to spend, 10 hours a week conducting that business. He might be
the proprietor of the formula that the business is allowed to use
without charge, for example. I urge the Minister to consider again
whether the simple 10-hour test is really the message that the
Government want to send about how they value individuals’ input
into a business. We can anticipate, I think, the fact that the same
argument will arise in relation to income shifting. Is it simply about
how much time somebody commits to the business, or about the unique
qualities and characteristics that they bring to
it? In conclusion, if
there is abuse through artificial arrangements, we would support a
targeted attack on that abuse, but that must not become an attack on
risk taking, entrepreneurship, or start-up or spare-time businesses.
The Opposition are deeply concerned that the Government are removing a
fundamental part of the support system, particularly for new
businesses, but also for serial entrepreneurs, which is absolutely not
the direction in which the UK tax system should move, nor—this
is perhaps more significant—the direction signalled in
Government rhetoric.
2
pm HMRC
appears to be saying in the proposals that individuals should not take
risks; that, if they have an income from an established business or
employment, they should not risk any of it. If they do take risks, that
will be entirely at their own risk, and they will be taxed on the gross
income from those other sources, rather than on the net income at the
end of the process after taking into account losses incurred through
investments made in genuine commercial ventures. I would differentiate
between genuine commercial ventures and contrived arrangements. The
Opposition believe that section 66 of the Income Tax Act 2007 already
provides sufficient protection against contrived arrangements where
HMRC can show that a business has been established for reasons other
than generating a profit and running a commercial
enterprise.
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