Finance Bill

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Mr. Field: Regrettably, the presumption behind the sideways loss-relief provisions proposed in schedule 21 seems to be that individuals are trying to take HMRC for a ride. As my hon. Friend the Member for Runnymede and Weybridge rightly pointed out in his extensive contribution, the Opposition do not wish to allow contrived schemes to go through, and it is quite right that they be stopped. However, the Government perhaps fail to understand simply how haphazard and lacking in calculation many new business ventures are. As he pointed out, in a world in which more and more people are entering consultancy work, running their own, and expanding, businesses, forming different partnerships and, therefore, receiving different income streams to help kick off those businesses, there is a real worry that a particularly eagle-eyed HMRC inspector could make such business expansion, which we all recognise to be in the interest of UK plc, ever more difficult.
Clearly, many such businesses are not contrived, but some individuals develop their businesses haphazardly. As my hon. Friend said, a business might start in someone’s garage and take up just a couple of hours at the weekend but, as the excitement and buzz of the new idea grow, so the business might take up ever more time and costs—both absolute and opportunity costs. It would be wrong if people setting up such businesses, many of which are in the service sector, are unable to utilise some of the sideways loss-relief provisions for business ventures that are already up and running. It is feared that the Government do not recognise how much change there is in the world of work. Individuals are no longer simply employees or self-employed. There is now much more of a mix, and people are willing to develop new ideas. Just as it would be wrong to encourage contrived schemes to avoid paying tax, we should, as far as we can, encourage provision for those individuals who are willing to take risks to be properly rewarded within the context of the tax scheme.
Amendment No. 136 makes it clear that out-and-out contrivances are not right. Neither the Treasury nor the Opposition would support them. The amendment states that the trade should not be carried on
“with the intention of generating a loss for tax avoidance purposes.”
However, I fear that the authorities believe that everything involved in setting up new businesses is far more regimented and organised than it probably is. We should do nothing to discourage that entrepreneurial spirit.
Jane Kennedy: HMRC has received evidence through the disclosure regime and other means that there is up to £1 billion of avoidance activity through this scheme. The measure follows action taken against partnership avoidance last year, and the scored yield reflects this: the projected revenue that we are protecting is £245 million, £80 million and £50 million in the next three successive years.
Mr. Mark Hoban (Fareham) (Con): The Minister said that there was £1 billion-worth of avoidance activity in this area, yet the figures for the next three years come to less than half of that sum. Can she reconcile the two statements?
Jane Kennedy: My advice is that that is the clear activity in this scheme, which is why the UK Film Council was very concerned to make sure that robust action was taken. I will provide a specific answer to the point made by the hon. Gentleman in a moment. It is important for the Committee to understand that this is not an unexpected response from the Government. Deloitte, in its full Budget commentary, said:
“This change was expected and shows how HMRC has benefited from the information received under the disclosure regime.”
The provision is working, and the UK Film Council states:
“We have made clear over and over again that the Government will take action against tax avoidance schemes and that’s what they’ve done today.”
Mr. Hammond: I am not quite sure why the Minister is quoting the UK Film Council, as they are the only people who are exempt from the impact of the Bill. I made it clear that we would support measures to deal with contrived avoidance arrangements. I asked her to give examples of this scheme that allow a contrived arrangement that can be distinguished from the ordinary, commercial activity to which my hon. Friend the Member for Cities of London and Westminster and I referred. She talked about £1 billion, so there must be quite a lot of it. I should be grateful if she could explain how it works.
Jane Kennedy: If the hon. Gentleman allows me to develop my argument, I will explain exactly how I arrived at my view that this is the right action to take. The hon. Gentlemen has made a reasonable argument and asked a reasonable series of questions—questions which I, too, ask when I decide whether an avoidance scheme of this nature should be tackled in this way.
I was quoting the UK Film Council, and I will address directly the point that the hon. Gentleman made about it in a moment. The council said that it had made it clear that action would be taken. It went on to say:
“The only specific tax relief for the production of films is the film tax relief, which has been structured to help filmmakers. Everything else has a large health warning attached to it.”
That was its quote on the day. The provision concerns only losses that arise from the old film tax reliefs for films completed before 31 December 2006, or for films in production on 1 January 2007, which are subject to the transitional rules. We had a pre-existing commitment to those films. The restrictions will apply to film losses generally, except those covered by the transitional arrangements.
The hon. Gentleman seems to think that the measure is retrospective. Neither the operation of the purpose test nor the annual limit is retrospective. The purpose test applies to arrangements made on or after Budget day—12 March 2008. The annual limit applies to a loss with a basis period ending on or after 12 March. This targeted and proportionate anti-avoidance measure is designed to prevent aggressive avoidance. However, I have acknowledged that there is some justice in the hon. Gentleman’s argument that it is possible—I have been concerned about this—that the measure will have an impact on a small number of non-avoiding, sole-trader businesses. I shall say more about that in a minute.
Mr. Field: I am interested to hear more. Given that there is allegedly a £1 billion problem, will the Financial Secretary give specific examples of the contrived schemes that are getting away with it, but which will be caught under schedule 21? I would like an idea of the type of contrivances that she has in mind.
Jane Kennedy: I am advised that we do not identify individual schemes. The schemes that we are discussing are used by wealthy individuals to access large losses that they set against other income or gains. Large up-front losses are generated by exploiting the capital allowances rules and special tax reliefs and generally accepted accounting practices that provide accelerated deductions for expenditure. The individuals concerned use the losses to reduce their tax liability. I can give the hon. Member for Cities of London and Westminster examples of the features that are regarded as completely unacceptable.
Mr. Field: The Financial Secretary mentioned “wealthy individuals” who are creating very large losses for the purposes of offsetting in the way that she described. Can we take that as an assurance from her that people such as small entrepreneurs setting up their own consultancy business while in full-time employment to see whether an idea will run will not be caught under schedule 21? That is the reassurance that my hon. Friend the Member for Runnymede and Weybridge and I seek.
Jane Kennedy: I will come to that in a moment, but first I would like to deal with one or two other points. However, I hope that I will be able to give the hon. Gentlemen that assurance.
Examples of other unacceptable features include: inflating the loss relief by the use of loans so that the relief exceeds the money contributed by the individual; and the buying of an asset by an overseas intermediary in a tax haven at a price far in excess of historical costs. There are other examples. On this issue, there is probably no difference between us. The debate relates to the proper concern about whether innocents would be affected by the measure, and I hope to offer some reassurance on that issue.
The proposed measure will still allow non-active sole traders to set up to £25,000 of losses sideways, with any unrelieved losses going forward against future profits. When genuine businesses make losses in the initial years, that will be on the expectation of profit in future years, the tax on which can be reduced by carrying forward the remainder of the losses not covered by the £25,000 limit. That concern was raised by the Chartered Institute of Taxation. This measure does not prevent losses from being set against profits from the same trade. An individual will not, therefore, be taxed on more than 100 per cent. of their net profits after losses from the same trade over the life of the trade.
Mr. Hammond: The point made was that an individual could find that they were being taxed effectively on 100 per cent. of their income in a given year. The Financial Secretary rightly says that losses can be carried forward for use in the same trade, but that does not reflect the reality of somebody struggling to start up a business. It is of no help telling someone in that situation that he cannot pay the gas bill this year, but that he should not worry, because he can offset his losses against his massive profits in three years’ time. That shows once again that the Government do not understand the problems facing small businesses and entrepreneurs.
2.15 pm
Jane Kennedy: I am assured that that will not be the impact. As always, I listen to the hon. Gentleman’s arguments because his work is thorough. I have already accepted that there is some concern, and I have looked at that carefully. However, there will not be many individuals who carry on that kind of business on their own account in a non-active capacity—I will say more about the 10 hours in a moment—who make losses substantially in excess of £25,000 and have other income significantly above that figure against which sideways loss relief could be claimed. They will still be able to claim genuine losses of up to £25,000 against their other income and gains, and where losses are not immediately relievable they are not lost but can be set against income from the business for other years. I hear that the hon. Gentleman says that that is not realistic, but we have to balance the benefit of preserving unlimited relief for a small number of genuine non-active traders against the cost of the exploitation of the relief, which is a problem.
Mr. Hammond: Will the Financial Secretary give way?
Jane Kennedy: If I could just demonstrate the reality of that, the revenue figures that I quoted earlier are for this year’s measure. The £1 billion refers to the total sideways loss relief avoidance being closed down both this year and last year.
Mr. Hammond: Will the Financial Secretary give way?
Jane Kennedy: Yes, but I have quite a bit to say.
Mr. Hammond: Perhaps it is easier if we deal with the issues as they come up, and as the Financial Secretary responds to them. She said that we have to balance the risk of damaging genuine sole traders and entrepreneurs against the risk to the revenue of abuse of the process. I say that we do not have to make that trade-off. We can target the legislation by introducing a motive test. None of us had suggested that people abusing the film tax credit scheme to siphon off hundreds of millions of pounds should not be dealt with, but she asks us to believe that it is beyond the Government’s capability to target the measure on contrived arrangements involving film tax credit claims. She could do that if she put her mind to it, and avoid overspill of the measure affecting entrepreneurs and start-up businesses in a way that she says she does not intend, and about which we have grave concerns.
Jane Kennedy: I will come to the question of a motive test. I fear that we will not agree, although I had hoped—
Mr. Bone: I am interested in the Financial Secretary’s argument about the £25,000 relief. That is an interesting starting point, but why is it so low?
Jane Kennedy: In looking to take anti-avoidance measures for this scheme, I was advised that on balance that was the best level at which to pitch the relief. We were satisfied that the £25,000 limit struck the right balance. It must prevent avoidance activity, but allow most individuals to remain unaffected. We will keep the amount under review. We are dealing with a particularly aggressive form of avoidance, where promoters have consistently adapted their schemes to challenge the intention of existing legislation. We had to deal with that last year when we looked at partnerships. Reliance on a motive test, as the hon. Member for Runnymede and Weybridge suggests, would be impractical and would give rise to unacceptable cost and risk. I will say more in a moment.
I have one or two more comments on the 10-hour rule. Many people involved in the avoidance schemes have no active involvement with the business. The 10-hour rule strikes a fair balance between allowing genuine part-timers to carry on without any effect, while ensuring that tax avoiders are not successful. The 10-hour rule has applied in the case of previous restrictions on partnership losses since 2004. It has proved an effective and practical test and I have no reason to believe that what the hon. Gentleman suggests would prove to be true.
The purpose test, which we propose, refers to arrangements made for the purpose of obtaining a reduction in tax. Whether there are avoidance arrangements is a factual matter. There will be many instances where the focus of the loss maker was not tax avoidance and relief will be due. Past experience of the abuse of sideways loss relief has made it abundantly clear that avoiders will take all possible steps to disguise the avoidance as commercial, and that a motive test will not deter them.
We need a mechanism that will deter promoters from instigating such schemes and individuals from entering into them. The annual limit provides that extra deterrent by making it uneconomic to challenge the intention of the legislation. The proposed amendment would make the annual limit apply only when a trade is carried on with the intention of generating a loss for tax-avoidance purposes. Where that is the case, there is no need for an annual limit as losses would not be allowed because the trade is not commercial. It would not provide the necessary deterrent and it would give rise to unacceptable levels of cost and risk in enforcing the application of the motive and purpose tests.
I am convinced that the right combination is a purpose test and the annual limit of £25,000 provided for in the clause. I have a slim hope that the hon. Member for Runnymede and Weybridge will accept my response to his argument and that he will agree to withdraw the amendment. If not, I shall ask my hon. Friends to oppose it and support the schedule.
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