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.
I wondered how the amendment
tabled by the hon. Member for Runnymede and Weybridge would work, as on
my understanding it is not technically correct.
Trade loss relief is not available unless the trade is commercial. If a
trade is carried on with the intention of making a loss, it would not
be commercial and trading losses would not be allowable. The test would
make the annual limit restriction redundant as there would be no losses
to restrict if the trade was not commercial. That is an incredibly
logical argument against the amendment. 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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