Mr. Hammond: This is an important debate and the Committee stage is designed for exactly this purpose. At one level, what the Financial Secretary says is entirely reassuring. She tells the Committee that the measure is designed only to deal with artificial schemes being marketed to high-net-worth individuals using film tax credits. Our concerns relate entirely and exclusively to the impact of such measures on people who are not involved in any way in such schemes.
I could stand here, think that I have misunderstood the whole thing and accept the Financial Secretarys reassurances at face value. The problem is that all the outside bodies who have drawn attention to the problems and the risks implicit in schedule 21, have not understood it in the way that she has presented it. Let me ask the Financial Secretary a specific question. At the beginning of her remarks she said that this related to the abuse of film tax credits only. That is why she mentioned the UK Film Council. In the schedule, there is no reference to the provision applying only to arrangements that involve the use of film tax credits. If it said that in the schedule, this debate would not have taken place and none of the concerns would have arisen. However, it does not say anything about film tax credits, except that authorised film funding arrangements are excluded from the scope of the provisions. Were she able to confirm for the record that in practice only arrangements involving film tax credits will be caught by the provisions, even if that means telling the Committee that the Revenue will use its discretion so that those who are not involved with film tax credits are not caught by the legislation, I would feel quite satisfied. I do not know whether my hon. Friends would agree.
The Financial Secretary also mentioned in the course of her last remarks that the Government were proposing a purpose test. She implied that their purpose test was
We are genuinely seeking after the truth. It may be that the schedule will not impact the serial entrepreneur who has never been anywhere near a film or any film funding arrangement, has never purchased an avoidance or tax-planning scheme from a firm of accountants and is simply someone who has established a small business and gone on to establish another and another; or, to take a different example, a highly paid investment banker in the City who, instead of consuming all his income on expensive champagne, decides to use some of it to start a business. That business might not trade successfully in its first year and might incur losses of £50,000, £60,000 or £100,000, which that individual might be reassured can be set against his six-figure income from his employment. It is those sorts of cases that we seek to protect and if the Minister can assure us in those terms we will be satisfied, but I have not heard such an assurance yet. I will be grateful if she can provide that assurance in the fullness of time, but if she cannot we shall have to press the amendment to a Division and resist the inclusion of the schedule, precisely because of our concerns about the unintended consequences of the measure.
Jane Kennedy: I do not know whether I am supposed to ask leave of the Committee to take a second chance. Although it will not help to reconcile the differences, it will be helpful to the Committee if I clarify that the measure that we are debating applies to trades generally, except to old film reliefs and Lloyds. I do not know whether that offers the hon. Gentleman the reassurance that he seeks. The purpose test that he said he was looking for is in new section 74B. I undertake to study carefully the representations that he has made this afternoon and test them against the advice that I have had, but I cannot give him any further assurances at the moment.
Mr. Hammond: To deal with the purpose test first, as I said, I see it in new section 74B, but that deals with the disallowance of any relief at all. It does not disapply the cap where mischievous purpose is not present.
That is our concern: even where there is no relevant tax avoidance arrangement, the £25,000 cap will still apply. Despite the Ministers statement that the measures will apply only to the abuse of film tax credits, the Government have created a juggernaut. She says that £1 billion in tax is at risk from the abuse of film tax credits, but the measures are not tailored
The Government have created a juggernaut to deal with the problem as they perceive it, and the Minister appears supremely unconcerned that along the way it will run down innocent entrepreneurs who are struggling or planning to start up businesses and seeking reassurance that if they make a loss, they will at least be able to offset it against profits from other businesses or earnings from employment. The £25,000 limit, although it will provide some reassurance to those operating at the bottom end on a small scale, will not really help where any larger-scale business operation is involved, particularly where capital investment is being made and amounts up to the new annual allowance might thus be available in the first years of a new business, in addition to any trading losses, to offset against other income streams.
If the Minister cannot offer us any further assurance, I must ask my hon. Friends to vote in favour of the amendment and against the schedule as it stands. If anything, her remarks have heightened my concerns. It is clear that there is a purpose that will drive HMRC in applying the measurestrying to shut down abuse of the film tax credit is a perfectly legitimate purposebut it is equally clear that the Government have not succeeded in making their intervention a targeted one. There will be collateral damage, and we must make a stand to protect those who would suffer from it.
Question put, That the amendment be made:
The Committee divided: Ayes 7, Noes 12.
Division No. 7]
Question accordingly negatived.
Motion made, and Question put, That the schedule be the Twenty-first schedule to the Bill:
The Committee divided: Ayes 12, Noes 7.
Division No. 8]
Question accordingly agreed to.
Schedule 21 agreed to.
Question proposed, That the clause stand part of the Bill.
Mr. Hammond: Briefly, the clause will amend the wording of a provision that was introduced only in the Income Tax Act 2007. The situation is becoming ludicrous. The Government thought that the definition in that Act was right, but now they are introducing the additional provisions that we have just discussed in schedule 21. They have a different definition, and wish to go back and change the definition that they introduced last year. Why can they not think ahead so that we do not constantly have to revise legislation that we have recently passed? More specifically, what caused the Financial Secretary to decide that the new definition in schedule 21 should be applied in the 2007 Act rather than import the 2007 definition into schedule 21? Why have they decided that they got the development of the definition in the 2007 Act wrong?
Jane Kennedy: To a degree, this is a continuation of the previous debate. The change that we are discussing ensures that the measures that we were forced to put in place last year to tackle the continued misuse of sideways loss relief for tax avoidance purposes are consistent in this Finance Bill and the last for partners and sole traders. The clause aligns the definition of non-active partner for the purposes of restrictions on sideways loss relief with the new definition of non-active capacity for individuals other than partners. As we discussed in the last debate, the existing 10-hour rule requires an individual to spend an average of at least 10 hours a week personally engaged in activities carried on for the purposes of the trade. I have said that that has proved to be effective and a practicable test, but increasingly, avoiders are undertaking activities with no commercial value and claiming that they are for the purposes of the trade.
The reason that we need to keep amending the definition is that avoiders continue to push the boundaries of the definitions and to find ways around them. The hon. Member for Runnymede and Weybridge asks why we should import one definition instead of the other. We are making this change so that we can use the definition that we believe is effective and will work. We believe that it will deter attempts to circumvent the rules. I hope that clause 58 will be supported and will be put on the statute book.
Question put and agreed to.
Clause 58 ordered to stand part of the Bill.
Clause 59 ordered to stand part of the Bill.
Avoidance involving financial arrangements
Mr. Hammond: I beg to move amendment No. 137, in schedule 22, page 279, line 21, leave out from (1A) to when and insert
Any credits or debits relating to any amount which would otherwise fall.
The Chairman: With this it will be convenient to discuss amendment No. 138, in schedule 22, page 279, line 26, after advantage, insert
as a result of that amount being treated as a distribution.
Mr. Hammond: On the version of the amendment paper that I have, the line number reference for the amendment is incorrect. I do not know whether that is a printers error or mine. The line that would be left out is line 21 on page 279, not line 26. I hope that no one on the Committee has been misled by that.
Mr. Hammond: I am glad to hear that the mistake has been corrected since this amendment paper was published on Tuesday. I wanted to ensure that nobody on the Committee was misled.
This is another measure introduced in the name of anti-avoidance. I understand that it, too, is the result of notification schemes under the legislation requiring such notification. Schedule 22 contains measures to prevent certain types of avoidance involving financial products, specifically the kind of products that give rise to interest-like income being delivered in a form that is non-taxable. The schedule will cover schemes relating to disguised interest where arrangements are entered into to avoid tax on returns that are economically equivalent to interest. It will cover the factoring of rents under a lease of plant and machinery, which makes rental receipts not subject to taxation.
The Government originally proposed in a consultation document of December 2007 that broadly drafted principles-based legislation would be introduced from 1 April 2008 to counter avoidance relating to disguised interest and sales of income streamsthat is to say the factoring of leasing income. That consultation prompted a widespread concern among practitioners that the proposals were very broad and were likely to be drafted in a way that would create high degrees of uncertainty for taxpayers and once again give HMRC excessive discretion to interpret the law as it sees fit. Recognising that they cannot afford to inflict any more damage on the UKs reputation as a stable and predictable place to do business, the Government have bowed to pressure from the professional bodies and deferred the introduction of the new disguised interest rules until 2009. I hope that the time between now and then will be used for proper consultation in an attempt to ensure some certainty about the measures when they are introduced. Unless the Minister tells us otherwise, the Committee must operate on the presumption that the measures will have
I turn to amendments Nos. 137 and 138. Paragraph 3 of schedule 22 will insert proposed new section 1A into paragraph 1 of schedule 9 to the Finance Act 1996, and is designed to counter certain arrangements, particularly those involving cross-border financing debt transactions, whereby payments corresponding economically to interest are treated as distributions and therefore fall outside the scope of the UK tax system. The proposed new section applies where amounts would otherwise constitute
a distribution in respect of a loan relationship.
Under the provisions, such avoidance techniques will be countered by a one-sided tax charge. The relevant amount paid by a UK resident company is treated as a non-deductible distribution for its tax computation purposes, but a UK resident recipient company will find that the payment is treated as taxable. However, overseas resident company are not be affected in the same way, which is the situation that the legislation is designed to counter. As I understand it, however, where a payment is received by a UK resident company, there will be a lop-sided, asymmetrical tax treatment.
The proposed new section is very broad in its potential application, in part because the arrangements to which it can apply are defined by reference to the broad definition of tax advantage
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