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 Secretary’s 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
superior to my motive test and that therefore the amendment was
unnecessary. I can see the purpose test in relation to the disallowance
of relief altogether under new section 74B, but my understanding is
that there is no purpose test in new section 74A—if there is one
and she can draw my attention to it, I stand to be corrected. It is
precisely because new section 74A does not appear to be limited by an
effective purpose test that we have sought to reinforce the existing
provisions of section 66 of the Income Tax Act 2007 with the
introduction of the motive test in amendment No. 136. 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 Lloyd’s. 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. 2.30
pm That is our
concern: even where there is no relevant tax avoidance arrangement, the
£25,000 cap will still apply. Despite the Minister’s
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
tightly to deal with film tax credits. Perhaps they could include a
reference to the use of film tax credits. I do not see why not, as the
film tax credit scheme is a specific scheme and, as far as I am aware,
no similar arrangements could be substituted by those trying to develop
avoidance schemes. 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
measures—trying to shut down abuse of the film tax credit is a
perfectly legitimate purpose—but 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.
Clause
58Non-active
partners 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.
Schedule
22Avoidance
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 printer’s 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.
The
Chairman: Order. The amendment paper that I am reading
from refers to line
21.
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. 2.45
pm 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 streams—that 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 UK’s 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
a life of one year only and that we must expect alternative,
principle-based arrangements to be introduced under the Finance Bill
2009 amending what will become the Finance Act 2008. 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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