The
Chairman: Order. If the hon. Member for Wellingborough
leaves the Committee Room, the Committee will be
inquorate.
Mr.
Bone: On a point of order, I shall remain to keep the
Committee quorate, but is it not the job of the Government to keep the
Committee
quorate?
The
Chairman: I take the hon. Gentleman’s point and
thank him for keeping the Committee quorate. That is certainly
something that the Government should keep their eyes on. Had it not
been for his good grace, the Committee would have been
inquorate.
Mr.
Hammond: During my 11 years in this place, people have
resorted to various techniques to shut me up, but I do not remember
anyone ever seeking to make a Committee inquorate to do so. I am
grateful to my hon. Friend the Member for Wellingborough, but
unfortunately he might have established a
precedent. I
was saying that the application of the proposed new section is very
broad. The arrangements to which it can apply are defined by reference
to the definition of tax advantage in section 840ZA of the Income and
Corporation Taxes Act 1988, whereas the target of this Bill is, or
should be, arrangements where a tax advantage is derived from the
treatment of the relevant amount as a distribution, rather than as
interest on a loan relationship. I have some sympathy with
HMRC’s approach. I suspect that that approach underlay our
disagreement over schedule 21. I understand that people charged with
undoing tax avoidance opportunities tend to prefer broader legislation,
which will be one step ahead of the avoidance industry. However, the
danger with that is that we get broadly
drafted legislation, which may have unintended consequences
specifically. More generally, that plays to what I am afraid is
becoming an important theme: the UK is no longer a clear, certain place
to do business, with a tax code that is easily understandable and
applied consistently. As the UK tax code has got longer and more
complex—it has doubled in length under the Government—it
has become more and more difficult for people to predict how they will
be treated. Uncertainty is a cost of business: uncertainty about the
application of the tax code is as much a cost to be factored in to an
investment decision as an extra tax. The complexity of the tax system
has the negative impact for the economy of additional tax, without the
positive aspect for the Exchequer of an additional tax. It is the worst
of all worlds, moving us one stage further down the road of
international
uncompetitiveness. The
purpose of the amendments is to limit the new provision to its intended
target. Amendment No. 138 specifically narrows the definition of
“tax advantage” to one arising from the
“amount” being “treated as a distribution”.
It also seeks to ensure that the tax treatment is symmetrical in cases
where the new rules could apply to transactions between UK resident
companies. Amendment No. 137 includes reference to
“credits” as well as “debits”, so that we
ensure that there is symmetrical treatment. When a debit is taken out
of calculation for the purposes of the tax computation of the paying
company, then the corresponding credit is also taken out of the
computation for the purposes of calculating the tax liability of the
recipient
company. The
amendments go some way towards refocusing the clause on its original
intention. I stress to the Minister that we are not seeking to change
the intended impact of the provisions—this is not a wrecking
amendment. It is intended to give her an opportunity to reassure the
Committee that the focus of the intended clampdown is narrow and is not
intended to create an asymmetric treatment where the payment is made
between two UK companies. Frankly, it might help her to bring some
political clout to bear, ensuring that the understandable official
preference for wider drafting is not allowed to prevail, but rather
political common sense and the Government’s own political
agenda. While the Government seek to close down tax avoidance, they are
also seeking to maintain the competitiveness of British business and,
by implication, the clarity and certainty of our tax code—that
agenda prevails over the official convenience agenda, which HMRC quite
understandably will always
push.
Jane
Kennedy: Work on principles-based legislation is ongoing
for the Finance Bill 2009 and will, as the hon. Gentleman suggests,
replace possibly much of the detailed legislation. I hope that I can
reassure him that this legislation only applies where there is a tax
avoidance motive. If there is no such motive, the legislation does not
apply. The principles-based legislation on which we are consulting
seeks a simpler approach to countering tax avoidance.
In response to the hon.
Gentleman’s regular attack on the length of the tax code, I will
say that the tax law rewrite group has been involved in a major piece
of work. I have debated that with officials within the Department since
taking up the post, and it has become clear to me that using simpler
language and
breaking up the density of tax law to make it easier to understand and
more accessible has led to greater length, but also to the benefit of
clarity. HMRC has been
notified of a number of schemes that involve companies designing
securities so that they are treated as paying distributions rather than
interest. The amounts paid are equal to the returns that would be paid
on an investment at interest but are claimed to be non-taxable because
of the distributions rules. The debtor company will generally be party
to an arrangement that allows it to obtain a tax deduction for the
amount treated as a distribution, or it is unconcerned about whether it
obtains such a deduction because it has losses and does not pay tax. On
Budget day, we announced that we were countering those schemes by
removing the tax-exempt status of distributions from loans where the
distributions arise in consequence of or in connection with any
arrangements that have as one of their main purposes the production of
a tax advantage for any
person. We
cannot accept the amendments proposed. If amendment No. 137 were
accepted, companies would be allowed to obtain deductions for payments
that are currently non-deductible because they are classified as
distributions when paid in connection with tax-avoidance arrangements.
That would provide companies with a fiscal incentive to facilitate
tax-avoidance, based upon their entering into arrangements that are
designed to allow another company to avoid corporation tax. Amendment
No. 138 would confine the effect of the changes to one form of
tax-avoidance where the tax advantage arises from treating interest as
a distribution. In practice, it is highly likely that the tax advantage
would arise from treating the interest as a distribution, but there is
no reason to restrict the rule to such cases. For instance, if the tax
advantage arose from some other aspect of the arrangement, such as a
tax distribution being sought for a drop in the value of the loan
relationship caused by the payment of the distribution, there is no
reason for the new rule not to apply. Companies not actively engaging
in tax-avoidance have nothing to fear from the changes.
After that short debate, I hope
that I have been able to reassure the hon. Member for Runnymede and
Weybridge and that he will not press the
amendment.
Mr.
Hammond: I am not sure that I quite follow the penultimate
paragraph of the Minister’s speech, but I will look at it in
Hansard. Once again, she made a perfectly reasonable case, but I
think that I, too, made a perfectly reasonable case. Members of the
official Opposition are not saying that we want to protect artificial
arrangements that give rise to artificial tax savings. She has
acknowledged that it is likely that the abuse that she wants to target
arises from the treatment of an amount as a distribution, but our sole
concern is that by drafting the legislation widely and being unwilling
to confine herself to a narrow definition, she is running the risk of
collateral damage, and that is a recurrent theme.
We all agree about the 99.5 per
cent., but on the one hand, we disagree on whether we should say,
“Keep it narrow and run the risk that next year you will have to
put something else in place if someone somehow gets into the last half
per cent. and levers it open.” On the other hand, she is saying
“Well, I don’t really care if
there is some collateral damage and a few people we didn’t intend
to be caught by the measure are unfairly caught by it, because we have
a bigger job to do in shutting down a tax avoidance
scheme.” 3
pm There is a
difference in approach that reflects how one views the relationship
between the citizen and the state. If we are of the view that it is
important to maintain the balance and not allow the state always to
take the over-mighty approach, we should err on the side of caution and
apply anti-avoidance legislation that is properly targeted at the
abuses that are occurring. We know, because the Minister has told us,
that if other abuses open up, she has powers to intervene rapidly and,
if necessary, retrospectively to the date of an announcement, to expand
the scope of anti-avoidance legislation. However, such a generalised
approach that does not target specific mischief runs the risk of
causing collateral
damage. I
am sure that we will return to this theme. I shall not detain the
Committee by pressing the amendments, but I hope that the right hon.
Lady will consider the general theme—I know that she thinks
about such things—and challenge her own officials on whether the
measures are necessary. My hon. Friends and I have not dreamed up
politically motivated points; by and large, they reflect points that
have been raised in discussion, particularly with the professional
bodies, which see the potential for unintended consequences.
If the Minister thinks back to
our discussions today, she will recall that on at least one
occasion—in the Finance Act 2007—she had to introduce
legislation to correct unintended consequences and ensure that
the taxpayer was not disadvantaged vis-Ã -vis the
Government’s intentions. I give her notice that we will come
back to the matter later in the Bill’s progress, but I beg to
ask leave to withdraw the
amendment. Amendment,
by leave, withdrawn.
Amendment
proposed: No. 127, in
schedule 22, page 279, line 34, at
end
insert— ‘Disposals
for consideration not recognised by accounting
practice 3A (1) In Schedule 9 to FA
1996 (loan relationships: special computational provisions), after
paragraph 11A
insert— “Disposals
for consideration not fully recognised by accounting
practice 11B (1) This paragraph
applies where in any accounting period (“the relevant accounting
period”) a company, with the relevant avoidance intention,
disposes of rights under a creditor relationship (in whole or in part)
for consideration
which— (a) is not wholly
in the form of money or a debt that falls to be settled by the payment
of money, and (b) is not fully
recognised. (2) The relevant
avoidance intention is the intention of eliminating or reducing the
credits to be brought into account for the purposes of this
Chapter. (3) Consideration is
not fully recognised if, as a result of the application of generally
accepted accounting practice, the full amount or value of the
consideration is not recognised in determining the company’s
profit or loss for the relevant accounting period or any other
accounting period. (4) In
determining the credits to be brought into account by the company for
the period for the purposes of this Chapter, it is to be assumed that
the whole of the consideration is recognised in determining the
company’s profit or loss for the relevant accounting
period.
(5) But this paragraph does not apply if paragraph
1(2) of Schedule 28AA to the Taxes Act 1988 (provision not at
arm’s length) operates in relation to the disposal so as to
increase the tax liability of the
company.” (2) In
Schedule 26 to FA 2002 (derivative contracts), after paragraph 27
insert— “Disposals
for consideration not fully recognised by accounting
practice 27A (1) This paragraph
applies where in any accounting period (“the relevant accounting
period”) a company, with the relevant avoidance intention,
disposes of rights or liabilities under a derivative contract (in whole
or in part) for consideration
which— (a) is not wholly
in the form of money or a debt that falls to be settled by the payment
of money, and (b) is not fully
recognised. (2) The relevant
avoidance intention is the intention of eliminating or reducing the
credits to be brought into account for the purposes of this
Schedule. (3) Consideration is
not fully recognised if, as a result of the application of generally
accepted accounting practice, the full amount or value of the
consideration is not recognised in determining the company’s
profit or loss for the relevant accounting period or any other
accounting period. (4) In
determining the credits to be brought into account by the company for
the period for the purposes of this Schedule, it is to be assumed that
the whole of the consideration is recognised in determining the
company’s profit or loss for the relevant accounting
period. (5) But this paragraph
does not apply if paragraph 1(2) of Schedule 28AA to the Taxes Act 1988
(provision not at arm’s length) operates in relation to the
disposal so as to increase the tax liability of the
company.” (3) The
amendments made by this paragraph have effect in relation to disposals
on or after 16 May 2008.’.—[Jane
Kennedy.]
The
Chairman: With this it will be convenient to discuss
Government amendment No.
128.
Mr.
Hammond: The Minister is making a good attempt at
progress, but I am afraid that she will have to work for her
ministerial salary. As
we have been discussing tax law rewrites and making things nice and
plain, I draw the Minister’s attention to Government amendment
No. 128. Proposed new paragraph (2D) of schedule 9 to the Finance Act
1996
says: “This
paragraph does not apply
where— (a) the
transferor company is party to arrangements...in circumstances in
which this paragraph would not apply”.
So the paragraph will not apply in
circumstances in which it will not apply. To me, that does not sound
like the kind of plain English of which the tax law rewrite project
would approve. I cannot understand what the words at the end of new
paragraph (2D)(a) mean when read in conjunction with the words at the
opening of paragraph (2D).
I shall leave
the Minister to ponder that for a moment. The changes introduced by the
amendments are, as I understand it, designed to block tax planning
where financial assets are sold without the market value of the
proceeds being taxed and, effectively, without their being recognised.
Of course we support measures to deal with any non-commercial,
non-arm’s-length transaction that gives rise to a tax advantage.
However, the wording of new paragraph 11B, which is inserted by
amendment
No. 127 into schedule 9 of the Finance Act 1996, could apply more widely
than the right hon. Lady thinks—we go back to our familiar
theme—and could catch normal commercial transactions where a
loan is exchanged for shares in a company, for example because of a
debt for equity swap. This is not an artificial transaction. This could
be a transaction where, because of the financial condition of the
borrower, the provider of the loan has no alternative but to exchange
the debt for equity. Companies holding such loans would be taxed if
they had a relevant avoidance intention, defined as the intention not
to be taxed on the loan interest receivable. Given that
any debt for equity swap will result in an instrument giving rise to
taxable income—the loan—being replaced with an instrument
that is taxed on a capital gains basis—the shares—there
is a concern that this provision will catch normal transactions.
“Normal” is perhaps not the right term, as a debt for
equity swap is fairly unusual, but it is a perfectly legitimate
commercial transaction. Moreover, given the present conditions in the
credit market, we might expect to see more forced debt equity swaps in
the near future.
There is therefore a concern
that a normal commercial transaction which replaces a loan with shares
could easily be argued to have a purpose of avoiding tax on the loan
income. When one swaps interest-bearing debt for equity, one surrenders
the opportunity, albeit theoretical, of receiving interest on the loan.
I should be pleased to hear the Minister’s specific answer to
those questions. Can she reassure the Committee that this unintended
consequence will not
arise?
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