Finance Bill


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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.”
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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- -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.
“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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