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(a) on the company ceasing to carry on the trade, any of the activities of the trade begin to be carried on by a person who is not (or by persons any or all of whom are not) within the charge to corporation tax, and
(b) the companys ceasing to carry on the trade is part of a scheme or arrangement the main purpose, or one of the main purposes, of which is to secure that subsection (2A) above applies to a loss by reason of the cessation.
Mr. Timms: The amendments and new clauses in this group all concern tax avoidance. For the tax system to be effective everyone needs to pay their fair share. Tax avoidance damages the ability of the tax system to deliver its objectives, imposes big costs on society and shifts a greater burden of tax on to taxpayers who do comply with the rules. So the Government are committed to continuing to move quickly and effectively to tackle tax avoidance in all its forms.
What I shall do, if I may, Mr. Speaker, is speak to the Government new clause and amendments in this group and seek to catch your eye later to respond to comments made by others when they discuss the other new clause and amendments.
New clause 8 counters an avoidance scheme that has been notified to Her Majestys Revenue and Customs. The scheme exploits corporation tax terminal loss relief rules that allow losses arising in a trade in the 12 months prior to cessation to be carried back and set off against profits made in the previous three years. The scheme works by artificially engineering a deemed cessation of trading, which allows the company to access the relief in circumstances not intended by Parliament, and it could be used by a large number of companies and it poses a risk of significant loss of revenue. In order to stop companies exploiting the scheme and, thus, to protect the Exchequer, I made a written ministerial statement on 21 May announcing our intention to introduce this legislation.
The new clause addresses situations in which there has not been, in any real sense, a cessation of the trade, but where it is claimed that the cessation occurs as a result of the trade being transferred to a person outside the scope of corporation tax. The new clause is targeted only at avoidance and applies only where it can be established that the reorganisation concerned is part of a scheme or arrangement, one of the main purposes of which is to access terminal loss relief. In such circumstances, terminal loss relief will not be available to the transferring entity. The new clause provides vital protection to the Exchequer from wholly artificial avoidance schemes and does so in a targeted and proportionate manner. I therefore ask hon. Members to ensure that the new clause stands part of the Bill.
Government amendments 41 and 42 seek to ensure that clause 59, which contains a provision to counter an avoidance scheme that abuses the double taxation relief rules, does not hit any unintended targets. Following representations, Government amendments were tabled in Committee that were intended to ensure that the clause would not have an unintended effect in normal commercial situations. The amendments would have provided that the clause applied only to payments made under the laws of a territory outside the UK. These amendments reflected agreement that HMRC reached with industry legal experts and had the advantage of following existing legal precedent that applies for the purposes of controlled foreign company legislation.
The Government amendments would have covered the overwhelming majority of cases in which refund of foreign tax might arise from commercial contracts. However, after those Government amendments were tabled, further representations were received which showed that they may not go far enough to ensure that the clause does not hit any unintended targets. Although these are unusual circumstances, I said during the course of our debate on this clause in Committee that it is right that we should take account of them and that I would return to this matter with further Government amendments on Reportand I have done so.
During the Committee debate, I made it clear that I accepted the principle of the similar Opposition amendments, but that I wanted to reflect further on the issue to ensure that any amendments were technically correct. The new Government amendments contain one minor adjustment, compared with the Opposition amendments in Committee, in that they refer to a tax authority rather than a taxing authority. This is
because a taxing authority might be seen as the legislative body which imposes the charge to tax, rather than the authority that assesses and collects the tax, and makes any necessary payments or repaymentsa small but necessary change. The amendment has also been duplicated to cover the situation where the taxpayer is seeking a deduction for foreign tax, as well as where double tax credit relief is sought.
The amendments will ensure that this clause will not affect normal commercial arrangements, and I ask the House to support them. I will seek to catch your eye later, Mr. Speaker, to respond to points made by others about this group.
Stewart Hosie (Dundee, East) (SNP): I rise to speak in favour of new clause 5. I originally had no intention of tabling such a new clause until we had the debate upstairs on clauses 66 and, more importantly, 67. Both of those clauses rightly seek to outlaw the highly contrived tax avoidance schemes that the Minister described in some detail at the time. That was the right thing to do.
Interestingly, the debate on clause 67 almost completely ignored its content and revolved around the issue of principle of retrospective legislation. In general terms, I oppose retrospective legislation, especially when it comes to the tax code, because it delivers uncertainty, but I do recognise that from time to time it might be necessary. One of the reasons why retrospective legislation is necessary when it comes to clamping down on contrived tax avoidance schemes did not become clear until after the debate in Committee.
Let me explain. The process that is followed in such schemes is that tax avoidance schemes are developed by promoters, they commence operating and only then, post-commencement, are they notified to the HMRC, which canand sometimes doesoutlaw the practices and introduce retrospective changes to the law to facilitate that. In the case of clause 66, the scheme was effectively outlawed within a week or so of the Revenues being notified of it. The Government can act very quickly, but not always, and it can take some timeperhaps a yearto introduce the necessary retrospective legislation. That is precisely what happened in the instances that we discussed in Committee.
It struck me as somewhat peculiar that such schemes were not checked by the Revenue in advance of their commencement to allow the commissioners to rule on their legality or otherwise or even to suggest, even if they were legal, that they were likely to be outlawed quickly because they were simply going to be tax avoidance schemes. I was very pleased, when we probed the Minister, to get his reply. I asked whether he could
confirm that promoters are able to seek confirmation of the schemes in advance
Promoters can seek that clearance as well. They are required to disclose, but they can seek clearance if they wish. [ Official Report, Finance Public Bill Committee, 16 June 2009; c. 431.]
In both cases, the correct answer should have been
HMRC offers a clearance service to businesses covering the tax implications of commercial transactions
where there is material uncertainty as to the tax outcome and the issue is of commercial significance to the business. Under the clearance regime HMRC will not give advice, or comment on, tax avoidance schemes.
In addition to the clearance service for business, HMRC offers a written...service to personal tax customers covering completed transactions where the correct tax treatment is in doubt or where guidance is needed on HMRCs interpretation of recently passed law or its application to a specific proposed transaction, where there is genuine uncertainty. This written advice service does not cover arrangements where tax avoidance is an issue. The scope and terms on which this service is offered is set out in Code of Practice 10.
That is extremely clear, but the implication of that answer is that the Finance Bill, unamended, would perpetuate the status quo, which is that schemes can be developed, promoted and commenced, people can buy into them or use them and they are then notified to the HMRC, outlawed and made subject to retrospective changes. That all risks uncertainty in the tax code, which none of us wants to see, and a potential loss of revenue yield, I am certain. Most importantly, it risks individuals taking tax or financial planning advice or action, thinking that they are doing the right thing and that they are behaving wholly within the law, and finding that they are then subject to retrospective changes to a law that they had no intention of breaking.
It would be much simpler to allow promoters to clear schemes in advance to ensure that if they were illegal, or likely to be outlawed, they simply would not be promoted. That would give us certainty in the tax code and protect those individuals who think they are doing the right thing and end up being subject to retrospective legislation.
Mr. Colin Breed (South-East Cornwall) (LD): I fully agree with the thrust of the hon. Gentlemans argument, but he might be aware that the Select Committee on the Treasury received certain information from Barclays bank about its tax avoidance schemes. The schemes that it developed are extremely complex, and it took them to HMRC and got the staff there to look at them and basically approve them, because it did not have the resources and everything else to go through it all, whopped it back to its clients and said, We put this to HMRC, they think its okay and now we have all sorts of ways of trying to alleviate that
The hon. Member for South-East Cornwall (Mr. Breed) makes an important point about the complexity of some schemes, but it is the very
complexity of the tax code that allows highly complex and contrived schemes to operate. There is an argument for simplifying the tax code as a whole, but todays debate is not about that. I want to ensure simplicity, help people avoid illegality and protect tax yields. That seems sensible, and I hope that it is uncontentiousunless there is a hidden argument or a problem in the Revenue that the Minister will tell us about in a few minutes.
Most Opposition amendments are moved to claw back powers from HMRC, or to stop officialdom interfering in peoples lives or businesses. Almost uniquely for me, I have moved the new clause because I want to give the tax commissioners more powers and responsibility. It makes absolute sense for them to be able to validate schemes in advance and declare them either legal or illegal. More importantly, even if a scheme is legal, the commissioners should be able to tell its promoters, Yes, its legal today, but I suspect that the Minister will come down on it like a ton of bricks in two weeks time, so its probably better not to promote it. That would create certainty in the tax code and protect people looking for tax and financial planning.
Mr. Michael Meacher (Oldham, West and Royton) (Lab): I want to make one very brief central point, and it relates to what the hon. Member for Dundee, East (Stewart Hosie) has just been saying. My right hon. Friend the Financial Secretary has explained that new clause 8 is necessary to block yet another loophole that would open up yet another lucrative tax avoidance mechanism, and I am absolutely sure that he is right. What is significant is that the Government have found it necessary to table the new clause now, and that is because the latest tax avoidance scam surfaced only after the Finance Bill was published.
Similar scams are being invented all the time, by extremely highly paid City accountants and lawyers. As a result, the Treasury has to scurry around trying to block them up as quickly as they are created.
Mr. Mark Field (Cities of London and Westminster) (Con): I do not disagree that it is perfectly within the rights of any Government to have a rigorous anti-avoidance regime along the lines that the right hon. Gentleman clearly supports, but does he accept that, commensurate with that, there also needs to be a full and open clearance process? Such a process would help prevent scams being created, and the need to deploy anti-avoidance measures.
Mr. Meacher: The question is what particular transparent and open system the hon. Gentleman would recommend, but I am in favour of something like what the hon. Member for Dundee, East has proposed. As I shall explain in a moment, we need a general provision of the sort that would avoid the House of Commons continually spending its time trying to block one scam after another. I agree that that is not the most efficient way of dealing with the problem.
Mr. Meacher: I was coming to that. The hon. Gentleman and I have had some conversations on this subject, and I entirely agree with him. My question to the Minister has to do with whether the Government are engaged in a labour of Sisyphus. Why do they not seek to break the cycle of endless tax avoidance scamsbecause, being clearly designed to get round paying tax, that is what they areby introducing a general anti-tax avoidance principle into the UK tax system? I can think of two or three previous Treasury Ministers who were very much in favour of that course.
I tabled a proposal along these lines two months ago, and I am glad to see that the hon. Member for Southport (Dr. Pugh) has retabled it as new clause 2. I realise that it has not been selected for debate, presumably because it would increase taxes. Of course, that is exactly what the new clause is designed to do, where appropriate, but under our rules only the Government have that prerogative. But I want to ask my right hon. Friend the Financial Secretary why we continually spend our time scrabbling around in the bulrushes trying to block off every new tributary of tax avoidance, when we could seize the high ground and block this ever-flowing antisocial river altogether at one go. There are good precedents for this
Mr. Gummer: Does the right hon. Gentleman accept that one of the prices of liberty is eternal vigilance, and that one has to be very careful about trying to claim that people are guilty unless proved innocent? That is precisely the reason that we do what we do. It is extremely dangerous to start off a taxation system on the basis that people must not be allowed to do anything lest they avoid tax.
Mr. Meacher: I do not often disagree with the right hon. Gentleman, but here I take a rather different line. Of course there must be transparency, as the hon. Member for Cities of London and Westminster (Mr. Field) said, and of course we do not hold people guilty until proved innocent. What I am recommendingthe hon. Member for Dundee, East said the sameis that there should be a general principle which makes it clear that if the purpose of the device is solely to evade or avoid tax and it has no sensible, practical, obvious economic purpose, it should be ruled out in terms of what the mechanism is designed to do.
I would add that there should be some penalty to discourage such action in future. That is not unfair. It is a way of avoiding an artificial, deliberate and proliferating attempt to avoid tax, which means that the rest of us who are not super-rich and not big corporations have to pay. I do not think that is a very good idea.
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