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Mr. Meacher: This is extraordinary. I always give way to my hon. Friend.
Rob Marris: I am grateful—it is Report stage. I have been racking my brains, going back a long time. I think my right hon. Friend will find that there is a Court of Appeal case to the effect that he seeks to push for this afternoon. It is a case about artificial transactions from, I believe, 1985, the Ramsay and Cook case, which does much of what my right hon. Friend wants.
Mr. Meacher: My hon. Friend has the advantage over me because I have not looked at that, but I find it difficult to believe that it achieves what I am seeking to achieve. If that is so, I am surprised that such schemes continue to roll on and on.
To conclude the speech, which I am finding difficult, there are good precedents for such a principle—it is not a novel idea—particularly the Australian one and, interestingly, in Jersey, both of which seem to be working perfectly well and have been accepted by all parties in those Parliaments. Will my right hon. Friend the Minister please explain the Government’s thinking and when we might expect such a provision to be brought forward? It is sorely needed when the deficit in the public accounts this year is of the order of £175 billion.
Dr. Pugh: I shall speak to amendments 34 and 35 and broadly in support of new clause 5. I do not doubt the Minister’s or the Treasury’s sincerity and determination in wishing to prevent tax avoidance, I do not doubt the skill and intelligence that they have put to the task and I do not doubt the expertise and knowledge that underlie the Government proposals. I need to be convinced that all this is enough to frustrate a huge, massively rewarded and well financed avoidance industry at the heart of modern commerce.
The right hon. Member for Oldham, West and Royton (Mr. Meacher) outlined the Government’s approach. They seem to advocate general principles and then track and box off avoidance schemes while encouraging notification, but they do not want to introduce a general anti-avoidance law. None the less, the Bill withdraws an important general control—section 765 of the Income and Corporation Taxes Act 1988. Albeit an anachronistic one, it is a general control. Pleasing though it might be to the City, this approach has failed to convince many people far more knowledgeable in this field than I. My amendments seek to toughen up this approach.
My preference, like that of the right hon. Member for Oldham, West and Royton, is for the introduction of a general anti-avoidance provision. It is in new clause 2, an unselected amendment in my name. A general anti-avoidance provision would reduce tax complexity straight off: complex avoidance schemes father complex tax law. The provision works elsewhere in the world, such as in Australia, Canada and all sorts of places; and with proper Revenue and Customs advisory services available to business, it would not need to gum up business.
Mr. Mark Field: Will the hon. Gentleman not also consider that the parentage is the other way around—that complex tax law begets complex avoidance provisions?
Dr. Pugh:
That is a fair point, but I was going to say that the Treasury at one stage, in the halcyon days of new Labour, began a consultation on the phenomenon
of the desirability of a general anti-avoidance rule, or GAAR. Interestingly, it said:
“The United Kingdom is unusual”—
“among developed countries in having neither a statute nor an established legal principle to counter tax avoidance in general. Many other countries in the developed world have found such a rule or principle to be a very useful remedy for countering tax avoidance, although not a universal cure.”
Stewart Hosie: Before the hon. Gentleman moves on, may I just check something? There are concerns that, if we have specific anti-avoidance rules, having an overriding anti-avoidance rule, too, might be a stage too far. If he were to get what he wanted with a general anti-avoidance rule, would he want to see the removal of the specific rules, too?
Dr. Pugh: We need a belt and braces rule—a specific provision that is assisted by a general rule. Again, the Government’s consultation stated:
“A GAAR, applying at first only to the corporate sector,”—
“would aim to put a stop to many of the complex avoidance schemes which currently cost the Exchequer large sums. In addition, it would be expected to discourage people from devising contrived avoidance schemes in the future.”
That was the Treasury, not the Opposition or the right hon. Member for Oldham, West and Royton.
Now we have the repeal of the time-served section, section 765 of the 1988 Act, which ensures that when funds leave the country the Treasury is notified of any detriment to it. It is an old rule to do with the flight of sterling and so on, but it does—or did—a good job. We have the replacement of a clearance and pre-disclosure scheme with a light-touch reporting regime, coupled with a series of attempts to outlaw specific dodges and scams.
However, if we read the legislation, we find that only transactions above £100 million will need to be reported, and not even then if they are said to be
“in the ordinary course of trade”—
hence my amendment. If, after six months, there is no report on a £100 million transaction, there will be a ludicrous fine of £300, which I remember made the hon. Member for Northampton, South (Mr. Binley) incandescent in Committee. It is a ludicrous penalty to enforce on a £100 million transaction.
Mr. Brian Binley (Northampton, South) (Con): “Incandescent” is a slightly heavy word in that respect!
Dr. Pugh: The hon. Gentleman is a man of most moderate temperament, and I should not wish to malign him.
In the game of chess being played out between Treasury officials and City tax lawyers, the Treasury is agreeing to play blindfolded, and there can be only one winner. What is there to stop a transaction being broken down into segments of less than £100 million to avoid reporting requirements—just wrapping up the transaction differently? What stops a firm declaring any transaction to be in “the ordinary course of trade”—a phrase that, incidentally, has created legal problems in countries where a general anti-avoidance provision is in place?
The Liberal Democrat amendments are simple attempts, like new clause 5, to strengthen the Treasury’s arm and powers of intervention—to make exemptions less open to abuse and less user-friendly. The principal argument for user-friendly exemption is the old chestnut, beloved of the CBI, about the anti-competitive dangers of slowing up commerce. At first, I took that argument seriously; I thought it a sound, decent argument. It is the argument against section 765 and the long-standing argument for its withdrawal. Indeed, I thought that it was a serious, solid argument, despite the claims made only four years ago by the then Paymaster General in its favour, saying that it saved
“a great deal of revenue”——[Official Report, Finance Public Bill Committee, 30 June 2005; c. 319.]
However, I had the good fortune recently to speak to a man who actually administers the provision. He told me that it still protects a great deal of revenue, that clearance procedures in the modern Revenue and Customs are very rapid, and that adequate advice is freely and readily available—in hours not days—provided HMRC has the staff to provide it. Understandably, I asked the Government—the Financial Secretary, actually—how many staff at HMRC administered the provisions of anti-tax-avoidance legislation. The answer that I received reads as follows:
“HM Revenue and Customs (HMRC) staff use whatever parts of the tax code are relevant to help people and businesses pay the right amount of tax and, where necessary, to tackle tax avoidance, evasion and fraud.”
But the right hon. Gentleman went on to say:
“HMRC is unable to provide information regarding the specific number of resources deployed on the separate elements of that work.”—[ Official Report, 22 June 2009; Vol. 494, c. 670W.]
The Government simply cannot tell us how many people are involved in counteracting tax avoidance.
4.15 pm
In summary, I am not confident about the Government’s approach, the reporting regime, the exemption or the penalties, which border on the pathetic. I am aware of the dilemma that the Government face: business legitimately needs clarity and speed, and the Treasury needs transparency, fairness and accuracy. However, there is an overwhelming case that a general anti-avoidance provision, coupled with revenue efficiency, can cover most of that. Loose reporting, pathetic penalties and a tangle of tax regulations, however, are unlikely to.
Mr. Mark Hoban (Fareham) (Con): My hon. Friend the Member for Cities of London and Westminster (Mr. Field) made an important point: sometimes the complexity of the tax system itself gives rise to opportunities for tax avoidance schemes. When relief is given, tax advisers and planners look to how they can maximise it to reduce their clients’ tax bills. From Finance Bill to Finance Bill, we have seen new loopholes being created and closed down—there have been significant revisions to the legislation on film tax relief in the past 10 years, for example.
There is a momentum within tax law itself that creates the loopholes that can be exploited; the loopholes are then closed, creating more complexity. We need to get that rolling process under control. New clause 8 represents an example of when the relief available on the termination of a business has been used to create a new opportunity for tax planning.
Mr. Frank Field (Birkenhead) (Lab): I know that the hon. Gentleman has only just begun, but before he finishes I hope that he will comment on the measures advocated by my right hon. Friend the Member for Oldham, West and Royton (Mr. Meacher), which aim to stop the poison from coming into the system in the first place. What the right hon. Member for Suffolk, Coastal (Mr. Gummer) said almost takes us back to last century’s debates on vaccination—did we want people to stop becoming ill in the first place, or were we to deal with the illness only once they became ill? That example has similarities with the issue of tax avoidance, as distinct from tax evasion.
Mr. Hoban: If I got dragged down that line of argument, Mr. Speaker, I would be trespassing into a new clause that was not selected, so I shall be careful about what I say about that general principle.
New clause 8 responds to a specific anti-avoidance scheme. In Committee, we discussed clause 23, which allowed losses to be relieved and extended the carry-back period for losses. During that debate, the Financial Secretary commented on the generous nature of the terminal loss relief, particularly for businesses that had closed down for reasons of economic viability. The scheme sought artificially to use the losses by trying to transfer a business to an entity outside the scope of corporation tax—for example, a partnership in respect of which an individual had a small share of the profits but the original company was entitled to the majority of the profits. That meant that the company was then able to claim terminal loss relief and carry back trading over possibly three years even though trade had continued. The conditions in the clause prevent the artificial abuse of the availability of that loss relief, and we welcome the step that the Government have taken.
New clause 5, tabled by the hon. Member for Dundee, East (Stewart Hosie), has its origins, as he said, in a debate on new clause 67 that we had in Committee, several of whose members had been lobbied by a company called NT Advisors, which had devised a scheme that was at the core of the provisions in the clause. The new clause has some appeal in proposing a pre-clearance device for such schemes, but I add a note of caution about this sort of mechanism. I understand that tax advisers spend a great deal of money on their clients’ behalf in trying to devise these schemes, which are potentially quite lucrative, as the numbers in clause 67 suggested. Clearly, they do not want to clock up fees with no chance of the scheme being viable, so I can see the attraction for them in having a pre-clearance device, which would save them a great deal of time and money. It would also put the onus on HMRC to act as almost a subcontracted or out-sourced arm of the tax adviser in looking at the fine detail of such schemes to see whether they worked. The advisers themselves should bear the principal responsibility of getting schemes right; otherwise, there is a risk of HMRC being inundated with speculative, half-thought-through schemes under which the advisers are looking to HMRC to tie up the fine detail.
Stewart Hosie:
The hon. Gentleman’s argument is absolutely right. However, advisers and promoters are coming up with schemes right now, and there is a real risk of loss of revenue yield and of individuals so engaged finding themselves subject to retrospective legislation. I am trying to work out where the balance
should lie between the Revenue saying, “No, you can’t do it—we’re about to outlaw it”, and allowing people to continue to develop these schemes and then finding that they are subject to retrospective legislation.
Mr. Hoban: Indeed, balance is a difficult issue to get to the bottom of. No one in this House likes to see retrospective legislation, and there are rules that constrain its use. In the debate on clause 67, we discussed the Rees rules and the doctrine put forward by my right hon. Friend the Member for Charnwood (Mr. Dorrell) when he was a Treasury Minister; we even referred to some principles established by the previous Paymaster General. However, I am worried that we may end up in a situation where HMRC is used as a clearing house for tax advisers and has the responsibility for checking whether the schemes work. The law should be clear enough for advisers to work out whether schemes are legal, and they should not be subcontracting their work to HMRC. Moreover, people who buy into these schemes will need to think carefully about the advice that they have been given and what happens if it turns out to be wrong. I suspect that in some cases, if the scheme does not quite work according to plan, advisers may make some clawback and try to cover their own backs by avoiding having to repay losses to their clients.
I am a little anxious about where new clause 5 would take us. In other areas, it is right that pre-clearance arrangements are in place and discussions can be had with the Revenue, but that arrangement causes me concern in this context. What would happen if HMRC did not reply within a reasonable period of time? Would it be assumed that the scheme has been passed as fine to be sold to a wider public? I am a little sceptical about the new clause, because I do not think it would have the effect that the hon. Member for Dundee, East desires it to have. It could have the consequence of adding burdens to HMRC by getting it to test out the legal aspects of these schemes and checking their detail, thereby adding costs to the taxpayer when we want HMRC to work on supporting the taxpayer.
On the onerous nature of introducing anti-avoidance procedures, I was not entirely persuaded by the arguments made by the hon. Member for Southport (Dr. Pugh) on amendments 34 and 35. My reading of schedule 17 suggests that it already contains the power to tackle some of the abuses that might arise through the more streamlined nature of the reporting rules, and there is provision for secondary legislation to address certain issues, including about the valuation of a transaction or event. We need to get the balance right between promoting compliance through reporting and ensuring that the rules are right in the first place.
On Government amendments 41 and 42, we are delighted to see that the Government have recognised the wisdom of my hon. Friend the Member for Hammersmith and Fulham (Mr. Hands). In introducing them, the Financial Secretary gave the sense that it was almost to be expected that they would be tabled on Report, and that we should not be surprised to see them on the Order Paper. In Committee, he gave a slightly different interpretation, saying:
“The Opposition amendment is broader in scope but has some technical difficulties. The reference to a taxing authority would be novel in tax law and its effect is not altogether clear.” ——[ Official Report, Finance Public Bill Committee, 16 June 2009; c. 393.]
Clearly between 16 June and the day when the amendments were tabled, the Government recognised the wisdom of my hon. Friend’s remarks, and I am pleased to see them form part of the Bill.
Mr. Timms: We have had an interesting discussion about new clause 5, on pre-commencement notification. The hon. Member for Dundee, East (Stewart Hosie) raised the matter in Committee, and I subsequently wrote to him to clarify the position.
HMRC already operates a clearance regime under code of practice 10, to which the hon. Gentleman referred, in cases in which the application of recent legislation to planned transactions is uncertain. As we can all see, when legislation is new there could well be uncertainty about exactly what it means. In that situation, a clearance regime is appropriate so that people can discuss with HMRC whether the transactions described will work in the way that is intended, particularly in the case of larger businesses. Such businesses have access to a clearance system in wider circumstances, following the implementation of Sir David Varney’s recommendations on HMRC’s links with them.
However, as the hon. Gentleman rightly said, HMRC will not entertain requests for clearance if it is obvious that the motive behind the application is to avoid tax. That policy is understood and accepted by the various professional bodies, and it is well established. I suggest to him that there is no good reason to change the policy on a situation in which disclosure will, by definition, involve arrangements that are intended to obtain a tax advantage as a key benefit.
I agree with the hon. Member for Fareham (Mr. Hoban) that the problem is that if such a facility were offered in practice, scheme promoters would take advantage of it by continually devising variations on schemes and making more changes to them until they eventually found one that worked. We would all agree that avoidance is not acceptable behaviour, and that we should not effectively ask HMRC to become complicit in avoidance by offering its promoters such a refinement service, which I fear is what would happen.
Stewart Hosie: I understand the arguments that the Financial Secretary and the hon. Member for Fareham (Mr. Hoban) are making, but is the point not that promoters are already finding schemes that work, and that the Government, the House and the Revenue are having to find and fix retrospectively, rather than saying in advance, “Yes, this may well work, but we’re going to outlaw it, and perhaps it would be better if you didn’t promote it in the first place”?
4.30 pm
Mr. Timms: The problem is that new clause 5 would help the promoters of avoidance. It would give them advice and help them clarify whether their avoidance product would work. I am sure that the hon. Gentleman accepts that HMRC should not provide such help. However, I am not averse to proposals to tighten up the way in which we tackle tax avoidance. As I shall explain shortly, we have done a great deal on that, much of which has been effective. I am certainly not saying that there is nothing further to do—there may well be—but new clause 5 would have an undesirable impact.
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