Schedule
17International
Movement of
Capital
Dr.
Pugh: I beg to move amendment 41, in
schedule 17, page 189, line 41, leave
out ‘£100’ and insert
‘£1’.
The
Chairman: With this it will be convenient to discuss:
amendment 42, in schedule 17, page 190, line 34, leave out
paragraphs (a) and
(b).
Dr.
Pugh: I have supported the legislation up to now, but I
cannot help thinking that, having done some sterling work, the Minister
has with this schedule snatched defeat from the jaws of victory. I
would like to put that in some context.
In clause 37
schedule 17, we are repealing section 765 of the Income and Corporation
Taxes Act 1988. The provision, which has existed in various forms for
58 years, demands that companies enacting schemes whereby
they move funds out of the EU—and, obviously, the UK before
that—receive consent to do so from the Revenue. As the Minister
undoubtedly explained, that is a hangover from the days of exchange
control, when people worried about sterling leaving the country and so
on. The provision is very broadly drafted and it encourages firms to
notify the Treasury of anything that is to its detriment. As the
Minister said, the provision has some old-fashioned, but
severe—and, I suppose, effective—criminal sanctions
attached. The
reality is that the retention of section 765 over the years has been
fairly useful. It has forced companies to disclose schemes to the
Revenue before undertaking them. The fact that the measure is backed up
by draconian measures, even though they are unlikely to be used, adds
to its force. It gives UK revenue authorities some real-time
information about the activities of multinational companies. That is a
good thing because state revenue authorities normally play a constant
game of catch-up—corporations undertake schemes and then the
revenue body finds out about them. Section 765 is virtually unique in
tax law because it allows the Revenue to know what companies plan to do
before they do it. It has been a major anti-avoidance measure because
it forces
multinationals to receive Government consent and, presumably, as a
result many tax avoidance schemes are stopped before they are
started. I know that
we cannot quantify the benefits of section 765, but they
have been real. Do not take my word for it: four years ago, the former
Paymaster General, now the Minister for Children, the right hon. Member
for Bristol, South (Dawn Primarolo), said: “the section was
introduced”—and presumably
kept— “to
counter tax avoidance; it has done that successfully and should not be
repealed, as it protects a great deal of
revenue.”—[Official Report, Standing Committee B,
30 June 2005; c.
319.] In
modern business terms, I accept that there is a case for pensioning off
section 765 and replacing it with something better. However, the
provisions in the Bill do not inspire confidence that we have something
better. There are a couple of reasons for that. First, at
£100 million, the threshold is high. Companies, such
as multinationals, that wish to avoid breaching that threshold can
simply parcel transactions into smaller units of £10
million or whatever, which is within their wit to do. Secondly, the
penalties for companies that do not comply with the legislation are
feeble. If a company gets away with a major bit of tax evasion or tax
avoidance, they face a fine of £300 if they have not reported
after six months. I cannot see that frightening anyone who is serious
about tax avoidance. The penalty for every further day of non-reportage
is £60. I suggest that the new set of provisions does not have
the teeth that it should have.
Amendment 41
considers the requirement for reporting transactions of £100
million or more and suggests that it is absurd as it stands. I cannot
see any reason why we should choose that figure, which seems
unreasonably high. My amendment—it is a probing
amendment—reduces the limit drastically to £1 million for
the purposes of the schedule. That is the point about the
threshold.
If we look at
exemptions—the Minister has talked about exemptions and about
how they oil the wheels of commerce, how they are a good thing and how
they avoid undue compliance costs and so on—we see that they are
extraordinarily generous when they are read in the literal sense. For
example, if someone is in difficulties and the Revenue comes after them
and there is a suggestion of tax avoidance, they can plead that the
transaction “is
carried out in the ordinary course of a
trade”. That
strikes me as an extraordinarily vague provision—almost a
licence for abuse. One can almost see tax planning advisers preparing
the excuse well in advance. I am not at all comfortable with retaining
that provision, because it is broad, colloquial and it seems a
catch-all excuse that almost anyone can use when challenged by the
Revenue. As far as I am concerned, it can only help tax avoidance and
it does not really have a significantly beneficial purpose for the
schedule as a
whole. The
second exemption is, if anything, worse. It says that the transaction
is exempt if
“all the parties
to the transaction are, at the time the transaction is carried out,
resident in the same territory”.
Therefore, if all
transactions are carried out in the Cayman Islands, they would be
exempt from reporting. That is an open invitation to use secrecy
jurisdictions—a licence and an invitation to go in for tax
avoidance. Therefore, although I support almost everything that the
Minister has done hitherto, I think that we have here a schedule that
opens the door to a new wave of tax
avoidance. The Minister should seriously address the weaknesses in
schedule 17. The fact that many people who are involved in tax law
welcome it adds to the
concern. The
Chairman: Amendment proposed in schedule 17, page
189, line 41, leave out ‘£100’ and insert
‘£1’.
Dr.
Pugh: On a point of order, Mr. Hood. I was
speaking to both amendments at the same
time.
The
Chairman: Had you finished speaking on amendments 41 and
42?
Dr.
Pugh: I have spoken on both amendments,
yes.
Mr.
Timms: I am grateful for the support that the hon. Member
for Southport has given to the changes that we have made so far today
to foreign profits taxation, and I will endeavour to persuade him that
he should support this element of the Bill as well.
Schedule 17
repeals the existing Treasury consents rules, which are at sections 765
to 767 of the Income and Corporation Tax Act 1988, and replaces them
with a targeted reporting requirement. At the moment, the rules require
companies to seek advance consent from the Treasury before undertaking
certain transactions involving foreign subsidiaries, and they include a
criminal penalty of imprisonment for non-compliance, although that has
never been used, as the hon. Gentleman rightly said, in the 58 years
during which the rules have been in
place. In
1951, the rules were aimed mainly at controlling company migrations at
a time of foreign exchange control. Over the decades, in response to
changes in UK tax law and changing business practice, the situations to
which the rules apply have changed. Their aim is to prevent groups from
entering into transactions that could result in a loss of tax to the
Exchequer.
6.30
pm It
might reassure the hon. Gentleman to know that as far as I am aware, no
other country has such a regime in place. He is right to refer to what
the then Paymaster General, my right hon. Friend the Member for
Bristol, South—she is much missed from this Committee’s
debates—said during debate on the Finance Act 2005 about the
Treasury consent rules protecting a great deal of revenue, but she went
on to say that we would consider section 765, the relevant
section,
“in the context
of work on the wider international context of the corporation tax
system”.—[Official Report, Standing
Committee B, 30 June 2005; c.
320.] The
culmination of that work is what we are debating today.
Consent is
very rarely refused these days, but the rules impose a significant
administrative burden, which is why we think that the time has come to
repeal them. However, the hon. Gentleman is absolutely right: we need
to ensure that HMRC gets the information that it needs to detect and
prevent tax avoidance. HMRC monitors tax avoidance closely using a
range of different tools. We have been taking steps consistently to
tackle avoidance by reforming the tax system, closing loopholes and
introducing the disclosure regime that he mentioned.
Anti-avoidance measures introduced in recent years have closed more than
£11 billion in avoidance opportunities. We will
certainly need to stay energetically on the case, as the pressure from
would-be avoiders does not diminish. Continuous action is needed to
mitigate the effects of tax avoidance, particularly at a time of global
economic difficulties. The hon. Gentleman will know that some of the
discussions that we had at the G20 summit on that topic
reflected concerns about tax avoidance outside the UK, not least on the
part of President Barack
Obama. We
are therefore putting in place a modernised post-transaction reporting
requirement targeted at changes in the capital structure of
multinational groups. It will provide an early warning if multinational
groups enter into large cross-border capital reorganisations that could
give rise to tax avoidance and ensure that, having been alerted early,
we can monitor what happens closely.
Mr.
Brian Binley (Northampton, South) (Con): I am listening
intently to the Minister. We have here a measure that is designed to
give forewarning of sizeable transactions that the Department needs to
look at more closely. Will he touch on the business of people who might
wish to avoid paying sizeable amounts of tax being fined £300?
That worried me, too. I just do not see the connection. Can he explain
the thinking behind that level of fine?
Mr.
Timms: I will certainly address the points raised
specifically about the amendments, including that one.
The hon.
Member for Southport is right: the new reporting requirement applies to
transactions involving foreign investments with a value in excess of
£100 million. Transactions above that are reportable,
so we are targeting the transactions about which HMRC most needs
information. The rules are targeted in that way as a result of
HMRC’s experience with high-value cross-border transactions, to
ensure that it can concentrate its time and effort most
productively.
Amendments 41
and 42 both seek to widen the scope of the new rules. Amendment 41, as
we have heard, proposes reducing the de minimis limit from £100
million to £1 million. The difficulty is that that would result
in a large number of relatively low-value transactions that are not the
target of the provision coming within its scope. That would
significantly increase the administrative burden without generating the
kind of really useful information that HMRC needs. The new reporting
requirement focuses on changes to the capital structure of
multinational groups. Those are the kind of changes featured, for
example, in The Guardian series referred to earlier by
the hon. Member for Southport, where large amounts of tax are at stake
and where we need to concentrate our efforts. As can be seen from the
FTSE 100, the net market capitalisation of such businesses runs into
many billions of pounds. We need to target material changes or
restructurings and not divert HMRC energy away from those high-risk
areas of potential tax avoidance to low-risk areas.
I remind the
Committee that the Government have a lot of tools available for
detecting and countering tax avoidance, such as the disclosure regime,
risk assessments and annual fining requirements. The £100
million limit does not mean that we are giving up on avoidance
activity below that level. The other measures at our disposal that I
have mentioned can target other types of avoidance activity as well,
but the new requirement will complement existing measures that are
compliant with how businesses work these days and provide the necessary
information to monitor the potential substantial avoidance
activity. Amendment 42
proposes to remove the exclusion for transactions carried out in the
ordinary course of trade and those between parties resident in the same
territory. We have included those exclusions because, as I have already
said, the focus of the schedule is on cross-border restructurings
undertaken by multinational groups where the biggest avoidance risks
arise. Trading and same-country transactions are relatively low risk
and are not the target of the provision. We should not be focusing our
avoidance efforts on them, so I think that exclusion is appropriate.
The same argument applies to transactions in the same territory, which
are, of course, not cross-border and pose a lower risk of
avoidance.
The problem
with the amendments is that they would result in a very big increase in
the administrative burden in return for very little benefit in
countering avoidance. We want to focus the rules on large-value,
cross-border transactions. Other avoidance measures, particularly the
disclosure regime, are available to target other types of
avoidance.
I hope I have
given the hon. Member for Southport some reassurance. I should add that
when we talk about transactions between parties in the same territory,
the CFC rules that we debated would tackle the problem of profits being
moved offshore to the Cayman Islands in the way that he, perfectly
properly, expressed concern
about.
John
Howell: Will the Minister give
way?
Mr.
Timms: I will just respond to the point made by the hon.
Member for Northampton, South regarding the penalty. A monetary penalty
to up to £300 would apply for the initial sum and up to
£60 per day thereafter for each day that the report is late.
That is in line with the wider penalty regime currently applicable. We
have done a lot of thinking about where the penalties from different
parts of the tax system should be applied and the level at which they
should be applied, and that is a value that is consistent with the
wider arrangements. Of course, the penalty attached to the Treasury
consent rules was, in theory at least, imprisonment. However, as I said
earlier, in 58 years that has never been used. So I think that this is
going to be an effective measure. It is going to be simpler to operate
and will provide the information that we
need.
Mr.
Binley: One assumes that a fine is a deterrent: the whole
concept of fining someone for not doing something is to ensure that
they do what you wish them to do. I need to understand how much of a
deterrent a fine of £300 will be to international financiers,
because I do not get it. Perhaps the Minister could explain how that
will act as a deterrent to stop someone failing to report what the
Government want them to report.
Mr.
Timms: That is an obligation in law with which companies
must comply. The hon. Gentleman will know that the various reporting
obligations we have imposed
to tackle avoidance have been effective and, I am glad to say, people
have complied with the rules. Of course, there is a pretty big incentive
for the kind of companies we are talking about to comply with rules
clearly set out in statute, not least because of the embarrassment for
major organisations when they do not comply with rules of that kind.
He will know that we propose to name and shame in some circumstances
where tax is underpaid. That will be a powerful incentive not only for
individuals, but for companies.
If someone
avoids tax, they are at risk of a tax-geared penalty for tax not paid
as a result of the underlying transaction, and that can be up to 100
per cent. of the tax avoided. With regard to the level of £300,
it is appropriate that that penalty should be consistent with the rest
of the penalty system that is in place. I would not want the hon.
Gentleman to think, however, that that is the only downside of not
meeting the obligation being
imposed.
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