Dr.
Pugh: I had not intended to speak, but have been inspired
to do so by the hon. Gentleman, who referred to this as a motley
schedule, because that was exactly my perception. It seems rather like
Leviticus, listing a set of financial sins in no particular order. I
would like to make a brief comment on anti-avoidance, which is
at the heart of the debate. There seem to be two essential processes in
the Bill. First, there is a kind of anti-avoidance catch-up process of
identifying things that have gone wrong and tabling clauses to deal
specifically with them. The other choice that the Government have is of
the kind that one always has in these dilemmas—to go for a set
of broad principles against which firms can judge for themselves
whether they are on the right side of tax law. With either choice,
there is some difficulty. With a broad set of principles, there is a
wide scope but certainty is lacking. With a measure such as schedule
30, on the other hand, there is certainty but much may be missed and
other things might evolve that have to be dealt
with. My
hon. Friend the Member for South-East Cornwall, who arrived in the
Committee recently, has been at a meeting of the Treasury Select
Committee, which has been discussing this issue today. Let me read from
the notes that were presented to
him: “One
should also not overrate the capacity of standards to ensure
appropriate national regulation”.
I guess that is why we
have schedule 30 and why we will have schedules precisely like it in
every financial Act to
come.
Mr.
Timms: I do not quite understand the parallel with
Leviticus, but I shall reflect on the hon. Gentleman’s
point.
Dr.
Pugh: When one reads Leviticus, which has a long series of
very detailed clauses, one finds that the ancient Hebrews must surely
have been getting up to some very strange and diverse activities, which
were obviously identified as the sins of Leviticus. When one reads
schedules such as this, one reaches similar conclusions about the
financial
sector.
Mr.
Timms: I am grateful to the hon. Gentleman. I shall bear
that in mind the next time I read Leviticus, and I shall look for those
similarities. The
schedule tackles three tax avoidance schemes and responds to a recent
High Court decision that could give rise to avoidance. The hon. Member
for Hammersmith and Fulham has talked us through the measures, but let
me go through them. Paragraph 1 involves exploitation of the tax rules
for interest relief under which individuals can claim relief against
their general income for interest paid on loans used to invest in some
small companies and partnerships. The existence of relief for interest
in those circumstances encourages investment in small businesses that
are carried on commercially and with a view to
profit. In
the schemes that have been notified to HMRC as a result of the
disclosure provisions that we have put in place, the interest relief
provisions are artificially exploited by means of arrangements that are
almost guaranteed to allow the investor to exit the arrangements with
more money than was originally invested. That will be achieved by the
interest paid being set against other income,
which is unrelated to the business in which the cash is invested, for UK
tax purposes, while the matching gain is not chargeable to tax. The
legislation will not deny relief to anyone who makes legitimate
investments in businesses that bear a normal commercial
risk. Paragraphs
2 and 3 relate to a scheme that involves a company exploiting a rule in
the tax provisions for corporate debt and derivative contracts, which
is intended to deal with revaluation issues on transition from one type
of GAAP to another. A company transfers risk and rewards of a loan or
derivative contract to a connected party and, in consequence, is
required by GAAP to derecognise the asset and so to reflect a loss in
its accounts equal to the value of the loan or derivative
contract. In
relation to paragraph 4, the scheme involves avoidance of corporation
tax by large companies using convertible loans. A company lends money
to another member of the same group—the debtor company—in
return for the issue of a bond that is likely to convert into shares in
the debtor company. Initially, no interest is payable, but interest
will be paid if the loan does not convert. The debtor company accrues a
deduction for that interest from the start, because under UK GAAP it
must not anticipate conversion and it must spread the expected interest
evenly over the length of the loan. The creditor company, though,
accounts for the loan on the more realistic assumption that it will
convert and so does not accrue any receivable interest. As a result,
the deduction for the debtor company is greater than the income that
the creditor company brings into account, so although there is no
economic loss for the group, the debtor company is able to claim a tax
deductible expense while the creditor claims not to be taxable in
respect of any corresponding amount.
Finally,
paragraph 5 responds to the High Court decision, in the case of DCC
Holdings, that might allow some companies to reduce their tax
liabilities inappropriately and other companies to be taxable on
profits not received. The case was concerned with the deductibility of
manufactured interest and suggested that it might be possible for
companies to claim deductions in excess of the amounts appearing in
their profit and loss accounts. Not making that change would result in
companies being able to release their profits artificially, and
therefore their tax liabilities. The total tax protection of all those
four measures, over the next four financial years, is expected to be,
or thought to be, in excess of £2
billion.
Mr.
Hands: I thank the Minister for giving us that figure. In
the previous couple of clauses he mentioned annual figures—I
think the amount in the previous clause was £150 million and the
one before that was £100 million. Will he tell us why he is
suddenly giving us a four-year forward projection? Is he able to break
down that £2 billion on a per annum basis? How much will it save
in this financial
year?
Mr.
Timms: I do not have the figure for the current year. I
can check whether we have such an estimate and, if we do, I can send it
to him, but the hon. Gentleman will accept that it is a very
substantial sum indeed. When we have seemingly arcane debates on these
topics, we need to bear in mind just how much revenue is at stake for
the Exchequer.
Mr.
Hands: The right hon. Gentleman is right in pointing out
that £2 billion is a very significant amount to save the UK
taxpayer by ending these avoidance schemes. Could he therefore tell us
something about the breakdown of the £2 billion between the
various paragraphs? We have already discussed the power of one in
particular being rather different to the other paragraphs. Surely he
must have some idea of how that £2 billion breaks down across
the various paragraphs.
Mr.
Timms: I am happy to drop the hon. Gentleman a line
setting out our assessment of how that is made up, both between the
four things being addressed here and how it looks as though they would
fall over the coming four years. Let me also respond to his point
about the application of the schedule to deemed payments. He is right,
legislation does not apply retrospectively to deemed
payments—only to real payments. The High Court litigation on
deemed payments has not yet finished; it is still continuing.
Question
put and agreed
to. Clause
61 accordingly ordered to stand part of the
Bill. Schedule
30 agreed
to. 1
pm The
Chairman adjourned the Committee without Question put (Standing
Order No.
88). Adjourned
till this day at half-past Four
o’clock.
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