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Stewart Hosie: I rise to support the Government’s attempts to end contrived avoidance schemes. The scheme to which clause 68 is addressed is seriously contrived, and I am sure that when the Minister gets to his feet later, he will have a similar description of the scheme relevant to clause 67. However, I also share the general concerns about retrospectivity. I could have made this argument under any number of the clauses, but I am doing it here because it allows me to raise another matter. I hope that I am not out of order, Mr. Hood, if I engage in a clause stand part debate. I assume that we are taking the amendments and clause stand part together.
The Chairman: I have not made my mind up as to whether we will have a stand part debate, so I suspect that the hon. Gentleman had better make his point now.
Stewart Hosie: I will be as careful as I can, Mr. Hood.
I understood that the practice of those engaged in schemes such as those to which clauses 66 and 67 relate was to notify HMRC shortly after commencement. Was the scheme that the Minister described, and the variation dealt with in clause 67, also notified to HMRC shortly after commencement? That is important.
One thing that we need to do to avoid retrospective taxation—the Bill contains lots of it—is to ensure that those working in tax and financial management and planning are able to behave in a proper manner and do not find themselves doing something that their lawyers and advisers tell them is within the law, but which ends up being subject to retrospective legislation days, weeks or even a few months after the commencement of the scheme. That is the point that I wanted to raise in relation to clause 67. Instead of giving post-commencement notification to HMRC, would it not be far better if those engaged in tax and financial planning and management could have pre-commencement approval of schemes, so that they knew that everything they were doing was on the straight and narrow and that they would not then be subject to a large amount of retrospective legislation? Most important, people wishing to use the services of those providing tax and financial planning and advice would then be able to do so with the confidence that they would not fall into schemes that were legal when they handed over the cash, but which ended up being illegal very soon thereafter due to retrospective taxation.
I am sure that I was well wide of the mark, Mr. Hood, but there was no other way I could go. I hope that the Minister will tell us why we do not have pre-commencement approval and why we only have post-commencement notification.
Mr. Timms: As I said, following the action we took in January, we discovered that a highly similar scheme was set up by the same provider, using the same approach and aimed at exactly the same people. The scheme used a loss like that referred to in the clause 66 scheme, which is created by an act of deliberate default during the course of a contrived employment, to exploit the provisions of section 128 of the Income Tax Act 2007. That allows employees to claim loss relief in certain circumstances where that loss arises from the conditions of their employment.
I will run through the measure again. Some of what I say will seem familiar because of the close similarity between the arrangements that clause 66 addresses and the arrangements that clause 67 tackles.
The scheme that clause 67 addresses used a number of entities—companies and trusts, some of which may be offshore. A key element is the creation, again, of a contrived employment, the duties of which cover financial arrangements with another party. During the course of the employment, the individual would deliberately default with regard to one or more aspects of the financial arrangements. Under the terms of the arrangement, that would trigger automatic damages payable by the employer that the individual was obliged to share by virtue of their contract of employment. The individual would borrow the money to pay the damages, not through a normal commercial loan from a high street bank or some other lender, but from another entity in the structure. The individual would not in reality repay the loan and, as a result, they would suffer no genuine loss in paying the sum designated as damages—indeed, the only real cost the individual would suffer is the cost of buying entry to the scheme.
Mr. Gauke: I recognise that there is a clear similarity between the section 11 schemes and those schemes identified on 12 January. Does the Financial Secretary also accept that clause 67 will apply to any arrangement that uses section 11 of the Income Tax (Earnings and Pensions) Act 2003, whether it is in relation to an employment loss that arises from a deliberate default or otherwise? I accept that a particular scheme caused HMRC, or the Minister, to make an announcement on 1 April, but the clause is somewhat broader than that and has a retrospective effect. I do not know whether any schemes are caught up as a consequence, but the similarity point is not a clinching argument because the application of clause 67 is broader and applies to schemes that are not quite so similar.
Mr. Timms: I think the similarity is striking. In a moment, I will explain how that affects the argument. I am confident that clause 67 will not damage proper and appropriate uses of the provisions already in legislation. Let me just go a little further.
Despite the arrangements that I have described, the individual would claim that they are entitled to deduct the amount of the damages from their income, because the damages rank as a liability that was incurred when acting in the capacity of an employee.
The general theme of artificial loss creation has been a common feature of tax avoidance for some years, with people wanting to shelter income and gains from tax. A number of previous arrangements around that general theme, but using different parts of tax legislation, have already been closed down. The avoidance that the Government are moving to close down with clause 67 is the individual seeking tax relief against genuine income for a contrived loss that the individual never actually suffered. I acted on 1 April to do that. Because it is a variant on the loophole we closed on 12 January and featured the same individuals, we made it effective from 12 January.
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The hon. Member for South-West Hertfordshire asked how targeted clause 67 is. I do not think that it is broadly drawn. The intention is to ensure that it will not be necessary to seek further legislation if more schemes involving claims for loss relief under the 2007 Act are devised. It will also remove any doubt about our view of loss relief claims that are contrived in that way.
Mr. Gauke: Perhaps I am approaching the matter from a different angle, but if the Minister is arguing that there was great similarity, why were section 11 arrangements not picked up on 12 January? Was any consideration given to doing so, or did it come as a surprise to HMRC that there was a way, as the Minister sees it, of achieving the same aim through the other provisions to which we referred?
Mr. Timms: We did not know on 12 January about the device to which the statement of 1 April refers. Information about that arrangement emerged later through a disclosure. I accept that the fine detail of the second scheme is somewhat different from that of the first, but the underlying approach is the same. Both schemes depend on the use of deliberate default to trigger artificial liabilities or losses for which relief would be claimed under legislation intended to provide relief for exceptional circumstances of genuine employment liabilities or losses. The people subscribing to the scheme would have known exactly what they were entering into when they decided to do so.
Mr. Jeremy Browne (Taunton) (LD): The Minister is giving a helpful explanation. What is his estimate of the potential cost to the Exchequer were the Government to be defeated on any vote on the clause or the amendments to it?
Mr. Timms: It would be £200 million—precisely the same as if clause 66 was not included in the Bill, because it deals with the same kind of avoidance targeted at precisely the same people by the same promoter who, having been thwarted by the announcement of 12 January, would, if allowed to do so, have simply switched all their customers into the device that clause 67 addresses.
Mr. Browne: I assume that the £200 million is an annual figure. If that is the case, is there any expectation that the figure would in time come down, or would others see the opportunity to exploit the same loopholes and, for example, make the aggregate figure over the lifetime of the next Parliament more than £1 billion, rather than just £200 million multiplied by five?
Mr. Timms: We are getting into speculation, but if all those people got away with avoiding £200 million-worth of tax, it is entirely possible that the promoter would find that other people were attracted to use the same device and that the loss would increase.
Mr. Gauke: We are talking about the period from 12 January to 1 April, so we are not talking about ongoing costs. Surely this is a one-off hit. I understand that the Government rightly believe that the scheme was a fraud arrangement anyway and want to avoid the uncertainty.
Mr. Timms: I was asked what would be the cost if clause 67 did not appear in the legislation, and that is the question I answered. A separate question is what would be the loss to the Exchequer if amendments 73 and 74 were agreed. The answer to that is £200 million. That would be a one-off loss.
Amendments 73 and 74 would ensure that clause 67 did not take effect until 1 April. The backdating of the clause was essential to preserve the intent and effect of the January announcement. The scheme, unlike the first, came to our notice through the disclosure regime. It was sufficiently advanced at that point that, had we not backdated the clause, we would have put at risk the entire £200 million protected by the clause and the announcement of 12 January, because all those individuals who had moved to the new variant scheme prior to 1 April would have been able to crystallise the artificial losses to claim against their real taxable income.
Mr. Binley: Will the Financial Secretary give way?
Mr. Timms: I will. I was just about to come to the point the hon. Gentleman made in his speech.
Mr. Binley: The Financial Secretary has just used the phrase “would have put at risk”, but what does that actually mean? Does it mean that he is not sure whether it is £200 million at risk or not?
Mr. Timms: There is of course a degree of uncertainty about that, depending upon precisely who had taken advantage of the scheme and made a claim accordingly, but £200 million is our best estimate, soundly based, of the loss to the Exchequer if the backdating had not occurred. The hon. Gentleman said that was disturbing and that about 600 people were involved—a figure I had not heard, but he might well have information to which I do not have access on how many are affected. I hope that, on reflection, he would find it far more disturbing if those 600 people, having had their large-scale tax avoidance thwarted by my announcement of 12 January, were able simply to switch across to that other, equally contrived and similar scam and obtain their £200 million between them as a result. That would be much more disturbing than the measure we have announced. I have seen correspondence from the promoters of the scheme rather echoing his points and suggesting that it really was not cricket for the Government to act in that way. I must tell the Committee that, where abusive tax avoidance is being promoted, we will take action to block it and will do so time and again.
Mr. Binley: There is nothing at all in the amendment that stops the avoidance process of the scheme the Financial Secretary is talking about. It is simply the concept of the provision being a retrospective reaction to the matter, which has much wider implications than the scheme he is talking about. There are many examples of circumstances in which people in this country feel that others are avoiding tax unfairly—I alluded to one, but there are many others. There is a bigger principle, and that is that HMRC is seen to be acting fairly and decently and not retrospectively, which is not seen as fair and decent in the main. One could still stop the scheme but keep one’s honour, and that, too, has relevance.
Mr. Timms: I can certainly reassure the hon. Gentleman that HMRC’s action has been fair. He is arguing for bolting the stable door after the horse has bolted, but that would indeed have led to a loss in revenue of £200 million. Had there been no retrospection when closing down the scheme, those 600 people, if that figure is correct, would have been able to make off with that sum. That is unfair. That is what honest taxpayers are worried about. They are worried that people who know exactly what they are doing and are who employ the services of highly paid advisers to devise those ingenious schemes are, by that route, avoiding paying tax like the rest of us.
Mr. Mark Todd (South Derbyshire) (Lab): I am struggling with a couple of questions for my right hon. Friend. First, what sort of fees must have been payable to those who devised such a contrivance? We must be wondering whether those people deserve our sympathies as widows and orphans seeking relief from the taxpayer. Secondly, does he believe that that type of activity bears any resemblance to the honest business activity referred to by the hon. Member for Northampton, South?
Mr. Timms: My hon. Friend is absolutely right. We are talking about a scam. The people who promoted it know exactly what they are doing and the people who wished to use the scam knew exactly what they were doing. I am sure that he is right and that substantial fees were paid or were due to be paid—I do not know how far the payments had gone. One can only surmise that it would have been some proportion of the £200 million. I would suggest that between 5 and 10 per cent. would have been the likely fee, so the promoters stood to gain perhaps £10 million to £20 million from having facilitated a very substantial tax avoidance scam.
Mr. Timms: That is a matter for judgment by Opposition Members. We will wait with interest—[Interruption.]
The Chairman: Order. I am sure we are all interested in hearing what the Minister has to say, not what each other is saying.
Mr. Timms: Thank you, Mr. Hood. We shall certainly wait with interest to see what Opposition Members decide.
The hon. Member for Northampton, South said that he wants certainty. He can be absolutely certain that when we find out about an abusive scam we will shut it down. Anyone who is interested in participating in such an arrangement can be certain of that. My hon. Friend the Member for South Derbyshire is right such arrangements have nothing whatever to do with the provision of a good and fair business environment in the UK. We are committed to that and everybody knows that we take a very dim view of tax avoidance.
We acted on 1 April to make it clear that the second version of the scheme covered by clause 66 was equally unacceptable. Just like the scheme we closed on 12 January, it relies on abusive and contrived actions over a short period which ignore fiduciary duty to get a tax advantage. It would have been deeply unfair to have allowed that scam to proceed. The Government’s response to the second scheme is reasonable and proportionate in the circumstances. There is a degree of retrospection here—that is perfectly correct. I hope that the Committee will accept that that retrospection was justified in the circumstances.
We ensured that all the relevant legal considerations were taken into account, including the Rees rules, the similarities between both schemes, the need to protect the human rights of potential users and previous announcements. In that respect we took account of the announcement on 12 January and the ministerial statement made the following day, as well as the statement made by the then Paymaster General, my right hon. Friend the Member for Bristol, South, on 2 December 2004, which was referred to by the hon. Member for South-West Hertfordshire.
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