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. 6
pm 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.
Jeremy Browne: Although I share the Minister’s view
that the scheme is a scam and I would much prefer that the Treasury had
the £200 million of additional
revenue, particularly in these straitened times for the public finances,
would he not agree that the hon. Member for Northampton, South holds
his view with great integrity? He should not feel inhibited, and nor
should his colleagues, about voting for these amendments merely because
Labour Back Benchers choose to describe them in those unfavourable
terms.
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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