Select Committee on Economic Affairs Minutes of Evidence

Examination of Witnesses (Questions 70-79)

27 APRIL 2004

Mr David Ramsden, Mr David Hartnett, Mr Chris Tailby, Mr David Hubbard and Mr Peter Hopkins

  Q70  Chairman: Good morning. I cannot remember whether I have ever seen any of you before. You certainly came mob-handed last year but some of you are new.

Mr Hartnett: I was part of the mob.

  Q71  Chairman: New or old, you are very welcome. Obviously, you cover all the areas that interest us. We gave you about five main topics but they vary in importance, and I do not know whether you, David, are going to act as a kind of chairman for your side or appoint someone to answer on each topic. But perhaps you could give us five minutes on each topic. The whole thing is a teaching session, as you will discover, with a not very good group of pupils. And then we will say, "We do not understand this. Can you explain it?", and so on, and we will see how far we can get this morning. I have no sense of how far we will get because I found one or two of the topics so difficult, and the notes on clauses actually make it more difficult rather than easier, so that we will need to reflect on what you say. Our first topic is tax avoidance. How do you want to kick off on that?

  Mr Ramsden: I was going to start, my Lord Chairman, by suggesting that we introduce ourselves so that you will know what the new ones do and what the ones you have met before are still doing.

  Q72  Chairman: Please do that. You are new, so tell us about yourself.

  Mr Ramsden: I am David Ramsden and I am Director of Tax and Budget at HM Treasury.

  Q73  Chairman: Can you remind me, because all this has changed since I had any Treasury interest, what the equivalent is? Is a Director the same as a Deputy Secretary?

  Mr Ramsden: It is the same as an Under Secretary.

  Mr Hartnett: I am Dave Hartnett. I am a Deputy Chairman of the Inland Revenue. I was here last year and I am again answering questions on stamp duty. I am responsible for the Revenue's work on policy, on technical issues and on fraud and avoidance at policy level.

  Mr Hopkins: My name is Peter Hopkins. I am an Assistant Director of our Savings, Pensions & Share Scheme Business Stream. I am here for the pensions clauses.

  Mr Tailby: I am also new. I am Chris Tailby. I am Director of Tax Practice at Customs & Excise, so I have responsibility for policy maintenance, which includes the anti-avoidance work. I was previously in the private sector. I was a partner with Price Waterhouse and PricewaterhouseCoopers and took up this job in July 2002.

  Mr Hubbard: I am David Hubbard. I am also, like Chris Tailby, from Customs & Excise and I am Head of Excise Group in the Business Services and Taxes part of Customs & Excise. I am here today to discuss with you duty stamps for spirits.

  Q74  Lord Barnett: Are any of you involved in merging the two departments?

  Mr Ramsden: I should declare a direct interest, Lord Barnett, in that I worked with Gus O'Donnell on the review of the Revenue departments, but it is fair to say that in particular the two colleagues on either side of me were quite closely involved. Dave Hartnett was very involved in the review process but obviously all the staff of the two Revenue departments were involved to some extent.

  Q75  Chairman: We have got Gus coming in a week or so. There is one other thing which I should have said at the beginning. This committee (the main committee, that is) has always, in the six years it has existed, done everything from an evidence base, and therefore nothing ever gets into our report if it is not based on evidence—which is vital for us, particularly today on what you say, because if you have not said what we need to know we cannot deal with it. The other thing which I think you aware of is that this committee is totally non-party political. It does not mean that we do not have party allegiances, but in our six years no party politics has ever got into our deliberations or reports and I have no intention of allowing that to happen today. I say that to you as officials partly for reassurance. Who are you going to appoint, David, to get us started, or is going to be you?

  Mr Ramsden: I was going to make some very brief framing comments and then hand over to colleagues on either side of me to go into more detail. My framing comments are going to be on the disclosure requirements aspect of the avoidance measures. There are various avoidance measures in the Finance Bill and we are going to focus on the disclosure requirements because we think that is your particular interest, and I will hand over to colleagues to talk more about the administration details of the two measures. The first comment I want to make is that during the policy development process there was a very close partnership between Customs, Revenue and Treasury in working up the policy on disclosure. A key element in this was the detail provided by the two Revenue departments on how some of the recent schemes for avoidance that they had had to deal with operated in the fields of direct and indirect tax. This factual information was very important in our policy deliberations. What these examples indicated was the increasingly sophisticated and aggressive nature of the schemes in this area which typically relies on secrecy for success. Given this, it was clear that the policy response had to be innovative and based on more powerful tools to provide and obtain information. The Finance Bill disclosure measures provide just that. At their heart is the common goal of greater transparency of information which will enable the Revenue authorities to respond more quickly and effectively to schemes. The government believes that the complementary and focused measures for direct and indirect tax are fair and proportionate, part of an increasingly strategic approach that the two departments are taking to avoidance. With your permission, Lord Chairman, I will hand over to Dave Hartnett who is going to provide more detail on the administration of the Inland Revenue disclosure measure but also give you some examples which I think would be very helpful on the sorts of schemes they are designed to tackle, and then Chris Tailby will do the same very briefly for the Customs & Excise measure and explain the rationale for some of the differences in implementation which I think you are interested in.

  Q76  Chairman: Very much so.

  Mr Hartnett: Essentially the disclosure measures for both direct and indirect tax are about providing the Inland Revenue and Customs & Excise with earlier information about tax avoidance schemes and arrangements than we have ever had before to enable us to analyse them much earlier and, where appropriate, for us to provide advice to Government as to whether they should be countered or not. We think this is a proportionate measure against the sorts of schemes I am going to describe in a minute. It is about increasing transparency in a non-judgmental way. I say that because it is about exposing the scheme rather than any individual or corporate, trust or anyone else actually using the scheme. The disclosure requirement will be about the product or the package that has been put together. We also hope that in here will be a disincentive to the creation and use of contrived and elaborate schemes of the sort that both Customs and ourselves see.

  With your permission I am going to give three examples and then I would like to read a very short e-mail which was circulated in the City just two hours after the Chancellor sat down this year on Budget day which I think will help the committee see the sort of issue we are wrestling with here. The first scheme I want to mention was one devised for the benefit of large corporates and in particular multinational enterprises. It involved stock lending where stock is lent one way and cash comes back the other way. It used an artificial scheme for helping to finance a multinational enterprise in a way that generated huge profits in the multinational enterprise but these were covered by losses which it already had, and it created very significant losses for the funding bank and it therefore got a reduction in its own corporation tax. This was a scheme marketed in 2001. I went back a little way for the reason I am just going to come to. We saw one case, and I hope this gives you a feel for the issues, where tax savings of well in excess of £150 million were to be split equally between the multinational enterprise and the bank, effectively creating a success fee of £75 million for the bank for arranging this. This was stopped in the Finance Act 2001. The second example is much more recent and there has been some mention of it in the media—what has been called the gilt strip scheme. This was marketed to and used by wealthy individuals in conditions of some secrecy. The aim was to create and sell options over gilt strips to generate income losses matched by gains that were outside the capital gains tax regime, and the losses were then used to match against other income and reduce tax liability. For some people—and we have not seen the relevant tax returns yet—we understand the aim was to reduce it to nil, so they would pay no tax. It was sold widely by major accounting firms for about six months in the summer of 2003, maybe a little earlier as well, and stopped by the Government by an announcement on 15 January. The third example is of a scheme that was marketed pretty narrowly and in conditions of even more secrecy to about 30 multinational or other large corporate enterprises. It involves tax efficient, off-market swaps, and I hope you are going to spare me explaining fully what those are, but I am going to give you the impact if I may. These have significant premiums which are front-loaded and those premiums were claimed to be deductible against corporation tax profits. Normally swaps are flat, if I can put it that way, in economic terms and in accounting and tax terms. It was sold mainly by one major accounting firm from January to September 2002 when it was blocked. I hope it will help the committee if I try and put a price tag on the last two. We think that the gilt strips scheme has cost the Exchequer around £200 million. We cannot put a better figure on that until we have seen the individual tax returns. The tax efficient off-market swaps scheme could well have cost a billion to the Exchequer in the time before it was stopped.

  I want if I may to read this short e-mail, which I think will give you some insight into how this industry works. It is an e-mail from a tax planner, I think a lawyer. I am not going to name him because I am not absolutely certain. It was sent around the City just before four o'clock on Budget day this year, so after the Chancellor had sat down. It is headed, "A complete relief from capital gains tax": "Our strategy, which provides complete relief from tax or capital gains of individuals, companies and most trusts, has survived the Budget."—I am tempted to say, "no longer"—"The proposals, which have been announced for the future, to prevent the use of tax planning schemes generally, however, represent a threat to the effectiveness of all the tax planning in the coming months."—and I think the reference is to disclosure schemes. "Therefore, if you have a client who or which has realised or will realise gains of £500,000 or more, you should contact us immediately so as to implement our strategy before the taxpayer's ability to benefit from tax planning strategies is curtailed." I wanted to share that with you as an illustration of how fast this industry can react.

  There are a couple more things I might usefully say. I mentioned that these disclosure measures were considered to be proportionate. There is another reason for that in that the one for direct tax is screened by a series of filters which narrow down very considerably the scope of the measure so that we get, as far as we can, to see the things that we really need to see and we do not see things that are not helpful to the Revenue and in fact burden our customers. We have tried very hard to learn from other fiscal authorities, particularly in the United States, and, as the Chancellor himself said, this measure falls a very long way short of being a general anti-avoidance rule. It is about providing transparency. The last thing I want to say by way of introduction is that we do not think there is anything in this measure which will in any way inhibit the giving of normal, plain vanilla advice (if I may call it that) by tax professionals. I hope that is helpful by way of introduction. I want to hand over to Chris now if I may.

  Q77  Chairman: You have even more frightening ones to tell us about?

  Mr Tailby: My Lord Chairman, the kinds of schemes that we are talking about are those which are contrived arrangements. They are put in place to try and achieve a VAT saving where otherwise there would be none. I give you an example of the Debenhams case. I give you it as an example because we won it in the VAT Tribunal, so it is in the public domain. I should say that there are many other retailers stacked up behind this case, the appeal of which comes up in the High Court at the beginning of May. What Debenhams did was to set up a subsidiary company which they maintained had the purpose of handling credit card transactions. You may have had this experience if you have gone into one of the high street retailers and paid for something with a credit card. You are asked to sign on the credit card slip that two and a half per cent of the purchase price is payment for this service of card handling. In fact, as the VAT Tribunal found, no such service was provided and effectively the card handling arrangements carried on as they had always done. Debenhams argued that the 2.5 per cent was an exempt supply of card handling so that they only had to account for VAT on 97.5 per cent of the total purchase price. We argued that the reality was that these arrangements made no change to what was a normal commercial arrangement and indeed the tribunal found for us. These schemes, if you take the ones that we know about, cost us, we estimate, £300 million in lost tax and we would argue that this is a particularly contrived scheme and it is the type of thing that we want to catch. As Dave Hartnett has said in relation to direct tax, we have set very high de minimis limits here. In relation to the hallmarks part of the scheme we have set it at businesses with £10 million turnover, so very high. In relation to the listed schemes where we are setting out schemes that we know about and asking for reports on those, we have got a de minimis limit of £600,000, so in actual fact there is quite a high level there. I can pick up on some of the other points as they come through in the other questions if I may.

  Q78  Chairman: Could I just repeat something you said at the beginning to make sure I understood what you said? You were saying that the whole approach to avoidance in the Finance Bill was a joint operation by Revenue and Customs. Did I hear you aright?

  Mr Hartnett: And Treasury.

  Q79  Chairman: So it is an example of already the kinds of benefits that might come from a unified scheme because that is in all our interests?

  Mr Ramsden: That is right, Lord Peston, particularly in the area of disclosure where we have had a number of joint meetings to talk through policy development where we were looking at the operational side and the detailed technical aspects as well as the higher level strategy.

  Chairman: The Committee, I am proud to say, has several accountants on it and Lord Barnett is one of them, And, as an ex-Treasury person himself, I thought he might kick off with this.

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