Mr. Flight: I want simply to add that it is interesting that the CBI has specifically said that it feels that the statement of Inland Revenue practice is unsatisfactory because it does not adequately clarify the position, is not a substitute for clear and understandable legislation and is liable to be overwritten by the courts if they are called on in future to interpret the strict wording of the schedule. It says that it is disappointing that in an era in which the tax law rewrite programme is introducing a new approach to tax legislation, Parliament is being asked to approve unclear legislation that will effectively give the Revenue discretion, subject to intervention by the courts, on how to apply the exemption, which it feels is undesirable in principle.
Mr. John Burnett (Torridge and West Devon): I welcome you to the Chair, Mr. Benton. I hope that it will be in order for me to comment on the generality of schedule 8, and in particular clauses 20 and 21, which limit the exemptions to trading companies. If that is not in order at this stage, Mr. Benton, please let me know and I shall address the matter later in the stand part debate.
The Chairman: Order. I should prefer the hon. Gentleman to leave his remarks on the generality of the schedule until the stand part debate.
Mr. Burnett: Thank you, Mr. Benton.
Mr. Mark Hoban (Fareham): May I, too, welcome you to the Chair, Mr. Benton?
I welcome clause 43, which is important for business. Having worked with clients on transactions in which tax issues played an important part in their timing, I know that the measures in the clause are to the advantage of business, and it is therefore not surprising that businesses have given them a warm welcome.
I want to pick up on the comments made by my hon. Friend the Member for Arundel and South Downs and by the hon. Member for Kingston and Surbiton (Mr. Davey) on the scope of new schedule 7AC(5), a matter on which not only the CBI but the Chartered Institute of Taxation has made representations. This morning, Committee members will have received representations from the Institute of Chartered Accountants in England and Wales, of which I am a member, concerning the clause. Interestingly, the ICAEW's view is that paragraph 5, which contains the anti-avoidance measures, is so widely drafted that it appears to catch almost any disposal, which is a concern to industry as a whole. If the Revenue were improperly to apply paragraph 5, that would risk emasculating a relief which business regards as very important.
As the hon. Member for Kingston and Surbiton said, we need greater certainty in the taxation of transactions. The ICAEW states:
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That is a legitimate concern, and I hope that Ministers will consider whether it would be appropriate to withdraw the clause so that they can consider whether specific anti-avoidance regulations could be drafted to tackle examples, with which I am sure that they are armed, of transactions that they are trying to rule out. They need to see whether there is a more specific way of ensuring that transactions are not structured to avoid tax, which would give a greater degree of certainty to businesses and their advisers.
Mr. Mark Field (Cities of London and Westminster): I want briefly to support what other Conservative Members have said.
As a matter of strategy, I am concerned that too much authority will be in the hands of the Inland Revenue if it has discretion on those matters, which would be a retrograde step. I appreciate that when the Economic Secretary dealt with the previous clause she referred to the concept of anti-avoidance. One could cynically suggest that much of the feeling on the matter from accountancy experts and those in other related professions derives from an attempt to discover avoidance measures on their clients' behalf. It is wrong that a company should have to structure its affairs to maximise the amount of tax that it pays. Although I support what the Government are trying to do, there is far too much discretion in the Revenue's hands, and such a lack of certainty will be damaging to business. I would be grateful for guidance on how the Government intend to ensure that the Revenue's discretion is kept to a minimum.
Ruth Kelly: I thank the hon. Member for Kingston and Surbiton for his opening comments that clause 43 is drafted in exemplary fashion, and that it was a good idea for the legislation to be available in advance for widespread consultation. That input has been valuable, and we have learnt much from consulting business and others who will be affected. We continue to learn from them, and we remain in dialogue with industry. Indeed, a partner in a major firm of accountants recently wrote in the Financial Times:
In the context of generous relief and substantial shareholdings, the amendment would remove a provision that will protect the regime against exploitation. The protection is designed to prevent companies from realising untaxed investment returns by way of shared disposal, where the gain on the disposal would be exempt under the new regime.
It was recognised by many participants in the consultation process that we have legitimate concerns about the potential abuse of the exemption provided by the regime. We are particularly concerned that schemes could be created for converting untaxed income into tax-free capital gains. The draft legislation published at the time of the pre-Budget report last November sought to tackle those concerns by excluding certain types of financial and investment activity from being qualifying trading activities under
Column Number: 149the regime. Business told us that that approach was too wide and could result in the exclusion of many genuine trading operations, but it continues to accept the validity of our concerns.
In consultation with the business community and through listening to its concern that the legislation was too widely drafted, we developed an alternative, suggested test. That test, which the hon. Member for Kingston and Surbiton queries, will prevent a gain from qualifying for an exemption where certain conditions are satisfied and tax-avoidance arrangements exist. The arrangements must be such that the sole or main benefit that can be expected to arise from them is that the gain would be exempt under the substantial shareholdings regime. The scheme is designed merely to take advantage of that loophole, and does not relate to any fundamental commercial activity.
Notwithstanding that extensive consultation, I have read the comments of the CBI and others about the provision's scope since the publication of the legislation, and am aware that there have been continuing mutterings about its being drawn too widely. In the light of those fears and earlier consultation with industry, the Inland Revenue is preparing detailed guidance that will set out the scope of the provision. The guidance is being prepared in close consultation with industry. The Revenue also seeks comments from all other parties who have an interest. When finalised, the detailed guidance will be published as a statement of practice, which should reassure the hon. Gentleman to some extent and allay companies' worries about the provision. It will demonstrate the Revenue's view that the provision is narrowly focused.
The need for tax-avoidance arrangements from the outset ensures that all normal disposals of substantial shareholdings will be unaffected by the anti-avoidance rule. It is important to put on the record that the vast majority of disposals of substantial shareholdings will not be affected by the anti-avoidance legislation. The Revenue has already received a number of encouraging comments that that is likely to be the case. For example, in its comments on the Finance Bill, the Chartered Institute of Taxation said:
Why did we decide to provide guidance rather than put everything in legislation? It is much easier to capture schemes, which can be very varied, and to be more flexible and illustrative in guidance than in legislation. We have received various suggestions as to how we might put beyond doubt in statute, if we were to write such legislation, the circumstances that would not be excluded from the scope of the exemption. However, a provision that dealt explicitly with every situation that might arise—even if they could all be predicted—would be too long to be practicable. The current tests have the benefit of being short and readily comprehensible, so I am not attracted to the idea of tinkering with them.
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The hon. Member for Kingston and Surbiton raised the Inland Revenue example, which gives a case in which avoidance might occur. In the example, if a company were to arrange for a subsidiary to buy a package of financial derivatives that were held such that it constituted the carrying-on of a financial trade and then sell the shares and subsidiary before the profits from the derivatives were realised, the gain on the sale of the shares would be exempt. We think that that is unlikely to happen in practice, as the gain will be captured by this anti-avoidance measure.
The hon. Gentleman and others raised concerns about uncertainties in the drafting of the legislation. It might be helpful to try to allay some of his concerns about that. He asked about the term ''arrangements'' in the schedule. The term is used elsewhere in tax legislation; it is not new. For example, it is used in the enterprise investment scheme. He also said that the interpretation of the term ''substantial'' is uncertain. However, there is already guidance on the meaning of ''substantial'' in the context of capital gains tax taper relief, and the Inland Revenue has confirmed that it will also apply in this context. The detailed drafting issues that the hon. Gentleman raised have already been dealt with or are not new, and I am sure that people will come to understand that as they look more closely at the legislation.
The hon. Gentleman said that so much uncertainty affects paragraph 5 that it is no longer useful. The anti-avoidance provision will have no application whatsoever in the vast majority of cases, and companies understand that it will not apply if they are carrying out reasonable rearrangements and restructurings. Again, I hope that that allays his concerns. He queried whether we would be willing to meet the CBI to discuss the matter. The Inland Revenue has been in close contact with the CBI and others in the development of the guidance. Indeed, I believe that it has a meeting with the CBI on the anti-avoidance legislation later this week.
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