Mr.
Goodman: It is a pleasure, Sir John, to see you in the
Chair. If I make the mistake of moving an amendment when I am debating
it, I know that you will pull me up at once and put me right. I think
that I am moving amendment No. 77 and speaking to amendments Nos. 78 to
87 and amendments Nos. 88 to 91. I do not know if the Economic
Secretary will be dealing with this chapter—I think that he will
not, from the way that he is moving with his files—so I might
not have the opportunity to congratulate him on his appointment, which
I have not yet had the chance to do even though it has been recorded
that I have done
so.
The
Chairman: Order. May I just make it clear, for the benefit
of all Committee members, that in relation to each of the amendments
that I have introduced, this will be the only opportunity for them to
be debated, although it will not be the only opportunity for them to be
voted
on?
Mr.
Goodman: I am grateful for your guidance, Sir John.
Because no Minister has had the opportunity to speak to clause 54, we
are in the correct but slightly difficult situation of having to
explain a little about the clause in order to make sense of the
amendments. Without pre-empting the clause stand part debate, I want to
outline the context, which is that the measures set out in clauses 54
to 58 aim to prevent the exploitation of charity tax reliefs. No doubt,
in due course, the Paymaster General will make the case for them. To
make part of her case for her, the measures have been welcomed by the
Institute of Fundraising, the National Council for Voluntary
Organisations and the charity finance directors group.
We understand the
Government’s concern about such exploitation, and support in
principle efforts to prevent it from taking place, as do other
organisations that have commented on the clauses, such as the Charities
Tax Reform Group, The Law Commission and the Chartered Institute of
Taxation. However, and in such matters there is nearly always a
“however”, those latter organisations are concerned about
the clauses both because some innocent transactions might inadvertently
be caught by them and because they will add unnecessary complexity to
the tax system. In addition, they fear that those two factors could
cause a reduction in charitable activity, which I am sure is not the
Government’s intention. In short, we might have another example
of the law of unintended consequences.
It is worth noting that
Ministers do not claim that the clauses are incapable of improvement,
given that they have tabled two amendments—Government amendments
Nos. 62 and 63—that seek to plug the gaps in the proposed
clauses. Government amendment No. 63, in relation to housing
associations, is particularly important in that regard. Our amendments
are essentially probing amendments. They seek to lessen the risk of
innocent transactions being caught by the clauses and to reduce
complexity.
Mr.
Brooks Newmark (Braintree) (Con): I understand that the
Charities Tax Reform Group has had discussions with Ministers to
express concerns about the very issues that my hon. Friend raises. It
would be interesting to know the results of those discussions as they
relate to my hon. Friend’s concerns.
Mr.
Goodman: Indeed. As my hon. Friend appreciates, I was not
present at those discussions, nor, I believe, were any of my hon.
Friends. I am sure that the Paymaster General will want to comment on
them in due course and in a moment I shall raise some of the concerns
that were voiced. Our intention is to prevent innocent transactions
from being caught by anti-avoidance measures that are quite proper in
their intent, and we will listen carefully to what the Paymaster
General says before deciding whether to press the amendments to a
vote. Amendments
Nos. 77 to 80 aim to clarify that the sale or letting of property to a
charity by a substantial donor at market value—that is, as part
of a normal business transaction in which there is no special deal or
arrangement between the substantial donor and the charity—would
not be caught by the clause.
Amendment No. 81, has a
similar aim—to clarify that an exchange of property between a
charity and a substantial donor at market value will not be caught by
the clause.
Amendment No. 82 aims to
ensure that otherwise unexceptionable transactions by a charity are not
caught by the legislation. One example of an unexceptionable
transaction is when a charity buys a property from a substantial donor
at full arm’s length value, whether or not the charity intends
to use it for charitable purposes.
To illustrate the example, let
us suppose that a private landowner owning 5 acres of farmland next to
a school donates 1 acre of that land, worth £200,000, to
the school for use as a playing field. The next year, he decides to sell
the remaining 4 acres on the open market, of which the school buys
another acre to build a new science block. If the school bought the
same property at the same price from a non-donor, the expenditure would
be treated as charitable expenditure. However, it is claimed that under
proposed new section 506A(3) of the Income and Corporation Taxes Act
1988, the school would be caught and would have a tax liability of
£60,000 in respect of purchase if it was a corporate charity and
£80,000 if it was a
trust. Another
example of an unexceptionable transaction is when a charity purchases
property from a substantial donor as an investment that qualifies under
any of the provisions of schedule 20 to the Income and Corporation
Taxes Act 1988 except paragraph 5. To illustrate the example, let us
suppose that a charity buys a house from a private householder as an
investment. Under the same section of the Bill, it would have a tax
liability of up to 40 per cent. of the value of the house if the
householder was a substantial
donor. A third
example is when a charity makes an investment in unquoted shares that
qualify under paragraph 9 of our old friend schedule 20 of ICTA 1998.
To illustrate, let us suppose that a charity enters into a joint
venture agreement with a commercial company. For example, a health care
charity might use its consultancy expertise to provide private health
care services through such a joint venture. The charity holds 50 per
cent. of the shares in the joint venture company and receives regular
and substantial payments of gift aid from the company. The 50 per cent.
subsidiary therefore becomes a substantial donor and, although the
investment is a qualifying investment, tax will be charged on the
amount of any share or loan capital invested by the charity in the
associated company. I
turn to another example. The National Trust is concerned that the
measures are drawn very widely and could catch many innocent
transactions in which the trust has a relationship with substantial
donors. It
says: “For
example, the following situations could trigger a tax change in our
circumstances: a donor family, living in a National Trust mansion free
of charge or at a below-market rent under a historic agreement entered
into at the time the mansion was donated to the Trust, who now make a
substantial donation to the
Trust” to fund a
restoration project at the mansion, for example. The National Trust
believes that it would be caught by the
clause. Another
example is when a trust purchasing land from a substantial donor needs
to pay more for the land than its market value—for instance,
when the trust makes a private offer to secure conservation land as an
incentive to the vendor not to sell it on the open market or at
auction. Those concerns were raised with me during the past few days,
after I had prepared my initial
remarks. Amendment
No. 83 seeks to remove subsection (3) from the Bill. The Charities Tax
Reform Group argues that the subsection is drawn too widely and that in
any case it is unnecessary because subsection (4), which catches all
transactions on non-arm’s length rate terms,
fulfils the same function. I would be interested to hear the Paymaster
General’s response to that. Amendment No. 84 seeks to
remove subsection (4) from the Bill. The Charities Tax Reform Group
argues that it can be difficult for a charity to establish what an
arm’s length rate might be for the purposes of a transaction,
and claims, with some force, that most charities do not have the
resources to pay consultants in order to establish a market rate for
every transaction. For instance, the market rate for the use of a
charity’s name and logo in an advertising campaign varies from
charity to charity. There is one main concern about the substantial
donor clauses: a substantial donor to a small charity might be a very
important donor whereas a substantial donor to a larger charity might
not be so important. Perhaps that is illustrated by the point about the
logos. Will the
Paymaster General tell the Committee what steps charities will be
required to take to determine whether a transaction is at a market rate
and what evidence they will have to retain? The Charities Tax Reform
Group argues that unless subsection (4) is removed, charities will
incur substantial compliance costs. However, if the subsection must be
retained, and of course amendment No. 83, which I proposed, presumed
that it would be retained—[Interruption.] I was waiting
for some alert person—possibly the hon. Member for
Wolverhampton, South-West—to get to his feet and ask why the
Charities Tax Reform Group proposed to delete one subsection relying on
another, and then to remove that other subsection. The Charities Tax
Reform Group argues that if it must be retained—I am confident
that the Paymaster General will say that it will be—there should
be a de minimis amount beneath which Her Majesty’s Revenue and
Customs would not dispute the amounts charged by or to a charity. I
would be grateful to hear her
comments. Amendment
No. 85 seeks to insert on page 39, line 26, after
“remuneration”: “unless
it is paid either under a contract of employment at a rate not
exceeding an arm’s length rate
or” for services as a
trustee. The amendment aims to ensure that employees of a charity can
be substantial donors to that charity. As it is, the subsection
apparently means that if an employee of a charity who is not a trustee
makes substantial donations to that charity, either under gift aid or
as a deduction from payroll, that employee’s salary is to be
treated as a non-charitable expense.
If the Paymaster General is
unwilling to accept the amendment, she might at least make it clear
that the subsection should apply only when an employee is paid more
than another employee doing a similar job who is not a donor, and that
it should be clarified that remuneration to an employee who is not a
trustee does not need to be approved by the Charity Commission. I would
be grateful for her
comments. 3
pm
Rob
Marris: I should now like to see whether we are alert; I
had picked up on the point to which the hon. Gentleman referred about
subsections (3) and (4). If I read amendment No. 85 correctly and if it
were inserted, subsection (5) would read extremely oddly, to say the
least. Is the hon. Gentleman aware of that?
Mr.
Goodman: What the hon. Gentleman thinks may read
oddly is not necessarily what I think reads oddly. I should be happy
for him to enlarge on that
point.
Rob
Marris: Although I may be misreading it, under the
amendment, subsection (5) would read
that “for the purposes
of section 505 as non-charitable expenditure unless it is remuneration
unless it is paid either under a contract of employment at a rate not
exceeding an arm's length rate or for services as a
trustee”. If I have read
that correctly, and I concede that I may have not, it is because the
word “unless” is used twice within four
words.
Mr.
Goodman: I think that the hon. Gentleman is using the term
“odd” to describe something “inelegant”. I
am willing to concede that it may not be elegant drafting, but I am
sure that, legally speaking—although I am not a lawyer—it
is effective or surely the amendment would not have been accepted for
debate. Perhaps I can
move on to amendment No. 86, ready as I always am to be picked up by
the hon. Gentleman for stylistic inelegance or, indeed, for any other
matter. Amendment No. 86 would leave out lines 37 and 38 on page 39.
Subsection (1)(a) of the proposed new section 68B provides an exemption
where a transaction is undertaken as part of the donor’s
business. As paragraph (b) deals with arm’s length terms, the
Charities Tax Reform Group argues that there is no need for paragraph
(a) and asks what difference it makes whether the transaction is a
business transaction for the
donor. Amendment No.
87 returns us to the country explored in amendment No. 82 and would
insert the words “or is
a Qualifying Investment for the purposes of Schedule 20 of ICTA
1988”. Committee members
will note that the amendment attempts in some detail to draw a more
watertight definition of the words “recognised stock
exchange.” The amendment would enable charities to continue to
benefit from any investment by the charity that is a qualifying
investment under schedule 20 to the Income and Corporation Taxes Act
1988. There appears to be no reason why charities dealing with
substantial donors should be prevented from making qualifying
investments that should surely be
unexceptionable. Amendment
No. 88 would leave out the words “which is wholly” on
page 40, line 23 and
insert “of which 50 per
cent. or more of the shares
is”. Subsection (8)
exempts transactions with trading subsidiaries from the new
legislation. That exemption is arguably too narrowly drawn and should
be extended to companies where the charity owns 50 per cent. or more of
the company’s shares. Again, however, I should be interested to
hear the Paymaster General’s
view. Amendment No.
89 would delete lines 1 to 6 on page 41 and
insert “(4) Subsection 3 of section
506A shall not apply to any transaction to which subsection 4
applies.’.” The
Charities Tax Reform Group believes that the amendment will
“restrict the damage” that would otherwise be caused by
subsection (3) of proposed
section 506A if the Government will not accept amendment No. 83, which
proposes to accept subsection (3). Committee members will recall, if
they are exceptionally alert, the argument made a moment ago that
subsection (3) is widely
drawn. Amendment No.
90 would insert a procedure that would provide an advance clearance
procedure for charities, so that they can check whether potential
transactions comply with new requirements of the legislation. If the
Paymaster General is unwilling to accept the amendment, it would be
helpful if she were able to give an assurance that charities seeking
advance clearance on transactions would, in practice, be able to obtain
advice from the HRMC. I imagine that she will be able to do
so.
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