Mr.
Goodman: We turn from the breathless excitement of the
Olympics to the somewhat more arid territory of anti-avoidance clauses.
[Interruption.] I am certain that they will not fail to engage
the attention of the hon. Member for Wolverhampton, South-West. Judging
from the noises coming from the back, I think that his party hopes that
they will engage his attention more favourably than the clauses on the
Olympics. Clause 69
is a brief but important clause. It is essentially a mini general
anti-avoidance clause relating particularly to disclosure, and it takes
us deep into tax planning and what advisers should and should not
disclose to HMRC. It will establish an anti-avoidance rule disallowing
any capital losses to companies arising from arrangements whose main
purpose is a tax advantage. It is an extension of previous disclosure
rules introduced, as the Paymaster General will tell us in due course,
in the Finance Act 2004.
The question is one of balance
and fairness. Obviously, we deplore the exploitation of different tax
rates in order to abuse them. In the Government’s favour, it is
perhaps worth knowing that Deloitte welcomes the revised
clauses: “The
amendments set out in the revised legislation and HMRC guidance notes
provide welcome clarification in certain areas and also amend some of
the unintended consequences of the proposed new
legislation.” However—there
is always a “however”—one of the difficulties is
that the Government have doubled the size of UK tax legislation in
eight years. By doing so, they have created more opportunities for
avoidance and more gaps that must be plugged, creating in turn yet more
opportunities for avoidance. It is worth testing with amendments the
complexity and uncertainty of the system, and whether the changes will
increase or reduce that complexity and
uncertainty. Amendments
Nos. 103 and 104 are essentially probing amendments, although amendment
No. 105, which relates to the imposition of a
possiblepre-clearance regime, is rather less probing. I shall
be interested to hear what the Paymaster General has to say about that.
We want to hear her response before deciding whether to press the
amendments to a
vote. Amendment No.
103 would introduce two further additions to section 8(2) of the
Taxation of Chargeable Gains Act 1992, which the clause will add to and
amend. The first part of the amendment seeks to remove capital loss
planning from the proposed disclosure rules. The argument runs that if
an allowable loss can be used only where obtaining a tax advantage is
not the main purpose for creating that tax loss, it is
unreasonable for the Government to impose a disclosure regime to prevent
the utilisation of such losses, which by their nature must be real
economic losses and not paper losses. The amendment would remove
capital loss planning from the scope of the disclosure rules by
excluding it from the relevant definitions in the statute that
introduced those
rules. The second
part of the amendment deliberately echoes the wording of the statutory
instrument that, from 1 July 2006, will put into effect key changes to
the disclosure rules. HMRC’s old regime required that a scheme
should be disclosed if it could warrant a premium fee, or if it were
confidential in the sense that the tax adviser would not want the idea
to be known to the wider tax community. The new regime goes wider: it
requires confidentiality in the sense that the adviser would not want
the scheme to be known to HMRC.
The statutory instrument
requires the promoter—the lawyer, accountant or bank—to
disclose the scheme
if “(i)
it might reasonably be expected that a promoter would wish
the way in which an element of those arrangements secures a tax
advantage not to be disclosed to any other promoter; and
(ii) the promoter
does not wish to disclose to Her Majesty’s Revenue and Customs
the way in which that element secures that
advantage”. The
second part of the amendment is intended to bring about a debate on the
contents of the statutory instrument, and in particular on what is
meant by the word “wish”, and how that wish will be
perceived. We also want to consider the reason for not dealing with
amendments to the disclosure rules by way of primary legislation, and
the reason why Ministers are seeking to impose limits on discussions
that are themselves legal and which may have arisen because of
deficient drafting of tax legislation—although I am sure that
that latter point was covered in the debate on the 2004
Bill. Amendment No.
104 seeks to clarify the proposed disclosure rules and to enshrine in
law an important comment contained in the explanatory notes—the
comment that clause 69 will not apply to economic losses. Thankfully,
amendment No. 105 is a bit less
dry—
The
Chairman: Order. We have not yet reached that
amendment.
Dawn
Primarolo: I was moving on with the hon. Member for
Wycombe. As he rightly identified, the clauses deal with three specific
anti-avoidance measure. They have their origin in disclosures made
under the regime that was introduced in 2004. At the time,
Mr. Flight—the then hon. Member for Arundel and South
Downs—spoke about disclosures on behalf of the Opposition and
said: “At the
heart of the issue, as far as we see it, is the fact that reporting of
the tax avoidance schemes being marketed is in essence a no-brainer.
People know when they are marketing them, and when such a scheme is
being marketed to
them.” He
continued: “The
objective is that the Revenue should at least be much more quickly
aware of what is being marketed. That is
sensible.”—[Official Report, Standing Committee A,
22 June 2004; c.
701-704.] That
fits specifically with the wider point made by the hon. Member for
Wycombe about complexity and
avoidance. Unfortunately, whatever Governments do—much of the
legislation that is being exploited is legislation that was in place
under the previous Government—the same old things are tried:
creating a loss or getting a capital allowance or a deduction or
converting one form of income into another to have it taxed under a
different regime. This goes to the heart of how our tax system works.
While I am happy to engage with the hon. Gentleman in that debate, it
is somewhat fruitless, at least on these
clauses. 12
noon As I said,
these measures result from information specifically provided under the
disclosure regime and are specifically targeted to deal with that.
Indeed, the comments made at the time of the announcement and the
observations on the draft clauses from a whole range of organisations
and accountancy firms, such as KPMG, Ernst and Young and Deloitte and
Touche to name but three, clearly acknowledged that this is precisely
how the clauses are operating.
Clause 69 denies tax relief
for capital losses where their existence or amount has been contrived,
that is, where the losses that arise do not reflect commercial reality.
The clause prevents relief for capital losses where there is either no
underlying economic loss, or there has been no commercial disposal of
an asset by a company or its group and the main purpose, or one of the
main purposes, of the arrangements was to secure a tax
advantage. These
measures were first published in draft in the pre-Budget report and
they are all effective from that date. In the pre-Budget report, HMRC
also published draft guidance on the new measures, with a statement
setting out why they are necessary and the principles that underpin
them. That approach, which clearly sets out what the measures are
seeking to achieve, has been well received by the accountancy and legal
professions and their clients.
There are two identifiable
classes of transaction that this legislation will affect. The first is
transactions structured so that the tax outcome does not reflect
economic reality. These are cases where a large capital loss is created
for tax purposes but where there is no, or only a very much smaller,
commercial loss. The second class of transaction targeted is one where
there is a contrived sale or other disposal of an asset and that sale
gives rise to a real commercial loss but there has been no effective,
or real commercial disposal of the asset. There is therefore no change
in the economic ownership of the asset because either the company, or
the group, still retains ownership. Since there has been no real
“disposal”, the clause will act to disallow the capital
loss.
Amendment
No. 103 is aimed at excluding from the scope of the disclosure regime
any arrangements that obtain an allowable capital loss. That is a very
wide exclusion indeed, covering all arrangements that involve capital
losses. The main purpose of the disclosure regime is to ensure that
HMRC receives early information about potential tax avoidance schemes
so as to inform current and future anti-avoidance legislation policy.
The disclosure regime, as the then hon. Member for Arundel and South
Downs pointed out, provides the
information to ensure that if steps are necessary, they are specific and
targeted to move away from what had been the practice of successive
Governments of a more blanket approach to some anti-avoidance
legislation, without having the clarity of the disclosure regime to
pinpoint specifically the transactions that are required to be in
order. The disclosure regime helps to identify schemes that may well
meet the letter of the law, but which use it in a way that was not
intended and, at times, in an abusive way. They do so by requiring
disclosure of schemes falling within certain descriptions contained in
the regulations. Those descriptions are carefully targeted at the
schemes that have a high risk of being avoidance. It seems absurd therefore, as
the amendment proposes, to exclude from the scope of the disclosure
regime a scheme that complies with that particular tax rule, but which
could have other avoidance aspects that have nothing to do with capital
losses. It is precisely those schemes that meet the letter of the
law—but in the way that was never intended—that the
disclosure regime is designed to detect. That was the debate when we
approached the clauses in Committee in 2004. If the logic applying to
the amendment were to be applied across the board, the disclosure
regime would be rendered worthless. There would be no point in it and
the objective of the effective operation of disclosure regimes that the
Opposition agreed that the Government should seek would be undermined.
It is no surprise to the hon. Gentleman that I believe that amendment
No. 103 strikes at the purpose of what we are trying to achieve under
the regulations. I am not attracted to it. I do not know whether the
amendment is probing, but I shall take it as such at the
moment. Amendment No.
104 would do two things. First, it would prevent the clause from being
applied when arrangements include certain claims or elections made
under other provisions of the Taxation of Chargeable Gains Act 1992. It
also undermines the purpose of the clause by allowing a capital loss
even though there has been no real commercial disposal of an asset. In
the majority of cases, the clause will have no impact on companies
making claims or elections under other sections of the Act, for
example, when a company claims a loss because an asset has become of
negligible value. I go back to the point made by the then hon. Member
for Arundel and South Downs in 2004, which is that people know when
they are marketing avoidance schemes and others know when such a scheme
is being marketed at them. HMRC’s additional published guidance
specifically addresses the points of which companies need to be aware.
It states that the making of such an election will not in itself be
regarded as an arrangement to which the clause
applies. However,
giving carte blanche to all arrangements that use particular claims or
elections, as the amendment would do, undermines the effectiveness of
the clause. It is possible that the claims or elections could be part
of larger arrangements that have been contrived to produce a loss. I
touched on that point when I covered amendment No. 103. The legislation
must be capable of deterring such behaviour because, again during our
discussions on the Finance Act 2004, it was clear from contributions
made by all members of the Committee that it was the presence of the
disclosure regime to deter people, in the first place, from engaging in
those activities that was of particular
importance. The
second effect of amendment No. 104 would be worse, in that it would
completely undermine the principles that underpin the clause by giving
relief for losses on assets that have not actually changed economic
ownership. In extreme cases, it would mean that companies could create
large capital losses, even though an asset might only temporarily have
fallen in value and there had been no change in economic ownership of
the asset. As if the
other bit of damage was not bad enough, the amendment would also have
wider implications for the corporate capital gains system.
Companies’ capital gains and losses are taxed or relieved on a
realisation basis. If we were to give relief for losses when there is
no real economic disposal, we would be allowing a mismatch in the
treatment of gains and losses, as losses would effectively be relieved
as they accrued whereas gains would continue to be taxed on
realisation.
Taken as a
whole, amendment No. 104 seriously undermines clause 69 to the extent
that any additional revenue from preventing avoidance schemes currently
in use would, in all likelihood, be lost. The estimate is something
like £260 million for the tax years 2006-07 to 2008-09 with a
continuing £150 million a year thereafter.
Amendment No. 103 would
exclude several potential avoidance schemes from the disclosure regime
and amendment No. 104 would seriously undermine clause 69. I hope,
therefore, that the hon. Gentleman has probed the intention of the
Government enough and will want to reflect on what has been said before
he decides whether to pursue the matter
further.
Mr.
Goodman: When tabling these amendments and those to
clauses 70 and 71, I thought that reference might be made to the former
hon. Member for Arundel and South Downs, Mr. Howard Flight. Although I
have not gone back through the 2004 debates to read every remark he
made or to follow entirely the flow of his thought, I suspected that he
might have dealt with such clauses.
The
Paymaster General’s reply was a little reliant on extreme cases
when she referred to amendment No. 104. She acknowledged that some
innocent arrangements might be caught by the provision. However, in the
light of the long consideration given to the proposals during the
consultation process that she referred to and my not wanting to explain
to her where we would plug a£260 million gap in
finances, I beg to ask leave to withdraw the
amendment. Amendment,
by leave,
withdrawn.
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