Mr.
Goodman: I beg to move amendment No. 105, in page 54, line
10 [Vol I], at end
insert— ‘(2D) Subsection
(2)(b) above shall not apply where, before the end of the accounting
period in which the allowance loss accrues, the Board have on the
application of the company notified the company that the Board are
satisfied that the disposal or deemed disposal does not accrue in
disqualifying
circumstances. (2E) Subsection
(2D) shall be subject to the same procedures contained within section
138(2) to (5).”'.
The
Chairman: With this it will be convenient to discuss
amendment No. 101, in clause 71, page 62,line 47 [Vol I], at
end insert— ‘(5A) Subsection
(2)(b) above shall not apply where, before the end of the accounting
period in which the allowable loss accrues, the Board have on the
application of the company notified the company that the Board are
satisfied that the disposal or deemed disposal does not accrue in
disqualifying
circumstances. (5B) Subsection
(2)(b) shall be subject to the same procedures as those contained in
section 138(2) to
(5).'.
Mr.
Goodman: As the Paymaster General and I both anticipated,
we come to amendment No.105. It is more straightforward than the
previous amendments in that it would introduce a pre-clearance regime
to the proposed rules on disclosure. Given that HMRC already has a
relationship with companies by way of the disclosure arrangement, there
is a case for introducing a pre-clearance regime that sets the dialogue
on a more formal basis. Capital gains tax frequently arises on major
business transactions, a classic example of which would be the sale of
a property or business, so large amounts of money may be at stake.
Capital gains by their nature tend to relate to substantial decisions
by companies, hence the risk that an adverse tax change could deter
businesses from making commercial
decisions. A
pre-clearance regime would mean that HMRC would make policy clearances
publicly available in order to provide greater certainty to taxpayers.
Such regimes are widely used abroad, for example in Australia and New
Zealand. My recollection is that in countries where they are not
used—for example, the Republic of Ireland—the tax regime
is a good deal simpler. I suspect that the Paymaster General will argue
that it will be difficult to staff the regime, or that the arrangement
might be administratively inconvenient, but since in this and other
clauses the Government are seeking in effect to enter into further
discussions about tax affairs with businesses, there seems no obvious
reason why a tax clearance regime should not form part of those
discussions. Furthermore,
there is a genuine debate to be had about whether the Government
should, on the one hand, spend more time tinkering with the tax system
in the light of the greater complexity caused by the expansion of tax
legislation since 1997, or, on the other, simply opt for a
pre-clearance regime.
12.15
pm
Jeremy
Wright: I rise briefly to support amendment No. 105,
tabled by my hon. Friend the Member for Wycombe. The difficulty is that
companies that have to make delicate commercial decisions about how to
manage their losses want clarity about what they are and are not
permitted to do while staying legitimately within the tax regime. For
example, they may have to decide whether to move losses from one
business period to another or make other arrangements that will benefit
them commercially. I hope that the Paymaster General will surprise my
hon. Friend and me and say that the amendment is a good idea, but I
fear she will not. In that case, I would ask her to think again,
because there is a huge advantage to be gained in companies being able
to contact HMRC for clarification of what they are permitted to do.
Certainly, that would be desirable.
As my hon.
Friend said, although there may be some additional administrative
inconvenience for HMRC in providing clarification, there would be
greater benefits for the company concerned and for the economy
generally. I therefore ask the Minister to consider the amendment very
carefully. It is a good idea that will assist companies in knowing
exactly what they are permitted to do in an important area that is
growing increasingly complex and difficult to
manage.
Mr.
Newmark: The added benefits for HMRC are time and money,
which are limited assets. Greater clarity upfront on these issues would
benefit the constituent involved and save HMRC time and money in
chasing up matters
later.
Jeremy
Wright: My hon. Friend is right; prevention is better than
cure. The consequences of the amendment should be that HMRC will be
able, perhaps very simply, to tell a company whether an arrangement
would be legitimate for tax purposes. I go back to what the Paymaster
General said earlier about remarks that were made in the 2004 Finance
Bill debate: if it is clear what is and is not a permissible
arrangement, it will not take long for HMRC to answer questions. If, by
having their questions answered, companies can stay within the limits
of the tax regime, in the long run, as my hon. Friend says, we will
save ourselves and them a great deal of time and
money.
Dawn
Primarolo: Before I comment on the amendments, let me
address the issue of statutory clearance. That concerns the additional
burdens on business and a great deal more that the hon. Gentlemen,
conveniently, did not touch on. The clauses deal with tax avoidance.
They have been disclosed as regimes under disclosure, and therefore
legislated for, and will apply only where one of the main purposes of a
transaction or arrangement is tax avoidance. They will not apply to the
vast majority of companies or to wholly commercial transactions. The
principle behind the measure is that companies should be able to claim
and use capital losses only where there is both a genuine economic loss
and a genuine commercial disposal. That is the absolute bedrock. The
hon. Gentlemen have spoken about complexity, but business is complex.
Assuming that they do not propose taking capital losses out of the tax
system completely, they are over-egging their comments about the tax
system and the way in which legislation is phrased.
Although the amendments affect
two separate clauses, clauses 69 and 71, they are grouped together
because they deal with the same principle. They seek to introduce a
statutory clearance procedure for both clauses, and I consider that to
be unnecessary. The majority of companies do not need to use the
clearance procedure, but could be forced to do so. Once that is in
place all sorts of other things come into consideration, such as
whether they have been properly advised, and indemnities for
accountants and lawyers. That does not apply to most companies because
the scheme is specifically about the misuse of losses, and in any case
they will know whether they are using it. To say that they will not is
to ignore commercial practice, as has been acknowledge in this
Committee on a number of
occasions and in debates on different Finance Acts about the nature of
avoidance. The
disqualifying circumstances with which clause 69 is concerned are those
in which companies have entered into arrangements whose main purpose is
to enable them to secure a tax advantage. In short, that is tax
avoidance, and that is what the measures are aimed at. Companies will
know whether they are doing it. There is no question that they need
statutory clearance. The effect on all other companies will be the
reverse of what is being advocated. It will not give speedy resolution,
but will drive them to feel that they should seek statutory
clearance—presumably before the transaction takes place and
therefore putting pressure on it—whereas they will not need it
in the first place because they are not engaged in the activities
covered by the clause.
Jeremy
Wright: Surely the Paymaster General cannot have it both
ways. If she is right—I do not think that she is—that
this is a straightforward area, it will always be obvious to companies
what is tax avoidance and what is not. Surely if there is a clearance
procedure, and they ask whether an arrangement is tax avoidance or not,
they will get a very simple, straightforward and quick answer from
HMRC, which will not cost much time or money. So what is the problem
with the
procedure?
Dawn
Primarolo: First, we are not talking about commercial
transactions. The clauses deal with very narrow and specific avoidance
mechanisms. That is all that we are talking about. We have put that
clearly in legislation and guidance notes. The idea that those who
design such schemes, knowing what they are designed to achieve, should
seek clearance before they start marketing them, is simply
unattractive—to put it mildly.
Mr.
Newmark: Will the Paymaster General give
way?
Dawn
Primarolo: No, I will not. I am going to answer the
question, and then the hon. Gentleman can come back. It is a complex
area, and I am not able to get one set of answers on the record before
the next set comes forward. The hon. Gentleman can make his points
later. Clause 69, as
I said, is aimed at those companies that specifically use that type of
scheme; those schemes are caught by the clause. They do not happen by
accident or incident; they are the result of highly contrived
circumstances when transactions are undertaken. It is very simple. If
there is no clearance, companies should not engage in such schemes. The
schemes are carried out in a particular way, primarily to achieve a
desired tax effect rather than general commercial purposes, and
companies will know that. For that reason,clause 69 does not
need a safety blanket of a statutory, pre-clearance procedure wrapped
around it. It is quite clear what it is aiming
at. The
schemes at which clause 71 is aimed are just as artificial as those
targeted by clause 69. They seek to turn an income stream into a
capital gain, or to contrive a linked income deduction, effectively
turning a capital loss into an income one. In each case, capital losses
are used to shelter tax liabilities on the contrived capital gain. The
relief for capital losses is given against income profits only in very
limited circumstances, when Parliament intends that to happen. Schemes
have been devised to
circumvent that intention and to obtain relief at
will, and clause 71 stops that. However, clause 71 is targeted at more
complex schemes, so there may be more uncertainty about whether the
legislation applies. HMRC has instigated an informal clearance scheme
for the clause, which businesses may use if they wish. That has the
advantage of providing help to people who want it, without adding any
unnecessary layer of bureaucracy to those who do not. It provides the
practical certainty that businesses want. HMRC will be bound by its
decision, with regard to clause 71, provided that businesses disclose
all the relevant facts when the application is sought. Furthermore, the
rules that the clause introduces will apply to companies only if the
notice to that effect is issued by the board of HMRC. That will further
comfort compliant companies. Both the amendments make
reference to a clearance procedure used for share exchanges, but they
would not adapt the legislation to make it relevant to the clauses, so
they would not actually work. They would also provide for statutory
clearances to be applied for before the transaction takes place. They
would be requested and, presumably, granted on the basis of planned or
hypothetical transactions. That cannot possibly make sense. The
amendments contain no requirement that an applicant is contemplating
carrying out the proposed transaction. There is a danger that the
clearance procedure will be used by tax professionals to tweak and
perfect schemes that they then implement and market to their clients. I
am sure that members of the Committee can understand why I am not
attracted to that
idea. 12.30
pm If
companies are unsure about the application of clauses 69 and 71, they
need only look at the comprehensive guidance issued by HMRC in December
2005 and at the statement of principles that underpins the measures.
Furthermore, there is the option of making an application to HMRC under
the code of practice 10 procedure if a company is unsure of the
interpretation of the wording of the law. There is also the informal clearance
procedure in clause 71, as I have pointed out. The Government believe
that those measures will provide the clarity and certainty needed. The
capital loss package was the subject of consultation with business and
its advisers, and there was no suggestion that the application of
either clause was unclear.
If there
were a formal clearance procedure, directors of compliant companies
might feel compelled to use it. Lawyers and accountants could find that
their professional indemnity insurance would be invalid if they failed
to use the statutory clearance procedure. They might then decide to
require applications for clearance in all cases in which they are
advising on transactions that might result in a capital loss, such as
the liquidation of a failed subsidiary or a capitalisation scheme such
as the sale or leaseback of property, even when there is clearly no tax
avoidance purpose and despite clear HMRC guidance. The only effect of
the amendments would be potentially thousands of pointless clearance
applications, costing businesses additional fees for their advisers,
and delays in commercial life due to the need for
applications. The
amendments would add none of the certainty that business seeks. The
clear targeting of clause 69 and the guidance, code and informal
clearance procedure in clause 71 provide that certainty without
creating an
unwieldy statutory clearance system that would not
benefit anybody except the advisers who would be paid
fees. Mr.
Goodman: The Paymaster General dealt convincingly with the
previous group of amendments, but I am not convinced that she has dealt
quite so convincingly with this group. I take her point about the
additional burden that a pre-clearance regime might place on business.
However, although I hear what she said about Howard Flight’s
contribution in 2004, I do not entirely accept that there is a stark,
clear line between anti-avoidance arrangements and other
arrangements.
Obviously, if someone is
framing an avoidance scheme they know that they are doing so.
However, the Paymaster General said that this is a complex area. She
then looked ahead at clause 71 and said, if I heard her correctly, that
there would be extra arrangements to help businesses drawing up schemes
to know whether they are in breach of the law. That sounds more complex
than what the Paymaster General set out.
We cannot simply impose a
pre-clearance regime on the Treasury. However, passing the amendment
would be a rather stark course of action to take, although we will want
to return to the matter in due course. As we go through clauses 70 and
71, we might find that where businesses stand with Her Majesty’s
Revenue and Customs and its tax arrangements is far less clear than the
Paymaster General made out. I beg to ask leave to withdraw the
amendment. Amendment,
by leave,
withdrawn. Question
proposed, That the clause stand part ofthe
Bill.
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