Dawn
Primarolo: How interesting.
Mr.
Goodman: I am gratified that the Paymaster General says it
is interesting, because I was not convinced that she would necessarily
think that was the case —[Interruption.] At last, a
Government Back Bencher is paying even closer attention to the detail
of the Committee’s procedure than they have to date. They will
turn with interest to what the Paymaster General said about amendment
No. 108. What she said about a consultation in relation to the point
that I raised about life assurance was welcome, because it was put to
me that the rule changes could hurt policyholders and deter life
assurance companies from commercial mergers. If we are talking about
life, that issue will be relevant to the consultation.
On amendment
No. 106, where we have a stab at writing into law a definition of what
the “main purpose” of a company is when that main purpose
is to avoid paying tax, the Paymaster General made the point that the
definition would be a narrow one. I accept that, so I beg to ask leave
to withdraw the amendment.
Amendment, by leave,
withdrawn.
Clause 70 ordered to stand
part of the
Bill.
Clause
71Other
avoidance involving losses accruing to
companies
The
Chairman: I have been advised that the
hon. Member who was to move amendment No. 99 and speak to the group of
amendments would prefer notto move that amendment or speak to
amendmentsNos. 111 and 102. He simply wishes to move
amendmentNo. 100. Is that
correct?
Mr.
Goodman: That is correct, Sir John.
I beg to move amendment No.
100, in page 61[Vol I], leave out lines 31 to
44. The reason for
that change is as follows: as the Committee will be aware from
listening to the Paymaster General’s response to the amendments
that were tabled to clause 69, clauses 69 and 71 are closely related.
In the debate on clause 69 she dealt with the arguments in the three
amendments that I do not wish to
discuss. However,
amendment No. 100 is discrete. The lines it proposes to delete refer to
an arrangement of notices. It is a probing amendment, seeking to
explore the regime of notices that the clause would write into the
Bill. The clause does not impose a tax system that Her Majesty’s
Revenue and Customs may challenge in the formal manner if it disagrees
with the self-assessment. It would instead allow HMRC to issue a
notice, which arguably represents issuing a notice by diktat. We should
be grateful to hear a reason for the measure, particularly because the
tax planning that would trigger the issue of the notice would probably
have to be disclosed to HMRC under the disclosure of tax avoidance
scheme rules, which are being extended in their remit. So HMRC should
not be ignorant of the planning undertaken. There also seems to be
nothing in the clause that enables a company to appeal against such a
notice. It could be argued that that gives tothe Executive
considerable powers that they shouldnot
have.
Dawn
Primarolo: I shall refer to the question of issuing a
notice, which amendment No. 100 covers. Issuing of notices is a general
part of the disclosure requirement regime. HMRC would issue the notice
when it believed that the conditions of the clause were met; however,
companies need not be concerned by the provisions unless they receive a
notice. That is the first step. The notice would be a possibility if
conditions were met. Obviously, HMRC must be consistent when issuing
notices, and such issuing must be based on cases to which it reasonably
believes that the conditions of the legislation apply. The conditions
requirement means the exercise of judgment, but that is inevitable for
what is a purposive test. There is nothing unusual in that, and such
judgment is called for in many other areas of tax law.
HMRC has also
issued guidance, to which I referred when we discussed amendment No.
101 and clause 69. HMRC has issued guidance on how it will exercise
judgment in relation to the legislation. We were discussing the
informal clearance procedure, and HMRC has also offered clearance on an
either pre or post-transaction basis. Clearly, however, if a company
takes its own view during its self-assessment, and ultimately disagrees
with the decision, it will be referred to a special commissioner for
ruling before going through the normal processes. I am not sure that I
made this point this morning, so I should add that having given that
informal clearance, HMRC will be bound by it—as long as all
relevant facts about the arrangement had been disclosed in the first
place. I hope that that explains the procedures. The hon. Member for
Wycombe asked, if a company nevertheless disagrees, can it challenge?
The answer is yes.
Mr.
Goodman: I think that the Paymaster General is saying
that, in effect, there is an appeal system after the notice is issued.
That being so, I beg to ask leave to withdraw the amendment.
Amendment, by leave,
withdrawn.
Clause 71 ordered to stand
part of the Bill.
Clauses 72 to 74 ordered to
stand part of the Bill.
Clause
75Interest
relief: film
partnership Question
proposed, That the clause stand part ofthe
Bill.
Mrs.
Theresa Villiers (Chipping Barnet) (Con):Clause
75 deals with film tax partnerships, and the Opposition broadly support
it. Film tax issues have already been discussed by the Committee at
length, but the avoidance scheme on which the clause focuses is one of
the latest of many that have sought to exploit loopholes in film tax
laws. As I stated in the debate on chapter 3, we have reservations
about certain aspects of the proposed film tax structure, but we
believe that the Government are right to close the loopholes, and we
agree that the complex system of sale and leaseback contracts should
not continue, because it is not yielding sufficient value for money for
the taxpayer. It seems
strange to remark on specific legislation concerning this particular
scheme, given that the regime that makes such schemes possible is about
to be
abolished. I have some sympathy with the position of the Law Society,
which has questioned
whether “it is worth
introducing a provision of such complexity and narrowness on the
statute book, particularly when film tax reliefs are being
refocused”. However, I
acknowledge that the particular scheme that we are debating has long
been a target for the Revenue—even from before the decision to
opt for wholesale film tax revision, although I have never understood
why the Government want to focus on it so much. For some years, the
plain vanilla sale of leasebacks had been tolerated by the Revenue if
it resulted only in a deferral of tax. However, the structure we are
discussing goes further—it seeks to achieve tax reduction by
converting taxable income into permanently tax-free income. The scheme
has an opaque and complex structure that involves both a film
partnership and an investment
partnership. The
clause restricts the amount of tax relief on interest borne by loans
whose purpose is the funding of investment in a film partnership.
Instead of 100 per cent. deduction being permitted, a film partner will
be able to deduct only 40 per cent. of paid interest, which will ensure
that at least some film income ends up being taxable. The Revenue
believes that the 40 per cent. figure will leave the investor in a
similar tax position to that for a plain vanilla sale and leaseback
structure, in which benefits are only deferred. However, the Law
Society pointed out that the 40 per cent. figure seems fairly
arbitrary, so will the Paymaster General indicate how the Treasury made
that calculation? Other than on that point, the Opposition have no
objection to the stand part
motion.
Dawn
Primarolo: I agree with the hon. Lady that the need for
the provision is regrettable. That is particularly so given that the
Bill also contains tax credit provisions that she has acknowledged are
better suited in directing money to those engaged in production, rather
than to high-value individuals who are not connected to production and
who are simply looking for a tax-saving
scheme. The change was
needed because the schemes were particularly aggressive: sale and
leaseback occurred over a 15-year period and it was necessary to ensure
that tax was paid over the rest of the period. Her Majesty’s
Revenue and Customs became aware that the schemes were being marketed
aggressively and the likely exposure, had we not taken steps, would
have been substantial. I am sure that the hon. Member for Chipping
Barnet (Mrs. Villiers) can imagine my delight in finding that I had to
have yet another arrangement under the Finance Bill in respect of
films. It has been challenging for all hon. Members who want to assist
particular technological abilities and the developments in the film
industry for such matters to be based in the United Kingdom where we
have great skills. There also comes a point when we must question for
what the tax relief is
providing. 5
pm As for the
question posed by the Law Society, 40 per cent. is not an arbitrary
figure. HMRC approached the matter by undertaking a detailed study of
standard sale and leaseback structures. It gave it a reasonable
approximation of the position that investors would be
in had they invested in such structures in a straightforward way. The
figure of 40 per cent. was therefore chosen as a proportionate response
to that particular type of aggressive tax plan. It was simply trying to
squeeze out aggressive tax planning. Such matters will never be an
exact science, but it was an attempt to deal with the avoidance while
not hitting other forms of sale and leaseback. I hope that hon. Members
are satisfied by my clarification of
matters. Question
put and agreed
to. Clause 75
ordered to stand part of the
Bill. Clause 76
ordered to stand part of the
Bill. Schedule
6Avoidance
involving financial
arrangements Amendment
proposed: No. 66, in page 185, line 5[Vol I], leave out
sub-paragraph (1) and
insert— ‘(1) After section
85B of FA 1996 (amounts recognised in determining company's profit or
loss)
insert— “85C
Amounts not fully recognised for accounting
purposes (1) This section
applies if— (a)
a company is, or is treated as being, a party to a creditor
relationship in any period, (b)
an amount is not fully recognised for the period in respect
of the creditor
relationship, (c) the
company is, or is treated as being, a party to a debtor relationship in
the period or has at any time issued share capital which falls to be
treated for accounting purposes as a liability (a “relevant
accounting liability”) for the
period, (d) an amount
is not fully recognised for the period in respect of the debtor
relationship or relevant accounting liability,
and (e) the amounts
are not fully recognised as mentioned in paragraphs (b) and (d) as a
result of the application of generally accepted accounting practice in
relation to the creditor relationship and the debtor relationship or
relevant accounting
liability. (2) For the purposes
of subsection (1) an amount is not fully recognised for the period in
respect of any loan relationship or relevant accounting liability of
the company if— (a)
no amount in respect of the relationship or liability is
recognised in determining its profit or loss for the period,
or (b) an amount in
respect of only part of the relationship or liability is recognised in
determining its profit or loss for the
period. (3) In determining the
credits and debits to be brought into account by the company in respect
of the creditor relationship for the period for the purposes of this
Chapter, the applicable assumption (see subsection (6)) must be
made. (4) In
any case where the condition in subsection (1)(c) is met by reference
to a debtor relationship of the company, in determining the credits and
debits to be brought into account by the company in respect of that
relationship for the period for the purposes of this Chapter, the
applicable assumption must be
made. (5) But the amount of any
debits to be brought into account by the company for any period for the
purposes of this Chapter as a result of subsection (4) must not exceed
the amount of any credits to be brought into account by the company for
the period as a result of subsection
(3). (6) For the purposes of
this section, in relation to any loan relationship, the applicable
assumption is the assumption that an amount in respect of the whole of
the relationship is recognised in determining the company's profit or
loss for the period.
(7) In any case
where— (a) apart from
this section any credits or debits are brought into account by the
company in respect of any loan relationship for the period for the
purposes of this Chapter,
and (b) the relationship is one
to which this section
applies, the credits and debits
to be so brought into account as a result of this section must be
determined on the same basis of accounting on which the credits or
debits mentioned in paragraph (a) were
determined. (8) In any other
case, the credits and debits to be so brought into account as a result
of this section must be determined on the amortised cost basis of
accounting.”.'.—[Dawn
Primarolo.]
The
Chairman: With this it will be convenient to discuss
Government amendments Nos. 67 to 70.
Mr.
Mark Hoban (Fareham) (Con): I wish to raise some worries
that the Chartered Institute of Taxation had about the original
paragraph 6 that the amendment would delete and I wish to clarify
whether those worries have been addressed by the amendments tabled by
the Paymaster General. The institute is worried about the way in which
the measures relate to sub-participations in loans and how they are
dealt with. For the sake of clarity, I shall set out how matters work.
What usually happens in respect of a funded sub-participation is that
the originator would derecognise part of its assets for accounting
purposes. Let us suppose that a loan of £100 is originated, of
which 40 per cent. is sub-participated. The originator only shows a
loan of £60 on its balance sheet, the profit and loss account
only shows income of £60 and nothing is recorded for the
remaining 40 per cent. asset or the 40 per cent. liability under the
sub-participation
agreement. The
Chartered Institute of Taxation believed that, under the original
paragraph 6, the proposed new section 85C of the Finance Act 1996 will
now require an originator to recognise income on the full £100
of the loan asset. When the sub-participation agreement is a loan
relationship under proposed new section 85C, the originator will, in
addition to taxing the debits and credits on the whole £100 of
the loan asset, be able to recognise the debits and credits on the loan
liability of £40, so the net result is that it still shows an
asset of£60 and it shows the income of £60 on
its profit and loss
account. The Chartered
Institute of Taxation’s worry about the matter and the
Government’s original proposals was that, when the
sub-participation agreement is not a loan relationship under proposed
new section 85C, the originator seems to be taxed on the income
of£100 from the loan asset, but there is no mechanism
to give relief to the amounts paid away on the sub-participation
agreement. Therefore, it would be taxed on £100 in its profit
and loss account, but it would have no relief on the interest it pays
on the 40 per cent. ithas given away—as it
were—to someone involvedin sub-participation, unless
of course the “fairly represent” provision in section 84
of the FinanceAct 1996 overrides that position. I should be
grateful if the Paymaster General would say whether she believes that
the “fairly represent” provision in section 84 does
override the treatment of the sub-participation where there is not a
loan relationship in accordance with proposed new section
85C.
There are a
couple of other issues to do with this relationship that I ought to go
through. Under proposed new section 85C, there are potential
consequences for originators in relation to what might happen where the
underlying asset is impaired. Proposed new section 85C requires the
originator to recognise the entire loss. The originator would also be
entitled to recognise the gain under the sub-participation agreement.
There should be no impact overall in respect of this, unless one of two
conditions are met. Either the section 209 “results
dependent” provision of the Income and Corporation Taxes Act
1988 applies to deny interest deductions, or the sub-participant is a
connected party. Section 209
“could apply wherever the
sub-participation counterparty is not within charge to corporation tax
(eg neither a UK bank nor a UK
branch)” and that would
then deny the interest deductions required to balance out the interest
of £100 on this
sub-participation. Rob
Marris (Wolverhampton, South-West) (Lab): I am perhaps
becoming forgetful, but could the hon. Gentleman remind me what section
209 of the Income and Corporation Taxes Act 1988 actually
says?
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