Mr.
Gauke: I am grateful for the Paymaster General’s
comments and particularly her comment that the controlled foreign
companies law is constantly under attack from those seeking to
undermine Parliament’s will. She will be aware of an attack on
that law in the current Cadbury Schweppes case, which is proceeding
through the European Court of Justice. The Advocate-General has already
determined against the Government. I merely ask whether anything in the
clause anticipates a judgment in that case and, if not, what is the
likelihood of the legislation having to be reformed next year or the
year after in consequence of an adverse judgment from the ECJ. Has the
Treasury reached an estimate of the likely cost of the Cadbury
Schweppes case if the ECJ finds against the
Government?
The
Chairman: Order. I do not think an estimate of the cost of the
Cadbury Schweppes case is relevant to the
clause.
Mr.
Gauke: I am grateful, Sir John. I withdraw that question
and have no further
comments. Mr.
Philip Dunne (Ludlow) (Con): I was interested to note that
the Paymaster General referred specifically to acquisitions abroad
within the sector of operation of the UK resident company or parent
entity. I shall be grateful if she could clarify whether she is ruling
out international diversification as a means of tax avoidance when
there may be a bona fide reason for a UK-based company to acquire a
company in a different sector but with some similarities. Is that
intended to be caught by the measure?
Mr.
Hoban: I shall briefly make one or two points. I am
grateful to the Paymaster General for her clarification of the clause.
I know that people outside the House will appreciate her comments and
clarity. I want to be clear about one point. She suggested that
companies should seek advice before entering into one of those
transactions, but I was not clear whether that was a form of
pre-clearance mechanism or a form of guidance that they could receive
from the HMRC prior to entering into a transaction. I would be grateful
for clarification from her on that.
The Paymaster General referred
to examples, and although I do not wish to ask for specific examples,
will she state how many companies migrated offshore prior to 1 April
2002? That will tell us whether she is addressing a small problem or
trying to close a large loophole.
As my hon.
Friend the Member for South-West Hertfordshire said, we are conscious
of the issue relating to the threat posed to CFC legislation by
European Court judgments. He referred to the Cadbury Schweppes case.
There appears potentially to be an issue when the UK-incorporated
company has migrated to within the European economic area: the loophole
that the Paymaster General is trying to plug will not be plugged if the
judgment goes against the UK Government, whereas companies outside the
EEA will find the loophole being closed down. I would be grateful if
she would address the issues relating to the ECJ and its thoughts on
the CFC legislation. To what extent can protection be gained to prevent
more companies from trying to avoid tax by locating outside the
EEA?
Dawn
Primarolo: I shall deal first with the question on the
Advocate-General’s opinion. As the hon. Gentleman knows better
than I do, it is an opinion; it advises the Court and it is not a final
judgment. I am sure that he would not expect me to go any further. He
will have seen from the Advocate-General’s opinion that CFC
rules were considered to be compatible with the treaty freedoms and
that compliance with such regimes does not represent, in the
Advocate-General’s view, an unacceptable burden on companies.
However, I have made it clear that that is his opinion and it would be
unwise for me to go any further until we have a judgment from the
Court. On the
specific points, I do not have a figure in respect of migrated
companies—I am unsure whether one exists. It would be
substantial, and we can see that in the flows. I wonder whether the
hon. Gentleman would find it acceptable for me to write to him, members
of the Committee and to you, Sir John, to outline the scope of the
problem. We believed that it was not insignificant and a potentially
difficult issue. The
hon. Gentleman made a point about clearance. I was not suggesting a
statutory clearance procedure in my opening remarks on the clause: I
was saying exactly what we thought was outside. If companies wished
still to seek clarification from the HMRC on a case in this area, they
could do so and the HMRC would consider itself bound, as is normal, by
what it then advised.
Let me turn to the other
questions. Bona fide acquisitions are not caught. Diversifications are
not ruled out, but they can be complex. The hon. Member for Fareham
will understand from my opening remarks
the specific points that we are trying to address. I do not want this to
be a cumbersome process, because it is no good for the companies
either. They are taking decisions on this matter and need to do so at a
relatively fast rate. However, if a company were in any doubt, the
offer relating to the seeking of clearance and advice in the informal
procedures, to which I referred, would be open and the same points
would stand with regard to the advice given. We have tried to return the
legislation to the 2002 intent. It is difficult, given the ingenuity of
tax planners, but at every opportunity we must recognise legitimate
activities and place them outside the scope of the clause. When that is
not clearly done, I suggest that companies speak directly to the HMRC
to get its response to their particular
case. Question put
and agreed to.
Clause 78 ordered to stand
part of the Bill.
Clause 79 ordered to stand
part of the Bill.
Schedule
7Transfer
of assets
abroad Amendments
made: No. 73, page 196, line 31 [Vol I], leave
out ‘the transfer and any
associated
operations' and
insert ‘such of the relevant
transactions as
were'. No.
74, page 196, line 42 [Vol I], leave out from first ‘to' to
second ‘the' in line 43 and
insert ‘relevant transactions by
reference to
which'. No.
75, page 197, line 1 [Vol I], leave out ‘other associated
operations' and insert ‘associated
operations not falling within paragraph (a)
above'. No.
76, page 197, line 32 [Vol I], at end
insert— ‘ “relevant
transactions”
means— (a) the transfer,
and (b) any associated
operations.'.—[Dawn
Primarolo.] Question
proposed, That this schedule, as amended, be the Seventh schedule
to the Bill.
Sir
George Young (North-West Hampshire) (Con): I just wanted
to press the Paymaster General on what appears in schedule 7 regarding
conditions A and B.
The schedule deals with the
transfer of assets abroad. I have no time for those who transfer their
assets abroad with a view to avoiding tax and I welcome the initiatives
that the Government are taking in the Bill to stop that practice.
However, there are legitimate reasons why assets might be transferred
abroad—the establishment of a business, for example. The bit
that caught my eye is in paragraph 3, where we come across conditions A
and B. The provision is referred to in the explanatory notes as a
revised purpose test, designed to discover the motive behind the
transaction. I would be grateful if the Paymaster General would let me
know whether the conditions appear in other tests of tax
avoidance.
As I
understand it, if there is a dispute between the Revenue and an
individual as to whether a certain activity is taxable, it goes before
the courts at the end of the day, and they would consider all the
circumstances of the case and come down on one side or the other. If
one goes down the condition A and condition B route, the taxpayer would
not just have to show that, on balance, his interpretation was correct,
but that the interpretation the Inland Revenue had put on it was
unreasonable. It would be interesting if the Revenue planned to
introduce this test in schedule 7, but extended it broadly to apply to
other cases in which there was a dispute between the individual and the
Revenue. If it did, the terms of trade between the Revenue and the
individual would be tilted towards the Revenue.
I have some questions for the
Paymaster General when she winds up the debate. Is there any precedent
for the conditions; why do not they apply, as I understand they do not,
in other tests of tax avoidance; and are they the beginning of a series
of new tests designed to shift the balance away from the individual and
towards the
Revenue?
5.45
pm
Mr.
Hoban: I shall raise several concerns, particularly from
the Law Society, about the operation of schedule 7. Some of them touch
on the points that my right hon. Friend the Member for North-West
Hampshire (Sir George Young) made. The Institute of Chartered
Accountants in England and Wales has also expressed some concerns about
the operation of schedule 7.
Schedule 7
amends the exemptions for bona fide transactions from sections 739 and
740 of the Income and Corporation Taxes Act 1988. However,
representations from the Law Society suggest that in several respects
the schedule goes too far, narrowing unnecessarily the scope of the
exemption and imputing on to the taxpayer the motives of the tax
adviser.
My right hon.
Friend referred to the two tests—conditions A and B. The
Institute of Chartered Accountants in England and Wales would welcome
some guidance on the circumstances in which HM Revenue
andCustoms believes that condition A would be satisfied.
Paragraph 60 of the consultation document, “Transfer of Assets
Abroad—Technical Notes on Draft Clause”, sets out the
Revenue’s view that the new provisions will require all relevant
circumstances of the case to be considered, including
the “actual objective
outcome of the transactions”.
The purpose of the amendments is to move
away from a subjective test of what happens when assets are transferred
abroad, to a more objective test of the motives behind it.
If the objective outcome of the
transactions is no reduction in the amount of UK tax payable, arguably
there will be no need for the Revenue to invokethe provisions
in section 739 of the 1988 Act, thus rendering the exemption of
proposed new section 741A redundant. The ICAEW requests clarification
about whether the Revenue envisages any scenarios in which the
objective outcome of the transaction results inthe reduction
of UK tax, but the exemption under proposed new section 741A(1)(a) is
still allowed, by virtue of condition A being satisfied.
Condition B is a broader test of
the transactions. It requires all transactions to be commercially
valid, and requires that the steps in the transaction are no more than
incidentally designed to avoid the liability for tax. Subsections (5)
and (6) of this schedule then give further details of the definition of
commercial transactions.
The Law Society believes that
transactions by individuals are unlikely to benefit from the exemption
in condition B. In a clear example, it shows that if a transferor
transfers assets into a trust for investment, the transfer will not be
at arm’s length, and it will therefore fall outside the
exemption. Indeed, that would be true if an individual invested
directly into an overseas fund, since although the fund would meet the
conditions of subsection (5), the personal investor would
not. Furthermore, the
Law Society is concerned that subsection (6) is overly focused on the
structure of the transaction. It provides
that “the making and
managing of investments...is not a trade or business except to the
extent
that— (a) the
person by whom it is done, and
(b) the person for whom it is
done, are
independent”. For that
purpose, independent means that the persons concerned are not connected
within the meaning of section 839 of the 1988 Act. The provision puts
to one side whether transactions are done on an arm’s length
basis, and it focuses on whether the people involved are
connected. The person
for whom the investment is done can be the transferor or the person who
receives the benefit of the investment, or the offshore entity, or the
fund itself, because the investment manager will often be contracted by
or on behalf of the fund rather than the investment. One can imagine a
situation, particularly in a corporate structure, in which the
investment manager could be connected with the offshore
fund. The Law Society
believes that it would be difficult for a transaction to satisfy the
independence element of subsection (6) of this schedule. It suggests
that the real test should not be about the structure of the
transaction, because that is likely to result in subsection (6) not
applying in a huge range of circumstances. Instead, it suggests asking
whether the transaction between investor and manager is at arm’s
length. Will the Paymaster General comment on that? Because if the
criterion is one of structure rather than an arm’s length test,
the exemption may be
redundant.
Mr.
Dunne: I should like to give an example to elaborate on
that point. It would be helpful if the Paymaster General would clarify
whether the provision is intended to catch investment managers who seed
a hedge fund offshore. Somebody may set up a hedge fund based in the UK
that seeks to have its centre of operations in a jurisdiction such as
the Cayman Islands, or another offshore jurisdiction attractive to
other foreign investors who are looking to invest in that fund and who
would not be subject to UK taxation. To get the fund off the ground the
individual—possibly a sole trader—could make an
investment in a special-purpose vehicle that would be set up in an
offshore jurisdiction. That might be classified as a connected
trade, because there would be no third party and it might take some time
for the individual to establish the business—it often takes
months if not years to get such investment vehicles running. It surely
cannot be intended that such a situation be
caught.
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