Mr.
Hoban: My hon. Friend’s point leads me to a similar
one made by the Institute of Chartered Accountants about setting up a
new business. An individual resident in the UK may establish a foreign
company to trade outside the UK—possibly in a country with
higher corporation tax rates than the UK—and he may decide that
it is commercially sound to provide finance or assets to the company on
favourable terms from his own resources, because he may consider it
worthwhile to subsidise his company to enable it to generate revenue.
The institute is concerned that that situation might be
caught. Those
situations concern different types of business, but the issue remains
how to demonstrate the value of assets that have been transferred
overseas, and whether they were transferred at a commercial rate, and
in both situations there could be an impact on the business economics.
A more equitable approach in both situations may therefore be to
consider the commerciality of a transaction as a factor to be taken
into account in determining whether it was more than incidentally
designed for the purpose of avoiding tax
liability. Subsection
(4) of the schedule concerns the imputation of tax advisers’
motives to their clients. It
says: “The
intentions and purposes of any person who, whether or not for
consideration,— (a)
designs or effects the relevant transactions or any of them,
or (b) provides advice
in relation to the relevant transactions or any of
them are to be taken into
account in determining the purposes for which those transactions or any
of them were effected.” I
am concerned that a tax adviser may decide to structure a particular
transaction in a way that minimises tax but the taxpayer might not be
aware of that. The clause would mean that taxpayers, even if they did
not know, ought to have borne in mind the fact that the tax adviser may
have tried to structure the transaction in a particular way.
I suspect that the Paymaster
General will say—as she did on an earlier clause when we were
debating an amendment tabled by my hon. Friend the Member for
Wycombe—that we are talking about legislation targeted at
particular schemes that have been marketed to individuals in an
aggressive fashion, and cases in which both the taxpayer and the
adviser know the exact purpose of the scheme, which is to reduce tax.
Could the Paymaster General comment a little further on subsection (4),
and say whether she thinks thatthe terms have been drawn so
widely that there may be situations in which innocent
taxpayers—someone setting up a business overseas, for
example—are inadvertently caught by that
subsection?
Rob
Marris: I do have some sympathy with
thehon. Gentleman’s point, and I think that it has
also been made by the Law Society of England and Wales, of which I am a
member, but I caution him about picking up other people’s
briefs, because I am almost
certain from what he has read that he is referring to subsection (4) of
proposed new section 741A, which is to be inserted into the Act. That
is at the bottom of page 193. It is not a subsection (4) to the
schedule. If I have got it wrong, and he is not referring to the final
two lines on page 193 and the first lines on page 194, perhaps he will
tell us so, but if he is referring to those lines, I caution him about
the way in which he takes his
briefs. Mr.
Andy Reed (Loughborough) (Lab/Co-op): There is no answer
to
that.
Mr.
Hoban: There is indeed no answer to that, and it is indeed
proposed new section 741A that relates to subsection (4) on line 39,
page 193. One of the issues in dealing with a Bill such as this one is
that outside bodies are interested in it, and raise concerns about the
scope of the changes and their impact on lawyers, accountants,
taxpayers and so on.
The Law Society also has
concerns about whether the provisions would allow inquiries into the
purposes of the adviser, and it also raises issues around legal
privilege and the confidentiality of clients’ information. I am
not a member of the Law Society of England and Wales—and I am,
at times, profoundly grateful for that. My hon. Friends and the hon.
Member for Wolverhampton, South-West may wish to comment on that aspect
of the Law Society’s brief, but that is a concern that it has,
and it is important that the issues that it raises are aired on its
behalf, as there are so few solicitors in this House who can speak up
in its defence. May I
just comment on subsection (9) on page 194? It
says: “The
jurisdiction of the Special Commissioners on any appeal includes
jurisdiction to review any decision taken by an officer of the Board in
exercise of the officer’s functions under this
section.” I should be
grateful to hear from the Paymaster General whether that gives the
special commissioners the power to amend or vary the decisions taken; I
suspect that it probably does, but I should be grateful for that
clarification. I
also want to raise the thorny issue of clearance, which has popped up
in debates along the way. As I understand it, any application for
exemption under section 741 is dealt with under a self-assessment
system, so that a company entering into a transaction such as
establishing a foreign company—something that my hon. Friend the
Member for Ludlow (Mr. Dunne) referred to—would claim the
exemption in its 2007 tax return. Assuming that the taxpayer were to
submit his return before the 31 January 2008 deadline and full
disclosure were made, HMRC would have until 31 January 2009 to open an
inquiry into the tax return. In effect, the taxpayer would not know for
certain whether he has a UK tax liability in respect of the
company’s income until almost three years after the company was
established. That will create uncertainty in the minds of
taxpayers. 6
pm We discussed
how exemptions could put into question some transactions. One solution
that would deal with the uncertainty and provide a clearer picture
for the taxpayer earlier than up to three years after he establishes the
business would be a formal clearance procedure. An alternative is the
informal route that the Paymaster General referred to under clause 78,
whereby a taxpayer could seek guidance from HMRC which would then be
binding. I
understand that advisers and professional bodies have been in
discussion with HMRC about the issue and that at present the Government
are not proposing a clearance system but are prepared to consider, in
the light of further evidence, whether such assistance might be
necessary. I understand that people are trying to determine whether
there is sufficient evidence to justify taking the matter back to the
Treasury. I should be grateful for the Paymaster General’s views
on whether any informal clearance will be offered to people who wish to
set up such
transactions. This
is not a straightforward schedule—I have ploughed through
it—and people outside this House are interested in following
through some important issues around the extent of the exemptions.
Theywant to ensure that bona fide, genuine commercial
transactions will not inadvertently fall within the scope of the Bill,
and they are particularly concerned about how conditions A and B and
subsections (5) and (6) will
operate. Jeremy
Wright (Rugby and Kenilworth) (Con): I have three concerns
about what is proposed in subsection (4) of proposed new section 741A
of the Income and Corporation Taxes Act 1988. As we have already
discussed, the proposed new subsection deals with the intentions and
purposes of the designers of transactions, and of tax
advisers. The first
concern arises because of a potential difficulty with legal privilege.
I should make it clear that I am a lawyer but not a member of the Law
Society. It is right, of course, that some of the advisers that the
schedule refers to will be tax lawyers—any member of the Gauke
family, for example—and under such circumstances a difficulty
with legal privilege may arise. I wonder whether the Paymaster General
can comment on
that. The
second difficulty is a practical one. Transactions will be permissible
although they avoid tax liability if they were incidentally designed to
avoid tax. It is difficult to envisage circumstances in which it will
be possible clearly to establish how an adviser explained to his client
that a particular transaction would only incidentally avoid tax, rather
than primarily avoid
it. My hon. Friend the
Member for Fareham referred to the third difficulty, which seems to be
the key problem. Surely it is the intention of the taxpayer, not the
adviser, that the Government are keen to explore. Those two things are
not necessarily the same. It is right and logical that the
client—the taxpayer—goes to an adviser because the
adviser has more knowledge of such matters than the client does;
otherwise, the advice would scarcely be necessary. It is therefore
conceivable that the adviser understands far more about the avoidance
of tax than the client does, and only if that intention to avoid tax is
communicated to a client does a problem
arise.
Dawn
Primarolo: Is the hon. Gentleman seriously suggesting that
if a professional adviser knowingly advises on tax avoidance and the
client simply does not ask because they are happy to take the money,
there is no
responsibility?
Jeremy
Wright: No. I am suggesting that a tax adviser might
advise a client on a sensible measure to take to order his financial
affairs, which that tax adviser understands far better than the client.
If that measure were taken incidentally to avoid tax, it would be
perfectly acceptable under the Government’s proposed
legislation, but if it were taken primarily to avoid tax, it would not
be. That distinction might in some circumstances cause clients
difficulty. The
measures are entirely superfluous. If the Government are seeking to
penalise those taxpayers who understand that they are avoiding tax,
surely the taxpayer’s intention and not the tax adviser’s
is significant. If a taxpayer came to understand from his tax adviser
that what he was going to sign off on was tax avoidance, he would
rightly be penalised for it. But why is it necessary to include in
consideration the intention of the tax adviser rather than what he has
communicated to his client? That seems to be the difficulty created by
the
clause.
Dawn
Primarolo: Clause 79 and schedule 7 will amend legislation
on the transfer of assets abroad. They are important anti-avoidance
provisions that were enacted in 1936, an important date in our
understanding of how the rules should
operate. The rules
introduced in 1936 aimed to prevent UK-resident individuals from
avoiding UK income tax by putting assets in offshore structures in such
a way that they retain control of the income arising from those assets.
The changes announced in the pre-Budget report closed a loophole
exploited by tax planners to avoid tax.
The provisions in schedule 7
will recast the exemption test for post-PBR transactions. All relevant
circumstances, including the objective outcome of the transaction, must
be taken into account when deciding whether there was a tax avoidance
purpose. The intention of advisers must also be considered. I shall
return to that
point. The
right hon. Member for North-West Hampshire asked whether the question
of purpose and reasonableness was new. The straightforward answer is
no. It is elsewhere in the legislation—in section 741 of the
Income and Corporation Taxes Act 1988, for example. Will the proposed
measures shift the balance toward HMRC? No. That is how HMRC operates
currently.
Perhaps I
should give a slightly longer answer. The provisions are based on the
existing purpose test in section 741 of the 1998 Act. The
Government’s view is that section 741A strikes a fair balance.
Its aim is a reasonable conclusion test to ensure that all
circumstances are taken into account when deciding whether an
individual had avoidance purpose. It is right to take all relevant
factors into account and draw a reasonable conclusion.
The courts
and commissioners have full power to consider HMRC decisions and
replace them if they decide that the taxpayer met the terms for
exemption under the reasonableness test. There is no doubt that
special commissioners’ jurisdiction under the provisions will
necessarily include a power to vary or set aside HMRC’s
decisions, not just to review them. That has always been the case under
current legislation, which has virtually the same
wording. On the
question of legal professional privilege, I disagree with the point
that the hon. Member for Rugby and Kenilworth (Jeremy Wright) made. The
aim of subsection (4) is to ensure that the professional advice
obtained is taken into account as one of the circumstances of the case
and not disregarded as irrelevant. If an individual asserts that they
did not have the subjective purpose of avoiding tax, it is reasonable
to see whether the advice they were acting on was consistent with that
claim. That is all that is being required.
The new provision does not
override advisers’ legal privilege. There is no compulsion under
subsection (4) to disclose advice given to clients. However, in
practice, using the example that the hon. Gentleman gave, it may be in
the taxpayer’s interest if advisers do provide advice and waive
that privilege, assuming that the advice given is consistent with the
claim that there is no subjective purpose of avoiding tax. Otherwise,
there is a complete mismatch; people would say, “I didn’t
have the knowledge, they just happened to get a good deal for
me.” That is ridiculous and that connection has to be
made. There is no
reason why transactions involving innocent offshore structures, such as
family trusts, could not qualify under condition A; likewise for
ordinary investment transactions on arm’s length terms in
commercially run offshore entities. In such cases, conditions for a
section 739 charge might apply. However, the taxpayer could potentially
show that an exemption was
due. The approach for
condition B mirrors that of the old purpose test in section 741. It
strikes a reasonable balance in allowing some element of avoidance in
commercial cases, provided that they are no more than incidental, but
that is an essential part of the test and the case must be genuinely
commercial and not driven by tax avoidance.
I disagree with the idea that
subsection (5) is too restrictive. It is needed to prevent the abuse of
non-resident personal trusts for avoidance purposes by UK residents.
Generally, in cases where individuals make ordinary investment
transactions in entities independently managed by commercial concerns
on arm’s length terms, condition A in section 741A will be
satisfied. There may be exceptional cases in which it is appropriate to
use section 739 against particular marketed retail investment
projects. I shall not
even attempt to answer the point made by the hon. Member for Ludlow;
what he says shows the complexity of the issues. Given that the
legislation has been in place for rather a long time—over 70
years—it would be foolish to respond specifically to his point.
I am sure that he would not expect me to, without the full facts before
me, and a summary of what might happen to hedge funds is not
sufficient. Nor—before the hon. Gentleman rises to repeat his
question—shall I indulge in giving tax advice. I am not a
solicitor. I am not an accountant. There is a vast Department called
HMRC that provides that advice, and it is the appropriate point for
advice.
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