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Standing Committee B
The Committee consisted of the following Members:
Chairmen:
†Sir Nicholas Winterton, Frank Cook
†Austin, Mr. Ian (Dudley, North) (Lab)
†Balls, Ed (Normanton) (Lab)
†Field, Mr. Mark (Cities of London and Westminster) (Con)
†Flello, Mr. Robert (Stoke-on-Trent, South) (Lab)
†Francois, Mr. Mark (Rayleigh) (Con)
†Goodman, Helen (Bishop Auckland) (Lab)
†Hammond, Mr. Philip (Runnymede and Weybridge) (Con)
†Hammond, Stephen (Wimbledon) (Con)
†Healey, John (Financial Secretary to the Treasury)
†Huhne, Chris (Eastleigh) (LD)
†Kramer, Susan (Richmond Park) (LD)
†Lewis, Mr. Ivan (Economic Secretary to the Treasury)
†Lucas, Ian (Wrexham) (Lab)
†McCarthy, Kerry (Bristol, East) (Lab)
†McFadden, Mr. Pat (Wolverhampton, South-East) (Lab)
†Marris, Rob (Wolverhampton, South-West) (Lab)
†Morden, Jessica (Newport, East) (Lab)
†Newmark, Mr. Brooks (Braintree) (Con)
†Primarolo, Dawn (Paymaster General)
†Ruffley, Mr. David (Bury St. Edmunds) (Con)
†Spring, Mr. Richard (West Suffolk) (Con)
†Tami, Mark (Alyn and Deeside) (Lab)
†Watson, Mr. Tom (Lord Commissioner of Her Majesty’s Treasury)
†Williams, Stephen (Bristol, West) (LD)
Frank Cranmer, Nerys Welfoot, Committee Clerks
† attended the Committee
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Tuesday 28 June 2005
(Morning)
[Sir Nicholas Winterton in the Chair]
(Except clauses 11, 18, 40, 43, 44 and 69 and schedule 8)
10.30 am
The Chairman: I welcome all members of the Committee to the sitting. I hope that they had a good, restful and fruitful weekend, part of which was beautiful in respect of the weather. We now return to the rigour of the third Finance Bill of 2005.
The Paymaster General (Dawn Primarolo): On a point of order, Sir Nicholas. I wish to clarify the Hansard record of our sitting last Thursday, which could be capable of a wider interpretation than I had intended. I fear that the problem is down to me, not the Hansard reporters. I stress that point. We were debating Opposition amendment No. 38 and controlled foreign companies. I referred to companies that have been unable to pass any of the exemptions under the controlled foreign company provisions and thus would be caught by the CFC legislation. I regret that, during what was quite a long day, the sentence
“In any case, there can be no justification for treating a CFC, which is by definition set up for tax avoidance purposes, more favourably than other companies”—[Official Report, Standing Committee B, 23 June 2005; c.141.]
potentially has a much wider interpretation.
I apologise to the Committee. I was not concentrating as much as I should have been on matters under discussion. I hope that the hon. Member for Runnymede and Weybridge (Mr. Hammond) will accept that that one tiny sentence does not fundamentally change a huge piece of legislation on controlled foreign companies. I am grateful to you, Sir Nicholas, for giving me the opportunity to put the record straight. I apologise to the Committee for my inadvertent slip.
The Chairman: I am sure that the Committee is grateful to the Paymaster General for her clarification.
Mr. Philip Hammond (Runnymede and Weybridge) (Con): Further to that point of order, Sir Nicholas. I am grateful to the Paymaster General for her clarification. It was a very long and hot sitting on Thursday. It was with admirable foresight that you managed to arrange matters so that you would not be in the Chair, Sir Nicholas. Due mainly to the weather, it was not the most pleasant sitting. It is important that, when discussing a Finance Bill in particular, everything that is said is precise, and if it is capable of misinterpretation, that it is clarified at a later stage.
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People outside the Room have suggested that two other issues referred to on Thursday afternoon require clarification. In answer to my hon. Friend the Member for Braintree (Mr. Newmark) about Inland Revenue pre-clearance, the Paymaster General said:
“The clearance is binding. If a company has approached the Revenue and gone through the clearance procedure in place as a result of the provisions, and if the HMRC makes a decision, that decision is binding.”—[Official Report, Standing Committee B, 23 June 2005; c.104.]
Lawyers expressed surprise at the expression, “The clearance is binding.” I am told that the al-Fayed case found that an agreement between the Inland Revenue and the taxpayer did not have the force of law and was not capable of enforcement by the taxpayer. I take it that the Paymaster General’s comment was not intended to rewrite the law and imply that a pre-clearance decision was binding—
The Chairman: Order. I fully appreciate the hon. Gentleman’s argument, but we must not reopen that debate. I am permitting clarification of the report in Hansard. The Paymaster General was specific in her remarks, and that was extremely helpful. I hope that the hon. Gentleman can bring his point of order to a conclusion so that we can continue our debate on the Bill.
Mr. Hammond: That is very helpful, Sir Nicholas. Perhaps I can make a suggestion. Clause 31 is the last clause in a chapter that deals with complex matters. The Paymaster General has heard my point of order. Perhaps it might be possible to tie up any loose ends in relation to the chapter in the stand part debate, to ensure that the record is clear.
The Chairman: The answer to that is most certainly yes.
Dawn Primarolo: Further to that point of order, Sir Nicholas. I cannot find the reference; it is not in column 140—[Interruption.] Sorry; it is column 104.
I was saying that the Revenue will consider itself bound by the decision. There is no question of inspection of the court case to which the hon. Gentleman refers. However, I am more than happy to write to every member of the Committee detailing how the Revenue will deal with applications from companies; how, having given its decision to those companies, the Revenue will consider itself bound by what it has said; and why that is perfectly in order with other decisions that have been taken in courts or elsewhere. That matter has been checked.
The Chairman: I am sure that the Committee is grateful to the Paymaster General, and that it will appreciate the letter that she says she will write.
Clause 31
Commencement
Mr. Philip Hammond: I beg to move amendment No. 49, in clause 31, page 28, line 10, leave out ‘16th March 2005’ and insert ‘31st July 2005’.
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The Chairman: With this it will be convenient to discuss the following amendments: No. 50, in clause 31, page 28, line 12, leave out ‘16th March 2005’ and insert ‘31st July 2005’.
No. 51, in clause 31, page 28, line 15, leave out ‘15th March 2005’ and insert ‘30th July 2005’.
No. 52, in clause 31, page 28, line 17, leave out ‘16th March 2005’ and insert ‘31st July 2005’.
No. 53, in clause 31, page 28, line 22, leave out ‘16th March 2005’ and insert ‘31st July 2005’.
No. 56, in clause 31, page 28, line 24, leave out subparagraph (a).
No. 54, in clause 31, page 28, line 24, leave out ‘16th March 2005’ and insert ‘31st July 2005’.
No. 55, in clause 31, page 28, line 26, leave out ‘31st August 2005’ and insert ‘31st December 2005’.
Mr. Hammond: The clause deals with the commencement provisions for the chapter, which addresses the problem of avoidance through tax arbitrage. For things covered by the chapter, a tax charge is potentially accruing now, and has done from 16 March. However, the commencement clause creates opportunities for companies to unwind the arrangements that they have in place by 31 August. That date gives companies an unrealistically short period within which to comply.
When the Bill was first introduced, 31 August was some four and a half months after the date of introduction, but since then the chapter’s provisions have undergone a number of changes. Issues are still outstanding, and clarification is still being sought and received as we go forward. It would be inappropriate and potentially dangerous for companies to collapse structures to take advantage of the window that is deliberately being granted by the Government without knowing the final form of the legislation
I am sure that the Paymaster General will agree that it would pretty much be a disaster if a company underwent a complex restructuring exercise to take into account activities outside the scope of the arbitrage provisions only to find that they had fallen foul of the new rules because changes took place or because further amendments needed to be made. The essential proposal is to extend until the end of December the window of opportunity for things to be unravelled. Also, we want the commencement date of the accrual of liabilities to be changed to 31 July. I accept that that is an arbitrary date to select to replace 16 March. It is based on a comfortable view of when the legislation will achieve Royal Assent.
There are two issues to address. The first is to do with the requirement placed on companies. They should not incur liabilities while the situation is still in a state of flux and changes are being made to the legislation. The second is that companies must have an opportunity, from a standing start, to make the changes necessary to ensure that they can take advantage of the intended window of opportunity to unravel the arrangements.
Companies are telling us that the arrangements take time to unravel. Many of them will involve third party lenders and, for example, complex banking covenants.
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They cannot be collapsed overnight. Financial terms will have to be negotiated, as will the legal documentation that will be necessary and the legal processes that will have to be carried out to give effect to the required changes. Last week, we spoke to one company that has decided for commercial reasons to unravel one of these structures. It took that decision before the Budget, but even now it is doubtful whether it can complete that by 31 August simply because of the time that it has taken to renegotiate the necessary arrangements. It is important to give effect to what the Government both intend in the legislation and made clear is their intention in subsequent explanations, so that we have a later starting date and a later closing of the window for cessation of schemes.
I hope that the Paymaster General takes that on board and that she reassures the Committee that if the Government are unable to accept the amendments they will, by whatever means—perhaps by extra-statutory concession—give companies a little longer than the 31 August cut-off date to take advantage of the cessation provisions in clause 31(3).
Dawn Primarolo: As the hon. Gentleman says, the clause deals with the commencement of the arbitrage rules in relation to both deduction and receipts cases. Provisions in any Finance Bill often take effect from the date of Royal Assent, thereby giving companies time to take them on board. However, in common with most anti-avoidance legislation, the relevant clauses have a Budget day start—in this case, 16 March 2005. The reasons for that are obvious; a Budget day start date removes the opportunity for companies to exploit any identified gap between the announcement and the commencement of the new rules. Allowing a gap between those dates could lead to additional loss of tax as, unfortunately, some companies might bring forward deductions or receipts so that they arise before the commencement date. These matters are always a challenge when considering anti-avoidance legislation, and it is difficult to strike the right balance.
Mr. Philip Hammond: The right hon. Lady makes a powerful point, and, perhaps, we have opened that window by suggesting 31 July as the date. Would her view be different if the amendment had suggested today as the commencement date?
10.45 am
Dawn Primarolo: No, it would not. There would still be a possibility of companies having schemes ready that could be demonstrated to have been enacted before the clear statement in the Budget on 16 March and the final decision being taken on a commencement date. We face a real challenge.
I want to answer the hon. Gentleman’s concerns and explain what the Government have done in taking the proposal forward. I think that he appreciates that we cannot allow a gap. Anti-avoidance legislation is specific and the technical notes and the statements have to be produced at the time that it becomes effective to deal with that matter. Amendment Nos. 49 to 54 would, unfortunately, create such a gap by moving the start dates. I appreciate the hon.
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Gentleman’s point about complexity, but moving the start date from 16 March to 31 July would open up a significant opportunity because legislation, by virtue of stating where an avoidance opportunity will be closed, signposts where it is in the first place. It is a bit like taking out an advertisement. Why would any Government want to advertise how to avoid tax when they announce that they are to prevent such avoidance? That is why the start date is that of the Budget.
I recognise that the legislation was introduced in the first Finance Bill but subsequently dropped and that changes have been made to the guidance as a result of consultation in the interim. However, the hon. Gentleman’s argument overlooks a number of facts. First, the Government made it perfectly clear on Second Reading of the last Bill that the legislation would be reintroduced and that the original start date would be preserved—that was a clear statement made in Parliament. Secondly, the guidance has been amended to take on board the comments made by business. Thirdly, moving the commencement date to 31 July would give companies and their advisers an extra four and a half months of deductions under arbitrage avoidance schemes, which would increase the cost to the Exchequer. That runs counter to the Government’s objective, which is to establish a modern and competitive tax system that is also fair.
It is hard to see how giving avoidance schemes, in effect, a risk-free period in which to obtain a UK tax advantage and then unwind the scheme fits in with that objective. In addition, I have been informed that a number of companies—I think that I made reference to this in earlier debates—have already unwound their schemes to limit their exposure to the legislation. It would clearly be unfair to those companies then to move the goalposts and allow other companies to benefit from a later start date.
I know that the hon. Member for Runnymede and Weybridge considers this a serious matter. He needs to concentrate on the point that moving the start date to 31 July would give about five weeks from today for companies and their advisers to put in place short-lived schemes, which could produce huge deductions and major losses of corporation tax. The principle of a start date and a period to comply is standard and straightforward.
Amendments Nos. 55 and 56 would open up the transitional arrangements to the point where they will defer any impact of the provision until 2006. Before I go into detail, I shall say a little more about the transitional provisions that are in place. Clause 31(3) provides an exemption for schemes with unconnected parties that were in existence on 16 March, provided that they are wound up before 31 August 2005. The purpose of the exemption is to give companies that have entered into a transaction that constitute an arbitrage scheme with an unconnected party—typically, with an unrelated bank—the chance to unwind the transactions without triggering the legislation.
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The exemption is restricted to transactions with unconnected parties, as it recognises that although transactions within the same group of companies can normally be unwound quickly, that process can take longer when third parties are involved. When the first Finance Bill was published, the transitional period lasted until 1 July 2005. As no statement was made on that specific point on Second Reading, the period has been extended to 31 August to take account of the election period and to give companies slightly longer to unwind their existing third party arrangements. Amendment No. 56 would remove the limitation to unconnected parties and amendment No. 55 would move the end of the exemption period from 31 August to 31 December. Together, the amendments would mean that all arbitrage schemes in existence on 16 March would be able to continue without penalty or challenge for another 10 and a half months.
We touched on this issue during our debates last week. Our proposals to close contrived avoidance schemes are a result of disclosures that have been made. I am sure that the hon. Gentleman understands that companies with existing schemes would have every incentive to bring forward and increase deductions under their schemes before the cut-off dates. I understand the point made by the hon. Gentleman: statements on the commencement date were made in Parliament. The moving of the transitional arrangements to take account of the election period is a reasonable step by the Government, but to accept the dates proposed in the amendments would leave the Exchequer unnecessarily open to potentially huge tax losses. I am not attracted to the hon. Gentleman’s amendments and cannot encourage my hon. Friends to support them.
The Chairman: To ease the consciences of those who have already taken off their jackets, I should say to Committee members wearing jackets that if they wish to take theirs off to make themselves more comfortable and conscious of everything that we are debating, I am happy that they should do so.
Mr. Philip Hammond: On a point of order, Sir Nicholas.
The Chairman: I am not sure whether there can be a point of order on that matter. However, I am happy to use my discretion and allow the hon. Gentleman to raise one.
Mr. Hammond: May I suggest that you follow the example suggested by the Paymaster General? Those who have already sinned against the rule should not now be let off the hook by the rule being changed retrospectively.
The Chairman: I could take that as criticism of the Chairman, but I shall not. I am grateful to the hon. Gentleman for that suggestion.
Rob Marris (Wolverhampton, South-West) (Lab): Thank you, Sir Nicholas, and thank you for your forbearance on sartorial matters.
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I have two questions. First, will my right hon. Friend the Paymaster General say whether the changed guidance issued on 26 May, following the draft guidance issued on 16 March, was adverse to or favourable to arbitrageurs?
Secondly, the hon. Member for Runnymede and Weybridge has not moved an amendment on clause 31(4), which relates to the date for receipts cases. May I ask whether there is a particular reason for that, or is it merely an oversight, owing to the pressure of work?
Dawn Primarolo: I shall answer first. The guidance was changed following consultation with business to clarify the intent of the legislation and ensure that it operated as had been announced by the Government in all of the statements. In that sense, by clarifying exactly where the Government envisage the legislation will bite and where it will not, the guidance errs on the side of those engaged in arbitrage, but not avoidance schemes; it does not change the intent or the content of the legislation
Mr. Philip Hammond: To answer my half of the questions asked by the hon. Member for Wolverhampton, South-West (Rob Marris), it was not an oversight but a conscious decision to focus on the deductions case, which I said last Thursday was the more important area because it has offered greater scope for manipulation. However, he could make the case that, in the interest of symmetry, the proposal should apply across both parts of the Bill.
In drafting amendments economy is all; unless we expect the Paymaster General instantly to accept or recommend amendments, we focus on an issue simply to get a response. She has made a perfectly coherent response that is, from her standpoint, logical; the problem is that she is always looking at this matter from the point of view of the offender—the company that is avoiding tax through arbitrage arrangements. I suspect that some of the heat in our debates is generated by the fact that we have an obligation to consider things from the point of view of those who are caught by the changes to legislation, who are not wicked, manipulative scheming tax offenders but people who have arrangements that have been in place for a long time, or arrangements that have been used over a long period and are well understood and well known to the Revenue.
I am advised that notwithstanding what the Paymaster General said last week, the Revenue has not become aware of these arbitrage arrangements as a result of disclosures under the Finance Act 2004. Some specific examples of schemes may have been disclosed to the Revenue—I am sure that they have—but the type of instrument that we are discussing is a well-established financing structure of which Revenue officials have been aware for a long time. Now, however, something that has been characterised over a long period as routine and acceptable tax planning is now being re-characterised as unacceptable tax avoidance.
I do not deny the Government’s right, as matters evolve, continually to examine the boundary between tax planning, which is accepted as legitimate, and tax
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avoidance, which is not. I am somewhat disappointed that, so far, we have not heard a clear recognition of the distinction between avoidance and planning. I am told that the long-standing and widely understood definition of tax avoidance refers to tax planning that is convoluted and has a legal form contrary to its substance. Those are its essential characteristics. In addition, avoidance includes transaction steps that have no commercial purpose other than the avoidance of tax.
11 am
Last Thursday, the Paymaster General mentioned her surprise that the Opposition were concerned about the impact on UK competitiveness of closing down some of these arrangements. Perhaps it will be helpful if I place clearly on the record that we support the systematic closing of avoidance opportunities, based on the definition that I have given. However, we also recognise that ordinary tax planning, whether or not the Government like it, is a normal and inoffensive part of business operations everywhere in the world.
We are discussing huge multinational corporations and complex hybrid structures, but let me make an analogy with personal taxation. Nobody suggests that somebody who every year carefully sells precisely the right amount of their modest personal shareholdings simply to use up their capital gains tax allowance, or somebody who every year invests right up to the limit of their tax-free individual savings account investment allowance, is engaged in tax avoidance. Of course they are not; they are engaged in proper tax planning.
The issue that we are addressing under clause 31 is what happens when the Government want to move something that has for a long time been acceptable tax planning into the category of being unacceptable tax avoidance. That is why we have dared to suggest a slightly more generous provision of time for arrangements to be shut down. I understand the Paymaster General’s reluctance to allow that to happen—we all understand the pressures that the Inland Revenue is under to raise the sums of cash that the Chancellor wants—but we feel that there is an issue in the way that these arrangements are being moved from one category to another. I hope that the Paymaster General now at least understands why we have put forward these proposals.
Mr. Brooks Newmark (Braintree) (Con): Would it not be helpful if the Paymaster General explained one point? My hon. Friend has continually highlighted the fact that tax is a key factor in decisions on where to invest. Given that fact and given the general shift among other countries toward lowering their taxes, it would be interesting to know whether the Paymaster General has done any analysis to discover the impact of the legislation in terms of reducing investment in this country.
Mr. Hammond: My hon. Friend is right. That is our underlying theme throughout our consideration of the Bill.
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I was a little disappointed that in last Thursday’s sitting the Paymaster General attempted to suggest that our argument made us the friend of the tax-avoider. That is certainly not our intention. I am also disappointed that she queried the relevance of a benign tax environment to international competitiveness.
I accept that there are difficult questions at the margin, but it is at the margin that our debates should be conducted. We will maintain our view that although the raising of revenue for the funding of public services is a critical activity of Government, it is ultimately self-defeating if doing so throttles the goose that lays the golden eggs by dissuading potential inward business investment and ultimately making the United Kingdom a poorer nation and reducing the Exchequer’s revenue flows.
In my opening remarks, I inadvertently did not speak specifically to amendments Nos. 55 and 56, but the Paymaster General has responded to those amendments none the less. Those amendments would remove the restriction for the escape clause, as I shall call it, which applies where arrangements are not at arm’s length. A number of people in the City are puzzled by that distinction. In relation to allowing companies with hybrid arrangements within group to unwind those arrangements and take advantage of the opportunity set out in clause 31(3), has the Paymaster General identified any danger that those companies could exploit the opportunity in a way that she considers to be further tax avoidance?
Word is getting back to us that that things are not as the Paymaster General described. She appeared to suggest that the approach was purely one of pragmatism, and that it was not so much a matter of denying the concession to companies with in-house arrangements as one of extending the period for companies with third party arrangements, on the basis that they would have to renegotiate those arrangements. I put it to the Minister that the practical experience is that even arrangements within group may still take time to unwind and to renegotiate. We must bear in mind that the new arrangements have to satisfy all the other anti-avoidance tests that are already in tax law. They have to be priced at arm’s length, and comply with the panoply of legislation already in place.
Outside the Treasury, it does not seem to be the view that companies involved in these relationships with external banks can necessarily collapse the arrangements without unintended or unfortunate—for them—consequences resulting from having to do things in that way. I do not know whether the Paymaster General will respond to that point. I was expecting her to say that there was a positive reason why that kind of arbitrageur could not be given more time. She appeared to say only that there was no positive reason why they should be given more time; however, that is not what we are hearing in the field.
I do not know whether the Paymaster General intends to speak again; it would be helpful to have an indication of whether she will. There being no
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indication—[Interruption.] Having more or less concluded my remarks, my intention was to beg leave to withdraw the amendments, in which case she would be unable to speak on them again. However, I see that the right hon. Lady wishes to speak and I am happy to give way to her.
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