Finance Bill |
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Dawn Primarolo: Good spot! It was good of the hon. Gentleman to make sure that I responded briefly to his points. On the question of— The Chairman: Order. Is this an intervention? Dawn Primarolo: It is an intervention to clarify the two points that the hon. Gentleman asked me to clarify. I shall do so briefly by speaking fast. First, on the arrangements within group and for unwinding, those involved do not have to unwind; they simply have to make a disclaimer. That shows that we, too, recognise the challenges. Secondly, I come back to the fundamental point that I have made all the way through our discussions: where an arrangement involving arbitrage is set up for wholly commercial non-tax purposes, it will not be affected by the legislation. The Bill is targeted at contrived avoidance schemes, so a balance has to be struck on the start dates and transitional periods. I think that the balance in the clause is fair. When we get to clause 37 and schedule 6, we can come back to that principal point, just to show how difficult it is for any Government, including the present one, to strike that balance. Mr. Hammond: I accept the Paymaster General’s assurance that the legislation is targeted at convoluted artificial arrangements; no one is suggesting that the Treasury set out to catch anything other than convoluted artificial arrangements. This Committee’s job is to ensure that the legislation does not inadvertently catch much more than that. The truth, as the Paymaster General has implicitly acknowledged, is that the original Bill would have done much more. The changes that were made to the Bill before its reintroduction are welcome in that they tighten the application. However, as she knows, concerns remain. What the Paymaster General has just said, which was useful, is that no transaction that has a commercial purpose will be caught by the provisions; they will catch only artificially constructed transactions. I seek your indulgence, Sir Nicholas, to follow up that specific point. As we come to the end of this long, complex chapter, one question that was raised is still outstanding, although other questions might or might not have been answered. The Paymaster General asked me last week to go away and read the record. She told me that I would see that she had answered all my questions. I have read the record and I have sent it to bodies outside this House and asked them to read it. Others are engaged in this work, not just myself. We are still not clear that the question has been answered. If an arrangement is the subject of a notice requiring a company to recompute its deduction for interest, is it the case that the comparator that it must use in order to identify the UK tax advantage that it has gained, and thus the amount
To people who are following the debate about the Bill, that it would have to do so seems the inevitable logical conclusion. The provision there creates an entirely illogical and inequitable solution, because if the loan had not been made, the investment would not have been made, no revenues would have been generated and no tax would have been paid anyway. We are talking about a situation where an investment has gone ahead, tax has been paid on the income generated and the investor seeks, at operating company level, a deduction for the interest charged. Surely it cannot be the case that all that interest should be disallowed on the grounds that, had the hybrid structure not existed, the loan would not have been made because it would not have met the test of commercial viability that the investor had to apply? I have looked at the record carefully and that seems to be the one major question that remains outstanding. I will not detain the Committee on this point, but there is another minor question: why on earth are the amounts chargeable under the provision being charged to case VI of schedule D? The Paymaster General says, “Because that is where they fit,” but the wide view of tax experts outside the House is that they do not fit in case VI of schedule D at all. However, that issue is not of burning importance, whereas the question I have just asked is significant and requires clarification. 11.15 amDawn Primarolo: I am not at all surprised that those outside the House who do not support these mechanisms—there are some, as there are others who support it—are seeking to get the hon. Gentleman to ask me, as Minister, to give a tax ruling on particular elements of a scheme that could be designed for contrived avoidance within the arbitrage arrangements. As he put that point repeatedly to me, I answer it on the same basis. First, I am not being drawn into giving tax advice on the record as a Minister. Secondly, as I have made clear repeatedly through my comments, arbitrage cases will be decided on their own facts and circumstances. The Government have put the mechanism in place to enable companies to seek informal clearance from the Revenue. Column Number: 164 Mr. Hammond: Although that point is clear and came over more clearly than it did in the heat of Thursday afternoon—I understand exactly the position that the Paymaster General is taking—unfortunately, it still leaves us with a lack of certainty at the centre of the arrangements. There is still the potential that companies with innocent arrangements—those that were not set up with no commercial purpose, but were standard commercially structured arrangements—will be caught and have to go through a clearance procedure that would be simply a hassle for new schemes, but could be a disaster for them. Without wanting to go round in circles, I hope that the Paymaster General will understand why we keep coming back to this issue. She is anxious to ensure that every loophole is closed and we are anxious to ensure that unintended consequences do not arise, either by catching people whom the Government do not intend to catch, or by creating a climate of uncertainty that will damage the United Kingdom as an investment location. That is a legitimate issue for Opposition Members to pursue. The Paymaster General has now placed on the record her position on both those matters and those outside the House will be able to hear what she has said. If, in due course, we feel that we need to ask further questions, we will find an opportunity to do so. I am grateful to the Paymaster General and I beg to ask leave to withdraw the amendment. Amendment, by leave, withdrawn. Clause 31 ordered to stand part of the Bill. Clause 32 Temporary non-residents Question proposed, That the clause stand part of the Bill. The Financial Secretary to the Treasury (John Healey): This is the first of a series of clauses dealing with capital gains tax and common avoidance schemes. In 1998 the Government introduced legislation to counter the widespread use of certain tax avoidance schemes that relied on the fact that in most circumstances the rules for capital gains tax did not generally impose a charge on people who had been non-UK resident for the entire tax year in which they disclosed financial information. Under the rule that was introduced in 1998 the gains of people who leave the UK temporarily are taxed; it applies only if they had a close connection with the UK before they left and they are absent for fewer than five complete tax years. However, some people took advantage of the interaction between the terms of some of our tax treaties and the capital gains tax rules in such a way that they could return to the United Kingdom before the stipulated five years had elapsed without having to pay any UK tax from gains realised while they were resident outside the UK. Column Number: 165 The measure in clause 32 removes this avoidance opportunity. It stops the exploitation of our double taxation treaties and ensures that a charge to capital gains tax is imposed when the individual’s absence from the UK is of a temporary nature. It does that by ensuring that the tax treaties cannot have the effect of preventing the UK’s rules that were introduced in 1998 from applying. The measure also deals with a situation in which the individual is regarded as resident in a foreign territory for tax treaty purposes, while simultaneously being resident in the UK. In such cases, the 1998 legislation will have no effect as the individual concerned will not have ceased to be resident in the UK. In certain circumstances, therefore, treaty non-residents could also be exploited by tax planners to enable people to avoid tax on capital gains; this measure closes that opportunity. The Government are introducing the measure to put beyond doubt the question whether the terms of our tax treaties prevent the application of the 1998 temporary non-residence anti-avoidance rules. Her Majesty’s Revenue and Customs has changed its view on that. It no longer accepts that our tax treaties have that effect, but to avoid uncertainty it seems sensible, wise and reasonable for us to legislate in clause 32 so that everyone is clear and individuals cannot seek to avoid capital gains tax in that way. The effect of this measure is to ensure that an appropriate amount of tax is charged in respect of gains made while individuals are temporarily absent from the UK. Whenever foreign tax has been paid, the double taxation relief will be available in line with the normal rules. Reaction to this clause has been relatively muted since we announced it in the Budget and published it in the first Finance Bill. Deloitte’s, for instance, has said:
In tax-planning and advisory circles, that has become widely known and promoted as “the Belgian wheeze”. The measure in clause 32 is targeted at avoidance—the avoidance that we are seeing. I suggest to the Committee that the measure is proportionate and fair, and I commend the clause to the Committee. Mr. Richard Spring (West Suffolk) (Con): As we have heard from the Minister, clause 32 removes a loophole so that temporary non-residents cannot avoid UK capital gains tax by becoming treaty non-residents. Essentially, that is a legitimate response to an exploitation of treaties drafted before section 10A of the Taxation of Chargeable Gains Act 1992 came into force in 1998. Although we accept the underlying force and rationale of the clause, we need to explore two important elements. The first is the jurisprudence of the European Court of Justice and the impact of the possible implications of EU law on our tax laws.
The second point was made by my hon. Friend the Member for Braintree, and I absolutely agree with him. We live in an era of tax differentials, which are growing ever larger not only internationally but within the European Union, where there are substantial tax reductions at all sorts of levels in some of the member nations, while our tax structures remain somewhat ossified. I should like to bring the Committee’s attention to the European Court of Justice case of Hughes de Lasteyrie du Saillant v. Ministere de l’Economie, des Finances et de l’Industrie. The Advocate General suggested that authorities could provide for taxation of taxpayers returning after a relatively short period of non-residence. There seems to be an indication in the Hughes de Lasteyrie case that the five-year period in section 10A of the Taxation of Chargeable Gains Act 1992 may not be construed as a relatively short period for that purpose. It would mean that the legislation was contrary to European Union law. The Hughes de Lasteyrie case involved a Frenchman who changed his tax residence to Belgium. France charges an exit tax on individuals who do so, being primarily a deemed disposal at market value of assets that they hold at the time. Monsieur de Lasteyrie successfully argued at the European Court of Justice that such a measure discriminated against his moving to another member state of the European Union and was hence contrary to the freedom of establishment and freedom of capital articles of the EU treaty. That will therefore impact on the existing equivalent measures under United Kingdom tax law, including clause 32. We need to be satisfied that the five-year period under section 10A of the 1992 Act is in line with the Advocate General’s comments. There is, however, an acknowledged balance to be struck in that the aim of section 10A is to stop people briefly going non-resident for tax avoidance purposes, as the Financial Secretary has said, and a potential opening of the door to the sort of avoidance that section 10A was designed to stop. The Government genuinely need to satisfy themselves that we have proper, robust support that is safe from unexpected attack under EU rules. Rob Marris: I hope that the hon. Gentleman will forgive me if I was not following his argument closely enough, but was the Hughes de Lasteyrie case a decision of the European Court of Justice or did the Advocate General’s opinion inform the court? Mr. Spring: The Advocate General made such a decision and the state of the matter in terms of its implication is still to be established. I hope that the hon. Gentleman will agree—I mean this dispassionately—that we have to deal with the potency of EU jurisprudence in our national law and our raising such an issue now is of huge importance. Under EU law, anti-avoidance legislation must be specific and not aimed generally at all situations. It could be said that clause 32 catches all situations, including when the intention was not to avoid tax. It
Chris Huhne (Eastleigh) (LD): I should like to ask the Financial Secretary a question because I am informed that another potential implication of the clause raises the issue of whether domestic legislation can override a tax treaty signed with another country. I gather that that is aimed particularly at residents moving to Belgium and availing themselves of the double taxation provisions under the treaty with that country. It would be interesting to hear the Minister’s comments on the status of domestic legislation. John Healey: I am grateful to the hon. Member for West Suffolk (Mr. Spring) for his description of the clause as a legitimate response to tax avoidance. He asked reasonable questions, and raised a concern—as did the hon. Member for Runnymede and Weybridge on Second Reading—about whether the measure could fall foul of European law. We are confident that it is compatible with our EU obligations and Community law. 11.30 amThe hon. Member for West Suffolk dwelt at length on the French case. I shall add a couple of points of explanation that may help make the point and draw the distinction between the French case and the provisions in clause 32. The hon. Gentleman is right that Community law prohibits a member state from imposing any unjustified restriction on the exercise of Community rights—such as, in this case, the right to free movement in the European Union. In March 2004, the French case that the hon. Gentleman cited imposed a tax charge on unrealised capital gains at the point when people depart from France to become resident in another member state. It was not the Advocate General but the European Court of Justice that held that that rule was incompatible with Community law. It may be helpful if I quote from the ECJ judgment. It stated that
That is precisely what we propose to do under this measure. When leaving the UK, the tax position of an individual is neither improved nor impaired as a consequence of their move from the UK. Such a tax-neutral rule means that there is no restriction on either free movement or free establishment. In other words, our temporary non-residence provision is not an exit charge, so there should be no question of its falling foul
The hon. Member for Eastleigh (Chris Huhne) asked whether this provision was a treaty override. The provision’s purpose is to close down an aggressive tax avoidance scheme that seeks to exploit the treaties that we have in place. Those treaties are designed to avoid double taxation; they are not designed to provide for non-taxation, which is the practical effect of the current situation. I think that the hon. Gentleman will accept that when tax treaties are abused in this way there is a danger of their being brought into disrepute. This measure will not lead to our infringing the taxing rights of any country with which we have taxation treaties, and, as I have said, the double taxation relief will be available to any taxpayer on whom the other country has imposed a charge. Furthermore, under this provision we will be taxing only UK residents. This provision is not a treaty override, but it is intended to ensure that the treaties work as intended, and if there is any question of taxation in another country where a double taxation treaty is in place, the normal rules ensuring that that taxpayer gains relief in our country on any UK tax charge will come into play. On that basis, I hope that the hon. Members for Eastleigh and for West Suffolk will accept that this is an important measure, and that the Committee will agree. Mr. Spring: I am grateful for the Financial Secretary’s comforting remarks. However, I shall simply point out that it was subsequent to the ECJ case that the Advocate General made his comment, which suggested that authorities could provide for taxation of taxpayers returning after a relatively short period of non-residence. With regard to the comfort that he has given, I say in a wholly dispassionate way to the Financial Secretary that I hope that our ability to frame our domestic anti-avoidance legislation will not be impaired. I ask him to monitor carefully the procedures that may be used in the European Court of Justice, and to ensure that our legislation means that we have control of the national level and that that is not impaired for reasons outside our control. Question put and agreed to. Clause 32 ordered to stand part of the Bill. Clause 33 Trustees both resident and non-resident in a year of assessment Question proposed, That the clause stand part of the Bill. John Healey: The clause introduces an anti-avoidance measure to counter certain tax avoidance schemes that, in tax planning circles, are commonly known as sunset schemes. They have been used by some trustees and settlers of settlements to exploit the gap in our capital gains tax rules that allows trustees to avoid capital gains tax by arranging their affairs so
The schemes take various forms but the common feature is that they exploit the terms of our tax treaties to ensure that no UK tax is chargeable on gains that would otherwise be taxable in the UK and little or no tax is payable on the gains elsewhere. The schemes rely on the broad proposition that at any given moment trustees are resident for capital gains tax purposes in the country where the majority of the trustees reside. It is usually a straightforward matter for trustees resident in one country to be replaced by trustees resident in another. That can be done quite straightforwardly on paper, and that, of course, makes residence for trust taxation purposes highly mobile. In the simplest case, we start with a long-established settlement with trustees resident in a tax haven. Those arranging the tax avoidance have the trustees replaced by trustees resident in another foreign country with little or no tax on capital gains and a treaty with the UK that gives the foreign country sole taxing rights in respect of any gains. While resident in that country, the trustees realise the gains. Finally, the trustees are replaced by a further set of trustees resident in the UK for the rest of the tax year in which the gains are realised. The result of the interaction of the tax treaty and the existing tax rules means that the UK cannot tax the gains, so they are realised free of UK tax and, in many cases, free of any tax whatever. As a Government, we have sought to negotiate protocols with our tax treaty partners to counter these schemes but with over 100 separate treaties, it is a slow process, as the Committee will appreciate. Also, as soon as we prevent schemes from making use of one country by amending the relevant treaty, the tax avoiders move on to another country. In other words, we are chasing avoidance around the world and never quite catching up with it, and all the while the tax avoiders are costing the UK Exchequer lost revenue. That is unacceptable and unfair to those who do not avoid the tax due to them. The clause ensures that the avoidance device cannot work in respect of disposals made by trustees on or after Budget day. It does so by ensuring that if residence changes during the tax year the terms of our tax treaties do not interfere with our right to tax gains under our existing domestic legislation. It does not affect the foreign country’s right to tax that gain, and established mechanisms are in place to prevent double taxation of the trustees in a similar way to that which we discussed when the hon. Member for Eastleigh questioned me on clause 32. The clause puts a stop to some highly artificial and tax-motivated avoidance schemes and I commend it to the Committee. Mr. Spring: As we have heard, the clause prevents the UK from breaching any taxation treaties and ensures that in innocent cases, where there is a tax
The Government are right to highlight any possible abuse of so-called sunset schemes, but it has become general practice for anti-avoidance legislation to be introduced without prior notice. It is perhaps not surprising that the Bill contains clause 33 to counter a perceived mischief, whereby trustees change residence in order to obtain a tax advantage. It appears to be part of a general movement against what the Revenue considers to be a manipulation of residence. However, it is surprising that legislation has been introduced while the question of trust residence is still under debate. As is often the case, the measure appears to assume that all international movement takes place purely for tax reasons; it might therefore penalise trusts that make genuine disposals during a period of non-residence. The prior notice point is still valid in that although we knew from the first Finance Bill of 2005 that the clause was likely to be included post-election, the effective date for the legislation remains at 16 March, so there was effectively no notice period for the change. The point about the outstanding issue of trust residence is also still valid, as draft legislation is not expected until spring 2006. We need clear reassurance that this anti-avoidance legislation, which we support in principle, will not catch innocent changes of residence. That point was made to us by outside, interested organisations and bodies. As a general point, we have been informed that the moving target of trust legislation under the modernisation review is making life extremely difficult for trustees, especially those who have primary interests in the interests of that trust. Rob Marris: I struggle with some of these issues, but I want to ask my hon. Friend the Financial Secretary a question. Given the complications of these cases, would it not be simpler to reintroduce capital transfer tax? John Healey: Perhaps I can take my hon. Friend’s point as an early Budget representation and leave it at that. The hon. Member for West Suffolk pointed out—and, I think, accepted—that for many moves to counter tax avoidance it does not make sense to offer prior notice. The clause does not contain what I would regard as retrospective legislation. It takes effect from the Budget date on which it was announced. How it would work was clearly spelt out at that time in a Budget notice. We published the draft legislation in the first Finance Bill and prior to the election we made it clear that if we were re-elected, we would reintroduce the provision. We have done that. The hon. Gentleman is concerned about trustees who might be caught, as he put it, for “innocent” actions. That follows on from what I have just said; the measure will apply only to disposals made by trustees on or after 16 March, which was Budget day. We have
Although the hon. Gentleman was not very direct about it, I think that he referred to the general review of residence and domicile provision. Once again, we made that matter quite clear in the Budget. We are continuing that review and continuing to review the rules as they affect the taxation of individuals. We are keen to proceed on the basis of evidence and we will do so. We welcome further contributions to that process, including those from the sort of trustees with whom he might have been in contact. We plan to take the process forward with the publication of a consultation setting out the possible approaches for reform. In the meantime, the measure does not pre-empt that review and it has provoked an interesting reaction from some of the specialists in the field. BDO Stoy Hayward remarked:
I have explained why that approach was too slow and allowed, in the meantime, those who were keen to continue their tax avoidance to switch their attentions to other countries. On that basis, I hope that the Committee accepts the clause. |
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