Finance Bill |
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Susan Kramer (Richmond Park) (LD): I shall speak briefly to the cluster of amendments and more specifically to amendment No. 69. The hon. Member for Runnymede and Weybridge is apparently reliant on an intent test for the purposes that he wishes to achieve. We regard that as permanent employment for lawyers, and as we do not have a lawyer in our collection, we would rather find other ways to deal with the problems in the schedule. As the hon. Gentleman made clear, paragraph 1 tackles rent factoring, the process by which the right to receive a stream of rentals for a period is sold in exchange for a lump sum. From the perspective of the Inland Revenue, as it was called at the time of the John Lewis case—it is now HM Revenue and Customs—it looks like a tax avoidance measure, an attempt to convert what would have been an income stream to a capital gain to be offset against capital losses. I come to the clause with a background not as a tax accountant or a tax lawyer but as a banker who worked for many years in structured finance, though more in the United States than in Europe and not particularly in the UK. As a consequence, I am conscious that one of the breakthroughs in terms of expanding liquidity in the financial markets and options for businesses and Government to finance a range of transactions, was to achieve the goal of taking what had not been recognised as an asset—the right to receive a future income stream—and to recognise it as an asset and treat it as such. The interesting part of the John Lewis case—I read the judgment from the Court of Appeal—was a recognition of the conversion of that perspective on a future rental stream, to see it as a right, or as attached to a right, which could be securitised and treated as any other asset. I gather from lawyers that the tree rather than the fruit of the tree is the ultimate test. Mr. Philip Hammond: The hon. Lady said that she and her colleagues did not much like our intent test, as she called it. I call it the motive test. However, throughout our proceedings a motive test has been used to identify an avoidance purpose. Is the hon. Lady saying that the Liberal Democrats would eliminate the use of motive tests throughout the Bill and elsewhere? 5.15 pmSusan Kramer: It is just that we have so many of those tests that if we could avoid one it would be to the general benefit. I would rather find a way to avoid one if we can, because their intent is so utterly blurred that we will spend the rest of our lives in the courts. I am conscious that the principle that is involved with rent factoring, particularly when people get over a 15-year benchmark and are looking at the sale of a long-term rental stream, is similar to other sorts of financing and securitisation that I suspect the Government are considering and will be looking at in the near future. That includes the securitisation of fares, for example, proposed by Transport for London as a mechanism for funding infrastructure, and potentially even the securitisation of future tax
Coming at the subject as a banker and considering it in a broader, more holistic sense, I would be interested to hear the Minister’s comments as to whether these actions compromise and restrict other forms of securitisation and liquidity that she and the Government will be seeking to achieve, particularly in respect of infrastructure projects in future. In the narrow sense of clause 69, our objection to sub-paragraphs (5) and (6) is that they are retrospective, not retroactive, measures. It seems that anybody who entered into a rent-factoring stream for a period greater than 15 years could have done so by being reliant on the Finance Act 2000, in a straightforward, completely honest and non-controversial interpretation of the language in the Act, which says, in section 43C:
That is remarkable clarity in a piece of legislation. Therefore to turn today to companies that relied on a straightforward, clear interpretation of a section in the 2000 Act and say to them that by behaving in accord with the law they are now contravening it is not an appropriate way to deal with businesses. Rob Marris: Has the hon. Lady read paragraph (1)(4) of the schedule, which says:
Susan Kramer: The hon. Gentleman makes my point. If he reads the 2000 Act, he will see that it says that that shall not apply. In other words, the various constraints that would require rent factoring to be treated as income rather than as a capital gain specifically do not apply to any financial transaction of more than 15 years under the 2000 Act. Anybody looking for the current law after that Act came into effect would have read that section and behaved accordingly. Under those circumstances we will go round in circles. We are all getting exhausted. So why do not I just carry on and finish making a relatively brief point? For companies that entered into transactions reliant on the 2000 Act, the lump sum or compensation that they received in exchange for the sale of future rents would have been based on the various tax protections and opportunities available to them in the relevant paragraph. Therefore to say that for the future, remaining years of the life of that transaction the sum has to be treated differently is a significant financial penalty. If that had been a devious reading of the various sections, one could understand it, but when it was a straightforward reading the measure is not justified. Column Number: 205 Rob Marris: Given her final remarks, either the hon. Lady is misreading the Bill or I am. Line 3 of page 89 states:
The mischief to which the hon. Lady referred about greater than 15-year agreements that were entered into, for example, two years ago, would not be caught under paragraph 1(4). Susan Kramer: I am sure that the Paymaster General will be delighted to clarify what I want to point out to the hon. Gentleman. I refer to the transactions entered into after the appropriate date in 2000. The remaining period for that transaction, which is after 16 March 2005, is caught by the provisions. Paragraph 1(5)(a) states that if
Having read that interpretation of the measure, which I assume is the intended interpretation, there is a retrospective action and that is outrageous. I return to the basic principle, which is whether any measures in the paragraph are consistent with the Government’s intentions to use securitisation of future income streams for a wide range of finances, particularly infrastructure. The Chairman: Order. Interventions should be brief. I allowed that one so as to continue to be helpful to the Committee. I can only say to the hon. Lady that, if she wants to come back later in the debate, she has the right to do so. She could have spoken a second time. Rob Marris: I shall not go further down that route. I am sure that the Paymaster General will deal with the point in her usual competent way. When we debated amendment No. 31 to clause 24, the hon. Member for Runnymede and Weybridge did not like the words
To my surprise, they now appear in amendment No. 117. Perhaps he will explain that later. Mr. Philip Hammond: I am happy to explain the reason now. We made our point about
The Paymaster General rejected our argument and, to be consistent with the architecture of the Bill, we have now accepted
The problem with drafting amendments is, that if they are not accepted, we must return to the world as it was before and, when drafting later amendments, we can only speculate whether the Government will accept any of our earlier amendments. On the basis of past form, however, I have become a competent speculator on that subject. Rob Marris: I am obliged to the hon. Gentleman for his explanation. Dawn Primarolo: I do not know whether it is good or bad that, since 1997, I have spoken in debates on Finance Bills on behalf of the Government. I say to the
In answering amendment No. 69 and then amendment Nos. 116 to 118, I wish to make a couple of things clear about the schedule. It tackles avoidance schemes for individuals and companies under nine different categories. When the original Finance Bill was published, the measures were mainly accepted as well-targeted anti-avoidance provisions arising from disclosure. There have been significant comments about the measures that treat certain shares as debt for tax purposes and, in the light of representations, the measures have been amended to ensure that they focus more tightly on the avoidance that we aim to tackle. We can draw the comparison, as the hon. Member for Runnymede and Weybridge did. We had this discussion during the debate on arbitrage. At times, anti-avoidance legislation is highly specific and very targeted, because it deals with specific regimes. That is certainly the case in this schedule. The schedule is complex because the contrived schemes that it seeks to prevent are complex. The Government continue to listen to the helpful and constructive points being made by business on these complex issues. However, I reaffirm to the Committee that I am determined that the measure should not be watered down in such a way as to reopen tax avoidance opportunities. In 1997, when the law was changed to prevent financial concerns avoiding tax on profits from lending, I, as the Minister, gave a warning. That is related to the debate that we had on how far the Government go in their anti-avoidance legislation— whether they can afford to put down markers and say, “Avoidance is not going on beyond this point; we do not expect to see it beyond this point and if we do we will act on it.” The warning that I gave was on the record; I said that if attempts were made to get around the change, the Government would take action, possibly with retrospective effect back to 1997. There are many ways to try to deter—to encourage tax-avoiders not to do so— and one of the many methods is for Ministers, on the record, explicitly to give a warning that they will not tolerate that type of avoidance, and that the Government will act. However, it seems that that warning had little effect since, unfortunately, the schemes continue to proliferate. Mr. Brooks Newmark (Braintree) (Con): I understand the spirit in which the Paymaster General approaches this issue, but I would like to raise a concern. Does she not believe that the changes that she proposes may cause an additional tax liability for at least some innocent transactions? Will she address that concern? Dawn Primarolo: No, I do not think that the legislation as targeted will affect innocent transactions. It specifically responds to the disclosures for schemes that are being marketed and it only responds to those marketed schemes through the disclosure. Therefore,
This is the issue: if the avoidance industry continues to try to find ways around new rules, the Government must seriously consider what other ways might be adopted to stop those intent on avoiding their fair share of tax. We cannot—and, frankly, will not—continue to play a cat-and-mouse game with those seeking avoidance in the financial field. I recall—I think that it was only last year—that in the debates in Committee on the Finance Bill, the then spokesperson for Her Majesty’s Opposition, the then Member for Arundel and South Downs, commented that the financial avoidance measures that were under consideration at that time were a fair cop for schemes that were simply designed to avoid tax and had no other commercial purpose. The measures in this schedule are the same. They are a fair cop against schemes that must be closed down, because they are specifically and only designed for avoidance purposes, not for any other commercial purpose. 5.30 pmSuch schemes are costing hundreds of millions of pounds. It is vital to protect the Exchequer against artificial tax avoidance arrangements. Nobody has suggested a better way of doing that. In the overwhelming majority of cases, particularly those in which there is no intention to avoid tax, the rules will have no application, especially after the Government amendments that we will discuss. It is clear to the companies and individuals concerned that that will happen. I fear that amendment No. 69, to which the hon. Member for Richmond Park spoke, is based on a misunderstanding, as my hon. Friend the Member for Wolverhampton, South-West pointed out, about when the clause becomes active. The hon. Lady referred to the commencement provisions in paragraph 1 of schedule 7. They have been carefully designed so as not to be retrospective in the proper sense of the word. There are two different types of rent factoring arrangements, and the hon. Lady referred to one, the lump sum assignment cases, such as the John Lewis case, which was litigated to the Court of Appeal. There is a single transaction completed when rents are assigned. Paragraph 1 applies only to those cases when the assignment takes place on or after Budget day. That is because to go back to an assignment in, say, 2001, and change the current tax treatment would be truly retrospective. The other type of case is the interposed lease case. That removes the grant of the lease and then continuing rental payments over a future period. It is the rental payments that cause the tax loss here, because a large part of them represents the paying back of the principal of the loan. If the company or group had entered into a straightforward loan to finance its operations, instead of a complicated and contrived interposed lease rent factoring scheme, it would not have had any relief for the repayment of the principal. Column Number: 208 Sub-paragraphs (5) and (6), to which the hon. Member for Runnymede and Weybridge referred, ensure that the principal elements of rents for the future are not allowed as a deduction in computing profit. That is not retrospective. “Retro” means “back”, and the paragraphs deal with the future, not the past. Nobody can have any expectation—this is not a feature regularly discussed in Finance Bills—that the law will not be changed in future in relation to transactions that have started but not yet finished. That is especially true of tax avoidance schemes. It would be ridiculous for an avoidance scheme to be designed for a very long period, and then to have no way to say that the scheme should not have been happening in the first place. There is nothing in the complaint that the Government gave a signal in 2000 that anything over 15 years was acceptable. That comes back to the themes that we discussed this morning about what is reasonable when the Government do not deal with an issue because they believe that it is not subject to avoidance and might interfere with commerce. Mr. Philip Hammond: Will the Minister give way? Dawn Primarolo: I shall deal with the issue of 15 years, and the hon. Gentleman can response and I shall answer his questions. At the time it was thought impractical to contrive an arrangement involving a lease of more than 15 years. That was the advice given to us, and it was the understanding of HMRC, then the Inland Revenue. Unfortunately, experience of the ingenuity of tax avoiders has shown that that was wrong. I could mention the fact that the amendment does not go far enough to achieve its objective, because sub-paragraphs (7) and (8), which the amendment does not affect, makes no sense without sub-paragraphs (5) and (6). Much more importantly, the amendment would cost the Exchequer £70 million in 2005-06, rising to £120 million in 2009-10. It would mean that tax avoiders could continue to milk the public purse. That cannot be a reasonable proposition. I therefore have no hesitation in saying that if the amendment is not withdrawn I will ask my hon. Friends to vote against it. I turn now to amendments Nos. 116 to 118. When the Government introduced the rules in 2000, it was not thought that arrangements were likely to exceed 15 years, so the legislation did not apply to arrangements exceeding that period. The avoidance industry latched on to the exemption and we are now seeing cases involving 15 years and a bit, albeit not hugely longer. As the avoiders will apparently go to any lengths to achieve a tax benefit, the Government have proposed measures in this Bill to remove the 15-year rule. The arrangements to which the rent factoring legislation applies are invariably tax avoidance arrangements, and I could not agree to the diluting of the effect of that legislation. Bona fide commercial arrangements will not be caught because there is an accounting test which keeps them out. There is no need for a motive test here either because the purpose of the
The amendments seek to retain the 15-year exemption for rent factoring cases involving assignment of rents unless one of the parties was seeking a tax advantage. Strangely, they do not seek to do the same for cases involving interposed leases. I am not really sure why. Do Opposition Members see some commercial motives in rent assignment arrangements in some cases but view all interposed leased cases as avoidance? I have tried to explain clearly that rent factoring arrangements caught by the 2000 legislation are invariably tax avoidance. There is therefore no need for a tax motive test, much less one that does only half the job. I reiterate the point that I have made to the hon. Gentleman: bona fide cases will not be caught because they are dealt with within the accounting test which ensures that those arrangements are clear. Mr. Philip Hammond: I am grateful to the Paymaster General. Her last remark comes to the nub of the issue for us. Of course our concern is that the bona fide commercial arrangements that she identified in 2000 are not adversely affected by this. It may be that those are bona fide commercial arrangements—interposed leases already in place—in the sense that they were not motivated primarily, or in any major way, by the tax advantage that was to be available. But I am sure she will agree that they will have been priced to reflect the tax treatment that they would expect to get under the legislation at the time. It is not clear whether she is saying that bona fide commercial 15-year-plus arrangements, be they lump sum or interposed leases, will not be affected by the change in treatment or that they will still be allowed to happen but will be subjected to what is effectively an apportionment of the amounts payable under them between principal and interest. If it is the latter case it is pretty cold comfort for someone who has entered into a long-term interposed lease arrangement. The Paymaster General has been generally reassuring about the issue. I look forward to hearing what experts outside the Room make of her response today. If we need to return to the issue, perhaps we shall do that on Report. I beg to ask leave to withdraw the amendment. The Chairman: I am in some difficulty, because I was going to give the hon. Member for Richmond Park the opportunity of coming back on her amendment. Mr. Hammond: If it helps the Committee, I shall beg to ask leave to withdraw my begging to ask leave to withdraw the amendment. The Chairman: I am happy to agree to that. The hon. Member for Richmond Park may make one or two comments about the Paymaster General’s response to her amendment. Column Number: 210 Susan Kramer: You are very kind, Sir Nicholas. I simply wanted to ask the Paymaster General for a response on the broader issue of the implications for similar securitisation transactions. She did not address that issue. Dawn Primarolo: I apologise to the hon. Lady for not having responded to that point. For rent factoring to apply, the arrangements must be accounted for as a loan that the rents repay over a period. That would not be the case in securitisation or other types of arrangements. The connection that she believes exists does not, and her fears are unfounded. Mr. Philip Hammond: I beg to ask leave to withdraw the amendment. Amendment, by leave, withdrawn. The Chairman: It is now nearly a quarter to 6. I am roughly aware of where the usual channels would like us to get before we adjourn. It looks as if we shall not make that much progress by 7 o’clock, unless we move very much faster than at the moment. It will be my intention to adjourn for dinner at 7 o’clock and come back at 8 o’clock if that is satisfactory to the Committee. As the Chair, I have that discretion. I hope that that information has been helpful. Mr. Philip Hammond: I beg to move amendment No. 119, in schedule 7, page 91, line 28, at end insert—
I am sure, Sir Nicholas, that you will now see how plodding carthorses can become racehorses, given a threat from the Chair. The amendment seeks to introduce into paragraph 3 a motive test to ensure that it bites only when the main purpose, or one of the main purposes, of the change of ownership was a tax avoidance purpose. Paragraph 3, quite reasonably, seeks to block a company being sold for the value of its tax losses and thus closes an existing tax loophole. The paragraph works by amending the scope of section 768B of the Income and Corporation Taxes Act 1988. Those rules to block the buying of companies specifically for the value of their tax losses apply so that they deny purchases of businesses—when the transaction is purely commercial—the benefit of the tax losses within non-trading companies of the acquired group whenever there is an injection of more than £1 million of capital post-transaction. That is a pretty small sum, which the purchaser of a failing business might reasonably expect to have to inject just to shore up the working capital base of the business. Given that there are many such transactions and that making them more difficult or costly could cut off or reduce the supply of investment finance to struggling or failing businesses—with all the consequences that that could entail—this approach seems very draconian. The amendment therefore seeks to introduce a motive test into section 768B of ICTA. We believe that the intended purpose can be achieved, and, at the same time, the underlying provision of
5.45 pmDawn Primarolo: The amendment would restrict the application of the law that prevents carrying forward certain tax deductions where there has been a change in ownership of a company with investment business. The Government are simply seeking to deal with an oversight where the legislation did not apply to non-trading loan relationship deficits. The amendment is completely unrelated to that change, but seeks to add a tax avoidance motive test to one small part of the legislation dealing with groups seeking to purchase unused tax reliefs. Part of the anti-avoidance armoury, which goes much wider than the single section that the amendment seeks to change, has been in place for many years in various guises. The section that the amendment covers was introduced in 1995 by the Conservative Government. None of the sections referred to here has ever had a tax avoidance motive test because, as those who introduced them realised at the time, they do not need one. Plenty of other filters are built in to ensure that only appropriate cases are caught. If the factual circumstances described in the legislation are satisfied, the legislation applies to deny carrying forward the reliefs and deductions specified. Therefore, there is no need to inquire into the purpose of the parties involved. These measures have worked well over time in various guises. The legislation introduced in 1995 was good, and it should be left in place because the filters and the specific targets ensure that avoidance is operated against. Mr. Philip Hammond: I did not hear the Paymaster General specifically say that no company that had entered into a bona fide purchase of another group for commercial purposes could be caught by this measure, but I think that that has to be the implication of what she is saying. If that is the case, we should go away and study this matter, because there is clearly no need for a motive test. I will take advice and not detain the Committee any longer at this stage. I beg to ask leave to withdraw the amendment. Amendment, by leave, withdrawn. |
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