Finance Bill


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Jane Kennedy: Who was it?
Mr. Gauke: The Minister anticipates what I am about to say. That Labour spokesman was one Tony Blair. He did not always make the right comments, but on that issue he made a fair point. [Interruption.] I know that the words of Tony Blair do not hold much sway with those in the modern Labour party. That is a pity for them as well as the country.
There is the issue of timing, which we touched on in relation to the previous clause. I do not think that anyone would dispute that the provision is retrospective. It goes back at least to 1987, so that is 21 years. As I said earlier, there is the issue of HMRC and the Treasury not necessarily acting terribly quickly when becoming aware of the arrangements. The explanatory notes refer to the “new avoidance scheme”. This is not the first time in these proceedings that I have had to query the explanatory notes, but I am not sure that the expression “new avoidance scheme” is entirely justified. How long have the Government, whether through HMRC or the Treasury, been aware of the arrangements? There is certainly evidence that HMRC has been aware of the arrangements for some years. That raises the question that I asked earlier. It is incumbent on the Government to act reasonably quickly. If they become aware of a scheme that they do not like but they sit on their hands and do nothing about it, and then some years later say, “Okay, we will introduce retrospective legislation,” that raises real concerns, because again there is a continued period of uncertainty. I would press the Government to move quickly if they saw something wrong, rather than sit on it for a long time and then seek to introduce retrospective legislation.
Mr. Hammond: I listened with great interest to my hon. Friend. He seems to imply that there is a concept of reasonable expectation. Where the Government are known to be aware of a practice and do not move to close it down, is it not the case that taxpayers have a reasonable expectation that the Government have chosen to tolerate that course of action, and plan accordingly?
Mr. Gauke: My hon. Friend makes an important point. It comes back to legitimate expectation. If the Government do not act on something, perhaps they have taken the view that they will not pursue it. That argument has become stronger in recent years, as the Government now benefit from a disclosure regime. Schemes that result in people making tax savings are disclosed to HMRC, which has the opportunity to review the situation and introduce legislation. We have seen some examples of that in this and previous Bills.
It is not acceptable that the Government permit something that they consider unacceptable to exist for some years, and then seek to introduce retrospective legislation to address it. That is what we see here. The comments from the professional bodies are universally critical. The Chartered Institute of Taxation described the retrospective nature as “extreme” and “unjustified”, the Law Society described it as “wrong in principle”, and the Institute of Chartered Accountants in England and Wales said that
“it sends out a very damaging signal about the stability of the UK tax system”.
In the light of that—I stress that we are talking about the retrospective element and not the intention of the clause—we are deeply concerned about the proposals. Hence, we have tabled amendments, which are in line with the intention of the hon. Member for South-East Cornwall in amendment No. 132. Looking at that, we have stated that the provision should have effect only from 6 April 2008. On reflection, we have been unduly harsh on the Government and it would be reasonable to say 12 March 2008, which was the date of the Budget as opposed to the beginning of the financial year, but given that the proposal has a retrospective effect of 21 years, I am not sure that one month here or there will make much difference. If the Minister wants to reassure us and say that she will introduce proposals to change the retrospective nature of the measure to date it back to 12 March 2008, I would happily withdraw the amendment and accept that as a fair compromise. I am being extremely reasonable—
Jane Kennedy: As always.
Mr. Gauke: As always, as the Financial Secretary generously concedes. The proposal raises serious questions, however, about the way in which retrospective legislation is increasingly being used and we have deep concerns about that.
10.15 am
Mr. Field: Unlike my hon. Friend the Member for South-West Hertfordshire, I am not merely troubled, I am very alarmed by the proposal, particularly when reading the words of subsection (4) that the hon. Member for South-East Cornwall rightly highlighted,
“are treated as always having had effect.”.
The argument about the retrospective effect of legislation is not merely an academic one, it reflects the potentially arbitrary and strong powers of HMRC. I suspect that later in our deliberations we will discuss precisely how those powers will operate, given the historical distinction between the powers of the Inland Revenue and those of Customs and Excise. It is of great concern that this particular wording is being used. I suspect that the Financial Secretary will tell us that this is a narrow case, but it sets something of a precedent. There are plentiful opportunities for the Government to examine anti-avoidance—we have a Finance Bill every year. All the time that I have been in Parliament, in Finance Bills year on year an inordinate amount of anti-avoidance provision has come into place, largely as a result of the fact that we have seen more complex arrangements being put in place. There are some broad philosophical issues about the arbitrary nature of the state’s power, but also some practical issues that other hon. Members have brought into play, about what this means for the stability of Britain as a place to do business, particularly for overseas investors.
Jane Kennedy: It is important to challenge the suggestion that this is an attempt to introduce retrospection as a thin end of what hon. Members might quite properly fear is a large wedge. That is not our intention. I understand that the 1987 legislation had retrospection that was unlimited and in effect went back to about 1945. This is a specific case where there has been serious abuse of the tax system.
Mr. Field: As I understand it, the legislation 21 years ago made it absolutely clear that it was not in any way trying to unravel arrangements that had been put into place before the Padmore case of 1987, where as the wording of the subsection to which I referred, about the legislation being treated as always having had effect, should have alarm bells ringing in all of us as parliamentarians. We all know the tremendous power of the state and, in particular, the tax authority, and the detrimental effect that that is likely to have on external investment. I want to make the more general points only; I know that the specific points have been made from the Opposition Front Bench by my hon. Friend the Member for South-West Hertfordshire. I think that my hon. Friend the Member for Gosport also wishes to address the issue, but I hope that the Minister will give it serious thought. It is in the nature of having a Finance Bill every year that it allows the Government to make annual changes looking forward, but to have a retrospective effect with such stark words as those set out in subsection (4) should alarm us all.
Peter Viggers (Gosport) (Con): There is a place for retrospective legislation. One of the better known cases was when someone intelligent discovered just after the second world war that the activities of the London fire brigade had been non-statutory and illegal. Parliament, in its wisdom, therefore decided to legitimise the London fire brigade, failing which matters such as compensation would have been extremely complicated. There is a case for retrospective legislation, but it should be reserved for those extreme, obvious cases. For the Revenue to use retrospective legislation to mop up bits of revenue law is simply unacceptable. If the Revenue is confident that the law has always been as it is now intended to be stated, surely it should challenge the case through the courts. The explanatory notes say:
“This clause will put it beyond doubt that the legislation has always had that effect.”
and the right way to challenge that is through the courts.
As I understand it, the Revenue has demonstrated that it was aware of the practice, and that the statement
“the legislation has always had that effect”
is disingenuous. The Law Society has briefed me that paragraph 1660 of HMRC’s international tax handbook shows that HMRC had known for some time about the way that tax professionals have been interpreting section 858 of the Income Tax (Trading and Other Income) Act 2005. It also mentions that the original legislation to reverse the Padmore case, from which this tax planning arrangement derives, was controversial because it too was retrospective.
The way that HMRC operates provides for a tax-avoidance disclosure regime that allows the case to be put to Revenue and for clearance to be obtained. Given that the disclosure regime is available, there should be no need for any retrospective legislation. The current drafting of the Bill would give HMRC the right to turn a blind eye to a scheme and come back retrospectively and decide that it is illegal. That is an important point of principle, and I hope that the Financial Secretary will listen to those arguments.
Jane Kennedy: I am conscious that we may have a Division on this. It is a shame that the calming effect of the music from outside has not applied in the Committee room. Hon. Members have become agitated over something that, after giving my explanation, I hope that I will be able to—[Interruption.]
Mr. Breed: I do not know about a calming effect; I think that they were praying for the soul of the Government.
Jane Kennedy: TouchÃ(c). I was pleased to hear that the hon. Member for South-West Hertfordshire declared himself a Blairite, albeit a little late.
We have carefully considered what action should be taken against such artificial schemes, and we have not come to a decision lightly. In words similar to those used by the hon. Gentleman who spoke for the Opposition in 1987 and who I will come to in a minute, the now noble Lord Lamont of—
Mr. Field: Lerwick.
Jane Kennedy: I am grateful, Lord Lamont of Lerwick.
I am satisfied that in these unusual circumstances, retrospective clarification of the law is fair, proportionate and in the public interest. That is the human rights test that we must apply.
It might be useful for me briefly to give some background. In 1979, Mr. Padmore, a UK resident, worked in the UK as a patent agent. He was also a member of a Jersey partnership, which had been set up to receive some of the income from Mr. Padmore’s activities as a patent agent. In line with the law as it was generally understood at the time, the Inland Revenue sought to tax him on his share of the foreign partnership’s profits. In December 1986, the courts upheld his claim that the tax treaty between Jersey and the UK meant that none of the Jersey partnership’s profits could be taxed in the UK, even those belonging to UK resident partners.
The decision was a surprise, not only to the Inland Revenue but to other tax authorities and most tax advisers. It overturned the generally held view that unless explicitly specified, tax treaties do not remove a country’s right to set taxes.
It being twenty-five minutes past Ten o’clock, the Chairman adjourned the Committee without Question put, pursuant to the Standing Order.
Adjourned till this day at One o’clock.
 
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