Mr.
Field: The Financial Secretary has gone into detail about
some of the thinking here. Is he not concerned that the spirit of the
age, whether on tax law or the law
as a whole, is much more towards certainty—in other words, having
deeper rules in a much broader context—rather than a
principles-based approach? One of the concerns in what will inevitably
and continuously be a competitive world, where we try to attract the
best brains and businesses to our shores, is that the lack of certainty
in the principles-based approach is likely to be detrimental to the
better interests of this
country. I
can see that there are great benefits from the Treasury’s point
of view—the Financial Secretary made that explicit. In effect,
he is suggesting that most avoidance schemes will be disallowed at the
outset unless they can be shown to have properly sidestepped from the
purposes of the Treasury, but the lack of certainty that a
principles-based system brings can surely only be detrimental to the
better interests of this
country.
Mr.
Timms: I suggest that our approach gives greater
certainty. The problem with the old approach was that legislation set
out that taxpayers could not do this, that or the other. It was pretty
straightforward for people to devise slight variations on what was
being prevented and then to argue they could carry on doing it. That
created a fair amount of uncertainty—and certainly a lack of
clarity—about the position. With this approach, however, the
position is absolutely clear: if it really is interest, the tax needs
to be paid on that basis. The arrangement is pretty clear and
certain. 10
am The
disguised interest rules apply where a company is party to an
arrangement that produces a return that is economically equivalent to
interest. There are some exceptions, which are clearly set out. I do
not agree that such an approach produces uncertainty; if anything, the
reverse is true. We have had an interesting debate on principles-based
legislation. This clause and schedule and the next clause and schedule
embody that approach, which is, in a sense, experimental; it has not
been tried before. The intention was to legislate in last year’s
Finance Bill along those lines, but the representative bodies argued
that we should take longer, because it was a significant departure from
how we legislated in the past. We have been able to resolve the
concerns about the principles-based approach, which I think is a good
one, not least from the point of view of
certainty. The
hon. Member for Taunton explained the background to amendment 176. He
is absolutely right: there was an error in the schedule as drafted. We
spotted the error, I am pleased to say, and it has been accepted as an
error to be corrected as a matter of printing. Nevertheless, I am
grateful to him for tabling his amendment and drawing attention to the
error in that way.
Government
amendment 159 also corrects a typographical error, but one that cannot
be dealt with as a matter of printing. The error, which is in the
transitional rules, would have the effect that certain types of
arrangement already in place on 22 April 2009 would be excluded
inappropriately from the scope of the legislation. The amendment
corrects the error and ensures that the disguised interest legislation
can apply to such arrangements. The amendment has effect from Budget
day, on the basis that the legislation was widely consulted on before
the Budget using drafts that did not include either of the errors. It
can affect only transactions that were already in place on Budget day
and were caught by existing anti-avoidance legislation.
I am happy to
accept the hon. Gentleman’s amendment and commend the
Government’s to the
Committee. Amendment
176 agreed
to. Amendment
made: 159, in schedule 24, page 243,
line 9, leave out ‘14’ and insert
‘15’.—(Mr.
Timms.) Schedule
24, as amended, agreed
to. Clause
49 ordered to stand part of the
Bill.
Schedule
25Transfers
of income
streams
Mr.
Timms: I beg to move amendment 178, in schedule 25,
page 247, line 6, after
‘taxed),’
insert— ‘(aa) section
809AZCA (certain
annuities),’.
The
Chairman: With this it will be convenient to discuss
Government amendments 179 and
180.
Mr.
Timms: The second example in the Bill of the use of
principles-based legislation, the schedule secures that receipts that
derive from a transfer of a right to income are treated as income for
the purposes of income tax and corporation tax. Like the measure on
disguised interest, it is the result of consultation on
principles-based
legislation. Case
law shows that it is possible for companies and individuals to convert
income into capital for tax purposes by selling the right to income
streams. For individuals, such schemes are particularly attractive as a
result of the capital gains tax increase to 18 per cent. Avoidance in
this area has led to a wide range of piecemeal measures that treat
sales of income as giving rise to amounts charged to tax as income. The
schedule replaces the various targeted anti-avoidance rules with a
comprehensive rule that ensures that a company or individual cannot
avoid tax by selling income for a lump sum that is taxed more
favourably than the income would have been—for example, a
capital gain covered by losses.
As a result
of the consultation, schedule 25, like the preceding schedule, contains
specific exceptions—in this case, for transfers of income that
are the consequences of the transfer of the asset from which the income
arises, or where a transfer of income is the consequence of the grant
or surrender of a lease over land. There are also exceptions for
disposals of rights in respect of oil licences. The new legislation
saves 15 pages of anti-avoidance legislation, using only eight pages,
and is another example of the principles-based approach being made to
work.
The
Government amendments correct an error in the schedule, which replaces
a number of enactments. Among the repealed provisions is a rule that
currently taxes the sale of the right to annual payments as
income—that is, recurring payments of an income nature that are
paid under a legal obligation. That repealed provision contains a
number of exceptions for sales of annual payments that are already
subject to appropriate tax treatment. Owing to an oversight, the new
transfers of income rules do not replicate those exclusions, but they
should have done. Without the amendments, the new rules could impose an
additional and inappropriate tax charge
on transactions of that kind, so they simply restore the exclusions and
make sure that they continue to apply under the new
legislation. Mr.
Bone: Is not the Financial Secretary making the case
against principles-based legislation? Instead of laying down things
that one knows are wrong and saying that they must not be done, the
principles-based approach sets out a principle that is thought to say
what things are wrong, but can catch things that are perfectly
acceptable. Is not the Minister outlining that in this exemption? Is
not that the problem that principles-based legislation
creates?
Mr.
Timms: No, I do not think it is necessarily a problem. It
is perfectly possible, with the new approach, to set out clearly things
that are excluded, and that is what we are doing. The hon.
Gentleman’s description highlights the difficulty with the old
approach. If one sets out in legislation things that people are not
allowed to do, it is not difficult for them to come up with a slight
variation that they will do instead. The disguised interest rules that
we were talking about a moment ago were introduced in 2005, but it has
been necessary every year to amend them to capture the new things that
people have come up with. I hope that annual amendments will not be
required under the new
approach.
Mr.
Bone: But again, I think the Minister is making my point
for me. Yes, the approach favours the Revenue in catching more
avoidance, but it is catching innocent taxpayers as well. Under the
previous approach, we said that something was definitely wrong and,
yes, it had to be updated every year, but taxpayers who were acting
innocently were not caught by it, whereas the new approach will capture
people whom the Minister has not realised should be exempted, so he
will have to introduce more and more exemptions each
year.
Mr.
Timms: I do not agree. It is important that we get the
exceptions right and set them out clearly and correctly, which the
amendments will help us to do. However, I do not agree that the
approach we are adopting needs to catch people who are doing perfectly
proper and innocent things. Of course, if an exception is subsequently
drawn to our attention, it will be perfectly possible to include it,
but I do not think we will be in the position of having to make annual
changes, which was the position under the old
approach.
Dr.
Pugh: There is an obvious analogy with the Green Book on
Members’ expenses. That had to be rewritten every year, but we
have now moved to a principles-based decision-making procedure. The
only problem with that is that it will lead to some post-hoc judgments
being made that might not be
favourable.
Mr.
Timms: The hon. Gentleman draws an interesting and perhaps
illuminating analogy to assist the Committee in its
deliberations.
I think that
the approach we have chosen is right. This is something of a pilot and
we will need to see how it goes, but the work has so far shown that it
is a promising approach that we can perhaps make more of in the future.
I commend the amendments to the Committee.
Mr.
Hoban: Given that the Financial Secretary made some
broader remarks about the schedule, perhaps it is appropriate for me to
make some comments about the schedule and ask one or two
questions.
On the
principles-based approach and the breadth of the schedule, I understand
the problem that the Minister wants to avoid of having to make annual
changes to legislation and introduce more exceptions to capture
different types of transaction. However, my hon. Friend the Member for
Wellingborough put the alternative case on the breadth of the schedule
and what sort of transactions it actually covers. Are we certain that
swapping narrow rules for a broader-based approach is the right way to
go?
An example
has been raised with me that illustrates the problem that the
Government are facing and the issue that my hon. Friend has discussed.
Throughout the consultation process, the policy focus of this part of
the Bill was on the corporate sector. There was no suggestion that the
rules in the Bill would be applied to individuals to any appreciable
extent. However, in the drafting, it is necessary to include in part 2
the words
“a person within
the charge to income
tax”, in
contrast with
“a company
within the charge to income tax”,
which is referred to in
part 1. The wording in part 2 captures non-resident companies that are
not carrying on a trade in the UK through a branch or an agency. I
understand the point of having that, but the suggestion has been made
that for individuals, arrangements that divert income to another party
are likely to be caught by settlement legislation. IR35—the
managed service company’s rules—also apply where income
from personal services is
concerned. Although
the Government have said that, as a consequence of the Arctic Systems
ruling, there has been some consultation on income shifting, in the
Budget it was suggested that such measures would be deferred. There is
concern about whether the provisions of schedule 25 are
drafted widely enough to be capable of catching transactions or
arrangements under which turnover generated by an individual’s
personal activities can be passed to another person and caught by the
income shifting rules that, so far, the Government have not sought to
introduce. That goes back to the question of breadth. Although it is
not the intention or the policy objective to capture individual
arrangements, the breadth of the schedule allows them to be
caught. 10.15
am The
Financial Secretary might say, by way of clarification, that the
schedule is not intended to capture individual arrangements, and such a
statement would be welcome. However, the concern is that any statement
to that effect made in this Committee would not have the weight in
court that it should have, because there is no ambiguity in the
schedule. I would be grateful if he clarified whether the schedule is
intended to capture income shifting between individuals. If it is not,
how can it be amended on Report to put it beyond doubt that it is not a
backdoor way of introducing the rules on income shifting that the
Government decided to put on hold?
I also want to
discuss how the rules will interact with other parts of tax law and
what the priority should be. For example, the CIOT representation
states that rules on loan relationships, derivative contracts and
intangible fixed asset regimes should take priority over the transfer
of income rules. There is also no specific provision on the interaction
of these rules with capital gains tax rules. Clarity on that would be
helpful. However,
the main issue that the Financial Secretary must tackle is whether the
transfer of income streams between individuals will be caught by these
provisions. If they are not intended to be caught, he should say how we
can clarify that through amendment on
Report.
Mr.
Timms: It certainly is possible for individual transfers
of income to be caught by the provisions, and deliberately so. Under
the new arrangements that the Committee has debated, people could
obtain a tax rate of 18 per cent. rather than 50 per cent., which is
the new higher rate of income tax. Therefore, individuals do come
within the schedule. However, on income shifting, I reassure the hon.
Gentleman that the provisions will not be applied in situations such as
the Arctic Systems case. That case involves a different type of
transaction whereby income is allocated tax efficiently between two or
more parties. As a result of the ownership of the asset from which the
income arises, that case does not involve the transfer of a right to
income. Therefore, the legislation will not apply in that case. What
the schedule deals with does not happen in cases such as Arctic
Systems, because there is no transfer of a right to
income.
Mr.
Hoban: Clearly there is some disagreement between the
Treasury’s interpretation of the schedule and that of the Law
Society and others. Is it not possible to put the matter beyond doubt
by introducing an explicit exclusion for income that is transferred as
a consequence of a performance of personal services, for
example?
Mr.
Timms: I think that the matter is beyond doubt, but I will
happily look at it again and reflect on the hon. Gentleman’s
point. The
hon. Gentleman’s second point was about capital gains tax. If
the consideration is charged as income under the transfer of income
rules and the transferor realises neither a capital loss nor gain on
the part disposal of the asset, but is able to carry forward the whole
pool of capital expenditure to deduct on a subsequent disposal of the
asset, that outcome is reasonable because the whole amount of capital
expenditure remains available when the asset is sold. If the asset is
subsequently sold for a capital loss, that loss cannot be set off
against the taxable income that previously arose, but that outcome is
not unreasonable, given that it is within the transferor’s power
to avoid that outcome by selling the asset rather than just the
income.
I
have been reminded, Mr. Hood, that the guidance on Arctic
Systems and income shifting cases of that kind does make the position
clear. Amendment
178 agreed to.
Amendments
made: 179, in schedule 25, page 248,
line 15, at end
insert— ‘809AZCA
Exception: certain
annuities This Chapter does not
apply to a transfer of a right
to— (a) annual payments
under a life annuity as defined in section 473(2) of ITTOIA 2005,
or (b) annual payments under an
annuity which is pension income within the meaning of Part 9 of ITEPA
2003 (see section 566(2) of that
Act).’. Amendment
180, in
schedule 25, page 250, line 32, at
end insert ‘and (i) in CTA 2009, in
Schedule 1, paragraphs 214 and 230.’.—(Mr.
Timms.) Schedule
25, as amended, agreed
to. Clause
50 ordered to stand part of the
Bill. Schedule
26 agreed
to. Clause
51 ordered to stand part of the
Bill.
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