Examination of Witnesses (Questions 70-79)|
27 APRIL 2004
Mr David Ramsden, Mr David Hartnett, Mr Chris Tailby,
Mr David Hubbard and Mr Peter Hopkins
Q70 Chairman: Good morning. I cannot remember
whether I have ever seen any of you before. You certainly came
mob-handed last year but some of you are new.
Mr Hartnett: I was part of the mob.
Q71 Chairman: New or old, you are very welcome.
Obviously, you cover all the areas that interest us. We gave you
about five main topics but they vary in importance, and I do not
know whether you, David, are going to act as a kind of chairman
for your side or appoint someone to answer on each topic. But
perhaps you could give us five minutes on each topic. The whole
thing is a teaching session, as you will discover, with a not
very good group of pupils. And then we will say, "We do not
understand this. Can you explain it?", and so on, and we
will see how far we can get this morning. I have no sense of how
far we will get because I found one or two of the topics so difficult,
and the notes on clauses actually make it more difficult rather
than easier, so that we will need to reflect on what you say.
Our first topic is tax avoidance. How do you want to kick off
Mr Ramsden: I was going to start, my Lord Chairman,
by suggesting that we introduce ourselves so that you will know
what the new ones do and what the ones you have met before are
Q72 Chairman: Please do that. You are new,
so tell us about yourself.
Mr Ramsden: I am David Ramsden and I am Director
of Tax and Budget at HM Treasury.
Q73 Chairman: Can you remind me, because
all this has changed since I had any Treasury interest, what the
equivalent is? Is a Director the same as a Deputy Secretary?
Mr Ramsden: It is the same as an Under Secretary.
Mr Hartnett: I am Dave Hartnett. I am a Deputy
Chairman of the Inland Revenue. I was here last year and I am
again answering questions on stamp duty. I am responsible for
the Revenue's work on policy, on technical issues and on fraud
and avoidance at policy level.
Mr Hopkins: My name is Peter Hopkins. I am an
Assistant Director of our Savings, Pensions & Share Scheme
Business Stream. I am here for the pensions clauses.
Mr Tailby: I am also new. I am Chris Tailby.
I am Director of Tax Practice at Customs & Excise, so I have
responsibility for policy maintenance, which includes the anti-avoidance
work. I was previously in the private sector. I was a partner
with Price Waterhouse and PricewaterhouseCoopers and took up this
job in July 2002.
Mr Hubbard: I am David Hubbard. I am also, like
Chris Tailby, from Customs & Excise and I am Head of Excise
Group in the Business Services and Taxes part of Customs &
Excise. I am here today to discuss with you duty stamps for spirits.
Q74 Lord Barnett: Are any of you involved
in merging the two departments?
Mr Ramsden: I should declare a direct
interest, Lord Barnett, in that I worked with Gus O'Donnell on
the review of the Revenue departments, but it is fair to say that
in particular the two colleagues on either side of me were quite
closely involved. Dave Hartnett was very involved in the review
process but obviously all the staff of the two Revenue departments
were involved to some extent.
Q75 Chairman: We have got Gus coming in
a week or so. There is one other thing which I should have said
at the beginning. This committee (the main committee, that is)
has always, in the six years it has existed, done everything from
an evidence base, and therefore nothing ever gets into our report
if it is not based on evidencewhich is vital for us, particularly
today on what you say, because if you have not said what we need
to know we cannot deal with it. The other thing which I think
you aware of is that this committee is totally non-party political.
It does not mean that we do not have party allegiances, but in
our six years no party politics has ever got into our deliberations
or reports and I have no intention of allowing that to happen
today. I say that to you as officials partly for reassurance.
Who are you going to appoint, David, to get us started, or is
going to be you?
Mr Ramsden: I was going to make some very brief
framing comments and then hand over to colleagues on either side
of me to go into more detail. My framing comments are going to
be on the disclosure requirements aspect of the avoidance measures.
There are various avoidance measures in the Finance Bill and we
are going to focus on the disclosure requirements because we think
that is your particular interest, and I will hand over to colleagues
to talk more about the administration details of the two measures.
The first comment I want to make is that during the policy development
process there was a very close partnership between Customs, Revenue
and Treasury in working up the policy on disclosure. A key element
in this was the detail provided by the two Revenue departments
on how some of the recent schemes for avoidance that they had
had to deal with operated in the fields of direct and indirect
tax. This factual information was very important in our policy
deliberations. What these examples indicated was the increasingly
sophisticated and aggressive nature of the schemes in this area
which typically relies on secrecy for success. Given this, it
was clear that the policy response had to be innovative and based
on more powerful tools to provide and obtain information. The
Finance Bill disclosure measures provide just that. At their heart
is the common goal of greater transparency of information which
will enable the Revenue authorities to respond more quickly and
effectively to schemes. The government believes that the complementary
and focused measures for direct and indirect tax are fair and
proportionate, part of an increasingly strategic approach that
the two departments are taking to avoidance. With your permission,
Lord Chairman, I will hand over to Dave Hartnett who is going
to provide more detail on the administration of the Inland Revenue
disclosure measure but also give you some examples which I think
would be very helpful on the sorts of schemes they are designed
to tackle, and then Chris Tailby will do the same very briefly
for the Customs & Excise measure and explain the rationale
for some of the differences in implementation which I think you
are interested in.
Q76 Chairman: Very much so.
Mr Hartnett: Essentially the disclosure measures
for both direct and indirect tax are about providing the Inland
Revenue and Customs & Excise with earlier information about
tax avoidance schemes and arrangements than we have ever had before
to enable us to analyse them much earlier and, where appropriate,
for us to provide advice to Government as to whether they should
be countered or not. We think this is a proportionate measure
against the sorts of schemes I am going to describe in a minute.
It is about increasing transparency in a non-judgmental way. I
say that because it is about exposing the scheme rather than any
individual or corporate, trust or anyone else actually using the
scheme. The disclosure requirement will be about the product or
the package that has been put together. We also hope that in here
will be a disincentive to the creation and use of contrived and
elaborate schemes of the sort that both Customs and ourselves
With your permission I am going to give three
examples and then I would like to read a very short e-mail which
was circulated in the City just two hours after the Chancellor
sat down this year on Budget day which I think will help the committee
see the sort of issue we are wrestling with here. The first scheme
I want to mention was one devised for the benefit of large corporates
and in particular multinational enterprises. It involved stock
lending where stock is lent one way and cash comes back the other
way. It used an artificial scheme for helping to finance a multinational
enterprise in a way that generated huge profits in the multinational
enterprise but these were covered by losses which it already had,
and it created very significant losses for the funding bank and
it therefore got a reduction in its own corporation tax. This
was a scheme marketed in 2001. I went back a little way for the
reason I am just going to come to. We saw one case, and I hope
this gives you a feel for the issues, where tax savings of well
in excess of £150 million were to be split equally between
the multinational enterprise and the bank, effectively creating
a success fee of £75 million for the bank for arranging this.
This was stopped in the Finance Act 2001. The second example is
much more recent and there has been some mention of it in the
mediawhat has been called the gilt strip scheme. This was
marketed to and used by wealthy individuals in conditions of some
secrecy. The aim was to create and sell options over gilt strips
to generate income losses matched by gains that were outside the
capital gains tax regime, and the losses were then used to match
against other income and reduce tax liability. For some peopleand
we have not seen the relevant tax returns yetwe understand
the aim was to reduce it to nil, so they would pay no tax. It
was sold widely by major accounting firms for about six months
in the summer of 2003, maybe a little earlier as well, and stopped
by the Government by an announcement on 15 January. The third
example is of a scheme that was marketed pretty narrowly and in
conditions of even more secrecy to about 30 multinational or other
large corporate enterprises. It involves tax efficient, off-market
swaps, and I hope you are going to spare me explaining fully what
those are, but I am going to give you the impact if I may. These
have significant premiums which are front-loaded and those premiums
were claimed to be deductible against corporation tax profits.
Normally swaps are flat, if I can put it that way, in economic
terms and in accounting and tax terms. It was sold mainly by one
major accounting firm from January to September 2002 when it was
blocked. I hope it will help the committee if I try and put a
price tag on the last two. We think that the gilt strips scheme
has cost the Exchequer around £200 million. We cannot put
a better figure on that until we have seen the individual tax
returns. The tax efficient off-market swaps scheme could well
have cost a billion to the Exchequer in the time before it was
I want if I may to read this short e-mail, which
I think will give you some insight into how this industry works.
It is an e-mail from a tax planner, I think a lawyer. I am not
going to name him because I am not absolutely certain. It was
sent around the City just before four o'clock on Budget day this
year, so after the Chancellor had sat down. It is headed, "A
complete relief from capital gains tax": "Our strategy,
which provides complete relief from tax or capital gains of individuals,
companies and most trusts, has survived the Budget."I
am tempted to say, "no longer""The proposals,
which have been announced for the future, to prevent the use of
tax planning schemes generally, however, represent a threat to
the effectiveness of all the tax planning in the coming months."and
I think the reference is to disclosure schemes. "Therefore,
if you have a client who or which has realised or will realise
gains of £500,000 or more, you should contact us immediately
so as to implement our strategy before the taxpayer's ability
to benefit from tax planning strategies is curtailed." I
wanted to share that with you as an illustration of how fast this
industry can react.
There are a couple more things I might usefully
say. I mentioned that these disclosure measures were considered
to be proportionate. There is another reason for that in that
the one for direct tax is screened by a series of filters which
narrow down very considerably the scope of the measure so that
we get, as far as we can, to see the things that we really need
to see and we do not see things that are not helpful to the Revenue
and in fact burden our customers. We have tried very hard to learn
from other fiscal authorities, particularly in the United States,
and, as the Chancellor himself said, this measure falls a very
long way short of being a general anti-avoidance rule. It is about
providing transparency. The last thing I want to say by way of
introduction is that we do not think there is anything in this
measure which will in any way inhibit the giving of normal, plain
vanilla advice (if I may call it that) by tax professionals. I
hope that is helpful by way of introduction. I want to hand over
to Chris now if I may.
Q77 Chairman: You have even more frightening
ones to tell us about?
Mr Tailby: My Lord Chairman, the kinds of schemes
that we are talking about are those which are contrived arrangements.
They are put in place to try and achieve a VAT saving where otherwise
there would be none. I give you an example of the Debenhams
case. I give you it as an example because we won it in the VAT
Tribunal, so it is in the public domain. I should say that there
are many other retailers stacked up behind this case, the appeal
of which comes up in the High Court at the beginning of May. What
Debenhams did was to set up a subsidiary company which they maintained
had the purpose of handling credit card transactions. You may
have had this experience if you have gone into one of the high
street retailers and paid for something with a credit card. You
are asked to sign on the credit card slip that two and a half
per cent of the purchase price is payment for this service of
card handling. In fact, as the VAT Tribunal found, no such service
was provided and effectively the card handling arrangements carried
on as they had always done. Debenhams argued that the 2.5 per
cent was an exempt supply of card handling so that they only had
to account for VAT on 97.5 per cent of the total purchase price.
We argued that the reality was that these arrangements made no
change to what was a normal commercial arrangement and indeed
the tribunal found for us. These schemes, if you take the ones
that we know about, cost us, we estimate, £300 million in
lost tax and we would argue that this is a particularly contrived
scheme and it is the type of thing that we want to catch. As Dave
Hartnett has said in relation to direct tax, we have set very
high de minimis limits here. In relation to the hallmarks
part of the scheme we have set it at businesses with £10
million turnover, so very high. In relation to the listed schemes
where we are setting out schemes that we know about and asking
for reports on those, we have got a de minimis limit of
£600,000, so in actual fact there is quite a high level there.
I can pick up on some of the other points as they come through
in the other questions if I may.
Q78 Chairman: Could I just repeat something
you said at the beginning to make sure I understood what you said?
You were saying that the whole approach to avoidance in the Finance
Bill was a joint operation by Revenue and Customs. Did I hear
Mr Hartnett: And Treasury.
Q79 Chairman: So it is an example of already
the kinds of benefits that might come from a unified scheme because
that is in all our interests?
Mr Ramsden: That is right, Lord Peston, particularly
in the area of disclosure where we have had a number of joint
meetings to talk through policy development where we were looking
at the operational side and the detailed technical aspects as
well as the higher level strategy.
Chairman: The Committee, I am proud to
say, has several accountants on it and Lord Barnett is one of
them, And, as an ex-Treasury person himself, I thought he might
kick off with this.