The Chairman: With this it will be convenient to take the following amendments: No. 115, in schedule 25, page 303, line 23, at end insert
No. 116, in schedule 26, page 344, line 23, at end insert
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(3B) Any application under subparagraph (3A) above shall be in writing and shall contain particulars of the contract to be entered into by the applicant and the Board may, within 30 days of the receipt of the application or of any further particulars previously required under this subsection, by notice require the applicant to furnish further particulars for the purpose of enabling the Board to make their decision; and if any such notice is not complied with within 30 days or such longer period as the Board may allow, the Board need not proceed further on the application.
(3C) The Board shall notify their decision to the applicant within 30 days of receiving the application or, if they give a notice under subparagraph (3B) above, within 30 days of the notice being complied with.
(3D) If the Board notify the applicant that they are not satisfied as mentioned in subparagraph (3A) above or do not notify their decision to the applicant within the time required by subparagraph (3C) above, the applicant may within 30 days of the notification or of that time require the Board to transmit the application, together with any notice given and further particulars furnished under subparagraph (3B) above, to the Special Commissioners; and in that event any notification by the Special Commissioners shall have effect for the purposes of subparagraph (3A) above as if it were a notification by the Board.
(3E) If any particulars furnished under this paragraph do not fully and accurately disclose all facts and considerations material for the decision of the Board or the Special Commissioners, any resulting notification that the Board or Commissioners are satisfied as mentioned in subparagraph (3A) above shall be void.'.
Mr. Flight: The clause inserts an unallowable purpose, anti-avoidance clause in the financial instrument rules and mirrors the existing rule for corporate debt purposes, the paragraph 13 rule. There is a general acceptance that that rule is unclear and untested in the courts. We propose that a statutory clearance procedure should be included in the legislation as an option to give companies certainty when entering into complicated commercial arrangements.
The unallowable purpose rule in the corporate debt legislation has been the subject of widespread criticism. Introducing a mirror image rule in the financial instruments legislation will, potentially, exacerbate rather than ease the situation. The Institute of Directors has made the point that
When we suggested that a statutory clearance procedure be included in the substantial shareholdings legislation, the Minister told us that it would be inappropriate for the Inland Revenue to provide a
Column Number: 317statutory clearance mechanism due to cost and that businesses would not want it if there was one. That was said to be because the rules on substantial shareholdings had been subject to extensive consultation and we were told that the Inland Revenue guidance notes would clarify any uncertainties.
Throughout the consultation process on substantial shareholdings, there were repeated calls for advance clearance procedures, and the same point applies to this clause. Taking first the cost argument and the suggestion that many clearances are obtained simply because the facility exists rather than because there is serious uncertainty, we do not think that that would be the case with the clearance arrangements that we propose. The amendment asks specifically for confirmation that the contract does not have an unallowable purpose--that is, that it meets the requirements of the legislation.
The clearance procedures contained in section 707 of the Income and Corporation Taxes Act 1988 and section 138 of the Taxation on Chargeable Gains Act 1992, the two most widely used Inland Revenue clearances, give the taxpayer certainty on whether a transaction is being carried out for what the Treasury consider to be bona fide commercial reasons, not whether the transaction meets the requirements of clearly worded and tested legislation. Clearly, there is a difference between a clearance that comments on the motivation for the transaction as a whole and one that gives certainty on the imposition of inherently ambiguous and untested legislation. If existing clearances are obtained unnecessarily, perhaps the Treasury should consider the problems with them, rather than dismissing out of hand the need for new clearance procedures in other parts of the tax law.
The Minister also stated that one of the reasons for excessive costs is that the position might change and the facts might be different when the transaction takes place. However, one of the conditions of the clearance is that the facts are unchanged. If they are not, taxpayers lose their certainty. That is not in the interest of taxpayers, and it is difficult to imagine why a taxpayer who went to the effort of obtaining a clearance would choose to change the facts. If that were a real concern, an additional condition could be included in the clearance procedure that the onus is on the taxpayer to notify the Treasury about any changes in facts or circumstances.
Finally, there is the argument that the legislation has been widely consulted on. I draw the Committee's attention to the response of the Chartered Institute of Taxation, which was submitted to the Inland Revenue last October:
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Given the above comments, it is clear that just because there is a consultation process, it neither means that the resulting legislation will be perfect nor that the Treasury will actually listen to all the consultation responses. The Minister said that there were informal methods of obtaining guidance. That is agreed and accepted, but how often a taxpayer would be prepared to bring his tax inspector into discussions when he is considering entering into a complicated commercial arrangement on an informal basis is debatable for obvious reasons. Surely, a statutory clearance procedure would help the Treasury help the Revenue, because it would have the full facts in advance, and it would help businesses and taxpayers by providing certainty.
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