Clause 78 - Attribution of gains of non-resident companies
Finance Bill
10:30 am
Mr Michael Jack (Fylde, Conservative)
I support my hon. Friend, who has given a clear and reasoned exposition. I want to discuss amendment No. 37. At the heart of the matter is the concern that closed companies might be used for tax avoidance purposes. My hon. Friend was open in referring to a possible device, but the device is visible and known about, and its purpose is understood.
My hon. Friend observed that, following last year's representations, the Inland Revenue consulted on section 13, but the consultation exercise was not distributed as widely as it should have been. One company, Grosvenor Estates, expressed interest last year, but was not directly informed about the consultation, even though it had a material interest in the substantive provision and the amendments. If that is the extent of the consultation exercise, one wonders how enthusiastic the Government were about it.
Let us focus on Grosvenor Estates, a closed company. For greater accuracy, I obtained a copy of its annual report. If one did not know that it was a closed company, one could thumb one's way through this attractively produced document and conclude that Grosvenor Estates had every characteristic of a public limited company. The company invested substantially in areas such as Liverpool, and in Preston, in my part of the world. Making profits on its capital assets at home and overseas is an essential part of its activities.
In no way could that company be described as a tax avoidance device. In common with any publicly operating company, it seeks to minimise its tax liability, but it could not be characterised as a tax avoidance vehicle especially created for that purpose. In investing in the property activities that are still the subject of this section of the tax code, such a company finds it hard to understand why it is unfairly penalised when other companies carrying out other forms of activity are relieved of having to remit capital gains tax.
During the consultation exercise—amendment No. 37 refers to it—the Revenue rejected the proposition of getting round the difficulty by having a bona fide commercial motive test. Paragraph 7 of the summary of replies to consultation states:
``The Government is not persuaded that such a test would work in this area and considers it unnecessary with the proposal that any gains on trading assets should in future be excluded from a charge under the legislation.''
Let us concentrate on the words used to justify the Government's position, as challenged by amendment No. 37.
The Paymaster General will know that motive tests apply in other parts of the tax code. If my distant memory is right, manipulations of company shares require prior approval by the Revenue under section 802—such numbers were once seared into my memory, but have become a little fuzzy round the edges with the passage of time. Companies wishing to manipulate their share capital must have the specific approval of the Revenue, so in one part of the tax code there is an element of motive test—and there may be others. Will the Paymaster General tell us in detail—if not now, later—which parts of the tax code are subject to motive tests? If they are okay in one bit of the code, why are they not okay in another?
In the criminal law of this country there is always a juxtaposition between the actions of an accused person and his motives. For example, what was in the mind of a killer plays a key part in determining whether he faces a charge of murder or manslaughter. Again, there is an inconsistency in that the Treasury rejects the possibility of a proper motive test in this context, despite the fact that a motive test is an integral part of other areas of the law. I would be the first to sign up to measures to prevent people creating artificial tax vehicles for the avoidance of tax—such as, in this context, capital gains tax—but given the entirely correct position of a company such as Grosvenor Estates, I find it hard to understand why a greater effort has not been made to resolve its problem.
I can certainly remember in my time at the Treasury seeing some quite innovative and remarkable examples of people creating artificial vehicles—but dealing with those is part and parcel of the Inland Revenue's trade. It has a team of inspectors who can spot those things. If they can spot the ne'er-do-wells, they can spot the honest Joes. I am sad that the Government were not prepared to go the extra mile to see whether they could devise a way of sorting the wheat from the chaff and being consistent in the use of motive tests.
I sometimes find it hard to understand the distinction that is drawn. I congratulate the Government on going as far as ruling out companies that are in a legitimate trade, but that raises the interesting question as to what is illegitimate about investing in property. Let us consider the case of a closed company that is set up in north America to provide machinery, such as a service company manufacturing lifts, air conditioning equipment and the like. It could decide to go into property, and acquire some substantial property assets. It might, for example, end up with a large building, part of which could be let for normal letting purposes, with the rest being used for the wholly legitimate storage of its equipment.
If it became apparent that property was becoming a major part of the company's activity, someone in the Revenue would start asking questions. By definition there would have to be an examination—almost a mini motive test—to determine whether it qualified for the tax reliefs that are part of the substantive provision. Although that is a hypothetical example, it shows that that issue will not go away if someone takes advantage of the exemption in the principle provision, but that people who are legitimately involved in a property business are caught. Amendment No. 37 seeks to relieve them.