Mr Howard Flight (Arundel & South Downs, Conservative)

I beg to move amendment No. 44, in page 56, line 14, at beginning insert

`If the Board reasonably believes that neither of the conditions set out in section 349B is satisfied then'.

Dr Michael Clark (Rayleigh, Conservative)

With this it will be convenient to take Government amendment No. 50.

Mr Howard Flight (Arundel & South Downs, Conservative)

The clause is the fruit of much consultation by the Revenue, and it is generally welcomed by the accounting industry. However, there is a slight concern that taxpayers who, in accordance with the Revenue's guidelines, conscientiously check the status of their payees, could be liable for their payees' tax if it subsequently transpires that, contrary to all appearances, the pay is not within the charge to corporation tax. The payer can never know for sure that the pay is within the charge to UK tax. Only the Revenue will know that.

The clause is allegedly a deregulatory clause to remove the requirement to withholding tax on certain payments between companies where the requirements of new section 349A are satisfied, but new section 349C gives the Revenue an arbitrary power to overrule that and instruct a company to resume paying withholding tax. That surely cannot be right, and there should be a requirement for reasonableness by the Revenue. That is what amendment No.44 is designed to achieve, and I believe that it is also the objective of the undoubtedly more perfectly drafted Government amendment.

Miss Melanie Johnson (Economic Secretary, HM Treasury; Welwyn Hatfield, Labour)

I can confirm that the Government amendment is intended to achieve the same objective as amendment No. 44. Were things different, we might have introduced this amendment on Report, but as there are drafting problems in the Opposition amendment, it seemed sensible to do so now.

Amendment No. 44 was intended to spell out that the Board should give directions only where it reasonably believed that the conditions for making the payment gross were not satisfied. We agree that the Board's power should be limited in that way. We believe that it was implicit in the wording, but we accepted that it was desirable to make it explicit. Some aspects of the drafting of amendment No. 44 would have frustrated the purpose of new section 349C, so we tabled an alternative form of wording that achieves the desired result. I hope that the Committee can accept our amendment.

Mr Howard Flight (Arundel & South Downs, Conservative)

I am more than happy to substitute amendment No. 50 for amendment No. 44. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment made: No. 50, in page 56, line 20, at end insert—

`( ) Such a direction shall not be given unless the Board have reasonable grounds for believing as respects each payment to which the direction relates that it is likely that neither of the conditions specified in section 349B will be satisfied in relation to the payment at the time the payment is made.'. —[Miss Melanie Johnson.]

Mr Howard Flight (Arundel & South Downs, Conservative)

I beg to move amendment No. 45, in page 56, line 25, leave out `Where' and insert

`This section applies where—

(a) an application has not been made under section 349E, or

(b) an application has been made under section 349E and the Board have

refused to give notice that they are satisfied as required in subsection (1) of

that section, or

(c) an application has been made under section 349E and within 30 days of

that application being received by the Board a payment of the nature

mentioned in subsection (2)(a) is made.

(2) Where this section applies and'.

Dr Michael Clark (Rayleigh, Conservative)

With this it will be convenient to take amendment No. 46, in page 56, line 41, at end insert—

`349E. (1) The Board may, on the application of a company in the situation mentioned in section 349D (2)(a), notify that company that the Board are satisfied that the conditions in section 349B are satisfied.

(2) Any application under subsection (1) above shall be made in writing and shall contain such particulars as are relevant and known to the company making the application 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.

(3) The Board shall notify the applicant of their decision within 30 days of receiving the application or, if they give a notice under subsection (2) above, within 30 days of the notice being complied with.

(4) If the Board notify the applicant that they are not satisfied as mentioned in subsection (1) above or do not notify their decision to the applicant within the time required by subsection (3) 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 subsection (2) above, to the Special Commissioners; and in that event any notification by the Special Commissioners shall have effect for the purposes of subsection (1) above as if it were a notification by the Board.

(5) If any particulars furnished under this section 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 subsection (1) shall be void.'.

Mr Howard Flight (Arundel & South Downs, Conservative)

These amendments try to correct the main points of concern about the new section that have been widely raised by lawyers and accountants. If a company in good faith pays without withholding tax, in other words it pays gross, and it subsequently transpires that that was incorrect, the Inland Revenue can recover the tax from it and in a sense it will lose out twice.

The provision effectively requires companies to police the tax affairs of people to whom they pay interest, annuities and royalties and to take the risk that they have not been provided with adequate and truthful information. Surely the Government should issue guidelines about what companies can rely on in deciding whether to withhold. They should provide a safer harbour than the clause provides.

The amendment would cure the defect by incorporating a fast-track clearance procedure, which would protect public revenue and withhold protection from a company that put in an application and immediately paid interest gross, to prevent applications for clearance from being used to further tax avoidance. The wording is modelled on an existing successful clearance procedure—capital gains tax rulings on corporate reorganisations under section 138 of the Capital Gains Tax Act 1979. The Law Society and the Chartered Institute of Taxation strongly support the need for a clearance procedure.

Miss Melanie Johnson (Economic Secretary, HM Treasury; Welwyn Hatfield, Labour)

In proposing amendments Nos. 45 and 46, the Opposition have made some play of the need for a clearance system to facilitate the operation of the regime introduced by clause 83. I am not clear on whether they think that the new regime is inoperable without a clearance system or whether such a system would slightly improve its workings. In either case, the Opposition's view is misconceived. The regime is not unworkable without a clearance system, and such a system would not improve the way in which the new rules work. In fact, it would place new burdens on business and reintroduce the bureaucracy that we have been so keen to avoid. I believe that the hon. Gentleman is also keen to avoid that.

Let me explain the situation in more detail. The clause is intended as a deregulatory measure and will cut red tape. It responds to calls that we have received to build on the reforms that we announced last year by lifting withholding tax on payments made between companies where the payment would be taxed anyway in the hands of the recipient. In making that change, it has always been the Government's view that the new system should be as light-handed as possible. That is why the new rules do not set an objective test, which would often be difficult for a paying company to verify. Instead, they simply require a paying company to act on its reasonable belief that the conditions for gross payments are met. A clearance system would place new burdens on business and the Revenue.

To protect the Exchequer, we have consistently taken the view that if it turned out that the tax was not deducted when the recipient was not in the categories entitled to gross payment, the Revenue should be able to recover its tax from the payer. We have recognised that payers would want to take steps to protect their position in the event of a Revenue claim for tax, but we believe—and have been told—that it will be perfectly possible for payers to do so by a system of indemnities as part of their normal contractual arrangements.

The Opposition's proposal to include a clearance system therefore runs completely counter to the clause's intention. It would not match the deregulatory objectives of the new regime, but would place significant burdens on the Revenue that we had not anticipated as part of the measure. It would also place burdens on business, because if a clearance system were instituted, everyone would feel bound to use it, perhaps incurring additional professional charges in the process.

A clearance system cannot give the sort of guarantees that the Opposition think it could. For example, if paying companies seek comfort from the Revenue because they have doubts about whether the recipient is the beneficial owner of the income to be paid, the Revenue will often be unlikely to have access to all the information that it needs to answer those doubts. As we announced on Budget day, we shall continue to work with the markets in developing guidance for the operation of the new rules. We are consulting on the need for and nature of any further guidance that the Revenue should produce. In that way, the Government can facilitate the regime's operation.

The amendments seem to contain flaws and would not achieve the Opposition's objectives. The result is that section 349D would apply in some circumstances when the Opposition wanted to disapply it; in other circumstances, it would not apply when the Opposition would presumably agree it should apply. For all those reasons, the proposals are unsatisfactory. I hope that I have explained the difficulties and that the Committee will reject the amendments.

Mr Howard Flight (Arundel & South Downs, Conservative)

We claim not that the clause is inoperable without the amendment but that it is unreasonable for there to be no clearance system or some form of safe harbour. If a clearance system is not acceptable, could the Minister say more about the type of safe harbour guidance that the Revenue intends? It would be unreasonable to place paying companies at risk of having to account for tax when they have taken reasonable steps to check that recipients were within the charge to UK corporation tax. While it may be wrong and unrealistic to prescribe exactly what evidence a paying company should obtain, there should surely be some form of safe harbour guidance and companies that have made specified checks should be safe from potential subsequent claims for tax and penalties. Whatever guidance the Revenue produces needs sufficient status to give that safe harbour. Companies within the safe harbour should be safe from having to account for tax and from penalties. If that approach were taken, there would be no need for clearance as an alternative.

Miss Melanie Johnson (Economic Secretary, HM Treasury; Welwyn Hatfield, Labour)

I cannot help the hon. Gentleman greatly in that regard. The Revenue placed initial guidance on the website when the Bill was published. As I said, we will continue to work with the market to provide guidance. I am not sure about the term ``safe harbour guidance'' because I am not sure that we can provide safe harbours. However, we are committed to producing as much further guidance as possible, by working with the market. It would be premature for me to go into any more detail but I hope that the hon. Gentleman registers the fact that there are difficulties in taking a different approach and that we are doing what we can to make the legislation as straightforward as possible for those who are operating it. The fact that it is a deregulatory measure is a real gain to the industry.

Mr Howard Flight (Arundel & South Downs, Conservative)

The Minister's comments are helpful but not helpful enough. The points were raised by the Law Society and the various accounting bodies. If a paying party has done its homework to ascertain whether it should stop withholding tax and there is a problem that it has not caused, it would be unreasonable for the Revenue then to charge it withholding tax and a penalty. I do not know about a safe harbour or a safe haven, but it should be made clear under the new streamlined arrangements—which are broadly welcome and the result of constructive discussion—that the Revenue do not intend to act unreasonably in situations where companies have been conscientious and professional about ascertaining whether they should be stopping tax.

Miss Melanie Johnson (Economic Secretary, HM Treasury; Welwyn Hatfield, Labour)

In some situations the measure can clearly work and in others it cannot. There will be areas in between—which is what the guidance relates to. As I said, the Revenue will often not have the information to provide the certainty that the hon. Gentleman seeks. In such circumstances, the companies concerned will have to operate on the basis of reasonable belief, and people must decide what they will do about that. Market operators who wish to protect against the Revenue making claims such as those mentioned by the hon. Gentleman might do so by seeking indemnities from those to whom they make such payments, but just on the basis of contractual arrangements between the concerned parties. I envisage that happening in some of the situations on which the hon. Gentleman seeks greater certainty.

Mr Howard Flight (Arundel & South Downs, Conservative)

The point is well aired and not worth pressing to a Division. However, it is an operational issue and, if the new arrangements are to work satisfactorily, the industry and the Revenue will have more work to do to reach a common understanding of what I would broadly call safe harbour situations. If, as the Minister said, the complications and expense of indemnities are necessary, they should be kept to a minimum; otherwise, the measure will not be deregulatory. Having aired the point, I will seek leave to withdraw the amendment.

Mr Oliver Letwin (West Dorset, Conservative)

I just want to set the record straight, because I misled the hon. Member for Torridge and West Devon in responding to his question on 75 per cent. holdings on double tax relief. Having re-examined my papers, I want to place on record the fact that the exemption or rollover ought to apply to any substantial shareholding. One could argue about how big a substantial shareholding should be, but I was wrong to say at least 75 per cent. and I apologise to him and to the rest of the Committee.

Mr John Burnett (Torridge & West Devon, Liberal Democrat)

I am grateful for that clarification.

Mr Howard Flight (Arundel & South Downs, Conservative)

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 83, as amended, ordered to stand part of the Bill.

Clauses 84 to 86 ordered to stand part of the Bill.