Mr John Healey (Economic Secretary, HM Treasury; Wentworth, Labour)

The clause contains anti-avoidance legislation that continues the Government's commitment to tackling tax avoidance wherever we can. The legislation that was introduced in 2000 gave small businesses 100 per cent. first-year allowances on investment in information and communications technology, such as computers, software and internet-enabled mobile phones. The allowance encourages small businesses to invest directly in that technology and enables them to embrace e-commerce and make their dealings with the Government and businesses faster and therefore more efficient.

The original legislation prevents a claim to allowances when the technology is acquired for leasing, but not when software rights are licensed out to others. An avoidance scheme has developed, using the loophole by allowing higher rate taxpayers to claim the allowances without expenditure being incurred on bona fide investments. I will briefly describe how the scheme works. It uses partnerships to purchase software. Individuals may put up around 20 per cent. of the money to make the purchase, with the rest being loaned by banks. The software is then licensed back to the software developer. One hundred per cent. first-year allowances are claimed on the total investment, so an individual putting up £20,000 would get tax relief of nearly £40,000 without any risk and without making an investment for the purposes intended to qualify for the relief. The effect of such a scheme is to give participants a risk-free profit at the Exchequer's expense.

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