I am aware that there may be some overlap between the Government amendments and those in my name, not least because of the order in which they were tabled.
Amendments Nos. 190 and 191 seek to limit the clause to those circumstances in which arrangements have been put in place to divert income to non-taxable persons. I am particularly grateful to members of the Law Society, who have highlighted some of the issues. The new rules in the clause are intended to counteract the particular scheme under which a UK corporate taxpayer gets an excess in their capital withdrawals, which results from an arrangement under which they are not allocated a proportion of the income profits to a partnership which they would have otherwise have received. Where that occurs, a charged tax under schedule D6 is imposed on the UK taxpayer which cannot be mitigated by using capital losses. In addition, no credit is given for that charge against a tax that may arise because the increased capital has been allocated to that partner.
I appreciate that the Inland Revenue may not believe that that is double taxation. The worry for others is that the provisions written in the legislation are what they have to go by, and they are concerned that no distinction has been made on that basis. I hope that the Financial Secretary can assure us on the following point, which causes the worry: it is quite possible that a UK corporate taxpayer may be taxed under the provisions by reference to income, but they are also taxed while the income is with another UK resident partner. That is the essential problem, which causes the worry.
The purpose of the amendments is to narrow the clause. To avoid inadvertently catching bona fide arrangements, the provisions should be limited to circumstances in which income has been allocated—other than in accordance with partnership capital—to partners who are not liable to be taxed on that income. It is a complicated point, and I must confess that I am not sure I am any more expert on it than I was a few weeks ago. I confirm that the amendment's purpose is to probe the Government's intention.
I shall ask the Committee to reject the amendment, but it may help if I first explain the intention behind the clause. Clauses 125 and 126 tackle certain avoidance schemes used by companies. The schemes use a partnership structure to convert taxable profits into untaxed increases in a partnership capacity. They allocate partnership profit shares in different proportion to partnerships' capital shares; for example, a company may give up all rights to income in return for a greater share of capital, then withdraw its increased capital from the partnership with little or no tax to pay.
Clause 125 returns the position to what it would have been if profits had been allocated in proportion to partnership capital. When the company realises the increase in capital, it will pay corporation tax on the profits that it would have earned with reference to its partnership share. Those schemes threaten to cost the Exchequer a significant amount of corporation tax each year and the Government are determined to tackle them to protect the interests of genuine businesses and the majority of taxpayers who pay their fair share.
I shall deal with the precise figures later in my contribution. First, I turn to amendment No. 190, which would add the word ''relevant'' so that ''profit'' becomes ''relevant profit''. Our advice from parliamentary counsel is that the meaning is clear without the amendment. Relevant profit is clearly defined and the later reference to profit in the same sentence can only be a reference to the relevant profit mentioned earlier in the sentence. There is no need for further qualification.
I am saying that the definition is clear in that ''profit'' refers to the relevant profit mentioned earlier in the sentence. I hope that the hon. Gentleman will be reassured on that point and that he will withdraw his amendment.
Amendment No. 191 would have no practical effect. It seeks to exclude from the meaning of ''relevant profit'' any chargeable gains arising from partnership of assets. However, the term ''relevant profit'' involves considering the shares of partnership profits allocated between the members of a partnership and refers to the partnership's commercial profits, not to the profits for tax purposes. In contrast, chargeable gains are purely a taxation concept. Excluding them from the business profits of a partnership makes no sense, as they are not part of those profits in the first place. I therefore hope that the hon. Gentleman will not press his amendments. If he does, I will ask my hon. Friends to reject them.
The Government amendments and new clause correct technical points that were raised in representations on the Bill. Their purpose is to ensure that new world rules interact correctly with the rules for computing chargeable gains. They ensure that there is an appropriate link to the rules for chargeable gains. The majority of schemes do not involve assets that might give rise to a chargeable gain, but, where they do, the amendments and the new clause will ensure that there is no double charge to tax. I know that the hon. Gentleman is concerned about that. That is achieved, first, by ensuring that the amount charged under clause 125 reads through correctly to the chargeable gains rule and, secondly, by deducting any amount that is charged to
corporation tax by the clause. Those schemes cost at least £75 million annually, but we believe that more such schemes could be brought into play if the loophole were not closed. So the potential loss to the Exchequer is much greater than £75 million, and revenue would be put at risk.
As I am sure you know, Mr. McWilliam, as do my hon. Friends, avoidance schemes are often updated and new schemes introduced, and the Revenue reacts accordingly. I am surprised that the right hon. Gentleman does not know that. A particular avoidance scheme has emerged and we have decided to close the loophole to secure revenue for the Exchequer in future years. That is perfectly reasonable, and I expect that my hon. Friends, at least, agree with our approach.
Like the hon. Member for Hertford and Stortford and many of my hon. Friends, I do not understand the precise technicalities of some of the clauses, and of the amendments in particular. The hon. Gentleman referred to the brief from the Law Society, of which I am a member. I am slightly surprised at amendment Nos. 190 and 191, which were tabled by the hon. Gentleman and by his friends. The Law Society proposed two amendments to the clause, neither of which are the amendments tabled by the hon. Gentleman.
I do not want to intrude on the relationship between the hon. Gentleman and the Law Society, which is clearly complicated. It is important that, where amendments are tabled, it is because one feels that they have strong merit. I feel that all the amendments that have been tabled fall into that category.
Thank you, Mr. McWilliam. I happily declare that I am not a member of the Law Society.
I thank the Financial Secretary for explaining the background to some of the Government's thoughts. I am not entirely sure whether the relevant/irrelevant debate has clarified the matter for those outside who are affected, but it has been helpful.
There is one matter on which I am still not clear; the Financial Secretary may be able to clarify it. There are instances when the income and capital of a partnership are not related to the capital contributions originally
made. One of the worries with the new clause and the amendments is that organisations, whether capital funds or whatever, may give a general partner a priority share of income to cover expenses and so on, but there will not be the matching of income and capital. The worry is that in trying to deal with those two aspects, there will not be any effort or opportunity for the tax system to recognise the existing conventional or commercial arrangements. One of the dangers when a tax system is a catch-all approach to tax avoidance with rigid rules is that a number of legitimate activities may also be caught up in that process.
However, having said that and having made it clear that the purpose of amendments Nos. 190 and 191 was to probe the Government's intention, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendments made: No. 184, in
clause 125, page 109, line 49, leave out 'the lower of' and insert
'(subject to subsections (6) and (7)) so much of A as does not exceed B, where'.
No. 185, in
clause 125, page 110, line 1, at beginning insert 'A is'.
No. 186, in
clause 125, page 110, line 5, at beginning insert 'B is'.
No. 187, in
clause 125, page 110, line 9, leave out subsection (6) and insert—
'(6) Subsection (7) applies if this section applies on more than one occasion in relation to the same company and partnership (whether because of two or more receipts by the company of consideration relating to the same disposal or for any other reason).
(7) On each occasion after the first, the amount found under subsection (5) shall be reduced (but not below nil) by the total of the chargeable amounts found (under that subsection read with this) on the previous occasions.'.—[Ruth Kelly]
Clause 125, as amended, ordered to stand part of the Bill
Clause 126 ordered to stand part of the Bill.