Helen Goodman (Bishop Auckland, Labour)

I beg to move amendment No. 103, in page 54, line 10 [Vol I], at end insert—

‘(2D) Arrangements where the tax advantage arises due to the creation or utilisation of an allowable loss shall not be treated as arrangements for the purposes of Part VII of the Finance Act 2004.

(2E) Where an allowable loss accrues to a company in circumstances that are not disqualifying circumstances, then for the purposes of the Tax Acts it should be assumed that the Promoter and the company did not wish that the element of the arrangements that secured a tax advantage not to be disclosed to any other promoter or Her Majesty's Revenue and Customs.”'.

Edward O'Hara (Knowsley South, Labour)

With this it will be convenient to discuss amendment No. 104, in page 54, line 4 [Vol I], after ‘enforceable)', insert

‘but arrangements shall not include any election undersection 24, 161 or 171A and shall not apply to either the whole or part of the loss to the extent that the allowable loss corresponds to an equivalent economic loss suffered by the company'.

Helen Goodman (Bishop Auckland, Labour)

We turn from the breathless excitement of the Olympics to the somewhat more arid territory of anti-avoidance clauses. [Interruption.] I am certain that they will not fail to engage the attention of the hon. Member for Wolverhampton, South-West. Judging from the noises coming from the back, I think that his party hopes that they will engage his attention more favourably than the clauses on the Olympics.

Clause 69 is a brief but important clause. It is essentially a mini general anti-avoidance clause relating particularly to disclosure, and it takes us deep into tax planning and what advisers should and should not disclose to HMRC. It will establish an anti-avoidance rule disallowing any capital losses to companies arising from arrangements whose main purpose is a tax advantage. It is an extension of previous disclosure rules introduced, as the Paymaster General will tell us in due course, in the Finance Act 2004.

The question is one of balance and fairness. Obviously, we deplore the exploitation of different tax rates in order to abuse them. In the Government’s favour, it is perhaps worth knowing that Deloitte welcomes the revised clauses:

“The amendments set out in the revised legislation and HMRC guidance notes provide welcome clarification in certain areas and also amend some of the unintended consequences of the proposed new legislation.”

However—there is always a “however”—one of the difficulties is that the Government have doubled the size of UK tax legislation in eight years. By doing so, they have created more opportunities for avoidance and more gaps that must be plugged, creating in turn yet more opportunities for avoidance. It is worth testing with amendments the complexity and uncertainty of the system, and whether the changes will increase or reduce that complexity and uncertainty.

Amendments Nos. 103 and 104 are essentially probing amendments, although amendment No. 105, which relates to the imposition of a possiblepre-clearance regime, is rather less probing. I shall be interested to hear what the Paymaster General has to say about that. We want to hear her response before deciding whether to press the amendments to a vote.

Amendment No. 103 would introduce two further additions to section 8(2) of the Taxation of Chargeable Gains Act 1992, which the clause will add to and amend. The first part of the amendment seeks to remove capital loss planning from the proposed disclosure rules. The argument runs that if an allowable loss can be used only where obtaining a tax advantage is not the main purpose for creating that tax loss, it is  unreasonable for the Government to impose a disclosure regime to prevent the utilisation of such losses, which by their nature must be real economic losses and not paper losses. The amendment would remove capital loss planning from the scope of the disclosure rules by excluding it from the relevant definitions in the statute that introduced those rules.

The second part of the amendment deliberately echoes the wording of the statutory instrument that, from 1 July 2006, will put into effect key changes to the disclosure rules. HMRC’s old regime required that a scheme should be disclosed if it could warrant a premium fee, or if it were confidential in the sense that the tax adviser would not want the idea to be known to the wider tax community. The new regime goes wider: it requires confidentiality in the sense that the adviser would not want the scheme to be known to HMRC.

The statutory instrument requires the promoter—the lawyer, accountant or bank—to disclose the scheme if

“(i) it might reasonably be expected that a promoter would wish the way in which an element of those arrangements secures a tax advantage not to be disclosed to any other promoter; and

(ii) the promoter does not wish to disclose to Her Majesty’s Revenue and Customs the way in which that element secures that advantage”.

The second part of the amendment is intended to bring about a debate on the contents of the statutory instrument, and in particular on what is meant by the word “wish”, and how that wish will be perceived. We also want to consider the reason for not dealing with amendments to the disclosure rules by way of primary legislation, and the reason why Ministers are seeking to impose limits on discussions that are themselves legal and which may have arisen because of deficient drafting of tax legislation—although I am sure that that latter point was covered in the debate on the 2004 Bill.

Amendment No. 104 seeks to clarify the proposed disclosure rules and to enshrine in law an important comment contained in the explanatory notes—the comment that clause 69 will not apply to economic losses. Thankfully, amendment No. 105 is a bit less dry—

Edward O'Hara (Knowsley South, Labour)

Order. We have not yet reached that amendment.

Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

I was moving on with the hon. Member for Wycombe. As he rightly identified, the clauses deal with three specific anti-avoidance measure. They have their origin in disclosures made under the regime that was introduced in 2004. At the time, Mr. Flight—the then hon. Member for Arundel and South Downs—spoke about disclosures on behalf of the Opposition and said:

“At the heart of the issue, as far as we see it, is the fact that reporting of the tax avoidance schemes being marketed is in essence a no-brainer. People know when they are marketing them, and when such a scheme is being marketed to them.”

He continued:

“The objective is that the Revenue should at least be much more quickly aware of what is being marketed. That is sensible.”—[Official Report, Standing Committee A, 22 June 2004; c. 701-704.]

That fits specifically with the wider point made by the hon. Member for Wycombe about complexity and  avoidance. Unfortunately, whatever Governments do—much of the legislation that is being exploited is legislation that was in place under the previous Government—the same old things are tried: creating a loss or getting a capital allowance or a deduction or converting one form of income into another to have it taxed under a different regime. This goes to the heart of how our tax system works. While I am happy to engage with the hon. Gentleman in that debate, it is somewhat fruitless, at least on these clauses.

As I said, these measures result from information specifically provided under the disclosure regime and are specifically targeted to deal with that. Indeed, the comments made at the time of the announcement and the observations on the draft clauses from a whole range of organisations and accountancy firms, such as KPMG, Ernst and Young and Deloitte and Touche to name but three, clearly acknowledged that this is precisely how the clauses are operating.

Clause 69 denies tax relief for capital losses where their existence or amount has been contrived, that is, where the losses that arise do not reflect commercial reality. The clause prevents relief for capital losses where there is either no underlying economic loss, or there has been no commercial disposal of an asset by a company or its group and the main purpose, or one of the main purposes, of the arrangements was to secure a tax advantage.

These measures were first published in draft in the pre-Budget report and they are all effective from that date. In the pre-Budget report, HMRC also published draft guidance on the new measures, with a statement setting out why they are necessary and the principles that underpin them. That approach, which clearly sets out what the measures are seeking to achieve, has been well received by the accountancy and legal professions and their clients.

There are two identifiable classes of transaction that this legislation will affect. The first is transactions structured so that the tax outcome does not reflect economic reality. These are cases where a large capital loss is created for tax purposes but where there is no, or only a very much smaller, commercial loss. The second class of transaction targeted is one where there is a contrived sale or other disposal of an asset and that sale gives rise to a real commercial loss but there has been no effective, or real commercial disposal of the asset. There is therefore no change in the economic ownership of the asset because either the company, or the group, still retains ownership. Since there has been no real “disposal”, the clause will act to disallow the capital loss.

Amendment No. 103 is aimed at excluding from the scope of the disclosure regime any arrangements that obtain an allowable capital loss. That is a very wide exclusion indeed, covering all arrangements that involve capital losses. The main purpose of the disclosure regime is to ensure that HMRC receives early information about potential tax avoidance schemes so as to inform current and future anti-avoidance legislation policy. The disclosure regime, as the then hon. Member for Arundel and South Downs pointed out, provides the  information to ensure that if steps are necessary, they are specific and targeted to move away from what had been the practice of successive Governments of a more blanket approach to some anti-avoidance legislation, without having the clarity of the disclosure regime to pinpoint specifically the transactions that are required to be in order. The disclosure regime helps to identify schemes that may well meet the letter of the law, but which use it in a way that was not intended and, at times, in an abusive way. They do so by requiring disclosure of schemes falling within certain descriptions contained in the regulations. Those descriptions are carefully targeted at the schemes that have a high risk of being avoidance.

It seems absurd therefore, as the amendment proposes, to exclude from the scope of the disclosure regime a scheme that complies with that particular tax rule, but which could have other avoidance aspects that have nothing to do with capital losses. It is precisely those schemes that meet the letter of the law—but in the way that was never intended—that the disclosure regime is designed to detect. That was the debate when we approached the clauses in Committee in 2004. If the logic applying to the amendment were to be applied across the board, the disclosure regime would be rendered worthless. There would be no point in it and the objective of the effective operation of disclosure regimes that the Opposition agreed that the Government should seek would be undermined. It is no surprise to the hon. Gentleman that I believe that amendment No. 103 strikes at the purpose of what we are trying to achieve under the regulations. I am not attracted to it. I do not know whether the amendment is probing, but I shall take it as such at the moment.

Amendment No. 104 would do two things. First, it would prevent the clause from being applied when arrangements include certain claims or elections made under other provisions of the Taxation of Chargeable Gains Act 1992. It also undermines the purpose of the clause by allowing a capital loss even though there has been no real commercial disposal of an asset. In the majority of cases, the clause will have no impact on companies making claims or elections under other sections of the Act, for example, when a company claims a loss because an asset has become of negligible value. I go back to the point made by the then hon. Member for Arundel and South Downs in 2004, which is that people know when they are marketing avoidance schemes and others know when such a scheme is being marketed at them. HMRC’s additional published guidance specifically addresses the points of which companies need to be aware. It states that the making of such an election will not in itself be regarded as an arrangement to which the clause applies.

However, giving carte blanche to all arrangements that use particular claims or elections, as the amendment would do, undermines the effectiveness of the clause. It is possible that the claims or elections could be part of larger arrangements that have been contrived to produce a loss. I touched on that point when I covered amendment No. 103. The legislation must be capable of deterring such behaviour because, again during our discussions on the Finance Act 2004, it was clear from contributions made by all members of the Committee that it was the presence of the  disclosure regime to deter people, in the first place, from engaging in those activities that was of particular importance.

The second effect of amendment No. 104 would be worse, in that it would completely undermine the principles that underpin the clause by giving relief for losses on assets that have not actually changed economic ownership. In extreme cases, it would mean that companies could create large capital losses, even though an asset might only temporarily have fallen in value and there had been no change in economic ownership of the asset.

As if the other bit of damage was not bad enough, the amendment would also have wider implications for the corporate capital gains system. Companies’ capital gains and losses are taxed or relieved on a realisation basis. If we were to give relief for losses when there is no real economic disposal, we would be allowing a mismatch in the treatment of gains and losses, as losses would effectively be relieved as they accrued whereas gains would continue to be taxed on realisation.

Taken as a whole, amendment No. 104 seriously undermines clause 69 to the extent that any additional revenue from preventing avoidance schemes currently in use would, in all likelihood, be lost. The estimate is something like £260 million for the tax years 2006-07 to 2008-09 with a continuing £150 million a year thereafter.

Amendment No. 103 would exclude several potential avoidance schemes from the disclosure regime and amendment No. 104 would seriously undermine clause 69. I hope, therefore, that the hon. Gentleman has probed the intention of the Government enough and will want to reflect on what has been said before he decides whether to pursue the matter further.

Helen Goodman (Bishop Auckland, Labour)

When tabling these amendments and those to clauses 70 and 71, I thought that reference might be made to the former hon. Member for Arundel and South Downs, Mr. Howard Flight. Although I have not gone back through the 2004 debates to read every remark he made or to follow entirely the flow of his thought, I suspected that he might have dealt with such clauses.

The Paymaster General’s reply was a little reliant on extreme cases when she referred to amendment No. 104. She acknowledged that some innocent arrangements might be caught by the provision. However, in the light of the long consideration given to the proposals during the consultation process that she referred to and my not wanting to explain to her where we would plug a£260 million gap in finances, I beg to ask leave to withdraw the amendment.

Helen Goodman (Bishop Auckland, Labour)

I beg to move amendment No. 105, in page 54, line 10 [Vol I], at end insert—

‘(2D) Subsection (2)(b) above shall not apply where, before the end of the accounting period in which the allowance loss accrues, the Board have on the application of the company notified the company that the Board are satisfied that the disposal or deemed disposal does not accrue in disqualifying circumstances.

(2E) Subsection (2D) shall be subject to the same procedures contained within section 138(2) to (5).”'.

Edward O'Hara (Knowsley South, Labour)

With this it will be convenient to discuss amendment No. 101, in clause 71, page 62,line 47 [Vol I], at end insert—

‘(5A) Subsection (2)(b) above shall not apply where, before the end of the accounting period in which the allowable loss accrues, the Board have on the application of the company notified the company that the Board are satisfied that the disposal or deemed disposal does not accrue in disqualifying circumstances.

(5B) Subsection (2)(b) shall be subject to the same procedures as those contained in section 138(2) to (5).'.

Helen Goodman (Bishop Auckland, Labour)

As the Paymaster General and I both anticipated, we come to amendment No.105. It is more straightforward than the previous amendments in that it would introduce a pre-clearance regime to the proposed rules on disclosure. Given that HMRC already has a relationship with companies by way of the disclosure arrangement, there is a case for introducing a pre-clearance regime that sets the dialogue on a more formal basis. Capital gains tax frequently arises on major business transactions, a classic example of which would be the sale of a property or business, so large amounts of money may be at stake. Capital gains by their nature tend to relate to substantial decisions by companies, hence the risk that an adverse tax change could deter businesses from making commercial decisions.

A pre-clearance regime would mean that HMRC would make policy clearances publicly available in order to provide greater certainty to taxpayers. Such regimes are widely used abroad, for example in Australia and New Zealand. My recollection is that in countries where they are not used—for example, the Republic of Ireland—the tax regime is a good deal simpler. I suspect that the Paymaster General will argue that it will be difficult to staff the regime, or that the arrangement might be administratively inconvenient, but since in this and other clauses the Government are seeking in effect to enter into further discussions about tax affairs with businesses, there seems no obvious reason why a tax clearance regime should not form part of those discussions.

Furthermore, there is a genuine debate to be had about whether the Government should, on the one hand, spend more time tinkering with the tax system in the light of the greater complexity caused by the expansion of tax legislation since 1997, or, on the other, simply opt for a pre-clearance regime.

Jeremy Wright (Rugby & Kenilworth, Conservative)

I rise briefly to support amendment No. 105, tabled by my hon. Friend the Member for Wycombe. The difficulty is that companies that have to make delicate commercial decisions about how to manage their losses want clarity about what they are and are not permitted to do while staying legitimately within the tax regime. For example, they may have to decide whether to move losses from one business period to another or make other arrangements that will benefit them commercially. I hope that the Paymaster General will surprise my hon. Friend and me and say that the amendment is a good idea, but I fear she will not. In that case, I would ask her to think again, because there is a huge advantage to be gained in companies being able to contact HMRC for clarification of what they are permitted to do. Certainly, that would be desirable.

As my hon. Friend said, although there may be some additional administrative inconvenience for HMRC in providing clarification, there would be greater benefits for the company concerned and for the economy generally. I therefore ask the Minister to consider the amendment very carefully. It is a good idea that will assist companies in knowing exactly what they are permitted to do in an important area that is growing increasingly complex and difficult to manage.

Brooks Newmark (Braintree, Conservative)

The added benefits for HMRC are time and money, which are limited assets. Greater clarity upfront on these issues would benefit the constituent involved and save HMRC time and money in chasing up matters later.

Jeremy Wright (Rugby & Kenilworth, Conservative)

My hon. Friend is right; prevention is better than cure. The consequences of the amendment should be that HMRC will be able, perhaps very simply, to tell a company whether an arrangement would be legitimate for tax purposes. I go back to what the Paymaster General said earlier about remarks that were made in the 2004 Finance Bill debate: if it is clear what is and is not a permissible arrangement, it will not take long for HMRC to answer questions. If, by having their questions answered, companies can stay within the limits of the tax regime, in the long run, as my hon. Friend says, we will save ourselves and them a great deal of time and money.

Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

Before I comment on the amendments, let me address the issue of statutory clearance. That concerns the additional burdens on business and a great deal more that the hon. Gentlemen, conveniently, did not touch on. The clauses deal with tax avoidance. They have been disclosed as regimes under disclosure, and therefore legislated for, and will apply only where one of the main purposes of a transaction or arrangement is tax avoidance. They will not apply to the vast majority of companies or to wholly commercial transactions. The principle behind the measure is that companies should be able to claim and use capital losses only where there is both a genuine economic loss and a genuine commercial disposal. That is the absolute bedrock. The hon. Gentlemen have spoken about complexity, but business is complex. Assuming that they do not propose taking capital losses out of the tax system completely, they are over-egging their comments about the tax system and the way in which legislation is phrased.

Although the amendments affect two separate clauses, clauses 69 and 71, they are grouped together because they deal with the same principle. They seek to introduce a statutory clearance procedure for both clauses, and I consider that to be unnecessary. The majority of companies do not need to use the clearance procedure, but could be forced to do so. Once that is in place all sorts of other things come into consideration, such as whether they have been properly advised, and indemnities for accountants and lawyers. That does not apply to most companies because the scheme is specifically about the misuse of losses, and in any case they will know whether they are using it. To say that they will not is to ignore commercial practice, as has been acknowledge in this Committee on a number of  occasions and in debates on different Finance Acts about the nature of avoidance.

The disqualifying circumstances with which clause 69 is concerned are those in which companies have entered into arrangements whose main purpose is to enable them to secure a tax advantage. In short, that is tax avoidance, and that is what the measures are aimed at. Companies will know whether they are doing it. There is no question that they need statutory clearance. The effect on all other companies will be the reverse of what is being advocated. It will not give speedy resolution, but will drive them to feel that they should seek statutory clearance—presumably before the transaction takes place and therefore putting pressure on it—whereas they will not need it in the first place because they are not engaged in the activities covered by the clause.

Jeremy Wright (Rugby & Kenilworth, Conservative)

Surely the Paymaster General cannot have it both ways. If she is right—I do not think that she is—that this is a straightforward area, it will always be obvious to companies what is tax avoidance and what is not. Surely if there is a clearance procedure, and they ask whether an arrangement is tax avoidance or not, they will get a very simple, straightforward and quick answer from HMRC, which will not cost much time or money. So what is the problem with the procedure?

Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

First, we are not talking about commercial transactions. The clauses deal with very narrow and specific avoidance mechanisms. That is all that we are talking about. We have put that clearly in legislation and guidance notes. The idea that those who design such schemes, knowing what they are designed to achieve, should seek clearance before they start marketing them, is simply unattractive—to put it mildly.

Brooks Newmark (Braintree, Conservative)

Will the Paymaster General give way?

Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

No, I will not. I am going to answer the question, and then the hon. Gentleman can come back. It is a complex area, and I am not able to get one set of answers on the record before the next set comes forward. The hon. Gentleman can make his points later.

Clause 69, as I said, is aimed at those companies that specifically use that type of scheme; those schemes are caught by the clause. They do not happen by accident or incident; they are the result of highly contrived circumstances when transactions are undertaken. It is very simple. If there is no clearance, companies should not engage in such schemes. The schemes are carried out in a particular way, primarily to achieve a desired tax effect rather than general commercial purposes, and companies will know that. For that reason,clause 69 does not need a safety blanket of a statutory, pre-clearance procedure wrapped around it. It is quite clear what it is aiming at.

The schemes at which clause 71 is aimed are just as artificial as those targeted by clause 69. They seek to turn an income stream into a capital gain, or to contrive a linked income deduction, effectively turning a capital loss into an income one. In each case, capital losses are used to shelter tax liabilities on the contrived capital gain. The relief for capital losses is given against income profits only in very limited circumstances, when Parliament intends that to happen. Schemes have been devised to  circumvent that intention and to obtain relief at will, and clause 71 stops that. However, clause 71 is targeted at more complex schemes, so there may be more uncertainty about whether the legislation applies. HMRC has instigated an informal clearance scheme for the clause, which businesses may use if they wish. That has the advantage of providing help to people who want it, without adding any unnecessary layer of bureaucracy to those who do not. It provides the practical certainty that businesses want. HMRC will be bound by its decision, with regard to clause 71, provided that businesses disclose all the relevant facts when the application is sought. Furthermore, the rules that the clause introduces will apply to companies only if the notice to that effect is issued by the board of HMRC. That will further comfort compliant companies.

Both the amendments make reference to a clearance procedure used for share exchanges, but they would not adapt the legislation to make it relevant to the clauses, so they would not actually work. They would also provide for statutory clearances to be applied for before the transaction takes place. They would be requested and, presumably, granted on the basis of planned or hypothetical transactions. That cannot possibly make sense. The amendments contain no requirement that an applicant is contemplating carrying out the proposed transaction. There is a danger that the clearance procedure will be used by tax professionals to tweak and perfect schemes that they then implement and market to their clients. I am sure that members of the Committee can understand why I am not attracted to that idea.

If companies are unsure about the application of clauses 69 and 71, they need only look at the comprehensive guidance issued by HMRC in December 2005 and at the statement of principles that underpins the measures. Furthermore, there is the option of making an application to HMRC under the code of practice 10 procedure if a company is unsure of the interpretation of the wording of the law. There is also the informal clearance procedure in clause 71, as I have pointed out. The Government believe that those measures will provide the clarity and certainty needed. The capital loss package was the subject of consultation with business and its advisers, and there was no suggestion that the application of either clause was unclear.

If there were a formal clearance procedure, directors of compliant companies might feel compelled to use it. Lawyers and accountants could find that their professional indemnity insurance would be invalid if they failed to use the statutory clearance procedure. They might then decide to require applications for clearance in all cases in which they are advising on transactions that might result in a capital loss, such as the liquidation of a failed subsidiary or a capitalisation scheme such as the sale or leaseback of property, even when there is clearly no tax avoidance purpose and despite clear HMRC guidance. The only effect of the amendments would be potentially thousands of pointless clearance applications, costing businesses additional fees for their advisers, and delays in commercial life due to the need for applications.

The amendments would add none of the certainty that business seeks. The clear targeting of clause 69 and the guidance, code and informal clearance procedure in clause 71 provide that certainty without creating an  unwieldy statutory clearance system that would not benefit anybody except the advisers who would be paid fees.

Helen Goodman (Bishop Auckland, Labour)

The Paymaster General dealt convincingly with the previous group of amendments, but I am not convinced that she has dealt quite so convincingly with this group. I take her point about the additional burden that a pre-clearance regime might place on business. However, although I hear what she said about Howard Flight’s contribution in 2004, I do not entirely accept that there is a stark, clear line between anti-avoidance arrangements and other arrangements.

Obviously, if someone is framing an avoidance scheme they know that they are doing so. However, the Paymaster General said that this is a complex area. She then looked ahead at clause 71 and said, if I heard her correctly, that there would be extra arrangements to help businesses drawing up schemes to know whether they are in breach of the law. That sounds more complex than what the Paymaster General set out.

We cannot simply impose a pre-clearance regime on the Treasury. However, passing the amendment would be a rather stark course of action to take, although we will want to return to the matter in due course. As we go through clauses 70 and 71, we might find that where businesses stand with Her Majesty’s Revenue and Customs and its tax arrangements is far less clear than the Paymaster General made out. I beg to ask leave to withdraw the amendment.

Brooks Newmark (Braintree, Conservative)

I have learned in the past year to study not only the Bill itself, but the explanatory notes, which are great at giving clarity. I shall read paragraph 2 of the summary of clause 69 in the explanatory notes because it has a bearing on a point that I shall make in a moment. As the Paymaster General said, it is very clear:

“The clause is based upon the principle that relief for corporate capital losses should only be available where a group or company has suffered a genuine commercial loss and has made a real commercial disposal of an asset. The rule will only apply where arrangements produce a loss that is greater than the real underlying economic loss or where arrangements entail the asset upon which a loss is claimed to have arisen remaining within the economic ownership of the company or the group.”

That is a fair point, which looks clear to me.

I remain concerned, however, when august institutions such as the Chartered Institute of Taxation write not only to me but, I believe, the Paymaster General. I am sure that she has seen the institute’s briefing. On clause 69, it said:

“In our comments on the draft legislation we said that what is now clause 69 will result in the taxation of arithmetical differences that do not correspond to actual gains. We gave the following example.

Suppose that a company has an asset with a base cost of 100, but with a market value of 40. It sells the asset for 40 and subsequently re-acquires it for 40. Some time later it sells the asset to an unconnected third party for 90. The loss on the first sale is not allowable, but the original base cost is not reinstated. Therefore a chargeable gain of 50 arises on the second sale, even though a real loss of 10 has been sustained.”

Rob Marris (Wolverhampton South West, Labour)

Will the hon. Gentleman explain why the loss on the first sale is not allowable?

Brooks Newmark (Braintree, Conservative)

Will the hon. Gentleman clarify his question? It was rather short and abrupt.

Rob Marris (Wolverhampton South West, Labour)

The hon. Gentleman read out an example given by the CIT:

“The loss on the first sale is not allowable”.

I am simply asking the hon. Gentleman, who prays in aid of that example, to explain to the Committee why the loss on the first sale is not allowable.

Brooks Newmark (Braintree, Conservative)

I confess that I am not a tax expert—[Interruption.]—but I certainly understand the mathematics to which the institute referred. If the CIT—a far more august institution than many to which we might belong—has expressed a concern about the arithmetic behind the expected impact of losses and gains in respect of this clause, I am merely sharing that concern. I should like to ask the Paymaster General, who has received the same document, why neither the Institute nor I should be concerned about the issue.

David Gauke (South West Hertfordshire, Conservative)

I am afraid that I cannot throw any light on why the loss in the first transaction will not count, but if the example given by the CIT is incorrect because of the assumption that the hon. Member for Wolverhampton, South-West mentioned, perhaps the Paymaster General should confirm whether the assumption is correct.

Brooks Newmark (Braintree, Conservative)

I thank my hon. Friend for that intervention, which reflects the point that I made a couple of minutes ago. I want to touch on the second concern raised by the CIT. It says:

“We also mentioned that draft s184a disallows a loss arising on a degrouping deemed disposal (eg where another person acquires more than 25 per cent. of the chargeable company), but does not exempt any gain arising on a similar deemed disposal. We cannot discern the rationale for this and would appreciate an explanation. However, it seems to us to be another case ofthe principles applying only where it suits the Government. The above comments apply to the provisions as included in the Finance Bill, which are the same as the draft provisions.”

Finally it says:

“It is disappointing that there has been no change in the draft legislation.”

I am sure that the Paymaster General has seen the document. I respect the CIT, so I shall be interested to hear her comments on the two concerns that it has raised in respect of clause 69.

Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

It will be more fruitful for me to write to the CIT to explain why its concerns are not relevant than it will be for me to answer the hon. Member for Braintree (Mr. Newmark), who has read out what it says but is not sure how it works. I would pray in aid a number of responses that we received as a result of publishing the draft clauses in December, including one from Ernst and Young, which says:

“The whole or main purpose test has been used extensively in recent legislation”.

That is to say that people are familiar with it. The author continues:

“I agree with the guidance notes. Purely commercial transactions should not be caught by this test.”

That is the case; they are not. The CIT put forward the example that we have heard. Let me paraphrase my reply. First, this is an anti-avoidance provision. It will catch only transactions undertaken with tax avoidance either as their main purpose or as one of several purposes. That is a well used concept in our tax system. The institute makes a general argument, whereas we are talking about anti-avoidance, which already has a narrow “target”. The principle behind the provision is that losses will be allowed only when they are matched by a commercial disposal. That has been made very clear, and has been acknowledged by the accountancy press and professional bodies with regard to this clause and the arrangements in it.

If a group still tries to avoid tax by crystallising a loss without matching it with a commercial disposal, it will not be surprised if it loses access to that loss. Should it go on to pay tax on the real commercial disposal after attempting to avoid tax, it will have to accept that consequence. That is the response to the CIT, however it is dressed up as company A doing this, company B doing that and some money exiting en route.

Clause 69 is specifically targeted; it is anti-avoidance and its purpose and intent are acknowledged to be clear. I am sure that the CIT will be grateful to receive a slightly longer and more detailed response from me, but those are the basic principles.