Clause 69
Finance (No.2) Bill
12:15 pm
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.