Clause 24 - Deduction cases
Finance Bill
9:15 am
Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede and Weybridge, Conservative)
It is a great pleasure to serve under your chairmanship of this Committee, Mr. Cook, and I am grateful for the precise definition of your guidance on clothing. As we will see when exploring this group of clauses, precision in definitions is what it is all about, since it can lead to the avoidance of embarrassment and unintended consequences.
I shall follow the precedent set by the Paymaster General in our deliberations on Tuesday and, in speaking to the amendments, set out broadly the background to the important group of clauses under chapter 4. I hope that my doing so will be for the convenience of members of the Committee, so that they can understand what the amendments would achieve and the context in which we tabled them.
It is no exaggeration to say that chapter 4, coupled with schedule 7, has given rise to the most controversy and concern outside the House. I am sure that when dealing with representations about the Bill Ministers noted that attention has focused on this part of the Bill. It is complicated. Even the concepts behind some of this stuff will not be easily comprehended by anyone who is not a tax lawyer or tax accountant employed by one of the big four firms or a large American multinational corporation. Members of the Committee, including me, will have to consider such matters carefully and slowly to ensure that we understand what the Bill is designed to do.
Clauses 24 to 31 deal with tax planning based on arbitrage, which is the exploitation of differences within or between tax systems when the two parties to a transaction are treated differently under different systems—typically, one of the parties is transparent in one of the tax jurisdictions. The perceived mischief is that that could lead either to a situation in which the same expense is capable of being a deduction from profits in the computation of tax in two separate jurisdictions—known in the trade as the double dip—or an interest payment arising in one jurisdiction could lead to a tax deduction being claimed in that jurisdiction without the interest payment being treated as a corresponding income in the other jurisdiction. Those are the two principal matters with which chapter 4 deals.
We have questions about some aspects of the measure, such as whether the attack is appropriate and whether it will be efficacious in what it will deliver to the United Kingdom Exchequer and economy. We also want to know about the methodology chosen by the Treasury to deal with the problems that it perceives in such matters. I shall deal with the broader questions in the clause 24 stand part debate—the clause deals with deduction cases,in which the mischief targeted is the so-called double deduction. I shall deal with the detailed issues on the receipts case when we come to clause 26 stand part.
As a backdrop to our amendments, I should like to set out our view that the legislation is far-reaching and has a very wide scope. The Revenue has made it clear in the guidance notes, and Ministers have made clear in their statements, including those made on Second Reading, that the intention is to apply the legislation quite narrowly. The guiding principle appears to have been: draft widely, apply narrowly. The difficulty with that approach is that the taxpayer community is left at the mercy of officials' interpretation when the legislation is implemented.
Unlike the issue that we dealt with on Tuesday afternoon, this is not about a few very wealthy people being paid in gold bars in an obvious scam to avoid paying income tax and national insurance contributions. It is about the financing structures routinely used in international investment, which underlie hundreds of billions of pounds of investment made by foreign companies in the UK. We are not just targeting a few individuals about whom, if they felt a little pain, most people would not be too concerned. We are talking about major players who are vital to the health and well-being of the UK economy.
There is scope for huge collateral damage, both to the effective financing of investment deals and—perhaps as important—to the UK's reputation as a stable and predictable tax jurisdiction, which is already somewhat tarnished by the amount and complexity of tax legislation passed during the past few years. It is not clear to the world outside what the policy objective is, other than to grab for what is, in Exchequer terms, a relatively small chunk of money. It appears to some people that the UK Government are seeking to appoint themselves the world's policeman on arbitrage, to the uncertain benefit of the UK Treasury in the long run. We shall explore that later, because it is by no means clear that the net effect—when all the dust has settled and corporations have responded to the regime that will be imposed on them—will be to increase the UK Exchequer's tax take. It may well be that this legislation will simply have some nice side-effects for various overseas jurisdictions collecting a little extra tax, but nothing significant for the United Kingdom. Under the Bill, the UK will in some cases seek to levy a tax charge because a foreign jurisdiction has chosen to incentivise outward investment by offering tax breaks to facilitate outward investment by its companies. There is a real question about whether the UK should set itself up unilaterally to police the world investment community in this way and whether the Government have correctly identified the target and designed legislation to hit it properly so that the UK will ultimately be the beneficiary.
Our view, and that of many expert practitioners in the field, is that there is an element of a real problem. There is potential for the use of hybrid structures in a way that would clearly constitute tax avoidance. We do not deny that and I do not think that any practitioners would. The practitioners' concern, however, is that a relatively small problem that requires excising with a micro-scalpel has been attacked by the Government with a sledgehammer. We are supposed to take some comfort from the fact once a thing has been smashed to pieces, only a few of the crumbs found on the table will be targeted. I know that the Government have received representations to that effect from many sources, some of which I shall cite later, but we believe that it would be best if the Government withdrew this part of the Bill, but continued clearly to signal their intention to deal with the abuse of hybrid entities and hybrid instruments to create advantages through tax arbitrage. They should then consult fully and widely, not only with industry and business and with specialist practitioners in this country, but with our overseas trade partners, particularly the United States, which is a significant inward investor into the United Kingdom. They should also talk to the Dutch Treasury. The Dutch tried legislating in this area and found that it damaged the interests of the Dutch economy and Dutch business; they are now heading in precisely the opposite direction.
In that way, the Government could include in the Finance Bill 2006 a properly thought out set of proposals, tightly drafted so that they could be implemented straight from the Bill, rather than have a provision with such wide scope that it needs an administrative commitment to narrow its implementation. In addition, they could minimise the risk to the UK's reputation by ensuring that the legislation addresses what it is intended to address and that the Government collect the right amount of additional tax—the amount of additional tax that they have identified as being their objective in this chapter. That may have the practical effect of limiting the yield that the Government seek, although in their statements they have made it clear that they do not seek to raise a tax charge that falls upon all companies using hybrid vehicles to make investments in the United Kingdom from the United States. However, doing what I suggest—withdrawing the provision, making it more tightly focused and bringing it back next year—will limit the scope of what could be hugely damaging uncertainty that could destroy jobs and investment among the overseas investment community and British business alike.