Clause 38 - Charges on income for the purposes of corporation tax
Finance Bill
4:30 pm
Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)
The clause prevents companies from using the charges-on-income regime to avoid corporation tax. To answer the questions of the hon. Member for Runnymede and Weybridge, yes it is an anti-avoidance measure, but it is about revenue protection and therefore does not score on the significance of the yield.
The clause emerges from the question of avoidance disclosure regimes introduced in the Finance Act 2004, which has revealed that the avoidance industry has been using annual payments in schemes to generate tax deductions matched by non-taxable income. The Finance Act 2005 blocked one category of the scheme involving foreign dividends, and it is clear that, unfortunately, one of the main attractions to the avoiders of the charges-on-income regime is that it does not contain any tax avoidance motive tests, such as the unallowable purpose test that applies to the management expenses and manufactured payments regimes.
The provision is both anti-avoidance and part of a tidying-up process that has been moving forward for some time. The Government decided to act to close the schemes by removing most remaining payments from the charges-on-income regime. Relief for genuine business expenses affected will continue to be available either as an expense of a trade, profession or property business or as a management expense. However, those expenses will have to satisfy the existing tax rules, thus eliminating amounts paid for the purposes of tax avoidance.
As the hon. Gentleman said, pending any final decision on the concept of charges on income, the scheme is being retained for qualifying donations and gifts to charities. Discussions had been proceeding on the reform of the corporation tax regime—and, as I have said, there have been a number of changes over the years—but having seen the disclosures, it seemed prudent to move on the basis of revenue protection, with the exception that the hon. Gentleman rightly identified.