Schedule 7 - Accounting practice and related matters
Finance Bill
4:30 pm
Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede and Weybridge, Conservative)
This is a complex schedule, which, it is fair to say, is one of the two most controversial parts of the Bill.
Let me qualify what I mean by controversial. The objectives of schedule 7 are not controversial: the objective clearly stated by the Government is to close a number of tax avoidance loopholes that have been identified primarily through disclosures and the Finance Act 2004. The reason that it is controversial, like the arbitrage provisions that we debated last week, is that practitioners and industry representatives are concerned that several provisions in the schedule mean that the focus of the legislation is still too wide and in some cases will lead to uncertainty. The Bill will need to be clarified by guidance or rules issued by the Revenue, which do not have the force of law, and thus a less certain climate would be created than if the whole matter was dealt with in the primary legislation.
I emphasise again our support for revenue protection and anti-avoidance legislation. I do not know whether it will always be in schedule 7, but there will clearly be a system in future by which a catch-all schedule is attached to every Finance Bill, in which a raft of different schemes that have been disclosed have to be addressed. We are talking about a long and complex schedule that contains a large number of non-controversial things and a small number that are not controversial in their objective but which raise questions about the ability of the drafting to deliver what the Government intend. We will principally address ourselves to that latter set this afternoon.
At the risk of repeating what my hon. Friends and I have said before, our principal job is to ensure that while the Government close tax avoidance opportunities, we do not compromise a climate of clarity and certainty for the taxpayer, so that business investment decisions can go ahead in the normal way and taxpayers can know where they stand vis-à-vis the tax authorities.
Our approach to the schedule has been to focus amendments primarily on paragraphs 10, 18 and 24. They deal with shareholdings that are treated as loan relationships and with degrouping. I am sure that the Paymaster General will recognise that the majority of representations she has received from industry and the professional sector have been about those issues.
We have tabled other amendments, but, by and large, they seek clarification or minor changes to tighten definitions. Without doubt, the large debate in principle is about shareholdings as loan relationships and about degrouping. If we have a stand part debate, I will discuss other paragraphs to which amendments have not been tabled but about which comments are worth making or points worth probing. Across both the amendments that are tabled and the points raised later in a stand part debate, we will focus our remarks on two areas.
The first is the equity of what is being done. We will discuss where rules are being changed unfairly or in an unbalanced way against the taxpayer or, to put it slightly more neutrally, where there is a danger or concern that the interpretation of the words in the Bill could have that end effect. The second area is efficacy. We will raise issues where there is a danger, in our opinion, that unintended consequences could arise from the legislation, especially where they might reasonably be expected to damage the business environment.
The first group of amendments comprises Nos. 116 to 118, which my hon. Friends and I tabled, together with the amendment—I use the word in its deliberate singular sense—that the Liberal Democrats have tabled. That was amendment No. 69, and I will speak about it separately.
Sections 43A to 43G of the Income and Corporation Taxes Act 1988 apply to transactions entered into under rent factoring schemes after 20 March 2000. Rent factoring involves companies selling future rental income schemes to a bank for a capital sum, which is essentially a loan. The point is that the company obtains tax relief on repayments that, in reality, cover both income and capital elements.
The Government legislated to deal with the problem in 2000, but did not include non-tax-driven rent factoring schemes with a lifetime of 15 years or longer. They subsequently discovered that manufacturers of avoidance schemes were using the exemption for rent factoring schemes of more than 15 years’ duration to circumvent the rules and using longer-term rent factoring schemes as an opportunity to achieve the favourable tax status.
The Bill seeks to abolish the 15-year rule. That will deal with the tax avoiders all right; there is no question about that. However, in 2000, when first tackling this issue, the Government—I suspect that it was the Paymaster General, although I do not know as I do not have the transcript of the Committee proceedings—explained the 15-year exemption on the grounds that they did not want to catch bona fide commercial transactions that were properly entered into by companies for all sorts of commercial purposes.
Of course, we are bound to ask what has led the Government to conclude that, between 2000 and 2005, those using 15-year-plus rent factoring schemes as a bona fide commercial transaction have disappeared off the face of the earth, enabling the Paymaster General to feel comfortable scrapping the 15-year exemption. Can she say, with her hand on her heart, that the provision will not catch anyone involved in a bona fide commercial transaction, even though that was the rationale for the 15-year exemption as recently as 2000?
We understand the need to close down avoidance schemes using the 15-year exemption, so our amendments propose going down the other route: instead of scrapping the 15-year rule, we would introduce a motive test into the paragraph. Our three amendments do just that. That way, the 15-year rule will remain, but any rent factoring arrangement will be caught if it has been established for a tax avoidance purpose. Amendment No. 118 defines a tax avoidance purpose using section 709 of the Income and Corporation Taxes Act 1988.
I hope that the Minister will appreciate what we are trying to do. We are not saying that there is no problem. We are asking why we should smash rent factoring completely to solve the problem when there is another way of doing so? We could introduce a motive test and leave 15-year-plus rent factoring in place for those who wish to use it for a purely commercial purpose.
It should be noted that under the Bill, on inception of a deemed loan, there will be a deemed partial disposal of the underlying properties for capital gains tax purposes. That in itself may generate a tax charge. Will the Minister say anything about the Government’s approach to that deemed capital gain and how it will be handled?
I should tell the hon. Members for Eastleigh (Chris Huhne) and for Richmond Park (Susan Kramer) that when I first looked at the Liberal Democrats’ amendment No. 69, I rather gleefully lit upon the fact that—if I understand correctly—they forgot to remove sub-paragraphs (7) and (8), which would be necessary if their amendment were to work. However, I shall not make too much of that because, as I shall confess when we consider a later group, I have similarly forgotten to remove a sub-paragraph (7) and a sub-paragraph (8). That underscores the difficulty of producing amendments of any volume in Committee.
The Liberal Democrats address the same problem that we identified, but they would exclude existing transactions from the Bill. I say to the hon. Member for Richmond Park that we do not favour taking that route because there are tax avoidance schemes that exploit the 15-year rule. There are three options: the sledgehammer, effectively banning rent factoring altogether; the hon. Lady’s solution, which is to allow it where it is already in place, which would allow some fairly convoluted avoidance schemes to remain; and our option, which I might dare to call the third way, and which is to limit the scope of the schemes for avoiders by introducing a motive test so that, by including existing and future schemes, avoidance will be caught, but rent factoring for periods of more than 15 years, whether already in existence or being dreamed up by firms for future commercial purposes, would still be allowed. I look forward to hearing what the hon. Lady has to say and to the Paymaster General’s response.