New Clause 3 - Treasury consent
Finance Bill
5:00 pm
Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede and Weybridge, Conservative)
I am delighted to return to the fray and I see that you share my view, Mr. Cook. New clause 3 would take out of effect sections 765, 765A, and 767 of the Income and Corporation Taxes Act 1988. Section 765 requires UK groups to write to HM Treasury and seek specific permission to subscribe to shares or debentures in overseas companies and to write for specific permission to sell shares or debentures in overseas companies. HM Treasury has issued general consents so that, if particular patterns of facts apply in any case, groups can treat themselves as having a deemed consent.
When a specific consent is required, usually for the sales of shares in an overseas subsidiary or a group reorganisation of an overseas sub-group, it is a criminal offence not to have obtained specific Treasury consent beforehand. For large multinationals that might have significant numbers of overseas subsidiaries, that causes considerable administrative burden backing the movements of the overseas entities that they ultimately control.
Section 765A of ICTA removes the Treasury consent conditions for transactions between companies in different member states of the EU. It was a provision that was inserted to make the original section 765 compliant with EU law. Although it removes those companies from the scope of section 765, it still has a notification requirement so there is still a compliance burden on companies. Section 766 of ICTA 1988 determines the offences and penalties for failing to comply with sections 765 and 765A so logically, if we are removing sections 765 and 765A, we need to remove section 766. Section 767 deals with interpretation and commencement.
The sections are an anachronism—a hangover from the pre-1979 world of foreign exchange controls. The Treasury consents were originally part of the foreign exchange control structure but were maintained when the rest of the foreign exchange control regime was scrapped to serve as an early warning system for the Inland Revenue in respect of particular types of tax planning and, to some extent, to act as a deterrent to those types of tax planning. That was a legitimate objective at the time. Now, the sections impose an additional compliance burden on companies and slow down the progress of commercial transactions. It causes great worry in the business world that, almost uniquely, the sections provide for criminal penalties, rather than civil penalties, for failure to comply with what are essentially reporting requirements, which is reminiscent of the original framework of exchange control legislation where provisions originate.
We drafted the new clause because we believe that those pieces of anachronistic legislation no longer have a purpose in relation to exchange control—the exchange control regime having been swept away—or in relation to advance warning of tax avoidance. There has been a considerable number of changes, some of which we have discussed in this Committee and not the least of which is the disclosure regime in the Finance Act 2004 that requires people who are developing and promoting tax avoidance schemes involving financial instruments to report them to the Revenue. The Revenue therefore has its early warning system in place through much more modern legislation.
Schedule 7 to the Bill contains measures such as the tax arbitrage rules that enable the Revenue to issue a notice and the substantial shareholdings exemption, which, although not creating a notification process, exempt gains on the sale of shares of trading companies and hence create a situation in which there is no tax to pay and thus no tax avoidance to worry about. We have made the point consistently in this Committee that when new compliance burdens—new legislation—is created, we need to clean the stable as we go. We cannot keep piling one more burden on top of another. I suggest to the Paymaster General that when the Bill is enacted, there will be sufficient procedures in place to negate the type of tax planning for which specific Treasury consent acted as an early warning system. If such procedures did not eliminate those areas of tax planning, they would at least, when combined with the Finance Bill 2004, provide all the armoury of early warning devices that the Treasury and Inland Revenue reasonably need to have proper advance warning of any tax planning schemes.
In the light of the present regime, the Treasury consent rules are wholly unnecessary and unnecessarily burdensome to business and can safely be eliminated without any risk to the Revenue. We seek to reduce unnecessary bureaucracy and make a tiny counterbalancing reduction in the volume of the UK statute book as this Bill is enacted.