Schedule 4
Finance Bill
6:30 pm
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
As I have just said, we have grave concerns about schedule 4. The amendment would delete proposed new section 103C of the IncomeTax Act 2007, which is proposed in paragraph 1 of schedule 4. In so doing, the amendment would remove the Government’s restriction on sideways loss relief for non-active partners, as proposed in the schedule. Sideways loss relief allows a partner to set off partnership losses against other income. I understand that it has been part of our tax system for more than50 years. Sideways loss relief is designed to give relief in the early years of a partnership, when losses might be high, as they often are with a start-up business.
In schedule 4, the Government propose a two-stage restriction on sideways loss relief. Proposed newsection 113A of the 2007 Act would disallow any sideways loss relief for arrangements, where one of the main purposes of entering the transaction was tax avoidance. That might not have caused an enormous amount of controversy. There would have been issues to explore around the purpose test and the scope of the proposals, but they would not have caused huge concerns. However, the Treasury proposes to go much further with new section 103C. That will impose significant restrictions on ordinary commercial ventures that are not motivated by tax avoidance. To obtain full sideways loss relief under the proposals in schedule 4, a partner will have to spend 10 hours a week working personally on the partnership’s business. For those partners who do not devote 10 hours a week to the venture, the sideways loss relief that they can claim is limited by the schedule to £25,000.
As the Institute of Chartered Accountants has pointed out:
“The measure is not targeted solely at tax avoidance schemes...The result is that the measure will impact upon many small businesses being set up with substantial investment in the early years.”
The London Society of Chartered Accountants has expressed concern that schedule 4 means that many deserving investment projects will now never see the light of day. It urges the Government to reconsider, and so do the Opposition.
That is why I tabled amendment No. 62 to delete the 10-hour condition and the £25,000 cap. Amendment No. 63, to which I shall come at the end of my remarks, is proposed as a compromise alternative to raise the cap from £25,000 to £100,000, although in our view it would be preferable to opt for amendment No. 62 and the complete deletion of proposed new section 103C.
I point out also that the Committee will soon have the opportunity to consider amendments Nos. 64 and 65, which form a key part of a package of proposals that the Opposition suggest in relation to schedule 4. They would restrict sideways loss relief to those ventures that can pass a demanding threshold designed to show that they are commercially motivated ventures, not artificial tax-avoidance schemes. We recognise that some of the schemes that have utilised sideways loss relief have caused problems in terms of revenue leakage from the Treasury. We do not oppose efforts by the Government to shut down abusive and artificial schemes that are motivated only by tax avoidance and that do not involve genuine commercial risk. However, we are worried that vital commercial ventures will be hammered by the Government’s attempts to shut down problematic tax-avoidance schemes.
The package comprising amendments Nos. 62,64 and 65 is aimed at giving Her Majesty’s Revenue and Customs the power to shut down abusive schemes, but without clobbering genuine enterprise and investment. The Opposition fear that, unless those amendments are adopted, schedule 4 will have a very damaging effect on high-risk investment and small business start-ups.
The first point to make about schedule 4 centres on the way in which the changes were announced on Friday 2 March this year. They were rushed out right at the end of the financial year, when many people had made their plans on the basis that the reliefs would be available. The changes will impact on many ventures in respect of which investments have already been committed on the basis of the existing tax system. Now, investors have had the rug pulled from under their feet, and they find themselves at risk for large amounts of money with no prospect of relieving potential losses in the way in which they had envisaged.
I have received protests on that point from many people, including Mr. Wood of Morgans Independent Advisers, Jeff Moores of Moores Warren, and Richard Grant of Pantheon Financial Management. They point out that the legislation impacts unfairly in treating partners in the same arrangement differently according to whether they contributed earlier or later in the tax year, even if both investments were made before these provisions came into effect. That might not be such a huge problem if the only arrangements hit by the changes were dubious and artificial tax-avoidance schemes, but as I have said, that is not the case. The retroactive nature of schedule 4 adds to the concern of the Opposition about the measures and their impact on ventures and contracts agreed on the basis that sideways loss relief was available.
The Committee may be aware that there was a rapid U-turn when the proposals were initially announced. They were initially due to cover film tax reliefsunder section 42 of the Finance (No. 2) Act 1992 and section 48 of the Finance (No. 2) Act 1997. Within, I think, three working days, there was a rapid about-turn, and the Treasury decided that section 42 and section 48 reliefs would not be restricted. That certainly seemed to make sense, because only a few weeks before that the Treasury had announced a temporary extension of those reliefs. The assumption seems to be that, the section 42 and section 48 problem having been solved, this sorts out the film industry, but that is not the case.
No doubt the Minister will quote back at me statements that suggest that not everyone in the film industry is worried about the remaining provisions in the Bill on sideways loss relief, but I have received a number of very concerned representations on that issue. The film industry has found sideways loss relief so important because of the high degree of risk involved in a film project. It is very difficult to predict in advance whether a film will be successful. Hence, investment proposals are often based around investing in a number of films. The assumption is that, if one backs 20 films, there is a chance that one of them might make money and offset some of the losses from the others. That becomes impossible with the abolition of sideways loss relief.
Sebastian Speight of Ingenious Media has told me that two high-profile UK films, “St. Trinian’s” and “Brideshead Revisited”, had seen their private investment withdrawn as a result of the announcement in schedule 4. These films were relying for up to a third of their funds on investors expecting to be able to reduce the risk of the investment by using sideways relief. Those films were rescued by the Film Council, but it remains a concern as to how other films will find funding in the absence of sideways relief. Mr. Speight put the problem as follows:
“The new film tax credit will provide 20 per cent. of the cost of making a film. However, for larger projects, it is difficult to see where the remaining finance will come from beyond a few national and local grants. Big films need a critical mass of investment before they can be undertaken and this restriction makes it much harder to get.”
The issue here is that part of film funding which is not covered by the film tax credit. Sideways loss relief reduces the high risks for investors who are asked to provide the 80 per cent. of funds that are not covered by the tax credit. The Government’s film tax credit will not work if projects find it impossible to raise the other 80 per cent. of funds that they need. Restricting sideways relief makes that much more difficult.