(Except clauses 1,3,7,8,12,20,21,25,67 and 81 to 84, schedules 1, 18, 22 and 23, and new clauses relating to microgeneration) - Clause 27
Finance Bill
10:00 am
Brooks Newmark (Braintree, Conservative)
There is now a tax advantage to be had by building an eco-home, but I doubt that the Economic Secretary is suggesting that that constitutes avoidance. If he were, it would be a quick clampdown even by his standards. Let us use the word avoidance, which is not in itself particularly clear or helpful, but does at least have a fine provenance.
On amendment No. 30, I am uneasy about the use of the term “main purpose” in any context concerning tax avoidance, because it reeks of over-simplification to say that any single commercial decision has a main purpose except perhaps that of making money. However, the clause does at least refer to “the” main purpose rather than “a” main purpose, which crops up in Budget note 30 and in HMRC guidance. I do not wish to be pedantic, but the presence of the definite article seems to imply that there must be a single overarching purpose and intention to avoid tax. Unfortunately, proposed new section 16A(1)(b) immediately spoils the effect by introducing the possibility of other, competing main purposes.
The amendment would clear up some of that confusion by making it clear that there is but one main purpose. It has the ring of a creed to it. I am concerned that as it stands, the clause sows the seeds for a test case about how much a taxpayer needs to be motivated by nefarious intent for his or her actions to qualify as a main purpose. If there were just one main purpose it would still be a difficult call to make, but if there are many possible main purposes I think that the determination will become almost impossible.
If there are three main purposes for undertaking a transaction, which has priority? Will we end up with an absurd litigation calculus in which it is necessary to ascribe an arbitrary value to each, with HMRC officers arguing the toss between the intention to avoid tax and other, legitimate, commercial purposes? It would be far simpler to do away with the idea of different main purposes and give the words their common meaning—that a main purpose is the one that eclipses all others instead of competing with them.
To go a little wider, there are further problems with the whole business of a main purpose forming the basis of a test for behaviour. If I understand paragraph 12 of the HMRC guidance correctly, making use of a statutory relief is not sufficient to demonstrate a main purpose and fall foul of the clause. Apparently, something stronger is needed—that the intention to avoid tax is so significant that it must be the main purpose. That is somewhat self-referential. Saying that something is a main purpose merely by dint of its being really significant does not help us much. It is also not particularly robust, because all the decisions involve value judgments being made about individual cases by individual officers. The determination of whether something is “main”, “genuine” or “straightforward”—all words that appear in the clause or the notes, is essentially a matter of personal choice and will lead to inconsistencies in outcome with even the best of guidance.
There is something a little strange about the Revenue’s insistence in paragraph 8 of its guidance that the definition of “arrangements” is
“in general a question of fact.”
It is not, and even that short statement contains a caveat. Determining the interface between legitimate tax planning and avoidance is a matter of judgment and discretion, which is why the Taxes Management Act 1970 originally gave the Revenue a discretionary power to grant extra-statutory concessions in difficult and unforeseen situations.
There needs to be more recognition in the Bill that none of those judgments are cut and dried. The question of “main purpose” needs a simple answer: a purpose that is so overwhelming that no rational person could doubt that it was the motivation behind a transaction. It does not need to be the only purpose, just the predominant one. Amendment No. 30 would simply introduce a little more clarity, and I hope that the Economic Secretary will support it.
On Amendments Nos. 32 and 33, the criticism that the clause has received from the Institute of Chartered Accountants in England and Wales is focused on one principle: that the clause is not as focused as it should be. The ICAEW goes as far as to say that it amounts to a general anti-avoidance rule instead of a targeted one, and that the reliance on external guidance instead of a tight focus sows the seeds of confusion. It does not help that so much of the language surrounding anti-avoidance legislation is morally loaded and open to interpretative whimsy.
The Revenue has accepted that its officers and, almost as an afterthought, the general public and their professional advisers need some form of guidance, but the status of that guidance seems to be equivocal, at least as far as the professional advisers are concerned. In its submission to the Committee, the Chartered Institute of Taxation cited its 2005 paper, “Taxed by Law, Untaxed by Concession”. I confess that I have not read the paper, but its title makes for a good little aphorism that the Economic Secretary could frame and put on his wall. It is drawn from a judgment in the late 1970s which aimed to address the law of unintended consequences where the commissioners of the Revenue wished to depart from the letter of the law to prevent a perceived inequity. It also confronts, pithily, the culture of extra-statutory concessions, which the Revenue relies on as a fiddle to get around awkward situations. Perhaps the Economic Secretary will confirm the current status of extra-statutory concessions.
The House of Lords seems to have thrown the cat among the pigeons by deciding in the Wilkinson case of 2005 that extra-statutory concessions could not run counter to explicit parliamentary intention or deal with a matter that Parliament could easily have addressed but did not. The ICAEW is of the opinion that the guidance provided by HMRC has the effect of narrowing the scope of the clause as presently drafted to the point that it changes the intention of clause and, therefore, interferes with the intention of Parliament. It contains undertakings that the clause will not be used in certain situations where it would be inequitable for it to be applied and, as such, is verging on being an extra-statutory concession.
A very helpful summary of the Wilkinson case appeared in The Independent—not that I read that paper very often.