Clause 33
Finance Bill
2:15 pm
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
The Opposition support the principles underlying the clause. In the circumstances, and given the wording of existing legislation, it seems to be a reasonable and proportionate measure. I will therefore mention only a few queries and background points so that the Committee has the opportunity to debate the policy objective behind the clause and how best to bring that about.
I will raise two points. The legislation at issue is schedule 24 to the Finance Act 2003 and sections 38 to 44 of the Income Tax (Trading and Other Income) Act 2005. Although introduced by the current Government, those Acts built on an approach first established by Nigel Lawson when introducing provisions to crack down on “potential emoluments”—deferred bonuses and benefits—in the Finance Act 1989.
There is, therefore, some common ground between our parties on the principles at stake. Like the 2003 Act that succeeded it and will be amended today, the 1989 Act sought to ensure that an employer gets a tax deduction on a payment or benefit provided to an employee only when they receive it in a form that constitutes employment income. In other words, the employer gets the deduction only when the employee has got the benefit. In effect, the point of the 1989 Act was to prevent employers from obtaining the corporation tax benefit of paying out a large bonus before the employee had paid the tax on it. I understand that the Government introduced schedule 24 to the 2003 Act out of concern that certain planning schemes involving employee trusts were being marketed as a means of circumventing the 1989 Act and accelerating the corporation tax deduction in the unacceptable way that I have outlined.
Clause 33 tackles some of the more recent schemes that have emerged since the 2003 Act. The clause appears to be appropriately targeted at those schemes, which would be fairly described as aggressive tax planning. I have received no representations that would indicate that any collateral damage would be caused to transactions that are not motivated exclusively by tax considerations.
I understand that some schemes have been developed to exploit the fact that the 2003 Act only catches situations where the employer transfers assets or makes payment to a third party. Attempts have been made to circumvent the anti-avoidance provisions by having the employer who wishes to make the deferred payment declare themselves a trustee over certain assets or money. In this case, there is no transfer of legal ownership to a third party. Alternative arrangements sought to get around the rules by increasing the value of existing trust assets and arguing that no payment or benefit had been transferred into the trust. Consequently, it was at least arguable that the 2003 Act did not bite in such cases.
Clause 33 would make it plain that such situations would be caught, and that is one of the reasons why we welcome it, although I want the Chief Secretary to consider two points. First, why have we ended up in this situation? Why has it proved necessary to have yet more legislation—and clause 33? If the Chancellor had not decided to meddle with the law in 2003, the Government might well have been successful in arguing in court that the original 1989 Act covered these latest avoidance schemes anyway.
I have in mind the very robust approach taken by the House of Lords in the Dextra case, which was decided under the 1989 Act. In it, their lordships seemed to signal clearly that they would have limited patience with those who put forward hair-splitting interpretations of the statute to seek to get round the clear objective of the law: not to allow the employer to accelerate the deduction before the employee has received the payment. Assuming a consistent approach from the courts, the Revenue might well have been able to challenge these new schemes in court as contrary to the intention that Parliament made plain in introducing the 1989 Act.
I should put it on the record that the Dextra judgment seems to make it clear that the 1989 Act was an effective statute that achieved the policy goal of catching deferred payments through employee trusts. It probably would have caught the schemes that clause 33 seeks to close down, so the scope for these new avoidance schemes was only created because the Government decided to junk perfectly good legislation introduced by Nigel Lawson. The revised form of wording that they chose in the 2003 Act was narrower than the wording in the 1989 Act, and room was thus created for the aggressive tax advisers to move in.