Clause 54
Finance Bill
7:00 pm
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
The clause provides a welcome correction for some errors contained in the trust modernisation legislation that we had the pleasure to consider in last year’s Finance Bill. I confess that the error escaped my research in preparation for the scrutiny of that Bill, although I recall that there was still a lengthy list of problems on which we sought clarification.
The clause appears to achieve the intended outcome. It will restore the mechanism that was in operation prior to the 2006 Act by which trustees of a settlement who receive a payment made by a company on the purchase of its own shares are taxable only on the excess over the original subscription payment for the shares. The drafting error in the 2006 Act would have meant that they were taxed on the entire payment.
Like me, the Chartered Institute of Taxation welcomes the clause, but it has expressed serious concerns on two points. First, it expresses regret that the period for consultation was short. It pointed the problem out on 3 August 2006, which should have given the Government a period for consultation. Secondly, the CIOT highlights a more significant problem with the approach taken to implementation, stating that
“we reiterate our concern at how HMRC intend to implement aspects of these changes, given that the Notes and Tax Calculations for the 2006/07 Return are inaccurate.”
It goes on to state:
“It is most unsatisfactory that Returns for 2006/07 submitted before Royal Assent is given should be filed on the basis that the whole amount of payment received on a buy-back of a company’s shares is taxable, with a correction having to be made subsequently.
It is disappointing that our comments on improving the clarity of Explanatory Notes to the legislation have been ignored.”
I have some sympathy with the CIOT’s point of view. It does not seem to make a great deal of sense to require that tax returns submitted before Royal Assent have to comply with the existing and incorrect legislation. The CIOT states that that
“is a recipe for muddle and confusion”
that is
“accentuated by numerous piecemeal changes to the trust taxation regime over the past few years”.
Bearing in mind that the provision will be backdated when the clause is enacted, it seems pointless to require people to submit returns that will have to be corrected. It also seems unfair to require people to include in their tax return a sum of money—the excess over the subscription price paid for the shares—that HMRC knows will not be taxable once the Bill comes into effect. The CIOT concludes:
“The taxpayer should not be penalised through enactment of defective legislation”.
If HMRC will not accept returns submitted on the basis of the legislation as corrected by clause 54, the notes to the 2006-07 return should at least be amended to alert taxpayers of the need to delay filing.
In conclusion, I should like to put on record a general comment about the provisions in the 2006 Act on the income and capital gains tax treatment of trusts, which the clause seeks to amend. The provisions were billed as simplifications and modernisations, but this is one of the most mind-boggling, opaque and complex structures it has ever been my misfortune to read about—and that is even before one gets into the twists and turns of the changes to the inheritance tax regime that caused such controversy in relation to schedule 20. I suspect that the Economic Secretary may return to this Committee in future years with further corrections to this problematic legislation.