Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede & Weybridge, Conservative)

I have a brief question on clause 51. It appears from the wording that the clause seeks to close an unintended loophole against devious mischief that the Government, the Treasury or HMRC have spotted. Would the Exchequer Secretary explain to the Committee what has given rise to the clause? What mischief has occurred that requires the provision to be introduced and, unusually, to be treated as if it has always had effect?

Angela Eagle (Parliamentary Secretary, HM Treasury; Wallasey, Labour)

I am happy to explain to the matter to the Committee. I would call it an unintended kink, rather than mischief. I do not think that there is any blame intended or that underhand behaviour has gone on that has led to the clause. My brief refers to a “minor deficiency”, but I think that quite a good way of putting it is that there is an unintended kink in the community investment tax relief scheme legislation that could prevent a bank from obtaining tax relief under the scheme if it invested money with one of its own customers. The Committee may not be aware that the scheme is intended to encourage companies and individuals to invest in community development finance institutions, which provide finance to enterprises in economically disadvantaged communities, helping to reduce economic disparities throughout the UK.

The tax relief is generous. It is worth up to 25 per cent. of the investment spread over five years, so it is right that the rules restrict relief to cases in which there is genuine investment of new money in the community development finance institution. There is no relief if the investment is returned to the investor, for obvious reasons, or if it is funded from money that originally came from the community development finance institution.

An obvious funding source for a community development finance institution is its own bank, and the most obvious home for any funds raised by such an institution for the period between raising the funds and investing them in the enterprises that it wishes to finance is the same bank. However, under the current rules, bank deposits made by a community development finance institution in the course of its ordinary banking transactions may reduce or eliminate the value of any relief available to the bank in respect of investments made under the scheme. That is the kink. It is not an intended result,  because it means that to secure funding from its bank under the community investment tax relief scheme, a community development finance institution must in effect sever its existing business relationship with its bank and re-establish that business elsewhere. That was not intended when the scheme was put together, nor is it sensible. The change, which is entirely beneficial to community development finance institutions and banks, will have a retrospective effect, because an unintended wrinkle in the structures has created an anomaly.

Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede & Weybridge, Conservative)

I thank the Exchequer Secretary for her lucid explanation. I am sorry if I detected mischief and underhand behaviour where there is none. I am glad that she does not see mischief and underhand behaviour in every kink in the arrangements. I have some experience of dealing with predecessors of hers who often were more inclined to see mischief and underhand behaviour wherever kinks occurred in the tax code. Was the introduction of the clause prompted by an instance of relief being denied to an institution, or has the issue merely been flagged up and is being pre-emptively resolved?

Angela Eagle (Parliamentary Secretary, HM Treasury; Wallasey, Labour)

CITR was introduced in 2002. We examined how it had worked and talked to, and liaised with, the stakeholders in the sector—both those who wished to lend and the institutions that had developed to take advantage of the tax exemption. The issue came up in that discussion. We realised that the points that were made had merit, which is why the clause has been included in this year’s Finance Bill. I hope that, with that explanation, the Committee is happy to let clause 51 stand part of the Bill.