Schedule 17
Finance Bill
6:15 pm
John Pugh (Southport, Liberal Democrat)
I have supported the legislation up to now, but I cannot help thinking that, having done some sterling work, the Minister has with this schedule snatched defeat from the jaws of victory. I would like to put that in some context.
In clause 37 schedule 17, we are repealing section 765 of the Income and Corporation Taxes Act 1988. The provision, which has existed in various forms for 58 years, demands that companies enacting schemes whereby they move funds out of the EU—and, obviously, the UK before that—receive consent to do so from the Revenue. As the Minister undoubtedly explained, that is a hangover from the days of exchange control, when people worried about sterling leaving the country and so on. The provision is very broadly drafted and it encourages firms to notify the Treasury of anything that is to its detriment. As the Minister said, the provision has some old-fashioned, but severe—and, I suppose, effective—criminal sanctions attached.
The reality is that the retention of section 765 over the years has been fairly useful. It has forced companies to disclose schemes to the Revenue before undertaking them. The fact that the measure is backed up by draconian measures, even though they are unlikely to be used, adds to its force. It gives UK revenue authorities some real-time information about the activities of multinational companies. That is a good thing because state revenue authorities normally play a constant game of catch-up—corporations undertake schemes and then the revenue body finds out about them. Section 765 is virtually unique in tax law because it allows the Revenue to know what companies plan to do before they do it. It has been a major anti-avoidance measure because it forces multinationals to receive Government consent and, presumably, as a result many tax avoidance schemes are stopped before they are started.
I know that we cannot quantify the benefits of section 765, but they have been real. Do not take my word for it: four years ago, the former Paymaster General, now the Minister for Children, the right hon. Member for Bristol, South (Dawn Primarolo), said: “the section was introduced”—and presumably kept—
“to counter tax avoidance; it has done that successfully and should not be repealed, as it protects a great deal of revenue.”—[Official Report, Standing Committee B, 30 June 2005; c. 319.]
In modern business terms, I accept that there is a case for pensioning off section 765 and replacing it with something better. However, the provisions in the Bill do not inspire confidence that we have something better. There are a couple of reasons for that. First, at £100 million, the threshold is high. Companies, such as multinationals, that wish to avoid breaching that threshold can simply parcel transactions into smaller units of £10 million or whatever, which is within their wit to do. Secondly, the penalties for companies that do not comply with the legislation are feeble. If a company gets away with a major bit of tax evasion or tax avoidance, they face a fine of £300 if they have not reported after six months. I cannot see that frightening anyone who is serious about tax avoidance. The penalty for every further day of non-reportage is £60. I suggest that the new set of provisions does not have the teeth that it should have.
Amendment 41 considers the requirement for reporting transactions of £100 million or more and suggests that it is absurd as it stands. I cannot see any reason why we should choose that figure, which seems unreasonably high. My amendment—it is a probing amendment—reduces the limit drastically to £1 million for the purposes of the schedule. That is the point about the threshold.
If we look at exemptions—the Minister has talked about exemptions and about how they oil the wheels of commerce, how they are a good thing and how they avoid undue compliance costs and so on—we see that they are extraordinarily generous when they are read in the literal sense. For example, if someone is in difficulties and the Revenue comes after them and there is a suggestion of tax avoidance, they can plead that the transaction
“is carried out in the ordinary course of a trade”.
That strikes me as an extraordinarily vague provision—almost a licence for abuse. One can almost see tax planning advisers preparing the excuse well in advance. I am not at all comfortable with retaining that provision, because it is broad, colloquial and it seems a catch-all excuse that almost anyone can use when challenged by the Revenue. As far as I am concerned, it can only help tax avoidance and it does not really have a significantly beneficial purpose for the schedule as a whole.
The second exemption is, if anything, worse. It says that the transaction is exempt if
“all the parties to the transaction are, at the time the transaction is carried out, resident in the same territory”.
Therefore, if all transactions are carried out in the Cayman Islands, they would be exempt from reporting. That is an open invitation to use secrecy jurisdictions—a licence and an invitation to go in for tax avoidance. Therefore, although I support almost everything that the Minister has done hitherto, I think that we have here a schedule that opens the door to a new wave of tax avoidance. The Minister should seriously address the weaknesses in schedule 17. The fact that many people who are involved in tax law welcome it adds to the concern.