Clause 23 - Loan relationships: debts becoming held by connected company
Finance Bill
4:45 pm
Nigel Mills (Amber Valley, Conservative)
I beg to move amendment 13, in clause 23, page 14, line 36, leave out subsections (8) to (12).
Peter Bone (Wellingborough, Conservative)
With this it will be convenient to discuss clause stand part.
John Mann (Bassetlaw, Labour)
The Government Whip is not keen on Labour Members speaking in these debates. He wants to get through the business a lot quicker and to get votes through. That is his prerogative, but if he really wanted to do that, he would have a word with the Ministers, who have tabled more than 200 amendments. It is a bit rich for a Government Whip who is trying to manage business to kick off and say that we are not getting through business fast enough when they do not have Ministers who can schedule business properly. They have to keep amending the Bill—as I say, they have more than 200 amendments, unless they are withdrawing them. The Government Whip turned up late to one sitting; I would be more than happy to stay late tonight to debate the issues with him.
Richard Harrington (Watford, Conservative)
The hon. Gentleman is very experienced in parliamentary matters—far more so than I. From memory, can he tell me how many amendments the Labour Government tabled in such Bill Committees?
John Mann (Bassetlaw, Labour)
As the hon. Gentleman might recall from pre-recess days, I was never invited to sit on a Finance Bill Committee, because of the Government Whips. That is why I was put on the Information Committee and Unopposed Bill Committees, as the hon. Member for Amber Valley will find out.
Nigel Mills (Amber Valley, Conservative)
I have already had the pleasure of two years on the Administration Committee; I am not sure what else the Government could do to me.
John Mann (Bassetlaw, Labour)
I suspect that the Government saw the hon. Gentleman coming and thought, “Here’s someone who wants to speak for the country—someone independent-minded who will point out obvious flaws in Government business.” So far, he is the only one on the Government Benches prepared to do that, but I can see others thinking that there are flaws that they wish to address. That is one good reason for supporting his amendment. A second good reason is the articulate way in which he introduced it. Who could not be convinced by his arguments? He has convinced me.
Richard Harrington (Watford, Conservative)
Again, I would like to record how grateful I am to the hon. Gentleman for giving way. His time is usually taken up by his own erudition. I would like to use this opportunity to ask whether one of the Ministers can tell us at some stage how many times the Labour Government tabled amendments to Finance Bills, and how many amendments there were. He has made the serious allegation that the Government are tabling a lot of amendments to take up our time. As one new to this parliamentary activity, I would be pleased to learn whether the number is far more or less than it used to be.
John Mann (Bassetlaw, Labour)
Well, we will all await with interest the response to that intervention, myself included.
There are two good reasons to support the amendment. The hon. Member for Amber Valley, my would-be future neighbour, cited the most compelling one: Tony Blair, as a young MP in 1987, seeing democracy emerging before him, felt that it was appropriate to point out that retrospective legislation is a bad thing, and who are we to disagree with such an outstanding Prime Minister? I am virtually convinced for that reason alone.
The hon. Member for Amber Valley has had the courage to table the amendment. It strikes me that his proposal is sound and that the Government are unsound. Given that at least two Members present are on the Treasury Committee, deliberated on the issue and reached consensus, I know that he is looking forward to at least two votes in support of his amendment: one from me, and a second from a Member on the Government Benches. It is only right that we members of the Treasury Committee show consistency in our wisdom in criticising the Bill. I suspect that the Government feel that the amendment is so well worded that they have to accept it. I look forward to hearing that.
Catherine McKinnell (Newcastle upon Tyne North, Labour)
I wish not so much to comment on the amendment of the hon. Member for Amber Valley, although I join my hon. Friend the Member for Bassetlaw in commending him for tabling it, but to seek clarification on the clause, which affects debts held by connected companies and has retrospective effect from 1 December 2011. Before the legislation, profits made as a result of such arrangements were not taxable, and companies would regularly seek to exploit the tax loophole. The clause addresses such aggressive avoidance measures, as the Minister states, ensuring payment of more than £500 million in tax, protecting further billions of pounds in tax from being lost, and maintaining fairness in the tax system—laudable aims. As the impact note states, the measure could bring in as much as £385 million in the first year, although subsequent declines in revenue are anticipated as the schemes increasingly fall out of use.
Turning to the origins of clause 23, Barclays bank, which was revealed as the bank involved in that tax avoidance measure, disclosed its use of the two schemes to HMRC in February this year, prompting the Government to introduce the legislation and to take the unusual step of giving it retrospective effect so as to cover arrangements entered into as far back as 1 December 2011 and up to 27 February 2012, when the decision was taken. It has been widely documented that Barclays was surprised by HMRC’s reaction to the two schemes, which it believed were in line with those employed by other banks. Barclays has subsequently voiced its concerns quite publicly. The hon. Member for Amber Valley has put on record his concerns about the use of retrospective tax avoidance action by the Government, and I shall be interested to hear the Minister’s comments on the amendment.
I would like some clarity on the impact of the measures in the clause, given the importance of the matter. Is HMRC aware of any other companies or British banks entering into such arrangements? If so, is it intending to come to any settlement with them? Has HMRC investigated or at least estimated how many such schemes are being used, and how many will close as a result of the clause? Turning to the retrospective nature of the legislation, how was the date—1 December 2011—decided on, and what does HMRC intend to do about schemes in place before that date? If the scheme and the determination of its abusive nature came to light before the announcement was made in February, why in particular was the 1 December date chosen? Finally, as there have been no tax information and impact notes since the Budget, what are the confirmed revenue numbers for the closure of the scheme?
Nigel Mills (Amber Valley, Conservative)
It would be useful to the Committee if the hon. Lady could set out the Opposition’s view on the use of retrospective legislation. Labour used it occasionally while in government—is that something the Opposition now regret and wish they had not done, or is it something that they would like to see used more often?
Catherine McKinnell (Newcastle upon Tyne North, Labour)
I had reached the end of my comments, and it would be useful at this stage to hear from the Minister with the Government’s response to the hon. Gentleman’s amendment. A particular decision was taken in this case to apply the legislation retrospectively. That is what is encapsulated in my questions—why was 1 December 2011 chosen?
Charlie Elphicke (Dover, Conservative)
Let me put two points to the hon. Lady. First, did not the previous Government use retrospective legislation time and again? Secondly, when there is egregious tax avoidance by a large financial institution, should we not stop it—and stop it quickly—to safeguard taxpayers’ interests?
Catherine McKinnell (Newcastle upon Tyne North, Labour)
I absolutely agree with the hon. Gentleman’s second point. The point I am making is that the legislation is backdated to 1 December. If the tax avoidance scheme had come to light on 1 December, why did it take until February to take appropriate action to close it down?
The Government’s use of retrospective tax avoidance action depends very much on each case, and we have discussed at length the circumstances in which tax avoidance is abusive, aggressive and egregious. All those matters need to be discussed at length, so I hope that the legislation on the general anti-avoidance rule that will be dealt with in the coming year will make things clearer. The hon. Member for Amber Valley raised valid points, and companies need to know where they stand with the law. Retrospective action is not ideal, but when circumstances mean that it is necessary, I agree with the hon. Member for Dover that action must be taken.
David Gauke (Exchequer Secretary, HM Treasury; South West Hertfordshire, Conservative)
Clause 23 amends legislation that applies to debts that are held by a connected company. It introduces a targeted anti-avoidance rule and a retrospective provision in relation to arrangements designed to work around existing rules. During my remarks, I will address the amendment tabled by my hon. Friend the Member for Amber Valley.
It may help the Committee if I say a word or two about the background. Normally, a company is taxed on the commercial profit that arises when it must pay back less than the amount that it borrowed, but special rules apply to connected companies. In such cases, a tax charge arises when a company connected to the borrower buys the debt, or when debt is held between companies that become connected. Those rules were amended in the Finance Act 2010 to block schemes under which banks bought back their own issued debt that was trading at a discount in the market. In other words, they could buy their own debt for less than the amount they originally borrowed without paying tax on the difference.
At the time, the Government made it clear in two written ministerial statements that they expected such profits to be subject to corporation tax. Despite those clear statements, a bank entered into a scheme using contrived arrangements that, again, sought to ensure that the profit on the buy-back of its own debt was not subject to corporation tax, and a substantial amount of tax—around £300 million—was avoided. In a written ministerial statement on 27 February, I announced amendments to the rules so that companies cannot get round the legislation in the future.
The measure will take effect retrospectively to 1 December 2011 to ensure that banks and any other company that use this or a similar scheme after that date will be taxed on the transaction as it should be. The hon. Member for Newcastle upon Tyne North asked why the specified date was 1 December. That is essentially the first date on which HMRC was aware that the scheme or similar schemes were being used. The hon. Lady said that the scheme was notified on 1 December, but that is not the case. It was notified in February, but its use dated back to 1 December, so that is the date in the clause.
We did not take this action lightly. The scheme involves a large potential tax loss. There is a history of abuse of debt buy-back, as is shown by the written ministerial statements, and the bank in question has adopted the code of practice on taxation of banks, under which it commits not to engage in such tax avoidance schemes.
Ian Mearns (Gateshead, Labour)
I am interested in the figures that the Minister cites. He said that something like £300 million involved just one bank. Has HMRC or the Treasury investigated how much could be recoupable from banks that use this mechanism?
David Gauke (Exchequer Secretary, HM Treasury; South West Hertfordshire, Conservative)
HMRC is not aware of other examples of similar avoidance in this area. Of course, under disclosure of tax avoidance schemes legislation, it is necessary for a taxpayer to notify in such circumstances. Considerable attention has been placed on such schemes, so the current assessment is that HMRC is not aware of other taxpayers who have made use of the mechanism.
Ian Swales (Redcar, Liberal Democrat)
Will the Minister clarify whether the connected companies have to be UK companies, or is this intended to catch arrangements made overseas? There are some well documented cases of debt being held by related companies in countries such as Luxembourg, which is clearly designed to avoid UK tax.
David Gauke (Exchequer Secretary, HM Treasury; South West Hertfordshire, Conservative)
This relates only to UK connected companies, if that provides clarification. For the reasons I have outlined, the Government believe that this is a wholly exceptional circumstance in which action to change legislation with full retrospective effect is justified.
I appreciate the points raised by my hon. Friend the Member for Amber Valley. It is right to make it clear that retrospection should be used only in wholly exceptional circumstances. He asked if I could set out in more detail the Government’s position on retrospection. We set out our position in the protocol on unscheduled announcements of changes in tax law, which was published in “Tackling tax avoidance” at Budget 2011. The protocol makes it clear that the deterrent effect of making changes with immediate effect needs to be balanced against the need to maintain the UK tax system’s reputation for predictability, stability and simplicity. It states:
“In particular, changes to tax legislation where the change takes effect from a date earlier than the date of announcement will be wholly exceptional.”
As we said in our announcement of 27 February 2012, we believe this is a wholly exceptional circumstance and that retrospective action is therefore justified. In this case, a very large amount was at stake, a part of the tax code that had been repeatedly exploited was involved, and the bank was in breach of its obligations under the banking code of practice. For fullness of disclosure, I should add that the Chancellor made it clear in his 2012 Budget statement that we are ready to take retrospective action if there are continued attempts to avoid stamp duty land tax, but I put on record that we will take that step only in wholly exceptional circumstances.
My hon. Friend the Member for Amber Valley brought his experience to bear on a point about a restriction of the use of debt buy-backs preventing company rescues. This measure would not prevent company rescues. HMRC has made clear in draft guidance that none of the current exceptions to the tax charge that arises on the acquisition of debt by connected companies have changed. The arrangements under which HMRC gives clearances in company rescue situations, such as debt equity swaps, will continue to apply. The retrospective legislation combats specific avoidance arrangements that were designed to avoid a tax charge that would otherwise have arisen and, as statements made when the legislation was last amended made clear, that should have arisen. The new provision will tax the full economic profit that a group makes when impaired debt of a debtor company becomes held by a connected company and is then released.
To return to the clause, in general it makes three changes to the existing legislation. First, when companies with existing debt become connected, the calculation of the deemed release is amended to prevent avoidance. In response to comments on the draft legislation, published on 27 February, clause 23 also amends the wording of the current legislation to iron out a feature that sometimes gives rise to queries about its application in the context of the loan relationships rules on connected companies.
Secondly, it introduces a targeted anti-avoidance rule, to prevent future tax avoidance in this area. Thirdly, to ensure that the particular avoidance scheme would not succeed, it introduces a retrospective provision to counter the contrived arrangements used by the scheme. This an appropriate point for me to address, in detail, the amendment that would remove subsections (8) to (12) of the clause, which introduce the retrospective element.
I have referred to the protocol on unannounced tax changes, and the Government have set out their policy on the area. The present case is an exceptional one, and, for the three reasons that I have outlined, we believe that it is justifiable to use retrospective legislation.
The Government are clear that aggressive tax avoidance schemes are unacceptable. The use of retrospective legislation demonstrates that we will not tolerate aggressive attempts by companies to abuse the tax system with contrived arrangements, to avoid paying their fair share. I therefore hope that my hon. Friend the Member for Amber Valley will be persuaded—having probed very effectively and shown all the diligence that one would expect, which no doubt he will demonstrate on the Information Committee in years to come—to withdraw his amendment. I hope that the clause will stand part of the Bill.
Nigel Mills (Amber Valley, Conservative)
I am grateful to the Minister for that clarification. I think that we can all see that, given the example of a bank signing the agreement and entering into a scheme with the amounts of tax in question at stake, if any case was going to be in the line of acceptability for retrospective legislation, this would be it. Therefore I am happy in this situation to withdraw the amendment. I was trying to get the Government to clarify what they perceived as acceptable use, and we have had some progress on that, for which I am grateful.
I beg to ask leave to withdraw the amendment.