New Clause 7 — Application of sections 298 to 301

Orders of the Day — Finance Bill — [1st Allotted Day] – in the House of Commons at 5:15 pm on 6 July 2004.

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'Sections 298 to 301 above shall apply to situations where a promoter sells or markets a scheme; and in this section, "Scheme" means a notifiable proposal or notifiable arrangements.'.—[Mr. Flight.]

Brought up, and read the First time.

Photo of Sylvia Heal Sylvia Heal Deputy Speaker

With this it will be convenient to discuss the following amendments:

No. 39, in page 255, line 22 [Clause 300], leave out 'the prescribed period' and insert 'thirty days'.

No. 40, in page 255, line 31, leave out 'the prescribed period' and insert 'thirty days'.

No. 42, in page 259, line 12 [Clause 309], at end insert—

'(2A) Regulations made by the Treasury or the Board under this Part may provide for a threshold below which arrangements shall not be notifiable arrangements under section 298(1).'.

Government amendment No. 222.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

There has been a great deal of discussion in the media and important lawyers have written to the Treasury and the Inland Revenue about the new regime for the reporting of tax avoidance schemes. The Paymaster General has responded to a significant number of the issues raised and Conservative Members are pleased that she has done so in the interests of the British economy.

There remains, however, a central unresolved issue, which we call the dividing line. There is pretty much unanimous agreement that a regime requiring the disclosure of tax avoidance schemes that are being marketed is a sensible measure both as a deterrent and in order to make the Inland Revenue more actively aware of what is going on. Without a dividing line, though, and as a result of the drafting of the provisions, it is unfortunately probable that in order to protect themselves, large numbers of company accountants will feel obliged to report normal tax planning circumstances. The money that the Government are budgeting for the task and the numbers of extra staff employed at the Revenue will be wholly inadequate to cope with the level of reporting. Indeed, the Revenue will be snowed under and yet another burden will have been placed on British business.

The Government generally and the Paymaster General in Committee specifically referred to schemes, and the understanding of the population at large is that the target of the new disclosure regime is widely marketed tax avoidance schemes. However, the current drafting is such that the schemes will operate much more widely than should be intended, and uncertainty and additional compliance burdens will be created.

New clause 7 is designed to clarify and confirm the focus of the new rules on the marketing of avoidance schemes—hence the crucial dividing line between reportable schemes and non-reportable everyday bespoke tax advice. In Committee debates, I said that I hoped that the arrangements were intended to apply to promoters of schemes and not, for example, to tax advice in the normal course of business or to takeover activities, which always require tax advice.

The direct tax disclosure proposals as they stand have been changed marginally as a result of the Government's amendments, and the regulations to implement the rules framework will be amended further in the light of the Paymaster General's recent press release. However, what remain are legislation and a set of rules that still have an uncertain reach—and uncertainty is not what a tax system should be based on. Accountants want to comply with the rules but, as currently drafted, the rules are bound to lead to excessive disclosure, which would be counter-productive for the Inland Revenue as well as for commerce.

The new clause is thus designed to ensure greater certainty in the application of the rules to everyday client-adviser situations and to bespoke advice coming from continuing and continuous business arrangements. As I have already explained, when it comes to takeovers, it is inevitable that commercial arrangements will change rapidly and frequently as the deal is worked on. A tax input is necessary and a tax can be either a cost or a benefit of the deal, which is factored into the price. The advice will be normal everyday tax planning advice designed to ensure that those involved understand the tax consequences of what they have in mind and that they take advantage of the basic rights of taxpayers to minimise their tax liabilities within the law. It is crucial to get rid of uncertainty; otherwise, advisers, their clients and the Inland Revenue will waste a lot of time over disclosures that surely are not required. That will help no one, least of all the Revenue.

It is notable that the House of Lords Select Committee on Economic Affairs made exactly those points about the Government's proposals. It stated that it was

"not convinced that the legislation as it stands has been sufficiently thought through or exposed for serious consultation with those who will have to deal with its consequences . . . We have seen the good results which such consultation has produced in the case of the Government's measures to simplify the taxation of pensions. We would like to have seen something along the same lines for some at least of the revenue protection measures."

In its conclusions, the Committee stated that

"there is a need to avoid the risk of over-reporting to ensure that taxpayers and their advisers do not report ordinary tax planning arrangements . . . We have sympathy with the view expressed to us that the primary legislation and the regulations ought to be worded sufficiently tightly to put matters beyond doubt and that the function of departmental guidance is to elucidate rather than to make" secondary market rules.

I hope that the Paymaster General will tell the House that it is her intent that the winnowing process of the regulations and, ultimately, the Revenue guidance will mean that marketed tax avoidance schemes are reported. However, tax law should not be run by Revenue fiat: it is wrong in principle that a law, as drafted, should not be clear.

The five-day time limit has been debated previously. It is obvious that there is no problem in reporting within five days avoidance schemes that are being marketed, and it is equally obvious that it is entirely impractical for the general run of tax advice to be reported in the same period. Moreover, the latter is a continuing process.

In addition, will the Paymaster General give an assurance that the voluntary sector will be excluded from the scope of the regulations? A growing number of charities and similar organisations offer advice on tax or tax credits to people on low incomes, on a pro-bono basis. The advice given by such bodies is not generally of the sort that would constitute avoidance schemes, but it is a way to help people to make the best of their opportunities. It often consists of simple advice to help a couple to structure their tax position to their best advantage.

The draft regulations focus on avoidance schemes rather than ordinary tax planning, and the draft guidance notes give some comfort. However, the difference at issue is the same as that between the business and marketing of tax avoidance schemes and the general giving of taxation advice in the normal run of tax planning.

We must have a clear dividing line in these matters. It is one of the major outstanding issues for the legal and accounting professions, and for much of business. If we do not get a clear dividing line, there will be huge problems for the Inland Revenue, and business will be faced with quite unnecessary compliance burdens.

I hope that the Paymaster General will be able to assure us that she has eventually made up her mind about the dividing line. If she has not, we will press the amendment on this major issue to a vote.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

I want to speak to amendments Nos. 39, 40 and 42. To some extent, I echo the comments of Mr. Flight. One advantage for us in our review of this year's Finance Bill is that we have been able to study the report from the House of Lords Select Committee on Economic Affairs, to which the hon. Gentleman referred. It goes into some detail on some prominent aspects of the Bill, especially those that have been controversial with businesses and tax practitioners. Having served on the Treasury Committee, I am not convinced that it has been able in the past to give enough attention to specific tax measures, as opposed to the macro-economic impact of Budgets. Therefore, it has not been able to inform the debates that we have in this place, especially by taking evidence from outside bodies. For that reason, I welcome the fact that the House of Lords Committee has again prepared a report on the Finance Bill and I hope that we shall be able to learn from some of its assessments, often made by people with much expertise in the area who have considered the issues in a non-party political and non-partisan way.

The House of Lords Committee's report echoes to a large extent the support in this place and outside for the broad thrust of the Government's proposals on tax avoidance, especially the early notification of tax avoidance schemes and, in particular, those that are widely marketed. In paragraph 19 on page 15, the Committee states:

"We wholeheartedly support the objectives of this draft legislation when applied to contrived schemes of artificial avoidance, and we have focused on matters that might assist in its practical application."

The Committee goes on to distinguish—as have our debates today—the artificial contrived schemes, which are marketed to large numbers of counterparties, from the bespoke schemes, of which there are many more.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 5:30, 6 July 2004

Will the hon. Gentleman explain to the House the difference between a bespoke scheme that saves one taxpayer £300 million that they should have paid, and a marketed scheme that is sold to hundreds of thousands and also costs the Exchequer £300 million? Both involve a tax loss through avoidance, and that is what we should deal with.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

I agree with the Paymaster General about the potential tax loss. However, we need to distinguish between the two types of tax planning activity—schemes that are widely marketed, about which the Inland Revenue can be contacted and the schemes registered, and the more detailed tax advice that most tax accountants would not even consider constituted a scheme. Such tax advice may also be provided by a number of different entities within one group at the same time, and the practical steps that would have to be taken to report that information to the Inland Revenue could cause problems.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I must press the hon. Gentleman on the issue, because he did not answer my question. If bespoke advice to one taxpayer saves them £300 million through avoidance that they should not have saved, why should not that bespoke scheme be notified to the Revenue?

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

In terms of the practical application and the compliance cost, there is a material difference between artificial schemes that can be reported and cover tax advice given to many entities at the same time, and tax advice that is given to individual companies when dealing with their day-to-day affairs and which even the Paymaster General might agree did not constitute a "scheme".

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

In that case, does the hon. Gentleman accept that those highly paid, highly qualified and intelligent tax advisers and accountants know full well that the advice they give will be used to avoid tax when it should not be avoided? Therefore, they would know the difference between a bespoke tax avoidance scheme and a bespoke tax planning scheme that would be within the rules.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

I do not want to disappoint the Paymaster General, but I genuinely do not believe that it is quite that simple. Like most tax practitioners, I think there is a spectrum—from actively marketed contrived schemes to advice given by tax practitioners in the ordinary course of events.

Our amendments address two practical issues that are dealt with in the House of Lords report. The first is whether there should be a requirement for a different reporting period for individual pieces of tax advice—perhaps the Paymaster General would prefer me to call them that rather than bespoke schemes, which carries the sense that they are indeed schemes—in contrast to that for the artificial and marketed schemes. The second issue is whether there should be a de minimis limit in order to reduce compliance costs.

Despite the Paymaster General's comments in Committee and in this debate, she has failed to convince not only many professional bodies and individual accountancy firms, which may worry her rather less, but a cross-party House of Lords Committee that has given the issue careful deliberation, no doubt bearing in mind the points that she has made. As the hon. Member for Arundel and South Downs noted earlier, the Committee's conclusion was that although it accepted the proposition that five days was long enough for "pre-packaged schemes", it had sympathy for the view that there were likely to be more complex commercial relationships where

"five days is too short a period in which to determine whether or not a report is due".

The Committee noted that, given its focus on ease of administration in keeping down the compliance costs of both sides:

"We recommend that consideration be given to adopting a 30-day time limit in respect of notifications under clauses 292 (1) and (3) of the Finance Bill".

The Committee also referred to the evidence given by John Whiting of PricewaterhouseCoopers. He commented:

"It is noticeable that the Inland Revenue, whilst requiring disclosure in five days"— in relation to this type of tax advice—

"is then allowed 30 days to simply register the item and return with a number for the scheme."

The practical implications of such deadlines for that type of tax advice were set out in a letter from Grant Thornton, the tax accountants, which I am sure that the Paymaster General has seen and which describes from Grant Thornton's perspective some of the practicalities in reporting that information and how it intends to handle the process, highlighting some of the steps it will need to take. Grant Thornton's evidence makes it clear that the marketed schemes are not an issue; the material for such schemes should be at hand and there should be no difficulty in notification. The letter states:

"Grant Thornton intends to make notifications"— of the individual advice—

"on a centralised basis. This should be of benefit to the Inland Revenue as it should avoid duplication and our submissions should be consistent in nature. However, with offices in 34 locations, the gathering, filtering, collation and summarisation of information within the five-day timescale will be virtually impossible to achieve. If we make each office responsible for its own notifications, then the Inland Revenue's Avoidance Intelligence Unit could potentially be swamped with duplicated notifications. A timescale of 30 days would be more realistic and would be in line with many other time limits for providing information".

When we consider how such information is likely to be reported and filtered in practice, we can see that a five-day deadline would be a rapid turnaround. If the Government insist on keeping to that deadline, they may receive information in much greater quantities, much less effectively filtered and from a number of different locations.

I understand the Paymaster General's concern about extending the notification period, thus providing an opportunity for tax avoidance. I hope that she will appreciate that that concern must be balanced by an understanding of the practicalities that many tax accountants will face in the circumstances and that, therefore, she will at least reflect on the deliberations of the House of Lords Committee even if she considers that tax practitioners have a commercial interest in amending the legislation in this way.

The second issue that I want to touch on is whether a de minimis threshold should be established. The House of Lords Committee discussed that issue and put it to the Inland Revenue officials who gave evidence to it. At paragraph 41, it says:

"The Revenue had practical objections to both the suggested measures for a de minimis rule" in respect of the possible tax avoidance or the fees that would be charged. It says that the Inland Revenue

"anticipated that promoters 'might argue that they would not know with any certainty how much tax was at stake when their scheme was used by a particular taxpayer.' A fees-based test was ruled out because 'it would not be straightforward to isolate fees for a particular tax scheme from fees for general tax advice'."

I do not want to go into too much detail, as it is already outlined in the House of Lords Economic Affairs Committee report, but that Committee has also had the benefit, which we have not, of taking evidence from the United States Internal Revenue Service and hearing about its experience of early declaration and notification and using a de minimis rule. The House of Lords Committee points out that three of the five filters used for notification in the US include a de minimis element. At paragraph 48, on the basis of its deliberations about how such matters work in the United States of America, it rejects the idea that a de minimis limit would be unworkable. Indeed, it says:

"We accept the argument that setting a de minimis threshold could serve significantly to reduce compliance costs and, in the light of the US IRS evidence to us, we therefore recommend that further consideration be given to adopting a de minimis limit for the reporting of individual schemes."

Both those matters are not straightforward for the Treasury and concerns have been raised about whether tax avoidance could occur while individual tax measures are being reported, but I hope that the Paymaster General will accept that countervailing concerns have been expressed about the burdens that could be imposed and about requiring a short reporting period for detailed tax advice while the Inland Revenue appears to allow itself much longer to respond to its counterparties. If the Paymaster General is unable to respond constructively to the House of Lords Committee's proposals, I hope that she will at least indicate that she will keep the matter closely under review in the year ahead and that, if it turns out that adopting those proposals has benefits, she will be willing to keep an open mind and introduce changes at a later stage.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

Perhaps I should start with the point about artificial versus bespoke schemes made by the hon. Members for Yeovil (Mr. Laws) and for Arundel and South Downs (Mr. Flight). The purpose of the disclosure clauses is to address the precise issues highlighted by the hon. Member for Yeovil—the artificial and contrived arrangements that can occur in marketed schemes and bespoke arrangements. Neither the Government nor any hon. Member have advanced an argument to say that normal tax planning should fall within the disclosure rules; on the contrary, the Government argue that normal tax planning should not fall within the bespoke rules. Frankly, I would say to the hon. Member for Yeovil that if organisations such as Grant Thornton cannot tell the difference between an artificial and contrived arrangement and normal tax planning, I would be amazed. Indeed, I might thus seriously question the quality of advice that it gives to people who pay a lot of money for that service.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury 5:45, 6 July 2004

Does the Paymaster General accept that not only Grant Thornton but all tax practitioners have expressed considerable concern about what they will be required to report and what they will not? Although it might be easy to distinguish between each end of the spectrum, it is more difficult to decide whether tax advice that falls in the middle of the spectrum constitutes something that the Government intend to be reported.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

With respect to the hon. Gentleman—and I shall address that issue later—he did not advance that scenario when he cited Grant Thornton. If he was quoting correctly, it sounded as though the company would send the Inland Revenue just about all the tax advice produced by every office in the country. I refer him back to the excellent speech made on Second Reading by Mr. Gibb, although I shall not repeat it. That was the best speech that I have heard about corporate responsibility, and it demonstrated clearly the fact that professionals should know full well the precise activities that they undertake.

I want to address further issues regarding new clause 7 and amendments Nos. 39, 40 and 42, but I make it absolutely clear again that we are talking about artificial and contrived schemes, such as gilt strips and those that we addressed when we considered new clauses 9 and 10 today. We want to get information so that we can deal with such schemes in the way in which all hon. Members have implored Ministers to do.

Photo of Quentin Davies Quentin Davies Conservative, Grantham and Stamford

As the Paymaster General says, everything turns on the words "artificial" and "contrived", because they determine whether something is notifiable. Does she agree that those terms are ambiguous because they involve an element of judgment—they are not mathematically precise? An adviser will need to know, ex ante, whether a scheme is artificial and contrived because it is no use waiting for a court to determine that. By that time, an adviser might have made a mistake and thus have been penalised. Will the Paymaster General give the House definitions of "artificial" and "contrived" to make their meanings unambiguously clear? If we use words that require an element of judgment, there will be, by definition, a large area of persistent doubt, and thus unfairness and perversity may arise.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

That was a long intervention. As the hon. Gentleman knows, the clauses and the filters in the regulations seek to make the position clear. We are talking about the operation of the provisions in only two areas of taxation—employment and financial products. He should cast his mind back to discussions on new clause 9, when we learned that tax planners have already designed a scheme to get round clause 134, even though the Bill has yet to receive Royal Assent. We were fortunate to receive the details of the scheme so that the House could close it off. If I explain how the relevant provisions will work in practice, the hon. Gentleman may not be satisfied but he will have a clearer understanding of them. By their very nature, artificial and contrived schemes introduce uncertainty into the system. I fail to understand how anybody could look at, for instance, the gilt strip arrangements and not conclude that they are contrived. I am trying to deal with those grey areas.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

Is there not a clear moral distinction to be made? The individuals to whom the right hon. Lady referred know when they are dealing in artificially contrived schemes, as opposed to tax planning to minimise tax liabilities. Legally, it is difficult to distinguish between the two, although the regulations may go some way towards doing so. The Bill, however, does not.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I am not even going to attempt to go down the road of moral definitions.

There has been a universal welcome for the Bill's attempt to provide disclosure mechanisms in the light of the experience of the US and other countries. Tax avoidance is not limited to marketed schemes or even schemes that are sold without marketing, which is why the Government's approach is to target arrangements where the risk of avoidance is greatest. New clause 7 would give rise to significant practical problems, as I shall explain to the House, and does not address or improve the position that hon. Gentlemen are trying to tackle. I accept that it attempts to differentiate between an off-the-shelf scheme and bespoke advice, but applying the disclosure rules only where a promoter sells or markets a scheme could create the very uncertainty and arbitrary boundaries that they seek to remove. That problem arises from the very nature of contrived and artificial schemes.

There is a genuine difficulty, I acknowledge, in drawing a clear line between advice on marketed schemes, such as the gilt strip scheme that the Government have dealt with in the Bill, and planning advice—advice on a major commercial transaction such as an acquisition or merger, however, is clearly bespoke advice—and hon. Gentlemen are seeking to address that grey area. It is not clear on which side of the dividing line between bespoke advice and advice on marketed or off-the-shelf schemes particular advice will fall. Trying to target the disclosure rules in that way would make it even harder for the majority of compliant advisers to apply them and, at the same time, would unfortunately—I know that this is not the hon. Gentlemen's intention—provide scope for less scrupulous advisers to find ways of side-stepping them. That would create a significant defect in the disclosure rules. That is why the Government's approach is to target the types of schemes and arrangements in which we believe that avoidance is most prevalent.

It is not clear how the new clause is intended to affect the disclosure of schemes devised in-house, and there are many such schemes. The result of the new clause could be the introduction of different rules for the disclosure of schemes that are marketed and sold by a promoter, and in-house schemes where no promoter is involved. Were the Government to adopt that approach, they would rightly be open to accusations of discrimination against firms that rely on in-house tax advice.

Notwithstanding some of the comments that have been made, the Inland Revenue has had extensive consultation with the profession and the industry on the draft regulations and has set out details of what would be caught by the disclosure rules. During the consultation, concern was expressed that the financial products regulations might be too wide. I recognise that the new clause attempts to deal with those concerns by narrowing the scope of the rules for marketed and off-the-shelf schemes.

I appreciate that the hon. Gentleman also wants to ensure that the disclosure rules do not apply to the normal tax planning advice on commercial transactions that is provided by the vast majority of tax advisers. He wants to distinguish between that sort of bespoke advice and aggressive schemes that depend on exploiting loopholes. I can assure him that the Government do not want to impinge on straightforward tax planning. That is not what we are attempting to do. However, our concern remains—I made the point in Committee as well—that some bespoke advice also depends on the aggressive exploitation of loopholes.

We therefore believe that the response that the Government propose is more effective and will preserve the new disclosure obligations. The Inland Revenue is working hard with tax advisers to ensure that the rules catch only aggressive schemes. We will refine the text of the regulations to ensure that the financial products test is clear and easier to apply in practice. The regulations will contain new filters, which we discussed in Committee. They will ensure that financial products that gain a tax advantage by exploiting loopholes are dealt with.

Government amendment No. 222 corrects a drafting error. It removes from clause 299 some extraneous words referring to a trade, profession or business that involves the provision to other persons of services relating to taxation.

Amendments Nos. 39 and 40 seek to remove from the Board of Inland Revenue the power to prescribe in regulations the time within which promoters are required to make a disclosure, and set out in primary legislation that that should be 30 days. I make a simple point to the hon. Member for Yeovil: when the promoters make the scheme available for use, they know whether or not it should be declared. Five days after the scheme is made available is therefore reasonable. Thirty days simply allows more time.

The broad framework for a disclosure regime is set out in primary legislation and specifies who needs to make a disclosure and what they need to disclose. The regulations published in May require promoters to supply those details within five days. If they know on day 1, day 2, day 3, day 4, day 5, day 29 and day 30, I do not see why they cannot make the information available by day 5 and why that should wait until day 30. I am not convinced that the promoters cannot supply the information within five days. They clearly have all the information that they need, because they make the schemes available.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury 6:00, 6 July 2004

Can the Paymaster General confirm that, like the House of Lords Economic Affairs Committee report, our proposal distinguishes between artificial marketed schemes, where we agree that the five-day limit is right, and more complex tax advice, where a potential problem exists and a 30-day limit might, as the House of Lords Committee suggested, be more sensible?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

Amendments Nos. 39 and 40 do not provide for that distinction, because they remove the five-day period. The operation of the disclosure rules means that the Government's arrangements are straightforward, and there is no reason why they should not work.

Amendment No. 42 gives the Treasury a new statutory power to impose a de minimis limit. It is difficult to see what it seeks to achieve, because it does not set the de minimis threshold, but merely enables the Treasury and the Inland Revenue to introduce such a limit. We resist the introduction of a de minimis limit for direct tax disclosure rules because it would not work in practice. For example, where such a limit applied to tax saved or to the turnover of a business, a promoter of a scheme might not be in a position to know those facts when they sold the scheme to the client, and would not know whether the de minimis limit applied and whether they should make a declaration. The disclosure rules in the Bill provide for the notification of the Government and the Inland Revenue when promoters and those giving advice believe that schemes fall within the definition of "artificial and contrived", which is vital if we are to defend tax revenues in order to invest in our public services.

Photo of Quentin Davies Quentin Davies Conservative, Grantham and Stamford

The Paymaster General said that my intervention, which she was kind enough to take, was too long, so I rise to take her up on one or two points. This afternoon's debate has become quite amusing, because she used an argument that she herself dismissed earlier in the debate to reject new clause 7. She says that one cannot make a viable distinction between a marketed scheme and a non-marketed scheme, because one cannot define what is marketed, so, in her words, "a grey area" exists between marketed and non-marketed schemes. Conservative Members have put that argument to her on the definition of "artificial and contrived", and a considerable grey area clearly exists.

The Paymaster General says that everyone knows what is "artificial and contrived", but I shall give her an example and take an intervention, if she wants to make one. What about transferring capital allowances from profit-earning firms to non-profit-earning firms through finance leases? That mechanism is classic, but surely it is "artificial and contrived." It must be contrived—presumably some clever tax accountant or lawyer thought it up 20 years ago when finance leases started—and it became a classic method of financing. It enabled companies whose profitability was not sufficient to do so to get full benefit from capital allowances by investing in plant and equipment, which is a socially and economically desirable objective that both Conservative and Labour Governments have sought to secure.

The Paymaster General has not intervened yet, but does she regard that example as "artificial and contrived"? The practice certainly did not flow directly from the original purpose of the capital allowances, which were effectively used by firms that were not making the corresponding profits, so one could describe that as both artificial and contrived. The right hon. Lady clearly does not know the answer.

Earlier this afternoon, the Government moved new clauses 9 and 10, which we did not oppose and which are designed to prevent from coming into effect artificial and contrived tax avoidance schemes that, we were told, have been marketed over the past few weeks. But she did not rely on her "artificial and contrived" definition to try to dispose of those particular schemes: she used the different mechanism of an anti-avoidance rule. Why does she not stick with that? Why does she not simply say that schemes will be disregarded by the Revenue if their main purpose is to avoid tax, as under new clause 10? That is a much more objective definition than "artificial and contrived".

The right hon. Lady cannot pray in aid new clause 10 because she adopted an entirely different approach to solving the problem of that set of schemes. She certainly cannot reject the argument that it is undesirable to have areas of doubt and uncertainty—grey areas—in tax legislation when they are put to her in one context, then five minutes later reject an Opposition amendment on precisely the same ground. There is a certain amount of irony, to put it kindly, in the position that the Government have taken up this afternoon.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

The only irony is that the hon. Gentleman has not read the proceedings of the Standing Committee, during which I specifically gave the answer with regard to leasing and the disclosure rule.

Photo of Quentin Davies Quentin Davies Conservative, Grantham and Stamford

The right hon. Lady did not then, or on any other occasion, define "artificial and contrived". I cited the lease as an example where doubt would exist ex ante as to whether it was artificial and contrived. She may well be able subsequently to say that she chooses not to regard it as artificial and contrived, yet it could have been considered to be so.

I am afraid that the right hon. Lady has not answered the question at all. We need a definition ex ante; otherwise, the only way in which we will get a definition is ex post, after a great deal of complicated and expensive litigation before the commissioners or the courts. What is more, as my hon. Friend Mr. Flight said, it is inevitable that tax advisers will play safe. The e-mails and pieces of paper that travel between tax advisers and Revenue offices will increase greatly as everybody tries to cover themselves in knowledge of the penalties that will apply if it is subsequently, and retrospectively, deemed that a certain piece of tax advice was involved in an artificial or contrived arrangement.

The right hon. Lady may live to regret this. I am afraid that by not giving us any guidance on what is artificial contrivance, and accepting a grey area in these matters that she rejects elsewhere, she has laid the basis for the problem that I fear will ensue.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

All hon. Members will understand what the Paymaster General is trying to achieve and why. Our concerns, as echoed by my hon. Friend Mr. Davies, centre on why the arrangements as they stand can achieve it without leaving too great a grey territory in the middle. We have a lot to learn from the US experience in this area, and I trust that the right hon. Lady will continue to monitor that.

Morally, everyone knows when they are crossing the line between acceptable tax planning and artificial contrivance, but legally defining that is extremely difficult. For good reason, the Minister does not want a definition of artificial and contrived schemes in law. Only a few years ago, inspectors of taxes were telling people that trust arrangements were not caught by the gifts with reservation rules and were perfectly okay and acceptable, whereas now they are seen as artificial contrivances. Judgments as to where the line is drawn change over time.

We believe that the most important place to start in this regard must be with practical measures that will have some effect. That is why it is important to draw the line in relation to any form of promotion and selling; that is where we shall stop most of the problems, because that is where most of the abuse has taken place. We understand the Minister's point that a clever company could come up with its own fancy internal scheme. We do not deny that that could be a problem, and we understand why the Government are trying to catch that kind of problem. However, our concern is that the price of doing that will be a degree of mayhem in terms of how the financial industry and accountants operate, and in terms of what the Revenue gets landed with.

I am afraid that, although the Minister has convinced us of the worthiness of her intentions, she has not convinced us that she has addressed the problem of the grey territory in the middle. If that is not addressed, the arrangements will be damaging to the economy. For that reason of principle, we would like to register our point by pressing the matter to a vote.

Question put, That the clause be read a Second time:—

The House divided: Ayes 128, Noes 268.

Division number 215 Orders of the Day — Finance Bill — [1st Allotted Day] — New Clause 7 — Application of sections 298 to 301

Aye: 128 MPs

No: 268 MPs

Aye: A-Z by last name

Tellers

No: A-Z by last name

Tellers

Question accordingly negatived.