'(1) Section 75 of ICTA (expenses of management: companies with investment business) is amended as follows.

(2) After subsection (2) insert—

"(2A) A deduction is not to be allowed under that subsection for any particular expenses of management if any part of those expenses is incurred directly or indirectly in consequence of, or otherwise in connection with, any arrangements the main purpose, or one of the main purposes, of which is to secure the allowance of a deduction (or increased deduction) under that subsection or any other tax advantage.

(2B) Subsection (2A) above does not apply if, as a result of paragraph 7A of Schedule 23A (manufactured payments under arrangements having an unallowable purpose), the company incurring the expenses is not entitled to a relevant tax relief (within the meaning of that paragraph) in respect of, or referable to, the whole or any part of the expenses.

(2C) The reference in subsection (2A) above to expenses of management includes amounts treated by any provision as deductible under this section."

(3) After subsection (5) insert—

"(5A) For the purposes of subsection (5)(a) above investments are not held for a business or other commercial purpose if they are held directly or indirectly in consequence of, or otherwise in connection with, any arrangements the main purpose, or one of the main purposes, of which is to secure the allowance of a deduction (or increased deduction) under subsection (1) above or any other tax advantage."

(4) After subsection (10) insert—

"(11) In this section—

"arrangements" includes any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable), and

"tax advantage" has the meaning given by section 840ZA."

(5) The amendments made by this section have effect in relation to accounting periods beginning on or after 20th June 2007, but have no effect in any case where the particular management expenses in question were paid before that date.

(6) In the case of an accounting period of a company beginning before, and ending on or after, that date, those amendments have effect as if, for determining the amounts that are deductible for the period under section 75(1) of ICTA, so much of the period as falls before that date, and the rest of it, were separate accounting periods.'.— [John Healey.]

Brought up, and read the First time.

I beg to move, That the Clause be read a Second time.

New clause 5 introduces a targeted anti-avoidance rule that tackles the use of tax avoidance schemes designed to generate deductions in respect of "expenses of management" under section 75 of the Income and Corporation Taxes Act 1988. If left unchecked, those schemes would cost the UK Exchequer—the public purse—£1 billion a year. Section 75 of the 1988 Act provides "companies with investment business" relief for the expenses of managing that investment business. The rules were introduced way back in 1915 and originally applied only to pure investment companies and to insurance companies.

The rules remained largely unchanged until the Finance Act 2004. The changes that we made three years ago widened the range of companies able to obtain relief for expenses of management. They also specifically excluded capital expenditure and introduced an unallowable purpose rule in relation to investments not held for a business or commercial purpose. The unallowable purpose rule made no explicit reference to tax avoidance purposes. It was believed at the time that that rule and a tough approach to the construction of the phrase "expenses of management" derived from case law would be sufficient to stop any abuse. Sadly, the appetite of some for tax avoidance has proved us wrong. In the past two or three years, the disclosure of tax avoidance schemes rules and other inquiries have shown us that there are already a number of avoidance schemes that create deductions for relief as expenses of management which are both substantial and contrived.

The latest scheme is an attempt to circumvent other anti-avoidance legislation introduced in the Finance Act 2004. It creates a wholly artificial deduction for management expenses in return for the receipt of a dividend to which the UK company was already entitled before the scheme was put in place. These payments—treated by the companies as management expenses—are made to overseas companies, which are usually located in tax havens and therefore usually outside the UK tax net. The group of companies as a whole suffers no economic loss as the money is effectively flowing in a circular fashion—the loss is actually borne by the UK Exchequer. That happens when the holding company gets relief for the artificially manufactured management expenses. That sort of scheme is relatively easy to implement and we calculate that—if effective—it has already put at risk more than £240 million to the public purse. Without urgent action, many more groups of companies are likely to adopt the scheme.

Her Majesty's Revenue and Customs does not accept that the schemes are in accordance with existing legislation. Given the potential cost to the Exchequer and the uncertain outcome of litigation, we are taking action now, to put the issue beyond doubt. The new clause confirms that assets held for a tax avoidance purpose are not held for a business or commercial purpose of the company, and ensures that the scope of the provisions is as wide as possible. We believe that the changes deal with the known schemes and also go appropriately wider, countering any other schemes that might try to secure relief of contrived management expenses.

The sheer size of the potential cost requires immediate action. I therefore regret that, in those circumstances, it has not been possible to consult on the new clause. However, the measure will not affect compliant companies. It affects only those that are involved in tax avoidance. The new clause tackles artificial schemes and will not therefore affect commercial transactions. I commend it to the House.

I thank the Financial Secretary for his explanation of the circumstances that lie behind the new Clause. It elaborates on the letter that he sent to my hon. Friend Mrs. Villiers and other members of the Committee last week. In the letter, the Financial Secretary said that the estimated cost approached £1 billion, but in his remarks he said that it was £240 million. I appreciate that the Treasury likes to round things up from time to time, but that appeared to be a large rounding up. Will he be a little clearer about the basis of both the figure in his letter and the cost that he cited in his speech?

My broader concern is that the new clause is drafted widely, as the Financial Secretary acknowledged. We held several debates in Committee about the breadth of anti-avoidance legislation. We had a long debate about the way in which broadly framed legislation was subsequently narrowed through guidance. I was therefore disappointed, given the circumstances that gave rise to the new clause, that the provision was not more tightly drawn to attack the specific abuses that he highlighted of group companies, the use of dividends and so on as a means of generating management expenses. I wonder why he feels the need to phrase the new clause so widely. Are not we in danger of creating uncertainty among taxpayers and their advisers through the breadth of the provision? Cannot we have a more specific provision to tackle the abuse that he mentioned?

I thank the hon. Gentleman for the measured way in which he at least implied that he and his party would support the step that we are taking.

In a sense, I covered the reason for our framing the new Clause in such a way in my speech. It covers the known schemes and our anticipation of the way in which other contrived schemes—those that try to take advantage of management expenses relief—may be constructed.

We calculate that what Her Majesty's Revenue and Customs has already examined under the system of notification has put at risk £246 million to the Exchequer. If left unchecked, the schemes would put at risk approximately £1 billion to the Exchequer and the public purse. I hope that that helps to explain the two figures that I used this afternoon and the one figure that I cited in my letter to Mrs. Villiers.

Question put and agreed to.

Clause read a Second time, and added to the Bill.