Clause 163 - Avoidance affecting proceeds

Finance Bill – in a Public Bill Committee at 5:15 pm on 20th May 2003.

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Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury 5:15 pm, 20th May 2003

I beg to move amendment No. 9, in

clause 163, page 106, line 9, at beginning insert 'or would' after the bracket.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

With this it will be convenient to discuss the following:

Amendment No. 10, in

clause 163, page 106, line 11, leave out subsection (2) and insert—

'(2) If, as a result of a tax avoidance scheme, the amount to be brought into account as the proceeds from the event is less than it would otherwise have been, the amount of any balancing allowance to which the taxpayer would otherwise be entitled shall be equal to the amount that (but for the provisions of this section) it would have been if the tax avoidance scheme had not been implemented.'.

Amendment No. 11, in

clause 163, page 106, line 17, after 'to', insert 'reduce or'.

Amendment No. 12, in

clause 163, page 106, line 19, at end insert 'in full'.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

Sir Nicholas, may I add my welcome to your chairmanship of the proceedings? You may have to listen to my voice for the next two sittings, so I shall be speedy.

Clause 163 introduces measures to counter an avoidance scheme, which should be blocked. The remedy it proposes is disproportionate to the abuse, however, because it denies the full amount of any balancing allowance that the asset owner claims rather than the proportion attributable to the scheme. The explanatory note is not strictly accurate because the detailed explanation refers to the denial of a balancing allowance on a fall in value, which is incorrect because the clause would entirely deny any allowance.

The Paymaster General knows that the amendment has the broad support of the Law Society and other professionals. She may argue that we should not pussyfoot around because the Government are trying to block tax avoidance, but it is traditional in British law that remedies should be proportionate. The amendment is designed to reduce the balancing allowance by the reduction in proceeds caused by the tax avoidance scheme, which is proportionate.

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

I shall ask my hon. Friends to oppose the amendment to the anti-avoidance provision in clause 163, which seeks to limit the clause's potential deterrent effect. It would allow a business entering into a tax avoidance scheme a balancing allowance equal to the amount that the allowance might have been had the avoidance scheme not been entered into. That is the amendment's purpose, although its precise meaning was not entirely clear until the hon. Gentleman spelled it out.

Perhaps it would help if I explained the avoidance mechanism: if we allowed the avoidance scheme to continue it would cost the British taxpayer some £500 million in lost revenue over the next three years. This is how the scheme operates: company A owns an industrial building that qualifies for capital allowances with, for example, a value of £1 million. Company A borrows 110 per cent. of the unencumbered market value of the property—in the example, £1.1 million—from company B, which is another group member. The loan is secured by way of a charge over the property. Company A then sells the property subject to the charge to another group member, company C, for £1. The liability under the loan remains with company A. Company C then grants company A a lease of the property at a peppercorn rent. The effect of the scheme is to trigger a balance in allowance of the whole, unrelieved, qualifying expenditure: £1 million less £1. The broad effect is thus equivalent to an immediate, upfront allowance of 100 per cent. of the unrelieved capital charge. We are not prepared to tolerate that. That is not the purpose of the provisions that are in effect.

The scheme occurs in an area of tax law that gives some £25 billion of relief through capital allowances each year. The hon. Member for Arundel and South Downs wants it both ways. If a company gets caught using the avoidance scheme, we would pretend that it was not using it, but still allow it to have the balancing allowance. I quote from Lord Green in the case of Lord Howard de Walden v. Commissioners of Inland Revenue, from page 134 of ''25 Tax Cases'':

''It scarcely lies in the mouth of a taxpayer who plays with fire to complain of burnt fingers.''

The anti-avoidance provision is intended to send a clear message to deter people from engaging in the scheme. If they persist in using it, and the Inland Revenue reveals that, it is wholly inappropriate that they would get access to the balancing allowance, and I ask the Committee to reject the amendments.

Photo of Adam Price Adam Price Plaid Cymru, Carmarthen East and Dinefwr

Perhaps the Paymaster General would give her response to the criticism that the definition of tax avoidance scheme under the clause is too broad. It defines a tax avoidance scheme or arrangement as one in which the main purpose, or one of the main purposes, is the obtaining of tax advantage by the taxpayer. How one defines what is the main purpose seems to have been left rather open-ended. For instance, it could be possible to argue that an arrangement has an improvement of the tax position as a purpose, but it was not the main purpose of the arrangement. There could be all sorts of debate about that. Would it not be preferable to define a tax avoidance scheme as one in which the sole or main purpose was the obtaining of the tax advantage?

Photo of Michael Jack Michael Jack Conservative, Fylde

This is one of those rare occasions when I rise to express sympathy with the view of the Paymaster General. I say to my hon. Friend the Member for Arundel and South Downs that had I been doing the same job as the Paymaster General, confronted with the enormity of the financial gain from a scheme such as this, I would have come down on it like a ton of bricks. There is a difference between sloppily drafted tax law that people take advantage of leading to the Treasury going somewhat over the top in trying to tie up their failings in the drafting, and the exploitation of a scheme. Someone has clearly looked at the provision and seen it as a way of driving a proverbial coach and horses through the spirit of the original legislation.

It is not that there were no capital allowances. It sounds from what the Paymaster General has said that the avoidance scheme has been exploited to such an extent that it goes against the spirit and purpose of the legislation. Under those circumstances, I do not blame the Revenue for trying to plug the hole. If someone has gone to the extent of obtaining professional advice to drive that coach and horses through the tax legislation, knowing exactly what they were about, I, for one, would not be in favour of giving them any mitigation because what seemed like a nice little earner is, rightly, cut off at the knees. Giving them a little something on the side is going over the top. I am less than sympathetic with my hon. Friend's amendment.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

I draw the Committee's attention to the fact that I said at the beginning that the clause counters an avoidance scheme that needs to be blocked. The Paymaster General did not respond to my second point that the notes on clauses describe incorrectly the way in which the clause operates, so it was entirely appropriate to ask about the balancing item. I understand the attitude of my right hon. Friend the Member for Fylde, but it has been a long-standing principle of British law that remedies should be proportionate. It is the general view of tax counsel that in this case it is inappropriate for the remedies not to be proportionate.

However, part of the purpose of the amendment was to probe the Minister and to discover exactly what was intended. When we debate subsequent clauses, we shall find that such problems often arise—as with the tonnage tax—when taxation is over-complicated. Incentives are exploited and we end up going round and round and making the legislation more complicated. The purpose of the allowances is obviously desirable economically, but they will tend to invite such problems.

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

I know that the hon. Gentleman is fully aware of the way in which capital allowances and the legislation evolved under the preceding Government. The importance of capital allowances is clear. The hon. Gentleman referred to ambiguity in paragraph 12 of the notes on clauses, but there is clarity in the summary and details in the explanatory notes and there are just a couple of words at the end of the sentence that need not be there.

The hon. Member for East Carmarthen and Dinefwr (Adam Price) referred to precedent. We are following the precedent of the definition of avoidance in the capital allowances Acts, so it is a well-trodden path.

Mr. Burnett rose—

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

The hon. Gentleman may not intervene on an intervention.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

I am grateful to the Paymaster General for her comments, but perhaps she should not let her power go over the top.

Photo of Mr John Burnett Mr John Burnett Liberal Democrat, Torridge and West Devon

I wonder whether it would help the hon. Member for East Carmarthen and Dinefwr to know that the words,

''a scheme or arrangement the main purpose, or one of the main purposes of which, is the obtaining of a tax advantage by the taxpayer''

constitute an expression well known to practitioners and the courts.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield 5:29 pm, 20th May 2003

As the Division Bell is ringing, I shall ask for the tolerance and patience of the Committee if we adjourn for 35 minutes, including the Division. That is to enable me to have my weekly weigh-in for WeightWatchers at 6 o'clock.

Sitting suspended for a Division in the House.

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