Schedule 24 - Restriction of deductions for employee benefit contributions

Finance Bill – in a Public Bill Committee at 4:30 pm on 12th June 2003.

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Photo of Stephen O'Brien Stephen O'Brien Conservative, Eddisbury 4:30 pm, 12th June 2003

I beg to move amendment No. 244, in

schedule 24, page 336, line 40, after 'asset', insert 'on trust'.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

With this it will be convenient to discuss the following:

Amendment No. 291, in

schedule 24, page 337, line 16, at end insert—

'(5) For the purposes of subparagraphs (3) and (4) above, the making of a contribution to a third party includes the holding of funds to the order of that third party notwithstanding that the funds are never transferred into a bank account in the name of that third party.

Amount of subsequently allowable deduction

1A (1) This paragraph applies where a deduction for an amount of employee benefit contributions is disallowed under paragraph 1 but a deduction becomes available for a subsequent period because of the later provision of qualifying benefits.

(2) The amount of deduction available in the subsequent period shall be the sum of—

(a) the higher of—

(i) the just and reasonable proportion of the original employee benefit contribution as is attributable to the provision of the qualifying benefits in question, and

(ii) the amount on which the recipient is subject to income tax (or would be if the conditions specified in paragraph 2(3) below were met); and

(b) the amount of any NIC charge (if any) arising on the provision of the qualifying benefit in question.

(3) A deduction shall be allowed only once in respect of any amount or part amount of any employee benefit contributions and any associated NIC charges (if any).

(4) Where more than one person could claim a deduction under this paragraph in respect of any NIC charge it shall, unless the parties agree otherwise, be claimed by the person who employs the recipient at the time that the charge arises.

(5) ''NIC charge'' has the meaning given it in paragraph 2.'.

Amendment No. 292, in

schedule 24, page 337, line 20, leave out 'loan' and insert

'a loan which does not give rise to an employment income tax charge'.

Amendment No. 293, in

schedule 24, page 337, line 26, leave out 'subparagraph (1)(a)' and insert 'this Schedule'.

Amendment No. 294, in

schedule 24, page 339, line 20, at end insert—

'(aa) in respect of the provision of any benefit which does not give rise to an employment income tax charge or to an NIC charge (as those terms are defined in paragraph 2),'.

Photo of Stephen O'Brien Stephen O'Brien Conservative, Eddisbury

I am grateful, Mr. McWilliam. I rose on the previous stand part debate because I discussed the matter with your co-Chair earlier today. He recognised the difficulty caused by the propensity to draft single line sentences in clauses to make schedules legally operative. We end up having to say whether or not we support the provisions in the schedule. We are

now moving on to the schedule and discussing the meat of our concerns.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. It may assist the Committee to know that were it to decide that it did not like the schedule and to vote it down, all that would happen is that there would be a clause in the Bill that would do nothing, which is why there would be no point in debating it.

Photo of Stephen O'Brien Stephen O'Brien Conservative, Eddisbury

I am content, but I think that the discussion will persist. There is a degree, depending on one's logic, of illogicality. Clause 142 and schedule 24 determine the timing of deductions for payments the employer makes to a third party, including the trustees of an employee benefit trust, to provide benefits to employees. That measure was first announced in the pre-Budget report to counter the avoidance of tax and national insurance charges through employee benefit trusts. Countering the avoidance of tax is understood and supported by us.

Our amendments are essentially probing in nature; I place that on the record, up front. They consider whether the legislation is intended to go beyond trust relationships, practical issues, timing and evaluation issues or equality of treatment between taxation of the employee and deductions for the employer. We are considering all the amendments to the schedule in one group, and I hope that I have given an encompassing introduction.

The schedule contains anti-avoidance measures that will clamp down on employee trust structures, but there is obviously some concern about how far that goes. Amendment No. 244 is a probing amendment to find out whether the schedule will deal with the holding or use of money or an asset on trust. That requires clarification. Amendment No. 291 raises a probing, practical point. As the Paymaster General will recognise, money does not often move in relation to certain planning structures. When money does not move, why should additional bankers' charges be paid? I suspect that that question would draw sympathy from several Committee members. For instance, if the title to the funds has legally passed, the employer cannot use the funds, so it is worth clarifying that a contribution has still been made. That would head off challenges from the Revenue, which were not intended by the Government under the provisions of the schedule.

Amendment No. 291 is intended to clarify the matter by adding a new sub-paragraph (5), defining for the purposes of sub-paragraphs (3) and (4) that the making of a contribution to a third party includes the holding of funds to the order of that third party, notwithstanding the fact that the funds are never transferred to a bank account in the name of that third party.

Amendment No. 291 covers not only the point I have just made, but a totally new provision, and would insert a new paragraph 1A. That addresses the point of the amount of subsequently allowable deductions. If the value of the contributions increase between payment into the trust, and payment out to the employee, the employee will be taxed on the higher value when the benefits come out. It is only fair,

therefore, that the employer should receive a higher deduction. They might have to take a higher profit-and-loss charge in any event, depending on how the arrangements are structured. New paragraph 1A would encompass that effect.

Amendments Nos. 292 and 293 are concerned within the area of deductions for employee benefit contributions. The new rules are designed to defer employer tax deductions until the employee receives a taxable benefit. We have already discussed that in part. The schedule provides that lending assets out of the trust to an employee does not constitute a triggering event that allows an employer to claim a deduction, but in certain circumstances the loan itself could be a taxable benefit. The amendments provide that a taxable loan of that kind constitutes a qualifying benefit. I therefore hope that there will be an opportunity to address some of the helpful comments that my hon. Friend the Member for Billericay has made in that respect.

The final amendment in this group is amendment No. 294, which relates to paragraph 8 of the schedule. We believe that the schedule contains a technical flaw. It defers employer tax deductions until the employee is subject to income tax and national insurance. That is presumably intended to catch national insurance avoidance schemes using offshore trusts. However, the trust may provide a benefit specifically excluded for tax and/or NIC because, as a matter of policy, the Government want to encourage it. Paragraph 8 lists a few worthy causes, but the list is not exhaustive. Employers providing such a benefit would be penalised and would never get a tax deduction. That is an important point that I hope the Paymaster General will welcome and accept.

Just to put it on the record, the Institute of Chartered Accountants in England and Wales, KPMG and others from the professions have unquestionably helped us to understand the issues that arise from the Bill.

Photo of John Baron John Baron Conservative, Billericay

I seek clarification from the Paymaster General on one or two points. We know that the schedule restricts deductions unless qualifying benefits are provided to employees and so on and that a company cannot get relief for corporation tax unless various conditions are met. Paragraph 2 lists those qualifying benefits and conditions, one of which must be the payment of money or transfer of assets to employees that lead to income tax and national insurance contributions being payable.

Will the Paymaster General confirm that in the case of a private company—a company whose shares are not listed—the granting of those shares will not attract national insurance contributions and, therefore, no corporation tax relief will be available under the schedule? In other words, the provision of shares to employees will not attract a national insurance charge, as the shares are not listed. Will the Paymaster General confirm that that is the intention of the schedule? I fully understand that relief may be available in such cases under clause 140 and schedule 23, but the interaction of the two is complex to say the least, and the availability of the relief is not clearly signposted in the Bill.

I ask the Paymaster General to confirm those few points. I do not want to put too fine a point on it, but the Bill seems to discriminate, however unintentionally, against private companies and unlisted shares.

Photo of George Osborne George Osborne Opposition Whip (Commons), Shadow Minister (Treasury) 4:45 pm, 12th June 2003

I want to raise a concern that has been brought to my attention and that of other members of the Committee by the Institute of Chartered Accountants in England and Wales. It is unclear what happens if the benefit is taxable, but the measure of the tax charge is completely unrelated to the cost of providing it. The example is given of the provision of cars to disabled employees. Clearly it is an issue of some concern, and I should be interested if the Paymaster General could address it.

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

I shall focus first on new clause 42 and schedule 24. They are designed to prevent the avoidance of tax and national insurance through the use of employee benefit trusts and other third-party structures, which are, unfortunately, used by employers to provide benefits to their employees and then try to make them look like shares. The measure levels the playing field between employers who remunerate employees direct and those who do so through third parties, and it has a yield of £300 million.

The measure works in this way. It defers the timing of an employer's tax deduction for its contribution to a third party until the employees receive benefits from that contribution that are subject to income tax and national insurance. It allows for a deduction when an employer's contribution is used by the third party to pay the operating expenses of the employee benefit arrangements. It does not apply to contributions used for pensions, retirement benefit or accidental benefit schemes, redundancy or termination payments, employee share schemes that fall within the statutory corporation tax deduction allowed in schedule 23 and other legislation, or schemes in which the employers' making of the contribution is itself taxable as a benefit to the employee. It applies to contributions made on or after 27 November 2002. I am informed that the amendments were not contained in the comments made subsequently by any of the representative bodies, because the intention has been known for some time.

As I said, the schedule is an anti-avoidance measure. It prevents avoidance by employers who provide benefits to their employees via third parties, usually trusts. It works by deferring the employer's tax deduction for certain contributions to the third party until the employees are taxed and subject to national insurance on receipt of benefits derived from those contributions. This matching mechanism seeks, as far as possible, to put the employer in the same position as if they had provided the benefit direct to the employee. It is a fair and proportionate response to the extensive avoidance of tax and national insurance that we know is taking place.

Amendment No. 244 would limit the application of the new anti-avoidance rules to contributions by

employers to third parties in respect of cash and assets held on trust. It would continue to allow avoidance opportunities by using third parties that are not trusts. For that reason, I am not attracted to the amendment.

Amendment No. 291 would allow the employer to obtain a tax deduction on an amount greater than its contribution to the third party, where the employer's deduction is deferred to a later period. It would allow a deduction for at least the aggregate of the employer's contribution used to provide benefits to the employee and the amount of the benefits received by the employee. The schedule is not intended to enhance deductions to which businesses would otherwise be entitled under the normal rules. There is no justification for providing such generous and expensive enhancement.

The exception to that is where an employing company awards shares to its employees that give them a real stake in the company. That is at the heart of the schedules. Such shares are excluded from the rules in schedule 24 and are dealt with in accordance with the rules providing the new, generous corporation tax relief in schedule 23.

Amendment No. 292 would allow the employer to get a deduction for a contribution used by a third party to provide employees with loans that give rise to income tax and national insurance charges, regardless of the amount of income tax or national insurance charged. Giving that creative use of loans to directors and key employees has been the source of much tax and national insurance avoidance through employee benefit trusts. The amendment would significantly undermine the effectiveness of the schedule.

The intention behind amendment No. 294 is unclear. It would make the whole of schedule 24 ineffective as an anti-avoidance measure—perhaps that is the intention. It adds to the list of deductions to which schedule 24 does not apply those deductions that do not give rise to a benefit that is subject to tax or national insurance. However, the whole purpose of the schedule is to restrict deductions unless they give rise to a benefit that is subject to tax and national insurance. The amendment appears to undermine the fundamental policy intention, and I cannot believe that Opposition Members really wish to do that. Amendment No. 293 is a consequential amendment, which stands or falls with amendments Nos. 292 or 294, so I shall not discuss it. I urge my hon. Friends to vote against the amendments.

Even comments in the quality newspapers have described the schedule as a neat way of stopping what the Government see as abuse of employee benefit trusts. That is precisely what we intend, and we will reject the amendments, which would undermine that process.

Photo of John Baron John Baron Conservative, Billericay

I am disappointed that the Paymaster General seems not to have addressed my point. Schedule 24 appears to discriminate against private companies in the sense that unlisted shares are being granted because they do not attract national insurance contributions and will not attract relief in respect of corporation tax. I have said, and now repeat, that such

relief may be available under clause 140 and schedule 23, but the interaction between the two clauses is somewhat complex, so the availability of that relief is not clear.

I ask the Paymaster General again whether she can confirm that it was the intention for schedule 24 to discriminate—as it clearly does—against private companies. If not, is that an oversight that can be put right? The complexity of the interaction between schedules 23 and 24 means that private companies might be discriminated against anyway. I question whether that is the Government's intention, but it could be the effect of the clauses and schedules. I know that the Paymaster General and the Chief Secretary are already writing a number of letters to me and to all colleagues, which I welcome, but could clarification on this point be forthcoming from the Government?

Photo of John Baron John Baron Conservative, Billericay

I want nothing more, but it appears that the schedules discriminate against private companies, and if that is the Government's intention, I question why; if it is not, can we get them tidied up? Will the Paymaster General give that due consideration?

Photo of George Osborne George Osborne Opposition Whip (Commons), Shadow Minister (Treasury)

The Paymaster General has not addressed my concern, which was raised with me by the Institute of Chartered Accountants, about the situation in which a benefit is taxable but the measure of the tax charge is completely unrelated to the cost of providing it. The example that I gave was the provision of cars for disabled employees, which is a serious issue.

Photo of Stephen O'Brien Stephen O'Brien Conservative, Eddisbury

This has been a difficult area to discuss. My hon. Friends the Members for Tatton (Mr. Osborne) and for Billericay have rightly raised several points. Indeed, I was aware of the representation that involved the provision of cars for disabled employees. We recognise the difficulty in seeking not to be emotional while we push for the clarification that is genuinely required to understand the provisions, and it is inevitable that we have had to be somewhat clinical. Unquestionably, there are real-world consequences.

My hon. Friend the Member for Billericay also made a very important point about loans.

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

I am sorry to do this to the hon. Gentleman, but does he agree that the discussion is about the transfer of the ownership of an asset? The circumstances that the hon. Member for Tatton described do not fit at all, because the asset is not transferred—ownership remains elsewhere.

Photo of Stephen O'Brien Stephen O'Brien Conservative, Eddisbury

I am grateful to the Paymaster General. I hope that she does not resent our seeking to raise points. This has been quite a long sitting, and it may have been somewhat trying, but it is important to place on the record those issues that others have raised with us. In addition, our deliberations are an important part of the process of clarifying the Bill. As the Opposition, we do our very best to understand what are complex provisions with, it has to be said, exceptionally limited resources, whereas the Government patently have been living with the

provisions for a good period. I hope that they feel very comfortable about the debate.

Photo of Paul Farrelly Paul Farrelly Labour, Newcastle-under-Lyme

This has indeed been a long session. I do not wish to worry the hon. Gentleman, but I believe that the hon. Member for Arundel and South Downs has expired.

Photo of Stephen O'Brien Stephen O'Brien Conservative, Eddisbury

My hon. Friend is very well. Anyone who is a passionate classical music concert-goer will know that people may very often appear to be asleep when they are actually concentrating the most.

Photo of Stephen O'Brien Stephen O'Brien Conservative, Eddisbury

They concentrate the most when things are most sublime.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. Examining the inside of one's eyelids is in order; snoring is not.

Photo of Stephen O'Brien Stephen O'Brien Conservative, Eddisbury

I heard no snoring whatsoever today, Mr. McWilliam. On the contrary, it is only because of the great support of all members of the Committee that we have been able to examine the issues in the necessary detail that they merit.

Let it be placed on the record that there is no attempt to undermine the major thrust of the Government's policy on anti-avoidance. That is not part of the Official Opposition's case in seeking clarification of the issues. However, the Bill not only raises issues, but prompts probing. As I properly and honestly pointed out when introducing the amendments, it is necessary to probe, and the amendments do just that.

The amendment that has had the least satisfactory response is amendment No. 294, but I shall not press it to a vote because I did not distinguish it from the group and flag it on the way through. In addition, if I am honest with the Paymaster General, regardless of how much I may have identified the issue, I frankly cannot actually think of an example. If I cannot think of a real-world example, it would be inappropriate to press the amendment to a vote, particularly as so much of what I have said this afternoon has been said in an effort to root what the Paymaster General is trying to achieve in the world as it is, rather than in some theoretical ivory tower of the sort that such legislation as this inevitably engenders.

Photo of Stephen O'Brien Stephen O'Brien Conservative, Eddisbury

I shall not go back to Black and Scholes. I have exhausted my mathematical abilities for a lifetime.

Having listened, then, to the Paymaster General's very clear statements as to what the intention is—she is totally right and has made it abundantly clear that it is a question of whether there is a transfer of ownership—I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 24 agreed to.

Further consideration adjourned.—[Mr. Sutcliffe.]

Adjourned accordingly at Five o'clock till Tuesday 17 June at five minutes to Nine o'clock.