Clause 162 - Transfers of value: attribution of gains to beneficiaries

Finance Bill – in a Public Bill Committee at 10:45 am on 17th June 2003.

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Photo of Stephen O'Brien Stephen O'Brien Conservative, Eddisbury 10:45 am, 17th June 2003

I beg to move amendment No. 208, in

clause 162, page 105, leave out lines 21 to 39.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

With this it will be convenient to discuss the following:

Amendment No. 209, in

clause 162, page 105, line 28, leave out 'that date' and insert '9th April 2003'.

Government amendment No. 297.

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

I am afraid that having reached this clause, it is time to hold on to our hats. It is very complex and the way in which the selection, although I do not blame the committee of selection for it—

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

Order. I say to the hon. Gentleman that the Chairman of the Committee is responsible for the selection of amendments and I know that there will be no criticism of me from him.

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

I am sure that the fact that I referred to a committee rather than to you personally, Sir Nicholas, shows that I was mindful of that.

The clause is very complex and there are a number of proposed alternatives. The way in which we will debate for the help and efficiency of the Committee does not sit easily. Amendments Nos. 208 and 209 and Government amendment No. 297 contain alternatives if the Government are not prepared to accept our preferred position, which is new clause 4. That is the most obvious solution to the problem that I am going to outline and to the mischief that we think could be created by the Bill as currently drafted.

Furthermore, there are amendments to schedule 29, to which we shall come later: amendments Nos. 210, 212 and 211.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

Order. The hon. Gentleman has been extremely helpful to the Chair in explaining the problem as he sees it. I should be perfectly happy for new clause 4 to be grouped with the amendments that we are currently debating, but if that happens, it will not be my inclination to have a clause stand part debate. If I indicate from the Chair that in addition to the lead amendment No. 208 and amendments Nos. 209 and 297 we shall also debate new clause 4, that may be for the convenience of the Committee, and be a sensible debate. If the Committee is happy with that, I am perfectly happy that it should be the case.

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

I am grateful to you, Sir Nicholas. I should like to respond affirmatively to that offer. I think that it would be helpful to the Committee to take all those together.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

May I ask whether the Government agree?

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

I shall be completely honest. I have looked into this in extreme detail and tried to outline the problem in the simplest way, but I have ended up with six pages of closely typewritten notes. For the

purposes of the argument, I should place those on the record, but I am conscious of the need to make progress in Committee, so I shall try to be as brief as I can. I mention the caveat that, inevitably, the full range of arguments that I feel is important and supports my case will not, therefore, be put on the record. That said, if we get into a debate, I might come in rejoinder to some of the points that I shall now leave out. That will be part of the normal process of discussion.

The provisions on transfers of value and attribution of gains to beneficiaries are lengthy and very complicated, and have a much broader application than merely catching the apparent mischief. Connected with the various provisions in the clause is a concern that we are dealing with a number of shortcomings in the drafting of the present legislation.

It is clear from a Budget press release—Revenue Budget note 33—that clause 162 and schedule 29 are intended to counter schemes made possible by section 90(5)(a) of the Taxation of Chargeable Gains Act 1992. Accordingly—I am putting this at its simplest—a better approach would be simply to repeal the offending subsection. Instead, the approach taken is to amend existing legislation, schedule 4C to the TCGA, which is extremely poorly drafted. The predictable result is legislation that is broad and difficult to make sense of.

I have received representations from, as well as all those that are regularly cited in our proceedings, a range of individuals and professional firms, including lawyers and investment managers. They form the largest section in the file that I have on the whole Finance Bill. The measure is causing considerable anxiety and concern.

It is particularly concerning that innocent transactions not intended to be caught by schedule 4C will now fall within it. Conversely, these provisions are so complex that they will inevitably open up new avoidance opportunities, if we are completely honest about the real world. The schemes that the provisions are intended to catch should instead be stopped by repealing the provision that made them possible in the first place. In the longer term, it would seem appropriate to have consultation on replacing schedules 4B and 4C to the TCGA with provisions that counter artificial schemes without either catching innocent transactions or creating new loopholes.

New clause 4 is our preferred solution. It would leave out the offending provision, subsection 90(5), which I think would suit everybody. I do not like to make assumptions, because I feel that on this occasion the Paymaster General may feel an overwhelming spirit of generosity come upon her, but if that proposed, obvious solution is not adopted, one will have to look at alternatives. There are alternatives but they are not by any means as simple or satisfactory. Amendment No. 208 deals with the retrospective effect of the clause. As I am sure Committee members are aware from dealing with retrospection, it is incumbent on us when scrutinising legislation to consider whether someone who, in good faith on the basis of legislation passed by Parliament at the behest of a Government, may suddenly be caught for something that they

thought was proper and legal at the time. That is a major issue that can cause grievance and a feeling of unfairness among citizens.

I am concerned that new section 85A is retrospective in effect because of the reference to 21 March 2000. I am sympathetic to the Revenue's position, but it should have got the drafting correct when it was introduced. The retrospective effect of the provision will penalise those who have made arrangements that would be legal if it were not for the changes introduced by clause 162(4). Furthermore, the level of penalty is over and above that which they would have suffered had the arrangements not been entered into in the first place. In addition to the injustice, the penalty is punitive.

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

Does the hon. Gentleman accept that the purpose of the schemes that the Government seek to close is to avoid a legitimate tax charge that has been in place since 1981? Those who play with fire must expect to have their fingers burned when the Government restore the legislation.

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

I am grateful for the Paymaster General's intervention, but it is our job as a Parliament to get the drafting of legislation right. It would be wrong of me to dispute that those who play with fire can expect to suffer fire, but it is our job to get legislation right, not least on taxation.

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

What could be clearer than the Finance Act 1981, which stated that there should be a charge? If taxpayers have found a way of not paying that charge when the legislation clearly states that they should, they are playing with fire and can expect any Government to act.

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

I shall not take issue with the Paymaster General on that because I would be misdirecting our concern. The provision should be amended to ensure that it will apply only when trustees have made transfers on or after Budget day and are expected to take the new legislation into account. Such an amendment would avoid the nonsense of schedule 4B and section 85A of the TCGA requiring settlements that had factually ceased to exist being regarded as continuing to exist. It is wrong in principle that anti-avoidance legislation should be backdated by a lengthy period to a time when taxpayers would have had no inkling of the legislation that would apply to them. That is bound to diminish respect for the law and discourage citizens from trying to ascertain and comply with the law, the terms of which cannot be known until long after the event.

The Paymaster General flagged that she is not minded to accept the amendment, but it seems that the backdating issues have become serious for a number of people. Not least, I note that there is no reference in the Government's amendment to the concern about retrospection. The clause seeks to catch any trusts that make a capital payment to beneficiaries after 9 April 2003. That is one level of retrospection. Even if the flip-flop tactic—the Committee will be familiar with flip-flop between tax periods—worked at the time of the transfer, it is now deemed not to have worked in

respect of any payments made after 9 April 2003. That is retrospectively closing a loophole created by poor drafting.

Photo of Michael Jack Michael Jack Conservative, Fylde 11:00 am, 17th June 2003

I am trying to follow my hon. Friend's careful argument in detail. Given that the April date to which he has just referred is effectively the beginning of the new tax year, can he explain how an element of retrospection would apply to a situation in which the taxpayer had not necessarily completed their return for the tax year 2003–04?

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

I am grateful for my right hon. Friend's contribution because it gives me the opportunity to seek to explain the matter. He will recognise that the process of disentangling the complex representations on the clause—let alone the clause itself—is interesting.

The provisions apply only to transferred pools rather than normal pools in which there have been no flip-flop transfers. Any transfers between trusts in the period from 21 March 2000 to 9 April 2003 create a pool in the recipient trust to which the provisions apply in the absence of any other provisions. My right hon. Friend will appreciate that that is harsh given that anyone carrying out such a transfer in that period could not have known about the provisions. Although the provisions are backdated to April 2003, those conducting a flip-flop expected the provisions to apply after the date of the flop. The issue concerns the expectation of the carry-over on the tax periods.

Government amendment No. 297 will make the position worse, not better. Subsection (4) of proposed new section 85A states that the provisions of schedule 4C relating to capital payments to beneficiaries not chargeable to tax would not apply to a case within paragraph (b). The Government amendment will ensure that the provisions will not apply to payments to beneficiaries not chargeable to tax only where the payment was made before 9 April 2003. Thus if the transfer were made in the period from 21 March 2000 to 9 April 2003 and the payments were made today, payments to non-taxable beneficiaries would be ignored. That would happen because the relevant rules were not in force at the time of the transfer.

That deals with my concerns about Government amendment No. 297, but I have not addressed the problem of retrospection.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Following on from the point made by the right hon. Member for Fylde on retrospection, the Government are seeking to change the rules so that a transaction that has not yet crystallised—to use the hon. Gentleman's word—will become taxable. Somebody who would have flop-flipped back into the original pool because they anticipated that the measure would lead to a future tax saving will not do so because of the change in the legislation. There is therefore no actual retrospectivity. I understand that the rules apply to offshore trusts, and legislators in Parliament always place a question mark against those who use offshore trusts.

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

I recognise the hon. Gentleman's point about flop-flipping as against flip-flopping. I also

recognise that somebody making their dispositions and arrangements must exercise a degree of judgment in deciding what will or will not take place in legislation. On the one hand that is a risk because they cannot know what will appear in legislation applying to a particular tax year. On the other hand a course of conduct and practice can become established.

The transactional arrangements on offshore trusts are clearly sensitive and are made under the public's gaze for various reasons of which we are all aware. However, offshore trusts exist and just because they are called offshore trusts does not mean that we should examine them with a sense of dark clouds and foreboding. Offshore trusts have existed for many years, for perfectly legitimate and proper reasons. We should not simply write them off as something to be condemned because they are offshore. They are not attractive to the Revenue because they are not within the tax net for the whole of the United Kingdom, which raises questions on what is a legitimate catch.

The comment on the clause has been interesting. In an article in Taxation on 5 June 2003, Emma Chamberlain argues that

''the Finance Bill seems to have gone further than is appropriate or justifiable . . . First, and most importantly, the clause is retrospective in effect . . . it completely rewrites the tax consequences of an event that has already occurred.''

The hon. Member for Wolverhampton, South-West (Rob Marris) made the point that the transaction had not crystallised—arrangements have to be put in place when one deals with offshore jurisdictions—but it has nevertheless occurred.

Rob Marris rose—

Mr. Jack rose—

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

I suspect that the interventions are on related points, so I may give way twice.

Photo of Michael Jack Michael Jack Conservative, Fylde

I seek to understand the logic of my hon. Friend's argument and that of the article from which he has just quoted. Was the expectation of the taxpayer a 1981 event or an event that was subsequently invented because of a reinterpretation of the 1981 situation? Can he help me on that point?

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

No. Does the hon. Member for Wolverhampton, South-West also want to intervene?

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

On a related point, I do not have the same knowledge of the matter as the hon. Gentleman, but I think that the retrospection issue relates to my point about crystallisation. I would characterise the transaction as not having crystallised, because when a sum has been flip-flopped from one settlement to another—which is crudely what the argument is about although there may be a chain of settlements—it is only when the distribution is made that the tax liability arises. If the clause is passed today and on Report, the distribution might not take place in the same way as it otherwise would have done, but that is not retrospection.

To trespass on your generosity, Sir Nicholas, is the situation not like my ordering a boiler because I believe that the Government will issue an energy efficiency grant, but finding when the boiler is

delivered that the grant is no longer available? That would not constitute retrospective withdrawal by the Government.

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

The position in the example that the hon. Gentleman prays in aid to support his point would be, ''Tough.'' The point made by my right hon. Friend the Member for Fylde was helpful.

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

The nature of the probe is such that I cannot make a judgment on what was in people's minds in 1981 or 2003. The point is that many people believe that they are genuinely affected and disadvantaged by the proposal. One could say that they have taken a risk and that, like the example of the hon. Gentleman's boiler, that is tough. There is a longer chain of setting up a transaction in taxation affairs; a greater degree of clarity and certainty is therefore required.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Another example, which happened under the Conservative Government, has occurred to me. How is the case that we are discussing different from the tapering and ultimate abolition of mortgage interest relief? When people bought houses on a 25-year mortgage, many of them expected—perhaps without really thinking about it—that mortgage interest relief at source would continue for the full term of the mortgage, but they found that that did not happen. That change was not characterised as being retrospective. The individual could have decided that the game was no longer worth a candle and sold their house.

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

The hon. Gentleman has made his point. One can draw distinctions based on that example, but I shall not be drawn down that channel because the matter is complex enough without introducing MIRAS and tapered relief.

I have dealt with our preferred position on new clause 4, amendment No. 208 and Government amendment No. 297. Amendment No. 209 clarifies the meaning of subsection (4)(b)(ii) of proposed new section 85A. In case my more general amendment to remove retrospection is not adopted, although I very much hope that it will be, I should point out that the words ''that date'' at the end of clause 162(4)(b)(ii) could refer to 9 April 2003, which is mentioned in line 22, or 8 April 2003, which is mentioned in line 25. It would be clearer if 9 April 2003 were substituted for ''that date''. Amendment No. 209 is purely related to clarification and is therefore somewhat easier to deal with. However, it is relevant only if the Government do not accept new clause 4.

On the basis that we have dealt with the new grouping under your ruling, Sir Nicholas, I beg leave to move the amendments standing in my name and the new clause. I guess that it is for the Government to move their own amendments.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

Order. The hon. Gentleman merely needs to move the lead amendment—amendment No. 208—and he has already done that.

Photo of Michael Jack Michael Jack Conservative, Fylde

I listened to my hon. Friend the Member for Eddisbury with great care and I congratulate him on the precision with which he condensed six pages of

notes into a shorter presentation. Like the hon. Member for Wolverhampton, South-West, I have not studied the matter in detail, but some important principles have been raised by my hon. Friend's comments.

As I understood the point about retrospection that lay at the heart of my hon. Friend's remarks, taxpayers affected by the amendments and the clause are conducting their affairs in accordance with their understanding of the law as it is now. The Government see the law as taxpayers are interpreting it as an avoidance issue, so they seek to return to the 1981 status quo. If that is what the Government are saying, if the situation has not been challenged between the initiation in 1981 and now, and if the things that have enabled taxpayers to avoid tax have been maintained without challenge, there is an interesting question about the legitimate understanding of the tax code at the time. I pose that question to my hon. Friend.

If those involved in the flip-flopping activity thought, ''Ah yes, we have a mechanism that gets round the purpose in 1981,'' they were taking a risk. They would have said to themselves, ''Well, it's always open to the Treasury to stop it.'' Many avoidance schemes are marketed as a result of clever people considering the tax law and deciding that if they do something in a particular way, they can get round a provision, but it is always on the basis that they can do so only for the time being. Any measure that seeks to deviate from the original tax position as it would have been in 1981 is by definition an artificial construct. It does something different from what happened in 1981. I do not have much sympathy if the good times come to an end, which appears to be the situation that my hon. Friend described.

I do not want my hon. Friend to expose himself by justifying a tax avoidance mechanism when those who designed it knew full well that it was a change from the spirit and purpose of the 1981 legislation.

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

For someone who says that he has not studied the area, my right hon. Friend has picked up the point exceptionally fast and well. The technicalities of the clause are unquestionably complex. We are dealing with some serious principles and fundamental ideas about the rights and wrongs of taxation in this area. Although I do not take issue with my right hon. Friend's description of what the Government are seeking to achieve, our approach in this case is not prompted by support for tax avoidance—it is not that we think that those who took risks from 1981 onwards were right in assessing those risks in the way that they did—nor do I want to expose myself—far from it. I have demonstrated that we are trying to be responsible.

With your indulgence, Sir Nicholas, as this is a long intervention, my argument is an analogy to the law of prescription such as when someone goes on to land. It has taken until 2003—22 years—to correct a 1981 risk, on which people have acted in course of conduct. There is a degree to which, by the normal principles of prescription, that we can deal with that.

Photo of Michael Jack Michael Jack Conservative, Fylde 11:15 am, 17th June 2003

I am grateful for your indulging my hon. Friend, Sir Nicholas, because his intervention has provided a legitimate reason why retrospection must be addressed in a slightly different way than if the Government had created a new tax law, then said that it applied to events that had occurred five years earlier under a previous code.

The Paymaster General must address my hon. Friend's point, because if something went unchallenged for a period of time, it is quite possible that the flip-floppers might have said, ''This is the way it is. Everyone has accepted the interpretation—the status quo—so we are doing nothing wrong.'' If they arranged their affairs on the basis that they had done nothing wrong because no one had challenged them, it is interesting to debate whether the Treasury should not say, ''Oh dear, we got it wrong in 1981, so we had better put it right for the future,'' and accept that what happened was a consequence of drafting in 1981 that was perhaps not the best. I look forward with keen interest to the Paymaster General's response.

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

I do not deny that the combination of offshore trusts, capital gains tax and complex anti-avoidance schemes is a poor recipe for simple legislation. However, in practice, only those trustees, advisers and individuals who get involved in complicated artificial schemes should need to operate the new provisions. Anyone who engages in transactions that would avoid a charge that has been around since 1981 need not be surprised by the Government's acting to stop them or by the means by which the Government do so.

Let me deal with the question of retrospection before dealing with the amendments. The Finance Bill 2003 in no way extends the taxpayer population caught by the Finance Bill 2000 legislation on flip-flops. Let us remind ourselves briefly what a flip-flop is. It is a structure that is used to pay out a gain realised offshore so that the beneficiaries avoid tax on it. There is a question about whether anything has been done in the past 23 years. Governments have challenged flip-flops. Originally, they were challenged by the 1981 legislation, and the problem was readdressed in 2002. The 1981 legislation was designed to ensure that the beneficial charge was paid. The 2000 legislation returned to the matter because new ways had been found to get around the legislation. The new flip-flops that we now have to deal with return to the theme of how to get round the 1981 legislation. The 1981 legislation was put in place to tackle flip-flops and stood the test of time for a reasonably long period. In 2000, the Government returned to the matter, and now we are returning to it again. I beg your pardon, Sir Nicholas. I think I said 2000, but I meant 2002.

To pick up the point about articles on taxation, the Finance Act 2000 sought to eliminate investment flip-flops. An article in Money Management stated that

''tax planners found a loophole in the way that the rules were drafted which enabled them to continue to use flip flop transfers. Budget 2003 announced the Revenue's intention to bring to an end to flip flop transfers once and for all which duly happened on 9 April 2003.''

It went on to say:

''While the abolition of this option removes an advantageous planning tool, the numbers of trusts that could be affected are very small. The fees for arranging such a transfer are enormous and so this tool is only suitable for high or ultra high net worth investors.

According to estimates by Susan Johnson, senior tax consultant at Moore Stephens, the accountancy, trustee and barrister fees would amount to £80,000-£100,000.''

The article in Taxation magazine on 5 June was also referred to.

We have designed the legislation to cater for cases in which there has been a transfer of value before Budget day, but we have altered only the possible consequences of later transactions, not the tax effects of the transfer itself. To avoid retrospection we have limited clause 162 so that it can operate only where there is payment to a beneficiary on or after Budget day. No capital gains tax charge can arise unless such a payment is made. In most cases it is entirely up to trustees to decide whether, when, or in what amounts they make such payments.

I return to the amendments and the point of the 1981 legislation that introduced the beneficiary charge in order to set in motion the question of what we seek to do. The new provisions counter the latest flip-flop avoidance scheme designed to allow UK beneficiaries of offshore trusts to escape a capital gains tax charge when they have received payments from trustees for whom capital gains have arisen. It is right that in such circumstances there should be a tax charge—otherwise, UK individuals using offshore trusts would gain an unfair tax advantage. The charge that the new scheme is designed to avoid has been in place since 1981. We have previously legislated against devices that are designed to avoid the charge and I have made it clear in the past that we are determined

to clamp down on new sorts of avoidance, should they arise. The clause puts a stop to the second generation of flip-flops, and ensures that payments to UK beneficiaries are fairly charged to UK tax.

The clause contains two other rules to prevent further avoidance opportunities. First, it will prevent payments to non-chargeable beneficiaries being used to soak up capital gains, thus diluting or eliminating the charge on UK beneficiaries. It will do so only where transactions have been carried out that fall within the anti-flip-flop legislation introduced in the Finance Act 2000. The clause will ensure that the new measure interacts with the rules on temporary non-residents, both to avoid any double-charging and so that a UK beneficiary cannot escape the charge by going abroad for a year or so and receiving the payment while a non-resident.

The amendment No. 208 would appear to eliminate what is wrongly interpreted as a retrospective element of clause 162 and schedule 29. The new provisions are not retrospective. The charge that the scheme aims to avoid is known as the beneficiary charge, and that charge arise when a beneficiary receives payment from the trust. The new provisions apply only where such payments are made on or after Budget day. The new provisions do catch cases in which some but not all of the necessary steps for the avoidance to work have been carried out before Budget day, but that does not make the legislation retrospective. We have deliberately designed the provisions to catch such cases.

It being twenty-five minutes past Eleven o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Two o'clock.