Schedule 39 - Relevant discounted securities:

Finance Bill – in a Public Bill Committee at 4:15 pm on 17th June 2003.

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Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury 4:15 pm, 17th June 2003

I beg to move amendment No. 324, in

schedule 39, page 425, line 33, leave out from 'security' to end of line 37 and insert

'which is listed on a recognised stock exchange.'.

As the Committee will be aware, the schedule is concerned with strips. It seeks to shut down a previous planning scheme that used discounted securities to generate an artificial loss on which income tax relief could be claimed. In closing down that loophole, we are concerned that it may also catch horrible situations, for example listed zeroes, in which people,

for whom tax relief would be appropriate, are carrying genuine losses.

The schedule grandfathers listed zeroes were held on 27 March 2003, the date on which the Government announced that they were closing down this planning scheme. We are concerned that the schedule could distort the surviving market for zeroes, because it will create two classes of holders: those who bought before March 2003, who will get tax relief, and everybody else. As the Government accept that listed discount securities are not part of the naughty planning arrangements, which they seek to end, would it not be reasonable to consider continuing the tax relief facility for listed securities for the original commercial reasons? If not, the schedule goes further than closing a loophole by imposing a stealth tax on bondholders.

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

An article in The Times on 7 April 2003 said:

''Accountants that deal with the affairs of the very rich concede the scheme was artificial.''

The schedule seeks to stop widespread and aggressive exploitation of the relevant discounted securities regime by high net-worth individuals using marketed schemes. The schedule's purpose is to put the taxation of relevant discounted securities on the same footing as the taxation of normal interest-bearing securities, and to ensure European Union capability by extending the special treatment of UK gilt strips to strips of overseas Government securities.

I shall ask the Committee to reject amendment No. 324, which seeks to preserve the existing tax treatment of relevant discounted securities listed on a recognised stock exchange for now and in the future. The first part of schedule 39 is aimed at stopping individuals from exploiting the relevant discounted security rules to create artificial income tax losses. It also ensures that relevant discounted securities will be taxed in broadly the same way as interest-bearing securities. It does so by removing the relief for losses and expenses from most relevant discounted securities from 27 March 2003—the date of the announcement.

However, where a relevant discounted security was held on 26 March and was listed on a recognised stock exchange, the existing rules will continue to apply until it is disposed of or redeemed. Although securities listed on a recognised stock exchange have not yet been seen in avoidance schemes, it cannot be ruled out as a possibility, in which case acceptance of the amendment will simply result in a new generation of avoidance schemes and further Exchequer losses. In addition the amendment will maintain the tax-favoured status of investors in relevant discounted securities over those investors who subscribe to securities that pay interest. Such investors will be entitled to both capital losses and finance costs, which is unfair. I hope that the hon. Gentleman accepts that the Government's approach is correct, but if he wants to press his amendment to the vote I will ask my hon. Friends to oppose it.

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

I was at pains to set out that the schedule will close down a tax planning scheme. The Paymaster General did not answer my points about zeroes. Have the Government thought about how the market will operate when there are two different

classes of holders? I will ask the Government and the Revenue further to consult with the industry specifically on the issue of zeroes, which are not part of the tax planning scheme to which the Paymaster General and I have referred. My point is obscure, but it has not been adequately addressed. In the interests of time, however, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That this schedule be the Thirty-Ninth schedule to the Bill.

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

May I just make one other point on the schedule, which was raised by the Law Society? The schedule is somewhat unhelpful to users, not least because the standard tax handbooks do not reproduce section 47 of the Finance Act 1942 to which it refers. The definition of ''strip'' should be replaced by a self-contained definition that does not cross-refer to another provision.

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

The hon. Gentleman is making an observation about ensuring proper communication and drafting. I will certainly examine his point, which, as he rightly says, is rather obscure, but it will take a little time to do so.

Schedule 39 agreed to.