(Except clauses 1, 4, 5, 9, 14, 22, 42, 56, 57, 124, 130 to 135, 138, 139, 148 and 184 and schedules 5, 6, 19 and 25, and any new clauses and schedules tabled by Friday 9th May 2003 relating to excise duty on spirits or R&D tax credits for oil exploration.) - Clause 162 - Transfers of value: attribution of gains to beneficiaries

Finance Bill – in a Public Bill Committee on 17th June 2003.

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Amendment proposed [this day]: No. 208, in

clause 162, page 105, leave out lines 21 to 39.—[Mr. Stephen O'Brien]

Question again proposed, That the amendment be made.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield 2:30 pm, 17th June 2003

I remind the Committee that with this we are discussing 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.

I sense an air of excitement. We have rounded Tattenham corner and are on the long straight. I am sure that we shall complete the race.

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

When we adjourned this morning, we were discussing amendments relating to flip-flops. The Finance Act 1981 introduced a beneficiary charge and the Finance Act 2000 introduced the first anti-avoidance measures. I was explaining to the Committee why I cannot accept the amendment tabled by the hon. Member for Eddisbury (Mr. O'Brien).

The new provisions catch cases in which some but not all of the steps necessary for the avoidance to work have been carried out before Budget day, but that does not make the legislation retrospective; we had a wide discussion about that. We designed the provision to catch those cases. Those who started to set up structures to avoid a tax charge that has been in place since 1981 should not be surprised when the Government take action to prevent them from achieving that end.

The amendment is defective and would not achieve its apparent aim of eliminating retrospection. It would have the opposite effect of making the legislation unacceptably retrospective. It would leave in place the commencement provisions applying the new legislation to transfers of value made on or after 21 March 2000, but delete the further commencement provision that ensures that the new legislation applies only to payments made to beneficiaries on or after Budget day. The suggested deletion would make it possible to apply the new legislation to payments made

to beneficiaries before Budget day. That would be unacceptably retrospective.

The aim of amendment No. 209 appears to be to clarify one of the commencement provisions. The amendment assumes that the words ''that date'' are unclear and would amend them to ''9th April 2003''. I have two points to make. First, the date to which ''that date'' refers is perfectly clear. It refers back to the date in line 25, so no amendment is necessary. Secondly, the correct date is not 9 April 2003 but 8 April 2003. That is because Budget day must be treated as the start of the new year of assessment and it follows that the previous date to which the amendment refers must be treated as the end of a year of assessment. The amendment is not only unnecessary, but defective. I conclude that amendments Nos. 208 and 209 are wrong in principle, could have a significant avoidance cost and are defective. I have no hesitation in asking the Committee to reject them if they are pressed to a vote.

Government amendment No. 297 is included in this group of amendments and I shall speak to it now and move it formally at the appropriate point. Clause 162 and schedule 29 introduce a new rule requiring payments to beneficiaries who are not domiciled and resident in the United Kingdom to be ignored when computing the amounts that may be charged on other beneficiaries under the new provisions. Beneficiaries who are not domiciled and resident in the UK are not charged on capital payments from offshore trustees. The rule prevents tax from being avoided on later payments made to chargeable UK beneficiaries. Amendment No. 297 clarifies the commencement provision for that rule. Our intention is for the new rule to come into effect in respect of payments to non-chargeable beneficiaries made on or after Budget day. The amendment puts that operative date beyond doubt and ensures that it is consistent with the main commencement provisions of clause 162 and schedule 29. At the appropriate time, I shall ask the Committee to support the amendment.

New clause 4, as the hon. Member for Eddisbury said in his opening comments on this group of amendments, attempts to tackle the new flip-flops in a different and apparently simpler way. We considered countering schemes in the way suggested in the new clause, but we came to the view that that would not be an effective way of preventing the avoidance and ensuring that payments to UK beneficiaries from offshore trustees are properly taxed. The new clause might work in simpler cases, but it would have the effect of leaving gains attached to a single settlement, so the risk of gains being stranded would remain. A range of avoidance opportunities would remain available for those who are determined to avoid the beneficiary charge. Furthermore, the change that the new clause would make would mean that cases would not be caught when some of the steps required to achieve the tax avoidance had been taken before Budget day and other steps remained to be undertaken. I have already explained at length why we chose our formula. There is evidence that substantial avoidance and significant amounts are

involved in such cases. I am satisfied that they should come within the new provisions.

In conclusion, although the new clause has simplicity to commend it, it is not a satisfactory way of clamping down on artificially contrived avoidance devices. I ask the Committee to oppose not only amendments Nos. 208 and 209, but new clause 4.

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

I am grateful to the Paymaster General for going through the amendments in detail and treating seriously the issues raised. I hope that the Committee agrees that our debate has been important and useful. We are dealing with an exceptionally complex and tricky area, one that from the point of view of the Inland Revenue and the Treasury inevitably creates a contest with some exceptionally knowledgeable and expert professionals. It is inevitable that those of us who seek to scrutinise the matter carefully must go into quite a lot of detail.

I am satisfied with the Paymaster General's very clear response, particularly on the issues raised in amendment No. 209 and Government amendment No. 297. Those who read our proceedings for further clarity will also appreciate her statements. We had an extraordinarily useful exchange on amendment No. 208. On new clause 4, I acknowledge with gratitude that the Paymaster General notes that it was a genuine attempt to introduce a measure that had the benefit of simplicity and clarity and had logic attached to it, in so far as it removed what had given rise to the initial problem.

I do not for one second wish to leave any impression that my colleagues in the official Opposition or I are at all focused on seeking to perpetuate a series of schemes that have operated over a protracted period of years from an original difficulty arising in 1981. It can be recognised that many of those involved, both individual taxpayers and the professionals who advise them—there is quite an industry—came into the situation post-1981 and thought that those schemes were a series of opportunities that one might describe as already cast in some form of precedent that was capable of being relied on. The key point that the Paymaster General made, which has genuinely influenced my thinking, is the interaction between that potential mindset on the part of those involved in the schemes that the Government are seeking to put right, and what was in the Finance Act 2000. She made the fair point that that part of the industry and those individuals—who might not have been familiar with the 1981 genesis of the schemes—have, in a sense, been put on notice.

It is accepted that the provisions in the 2000 Act did not get the arrangements right first time. This clause is an attempt to get them right now. We hope that the consultations that the Revenue and Treasury are no doubt having with professional bodies can be concluded very quickly, with a view to ensuring that the measure is well understood, clear and right. On the basis that this has been a genuinely important debate, I am happy not to press new clause 4, which we are conveniently considering with the rest of the group. I

beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

I should not be prepared to accept, even if the hon. Gentleman wanted it, a Division on new clause 4, as it is a straight alternative to clause 162.

Amendment made: No. 297, in

clause 162, page 105, line 32, leave out paragraph (d) and insert—

'(d) so much of Schedule 4C as amended as provides—

(i) that gains treated as accruing to beneficiaries who are not chargeable to tax are treated as outstanding section 87/89 gains, or

(ii) that gains in a settlement's Schedule 4C pool are not to be treated as accruing to such beneficiaries,

applies only in relation to capital payments made on or after 9th April 2003;'.—[Dawn Primarolo.]

Clause 162, as amended, ordered to stand part of the Bill.