(except clauses 4, 5, 20, 28, 57 to 77, 86, 111 and - Schedule 2 - Disclosure of value added tax avoidance schemes

Finance Bill – in a Public Bill Committee at 9:30 am on 11th May 2004.

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Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury 9:30 am, 11th May 2004

I beg to move amendment No. 7, in

schedule 2, page 257, line 22, at end insert

'and the Treasury shall with any such designation provide details of the circumstances in which they believe such a tax advantage may be obtained.'.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

With this it will be convenient to discuss amendment No. 8, in

schedule 2, page 257, line 37, leave out from 'the' to end of line 38 and insert

'main benefit of the scheme is the obtaining of a tax advantage by any person in the circumstances specified in the designation of the provision by the Treasury in accordance with paragraph 4(1).'.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

I welcome you to the Chair, Mr. McWilliam. In addressing the two amendments, I hope that the Economic Secretary will deal with some of the problematic issues that we did not cover entirely during the debate on clause 19, which was the introduction to the contents of schedule 2, and in particular with some of the practical problems raised by the Institute of Chartered Accountants.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. Just in case I have misunderstood the hon. Gentleman, my colleague suggested at the closing of the previous sitting that he was not minded to allow a debate on schedule stand part, so it would seem to me that rather more than an introduction to the schedule took place.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

I thank you for your comments, Mr. McWilliam. There was discussion as to whether there should have been a broad debate on clause 19—the introductory clause—or schedule 2. There was a stand part debate on clause 19 covering the whole territory. I was merely making the point that the Economic Secretary has not yet responded to some of the issues raised in that debate that are relevant to the two amendments.

The amendments are designed to bring better proportionality to the proposed measures in the schedule. As pointed out, the provisions are likely to result in excessive and unnecessary compliance burdens and costs for business. Equally, as has occurred in the USA, they are likely to lead to Customs and Excise being snowed under with reports, especially where the requirements are too loosely drawn for businesses with a turnover of more than £10 million. How many extra Customs and Excise staff are the Government proposing to take on to deal with the processing of reports?

As with many other measures that have been introduced, such as the lowering of tax rates on small businesses that are incorporated, the Government fail to heed our warning on this matter at their own risk. Hon. Members will appreciate that schedule 2 provides two different, wide-ranging sets of powers for Customs and Excise to be defined and determined in regulations. However, even if the regulations confine reporting objectives to specific schemes, they are unlikely to reduce the potential burdens on Customs or business.

Amendment No. 7 would require the Treasury to include in any scheme designation details of the way in which the designated provision may be used to avoid VAT. The objective is to assist business in complying with VAT scheme reporting obligations in respect of such arrangements, and, with regard to paragraph 5, to make it impossible for Customs and Excise to overdesignate or designate provisions without supporting explanations of the nature of the abusive scheme that it seeks to deal with.

Amendment No. 8 has two purposes. First, it would substitute a main benefit approach for the existing main purpose approach test in paragraph 5. The Inland Revenue clauses later in the Bill apply a benefit test rather than a purpose one. We suggest that taking the benefit rather than the purpose route would make the objective of providing more objectivity in defining the application of the clause more achievable. It should be easier to define the benefits that flow from an arrangement than to determine their purpose, which will inevitably be subjective and will reflect what the individuals in any business that has put such arrangements in place think that the purpose might be. In our view, the VAT clauses should follow the same approach as the later Revenue clauses.

Secondly, the amendment would tie the reporting requirement to the sort of arrangements that the Treasury had in mind in designating the provisions. The combined objectives and intended effects of our two amendments would be to reduce the number of cases to which the provisions could apply, without reducing their effectiveness, and to lessen the potential for snowing under of the Customs and Excise officials involved in operating the measures in schedule 2.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs)

I welcome you to the Chair, Mr. McWilliam. I have served under your wise chairmanship on many occasions in the past.

I will make a general point, because this is my first time in this Committee Upstairs, although I have spoken in debates on the Floor of the House. That point is that the Finance Bill is scattered with anti-avoidance provisions. Hon. Members of all parties will welcome such provisions, but we should not forget a principle in British tax law that has been enshrined for at least a century. There was a leading case at the end of the 19th century or the beginning of the 20th, the effect of which is that individuals, companies and trustees can so organise their affairs as to mitigate the tax that is due and payable—whether it be value added tax, income tax, capital gains tax, inheritance tax or whatever.

Another problem is that there have been many aggressively marketed, artificial schemes. Ten or 15 years ago, leading cases taken up by the Inland Revenue, such as the Ramsay and the Furniss and Dawson cases, narrowed the ability of taxpayers to use artificial schemes to avoid taxation. It is a very difficult line to tread, but I hope that the Government agree with the general principle that all persons—in tax, persons means individuals, trustees and corporations—can organise their affairs in such a way as to mitigate the tax that they have to pay.

I support amendment No. 7, because in dealings with the taxman—Customs and Excise or the Inland Revenue—there must be some balance. We cannot be taxed by fiat of the Customs and Excise—what it believes to be the law. We can be taxed only by what actually is the law. I believe that amendment No. 7 goes a small way towards redressing that balance in favour of the taxpayer.

I am grateful to the Law Society for providing a few examples of fairly simple and straightforward steps that are ordinarily taken by VAT payers. For instance, a company can obtain a tax advantage by joining a group of companies for VAT purposes, which in itself may be subject to anti-avoidance provisions. We have to know what Ministers and the Inland Revenue, Treasury and Customs are driving at when they make such provisions in anti-avoidance laws.

I also support amendment No. 8, which is a logical amendment to ensure that the test is benefit rather than purpose. I look forward to hearing from the Economic Secretary on those general and specific points.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Before I call the Economic Secretary, may I remind hon. Members of my colleague's ruling in the last sitting? If anyone wants to make any points on schedule 2, they had better use the vehicle of these two amendments to do it.

Photo of John Healey John Healey The Economic Secretary to the Treasury

The amendments relate to the hallmarks scheme, which is the second element of the new disclosure rules. It requires large businesses to disclose use of schemes that have certain provisions, or hallmarks, that are characteristic of avoidance. The objective behind the designation of certain hallmarks that are or are likely to be associated with avoidance schemes is to provide Customs officials with information about new VAT schemes that they do not already know about, which may be avoidance schemes. Early action can then be taken to examine the scheme, and if necessary act against it, either by litigation or by making changes to legislation.

The hon. Member for Torridge and West Devon (Mr. Burnett) vividly described the challenge that the Revenue faces in this modern age, given modern tax planning and advice. He referred to aggressively marketed and highly artificial schemes. He was not present at the last sitting when we debated at length the points that he raised. With your indulgence, Mr. McWilliam, I shall briefly repeat that the general principle that companies have a right to organise their

affairs in such a way as to mitigate tax is correct, but when such activity becomes abusive—in other words, when their action is contrary to the purpose or spirit of the legislation—we move into a different realm. It is right that Customs and the Inland Revenue act to protect the taxpayer and those businesses that pay the full amount of tax that is due; indeed, they have a duty to do so.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury 9:45 am, 11th May 2004

What the Economic Secretary just said is extremely important, in that he set the juxtaposition in which it is accepted that a citizen has the right not to pay more tax than he is legally obliged to pay, although he used the somewhat questionable word ''abusive'' in his definition. A major objection to the hallmarks scheme is that the requirements are worded such that anything other than paying the maximum VAT constitutes a scheme to be reported. I cannot think that that is the Government's intention, as Customs and Excise will be snowed under. That was one of the main criticisms made by the Institute of Chartered Accountants about the drafting.

Photo of John Healey John Healey The Economic Secretary to the Treasury

I am aware of that, but it is a serious misrepresentation of the way in which the measure will be brought into effect. Far from being a scheme that will catch anything that is not the fullest possible payment of tax, the hon. Gentleman will be aware—he has had a chance to study the draft statutory instrument—that, as with the listed schemes that we discussed last week, the hallmarks will be designated specifically by Treasury order, subject to affirmative resolution, and therefore debate in the House. Drafts of the order will be exposed for comments one month before it is laid, so it will be subject to consultation and parliamentary scrutiny. The first hallmark will be designated at the same time as the first listed schemes under the same order.

It is highly unlikely that Customs will be ''snowed under'' by notifications under these provisions. There will be a central unit, as I explained during our proceedings last week, but we anticipate being able to cope well within existing resources to deal with this. The central unit will be staffed by existing staff in Customs who will be redeployed to work in the unit.

With the hallmarks scheme, we have designed arrangements to minimise the burdens on business. Any burden need fall only on those who think up such schemes, and we have provided a facility for promoters to remove the disclosure requirement on their customers by making prior disclosure themselves. Promoters who make use of that facility can relieve businesses and clients of any burden. If a business with a turnover of more than £10 million chooses to use a scheme not disclosed by the promoter, it will have to consider whether it needs to be disclosed.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

What the Minister has just said seems to be the nub of the matter, in that we all understand that the intent is that advisers will disclose to the Revenue schemes that will be become hallmark schemes, but he is also saying that if businesses use hallmark schemes, they will have a number, so they should disclose it. Anything that is not hallmarked will be left with the law, which goes back to what is disclosed, what is

reasonable tax planning and what is potentially a scheme. If you look at the schedule, you find that virtually everything is to be regarded as a scheme unless it maximises tax. How practical are hallmarks for businesses with a turnover of more than £10 million, and what aspects of their normal tax planning must they disclose? That is still not clear.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. Mr. Speaker has asked us to be vigilant about ensuring that all hon. Members stick to the rules. The hon. Gentleman would have been correct in referring to me as ''you'' 30 years ago when I was a tax commissioner, but that is no longer the case.

Photo of John Healey John Healey The Economic Secretary to the Treasury

The situation is contrary to the hon. Gentleman's interpretation, and I shall detail the conditions that must be met for a hallmark to be listed. That is likely to be specifically drawn according to particular conditions and is contrary to his wide suggestion that anything that is not the fullest possible payment of tax will become a disclosable activity.

To finish the point about the burdens on business, the high de minimis will keep the additional burdens to a minimum, and businesses that are required to disclose have only to send an outline of their scheme and disclose the hallmarks involved to Customs.

Amendment No. 7 would require the Government to specify the tax advantage that would be obtained through use of a scheme bearing a particular hallmark at a time when they are adding new hallmarks to the law. In other words, it would require the Government to give details of the tax avoidance scheme in which the hallmark features. However, at the time of listing those hallmarks, the Government will not necessarily know the details of the arrangements by which the taxpayer seeks to obtain tax advantage. The very purpose of the hallmarks scheme and the measure is to discover those details, and that purpose would be removed and neutered by the amendment.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs)

Is the Minister saying that the disclosure provisions are so weak and insipid that an educated person in Customs and Excise would be unable to quantify the tax advantage?

Photo of John Healey John Healey The Economic Secretary to the Treasury

No. I am going to explain that the purpose of the arrangements is one of the conditions for notification under the scheme. If the hon. Gentleman bears with me, I shall come to that point later.

Amendment No. 8 would change the definition of a ''notifiable scheme'' so that a hallmark scheme is notifiable only when its main purpose is obtaining the tax advantage under the scheme that would be specified under the first amendment. As I have said, the Government will not necessarily know at that stage what the avoidance scheme is or exactly how it obtains a tax advantage.

A scheme is notifiable under the hallmarks provision only if all three of the following conditions are met. First, the main purpose of the scheme, or one of its main purposes, must be the obtaining of a tax advantage for any purpose. Secondly, a person must obtain a tax advantage that includes or is associated with a hallmark provision. Thirdly, the designated hallmarks associated with the scheme must comprise,

for instance: confidentiality conditions limiting disclosure of a scheme; sharing the tax advantage with another party to the scheme or with the promoter; and fees payable to a promoter contingent on tax savings. Designated hallmarks included in a scheme must comprise: pre-payments between connected parties; funding by share subscriptions or loans between connected persons; construction work associated with property transactions between connected persons and certain offshore suppliers. It is highly unlikely that ordinary commercial transactions will come within all three requirements.

However, some arrangements may have to be reported under the hallmarks provision if the main purpose is to gain a tax advantage but there is, on examination, no tax avoidance. The process allows for that possibility, although we expect that such instances will be few, and that the vast majority of schemes reported are likely to be avoidance. In such instances, a decision will have to be made on whether the scheme is avoidance. That may involve further inquiries or the provision of further information by the business.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs)

Presumably—and I would like the Minister to confirm this—the decision as to whether a scheme falls within the rules is initially made by an official at Customs and Excise. What level of seniority and experience will that person have? Will the decision be appealable, and if so, to whom, or to which court or tribunal?

Photo of John Healey John Healey The Economic Secretary to the Treasury

At the risk of going over ground that we have already covered in a previous sitting, I shall explain to the hon. Gentleman that the notification scheme in clause 19 and schedule 2 simply draws to Customs' attention schemes that it would otherwise have to uncover in the normal course of assurance visits. The scheme triggers business as usual for the Customs officer. There will be the same inquiries, examinations, rights of appeal and decisions as there are at present. No change is made to that by the provisions in clause 19 and schedule 2.

The system proposed in the clause and schedule, which amendments Nos. 7 and 8 would severely curtail, is no different than if an avoidance scheme had come to Customs' attention via a VAT visit or through normal correspondence. The hallmarks disclosure provision simply brings to the attention of Customs matters that would otherwise remain hidden or be identified only much later. In all other respects, it is business as usual.

Far from helping the scheme work—or, as the hon. Member for Arundel and South Downs (Mr. Flight) argues, bringing proportionality to the proposal—the amendments would seriously undermine the operation of the measure as the Government intend. It would undermine this element of the Government's anti-avoidance strategy, which plays a vital part in securing revenues and creating a more level playing field for those businesses that fulfil their tax obligations. For that reason, I ask the Committee to reject the amendments.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

There would not be much point in having a vote on the two amendments, but I will make one or two comments.

First, in preparing the amendments, I consulted a leading anti-avoidance individual who had been working for the Treasury in that capacity for a long time, and was concerned about the issues that I have raised. The Minister's explanation is not entirely convincing, and there is not anywhere near an understanding out there about how the arrangements will operate. The schedule 2 provisions will operate broadly as I have described with regard to larger businesses. There is the danger of being snowed under, with people protecting themselves from being attacked while not reporting something that they should—that will be the gut reaction of every business. The Government and Customs and Excise are unwise if they do not realise that that is how people will naturally and rightly behave.

Benefit, rather than purpose, is the correct way to measure this. The Minister has said on many occasions that for any scheme its purpose is self-evidently to reduce the tax burden. However, greater specificity is needed about what is being provided for the Revenue under subsequent clauses.

I am left entirely unclear about the duty of a large business in respect of reporting hallmark schemes. If I am left unclear, I am arrogant enough to believe that businesses, too, will not be clear about the arrangements. I beg to ask leave to withdraw the amendment, but I hope that the Minister will think further about the arrangements. No doubt he will discuss them further with outside professionals, but as the schedule stands, the concerns that we have raised are valid.

Amendment, by leave, withdrawn.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

May I point out that under Standing Orders, the moment a Member asks permission to withdraw an amendment, I should put that to the Committee? I allowed a little leeway just then.

Schedule 2 agreed to.