Clause 33 - Provision not at arm's length:

Finance Bill – in a Public Bill Committee at 3:45 pm on 11th May 2004.

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Mr. Prisk rose—

Photo of John Butterfill John Butterfill Conservative, Bournemouth West

Order. The hon. Gentleman was slow to rise, and we nearly agreed to the clause formally. I do not have supernatural powers and I cannot anticipate what people want to do unless they indicate it to me.

Question proposed, That the clause stand part of the Bill.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

Thank you, Sir John. You can see why I would not make a good contestant on ''University Challenge''—my starter for 10 would obviously not make it at all.

Photo of Steve Pound Steve Pound Labour, Ealing North

That is only one reason.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

I thank the hon. Gentleman for highlighting many of my failings. He is very kind.

Clause 33 relates to what we were discussing earlier regarding those affected, and the temporary relaxation of penalty liabilities. During the consultation on the issue—it is fair to say that it was a thorough consultation—everybody accepted that the relaxation identified here was welcome. We certainly add our support to that.

The crucial requirement here is for clarity. The Paymaster General rightly highlighted the need for clarity in previous debates. Although much of the clause is somewhat convoluted, there is one particular aspect that I would appreciate her confirmation of. After several attempts to read it, I am still unclear about what it means. I refer to subsection (2). It starts:

''In this section 'records relating to an arm's length provision' means such records as might have been requisite for the purpose of making and delivering a correct and complete return,''

which may seem clear, but it goes on:

''so far as relating to the determination of the provision asserted to be the arm's length provision for the purposes of Schedule 28AA to the Taxes Act 1988 in a case where that Schedule applies.''

I confess that, having read that for the eighth time, I am not entirely sure that I am any clearer about what it means. I would appreciate it if the Paymaster General could guide us through that. If the clause is to provide any benefit, it must be crystal clear. The question as to which documents and records are included must be clear. Given that, and given the related information offered in the guidance to taxpayers, will she put firmly on the record which documents are included and which are not?

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

I repeat the point that I made earlier. I stress to the Paymaster General that I do not want companies to avoid the transfer pricing rules, but if a company innocently goes over the threshold into the large company regime, and for various reasons—it may not have much experience or it may be an international trading group that has a bonanza profit in one year that takes it over the threshold—I hope that the Inland Revenue would, to use the words that I used earlier, be merciful and mitigate the penalties.

I have also had a submission from the Confederation of British Industry, which says:

''The transitional period to April 2006 only provides for the remission of penalties arising from inadequate records, and not for any other reason. The Inland Revenue Technical Note published with the Autumn 2003 Pre-Budget report said that the transitional rules 'are designed to give businesses more time to develop an understanding of transfer pricing requirements, and to adopt appropriate systems, before being exposed to penalties for failure to do so.' The remission of penalties for inadequate records only would not achieve this. A general remission of penalties is needed if the introduction of the new regime is not to place unreasonable burdens on taxpayers, particularly those mainly UK larger businesses, such as retailers, which have had little or no experience of transfer pricing issues to date.''

I had hoped to hear from the Paymaster General on both the former and latter points. On the former, I am not trying to wriggle out of the transfer pricing rules. I am just asking whether the Revenue will mitigate the penalties regime in relation to a company that quite

innocently goes over the threshold into the larger company regime for transfer pricing.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 4:00 pm, 11th May 2004

The clause introduces a temporary waiver of penalties for inadequate documentation of transfer pricing for the tax years 2004–05 and 2005–06. As we have discussed, the transfer pricing rules were the most straightforward way to address current uncertainty for business. However, we recognise that it will take some businesses some time to adapt their record keeping fully to the new rules. I think that the hon. Gentleman would agree that the penalty waiver is a pragmatic measure to ensure that businesses have the time that they need to change their systems, and to minimise compliance costs.

The relaxation of the penalty regime for a transitional period of two years will give businesses time to adjust to the new rules. It will apply to all businesses, large and small, and to all transactions, cross-border and domestic. During this period, businesses will not be exposed to the risk of penalties for failing to keep records that demonstrate that results are arm's-length results for transfer pricing purposes.

Of course, businesses still need to make a reasonable attempt to establish an arm's-length result for transactions with connected businesses. Businesses can use the information currently available to them to meet the requirement from the start. However, as I have said, we recognise that it will take time to adapt the record-keeping systems to the new rules, which is why we are making provisions in this area. In effect, the penalty rules will not apply automatically; the Inland Revenue will investigate and use its discretion. In applying that discretion, the Inland Revenue will take account of the circumstances, including any mitigating circumstances. That is the point that the hon. Gentleman was pressing me on earlier.

We want to be reasonable. At the end of the two years—at the end of the 2005–06 period—we want the transition to be made in the best way and the transfer pricing rules to run smoothly. That is our aim. In getting there, the Revenue will take mitigating circumstances into account. The records to be included are those that demonstrate that a price is arm's length. The Inland Revenue will not be prescriptive about the precise nature of the records. They are simply to establish the arm's-length price.

I hope that the hon. Gentleman can see that there is a generous relaxation across the board with regard to the penalty regime. In the transition period, businesses will not be exposed to the risk of penalty for failing to keep records that demonstrate that the results are at arm's length for the transfer pricing. That is an important point, and I hope that my response satisfies the Committee.

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

I hope that I heard the Paymaster General correctly. Did she say that, after the two-year period is over, the Revenue will take account of mitigating factors when it applies the penalty regime? My experience has been mainly with small and

medium-sized companies, and I know that she is conscious of the fact that such companies do not have the in-house expertise that larger companies have.

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

I can confirm that Revenue discretion is always a feature of penalties, regardless of this clause, and there will be an additional waiver of penalties for record keeping during the transitional period. We are strengthening that and including additional provisions to respond to the points made in both this and previous debates. I hope that that satisfies the Committee, and I stress again that the Revenue will take the appropriate and understanding approach that I have outlined.

Question put and agreed to.

Clause 33 ordered to stand part of the Bill.