Clause 31 - Exemptions for dormant companies and

Finance Bill – in a Public Bill Committee at 2:45 pm on 11th May 2004.

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Photo of Mark Prisk Mark Prisk Shadow Paymaster General 2:45 pm, 11th May 2004

I beg to move amendment No. 9, in

clause 31, page 26, line 9, at end insert—

'5AA(1) Paragraph 1(2) above does not apply in computing for any chargeable period the profits and losses of a potentially

advantaged person if that person is a company which is dormant but which does not satisfy the condition in paragraph 5A(2).

(2) Sub-paragraph (1) above does not apply in respect of any accounting period of a company if the Board gives the company a notice under this sub-paragraph requiring the company to compute the profits and losses of that accounting period in accordance with paragraph 1(2) above.

(3) A notice may be given in accordance with sub-paragraph (2) above only if the Board has reasonable grounds to believe that in that accounting period the company has been party to any transaction in respect of which provision has been made or imposed otherwise than for bona fide commercial reasons or as part of a scheme or arrangements for the avoidance of tax.

(4) In this paragraph ''dormant'' has the same meaning as in section 249AA of the Companies Act 1985 (see subsections (4) to (7) of that section).'.

Photo of John Butterfill John Butterfill Conservative, Bournemouth West

With this it will be convenient to discuss the following:

Amendment No. 10, in

clause 31, page 26, line 9, at end insert—

'5AB(1) Paragraph 1(2) above does not apply in computing for any chargeable period the profits and losses of a potentially advantaged person if that person is a company which satisfies the condition in sub-paragraph (2) below.

(2) The condition is that either—

(a) the company is in insolvent liquidation;

(b) the company is in insolvent administration;

(c) an appointment of a provisional liquidator is in force in relation to the company under section 135 of the Insolvency Act 1986 or Article 115 of the Insolvency (Northern Ireland) Order 1989;

(d) the company is in insolvent administrative receivership; or

(e) under the law of a country or territory outside the United Kingdom, circumstances exist corresponding to any of those described in paragraphs (a) to (d) above.

(3) For the purposes of this paragraph, the company is in insolvent liquidation, in insolvent administration or in insolvent administrative receivership if it is in insolvent liquidation, insolvent administration or insolvent administrative receivership for the purposes of paragraph 6A of Schedule 9 to the Finance Act 1996.'.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

This is my first speech this afternoon and I am pleased to welcome you to the Chair, Sir John. I am sure that you will continue to guide us and keep us on the straight and narrow.

The clause seeks to provide a range of exemptions for dormant companies and small and medium-sized enterprises in the context of transfer pricing. The amendments are probing.

The purpose of amendment No. 9 is to extend the exemption for dormant companies to include those that become dormant after 1 April this year. A company is dormant and, therefore, exempt from the requirement to prepare a report and accounts during any period for which it has no significant accounting transaction. The imposition on such enterprises of the proposed transfer pricing adjustments for UK companies would give rise to accounting transactions that would cause many currently dormant companies to lose that status. The effect would be to require UK groups to prepare a report and accounts for those companies.

The Government have sought to address the issue by providing an exemption from the transfer pricing rules for companies that were dormant prior to the commencement of the new regime. The current

exemption will not extend to companies that become dormant after 1 April 2004. Many companies cannot be liquidated, whether for tax, name protection or other reasons, and unless the exemption is extended those companies could be brought within the regime and be required to prepare a report and accounts under existing company law rules.

I appreciate that the Inland Revenue's concern is that dormant companies might—I emphasise ''might''—be used as a conduit for transactions that might otherwise be caught by the rules and that that might be inappropriate in some circumstances. Many people believe and have argued—I understand this, although I am no tax expert in this context—that there could be a reserve power to bring such companies within the scope of the rules in tax avoidance cases. I would be grateful if the Minister commented on that because that might solve the problem that has been identified.

Under amendment No. 10, companies that are in insolvent liquidation, administrative receivership or administration would be excluded from the rules. Many people believe that such companies should be excluded and that the obligation to prepare the documentation should be removed for a number of reasons. First, in most cases, those companies will be part of a group and their debtors will also be insolvent and, therefore, unable to make adjustments to, or, for that matter, even to repay, debt that is outstanding at the date on which the process begins. Secondly, an insolvent company is limited by insolvency law in the transactions that it can enter into, and that is relevant. The arm's-length principle at the heart of the transfer pricing mechanism cannot be readily applied in those circumstances. Thirdly, there is a danger that the cost of compliance will fall on creditors, who in such circumstances will already have suffered considerable losses. The idea behind the amendment is to establish the Government's response to the argument that insolvent companies should be exempt.

I hope that with those explanations we can look forward to a positive response from the Minister.

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

I do not want to repeat the points made by the hon. Gentleman, although I have sympathy with what he asserted. The lack of amendment No. 9 will provide simplicity, but there is no real reason why the benefit of simplification should be significantly denied if we agree to it. To avoid unnecessary compliance burdens, exemption should be available to companies whenever they become dormant. The number of companies that become dormant after 31 March is not likely to be great, and any potential risk to the Exchequer could be eliminated by introducing a clearance procedure as a precondition of exemption for newly dormant companies. That comes to me in a briefing from the Confederation of British Industry. It would enable a smoother and fairer operation of the transfer pricing rules. I shall not repeat the remarks about how difficult it is to debate the subject, given the straitjacket of EU rules. I look forward to hearing

the Paymaster General's comments on the amendment.

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

In the consultation before the Budget, we received many representations that a consequence of extending the transfer pricing rules to domestic transactions would be to cause many companies to cease to be dormant. As the hon. Gentlemen pointed out, that would cause significant administrative costs.

The Government are sympathetic to the representations, but there are two important constraints on what we can do. First, we must ensure that we do not create uncertainty under European law. We cannot treat dormant companies with a foreign parent less favourably than dormant companies with a UK parent. Secondly, we must ensure that we do not create an opportunity for dormant companies to be used as a conduit for extracting profits from the UK without paying tax. That is by far the greater danger to the corporate tax base, in that it would be possible for a group to transfer income-generating assets to a company and then allow that company to become dormant. Such planning cannot be done if the exemption is limited to companies that are dormant at 1 April 2004. I am sure that neither hon. Gentleman needs to engage in a leap of the imagination to understand that the opportunity to create dormant companies at any time would also create the opportunity to extract profits from the UK without paying tax in the UK.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs) 3:00 pm, 11th May 2004

I think I referred the Paymaster General to the fact that the problem of loss to the Exchequer resulting from use of a post-31 March 2004 dormant company could be avoided if the Government were to introduce a clearance procedure as a precondition for exemption of newly dormant companies.

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

This is the problem. Groups might be able to use insolvent companies as a means of washing out tax liabilities in the same way as for companies that became dormant. That is a real problem. I find it a little odd that, in a situation in which there is such a risk to the corporate tax base, the hon. Gentleman, who normally impresses on the Government that they should aim for simplicity and not add complexity, seeks to put more layers into the tax system in order to prevent what he knows will happen without that protection. It seems better not to provide the opportunity in the first place.

The Government's proposals provide that companies that are dormant on 1 April 2004, but not those that subsequently become dormant, satisfy the two constraints that I have identified. The hon. Member for Hertford and Stortford suggested that a reserve power in the amendment might be able to be operated. That is not a practical alternative. A dormant company is not required to provide a return to the Inland Revenue. It would be impossible to police any special rules using a reserve power because the Inland Revenue would never see the information in the first place, unless—this is not provided for in the Bill—we had another battery of arrangements to

specify when and how it should be notified. We would require all that because, as the hon. Gentleman recognises, there is the potential for dormants to be used to extract profit. It seems much more sensible not to provide the opportunity in the first place.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

I fully appreciate what the Paymaster General is saying, although the call is perhaps slightly closer than she suggests. Inevitably, a number of innocent enterprises will be caught. Was any consideration given, before the legislation was prepared, to making the date 1 May, or even 1 June? In other words, does she recognise that the sudden cut-off—there is no time gap: the Bill was published seven days after the date we are discussing—made it very difficult for any enterprise, however innocent, to take advantage of the provision?

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

We are not talking about innocents—we are talking about using dormant companies to extract profit without paying tax. Any delay or any period that opened up the possibility of removing profit and therefore escaping UK tax would not be acceptable.

All these routes lead to mischief, not to a practical reason why what the hon. Gentleman proposes is necessary. Why would we knowingly allow in the system an opportunity for mischief and then say, ''Well, we hope that you won't undertake this mischief, but just in case you do we're going to do X, Y and Z''? Why would we have even more complicated rules when hon. Members have already rightly pointed out, only two clauses into this chapter, how complex transfer pricing is in the first place?

The problem with the measure being triggered, as the hon. Gentleman would like, by some sort of reserve power, is deciding when that reserve power would be used. Would it be used only when the Revenue believed mischief was being undertaken? Given that the Board would identify any such practice as mischief, we come back to the same argument. Even if the Government were prepared to allow it, which we are not, there would be huge difficulty in drawing the distinction between cross-border and UK. The uncertainty—the very thing that we are designing out of the system in response to business—would be reinserted in a different dimension with a different set of rules.

The hon. Gentleman has not made a case for the necessity of his proposal. What business function does it provide for? We dealt with dormants in a certain way up until 1 April 2004. There would have been administrative pressure where the companies were dormant, and we were responding to business and trying to be helpful.

The question of insolvency is very important. Insolvency rules serve to protect the position of creditors and other interested parties when a company becomes insolvent. Insolvency is not a reason to relieve a company of transfer pricing requirements; the reverse should be true. Transfer pricing requirements ensure that the transactions between associated enterprises are priced on an arm's-length basis for tax purposes. If insolvent companies within a group were removed from

transfer pricing requirements, which is what the hon. Gentleman seeks to do through his amendments, there would be opportunities for the group to use them to reduce taxable profits in the UK. As a Minister, I am not prepared to allow the Exchequer risk that goes with that.

I understand the importance of the questions around dormant companies. In the clause, we have responded very positively to business by making sensible arrangements up to 1 April 2004. I am not prepared to take the next step that the hon. Gentleman suggests I might consider, which would be to leave a gap in the rules with the possibility of profit being extracted and escaping UK tax. That is not acceptable, so I hope that he now understands why we chose the dates that we did, and on that basis will refrain from pressing his amendments. If he does not, I will ask my hon. Friends to oppose them should there be a Division.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

We have had a useful discussion on an essential element of the rules. I concur with the Paymaster General that certainty is crucial, but I am not clear that the date chosen was the best date for the benefit of business. The debate about amendments Nos. 9 and 10 revealed that the Minister assumed that all business activity in that area is mischief. That is an unfortunate assumption. I understand that it might be the case—who knows, were I to be in her position, I might come to that view. However, it is not the right view.

I accept that lines have to be drawn, but the danger is that that assumption is more revealing about the Government's position on tax avoidance and their confusion between avoidance and evasion than about anything else. However, I stated that the proposals were probing, and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

I beg to move amendment No. 11, in

clause 31, page 29, leave out lines 7 to 13.

This probing amendment is essentially about time. The definitions of small enterprise and medium-sized enterprise should be determined by the results of the prior period rather than by reference to the chargeable period in question.

Under the drafting of paragraph 5D of schedule 28AA to the Taxes Act 1988, the definitions of small and of medium-sized enterprises in the Commission's recommendation are amended for the purposes of the rules so that the various tests are applied by reference to the chargeable period in question and not by reference to a prior period.

I am sure that there are many circumstances that Committee members can remember when companies in their constituencies crossed that threshold in the course of an accounting period. Companies may not be aware that they need to maintain the relevant records in preparing documentation on transactions entered into in that period. They will realise that they need to do so in the subsequent period, but perhaps not during that taxable year. That could arise as a

result of the natural growth of the company, but it might be something else—for example, a takeover.

The provisions of new paragraph 5D amend the definition of small and medium-sized enterprises so that they are determined by reference to the chargeable period in question. As I said, the purpose of the amendment is to recognise that potential confusion and remove it from the Bill.

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

I, too, have read the brief on this matter that was produced by the Law Society. It is useful and compelling. To protect revenue and to ensure compliance, we will have to use the immediately prior accounting period, as the hon. Gentleman made clear. To use the rules in the existing paragraph 5 would put taxpayer companies in jeopardy of breaking the law when they do not have any idea that that is what they are doing. Companies grow organically and for other reasons, as has been described. It is fair to taxpayer companies to ensure that they can apply their rules and flag up the problem just after an accounting period has ended.

As the Paymaster General knows, it is important that we have a vibrant corporate and corporation tax system. One of the things that I used to be involved in before coming to the House was the acquisition and sale of companies. Having the rules as the Government have outlined would inhibit such transactions because it would provide another hurdle for the company to overcome and to give warranties over when a share sale is being agreed and transacted.

For simplicity's sake—the Paymaster General has always persuaded me that simplicity is frequently if not invariably important, and I am sympathetic to that idea—it would be wiser to take out paragraph 5, as the amendment would do. It is a case of simplification, it would enable the smooth running of the corporation tax system and it would reduce yet another burden on business.

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

The clause introduces an exemption for small and medium-sized enterprises in order to ensure that the change in the scope of transfer pricing does not lead to increased regulatory burdens for companies. For that purpose, the legislation draws on an updated European Union definition of small and medium-sized enterprises. The EU definition considers the characteristics of an enterprise in the preceding period to establish whether it is small or medium-sized in the current period.

For the purpose of the clause, however, we need to consider the current period. I want to explain why we need to do that. To do otherwise would create an unacceptable risk of abuse. I have been through the matter in some detail with my officials to ensure that there really is an issue and the requirements are reasonable.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General 3:15 pm, 11th May 2004

I am sure that the Paymaster General has been assiduous. Could she establish for us the scale of the risk, as it is difficult to judge?

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

I was going to do that. The first thing that the hon. Gentleman must remember is that transfer pricing involves vast amounts of money that can be moved around within a group. Although I am not able to say to him that the amount would be x—obviously, the amount would depend on how quickly tax planning developed—I wish to explain how transfer pricing works. It really is quite simple and straightforward, and the risk is clear.

A large group of companies might acquire a small company from outside the group. If the exemption remained in place for a further year after the acquisition, the group would be in a position to exploit it by routing transactions through the new company, which would still be treated as a small company under the exemption. The whole point of transfer pricing is to prevent such things from happening. I kept asking my officials whether that would really happen, and they kept saying yes. What is more, with the amount of money at stake being so vast, it would be worth while for a large group to do that to achieve a tax saving.

The existence of the exemption would create a simple means for groups to sidestep transfer pricing rules, at least for that year. Clearly, it would not be acceptable to introduce a weakness into the rules that would provide a vehicle for removing profit without paying tax in the UK. I am sure that the hon. Gentleman would agree with that. As difficult as it may be to accept that such things happen, I assure him that they do. The reason for looking at the current year is that it is important to know the company's position at a given time.

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

How will small companies on the threshold of growth operate under such a system? Will they have to make a monthly check to determine whether they fall within or without the small and medium-sized exemption?

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

I am grateful to the hon. Gentleman for continuing to anticipate what I am going to say next. I am becoming more and more convinced that he is sitting on the wrong side of the Room. Before I answer his question, does he accept that it would be unfair to other companies that apply the rules and do not seek to indulge in such tax planning to leave that loophole? It would be unacceptable for the Government even to contemplate introducing a set of rules if they knew that such activities were possible.

The hon. Gentleman asked how a small or medium-sized company would know when it crossed the threshold. We will come to that again on later clauses. The Government recognised that changes to record keeping cannot be achieved overnight and provided the temporary relaxation of the penalties for that reason. It is incorrect to suggest that those companies whose financial data show that they are close to the threshold—that they are not miles away—but choose not to account for all their transactions on an arm's-length basis will be caught unawares during an accounting period. Such companies must take account of their forecast growth—and they will—to ensure that their record keeping remains adequate for a whole range of reasons as well as transfer pricing.

They will, therefore, have done so well before the period in which the SME exemption is lost. We shall discuss later the relaxation of the penalties.

The only other possibility, which was touched on by the hon. Member for Hertford and Stortford, is a hostile takeover. Hostile takeovers are not a feature of small and medium-sized enterprises: any takeover would be the result of negotiations over a reasonable period, during which the larger company will have fully acquainted itself with the business it is acquiring. The acquiring group will have acquainted itself fully with the business for a host of tax and non-tax reasons, and that process will include reviewing the appropriate documentation and record-keeping systems required. The position the Government have taken is to strike a fair and reasonable balance in, wherever possible, removing small and medium-sized companies from the provisions by providing exemptions, while not leaving in place a mechanism whereby such companies could be used as a vehicle by larger groups to extract profit from the UK without the payment of UK tax.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

The Paymaster General has rightly highlighted the potential risk when a larger company acquires a smaller one for the purposes she describes. However, I referred to another aspect, which is the natural growth of a small company that may find itself tipped over the threshold. Clearly, in that situation no larger company is involved that is seeking to use that acquisition for the purpose of avoiding the rules, as she puts it. Is it not the case that that is a different set of circumstances to the one that she described? The risk that she ascribed to that situation is not appropriate in relation to the natural growth of a small company.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 3:23 pm, 11th May 2004

No. The hon. Gentleman perhaps misunderstands my point.

Sitting suspended for a Division in the House.

On resuming—

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 3:38 pm, 11th May 2004

The hon. Member for Hertford and Stortford asked about companies that tip over the threshold into loss of exemption. We are not discussing tiny companies, and by the time they are moving through the threshold they are substantial in terms of the number of employees, turnover and balance sheet assets. I made the point that with their planning, forecasting and use of data, they will not accidentally trip over that threshold. They will know when they are approaching it, and other issues will arise when moving from being small and medium-sized companies—for instance, the full corporate tax rate will apply. It is not unreasonable to assert that companies will track that closely in their forecasts.

A second point, which goes back to the Government's starting point in their discussions with businesses, is that, at each point, we have attempted to put in a simple arrangement for exemption to enable businesses to deal with the majority problem that has been identified, particularly for small and medium-sized companies. The European Union definition does

not distinguish between growth and takeover. However, it is a widely recognised and very generous identification, and the limit for exemption is likewise generous to companies. Without devoting many pages of legislation to our own definition to address the point, it is simply not possible to make the distinction that the hon. Gentleman is driving at. We have relied on penalties and relaxation of penalties, information given to companies and the transition period, building on what we know companies will already be doing in their growth forecasts. That is the sensible way in which to proceed. As I said in my opening comments, something like 95 per cent. of companies that will be designated as small and medium-sized will be well within the exemption and it will work very well.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

I understand the point that the Paymaster General is making in legislation, and that is absolutely right, but it would help those companies—I accept that it will be a small group—that have naturally grown over the threshold and found themselves caught by the problem that I identified in the amendment if she would say that the Revenue would look that with due care and attention. I am talking not about companies that have been taken over by larger companies—the risk that she highlighted earlier was correct—but about those that have grown naturally. If she would confirm that the Revenue will deal with that sensitively and carefully, that would be very persuasive.

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

The Revenue always deals with transfer pricing matters and any other matter carefully. That is precisely recognised by the clauses on penalties under which there is a relaxation for the transition period. Penalties will not be imposed on record keeping within the limits that we shall discuss when we come to that debate. The balance is already being struck, not only on how the Revenue will respond at the time, but on the preparations that it is making in guidance and the specifics in the clauses to help that transition period for those companies so that everything has been provided for that sensibly could have been provided for, given the balance that we are trying to strike with maximum assistance and minimum requirements across the whole range of companies from micro to multinational to comply with the transfer pricing laws. I am satisfied that that is the best balance that we could achieve.

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

I have had a quick look at clause 33. I do not believe that I am out of order, Sir John, because it is relevant to the point that the hon. Member for Hertford and Stortford is making. The Paymaster General is referring to the transitional period of the Bill. I believe that the hon. Gentleman is saying that there is also a transitional period for a particular company. If a company, during an accounting period, innocently goes over the limit, we hope that the Inland Revenue, in 10 years or whatever, will be relaxed and merciful in relation to penalties and so on.

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

I am talking about the transitional period that is provided in the clause on penalties, which we shall come to, to give a period for companies to adjust. I have confirmed that the Inland Revenue deals with such matters carefully at present, and if the hon. Gentleman is trying to tease me down the route

of saying that it might relax the transfer pricing rules, the answer is no. If the transfer pricing rules apply, they apply on an arm's-length principle and the company, having crossed the threshold, will be required to comply with them.

The point of the penalties and, therefore, their relaxation for that period is the sensitive approach that the hon. Gentleman is seeking. The transitional period of moving from a small or medium-sized company to a large company is a separate point, and I have already dealt with that. To be honest, I find incredible the hon. Gentleman's suggestion that an already quite large company might not realise that its profit had increased dramatically, it was employing more people and its turnover had greatly increased. Somehow that is supposed to have come as a great surprise, and its forecasts did not show those things. Under those circumstances, I do not see his point.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs) 3:45 pm, 11th May 2004

It can happen. Having spent most of my time in the private sector, I know that a company can, completely innocently, and without knowing anything about the transfer pricing regulations, make a bonanza profit in a year and find itself in a vulnerable position.

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

We are talking about transfer pricing, transfer between companies, and how that profit is moved around within a group. We are not talking about individual companies. We are now moving a long way away from the point, which relates to transfer pricing, the arm's-length principle and ensuring that profit is taxed in the appropriate place. It is not unreasonable, given all the guidance and information that is available—such as the specialist advice those companies will already be receiving from their advisers—to assume that companies know about the transfer pricing requirements. The Government are doing all they can to ease the transition and recognise that we need to provide for it. Exemption from transfer pricing, if it applies, is not one of the exemptions that we are about to provide for.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

This has been an instructive and surprisingly extended debate, but nevertheless a useful one. The Paymaster General has been persuasive on the question of takeovers of companies. She rightly highlighted that, and I entirely concur with what she said—without wanting to encroach on the territory of the hon. Member for Torridge and West Devon in making the most ingratiating remarks to a Minister. I am less persuaded of the argument relating to natural growth, but it has been a useful debate.

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

I do not want to extend the debate any longer than usual. I have an up-and-down relationship with the Paymaster General. Sometimes it goes terribly well, and sometimes not quite so well. Does the hon. Gentleman take the point that I made in my last intervention on her, that I was not seeking to avoid the transfer pricing rules coming into play, but the penalty regime? A small group of companies exporting could

make a bonanza profit and fall under the regime. We have to take her point—transfer pricing rules come into play—but what about the penalties? Does the hon. Gentleman agree that an innocent getting into the transfer pricing rules regime should not attract untoward penalties?

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

I concur with the hon. Gentleman, but we are coming to clause 33, which deals specifically with penalties, and we shall be able to consider that matter more closely. I would not wish to get in the way of the relationship of the Paymaster General and the hon. Gentleman, and we are getting much further away from the issue of transfer pricing than you would like, Sir John. However, having listened to the arguments and learned of the apparent relationships, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

I shall not detain the Committee for very long. I have one simple point that I was not able to raise in the context of an amendment. It relates to the question—and I put in no more strongly than that—whether the clause would adversely affect charities. I suspect that several members of the Committee have received, as I have, representations from charities, including the Charities Tax Reform group. I hope that the Paymaster General will be able to clarify the purpose of the clause in her response, because the concern is that it is in danger of affecting those charities that work in consortiums, purchasing services or using agency personnel. The concern is that in those circumstances they might inadvertently get caught up in the provisions.

I received a very late offer of a potential amendment, but it arrived too late and I was not able to table it. I hope that the Minister will be able to clarify the matter for the peace of mind of those charitable groups concerned.

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

I am happy to reassure the hon. Gentleman. The Inland Revenue recently issued guidance on the matter, which I hope will set hon. Members' minds at rest. Where a charity is acting in the normal way and pursuing its charitable objectives, it is not acting as an enterprise and so is outside the scope of the transfer pricing rules, which apply only to enterprises.

Only in exceptional circumstances, in which a charity is engaging in commercial activity with a view to profit or gain, would it cross the line and become an enterprise. Re-charging of expenses for the purposes of offsetting costs would not fall into that category. The guidance sets that out in greater detail and it is now available on the Inland Revenue website. I became aware of some concerns yesterday evening, and I hope that that absolute reassurance will put minds at rest. I hope that for those concerned I have provided clarification on the record, and I urge them to see the detail on the website, which they will find very helpful.

Question put and agreed to.

Clause 31 ordered to stand part of the Bill.