Clause 119 - Restriction of relief: non-active partners

Finance Bill – in a Public Bill Committee at 11:15 am on 25th May 2004.

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Photo of Mark Prisk Mark Prisk Shadow Paymaster General 11:15 am, 25th May 2004

I beg to move amendment No. 183, in

clause 119, page 99, line 30, leave out

'or a member of a limited liability partnership'.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

With this it will be convenient to discuss amendment No. 182, in

clause 119, page 100, line 11, leave out subsections (7) and (8) and insert—

'(7) In subsection (1) ''a trade'' does not include—

(a) underwriting business within the meaning of section 184 of the Finance Act 1993 (Lloyd's underwriters), or

(b) a trade where the Board have, on the application of a partnership of which an individual is a general partner or member of a limited liability partnership, notified the partnership that the Board is satisfied that the trade will be effected for bona fide commercial reasons and will not form part of any scheme or arrangements of which the main purpose, or one of the main purposes, is avoidance of liability of tax.

(8) Any application under subsection (7)(b) above shall be in writing and shall contain particulars of the operations that are to be effected and the Board may, within 30 days of the receipt of the application or of any further particulars previously required under this subsection, by notice require the applicant to furnish further particulars for the purpose of enabling the Board to make their decision; and if any such notice is not complied with within 30 days or such longer period as the Board may allow, the Board need not proceed further on the application.

(9) The Board shall notify their decision to the applicant within 30 days of receiving the application or, if they give a notice under subsection (8) above, within 30 days of the notice being complied with.

(10) If the Board notify the applicant that they are not satisfied as mentioned in subsection (7)(b) above or do not notify their decision to the applicant within the time required by subsection (9) above, the applicant may within 30 days of the notification or of that time require the Board to transmit the application, together with any notice given and further particulars furnished under subsection (8) above, to the Special Commissioners; and in that event any notification by the Special Commissioners shall have effect for the purposes of subsection (7)(b) above as if it were a notification by the Board.

(11) If any particulars, furnished under this section do not fully and accurately disclose all facts and considerations material for the decision of the Board or the Special Commissioners, any resulting notification that the Board or Commissioners are satisfied as mentioned in subsection (7)(b) above shall be void.

(12) This section has effect subject to sections 118ZJ and 118ZK (transitional provision).

118ZEA Application to particular trades

(1) Section 118ZE(7)(b) shall not apply to any trade unless—

(a) It can be shown that in respect of any period where a loss was sustained, the trade was carried on throughout that period on a commercial basis and in such a way that profits in the trade could reasonably be expected to be realised in that period or within a reasonable time thereafter;

(b) The profits of the trade are taxed on the general partners or members of a limited liability partnership who claimed the reliefs referred to in subsection 118ZE(1) in the same proportions that the partnership's loss was claimed.

(c) The partnership's expenditure is not applied, directly or indirectly, to provide security for repayment of any borrowings of the partnership or of any of its general partners or members of a limited liability partnership, including without limitation, by means of a cash deposit;

(d) The receipts from the trade are entirely contingent on the performance of the products or services comprising the trade; and

(e) The trade is carried on for bona fide commercial reasons and does not form part of a scheme or arrangements of which the main purpose, or one of the main purposes, is avoidance of liability of tax.

(2) The Board may make regulations with respect to the application of section 118ZEA(1) above to particular trades.'.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

Amendment No. 183 seeks to amend new section 118ZE of the Taxes Act 1988 in clause 119, so that it does not apply to members of limited liability partnerships. New section 118ZE introduces a new provision restricting interest relief on borrowings to fund a partnership and sideways loss relief for general partners and members of limited liability partnerships who carry on trade where the partners may devote only a small amount of their time to that trade.

There is provision for repeal in section 118ZB, which restricts that relief, but it is provided without any time requirement. New section 118ZE(3) creates a potential duplication, namely what I would describe as a parallel restriction for people in different circumstances. The purpose of amendment No. 183 is to probe the Government's reasoning, not least because new section 118ZE seems to lack any provision for repeal. I hope that the Paymaster General will address that particular point.

Amendment No. 182 makes a more substantial point. Clause 119 aims to restrict tax relief for non-active partners in limited liability partnerships. The purpose of the amendment is to allow commercial trade to continue subject to prior Inland Revenue approval. The Committee will recall the Paymaster General's decision on 10 February suddenly to change the rules on tax relief for partnership losses. There was quite a furore at the time. I think it is accurate to say that the action was precipitate and that it may well affect current projects. However, the most significant effect is the message that it sends.

The Paymaster General will say that her actions signal that the Government are no longer prepared to tolerate persistent and abusive tax avoidance. There is a strong element of truth in that and I fully understand it. However, there is an important balancing question to answer. Those investing from abroad, especially many of the major legitimate players, have been very concerned. They seek certainty and not sudden change. In previous debates on the clauses, she has rightly referred to the evidence and considerations of the matter by the Select Committee on Culture, Media

and Sport. What shines out from its report is that certainty is crucial in the tax regime treatment of the film industry, so there is a risk that 10 February has undermined that long-term confidence.

Amendment No. 182 seeks to provide certainty and to distinguish tax-avoidance-led trading and legitimate commercial trades. In addition, new section 118ZE already contains a carve-out for underwriting businesses. Therefore, it would seem legislatively logical for the amendment to provide a further carve-out by extending the scope of new section 118ZE(7).

The amendment would exempt commercial trades and make them subject to pre-approval by the Revenue based on a well established tax law test, namely, that the trade must be effected for bona fide commercial reasons. The benefit would be twofold: first, there would be considerable improvement in the certainty for the prospective investing partner; secondly, it would create an opportunity for the Government and the Revenue to protect tax revenues.

The amendment seeks to distinguish between commercial trades and tax-avoidance structures using several simple measures, including striving for profit, or the fact that tax on profit should be treated in the same way as tax on losses, or that profit should depend on performance.

The amendment seeks to enable the Revenue to make sector-specific regulations if it deems it necessary. That might allow the Government, if they feel that it is required, to change the definition of a British film in due course. There has been a recent change in that field and the amendment would allow the Government that flexibility.

I know that it is not the aim of the Paymaster General to hit genuine enterprises and investors. Indeed, that was made quite clear in the statement on 10 February. The Inland Revenue notice that was sent out to the press states:

''The new rules will apply to trades carried on in partnership, and will only affect partners who did not spend a significant amount of time working in the trade when the losses arose. The changes will not therefore affect genuine traders who actively run their own trade.''

Unfortunately, clause 119 may well restrain commercial trades. That is the view of several tax experts and a number of leading players in the field, such as Grosvenor Park and Ingenious Media plc, which has invested something like £120 million in the sector. The Paymaster General earlier referred to a number of films. One example is ''Girl with a Pearl Earring'', a film that has been much acclaimed—at least by the female population, given the presence of Mr. Colin Firth. That aside, it is nevertheless an important long-term investment.

Mr. Stephen Pound (Ealing, North) (Lab) rose—

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

I give way to the hon. Member for Ealing Comedy.

Photo of Steve Pound Steve Pound Labour, Ealing North

This has absolutely nothing to do with the subject under discussion, but in the interests of parity and equality we should mention Scarlett Johansson.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

I am grateful to the hon. Gentleman, and I have no doubt that he will be making his usual erudite and unique contribution to the Committee's proceedings in due course.

I have mentioned a number of organisations. One example is, as I said, Ingenious Media, which operates a structure called Inside Track, which invests 33 per cent. of the film's budget and draws about 50 per cent. of the film's receipt by way of cash. It operates on a portfolio basis, or, as the industry describes it, a slate basis. That reflects the commercial reality, which the Paymaster General herself highlighted, that most UK domestic films do not make a profit, and that there therefore needs to be the ability to look at the portfolio as a whole. That form of investment is vital to the industry.

I am sorry that the hon. Member for Yeovil is not able to debate whether tax relief for the film industry is a good thing, but no doubt the Liberal Democrats will sort out their policy and decide whether they are in favour or not.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

Indeed, I suspect that they may be both simultaneously.

The crucial point is that, helpful as tax relief is, without the actual upfront investment, many films

would not even begin production. I am aware that the Paymaster General has received a number of representations from hon. Members from both sides of the House, be it from the chair of the all-party group on the film industry or senior members of the Culture, Media and Sport Committee. There is genuine concern across the House that the clause may be defective.

In short, ensuring that anti-tax avoidance measures do not ensnare legitimate operations is not only crucial to those affected but pretty important to the industry as a whole. That is at the heart of our concern. The aim of the amendment is clearly to distinguish between tax avoidance and genuine commercial trades. The amendment could well achieve that, while enabling the Revenue to take the reasonable steps it needs, in due course, to protect tax revenue. The approach is balanced and I hope that it will merit serious consideration by the Paymaster General. I fully accept that it is not a perfect amendment, but its purpose is certainly clear. On that basis, I look forward to listening to her response.

It being twenty-five minutes past Eleven o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Two o'clock.