Clause 129 - Gilt strips

Finance Bill – in a Public Bill Committee at 3:45 pm on 25th May 2004.

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

Photo of Andrew Tyrie Andrew Tyrie Shadow Financial Secretary

My reaction to the clause is only a little less perfunctory than that of my hon. Friend the Member for Arundel and South Downs to the previous clause. It attempts to close what could reasonably be called a minor racket, which is the use of gilt strips for tax avoidance.

The anti-avoidance measures were originally announced in January 2004. The idea derives from the fact that the value of the bond is stripped into income and capital, the principal strip and the coupon strip. The opportunity for tax avoidance arises because non-corporate holders of the strips are deemed to have disposed of and reacquired the strip at the end of the tax year at market value, which gives an opportunity for loss relief.

I agree with the intended effect of the clause. My only questions relate to whether we get that effect. It is a very long anti-avoidance clause. Compared to clause 128, which is three and a half lines, we have here four and half pages, or 275 lines of anti-avoidance legislation. I have a couple of questions. I ask the easy one first. Do the Government know how much yield they are protecting with this anti-avoidance legislation? How prevalent are the schemes? Gilt strips are about 2 or 3 per cent. of the total bond market, which is about £180 billion. What proportion of the strips market is being used for anti-avoidance purposes? That would give us a rough answer.

The second question is slightly more complicated. In order to clamp down on the problem, the clause creates a definition of market value in subsection (8). The definition strikes me as a bit odd. For example, new paragraph 14E(2) in that subsection states:

''The market value on any day of a strip or security quoted in the Daily List shall be—

(a) the lower of the two figures shown in the Daily List for the strip or security for that day''.

There may be more than one price on any one day. Indeed, there may be wide variations in price, particularly if large transactions have gone through. Then there is the problem of computer-mapped market prices, under which the price may move around hugely during the day. The new paragraph refers to the list price. Other parts of the measure imply that there may not even be a list price, and the Government tacitly acknowledge that.

New sub-paragraphs (8) and (9) contain the sort of catch-all provisions that all too often act as a substitute for clarity of thought, and can give rise to a great deal of discontent later, in this case, about the definition of the market price. I would be grateful if the Financial Secretary commented on that and on whether she is sure that new sub-paragraphs (8) and (9) are needed if the definition of market price earlier in the new paragraph is right.

Those are technical points, and the Financial Secretary cannot be expected to know every detail of anti-avoidance legislation of this type. She is a very thorough Minister, but I do not expect her to have all the answers at her fingertips. She may have them, but I would not be in the least concerned if she did not. As a general point, I wonder whether this kind of scrutiny would not be better done in some Special Standing Committee, although I realise that saying that is considerably beyond the scope of this debate.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

We, too, support clause 129, which deals with a particularly serious form of tax avoidance. I wish to seek clarification from the Financial Secretary on a few points. First, can she provide the most up-to-date estimate of the cost of the tax avoidance? I am sure that she intended to deploy it in her speech in any case. Secondly, when was this form of avoidance identified by the Treasury and when were Ministers alerted to it? How long does she think it has been going on, and when were proposals first put to Ministers suggesting that the loophole be closed? How long ago was that suggestion first made?

[Mr. Mark Todd in the Chair]

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

Ah! I welcome you to the Chair, Mr. Todd, and look forward to your expert guidance.

I am delighted that members of the Committee recognise the serious form of tax avoidance that is at issue in the clause, which amends the law relating to the taxation of strips of Government bonds held by individuals and others liable to income tax and capital gains tax. The clause has two main purposes: to tackle aggressive tax-avoidance schemes and to prevent tax relief from being available for any loss of original capital invested in the strip.

The avoidance involves contrived deals to manipulate the cost or disposal proceeds of strips for tax purposes. The only purpose of such unwanted deals is to generate tax reductions at the expense of the Exchequer. The Government are committed to tackling such avoidance to ensure sure that everyone pays their fair share of tax. The changes will not affect genuine investors in any way.

Hon. Members have been interested in the yield at stake. We believe that the Exchequer has lost at least £200 million through that route. We believe that avoidance started around July 2003. My right hon. Friend the Chancellor was alerted in the first week of January this year and an announcement was made on 15 January—a quick reaction, I hope hon. Members will agree.

[Mr. John McWilliam in the Chair]

On the technical issue of market value, why we have defined it and what definition we are using, currently, all strips of Government bonds are publicly quoted in the major stock exchange in the country of issue. Using that figure for market value, information is readily available and cannot be manipulated for tax purposes.

A regulatory power has been ceded to the legislation in case at some time in the future strips of a foreign Government are not quoted on a recognised stock exchange. The quoted price used is worked out in deals in-day, as reported via the Debt Management Office to the stock exchange list. I hope that that satisfies hon. Members and I ask my hon. Friends and other members of the Committee to support the clause.

Question put and agreed to.

Clause 129 ordered to stand part of the Bill.