I remind the Committee that with this we are taking 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.'.
I am delighted to see you in the Chair again this afternoon, Mr. McWilliam, because I rise with a little trepidation, as the Treasury's resident tax expert, the Paymaster General, is undergoing an emergency dental procedure. Nevertheless, I am delighted to be able to address the subject of film tax relief, and in particular the amendments tabled by the hon. Member for Hertford and Stortford (Mr. Prisk). I believe that the amendments would seriously undermine the effect of the legislation and open the door to continued avoidance on a wide scale.
Clause 119 tackles tax avoidance and deals with schemes that offer a risk-free tax gain to wealthy individuals acting in partnership through misuse of loss relief intended to benefit people who risk their capital trying to make a living from a trade. The abuse consists of the misuse of sideways trading loss relief so that wealthy individuals receive tax relief that is greater than their financial contribution to the partnership. It follows that the partnership must be trading if there is to be a trading loss on which the scheme depends. I would argue that to exclude partnerships from the provision simply on the basis that they were trading would miss the abuse entirely. I want to make it absolutely clear that the clause does not enforce a specific commercial structure on partnerships. It simply restricts the way in which losses can be used for tax purposes.
The schemes that the clause targets effectively allow a business to transfer the benefit of its trading losses to a partnership of individuals by allocating more losses to the individuals than the amount they put into the partnership. The individuals can then cash in the loss by setting it against their general income and gains. Because they claim 100 per cent. of the losses, the wealthy individuals get back 40 per cent. as a tax rebate. That is more than the 25 to 35 per cent. that they typically put in, so they receive an immediate cash gain at the expense of the Exchequer.
The partners using the scheme have not, in effect, invested any of their own money: their investment was funded by the honest taxpaying public. In practice, the individuals are guaranteed to make a tax-free gain, even if the trade generates no income whatever, as the tax relief is greater than the amount they have put in,
and they have a chance of increasing their gain if the trade generates future income. They are on a one-way bet, underwritten by the Exchequer.
Does the Financial Secretary accept that, as was inferred from the Paymaster General during our previous debate, the clause as drafted casts the net wider than simply the illegal activity to which she has rightly referred, and which it is right to block in the clause? Does she accept that the danger is that, contrary to what was said previously, the provision will affect legitimate commercial trades, even if only a small number?
This turns on the point of certainty, which the hon. Gentleman talked about this morning. The new rules ensure that individuals cannot claim more loss relief against their general income than they have put into the partnership. To claim the rest of the loss, they must either stay in the trade and claim it against future profits or make a further contribution. The changes apply only to someone who is not active in running the trade and only to losses in the first four years that the trade carries on. They have no effect on someone who actively starts up and runs their own business.
I do not accept the hon. Gentleman's point. The legislation as drafted carries an objective test and people will know where they stand.
Well, business angels, just like any other investor through a partnership model, will know exactly where they stand. An objective test is applied, and they know under what circumstances they can claim options against future profits, and indeed they understand exactly how the contributions are treated, both in the initial year and in future years.
This is a narrowly drawn definition, for the reasons that I have set out already. Turning to business angels, one has to ask the question: why should they attain more relief than they have invested through a partnership in the film industry? It is a fairly common-sense proposition that relief should be constrained in the way that the new rules set out.
On amendment No. 182, an important part of the new rules is the change for limited liability partnerships. Under the current rules, as the hon. Gentleman pointed out this morning, a member of a limited liability partnership can base their claim to loss relief on the amount of their liability in a winding up. However, this liability can be no more than notional, and has been exploited aggressively to allow individuals to claim far more in loss relief than they have actually contributed. That is why we are changing the rules, so that only the actual amounts
contributed, either in the course of the trade or during a winding up, can rank as contributions for deciding the amount of loss relief against general income. However, we are making those changes only for people who are not actively engaged in the trade of a limited liability partnership, which draws a clear line between people who are actively running their own businesses and people who use these vehicles as schemes to claim large amounts of tax relief when they have no active role in the trade.
I can confirm that the existing provision under section 118ZC, which the hon. Gentleman raised this morning, has not been repealed, because this provision is still required to apply to partners who are not affected by the new rules—for example, active partners. If amendment No. 183 were accepted, it would mean that all members of limited liability partnerships could carry on as if nothing had changed, which would completely undermine the effect of this measure.
I also ask the Committee to reject the amendment No. 182, on two grounds. First, there is the question of certainty. I can confirm that it would create uncertainty over how and when the legislation will apply. The new rules that we have introduced are simple and objective, as I have already set out. If you are not an active trader, you can claim losses against general income only up to the amount of your contribution. It is easy to apply, and easy to understand. The amendment would introduce a whole layer of subjective tests that would make the position uncertain, as well as being a burdensome administrative procedure.
Secondly, the amendment is founded on a completely flawed view of profits and commerciality. These schemes involve creating a very large loss in year one by selling a film, say, with the right to future income, and estimating that future income at a fraction of the production cost.
Very briefly, those of us whose previous experience of these fiscal manoeuvres has been limited to watching ''The Producers'', the Mel Brooks film with Zero Mostel, which seems to have something in common with this situation, have been listening with great interest. I am becoming more inclined by the minute to support the Government on this. However, I have received a number of letters from constituents on the fashionable left bank area of Ealing, North—the left bank of the River Brent, of course—who are involved in film production and fear that the clause impacts on future plans and commitments that they have made over the next months. Will my hon. Friend give me an assurance that that will not be the case?
I am delighted that my hon. Friend is inclined to support the Government's position. It is always reassuring to hear the value of an argument. I will continue to explain how contrived the actual schemes are, to illustrate the point that people who
entered into these artificial arrangements knew that they were in danger of being stopped.
The loss in year one is allocated to individuals in the partnership who use sideways tax relief so that they are guaranteed a return—gaining more from tax relief than their original capital contribution—even if the partnership earns no taxable income at all. That is not a genuinely commercial arrangement. It is an abuse of sideways tax relief, and the clause prevents that abuse fairly and objectively. In contrast, the authors of the amendment appear to believe that a scheme is commercial if it is set up with a prospect of the partnership receiving taxable profits from year two onwards, even if the profits are estimated to be a fraction of the loss in year one. That is not the Government's idea of a genuinely commercial arrangement. The amendment would mean that the prospect of even a few pounds of profit in later years would remove the restrictions on the initial loss claim.
We are determined to tackle tax avoidance. The Government have been extremely generous in supporting the film industry with tax relief. It was very disappointing to find that some people in the industry were intending to use an unintended tax subsidy that would have cost several hundred million pounds a year. I believe that any responsible Government would have acted quickly to stop such schemes with immediate effect.
Since the announcement on 10 February, most of the films have been refinanced and are in production. In April, 15 films were shooting in the UK: one more than in April 2003, and 2003 was a record year for film production. I therefore ask the Committee to reject the amendment, which would render the new rules ineffective and allow substantial tax losses through avoidance to continue unchecked.
We are discussing two amendments, and I am aware that amendment No. 183 has been proposed formally, but not amendment No. 182. Listening to the Financial Secretary run through the Government's arguments, I am not convinced that sufficient consideration has been given to the impact of the clause. If it is not the Government's intention to hit genuine trades, I have to say that the clause would undermine that aim.
The Minister has said that the clause has simple and objective rules, which may indeed be the case. However, one of the problems with the clause—this is a common theme in the Bill—is that it seems to have a catch-all approach, underwritten by very rigid rules, under which some innocent and legitimate trades will be caught up in the process, but there is an assumption that that can be amended in due course. Such a legislative approach is questionable and likely to lead to a significant number of further changes to tax law and, therefore, further complexities. Some might argue that the very reason why we are debating the clauses today is that the original scheme was not right in 1997.
It is also unclear whether the Government have made a proper and thorough assessment of the impact of the clause. The hon. Member for Yeovil (Mr. Laws) talked in previous debates about whether an objective assessment has been made of how a measure will impact on the industry. Members of the Committee will understand, as do members of the Culture, Media and Sport Committee, that certainty in the tax regime is crucial to the film industry. I shall briefly cite one of the leading witnesses to that Committee, Mr. David Elstein, the chairman of the British Screen Advisory Council. He said:
''What we actually need . . . if we were really going to try and solve this once and for all, is . . . a permanent fiscal regime which we know is there forever, that is how you treat a film from a tax point of view.''
That is very much the view of the industry as a whole. The danger is that the clause will compound the errors that were made in the beginning. The purpose of amendment No. 182, in particular, and No. 183 was to prevent that.
On amendment No. 182, I hope that the Financial Secretary will confirm that the Treasury, as well as the Department for Culture, Media and Sport, will watch and monitor the impact with care. There is concern across the House that, having established a stable fiscal regime, via both section 42 and section 48, for how film investment is treated, the events of 10 February—perhaps rightly plugging some activity that is not legitimate—sent out a signal that could undermine the long-term viability of many films in this country. I hope that she will forward those concerns to her colleague the Paymaster General.
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Question proposed, That the clause stand part of the Bill.
Order. Sedentary interventions are always to be deplored: they are rarely as funny as people think they are. The hon. Member for Hexham (Mr. Atkinson) had part of ''Robin Hood: Prince of Thieves'' filmed in his constituency, and the right hon. Member for Berwick-upon-Tweed (Mr. Beith) had ''Harry Potter'', but the only film made in my constituency was ''Get Carter''.
I shall not even try to compete with you, Mr. McWilliam. It would be dangerous to do so—certainly if I want to get called in any future debates.
So far, the clause has been considered in the context of the film industry, but it affects any partnership and reaches way beyond the film sector. What assessment has been made of its impact outside the film sector? Earlier, we touched on business angels. They are particularly important in, for example, the theatre sector. I would appreciate it if the Financial Secretary could clarify what thought the Treasury has put into the impact. Was casting the net this wide intentional, and if it was, has a regulatory impact assessment been commissioned to assess exactly how the provisions will work?
In new section 118ZH, a benchmark of 10 hours is set. That seems clear in one sense, but it is inevitably somewhat arbitrary, especially, for example, in the case of parallel partnerships. As many members of the Committee will realise, professional firms quite often create a side partnership to draw in a specialist in a particular niche in their profession. Creating such a partnership allows them to do that without the complication of restructuring an existing partnership. Members of the Committee will be familiar with that arrangement operating in the fields of accountancy, law, and in particular in the environmental trades and professions, such as surveying, architecture and planning. Would it not be logical to recognise that that takes place, instead of having a 10-hour fixed benchmark that is somewhat arbitrary? That benchmark will clearly cause significant problems in the tax affairs of the partnerships to which I referred.
There is a further danger with the rigid nature of the benchmark: it could discriminate against someone on maternity or paternity leave. In most circumstances, the end of the financial year is 30 April, so where a person goes on maternity leave on 1 July of a tax year through to the following May, and even if they were able to manage seven hours in a working day in the 40 days before they took leave in the July, they would still be treated as if they had done five and a half hours per week.
It is not necessary for anybody to attribute anything really. I have no idea what brief the hon. Gentleman is citing examples from, since with any briefs sent to me my staff have instructions to send a note back stating that I do not read them because I am chairing the Committee.
I am perfectly happy to say that I have read the brief, but I am also aware that the Financial Secretary has recently been on maternity leave. Many hon. Members know about that, including the hon. Member for Wolverhampton, South-West (Rob Marris).
In circumstances in which someone is judged to have worked five or six hours a week, if that partnership incurs a loss, the new parent could be at a disadvantage because of the inflexibility of the clause. I cannot believe that that was the Government's intention, so is the Financial Secretary prepared to account for it?
The clause highlights the general mistake of a tax avoidance strategy that is founded on trying to catch every possible activity in the knowledge that it will probably hurt a small number of legitimate activities but will inevitably have to operate in that way because it is trying to catch every last pound.
The Opposition do not reject the argument that abuse of the tax system should be dealt with. However, the danger of the catch-all approach in this clause and others is that a significant minority will be penalised.
The hon. Gentleman was citing the example provided by Grant Thornton. I did not hear him cite the concluding sentence of that paragraph dealing with the potential difficulties of the situation outlined in the example. It goes on:
''Otherwise the losses will be carried forward and treated as current-year trading losses.''
That suggests to me that someone on maternity leave could use the losses unless they gave up their role in the partnership or went on another maternity leave.
I am happy to return to that point, because the hon. Gentleman is right to say that there is a possible opportunity for avoidance. That is where the difficulty lies, however. How does one draw the line in a way that is not unfair? I am not sure that the clause does that, and that is why I want to hear from the Financial Secretary.
It is an interesting argument that somehow individuals should get more tax relief than the amount that they put into a partnership. It is quite a difficult argument to make. We are not removing the right to tax relief; we are just saying that one cannot use it to the extent that it is greater than the sum originally contributed to the partnership. As profits accumulate, losses can be set aside in future years.
The hon. Gentleman argues that legitimate trade could be affected, but we have received no representations whatever from anyone whom he thinks might be affected. No representation was made by the British venture capital industry or by individual business angels or people with the sorts of cases that he cites. We simply do not accept that
legitimate trade could be affected in the way that he suggests.
We all receive representations and we have to balance those that we receive with those that we do not. This year in particular, all the outside bodies have highlighted the fact that many people had significant difficulty responding to the clauses because the Bill was published on Maundy Thursday. We do not know whether the end result will be poor, but problems may well arise in due course and the rigidity of the drafting of some clauses is more likely to create problems than some flexibility would. I hope that the Financial Secretary can respond positively to that.
I do not accept that they are drafted in a rigid way. I will turn to the 10-hour test in a moment. Let me first consider some of the other points raised by the hon. Gentleman.
The hon. Gentleman asked whether we have done a regulatory impact assessment, but it is not Treasury practice to carry out an RIA for anti-avoidance measures, as I am sure he understands and realises. He also suggests that the industry desires certainty, and that it seeks a permanent new relief to provide that certainty. We think that the Budget announcement gives the industry the certainty that it is seeking to 2005 and beyond. As we have said, we are working in full co-operation with the industry to design a new permanent tax credit. That point has been widely welcomed by the industry and should provide the additional certainty that the hon. Gentleman desires.
Most of the detail of the measures before us was announced on 10 February, so organisations and individuals have had a fair amount of time to study them and make representations to us. It is an important point that no representations whatsoever have been made by people or organisations who think that this measure could affect legitimate trading activity.
I appreciate that the Financial Secretary is standing in for the Paymaster General, but she may find the Treasury has received at least one representation. The important point here, though, is not necessarily whether there have been one or two representations, but the concern that many people are not clear about the impact of the measure because of the length and nature of the legislation. We need an assurance from the hon. Lady that the Treasury—not just the other Departments—will monitor the impact and respond if it is clear that it is not having the desired effect. I hope that she will respond to that point.
We do, of course, keep all tax measures under review and monitor the impact of tax legislation in particular fields. We will continue both to do that and to listen to any representations about the impact. However, I put it to the hon. Gentleman that the intent of the legislation is very easy to understand. The concept is simple: it is not possible to have loss relief against one's general income for more than the amount that one has actually put into the business, and anyone who can understand that can work out whether they are affected. Clearly, to give effect to that, the legislation is more complex.
The hon. Gentleman asks about the 10-hour rule. Most people involved in the avoidance schemes have no active involvement whatsoever in the businesses, but we have had to guard against attempts to dress up very minor activity—a few hours a week, for example—as active involvement. We feel that 10 hours is fair, and it strikes the right balance between allowing genuine part-timers to carry on without any effect and making sure that we tighten the net around the tax-avoiders.
The Financial Secretary has said, with all the certainty that has required the rewriting of this clause, that she thinks 10 hours strikes the right balance. Will she, for my education and understanding, tell me what other options she looked at, and will she put on the record the reasons for rejecting them and fixing on 10 as, in her judgment, the right number?
We could debate endlessly whether the rule should have used nine or 11 hours, but 10 struck us as a relatively sensible compromise that people could work with, and one that would prevent people from dressing up a few hours as active involvement in a business when really there was no involvement whatsoever. That compromise recognises that some people may, for example, work part-time or take maternity leave during the year.
The reason I asked the question is that there are in statute law different definitions of part-time and full-time working. I was intrigued by this new definition, at 10 hours, of some-time working. Was there an effort to align the number with other delineations between part-time and full-time involvement, and if not, why not?
Order. The right hon. Gentleman is referring to a subsection that in fact limits the 10-hour test to section 118ZE and nothing else. Therefore, his question is beyond the scope of the matter under discussion.
On a point of order, Mr. McWilliam. I am sure that you will tell me if I am out of order, but is it not within the narrow confines of the matter under debate to ask a Minister why a particular number has been chosen and whether any attempt was made to import an existing concept from other statute law?
I am afraid that we are stuck within the confines of the matter under debate. If the right hon. Gentleman is trying to suggest that this measure could affect anything else or that anything else could affect it, it is not out of order to ask the question. It would be out of order for the Minister to answer it outside the context of what is in the Bill.
The fact is that the 10-hour test applies only to passive investors, who are not employees at all. We developed a definition that strikes a sensible and fair balance between those who are covered by it and others who may work in a different way.
The hon. Member for Hertford and Stortford says that the measure is unfair to those who work in more than one partnership and that there should be a rule to help such people. I do not think that that is a problem.
Mr. Prisk rose—
I am not entirely clear what consideration has been given to the special role of business angels, whose involvement is often passive. They make a capital investment and may occasionally contribute expertise at the beginning of a project, particularly in the creative sector, but then rightly step back. Their aim is not to run things; they do not have an executive or salaried role. I am genuinely worried that that group will be drawn in unintentionally. There may be a conflict with Department of Trade and Industry rules. What assessment was made of the impact on those people and that sector?
It is difficult to conceive circumstances in which legitimate business angel activity would be caught by the measure, because it is difficult to conceive a situation in which a business angel investor or anyone, other than those who are seeking a tax advantage, would want losses attributed to them that were greater than their contribution to the venture or partnership. I am sure that the hon. Gentleman agrees with the logic of that argument. The measure was specifically designed to counter tax avoidance.
To return to the 10-hour test, I can tell the Committee that it applies only to passive investors, and the new rule still allows someone to claim sideways loss relief up to the amount of their financial contribution. If people genuinely contribute their time, skills or money, they will not be affected. If they are affected, losses can be offset against later profits from the same trade. I believe that that directly relates to the hon. Gentleman's point. For those reasons, I urge members of the Committee to support the clause.
On a point of order, Mr. McWilliam. I have listened with interest to the debate on the clause. The Financial Secretary said on several occasions in her remarks on the amendments that the matter is one of tax avoidance. I was surprised that she did not in even a sentence or two explain some of the deficiencies in the drafting of the original legislation. What was wrong in the first place?
The hon. Lady has assured us of the correctness of the Government's position in rebutting the line of argument put forward by my hon. Friend the Member for Hertford and Stortford in favour of his amendments, on the grounds of her absolute certainty that everything in the clause is right, and therefore my hon. Friend's amendments are wrong. However, I am sure that that line was adopted when the original legislation was put to the House, so I am doubtful about how right it is. She has not told us what went wrong in the first place or why we now have several pages of legislation to fix it. My hon. Friend sought to improve the provisions through his amendments, yet the Financial Secretary tells us that
she is as certain now as she was when the original legislation was passed.
Order. The right hon. Gentleman was not present for the debate on amendments Nos. 183 and 182, so he did not have the benefit of listening to the Minister. We are dealing with the clause stand part, not the amendments, which have been disposed of.
Question put and agreed to.
Clause 119 ordered to stand part of the Bill.
Clause 120 ordered to stand part of the Bill.