The Opposition support the principles underlying the clause. In the circumstances, and given the wording of existing legislation, it seems to be a reasonable and proportionate measure. I will therefore mention only a few queries and background points so that the Committee has the opportunity to debate the policy objective behind the clause and how best to bring that about.
I will raise two points. The legislation at issue is schedule 24 to the Finance Act 2003 and sections 38 to 44 of the Income Tax (Trading and Other Income) Act 2005. Although introduced by the current Government, those Acts built on an approach first established by Nigel Lawson when introducing provisions to crack down on “potential emoluments”—deferred bonuses and benefits—in the Finance Act 1989.
There is, therefore, some common ground between our parties on the principles at stake. Like the 2003 Act that succeeded it and will be amended today, the 1989 Act sought to ensure that an employer gets a tax deduction on a payment or benefit provided to an employee only when they receive it in a form that constitutes employment income. In other words, the employer gets the deduction only when the employee has got the benefit. In effect, the point of the 1989 Act was to prevent employers from obtaining the corporation tax benefit of paying out a large bonus before the employee had paid the tax on it. I understand that the Government introduced schedule 24 to the 2003 Act out of concern that certain planning schemes involving employee trusts were being marketed as a means of circumventing the 1989 Act and accelerating the corporation tax deduction in the unacceptable way that I have outlined.
Clause 33 tackles some of the more recent schemes that have emerged since the 2003 Act. The clause appears to be appropriately targeted at those schemes, which would be fairly described as aggressive tax planning. I have received no representations that would indicate that any collateral damage would be caused to transactions that are not motivated exclusively by tax considerations.
I understand that some schemes have been developed to exploit the fact that the 2003 Act only catches situations where the employer transfers assets or makes payment to a third party. Attempts have been made to circumvent the anti-avoidance provisions by having the employer who wishes to make the deferred payment declare themselves a trustee over certain assets or money. In this case, there is no transfer of legal ownership to a third party. Alternative arrangements sought to get around the rules by increasing the value of existing trust assets and arguing that no payment or benefit had been transferred into the trust. Consequently, it was at least arguable that the 2003 Act did not bite in such cases.
Clause 33 would make it plain that such situations would be caught, and that is one of the reasons why we welcome it, although I want the Chief Secretary to consider two points. First, why have we ended up in this situation? Why has it proved necessary to have yet more legislation—and clause 33? If the Chancellor had not decided to meddle with the law in 2003, the Government might well have been successful in arguing in court that the original 1989 Act covered these latest avoidance schemes anyway.
I have in mind the very robust approach taken by the House of Lords in the Dextra case, which was decided under the 1989 Act. In it, their lordships seemed to signal clearly that they would have limited patience with those who put forward hair-splitting interpretations of the statute to seek to get round the clear objective of the law: not to allow the employer to accelerate the deduction before the employee has received the payment. Assuming a consistent approach from the courts, the Revenue might well have been able to challenge these new schemes in court as contrary to the intention that Parliament made plain in introducing the 1989 Act.
I should put it on the record that the Dextra judgment seems to make it clear that the 1989 Act was an effective statute that achieved the policy goal of catching deferred payments through employee trusts. It probably would have caught the schemes that clause 33 seeks to close down, so the scope for these new avoidance schemes was only created because the Government decided to junk perfectly good legislation introduced by Nigel Lawson. The revised form of wording that they chose in the 2003 Act was narrower than the wording in the 1989 Act, and room was thus created for the aggressive tax advisers to move in.
I cannot answer that because I was not in the House then, so I did not take part in that Committee. That issue is a concern, and I can certainly check Hansard to see whether or not we raised it. If we did not do so, we should have done.
We have frequently made the point that the Government’s anti-avoidance legislation has often been used as a sledgehammer to crack a nut—in some cases, the Chancellor takes a sledgehammer to miss a nut. We support their efforts to shut down these schemes, but feel that the clause would not have been necessary were it not for the changes to the legislation made in 2003.
Secondly, I briefly want to ask about the interaction between schedules 23 and 24 to the 2003 Act, which are crucial in how the anti-avoidance schemes work. Although, as I have said, I very much support the intention behind the 2003 Act, it is not a problem-free piece of legislation. My question is about the distinct difference between the two schedules’ treatment of share-based and cash-based remuneration.
Tax deductions under schedule 23, which covers share-based remuneration, are determined by the value at receipt at the hands of the employee. If an employer funds a trust to acquire shares to be awarded to employees at a later date and the shares have gone up in value by the time the deduction takes place, the deduction for the employer becomes larger, so the value during the deferment is given to the employer. If, on the other hand, the shares have gone down in value, the employer has made a bad bet and only a reduced deduction can be claimed when it is eventually due, when the employee receives the benefit.
Deductions under schedule 24, however, which broadly covers anything that is not share based or to do with pensions, are based on the value on contribution by the employer, so that when the employer finally gets the deduction at the appropriate time, when the benefit gets into the employee’s hands, they are denied any growth in value during the deferral period, even if the employee is taxed on the higher amount. Does the Chief Secretary agree that different approaches are being taken? If so, why does the law treat those different types of benefit differently? The lack of neutrality between those approaches disadvantages employers such as mutual societies that cannot forward shares to their employees. It would be useful to hear him explain why the deferred benefit is treated differently in those cases.
I think that I understand the first limb of the hon. Lady’s argument—that the 1989 legislation covers the mischief that developed after 2003 and that is addressed in clause 33. However, I am at a loss to understand why she has not tabled an amendment to go back to the status quo ante the 1989 position if she thinks that that would cover the mischief. That would, presumably, produce the simplification and shortening of tax legislation that she and her party want.
That is certainly an interesting idea, which I shall consider for next year. As I have said, clause 33 deals with the problem, but we have had to go around the houses with yet more tax legislation to do so.
The hon. Lady has correctly set out the aim of the clause, and I am grateful to her for supporting what we seek to do. There have been a number of attempts to use employee benefit trusts as a means of avoiding tax—another example, sadly, of very bright people misapplying their talents—and legislation was, as she said, introduced in 2003 to deal with the abuse.
The hon. Lady has a point when she says that there is a sound case for arguing that what was being done was illegal anyway, but the Dextra case that she mentioned was won in 2004, after the change in the legislation. It was thought to be appropriate to put the matter beyond doubt, and those moves were successful in stopping much of the avoidance that was going on and being attempted. However, there is evidence of a recent increase in the marketing and take-up of schemes to get around the legislation, which is why we need to take action again to stop the abuse.
Employee benefit trusts are used quite properly by employers to provide remuneration and other benefits to employees through, for example, share-ownership trusts, which the Government have encouraged to good effect. From the mid-1990s, however, the trusts have been used as a mechanism for obtaining deductions from taxable profits that would not otherwise be due. Such usage has often been coupled with other kinds of avoidance.
The Finance Act 2003 restricted the deduction available to employers. As a result of those changes, an employer can only deduct the amount that is paid out of the trust to employees in a form on which income tax and national insurance are due within nine months of the end of the accounting period. There is no impact on genuine users of employee benefit trusts.
The new avoidance schemes, known as “employer self trust schemes”, attempt to avoid the restrictions introduced in 2003. The employer declares a trust over assets that he already holds. It is claimed that the action does not amount to making a payment or transferring an asset into a trust and therefore the existing anti-avoidance legislation does not apply. They seek to allow employers to manufacture deductions artificially without the need to provide real benefits to employees.
The Government do not accept that employer self trust schemes bypass the existing anti-avoidance legislation that was put in place in 2003. However, given the scale of activity in that area, we have decided to clarify the position and put it beyond doubt that employers are not entitled to a deduction under such schemes. I think that the hon. Lady will accept that, if we can do that in a reasonably straightforward way and avoid several cases of litigation, it will probably be in everyone’s interests.
The clause extends the existing legislation to include any act or omission that results in money or assets being held for the benefit of employees or in an increase in the value of those assets. It makes sure that the same restrictions apply to all trusts that are used as vehicles for employee remuneration, regardless of whether the trust is administered by a third party or by the employer. An employer will be able to make a deduction for the contribution to that trust only to the extent that it is actually paid to employees in a taxable form within nine months of the end of the relevant accounting period. The clause will apply to any act or omission, including a declaration of trust, made on or after 21 March. That will prevent not only those schemes we are aware of, but further attempts to use a similar method to sidestep the legislation.
The hon. Lady asked about the interaction of schedules 23 and 24 in the Finance Act 2003. Schedule 23 seeks to promote share ownership; schedule 24 is anti-avoidance legislation. I hope that I have outlined the difference that she wanted clarified.
The clause strengthens existing legislation to counter a further abusive avoidance scheme that uses employee benefit trusts to obtain a tax deduction not otherwise due. The Government will continue to tackle avoidance of that sort to make sure that all employers pay their fair share of tax. I commend the clause to the Committee.