(Except clauses 1, 3, 7, 8, 12, 20, 21, 25, 67 and 81 to 84, schedules 1, 18, 22 and 23, and new clauses relating to microgeneration) - Clause 27

Finance Bill – in a Public Bill Committee on 17th May 2007.

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Extension of restrictions on allowable capital losses

Amendment proposed [this day]: No. 30, in clause 27, page 17, line 33, leave out ‘, or one of the main purposes,’.—[Mr. Hoban.]

Question again proposed, That the amendment be made.

Photo of Roger Gale Roger Gale Conservative, North Thanet

I remind the Committee that with this we are discussing the following amendments: No. 29, in clause 27, page 17, line 34, after ‘arrangements’, insert ‘taken as a whole’.

No. 27, in clause 27, page 17, line 34, leave out ‘secure a tax advantage’ and insert

‘avoid a liability to capital gains tax, corporation tax or income tax’.

No. 32, in clause 27, page 17, line 34, at end insert

‘; and

(c) the arrangements are not prescribed arrangements.’.

No. 26, in clause 27, page 17, line 38, leave out from ‘enforceable),’ to end of line 7 on page 18.

No. 33, in clause 27, page 17, line 38, leave out ‘and’ and insert—

‘“prescribed” means set out in regulations made by the Commissioners for Her Majesty’s Revenue and Customs.’.

No. 28, in clause 27, page 18, line 11, leave out

‘tax advantage is secured for’ and insert

‘avoidance of liability to taxation relates to’.

Photo of Edward Balls Edward Balls The Economic Secretary to the Treasury

We are pleased to have you back in the Chair, Mr. Gale. You missed a most illuminating and lengthy sitting this morning. I hope that we can reach a swifter conclusion on this clause, not least because of the turnout so far on the Opposition Benches.

Several points were raised this morning, and I hope to give the Committee further reassurance on a couple of points of detail. At the end of the sitting, I was  explaining the importance, which paragraph 13 of the guidance stresses, of considering all the circumstances in the round. I explained two examples in which a fall in the value of FTSE 100 shares gives rise genuinely to a loss, which can be offset elsewhere on gains, where the tax advantages are incidental but the transactions are genuine. I also explained the straightforward way in which statutory tax relief can be passed between husband and wife in a way that allows a loss to be set against a gain. The clause does not interfere with that normal tax practice and planning.

There was much discussion about whether the guidance provides sufficient clarity. As I said this morning, Her Majesty’s Revenue and Customs is working with the representative bodies on improving the guidance, and we will publish revised guidance before Report. However, it is important to remember that for the vast majority of people, the guidance will not be relevant, as they will not be caught by clause 27, which contains a targeted anti-avoidance rule to counter tax-avoidance schemes that make use of contrived capital losses.

The legislation was first published in draft with the pre-Budget report. At the same time, HMRC also published a statement setting out why it was necessary and the key principles that underpinned it. The key principle is that relief for capital losses should be available only if a person has suffered a genuine commercial loss and a real disposal.

As was recognised this morning, there is always a grey area, a question of debate, in dealing with tax avoidance. The HMRC statement of principle and guidance makes that area for debate as narrow as possible. It is necessary to do that in guidance in order that we have flexibility. These things cannot all be tied down in the Bill. However, as I said this morning, the person entering into the arrangements is best placed to decide whether gaining a tax advantage was a main purpose of the arrangements. The sort of arrangements that the clause is aimed at are not entered into by accident. People know when they are setting out to avoid tax, and the clause is intended to catch them if they are.

The amendments, taken together, would simply weaken the targeted anti-avoidance rule in the clause. They would introduce uncertainty for those who do not seek to avoid tax and would leave loopholes for those who seek to avoid paying the right amount of tax, while introducing unnecessary regulation-making powers for HMRC. I therefore ask the Committee to reject the amendments, and I reaffirm my commitment to providing all members of the Committee with the detailed and updated guidance before Report, which I am sure will make for interesting reading for all, but especially for the hon. Member for Braintree and Mrs. Newmark in case there is nothing decent to watch on telly.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

It is a pleasure to see you in the Chair this afternoon, Mr. Gale. I am sure that Mrs. Hoban and I will find something much more interesting than the guidance to read, regardless of what is on television during the recess. However, I thank the Economic Secretary for his comments on the guidance, because it had crossed my mind that it would be helpful for the guidance to be available before Report, so that if we felt that it was still not quite right,   we would have the opportunity to probe further on Report. In a sense, the withdrawal of my amendments this morning was predicated on the adequacy of the guidance, so the present approach is an appropriate way to try to resolve the problems before Report. It will give us and the representative bodies the opportunity to think again and consider whether there are further areas of doubt or ambiguity about which we want to probe the Government’s intentions.

The debate on “main purpose” had some interesting elements. I had always thought that there could only be one “main purpose” until I got involved in Finance Bills. However, the Economic Secretary mentioned earlier that there can be many main purposes. Clearly, therefore, the rules of grammar and of English usage are suspended somewhat when it comes to finance legislation.

The Economic Secretary said also that he did not wish there to be any ambiguity in the drafting of legislation. That is a fair comment, but it is important that ambiguity is not introduced in the guidance either, so we want to ensure that that guidance is clear. In mentioning the avoidance of tax liability, he made a point that had eluded me in my remarks on the earlier amendments; he mentioned schemes that would give rise to repayment, and his argument was I think correct.

In the eager expectation of the revised guidance becoming available, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Roger Gale Roger Gale Conservative, North Thanet

Before we proceed, it might be helpful to say that I do not propose to have a stand part debate on the clause, given the copious debate that took place on it under the guise of earlier amendments, and given also that we are about to debate amendment No. 37.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I beg to move amendment No. 37, in clause 27, page 17, line 34, at end insert—

‘(1A) This section does not apply where the aggregate of a person’s allowable losses does not exceed £25,000 in the year of assessment.’.

I am disappointed that we shall not have a stand part debate, Mr. Gale, but I shall bear my disappointment manfully. In his remarks on the previous group of amendments, the Economic Secretary said that there was an expectation that very few people would be caught by the clause. That is absolutely right; one hopes that taxpayers will not need to have resort to an understanding either of the clause or of the guidance notes, and the details to which we have applied ourselves. However, bearing in mind the breadth of the clause, it might be helpful to taxpayers—particularly those with small capital losses—if we introduced a de minimis limit. The amendment would introduce such a limit, thereby disapplying the clause in cases where the aggregate of a person’s losses in any one year did not exceed £25,000.

The Economic Secretary indicated earlier, and we concurred, that much of the focus of the clause is on expensive, marketed, tax avoidance schemes. I assume that the cost of most such schemes, and the fees that people pay to tax advisers to implement them, means that they relate to fairly significant amounts of money and to the generation of fairly significant capital losses. I assume that someone whose losses were less than  £25,000 would not adopt such a scheme—whether it be contrived and complex, or simple—and the intention of the amendment is to make it clear that, in the case of relatively small losses, taxpayers need not bother to understand the details of the clause or of the guidance.

In its comments on the clause, the Chartered Institute of Taxation said:

“At the Open Day, HMRC stated that, if a transaction was caught by the rules, it would be incorrect to then exempt it due to it being less than a de minimis amount. However, we consider that, in view of the uncertainty as to how the rules will be implemented, and that a wide range of ordinary transactions could potentially be caught, giving rise to a significant administrative burden, a de minimis amount should be applied per person, below which losses are not disallowed.”

The institute suggested a de minimis amount of £100,000. I have been somewhat less generous, but I should be grateful if the Economic Secretary would comment on the proposal.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I wish to make a comment in passing, and I will be interested to hear what my hon. Friend the Economic Secretary says about it. The hon. Member for Fareham rightly pointed out that the CIOT suggested a de minimis limit of 100,000, but I say to my hon. Friends that the amendment and the way in which he carefully moved it indicate the different worlds in which we live, particularly those of us from parts north of Watford.

This morning the hon. Gentleman referred to “relatively small” losses and he used the same term this afternoon when moving the amendment. He also mentioned “small capital losses”. I say to him and his hon. Friends that I have had the great good fortune for most of my working life to be a higher-rate taxpayer, along with less than 10 per cent. of the population. That said, the concept of £25,000 being a relatively small loss is beyond my financial ken, as it would be for the vast majority of my constituents.

I understand the concept of a de minimis limit and how it might help in certain circumstances. However, to point out to the Committee the different ways in which Members from different parties view such things, if I were to suffer a capital loss of £25,000, or £20,000, I would regard it not as a relatively small or a small capital loss but as pretty catastrophic. Fortunately, because I am not a speculator and do not play the casino economy on the stock market, I am unlikely to suffer any such capital loss. If I did, it would not be relatively small to me, and it would not be to my constituents or to most of those who vote Labour.

Photo of Edward Balls Edward Balls The Economic Secretary to the Treasury

I note my hon. Friend’s comments on the—how can one put it?—rather elastic concept of middle England that is sometimes employed in these tax debates. I fear that you might rule me out of order, Mr. Gale, so I shall come to the detail of the amendment. It would alter clause 27 by prohibiting the anti-avoidance rule from applying in any tax year in which a person’s loss does not exceed £25,000. The intention behind the amendment, as the hon. Member for Fareham set out, is to make things simpler for the majority of individuals who do not use avoidance schemes involving capital losses, by allowing them to ignore the new rule in the clause if their losses are modest. It is a reasonable aim, with which we sympathise.

The hon. Gentleman is right that the overwhelming majority of individuals are likely to have no capital losses in any one year and that most of those engaged in such schemes have losses substantially in excess of £25,000, but there will be a small number of individuals who fall in the middle. I understand his desire to see whether something can be done to simplify matters for that group of people but, having examined the amendment in detail, our conclusion is that it is rather unattractive. It would allow contrived losses of £25,000 to be manufactured and then rolled up each year. That could let a tax avoider stock up tax losses for use when the opportunity arose. For instance, after four years of careful planning, it would be possible to accumulate £100,000-worth of artificially contrived losses to set off against a properly taxable gain made in a later year.

I should warn the Committee that one avoidance scheme of which HMRC is aware could easily be adapted for the mass market and used to generate losses of £25,000 per user per year. That loss could be set against income, giving a maximum income tax saving of up to £10,000 per annum for a higher-rate payer. Such a scheme would clearly have a serious impact on the Exchequer, potentially costing millions or even billions of pounds. We would then be into difficult territory and I am sure that we would be forced to revisit the de minimis limit.

There are a small number of individuals for whom there is a question whether losses below £25,000 are contrived or not. Given the potential for the amendment to be abused and marketed in the contrived way that I have set out, at substantial Exchequer cost, our conclusion is that it would introduce an unjustified loophole to tax avoidance. I hope that, given that explanation, the hon. Gentleman will understand why we propose to reject the amendment.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 1:15 pm, 17th May 2007

I will not go into the semantics of what relatively small losses are and what their impact is on various Members’ constituents, because I think that that is a slightly pointless route to go down.

Looking back at the way that the debate has unfolded, the Conservatives have sought to stick to the principle, which we support, of clamping down on contrived capital losses, while at the same time ensuring that, for people who perhaps have relatively small share portfolios, a second property or some other assets, there is a relatively straightforward way for them to navigate these rules.

I made the point that we have a broadly written clause and people are untaxed through the guidance. What we have sought to do is to provide greater clarity in the clause, to ensure that taxpayers—relatively straightforward taxpayers—can work their way through all the provisions and not feel obliged to seek the professional advice of my former colleagues in the accountancy profession. I am always keen to ensure that people do not have to pay compliance costs if they are unnecessary.

I sense that the Minister understands those concerns and he has tried to allay some of them by refining the guidance, and I am grateful for that. However, I sense that those taxpayers who will incur modest losses will  still need to go through the full rigour of the procedure, and they will need to understand what their transactions are doing. I am not sure that we have made any real progress in trying to alleviate those burdens for taxpayers with relatively small losses.

Although we have made some progress, we have not made substantial progress. Having said that, in the context of the de minimis limit, I am intrigued by the concept of a mass market capital losses avoidance scheme. It certainly would not be of much use in Wolverhampton, South-West and if it does not meet the market needs in Wolverhampton, South-West, where will it meet market needs?

I understand the Minister’s concern about how the de minimus limit could be abused. On that basis, I shall ask the Committee’s leave to withdraw the amendment. However, I would hope that the Minister might consider, between now and Report, whether we can take any other practical steps to reduce the burden on people with relatively small capital losses who wish to take responsibility for their own affairs without having to be burdened by understanding complex statements of principle and guidance.

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 27 ordered to stand part of the Bill.