Clause 25

Finance Bill – in a Public Bill Committee at 5:15 pm on 2nd June 2009.

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Agreements to forgo tax reliefs

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I beg to move amendment 38, in clause 25, page 15, leave out lines 37 to 38 and insert

‘the Treasury may by regulations make provision for and in connection with the application of all relevant enactments as follows.

(1A) The Treasury may make regulations to—

(a) give effect to the agreement referred to in subsection (1), and

(b) give effect to subsection (3).

(1B) Regulations under this section may include provision having effect in relation to any time before they are made even if the provision creates or increases the liability to tax of P or such other person as is referred to in subsection (3).

(1C) Regulations under this section may include—

(a) provision amending any relevant enactment, and

(b) consequential, supplementary and transitional provisions.

(1D) Regulations under this section are to be made by statutory instrument subject to annulment in pursuance of a resolution of the House of Commons.’.

Photo of Peter Atkinson Peter Atkinson Conservative, Hexham

With this it will be convenient to discuss amendment 39, in clause 25, page 16, leave out lines 14 to 16.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

With your leave, Mr. Atkinson, and that of the Committee, I hope that we might be able to discuss the amendments and clause stand part at the same time. It would make life easier.

To call clause 25 a tidying up measure may not be to use quite the right phrase, but it stems from the agreement reached between the Government and Royal Bank of Scotland earlier this year. In a statement of 26 February, the Chancellor said of RBS that

“It has also agreed for a number of years not to claim certain UK tax losses and allowances, meaning that when they do return to profitability it will not be able to benefit from the losses accrued in the intervening period.”—[Official Report, 26 February 2009; Vol. 488, c. 369.]

It is worth remembering the scale of Government support for RBS through the asset protection scheme, which was announced on 26 February. RBS intends to protect £325 billion of eligible assets; it will bear the first £42.2 billion of loss and then 10 per cent. of the balance, with the taxpayer bearing 90 per cent.

The Chancellor’s statement in February was not particularly detailed about the areas covered, so I thought that I might chance my arm by tabling a parliamentary question to ask what would happen to losses incurred in 2008 and whether they would they be available for offset against the tax paid by RBS in previous years. The response was:

“RBS have agreed not to claim certain UK tax losses and allowances for a number of years, meaning that when they do return to profitability, they will not be able to benefit from the losses accrued in the intervening period.”—[Official Report, 13 March 2009; Vol. 489, c. 810W.]

That is effectively a repeat of the Chancellor’s words in February, and not a very clear answer to what I thought was a relatively simple question.

The clause does not help us to work out when the agreement that RBS and the Government have reached kicks in. Which losses are covered by the agreement? Is it only losses on those assets covered by the asset protection scheme? Is it losses on that element of the asset protection scheme that the Government guarantee? Is it on the £42 billion? Is it on the 10 per cent.? What happens if RBS writes off debts outside the APS pool? Will those losses be available for offset against future profits? Are they covered by the agreement? The situation is not clear. An agreement has been reached between the Government and RBS on the losses, but there is no transparency for the House or other taxpayers regarding which losses have been forgone by RBS.

It is equally unclear whether it is just RBS that is subject to the agreement or whether Lloyds has also agreed to forgo losses. The taxpayer might say, “I get some value from the break-up of RBS because I know it will pay more corporation tax in the future, but Lloyds appears still able to take advantage of the losses on assets guaranteed by the asset protection scheme without having given up those losses.” Will the Minister provide some clarity on the losses that are covered by the scheme, and on whether Lloyds bank is in or out of the agreement?

The technical problem that I have with the clause, which gives rise to my amendments, is that it is not clear what parliamentary process will be gone through when agreements are reached between the Government and P—the company that receives the guarantees is referred to as P. How will those agreements be scrutinised in Parliament? Subsections (1) and (3)(b) refer to

“such modifications as are necessary or expedient” being made. That takes us back to the Henry VIII powers in the Banking Act 2009. I want to know what parliamentary scrutiny will be in place to ensure that the agreements are monitored. That is why amendment 38 sets out that there should be a regulation-making power in the clause, which would enable this House to have proper scrutiny of the arrangements.

Photo of Stewart Hosie Stewart Hosie Shadow Chief Whip (Commons), Shadow Spokesperson (Treasury) 5:30 pm, 2nd June 2009

I broadly support the amendment, but there are some concerns. Regarding Lloyds versus RBS, one used some of the tax assets and one did not. They also have different other terms and attachment points regarding asset protection, which would have to be established in advance in terms of regulation. Is there not a very real danger that that information could be highly market-sensitive, if unrelieved tax assets were abused or there was cash that would weaken the balance sheets? Where does the balance lie between market sensitivity and the transparency that the hon. Gentleman seeks in his amendment?

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The hon. Gentleman makes an important point; it is one that we wrestled with during consideration of the Banking Bill. Where do we draw the line between, on the one hand, transparency and accountability to this House on tax matters, especially when Government support is being used to bail out business and, on the other hand, what we allow to be shielded from that accountability by virtue of market confidentiality? The Chancellor’s statement on 25 February, which might be all that we have to go on, was too much in favour of market confidentiality and paid insufficient regard to taxpayers’ interests. We could have a little more information  without breaching market confidentiality. We could be much clearer about whether the provision applies only to the asset protection scheme or to other losses as well. The taxpayer is giving significant support to RBS. That is in the public domain, so why is the other side of the bargain not also in the public domain?

Photo of Stewart Hosie Stewart Hosie Shadow Chief Whip (Commons), Shadow Spokesperson (Treasury)

I can see the point that the hon. Gentleman is trying to make about transparency, but let us return to the initial discussions with RBS on the APS. I suspect that the use of unrelieved tax assets versus cash, bonds or preference shares was the most market-sensitive piece of information available in the entire banking sector at that time. Had that entered the public domain, would there not have been a very real risk of a further collapse in banks’ share prices?

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am not sure that I agree; this takes us back to what is covered by the deal. The losses that RBS will forgo might simply relate to assets covered by the asset protection scheme, but that information is in the public domain. One can see where the contract would be between RBS receiving public support from the taxpayer and the losses that it forgoes as a consequence. If the deal is otherwise, and if the losses forgone go beyond those in the asset protection scheme, there might be an argument about market confidentiality.

I would have thought, however, that any deferred losses no longer available because RBS has given them up—if that is material—would be disclosed in the company accounts anyway. I am therefore sceptical about the market confidentiality argument. It is a very easy argument for the Government to hide behind. That is why we need a bit more transparency now about the nature of the losses covered. If the Minister says that only losses arising in relation to assets within the asset protection scheme are covered, that will be fine and I can leave the matter there. However, a proper debate is required, and my amendments 38 and 39 give us the opportunity to have that debate on future agreements. I tabled the amendments to enable proper parliamentary scrutiny of future agreements.

We need to think very carefully about the sorts of arrangement covered by clause 25. In subsection (2), the Government have set out a series of arrangements that could give rise to an agreement between the Government and P to forgo tax losses. Those arrangements include where the Government

“guarantees or assumes a loss or other liability of P or another person...insures or indemnifies P or another person against a loss or other liability...agrees to make a payment to P or another person in respect of a loss or other liability...whether or not the person to whom the payment is to be made...or...gives other financial support of assistance to P or another person”.

That is a wide range of circumstances.

In response to the economic crisis, the Government have introduced a number of schemes to help businesses by giving some form of support. For example, under the enterprise finance guarantee scheme, there is a Government guarantee in place for loans made to small and medium-sized enterprises, so that the Government guarantee a proportion of the losses. I do not believe that there is any indication from the Government that  the banks taking part in the enterprise finance guarantee scheme have to forgo any losses as a consequence of taking part in the scheme. However, it is another scheme whereby a guarantee has been issued and it could fall within the scope of clause 25.

The Government have issued guarantees for money borrowed via the European Investment Bank. Again, that type of transaction would fall within the scope of the clause. The Secretary of State for Business, Enterprise and Regulatory Reform has said that there may be some financial support available to the purchaser of General Motors in Europe. That financial support could fall within subsection (4). Would that be part of the deal?

The Committee needs some clarity about the use of the clause and about how the use of the powers outlined in the clause will be scrutinised. The Minister might argue that we should be very grateful if a business decides to give up some of its losses in return for one of these deals and that that arrangement reduces the cost to the taxpayer of those deals. However, it would be helpful if we knew that the losses that are to be forgone bear a reasonable relationship to the amount of support that we give and that a proper deal is being done.

Clause 25 is wide ranging. Most of my remarks have been made in the context of the agreement reached between the Government and RBS, but the clause has wider application. There is not sufficient parliamentary scrutiny built in to the arrangements as set out in the clause, so we should be very careful about how we enact this measure.

Of course, one of the drives behind the clause is that a company automatically qualifies for loss relief; it does not elect to qualify for it. The Government therefore need to have the measure in place to tidy up the arrangements; I understand that part of it. However, the Government could go a little further than they have in terms of ensuring that there is parliamentary scrutiny of the arrangements.

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

I hope that I can reassure the hon. Gentleman about the nature of the clause and about the inappropriate effect that his amendment would have on it.

Clause 25 ensures that any agreement reached between a company and the Treasury or other arm of Government under which the company gives up the right to tax losses or reliefs in order to access Government financial assistance will be effective for tax purposes. The clause will initially apply to the asset protection scheme, but it could apply to other circumstances where Government assistance is required to maintain financial stability and restore confidence.

It is therefore essential that the parties to the agreement, in particular the Government, know that when an agreement is reached, it will have the effect that is intended, so that the agreement will not need to be revisited if it transpires that any agreement reached on relinquishing tax losses is not actually effective in tax law. The hon. Member for Hoban is right—

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

Sorry, the hon. Member for Fareham. [Laughter.] I knew what I meant. The two go together.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The right hon. Member for Normanton (Ed Balls) made the same mistake in a Committee several years ago. I suggested that I might refer to him by his surname rather than by his constituency. He soon learned not to make that mistake again.

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

I do not have quite that embarrassment with my surname.

The provisions will apply automatically to any agreement designated by the Treasury. They simply enable companies to enter into tax undertakings with the Treasury in order to access Government assistance in a way that the existing legislation precludes. Accountability to Parliament for such contractual undertakings will take effect in the normal way.

However, the amendment seeks to make each operation of the clause subject to a statutory instrument, with the result that the terms of such Government assistance would remain uncertain until a statutory instrument was enacted. That could have the perverse effect of reducing rather than boosting market confidence. That was the point made by the hon. Member for Dundee, East in his intervention on the hon. Member for Fareham.

If the agreement to give up losses were contingent on subsequent parliamentary approval of a statutory instrument, there would need to be provision in the agreement to revisit terms if such approval was not given or amended. Such a term in the agreement would mean that it could not achieve its aim of restoring confidence and stability in the market. In summary, the clause will apply only when a company has agreed to relinquish its losses and only when that agreement is pursuant to the company accessing financial assistance from the Government. We are not legislating to force tax undertakings on anyone, so a further layer of scrutiny is unnecessary and potentially destabilising, because such deals may need to be struck with absolute certainty and in a very short time scale.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 5:45 pm, 2nd June 2009

But a host of deals have been subject to the affirmative procedure that have flowed from the Banking (Special Provisions) Act 2008 and the Banking Act 2009. The Exchequer Secretary’s argument about uncertainty does not really hold, given that experience has shown that when an agreement has been reached, it has passed on to the statute without causing uncertainty.

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

In the case of the asset protection scheme, the agreement on losses will be part of a wider agreement covering accession to, and the operation of, the scheme, the terms of which will be set out before Parliament after the agreement has been made. A similar process would apply for any other such designated agreement.

The hon. Gentleman asked about Lloyds. Clearly, RBS has at least entered into an agreement in principle to forgo the offsets in tax losses, but Lloyds has not. Those are the only two banks that have accessed the asset protection scheme as it is currently set out. As to whether Lloyds is involved as well as RBS, the answer is that the former is not; it decided that it wishes to pay for its access to the scheme in a different way. RBS has made an agreement concerning its UK tax losses at  2008 and for a certain number of years thereafter. The agreement will be finalised in the ongoing negotiations with the bank. There has been agreement in principle, but the detail and the due diligence is in the middle of being done. Although the agreement in principle involves surrendering the losses, the details have not yet been finalised and the work is still ongoing.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am grateful for that explanation, but will the Exchequer Secretary say when the agreement will be finalised?

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

We hope that the two banks will have signed up to the asset protection scheme in detail by the end of the summer. There is a great deal of work going on, not least on due diligence on the assets in the scheme and on getting state aid clearance. As I said, Lloyds has not entered into an arrangement to forgo tax losses. It is paying for access to the scheme by paying £15.6 billion for participation, which will be satisfied through the issuance of B shares. That does not prejudice agreements with other banks, which might prefer to settle their fees differently.

Any bank that wishes to access the asset protection scheme, by definition I suspect, will have a different agreement—the agreement is not a template for every bank. Every agreement for every bank that wishes to enter the scheme will be bespoke and relevant to that bank’s circumstances. Of the two banks that are in the scheme at the moment, one—RBS—has agreed to forgo tax losses and reliefs. Lloyds has not; it is paying for access in a different way. Therefore, I hope the hon. Gentleman will agree that his amendments would destabilise the negotiations because of the uncertainty that they would create. I hope he will not press them to a vote.

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

In a minute.

I wanted to spend some time talking about clause 25, because the debate has rolled into that, but before I do so, I would be happy to give way

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

Clause 25 is part of a package of measures designed to stabilise high street banks and boost the amount of money available for lending. The asset protection scheme has been offered, and the aim of that scheme was to restore confidence in the banks and get credit flowing again by dealing with the losses associated with impaired assets. Under the scheme, the details of which were published on 26 February, the Government will provide protection against future credit losses on certain assets in exchange for a fee. Each bank that wishes to receive support under the asset protection scheme will enter into a contractual agreement with HM Treasury.

In addition to the fee, banks may separately enter into several other undertakings in return for Government protection, including, but not limited to, undertakings to forgo tax reliefs for losses and allowances, which is where clause 25 comes in. Those undertakings would be under bilateral agreements between the two parties and would therefore not override tax law. We are bringing  forward clause 25, therefore, to ensure that any such agreements or undertakings entered into by a company to forgo tax reliefs or losses are actually effective in tax law.

Photo of Robert Syms Robert Syms Conservative, Poole

Would that agreement relate only to UK tax losses and reliefs? The Royal Bank of Scotland, for example, straddles several continents. Would the clause have a perverse affect on the bank if it ever got back to profitability, as one hopes it will, so that it will shelter those profits outside the UK simply because part of the agreement is that it will have to pay tax at an earlier stage under the arrangements the hon. Lady described?

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

No bank can avoid paying tax liabilities legally by sheltering profits in a way that is against UK tax law. The agreement is really a recognition that, in order to pay for access to the asset protection scheme, a bank, such as RBS in this case, has agreed to forgo any tax arrangements that might allow it to offset profits. It will begin to pay tax much sooner in the process when it comes back into profitability, which is a good deal for the taxpayer, a point to which the hon. Member for Fareham was kind enough to refer in his contribution.

Therefore, the answer effectively is that the bank could do nothing that would be illegal under normal tax law to avoid paying what was due, and nor could it use some of its reliefs on losses, which it would normally have access to, because it has agreed to forgo those reliefs as part of payment for access to the protection available for some of its impaired assets. Clause 25 merely ensures that that agreement, voluntarily entered into bilaterally between the company and the Treasury, is effective in tax law and that it cannot be overridden by more general provisions in tax law. Although the immediate focus of the clause is to deal with the tax consequences of the asset protection scheme, it is prudent to ensure that those provisions could, if needed, be applied more generally in future. The clause could therefore be applied to a Treasury-designated arrangement whereby Government financial support is granted to a company.

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

Before the hon. Gentleman leaps to his feet, I will deal with the point that he might wish to make. I can assure the Committee that clause 25 will only have effect when the company has given an undertaking to surrender its right to benefit from tax losses and other reliefs under arrangements entered into with HM Treasury, or any other public body, and when the Government are providing financial support. The clause will only become relevant in those narrow and particular circumstances.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The hon. Lady is absolutely right that the clause relates to those circumstances, but as I indicated in my remarks, the Government have supported several schemes in which they give financial support to see businesses through this time. We are talking about European Investment Bank guarantees, and there are  other schemes. What criteria will be used by the Treasury to determine whether the agreements it has reached or the support it has given to businesses should lead to those companies forgoing their tax losses?

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

This is not a general approach that we are going to apply across the piece. The hon. Gentleman knows that we have not applied it to Lloyds in its access to the asset protection scheme, even though we have agreed with RBS that it should forgo some of the tax reliefs and losses.

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

I will in a minute when I have finished what I am trying to say.

Therefore, the approach will apply only when it is explicitly part of an agreement that is made between the particular company and HM Treasury. It will not be applied retrospectively to a range of general agreements that have already been reached. This is about having access to particular assistance, in this case from the asset protection scheme, through an arrangement made between HM Treasury and the company concerned. I hope that will reassure the hon. Gentleman that this is not just a general sweeping power that we intend to apply across the piece to help and assistance that the Government may wish to give to industry in general. It is much more specific and narrow than that.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I understand the Minister’s point about it being specific. She drew a distinction between the treatment of Lloyds and RBS. But once this power is in the Bill, and given the breadth of the power and the range of circumstances it could cover, businesses will ask whether they want to accept this help from the Government in return for forgoing tax losses and in what circumstances the Government would ask them to forgo those tax losses. Although the Minister says that it refers to a particular historical event, the breadth of the clause makes it more widely applicable in future to agreements reached between the Government and particular businesses. Those businesses might want some clarity about when the Government might seek to take advantage of this clause.

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

The asset protection scheme is not one of those things that comes into existence every day of the week. We are not likely, hopefully, to need schemes such as that regularly in future. It is a response to a critical situation that has arisen in the global financial markets and the credit crunch. I hope the hon. Gentleman will accept that.

Photo of Stewart Hosie Stewart Hosie Shadow Chief Whip (Commons), Shadow Spokesperson (Treasury)

The Minister is right about the asset protection scheme: there are one or two banks involved and there may be one or two more. In terms of the potential scale, there is also the working capital scheme, the enterprise finance guarantee scheme, the capital for enterprise fund, the asset purchase scheme, the direct assistance to the automotive industry and £1.3 billion of EU additional funding. That could cover a large number of companies receiving aid in one form or another that might be invited to surrender tax reliefs as well. Should we not have some concerns that the proposal might grow arms and legs unnecessarily?

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

Although Opposition Members have said that this is a wide-ranging clause, they have also acknowledged that it would be applied in a very narrow range of circumstances in which a bilateral agreement has been reached between HMT and a particular company in order to pay for access to Government support. Effectively, we are talking about getting good value for taxpayers’ money, if we are essentially acting as insurers of last resort to companies who have got themselves into difficulties. That is one of the ways that access to such support might be paid for in certain circumstances. In those circumstances, there must be a bilateral arrangement as part of an application to get Government support.

[Mr Jim Hoodin the Chair]

What we propose is not a general principle to be applied across the board. I hope I have made that clear and I hope that offers some reassurance to Opposition Members. In addition, subsection (3) ensures that giving up tax reliefs in return for Government assistance under such designated arrangements does not create any new tax relief either to a company that has given up reliefs or to any other person. For example, no tax relief will be due when one company in a group that has benefited directly from the asset protection scheme compensates another company for forgoing tax relief. In that circumstance, the clause denies any relief for the compensation payment. I therefore move that it should stand part of the Bill.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

We are debating amendments, Mr. Hood, although it has transformed into a wider debate about the clause. I would not have spent so much time on this matter if it had been restricted purely to the one transaction of RBS and the asset protection scheme. I understand why the legislative underpinning needs to be in place to enable RBS to surrender its losses. If there had been a way of drafting the measure to restrict it, I think that it would have gone through on the nod without much debate, other than my asking when the APS might be signed off.

My concern is that the clause is much more widely drafted. It relates to particular companies and financial support, but it can also be used to enable an agreement to be reached with a company to forgo its losses in return for financial support. In the Minister’s statement, there is no clarity as to the future circumstances in which the measure will be used. That is where I have a problem, as it is a wide-ranging clause that could be used in the future.

Let us return to the example of Vauxhall, or let us suppose, for example, that a rail franchise collapsed. If the Department for Transport wanted to bail out the company, the Government could say that in return for that support, they wanted the company to surrender its tax losses. That might be restricted to the losses made on that franchise, or could be related to the wider business. I am not comfortable with the breadth of the clause.

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee 6:00 pm, 2nd June 2009

The hon. Gentleman should at least acknowledge that for tax losses to be surrendered in that way, there would need to be a bilateral agreement  between the company and the Treasury. That is true whatever company it is—I do not wish to speculate on which companies might be involved in that. That is a part payment for the support given, which obtains value for the taxpayer. Surrendering tax losses is merely one option. The clause makes it certain that any such bilateral agreement between a company and HM Treasury would be effective in tax law. To that extent, it is a technicality.

I hope the hon. Gentleman is reassured that for other support—of which there is a great deal at the moment, with a number of schemes that support various parts of industry—we have not insisted on tax losses being relinquished as part of the structure or payment that we expect for that support. This is a narrow provision and must be agreed between the company that is asking for support and HMT. Although it is potentially wide, paradoxically it is also narrow at the same time.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I take that point and that is why in my remarks to wind up the debate I said that if the provision had been entirely related to the narrow example of RBS, it would have gone through on the nod. The fact is that it could be used more widely in the future.

The Minister talks about the RBS scheme, which is potentially a huge financial cost to the taxpayer and a big event. We have seen other examples in which seemingly innocuous clauses in Bills have been used with a wider impact at a later stage, in ways that had not been envisaged at the time. Yes, a bilateral agreement must be reached with the company, but there is sometimes an asymmetrical relationship between the Government and a company in terms of the power that each has and how one might be prepared to do the other’s bidding because of the circumstances at the time.

I am not sure that there are sufficient safeguards for the use of this power in the future, and I would be happier if it had been restricted to implementing what is seen as a one-off deal in the context of RBS and the asset protection scheme. What has happened before provides some comfort, but not total confidence, about how the power will be used in future.

As the Minister has made points about the uncertainty that might arise as a consequence of waiting for parliamentary scrutiny, I am not minded to press the amendment this evening, although I am not sure how robust her argument is. I will reflect on a different approach to tackling clause 25 on Report. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 25 ordered to stand part of the Bill.