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I have supported the legislation up to now, but I cannot help thinking that, having done some sterling work, the Minister has with this schedule snatched defeat from the jaws of victory. I would like to put that in some context.
In clause 37 schedule 17, we are repealing section 765 of the Income and Corporation Taxes Act 1988. The provision, which has existed in various forms for 58 years, demands that companies enacting schemes whereby they move funds out of the EUand, obviously, the UK before thatreceive consent to do so from the Revenue. As the Minister undoubtedly explained, that is a hangover from the days of exchange control, when people worried about sterling leaving the country and so on. The provision is very broadly drafted and it encourages firms to notify the Treasury of anything that is to its detriment. As the Minister said, the provision has some old-fashioned, but severeand, I suppose, effectivecriminal sanctions attached.
The reality is that the retention of section 765 over the years has been fairly useful. It has forced companies to disclose schemes to the Revenue before undertaking them. The fact that the measure is backed up by draconian measures, even though they are unlikely to be used, adds to its force. It gives UK revenue authorities some real-time information about the activities of multinational companies. That is a good thing because state revenue authorities normally play a constant game of catch-upcorporations undertake schemes and then the revenue body finds out about them. Section 765 is virtually unique in tax law because it allows the Revenue to know what companies plan to do before they do it. It has been a major anti-avoidance measure because it forces multinationals to receive Government consent and, presumably, as a result many tax avoidance schemes are stopped before they are started.
I know that we cannot quantify the benefits of section 765, but they have been real. Do not take my word for it: four years ago, the former Paymaster General, now the Minister for Children, the right hon. Member for Bristol, South (Dawn Primarolo), said: the section was introducedand presumably kept
to counter tax avoidance; it has done that successfully and should not be repealed, as it protects a great deal of revenue.[Official Report, Standing Committee B, 30 June 2005; c. 319.]
In modern business terms, I accept that there is a case for pensioning off section 765 and replacing it with something better. However, the provisions in the Bill do not inspire confidence that we have something better. There are a couple of reasons for that. First, at £100 million, the threshold is high. Companies, such as multinationals, that wish to avoid breaching that threshold can simply parcel transactions into smaller units of £10 million or whatever, which is within their wit to do. Secondly, the penalties for companies that do not comply with the legislation are feeble. If a company gets away with a major bit of tax evasion or tax avoidance, they face a fine of £300 if they have not reported after six months. I cannot see that frightening anyone who is serious about tax avoidance. The penalty for every further day of non-reportage is £60. I suggest that the new set of provisions does not have the teeth that it should have.
Amendment 41 considers the requirement for reporting transactions of £100 million or more and suggests that it is absurd as it stands. I cannot see any reason why we should choose that figure, which seems unreasonably high. My amendmentit is a probing amendmentreduces the limit drastically to £1 million for the purposes of the schedule. That is the point about the threshold.
If we look at exemptionsthe Minister has talked about exemptions and about how they oil the wheels of commerce, how they are a good thing and how they avoid undue compliance costs and so onwe see that they are extraordinarily generous when they are read in the literal sense. For example, if someone is in difficulties and the Revenue comes after them and there is a suggestion of tax avoidance, they can plead that the transaction
is carried out in the ordinary course of a trade.
That strikes me as an extraordinarily vague provisionalmost a licence for abuse. One can almost see tax planning advisers preparing the excuse well in advance. I am not at all comfortable with retaining that provision, because it is broad, colloquial and it seems a catch-all excuse that almost anyone can use when challenged by the Revenue. As far as I am concerned, it can only help tax avoidance and it does not really have a significantly beneficial purpose for the schedule as a whole.
The second exemption is, if anything, worse. It says that the transaction is exempt if
all the parties to the transaction are, at the time the transaction is carried out, resident in the same territory.
Therefore, if all transactions are carried out in the Cayman Islands, they would be exempt from reporting. That is an open invitation to use secrecy jurisdictionsa licence and an invitation to go in for tax avoidance. Therefore, although I support almost everything that the Minister has done hitherto, I think that we have here a schedule that opens the door to a new wave of tax avoidance. The Minister should seriously address the weaknesses in schedule 17. The fact that many people who are involved in tax law welcome it adds to the concern.
I am grateful for the support that the hon. Member for Southport has given to the changes that we have made so far today to foreign profits taxation, and I will endeavour to persuade him that he should support this element of the Bill as well.
Schedule 17 repeals the existing Treasury consents rules, which are at sections 765 to 767 of the Income and Corporation Tax Act 1988, and replaces them with a targeted reporting requirement. At the moment, the rules require companies to seek advance consent from the Treasury before undertaking certain transactions involving foreign subsidiaries, and they include a criminal penalty of imprisonment for non-compliance, although that has never been used, as the hon. Gentleman rightly said, in the 58 years during which the rules have been in place.
In 1951, the rules were aimed mainly at controlling company migrations at a time of foreign exchange control. Over the decades, in response to changes in UK tax law and changing business practice, the situations to which the rules apply have changed. Their aim is to prevent groups from entering into transactions that could result in a loss of tax to the Exchequer.
It might reassure the hon. Gentleman to know that as far as I am aware, no other country has such a regime in place. He is right to refer to what the then Paymaster General, my right hon. Friend the Member for Bristol, Southshe is much missed from this Committees debatessaid during debate on the Finance Act 2005 about the Treasury consent rules protecting a great deal of revenue, but she went on to say that we would consider section 765, the relevant section,
in the context of work on the wider international context of the corporation tax system.[Official Report, Standing Committee B, 30 June 2005; c. 320.]
The culmination of that work is what we are debating today.
Consent is very rarely refused these days, but the rules impose a significant administrative burden, which is why we think that the time has come to repeal them. However, the hon. Gentleman is absolutely right: we need to ensure that HMRC gets the information that it needs to detect and prevent tax avoidance. HMRC monitors tax avoidance closely using a range of different tools. We have been taking steps consistently to tackle avoidance by reforming the tax system, closing loopholes and introducing the disclosure regime that he mentioned. Anti-avoidance measures introduced in recent years have closed more than £11 billion in avoidance opportunities.
We will certainly need to stay energetically on the case, as the pressure from would-be avoiders does not diminish. Continuous action is needed to mitigate the effects of tax avoidance, particularly at a time of global economic difficulties. The hon. Gentleman will know that some of the discussions that we had at the G20 summit on that topic reflected concerns about tax avoidance outside the UK, not least on the part of President Barack Obama.
We are therefore putting in place a modernised post-transaction reporting requirement targeted at changes in the capital structure of multinational groups. It will provide an early warning if multinational groups enter into large cross-border capital reorganisations that could give rise to tax avoidance and ensure that, having been alerted early, we can monitor what happens closely.
I am listening intently to the Minister. We have here a measure that is designed to give forewarning of sizeable transactions that the Department needs to look at more closely. Will he touch on the business of people who might wish to avoid paying sizeable amounts of tax being fined £300? That worried me, too. I just do not see the connection. Can he explain the thinking behind that level of fine?
I will certainly address the points raised specifically about the amendments, including that one.
The hon. Member for Southport is right: the new reporting requirement applies to transactions involving foreign investments with a value in excess of £100 million. Transactions above that are reportable, so we are targeting the transactions about which HMRC most needs information. The rules are targeted in that way as a result of HMRCs experience with high-value cross-border transactions, to ensure that it can concentrate its time and effort most productively.
Amendments 41 and 42 both seek to widen the scope of the new rules. Amendment 41, as we have heard, proposes reducing the de minimis limit from £100 million to £1 million. The difficulty is that that would result in a large number of relatively low-value transactions that are not the target of the provision coming within its scope. That would significantly increase the administrative burden without generating the kind of really useful information that HMRC needs. The new reporting requirement focuses on changes to the capital structure of multinational groups. Those are the kind of changes featured, for example, in The Guardian series referred to earlier by the hon. Member for Southport, where large amounts of tax are at stake and where we need to concentrate our efforts. As can be seen from the FTSE 100, the net market capitalisation of such businesses runs into many billions of pounds. We need to target material changes or restructurings and not divert HMRC energy away from those high-risk areas of potential tax avoidance to low-risk areas.
I remind the Committee that the Government have a lot of tools available for detecting and countering tax avoidance, such as the disclosure regime, risk assessments and annual fining requirements. The £100 million limit does not mean that we are giving up on avoidance activity below that level. The other measures at our disposal that I have mentioned can target other types of avoidance activity as well, but the new requirement will complement existing measures that are compliant with how businesses work these days and provide the necessary information to monitor the potential substantial avoidance activity.
Amendment 42 proposes to remove the exclusion for transactions carried out in the ordinary course of trade and those between parties resident in the same territory. We have included those exclusions because, as I have already said, the focus of the schedule is on cross-border restructurings undertaken by multinational groups where the biggest avoidance risks arise. Trading and same-country transactions are relatively low risk and are not the target of the provision. We should not be focusing our avoidance efforts on them, so I think that exclusion is appropriate. The same argument applies to transactions in the same territory, which are, of course, not cross-border and pose a lower risk of avoidance.
The problem with the amendments is that they would result in a very big increase in the administrative burden in return for very little benefit in countering avoidance. We want to focus the rules on large-value, cross-border transactions. Other avoidance measures, particularly the disclosure regime, are available to target other types of avoidance.
I hope I have given the hon. Member for Southport some reassurance. I should add that when we talk about transactions between parties in the same territory, the CFC rules that we debated would tackle the problem of profits being moved offshore to the Cayman Islands in the way that he, perfectly properly, expressed concern about.
I will just respond to the point made by the hon. Member for Northampton, South regarding the penalty. A monetary penalty to up to £300 would apply for the initial sum and up to £60 per day thereafter for each day that the report is late. That is in line with the wider penalty regime currently applicable. We have done a lot of thinking about where the penalties from different parts of the tax system should be applied and the level at which they should be applied, and that is a value that is consistent with the wider arrangements. Of course, the penalty attached to the Treasury consent rules was, in theory at least, imprisonment. However, as I said earlier, in 58 years that has never been used. So I think that this is going to be an effective measure. It is going to be simpler to operate and will provide the information that we need.
One assumes that a fine is a deterrent: the whole concept of fining someone for not doing something is to ensure that they do what you wish them to do. I need to understand how much of a deterrent a fine of £300 will be to international financiers, because I do not get it. Perhaps the Minister could explain how that will act as a deterrent to stop someone failing to report what the Government want them to report.
That is an obligation in law with which companies must comply. The hon. Gentleman will know that the various reporting obligations we have imposed to tackle avoidance have been effective and, I am glad to say, people have complied with the rules. Of course, there is a pretty big incentive for the kind of companies we are talking about to comply with rules clearly set out in statute, not least because of the embarrassment for major organisations when they do not comply with rules of that kind. He will know that we propose to name and shame in some circumstances where tax is underpaid. That will be a powerful incentive not only for individuals, but for companies.
If someone avoids tax, they are at risk of a tax-geared penalty for tax not paid as a result of the underlying transaction, and that can be up to 100 per cent. of the tax avoided. With regard to the level of £300, it is appropriate that that penalty should be consistent with the rest of the penalty system that is in place. I would not want the hon. Gentleman to think, however, that that is the only downside of not meeting the obligation being imposed.
I thank the Minister for that thoughtful response. I totally accept that we have to move away from a consent system to a reporting system in an age when millions of pounds can be transacted at the touch of a computer button. I also accept that modern business needs a different system and agree with him that it needs to be a robust and stringent system that ensures that everyone pays due tax and that, none the less, business functions as efficiently as it can.
As for pathetic nature of the fine, we explored the possibility of tabling an amendment on that. I understand that there are some technical reasons why that might be difficult, but it is still a preposterous penalty. Although we were unable to table an amendment, we might need to take another look at what we can do to beef up the penalties for people who flagrantly disregard the legislation as the Minister wishes it to work. I do not think he really responded to my point that the reporting regime is lax, and nor did he really respond to my point that in paragraph 9 we are not so much closing loopholes as drilling more. We will have to revisit that topic on Report.
The Minister has made some interesting points that are pertinent to my amendments. He discussed how HMRC is best to conduct itself when investigating tax avoidance and what is the most efficient use of the Revenue. That is certainly an issue that has cropped up in the Public Accounts Committee. I am aware that HMRC wants to target those areas where it will get the best results, although it remains the case that tax avoidance, at any level, should be prevented, and big companies should certainly be prevented from parcelling up their businesses into smaller units to avoid the reporting restrictions.
Underlying that is the other question of how business and the taxation system can best exist in the modern world, and the Minister, reasonably, is trying to suggest that he has the recipe right, but I am not completely convinced. He has pointed out that some of the evils to which I am drawing attention and that appear to be omitted by schedule 17 are addressed in some way and in other parts of Bill. I will have to go away and investigate that and consider whether that claim is fairly or adequately made. For the moment, however, I beg to ask leave to withdraw the amendment.
With this it will be convenient to discuss the following: amendment 160, in schedule 17, page 190, line 12, leave out from partnership to end of line 14.
Amendment 162, in schedule 17, page 190, line 33, leave out a and insert an event or.
Amendment 163, in schedule 17, page 191, line 38, at end insert
debenture does not include a guarantee;
transfer does not include a transfer by way of security..
Amendment 164, in schedule 17, page 192, line 9, at end insert
or six months after the regulations referred to in paragraph 4(2) are made, whichever is the later.
Amendment 165, in schedule 17, page 192, line 10, after Schedule, insert
(with exception of those made under paragraph 8(2)(e)).
These are relatively small amendments, so I will not spend a huge amount of time talking about them. The objective of the group of amendments is to try to tighten the rules for reporting transactions and to be clear about the circumstances in which transactions will be reported.
Amendment 161 would simply insert the word or between sub-paragraph (2)(c) and (d) in paragraph 8 on page 190. Sub-paragraph (2)(c) and (d) refer to a transfer of an economic interest. It would be one type of transfer or another, rather than (c) and (d) applying sequentially.
Amendment 160 would create some certainty that commissioners will not seek to expand the event or transaction set out in paragraph 8(2)(a) to (d) unless they do so through primary legislation. This is a probing amendment. I am interested in understanding a bit more from the Minister as to why he feels that the power in sub-paragraph (2)(e) is necessary.
Amendment 162 is a drafting amendment. Paragraph 4(2) refers to an event or transaction, whereas paragraph 9 on page 190 refers to a transaction. Should it refer to an event or transaction? This is very much a drafting amendment.
Amendment 163 would provide some clarity that there is no obligation to report the creation of a legal or equitable mortgage over the shares of a foreign subsidiary or the giving of a guarantee to a foreign subsidiary. If they were specifically excluded, it might reduce the number of transactions that could be reported. The Minister may suggest that such an exemption might give rise to some tax-paying opportunities. I would like to hear his thoughts on the matter.
Amendments 164 and 165 relate to the transitional provision in paragraph 14. I would like to hear from the Minister how he expects it to work in practice. On amendment 164, the problem is that companies have six months from the day on which transactions took place to report them. Regulations may be introduced that lead to that reporting period being eroded. It may be less than six monthsin effect, a kind of technical retrospection. I am not sure whether that is the Governments intention in paragraph 14(1).
Amendment 165 seeks to tighten up reporting on the transition, again in respect of regulations that are made under the schedule. In part, these are probing amendments, to see if we can focus on the schedule to try to reduce the volume of transactions that can be reported and to ensure that companies are not caught out having to report transactions in less than a six-month period because of regulations that may be made.
I shall be brief. Amendments 160 to 162 concern the regulation-making powers in the schedule. The first two would remove HMRCs power to widen the scope of the reporting requirement in the light of commercial or legal developments. The new post-transaction reporting requirement is targeted at areas that pose a significant risk of tax avoidance in order to ensure that HMRC receives the information that it needs to deal with tax avoidance, but amendments 160 and 161 would remove the ability to ensure that those provisions track commercial or legal changes. That could give rise to new tax avoidance opportunities and undermine the purpose of the requirement. We want to be sure that the schedule can target areas of significant avoidance risk, and that it can be used for future avoidance opportunities as they arise.
Amendment 162 would give HMRC additional powers to narrow the scope of the reporting requirement by extending the excluding power in paragraph 9 to cover events as well as transactions, but the only event reportable under schedule 17 is a foreign subsidiary entering into a partnership. For the provision to be effective, HMRC would first have to introduce new reportable events using the regulatory power in paragraph 8(2)(e). In effect, the amendment would give a circular result, which makes it unnecessary.
Amendment 163 seeks to insert two additional definitions in the schedule that would exclude guarantees and transfers by way of security from the reporting transactions. The schedule already contains exclusions for giving securities to financial institutions, including guarantees and transfers of securities in that context, so the additional definitions are not necessary.
As the hon. Member for Fareham explained, amendments 164 and 165 are about the transitional provisions in paragraph 14 of schedule 17. Amendment 164 would ensure that companies have at least six months to make a report under the new rules in the event that regulations are not in force by 1 July. I reassure the hon. Gentleman that the amendment is not necessary. The regulations have been drafted and were sent to the House last Thursday, after the amendment was tabled. We can therefore be confident that the regulations will come into force on 1 July, when the schedules provisions commence. The transitional provision also allows for regulations made under the schedule within one year of the Bills enactment to have effect from 1 July 2009. Amendment 165 would prevent that from applying to additional categories of reportable transactions specified by the regulations. However, it is appropriate for the transitional provision to apply evenly to all the regulation-making powers in the event that a new avoidance opportunity was detected by HMRC in the next year, which is quite possible.
How will the retrospection interact with the deadlines for reports if HMRC included a new reportable transaction? We would be happy to abide by the six-month time limit. For example, if the regulations were amended on 1 June 2010 to include a new reportable transaction, it would apply only to transactions undertaken after 1 December 2009. That might be of some reassurance. In practice, I would not expect new reportable transactions to be added in the next 12 months, but we need to be sure that we can address tax avoidance and protect the Exchequer if the need arises.