Finance Bill – in a Public Bill Committee at 9:15 am on 11 June 2009.
Mark Hoban
Shadow Minister (Treasury)
I have just one question about schedule 21. Paragraph 2 states that
“the arrangements cause the company or any other company to gain a tax advantage (other than a negligible tax advantage).”
Schedule 21 introduces anti-avoidance provisions, but why is there not a more traditional motive test? Paragraph 2 offers a very broad definition, but when anti-avoidance is involved, one normally expects the more traditional wording where the main purpose involves tax avoidance. Paragraph 2 might cover a much broader range of transactions than would normally be covered by a targeted anti-avoidance measure.
Ian Pearson
Economic Secretary, HM Treasury
This is an important schedule in relation to targeting anti-avoidance. It is designed to stop schemes that involve abuse of the tax rules for what is known as forex matching. A number of such schemes have been disclosed to HMRC, and have been widely used in practice. It is estimated that stopping such avoidance will bring in additional corporation tax of £20 million a year and prevent further losses to the Exchequer of approximately £120 million a year. It is therefore important that we introduce legislation.
The hon. Gentleman has asked why the legislation does not contain a purpose test. Existing provisions in the tax rule for loans and derivatives deny relief for losses where the loan or derivative has a tax-avoidance purpose. Although those provisions may deny relief for losses generated by forex matching schemes, they can involve some very difficult and long drawn-out arguments between HMRC and the businesses concerned. The Bill aims to put it beyond doubt that such schemes do not work, even where they are designed to reduce the risk of a purpose test challenge. The tax avoidance purpose rule would therefore be counter-productive. It would not give certainty to compliant companies, because experience suggests that such companies are likely still to be concerned about whether their purposes could be perceived as unallowable. It might also provide avoiders a loophole through which they could escape, where contemporaneous evidence of a company’s purpose is lacking. We considered a purpose test, but there are clear reasons why we deliberately rejected it. Our approach is more robust.
