Schedule 24

Finance Bill – in a Public Bill Committee at 9:45 am on 11th June 2009.

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Disguised Interest

Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

I beg to move amendment 176, in schedule 24, page 233, line 16, leave out ‘485B’ and insert ‘486B’.

Photo of Jimmy Hood Jimmy Hood Labour, Lanark and Hamilton East

With this it will be convenient to discuss Government amendment 159.

Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

I shall be extremely brief. We sometimes have debates by proxy through various interest groups that are knowledgeable in a field making representations to the Government and Opposition. Amendment 176 was suggested by the Chartered Institute of Taxation as a more preferable form of drafting. I want to give the Minister the opportunity to consider what seems to be a reasonable representation and to find out whether he concludes that the proposal is superior to the current drafting.

Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

Welcome back to the Chair, Mr. Hood. I would like to say a few words about clause 48 and schedule 24 before responding to the hon. Gentleman’s amendment.

Current tax law contains targeted anti-avoidance rules to ensure that amounts economically equivalent to interest are charged corporation tax in the same way as interest, instead of in a lower tax way. Clause 48 and schedule 24 replace those piecemeal measures with a rule that sets out the principle comprehensively. It is the result of consultation over the past couple of years on the use of principles-based legislation to tackle avoidance involving disguised interest. Subject to some exclusions, a return equivalent to interest will be charged to corporation tax as interest in all circumstances where it would not currently be taxed as income.

The schedule ensures that companies party to arrangements that produce interest for them in a disguised form are subject to corporation tax in the same way as if they had received actual interest. It replaces a range of targeted rules with the comprehensive rule that I have described, which charges companies corporation tax on all returns equivalent to interest in the same way as on interest, unless a specific exemption covers the returns. There are specific exceptions for arrangements where it is reasonable to assume that avoiding corporation tax is  not the main purpose, or where the return simply results from an increase in the value of certain shares held by the company.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

One of the representations that we received from outside bodies was about the phrase

“it is reasonable to assume” in proposed new section 486D(1). The concern is that that is a subjective test, whereas normally a much more robust test is used for anti-avoidance measures. In such cases, the principal purpose is to avoid tax, and that is demonstrable. Here, Inland Revenue or Her Majesty’s Revenue and Customs might think that “it is reasonable”. However, others might disagree about whether it is reasonable to make such an assumption. Will the Financial Secretary give some clarity as to why that wording was chosen, particularly as it was not the wording in the original drafts that were consulted on?

Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

There certainly has been some interest on this point, as the hon. Gentleman says. Tax legislation already uses the words “reasonable to assume” in a wide variety of contexts, and HMRC has taken legal advice on legislation containing those words on several occasions. However, the advice would not have relevance to disguised interest legislation because of the different context.

The words in the schedule are words of limitation and would be interpreted as such by the courts. In practice, “reasonable to assume” will only rarely make a difference to the way in which the test is applied, since an unsupported assertion as to purpose would, in any case, not be accepted by HMRC as establishing true purpose, if objective evidence pointed to the contrary. Any tax avoidance test based on purpose already implicitly contains a reasonable assumption requirement. The wording in the schedule simply makes that fact explicit. We have thought about this point and discussed it with several outside organisations. We think that it is helpful to have the words for clarity.

There has been extensive consultation on that narrow point and also on the wider point of using principles-based legislation to tackle avoidance. The aim of such legislation is to stop avoidance activity in the area concerned and to allow the repeal of traditional legislation that sets out a series of detailed conditions to be met before the legislation can apply.

The traditional approach can, in effect, allow avoidance, because taxpayers can seek to sidestep the detailed conditions. It is much more difficult to sidestep an approach based on a comprehensive principle with exceptions built in. We are turning around the way in which the legislation operates, and we think that that approach will be more effective. There has been a great deal of discussion about it.

The new legislation allows the removal of 30 pages of existing detailed anti-avoidance legislation—it will be replaced with the 11 pages here—and signals that we think that the principles-based approach, which has been widely discussed, can be made to work, and that we will in future consider its use in appropriate areas of legislation as a means of tackling persistent attempts at avoidance.

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster

The Financial Secretary has gone into detail about some of the thinking here. Is he not concerned that the spirit of the age, whether on tax law or the law  as a whole, is much more towards certainty—in other words, having deeper rules in a much broader context—rather than a principles-based approach? One of the concerns in what will inevitably and continuously be a competitive world, where we try to attract the best brains and businesses to our shores, is that the lack of certainty in the principles-based approach is likely to be detrimental to the better interests of this country.

I can see that there are great benefits from the Treasury’s point of view—the Financial Secretary made that explicit. In effect, he is suggesting that most avoidance schemes will be disallowed at the outset unless they can be shown to have properly sidestepped from the purposes of the Treasury, but the lack of certainty that a principles-based system brings can surely only be detrimental to the better interests of this country.

Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

I suggest that our approach gives greater certainty. The problem with the old approach was that legislation set out that taxpayers could not do this, that or the other. It was pretty straightforward for people to devise slight variations on what was being prevented and then to argue they could carry on doing it. That created a fair amount of uncertainty—and certainly a lack of clarity—about the position. With this approach, however, the position is absolutely clear: if it really is interest, the tax needs to be paid on that basis. The arrangement is pretty clear and certain.

The disguised interest rules apply where a company is party to an arrangement that produces a return that is economically equivalent to interest. There are some exceptions, which are clearly set out. I do not agree that such an approach produces uncertainty; if anything, the reverse is true. We have had an interesting debate on principles-based legislation. This clause and schedule and the next clause and schedule embody that approach, which is, in a sense, experimental; it has not been tried before. The intention was to legislate in last year’s Finance Bill along those lines, but the representative bodies argued that we should take longer, because it was a significant departure from how we legislated in the past. We have been able to resolve the concerns about the principles-based approach, which I think is a good one, not least from the point of view of certainty.

The hon. Member for Taunton explained the background to amendment 176. He is absolutely right: there was an error in the schedule as drafted. We spotted the error, I am pleased to say, and it has been accepted as an error to be corrected as a matter of printing. Nevertheless, I am grateful to him for tabling his amendment and drawing attention to the error in that way.

Government amendment 159 also corrects a typographical error, but one that cannot be dealt with as a matter of printing. The error, which is in the transitional rules, would have the effect that certain types of arrangement already in place on 22 April 2009 would be excluded inappropriately from the scope of the legislation. The amendment corrects the error and ensures that the disguised interest legislation can apply to such arrangements. The amendment has effect from Budget day, on the basis that the legislation was widely consulted on before the Budget using drafts that did not include either of the errors. It can affect only transactions that were already in place on Budget day and were caught by existing anti-avoidance legislation.

I am happy to accept the hon. Gentleman’s amendment and commend the Government’s to the Committee.

Amendment 176 agreed to.

Amendment made: 159, in schedule 24, page 243, line 9, leave out ‘14’ and insert ‘15’.—(Mr. Timms.)

Schedule 24, as amended, agreed to.

Clause 49 ordered to stand part of the Bill.