My contributions so far to this years Finance Bill seem to be in inverse proportion to the length of the material in front of us. Schedule 30 is extremely lengthysix pages from page 258 to 264. As they continue the anti-avoidance theme of the clauses that we discussed earlier, I do not intend to speak at length on it.
Thank you, Mr. Atkinson. It would certainly be more convenient, but I must commend the Government Whip for being on the ball. I was lost in schedule 30 before I realised that we were officially debating clause 61.
The schedule proposes, in some detail, various new measures to stop specific tax avoidance schemes and practices, which seem to arise from the tax avoidance disclosure regime of recent years. It is a bit of a motley scheduleparagraphs 2 to 5 could make some sense together, but paragraph 1 appears to be something rather different, at least in my interpretation.
Paragraph 1 relates to various structures akin to the previously favoured film partnership structures, which were tackled, I think, in the Finance Act 2006. Interest paid on qualifying loans, such as loans taken out to buy into a partnership or shares in a close company, is deductible. It was announced on 19 March 2009 that legislation would be introduced in the 2009 Finance Bill to deny individuals relief for loan interest on investments in partnerships or close companies, where the interest is paid as part of an arrangement and the deductibility of the interest means that the investor is guaranteed to make a profit. In other words, it is a no-lose investment scheme. Draft legislation was released on 19 March and will be retrospective to that date.
It is understood that that anti-avoidance measure is principally aimed at several arrangements that were being offered to partners in old sale and leaseback film partnershipspeople who had previously gone down that road of tax avoidance. They purported to produce an interest deduction for borrowings to participate in the new arrangement, which could then be used to offset the reverse in film sale and leaseback income. There were other arrangements whereby a significant loss, funded by debt rather than personal investment, would be generated in the first year that an individual joined a partnership and would then give a guaranteed return of funds over the life of the partnership. Put another way, some companies had been getting full tax relief for making only a partial investment. As I understand it, the legislation is not intended to affect genuine commercial investments in businesses where there is uncertainty as to the return that will be produced from the arrangements.
Paragraphs 2 and 3 relate to amounts not fully recognised for accounting purposes. Their provisions block certain tax avoidance schemes that involve derivatives. Under a certain scheme and its variants, a company would derecognise in its accounts a derivative that is carried at fair value, with the result that profits arising to the company on that derivative fall out of the account for tax purposes. Where a derivative contract of a company is matched with shares, securities or fixed income instruments issues by it, it might be permissible under generally accepted accounting principles for the contract or amounts arising in respect of the contract not to be recognised in determining the companys accounting profits or losses for the period. The new legislation requires the profits and losses on the derivative to be fully brought into account for tax purposes, even if they are recognised separately or not at all in the account.
Paragraph 4 relates to amounts not fully recognised for accounting purposes. That is another scheme that involves an intra-group convertible loan that is highly likely to convert into shares of the issuing company. The debtor company accrues and obtains a tax deduction for more than the corresponding taxable amount in the creditor company. The new legislation will input additional taxable credits into the creditor company to make the tax treatment symmetrical.
Paragraph 5 deals with credits and debits for manufactured interest. Again, as announced on 27 January by the Financial Secretary, the paragraph is being introduced to ensure that the tax treatment of manufactured interest payments is consistent with the treatment of such payments in company accounts prepared in accordance with UK GAAP. The announcement followed a decision in the High CourtDCC Holdings (UK) Ltd v. HMRCrelating to the treatment of deemed manufactured payments. It was felt that that decision could result in payers of real manufactured interest obtaining excessive deductions and recipients being taxed on amounts greater than those they actually received.
The legislation will apply to real manufactured interest payments made both before and after 27 January and to manufactured interest payments deemed to be made on or after 27 January. HMRC has indicated that the legislation is not intended to apply to the type of deemed manufactured payments that were the subject of the High Court case. I would be grateful if the Minister would confirm that that is correct.
We look forward to the Ministers explanation for those proposals, to check that we understand schedule 30 correctly. There is, however, one area on which we would especially like to question the Minister: the retrospective nature of the provision in paragraph 5 following the DCC Holdings case. As I understand it, there was a widely held, but not universal, view on how the legislation should apply, but that did not accord with the Courts decision on the case. The Chartered Institute of Taxation argues that neither taxpayers who have followed the letter of the law, nor taxpayers who have followed the accepted practice, should be penalised. I would be grateful for the Ministers view on that.
I had not intended to speak, but have been inspired to do so by the hon. Gentleman, who referred to this as a motley schedule, because that was exactly my perception. It seems rather like Leviticus, listing a set of financial sins in no particular order. I would like to make a brief comment on anti-avoidance, which is at the heart of the debate. There seem to be two essential processes in the Bill. First, there is a kind of anti-avoidance catch-up process of identifying things that have gone wrong and tabling clauses to deal specifically with them. The other choice that the Government have is of the kind that one always has in these dilemmasto go for a set of broad principles against which firms can judge for themselves whether they are on the right side of tax law. With either choice, there is some difficulty. With a broad set of principles, there is a wide scope but certainty is lacking. With a measure such as schedule 30, on the other hand, there is certainty but much may be missed and other things might evolve that have to be dealt with.
My hon. Friend the Member for South-East Cornwall, who arrived in the Committee recently, has been at a meeting of the Treasury Select Committee, which has been discussing this issue today. Let me read from the notes that were presented to him:
One should also not overrate the capacity of standards to ensure appropriate national regulation.
I guess that is why we have schedule 30 and why we will have schedules precisely like it in every financial Act to come.
I do not quite understand the parallel with Leviticus, but I shall reflect on the hon. Gentlemans point.
When one reads Leviticus, which has a long series of very detailed clauses, one finds that the ancient Hebrews must surely have been getting up to some very strange and diverse activities, which were obviously identified as the sins of Leviticus. When one reads schedules such as this, one reaches similar conclusions about the financial sector.
I am grateful to the hon. Gentleman. I shall bear that in mind the next time I read Leviticus, and I shall look for those similarities.
The schedule tackles three tax avoidance schemes and responds to a recent High Court decision that could give rise to avoidance. The hon. Member for Hammersmith and Fulham has talked us through the measures, but let me go through them. Paragraph 1 involves exploitation of the tax rules for interest relief under which individuals can claim relief against their general income for interest paid on loans used to invest in some small companies and partnerships. The existence of relief for interest in those circumstances encourages investment in small businesses that are carried on commercially and with a view to profit.
In the schemes that have been notified to HMRC as a result of the disclosure provisions that we have put in place, the interest relief provisions are artificially exploited by means of arrangements that are almost guaranteed to allow the investor to exit the arrangements with more money than was originally invested. That will be achieved by the interest paid being set against other income, which is unrelated to the business in which the cash is invested, for UK tax purposes, while the matching gain is not chargeable to tax. The legislation will not deny relief to anyone who makes legitimate investments in businesses that bear a normal commercial risk.
Paragraphs 2 and 3 relate to a scheme that involves a company exploiting a rule in the tax provisions for corporate debt and derivative contracts, which is intended to deal with revaluation issues on transition from one type of GAAP to another. A company transfers risk and rewards of a loan or derivative contract to a connected party and, in consequence, is required by GAAP to derecognise the asset and so to reflect a loss in its accounts equal to the value of the loan or derivative contract.
In relation to paragraph 4, the scheme involves avoidance of corporation tax by large companies using convertible loans. A company lends money to another member of the same groupthe debtor companyin return for the issue of a bond that is likely to convert into shares in the debtor company. Initially, no interest is payable, but interest will be paid if the loan does not convert. The debtor company accrues a deduction for that interest from the start, because under UK GAAP it must not anticipate conversion and it must spread the expected interest evenly over the length of the loan. The creditor company, though, accounts for the loan on the more realistic assumption that it will convert and so does not accrue any receivable interest. As a result, the deduction for the debtor company is greater than the income that the creditor company brings into account, so although there is no economic loss for the group, the debtor company is able to claim a tax deductible expense while the creditor claims not to be taxable in respect of any corresponding amount.
Finally, paragraph 5 responds to the High Court decision, in the case of DCC Holdings, that might allow some companies to reduce their tax liabilities inappropriately and other companies to be taxable on profits not received. The case was concerned with the deductibility of manufactured interest and suggested that it might be possible for companies to claim deductions in excess of the amounts appearing in their profit and loss accounts. Not making that change would result in companies being able to release their profits artificially, and therefore their tax liabilities. The total tax protection of all those four measures, over the next four financial years, is expected to be, or thought to be, in excess of £2 billion.
I thank the Minister for giving us that figure. In the previous couple of clauses he mentioned annual figuresI think the amount in the previous clause was £150 million and the one before that was £100 million. Will he tell us why he is suddenly giving us a four-year forward projection? Is he able to break down that £2 billion on a per annum basis? How much will it save in this financial year?
I do not have the figure for the current year. I can check whether we have such an estimate and, if we do, I can send it to him, but the hon. Gentleman will accept that it is a very substantial sum indeed. When we have seemingly arcane debates on these topics, we need to bear in mind just how much revenue is at stake for the Exchequer.
The right hon. Gentleman is right in pointing out that £2 billion is a very significant amount to save the UK taxpayer by ending these avoidance schemes. Could he therefore tell us something about the breakdown of the £2 billion between the various paragraphs? We have already discussed the power of one in particular being rather different to the other paragraphs. Surely he must have some idea of how that £2 billion breaks down across the various paragraphs.
I am happy to drop the hon. Gentleman a line setting out our assessment of how that is made up, both between the four things being addressed here and how it looks as though they would fall over the coming four years. Let me also respond to his point about the application of the schedule to deemed payments. He is right, legislation does not apply retrospectively to deemed paymentsonly to real payments. The High Court litigation on deemed payments has not yet finished; it is still continuing.