Clause 66

Finance Bill – in a Public Bill Committee at 5:15 pm on 16th June 2009.

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Deductions for employee liabilities

Question proposed, That the clause stand part of the Bill.

Photo of David Gauke David Gauke Shadow Minister (Treasury)

I have one brief question on clause 66. It has something in common with clause 67, and our debate will focus on that clause. Both clauses relate to anti-avoidance provisions. The test that is inserted for arrangements that fall foul of those provisions is that

“the main purpose... is the avoidance of tax”.

Most new avoidance legislation seems to include in its main purpose test the phrase “obtaining a tax advantage” or something similar. What is the reason for the change in terminology? Is this the terminology that we can expect to see in future in these anti-avoidance provisions and is there not a danger of some complexity or confusion here? The phrase “the avoidance of tax” seems narrower. I do not know whether that is the intention.

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

Clauses 66 and 67 are an interesting case. Early in the new year, HMRC received information about a particularly abusive avoidance scheme, which relied on deliberate default to generate artificial liabilities, which are then set against the otherwise taxable income of the individual concerned at a potential cost to the Exchequer of about £200 million in the first instance. So on 12 January, to head off this threat to the public finances, I issued a ministerial statement announcing the closure of this scheme with effect from that date.

Following that announcement, HMRC received further information that a variant of the scheme—this time involving the legislation on employment-related losses—was being used to similar effect at a potential loss to the public purse of at least £200 million in the first instance. So I took further action on 1 April, but also effective from 12 January, to close this down. We will come to that in the debate on the next clause.

Clause 66 gives effect to the original 12 January statement. It works by amending sections 346 and 555 of the Income Tax (Earnings and Pensions) Act 2003. As they stand, these sections allow relief to employees where either they, or their employer on their behalf, meet the costs of insuring against employment-related liabilities, or the actual cost of those liabilities, such as damages relating to their jobs or legal costs to defend against such damages.

The particular scheme that clause 66 addresses took a rather tortuous route to exploit these provisions and make sure there was no real loss to the scheme users. The arrangements would have involved the use of a number of both companies and trusts, some of them offshore. A key element was the creation of a contrived employment, the duties of which included entering into financial arrangements with another party. During the course of the contrived employment, the individual would deliberately default on some aspects of the financial arrangements. Under the terms of the arrangement, this would trigger automatic damages payable by the individual. The individual would borrow the money to pay the damages, through a loan made by another entity in this rather complex structure, and in reality the individual would not need to repay the loan.

I have gone into that in detail so the Committee has a sense of what we are dealing with and of the degree of contrivance and artificiality.

It is a highly abusive, completely contrived arrangement, with the sole aim of avoiding paying the tax due to the Exchequer. We are providing that that relief be allowed only where there are not arrangements in place designed to avoid tax. Any real employment-related liabilities will still be eligible for relief in the normal way.

The hon. Member for South-West Hertfordshire asked why the main purpose test in the clause uses the phrase

“the main purpose...of which is the avoidance of tax.” when most new avoidance legislation uses the tax advantage test, as he rightly said. The main goal is to ensure that all wording is effective in achieving its primary purpose, which we are satisfied that the wording achieves. The words used are in keeping with those used elsewhere, such as the Income Tax (Earnings and Pensions) Act 2003, so they are not novel.

By taking swift action, we are preventing exploitation of the tax system by the schemes of a small number of wealthy people. Honest taxpayers rightly expect the Government to identify such schemes quickly and block them effectively. That is what we have done.

Question put and agreed to.

Clause 66 accordingly ordered to stand part of the Bill.