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I thank the Financial Secretary for setting out details of the arrangements. He describes them as particularly abusive, which is perfectly accurate given that it is a deliberate default in relation to arrangements entered into during employment to create employment income offsets that can reduce tax on personal income. It is highly contrived. I want to make it clear that we fully support his statement that such loopholes and such contrived and artificial arrangements should be identified quickly and blocked effectively, so we support clauses 66 and 67 in their attempt to do that. We are concerned about the potential retrospective elementI wish to stress that that is a narrow concernwhich is the purpose behind tabling these amendments. I know that we will debate the extent to which it is retrospective later.
This is not the first time that the some of us have debated retrospective taxation. On 22 May last year, I debated the issue with the Financial Secretarys predecessor, the right hon. Member for Liverpool, Wavertree (Jane Kennedy)may I say on behalf of the Opposition that we hope that she is safe and well? A similar point was raised in the context of double taxation treaties and retrospective provisions on Isle of Man partnerships. It would be fair to say that the case against the Government then was stronger than it is today, because then we looked at retrospection going back 21 years for something that HMRC had known about for a long time and not sought to address. One could argue that the arrangements that we debated last year were less abusive then the arrangements that we have today. None the less, there is a principle to do with the nature of retrospective legislation in this field. Last year, the right hon. Member for Liverpool, Wavertree said:
The Government understand some of the concerns about retrospectivity. It is right to be concerned about the use of that, and it is right for the Government to justify every case.[Official Report, Finance Public Bill Committee, 22 May 2008; c. 371-372.]
I therefore make no apology for raising this issue, notwithstanding the aggressive and abusive nature of the loophole that the Government are closing. The point is whether the announcement of 12 January 2009 to which the Financial Secretary referred was sufficient to close the loophole or whether this matter was not addressed effectively until 1 April 2009.
When debating the retrospective nature of taxation, it is customary to refer to the Rees rules, which date back to the Finance Act 1978. The shadow Chief Secretary of the time stated that it is important that clear and specific warning is given prior to a Finance Act implementing any such legislation. My right hon. Friend the Member for Charnwood (Mr. Dorrell) went on in the early 1990s to argue that in addition to those clear and specific warnings being given in advance, there must be exceptional circumstances for legislation to be retrospective. It may well be that the abusive nature of these arrangements and the considerable potential cost to the Exchequer are exceptional circumstances.
I will turn to what the Government said in considering whether the Rees rule was met. In the press release of 12 January 2009, HMRC stated:
The specific avoidance arrangements of which the government is aware aim to exploit the provisions of sections 346 to 348 and 555 to 559 Income Tax (Earnings and Pensions) Act 2003, (ITEPA).
Those references are picked up in clause 66, which we debated earlier. Paragraph 9 of the press release states:
The specific avoidance arrangements being countered are outlined above but the government is aware that it might be possible to use different structures to achieve a similar outcome. As a result the proposed legislation will deny any deduction under section 346 or section 555 ITEPA where the liability in respect of which the deduction would otherwise be due has been paid in connection with arrangements the main purpose, or one of the main purposes, of which is the avoidance of tax.
The press release, which reflects the Financial Secretarys written statement, highlights certain specific arrangements and broadens it further. However, it does not broaden the identification of the scheme used in the loophole as widely as the subsequent press release and technical note of 1 April 2009, to which the Minister referred.
That press release announced further action and was entitled Government taking further action to prevent artificial avoidance schemes. Having outlined the contents of the January provisions, in paragraph 5 the technical note goes on to state:
The Government is aware of a similar scheme or schemes that seek to exploit S11 ITEPA 2003 and S128 ITA 2007.
The essential point is that we are concerned about backdating those anti-avoidance provisions to 12 January, when that announcement addressed certain specific arrangements; indeed it slightly broadened it out to beyond the arrangements of which it was aware, but was not as broad as the 1 April arrangements. We consider that the risks of retrospective legislation are very considerable. That is important as it damages stability and certainty in the UK tax system. If we have a tax system that is unpredictable, it undermines confidence. We are therefore concerned that by backdating the effect of clause 67 to 12 January as opposed to 1 April, the Government are going beyond what we accept as allowable under the Rees rules, the Dorrell doctrine and, indeed, by the statement made by the former Paymaster General, the right hon. Member for Bristol, South (Dawn Primarolo). In December 2004, she referred to remuneration planning, an area where there has been retrospective legislation for some time. This would appear to be broader than that and my attention has been drawn to comments made by the right hon. Lady on 6 June 2006. I interpret her remarks to mean that the approach to remuneration planning applied merely to the extraction from a company of income otherwise taxable in the form that was rendered free of national insurance, PAYE and income tax. I do not think that this is quite what we have here, so we are concerned about these provisions.
Perhaps I can take this opportunity to ask the Minister where the Government stand on retrospectivity in general. In what circumstances do the Government consider that a retrospective provision is justified? Does the Minister recognise that there is a risk that HMRC may use this as a fallback against its mistakes? That was very much the nature of our case last year on partnership income and Isle of Man partnerships. HMRC should have addressed that matter much earlier and it sought to address it through retrospective legislation. What constraints are there on the use of retrospective legislation and do the Government recognise that there are problems caused to the UK tax system if it is overused? It may well be that the Ministers remarks today can provide some reassurance, but it would be a damaging attribute to our tax system if there was frequent use of retrospective legislation in this area.
More specifically, on clause 67 and amendments 73 and 74, may I ask the Minister why the announcement on 12 January was thought to cover more than that which is specifically mentioned in that announcement? I suppose the question that should be asked is why section 11 was not mentioned in it. How does the Minister justify including section 11 in something that was not mentioned for another two and a half months or so? With those questionsI have tried to present this case in a probing mannerI have to warn the Financial Secretary that we may well seek to divide the Committee. We are concerned about this use of retrospective legislation. We are not convinced by what we have heard so far that the Government are fully justified in dating the provisions back to 12 January rather than 1 April, notwithstanding the fact that the Government are absolutely right to seek to close that loophole.
May I say what a pleasure it is to serve under your chairmanship, Mr. Hood? I am grateful to have the opportunity to speak on the clause, and I congratulate my Front Bench colleagues on emphasising its importance. It seems to me to be one of the most disturbing clauses in the Bill, not least for the wider reasons. My hon. Friend the Member for South-West Hertfordshire made the point that an announcement on certain issues was made on 12 January 2009indeed, I am told that it was made clear that the rules would not apply to payments made after the date of the announcementand the industry ceased to use the scheme. That is the information that I have received.
The crime comes when we consider the announcement of 1 April 2009, when the Government widened the scope of the provision, and did so retrospectively and without notice. It is said that the measure will impact upon only 600 people, but retrospective legislation that impacts upon one person, particularly in such an activity, is not good enough. For 600 people, of course it is not good enough. However, it is the wider questions of perception and the breaking of what many businesses see as a genuine understanding between business and the Department that is the real danger inherent in the provisions.
I understand that the hard-working people of the Treasury are keen to protect the interests of the Government and the nation by stopping tax avoidance. To most people, tax avoidance is unacceptable. I would love to get certain people who live on certain islands and then, through their own newspaper organs, make their own moral judgments, and many Members of the House would agree. In this instance, however, we are not talking about the normal practice of announcing a measure and giving people due warning. We are talking about the Department making an announcement, with no warning, of a measure that would be used retrospectively. Therein lies our concern.
To date, it has been generally accepted practice to apply retrospective tax legislation only when HMRC has announced that it will do so. It is that element that has been broken in the clause. I do not need to tell the Committee that retrospective legislation is bad legislation, no matter what the issue, as it is a fundamental requirement that legal frameworks should provide certainty for individual behaviour at the point when that behaviour takes place and not retrospectively. That is generally accepted as good, fair and proper government. It is the undermining of that concept that is so damaging in the wider sense.
It is the question of perspective that concerns me immensely. I come from a world where certainty is vitalthe business world. I come from a world that believes that treatment between business and the Department is fair and proper. Action of this sort undermines that concept. If it happens more and more, business will begin to think that it cannot trust the Department, and therein lies the real danger. The perception of HMRC itself is under threat when the Government decide to act retrospectively in such a fashion. I recognise that accountants rarely take perception into account, but business men do, because the perception of their business is vital to the well-being of their customers. That is the point that I fear the Treasury is unable to grasp, and which I would particularly like the Minister to address.
The Government tell us that the measure will prevent a loss to the economy of some £200 million. That is pure accountancy talk; it fails to take into account the image of this country doing good and fair business. It is another little brick in that wall that will prevent more and more people from wanting to do business here. What assessment has there been of the impact on people who might want to come to the UK to do business, but might be put off by the thought that they could be taxed retrospectively without their knowledge? That also needs to be taken into account.
I rise to support the Governments attempts to end contrived avoidance schemes. The scheme to which clause 68 is addressed is seriously contrived, and I am sure that when the Minister gets to his feet later, he will have a similar description of the scheme relevant to clause 67. However, I also share the general concerns about retrospectivity. I could have made this argument under any number of the clauses, but I am doing it here because it allows me to raise another matter. I hope that I am not out of order, Mr. Hood, if I engage in a clause stand part debate. I assume that we are taking the amendments and clause stand part together.
I will be as careful as I can, Mr. Hood.
I understood that the practice of those engaged in schemes such as those to which clauses 66 and 67 relate was to notify HMRC shortly after commencement. Was the scheme that the Minister described, and the variation dealt with in clause 67, also notified to HMRC shortly after commencement? That is important.
One thing that we need to do to avoid retrospective taxationthe Bill contains lots of itis to ensure that those working in tax and financial management and planning are able to behave in a proper manner and do not find themselves doing something that their lawyers and advisers tell them is within the law, but which ends up being subject to retrospective legislation days, weeks or even a few months after the commencement of the scheme. That is the point that I wanted to raise in relation to clause 67. Instead of giving post-commencement notification to HMRC, would it not be far better if those engaged in tax and financial planning and management could have pre-commencement approval of schemes, so that they knew that everything they were doing was on the straight and narrow and that they would not then be subject to a large amount of retrospective legislation? Most important, people wishing to use the services of those providing tax and financial planning and advice would then be able to do so with the confidence that they would not fall into schemes that were legal when they handed over the cash, but which ended up being illegal very soon thereafter due to retrospective taxation.
I am sure that I was well wide of the mark, Mr. Hood, but there was no other way I could go. I hope that the Minister will tell us why we do not have pre-commencement approval and why we only have post-commencement notification.
As I said, following the action we took in January, we discovered that a highly similar scheme was set up by the same provider, using the same approach and aimed at exactly the same people. The scheme used a loss like that referred to in the clause 66 scheme, which is created by an act of deliberate default during the course of a contrived employment, to exploit the provisions of section 128 of the Income Tax Act 2007. That allows employees to claim loss relief in certain circumstances where that loss arises from the conditions of their employment.
I will run through the measure again. Some of what I say will seem familiar because of the close similarity between the arrangements that clause 66 addresses and the arrangements that clause 67 tackles.
The scheme that clause 67 addresses used a number of entitiescompanies and trusts, some of which may be offshore. A key element is the creation, again, of a contrived employment, the duties of which cover financial arrangements with another party. During the course of the employment, the individual would deliberately default with regard to one or more aspects of the financial arrangements. Under the terms of the arrangement, that would trigger automatic damages payable by the employer that the individual was obliged to share by virtue of their contract of employment. The individual would borrow the money to pay the damages, not through a normal commercial loan from a high street bank or some other lender, but from another entity in the structure. The individual would not in reality repay the loan and, as a result, they would suffer no genuine loss in paying the sum designated as damagesindeed, the only real cost the individual would suffer is the cost of buying entry to the scheme.
I recognise that there is a clear similarity between the section 11 schemes and those schemes identified on 12 January. Does the Financial Secretary also accept that clause 67 will apply to any arrangement that uses section 11 of the Income Tax (Earnings and Pensions) Act 2003, whether it is in relation to an employment loss that arises from a deliberate default or otherwise? I accept that a particular scheme caused HMRC, or the Minister, to make an announcement on 1 April, but the clause is somewhat broader than that and has a retrospective effect. I do not know whether any schemes are caught up as a consequence, but the similarity point is not a clinching argument because the application of clause 67 is broader and applies to schemes that are not quite so similar.
I think the similarity is striking. In a moment, I will explain how that affects the argument. I am confident that clause 67 will not damage proper and appropriate uses of the provisions already in legislation. Let me just go a little further.
Despite the arrangements that I have described, the individual would claim that they are entitled to deduct the amount of the damages from their income, because the damages rank as a liability that was incurred when acting in the capacity of an employee.
The general theme of artificial loss creation has been a common feature of tax avoidance for some years, with people wanting to shelter income and gains from tax. A number of previous arrangements around that general theme, but using different parts of tax legislation, have already been closed down. The avoidance that the Government are moving to close down with clause 67 is the individual seeking tax relief against genuine income for a contrived loss that the individual never actually suffered. I acted on 1 April to do that. Because it is a variant on the loophole we closed on 12 January and featured the same individuals, we made it effective from 12 January.
The hon. Member for South-West Hertfordshire asked how targeted clause 67 is. I do not think that it is broadly drawn. The intention is to ensure that it will not be necessary to seek further legislation if more schemes involving claims for loss relief under the 2007 Act are devised. It will also remove any doubt about our view of loss relief claims that are contrived in that way.
Perhaps I am approaching the matter from a different angle, but if the Minister is arguing that there was great similarity, why were section 11 arrangements not picked up on 12 January? Was any consideration given to doing so, or did it come as a surprise to HMRC that there was a way, as the Minister sees it, of achieving the same aim through the other provisions to which we referred?
We did not know on 12 January about the device to which the statement of 1 April refers. Information about that arrangement emerged later through a disclosure. I accept that the fine detail of the second scheme is somewhat different from that of the first, but the underlying approach is the same. Both schemes depend on the use of deliberate default to trigger artificial liabilities or losses for which relief would be claimed under legislation intended to provide relief for exceptional circumstances of genuine employment liabilities or losses. The people subscribing to the scheme would have known exactly what they were entering into when they decided to do so.
It would be £200 millionprecisely the same as if clause 66 was not included in the Bill, because it deals with the same kind of avoidance targeted at precisely the same people by the same promoter who, having been thwarted by the announcement of 12 January, would, if allowed to do so, have simply switched all their customers into the device that clause 67 addresses.
I assume that the £200 million is an annual figure. If that is the case, is there any expectation that the figure would in time come down, or would others see the opportunity to exploit the same loopholes and, for example, make the aggregate figure over the lifetime of the next Parliament more than £1 billion, rather than just £200 million multiplied by five?
We are getting into speculation, but if all those people got away with avoiding £200 million-worth of tax, it is entirely possible that the promoter would find that other people were attracted to use the same device and that the loss would increase.
We are talking about the period from 12 January to 1 April, so we are not talking about ongoing costs. Surely this is a one-off hit. I understand that the Government rightly believe that the scheme was a fraud arrangement anyway and want to avoid the uncertainty.
I was asked what would be the cost if clause 67 did not appear in the legislation, and that is the question I answered. A separate question is what would be the loss to the Exchequer if amendments 73 and 74 were agreed. The answer to that is £200 million. That would be a one-off loss.
Amendments 73 and 74 would ensure that clause 67 did not take effect until 1 April. The backdating of the clause was essential to preserve the intent and effect of the January announcement. The scheme, unlike the first, came to our notice through the disclosure regime. It was sufficiently advanced at that point that, had we not backdated the clause, we would have put at risk the entire £200 million protected by the clause and the announcement of 12 January, because all those individuals who had moved to the new variant scheme prior to 1 April would have been able to crystallise the artificial losses to claim against their real taxable income.
There is of course a degree of uncertainty about that, depending upon precisely who had taken advantage of the scheme and made a claim accordingly, but £200 million is our best estimate, soundly based, of the loss to the Exchequer if the backdating had not occurred. The hon. Gentleman said that was disturbing and that about 600 people were involveda figure I had not heard, but he might well have information to which I do not have access on how many are affected. I hope that, on reflection, he would find it far more disturbing if those 600 people, having had their large-scale tax avoidance thwarted by my announcement of 12 January, were able simply to switch across to that other, equally contrived and similar scam and obtain their £200 million between them as a result. That would be much more disturbing than the measure we have announced. I have seen correspondence from the promoters of the scheme rather echoing his points and suggesting that it really was not cricket for the Government to act in that way. I must tell the Committee that, where abusive tax avoidance is being promoted, we will take action to block it and will do so time and again.
There is nothing at all in the amendment that stops the avoidance process of the scheme the Financial Secretary is talking about. It is simply the concept of the provision being a retrospective reaction to the matter, which has much wider implications than the scheme he is talking about. There are many examples of circumstances in which people in this country feel that others are avoiding tax unfairlyI alluded to one, but there are many others. There is a bigger principle, and that is that HMRC is seen to be acting fairly and decently and not retrospectively, which is not seen as fair and decent in the main. One could still stop the scheme but keep ones honour, and that, too, has relevance.
I can certainly reassure the hon. Gentleman that HMRCs action has been fair. He is arguing for bolting the stable door after the horse has bolted, but that would indeed have led to a loss in revenue of £200 million. Had there been no retrospection when closing down the scheme, those 600 people, if that figure is correct, would have been able to make off with that sum. That is unfair. That is what honest taxpayers are worried about. They are worried that people who know exactly what they are doing and are who employ the services of highly paid advisers to devise those ingenious schemes are, by that route, avoiding paying tax like the rest of us.
I am struggling with a couple of questions for my right hon. Friend. First, what sort of fees must have been payable to those who devised such a contrivance? We must be wondering whether those people deserve our sympathies as widows and orphans seeking relief from the taxpayer. Secondly, does he believe that that type of activity bears any resemblance to the honest business activity referred to by the hon. Member for Northampton, South?
My hon. Friend is absolutely right. We are talking about a scam. The people who promoted it know exactly what they are doing and the people who wished to use the scam knew exactly what they were doing. I am sure that he is right and that substantial fees were paid or were due to be paidI do not know how far the payments had gone. One can only surmise that it would have been some proportion of the £200 million. I would suggest that between 5 and 10 per cent. would have been the likely fee, so the promoters stood to gain perhaps £10 million to £20 million from having facilitated a very substantial tax avoidance scam.
Although I share the Ministers view that the scheme is a scam and I would much prefer that the Treasury had the £200 million of additional revenue, particularly in these straitened times for the public finances, would he not agree that the hon. Member for Northampton, South holds his view with great integrity? He should not feel inhibited, and nor should his colleagues, about voting for these amendments merely because Labour Back Benchers choose to describe them in those unfavourable terms.
That is a matter for judgment by Opposition Members. We will wait with interest[Interruption.]
Thank you, Mr. Hood. We shall certainly wait with interest to see what Opposition Members decide.
The hon. Member for Northampton, South said that he wants certainty. He can be absolutely certain that when we find out about an abusive scam we will shut it down. Anyone who is interested in participating in such an arrangement can be certain of that. My hon. Friend the Member for South Derbyshire is right such arrangements have nothing whatever to do with the provision of a good and fair business environment in the UK. We are committed to that and everybody knows that we take a very dim view of tax avoidance.
We acted on 1 April to make it clear that the second version of the scheme covered by clause 66 was equally unacceptable. Just like the scheme we closed on 12 January, it relies on abusive and contrived actions over a short period which ignore fiduciary duty to get a tax advantage. It would have been deeply unfair to have allowed that scam to proceed. The Governments response to the second scheme is reasonable and proportionate in the circumstances. There is a degree of retrospection herethat is perfectly correct. I hope that the Committee will accept that that retrospection was justified in the circumstances.
We ensured that all the relevant legal considerations were taken into account, including the Rees rules, the similarities between both schemes, the need to protect the human rights of potential users and previous announcements. In that respect we took account of the announcement on 12 January and the ministerial statement made the following day, as well as the statement made by the then Paymaster General, my right hon. Friend the Member for Bristol, South, on 2 December 2004, which was referred to by the hon. Member for South-West Hertfordshire.
Let me just say a couple of words about that statement. My right hon. Friends statement in 2004 warned that where we became aware of arrangements that attempt to frustrate our intention that employers and employees should pay the proper amount of tax, we would introduce legislation to close them down, where necessary from 2 December 2004. It therefore remains the Governments view that in rare cases like this it is appropriate for us to act retrospectively to make sure that abusive schemes are closed down rapidly and effectively. That takes account of the doctrine named after the right hon. Member for Charnwood, who recognised that retrospective legislation should be introduced only in exceptional circumstances and only where the Government consider such action to be necessary to protect the general body of taxpayers. I agree with that view, and this measure is certainly consistent with those criteria. We have met the Rees rules, the Dorrell doctrine and perhaps what we should refer to as the Primarolo doctrine as well.
I shall now try to create the Binley doctrine, with your permission, Mr. Hood. We have a situation in which the Government, rightly and properly, are intent on cutting back on those people who act outside the rules of decency by avoiding tax. The Minister calls such behaviour a scam, which is a bit subjective, bearing in mind that it must have been legal or there would not have been a need for this particular piece of legislation. Can I assume, therefore, that we need many more retrospective pieces of action should similar so-called scams turn up in the future?
The hon. Member for South-West Hertfordshire accuses me of failing to achieve consistent alliteration. He is right; I should have referred to the Primarolo principles. I did not entirely understand the question that the hon. Member for Northampton, South asked. If his question is whether we would act similarly again in similar circumstances, the answer is most certainly yes. Anyone who thinks of promoting or taking part in such arrangements needs to understand very clearly that the Government take an extremely dim view of those arrangements and are determined to close them down, as we successfully did in this case.
The hon. Member for Dundee, East asked me about pre-commencement approval. There is provision for that in code of practice 10. Taxpayers can ask about the HMRC view of arrangements before they decide to go ahead with implementing them. That alerts taxpayers to note that HMRC may take action against their proposal. If anyone is in doubt, they can seek clarification.
The Minister said earlier that the scheme that he was talking about had been disclosed. Now he talks about taxpayers being able to check out schemes that they may enter into, and that is all good and well, but can I confirm that promoters are able to seek confirmation of the schemes in advance, or is it only in post-commencement notification that some of the difficulty may arise?
Promoters can seek that clearance as well. They are required to disclose, but they can seek clearance if they wish.
Can the Minister tell the Committee the date on which the promoters first started to market the scheme? It appears from what he says, or we can surmise, that it was after 12 January, in the sense that it was an innovation to the scheme that was outlawed on 12 January. At what point was it notified to HMRC? We know that HMRC took action on 1 April, but it might be helpful to the Committee if we knew the other dates.
I think that the hon. Gentlemans surmise is correct. It must have been after 12 January and before 1 April. I do not have the precise date in front of me. I am not sure whether we know it. As far as I am aware, the disclosure took place properly, in accordance with the requirements of the rules.
So, this was a completely artificial and contrived arrangement. It was clear to both the promoters and to anyone who was considering taking advantage of the scheme that it was open to abuse. It was essential to backdate the effectiveness of this measure to 12 January. Otherwise, people could have taken advantage of this very big tax avoidance opportunity. I hope that the hon. Gentleman will agree to withdraw his amendments and that the Committee will agree that clause 67 stand part of the Bill.
The Financial Secretary defended the Governments position with much vigour, as we would expect, but I am slightly disappointed in his response. I shall look in general at retrospective legislation in this area before turning to the specific case in front of us, because a balance needs to be achieved between creating certainty within the tax system and the desire that the Minister rightly expresses to close down scams as quickly as possible. As I said earlier, we enthusiastically support the Governments attempts to close down these scams. There is a balance to be achieved; there is a tension.
There is an argument, as the Minister knows, as to whether this scheme falls within the scope of the Primarolo principles. It can be argued, as I did earlier, that that is too narrow to encompass this particular scheme, although I appreciate that there is an alternative view. He is right to say that this scheme is very similar to that identified on 12 January, although as I understand it the 1 April provisions could capture some schemes that are quite dissimilar from those identified on 12 January. He is also right to say, as I acknowledged from the beginning, that this is a particularly abusive scheme, and that there is clearly a substantial cost to the Exchequer.
I am disappointed that we did not get an answer on the Governments general approach to retrospective legislation. As I said earlier, I thought that the legislation that we had in front of us last year was stronger ground to make the case against retrospective legislation than the scheme that we are debating today. In those circumstances, with some concern at the failure of the Government to address the wider issue of retrospectivity, I beg to ask leave to withdraw the amendment.