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Clause 23 - Loan relationships: debts becoming held by connected company

Part of Finance Bill – in a Public Bill Committee at 4:45 pm on 12th June 2012.

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Photo of Nigel Mills Nigel Mills Conservative, Amber Valley 4:45 pm, 12th June 2012

I am sure that you have never been welcomed to the Chair as often as you have been today, Mr Bone. I tabled this amendment to secure a debate on the Government’s use of retrospective taxation measures. The Select Committee on the Treasury noted that there were potentially four such measures in the Bill, of which this is the most significant, in terms of revenue raised. I would not like anyone to think that when I tabled the amendment, I was motivated in any way by sympathy for Barclays bank, which entered into aggressive tax avoidance arrangements. Given the esteem in which banks are held in this country and the way that they have been bailed out, Barclays was remarkably badly advised to have gone down the line of aggressive tax planning. If any body were not justified in tax planning, a bank would be top of that list.

Nevertheless, Government and Parliament should be careful about where we seek to use retrospective legislation. It is a pretty fundamental point of the rule of law that individual citizens or subjects should know what the law is and be entitled to plan their affairs based on the law. If the Government realise that that law is not appropriate or is not correct, then that law can clearly be changed, but that change should apply only from the point at which notice is given of the change. We could find numerous examples in the Bill where the Government have announced changes or the intention to introduce a change. Perhaps the detail will come along later, but clearly all taxpayers can understand that there is a potential change coming. What we have in this clause is a backdated change that effectively cancels the effect of a measure that may or may not have been in compliance with the tax code; the Government were clearly not entirely confident in the tax situation.

There is a real principle here about whether the Government should use retrospective taxation effectively to change the law to make it apply in a way that is different from how the person thought it would apply when they entered into a transaction. I suspect that in any field other than taxation, we would be very concerned. I do not think we would like to see the criminal law  being amended retrospectively to make something we did yesterday a crime when it would not have been a crime then, based on the law as it stood. Not that all retrospective legislation is inappropriate; I think in the last Session both Houses of Parliament quite happily passed a retrospective bail law to put the situation back to what both the Government and most defendants thought it was. The clear point there was that that was restoring a situation that everyone had thought pertained, as opposed to creating a situation that perhaps one side wished was the case but may not have been.

It is important that the Government now set out when they are prepared to use retrospective legislation and when they are not. We have obviously had the Rees doctrine in place for a long time. My right hon. Friend the Member for Charnwood (Mr Dorrell) set out the principle when he was a Treasury Minister:

“Where it is discovered that the tax law does not have the effect that the Government and taxpayers generally thought it had, there are circumstances in which it is right to introduce legislation to restore the position retrospectively to what it was thought to be.”—[ Official Report, 29 June 1992; Vol. 210, c. 378-79W.]

The key point is the effect that the Government and taxpayers generally thought a measure had, not simply the effect that the Government might have wished it had.

Those of us concerned about the use of retrospective legislation are in pretty good company. In 1987, the former Prime Minister, Tony Blair, said:

“Parliament should oppose retrospective legislation, for a number of reasons. The principal democratic reason is that people are perfectly entitled to do whatever the law permits them to do and that it is wrong afterwards to make it unlawful.”—[Official Report, 15 July 1987; Vol. 119, c. 1179.]

Who are we to disagree with Tony Blair? For those not convinced by what the former Prime Minister said, the Exchequer Secretary to the Treasury himself said the following in debate four years ago:

“For investors, the idea that UK tax law is likely to be changed retrospectively is unattractive, and the UK is, for various reasons, acquiring a reputation for having an uncertain and unstable tax system, which is bad for the UK economy.”––[Official Report, Finance Public Bill Committee, 22 May 2008; c. 367.]

He was entirely right four years ago.

I accept that sometimes compromises have to be made in government. Clearly, if there are large amounts of tax at stake as a result of aggressive tax schemes, there may be a need to close those promptly to protect the Exchequer, especially in the current situation. However, we must be careful that we do not create the impression of a tax regime in which people cannot plan their affairs based on what the law is, and in which there is a risk that the situation regarding what they may quite reasonably do today, thinking it legal, could somehow change retrospectively, with unfortunate tax results.

We may accept that where people are engaging in predominantly aggressive tax avoidance, that is fair game, but the risk is that people undertaking innocent transactions may get caught up in the crossfire. There is also the general reputational risk of a tax regime where that can happen. People might think, “I am not sure I want to invest there and expose myself to those vagaries.” They want the Government to set things out, because they want a certain, stable and predictable tax regime in which people can invest with certainty and know what the situation will be. A combination of the use of  retrospective legislation and having a general anti-abuse rule, which I know the Government are consulting on today, creates quite a poisonous mix. It is hard to know exactly what the law is that we are being expected to comply with. It can be changed by legislation, or it can be effectively changed by a tax inspector in the course of their job.

I am not the only one who is concerned. In paragraph 89 of its excellent report on the Budget, the Treasury Committee raised concerns. I am sure that the hon. Member for Bassetlaw was keenly involved in that. It asked the Government to set out a policy on when retrospective legislation should be used. I hope the Minister can do that.

On the rule on taxing a release of debt, I can see the logic; if there is a UK lender and a UK borrower, and the loan is impaired and written off, the UK lender gets a tax deduction. It is right that the borrower, who now owes a lot less, should get taxed on that effective profit. That symmetry is entirely reasonable in the tax regime, but the rule causes huge complexity for struggling companies that face insolvency, because if they enter a formal insolvency procedure, there is no tax on the waiver of the loan. If we try to apply this structure outside a formal process, that tax liability is triggered.

I was practising a few years ago and the insolvency issue used to come up. We had insolvent companies, and we tried to find a way to rescue the trade and make it viable, and to protect the jobs. We did not really want to go down the formal administration process, with all its costs and various horrors. This provision could make that quite hard. If someone goes down the administration route, they avoid the tax, so what people were trying to do was get into that situation without the full administrative procedure. I do not pretend that that is what the people we are talking about here were worried about. This is not perhaps an area where there is no commercial reason at all for concern about the operation of the rules, which is why I am a little concerned about why the Government decided that of all the tax avoidance issues that they have chosen to legislate on, this was the one that justified the full retrospective effect of backdating a change to before the Government announced that there might be some change.

It would be useful if the Minister set out the Government’s policy on the use of retrospective legislation—when they think it is appropriate, and what criteria they use to decide that it is necessary—so that we can be sure that it is used only in exceptional circumstances where there is really abusive behaviour and significant amounts are at stake, and that it does not creep into being a general approach to tax policy for this Government.