Clause 15 - Abolition of tax relief for patent royalties

Finance Bill – in a Public Bill Committee at 4:00 pm on 16 May 2013.

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

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

We are making good progress this afternoon. I hope to maintain that speed, as I can see that people are noticing that many others have gone home while we are still here enjoying our consideration of the Bill. I was wondering about whether, if the officials had gone home, all that inspiration would have been lost to the Minister.

We have had many lively debates regarding tax avoidance, not least during the sitting of the Committee of the whole House. Despite our criticism of other attempts  by the Government to crack down on tax avoidance, of which the Minister will be well aware, we support their proposals in this short clause. The Minister will no doubt state that this relief is being abolished to counter known avoidance and to simplify the tax code—that brings us back to some of the issues that we have already debated.

The relief abolished by clause 15 applies only to payments that are not deducted in calculating income tax liability from any other source—for example, a trade. Where patents royalties are deductible in calculating income from any source, they will continue to be relieved in that way. To cut to the chase, I would like to ask the Minister a number of questions. What assessment has he made of the levels of tax avoidance regarding these specific payments of patent royalties? I would like to hear him state, for the record, why he feels the clause is so important.

The Government stated in their summary of impacts that

“the proposed changes will impact only a small number of individuals and households who pay patent royalties other than as part of a trade or profession”.

Will the Minister tell us exactly what assessment has been made of the numbers of businesses and households affected by the changes?

The Government also stated in the summary of impacts that

“businesses will need to understand the effect of the changes to advise the small number of their clients that may be affected”.

Given that the changes will have effect for payments made on or after 5 December 2012, will the Minister tell us what guidance he has given to businesses regarding the measure and what efforts he has made to publicise it to ensure that businesses are already fully aware of it and its impact? Or, will he tell us what additional guidance he intends to introduce or whether he intends to take any action to alert businesses to the measures in the clause?

Photo of Sajid Javid Sajid Javid The Economic Secretary to the Treasury

Clause 15 makes changes to protect the Exchequer from a loss of tax resulting from avoidance arrangements exploiting the income tax relief of patent royalty payments. It is one of a number of measures in the Bill to ensure that individuals and businesses cannot exploit loopholes in the tax legislation to gain unintended and unfair tax advantages.

In October 2012, HMRC became aware of a new income tax avoidance scheme that was being marketed to wealthy individuals. It made use of this little-known relief for patent royalty payments. The relief in question was unlimited and given as a reduction to individuals’ net taxable income. The avoidance scheme that exploited it was structured so that the amount of tax relief that could be claimed was greater than the net outlay by the claimant. The relief applied only to those patent royalty payments that were not relieved from tax in any other way, for example as business expenses.

Individuals will therefore continue to receive income tax relief for the vast majority of patent royalty payments in the usual way. The changes made by clause 15 will abolish the relief for non-business patent royalty payments made by individuals and other persons who are within the charge to income tax, such as trustees. Some wealthy individuals have in the past had an appetite for similar  schemes. Using the data from those other schemes, the potential tax loss from the scheme was estimated at £100 million per annum. The potential tax loss for the period from the date of the autumn statement to the end of the 2012-13 tax year was estimated at £50 million.

The abolition of the relief, with immediate effect, was therefore announced in the most recent autumn statement. The relief was little known and it was not thought to have been used that much, in any case in recent years. In fact, when it was announced—[Interruption.] Was it something I said? I am surprised that hon. Members find dealing with tax avoidance such a joyous matter.

Photo of Ian Mearns Ian Mearns Labour, Gateshead

I would just like to wish the Minister a nice weekend.

Photo of Sir David Amess Sir David Amess Conservative, Southend West

Order. It is not necessary for hon. Members to make an intervention when they are leaving—but do have a nice weekend.

Photo of Sajid Javid Sajid Javid The Economic Secretary to the Treasury

I have taken the hint, Mr Amess.

To ensure that compliant taxpayers would not be disadvantaged, a written ministerial statement announcing the change invited anyone who thought that they had been adversely affected to contact HMRC. No representations were made to HMRC following that  announcement. There was no consultation before the abolition of the relief from the date of announcement at the time of the autumn statement.

Photo of Nigel Mills Nigel Mills Conservative, Amber Valley

Just so we know where we are for next year, would this scheme have been ruled ineffective by the general anti-abuse rule, so that in future years we would not need to have had such provisions?

Photo of Sajid Javid Sajid Javid The Economic Secretary to the Treasury

My hon. Friend, as always, makes a good and incisive point. The general anti-abuse rule, which will be introduced by the Government—something that was not done in the 13 years of the previous Government —will help to tackle future tax avoidance schemes and help the Government to act more quickly as soon as such schemes come to their notice.

The clause removes an opportunity for avoidance and, at the same time, has simplified tax legislation by removing an obscure relief. I therefore recommend that the clause stand part of the Bill.

Question put and agreed to.

Clause 15 accordingly ordered to stand part of the Bill.

Ordered, That further consideration be now adjourned—(Greg Hands.)

Adjourned till Tuesday 21 May at ten minutes past Nine o’clock.