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It is a pleasure to have the opportunity to speak on this clause on disguised distribution arrangements involving derivative contracts. Derivatives are securities, the prices of which are dependent on, or derived from, one or more underlying assets. The derivative itself is merely a contract between two or more parties, although it can be treated as an asset in itself. The value of the derivative is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterised by high leverage.
In a total return swap, the party receiving the total return will receive any income generated by the asset, as well as the benefit if the price of the asset appreciates over the life of the swap. In return, the total return receiver must pay the owner of the asset the set rate over the life of the swap. This particular measure seeks, once again, to block avoidance schemes using total return swaps, where deductions are claimed for payments between companies in the same group under derivative contracts that are linked to company profits. The measure seeks to ensure that deductions are not allowed for corporation tax purposes where a payment is made under a derivative contract that is, in substance, a payment of profits.
The clause will introduce a new section to the CTA 2009 that provides that no deduction is allowable for corporation tax purposes where a payment is made from one group member to another using a derivative, and where that payment equates, in substance, to the profits of a group company. This is the second year in which the Government have acted to close a tax loophole related to total return swaps, following on from a clause on property land swaps in last year’s Bill. This measure blocks avoidance schemes in which deductions are claimed for payments between companies in the same group, if those payments are linked to company profits—I mentioned this in relation to derivative contracts. It will apply from 5 December 2015 to schemes entered into on any date.
HMRC is targeting group companies that use financial derivatives such as swaps to mitigate their tax position. The change to the legislation removes their ability to deduct, for corporation tax purposes, the value of a payment made to another group company using a derivative that essentially equates to the profits of the company. The effect of the measure would be to ensure that no tax deduction is due for payments of that nature.
Again, I have some questions for the Minister; it would be helpful if she could answer them in her response. The clause’s ultimate aim is to prevent profits from being shifted, for the purposes of tax avoidance, through the use of financial instruments such as derivatives and total return swaps. According to figures set out in the autumn statement and certified by the Office for Budget Responsibility, the measure is expected to generate £110 million over the four years 2013-14 to 2016-17. Although we welcome the fact that unlike some other corporation tax measures, this measure should generate some revenue for the Exchequer, it would have been interesting and informative to see more information on how the savings were calculated.
On numerous occasions, people have asked how HMRC will be able to bear down on, monitor and scrutinise tax avoidance and ensure that it is kept at the top of the agenda when further specialist staff might be removed from their posts by cuts. The Minister might want to comment on that. The estimated cost to the Exchequer of tax avoidance stands at £35 billion, and there is concern that that is likely to be an underestimate. She was unable, understandably at that point, to give me information on whether she expected all the amount predicted to be collected from one particular crackdown on tax avoidance. Can she give us any more information on how she expects the cost of tax avoidance to be reduced this year, and on what she expects to happen in the year ahead?
The Minister has already given some response to questions about the Public Accounts Committee report, and particularly on whether HMRC has tested the limits of its powers to address aggressive tax avoidance. I do not want to open up a tangential argument relating to what the PAC did or did not say or mean, but it is important to ask whether HMRC can pursue these matters as aggressively as people avoid tax by making use of various financial instruments. As I have said, we welcome the Government’s stated aim of making legislation simpler, more certain and less open to abuse, but there is concern about how that will keep pace with cuts to HMRC staff. Will that make enforcement of the rules, which are already complex, more difficult?
The tax information accompanying the clause predicts that the measure will generate about £110 million in additional revenue to the Exchequer over the next four years. It would be helpful if the Minister could explain or give further information about the estimates on which that figure was based and how it will be monitored over the next four years. Will the Minister at least recognise the point that I have been making throughout our debates on these clauses? I want to try to ensure that HMRC can gather as much evidence or intelligence as possible about the extent of tax avoidance and where there may be other loopholes. It might then be able to bring back further information to Parliament, so that we could consider the matter in more detail and seek to plug those other loopholes.
Clause 29 blocks corporation tax avoidance schemes involving total return swaps and other financial derivatives. The schemes involve a UK company entering into contracts, described as total return swaps, with another company in the same group. Let me briefly explain how the types of arrangements targeted by the clause are structured.
Under a typical contract, all the UK company’s profits are paid to another company in the same group, often based in a tax haven, in return for much smaller benefits, such as a small percentage of the profits being returned. The company making the payment claims a deduction against its profits for corporation tax purposes. The effect is that most or all of the profits escape taxation. The transaction in question is designed to confer a tax advantage that was never intended. The Government do not accept that such schemes achieve the tax avoidance benefit that is claimed, but the clause will put it beyond doubt that tax cannot be avoided in this way. The clause will provide that, where profits are paid away under a derivative contract of this type, no deduction will be allowed for tax purposes. The effect will be that the correct amount of profits will be taxed in the UK.
The legislation took effect from the date of the announcement at the autumn statement 2013. Some concerns were raised at the time that normal commercial arrangements could be affected. In response, the Government have published more detailed guidance and have made some minor changes to the final legislation to ensure that arrangements in the ordinary course of business will be unaffected.
I shall try to answer the hon. Lady’s questions. As I mentioned before in relation to general HMRC success in ensuring anti-avoidance, HMRC recovered £23 billion from large business between April 2010 and April 2013. Since April 2010, HMRC has collected more than £750 million in additional tax revenue from the UK’s 6,000 wealthiest individuals. HMRC is winning 80% of avoidance cases heard in the courts. Disclosures of tax avoidance fell by almost 50% between 2011-12 and 2012-13. As I said earlier, HMRC is doing pretty well at improving its ability to lock down anti-avoidance measures.
We are all appreciative of HMRC staff, who work extremely hard to identify tax avoiders, ensure that evidence is gathered, close down tax avoidance schemes and bring people to justice, where that is the right thing to do. Is the Minister able to say anything in answer to my question about potential cuts to the special staff who do such work at HMRC, and can she assure the Committee that that will not happen?
I can assure the hon. Lady that HMRC considers that it has the right level of resourcing for the job. Its success demonstrates that it is well resourced and doing a good job.
In answer to another of the hon. Lady’s questions, HMRC is aware of at least five companies that are involved in the specific avoidance that is tackled by the clause. Tax at risk from the scheme was estimated at £40 million in 2013-14 and £120 million in the first full year covered by the clause, which is yet another example of how well HMRC is doing in jumping on such avoidance as soon it becomes aware of it.
In conclusion, the clause ensures that companies cannot use derivative contracts to avoid tax by transferring their profits. It brings fairness and certainty to taxpayers and underlines the Government’s commitment to tackling tax avoidance.