Finance Bill Progress - Drama Queen

ALLISON PLAGER reports on the eleventh and twelfth sittings of the debate of the Finance Bill 2002 by Standing Committee F.

PERCEIVED ABUSE OF favourable tax reliefs is a problem for all Governments, not least the current one. Among the topics up for debate in the eleventh and twelfth sittings were gift aid, films, and regeneration of land in disadvantaged areas, all of which offer substantial tax savings, but also the potential for manipulation. In respect of the relief for British qualifying films, the Government seems particularly to have taken to heart that the relief has not been used as it intended.

Withholding tax

However, the eleventh sitting started with a more mundane matter, namely the start date of clause 93: deductions of tax - payments to exempt bodies. Howard Flight tabled an amendment that this be brought forward to the date of Royal Assent from 1 October 2002.

Defending the original date, Ruth Kelly said that clause 93 removed the obligation for companies to withhold tax on payments of interest royalties, annuities and other annual payments made to specified tax exempt bodies. In particular, charities, local authorities and pension funds would benefit, as they would not have to claim repayment of tax paid. The reason for making the operative date 1 October 2002, was to allow firms enough time to 'establish their systems under the changed rules'.

Mr Flight accepted Ms Kelly's explanation, and withdrew the amendment. Clauses 93 and 94 were ordered to stand part of the Bill.

Royalties overseas

Clause 95 concerned arrangements under which companies can pay royalties to overseas recipients without deducting tax at source or obtaining Revenue approval. Currently, a United Kingdom company has to withhold 20 per cent tax, or 22 per cent for royalties, and account for it to the Revenue. Howard Flight wanted to amend the clause to include all such payments.

Ruth Kelly said that this would not be appropriate. While the cost of the new scheme is negligible where royalties are concerned, it would be in the region of £5 million a year were it extended to all interest payments. Mr Flight agreed to withdraw the amendment.

Before the clause was ordered to stand part of the Bill, Ms Kelly said that where a 'genuine' mistake was made, it could be rectified later, and the tax paid with interest, but that a penalty in such circumstances would be 'very unlikely' to be incurred.

Charitable giving

The next amendments related to clause 96: gifts of real property to charity. Howard Flight began by saying that the addition of allowing tax relief on gifts of property to charity was welcome, and tabled an amendment that relief also be allowable on gifts of art treasures. He said that to include this amendment would 'constitute a major step forward in helping public museums and galleries to expand their holdings'. It would also be a spur to encourage gifts of art work to other charities, and may even help to keep valuable works of art in the country. He anticipated, however, that the Government would argue that the cost to the Exchequer would be too great to include the amendment in this year's Bill, but hoped that if that were the case, the amendment would be 'on the agenda next year'.

Edward Davey, supporting Mr Flight's amendment, said that he would like to broaden the scope of the amendment to include a range of chattels, i.e., all moveable property. He said that there were potential advantages to such donations, since charities could find the donation of items such as computers, scientific equipment, and motor vehicles, very useful. They would possibly be more useful than the cash value of the object.

Cost was 'categorically' not the reason why the Government was against the proposed amendment, said John Healey. Rather it was the possibility that charities would then receive assets which had no investment value or which could not easily be converted into money. This would add to the complexity of administering the relief both for donors and the Revenue. Michael Jack countered that charitable organisations existed which solely collect individual items, such as motor cars. He asked why they should not have the benefit of the relief if they were offered a car. Mr Healey replied that the idea was to boost charities 'right across the field, irrespective of the particular activities that they undertake'. He said that Mr Jack's example was 'relatively uncommon', and that most charities were not geared 'specifically to collect items'.

Clearly possessed of a fertile imagination, Mr Healey seemed to think that charities would 'be badgered by all sorts of people to accept all sorts of gifts under the amendments', and that they would be a 'source of aggravation and unnecessary activity'. The debate continued in similar vein for a short time, until Mr Flight, saying that there was 'not much point in voting on the issue', (but rarely is there much point in voting on issues raised in recent Finance Bill debates!) agreed to withdraw his amendment, as did Mr Davey.

Land outside the United Kingdom

Another amendment to clause 96 was proposed by Howard Flight, who mooted that the relief be extended to land held outside the United Kingdom. John Healey said that this 'would make it complicated to administer and virtually impossible to police'. It was relatively simple for the Revenue to obtain and confirm information relating to United Kingdom property, but it was 'not hard to foresee the problems that would be caused by properties that could be anywhere in the world'.

Michael Jack while partly sympathising with Mr Healey's argument, said that 'in a world of double tax treaties the internationalisation of tax and other matters... such as valuations, are part and parcel of the issue'. He emotively suggested that if a children's charity were offered a holiday home in a warm country in order to provide 'good quality' holidays to United Kingdom children, under the current structure of the clause 'it would be unable to take control to show that that particular property was of worth to it'. This would 'inhibit its ability to be of service to United Kingdom children'.

While appreciating the picture painted by Mr Jack, Mr Healey said that the legislation was aimed at the 'general, not the exceptional, case'. It was also pointed out that a charity which did not want to accept a gift of land in a foreign country could then find itself in an awkward position.

The amendment was withdrawn.

Easements

The next amendments to clause 96 were tabled by the Government. John Healey explained that the amendments were designed to clarify the position of easements included as part of a gift of land, to take into account Scottish law.

Not surprisingly, these amendments were agreed.

Losses

Howard Flight outlined the problem that if a donor makes a gift of land or shares to a charity, for capital gains tax purposes the transfer is made on a no gain no loss basis. However, there was a likelihood that the donor could make a loss in the gift and would, in doing so, lose the available loss. Equally, if he first sold the land or shares, then gave the proceeds to charity, he would be able to use the loss, but denied the tax relief for the cash gift because of the anti-avoidance rules in section 252F, Finance Act 1990.

Unable to provide a satisfactory response, Mr Healey agreed to consider the matter further, and Mr Flight agreed to withdraw the amendment.

Other points

There followed a brief stand part debate on other parts of the clause. John Burnett requested clarification on the danger of recapture of tax relief. This would happen where the person who gifted land later became entitled to an interest in the land, for less than the full consideration. This was 'an extremely wide provision'. His second concern was with the possibility relief may be withdrawn where a person gave land to a charity on the condition that it was used for charitable purposes, and the charitable use ended many years later.

John Healey brushed aside these concerns saying that the clawback provisions were 'clear', and that there was a six-year limit. Ultimately, Mr Healey could not quell Mr Burnett's concerns, so he said that he would write to him on the matter.

Clause 96 was ordered to stand part of the Bill.

Gift aid

Staying in charitable mode, clause 97: gift aid - election to be treated as if gift made in previous tax year, came under discussion. Howard Flight tabled four amendments which he said would 'extend the one-year roll-back for gift aid to a six year roll-forward', thereby making the scheme more flexible, and encouraging greater charitable giving.

Discouraging acceptance of the amendments, John Healey trotted out the well-rehearsed claim that to do this would 'add considerable complexity', and confuse taxpayers over which donations had been identified for relief. Mr Flight surrendered, and withdrew the amendments.

Mr Flight's next amendment concerned the date from which gift aid tax roll-back provisions should apply, suggesting that from the date the Act was passed was more appropriate than from April 2003. He accepted Mr Healey's explanation that this would not be practical, as the claim will usually be made via the taxpayer's self-assessment return which has to be amended accordingly. Since most 2001-02 forms have been issued, it was too late to amend the forms.

New clauses

The discussion on gift aid continued, with the proposals for two new clauses. In essence, new clause 12 would enable a donor who had insufficient total income and gains to absorb relief from a particular gift to carry forward the relief and treat it as though it arose from a gift made in future years, until the relief was exhausted. Secondly, the donor should be able to elect that any relief not absorbed by his total income be allowed against his capital gain for the year.

Putting the case for a new clause 14, Roger Casale suggested that non-taxpayers be allowed to make small donations which qualify for gift aid, without becoming liable to tax. He proposed an annual limit of £520. This would alleviate some of the administration problems associated with gift aid, such as charities having to write to donors to remind them of potential tax liabilities if their income no longer covered the relief.

After some debate in support of these clauses, John Healey asked the committee to reject both new clauses, although he appreciated the concerns raised. In respect of a non-taxpayer's donation being included in a gift aid claim from a charity, he said that the Revenue invited the charity to 'make good the shortfall rather than pursuing the individual taxpayer'. He reassured the committee that the carry back provision was available to all taxpayers, and that the Revenue would 'make available alternative routes to those who do not receive self-assessment returns'.

In respect of new clause 12, he saw no reason to allow unused relief to be set against capital gains, since such gifts had 'already enjoyed full relief from capital gains tax on the gift itself'.

As to allowing non-taxpayers to make gifts of up to £520 a year under gift aid, Mr Healey said that this would be equivalent to a 'grant from the Exchequer', and was not keen to pursue that idea.

Clause 97 was ordered to stand part of the Bill, and the committee adjourned.

Dramatic matters

Luvviedom was the subject of the first clause which came under discussion in the twelfth sitting. In relation to clause 98 films: restriction of relief to films genuinely intended for theatrical release, Howard Flight said that the 'tightening up amendments are somewhat flawed'. They would affect several outstanding contracts for television films which were already committed, and it was 'against principle to change rules in the middle of that'. The amendments also ruled out all television productions, which would affect such dramas as 'The Jewel in the Crown', which had been a major production and a valuable export. He wanted the clause amended to take these factors into account.

Dawn Primarolo responded early in the debate. She first reminded the committee about why, in 1997, the relief was introduced. Then she explained the new restrictions. They were needed because the Government felt that the relief was not being used as intended. For example, television drama series were typically made by commission from a broadcaster and had a guaranteed customer and income, yet producers had managed to access tax relief 'in order to reduce the price paid to the broadcaster' and this was unacceptable. There was 'no justification for television's use of special incentives' that were aimed at supporting the British film industry, and the clause was devised to prevent that happening.

Clearly, the Government is a little sensitive on this issue, since later, Ms Primarolo says that in initially providing the relief, the Government 'acted in good faith', but believes that 'faith has been breached'.

Mark Field accepted Ms Primarolo's point on tightening up the eligibility for the tax relief, but added that he hoped that an eye would be kept on the situation to ensure that top qualify film production in the United Kingdom was maintained. The amendment was withdrawn, but changes to the clause were subsequently tabled by the Government (see Taxation, 4 July 2002 at page 371).

Howard Flight went on to table another amendment to the clause to the effect that those who had committed expenditure in the expectation of receiving the higher relief would still get it. The amendment was supported by Chris Grayling, Dr John Pugh, and Mark Hoban. Responding, Dawn Primarolo said that the Government was sympathetic to the idea of transitional relief, but added that there were 'considerable difficulties in constructing a transitional relief that can be limited to circumstances in which it would be abused'. However, she was 'struggling to respond to it without losing revenue to the Government. She said that the points raised by the amendment were 'very valuable' and made 'a commitment to the committee' to try to settle them on report.

Mr Flight withdrew his amendment 'in anticipation of the Government solving the nitty gritty problems'.

Commercial return

An amendment tabled by Howard Flight concerned clause 100: distributions - reasonable commercial return for use of principal secured. The clause affects financial institutions which deal in asset linked securities, where the value of the security is linked to the value of other unrelated assets. Companies can claim tax relief for interest expenditure, unless the interest is considered excessive. The intention of the clause is to provide certainty and redress a possible disadvantage of the United Kingdom compared with other countries. Mr Flight's amendment was to make clear that, in certain circumstances, the payment of interest on credit linked notes would not be treated as a distribution.

Dawn Primarolo said that the amendment would relax the rules defining a distribution of profit, and effectively provide interest relief for dividends. She said that the point raised in the amendment would be covered by the Revenue's guidance notes, so Mr Flight withdrew his amendment.

After a Government sponsored amendment was made, clause 100 was ordered to stand part of the Bill, as were clauses 106 and 107.

Venture capital trusts

In respect of Schedule 33, Venture capital trusts, Howard Flight had a 'small, but important' point to make. Up to now, it has not been possible for venture capital trusts to invest in the securities of other venture capital trusts, which Mr Flight felt should now be possible. Thus his amendments aimed to 'draw the definition of merger slightly more widely, to allow as many commercial situations in that territory to be covered' as was reasonable.

Dawn Primarolo said that what the amendment wanted to provide 'is already provided'. However, she would give the matter further consideration, and ensure that it was covered fully.

Mr Flight withdrew the amendment, and Schedule 33 was agreed to.

Disadvantaged areas

The committee's debate moved to clause 108: land in disadvantaged areas, i.e., the exemption from stamp duty on commercial properties and certain other defined properties in disadvantaged areas where the sale proceeds are under £150,000. Howard Flight tabled an amendment proposed by the Law Society. The latter was concerned that a building, for instance a church, could be adapted for residential use and be treated accordingly as a residential building. This would mean that it would not qualify for stamp duty relief. The amendment would ensure that it did so qualify.

Dawn Primarolo said that in most cases, there would be no doubt about whether or not a building is residential. However, to help in situations where doubt arose, the Revenue would produce a statement of practice 'with key stakeholders, including representative organisation'. The phrase 'suitable for use as a dwelling' in the clause was not intended to be interpreted as a church or office block.

The amendment was withdrawn.

Stamp duty rates

Howard Flight introduced a new clause 16: rate of stamp duty on commercial property. He pointed out that since 1997 there have been four increases in stamp duty, and that about 70 per cent of the extra duty had fallen on commercial property. The new clause was designed to reduce the level of duty on commercial property by reducing the maximum rate to two per cent. He said that the relevance of new clause 16 to clause 108 was that the Government had established in the latter clause that commercial and residential property could be separated for the purposes of stamp duty.

The debate then seemed to wander into a wider range discussing the merits of using stamp duty on residential and commercial property as a redistributive vehicle, and the variations in property prices up and down the country. Dawn Primarolo, however, brought the committee back to the point, and said that there was a 'huge gulf between the Government and the Opposition on the issue'. With regard to the new clause separating commercial and residential rates of stamp duty, she said that it was not the right time to consider 'decoupling the rates'. Furthermore, to cut the top rate to two per cent would cost the Exchequer £740 million a year, when already, she said, 'some purchasers... of commercial property are actively avoiding stamp duty', to the estimated tune of £10 billion of property value. She felt it more appropriate to consider the structure of the tax rather than the rates.

Mr Flight retired wounded, but referred to a comment that he had made about clause 108 to which Ms Primarolo had not responded. This was that the list in the clause defining certain categories as not residential did not seem logical, and that other equally deserving categories existed.

The committee adjourned at this juncture, but returned for the thirteenth sitting the same afternoon. Feelings which had evidently been running high in the morning had calmed, and Mr Flight concluded by wishing clause 108 'luck' since everyone wanted to see 'improvements to run-down areas in inner cities'. He did not press his new clause 16.

Clause 108 was ordered to stand part of the Bill.

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