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RICHARD CURTIS reports on the penultimate session of Standing Committee A's review of the Finance Bill 2004.
THE FIRST FEW minutes of the twentieth and penultimate session of Committee A's deliberations were devoted to the conclusion of the pensions simplification provisions, and with the end of that matter, Jon Healey (the Economic Secretary to the Treasury) noted that 'in many ways we have reached the end in the committee proceedings'. However there did remain some points of interest, as subsequent discussions were to prove.
Mumbo Jumbo
RICHARD CURTIS reports on the penultimate session of Standing Committee A's review of the Finance Bill 2004.
THE FIRST FEW minutes of the twentieth and penultimate session of Committee A's deliberations were devoted to the conclusion of the pensions simplification provisions, and with the end of that matter, Jon Healey (the Economic Secretary to the Treasury) noted that 'in many ways we have reached the end in the committee proceedings'. However there did remain some points of interest, as subsequent discussions were to prove.
The oil industry
The sessions started rather innocuously with a discussion of clauses appertaining to the oil industry. I seem to recall that North Sea oil production peaked several years ago and John Healey admitted that the Government 'recognises that the North Sea is entering a mature phase where future developments depend upon extending the life of existing infrastructure'. Because new fields are smaller and less profitable than earlier finds, the Government was, in clause 271 , introducing a lower tariff charge for all 'new business', which means business under contracts agreed after 9 April 2003, the date of the 2003 Budget.
Other oil-based measures
Clause 272 introduces a credit for the costs of exploration if they cannot immediately be deducted for tax. This seemed likely to be of benefit to the smaller operators in the industry.
Clauses 273 and 274 are anti-avoidance measures. The first is designed to stop connected-party transactions. Howard Flight was unconvinced that the scheme which the clause was designed to prevent actually worked, so the Opposition had no objections to this measure. The second clause stops the circumvention of restrictions on the use of terminal losses.
Mr Tyrie was not impressed by clause 275 , which is designed to avoid the double taxation of certain fuels as a consequence of the climate change levy. Quoting from a recent report by Edward Troup, head of business tax policy at Customs and Inland Revenue, he argued that 'once the Government started down this particular road [climate change levy] from the wrong end of town, the complexities, dead ends and diversions it would find itself in were inevitable'.
John Healey refused to be drawn on this and explained that the measure was needed to avoid double taxation of new fuels such as biodiesel and bioethanol and the clause was agreed.
Aggregates in Northern Ireland
Clause 277 amends the relief scheme for aggregates in Northern Ireland, by ending the scheme on 31 March 2012, one year earlier than planned. This was to comply with European Union rules on state aid. Mr Marris (Labour), wanted the thinking behind the clause explained. He noted that '60 per cent of the gross domestic product of that economy [Northern Ireland] is down to the government as opposed to 40 per cent in the rest of the United Kingdom'. He was presumably satisfied by Mr Healey's explanation that, in addition to having a long land border, 'the Northern Ireland economy — particularly in the case of the aggregates industry … is a special and unique case as far as the United Kingdom is concerned'. He concluded that 'the new scheme is more generous, better suited to Northern Ireland's circumstances, and strongly welcomed by Northern Irish industry…'. As previously noted, it is rare that a tax relief is not welcomed by someone or other.
Lorry road-user charge
According to Mr Tyrie, clause 278 was 'another apparently innocuous clause that, if we scratch it, looks less nice underneath than it appears on the surface'. It proposes that responsibility for preparing the lorry road-user charge is assigned to Customs and will 'be administered and enforced in accordance with such provisions as Parliament may determine'. He was concerned that a report by Professor Alan McKinnon was 'a devastating assault on the Government's proposals'. Would Parliament be able to discuss future legislation here? Mr Healey confirmed that clause 278 does not give general powers and there would be opportunities for discussions in the House.
Estates
Clause 279 provides for an extension to the existing simplified inheritance tax procedures. Current regulations (The Inheritance Tax (Delivery of Accounts)(Excepted Estates) Regulations SI 2002 No 1733) specify that an inheritance tax account is not required if an estate is simple and smaller than £240,000. This clause will allow amendments to be made to the regulations to allow other non-taxpaying estates to be brought within the rules; for example estates that are greater than the threshold, but which are covered for the exemption for transfers to a spouse or charity. Clauses 280 and 281 deal with associated changes to probate rules and penalties. Mr Tyrie was concerned at the lack of clarity in the accompanying Explanatory Notes and suggested that we 'keep any eye out for mumbo-jumbo'. Mr Burnett was concerned at the application of the penalty provisions when a genuine valuation was later amended. Dawn Primarolo confirmed that 'the appeals procedure used against any penalties would, in this process, be the same as in any other. Therefore reasonableness would be used as a measure'.
Tax avoidance schemes
The committee proved that it had not reached the end of its duties when it moved to the clauses dealing with the 'disclosure of tax avoidance schemes'.
Arrangements and proposals
Mr Flight described this section of the Finance Bill as 'the most controversial part' and clause 290 was 'the most important focus'. In his view 'the reporting of the tax avoidance schemes being marketed is a "no brainer"'. People know when they are marketing such schemes and when they are being sold to them. However, framing the clauses in much wider terminology has led to a lack of clarity and would include normal commercial transactions that are structured in a tax efficient way. Concerns were on the notification date, whether the proposal was notifiable, definitions, multiple promoters and the formula used.
Dawn Primarolo indicated that the thrust of the legislation is against 'those who know that they have a tax liability and seek to extinguish it in ways that they choose to keep secret from the Revenue, sometimes with less than candid returns'. Mr Burnett and Mr Flight attempted to 'tease out' from Ms Primarolo 'exactly what she was trying to hit'. This drew the comment from Mr Marris (Labour), 'tax avoidance'. However, Ms Primarolo continued:
'It is not the intention of the disclosure rules to stop accountants advising their clients on the tax breaks and concessions that Parliament has introduced. That is entirely acceptable tax planning ... Disclosure will not of itself affect the tax treatment of a particular transaction. Nor will the fact that a scheme falls within the new rules invite any judgment about the nature of the scheme ... The heart of the issue is the question of abusive schemes.'
Mr Flight said that 'marketing is a key practical dividing line' and agreed that 'clever cuts schemes' should be targeted, but he remained concerned that clause 290 does not use marketing as the dividing line. Ms Primarolo agreed that it was difficult to draw a clear dividing line between 'acceptable tax planning' and 'unacceptable tax avoidance', the new rules 'are aimed at those types of transactions where, in the Inland Revenue's experience, there is a risk of unacceptably high avoidance'. The amendments to clause 290 clarify the definition of 'a notifiable arrangement' as 'one that might be expected to produce a tax advantage, rather than one that does produce such an advantage' and the second confirms that the allocation of a reference number by the Revenue was a purely administrative matter; but, she added, 'if it stops some tax planners in their tracks, good'. In further explaining the clause, Ms Primarolo added that having decided whether there was a tax advantage to be obtained, the test was narrowed to focus on whether the arrangements are a 'financial product' or an 'employment product'.
She then addressed three areas of concern.
First, on the definition of promoter, the Government wanted to strike the right balance. It was admitted that clause 291 was drawn very widely, but this would be narrowed by regulations detailing the circumstances in which a person would not be treated as a promoter. She confirmed that 'only those who are at the heart of a scheme or arrangement, and are capable of meeting the obligations, are treated as promoters'.
Secondly, with regards to the definitions of what has to be disclosed, the Government believes that the employment products test meets its objectives (apart from some minor refinements), but she agreed that 'the financial products test as drafted is, frankly, proving difficult to apply in practice' and she confirmed that the formula requiring promoters to calculate the value of the tax benefit would be dropped.
Finally, with regard to the operative date and in the absence of evidence of the marketing of arrangements since Budget Day, promoters will now only be required to disclose arrangements involving financial products where the relevant date falls on or after 22 June 2004 (the date of the Committee meeting) and promoters will have until 31 October 2004 to declare financial product arrangements falling on or between 22 June and 31 July 2004. However, there was evidence of the marketing of employment products and where the relevant date for such arrangements fell between 18 March ( clause 302(3) ) or 23 April 2004 ( clause 302(4) ) and 31 July 2004, a promoter had to make a declaration by 31 October 2004.
The final part of the debate on this clause related to the question of whether the Revenue should issue anonymised rulings on the status of disclosed schemes. This was proposed by Mr Flight and Mr Burnett, but Ms Primarolo reiterated that the allocation of a number was not a judgment on the scheme and she saw this as the introduction of a general anti-avoidance regulations, which most businesses and advisers seemed to be opposed to.
Meaning of 'promoter'
Clause 291 defines the meaning of 'promoter' with regard to notifiable arrangements and notifiable proposals. Mr Flight felt that the definition needed restricting to those parties who provided tax structures or tax services.
Dawn Primarolo felt that the current definition, which restricts promoter to someone who 'in the course of a trade, profession or business which involves the provision to other persons of services relating to taxation', was satisfactory, with the exception that it omitted banks from the definition. These would be brought within it by a government amendment. She was unhappy with Opposition amendments that would limit the scope and would enable an adviser to step back and ensure that they did not know whether the scheme was actually entered into. They could thus sidestep all of the rules.
Clause 291 stood as part of the Bill.
Duties of promoter
Clause 292 provides that a scheme promoter must give information to the Revenue. Mr Flight felt that whilst the five-day time limit was 'tight, but manageable' for mass-marketed schemes — which he believed should be the main target of the legislation — the limit took no account of the practicalities of business organisation, such as the need to confirm details, agree with colleagues, exact interpretation and confirm with clients. How would the trigger point be identified? The promoter only has five days to notify the Revenue, whilst the Revenue has 30 days to register the scheme and issue a number. He considered that the 30-day limit should also apply for more general advice.
Dawn Primarolo was 'not aware of any persuasive argument for allowing longer than five days, except in the early days of the new régime' as mentioned above. She recognised that there were concerns with multiple promoters and notification requirements and confirmed that this would be taken into account when revised regulations are issued to ensure that only those 'at the heart of the scheme' are treated as promoters.
Ms Primarolo also explained that taxpayers had to include the scheme registration number on their tax returns each year, until any tax advantage arising from the scheme has been exhausted. An Opposition amendment to remove this obligation would simply lead to unnecessary Revenue enquiries. Government amendments to the clause tidied up the wording to make it consistent and, to avoid Parliament having to approve a new notification form whenever the Revenue wanted to make a minor change, allowed this to be dealt with through the Revenue's normal processes.
There was further discussion as to where the line between normal tax planning and tax avoidance was drawn and although it was not satisfactorily resolved, the amendments were withdrawn and clause 292 stood.
Related clauses
Clauses 293 dealing with non-United Kingdom promoters was agreed without debate subject to a Government amendment. Mr Flight felt that clause 294 , which deals with the disclosure duties of a person entering into arrangements without a promoter, should be limited to normal self assessment reporting requirements and that it had moved well wide of the reporting of unacceptable schemes. Nevertheless, the clause was approved, as were clauses 295 (allocation of reference numbers), 296 (clients to be notified of those numbers) and 297 (the duties of parties to notify the Board of the scheme numbers).
Legal professional privilege
Clause 298 provides that nothing in Part 7 of the Finance Bill ('Disclosure of tax avoidance schemes') requires any person to disclose to the Inland Revenue any privileged information, which is defined as information with respect to which a claim to legal professional privilege (or in Scotland, confidentiality of communications) could be maintained in legal proceedings. Mr Flight noted that some lawyers felt that legal professional privilege meant that they did not have to comply with the disclosure provisions. Mr Burnett wondered if an advantage might be given to those covered by legal professional privilege.
Ms Primarolo felt that the law here was sufficient and that as notifications of schemes, etc. were anonymised, there should not be breach of privilege, 'that is probably why we have not heard from the Law Society — the provisions are pretty clear'. That said, she noted that the law on legal professional privilege was in a state of flux' following Three Rivers Council v Bank of England (No 10) [2004] EWCA Civ 218, which was under appeal. However, 'the disclosure rules do not override legal professional privilege, but that does not prevent compliance with the disclosure rules'.
The clause was approved.
