Ivory Towers
ALLISON PLAGER reports the final debate of the Finance Bill in the House of Commons.
Ivory Towers
ALLISON PLAGER reports the final debate of the Finance Bill in the House of Commons.
THE REPORT STAGE of the Finance Bill took place on 6 and 7 July 2004. This provides a final opportunity for the House of Commons to debate clauses and Schedules in the Bill and for the Government and Opposition to introduce new clauses and amendments. This in fact the Government did with gusto. Howard Flight, for the Opposition, complained that '180 and more new clauses and amendments' had been tabled for Report, leaving 'quite insufficient time for the various professionals to pore through them in detail to ensure that there are no unintended effects'.
Responding to Mr Flight's complaints, Dawn Primarolo, the Paymaster General, said that she felt 'the same frustration as other members at the need for Treasury ministers to act in that way, but such is the problem of the creativity of a small number of accountants, tax planners, legal professionals and companies'. She said that they had to be 'held in check' to prevent the Treasury losing 'vast amounts of revenue'.
The fact is, as the following shows, that at least in respect of tax planning schemes, Ms Primarolo is right. But, how sensible is it to keep making new rules? The Government is like a dog chasing its tail: it never quite gets hold of its goal. As soon as one arrangement is legislated against, someone gets around the new legislation, thus necessitating that new arrangement to be closed. And so it goes on. It is not surprising that the tax legislation is in the mess that it is, given the piecemeal way in which it is formed. There must be a better way.
Avoidance clauses
Dawn Primarolo introduced new clause 9, 'Rent factoring of leases of plant or machinery'. She said that the new clause would prevent new avoidance using arrangements being marketed to circumvent the effect of clause 134 of the Bill. This clause legislated against avoidance through sale and finance leaseback or lease and finance leaseback generating double benefits. Ms Primarolo said that 'aggressive new schemes' now existed which achieved similar results by 'generating a tax-free sum from the sale of rental income streams from the leasing of plant and machinery'. New clause 9 ensured that such income streams would be taxed as rental income.
New clause 10, 'Manufactured payments under arrangements having an unallowable purpose', would prevent companies from avoiding corporation tax by entering into artificial arrangements involving manufactured payments. The new clause introduced 'an unallowable purpose rule for the manufactured payments' denying tax relief for that payment where it could be attributed to an unallowable purpose, such as tax avoidance.
Both clauses were added to the Bill.
New clause 11, 'Gifts of shares, securities and real property to charities, etc .' was tabled by John Healey, Economic Secretary. This clause ensures that the income tax deduction for the donor cannot exceed the value of the net benefit to the charity. Mr Healey said that 'evidence of complex avoidance schemes' had been 'recently' uncovered, but was unable to say how much it had cost the Exchequer. This clause was also added to the Bill.
All three of the above clauses were covered in the Update pages of Taxation , 8 July 2004 on page 378.
Other changes
Ruth Kelly introduced new clauses 12 'Overseas pension schemes: migrant member relief', 13 'Non-United Kingdom schemes: application of certain charges', and 14 'Appeal against decision to exclude recognised overseas pension scheme' to the Bill. Again, the Government was castigated for introducing new clauses but without the excuse of reacting to events which could not have been anticipated. In the spirit of conciliation, Ruth Kelly, Financial Secretary, apologised, acknowledging that it would have been desirable to have included them 'in committee'.
The clauses were added to the Bill.
New clauses were also added in respect of stamp duty land tax, access for disabled persons, individual savings accounts, before the debate moved on to the topic which continues to excite … the disclosure rules.
Disclosure
Howard Flight lamented that the so-called 'dividing line' had not been resolved and proposed a new clause 7 which would clarify the purpose of the new rules. His concern was that it would be impossible for advisers to differentiate between schemes that must be disclosed and ordinary tax planning. Dawn Primarolo scoffed that surely advisers, who were 'highly paid, highly qualified and intelligent', would know when advice they gave would be used to 'avoid tax when it should not be avoided'. Like a thunderstorm, the argument about this point rumbled on for a while, with Ms Primarolo interspersing periodically that the disclosure rules were aimed at 'artificial and contrived schemes, such as gilt strips …'. Quentin Davies wanted a definition of the words 'artificial' and 'contrived', but none was forthcoming. Ms Primarolo said:
'There is a genuine difficulty, I acknowledge, in drawing a clear line between advice on marketed schemes, such as the gilt strip scheme … and planning advice — advice on a major commercial transaction such as an acquisition or merger; however, it is clearly bespoke advice … It is not clear on which side of the dividing line between bespoke advice and advice on marketed or off-the-shelf schemes particular advice will fall. Trying to target the disclosure rules that way would make it even harder for the majority of compliant advisers to apply them …'
So, there it is. It is too difficult for the Government to clarify the dividing line, so it is not going to bother even to try. It is comforting to know that the tax legislation affecting the entire taxpaying population of the United Kingdom is in such able hands.
Ms Primarolo did say that the Government did not want to 'impinge on straightforward tax planning'.
Howard Flight's proposed new clause was put to the vote, and negatived.
Another exciting matter
The non-corporate distribution rate cropped up again for debate. Dr Vincent Cable for the Liberal Democrats proposed the substitution of 19 per cent with five per cent. Dawn Primarolo said that it was a
'complete fallacy that the introduction of the small companies rate makes calculations for companies more complex — it does not. The scheme is extremely simple and it works through the corporate tax system. The system is straightforward for companies that start as micro-companies, reinvest in themselves and grow, because the zero rate will be left in place to assist such companies.'
Really, it makes you wonder what all the fuss is about. Can tax advisers have got it so wrong?
Ms Primarolo said that setting a rate of five per cent would increase complexity, and 'the Exchequer, on behalf of all taxpayers who pay their fair rate of tax, rejects it as a principle' [that word fair again].
And another thing
No debate on the Finance Bill could be complete without reference to the infamous pre-owned asset measures. In essence, the debate was like a pantomime scene, with Dawn Primarolo on one side saying that the measure was not retrospective, and Howard Flight and John Burnett on the other saying that it was.
Howard Flight proposed amendments which would restrict the starting date of the measure to 19 June 2003, the date when the Government last amended the gifts with reservation rules. In addition, he proposed amendments which would exclude from the charge interests in trusts that have never previously been treated as gifts with reservation. Another amendment would 'tackle the most ridiculous aspect' of the rules, i.e. that sales of part interests in property for full consideration are caught.
John Burnett was interested in the annual de minimis limit of £5,000. He wanted to know if that limit was exceeded, would the whole sum be charged, or just the surplus amount. Did it operate, he asked, with a 'slab effect, as with stamp duty'?
Dawn Primarolo did not care to align the pre-owned asset de minimis limit with stamp duty, preferring to call it a 'cliff edge effect'. If the value were £5,001, the whole amount would be chargeable, not just the £1 — a rose by any other name …?
Mr Burnett then got into trouble saying that the tax 'criminalises the innocent'. Ms Primarolo took great exception to this, saying that the arrangements 'do not criminalise anyone'. What was being proposed was that 'people are not allowed to avoid the tax in the first place, with which all good, fair taxpayers comply anyway'. It is an interesting concept a 'good, fair taxpayer' … if a taxpayer beats up his wife, but pays the correct (according to the Government) amount of tax, is he a 'good, fair taxpayer'? But this is to digress.
Dawn Primarolo said she could not agree with the Opposition's amendments. She explained at first that the legislation was needed to 'tackle a range of artificial avoidance schemes' whereby 'wealthy persons appear to give their assets away so that they can take advantage of the inheritance tax exemption for lifetime gifts', although the schemes they employ allow them to continue to use the assets as they always have. She mentioned Government amendments which refined the exclusions in paragraph 11 of Schedule 15 and dealt with overseas property. The legislation enabling people to reverse the effect of what are now classed as 'avoidance schemes' was also improved. Ms Primarolo said that the Government amendments would ensure that when such an election was made, 'only the appropriate proportion of the property's value is brought back into the person's taxable estate'.
With regard to the idea of disapplying the charge from arrangements made before 19 June 2003, Ms Primarolo said that the anti-avoidance legislation referred to by Howard Flight related to Eversden schemes. This case had not acted as a 'seal of approval throughout the tax system to the future consequences of such schemes'.
Interests in trusts that had never been treated as gifts with reservation, could be dealt with 'using other means provided in these arrangements'. With regard to the amendment concerning the sale of shares of interests in land, this problem was still under consideration, and if there was a problem would be addressed in regulations or in a future Finance Bill.
The de minimis limit would not be increased to the Opposition's suggested £50,000, rather than £5,000 as this would allow 'wealthy owners to get rid of assets worth up to £1 million and retain the use of them without attracting the charge'. The £5,000 amount equated to capital values of £100,000 and this seemed sufficient to Ms Primarolo.
She added, by way of warning presumably, that 'if Schedule 15 brings home the message that avoidance is not a one-way bet — by that I mean that people do not just get away with it and then do not have to do anything about it — it will be a useful addition to the direction of the benefit in the Schedule'. The 'law of the land is that people pay this tax'. John Gummer interrupted Ms Primarolo reminding her that it was retrospective legislation, but she still refused to accept this, saying that the law was 'changing' and that 'transitional arrangements' had been established.
As might be expected, the Opposition's amendments were negatived.
After some more amendments relating to pension simplification and oil taxation, the Finance Bill was read for a third time and passed.
(Hansard, 6 and 7 July 2004, Vol 423, Nos 114 and 115.)
