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New Clause 6

Volume 408: debated on Tuesday 1 July 2003

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Intangible Fixed Assets: Tax Avoidance Arrangements And Related Parties

(1) Schedule 29 to the Finance Act 2002 (c. 23) (gains and losses of a company from intangible fixed assets) is amended as follows.

(2) In paragraph 111 (tax avoidance arrangements to be disregarded)—

  • (a) in subparagraph (1) for the words following "in determining" substitute "whether a debit or credit is to be brought into account under this Schedule or the amount of any such debit or credit", and
  • (b) in subparagraph (2)—
  • (i) for "under paragraph 9" in paragraph (a), and
  • (ii) for "under Part 4" in paragraph (b),
    substitute "under this Schedule".
  • (3) In paragraph 95(1) (cases in which persons are "related parties") at the end add—

    • "Case Four
    • P is a company and C is another company in the same group."

    (4) The amendments in this section—

  • (a) have effect in relation to the debits or credits to be brought into account for accounting periods beginning on or after 20th June 2003, and
  • (b) in relation to the debits or credits to be brought into account for any such period shall be deemed always to have had effect.
  • (5) For this purpose an accounting period beginning before, and ending on or after, that date is treated as if so much of that period as falls before that date, and so much of that period as falls on or after that date, were separate accounting periods.'.— [Dawn Primarolo.]

    Brought up, and read the First time.

    1.24 pm

    I beg to move, That the clause be read a Second time.

    Last year, after extensive consultation, the Government introduced new tax rules for companies' good will and intangible assets, such as patents, brand names and copyrights, which are vital for a modern, knowledge-based economy. The new rules, which are in schedule 29 of the Finance Act 2002, broadly allow companies to claim tax relief for those assets as they write them down in their accounts. Companies may alternatively elect to treat them as though they were written down at 4 per cent. per annum. The rules are meant to apply only to assets created by or acquired from an unrelated party after 31 March 2002.

    There is clear evidence of marketing tax avoidance schemes that are intended to bring assets that already existed on 31 March 2002 into the new regime to claim relief under the alternative 4 per cent. option. We estimate that there are approximately £400 billion to £600 billion of potentially eligible assets. If only a small fraction were brought into the new tax regime, the cost would be enormous, apart from the fact that that was not the intention. The cost would continue for the next 25 years.

    The avoidance schemes rely first on the fact that the anti-avoidance rule does not currently apply to the 4 per cent. relief. They then try to exploit a mismatch in the definitions of "related persons" in the intangibles rules and of a group for capital gains purposes. To put it simply, they try to transfer assets in a group for capital gains purposes so that no capital gains tax arises, while arranging matters so that the transfer is between unrelated persons for intangible assets purposes. Thus, the asset is treated as acquired from an unrelated person and can be brought within the new regime.

    The new clause would block such schemes by widening the scope of the anti-avoidance rules in schedule 29 of the 2002 Act and by tightening the definition of "related persons". It is a modest and proportionate response to an attempt to exploit a new relief. I underline our determination to act against tax avoidance speedily and firmly.

    I commend the new clause to hon. Members and I am happy to respond to any questions.

    The Paymaster General told us in a written statement on 20 June after the Committee had concluded its proceedings on 17 June that such a new clause would be tabled. It prompts us to ask why the Treasury and the Inland Revenue were unable to formulate it before the Finance Bill was considered or during the Committee's proceedings. That would have been more appropriate than taking up time now.

    It is clear that the changes will have an immediate effect and the new clause therefore smacks of panic by the Treasury and the Government. It is part of a transparent and notable theme that will become apparent in our proceedings today, in that it reflects a panic in the Treasury, which has splurged and wasted so much money that it now has to gather much, make every part of the tax system sweat and, above all, change the balance between the rights of the citizen taxpayer and those of the Government. I do not wish to explore that more general theme now because there will opportunities to do that later.

    The background note to the new clause is useful and I daresay that it would not have attracted controversy if it had been tabled when we considered the Bill in Committee. Paragraph 22 of the background notes states:
    "There is now clear evidence",
    to which the Paymaster General referred,
    "that companies are seeking to overcome the restrictions in Schedule 29, by exploiting a perceived mismatch between the definition of related persons in the intangibles rules and the definition of a group for capital gains purposes as well as the fact that the anti-avoidance rules in paragraph 111 of Schedule 29 do not extend to cover the optional 4 per cent. scheme."
    The new clause therefore tries to remove the mismatch. It has been decided that the provision will not be retrospective—a major issue with which we had frequently to contend in Committee. We may dispute the Government's ability to deploy money or doubt whether they deserve to receive so much taxpayers' money, given the way in which it is deployed—let alone wasted—on behalf of taxpayers.

    None the less, because the proposal is not retrospective and because the changes seem to be in line with the consultation—had it been considered in a timely manner in Committee, it might have attracted our broad non-objection—we may on this occasion have to accept that the Government are entitled to introduce it, notwithstanding those reservations.

    1.30 pm

    I have declared my interest in the register. I am rather perplexed by this proposal. I can quite understand why the Government need more and more money—as my hon. Friend the Member for Eddisbury (Mr. O'Brien) rightly said, they are wasting so much of it—but I am not sure that this is the final answer. The Government are legislating at the last minute in a panic, and my hon. Friend is right to ask why a whole year has elapsed since the previous legislation, why nothing was forthcoming if the matter was this urgent, and why nothing was forthcoming when the original Bill was considered in Committee. Why is this proposal being introduced from 20 June, as if huge gaps appeared in the revenue from that date onwards but no such problem had existed previously?

    If the Paymaster General is right in saying that she is going to lose revenue unless she makes this particular change, is she not running the risk—if the change is adopted—of losing revenue in other ways following the bolting of this particular stable door? For example, might not many more exchanges of brand assets and other intangibles take place between groups of companies? I believe that it is becoming quite fashionable for certain large companies owning lots of brands to concentrate on their top six or 12 and to sell their other brands. Those other brands may be very advantageous or interesting to competitors or other companies in related fields, which, by dint of acquisition from an external group, could then trigger the advantages of the Finance Act 2002.

    Is the Paymaster General worried that this change might simply shift the method of making sensible tax-planning arrangements from transfers of brands and intangibles between companies in the same group, to transactions between different groups of companies? Has she considered that if the closure of this loophole leads to the tax-planning advantages becoming much greater for one system than for the other, the legislation itself might trigger changes in corporate structure? Might it not be better for shareholder value for the boards of companies owning a substantial number of brands to de-merge different companies within the group, and then to transfer brands and assets of an intangible nature afterwards, so that they can get round this particular closing of the loophole?

    I fear that the Paymaster General has not come up with the final answer, and that what she is really seeking to do is to repeal schedule 29, but has yet to realise that the insatiable demand for revenue requires that the Government take such action. As a result, she has brought a half-baked half-measure to the House today, and I doubt whether it will be found sufficient. I ask her to address my worry that closing one door simply opens up others that industry and commerce will take advantage of, because of the obvious tax-planning advantages in so doing.

    I should point out to the right hon. Member for Wokingham (Mr. Redwood) that this regime was introduced last year with the support of his party, following extensive consultation with business. The facility that it provides within the tax system—a facility that did not exist under his Government or in the first years of this Government—has been widely welcomed.

    The right hon. Gentleman asked me the $64,000 question: will tax planners continue to try to tax plan? Well, I expect that they will. As a Minister, the issue for me is this. I have seen marketed specific suggestions and arrangements that would lead to a loss of revenue to the taxpayer, collected on the Government's behalf, in respect of what was introduced last year as essentially a relieving measure. I should point out to the right hon. Gentleman that the proposals are specific and targeted and will deal with those avoidance measures.

    I realise that the regime was introduced last year with our agreement; indeed, I welcomed it at the time and thought it an excellent idea. My understanding was that the whole idea was to charge less tax on companies and therefore, from the Treasury's point of view, to lose revenue. My worry this afternoon is that the Government seem to be trying to reverse that. They appear to regret the fact that they lost revenue through a measure that I thought was introduced as a tax relief. My suspicion is that what they are really seeking to do in due course is to scrap the whole thing, which I would regret deeply.

    I can assure the right hon. Gentleman that that is not the case. If he looks at the legislation he will discover the specific intended use of the 4 per cent. annual deduction, which, as I explained in my opening remarks, is being abused. We are therefore seeking to prevent that by introducing anti-avoidance measures.

    If I may, I shall first answer the questions from the hon. Member for Eddisbury (Mr. O'Brien). Perhaps I did not hear him correctly, but my understanding from what he said is that the Opposition will not be dividing the House on this issue.

    I thank the hon. Gentleman. His first question was why the proposal has been introduced now and not in the original Bill. Regrettably, I was not able to table the new clause in time: the Revenue has only recently received the relevant information, which requires us to act immediately. As he knows—we have discussed this issue before—it was the practice of the previous Government and of other Governments that anti-avoidance legislation becomes effective from the date of its announcement, and that is the practice of this Government.

    I know that the hon. Gentleman shares my view about the importance of the issue of retrospection. Whatever the view of schemes introduced before 20 June, there is no retrospection in this proposal. It deals immediately with what we understand to be the perceived problem with the arrangements, in terms of exploiting an aspect of this legislation. This House never intended that the arrangements be used in this way, and I am grateful to him for his support on this issue.

    I am very grateful to the Paymaster General for giving way. She is bringing a certain world-weary cynicism to today's exchanges, and I can tell that she is very taxed by, and disappointed by, the incidents of abuse that she believes she has identified. However, for the edification of the House and in order to satisfy the legitimate curiosity of my constituents in Market Hill, Buckingham, this weekend, would she care to identify three examples of especially grave abuse that the new clause is designed to tackle?

    Order. I should point out to the hon. Gentleman that there was probably a shorter way of putting that point.

    I can do better than that—I can explain to the hon. Gentleman, so that he can explain to his constituents, why the new provisions are needed and the otherwise potential loss to the Treasury, to which I referred in my opening remarks. He will surely agree with me that it is better to prevent loss of revenue through speedy action than to sustain such loss in the first place. The provisions are needed because of the way in which the aims of two parts of the legislation seek to be achieved. The provision on the related party is clear and effective where it applies. It gives certainty to the meaning of the law—a meaning that all of us understood, and therefore agreed with, in passing this legislation last year.

    However, there are a variety of possible schemes, as I said. I am sure that the hon. Member for Buckingham (Mr. Bercow) is not suggesting that I wait until they are in action. They are designed to refresh old assets, as they are politely called in the trade. The purpose of the legislation was to operate forwards from last year, not backwards from the date of the legislation. Some fresh old assets—if such a term could be used—will not need to use the related-party mismatch. To deal with those, and also to close the door on schemes that have yet to be designed—that is, to anticipate subsequent exploitation—we also need the general cover provided by the wider anti-avoidance rule.

    The House is rightly sensitive about the use of wider anti-avoidance rules, and it expects Ministers to be sensitive about that as well, but the rules are needed in this case. By virtue of its less mechanistic approach of testing the main object of the scheme, the provision can apply in a wider range of circumstances. In simple cases, it is easier to test for the group relationship than to examine the various possible objectives of transactions.

    From that, I am sure that it is immediately obvious to the hon. Member for Buckingham how much mischief could be made with regard to those two rules, and that he will be able to think up many examples for himself. I commend the new clause to the House.

    Question put and agreed to.

    Clause read a Second time, and added to the Bill.