Not amended in Committee and as amended in the Standing Committee, further considered.
Missing trader intra-community fraud
Clause 19 provides for a change in the VAT accounting provisions for sales of specific goods to tackle missing trader intra-community fraud. That fraud is an organised criminal attack on the VAT system, which, in 2004-05, is estimated to have cost up to £1.9 billion in stolen VAT.
This change of accounting provision, known as the reverse charge, will be introduced once the necessary derogations from the sixth VAT directive have been agreed. It will apply to sales of certain specified goods between VAT-registered businesses. When the reverse charge applies, it is no longer the seller’s responsibility to account for and pay the VAT on the sale to Her Majesty’s Revenue and Customs, but that of the customer. Subsection (13) of new section 55A, which clause 19 introduces, of the VAT Act 1994 provides for amendments to be made to that Act by Treasury order where it is necessary and expedient for the reverse charge.
Amendment No. 18 allows a Treasury order under this provision to amend the VAT Act to confer power on the Commissioners of Revenue and Customs to make regulations or exercise any other function. The amendment is necessary to ensure that the power can be tailored to introduce any change in the manner most appropriate to the circumstances. By that, I mean the evolving fraud being perpetrated. I appreciate that this is a wide power, but it is a necessary one, and of course it will receive proper scrutiny by this House.
Amendments Nos. 19 and 20 reflect concerns highlighted following discussions with the European Commission about the need to ensure that the reverse charge mechanism does not create opportunities for further revenue loss—a matter that I am sure will also be of concern to Members of the House. The amendments allow HMRC to introduce secondary legislation, first, to require VAT-registered persons trading in the specified goods to which the reverse charge will apply to submit reports of those transactions and notify HMRC when they first make supplies of those goods; and, secondly, to apply the existing penalties for similar statements in respect of intra-Community sales for inaccurate statements or non-submission of statements, as well as existing penalties for a failure to make any required notification.
As the Paymaster General rightly says, the amendment is widely drawn, and that might be entirely justified. She indicates that the power would be subject to proper scrutiny. Can she tell the House whether the provision would be subject to the negative procedure of the House or its affirmative counterpart?
The affirmative procedure will be necessary. I know that Members, including the hon. Gentleman, fully appreciate the importance and urgency of tackling this fraud and of the Department having the necessary powers. None the less, the House should still scrutinise how the powers are intended to be used and how they are used.
I will go further and say that the details of the reporting requirement and how it will affect business means that there needs to be discussions with business as well. We have to make sure that there is the minimum impact, particularly regulatory impact, on businesses generally. The reporting requirement should be kept to an absolute minimum. The provisions will need to take into account consultation on those elements. Thus far businesses have been totally supportive of the Government’s actions—they have been consulted—because they are well aware of the dangers that such fraud poses not only to the Revenue, but to their activities as legitimate businesses that can be undermined by fraud.
I am extremely grateful to the right hon. Lady for giving way again and for her helpful earlier reply. It is a matter of concern to me that when regulations of this sort are introduced they should as far as possible be subject to widespread advance consultation, and I have asked the Leader of the House if we could be sure on these occasions that, wherever possible, draft regulations are issued before the passage of the Bill. Might that happen in this instance?
The regulations are not available at this point. It would be foolish to reveal to the fraudsters, in advance of receiving agreement on the reverse charge, exactly how it will operate. However, it will be necessary for the regulations to come before a Committee through the affirmative procedure, and it stands to reason that they will have to be available for the Committee to read, with an explanatory memorandum. As I have said before—I know that the hon. Member for Rayleigh (Mr. Francois) appreciates this—I am doing my best to make as much information as possible available to the House without prejudicing the Department’s position in dealing with this important matter.
I come finally to amendment No. 121. A similar amendment was tabled in Standing Committee, although it was not moved. Recognising the importance that the Opposition placed on the matter, I indicated to them that had they moved it I would have accepted it, and here it is again, so I repeat my assurance. The amendment seeks to insert a sunset provision, namely, that if the orders have not been made by 22 March 2009 the powers cannot be used. I do not think that it is necessary, but I see no problem with it, and if it reassures the Opposition that this matter will be dealt with in a timely fashion I am, as I indicated, prepared to accept it. We need to sort out the matter a lot earlier than 2009.
I am tempted to say thank you and sit down quickly, but there are a few points that need to be made.
I rise to move amendment No. 121 in my name and those of my hon. Friends. It seeks to insert an additional sunset provision into clause 19.
I am very grateful for your procedural advice, Mr. Deputy Speaker. As the Paymaster General said that she was going to accept it the amendment, I wanted to take no chances whatsoever.
As we heard, the right hon. Lady said in the Standing Committee that she was minded to accept the amendment. We have brought it back to the Floor of the House on Report to test her commitment to that, and I am pleased to say that she has honoured her pledge, for which I am grateful.
I want also to comment briefly on Government amendments Nos. 18 to 20, particularly No. 18, which appears to confer on Ministers a wide-ranging regulation-making power. It is therefore right that we should focus on that at least briefly before we allow the measure to be included in the Bill.
Clause 19 refers to missing trader intra-community fraud, or MTIC fraud, as it is more popularly known, which is now a multi-billion-pound problem across the European Union. We debated the issue at some length in the Standing Committee on 11 May, and I do not intend to reprise the whole debate on the Floor of the House, but there are a few points that need to be reiterated in debating these amendments.
The problem of MTIC fraud has become so widespread that the Office for National Statistics now adjusts UK trade figures to take into account estimates of MTIC fraud. As the ONS points out, by definition the extent of such fraud is difficult to measure accurately. However, HMRC, in a press release dated 26 January 2006, estimated UK VAT losses from MTIC fraud to be between £1.1 billion and £1.9 billion for 2004-05. It is interesting that the Paymaster General used the £1.9 billion figure a few moments ago. In April 2006 the Government announced the first annual fall in VAT revenues since the UK started collecting the tax in 1973, largely because of a significant rise in estimated carousel fraud, which is a particular breed of MTIC fraud.
I am not questioning that that occurred; I am saying that in this instance VAT receipts have fallen and the Government’s explanation for that is fraud. I want to press the Paymaster General on the exact extent of the fraud in a moment.
On 30 May The Guardian estimated that the cost to the UK alone of MTIC fraud is now running at about £5 billion a year. Nicholas Watt wrote the following:
“The Guardian recently reported that carousel fraud jumped by 50 per cent. in the first quarter of the year—and has swollen by more than 500 per cent. in the past 12 months. Tax losses in Britain alone are more than £5bn this year.”
On 11 June, in an article in The Sunday Telegraph, Jasper Copping and Robert Watts, under the headline “Carousel gangs cheat UK out of billions”, said:
“The alarming scale of carousel fraud indicates that the scam is spiralling and this year will far exceed the Government’s estimate that it cost £1.9 billion in 2004-05.”
This seems a suitable opportunity to ask the Paymaster General to update the record. Given that her figures relate to 2004-05, and we are now in 2005-06, and in the financial year 2006-07, can the right hon. Lady provide an official updated estimate of the scale of the fraud as the Treasury now understands it to be? All the signs are that the scale of the fraud is rising, so we would believe it to be in excess of £1.9 billion a year. The Guardian is talking about £5 billion and The Sunday Telegraph is talking about some billions of pounds. To clear up the confusion, will the Paymaster General tell the House the latest Government estimate of the scale of MTIC fraud and its cost to the Exchequer? Part of their argument for the powers that are being sought, and the amendments, is that they are needed to combat the fraud. Therefore, the House will want to know how bad the Government think that the problem is and what the trend-line is.
The Government update the position on MTIC fraud in every pre-Budget report. The hon. Gentleman’s observations about the Office for National Statistics and the trade statistics do not relate directly to either VAT that is claimed or paid out. The correct figures will be available in the PBR, as they are every year following the application of the strategy for reducing MTIC fraud.
I thank the right hon. Lady for that reply. She may recall that when we debated this matter in Standing Committee on 11 May, I pressed her for some clarification based on last year’s PBR figures. If I recall correctly, we did not get an updated figure at that time. If the right hon. Lady is saying, having read yesterday’s debate, that we will definitely get an updated figure in the PBR this autumn, that is to be welcomed. It would have been more helpful if we could have had an updated estimate for the House today, bearing in mind the importance of the powers that we are about to agree to. However, we look forward to seeing the updated figure in the PBR.
The Government’s solution to the problem, as set out in clause 19, is essentially to introduce a so-called reverse charge procedure for certain categories of goods that can be specified by secondary legislation. This is intended to combat fraud by passing the duty to account to the Government for the VAT further down the chain to legitimate businesses. As the HMRC press release of 26 January 2006, which outlines the process, explained:
“Under the reverse charge procedure the suppliers of the goods do not account for VAT on their sales when selling to other VAT-registered businesses. Instead, it is the responsibility of the purchaser of the goods to account for the VAT, although they can recover this VAT in the normal way.”
This means that HMRC is not put into a position where it may have to make repayments of VAT where the corresponding tax on the purchase has not been paid to HMRC.
A similar procedure was adopted some years ago to combat missing trader fraud in the gold bullion market, apparently with some success, and the intention is essentially to apply the same solution here. However, the Government’s solution, including that which is set out in the amendments, depends on the Government obtaining a derogation from the sixth VAT directive in order to apply the reverse charge in situations where it was not originally envisaged.
On 1 June, a little while after our debate on these matters in Standing Committee, the Financial Times reported that the EU tax commissioner, Mr. Lazlo Kovacs, was saying that the UK would most probably receive a positive response to the derogation request. On 7 June, there was an ECOFIN meeting in Brussels, which was rather famously attended by the Chancellor of the Exchequer at short notice. Was the matter discussed there? As we return to the subject on Report, which I welcome, I take the opportunity to ask the Paymaster General to update the House on progress in seeking the derogation that is necessary for the procedure to come into effect. In essence, what is the latest state of play in our negotiations with the Commission on this matter?
Similarly, when do Ministers anticipate that they will be in a position to issue the orders to implement this element of the strategy? I repeat the question that I put to the Paymaster General in Standing Committee on this issue, which she really did not address at that time. Given the history of our negotiations with our EU partners in recent years, what is our plan B if, for any reason, the derogation is not granted? Given the scale of the problem, what do the Government intend to do then?
I come now to Government amendments Nos. 18 to 20. As I understand it, the essence of amendment No. 20 is to confer a regulation-making power on Ministers to set out reporting requirements on suppliers in relation to the operation of the reverse charge. Amendment No. 19 appears to be essentially contingent on amendment No. 20, in that it allows for a penalty regime if reporting requirements are not complied with correctly as specified by Ministers in the regulations. This seems reasonable, but why was the provision not included in the Bill?
Conversely, amendment No. 18 confers on Ministers a relatively wide-ranging regulation-making power in the context of the operation of the reverse charge procedure as a whole. As this is potentially quite a broad power—certainly compared with the other two Government amendments—can the Government give us any examples of how the power is likely to be used in practice without tipping off the fraudsters? For instance, will the power be used only to specify the types of goods to which the reverse charge procedure will apply, or is it intended to be used more widely than that?
Given the scale of the power, I had intended to ask the Paymaster General whether it would be subject to the affirmative resolution procedure. However, my hon. Friend the Member for Buckingham (John Bercow), in his usual perspicacious manner, has already elicited that information in an intervention. I am pleased that the Paymaster General has, quite rightly, told the House that the process would go through in practice after the affirmative resolution procedure has been adopted. We thank the right hon. Lady for that assurance, which we welcome.
I move on briefly to amendment No. 121. The powers to introduce the reverse charge procedure are potentially quite powerful. They are therefore subject to the sunset provision contained elsewhere in the clause. The purpose behind the amendment is to introduce an additional sunset provision with regard to the adjustment of output tax. This seems a relatively non-controversial additional safeguard provision, and one that we hope might be accepted.
The Paymaster General rightly recalled that she said in Standing Committee that she would have been minded to grant us the amendment had it been pressed at the time. For the information of the House, the Hansard record stated:
“his amendment No. 3 touched on an issue that would not have been in dispute between us.”—[Official Report, Standing Committee A, 11 May 2006; c. 120.]
The right hon. Lady’s more direct reaction, which unfortunately was not captured by Hansard but which I clearly recall, was, “Oh, I was going to give you that one.” Perhaps she will be kind enough, as she has indicated, to grant us that amendment and to allow what is now amendment No. 121 to be incorporated in the Bill.
I have only a few brief remarks. We dealt with the matter in some detail in Standing Committee. We are dealing with what is clearly a significant problem and real efforts have been made in various clauses to overcome it. The Government’s amendments are an exposition of that. Amendments Nos. 19 and 20 seek to overcome openings where there could continue to be fraud, and amendment No. 18 confers extra powers, so essentially we are talking about regulation and reporting requirements.
The Paymaster General referred to why it was not possible to reveal the draft regulations in advance. If fraudsters are trying to get around the regulations, what difference does it make if they see them in draft form? Surely their desire to get around them will be exactly the same. [Interruption.] The Paymaster General is saying “Time”, but presumably once they are on the statute book, the fraudsters will still have time to avoid the regulations.
If draft regulations are available before the House has given the authority for the powers to be used, those who study them have time to get round the regulations before the authorities can use the powers that are conferred in them. That is the difficulty. That is why there has not been a long exposure of what the powers may look like. This is straightforward, really.
I thank the Paymaster General for that clarification. There is a development beyond the regulations and reporting requirements that are set out in the amendments. If the requirements are to be enforced, they need to be supported by resources. I refer to an article in The Times of 13 June, in which it is said that there are believed to be 9,000 people involved in spearheading the crime that is known as missing trader intra-community fraud, but Revenue and Customs has only 500 officers to tackle it. The article points to a lack of resources making very difficult the enforcement of whatever regulations are in place to overcome this fraud. In fact, the article goes on to say:
“There is even a suggestion that fraudsters believe the risk of detection is so low that they no longer trade actual goods but engage in a ‘virtual’ fraud where the trade exists only in the bogus documents used to support fraudulent VAT reclaims.”
What efforts have the Treasury made to ensure that it has sufficient resources to enforce the regulations?
I should like to touch on three issues relating to MTIC fraud.
First, in Committee, the Paymaster General said that the German Government advocated applying the reverse charge generally, but she rightly said that that would create great difficulties for small and medium-sized companies, and was thus unattractive. It has been said, too, that there would be substantial fiscal consequences if we went down that route. Can the Paymaster General confirm whether that is correct? More significantly, I seek reassurance that the reverse charge approach will be neither generally applied nor negotiated away, although one member state is keen to go down that route.
Secondly, I am concerned about the effectiveness of an approach that requires a reverse charge on certain goods. In Committee, the Paymaster General said at column 135 on 11 May that
“90 per cent. of…losses from MTIC fraud arise from goods that would be targeted specifically under the reverse charge mechanism”.
She went on to say that
“it tends to be small, high-value goods that can be circulated easily—but, of course, they are not circulated.”—[Official Report, Standing Committee A, 11 May 2006; c. 135.]
I should be grateful if the Paymaster General, drawing on the expertise of Her Majesty’s Revenue and Customs, clarified that response. Is MTIC fraud a matter of small, high-value goods being circulated—there is, however, a missing trader, so there is VAT fraud—or is it a matter, as the hon. Member for Falmouth and Camborne (Julia Goldsworthy) suggested, of virtual transactions in which goods are not circulated at all? If it is the latter, it would be easy for fraudsters to move from the small, high-value goods to which the measures apply to other goods and services, so the Bill’s provisions would not be as effective as we would all like.
Thirdly, the Government have attempted to reduce MTIC fraud by toughening the VAT registration process—the Paymaster General will recall that I asked a question about that in Committee. Since then, I have tabled written questions on the issue, and I understand that, in the spring months, only 65 per cent. of VAT registration applications were completed within the target 21 days. Can steps be taken to improve and speed up the VAT registration, because it is worrying that it takes a substantial period to register? Complaints about registration come not just from applicants in the high-risk sector of small, high-value goods such as computer equipment and so on but from other sectors. Again, I would be grateful for the Paymaster General’s comments.
I shall deal quickly with the points made by hon. Members. May I tell the hon. Member for Rayleigh (Mr. Francois) that the Government are confident that the European Commission will introduce a proposal in response to our request for a reverse charge? Discussion is under way—hence the amendments—but the proposal will be submitted to ECOFIN for a unanimous decision by the 25 member states. The Commission will not submit it before it is satisfied that there is a sensible working arrangement.
That links to the point made by the hon. Member for South-West Hertfordshire (Mr. Gauke). We are confident that we will secure agreement, because this is a matter not just for the UK but for all European member states—indeed, Germany has been mentioned, and its preferred option is a general reverse charge. However, that would cause reporting problems for small businesses and people who are not involved in illegitimate activity, and would completely change the structure and orientation of VAT. The Commission is aware that the problem is urgent and that we need to find a solution. The UK and other member states understand why the Germans want a complete reverse charge, but have made it clear that that is not desirable. We are doing all that we can to ensure a speedy solution, but we must reach the right agreement with the Commission and, after discussions, we must be able to deliver it.
May I remind the House of the nature of the powers that are being sought? The provision allows only amendments necessary for the implementation of the reverse charge, and it cannot be used to increase anything else, including the amount of tax payable. As I have said, it is subject to affirmative resolution. It is not an open-ended power—it is necessary purely for the implementation of the reverse charge—so it will lapse three years after Budget 2006. The Conservative Government introduced a similar power in 1993, but it lacked a sunset clause. I believe, however, that a time limit is necessary to ensure that we tackle the issue properly.
I have dealt with the hon. Member for Rayleigh’s points about the extent of MTIC fraud. The latest estimates for 2004-05 cover a range of figures, and £1.9 billion is at the top end. However, that represents a 30 per cent. reduction in MTIC fraud since 2001-02 as a result of the Government’s strategy. We have to wait for the pre-Budget report, even in subsequent years, because we require data from European Union member states on the nature of such fraud, which take five or six months to be processed, hence the PBR is an appropriate point for an update.
I thank the right hon. Lady for her explanation of the timings. She said that the figures cover a range, and that we will be given an updated estimate in the autumn 2006 PBR. Given her knowledge of HMRC, does she think that by that stage the figure will rise above £1.9 billion, or will it fall below it?
I am not in a position to make such a forecast, but the hon. Gentleman will accept that the purpose of the reverse charge is to disrupt the fraudsters. VAT registration and repayment are subject to challenge by HMRC. It will be difficult to assess the strategy that is running in parallel—plan B, as the hon. Gentleman put it—because we hope that HMRC will not need to make those challenges in the first place. People may try to defraud, but our intention is that they should not be successful.
The hon. Member for Falmouth and Camborne asked about resources. I refer her to column 1090W of the Official Report of 17 May, where I gave the full list to her hon. Friend the Member for Kingston and Surbiton (Mr. Davey), showing the extra resources and the work that is being undertaken by HMRC. I also gave the figures in Committee. Hon. Members should be cautious about believing what is written in the newspapers.
On the question about VAT registration—whether the transaction is fictitious or real and how the Government are dealing with it—the answer is that it can be fictitious, as is increasingly the case, or real. The real is dealt with in the Bill by the stamping of goods, tracking and record keeping, which is the subject of other clauses. That will be effective where there is fraud in the chain, as opposed to the whole chain being fraudulent.
There is the fictitious as well, and I shall give two examples. In August 2005 four people were found guilty of carousel fraud resulting in an estimated loss of £40 million in VAT. They used fictitious companies and false invoices, with the proceeds being sent to a Hong Kong bank account. They received sentences of 22 years. In December 2005 jail sentences totalling eight years were handed down to two men involved in a £58 million fraud. The fraud involved mobile phones purchased from fictitious companies and sold to other mobile phone brokers. The phones never found their way into the legitimate market. It was a perpetual fraud, and the reverse charge is specifically directed at that aspect of carousel fraud. The hon. Member for South-West Hertfordshire is right that we need to look carefully at whether that might mutate into other high value goods.
Part of the discussion with the Commission is about what measures will be available to member states to counter such fraud. We need a careful balance so that there is not a reverse charge on all goods. Intelligence and an understanding of how MTIC frauds are perpetrated are needed. There will not be a general tightening of VAT registration. The Department is undertaking rigorous checks at the point of registration where it seems that something is not quite as it should be—missing information or a company that has been dormant for a long time suddenly submitting a high claim on VAT or seeking to become active again. Bogus businesses must be prevented from entering the VAT system, so the Department is doing its best to target those checks. If there was a general holding up of VAT registration, the numbers that I gave would have been considerably higher.
The Department is approaching, sensibly and proportionately, a serious problem in the tax system not just for the UK, but for other member states where this type of fraud can be committed. I hope the House will agree the amendments today and that I can report soon on the progress of negotiations on the reverse charge and the start date of its operation.
Amendment agreed to.
Amendments made: No. 19, page 22, line 40, at end insert—
‘(2A) In section 65 of VATA 1994 (inaccuracies in EC sales statements)—
(a) at the end insert—
“(7) This section applies in relation to a statement which is required to be submitted to the Commissioners in accordance with regulations under paragraph 2(3A) of Schedule 11 as it applies in relation to an EC sales statement.”, and
(b) in consequence of the amendment made by paragraph (a) the heading becomes “Inaccuracies in EC sales statements or in statements relating to section 55A”.
(2B) In section 66 of VATA 1994 (failure to submit EC sales statements)—
(a) at the end insert—
“(10) This section applies in relation to a statement which is required to be submitted to the Commissioners in accordance with regulations under paragraph 2(3A) of Schedule 11 as it applies in relation to an EC sales statement.”, and
(b) in consequence of the amendment made by paragraph (a) the heading becomes “Failure to submit EC sales statement or statement relating to section 55A”.
(2C) In section 69 of VATA 1994 (breaches of regulatory provisions), in subsection (1) (failure to comply with a requirement imposed under provisions mentioned in the paragraphs in that subsection), after paragraph (b) insert—
“(ba) paragraph 2(3B) of Schedule 11; or”.’.
No. 20, page 22, line 44, at end insert—
‘(3A) In Schedule 11 to VATA 1994 (administration, collection and enforcement), in paragraph 2 (accounting for VAT and payment of VAT), after sub-paragraph (3) insert—
“(3A) Regulations under this paragraph may require the submission to the Commissioners by taxable persons, at such times and intervals, in such cases and in such form and manner as may be—
(a) specified in the regulations, or
(b) determined by the Commissioners in accordance with powers conferred by the regulations,
of statements containing such particulars of supplies to which section 55A(6) applies in which the taxable persons are concerned, and of the persons concerned in those supplies, as may be prescribed.
(3B) Regulations under this paragraph may make provision, in relation to the first occasion on which a person makes a supply of goods to which section 55A(6) applies, for requiring the person to give to the Commissioners such notification of the supply at such time and in such form and manner as may be specified in the regulations.”.’—[Dawn Primarolo.]
No. 121, page 23, line 3, at end insert—
‘But no order may be made under this subsection on or after 22nd March 2009.’.—[Mr. Francois.]
Group relief where surrendering company not resident in UK
I beg to move amendment No. 122, page 155, line 21, leave out from second ‘the’ to end of line 22 and insert ‘earlier of—
(a) two years after the end of the accounting period; or
(b) the deadline for filing corporate tax returns in the EEA territory concerned.’.
Both amendments seek to amend the deadline by which group relief claims can be made in regard to losses made in other European economic area countries where the group relief payments are to offset profits incurred in the UK.
The background to schedule 1 is a case involving Marks and Spencer, which sought to use various provisions of European treaties to enable losses incurred in other EEA territories to be offset against profits in the UK. The European Court of Justice found in favour of Marks and Spencer, albeit with strict limitations on the circumstances in which that relief could be claimed. There were several issues on which further guidance was needed, including the timing of making a claim, which is the subject of both amendments.
When we discussed these matters in Committee, the Government approached the task of implementing the ECJ’s judgment and a subsequent judgment by Mr. Justice Park, who was asked to rule on specific elements of the ECJ’s judgment, including the timing of the claim, as restrictively as possible. They sought to narrow the circumstances in which claims could be made, whereas one of the arguments that I made on behalf of the Opposition concerned effectiveness.
In Mr. Justice Park’s later judgment on the case, he commented:
“A principle that runs through the whole of community law and has been enunciated by the ECJ in numerous cases is the principle of effectiveness: procedures in Member States must not render practically impossible or excessively difficult the exercise of rights conferred by Community Law”.
That is the principle of effectiveness, which I want to explore.
The ECJ conferred upon UK companies the right to claim group relief in certain circumstances on losses incurred by subsidiaries in other EEA states. That is enshrined in schedule 1, but we need to consider whether the procedures set out there meet the terms of Mr. Justice Park’s judgment—whether they
“render practically impossible or excessively difficult the exercise of rights conferred by Community Law”.
I would argue that the time of the claim does make it practically impossible or excessively difficult to exercise the rights.
We should remember that UK companies claiming group relief on UK losses have up until two years after the end of the accounting period in which those losses are incurred to make a claim. One might ask why they need two years. I suspect that there is no scientific reason for that, but it enables groups to go through the necessary steps. It enables them to draw up the accounts of subsidiaries and determine the scale of any losses incurred. It enables them to revise accounting estimates, and to assess the write-down in the value of assets, such as stock and debtors; and it allows the parent company to calculate the extent to which losses can be carried back against profits made in earlier years. The auditors can audit the accounts, and any adjustments between accounting and taxable profits or losses can be made. Companies need to go through a drawn-out process to assess such profits, to ensure that the auditors have signed off such profits and to calculate taxes and profits properly.
I have a degree of experience. I have worked as an auditor and with companies in preparing their accounts, so I understand why the exercise is not straightforward or quick. My problem with the way in which the Government have introduced the Marks and Spencer judgment in schedule 1 is that without a gap between the year-end and the filing of the claim it would be virtually impossible for any business to submit a robust claim that would withstand scrutiny from Her Majesty’s Revenue and Customs. I hope that the Treasury will acknowledge that the process of making a group relief claim is not straightforward.
The Marks and Spencer judgment, which involves a company making a group relief claim in relation to losses incurred in another EEA country, adds a further layer of complexity. Where there is any prospect of losses incurred in EEA territory being carried forward against profits, the losses cannot be claimed, so a business will have to have made decisions about the future of that loss-making company—it may have had to close it during the course of the year, or it may plan to close it down in the next accounting period.
Where there is any prospect of such losses being offset against future profits, the losses cannot be claimed through group relief against the profits of a UK company. More time will be required for businesses to make those claims, a more thorough investigation will be required and the process will be longer. One cannot simply press a button in an overseas territory at the end of the financial year and produce perfectly formed accounts and a group relief claim.
The hon. Gentleman is the accountant, not me, but he may have misread the provision that he seeks to amend. He has referred to distinguishing between a year-end point and the time for filing a claim for that year-end. Amendment No. 122 refers to the filing of the claim part of the process, whereas I read paragraph 7(4) as dealing with the end of the current period, when the picture is taken—as he has said, the figures are put together afterwards through a long process. By my reading of the provision—I may be wrong—he is confusing apples and oranges.
We debated that point in Standing Committee, where I felt that the Government shared my interpretation of when the claim would be made, so it would be welcome if the Economic Secretary were to clarify the position. The message that I have received in talking to advisers in the field is that the timing of the claim is so tight that it renders impossible the making of a group relief claim. A number of people involved in the area are concerned that the time for making a claim is so tight that it renders a group relief claim practically impossible. The consensus in the sector is widespread, but if the Economic Secretary were to reassure the accountancy profession and business, that would be welcome. The situation is not clear at the moment in the eyes of companies and their tax advisers, which is one reason why the amendment was tabled today.
In his judgment, Mr. Justice Park considered the timing of the claim and examined various possibilities. It is important that companies can make such claims and that the right conferred upon them by the ECJ judgment is not rendered impossible to exercise in practice, which is why we have re-introduced the amendment on Report. I was concerned that the answer given by the Financial Secretary in Committee did not address the issue properly, and I want to use the debate on Report to clarify the matter for the sake of those who must implement the provision.
I hope that I can provide the reassurance sought by the hon. Member for Fareham (Mr. Hoban) and those whom he has consulted in recent weeks.
I have re-read the Hansard of the debate in Committee, where we had an interesting and wide-ranging discussion about the role of the ECJ and European decision making in UK tax law and considered the almost philosophical issues around tax policy. However, the hon. Gentleman has raised some particular points, which I shall address in a particular way.
As the hon. Gentleman has said, clause 27 and schedule 1 provide for a small extension to the group loss relief rules for companies. That extension allows UK groups to claim corporation tax relief for foreign losses in very limited circumstances. Existing group relief rules for UK losses, including the timing period, which business is keen to retain, are unaffected by the proposed legislation. We are introducing this small extension to group relief following last December’s judgment of the ECJ in the case of Marks and Spencer plc v. Halsey, which set the conditions under which group relief should be extended to foreign losses. Those conditions are very restrictive, which was the intention. Indeed, the way in which members of the European judiciary reflected legal opinions made it clear that the conditions are to be applied in extremely restricted circumstances.
Amendments Nos. 15 and 122 go beyond the judgment and relax one of the conditions under which extended group relief is available. The condition is that to be eligible for relief in the UK, there must be no possibility of relieving a loss in a future period in another state. The amendments would change the date by reference to which companies determine whether that possibility exists. The reference date is currently immediately after the end of the loss period, but amendment No. 15 would change that to the date on which the group relief claim is made by a UK company. Amendment No. 122 would change the reference date to the earlier of two years after the end of the accounting period or the deadline for filing corporate tax returns of the foreign loss-making company, whichever is earlier.
On amendment No. 15, as my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) has said, there is no logic in tying the test of possibility of relief to the rules that apply in respect of claims, because the concepts are entirely separate. The claims rules apply to the claimant company, while the possibility of relief rule applies to the losses of the surrendering company, and there is no logic in trying to create an entirely forced link between the two. We are talking about the definition of the loss period and the point at which the decision is made; we are not talking about the timing of the claim. The claimant company will still have at least two years to claim relief, which exactly mirrors the current relief rules for UK group relief. The difference is that at the time of the claim, the claimant company must look back to the date immediately after the loss period to see whether there is any possibility of relief at that time. As I have said, we are discussing the loss period, not the claim period.
As I have said, the company has a two-year period to make a claim. The issue is the date at which the losses from the foreign company are judged to be unrelievable in the foreign tax jurisdiction. Once that date is decided, there are two years in which to make the claim. We are in danger of confusing two different concepts—the two-year claim period and the loss period, which relates to the tax year when the decision on unrelievability was made. There will still be two years for that assessment to be made and for the relief to be claimed back in the UK tax jurisdiction and against UK profits. The idea that an immediate assessment calculation will subsequently have to be delivered to the Revenue at a particular point in time is not in line with what we are seeking to do. The claimant company will have at least two years to claim relief, mirroring current rules for UK group relief. As I said, the difference is that at the time of the claim the claimant company must look back to the date immediately after the loss period to see whether there is any possibility of relief at that time. It is true that Mr. Justice Park decided in his High Court ruling that the relevant time was the date on which a claim was made by the UK-resident company. However, that is not a settled point; it is still subject to appeal. His judgment also considers past claims to group relief, whereby the current legislation sets out the rules that are to apply to claim periods after 1 April 2006.
Amendment No. 15 would provide a fiscal and financial incentive to delay claims until the last possible minute. Moreover, since the ability to claim can depend on whether an inquiry is open, companies would have an incentive not to settle inquiries. Those factors would sit uneasily with the Government’s compliance objectives and with businesses’ oft-repeated requests for certainty.
Amendment No. 122 would make the relief more generous than that in the Bill by effectively giving access to up to three years’ worth of losses rather than one. That would go beyond the ECJ judgment. Moreover, it would substantially increase the extension’s cost to the Exchequer, from the £50 million estimated in the Budget documentation to £150 million. That is not a concession that we seek to make, nor is it necessary given the distinction between the claim period and the loss period. The amendment could facilitate a form of loss shopping, with companies putting their losses into the state with the most generous filing deadline. It would also cause many practical problems for business and for Revenue and Customs, as filing dates vary from country to country.
In short, both amendments would remove important protections in the Bill at substantial cost to the Exchequer. I agree with my hon. Friend the Member for Wolverhampton, South-West that the concerns of the hon. Member for Fareham are based on a confusion between two different concepts. I hope my remarks enable him to assure his friends in the industry that their concerns are not justified and to withdraw the amendments.
I am grateful to the Minister for putting on the record his clarification of the important point about the timing of the claim that people can make and its being in line with UK group relief rules.
One outstanding issue remains. At the end of the accounting period, the overseas company must be aware of its current position and its ability to offset losses that it has incurred against profits of other group companies in the same territory, as well as whether there is the prospect of relieving those losses against future profits to be made. That is a difficult issue, because if there is any prospect whatsoever of profits being made in the next accounting period—for example, if some trading is still taking place—the losses cannot be relieved. If, however, a business has taken the decision to close during the accounting period, at the accounting period end it will know that there is no future prospect of relieving those profits. That issue of how much knowledge a business must have at the end of an accounting period is problematic. It leads to a difficulty in applying the ECJ judgment. It is in line with the Government’s strategy of applying the most restrictive interpretation of the ECJ judgment. I suspect that companies may wish to return to it in future.
Given the Minister’s confirmation of the date of the filing deadline, and notwithstanding my concerns about information that a business must have at the end of the accounting period to determine whether it can carry forward losses and whether they are available for relief elsewhere, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Entitlement to film tax relief
Amendment proposed: No. 98, page 171, line 40, leave out ‘partly’ and insert ‘mainly’.—[John Healey.]
With this we will take Government amendments Nos. 21, 24, 25, 26, 22 and 23.
I turn first to the Government amendments in this group on taxation of leases—amendments Nos. 21 to 26. Government amendments Nos. 24 to 26 provide some useful technical clarification of schedule 8, which introduces a completely new framework for the taxation of leases, in relation to the backdating of the provisions. The Opposition have no objection to those amendments being made.
I particularly welcome amendments Nos. 21 to 23, since they are virtually identical to amendments which I tabled in Committee and which the Financial Secretary graciously said that he would look into. In three places, the Bill imposes a motivation test. The formulation usually adopted in anti-avoidance legislation asks whether the purpose, or one of the main purposes, of entering a relevant transaction is that of obtaining a tax advantage. By contrast, under schedule 8 it is sufficient if the Revenue can show that the circumstances of the case are such that it would not be unreasonable to conclude that the purpose of entering the transaction is to gain the tax advantage. Under the traditional formulation for motivation provisions, it is for the Revenue to prove its case in court—that is, that obtaining the tax advantage was the purpose of entering the transaction. It would have to prove that on the balance of probabilities, according to the normal civil standard of proof. However, under the formulation chosen in schedule 8, the Revenue would no longer have to prove that tax avoidance was one of the motivations—it would have only to show that it was not unreasonable to reach that conclusion. That seems to allow for the possibility that the Revenue might succeed despite failing to show that the actual purpose was to obtain a tax advantage, if it could show that it was not unreasonable to conclude in the circumstances that that was the motivation. It would then be up to the taxpayer to show that the relevant tax inspector’s decision was unreasonable in the circumstances. That alters the ordinary onus of proof and therefore gives rise to significant problems.
I am grateful that the Financial Secretary has reviewed the matter and decided to remove the formulation that I mentioned and return to a more orthodox approach that requires the Revenue to prove that tax avoidance was the motivation. I hope that that change of approach by the Government will be reflected in future and that the “not unreasonable in the circumstances” formulation does not become the norm in tax law. That was one of the main anxieties raised with me by organisations such as the Law Society, which was concerned not only about the impact of this measure in terms of the taxation of leases but about the possibility of its becoming the standard form for drafting anti-avoidance provisions.
I am positive about the Government’s amendments to schedule 8, and I need only delay the House with a few remarks on the schedule. The Opposition still have serious reservations about the new framework for the taxation of leases. Although it is improved by the Government amendments, we are concerned that the abolition of tax incentives for leasing environmentally friendly equipment could harm the battle against climate change. The administrative costs of proposed new section 70Q(2)(d)of the Capital Allowances Act 2001 could be excessive, with lessees forced to establish the tax position of their immediate lessors and superior lessors; and, if they are overseas companies, their theoretical position in UK tax law, had they been subject to UK taxes. That could be a complex process and is not one that is required by the needs of the Revenue.
There is a danger that the new provisions on the taxation of leases could interact negatively with the tonnage tax regime. Overall, we are concerned about the considerable complexity of the new rules in schedule 8. We are worried about the impact that the changes could have on the leasing industry, which plays an enormously important role in UK business investment and fixed capital formation. The Finance and Leasing Association has reported that its members provided the finance in about a quarter of all fixed capital investment in the UK in 2004, involving some £93 billion in new business.
The outgoing leasing rules have proved attractive to foreign direct investors, so their loss might be expected to remove an important incentive to bring business to the UK. We also believe that the shift of capital allowances from lessor to lessee, which is at the heart of schedule 8, will push up costs for the public sector. The NHS in particular has benefited in recent years from reduced costs in leasing equipment, because it can pass on to lessors the tax allowances on those leases which, as a non-taxpayer, it cannot use itself.
We hope that the Government will keep the new framework for the taxation regime for long-funding leases under review and monitor its impact on the three areas that I have outlined, namely business investment, the public sector and overseas investment in the UK. We also hope that they will consider seriously the options for simplification, and that they will continue to consult the market participants affected by these rules closely, because of the key role that the leasing industry plays in business investment, and hence in productivity in the economy.
We acknowledge, however, that the Government have conducted a lengthy and detailed consultation with the industry on these matters, and that they have removed a number of the problems that initially arose from their draft proposals. So as well as graciously conceding an important point today, they have taken steps to remove several difficulties that were present in the earlier drafts.
My comments on Government amendment No. 98 will be even more brief. The provision relates to schedule 5 and the Government’s new framework for film tax, and it seems to provide a sensible, albeit minor, clarification of the provisions. I shall therefore add only a few general remarks about the provisions that the Government are seeking to amend today. There is of course a degree of consensus on the film industry. Members on both sides of the House recognise the importance of making the UK a competitive and attractive place in which to make films, because of the commercial and cultural importance of the film industry, and because it is a highly mobile industry and we are competing with other jurisdictions providing incentives for film makers.
We all agree that the old section 42 and section 48 reliefs have been abused and that they have to go because they are not providing sufficient value for money for the taxpayer. If we are going to have film tax reliefs, it make sense to focus them on the people who actually make films, as the Bill attempts to do, rather than on those who merely wish to reduce their tax bill—the people whom the Chancellor memorably described as the grey middlemen.
There are, however, a number of technical problems with the new structure, such as the blurred edges of the definition of a film production company, and the requirement that such a company be involved in pre-production as well as in principal photography and post-production. We are also concerned about the impact of the rules on TV companies, which cannot claim the reliefs but are still subject to the burdens of the framework, including problematic new accounting provisions.
Above all, we very much hope that the pattern of continuing changes in the film tax regime that we have seen in recent years will not be repeated in the next Finance Bill. There have been recurring amendments to the regime, and the resulting instability creates serious difficulties for the industry, driving up costs and deterring film makers from coming to the UK. We urge the Government to do everything possible to provide a stable tax framework for the British film industry, and one that will provide much greater value for money for the taxpayer—
Order. May I remind the hon. Lady that these are minor technical and drafting amendments? Her remarks are going rather wide of those matters.
I welcome the fact that the hon. Member for Chipping Barnet (Mrs. Villiers) regards these amendments as useful. The provisions on leasing are narrow, and I do not propose to re-run the wider arguments that we went into in some detail in Committee. However, we will keep the new regime for leasing under close review. We will also consult the interests in the industry when monitoring the impact and operation of the new regime, just as we did during its design.
Amendments Nos. 21 to 23 in particular reflect the points made by the hon. Lady in Committee, as well as the representations of the Law Society. We have had a chance to look at all those points more closely, and we have now tabled those amendments. I pay tribute to her work and to the representations of the Law Society on this matter.
On amendment No. 98, the hon. Lady is right to say that there is a degree of consensus in the House on the need to support our film industry. It is an important, innovative, creative and economically successful industry. There is also consensus, however, that we need to safeguard against the practice of artificially inflating claims for relief or abusing the reliefs that we put in place. We believe that the Bill gets the balance right and that the new regime will work, but we will keep it under close scrutiny.
Perhaps the House will be interested in a letter that Mr. Dan Glickman, the chairman of the Motion Picture Association of America, sent to the Chancellor last month, in which he said of the American industry:
“Our industry…finds the UK an enormously attractive location to produce our films for a variety of reasons. We are optimistic that the revised tax program will continue to make the UK an economically attractive location as well”.
Amendment agreed to.
I beg to move amendment No. 126, page 46, line 29, leave out clause 61.
Thank you, Mr. Deputy Speaker, for giving me the opportunity to raise this issue again. I believe that a fundamental problem still remains, and I welcome the opportunity to discuss it again on Report. However, rather than rehearse the arguments that were put in some detail in Committee, I shall ask a number of questions to which I hope the Paymaster General will be able to respond.
Clause 61 seeks to remove the tax exemption that existed prior to the Budget, whereby employers who made computer equipment available for private use could do so tax-free, provided that the annual amount of the benefit in kind was £500 or less. Under the new regime, it remains the case that when the personal use of computer equipment is “not significant”, it does not need to be reported for tax purposes. What value does the Paymaster General attribute to “not significant”? How much below the previous limit of £500 per year will it be? How will the Government assess what does and does not count as significant?
The Paymaster General made the point in Committee that the system was being abused—by being extended to include MP3 players, for example. There was a great deal of discussion at the time about what evidence the Government had used when they decided to withdraw the scheme rather than to tighten the definitions. The Paymaster General was kind enough to give examples of websites illustrating how the scheme could be abused, but can she quantify the scale of the abuse? Half a million people have benefited from the scheme, and many family members, as well as employees, now have access to a computer at home as a result. In particular, people found the kind of support provided through the scheme particularly helpful and reassuring.
Companies involved in delivering the scheme were reporting an increase in uptake, and I do not believe that that was entirely due to abuses of the system. However, if the Paymaster General has evidence to show that that increase was due solely to such abuse, I would welcome that information. However, the Paymaster General rightly pointed out the perceived weakness of the scheme—that it related only to employees, and that vulnerable and isolated groups not in employment could not benefit from it. The Home Computing Initiative Alliance recognised that, and I understand that it was in discussions with the Treasury and auditors about how best to resolve that issue when the scheme was withdrawn.
While I recognise and applaud the new digital inclusion team announced in the Committee of the whole House, why were existing partners not deemed appropriate to fulfil the remit that was described? Will the entirety of the £370 million in savings generated by the scheme’s abolition be transferred to the new team, or will some of that go back into the Treasury pot? That question was asked in the Committee of the whole House, but I do not see a response to it in Hansard. Finally, will the Paymaster General provide us with an update on the digital inclusion team’s work? On that note, I look forward to her response.
It is a pleasure to follow the substantive contribution of the hon. Member for Falmouth and Camborne (Julia Goldsworthy). As the House may recall, we debated in some detail the Government’s proposal to abolish the home computing initiative scheme, under clause 61, in the Committee of the whole House on 2 May. On that occasion, the official Opposition proposed the deletion of clause 61, which, as I recall, the Liberal Democrats supported. If the hon. Member for Falmouth and Camborne presses her amendment to a Division, we shall remain consistent with our original position, return the compliment and support her amendment.
On 2 May, I spoke on this matter for some time and, I hope, in considerable detail, going back to the genesis of the scheme under section 45 of the Finance Act 1999. I therefore suspect that the House will welcome the fact that I do not propose to rehearse all that today. Instead, my aim this afternoon is to re-examine the Government proposal under five fairly succinct— I hope—headings. First, how was the decision to abolish HCI taken? Secondly, what was the subsequent impact? Thirdly, why was an alternative scheme not adopted? Fourthly, what is the tax position now, including such questions as: what now constitutes private use, which can be deemed for tax purposes to be “not significant”? Lastly, what really lay behind the decision all along?
On the first question, there is little doubt in the industry or elsewhere that the decision to abolish the scheme was taken late in the run-up to the Budget. That is evidenced by several points. In the days immediately preceding the Budget, the HCI Alliance, which represents companies specialising in this field, was negotiating with the Treasury in good faith to see how the scheme could be modified, in order to save it from the allegations that elements of it were being abused. The HCI Alliance was therefore shocked when the scheme was abolished in the Budget on 22 March, while those negotiations were effectively still ongoing. They were not the only ones to be caught out. The Department of Trade and Industry, the scheme’s departmental sponsor, was also taken unawares, not least as it was about to roll out the scheme to its own employees, and was promoting it on its departmental website on the day of abolition, stating:
“The real beauty of HCI schemes is that they have the potential to improve performance in almost every area of the organisation. As well as traditional drivers—reducing cost, increasing profitability—they can also contribute to more recent imperatives such as corporate responsibility, individual learning and workplace development.”
The Department for Work and Pensions, one of the largest employers in government, was also about to roll out the scheme to its staff, and was also blind-sided by the Treasury.
The announcement also drew criticism from the CBI and the TUC, both of which had actively promoted the scheme to their members. Brendan Barber, the general secretary of the TUC, protested:
“The Home Computing Initiative has helped thousands of low-paid workers without confident IT skills buy their first ever computer. Unions up and down the country have been promoting the scheme, often linked to training schemes. The sudden closure of the scheme would mean that many hours of voluntary union effort would go to waste.”
Moreover, the matter received no prior formal public consultation and, as the Government’s regulatory impact assessment pointed out, unusually, no small firms impact test was carried out in advance of the decision either. In short, it had all the hallmarks of a decision taken hurriedly in the final few days before the Budget announcement, as the printers were straining to print the final version of the Red Book.
Order. I would prefer that we stuck to the proceedings before the House this afternoon.
Thank you, Mr. Deputy Speaker. I shall gladly write to the hon. Gentleman on that matter, either one way or the other.
As for the impact of the decision, take-up of the HCI scheme was just beginning to take off when the Treasury suddenly and unfortunately announced its abolition. Nearly half a million employees around the country had taken advantage of the scheme to help improve their computer literacy and that of their families, which was part of the point of the scheme. More than 1,000 organisations, including public, private and voluntary sector bodies had begun to use the scheme. More than 100 different NHS trusts and hospitals had done so, including King’s College hospital and even the Sedgefield primary care trust, as had a wide variety of local authorities, a number of which were Labour-run. Many other organisations were also planning to adopt the scheme, including, as we have heard, two Departments.
Unfortunately, even for organisations that had already signed up their employees, the benefits will now be time-limited, as once current HCI agreements expire they cannot be renewed on the same terms. That is confirmed by paragraph 71 of the regulatory impact assessment, which states:
“Changes to the exemptions for computers and mobile phones were announced in the Chancellor’s Budget Statement on 22 March 2006 and will take effect from 6 April 2006. However, those people also participating in schemes based on the law as it applied prior to 6 April will not be affected until the period of their current agreement expires and they enter into a new agreement.”
Therefore, even those people’s HCI schemes will run out when whatever agreement they happen to have signed over the past few years reaches its originally agreed termination date. If clause 61 remains in the Bill, they will not be allowed to renew on those terms.
Having worked in the computing industry for 30 years before coming to this place, I welcomed the initiative and the attempt to raise levels of computer literacy, as lack of such literacy has resulted, among other things, in unnecessary recruitment from abroad to fill jobs that UK citizens could do. However, does the hon. Gentleman acknowledge that any Government must act if they believe that a scheme has been abused, or that growing numbers of people are using it in a way not anticipated under the original terms and objectives?
I thank the hon. Gentleman for his intervention. As he knows, I have quite a lot of time for him. At one level, what he says is correct, if the motive had genuinely been to address abuse. First, however, I do not believe that there was widespread abuse of the scheme, as I shall briefly explain. Secondly, as I hope I shall demonstrate, I believe that the motivation was not to combat abuse per se, and that the Government had other reasons. The issue of abuse has been used as a smokescreen, and I shall explain why. I take his point, but I do not believe that what he describes is what happened in this instance.
The impact on employment has been estimated by the UK trade body Intellect at around 2,000 job losses. Since the announcement was made, a number of companies operating in the field, including Red PC, Encompass and Evesham Technologies have, sadly, announced redundancies as a result. The greatest overall effect, however, is on the people who will no longer be able to avail themselves of the scheme, many of whom are in modestly paid jobs. When we debated the matter in the Committee of the whole House, I read into the record a series of e-mails and web comments from people who feared that they would no longer be able to use the scheme. I will not go over that again, but in summary, the HCI Alliance estimated that 60 per cent. of the scheme's participants are in blue-collar industries and 75 per cent. pay the standard rate of tax or lower. Three quarters of the people who were using the scheme could hardly be described as rich by any measure. Moreover, the computer supplier Intel pointed out in a letter to me that 21,000 Tesco workers had taken up the scheme, and expressed the view that many of them would not have computers had they not been offered them under the scheme.
Why was an alternative scheme not adopted? We debated that at some length on 2 May. If the Treasury was generally concerned about the degree of abuse to which it argued that the scheme was subject—and I accept that there was some abuse at the margin—it should have been possible to amend the 2004 scheme guidelines to specify a “positive” list of products to which the scheme and the exemptions would apply in future, perhaps supplemented by a “negative” list of those to which they would definitely not apply. That would have been a way of tightening up the scheme in order to save it.
There is a precedent. The Government in Sweden have operated a system similar to the HCI for some time, and similar concerns were expressed there about people seeking to exploit the tax advantages by purchasing equipment outside the original spirit of the rules. However, in 2004, rather than scrapping the scheme the Swedes simply tightened the rules on qualifying equipment. It deemed that only personal computers were allowed, with a maximum of one per employee. The monitor size was restricted to 30 in to avoid the alleged abuse by people using the scheme to buy large-scale plasma televisions. Peripherals and accessories were divided into two categories: those primarily used connected to a PC, such as keyboards and printers—which were allowed—and those whose primary use did not involve a PC, such as digital cameras and MP3 players, which were specifically not allowed.
Even if the Treasury refused to accept the Swedish example wholesale, as we have argued before, restrictions of that kind would be relatively simple to introduce through modification of the guidelines. The Government simply cannot hide behind excuses such as the difficulty of defining qualifying equipment, because we have already given them an empirical example of that being done successfully elsewhere. Furthermore, that very option was included in the Government’s own regulatory impact assessment, under the heading “Refocus the Exemptions”. The more tightly defined scheme, which was option 2 in the RIA, still offered considerable revenue savings to the Treasury, while also offering the prospect that the scheme could continue relatively intact. If option 2 had been used, the taxpayer would have saved money against the alleged abuse, while the scheme—still relatively intact—could have achieved its objective of contributing positively to the spread of e-literacy among the population. The Government could have saved it if they had wanted to; their own regulatory impact assessment makes that clear.
What is the tax position now? Here we see some clarification from the Paymaster General. If the Government are determined to press ahead with their decision, that leaves open the question of the tax position following the introduction of clause 61. Paragraph 22 of the RIA states
“If significant private use is made of a computer provided for business purposes a tax charge will arise on the private use element based on the value of the computer and the extent of the business and private use. Employers will also be liable to class 1A National Insurance contributions.”
On the day of our debate in the Committee of the whole House, The Times said in a leading article
“Treasury officials have promised to take a “practical” view of how much private use should be regarded as “significant”. The most practical approach, when the issue is debated in the Commons today, would be to withdraw it. We are watching.”
I very much hope that it is still watching.
Can the Paymaster General update us on the progress of the post facto consultation with interested parties? Paragraph 74 of the RIA implied that that work would be completed by Royal Assent. As Third Reading is due in just a few hours, and as, following scrutiny in the House of Lords, we might reasonably expect Royal Assent before the end of July, can the Paymaster General tell us whether a solid working definition has been achieved so that employees will know exactly where they stand in relation to tax—which will be very important to them—and employers will not have to endure a complicated compliance burden to try to stay on the right side of the law, as all Members of Parliament would expect them to do?
What really lay behind the decision? The answer seems very clear: the Chancellor simply wanted the money. The Red Book reveals that the decision to scrap the HCI will raise some £300 million in revenue between 2006-07 and 2008-09. No doubt that preyed heavily on the Chancellor’s mind in the run-up to the Budget, given that he is now pledged to borrow an incredible £175 billion over the next six years. Coming from a Chancellor who always likes to wax lyrical about making decisions for the long term, this smacks of short-term decision making of the worst kind. Indeed, we observed the irony during the most recent Treasury questions, on 15 June. The Chancellor himself was berating the Opposition for, in his opinion, not doing enough to encourage investment in computers.
Is it not the case that over a three-year period, £200 million represents about one sixtieth of 1 per cent. of a public expenditure total of some £1,200 billion? Is the hon. Gentleman really suggesting that what is, in that context, a trivial sum would provide the motivation for a decision of this kind?
The hon. Gentleman must forgive me; I know that he is an accountant by training, but I would not call hundreds of millions of pounds trivial in any context. I remind him of what the Chancellor proudly told the Daily Record in March 1999, when he was attempting to float the official version of what became the HCI. He said
“Britain can no longer afford to lag behind America. Inequality in computer learning today will mean inequality in earning power tomorrow”.
Perhaps the hon. Gentleman should take that point up with the Chancellor directly. Someone must tell him that his decisions should remain consistent at least for a few months.
Is it any wonder that even Labour Members are beginning to doubt the Chancellor’s judgment? That was evidenced in an excellent article in yesterday’s edition of The Daily Telegraph by Rachel Sylvester, entitled “Twitchy Labour MPs look to ditch Brown along with Blair”. As she explained,
“Even Mr. Brown’s closest allies in the Commons are becoming frustrated with their preferred leader. Changing people who are set in their ways is very difficult according to one weary MP.”
This is clearly a decision made in haste by a Chancellor on the look-out for short-term revenue-raising measures. In fairness to the Paymaster General, it must be said that, as so often happens, the Chancellor has made a difficult decision and expected his junior Ministers to front for him. His decision will impede the spread of computer literacy in our country, not least among modestly paid employees and their families, at a time when, according to Hewlett Packard, our international competitors such as China and India are between them churning out more than 100,000 IT graduates a year.
The bottom line is that the Government could have refocused the exemptions to protect revenue for the taxpayer, and still have saved the scheme. They had that option, but they did not follow it because they wanted every penny that they could squeeze. Nevertheless, I call on the Government one last time to reverse this erroneous decision—although, sadly, I believe I know the outcome even before I ask the question.
In Committee of the whole House, I made it clear that there were a number of reasons why it was the right time to remove the exemption. I shall briefly repeat each one.
The home computer initiative has been used extensively by groups whom we would not generally expect to experience difficulty in accessing information technology. Twenty-five per cent. of participants in the scheme are higher rate taxpayers, more than twice the proportion among taxpayers as a whole. Furthermore, nearly a third of participants are employed in white-collar industries. In March, the Low Pay Commission published the findings of its review of benefits in kind, salary sacrifice schemes and the accommodation offset. It found that take-up rates were often low and that many part-time low-paid workers would gain no advantage from salary sacrifice schemes for home computers and other benefits in kind. The analysis shows that those who can afford to do so have the computers and those who cannot afford to do so, do not. The recommendation was, therefore, to refocus—not to amend—the scheme.
It may be that the benefit of the scheme was focused on the middle class, IT-literate, higher paid section of the population, but many people would have been happier had the savings—some £200 million over three years—been refocused in a way that enabled access for older or less-well-off people in certain areas. It could have been done perhaps through the community education system, which has had some problems in recent times.
My hon. Friend is right and I will come to that point.
The HMRC also had evidence that the tax exemption was being used beyond the scope of its original intention, not only in the equipment provided but in the marketing of the scheme, which implied that people could buy that equipment at prices offset against their salary sacrifice.
I shall come to the hon. Lady’s points and, if necessary, give way then.
The investment for the groups that my hon. Friend mentioned was specifically addressed in the digital review and the Low Pay Commission report. I shall come to those points when I have finished explaining why the scheme was not appropriate. It was the correct time for the Government to remove the exemption and better focus support on the groups of people in our community that my hon. Friend mentioned, so as to increase access to technology for the poorest, the unemployed, the elderly and the low paid. Salary sacrifice schemes cannot provide that access.
During proceedings in the Committee of the whole House, I announced that we would establish a dedicated digital inclusion team. That team has now been set up by the Department for Communities and Local Government, and is working closely with the City of London Corporation. It will champion examples of excellence in using highly effective and efficient information and communication technology to tackle the key drivers of exclusion. It will also promote leadership and understanding and inform decisions.
I also announced that the Government would change the aims and objectives of the digital strategy to focus on digital inclusion. The Treasury will collaborate closely with industry on meeting the goals of the digital strategy, building on the success of more than 6,000 UK online centres—more than half of which are located in the 2,000 most deprived wards in England. Some 90 per cent. of the population live within 5 km of one of those centres, and that is precisely the type of investment that is needed to reach those groups.
It is stunning that every time the hon. Member for Falmouth and Camborne (Julia Goldsworthy) is asked about the Liberal Democrats’ spending commitments, we are told that they have a commission and are thinking about it. Then she berates the Government for investment in making progress on tackling social exclusion—
I have told the hon. Lady the Government’s plans for spending the money. She has a flipping cheek—I shall rephrase that. It is somewhat audacious of the hon. Lady to suggest that I should forecast future Government spending when she is not even prepared to make a current commitment on expenditure by her party on anything, let alone in this area.
I have made it clear that with the refocusing of the digital strategy, the setting up and use of the digital inclusion team and the discussions that we are having with industry, we are looking at how we can refocus support on targeted groups. I remind the hon. Member for Rayleigh (Mr. Francois) that if those people are low paid, unemployed or elderly, a salary sacrifice scheme will not help them, however it is amended. The point of the reports that the Government received was to demonstrate that the resources should now be directed at the groups I have mentioned.
The final question was about the remaining arrangements for when computer equipment is provided by employers solely for work purposes and the definition of “significant” in relation to private use. The HMRC’s interpretation of not significant is that
“where a computer is provided by an employer because it is necessary for an employee to have it available at home or in the office to carry out the duties of their employment, it is highly unlikely that any private use made of that equipment will be significant when compared to the business need.”
It is assumed that the business need would outweigh any consideration of private use. To put that point beyond doubt, the HMRC—in consultation with the employers—has drafted guidance with detailed explanations of the point, which is currently being scrutinised. Employers can still provide computers for business need.
It is entirely appropriate that the Government should refocus the resources. There is no hidden agenda. The agenda is clear and it involves reaching out to those who are excluded from information technology and ensuring that the regime as provided is properly used. That is precisely what we have done.
I shall be brief. Although the hon. Member for Rayleigh (Mr. Francois) may not approve, I am sure that many other Members will be grateful.
The unfairness still stands. People who could have benefited from the home computer scheme will not be able to access it and, as has been said in previous debates and again today, many of those people are in blue-collar jobs and low-income households. Businesses have closed as a result of the end of the scheme, so what confidence can the Paymaster General expect businesses to have in the Government’s proposals to extend digital access to vulnerable groups? Why would they support or invest in future schemes, given their experience of the home computer scheme?
The right hon. Lady has not explained why the Government were not able to tighten the definition, when other countries were perfectly able to do so. For those reasons—
I cannot give the hon. Lady an absolute guarantee—that is subject to the Chair.
Having heard the Government’s explanation of what they have decided to do, we would very much like to join the hon. Lady in the Lobby if she decides to press the amendment to a vote. Does she agree that as the Paymaster General said that draft guidelines had been prepared on the “not significant” issue, it would be helpful if the Government placed a copy of the guidelines in the Library as soon as possible?
I very much agree with the hon. Gentleman’s last point. I was hoping to intervene on the Paymaster General to ask her to place in the Library the evidence provided to her by HMRC that the scheme was being used beyond its scope.
For the reasons I have outlined, I feel that the issue is still significant and I shall press the amendment to a vote.
Question put, That the amendment be made:—
Avoidance involving financial arrangements
I beg to move amendment No. 99, page 181, line 2, at end insert—
‘Repeal of rent factoring provisions
A1 (1) Sections 43A to 43G of ICTA (rent factoring) shall cease to have effect.
(2) The amendment made by this paragraph has effect in relation to transactions entered into on or after 6th June 2006.’.
With this it will be convenient to discuss Government amendments Nos. 16, 100, 17 and 101 to 106.
These amendments cover two similar areas. They deal with changes to the legislation on “repos”—the name for agreements for the sale and repurchase of securities—and introduce legislation on the factoring of income generally, replacing existing legislation on the factoring of rents from land. Both these areas involve anti-avoidance rules.
Amendments Nos. 99 to 101 deal with factoring of income generally and are more substantial, so I will describe them first. The ideas behind the rules for structured finance arrangements are not new; they build on, extend and replace legislation introduced in 2000 called rent factoring. However, the structures that Her Majesty’s Revenue and Customs has seen recently are new: they take rent factoring ideas and extend them to types of receipts other than rents.
Before turning to the detail, it may be helpful to start by outlining why the amendments are being introduced at this stage of the Finance Bill cycle, rather than on Budget day. The context is that, earlier this year, HMRC became aware that a major corporation had entered into the new type of factoring scheme to avoid paying tax on significant amounts of income. At that stage, HMRC was not aware of the detailed mechanics of the scheme, so the Government were not in a position at Budget time to introduce properly targeted legislation. Work continued to ensure that the scheme was properly understood and then on developing a legislative solution.
On 6 June, my right hon. Friend the Paymaster General announced to Parliament that the Government would introduce amendments to the Finance Bill on Report to ensure that the new type of factoring arrangement would be properly taxed, and that the legislation would have effect from 6 June. On that day, HMRC published draft legislation and a detailed explanatory statement on its website identifying the types of scheme that the legislation would affect. It also invited interested parties to attend a longer open day later in June, with HMRC and Treasury officials, with the object of clarifying the new rules and identifying any areas where they might need to be amended. As I said, this is, in essence, anti-avoidance legislation. The Government do not usually consult about anti-avoidance legislation.
I was just coming on to explain how the consultation had affected the initial proposals and how consultation had helped us to make better tax policy.
I was saying that, normally, one would not consult on this kind of anti-avoidance legislation, but because we are talking about a difficult area, we thought that it would be helpful for there to be a period of consultation and discussion about the detail—as long as it was always clear that the legislation would have effect from the date that it was announced, 6 June, and provided that the House was content for these amendments to be introduced on Report. As I said, we held an open day discussion on 20 June, which was attended by about 30 representatives of business and the advisory professions, to go through the legislation and, in particular, to consider whether the exclusions that had originally been built in were sufficient. Those exclusions were to make sure that we did not inadvertently capture appropriate behaviour as we tried to deal with the particular form of tax avoidance relating to this complex way of providing loan finance.
The consultation process has been constructive and beneficial in identifying areas where changes to the original proposals were needed in order to exclude cases that could be inadvertently caught. The process has been welcomed by business as a way of striking the right balance between protecting tax revenues and making sure that we get legislation right. The main exclusions are for transactions that are already taxed in the way that the amendments propose. That includes finance leases and other similar arrangements such as repos, stock lending and some types of Islamic finance. To put the point beyond doubt, ordinary loans are also excluded. In essence, the new legislation for structured finance arrangements will bring other types of financing arrangements into line with the new finance leasing rules, and so remove what would otherwise have been an anomaly from the tax system.
I want to confirm in particular that, following discussions, the finance leasing industry is content with the exclusions in the amendments. In response to the hon. Member for Fareham (Mr. Hoban), I should say that it was around those issues of finance leasing that most of the detailed changes to the original 6 June announcement were made. Following those consultations with the industry, we understand that it is content that the exclusions in the amendments provide the right outcome, particularly in relation to any overlap between the leasing rules and the structured finance rules. We think that these measures are a proportionate response to complex arrangements. Had we not acted, several hundreds of millions of pounds of tax would have been at risk. The provisions do not penalise, but put all finance arrangements on a level playing field so that a company’s decision on how to finance itself is not driven by tax considerations, but by commercial ones.
Amendments Nos. 16 and 17 are changes to the tax treatment of sale and repurchase—or, as they are commonly known, repo—transactions. These amendments are the Government’s prompt reaction to a recent adverse decision of the special commissioners—the first instance tax tribunal—in a case where there was what is known as a three-legged repo. Clearly, in this case, there was no question of consultation because we were responding to that decision.
Repos are used widely in the financial markets as a form of a secured loan. They typically involve one party agreeing to sell securities to another, with a related agreement to buy back the securities at an agreed future date at a price agreed at the outset. Ordinary repos involve only two parties: the original holder and the interim holder. The special commissioners held that the legislation for taxing repos did not work properly in a three-legged repo situation and upheld a company’s claim to a deduction when, overall, there was no net loss to the group of companies involved. It is very likely that HMRC will appeal that decision, but it opens up the possibility of companies trying to enter into similar schemes in the hope that the special commissioners’ decision will be upheld. The possible cost of that could run into hundreds of millions of pounds.
The amendments on repos will ensure that such a scheme will not succeed in future, whatever the outcome of the appeal. The changes will not have any wider effect on genuine commercial repo transactions. This is another example of us acting quickly and fairly, but properly, to deal with tax avoidance without damaging legitimate transactions. I hope that I have assured the hon. Member for Fareham that the consultation has been well handled, and I commend the amendments to the House.
I thank the Minister for his explanation of these complex and technical changes. He was right to suggest that the consultation process has been thorough and effective. Given that many of the issues on which we have had conflict during the passage of the Bill have been areas on which there has not been proper consultation, that is something on which we can agree. The Minister has taken on board fully the remarks made by tax advisers. On that point, may I put on record my thanks to the advisers who have helped us throughout the passage of the Bill? PricewaterhouseCoopers has helped us to tackle some of the complexities of the Bill, but it was not alone in providing us with guidance, support, suggestions and help.
The Minister is right to clamp down on the problem. I understand that taxpayers are trying to obtain tax relief on both the interest and the principal. The example given in the explanatory notes demonstrates the extent to which people will structure such transactions simply to acquire tax relief on them. The amendments are thus valid. My discussions have shown that the industry is broadly content with them. Things such as finance leases were in the original scope of the draft legislation and the fact that they have been taken out is welcome. There is provision in the legislation that when other genuine commercial transactions could be caught by the changes, there is a mechanism for ensuring that they will fall outside the scope of the anti-avoidance provisions.
May I ask several questions about repos? The Minister was right to point out that such transactions are ordinarily straightforward. However, the transactions that came to the Government’s attention through the case considered by the special commissioners involved three parties. The original owner sold securities to an interim purchaser, who sold them to someone else, who then sold them back to the original owner—that is quite a complex loop. When considering such transactions, did the Treasury or HMRC do any research to determine whether any valid commercial transactions involved three parties in a tri-party repo arrangement?
I understand that there are frequently occasions on which a third party will act as an agent between the two parties to a repo. Will the Minister confirm whether the use of agents will lead to transactions being classified as tri-party repos and thus fall under the terms of the amendments? Clarification on that would be useful because agents are widely used when such transactions are carried out.
The third issue is assignment and novation of the arrangements. There may be occasions when, for entirely commercial reasons, existing repos are assigned and novated to another party—for example, as part of a corporate reorganisation or a transfer or takeover of business. In those circumstances, since the assignee would not be the party to whom the securities were originally sold, one would not expect that they would be eligible for tax relief in respect of any deemed manufactured dividend or interest. There is some concern that the new rules might capture those transactions inadvertently.
I should be grateful if the Minister responded to those three concerns: has there been any research into the valid commercial use of tri-party repos; will it capture deals where an agent has facilitated the repo; and what will happen where there are assignments and novations as part of an ordinary commercial transaction or corporate reorganisation? Will the Minister clarify those three matters?
I am happy to clarify those three issues. Having spent some time reflecting on these matters in recent weeks, it is clear that it is a highly complex area and that changes to legislation in respect of market developments over a number of years have led to very considerable complexity. In future, we will look to finding ways to make the legislation more user friendly, without at the same time losing any of the important protections that have been introduced in recent years and in the amendments today.
On the first point, I can confirm that protection of revenue is being put in place without affecting normal transactions in any way. We have been careful to ensure that standard repo contracts will not be affected. We are talking about a particularly contrived form of three-party repo—not the sort of transactions that one stumbles into inadvertently. They exist only where taxpayers are attempting to avoid paying tax by using artificial or contrived arrangements. Standard commercial or two-party repos will not be inadvertently affected by the changes.
The second question was about agency cases. I can confirm that they will not be caught by the changes, as we looked into that particular problem.
On the third question about novations, I can confirm that our understanding is that they will not be caught in that way. Following the special commissioner’s decision, we decided to act quickly. We do not want to open up a wider problem. As a result of the commissioners decision, the right thing to do was to act in a speedy manner and hopefully in a well thought out manner. I can assure the hon. Gentleman on all of his three points. More generally, because this is a complex area, we will keep it under review and if we can take further action in future Finance Bills to bring greater simplicity while at the same time keeping proper revenue protections in place, we shall certainly do so. For now, I urge hon. Members to support the amendments, which are necessary to protect the taxpayer from the potential loss of hundreds of millions of pounds. They will also help to ensure that the vast majority of people who go about their proper business in the financial markets will not be affected by the problem.
Amendment agreed to.
Amendments made: No. 16, page 185, line 8, at end insert—
‘Multiple holders of securities subject to sale and repurchase agreement: no relief for deemed manufactured payments
3A (1) Section 737A of ICTA (sale and repurchase of securities: deemed manufactured payments) is amended as follows.
(2) In subsection (5) (application of Schedule 23A and dividend manufacturing regulations), after “apply” insert “, subject to subsection (5A) below,”.
(3) After that subsection insert—
“(5A) If the relevant person is not the person to whom the transferor agreed to sell the securities, the relevant person is not entitled, by virtue of anything in Schedule 23A or any provision of dividend manufacturing regulations, or otherwise—
(a) to any deduction in computing profits or gains for the purposes of income tax or corporation tax, or
(b) to any deduction against total income or total profits,
by virtue of subsection (5) above.
Where the relevant person is a company, an amount may not be surrendered by way of group relief if a deduction in respect of it is prohibited by this subsection.”.
(4) In subsection (6) (interpretation), for—
(a) “subsection (5) above”, and
(b) “that subsection”,
substitute “this section”.
(5) The amendments made by this paragraph have effect in relation to securities if—
(a) the agreement to sell them was made on or after 27th June 2006, or
(b) a person other than the person to whom the transferor agreed to sell them became the relevant person in consequence of any other agreement made on or after that date.’.
No. 100, page 185, line, at end insert—
‘Structured finance arrangements: factoring of income receipts etc
3B (1) After section 774 of ICTA (transactions between dealing company and associated company) insert—
“Factoring of income receipts etc
774A Meaning of “structured finance arrangement” for purposes of s.774B
(1) For the purposes of section 774B an arrangement is a structured finance arrangement in relation to a person (“the borrower”) if the following condition is met in relation to the borrower.
(2) The condition is that—
(a) under the arrangement the borrower receives from another person (“the lender”) any money or other asset (“the advance”) in any period,
(b) in accordance with generally accepted accounting practice the accounts of the borrower for that period record a financial liability in respect of the advance,
(c) the borrower, or a person connected with the borrower, makes a disposal of an asset (“the security”) under the arrangement to or for the benefit of the lender or a person connected with the lender,
(d) the lender, or a person connected with the lender, is entitled under the arrangement to payments in respect of the security, and
(e) in accordance with generally accepted accounting practice those payments reduce the amount of the financial liability in respect of the advance recorded in the accounts of the borrower.
(3) For the purposes of this section, in any case where the borrower is a partnership, references to the accounts of the borrower include the accounts of any member of the partnership.
(4) For the purposes of this section and section 774B—
(a) references to a person connected with the borrower do not include the lender, and
(b) references to a person connected with the lender do not include the borrower.
774B Disregard of intended effects of arrangement involving disposals of assets
(a) an arrangement is a structured finance arrangement in relation to a person (“the borrower”), and
(b) the arrangement would (disregarding this section) have had the relevant effect (see subsections (2) and (3)),
the arrangement is not to have that effect.
(2) If the borrower is a person other than a partnership, the relevant effect is that—
(a) an amount of income on which the borrower, or a person connected with the borrower, would otherwise have been charged to tax is not so charged,
(b) an amount which would otherwise have been brought into account in calculating for tax purposes any income of the borrower, or of a person connected with the borrower, is not so brought into account, or
(c) the borrower, or a person connected with the borrower, becomes entitled to an income deduction.
(3) If the borrower is a partnership, the relevant effect is that—
(a) an amount of income on which a member of the partnership would otherwise have been charged to tax is not so charged,
(b) an amount which would otherwise have been brought into account in calculating for tax purposes any income of a member of the partnership is not so brought into account, or
(c) a member of the partnership becomes entitled to an income deduction.
(a) a person in relation to whom the structured finance arrangement would otherwise have had the relevant effect is a person within the charge to income tax, and
(b) in accordance with generally accepted accounting practice the accounts of the person record an amount as a finance charge in respect of the advance,
that person may treat the amount for income tax purposes as interest payable on a loan.
(5) If a person in relation to whom the structured finance arrangement would otherwise have had the relevant effect is a company within the charge to corporation tax—
(a) the advance is to be treated, in relation to the company, for the purposes of Chapter 2 of Part 4 of the Finance Act 1996 as a money debt owed by the company,
(b) the arrangement is to be treated, in relation to the company, for the purposes of that Chapter as a loan relationship of the company (as a debtor relationship), and
(c) any amount which, in accordance with generally accepted accounting practice, is recorded in the accounts of the company as a finance charge in respect of the advance is to be treated as interest payable under that relationship.
(6) For the purposes of this section, in any case where the borrower is a partnership,—
(a) references to accounts include the accounts of the partnership, and
(b) any deemed interest is treated as payable by the partnership (whether or not the finance charge is recorded in the accounts of the partnership).
(7) For the purpose of determining when any deemed interest in respect of the advance is paid—
(a) the payments mentioned in section 774A(2)(d) are treated as consisting of amounts for repaying the advance and amounts (“the interest elements”) in respect of interest on the advance, and
(b) the interest elements of those payments are treated as paid when those payments are paid,
and the deemed interest in respect of the advance is treated as paid at the times when the interest elements are treated as paid.
(8) In this section “deemed interest” means any amount which is treated as interest as a result of subsection (4) or (5).
(9) This section is subject to the exceptions contained in section 774E.
774C Meaning of “structured finance arrangement” for purposes of s.774D
(1) For the purposes of section 774D an arrangement is a structured finance arrangement in relation to a partnership (“the borrower partnership”) if condition A or B is met in relation to the borrower partnership.
(2) Condition A is that—
(a) a person (“the transferor partner”) disposes of an asset (“the security”) under the arrangement to the borrower partnership,
(b) the transferor partner is a member of the borrower partnership immediately after the disposal (whether or not a member immediately before the disposal),
(c) under the arrangement the borrower partnership receives from another person (“the lender”) any money or other asset (“the advance”) in any period,
(d) in accordance with generally accepted accounting practice the accounts of the borrower partnership for that period record a financial liability in respect of the advance,
(e) there is a relevant change in relation to the membership of the borrower partnership involving the lender or a person connected with the lender (see subsection (6)),
(f) under the arrangement the share of the lender or person connected with the lender in the profits of the borrower partnership is determined by reference (wholly or partly) to payments in respect of the security, and
(g) in accordance with generally accepted accounting practice those payments reduce the amount of the financial liability in respect of the advance recorded in the accounts of the borrower partnership.
(3) For the purposes of condition A, references to the accounts of the borrower partnership include the accounts of the transferor partner.
(4) Condition B is that—
(a) the borrower partnership holds an asset (“the security”) as a partnership asset at any time before the arrangement is made,
(b) under the arrangement the borrower partnership receives from another person (“the lender”) any money or other asset (“the advance”) in any period,
(c) in accordance with generally accepted accounting practice the accounts of the borrower partnership for that period record a financial liability in respect of the advance,
(d) there is a relevant change in relation to the membership of the borrower partnership involving the lender or a person connected with the lender,
(e) under the arrangement the share of the lender or person connected with the lender in the profits of the borrower partnership is determined by reference (wholly or partly) to payments in respect of the security, and
(f) in accordance with generally accepted accounting practice those payments reduce the amount of the financial liability in respect of the advance recorded in the accounts of the borrower partnership.
(5) For the purposes of condition B, references to the accounts of the borrower partnership include the accounts of any person who is a member of the partnership immediately before the arrangement is made.
(6) For the purposes of this section and section 774D there is a relevant change in relation to the membership of the borrower partnership involving the lender or a person connected with the lender if directly or indirectly in consequence of, or otherwise in connection with, the arrangement—
(a) the lender, or a person connected with the lender, becomes a member of the borrower partnership at any time, or
(b) there is at any time a change in the share of a member of the borrower partnership in the profits of the borrower partnership in a case where that member is the lender or a person connected with the lender.
(7) For the purposes of subsection (6)(b) the reference to a person connected with the lender includes a person who at any time becomes connected with the lender directly or indirectly in consequence of, or otherwise in connection with, the arrangement.
774D Disregard of intended effects of arrangement involving change in relation to a partnership
(1) This section applies if—
(a) an arrangement is a structured finance arrangement in relation to a partnership (“the borrower partnership”), and
(b) any relevant change in relation to the membership of the borrower partnership involving the lender or a person connected with the lender would (disregarding this section) have had the following effect.
(2) The effect is that—
(a) an amount of income on which a relevant member of the borrower partnership would otherwise have been charged to tax is not so charged,
(b) an amount which would otherwise have been brought into account in calculating for tax purposes any income of a relevant member of the borrower partnership is not so brought into account, or
(c) a relevant member of the borrower partnership becomes entitled to an income deduction.
(3) In this section “relevant member of the borrower partnership” means—
(a) in any case where condition A in section 774C is met in relation to the arrangement, the transferor partner, and
(b) in any case where condition B in that section is met in relation to the arrangement, any person other than the lender who is a member of the borrower partnership immediately before the time at which the relevant change in relation to the membership of the borrower partnership involving the lender or a person connected with the lender occurs.
(4) Part 9 of ITTOIA 2005 and section 114 above are to have effect in relation to any relevant member of the borrower partnership as if the relevant change in relation to the membership of the borrower partnership involving the lender or a person connected with the lender had not occurred.
Accordingly, the structured finance arrangement is not to have the effect mentioned in subsection (2).
(5) The following provisions of this section confer relief from tax the availability of which depends on which of the conditions in section 774C is met in relation to the arrangement.
(6) In any case where condition A in section 774C is met, if—
(a) the transferor partner is a person within the charge to income tax, and
(b) in accordance with generally accepted accounting practice the accounts of the borrower partnership record an amount as a finance charge in respect of the advance,
the transferor partner may treat the amount for income tax purposes as interest payable by the transferor partner on a loan.
(7) In any case where condition A in that section is met, if the transferor partner is a company within the charge to corporation tax—
(a) the advance is to be treated, in relation to the company, for the purposes of paragraph 19 of Schedule 9 to the Finance Act 1996 (and the other provisions of Chapter 2 of Part 4 of that Act) as a money debt owed by the borrower partnership,
(b) the arrangement is to be treated, in relation to the company, as a transaction for the lending of money from which that debt is treated as arising for those purposes, and
(c) any amount which, in accordance with generally accepted accounting practice, is recorded in the accounts of the borrower partnership as a finance charge in respect of the advance is to be treated as interest payable by the company under that transaction.
(8) For the purposes of subsections (6) and (7), references to the accounts of the borrower partnership include the accounts of the transferor partner.
(9) In any case where condition B in section 774C is met, if—
(a) a relevant member of the borrower partnership is a person within the charge to income tax, and
(b) in accordance with generally accepted accounting practice the accounts of the borrower partnership record an amount as a finance charge in respect of the advance,
the relevant partner may treat the amount for income tax purposes as interest payable by the borrower partnership on a loan.
(10) In any case where condition B in that section is met, if a relevant member of the borrower partnership is a company within the charge to corporation tax—
(a) the advance is to be treated, in relation to the company, for the purposes of paragraph 19 of Schedule 9 to the Finance Act 1996 (and the other provisions of Chapter 2 of Part 4 of that Act) as a money debt owed by that partnership,
(b) the arrangement is to be treated, in relation to the company, as a transaction for the lending of money from which that debt is treated as arising for those purposes, and
(c) any amount which, in accordance with generally accepted accounting practice, is recorded in the accounts of the borrower partnership as a finance charge in respect of the advance is to be treated as interest payable by the borrower partnership under that transaction.
(11) For the purposes of subsections (9) and (10), references to the accounts of the borrower partnership include the accounts of any relevant member of the borrower partnership.
(12) For the purpose of determining when any deemed interest in respect of the advance is paid—
(a) the payments mentioned in section 774C(2)(f) or (4)(e) are treated as consisting of amounts for repaying the advance and amounts (“the interest elements”) in respect of interest on the advance, and
(b) the interest elements of those payments are treated as paid when those payments are paid,
and the deemed interest in respect of the advance is treated as paid at the times when the interest elements are treated as paid.
(13) In this section “deemed interest” means any amount which is treated as interest as a result of any of subsections (6) to (10).
(14) This section is subject to the exceptions contained in section 774E.
774E Sections 774B and 774D: exceptions
(1) Section 774B or 774D does not apply if the whole of the advance under the structured finance arrangement—
(a) is charged to tax on a relevant person (see subsection (7)) as an amount of income,
(b) is brought into account in calculating for tax purposes any income of a relevant person, or
(c) is brought into account for the purposes of any provision of the Capital Allowances Act as a disposal receipt, or proceeds from a balancing event or disposal event, of a relevant person.
For the purposes of this subsection the effect of section 785A (rent factoring of leases of plant or machinery) is to be disregarded.
(2) Subsection (1)(c) is not to be taken as met in any case where—
(a) the receipt or proceeds gives rise to a balancing charge, and
(b) the amount of the balancing charge is limited by any provision of the Capital Allowances Act.
(3) Section 774B or 774D does not apply if, at all times, the whole of the advance under the structured finance arrangement—
(a) is a debtor relationship of a relevant person for the purposes of Chapter 2 of Part 4 of the Finance Act 1996 (loan relationships), or
(b) would be a debtor relationship of a relevant person for those purposes if that person were a company within the charge to corporation tax.
For the purposes of this subsection references to a debtor relationship do not include a relationship to which section 100 of the Finance Act 1996 (money debts etc not arising from the lending of money) applies.
(4) Section 774B or 774D does not apply in so far as the structured finance arrangement is an arrangement in relation to which—
(a) section 263A of the 1992 Act (agreements for sale and repurchase of securities) applies,
(b) paragraph 15 of Schedule 9 to the Finance Act 1996 (repo transactions and stock-lending) applies, or
(c) Chapter 5 of Part 2 of the Finance Act 2005 (alternative finance arrangements) has effect.
(5) Section 774B or 774D does not apply in so far as—
(a) the security under the structured finance arrangement is plant or machinery which is the subject of a sale and finance leaseback, or
(b) the structured finance arrangement is an arrangement in relation to which sections 228B to 228D of the Capital Allowances Act apply with the modifications contained in section 228F of that Act (lease and finance leaseback).
(6) For the purposes of subsection (5)(a), whether plant or machinery is the subject of a sale and finance leaseback is determined in accordance with section 221 of the Capital Allowances Act.
But, in applying that section, it is to be assumed that the words “and which are not a long funding lease in the case of the lessor” were omitted from section 219(1)(b) of that Act (meaning of “finance lease”).
(7) For the purposes of this section a “relevant person” means—
(a) if section 774B applies, a person in relation to whom the structured finance arrangement would (but for that section) otherwise have had the relevant effect (within the meaning of that section), and
(b) if section 774D applies, a relevant member of the borrower partnership (within the meaning of that section).
774F Sections 774B and 774D: power to provide further exceptions
(1) The Treasury may make regulations prescribing other circumstances in which section 774B or 774D is not to apply in relation to a structured finance arrangement.
(2) Any regulations under subsection (1) may make provision amending section 774E.
(3) The power to make regulations under subsection (1) includes—
(a) power to make provision having effect in relation to times before the making of the regulations (but not times earlier than 6th June 2006),
(b) power to make different provision for different cases or different purposes, and
(c) power to make incidental, supplemental, consequential or transitional provision and savings.
774G Sections 774A to 774D: minor definitions etc
(1) For the purposes of sections 774A to 774D “arrangement” includes any agreement or understanding (whether or not legally enforceable).
(2) For the purposes of sections 774A to 774D “income deduction” means—
(a) a deduction in calculating any income for tax purposes, or
(b) a deduction against total income or total profits.
(3) For the purposes of sections 774A to 774D—
(a) references to a person’s receiving any asset include the person’s obtaining directly or indirectly the value of any asset or otherwise deriving directly or indirectly any benefit from it,
(b) references to a disposal of an asset include anything which constitutes a disposal of the asset for the purposes of the 1992 Act,
(c) references to payments in respect of any asset include obtaining directly or indirectly the value of any asset or otherwise deriving directly or indirectly any benefit from it.
(4) For the purposes of sections 774A to 774D, section 839 (connected persons) applies.
(5) For the purposes of sections 774A to 774D references to the accounts of any person who is a company include the consolidated group accounts of a group of companies of which it is a member.
(6) If any person does not draw up accounts in accordance with generally accepted accounting practice, sections 774A to 774D apply as if the accounts had been drawn up by the person in accordance with that practice.
(7) Sections 277 to 281 of ITTOIA 2005 and section 34 above (lease premiums) are not to apply in relation to a premium paid in respect of a grant of a lease where the grant constitutes a disposal of an asset for the purposes of section 774A(2)(c) or 774C(2)(a).”.
(2) The amendment made by this paragraph has effect in relation to any arrangements whenever made (but see sub-paragraphs (3) and (4)).
(3) In relation to arrangements made before 6th June 2006, amounts are, as a result of the amendment made by this paragraph,—
(a) to be charged to tax, or
(b) to be brought into account in calculating any income for tax purposes or deducted from any income for tax purposes,
only if the amounts arise on or after that date.
(4) The amendment made by this paragraph has no effect in relation to any arrangement made before that date in so far as section 43B or 43D of ICTA (rent factoring) applies to it.
(5) In any case where, in relation to arrangements made before that date, a person is treated, as a result of the amendment made by this paragraph, as being a party to any loan relationship—
(a) a period of account is to be treated for the purposes of Chapter 2 of Part 4 of FA 1996 as beginning on that date, and
(b) the loan relationship is to be treated for those purposes as being entered into by the person for a consideration equal to the notional carrying value of the liability representing the relationship.
(6) For this purpose, the notional carrying value is the amount that would have been the carrying value of the liability in the accounts of the person if a period of account had ended immediately before that date.
(7) “Carrying value” has the same meaning here as it has for the purposes of paragraph 19A of Schedule 9 to FA 1996.
Rent factoring of leases of plant or machinery
3C (1) Section 785A of ICTA (rent factoring of leases of plant or machinery) is amended as follows.
(2) After subsection (5) (provision about partnerships with legal personality) insert—
“(5A) This section does not apply in so far as section 774B or 774D (structured finance arrangements) applies in relation to the arrangements mentioned in paragraph (c) of subsection (1) above as a result of the transfer mentioned in that paragraph.”.
Transactions associated with loans or credit
3D (1) Section 786 of ICTA (transactions associated with loans or credit) is amended as follows.
(2) After subsection (5) (transaction under which a person assigns, surrenders etc income arising from property) insert—
“(5ZA) But subsection (5) above does not apply if the person mentioned in that subsection is, as a result of section 774B or 774D (structured finance arrangements), chargeable to tax on the amount of income assigned, surrendered, waived or forgone.”.
Structured finance arrangements: chargeable gains treatment of acquisitions and disposals
3E (1) After section 263D of TCGA 1992 (gains accruing to persons paying manufactured dividends) insert—
“263E Structured finance arrangements
(1) This section applies if—
(a) section 774B of the Taxes Act (disregard of intended effects of arrangement involving disposals of assets) applies in relation to a structured finance arrangement,
(b) the borrower or a person connected with the borrower makes a disposal of any security at any time under the arrangement to or for the benefit of the lender or a person connected with the lender, and
(c) condition A or B is met.
(2) Condition A is that the person making the disposal subsequently acquires under the arrangement the asset disposed of by that disposal.
(3) Condition B is that—
(a) the asset disposed of by that disposal subsequently ceases to exist at any time, and
(b) that asset was held by the lender, or a person connected with the lender, from the time of the disposal until that time.
(4) The disposal of the security by the borrower or a person connected with the borrower is to be disregarded for the purposes of this Act.
(5) Any subsequent acquisition by the person making the disposal of the asset disposed of by that disposal is to be disregarded for the purposes of this Act.
(6) In this section—
“the borrower”, in relation to a structured finance arrangement, means the person who is the borrower under the arrangement for the purposes of section 774A of the Taxes Act,
“the lender”, in relation to a structured finance arrangement, means the person who is the lender under the arrangement for the purposes of that section,
“security” means any such asset as is mentioned in subsection (2)(c) and (d) of that section.
(7) For the purposes of this section—
(a) references to a person connected with the borrower do not include the lender, and
(b) references to a person connected with the lender do not include the borrower.”.
(2) The amendment made by this paragraph has effect in relation to disposals made on or after 6th June 2006.
(3) The amendment made by this paragraph also has effect in relation to any disposal made by a person before that date if the person makes a claim to that effect under this sub-paragraph.’.
No. 17, in page 192, line 19, at end insert—
‘Loan relationships: repo and stock-lending arrangements
13A (1) In Schedule 9 to FA 1996 (loan relationships: special computational provisions), paragraph 15 (disposal or acquisition made in pursuance of repo and stock-lending arrangements not to be related transaction) is amended as follows.
(2) In sub-paragraph (2)(b) (transfer to original transferor (“A”) giving effect to entitlement or requirement to rights on re-transfer etc.), after “to A” insert “by B”.
(3) The amendment made by this paragraph has effect in relation to any transfer to A (within the meaning of paragraph (a) of sub-paragraph (3) of paragraph 15) under arrangements—
(a) consisting in or involving an agreement made on or after 27th June 2006 for the transfer of rights by A to B (within the meaning of that paragraph), or
(b) involving an agreement made on or after that date providing for a transfer giving effect to the entitlement or requirement described in paragraph (b) of that sub-paragraph otherwise than by B.’.—[Mr. Watts.]
Long funding leases of plant or machinery
Amendments made: No. 21, page 203, line 30, leave out from ‘the’ to ‘purpose’ in line 31 and insert ‘main’.
No. 24, page 209, line 7, at end insert—
‘(6) A plant or machinery lease is not a funding lease in the case of the lessor if—
(a) before 1st April 2006, the plant or machinery had, for a period or periods totalling at least 10 years, been the subject of one or more leases, and
(b) the lessor under the plant or machinery lease was also lessor of the plant or machinery on the last day before 1st April 2006 on which the plant or machinery was the subject of a lease.’.
No. 25, page 212, line 43, at end insert ‘(but see also subsection (4A))’.
No. 26, page 213, line 23, at end insert—
‘(4A) A lease is not excluded by virtue of subsection (2) if—
(a) the inception of the lease is before 28th June 2006, and
(b) by virtue only of section 70J(6), the lease is not a funding lease in the case of the lessor.’.
No. 22, page 214, line 32, leave out from ‘is’ to ‘that’ in line 33.
No. 23, page 216, line 26, leave out from ‘if’ to third ‘the’ in line 27.—[Mr. Watts.]
Amendment of section 29 of the Energy Act 2004
With this it will be convenient to discuss amendment No. 2, in clause 100, page 93, line 40, leave out clause 100.
I wanted another run around the block on the UK nuclear industry from a financial point of view. Clauses 99 and 100 go hand in hand in amending the Energy Act 2004. Clause 99 deals with British Nuclear Fuels Ltd and clause 100 covers the Nuclear Decommissioning Authority.
British Nuclear Fuels Ltd is a Government company, which has a turnover of approximately £3.5 billion. It appears to me, prima facie, that clause 99 is part of a device to fatten up BNFL from a tax point of view because of the sell-offs that it proposes to make. It will sell British Nuclear Group, and the rumours are that that is expected to raise between £500 million and £1 billion. It proposes to sell BNG America and is in advanced talks with Toshiba to sell Westinghouse this autumn for a reported £5.4 billion. It also owns a third of Uranco, a uranium reprocessing company, the other two thirds of which are owned in the Netherlands and Germany. British Nuclear Fuels Ltd is therefore a sprawling, large company, which deals with a large industry. Whatever happens in future, it will continue, for many years, to play a significant part in energy delivery and have a significant environmental impact in the United Kingdom.
Hon. Members will not be surprised to hear me referring to the explanatory notes. Paragraph 12 of the explanatory notes for clause 99 states:
“The amendments provided in this clause will preserve the intended effect of section 29”—
of the Energy Act 2004—
“and ensure that a BNFL site licensee company does not incur corporation tax charges or acquire taxable losses as a consequence of the NDA taking responsibility for decommissioning and cleaning-up liabilities.”
I wanted to probe the Government a little about the figures.
British Nuclear Group is a site-management and clean-up company, a contractor for the Government’s Nuclear Decommissioning Authority and, as I said, a subsidiary of BNFL. It remains state owned, although BNFL may sell it off sometime in the next 12 months. British Nuclear Group has responsibility for Sellafield, formerly Windscale, for the older Members among us, and it operates 14 sites in the UK. There is also BNG America, which is a different operation, albeit owned by BNFL.
The nuclear industry has a history of lying about figures. That is widely accepted, although whether it continues to do so is a matter for debate. However, proponents of nuclear power, and especially the nuclear industry in the 1960s, 1970s and 1980s, made statements that were clearly inaccurate on many counts. In some cases, they were outright lies rather than simply optimistic projections. The nuclear industry around the world is, in every case, heavily subsidised directly or indirectly by Governments, including in the UK.
I am worried that clauses 99 and 100 would further the subsidies to a failing industry.
Does the hon. Gentleman agree that one of the difficulties with the two clauses is that nothing appeared about them in the press releases that accompanied the Budget resolutions and that the Red Book contains nothing about how much they might cost? The Government might be trusted more on that issue if such figures were available.
It is part of the process of parliamentary scrutiny, in which we are currently engaged, to try to tease some of that information out of the Government. It might have been preferable, if the figures were available, for them to be in the Red Book. I suspect—although I do not know—that part of the Government’s response will be to say that we are considering a recirculation exercise for corporation tax liabilities, allowable tax losses and so on. That is a strong suspicion, based on what my right hon. Friend the Paymaster General said when we had a brief debate on the matter in the Standing Committee, on which I served. I would like, as I said, to tease out some figures, and I am sure that the hon. Gentleman and others would also like to do so. Leaving aside all the environmental issues about nuclear power, which it is not appropriate for us to discuss today—I am sure that you would rule me out of order if I tried to do so, Mr. Deputy Speaker—there are clear financial questions to be asked about the nuclear industry, both in the United Kingdom and around the world.
As I was saying, the industry is subsidised around the world. It is a private industry in the United States, where it is heavily subsidised. No nuclear reactor has been built or commissioned in the USA, that bastion of free enterprise, for at least 25 years because the figures do not stand up. In Finland, which has been widely quoted recently because it is opening up nuclear power—quite controversially, perhaps, for a Scandinavian country—there are direct and very indirect subsidies for the power stations that are being built.
I want to try to find out whether the Government are subsidising the nuclear industry in this country more than is commonly known, because of course there is a debate about whether there should be more nuclear power stations built in the United Kingdom. It is interesting to note, as I have teased out in the House before by parliamentary questions and in the Trade and Industry Committee, on which I serve, that any company could now apply to build a new nuclear power station in the United Kingdom.
The clauses deal with the history of nuclear power stations and with decommissioning today; they do not go forward in any way. I will cover that in my remarks. We are talking about responsibilities for decommissioning power stations that are already in operation and need to be decommissioned.
Yes, of course these are in a sense backward-looking clauses, but in the context of a public debate about nuclear energy and what we do with the nuclear power stations and the spent materials that we have—a debate that will develop this summer when the energy review is published—we need to try to be aware of the historic cost of nuclear power, as perhaps evidenced in these two clauses, to inform that public debate about the possible future cost of nuclear power.
The Paymaster General said a moment ago, no doubt accurately, that these clauses are about looking back. But is it not important at least to explore who will be doing this clear-up work, given that it would appear that a private company may be doing it and enjoying tax advantages that were designed for the public sector?
I quite agree, and that is what I am trying to find out. Whether we talk about existing nuclear power stations or a new group—what the industry tries to dress up as a fleet—we have to look at the question of dealing with spent materials, radioactive waste and so on. That is particularly true of the radioactive waste that we already know exists, because it is here, and the waste that we know will be generated in the next 13 to 15 years, until 2020, the life of the current nuclear power stations. The Nuclear Decommissioning Authority is a Government body, but as the hon. Gentleman points out, it uses British Nuclear Group as a subcontractor for site management, clean-up and so on, and BNG is likely to be privatised in the next 12 months.
I would like to know whether there are any tax breaks for the existing nuclear industry because that must inform the public debate about the future—or lack of future, whichever it may be—of nuclear power stations in the United Kingdom. One thing that the nuclear industry has historically been very good at is getting hidden subsidies. I am not sure whether clauses 99 and 100 are indicative of that; I want to find that out. It already has a hidden subsidy through the cap on its public liability insurance, because given the liabilities it would be almost impossible, even with reinsurance—the hon. Member for South-West Bedfordshire (Andrew Selous) knows a great deal about that and could correct me if I am wrong—to get insurance cover at a premium that would make a nuclear power station viable. There has to be an indirect state subsidy on those liabilities. Clauses 99 and 100 may or may not speak to that, and I wish to find out more.
The Minister talked about how, in effect, the clauses look back. Is it not also true that they deal with transitional issues? As the explanatory notes to clause 100 say:
“The amendments provided in this clause will preserve the intended effect of section 30 and ensure that the NDA does not incur corporation tax charges or acquire taxable losses as a consequence of the accounting caused by the imposition of the transitional arrangements.”
If these companies are still benefiting during the transitional arrangements, does this provision not still qualify as a state aid? Is this not a question that needs to be answered?
As I understand it, the transitional arrangements came in because the European Commission started examining whether there was or is unauthorised state aid in the UK for the nuclear power industry, part of which has been privatised and more of which will be privatised.
Whatever the proponents of the nuclear industry say, we have what I would regard as a dinosaur industry that is using technology, even with the pebble-bed reactors and so on that it is talking about—technology that has been around in Germany since, I think, 1958, but which is supposed to be the new generation of nuclear power—that is about 50 years old. The technology has never been operated anywhere without state subsidy, directly or indirectly. The proponents of a new generation of nuclear power stations are looking forward rather than backwards, which the clauses do, to a situation where there will not be state subsidies. I am a little cynical about that. I have heard it all before. Throughout my adult life I have heard about how there would not be state subsidies, and that we would have electricity too cheap to meter, for example. That never worked out.
We are talking about old technology. It is about 50 years old, as I have said. That is the basic design, however much we talk about advanced gas water and all that, heavy water and can-do reactors, for example. It is, as I have said, old technology. It works in as much as it produces electricity, but it does not work in that it is not economic. Even with today’s high energy prices, there are serious questions to be asked about whether the nuclear power that we have, let alone the nuclear power that we may have in future, is economic, given the direct subsidies for the existing nuclear fleet of power stations and the possible subsidies, whether on insurance or guaranteed purchase of electricity, for future nuclear power stations.
As for the environment, we would be much better spending the money on energy conservation and renewables than on a new generation of nuclear power stations, but that is not a debate for today. The debate is whether clauses 99 and 100 are directly or indirectly a hidden subsidy for the nuclear industry that already exists. I hope that today, or perhaps by writing to me, my right hon. Friend the Paymaster General will indicate what the fiscal effects of the two clauses will be on the Government's net balance sheet. The explanatory notes talk about avoiding incurring corporation taxes and a company acquiring taxable losses.
I wanted to get some idea for the entire industry, in as much as it is state owned in the UK—that is pending the sale of larger chunks of it than have already been sold off—whether corporation tax charges that might be avoided by means of clauses 99 and 100 will be greater than the acquired taxable losses that the clauses facilitate in a sort of wiping-out exercise. My right hon. Friend the Paymaster General, perhaps to use my words rather than hers in Standing Committee, referred to these measures being, in a sense, a recirculation of Government money.
There is the fiscal net effect—that is, weighing the avoided corporation tax and the avoided tax write-offs through acquired losses and determining whether that is even or whether there is an imbalance. If there is an imbalance, what is it? That will enable us to have some idea at this stage of whether there will be yet another subsidy to an industry that is financially, let alone environmentally, a failed industry, or whether this is an accounting exercise that results in even stevens at the end. I hope that my right hon. Friend the Paymaster General will elucidate. If not—I realise that there may be complex figures—I should like to receive a response in writing at a later date.
I am grateful for the opportunity to speak in this debate. As this might be my last chance to contribute to the Bill, I should like to pause and thank everyone from PricewaterhouseCoopers and elsewhere who has provided me with advice on technical aspects of the Bill over the past few weeks.
It is appropriate to use the word “technical” for clause 99 because, as the hon. Member for Wolverhampton, South-West (Rob Marris) intimated, it is a difficult provision. As he said, we discussed the clause in Committee, and he will recall that I asked questions about it when it was debated on 6 June—as, indeed, did he. Having had time to reflect on the debate in Committee, and having reread the relevant proceedings in Hansard, I am not entirely happy.
While the hon. Gentleman is reflecting, perhaps he and the hon. Member for Falmouth and Camborne (Julia Goldsworthy), if she catches your eye, Mr. Deputy Speaker, will tell the House what their parties said in 2004, when the Energy Bill proceeded through Parliament. The clauses in the Finance Bill correct a mismatch, but the principle was accepted in the House in 2004. I would be interested to know what the two parties said then—they probably supported the provision.
I am surprised that the Minister did not ask me that in Committee. However, the line of inquiry that I am about to pursue is the same as the one that I pursued in Committee. Strictly speaking, it is not predicated on the Energy Act 2004 but on the question of whether a private company would enjoy the tax advantages enjoyed by public companies.
As I said, I am not entirely satisfied with the answers that I received from the Paymaster General in Committee—that might explain why the right hon. Lady was so anxious to intervene on me—and neither, it appears, is the hon. Member for Wolverhampton, South-West.
Clause 99 aims to preserve the intended effect of section 29 of the Energy Act, to which the Paymaster General referred. According to the explanatory notes on the clause, which the hon. Member for Wolverhampton, South-West will have read, section 29 is intended to ensure
“that accounting entries made by certain publicly owned companies in the British Nuclear Fuels Group, arising from the recognition of the Nuclear Decommissioning Authority taking responsibility for nuclear decommissioning and cleaning-up, should not be brought into account for corporation tax purposes…Section 29…operates on the basis that the assumption of financial responsibility by the NDA would be recognised when certain events of the reorganisation occurred…The reorganisation took place on the 1 April 2005 however, between the Energy Act 2004 and the reorganisation, the European Commission”—
as the hon. Gentleman said—
“began a state aid investigation into the NDA. This caused transitional arrangements to be put in place governing the financial liability assumed by the NDA. As a result of these arrangements the accounting recognition by the site licensee companies of the assumption of financial responsibility by the NDA may be deferred and section 29 would not apply to the later accounting entries.”
I assume that that means that the tax advantage would not be enjoyed.
As the hon. Member for Wolverhampton, South-West implied, since the Budget, it has been announced that one company in the BNFL group—British Nuclear Group, which is British Nuclear Fuels Ltd’s specialist site management and nuclear clean-up business—is to be transferred from the public to the private sector. As I said in Committee, that sounds reasonable in principle and the Opposition are obviously the last group of people who will look unsympathetically on the case for transferring services from the public to the private sector. However, it is important that any tax arrangements that result from such a transfer are transparent, and that the interests of taxpayers are protected.
I asked the Paymaster General on 6 June in Committee to correct me if I was mistaken in asserting that an exemption from corporation tax that applied to a public body is now to be applied to a private body. The right hon. Lady said at column 451:
“Although I recognise that the BNFL group”—
I stress the next few words—
“includes the private sector, tax and liabilities follow the normal tax provisions.”
So it seems on the face of it that an exemption from corporation tax that applied to a public body is now to be applied to a private body.
I also asked whether the exemption was intended to make the sale more attractive. The hon. Member for Wolverhampton, South-West used the phrase “fatten up”, which is a more vivid way of putting it. My reading of the record of 6 June is that the Paymaster General did not definitively deny that claim. I would be grateful if she took the opportunity to do so now.
I asked for precedents. The right hon. Lady cited the Government taking over British Energy plc’s liability for decommissioning and certain other liabilities in 2005. She said at column 451:
“The hon. Member for Wycombe asked me . . . whether there are examples of a similar arrangement being made to prevent the circular movement of Government finances. There are such examples. I do not have them to hand, but I am happy to let him know what they are.”—[Official Report, Standing Committee B, 6 June 2006; c. 451.]
Two points follow. First, it has been suggested to me that the British Energy example is not particularly apposite. British Energy, it was argued, was effectively insolvent and the Government decided to rescue it, rather than have a major generator go bust. In other words, the British Energy example describes an old fashioned rescue operation, so reducing the tax burden of what the Government intend to be a newly privatised business, BNG, is surely not comparable. Secondly, I have not yet received from the Paymaster General, although I hope to do so in due course, the other examples to which she alluded.
I want to try to get to the heart of what the Paymaster General meant on 6 June by speaking of the purpose of clauses 99 and 100 being to prevent Government money from, as she put it at column 452, “moving in circles.” On the evidence of that debate, it seems to me that the effect of the clause, if not the purpose, might no less accurately be described as reducing the tax burden of what will be a newly privatised business. If that is the case, a further question arises.
The Nuclear Decommissioning Authority presumably employs private sector contractors other than BNG for one purpose or another. Do they also have arrangements in place that effectively reduce their tax burden? If not—and I suspect the answer is not—there is a bit of mystery hanging over the clause. I hope the right hon. Lady will take the opportunity to clear it up.
As my hon. Friend the Member for Cambridge (David Howarth) pointed out, there was nothing about these matters in the Budget statement, the press notices or the Red Book, and there was no information available at the time that the Budget resolutions were debated and passed in the House. The Paymaster General made a specific reference to the Lib Dem contribution to the relevant section of the Energy Act 2004, which was not debated in Committee, as I found when I looked back at Hansard for that time. As has been observed, at that time all the organisations that would have been affected by these clauses would have been in the public sector, so effectively it would have been public money swilling around and the issue would not have been seen to be so important.
The key issue is whether there is state aid and, if so, to what extent. While BNFL group is a publicly owned company, it is free from corporation tax, but when it becomes private it will be liable for corporation tax. It is not clear what happens in the transitional period. Is there a hidden subsidy and will it continue through the transitional arrangements?
Finally, on the closing comments by the hon. Member for Wolverhampton, South-West, what are the net fiscal effects on the Exchequer? As well as writing to the hon. Member for Wolverhampton, South-West, will the Paymaster General undertake to place that information in the Library, because I am sure that many hon. Members will be interested?