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Written Statements

Volume 457: debated on Tuesday 6 March 2007

Written Ministerial Statements

Tuesday 6 March 2007

Treasury

Avoidance in Financial Products

In the pre-Budget report (PBR) of 6 December 2006, action was announced to close loopholes used by companies to avoid paying corporation tax. Thanks partly to the disclosure regime, we have now become aware of more schemes similar to those we closed from the date of the PBR.

Legislation will be included in the next Finance Bill to stop companies getting round existing anti-avoidance legislation and exploiting an exemption from corporation tax in circumstances for which it was not intended.

A. Schemes have been disclosed to HM Revenue and Customs (HMRC) under the legislation in part 7 Finance Act (FA) 2004 which seek to avoid the proper application of sections 91A and 91B FA 1996 (certain shares treated as debt).

To prevent the schemes

The limited definition of share in section 103 FA 1996 (which provides that “share” includes only those instruments from which it is possible to obtain a distribution, where distribution does not include a distribution in a winding-up) will no longer apply for the purposes of sections 91A to 91G of that Act.

The fair value of assets acquired in transactions which are effected to prevent the value of shares increasing in an interest-like manner will be disregarded in computing the credits and debits to be brought into account from changes in fair value of the shares.

B. Schemes have been disclosed to HMRC under the legislation in part 7 FA 2004 which seek to avoid the proper application of paragraph 4 schedule 10 FA 1996.

To prevent the schemes the fair value of assets acquired in transactions whose purpose is to reduce the value of the shares, units or other interests in an offshore fund, unit trust or OEIC to which paragraph 4 schedule 10 FA H996 (holdings in funds invested as to 60 per cent. or more in debt and so on treated as loan relationships) applies will be disregarded in computing the credits and debits to be brought into account from changes in fair value of the holdings.

C. Schemes have been disclosed to HMRC under the legislation in part 7 FA 2004 which seek to avoid the proper application of paragraph 26 schedule 26 FA 2002 (derivative contracts: options used to transfer value between connected parties).

To prevent the schemes paragraph 26 (expiry of options to transfer value) will be amended to provide that it applies where an option is partly exercised and partly not.

D. HMRC has obtained information about a scheme which seeks to avoid the proper application of schedule 26 FA 2002 to relevant contracts which are accounted for as financial assets. Schedule 26 will be amended to provide that such contracts must be brought into account for tax purposes on the assumption that fair value accounting is used in cases where it is not.

E. HMRC has also obtained information which indicates that it might be possible to frustrate the workings of sections 774A to 774G of the Income and Corporation Tax Act 1988 (structured finance arrangements or SFAs). To put the issue beyond doubt legislation will be introduced to amend those sections so that arrangements under which existing liabilities ape refinanced using an SFA will be brought clearly within the legislation.

Where the assets which have been used as “collateral” in an SFA are changed the charge to tax will continue to apply to income from the new assets.

In addition, section 263E Taxation of Chargeable Gains Act 1992 (TCGA) which deals with assets transferred in an SFA will be amended so that there is no application of hindsight. This will bring certainty to the position. In future there will a charge to tax under TCGA if it becomes apparent that the asset will not be returned to the seller in a case where section 263E has applied to the original sale.

F. A scheme has been disclosed to HMRC under the legislation in part 7 FA 2004 that seeks to avoid a chargeable gain crystallising by transferring assets when they are subject to an option rather than by a straight sale.

To prevent the scheme, assets transferred between companies in the same TCGA group, will be treated for tax purposes as occurring at market value, instead of a value that leads to neither a gain nor a loss, where that transfer occurs following the exercise of an option granted before the companies were part of that group. The rule governing transactions within a group in section 171 TCGA will be disapplied in these circumstances.

G. Companies could attempt to artificially obtain a tax-free income stream through the manipulation of the settlements legislation in chapter 5 part 5 Income Tax (Trading and Other Income) Act 2005. Such manipulation not intended by the rules should be stopped. To prevent this, subsection (4) of section 660C of the Income and Corporatation Taxes Act 1988 (ICTA) will be repealed.

The legislation described at items A to G above will be effective from today, 6 March 2007. More details about the legislation and the commencement rules can be found on HMRC’s website.

H. On 6 December 2006, regulations were laid before Parliament to prevent the sidestepping of restrictions that exist in ICTA in relation to foreign tax paid on trading profits. The arrangements involve banks and other financial traders using Authorised Investment Funds (AIFs), which in turn invest in overseas securities.

The regulations (SI 2006 No. 3239) apply where a financial trader, together with connected persons, owns more than 50 per cent. of the interests in the AIF. Information disclosed to HMRC has shown that there are arrangements under which financial traders together own a majority of units in an AIF but in such a way that none individually owns more than 50 per cent. To prevent these arrangements being used, amending regulations will be laid today which apply to restrict tax relief where a financial trader individually owns more than 10 per cent. of the interests.

The proposed regulations apply in relation to any distribution from an AIF received by a bank or financial trader made on or after 6 March 2007.

Defence

Adult Learning Inspectorate

Today I welcome publication of the second report by the adult learning inspectorate (ALI), into the conduct of initial training in the armed forces. In this report, “Better Training”, the ALI publishes its findings on the progress we have made in improving the initial training environment so as to reduce the risks to, and improve the welfare and wellbeing of, recruits and trainees.

The ALI’s initial review, “Safer Training”, published in March 2005 identified that training in the armed forces, and the care of young people undergoing training, were not sufficiently well managed. The subsequent report of Mr. Blake QC in March 2006 confirmed many of the ALI and, indeed, earlier HCDC findings.

Following publication of “Safer Training”, I gave my full commitment to delivering the improvements necessary to correct this situation; we had to ensure the right balance between robust preparation for frontline duties and the absolute necessity to treat our young people fairly and with due care. I also noted at this time that the transparency provided by independent oversight was vital in demonstrating to the wider community that we seek to improve. To that end, the ALI has continued to have unrestricted access to every aspect of our initial training whilst we have sought to implement the necessary improvements. External inspection has proved to be an extremely beneficial process.

I am pleased to report that substantial improvements have been made everywhere, with some very marked achievements. Against a backdrop of fiercely competing priorities, not least our operational commitments in Iraq and Afghanistan, we have made substantial financial investment to date, with more planned in the coming four years. This investment, over and above that already committed to the training environment, is testament to our resolve. We recognise, however, that money alone will not suffice and have completely overhauled our policies, processes and training, notably for our instructors and commanding officers, to ensure that minimising the risks to trainees’ welfare is a core activity. The scale of our achievement thus far is recognised in “Better Training” and should provide Members of the House and the public with reassurance of the scale and depth of our determination to succeed in this critical area.

We fully recognise that there is still much to do and “Better Training” identifies a number of areas where performance can be improved. We will remain focused on addressing these issues, while maintaining the improvements already achieved. The improvement programme, vigorously pursued from the outset, has been difficult and demanding, but we are now beginning to reap the rewards. I am confident that our armed forces will continue to receive the training they need and deserve; robust in order to fully prepare them for operations, but delivered in an environment that is fair and sensitive to individuals’ needs.

I have today placed copies of “Better Training” in the Library of the House and Members may also access the report at:

http://www.mod.uk/DefenceInternet/DefenceNews/Defence PolicyAndBusiness/DefenceNewsDaily.

I am grateful to the chief inspector, ALI and his team for assisting us in reviewing the changes that we have made and continue to make in the initial training environment.

Foreign and Commonwealth Office

Afghan Counter-Narcotics

The recently released United Nations Office on Drugs and Crime (UNODC) rapid assessment survey for 2007 is a snapshot that identifies early trends in cultivation. It shows a mixed picture. It suggests that cultivation is down in the north; stable in the centre and west; but heading up in the south and east, including in Helmand, Kandahar, Uruzgan and Nangarhar. It is too early to predict overall cultivation levels for 2007, but if these trends are bourne out, it shows that Afghanistan may be facing another year of high poppy cultivation. Security challenges, insurgent activity and the lack of extension of rule of law continue to present obstacles toward poppy elimination. The survey also shows similarities with last year’s pattern of cultivation, with a levelling off or reduction in areas of improved access to governance, security and development.

The threat from drugs to Afghanistan’s reconstruction and development ranks alongside the threat from the Taliban. There are no quick or simple ways of dealing with this problem. The only way to reach a sustainable solution is to deal with the full range of causes. The Afghans know this, but need the international community’s help to make it happen. The Afghan Government’s national drug control strategy (NDCS) is the right approach. It includes measures to reduce the cultivation, production and trafficking of opium. Progress is being made. We are working with the Afghans to build up the criminal justice system and we have helped establish the counter-narcotics police force and the Afghan special narcotics force. In the last year and a half we have seen the passage of vital counter narcotics legislation, the conviction of over 320 traffickers, and an increase in drug related seizures. With the support of international partners a community led programme has been established to develop alternative rural livelihoods that have so far reached some 8.5 million rural Afghans.

Opium poppy eradication plays an important role in the overall strategy. It can have a deterrent effect for poppy farmers in areas where there is access to alternative legal livelihoods. Eradication on its own will not solve the drugs problem. But it is an important part of the comprehensive strategy when balanced with measures to interdict drugs, bring criminals to justice, build institutions and encourage development of rural communities to provide alternatives for poppy farmers. Eradication implementation is the responsibility of the Afghan Government and they have expressed their determination to carry out robust eradication through manual and mechanical means.

There are no silver bullets. There have been suggestions that the opium poppy crop could be used for licit medical purposes. We have considered options for the licit cultivation of opiates in some detail and the Afghan Government have ruled out licit cultivation as a means of tackling the illicit trade. Currently there are no central Government and law enforcement mechanisms in place to administer such a scheme. In the absence of an effective control system, traffickers would be free to continue to operate and there would be a high risk that any licit cultivation would be diverted into the illegal market. Another buyer in the market might also drive up the price, attracting more farmers to cultivate poppy.

Sustainable drug elimination takes time. But if we are to succeed, the Afghan Government and the international community must embark on a vigorous and sharpened counter narcotics effort in coming years.

Home Department

Domestic Violence: (MP’s Guide)

I am pleased to announce today that the Government have published a domestic violence guide and supplementary booklet for MPs.

Copies of the guide will be placed in the Library in both Houses. Further copies of both the guide and a supplementary booklet are available from the crime reduction website at: www.crimereduction.gov.uk/dv01.htm.

These publications are the latest phase in a long line of work aimed at tackling domestic violence, a crime that devastates lives and ruins families. The guidance aims to raise awareness of domestic violence issues amongst MPs and provide them with a resource to support their constituents.

Throughout March, the Government will be focusing on tackling all forms of sexual abuse and gender based violence, as part of their work to rebalance the criminal justice system in favour of the law abiding majority.

We still have a mountain to climb but the Government have already revolutionised the way domestic violence is dealt with by the courts. Prosecutors and magistrates receive specialist training and victims are able to give evidence through video links to reduce trauma. Offenders can now be prosecuted without a victim’s statement and previous offences can be admitted as evidence. Specialist victim support is also being rolled out across the country to ensure that victims’ safety and welfare come first in the work of the police and partner agencies.

We are heading in the right direction but this month- long set of activities is designed to remind us all of the responsibility we have in our public and personal lives to take action and stop abuse.