Standing Committee B
Tuesday 8 June 1999
(Morning)
[Mr. Frank Cook in the Chair]
(Except clauses 2, 28 and 99)
10.30 am
The Chairman: May I first welcome Committee members back after the break? I hope that you are in the same good humour that appertained prior to your legging it for the hills, and I hope that our proceedings will continue in that way.
The Economic Secretary to the Treasury (Ms Patricia Hewitt): On a point of order, Mr. Cook. I am sorry to delay the Committee, if only for a moment. At the end of our debate on clause 50 and schedule 6 on 25 May, I was asked a question by the hon. Member for Torridge and West Devon (Mr. Burnett) about the application of schedule 6 to different types of fitting-out costs. I undertook to take further advice, and I would now like to clarify the position. Fitting-out costs will normally procure tenant's or trade fixtures, which, as a matter of general property law, the tenant has a right to remove at the end of the lease. Even if the parties make a special agreement that those assets will belong to the landlord at the end of the lease, a landlord's contribution to the cost of providing them will still be assessable as a payment by way of inducement to take the lease. The test is not to whom the assets belong at the end of the lease, but whether their provision enhances the value of the reversionary interest, or permits the landlord to command a higher market rent on a rent review. I hope that that clarifies the position.
The Chairman: As I am sure the Economic Secretary will understand, that is not a point of order for me, but Committee members will have taken note of her comments.
Mr. John Burnett (Torridge and West Devon): Further to that point of order, Mr. Cook. I am grateful to the Economic Secretary for her statement because there has been a little uncertainty on that issue. I believe--subject to reading it--that her statement answers my questions.
Clause 59
Relevant discounted securities
Mr. Nick St. Aubyn (Guildford): I beg to move amendment No. 182, in page 34, line 36, after "capable", insert
"by virtue of power contained in its terms of issue".
The Chairman: With this we may consider the following amendments: No. 140, in page 34, line 39, leave out from "gain" to end of line 40.
No. 141, in page 35, line 1, leave out "(5)" and insert "(5)(b)".
Mr. St. Aubyn: I thank the Financial Secretary for circulating to the Committee copies of her letter setting out the Government's amendments to clause 59. The amendments go some way to answering the concerns expressed by Opposition Members and by experts outside about the drafting of the clause.
I understand that the clause is an anti-avoidance measure. We all support any effort to close loopholes that prevent the proper collection of tax but, unfortunately, in the original draft, the scope of the clause was too wide and seemed to encompass any bond that included the possibility of early redemption. Of course, it is a feature of most bonds that they envisage circumstances in which early redemption might take place. Certain events may befall the company that issued the bonds or there might be changes in the tax system, with the result that the terms on which the bond was originally issued no longer apply. In particular, there might be changes in the tax system regarding withholding tax, which we shall discuss in a moment.
Our first three amendments clarify that any bond can be called early by agreement between the parties issuing and buying the bond, but there must be a specific power in the bond to call early. We believe that our amendment may have been picked up in the amendments proposed by the Financial Secretary in what I believe is no. 2 of her draft amendments. I hope that she will clarify the intention of that draft amendment.
It has been suggested that the reference at the top of page 35 of the Bill to sub-paragraph (5) of the Finance Act 1996, should be a reference to sub-paragraph 5(b). We understand from experts in the industry that tax is avoided by exploiting the loophole in sub-paragraph 5(b) and that making the clause apply to the whole of sub-paragraph 5 betrays the Government's ignorance of the bond market and causes great concern. The spokesman for the International Primary Market Association said of the proposals:
"Insurance companies and unit trusts could be hit very badly".
A partner at Linklaters, a leading firm of City solicitors, said:
"We are concerned about this new tax threat arising at a time when the London bond market has already been unsettled by the proposed EC withholding tax."
The lesson to be learned from the clause and the Government's belated attempt to put it right is that advice from the industry on technical clauses should be sought in advance of such legislation being introduced. The uncertainty created in the London market by the inappropriate drafting of clauses does no credit to the Government or the standing of the City of London and in many ways goes against the principles of the stability code under which the Government promised to act. They said that their tax policies would be transparent and clear, but it is evident from the confusion about clause 59 that they are not. The clause was not clear and sowed confusion. We tabled probing amendments in our inexpert but loyal Opposition way to prompt the Government to provide a better and clearer solution, which they should have provided initially. I look forward to the Financial Secretary's response.
The Financial Secretary to the Treasury (Mrs. Barbara Roche): It may help the Committee if I begin with a brief explanation of the purpose of clause 59. With clause 60, which is consequential, it was designed to prevent leakage of taxpayers' money through an artificial avoidance scheme. I welcome the comments of the hon. Member for Guildford (Mr. St. Aubyn) in a similar vein. The scheme works by exploiting a weakness in the definition of a discounted security so that the discount on the security, which should be taxed as income over the lifetime of the security, is in fact charged only to capital gains tax and only when the security is disposed of or redeemed. The clause makes a small change in the definition of a discounted security so that that trick will no longer be possible.
On 15 February, the Inland Revenue issued a press release announcing the Government's intention to stop the loophole and we propose that the clause should take effect from that day. That may catch avoidance devices that have already been entered into, but where the return has not yet been received. Avoiders have been warned in the past that future measures may have immediate effect in this way and a similar provision was a feature of last year's Finance Bill. I have said before that tax abuse is against the public interest and those engaging in it do so at their own risk.
The hon. Member for Guildford explained the fears expressed by lawyers and others who advise on the tax consequences of security issues about clause 59. It was necessary to introduce the clause to close a glaring loophole in the definition of relevant discounted securities that was allowing tens of millions of pounds of tax to be avoided, and we should not forget that figure in our deliberations.
The complaint is that the clause goes too far--it now catches securities where any discount that arises is small in absolute terms and only obtainable on the happening of an event that is outside the control of the parties to the security. The amendments introduce three changes. The first would prevent any redemptions for which the terms of the issue of the security do not provide, from being taken into account in determining whether it should be classified as a relevant discounted security. The other two would restore the rule whereby only redemptions before maturity that can be triggered by the holder are taken into account in deciding whether a deep gain is possible. The amendments would go even further than the original rule by removing cases that might produce a deep gain as well as those that do or will do so.
The Government have received representations about the clause, and, after examination of those, we recognise that clause 59 may catch some securities where it would not be appropriate to do so. Removing the clause's teeth, however, would not be the remedy. The amendments would reopen the door to schemes to which the clause is designed to put an end.
Nevertheless, we accept that changes are necessary, and we have published draft amendments for consultation. I wrote to you and your co-Chairman last week, Mr. Butterfill, enclosing a copy of the draft amendments and an accompanying Inland Revenue press release. As the hon. Member for Guildford said, a copy of that letter has been sent to each Committee member, and to the Clerk.
The draft amendments target the clause more closely on the objectionable transactions, and should meet the concerns that have been expressed about the clause, without reopening the possibility of avoidance. When we have taken into account comments on the draft versions, amendments will be tabled on Report.
The hon. Member for Guildford raised a couple of points in relation to why consultation had not taken place before. As he will know, discounted securities may be issued in a wide range of circumstances and with an almost endless range of different clauses and divisions. As the clause is an anti-avoidance measure, and substantial amounts of taxpayer's money are at stake, it would not be appropriate to issue a draft for consultation before the measure came into effect. The Finance Bill process allows for consultation on the details of the measure and for its improvement.
The hon. Member for Guildford appeared to suggest that things used to be done differently. Such collective amnesia appears to afflict Conservative Members so often that I am tempted to ask my right hon. Friend the Secretary of State for Health to conduct an urgent public inquiry. Some Committee members--and certainly my hon. Friend the Paymaster General, who was a member of the shadow Treasury team--will recall the gilts and bonds legislation that was introduced by the Conservative Government in 1996. Not only did the Finance Bill Committee have to consider 200 amendments--which were mostly tabled two days before the event--but the Government of the day had to ask it to vote against whole clauses, which were subsequently replaced.
I raise that matter not to criticise Conservative Members, but to assist them in recovering their memory. I accept the assertion of the hon. Member for Guildford that the amendments were tabled in a probing spirit, and I hope that I have given him a full response. I ask him to withdraw the amendment. If he will not, I shall ask my hon. Friends to reject it.
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