Money and Masochism

Money and Masochism

RICHARD CURTIS reports on the twenty-first session of Standing Committee A's review of the Finance Bill.

THE FINAL SESSION of Standing Committee A's work on the 2004 Finance Bill and the future of our money started with a review of clause 303, the exclusion of the extended limitation period in England, Wales and Northern Ireland. Historically, taxpayers could make repayment claims for the previous six years and the Revenue could likewise assess tax discovered to be outstanding over a similar period. The case of Deutsche Morgan Grenfell plc v Commissioners of Inland Revenue [2003] STC 1017 decided that where, for example, the view of the law changes as a result of a court decision, proceedings could be commenced for repayment of tax made under a 'mistake of law' for all back years. The above High Court decision is under appeal, but to protect tax revenues, clause 303 (and clause 304 for Scotland) returns the position to the previous six-year (or five years and ten months) period.

Mr Flight argued for a transitional period to introduce this change to prevent a repeat of the problems that arose with the introduction of the three-year cap to VAT repayments. In that case, the European Court of Justice held that national legislation, retroactively curtailing limitation periods, was incompatible with the principle of effectiveness and the protection of legitimate expectation.

Mr Flight mentioned that the Institute of Chartered Accountants expected that there would be similar litigation on this latest clause and it was for this reason that he was proposing an amendment to bring in a transitional provision.

Dawn Primarolo argued that the amendment would undermine the clause and would lead to a loss of revenue. She considered that the VAT issue, which reduced a six-year limit to three years, was different from the present clause, which returned the legal position to that which had been the case before the Deutsche Morgan Grenfell decision. The amendment was withdrawn and the clause stood as part of the bill.

Shipbuilders' relief

Clause 306removes tax relief on energy input used to construct ships and was supported by the Opposition, but Mr Tyrie was concerned that other European Community Member States might be continuing with this form of state aid. John Healey confirmed that the European Union state aid rules applied across the Union; however, he mentioned that in June 2001, a four-year project (the Link shipbuilding research project) was started which was designed to help work forces and yards by combining academic studies and masterclasses. The clause was agreed.

The single currency

Clause 307 gives the Government and its agencies the power to spend money in preparation for the possibility of a single currency. This lead to a rather wide-ranging discussion on the necessity of such expenditure and private sector measures. At the end of this, the clause was approved.

New clauses 2 and 3

These two new clauses introduce anti-avoidance measures related to shares in employee-controlled companies and unconnected companies (new clause 2) and to restricted securities with artificially depressed value (new clause 3). In the words of the Explanatory Notes to the new clauses, 'the Revenue had become aware of schemes that use employment-related securities subject to restrictions in order to pass value to employees in a way that attempts to circumvent the anti-avoidance provisions in Chapters 3A and 3B of Part 7 of the Income Tax (Earnings and Pensions) Act 2003'. Consequently, the new clauses ensure that certain relieving provisions in Part 7 do not apply if the securities involved form part of arrangements to avoid income tax and/or National Insurance contributions. They also ensure that artificially depreciated restricted securities, disposed of or cancelled in a manner that would not otherwise create a charge, are brought within the restricted securities legislation in Chapter 2 of Part 7.

Both the Conservative and Liberal Democrat spokesmen, Mr Flight and Mr Laws supported the anti-avoidance nature of the new clauses. However, Mr Flight was concerned that new clause 2 would have 'an unintended impact on arrangements for long-term saving available to companies by means of which they can provide a method for their employees to invest in a spread of equities or other securities held in authorised open-ended investment companies'. He proposed an amendment to the clause to counter this. Mr Laws was more concerned at the reason for the need to legislate against anti-avoidance schemes 'year after year'. Was this because new reliefs created new loopholes and would it not be possible to 'deal with the matter once and for all'?

Ms Primarolo assured Mr Flight that new clause 2 had no unintended effects and that his proposal would mean 'before tax income being available for the employee to invest'. The relieving provision of Part 7 was intended to cover limited circumstances in which the benefit to an employee was incidental to a wider company reorganisation, where the majority of shareholders were not employees and the benefit does not pass to employees by reason of employment. This would not be so with regards to Mr Flight's proposals that dealt with 'special purpose vehicles'.

Ms Primarolo, like Mr Laws, was concerned 'that people continue to use such schemes' and she mentioned that the Inland Revenue's estimate was that £150 million tax and National Insurance was foregone annually from the use of these schemes.

Although Mr Flight was concerned that the avoidance schemes had been put in place with the knowledge of the Financial Services Authority, new clauses 2 and 3 were brought up, read the first and second time and approved.

New clause 12

' Clause 125 of the Finance Bill imposes a corporation tax charge on a company in a partnership where partnership shares are manipulated to shelter taxable profits within a partnership structure.' However, these same transactions could give rise to a chargeable gain and new clause 12 ensures that the company will not be charged twice in respect of the same transaction. This clause was approved without debate.

Premium bonds

The power of the Treasury to vary the terms of premium bonds is given by Clause 17 . Mr Tyrie noted that premium bonds now accounted for about 20 per cent of total national savings activity and was concerned that their integrity remained unchallenged. Ruth Kelly confirmed that changes in the financial services market had had an impact on premium bonds and other products and to enable bonds to continue to meet customer need, the clause would allow regulations to be made. National Savings and Investments has a wide-ranging modernisation programme and, over the next year, it will 'review and where necessary update Premium Bonds'. Matters that might be under consideration were notice periods, changes in prize rates, publication of numbers, etc. The clause was approved.

Other new clauses

The following clauses were also approved.

New clause 18 implements the legislation countering the avoidance of tax by partnerships exploiting films. It targets schemes that use generally accepted accounting practice to generate large initial losses, thus deferring tax for individuals who do not spend a significant amount of time in that trade.

New clause 19 amends Part 7 of the Income Tax (Earnings and Pensions) Act 2003 (dealing with employment-related securities). The changes ensure that remuneration value passed to employees through their ownership of shares after they are received from approved share schemes is correctly subject to income tax and National Insurance and anti-avoidance tests will protect the bona fide use of such share schemes.

New clause 20 makes similar changes to those in clause 19, but in respect of shares acquired under public offer. The exemptions for the commercial use of restricted, convertible or partly-paid shares in such offers (Chapters 2, 3 and 3C of Part 7) are retained, unless this is part of a scheme or arrangement to avoid tax or National Insurance.

New clause 21 ensures that the employment link between the employee and the securities or securities option acquired by reason of employment, once in place, cannot be broken, e.g . by the interposition of a personal company

New clause 22 allows the Board of Inland Revenue to specify the form and manner in which information under Part 7 must be provided.

Leased assets

Mr Flight introduced new clause 4 at the request of the Confederation of British Industry. This provides for the first year allowances for assets purchased by small or medium-sized companies to also be available for leased assets. It was felt that this measure, which should be revenue neutral, would improve the performance of this sector.

John Healey did not agree that the costs (estimated at £500 million over three years) would be revenue neutral. First year allowances were introduced to address cash flow constraints of smaller businesses and this would not be a problem where businesses were spreading the cost by rental payments. This issue would be considered in the ongoing reform of corporation tax and the clause was withdrawn.

Access ramps

New clause 5 proposed tax relief for the cost of installing ramps to facilitate access by disabled persons in accordance with the Disability Discrimination Act 1995, but Ruth Kelly was 'not convinced that the proposed changes to the tax system would be the best way in which to improve rights for disabled people'. It would be unfair only to give support to private business when the public sector also had to bear such costs and many of the costs would already be eligible for relief as expenses or capital allowances. The Revenue was working on guidance to remind businesses of the tax reliefs available for the most common types of disability extension work and this should be available before the Disability Discrimination Act 1995 comes into force in October 2004. The clause was withdrawn.

Transfers of real property

Mr Flight proposed new clause 6, which would allow the transfer of shares in a main residence between joint occupiers on the death of one of them to be exempt from inheritance tax. His concern was that, especially given the forthcoming extension of the exemption to those in same sex partnerships via the Civil Partnership Bill, other people sharing a property could be at a disadvantage; for example, two elderly sisters who were living together. Mr Healey was unconvinced. Not all sharers left their share to their co-owner and those that did could already mitigate the liability either via a lifetime transfer or by payment of the liability in instalments. This clause was also withdrawn.

The end

This final session of the Committee concluded with the usual rounds of thanks from each side. Ms Primarolo thanked the chairmen for their guidance, the Opposition for their contributions to 'lively exchanges', the Clerks and Whips and other officers for their assistance, and her own side's members who 'can now have their diaries back'.

Mr Flight, for the Conservatives, seconded her comments and congratulated Ms Primarolo on her stoicism in dealing with her tenth Finance Bill. Mr Laws, for the Liberal Democrats had 'enjoyed debating the various issues'.

Finally, the Chairman, Sir John Butterfill, recorded that as this was his fourteenth Finance Bill, surely his 'masochism knows no bounds'.

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