RENOUNCEABLE LETTERS OF ALLOTMENT ETC. (Hansard, 9 July 1985)

§ The Economic Secretary to the Treasury (Mr. Ian Stewart)
I beg to move, That the clause be read a Second time.
This new clause brings to an end the device which goes under the name of the pref-trick, which can be used to avoid the payment of stamp duty on a company takeover or merger in circumstances where relief for papers and paper exchanges would not be available. The pref-trick takes advantage of an exemption from sales duty for renounceable letters of allotment and similar instruments.
The clause accordingly withdraws the exemption where these documents are used in connection with a takeover or the acquisition of a minority holding following a successful bid. It closes a loophole which had become evident. It follows from the arguments that I adduced in Committee in support of the purpose of clause 75, which was clause 74 in the earlier printing of the Bill, and I commend it to the House.

§ Mr. Terry Davis (Birmingham, Hodge Hill)
The Economic Secretary begged as many questions as he answered in that brief introduction of the new clause. Why has it taken so long for the Government to take action to close this loophole? He spoke to the House as if it had recently emerged, but the loophole was known in the accountancy profession more than a year ago. An article in the magazine Taxation on 11 August 1984 drew public attention to the loophole. Members of the Opposition are surprised that it has taken nearly 12 months for the Government to take action. One wonders why this new clause is not included in the Bill. Surely the Government had enough notice. If they were not given this advice by civil servants, they could at least have been informed 905 through reading the press. It is amazing that it has taken so long for the Government to close what is admitted by them to be a loophole.
My second point concerns another loophole, another variant of the pref-trick. If it has taken the Government nearly a year to move as a result of this loophole being publically disclosed in August 1984, may we assume that it will take them the same time to move to close the loophole described in the magazine Accountancy Age last week when a Queen's Counsel pointed out that the pref-trick could continue?
Although this new clause closes one aspect of the loophole, it is still open to a purchasing company to avoid duty by subscribing to a few shares in the target company and for the people who control the target company to pass a resolution transferring the value to the purchasing company. In that way there would be a clear avoidance of stamp duty. Will the Economic Secretary say what action he proposes to take in 1985 to deal with a loophole which has been discovered in 1985?

§ Mr. Ian Stewart
The hon. Member for Birmingham, Hodge Hill (Mr. Terry Davis) asks why the new clause did not appear earlier and was not incorporated in the Bill. The Government and the Revenue were aware for a long time that there were schemes afoot which might be able to circumvent the proposals announced by my hon. Friend the Financial Secretary dealing with the pref-trick. Clause 75 is one of two legs which deal with this problem. It makes exemption legal for paper mergers or takeovers. The counterpart of that is to remove the exemption from sale duty for renounceable allotment letters.
I wish it had been possible to bring forward proposals at an earlier date, but because they are technical it took time to get them into the correct form. I should have liked to be able to announce this at the Committee stage when we were dealing with this subject, but it would have been wrong to have done so before the Government were ready with their solution which is now before the House.
The hon. Gentleman drew my attention to an article in Accountancy Age on 4 July. If he looks at that carefully, he will see that the author is not suggesting that the pref-trick can be used if the House accepts new clause 24. What is suggested is that there might be other ingenious methods devised to circumvent the stamp duty provisions. Clearly those are at this stage hypothetical, but the Revenue will remain fully alert to the possibility and I hope that if any valid or potentially successful means of circumventing the provisions as we are proposing them should emerge the Government will be able to take whatever action is necessary.

§ Mr. Terry Davis
That was a most unsatisfactory response from the Government and a very poor start to the Report stage. Are we being told that the Government have brought forward a one-legged Finance Bill? Why was it not possible to include this new clause when the Bill was published? Surely the Government had enough time between August and March to draft a clause for the Bill. Will the Economic Secretary tell the House why it was not possible to come to this conclusion before? Why were not the Government ready before July 1985?
How much money has been lost since August 1984? How much money has gone through this loophole during the past 11 months, and how much will be lost as a result 906 of the ingenious scheme described in Accountancy Age last week? Why will not the Government shut the door before the horse bolts?

§ Mr. Ian Stewart
The hon. Gentleman asks about the new scheme, but it does not yet exist. There have been suggestions in Accountancy Age that such devices might be invented, but unless and until they come forward the Government cannot respond to them.
The problem about new clause 24 is that it is always very much more difficult to close potential loopholes than to make basic provisions in the Bill. The substantial provision in clause 75 validates the availability of exemption from stamp duty that was planned last year. New clause 24 deals with an exploitation of a particular technique attached to the pref-trick system, and until that has been properly analysed and the way to deal with it has been settled it will not be possible to introduce a new clause, although it was announced last month and not today so that it is effective from 27 June.

§ Mr. Barry Sheerman (Huddersfield)
Will the hon. Gentleman answer the question put to him by my hon. Friend the Member for Birmingham, Hodge Hill (Mr. Davis)? Has he been able to make any assessment of the gain to the Revenue as a result of this course?

§ Mr. Stewart
I am not able to make an exact assessment. It is likely that some transactions that have taken place during the past few weeks would have taken advantage of the new scheme with which new clause 24 deals. I am not able to give a specific answer. If I am able to say more, I shall write to the hon. Member for Birmingham, Hodge Hill (Mr. Davis). He will appreciate that there is some difficulty in a case such as this, because if it is established that in one or two specific cases such a cost to the Revenue has been created it would be through the divulgence of the tax affairs of an individual taxpayer.

§ Mr. Terry Davis
As it is understood that the tax affairs of individuals are not disclosed to Ministers, how does the Economic Secretary propose to gather evidence about whether this ingenious scheme is being used?

§ Mr. Stewart
The Inland Revenue is always alert to the ways in which these schemes are being used or are potentially able to be used. I shall look to its advice.