DEEP DISCOUNT SECURITIES (Hansard, 10 July 1985)

§ Mr. Ian Stewart
I beg to move amendment No. 59, in page 124, line 38, leave out subparagraph (3).

§ Mr. Speaker
With this it will be convenient to take Government amendments Nos. 60 to 66.

§ Mr. Stewart
This measure fills a gap in the schedule which could have allowed the aim of the coupon-stripping legislation to be subverted by the conversion of securities issued as part of a coupon-stripping operation.
1170 When we discussed the schedule in Standing Committee I assured the hon. Member for Thurrock (Dr. McDonald) that we would consider possible ways around the legislation. We have concluded that the existing provisions on conversion of securities are not entirely satisfactory. This group of amendments is designed to close a potential loophole.

§ Dr. Oonagh McDonald (Thurrock)
I am glad that, because of our questioning in Committee, the Government have identified a complicated manoeuvre which could have led to tax avoidance. As usual, the Opposition are glad when such possible abuses are prevented by Government legislation.
Does the Economic Secretary have any idea how much revenue would have been lost had tax planners been able to indulge in such manoeuvres and avoid the tax that should have been paid? I am grateful to the hon. Gentleman for explaining the possible abuses that could have arisen and the ways in which they have been prevented by the amendments.

§ Mr. Ian Stewart
It is not possible to quantify the amount of potential revenue involved, as no activities of this type have taken place. The calculations would be complicated, so it is difficult to assess the extent to which the procedures have been used.
I shall briefly explain how the system would work. To exploit the defects in the Bill as drafted, a promoter of a coupon-stripping scheme would engage in something like the following sequence of operations. First, he would issue deep discount securities for cash. Then, at a later date, the cash would be invested in securities where the coupons were to be stripped. Later, but before the end of the first income period of the deep discount securities, some of the securities in which the coupon-stripping company had invested would be sold, so as to take the percentage of relevant securities that it owned below the 75 per cent. limit. The coupon-stripping company would then convert its deep discount securities into new securities and shortly after would re-acquire the relevant securities that it had previously sold. The process would be repeated.
This type of arrangement could enable the provisions of the Bill as drafted to be avoided, because paragraph !(3) at present applies only to the tests that operate on the position of the coupon-stripping company at the time when it issues the deep discount securities.
The purpose of the amendment is to stop this type of device by ensuring that the first test of a coupon-stripping operation in paragraph 1(4), which looks at what happens over the first income period, is applied in a modified way when securities are converted during their first income period.