HC Deb 23 January 1997 vol 288 cc1096-123
Sir Robert Hicks (South-East Cornwall)

I beg to move amendment No. 10, in page 137, line 34, at end insert 'in relation to distributions made on or after 5 December 1996'.

The Chairman

With this, it will be convenient to take amendment No. 9. in schedule 7, page 141, line 25, at end insert— '13. Paragraphs 4, 5, 6, and 10 above shall not apply to any distribution unless the transaction in securities is carried out for bona tide commercial reasons and does not form part of a scheme or arrangement of which the main purpose, or one of the main purposes, is the obtaining of a tax advantage.'.

Sir Robert Hicks

The purpose of amendment No. 10 is to clear up any confusion that may have arisen over the date of implementation of the proposed new arrangements for the tax treatment of certain distributions where a company purchases its own shares. I must emphasise that I have no quarrel with the Government's proposals for such a change in tax policy. The genuine confusion, and with it a suggestion of retrospection, was drawn to my attention by a family-owned company that has a major investment in my constituency. Indeed, it is the largest single employer.

The company acted in a totally legitimate manner under the previous arrangements, and it was not until the draft legislation was published on 5 December 1996 that it realised that the specific provisions might be applied retrospectively and a tax liability therefore imposed that could be damaging to its business and future investment plans. On the basis of clarity and equity, I ask my hon. Friend the Minister to accept the amendment.

Mr. Paul Tyler (North Cornwall)

I am delighted to support my parliamentary neighbour the hon. Member for South-East Cornwall (Sir R. Hicks). He and I share not only a boundary but the distinction and responsibility of representing the two bakeries of Ginsters Ltd., which manufactures, as everybody in the House will know, the best-known Cornish pasties in the world. The business is extremely important to us. It also manufactures a number of other products, including custard pies. I shall leave it to the House to determine whether it is appropriate that the hon. Gentleman should represent one product and I the other.

The issue is extremely important, although, as the hon. Member for South-East Cornwall said, it is very technical and appears to apply to very few people. It has the unfortunate effect of applying retrospectively at precisely the moment when the company—Samworth Brothers Holdings Ltd.—had thought that it had obtained clearance from the Inland Revenue for appropriate treatment of the business that it wished to undertake. A press release gave the business confidence that there was no problem, and it proceeded with the transaction only to find that, when the draft legislation was published, its effect was precisely the opposite of what the business and its financial advisers had anticipated.

I am delighted that the Government are minded to respond positively to the amendment, which I am sure will be welcome. As the hon. Member for South-East Cornwall said, the business is extremely important to our part of Cornwall. Indeed, it is a flagship business for Cornish products generally.

I should like to draw the Committee's attention to an article that appeared in Taxation on 2 January, which emphasised that although the issue was a minor one, it raised important wider implications. The author of the leading article said: To my mind, if we are now entering an era in which tax rules are changed retrospectively without announcement, there is not really any point in having any rules at all in the first place. The idea of tax legislation is to tell people what tax they owe and on what date. If the legislation no longer does that, we may as well abandon our sophisticated and refined system and simply have the Revenue send round heavy boys periodically to relieve people of as much of their wealth as possible. I acknowledge that Treasury Ministers have responded swiftly to the concerns that have been expressed on behalf of the company and I hope that the Minister will be able to assure us that problem was an unfortunate oversight rather than an attempt to get away with something that the House would deplore.

Mr. Tim Smith (Beaconsfield)

I believe that the paragraph from Taxation that the hon. Member for North Cornwall (Mr. Tyler) read out is, if I may say so, a slight exaggeration. The problem is not exclusively Cornish and I have received a letter from a company in Nottinghamshire that said that its family-owned business would be severely hit by the retrospective and unannounced nature of the proposals. It continues: Clearance had been obtained from the Inland Revenue for my Companies to buy their own shares but no mention was made of a charge on the Trustees for additional tax liability.

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Only one issue of principle arises—albeit an important one—because it was not clear, when the Inland Revenue press release was published on 8 October, that the change would take place or take place on that date. It was not clear until 5 December, by which time another Inland Revenue press release had been issued. I have always been concerned that tax legislation should not contain any element of retrospection. It is not fair on tax payers who need to have a clear understanding about the tax consequences of their decisions. They cannot do that if announcements are made subsequently about changes that will take place retrospectively. We are talking only about a few weeks but a number of taxpayers are affected and I hope that my hon. Friend will be able to respond positively to the representations he has received.

Mr. Christopher Gill (Ludlow)

I wish to speak briefly in support of amendment No. 10. The hon. Member for North Cornwall (Mr. Tyler) quoted from the article in Taxation on 2 January 1997. Later the article says: with self assessment being imminent … taxpayers will have to volunteer their own tax liabilities. They are far more likely to do so fairly and conscientiously if they consider that the tax regime is itself imposed by fair and proper means. That brings me to the point made by my hon. Friend the Member for Beaconsfield (Mr. Smith) about retrospection in tax legislation. There should be no retrospection in tax legislation, otherwise none of us knows where we are and nobody can make their tax planning dispositions.

Samworth Brothers is one of the most pre-eminent companies in the food manufacturing industry in this country. Mr. Samworth, whose letter was mentioned by the hon. Member for North Cornwall, won this year's Massey-Ferguson award for agriculture and gave a most impressive presentation when he accepted that award. He demonstrated how his company, which I have known of for many years, has grown and grown to become a pre-eminent company in the meat industry. It provides a good example to many other British companies. I have no doubt that the company's planning of its financial and tax affairs has been involved in its success story.

I hope that the Minister will agree that it would be wrong for the House to act retrospectively and I hope that he will accept the amendment.

Mr. Mike O'Brien (North Warwickshire)

I hope that it will be for the convenience of the Committee—if you agree, Mr. Morris—if we have a wide-ranging discussion on the amendments and also schedule 7. In that case, we would not have to have a separate stand-part debate.

The Chairman

The Chairman is here to serve the Committee. We should have discussed that point at the beginning, but if all parties are happy for the general principle of schedule 7 to be incorporated in this debate, I am happy.

Mr. O'Brien

Thank you, Mr. Morris.

Amendment No.10 deals with the issue that arises in relation to cornish pasties and pork pies and the Minister must address it. There have been complaints not only from Samworth Brothers but from organisations such as the Law Society. I suppose I should declare an interest because I am a member of the Law Society, but I have no other interest in the matter. The Inland Revenue press releases appear to have misled certain people—innocently, I am sure. The Inland Revenue press release of 8 October 1996 said in paragraph 1 that the income tax liability of taxpayers who receive such distributions will be unaffected by the change. The second press release, on 26 November, went further and it said: the income tax liability of taxpayers who receive such distributions will be largely unaffected by the change. The significance of the insertion of the word "largely" became clear only when the draft legislation was published on 5 December and it became clear that it will impose a new tax liability on trusts.

The Minister should explain the sequence of events behind the press releases. Why was it not made clear on 8 October that the Minister and the Inland Revenue intended to take the course of action that they later took? As a result, certain people arranged their tax affairs in a particular way and might, as a consequence, face a liability that might not have arisen if the Inland Revenue had clearly indicated what it intended to do. I hope that the Minister will deal with that issue today.

More broadly on schedule 7, share buy-backs and special dividends have been identified as a problem for some time. Much credit must go to my hon. Friend the Member for Dudley, West (Mr. Pearson), who has repeatedly pointed out to the Chancellor, in a series of letters and parliamentary questions, the abuse of the system of share buy-backs and special dividends. I pay tribute to my hon. Friend for recognising the problem and putting pressure on at an early stage to ensure that the Treasury also recognised the difficulty. When my hon. Friend raised the issue in March with the Financial Secretary, he provided reassurances. In a letter to my hon. Friend, the Financial Secretary stated: The availability of a tax credit on a special dividend is not a tax loophole. That begs the question of why the Government are now taking action. The definition of a tax loophole is a technicality, but surely creating opportunities for streaming is a loophole for all practical purposes.

The media became agitated by the way in which special dividends and share buy-backs have been used and major company takeovers that resulted in special dividend payments have highlighted the issue of tax-exempt shareholders receiving tax-exempt credits at the expense of the taxpayer. Articles in The Times and in the Lex column in the Financial Times have brought the inconsistencies in the system to public attention. In The Times on 18 August 1996, Graham Sargent wrote: Since the beginning of 1995, buy-backs have totalled some £4.8 billion. Those buy-backs cost the taxpayer more than £1 billion in tax subsidies in just 20 months. Another example of these arrangements is Granada's bid for Forte, the loss to the taxpayer from which has been estimated at roughly £40 million. Special dividends have been widely used in the circumstances, and there are a number of estimates as to the total lost by the Inland Revenue during the past year as a result. I hope that the Financial Secretary will be able to state how much has been lost. It is right for the Treasury to examine this area as a tax issue, and we welcome the Government's decision to make changes to the treatment of share buy-backs and dividends. Our concerns are twofold: why did the Government not do this before, and why are they doing it in this way?

I shall return to a number of issues arising from the wording of the schedule in a moment. The amendment seeks to restrict access to exemptions to bona fide commercial arrangements and not those set up merely to avoid taxation. There may be circumstances in which share buy-backs and special dividends have market benefits, but the issue is whether they should be used merely to avoid tax. A legitimate use, for example, might be when a mature company with cash to spare has insufficient good investment opportunities. In such circumstances, it may be better for the surplus to go to the shareholders, who may divert it to other companies which could use the surplus more effectively.

A difficulty is that the tax rules regard dividends and share buy-backs as essentially the same thing, and treat them as the distribution of capital from a company. Companies are currently required to pay advance corporation tax on distributions at a rate of 20 per cent. on the gross dividend or 25 per cent. on the net dividend, which is the dividend paid less the ACT. Shareholders receive a dividend from the company together with a credit for the ACT paid, and UK taxpayers will pay tax on the gross dividend and can use the tax credit to offset their tax bill. Shareholders who pay income tax at the basic and lower rate pay no further tax on the dividend, and higher rate taxpayers pay an extra 20 per cent. on the gross dividend received.

Pension funds and other tax-exempt institutional shareholders may reclaim the ACT paid on dividends from the Inland Revenue by, in effect, cashing in their credit. In the financial year 1995–96, the Inland Revenue collected £23.6 billion in corporation tax, of which £9.9 billion was ACT. Tax-exempt pension funds and other institutional investors are the largest investors in UK equities or shares, so a substantial proportion of the ACT paid will be reclaimed. That will reduce the tax yield to the Inland Revenue.

The Government proposals in the schedule will have the effect of preventing shareholders from claiming back ACT where their company has paid it as part of any share buy-back, or as dividends paid in more limited special cases. A fundamental principle of UK company law, and of tax law as it applies to companies, is that all shareholders should be treated in the same way. However, prior to the Government's decision to deny the reclaiming of tax credits, various UK companies were engaging in schemes or arrangements where most of the shares offered for buy-backs were purchased by tax-exempt institutions. This practice is often referred to as streaming, and offends the principle of equal tax treatment for all shareholders. It also applies in many ways to special dividends.

The Lex column in the Financial Times on Wednesday 10 January 1996 reported: Granada's increased bid for Forte includes a helping hand from the Inland Revenue. The 47p special dividend Granada is proposing to pay from Forte's balance sheet comes with a 11.75p tax credit for tax-exempt institutions such as pension funds. These shareholders—who will determine the bid's outcome since they account for perhaps 50 per cent. of Forte's shares—will receive an extra £50 million or so from the Revenue if the bid succeeds. The column continued: No public interest is served by a loophole that involves taxpayers subsidising corporate raiders. The timing of the Government's initial announcement in October was prompted by a transaction proposed by Reuters that involved the creation of special shares which could have cost the taxpayer an estimated £150 million. However, instead of dealing directly with the problem of streaming, the Government have denied the reclaiming of tax credits on all share buy-backs, irrespective of whether the shares have been streamed or not. The rules are mandatory, and the Inland Revenue seems to have no discretion as to how to apply them.

5.15 pm

The clause is broadly defined, and there is some danger that the innocent may be caught with the guilty. I hope that the Minister can assure us about the way in which the scheme will be enforced. The scheme may affect company reorganisations and will create another layer of complex fiscal detail. Fiscal detail is sometimes necessary, but we should be careful not to indulge in the creation of fiscal detail for the sake of it, and full explanations will be needed from the Treasury. Companies will have to contend with complex provisions when they arrange their corporate financial affairs as a result of the schedule. It will provide income for lawyers and accountants, but may in effect frustrate many bona fide financial engineering projects within the City.

Mr. Tim Smith

What point is the hon. Gentleman trying to make? Who is he saying should decide whether a "financial engineering project"—as he described it—is bona fide or not?

Mr. O'Brien

My point relates to the provisions contained in section 703 of the Taxes Act 1988, which allowed the Inland Revenue to deal with issues of tax avoidance. The Revenue can look at particular mechanisms and ask whether they are geared towards tax avoidance or towards dealing with genuine commercial arrangements with a practical benefit. Why did the Government not get the Inland Revenue to look at whether the arrangements were bona fide? There may well be good reasons for that, but it remains to be seen whether the Minister can provide a justification for the course that has been taken. The House has a right to hear such a justification.

The Government have provided exemptions to clause 68 but have not sought to distinguish between bona fide operations and any abuse of the exemptions. Why do the Government believe that those in the City who, in a sense, abuse the current system will not abuse the proposed system by, for example, exploiting the exemptions for preference shares and pre-sale distributions? I hope that the Minister can reassure us on that.

The amendment denies the benefit of the exemptions to transactions that do not have commercial justification. Each case would be considered on its merits, and the Inland Revenue would be able to exercise discretion. Where the Inland Revenue and taxpayers agree, both would have recourse to the courts which would decide on the facts and the law in each case. The Red Book forecasts that the Government will save £200 million in 1997–98, rising to £400 million in 1998–99 and 1999–2000. The amendment might provide a little extra help for the taxpayer by increasing resources. It is difficult to gauge precisely how much will be raised, but ensuring that the exemptions are used only for bona fide purposes seems to be a good way to proceed.

I have a series of questions to which I hope the Minister can give me some answers. Why have the Government taken so long to tackle the problem? They knew about the special dividend issue when it arose in bids for several electricity companies back in 1995, as well as in the Lloyds-TSB merger. Surely the Minister could have acted to deal with the matter in the 1995 Budget. Why did it take a further year to take the necessary action? Surely the Treasury must have thought about it during the intervening period, so why did a subsequent complication arise as a result of the various press releases that were issued? That complication had a detrimental effect not only on Ginsters and Samworth Brothers, but various other people have complained to their accountants that they did not realise what would happen.

Even if action was not taken in the 1995 Budget, the Chancellor was aware of the abuse. Why was it not possible to use the powers in sections 703 to 709 of the Taxes Act 1988 to challenge the tax advantages from special dividends in takeovers? The respected Stephen Edge of Slaughter and May wrote an article in The Tax Journal on 10 October 1996 in which he questioned whether the current changes were necessary. He thought that section 703 of the 1988 Act enabled the Inland Revenue to act. Will the Minister clarify the position with regard to that section and explain why it was impossible to use it to deal with the issues that arose in various takeovers?

Why is schedule 7 so widely drawn? Why has it not been possible better to target the abuses? Accountants and lawyers will do very well as they work out the meaning of paragraph 1(3)(a), especially the meaning of was … referrable (in some way and to any extent) to, or to the carrying out of, a transaction in securities". Is it the intention that United Kingdom tax exempts should never qualify for ACT refund on share buy-backs? Are we not left with a complex schedule with an uncertain meaning? Will the Minister confirm that the legislation requires to say on the dividend voucher whether the distribution is affected by that legislation? That may prove difficult.

The schedule may create uncertainty because the scope of the wording is too complex and difficult to understand. It requires that companies should prejudge the outcome of any difficulty or complexity before they can issue any dividend. A company is prevented from paying up and arguing later with the Inland Revenue about whether it is covered by the schedule. If that is so, it is likely that mistakes will be made.

Are we not in danger of creating an extra burden on businesses, many of which are not large but may still be affected by the terms of the schedule? Should we not have dealt with the issue of complexity with more care?

A judgment must be made about the dividend voucher before the dividend is issued. What is the penalty for getting it wrong? I have been unable to discover it, but perhaps the Minister can let us know.

The Labour party strongly supports action to tackle the abuse of share buy-backs and special dividends for the purposes of tax avoidance. My hon. Friend the Member for Dudley, West deserves credit for repeatedly warning the Treasury about that abuse. We are concerned about the Government's failure to act earlier and the complexity of the method used to tackle the problem. The schedule adds yet a further layer of complexity to an already complex system of corporation tax. It follows other fundamental changes to the imputation system, which have been passed in recent years, such as the decoupling of ACT and the basic rate of income tax and the introduction of foreign income dividends.

The system will become yet more complex because of the schedule and because the income tax and corporation tax structures have changed significantly since the introduction of the imputation system in 1993. Is it not therefore time to consider whether we can simplify that complex system as soon as possible?

I should like to ask the Minister a few questions of a more technical nature, although I accept that he may be unable to answer them immediately. If so, perhaps he can write to me and ensure that those answers are published because the current proposals have led to a number of confusions. Can the Minister confirm that foreign recipients will not be able to claim tax credit repayments on the double taxation agreements? If so, can the Minister explain why such shareholders would be affected in that way?

Can the Minister say whether the words "made to" in paragraph 1(3) in relation to the scope of special rules for trustees referred to in sub-paragraph (4) mean that the provisions apply to bear trusts and not to just to qualifying distributions belonging to the trustees? As for the meaning of payment, can he explain whether the term "payment" in paragraph 1(2) covers payments in kind as well as payments in cash? That uncertainty might create an opportunity for abuse, so I hope that the Minister can clarify that.

As for the meaning of arrangements in paragraph 6(2), can the Minister explain whether the word "arrangement" means any agreement or understanding whether or not it is legally enforceable? On the extent of transactions in securities, can the Minister explain whether the phrase "transaction in securities" in paragraph 1(3)(a) could include the payment of the dividend? Can he clarify the meaning of the words "by virtue of which" and "made referrable to" in paragraph 1(3), which seem to add to the confusion? Can the Minister cite some examples to illustrate the strength or laxity of those important connecting words?

On the scope of exclusion for pre-sale dividends, can the Minister explain the basis of the 14-day limitation in paragraph 6? Why should a dividend that is paid more than 14 days before a sale be regarded as more offensive than one that is paid within that 14-day window? That difference may be academic, but we are here to clarify such details. It is important that we do so because a lot of people will read the answers in Hansard.

The Financial Secretary to the Treasury (Mr. Michael Jack)

We will be here all night.

Mr. O'Brien

I hope not.

The schedule also has the odd effect that the longer the time the dividend is paid prior to sale, the more likely it is to be safe. It will not be referrable to the later sale. As the time lapse shortens, the risk gradually increases, until at 14 days it suddenly drops to nil. That does not seem logical. I appreciate that the Minister may not be able to deal with all those questions, but I want to place them on record so that answers are given to aid those who will have to deal with the issue later.

Can the Minister advise us whether for the purposes of relief as set down in paragraph 6, it is necessary that the sale should have been completed by the end of the 14 days?

We have sought to clarify the meaning of a complex set of provisions. We also want to strengthen them. The Government are tackling the right issue, but we have doubts about their methods. The Minister must answer some important questions about the effects of the press releases. The points that were raised by the hon. Member for Beaconsfield (Mr. Smith) are important and I hope that the Minister will be able to deal with them. He must deal with those problems—and not just in terms of retrospective legislation. There is also the question of the press releases and whether or not the Inland Revenue properly clarified what it intended to do.

If the Committee wishes, I shall later move amendment No. 9 formally and seek to commend it as one that will add strength and clarity to the schedule.

5.30 pm
Mr. Ian Pearson (Dudley, West)

My speech will fall into three parts: first, schedule 7 and the general principle behind it; amendment No. 10; and, finally, amendment No. 9.

Clause 68 and schedule 7 tell a story—

The Chairman

Order. We have finished with clause 68 and are now debating schedule 7.

Mr. Pearson

Thank you, Mr. Morris.

Schedule 7 tells a story that I have been highlighting, as my hon. Friend the Member for North Warwickshire (Mr. O'Brien) said, for well over a year. It is the all too familiar story of Government dithering, denial and delay followed by climbdown and belated action. That is pretty much par for the course with this Government, but what marks out this case is the fact that their negligence has cost the hard-pressed taxpayer, by my calculation, £1.75 billion in lost revenue, and possibly more.

On the face of it, schedule 7 provides a number of technical amendments to be made to the treatment of certain distributions by companies. They apply to purchases by companies of their own shares and other distributions, mainly special dividends, which are linked to transactions in securities. The decision to make the changes was sneaked out on 8 October—no doubt coincidentally, but certainly conveniently, during the Conservative party conference. It did not, therefore, receive much publicity; it would probably not have received much coverage anyway. The subject of the operation of the imputation system of taxation and its effect on tax-exempt institutions does not interest the average person in the street and would not grab the imagination of the popular press, but if the story had been headlined, "Ken throws away nearly £2 billion of taxpayers' money"—which is what has happened—perhaps the tabloids would have been interested.

Mr. Tim Smith

The hon. Gentleman has twice said that there has been a huge haemorrhaging of revenue. Does he agree that, if the rules that are now proposed had been in place, the companies would not have behaved in the same way? It is unrealistic to think that, if there is a major change in the law, it does not influence people's behaviour. It is nonsense to suggest that a great deal of revenue was lost.

Mr. Pearson

Surely the hon. Gentleman is aware that the estimated cost savings—on the Treasury's own assumptions—to be made from introducing the Bill will be £200 million in the next financial year and £400 million the year afterwards. Substantial savings are predicted even if people's behaviour has been modified as a result of the change.

If the headlines had been, "Ken throws away nearly £2 billion of taxpayers' money", the tabloids would, rightly, have been interested in what happened. The sum being thrown away by the Government is the approximate equivalent of 1p off the basic rate of income tax—or about the total amount that has been given out in grants to good causes since the national lottery began. That money has been needlessly squandered by the Government when it could have been well spent on improving education and the health service.

We are talking about an abuse of the taxation system or, put differently, a tax loophole—something that the Chancellor always denies exists, but later takes action over. The loophole has been consistently pointed out to the Government by the Opposition. In this instance, it consists of a range of smart schemes that have been drawn up by corporate financiers and which favour the big pension funds at the expense of other shareholders. It has cost the taxpayer millions each time for each deal and it has distorted competition in takeovers.

The loophole was becoming known when the 1995 Finance Bill was passing through the House of Commons, and it was apparent long before the drafting of the 1996 Act. Selective share buy-backs were increasingly used by large companies through 1995 and, as my hon. Friend the Member for North Warwickshire said, the use of special dividends was common in the water and electricity industries. Special dividends were also used in other situations, such as Lloyds bank's bid for TSB and, more recently, Granada's takeover of Forte last year.

It has already been mentioned that many respected financial commentators, such as Lex in the Financial Times and Graham Searjeant in The Times, graphically pointed out the abuse. On 10 January last year, the Financial Times, not for the first time, talked about the special dividend wheeze and its close cousin the share buyback". It said that no public interest is served by a loophole that involves taxpayers subsidising corporate raiders. Labour Members, both here and in the other place, highlighted the abuse. I tabled a number of parliamentary questions on special dividends and raised the subject on the Second Reading of the Finance Bill. I even went so far as to table amendments to the Bill to alter sections 703 to 706 of the Income and Corporation Taxes Act 1988. That was a clear sign to Ministers that something was wrong, but no attention was paid and the scandal of the abuse of share buy-backs and special dividends was allowed to continue.

The Government's response was to deny the problem. The Financial Secretary to the Treasury, who has unfortunately slipped out of the Chamber for a moment—he probably has an inkling of what is to come—in a parliamentary answer dated 1 February 1996 said: The payment of a special dividend does not involve a tax loophole."—[Official Report, 1 January 1996; Vol. 270, c. 862.] Owing to the Minister's dithering and denial, the use of share buy-backs and special dividends escalated. Figures from Kleinwort Benson demonstrate that quoted companies cut their equity capital by £3 billion from the start of the last calendar year to the end of July alone through selective buy-backs.

The cost to the Exchequer has been an estimated £750 million. That loss could easily have been avoided by a half-competent Government. So, too, could the £50 million or so that the Revenue had to pay to subsidise Granada's takeover of Forte, not to mention the money paid in other special dividends.

In The Times on 19 August 1996, Graham Searjeant expressed the hope that even at this late stage, the Chancellor might be stirred from his supercilious lethargy to take some action in his autumn Budget. If the Chancellor read that article—no doubt, while he was on the beach—it took him until Tory party conference week to act. Typically, he blustered his way through the climbdown, conveniently forgetting what had happened before.

The Inland Revenue press release of 8 October 1996 quoted the Chancellor as saying: We have seen recently companies buying their own shares or paying special dividends in such a way that the proceeds end up entirely in the hands of those who are entitled to payment of a tax credit. This has costs for the Exchequer, and if action is not taken soon that cost would escalate. That was the issue of streaming mentioned early by my hon. Friend the Member for North Warwickshire.

In the press release, the Chancellor said: we will not hesitate to take any further action should further evidence of abuse appear. At least he finally admitted that it was an abuse—a tax loophole exploited by companies and their advisers—and, in so doing, he directly contradicted the Financial Secretary who has said all along that it is not a tax loophole. Perhaps he will now apologise and admit that he got it wrong.

During the debate on the Loyal Address, I challenged the Government to publish their figures on the cost to the Exchequer of allowing the loophole to remain open for so long. I had to follow up my inquiry with a parliamentary question, which was due to be answered on 7 November but was not answered until 2 December—and even then it contained an error. That shows just how unwilling the Government have been to tell the truth on this matter.

The answer from the Financial Secretary used the same method of calculation as that used for the estimated cost savings projected from closing the tax loophole, which produced an estimate of the total cost to the Exchequer of £400 million in the financial year 1995–96 and £450 million in the period from 1 April to 8 October, when the Inland Revenue announcement was made. There we have it—the Financial Secretary admitted that the cost to the Exchequer was a total of £850 million over a period of less than two years.

I believe that that is a gross underestimate and many respected commentators agree. On 9 October, the day after the press release, The Times made what I think is a wonderful comment on the Chancellor's decision. It said: The only fair complaint against the Chancellor's attack on the gross dividend scandal is that it has taken him at least a year too long to close a loophole so large that it must be visible from outer space. It went on: The Inland Revenue, so deft at plucking numbers from the air, reckons yesterday's change will eventually save £400 million a year. That is the figure still quoted by the Government today. However, The Times pointed out: share buybacks in 1996 alone appear to have attracted about £750 million in tax subsidies. Over two years, buybacks and special dividends paid in takeovers have probably extracted £1.75 billion from taxpayers. The staff of The Times know a few things about goings-on in the City, and they should be listened to.

I simply do not believe the figures quoted by the Financial Secretary, nor do I accept that the long overdue changes that are to be made will yield only £200 million in 1997–98 and £400 million from 1998–99 onwards. In my view, the yields will be substantially higher than that, which will be good news for a future Labour Government.

Who will take responsibility for losing taxpayers' money on such a grand scale? Nobody, it seems. That comes as no great surprise, even though the financial director of a public company who was this incompetent at managing the business's finances would be dismissed as soon as blunders on such a large scale came to light. We have to ask, who took their eyes off the ball? Was it the Chancellor? Was it the Financial Secretary? Should everything be blamed on the hapless civil servant who undoubtedly gave the Financial Secretary bad advice when he was replying to my question? The taxpayer deserves some honest answers.

The Government's failure to act speedily in the face of the growing scandal of share buy-backs and special dividends exposes as a myth Tory claims to economic competence. When he gave evidence to the Treasury Committee on 9 December 1996, the Chancellor tried to gloss over the Government's negligence in not acting sooner. According to him, the Government acted speedily. He said: The particular announcement was timed because the nature of share buy-back was changing at the time and a whole new type of share buy-backs was being devised which in our opinion was not consistent with the purposes for which the previous regime was devised. That was a classic case whereby an allowance or tax arrangement was used for one purpose for a very long time and then suddenly with great ingenuity people found a new way of taking advantage of the tax relief. It is not at all unknown for the government to move quickly, we would have been criticised if we had not, to stop this.

5.45 pm

I am not sure what planet the Chancellor was on when he claimed that the Government moved quickly. Eighteen months previously, it was quite well known in the financial community that such arrangements were an abuse of the tax system. One could talk to any corporate financiers of repute about the issue and they would say, "Well, yeah, it probably is an abuse of the tax system, but we're allowed to get away with it." They all thought that it was a loophole and one that would certainly be closed—not in this Budget, but in the one before.

I shall now consider amendment No. 10, which I support. It should be clear from my remarks that I do not approve of share dividends and share buy-backs being used as a tax wheeze; however, I do believe that retrospection of taxation is an important issue and one that the Minister should address. I hope that he will take the amendment seriously—indeed, I understand that he might do so.

It is not only one prominent company in Cornwall that will be affected by the proposal. A company called The Birmingham Guild Ltd., which is based in Netherton—which is not in my constituency, but which I hope, with boundary changes and after a short general election campaign, will fall comfortably within it—wrote to me about tax-saving measures in respect of companies buying their own shares or paying special dividends. The letter says: Our Company, The Birmingham Guild Limited, has over the past few months been involved in certain transactions for bona fide commercial reasons. These transactions have involved the purchase of the Company's own shares from Trustees of family Accumulation and Maintenance Settlements. We have been advised in these transactions by Messrs Coopers and Lybrand who applied for tax clearances on 13 and 24 September 1996"— before the Chancellor's announcement— and such clearances were duly received in October 1996. The retrospective nature of the legislation adversely affects the transactions we have entered into in good faith and in the light of the legislation prevailing at the time. The company is clearly being penalised as a result of proposed legislation that was rather woollily outlined on 8 October and only inadequately clarified in December.

The letter goes on to quote a number of reputable sources and highlights the interest shown by the chairman of Coopers and Lybrand and by Deloitte and Touche, which has also contacted the Inland Revenue in respect of this issue. The letter concludes by saying: I hope you will agree that the retrospective nature of the proposed legislation is quite unacceptable in breaking as it does a long established principle and is absolutely contrary to natural justice. Your help in addressing this matter will be appreciated. I wanted to read that because it is important for the Committee to realise that the Bill affects real businesses in the black country as well as in Cornwall. We should therefore consider accepting amendment No. 10.

Amendment No. 9 seeks to withdraw the allowance made in paragraphs 4, 5, 6 and 10 of schedule 7 if transactions are not carried out for bona fide commercial reasons. The Minister must look seriously at this matter. It was clear to me when I sought to amend sections 703 to 706 of the Income and Corporation Taxes Act 1988 last year that those sections could not easily be used to stop streaming. That may be why the Government have adopted such an approach in schedule 7 rather than making a simple alteration to that Act.

However, it is a clear principle—I suspect that the Minister will use it as a reason for opposing the amendment—that "bona fide commercial reasons" is an accepted term in law and is referred to in sections 703 to 709 of the 1988 Act. That Act relates directly to schedule 7, as it provides that if a transaction or transactions were carried out either for bone fide commercial reasons or in the ordinary course of making or managing investments, and that none of them had as their main object, or one of their main objects, to enable tax advantages to be obtained", tax advantages gained can be counteracted. I hope that that is clear.

The amendment is similarly clear about how we would expect it to operate in law. Section 703 of the 1988 Act could apply to a takeover bid involving the offer of a special dividend but that would depend on two further requirements: first, the obtaining of a tax advantage and, secondly, the absence of a bona fide commercial defence.

In the case of Shepphard and another, trustees of the Woodland Trust, v. Commissioners of the Inland Revenue, members of a family who were also trustees of a charitable trust decided that the trust should be financed by dividends. The company issued bonus shares, which were announced in favour of the trust. The family then renounced the right to a dividend in favour of the trust, and the company paid the dividend to the trust. As a non-taxpayer, the trust was able to claim back the advance corporation tax paid by the company on the distribution. The Inland Revenue sought to deny the claim for repayment, relying principally on section 703 of the 1988 Act, and said that the right to claim repayment of the advance corporation tax was a tax advantage.

That was accepted in the High Court, where Mr. Justice Aldous held that the ability to claim the advance corporation tax paid by the company on the making of the distribution at a later stage on appeal was not a "tax advantage" for the purpose of the provisions, having regard to the statutory definition. He said: The whole idea of a tax advantage is that the taxpayer has done something which allows him to resist an assessment and the Inland Revenue can point to something which alters his position to his advantage. That ruling followed the words of Lord Wilberforce. It is significant to amendment No. 9, which refers to "bona fide commercial reasons" and the obtaining of a tax advantage". I was not surprised that the Government rejected the amendment that I sought to table last year to sections 703 to 706 of the Income and Corporation Taxes Act 1988, but I am surprised that they have not sought to go down that route themselves in their rather complicated schedule 7. I support the principles behind the schedule, but remain to be convinced whether it is effectively drawn. I suspect that clever tax accountants will still find ways to get round it.

The schedule misses the target of special dividend shares that do not require consolidation, and does not establish a level playing field for takeovers. Will the Minister clarify that, because it is an accepted principle that there should be a level playing field for takeovers in terms of the tax system. Whereas the old system offered corporate raiders a tax advantage by allowing them to make a special dividend payment from the target company on a successful takeover, schedule 7 will shift the bias from favouring the bidder to favouring the target company, which will be able to take account of certain tax advantages not available to the bidding company. I suspect that, for that reason and many others, we shall return to the matter in future Finance Bills.

I support amendments Nos. 9 and 10 and hope that the Minister will consider them favourably.

Mr. Stephen Timms (Newham, North-East)

I wish briefly to put three specific questions to the Minister. First, why have the Government taken so long to stop this abuse? The original announcement of the proposals on 8 October last appeared to be linked to Reuters' proposed special dividend, but the Government could have acted much earlier. Special dividends were used in the bids for a number of electricity companies in 1995 and by Lloyds bank when it merged with the Trustee Savings bank. The Chancellor could have taken action before the 1995 Budget. My hon. Friend the Member for Dudley, West (Mr. Pearson) tabled an amendment to the Finance Bill following that, and the Government did not act. If those bids were not enough, Granada's bid for Forte should have made the Chancellor sit up and take action no later than January 1996.

My hon. Friend the Member for Dudley, West mentioned what Graham Searjeant said in The Times on 22 January 1996. The problem was well known more than a year ago, so I want to know why the Government are taking so long to deal with the abuse.

Secondly, why did the Inland Revenue not use existing anti-avoidance legislation to tackle the problem? As a number of hon. Members have said, the powers in sections 703 to 709 of the Income and Corporation Taxes Act 1988 exist to allow the Inland Revenue to cancel tax advantages from certain types of transactions in securities. The growth in the use of special dividend and buy-back schemes was probably prompted by the Revenue's apparent unwillingness to use those existing powers.

Stephen Edge wrote in The Tax Journal on 10 October, referring to the proposal that we are debating: This is probably an unnecessary change if the provisions of s703 were applied properly and it is somewhat puzzling that the Inland Revenue has not responded to the press clamour by saying that it already had adequate weapons to deal with this abuse. Thirdly, why has the schedule been so widely drawn? Why does it not target the problem that has been identified? As it is drawn, it could catch almost any dividend, as Stephen Edge noted in The Tax Journal. The schedule is riddled with complexity and uncertainty, and clever people will probably find ways around it.

Those are my three questions to the Minister: why did the Government wait so long, why was the existing legislation not used by the Inland Revenue, and why has the schedule been drawn so wide?

6 pm

Mr. Martin O'Neill (Clackmannan)

When we are dealing with a Government changing tack, there is always a tendency for us not to adopt the generosity of spirit implicit in the Bible when it says that there is rejoicing in Heaven over one sinner that repenteth.

Ministers always start their speeches in debates such as this by telling us that the Government have changed and that they have listened to what people have been saying. I would respond to that with the words that, as a schoolteacher, I used to write on essays, "Not good enough. Try harder." We are trying this evening to give the Minister the chance to do a little better.

The Government—inept as they may be—have recognised that for 20 months there has been a massive leakage of potential revenue. The ability of predatorial companies to make use of loopholes, and the impact of that on potential revenue, was recognised even by the Government as a matter on which they had to act.

We should all be grateful to my hon. Friend the Member for Dudley, West (Mr. Pearson), who has worked hard to highlight company excesses. We are entitled to claim credit for the Opposition's effectiveness in drawing attention to the shortcomings.

We must find out why the Revenue felt unable to use sections 703 to 709. If those provisions were not appropriate, that is a reasonable defence. It would not be unfair for the Government to accept that. The problem is that several tax experts are of a different mind: they say that the provisions could have been used and that, if the Revenue had applied its ingenuity to the problem, it could have had a go. Even if its attempts had failed, the fact that the Revenue was trying would have deterred some of those who were trying to take advantage of the loophole.

It is not good enough for the Government to claim that on the dawn of 8 October a new world was in prospect, another avoidance scandal was about to break and that, as a consequence, they had to act. Even this wretched Government probably recognised that they could not afford to ignore the issue any longer, so they drafted the measure. Unfortunately, they have botched it again. It is such a blunt instrument and is so widely drawn that it could pull into the provisions certain activities that are quite legitimate.

Amendment No. 9 is more explicit. It states: Paragraphs 4, 5, 6, and 10 above shall not apply to any distribution unless the transaction in securities is carried out for bona tide commercial reasons and does not form part of a scheme or arrangement of which the main purpose, or one of the main purposes, is the obtaining of a tax advantage. A culture has developed over the past 17 years—it has assumed the proportions of an industry—that legislation should be framed in such a way that individuals can obtain tax advantages. Schemes are offered by the City to enable individuals to benefit as a consequence. That should not be the purpose of legislation. If there is to be distribution, it should be for bona fide commercial reasons.

The Minister cannot complain about our amendment. When the Opposition draft amendments, they are advised by skilled draftsmen, but those draftsmen do not have the authority of the Treasury or Inland Revenue solicitors. Amendments are often defective, but the wording of amendment No. 9 is clear and specific. The words are part of everyday parlance in the circles in which those matters are considered.

The Minister cannot say that he does not object to the amendment—he simply does not like the words. He could table a drafting amendment in Committee. That would be no problem. We all know that, from time to time, even the Treasury and the Inland Revenue are less than precise in their language. We are prepared to give them the benefit of the doubt. If the Minister wants to play around with our amendment once he has accepted it, we will be more than happy to let him do that.

We have witnessed 20 months of grief and failure. Various commentators have estimated the amount of revenue lost—£40 million in one deal alone, the Granada bid for Forte. That was a hostile bid which was hotly contested. The advantage gained by the predator in that case must have been critical in determining the price of the bid: if it appeared that assistance would be available, the bid could be framed in such a way that the company was, in effect, being subsidised to the tune of £40 million.

That example and others cited by my hon. Friends add weight to the argument that action must be taken. The Government have responded in part, but they have not got it right. We expect the Minister to claim that the Government have changed, have responded and should be given the benefit of the doubt. If we give the Government the benefit of the doubt, many people will either make a lot of money or lose a lot of money. We want to ensure that the legislation is as tightly and precisely drawn as possible. It must exclude bona fide transactions and a clearance procedure should decide what transactions would be affected. The rules should be mandatory so that the Inland Revenue has no discretion not to apply them. It must be required to do so; we must not see a return to the laissez-faire approach that existed before 8 October 1996.

The legislation must be clear; it is not enough to produce a memorandum of understanding or some form of statement of practice as guidance. The information should be in the core of the legislation. An abuse is being corrected and the issues must be clearly defined. If there is a case for moving on this matter—we accept that there is—there is an even greater case for ensuring clarity and precision.

The Government have come to the issue late in the day. I am sure that the pushing and probing of my hon. Friend the Member for Dudley, West has played a large part in the Government's U-turn. The Government must tell us why they have decided to move. Is it because the legislation at their disposal is not appropriate and that sections 703 to 709 of the Income and Corporation Taxes Act 1988 are not relevant? If that is so, the Government should refute the claims of those individuals who have argued that the relevant powers exist. The Minister must not provide a bland assurance such as, "We have been advised that the legislation would not be appropriate to act in these cases." We want more than that: we want a clear statement from the Minister and precise legislation.

We believe that our amendment would afford such clarity: it would give Inland Revenue clear and explicit instructions about how to do its job. That would be far more effective than any side notes or advice to accountants and lawyers. We want to see clear instructions. The measure must come into effect only for bona fide commercial reasons. People must be protected and legitimate business operations should be encouraged. The Government must not introduce a catch-all provision, which we would have to change and improve in subsequent Finance Bills.

The Government deserve a little credit: the massive ship has turned around. However, it has not yet reached its destination, and we shall help it on its way. The amendment offers the Minister much-needed assistance in dealing with the matter properly once and for all. That would be a major step forward in our treatment of this anomaly.

Mr. Tipping

I support amendment No. 10, tabled by the hon. Members for South-East Cornwall (Sir R. Hicks) and for North Cornwall (Mr. Tyler). I do not know quite how to describe them. Earlier in the debate, the hon. Member for North Cornwall described the hon. Member for South-East Cornwall and himself as Cornish pasty and custard pie, and he invited us to adjudge which was which. That is a bit like being asked to separate the sheep from the goats, but I think that their amendment is right and just.

The hon. Members mentioned a case in Cornwall, the hon. Member for Beaconsfield (Mr. Smith) mentioned a case in Nottinghamshire, and my hon. Friend the Member for Dudley, West (Mr. Pearson)—to whom the Committee owes much recognition and praise for his work in this area—referred to yet another firm. I know of many other examples across the country. It is a straightforward matter: those firms acted in good faith. They were aware of the press release issued on 8 October and they believed that they were acting properly. A further press statement issued on 5 December changed the situation completely and, although the companies had acted properly with the benefit of the appropriate advice, they now stand to lose significantly. I hope that the Financial Secretary will look favourably on the amendment, and I look forward to his reply to the debate.

6.15 pm

The Committee has discussed a wider issue this evening: the significant loss of finance to the Exchequer over a considerable period. As the debate progressed, it became clear that the problem was identified 24 months ago; yet the Government have been slow to act. The Committee has disagreed on the extent of the loss to the Exchequer. For example, we are told that the Granada takeover of Forte involved a potential loss of £40 million. I think that it would be appropriate for the Minister to give us his best estimate of the loss. There is argument, first, about the length of time that it has taken Ministers to act and, secondly, about the cost to the Exchequer.

The Budget statement has featured prominently in the proceedings this afternoon, and I wish to contrast the Chancellor's words with the Government's actions. The Chancellor said: As part of our continuing tight against tax and benefit fraud and tax loopholes, I am introducing a package of measures called 'spend to save'. That is an important statement of the Government's intention to act. The Chancellor devoted considerable time to the subject in his Budget statement. I support his objective: it is vital to close tax loopholes such as this.

However, I shall contrast the determination and vigour of the Budget statement with the Government's tardiness in acting on the matter. I return the Financial Secretary to the Budget statement, when the Chancellor said: The 'spend to save' package will cost £800 million over the next three years to secure, in a well-planned and measured way, revenue and expenditure savings of well over eight times that amount—£6.7 billion. These measures are additional to the effective steps that we have taken previously".—[Official Report, 26 November 1996; Vol. 286, c. 162–63.] I contrast that vigorous statement and the commitment of significant resources—£800 million that will result in a payback of £6.7 billion in three years—with the Government's actions in the circumstances described in schedule 7. It is clear that the Government have been tardy and that a significant amount of money has been lost. Their actions contrast markedly with the Chancellor's promises in the Budget.

That leads me to my final point. Commentators are sceptical about the effect of the "spend to save" package: £800 million spent to bring in £6.7 billion in three years' time. Ministers may not be here in three years' time. It is quite clear that we will have a different Government then. It is important that the Financial Secretary assures the Committee this evening that the rhetoric in the Chancellor's Budget statement will be put into practice. Certainly the example that we have discussed tonight belies what was in it. Unless the "spend to save" package is achieved, my hon. Friends on the Treasury Bench in a future Labour Government will face a real financing difficulty. We will have an inheritance of neglect.

I commend my hon. Friend the Member for Dudley, West on his long battle to get action on this issue. I believe that he has been successful. I wish that we had seen the same passion from the Government on it.

Mr. Gary Waller (Keighley)

I shall make the briefest possible contribution about amendment No. 10, to which I have added my name.

I do not think that anybody would disagree with the objective of closing unsatisfactory tax loopholes. Nevertheless, I believe that it is a key precept of our system—indeed, of any truly democratic system—that legislation should not have a retroactive effect. Many people—rightly in my view—consider that schedule 7, as drafted, will be retroactive in effect, bearing in mind the wording of the original Inland Revenue press release. As a consequence, some family trusts will be adversely affected.

We have it in our power to put matters right. I very much hope that my hon. Friend will accept the amendment.

Mr. George Stevenson (Stoke-on-Trent, South)

I support amendment No. 9, which stands in the name of my hon. Friends. I shall reflect a little on the circumstances that have led us to consider this schedule and amendment. I shall also talk about the situation that we shall face if the schedule is not amended, and how that will be interpreted, given the evidence that we have, particularly that from the early 1990s onwards.

We all know that the Conservative party is desperate—perhaps more than desperate—to establish itself as the party of tax prudence and to have probity in all matters concerning tax. If we look at the circumstances that led to schedule 7, which the Government proposed, and try to relate it to the old saying, "You can lead a horse to water, but you can't force it to drink", we will have a good illustration of the Government's complacency—some would say irresponsibility—in this area.

Some of my hon. Friends have described the situation as a tax scam. I am not sure how individual hon. Members would describe a scam, but it is a scam when a law is being abused and those abusing it benefit. I think that that is the generally accepted definition of a scam. Could any hon. Member effectively deny that that has been happening since the early 1990s in this regard?

I am pleased to say that the horse to which I referred, and which we are hypothetically taking to drink, had a halter put around its neck when the companies involved—Reuters, Granada, some takeovers of privatised electricity companies, and perhaps many more—led even the Inland Revenue to accept that millions, not tens of thousands, of taxpayers' money was being creamed off as a result of the abuse of the regulations and the irresponsibility of the Treasury and Ministers in not applying the law properly, to the evident detriment of taxpayers.

My hon. Friends referred to the estimated £40 million that was lost to the taxpayer due to the Granada takeover. I leave hon. Members to contemplate what they could do with a very small fraction of that money, which they could spend on the dilapidated schools in their constituencies. That underlines how serious this is.

I realise that the Government can sit back complacently and think, "This is a technical matter. It is buried in the schedules and clauses of the massive Finance Bill. Who gives a damn? The general public aren't going to worry about this, only the high fliers in the City, and so on." However, as has been amply shown by my hon. Friends, it does matter, because the more money the Conservative Government complacently allow to be creamed off—money that should legitimately be paid into the public purse—the less there is available for vital projects in our constituencies.

In 1995, that mechanism was used in the Reuters and Granada takeovers and in the acquisition of several electricity companies. The same electricity companies as the Government undersold when they privatised them, which had benefited from massive public subsidy when they were privatised, used this mechanism to cream off more taxpayers' money and the Government sat on their hands and did nothing.

I have heard no one challenge the fact that the provisions of section 703 of the Taxes Act 1988, had they been implemented, could have stopped this scam dead in its tracks. We are legitimately entitled to ask why.

Mr. Pearson

I should like to point out two things to my hon. Friend, who talked about the giveaway to electricity companies. According to my figures, the water and electricity companies combined have probably benefited to the tune of £400 million as a result of the loophole not being closed before the 1995–96 financial year.

Someone in the Inland Revenue must have signed cheques, because this money had been paid out to people. That is how the system works.

Mr. Stevenson

I am grateful to my hon. Friend for putting several noughts on the figures that I quoted. I have no doubt that he is correct. I suspect that no hon. Member present in the Chamber could deny that this is the tip of a pretty large iceberg.

6.30 pm

I used the metaphor of the horse being taken to water. The halter should have been put around its neck when this scam emerged. It was tightened by Stephen Edge, who, in The Tax Journal on 10 October 1996, said that the Government should do something about the scam. He said that they should use their powers and did not need to amend the law, and that it was costing the public purse.

This is the Government of tax probity and financial probity: they stand up in the Chamber day after day, week after week, telling us how they intend to close tax loopholes. In 1996, they were told by a reputable, well-recognised authority to do something about it. What happened? Nothing. So the halter was tightened around the horse's neck.

The next step was that my hon. Friend the Member for Dudley, West (Mr. Pearson) got hold of the halter and pulled it towards the water trough. The amendments that he tabled to the Finance Bill hit the nail on the head.

Mr. Jon Trickett (Hemsworth)

On the horse's shoe.

Mr. Stevenson

On the horse's shoe. In a most effective and devastating critique of the Government's complacency and irresponsibility, he urged them—[Interruption.] Some hon. Members may think that this is a laughing matter, but I do not. My hon. Friend the Member for Dudley, West urged the Government to take action, and tabled an amendment to that effect. What happened? They did not do "nothing" this time. They were shaken out of the complacent and irresponsible attitude that they had taken for well over 12 months. Heaven knows how much money had been lost to the Revenue by that time because of this scam. They said, in effect, "We will not accept it."

The halter that was put around the neck of the Government horse, the pull that it was given by the reputable authority and the further pull that was given by my hon. Friend the Member for Dudley, West have brought the Government to the trough. I commend them, because they are now at the trough and their heads are bent forward ready to drink. Unless they accept amendment No. 9, they will bend their heads to drink and, before they know where they are, the clever people in the City will have pulled the plug and there will be no water left in the trough.

What can possibly be wrong? How can the Government concoct or construct a case against an amendment that says: Paragraphs 4, 5, 6 and 10 above shall not apply to any distribution unless the transaction in securities is carried out for bona fide commercial reasons and does not form part of a scheme or arrangement of which the main purpose, or one of the main purposes, is the obtaining of a tax advantage. That is critical.

Mr. Jack


Mr. Stevenson

I realise that the Minister is getting jocular, impatient and nervous. He should be nervous: he should be ashamed of himself, not nervous. His predecessors allowed this situation to develop.

Had the evidence of this scam not been there for the Government to see in the past few years, perhaps they would be entitled to say, "We do not need this amendment. We think that we have got it right." I congratulate the Government on going as far as they have already. The evidence is overwhelming that the bona fide people involved have been penalised and the scam merchants have been allowed to get away with it. That is why our amendment is so essential.

The amendment is based not on a party-political knock-about, but on the facts as we know them. First, the Government's complacency has bordered on the irresponsible. Secondly, they have allowed this scam to continue, which has cost the taxpayer millions. That blows a hole in the Government's propaganda: they have tried to convince the public that they are prudent on tax and want to close loopholes. They are now trying to close a loophole, but they will fail unless the amendment is carried. Thirdly, they will leave a mess that, after the next election, a Labour Government will lose no time in clearing up.

Mr. Jack

This has been a wide-ranging and interesting debate. I should first like to deal with the amendment that has attracted the most attention and support. It was tabled by my hon. Friend the Member for South-East Cornwall (Sir R. Hicks) and supported by the hon. Member for North Cornwall (Mr. Tyler) and my hon. Friends the Members for Beaconsfield (Mr. Smith), for Ludlow (Mr. Gill), for Keighley (Mr. Waller) and for Rutland and Melton (Mr. Duncan). The hon. Members for North Warwickshire (Mr. O'Brien) and for Dudley, West (Mr. Pearson) also took up this point. I thank them all, especially my hon. Friend the Member for South-East Cornwall, for raising this issue. A number of family companies affected by the new legislation have already made representations to me on this point.

I looked again at the Inland Revenue press release that announced these proposals, to which hon. Members referred. Although it did not intend any element of retrospection, we accept that the original press release was ambiguous, which may have led trustees to take an overoptimistic view. We are prepared to err on the side of the taxpayer and accept the amendment.

Mr. Mike O'Brien

This problem is clearly due to the Government's incompetence. Will the Minister give us the cost involved during the period between the publication of the Bill and that press release? We want to know the cost of this new commitment as a result of the Government's incompetence.

Mr. Jack

I am sad that the hon. Gentleman calls it incompetence. As I said, it was a matter of interpretation. I said that we erred on the side of the taxpayer. If we have made an error, I am always the first to put my hand up and agree that we should put matters right. That is precisely what we have done. The hon. Gentleman implored us so to do, and other hon. Members made their particular points. We have decided to act, but there are some lessons to be learnt for the future.

Mr. O'Brien

Will the Minister give way?

Mr. Jack

No, I shall not give way, because the hon. Gentleman had plenty of time to give his view.

In future, it would be sensible if taxpayers and their advisers remembered that Inland Revenue press releases are no substitute for the eventual legislation passed by the House. They simply inform the public that changes are being made. People who are considering entering into transactions can and should contact the Inland Revenue for further guidance, or wait until the legislation is finalised.

I should like to return to the substance of the remarks made by the hon. Member for North Warwickshire and his hon. Friends. It is important to focus on the heart of the matter, which is the use of the tax credit. Many hon. Members have said that money has been wasted, as if it has disappeared. The hon. Member for Stoke-on-Trent, South (Mr. Stevenson) even said that money had been creamed off. This money has gone, by and large, to exempt institutions—by that, we mean charities and pension institutions—ultimately for the benefit of recipients, especially of pensions.

My right hon. and learned Friend the Chancellor decided to act, because the cost and the use of the mechanism of paying special distributions by company share buy-backs was getting out of hand, and action had to be taken. I have been asked a number of times why we did not act more quickly. The answer—and, to be fair, the hon. Member for Dudley, West has probed us on this—is that, although we had seen what was happening, the situation had not reached the stage at which we felt that we must act.

In 1996, the use of this mechanism took on a much bigger proportion than was the case in 1995, as I think is shown by the figures published in the parliamentary answer. We therefore decided that it was right to end the activity in connection with security transactions. That is why we took the action that we took to stop the abuse that was eventually occurring. That said, the use of tax credits is important for exempt institutions, but we decided to halt the way in which they were being used by means of the mechanism of "streaming". It has been asked why we did not use section 703 of the 1988 Act. The simple answer is that the existing legislation was not effective against most manipulation of that kind. If it had been, we would have used it, and we would not be debating the matter tonight. We have also been asked why we chose the mechanism that we chose. Classifying distributions in transactions associated with securities as the equivalent of FIDs was the most effective way in which to deal with the problem, and the terms under which that will apply are clearly stated in the schedule. The arrangements avoid the necessity to include a motive test, and the Bill sets out, precisely and unambiguously, how they will work.

The hon. Member for North Warwickshire asked a series of questions. I was grateful for his kindness when he said that he would allow me to write to him about specific points that he raised, and that is precisely what I shall do.

As for amendment No. 9, Opposition Members are clearly concerned that what they describe as bona fide activities are not effectively ruled out by our proposals. The legislation has been cast widely to ensure that all the transactions associated with securities that had exploited the streaming mechanism were caught, except those involving bona fide reasons—hence the exemptions for stock options, fixed-rate preference shares and ordinary pre-sale distributions. Those were carved out to ensure that bona fide transactions would not be prevented. In view of the exemptions, which have been carefully drafted to ensure that they do not put the Exchequer at risk, the amendment would produce a further set of hoops for taxpayers to jump through, and would introduce an additional and unnecessary element of bureaucracy.

Our drafting follows the spirit of amendment No. 9, but I think that the amendment is unnecessary. I hope that the Committee will accept amendment No. 10, and that the Opposition will not press amendment No. 9 at this stage.

Mr. Mike O'Brien

I am very sorry that the Financial Secretary has not seen fit to accept our amendment, which would clarify the position in a way that he has said is in the spirit of his intention. It is regrettable that the Government have not accepted an amendment that would have clarified a complex schedule. The schedule clearly needs clarification, and, in due course, we intend to press our amendment to a vote.

We have seen this Financial Secretary, and the other Treasury Ministers who are present, rise repeatedly to demand that the Labour party provides costings for this, that and everything. Here we have a Treasury Minister making a concession at the Dispatch Box as a result of the Government's incompetence in failing to set out their tax intentions properly on 8 October. He has no answer to the question, "How much will this concession cost?", but we know that the cost to the taxpayer of the Government's failure to act over the past year has been considerable. It may have been as much as £2 billion. It may have been a good deal less, but it has certainly been in the hundreds of millions.

That money has been used to finance corporate raiders and takeovers. It has been used in a way that is not in the public interest—in a way that has left hospitals short of resources, and schools facing cuts. It could have been used to build hospitals, to provide police officers on the beat and to prevent education cuts, but the Minister has failed to act.

Mr. Jack

I apologise for not dealing with the question of the cost of amendment No. 10. It would be less than £10 million.

6.45 pm
Mr. O'Brien

Over the past year, however, the Government's failure to act has cost the taxpayer much more than that—and now, simply through his incompetence in releasing a press release from the Inland Revenue, the Financial Secretary has cost the taxpayer £10 million. As one of my hon. Friends has rightly said, he should apologise to the Committee. I am ashamed that the Government have taken such a course. They knew the problems, but failed to do anything about them in the 1995 Budget. They failed even to express displeasure at the abuse that was taking place in various takeovers. They did not use the anti-avoidance provisions in the 1988 Act. The Times said that there was a loophole big enough to be recognised from outer space, but the Minister did not even see it.

Today, we have seen the complacency of an incompetent Government and the failure of Treasury Ministers to protect the Revenue. The complexities of tax legislation all too often deter the public from taking an interest; that is a pity, because here we have a scandal that the Financial Secretary has not properly explained. How can the Government justify failing to act when the electricity industry was using £400 million of taxpayers' money, and Granada's bid for Forte was costing up to £50 million of their money—money that could have been used in the public interest? They have wasted taxpayers' money, and that is why we must press our amendment to a vote.

Amendment agreed to.

Amendment proposed: No. 9, in schedule 7, page 141, line 25, at end insert— '13. Paragraphs 4, 5, 6, and 10 above shall not apply to any distribution unless the transaction in securities is carried out for bona fide commercial reasons and does not form part of a scheme or arrangement of which the main purpose, or one of the main purposes, is the obtaining of a tax advantage:.—[Mr. Mike O 'Brien.]

Question put, That the amendment be made:—

The Committee divided: Ayes 222, Noes 280.

Division No. 50] [6.47 pm
Abbott, Ms Diane Clarke, Eric (Midlothian)
Adams, Mrs Irene Clelland, David
Ainger, Nick Clwyd, Mrs Ann
Ainsworth, Robert (Cov'try NE) Coffey, Ms Ann
Allen, Graham Cohen, Harry
Anderson, Donald (Swansea E) Cook, Frank (Stockton N)
Anderson, Ms Janet (Ros'dale) Corbett, Robin
Armstrong, Ms Hilary Corbyn, Jeremy
Ashdown, Paddy Corston, Ms Jean
Ashton, Joseph Cousins, Jim
Austin-Walker, John Cox, Tom
Banks, Tony (Newham NW) Cummings, John
Barnes, Harry Cunningham, Jim (Cov'try SE)
Barron, Kevin Cunningham, Ms R (Perth Kinross)
Bayley, Hugh Dalyell, Tam
Beckett, Mrs Margaret Darling, Alistair
Bell, Stuart Davidson, Ian
Bennett, Andrew F Davies, Bryan (Oldham C)
Bermingham, Gerald Davies, Chris (Littleborough)
Berry, Roger Davies, Denzil (Llanelli)
Blair, Tony Davis, Terry (B'ham Hodge H)
Blunkett, David Denham, John
Bray, Dr Jeremy Dewar, Donald
Brown, Gordon (Dunfermline E) Dixon, Don
Brown, Nicholas (Newcastle E) Dowd, Jim
Burden, Richard Eagle, Ms Angela
Byers, Stephen Ennis, Jeff
Caborn, Richard Etherington, Bill
Callaghan, Jim Evans, John (St Helens N)
Campbell, Mrs Anne (C'bridge) Ewing, Mrs Margaret
Campbell, Menzies (Fife NE) Fatchett, Derek
Campbell, Ronnie (Blyth V) Faulds, Andrew
Campbell-Savours, D N Field, Frank (Birkenhead)
Canavan, Dennis Fisher, Mark
Cann, Jamie Flynn, Paul
Carlile, Alex (Montgomery) Foster, Derek
Clapham, Michael Foster, Don (Bath)
Fyfe, Mrs Maria Mudie, George
Gapes, Mike Mullin, Chris
George, Bruce Murphy, Paul
Gerrard, Neil Nicholson, Miss Emma (W Devon)
Gilbert, Dr John O'Brien, Mike (N Warks)
Godman, Dr Norman A O'Hara, Edward
Golding, Mrs Llin Olner, Bill
Gordon, Ms Mildred O'Neill, Martin
Graham, Thomas Pearson, Ian
Grant, Bernie (Tottenham) Pike, Peter L
Grocott, Bruce Pope, Greg
Gunnell, John Powell, Sir Raymond (Ogmore)
Hain, Peter Prentice, Mrs B (Lewisham E)
Hall, Mike Prentice, Gordon (Pendle)
Hardy, Peter Prescott, John
Henderson, Doug Primarolo, Ms Dawn
Hill, Keith (Streatham) Purchase, Ken
Hinchliffe, David Quin, Ms Joyce
Hodge, Ms Margaret Randall, Stuart
Hoey, Kate Raynsford, Nick
Hogg, Norman (Cumbernauld) Reid, Dr John
Hood, Jimmy Rendel, David
Hoon, Geoffrey Robertson, George (Hamilton)
Howarth, George (Knowsley N)
Howells, Dr Kim Robinson, Geoffrey (Cov'try NW)
Roche, Mrs Barbara
Hoyle, Doug Rogers, Allan
Hughes, Kevin (Doncaster N) Rooker, Jeff
Hughes, Robert (Ab'd'n N)
Hughes, Roy (Newport E) Rooney, Terry
Hutton John Ross, Ernie (Dundee W)
Illsley, Eric Ruddock, Ms Joan
Ingram, Adam Salmond, Alex
Jackson, Ms Glenda (Hampst'd) Sedgemore, Brian
Jackson, Mrs Helen (Hillsborough) Sheerman, Barry
Jamieson, David Sheldon, Robert
Janner, Greville Shore, Peter
Jenkins, Brian D (SE Staffs) Skinner, Dennis
Jones, Barry (Alyn & D'side) Smith, Andrew (Oxford E)
Jones, Dr L (B'ham Selly Oak) Smith, Chris (Islington S)
Jones, Nigel (Cheltenham) Smith, Llew (Blaenau Gwent)
Jowell, Ms Tessa Soley, Clive
Kaufman, Gerald Spellar, John
Keen, Alan Squire, Ms R (Dunfermline W)
Khabra, Piara S Steinberg, Gerry
Kilfoyle, Peter Stevenson, George
Kirkwood, Archy Stott, Roger
Lestor, Miss Joan (Eccles) Strang, Dr Gavin
Livingstone, Ken Straw, Jack
Loyden, Eddie Taylor, Mrs Ann (Dewsbury)
McAllion, John Taylor, Matthew (Truro)
McAvoy, Thomas Thompson, Jack (Wansbeck)
McCartney, Ian (Makerf'ld) Timms, Stephen
Macdonald, Calum Tipping, Paddy
McFall, John Touhig, Don
McKelvey, William Trickett, Jon
Mackinlay, Andrew Turner, Dennis
McLeish, Henry Tyler, Paul
MacShane, Denis Vaz, Keith
McWilliam, John Walker, Sir Harold
Maddock, Mrs Diana Wardell, Gareth (Gower)
Mahon, Mrs Alice Wareing, Robert N
Mandelson, Peter Watson, Mike
Marshall, David (Shettleston) Welsh, Andrew
Marshall, Jim (Leicester S) Wicks, Malcolm
Martin, Michael J (Springburn) Wigley, Dafydd
Martlew, Eric Williams, Alan (Swansea W)
Maxton, John Williams, Alan W (Carmarthen)
Meacher, Michael Wilson, Brian
Meale, Alan Winnick, David
Michael, Alun Wise, Mrs Audrey
Milburn, Alan Wray, Jimmy
Miller, Andrew Wright, Dr Tony
Morgan, Rhodri
Morris, Ms Estelle (B'ham Yardley) Tellers for the Ayes:
Morris, John (Aberavon) Mr. Clive Betts and
Mowlam, Ms Marjorie Mrs. Jane Kennedy.
Ainsworth, Peter (E Surrey) Elletson, Harold
Aitken, Jonathan Emery, Sir Peter
Alexander, Richard Evans, David (Welwyn Hatf'ld)
Alison, Michael (Selby) Evans, Jonathan (Brecon)
Allason, Rupert (Torbay) Evans, Nigel (Ribble V)
Amess, David Evans, Roger (Monmouth)
Arbuthnot, James Evennett, David
Arnold, Jacques (Gravesham) Faber, David
Ashby, David Fenner, Dame Peggy
Atkinson, Peter (Hexham) Field, Barry (Isle of Wight)
Baker, Kenneth (Mole V) Fishburn, Dudley
Baldry, Tony Forman, Nigel
Banks, Matthew (Southport) Forsyth, Michael (Stirling)
Banks, Robert (Harrogate) Forth, Eric
Bates, Michael Fowler, Sir Norman
Batiste, Spencer Fox, Dr Liam (Woodspring)
Bellingham, Henry Fox, Sir Marcus (Shipley)
Bendall, Vivian Freeman, Roger
Beresford, Sir Paul French, Douglas
Biffen, John Fry, Sir Peter
Body, Sir Richard Gale, Roger
Bonsor, Sir Nicholas Gallie, Phil
Booth, Hartley Garnier, Edward
Boswell, Tim Gill, Christopher
Bottomley, Peter (Eltham) Gillan, Mrs Cheryl
Bowden, Sir Andrew Goodlad, Alastair
Bowis, John Gorman, Mrs Teresa
Boyson, Sir Rhodes Gorst, Sir John
Brandreth, Gyles Grant, Sir Anthony (SW Cambs)
Bright, Sir Graham Greenway, Harry (Ealing N)
Brooke, Peter Greenway, John (Ryedale)
Brown, Michael (Brigg Cl'thorpes) Gummer, John
Browning, Mrs Angela Hague, William
Bruce, Ian (S Dorset) Hamilton, Neil (Tatton)
Budgen, Nicholas Hampson, Dr Keith
Burns, Simon Hanley, Jeremy
Burt, Alistair Hannam, Sir John
Butler, Peter Hargreaves, Andrew
Carlisle, John (Luton N) Harris, David
Carlisle, Sir Kenneth (Linc'n) Haselhurst, Sir Alan
Carrington, Matthew Hawkins, Nick
Carttiss, Michael Hawksley, Warren
Cash, William Hayes, Jerry
Channon, Paul Heald, Oliver
Chapman, Sir Sydney Heath, Sir Edward
Churchill, Mr Heathcoat-Amory, David
Clappison, James Hendry, Charles
Clark, Dr Michael (Rochf'd) Heseltine, Michael
Clarke, Kenneth (Rushcliffe) Hicks, Sir Robert
Clifton-Brown, Geoffrey Higgins, Sir Terence
Coe, Sebastian Hogg, Douglas (Grantham)
Colvin, Michael Horam, John
Congdon, David Hordern, Sir Peter
Conway, Derek Howard, Michael
Coombs, Anthony (Wyre F) Howell, David (Guildf'd)
Cope, Sir John Howell, Sir Ralph (N Norfolk)
Cormack, Sir Patrick Hughes, Robert G (Harrow W)
Couchman, James Hunt, David (Wirral W)
Currie, Mrs Edwina Hunt, Sir John (Ravensb'ne)
Curry, David Hunter, Andrew
Davies, Quentin (Stamf'd) Hurd, Douglas
Davis, David (Boothferry) Jack, Michael
Day, Stephen Jackson, Robert (Wantage)
Deva, Nirj Joseph Jenkin, Bernard (Colchester N)
Devlin, Tim Johnson Smith, Sir Geoffrey
Dicks, Terry Jones, Gwilym (Cardiff N)
Dorrell, Stephen Jopling, Michael
Douglas-Hamilton, Lord James Kellett-Bowman, Dame Elaine
Dover, Den Key, Robert
Duncan, Alan King, Tom
Duncan Smith, Iain Kirkhope, Timothy
Dunn, Bob Knapman, Roger
Durant, Sir Anthony Knight, Mrs Angela (Erewash)
Dykes, Hugh Knight, Greg (Derby N)
Eggar, Tim Knight, Dame Jill (Edgbaston)
Knox, Sir David Sackville, Tom
Kynoch, George Sainsbury, Sir Timothy
Lamont, Norman Scott, Sir Nicholas
Lang, Ian Shaw, Sir Giles (Pudsey)
Legg, Barry Shephard, Mrs Gillian
Leigh, Edward Shepherd, Sir Colin (Heref'd)
Lennox-Boyd, Sir Mark Shepherd, Richard (Aldridge)
Lester, Sir Jim (Broxtowe) Shersby, Sir Michael
Lidington, David Sims, Sir Roger
Lilley, Peter Smith, Sir Dudley (Warwick)
Lloyd, Sir Peter (Fareham) Smith, Tim (Beaconsf'ld)
Lord, Michael Soames, Nicholas
Luff, Peter Speed, Sir Keith
MacKay, Andrew Spencer, Sir Derek
Maclean, David Spicer, Sir Jim (W Dorset)
McLoughlin, Patrick Spink, Dr Robert
McNair-Wilson, Sir Patrick Spring, Richard
Madel, Sir David Sproat, Iain
Maitland, Lady Olga Squire, Robin (Hornchurch)
Major, John Stanley, Sir John
Malone, Gerald Steen, Anthony
Mans, Keith Stephen, Michael
Marland, Paul Stern, Michael
Marlow, Tony Stewart, Allan
Marshall, John (Hendon S) Streeter, Gary
Marshall, Sir Michael (Arundel) Sumberg, David
Martin, David (Portsmouth S) Sweeney, Walter
Mawhinney, Dr Brian Sykes, John
Merchant, Piers Tapsell, Sir Peter
Mitchell, Andrew (Gedling) Taylor, Ian (Esher)
Mitchell, Sir David (NW Hants) Taylor, John M (Solihull)
Moate, Sir Roger Temple-Morris, Peter
Monro, Sir Hector Thomason, Roy
Montgomery, Sir Fergus Thompson, Sir Donald (Calder V)
Needham, Richard Thompson, Patrick (Norwich N)
Nelson, Anthony Thornton, Sir Malcolm
Neubert, Sir Michael Townsend, Sir Cyril (Bexl'y'hth)
Newton, Tony Tracey, Richard
Nicholls, Patrick Tredinnick, David
Nicholson, David (Taunton) Trend, Michael
Norris, Steve Twinn, Dr Ian
Onslow, Sir Cranley Vaughan, Sir Gerard
Oppenheim, Phillip Viggers, Peter
Ottaway, Richard Waldegrave, William
Page, Richard Walden, George
Paice, James Walker, Bill (N Tayside)
Patnick, Sir Irvine Waller, Gary
Patten, John Ward, John
Pawsey, James Wardle, Charles (Bexhill)
Peacock, Mrs Elizabeth Waterson, Nigel
Pickles, Eric Watts, John
Porter, David Wheeler, Sir John
Portillo, Michael Whitney, Sir Raymond
Powell, William (Corby) Whittingdale, John
Rathbone, Tim Widdecombe, Miss Ann
Redwood, John Wilkinson, John
Renton, Tim Willetts, David
Richards, Rod Winterton, Mrs Ann (Congleton)
Riddick, Graham Winterton, Nicholas (Macclesf'ld)
Rifkind, Malcolm Wolfson, Mark
Roberts, Sir Wyn Wood, Timothy
Robertson, Raymond S (Ab'd'n S) Yeo, Tim
Robinson, Mark (Somerton) Young, Sir George
Roe, Mrs Marion
Rowe, Andrew Tellers for the Noes:
Rumbold, Dame Angela Mr. Bowen Wells and
Ryder, Richard Mrs. Jacqui Lait.

Question accordingly negatived.

Schedule 7, as amended, agreed to.

Bill (Clauses 40,62,68 82 and 92 and Schedules 7 and 13), reported, with amendments; to lie upon the Table.