§ The Financial Secretary to the Treasury (Mrs. Barbara Roche)I beg to move amendment No. 15, in page 35, line 27, leave out 'sub-paragraph (2)' and insert
'the following provisions of this paragraph'.
§ Mrs. RocheClause 61 is designed to prevent avoidance of tax through an artificial scheme that exploits a feature of the definition of a discounted security. The effect is that a discount on a security which should be taxed as income over the lifetime of the security is charged only as capital gains tax and only when the security is disposed of or redeemed. The clause changes the definition of a discounted security so that it will no longer be possible to use that device.
The Government received a number of representations expressing concern that the clause went too far and would catch securities for which any discount that arises is small in absolute terms and obtainable only in the case of an event that is outside the control of the parties to the security. We listened carefully to the industry and examined the representations. As I said in Committee, we recognise that clause 61 might catch some securities where it would not be appropriate to do so.
We therefore published, during the Bill's passage through the House, draft amendments for consultation, and we have received comments from practitioners. The amendments before the House are slightly different from those published in draft form and take into account our considerations following the representations that we received.
The amendments would target the clause more closely on the objectionable transactions. They deal with the concerns expressed about the current version of the clause, without reopening the possibility of the avoidance at which the clause is aimed. I commend the amendments to the House.
§ Mr. FlightThe amendment, which we welcome, is yet another example of the result of over-zealous but somewhat sloppy initial attempts to introduce tax avoidance measures. The original proposals aimed to close a loophole through which bonds had been issued which offered a redemption premium in place of interest payments, and which had previously escaped the relevant discount securities regime. However, the proposals went much further and would trigger what is known as the Spens clause.
I should declare an interest at this point. I have some knowledge of bonds because I ran an investment management business for 25 years. There are unit trusts holding some £12 billion of bonds which, under the original proposals, could have found that their capital gains were assessed under income tax rules, and that would have affected hundreds of thousands of small investors.
As the Financial Secretary pointed out, the amendments serve—as was the original intent—to exempt from the anti-avoidance measure the Spens clause arrangements where redemption premiums can be paid at the issuer's option, in circumstances in which the owner can have no influence over that, except in cases of connected companies.
Various learned tax lawyers and the financial services industry generally take the view that the amendments reflect the Government's original intention. We therefore welcome them. However, although it can be difficult initially to focus anti-avoidance measures so that they will not cause injustices way beyond their intended effects, we should like to think that in future there will be a greater effort to get such measures right first time.
§ Mr. St. AubynI thank Ministers on the Treasury Bench for finally getting their act together on this complicated issue. Why are they prepared to go to such lengths to make sure that these anti-avoidance provisions are sufficiently finely honed to deal with the mischief about which the Government were originally concerned, when last night, in the case of the sale of trust interests for capital gains tax purposes, they introduced a very crude anti-avoidance measure? It was so ill-thought-out—
Mr. Deputy SpeakerOrder. I hope that the hon. Gentleman does not intend to dwell on what happened last night—we have moved on.
§ Mr. St. AubynNo, I do not mean to do so, Mr. Deputy Speaker. However, we need to know why the Government are now making such an effort while in that case they were prepared to breach the terms of their own code for fiscal stability by not adhering to the cardinal principle of tax neutrality.
§ Mrs. RocheIt always pains me considerably to break the mood of consensus and all-party support, but I must do so. As the hon. Member for Arundel and South Downs (Mr. Flight) knows, because this is an anti-avoidance measure and substantial amounts of taxpayers' money are at stake, it would not have been appropriate to issue draft clauses for consultation before the measure came into effect. However, because this Government listen and develop our policies properly, the Finance Bill process allowed us to consult on the details of the measures and to make improvements.
In the gentlest way possible, I say to the hon. Gentleman and the hon. Member for Guildford (Mr. St. Aubyn) that the amendments and the clause complete yet more unfinished business left to us by the previous Conservative Administration. They will know and appreciate that we have had to deal with the deficiency of definition in the Finance Act 1996.
§ Mr. St. AubynWill the hon. Lady give way?
§ Mrs. RocheNo. I say to the hon. Gentleman exactly what I said to him in Committee: in 1996, 200 amendments on this matter were tabled two days before the debate in the House, and the Conservative Government had to vote down a clause. I have great pleasure in commending the amendments to the House.
§ Amendment agreed to.
§
Amendments made: No. 16, in page 35, line 32, leave out 'that is capable of and insert
'of which there may be a'.
§ No. 17, in page 35, leave out lines 37 to 42 and insert—
§ '(1A) The occasions that are to be taken into account for the purpose of determining whether a security is a relevant discounted security by virtue of sub-paragraph (1)(b) above shall not include any of the following occasions on which it may be redeemed, that is to say—
- (a) any occasion not falling within sub-paragraph (1C) below on which there may be a redemption otherwise than at the option of the person who holds the security;
- (b) in a case where a redemption may occur as a result of the exercise of an option that is exercisable—
- (i) only on the occurrence of an event adversely affecting the holder, or
- (ii) only on the occurrence of a default by any person,
§ (1B) In sub-paragraph (1A) above 'event adversely affecting the holder', in relation to a security, means an event which (judged as at the time of the security's issue) is such that, if it occurred and there were no provision for redemption, the interests of the person holding the security at the time of the event would be likely to be adversely affected.
§ (1C) An occasion on which there may be a redemption of a security falls within this sub-paragraph if—
- (a) the security is a security issued to a person connected with the issuer; or
- (b) the obtaining of a tax advantage by any person is the main benefit, or one of the main benefits, that might have been expected to accrue from the provision in accordance with which it may be redeemed on that occasion.
§ (1D) In sub-paragraph (1C) above 'tax advantage' has the meaning given by section 709(1) of the Taxes Act 1988.
§ (1E) Subject to sub-paragraph (1F) below, where a security which is not a relevant discounted security but which would have been such a security if it had been issued to a person connected with the issuer—
- (a) is acquired by a person who is so connected, or
- (b) is held by a person who becomes so connected,
§ (1F) Where a security which—
- (a) is a relevant discounted security, but
- (b) would not be such a security but for sub-paragraph (1C)(a) or (1E) above,
§ No. 18, in page 35, line 42, at end insert—
§ '() After sub-paragraph (2) of that paragraph there shall be inserted the following sub-paragraphs—
§ "(2A) Nothing in sub-paragraph (2)(c) above shall prevent a security that would have been a relevant discounted security if it had been issued to a person connected with the issuer from being treated as a relevant discounted security by virtue of sub-paragraph (1E) above.
§ (2B) Nothing in sub-paragraph (2)(f) above shall prevent a security from being treated as a relevant discounted security by virtue of sub-paragraph (1C)(a) or (1E) above.".'.
§ No. 19, in page 35, line 43, at end insert—
§ '(2A) After sub-paragraph (6) of that paragraph there shall be inserted the following sub-paragraphs—
§ "(7) Section 839 of the Taxes Act 1988 (connected persons) applies for the purposes of this paragraph.
879§ (8) In determining for the purposes of sub-paragraph (1C), (1E), (IF) or (2A) above whether a person is or becomes connected with the issuer, no account shall be taken of—
- (a) the security mentioned in that sub-paragraph; or
- (b) any security issued under the same prospectus as that security."
§ (2B) In paragraph 10 of that Schedule (issue of securities in separate tranches), after sub-paragraph (3) there shall be inserted the following sub-paragraph—
§ "(4) For the purpose of determining whether a security held by a person who is not connected with the issuer is a relevant discounted security by virtue of this paragraph, a security which—
- (a) is a relevant discounted security, but
- (b) would not be such a security but for paragraph 3(1C)(a) or (1E) above,
§
(2C) In paragraph 13 of that Schedule (excluded indexed securities), after sub-paragraph (8) there shall be inserted the following sub-paragraph—
(9) In this paragraph references to redemption, in relation to a security, do not include references to redemption of the security on any such occasion as, by reason of subparagraph (1A) of paragraph 3 above, is not to be taken into account for the purpose of determining whether the security is a relevant discounted security by virtue of sub-paragraph (1)(b) of that paragraph.
§
(2D) In section 92 of that Act, after subsection (6) there shall be inserted the following subsections—
(7) Where an asset representing a creditor relationship of a company—
the company shall be deemed for the purposes of the Taxation of Chargeable Gains Act 1992 and this Chapter to have disposed of the asset immediately before that time for the relevant consideration, and to have re-acquired it immediately after that time for the relevant consideration.
§ (8) Any deemed disposal and re-acquisition under subsection (7) above shall be treated for the purposes of that Act of 1992 as a transaction in the case of which—
- (a) sections 127 to 130 of that Act would apply, apart from the provisions of section 116 of that Act, by virtue of any provision of Chapter II of Part IV of that Act;
- (b) the asset in question represents both the original shares and the new holding for the purposes of those sections;
- (c) the market value of the asset at the time of the transaction is an amount equal to the relevant consideration.
§ (9) Subject to subsection (10) below, in subsections (7) and (8) above 'the relevant consideration', in relation to an asset, means the amount that would have been taken, in accordance with the relevant accounting method, to be the value of the asset at the time of its deemed disposal if that method had been applied to the asset for tax purposes at all times until then.
§ (10) Subsection (5) above shall not apply in the case of a deemed disposal and re-acquisition under subsection (7) above; but the amount of the relevant consideration in such a case shall be treated for the purposes of the Taxation of Chargeable Gains Act 1992 as reduced by so much (if any) of the amount mentioned in subsection (9) above as is referable to interest which—
- (a) is not paid or payable to the company before the time of the deemed disposal; but
- (b) is interest falling to be brought into account under subsections (2) and (3) above as having accrued before that time.
§ (11) In subsection (9) above 'the relevant accounting method', in relation to an asset representing a creditor relationship of a company, means the accounting method which, for the accounting period of that company in which the deemed re-acquisition takes place, is used as respects that asset and the part of that accounting period beginning with the deemed re-acquisition.".'.
§ No. 20, in page 35, line 44, leave out 'and (2)' and insert 'to (2D)'.
§ No. 21, in page 36, line 3, leave out 'and (2)' and insert 'to (2D)'.
§ No. 22, in page 36, line 12, leave out 'and (2)' and insert 'to (2D)'.
§ No. 23, in page 36, line 20, leave out 'and (2)' and insert 'to (2D)'.
§ No. 24, in page 36, line 25, leave out 'and (2)' and insert 'to (2D)'.—[Mr. Hanson.]