§ Mr. Flight
I beg to move amendment No. 147, in page 66, line 21, leave out "that are" and insert—'who are not trustees of a settlement for the benefit of the persons named in paragraphs (a) and (b) of section 86 of the Inheritance Tax Act 1984 but who are'.
Mr. Deputy Speaker
With this it will be convenient to discuss the following amendments: No. 148, in clause 93, page 67, line 26, after "(a)", insert—'"settlement" means any settlement other than for the benefit of the persons named in paragraphs (a) and (b) of section 86 of the Inheritance Tax Act 1984 and'.No. 149, in clause 94, page 67, line 45, after "13", insert—'and "settlement"means any settlement not being for the benefit of the persons named in paragraphs (a) and (b) of section 86 of the Inheritance Tax Act 1984.'.No. 150, in page 68, line 34, leave out "that" and insert—'which is not engaged in a trade or which does not have a 51 per cent. subsidiary (as that term is defined in section 838 of the Taxes Act 1988) which is engaged in a trade, and which'.No. 151, in page 68, line 34, at end insert—'(3) This section shall not apply if the trustees show in writing or otherwise to the satisfaction of the Board of Inland Revenue either
- (a) that the purpose of avoiding liability to capital gains tax was not the purpose or one of the purposes for which the trustees became a participator in the close company to which the chargeable gain accrued; or
- (b) that the acquisition and the disposal by the close company of the asset on which the chargeable gains accrued were bona fide commercial transactions and were not designed for the purpose of avoiding liability to capital gains tax.(4) The jurisdiction of the Special Commissioners on any appeal shall include jurisdiction to review any relevant decision taken by the Board in exercise of their functions under subsection (3) above.'.
§ Mr. Flight
There was a fairly full discussion in Committee of the territory that these amendments cover. A matter of principle is ultimately involved: whether the Government's objective is fundamentally to prevent tax avoidance or to change a principle of British law. It is understood that the purpose of clauses 92 and 93 is to try to stop tax avoidance, but they are widely drafted and apply to all trusts, irrespective of their purpose and operation.
436 Employee trusts frequently take out a series of loans from employing companies within a group as part of their disposal of shares to employees. The loose wording of schedule 25 could be applied, more or less, to anything to which the Inland Revenue wanted it to apply. Under amendments Nos. 147 and 148, we suggest that employee trusts should be excluded from the scope of the measure, putting beyond doubt that wider employee share ownership should not be hindered inadvertently by such ambiguously worded legislation.
The same point arises in relation to amendment No. 148. Employee trusts could make both gains and losses as they pass to employees shares that have been warehoused for a period. It is possible for them to receive shares from, for example, a retiring controlling director. They could be exposed to higher than necessary capital gains while engaged in perfectly legitimate activity, which the Government wish to encourage.
Similarly, amendment No. 149 is drafted to exclude employee trusts. Why should employee trusts be penalised because they happen to be established for United Kingdom employees where the parent company is located overseas? The Government may say that that is highly unlikely, but business is increasingly global and an employee trust could hold 5 per cent. or more of a company—the minimum threshold to receive a tax bill under clause 94. However, an employee trust would be unlikely to hold more than 5 per cent. of such a company as part of a tax avoidance scheme.
Amendment No. 150 focuses on different territory. The Paymaster General has helpfully confirmed in correspondence that the provisions under clause 94 will apply only to investment gains; it is not intended to apply to gains on tangible assets used in a trade. That relates to section 13 of the Taxation of Chargeable Gains Act 1992, but the defences in that section are not sufficient. Therefore, why have only tangible assets been included? What about software? The principle set out in the Paymaster General's letter could be best safeguarded by making it clear that those provisions will apply only to non-trading groups.
Amendment No. 151 is somewhat larger in scope, so I hope the House will excuse me if I deal with the arguments in total. Those subsidiaries of United Kingdom companies that make gains on the disposals of their assets pay tax in the appropriate location. If the proceeds are used to invest overseas, it is right that no UK capital gains tax arises. UK tax is payable when the proceeds are brought back to the UK or distributed to UK shareholders. Those general rules are overridden only where necessary to prevent avoidance.
The Government say that clause 94 is focused on avoidance, but their definition of avoidance includes any cases in which trustees are shareholders in a close company. Unless, as I have said, the intention is to change an underlying principle of tax law, that definition is too sweeping and unfair. It could significantly reduce the ability of UK-based groups to reinvest overseas and to create continuing flows of income, which would be taxable when brought back to the UK.
We have received a number of representations from taxpayers who are clearly not involved in avoidance and who will be damaged by the new rules. For example, a pension fund may want to invest in property overseas and find that it can take a stake in a non-UK company, 437 the rest of which is owned by a UK private group. Under clause 94, if such overseas property were sold—that would be outside the control of the pension fund—the pension fund would be deemed to be a tax avoider and a notional gain would be charged even if the proceeds were invested overseas and thus not available.
Another example is a charity with significant assets represented by a gift of shares in a private company. If the status of the private company changed to close—which, by definition, would be outside the charity's control—the charity would have deemed gains visited on it. Thus, it would have a tax liability even when it had no taxable proceeds. A more glaring anomaly is represented by the example of a close company at present controlled by individuals who will be outside the scope of the new rules introduced by clause 94. If those individuals believe unreservedly in the values of employee share ownership, they might create a trust for the permanent benefit of their staff and transfer to it the majority of the shares in the company. Under clause 94, the situation would change totally so that the trustees would be deemed guilty of tax avoidance. Overseas gains would be attributed to them even if they had no money with which to meet the tax. The Baxi Partnership, to which we referred extensively in Committee, is an example of that.
A company that has had investments abroad for 20 or 30 years might decide that the time has come to realise those investments and reinvest the proceeds in either a different asset or another overseas country. Again, there would clearly be no UK tax avoidance motive, but if the company committed the heinous crime of having trustee shareholders, deemed gains would be attributable through to those shareholders if the company was close and the funds available for reinvestment would be reduced.
In Committee, we urged the Government to accept that they had to identify commercial cases, including such examples as I have described, to meet what we understood to be their intention to focus on avoidance situations. Our amendment, which draws on long-standing precedents, offers an acceptable way to achieve that. One of the oldest anti-avoidance provisions in our tax code was originally section 18 of the Finance Act 1936, which became well known through the Vestey case in the 1980s. Even that provision, the severity and breadth of which has been commented on by a number of distinguished judges, provides an exemption when the taxpayer has invested overseas for bona fide commercial reasons or not to avoid UK tax. In the narrow area on which the Government are focusing, we ask that they afford the same protection that extends to that wide income tax avoidance provision.
To sum up, a recent Revenue technical note said:Certain aspects of the current tax code for capital gains can hinder businesses' international competitive position and distort their commercial decisions, forcing them to adopt structures that they would not have needed otherwise. It may also act as a disincentive to companies that are investing to innovate and to modernise.We ask the Government to see that justice is done.
§ The Paymaster General (Dawn Primarolo)
I shall respond briefly as we had a similar debate in Committee, and I must admit to a feeling of déjà vu as the hon. Member for Arundel and South Downs (Mr. Right) has 438 made exactly the same arguments. I remind the House that the proposals represent an important package of measures that we have introduced to counter a large number of tax avoidance schemes involving the use of trusts, which have been devised to enable individuals to sell valuable assets without paying any tax on their gains. Our proposals, which are specific and tightly drawn, deal with avoidance.
Although this may disappoint the hon. Gentleman, I am no more convinced by his amendment than I was in Committee, even though we have had extensive discussions. Towards the end of his remarks, he referred to three aspects on which there was a meeting of minds in Committee: charities, pension funds and whether the operation of section 13 of the Taxation of Chargeable Gains Act 1992 is harsh. Particular discussion centred on the Baxi company.
Before I respond on those points, which are the ones on which the hon. Gentleman seeks the comfort of a reassurance given on the Floor of the House, I say to him that the proposals deal with avoidance. In Committee, he agreed that he would not want himself or his party to be associated with activities deliberately designed to allow someone not to pay tax. I accept his point about the amendment, but in the knowledge that there is much to agree on with respect to the broad sweep of the proposals. However, I recognise that the Opposition feel strongly as they have returned to these issues yet again.
§ Dawn Primarolo
Third time lucky, perhaps.
As I said in Committee, I have asked the Inland Revenue to review without prejudice the operation of section 13 of the 1992 Act in respect of charities. I have also asked it to consider pension funds, which the hon. Member for Arundel and South Downs also mentioned. I have some sympathy—I would not like to overstate the point—with the view that section 13 may operate harshly in some circumstances, so I have asked the Inland Revenue to extend the remit of the review, again without prejudice, to see whether there is a case for widening the categories of gain not caught by section 13.
May I put out a general statement? People concerned about those matters, including the hon. Gentleman, will have the opportunity to make their points to the Revenue. I take a great deal of pleasure in my correspondence with him, and I am sure that the Revenue will do likewise. I shall consider carefully the points arising from the review and there is no reason why there should not be further correspondence at that time. I trust that my remarks have helped to allay the fears expressed by Conservative Members and that they will withdraw the amendment and await the outcome of the Inland Revenue's considerations.
§ Mr. Flight
I thank the Minister for a most constructive response. Both of us seek justice and fairness and, with pleasure, I beg to ask leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.