Finance Bill

Lord MacGregor of Pulham Market Excerpts

Monday 15th July 2013 Lords Chamber

[Lord MacGregor of Pulham Market]

My Lords, I am very pleased to introduce the report of the sub-committee of the Economic Affairs Committee on the draft Finance Bill 2013. In the time available, it is right that I should focus not on the Finance Bill as a whole, tempted though I am to do so, but on our report, much of which is technical but none the less important for that. Indeed, my noble friend has referred to the three measures already.

As always, we had to work at speed. I am grateful to our witnesses, professional and official, to Bill Sinton, our committee clerk, and his team, and to our special advisers Trevor Evans and Tony Orhnial, who served us well in previous years and have done so again, not least because of their expert knowledge and experience of HMRC and Finance Bills. I should also like to thank my fellow members of the sub-committee for their knowledge and wisdom, their objective approach and their speedy and intensive work.

I particularly want to emphasise an important and, as it turned out, for us valuable change this year, to which my noble friend has just referred. In December 2010, the Government introduced a new approach to tax policy-making which set out a number of stages at which consultation should be undertaken. It involved a draft of the Finance Bill being published in December, some three months before it was laid before Parliament. This was a very welcome change from many points of view, not least the work of the sub-committee. In previous years, we could start our work only after the Finance Bill had been published. Therefore, we had to work in great haste to have any influence at all on the debates in the other place. Inevitably it was always late in the day. However, outside commentators, including most chartered accountancy and taxation bodies and one former Treasury Minister, had frequently alluded to the expertise in our committee and the more useful role it could perform.

Consequent to this new approach, this House revised the terms of reference of the sub-committee so that it could start its work earlier in the year and examine the provisions of the draft Finance Bill. The draft Finance Bill was published in December 2012 and we began our inquiry in January 2013. Starting earlier provided us with the opportunity to influence the content of the Finance Bill as published, as well as the Committee stage debates in the House of Commons.

Not least because of the shortage of time, the sub-committee has to focus and this year it examined three topics concerned with the avoidance of tax: the general anti-abuse rule, or GAAR; the annual residential property tax, later renamed the annual tax on enveloped dwellings; and the cap on the availability of certain reliefs. I can touch on only some of the main points.

The sub-committee devoted the majority of its time to the general anti-abuse rule, which is a radical approach to countering the avoidance of tax. The GAAR is narrowly targeted at abusive transactions that fail a stringent “double reasonableness” test; the provisions also include the formation of an advisory panel to agree guidance and give its opinion on the application of the double reasonableness test to a given set of tax arrangements. It followed the recommendations of what became known as the Aaronson study.

Our report considered the narrow GAAR a “reasonable starting point” but recommended a wider post-implementation review after five years, which would look in particular at how the double reasonableness test had been applied in practice, and its deterrent effect. We thought it important that it be made clear to the press and the wider public that the GAAR would not apply to structural issues involving the taxation of multinational groups. These have to be dealt with by reviewing the international tax rules in fora such as the G8, the G20, the OECD and the EU. We argued that the Government need to communicate much more clearly what the GAAR can and cannot achieve.

Since we published our report in March, there has been a huge amount of publicity and debate in Parliament and the press about corporate tax avoidance among multinational companies, with the spotlight on Google, Starbucks and Amazon—not least from the Public Accounts Committee in the other place. Of course, we welcomed—and our report argued for—the lead given by the Prime Minister and the British Government at the recent G8 summit and the decisions taken there. It is important to recognise that the GAAR is only a small part of that and the two are in many ways separate.

I should add that having dealt with Scottish independence, in the spring our main committee embarked on a new topic: “Taxing Corporations in a Global Economy: Is a New Approach Needed?”. This does cover these wider issues and we hope to complete our report before the Summer Recess.

We agreed with our witnesses on the importance of guidance from HMRC and the advisory panel on how the GAAR would apply to particular transactions. We recognised that progress was being made in drafting this guidance but we remained concerned that our witnesses felt that it was far from acceptable as it stood at the time of our inquiry. We thought it important for the guidance to include as many examples as possible, illustrating up-to-date arrangements on both sides of the boundary between abusive and non-abusive.

We also thought it important for the advisory panel to have a balance of views and we recommended that the opinions of the panel on whether proposed tax planning schemes are caught by the GAAR should be publicised so that taxpayers can see how the GAAR is being applied. There were also concerns about the application of the GAAR to inheritance tax planning transactions, and a specific concern concerning the imposition of the charge where adjustments arose from the application of the GAAR.

The Finance Bill as published on 28 March was redrafted to deal with the point concerning the imposition of the charge and we were pleased to see this. The finalised guidance was published on 15 April and had been very substantially redrafted, consistent with the recommendations in our report. There was specific recognition that the GAAR could not apply to most structural international tax planning, and the number of examples had doubled, including an increase in the number of inheritance tax examples.

In the Commons debate on the GAAR, our report was quoted with approval. The Opposition had tabled an amendment to require a post-implementation review after two years. I have ploughed through all the Hansards of the Commons in relation to these issues and have noted the number of times that our report was commented on. The Government rejected the requirement to have a post-implementation review after two years, arguing that a two-year period was too short. We agree with this. However, while we welcome the Government’s acceptance that the operation of the GAAR will need to be monitored carefully, we continue to believe it necessary to set a timeframe for such a review, notwithstanding the difficulties that the Exchequer Secretary highlighted at Report stage in the Commons. Our report had suggested five years and we recommend that with a change as important as this the Government should commit themselves to a post-implementation review around the five-year point.

The application of the GAAR to the sorts of multinational company tax-planning issues to which I have referred was raised by several Members of Parliament. The tendency to promote the GAAR as a panacea for dealing with the problem of tax avoidance was deplored and we agree with that. “The valuable scrutiny” of the Bill provided by our report was commended. Building on this, the need for the taxation of multinational groups to be tackled in international fora was discussed in the debate on the GAAR and other clauses, including at Report stage. As we know, at the G8 summit the Prime Minister and other G8 leaders set the ball rolling by asking the OECD to draft a template for multinational companies to report the tax that they pay in each of the jurisdictions in which they operate.

It is important that this first step is treated as urgent and that the momentum achieved at the G8 is maintained. We argued for that in our report. The need for the advisory panel to have a wide balance of views was discussed in the Commons debates and the Exchequer Secretary assured the House that the panel would be broadly based and have commercial expertise to provide reassurance that the GAAR would not be abused, with too much power being placed in the hands of a part of the Executive. We welcome that too.

The annual tax on enveloped dwellings is part of a package of measures to address stamp duty land tax avoidance by using companies to buy expensive residential properties, a practice known as “enveloping”. We agreed with our witnesses that the Government’s proposals might have been more appropriately designed had they consulted interested parties at the outset, but we recognised that once consultation was under way, the Government responded to the need to exempt certain businesses and other organisations.

We remained concerned about the relief for farm houses and thought that this needed further work. We shared the concern of witnesses about the practical workability of this tax and encouraged HMRC to set out in detail how it would implement the provisions and we recommended a review of its operation after three years. We thought that further work was needed on the capital gains charges on de-enveloping properties. We agreed with a widespread concern about whether the problem that the legislation sought to address justified its length and complexity.

The Finance Bill as published responded to the need for further work on the relief for farm houses and the two clauses implementing this were substantially redrafted. Our concerns around the length and complexity of the legislation were not alleviated by what appeared in the Finance Bill as published. Much of Part 3 of the Bill is devoted to this particular tax. Some 107 pages involving 84 clauses and four schedules is hardly tax simplification.

Finally, on the cap on income tax reliefs, our report expressed concern about the potentially adverse effects of limiting relief for genuine trading losses and recommended a review of the potential impact of this measure in time to inform the Finance Bill debates in the House of Commons. It was disappointing that the Government did not respond to this recommendation. However, the measure’s impact on businesses, particularly smaller ones, was raised in the debates in the Commons. We continue to believe that it is important to monitor carefully the potential disadvantage to small businesses of restricting relief for genuine trading and other losses so that remedial steps can be taken if this proves to be a problem.

In conclusion, we were gratified by the extent to which the recommendations in our report were acted on by the Government and also informed the Finance Bill debates in the Commons. We continue to believe it important that the effect of these measures is assessed by way of systematic and independent post-implementation reviews. It is our view that a commitment to carry out post-implementation reviews is as important as the Government’s very welcome commitment in their new approach to tax policy-making to consult on the design and implementation of a measure.

To sum up, I believe that the new system overall has proved its worth and that it makes even more relevant the work of the sub-committee on Finance Bills of the Economic Affairs Committee in that it enables much wider debate and consultation with all the many relevant companies, private sector experts and tax and accountancy committees, not least through the medium of our committee, and it gives the House the opportunity to make recommendations to the other place in a timely manner, not, as in the past, rather late in the day. I commend our report to the House.