Finance Bill

I beg to move, That the clause be read a Second time. New clause 5 introduces a targeted anti-avoidance rule that tackles the use of tax avoidance schemes designed to generate deductions in respect of ““expenses of management”” under section 75 of the Income and Corporation Taxes Act 1988. If left unchecked, those schemes would cost the UK Exchequer—the public purse—£1 billion a year. Section 75 of the 1988 Act provides ““companies with investment business”” relief for the expenses of managing that investment business. The rules were introduced way back in 1915 and originally applied only to pure investment companies and to insurance companies. The rules remained largely unchanged until the Finance Act 2004. The changes that we made three years ago widened the range of companies able to obtain relief for expenses of management. They also specifically excluded capital expenditure and introduced an unallowable purpose rule in relation to investments not held for a business or commercial purpose. The unallowable purpose rule made no explicit reference to tax avoidance purposes. It was believed at the time that that rule and a tough approach to the construction of the phrase ““expenses of management”” derived from case law would be sufficient to stop any abuse. Sadly, the appetite of some for tax avoidance has proved us wrong. In the past two or three years, the disclosure of tax avoidance schemes rules and other inquiries have shown us that there are already a number of avoidance schemes that create deductions for relief as expenses of management which are both substantial and contrived. The latest scheme is an attempt to circumvent other anti-avoidance legislation introduced in the Finance Act 2004. It creates a wholly artificial deduction for management expenses in return for the receipt of a dividend to which the UK company was already entitled before the scheme was put in place. These payments—treated by the companies as management expenses—are made to overseas companies, which are usually located in tax havens and therefore usually outside the UK tax net. The group of companies as a whole suffers no economic loss as the money is effectively flowing in a circular fashion—the loss is actually borne by the UK Exchequer. That happens when the holding company gets relief for the artificially manufactured management expenses. That sort of scheme is relatively easy to implement and we calculate that—if effective—it has already put at risk more than £240 million to the public purse. Without urgent action, many more groups of companies are likely to adopt the scheme. Her Majesty’s Revenue and Customs does not accept that the schemes are in accordance with existing legislation. Given the potential cost to the Exchequer and the uncertain outcome of litigation, we are taking action now, to put the issue beyond doubt. The new clause confirms that assets held for a tax avoidance purpose are not held for a business or commercial purpose of the company, and ensures that the scope of the provisions is as wide as possible. We believe that the changes deal with the known schemes and also go appropriately wider, countering any other schemes that might try to secure relief of contrived management expenses. The sheer size of the potential cost requires immediate action. I therefore regret that, in those circumstances, it has not been possible to consult on the new clause. However, the measure will not affect compliant companies. It affects only those that are involved in tax avoidance. The new clause tackles artificial schemes and will not therefore affect commercial transactions. I commend it to the House.