Finance Bill – ‘Innocent’ funds hit by clampdown

Treasury ministers have been accused of unsettling financial markets by mishandling a crackdown on tax avoidance, involving the early redemption of discounted securities.

The charge followed the publication of draft government amendments to the Finance Bill, preventing the device that would unintentionally penalise ‘innocent’ investment trust, unit trust and insurance funds.

Tory MP Nick St Aubyn said further changes could have been avoided if the industry had been consulted. He told MPs: ‘The uncertainty created by the inappropriate drafting of clauses does no credit to the government or the standing of the City of London.’

St Aubyn said action against the abuse was signaled on 15 February by press release, before the Budget, and there had been ‘plenty of time to consult with the industry on the proper phrasing of the clause’.

But financial secretary Barbara Roche said the crackdown had to be imposed to prevent further avoidance. ‘As the clause is an anti-avoidance measure, and substantial amounts of taxpayers’ money are at stake, it would be inappropriate to issue a draft for consultation before the measure came into effect,’ she said.

Roche also said the parties most concerned were specialists able ‘to study the proposals in great detail in a short time’.

Tory accountant MP Nick Gibb demanded to know why it had taken so long to publish the amendments and Roche admitted: ‘Under the clause, it’s possible that innocent provisions for early redemption could lead to the security being classified as a deep discounted security provision.’

The amendments would prevent the clause applying where redemptions were not at the holder’s option or the result of ‘an unlikely event’ that would adversely effect the holder if there were no redemption.

Roche said the crackdown would still apply where the holder and issuer were connected, or where tax avoidance was involved.

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