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Finance Bill

No, such a transaction would, in my judgment, be well beyond those related to the financing of the company, and would not therefore fall under this clause and schedule. Generally, we have tried to limit the scope of the rules to transactions that relate to financing arrangements and to target changes for particular avoidance risks that we have identified, which is the route of the provisions in the schedule. We know that some professional advisers are beginning to advise some clients to structure their affairs in that way. The reason that we are extending the rules is that some of those advisers are promoting ways for companies to get around the existing rules and we want to ensure that that cannot happen in the future. The other substantive amendment that the hon. Gentleman tabled was what he described as a probing amendment, amendment No. 19. It would create the power to make regulations specifying the criteria that determine whether or not financing arrangements are on an arm’s length basis. What constitutes an arm’s length financing arrangement depends, as he will appreciate, on all the facts and circumstances relating to the particular provision of finance. He is creating a problem if he believes that that can somehow be determined by a formula set out in regulations. The problem with looking for a formula, particularly one codified in regulations, is that it simply could not take into account the facts and circumstances that are likely to exist in a range of situations. To that extent, the danger is that it would become inflexible. If we had a standard formula, which I understand to be envisaged under regulations that could be laid under amendment No. 19, it would inevitably be too generous to some and too tight and mean to others. Those who were treated generously would make use of that to avoid the impact of the new rules. The practical effect for some companies of having such a set of rules would be that financing could still be set up on a non-arm’s length basis and still stay outside the scope of the transfer pricing rules, which is the purpose of schedule 8 brought in by clause 40. Such companies could therefore continue to obtain tax deductions for excessive interest with impunity, which is precisely what we wish to stop.