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Finance Bill

I cannot accept the amendment, but I want to reassure the hon. Gentleman about some of his reasonable concerns. First, he will accept that a purpose test needs careful consideration to ensure that it hits the right target and can be effectively enforced. The amendment would pre-empt the further discussion and work required before such a test could be introduced. The wording of the amendment restricts the application of the rule to situations in which the investor’s only purpose in owning 10 per cent. or more of a fund is tax avoidance. That would make it simple for investors to get around the rule. It is almost always possible to find some other reason, however trivial or irrelevant, for owning 10 per cent. or more of a fund. To prevent sidestepping other-purpose rules, the Bill stipulates that tax avoidance must be the main purpose, or one of the main purposes, behind entering into transactions. Without such protection, it is unlikely that the different tax treatment rule would ever be applied. To police a combined 10 per cent. and purpose test would inevitably lead to greater compliance costs for the industry, investors and HMRC than would be incurred by a straightforward rule that applies a different tax treatment based simply on percentage ownership of a fund. The experience from other-purpose tests is that proving that tax avoidance was the only purpose is difficult and time consuming. It also leads to uncertainty for the investor while the position is resolved. I hope that the hon. Member for Eastleigh (Chris Huhne) finds the next bit helpful. We recognise that some investors may end up owning 10 per cent. or more of a fund inadvertently. For example, that might happen if a substantial investor redeemed his units. To ensure that investors who find themselves over the limit unwittingly are not affected adversely, the regulations will provide a period of grace for matters to be reversed. I have said that before, but I am happy to repeat it today. As with all the regulations planned for authorised investment funds, officials will continue to consult stakeholders on the detail of how the relaxation in respect of the sort of inadvertent breach that I have outlined will operate. We believe that the 10 per cent. rule is a simple percentage rule that applies a different tax treatment to investors who meet or exceed it. Qualified investor schemes are restricted to sophisticated investors who will know when that different treatment will apply to them. Such investors will also know exactly what the consequences will be if they meet or exceed the limit. To add a second leg that requires a subjective test of motive would remove those certainties. I hope that my response goes some way towards answering the concerns voiced by the hon. Member for Eastleigh in respect of those people who might find themselves to be inadvertent victims of the proposals. We are making it very clear, on the record, that the regulations will be sensitive to investors’ circumstances. Given what I have said, I hope that the hon. Gentleman will feel able to withdraw the amendment.