Standing Committee E
Tuesday 9 June 1998
[Mr. John Butterfill in the Chair]
[Continuation from column 678]
Mr. Ruffley: My point, reiterated by my hon. Friend the Member for Witney, was that there was demand from the industry and from practitioners for the rules to be rationalised and codified in one place. There is some confusion in the industry about the differing thresholds and control tests. The industry believes that the schedule will complicate and confuse matters so that there will be a lack of coherence. Will the Paymaster General respond to that?
Mr. Robinson: I think that I have grasped the complaints of the Law Society, Opposition Members and others about the complexity of the schedule. However, as the right hon. Member for Wells acknowledged, that complexity is inherent to the subject. That does not mean that the schedule cannot or will not be improved, but I repeat to Opposition Members if the hon. Member for Bury St. Edmunds listens carefully, he will understand the point that paragraph 1 gives the basic rule for UK tax purposes and is the first point of reference, while paragraph 2 sets out rules for the construction of that basic pricing rule in a manner consistent with the OECD model limits. I do not believe that it matters whether we use "best endeavours" or "best" in that regard.
The requirement to construe the basic pricing rule in a manner consistent with the OECD model is clearly intended to limit the scope of the basic pricing rule. Paragraph 1 is therefore drafted in broad terms, while paragraph 2 ensures that paragraph 1 cannot be interpreted in a way that goes beyond what is covered by the OECD model. That is a precise reply to the hon. Gentleman's question. I cannot be clearer than that, because the advice we were given did not incorporate the matter directly. I have explained the reasons for that and it therefore seems fair to say that the legitimate objections of Opposition Members have been accommodated. I suggest that we make progress.
Mr. Heathcoat-Amory: In his genial way, the Paymaster General has grappled with some of the issues raised by Opposition Members in what has been a constructive debate. It would not be appropriate for us to vote against the schedule, but I must protest that, despite all that the Paymaster General has said, we are being invited to accept 10 pages of legislation that lawyers say are comprehensible only to parliamentary draftsman or to people who have discussed the legislation with Inland Revenue officials. That is a bad way of legislating 10 pages of what can be described only as verbal treacle.
An instance of that I have not selected a particularly difficult excerpt is paragraph 4(6), which states:
"In paragraph (d) of sub-paragraph (3) above, the reference to rights and powers which would be attributed to a connected person if he were the potential participant includes a reference to rights and powers which, by applying that paragraph wherever one person is connected with another, would be so attributed to him through a number of persons each of whom is connected with at least one of the others."
That reminds me of a parlour game for the super-intelligent, in which one has to try and work out whether Uncle John is somehow related to nephew Geoffrey. That is not the way to attract and retain business in this country.
Apart from our comparatively low business taxes, foreign companies are attracted here because of our judicial system, which operates not on purposive legislation but on literal interpretation, so that people can work out for themselves where they and their companies will stand in relation to the Revenue. A foreign company hoping to invest or to set up a subsidiary here would get hold of the relevant legislation, but would find that a paragraph such as the one I have quoted would prevent it from working out where it stood. To foreigners, it is gobbledegook. Such a company would have to go and talk to a firm in the City, which would refer it to a lawyer not an ordinary lawyer, but one who has talked to the Inland Revenue or who is connected with a parliamentary draftsman. That is the sort of overhead that the foreign company would incur. The legislation will create a superstructure of costs that will affect both UK companies and foreign companies that want to locate here without falling foul of the Inland Revenue on transfer pricing.
I am pleased that the Paymaster General said that the tax rewrite project did not die with my resignation from the Treasury. Indeed, he said that that small monument of mine was alive and kicking so it was a healthy baby that has survived a change of Government. It is therefore all the more regrettable that it has not informed the legislation.
The Paymaster General gave us few assurances on the schedule, but we shall return to the matter. As I said, we will not vote against it but I hope that our reservations about it have been noted.
Mr. Geoffrey Robinson: It might be helpful to the right hon. Gentleman if I responded briefly. Our provisions are in line with the OECD guidelines. We have consulted fully and have changed several of the undertaking in the published guidance, but the legislation will not go wide of the OECD formulation. There is significant deregulation for UK-UK transactions. We intend that the UK will remain a most attractive area in which to do business and in which to invest much of our debate today has turned on that attractiveness, an important part of which is what we have done in our two Finance Acts to reduce the burden of taxation on companies. We now have the lowest level of taxation: 30 per cent. for large companies and 20 per cent. for small companies. We intend that that should continue and that is why we have given the undertaking, as we have with personal taxation, that corporate tax rates will last for the length of the Parliament. [Interruption.] Opposition Members do not like to hear[Mr. Geoffrey Robinson]
about our success, but it is a fact and that is why people continue to come to Britain to do business. I commend the provisions to the Committee.
Question put and agreed to.
Schedule 16 agreed to.
Clause 107 ordered to stand part of the Bill.
Determinations requiring the sanction of the Board
Question proposed, That the clause stand part of the Bill.
Mr. Fallon: I should be grateful if the Paymaster General would explain why the power under subsection (3)(b) appears to be discretionary. Presumably, the Inland Revenue itself contravenes subsection (1) and it should therefore always allow a period of notice for making or amending a claim. Should not that power be mandatory, not discretionary?
Mr. Robinson: I do not see why; a discretionary power is adequate for the circumstances envisaged. The Opposition normally prefer discretionary to mandatory arrangements and I would have thought that the hon. Gentleman would approve of the subsection. If he wishes to elucidate his point, I shall be happy to answer him.
Mr. Fallon: I welcome the opportunity to elucidate, although I am slightly suspicious that the Paymaster General may be playing for time to consult his professional advisers or perhaps his amateur legal adviser. My point is that if the Inland Revenue contravenes subsection (1), it should always allow some period for a claim to be made or amended; that should not be discretionary.
Mr. Robinson: The hon. Gentleman makes a reasonable point. However, to set down a statutory time limit would be unnecessarily restrictive. We had a similar discussion about motive. Leaving the matter to the Revenue's discretion allows it a degree of flexibility to respond to the facts and circumstances of the case in question. I do not want to anticipate what should be at the Revenue's discretion or what should be mandatory everything depends on the circumstances.
I take the hon. Gentleman's point and correct slightly what I said before. I understand why he whould want a restriction or obligation on the Revenue to be mandatory and other matters to be discretionary. As with the question of motive, however, it is up to him to prove that there is a need for the change that he suggests. If he has evidence that the Inland Revenue does not respond as it should, that it does not allow the necessary time or that it behaves in an oppressive manner that is the adjective that is usually used to describe unacceptable Treasury behaviour let him produce it. I will willingly consider it to see whether there are grounds for changing the Bill. However, no representations have been brought to my attention. The change would be unnecessarily restrictive. We should let the Revenue judge each case according to its circumstances.
Question put and agreed to.
Clause 108 ordered to stand part of the Bill.
Clauses 109 to 111 ordered to stand part of the Bill.
Controlled foreign companies
Mr. Robinson: I beg to move amendment No. 144, page 276, line 14, leave out "(5)" and insert "(4)".
This is one of several small amendments on numbering that we have had to table. It is nothing our of the ordinary. Numbering problems arise in Opposition amendments of only two lines, let alone in a whole Bill. I command the amendment to the Committee.
Amendment agreed to.
Mr. Gibb: I beg to move amendment No. 134, in page 282, line 38, at end insert
"(3)In subsection (2)(b) after `section', add "but in the application of subsection (7) of section 839 for the purpose of the Chapter, references to persons acting together to secure or exercise control of a company shall not include members of a partnership, and in the application of subsection (10) of section 783 for the purposes of this Chapter, there shall be omitted from subsection (11) of section 783 the words `body of persons' includes a partnership".'.".
This is a technical amendment, but it has a commercial implication for the amount of investment that this country's venture capital funds carry out overseas. Controlled foreign companies legislation was introduced in about 1984 to stop UK companies siphoning off profits and storing them in overseas tax jurisdictions with low rates of tax. A company could, for example, store large amounts in a subsidiary's bank account in a tax haven. The interest would be free of tax or subject to a low rate of tax. The money could be distributed back to the UK when it was more convenient for tax purposes, rather than just earning interest in the UK and being subject to UK tax. It could also be re-invested elsewhere in the world.
The amendment tries to deal with a problem that is created by schedule 17. UK capital funds are typically structured as limited partnerships under UK law. That creates the appropriate relationship between the investors in the fund and the fund managers. It also achieves transparency for tax purposes for the investors. There is an increasing amount of investment abroad. Technically, under sections 416 and 783(10) of the Taxes Act 1988, as modified by section 756, a UK investor could be deemed to control an overseas investment for controlled foreign company purposes even though his investment was small.
Earlier, we discussed control in terms of owning more than 50 per cent. of the shares. However, it is possible to have control with much less than 50 per cent. even less than the 25 per cent. that the schedule requires, because the various partners in one of the venture capital trust funds must be attributed to each other. That is because the legislation requires the attribution to them of the right of their partners as associates.
In such a circumstance the investor would control a controlled foreign company, with all the implications that that would bring. Before the Bill, the matter was academic. Of course, there is nothing in the Bill that would necessarily bring that into effect but it was always a theoretical possibility. However, the Inland Revenue seemed never to take the point.
Before the Bill, a partner in a fund faced with that theoretical possibility had simply to wait and see whether the Inland Revenue took the point and made a direction under the CFC legislation. It was the Revenue's responsibility to make the direction under the legislation; it was not the investor's or taxpayer's responsibility to say that the CFC legislation applied. The Bill introduces schedule 17 in order to prepare for self-assessment. It will require a company to include any such liabilities in its self-assessment corporation tax return. We cannot continue with the unreceived technical possibility that a CFC exists, so matter must be classfied in the Bill.
It is possible that investee companies and their subsidiaries will be resident in territories on the excluded countries list, where tax rates are as high or higher than the UK's. No advantage can therefore be derived from seeking to siphon money offshore to such countries. It is also possible that investee companies might engage in exempt activities such as trading in those local jurisdictions. However, it would be difficult for a UK investor to acquire sufficient information about the investee to sign a tax return with confidence and in good faith without including any controlled foreign company income. It would be harder still to compute the share of the chargeable profits. The burden of signing something that might not be true might discourage the making of an overseas investment, which would otherwise benefit UK plc through the significant capital gains that generally arise when such investments are exited.
The solution is for the Paymaster General to accept the amendment, which excludes the attribution of partners' interests from the definition of control for CFC purposes. Should he consider the amendment insufficiently well drafted, I hope that he will nevertheless accept the principle behind it and table a similar amendment on Report.