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Session 2006 - 07
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Public Bill Committee Debates

Draft Taxation of Securitisation Companies Regulations 2006

The Committee consisted of the following Members:

Chairman: Sir John Butterfill
Balls, Ed (Economic Secretary to the Treasury)
Breed, Mr. Colin (South-East Cornwall) (LD)
Brennan, Kevin (Lord Commissioner of Her Majesty's Treasury)
Bryant, Chris (Rhondda) (Lab)
Clarke, Mr. Kenneth (Rushcliffe) (Con)
Curry, Mr. David (Skipton and Ripon) (Con)
Davies, Mr. Quentin (Grantham and Stamford) (Con)
Evennett, Mr. David (Bexleyheath and Crayford) (Con)
Hepburn, Mr. Stephen (Jarrow) (Lab)
Hoban, Mr. Mark (Fareham) (Con)
Iddon, Dr. Brian (Bolton, South-East) (Lab)
Lucas, Ian (Wrexham) (Lab)
Naysmith, Dr. Doug (Bristol, North-West) (Lab/Co-op)
Prosser, Gwyn (Dover) (Lab)
Reed, Mr. Andy (Loughborough) (Lab/Co-op)
Thurso, John (Caithness, Sutherland and Easter Ross) (LD)
Wright, Mr. Anthony (Great Yarmouth) (Lab)
Emily Commander, Committee Clerk
† attended the Committee

Fourth Delegated Legislation Committee

Tuesday 5 December 2006

[Sir John Butterfill in the Chair]

Draft Taxation of Securitisation Companies Regulations 2006

10.30 am
The Economic Secretary to the Treasury (Ed Balls): I beg to move,
That the Committee has considered the Draft Taxation of Securitisation Companies Regulations 2006.
It is a pleasure once again to serve under your chairmanship, Sir John.
The regulations make good our commitment to provide a stable and certain tax regime for securitisation companies. Questions about the long-term future of our regime arose with the adoption in 2005 of international accounting standards. Although they amounted to a significant advance in many areas, IAS caused problems for securitisation as they required an asset to be accounted for at its fair value as opposed to its amortised cost. That requirement would have been likely to cause fluctuations in the value of assets, making tax laws less predictable and potentially impacting on the credit ratings given to securitised bonds.
After discussions with industry, we introduced a transitional regime in the Finance Act 2005, which allowed securitisation companies to continue to account for tax under generally accepted accounting practice. When we created the regime, we committed to introduce a new, stable regime based on IAS. Since then, we have worked with industry to find a workable scheme that reflects commercial reality. In the debates on the Finance Act 2006, we agreed to extend our transitional scheme by a further year to ensure that we got the regime right.
The regulations reflect our discussions and we are confident that the securitisation market will welcome them. That matters because securitisation is an important new feature that adds substantially to the liquidity of modern financial markets. The regulations set out new tax rules for companies involved in securitisation, which are needed to ensure that the tax rules work effectively with the new accounting standards. In essence, the regulations provide for securitisation to be taxed on a basis similar to that which applied before the change in accounting standards.
We have consulted carefully with the industry over a number of months to ensure that we get the regulations right. Under the new rules, the corporate tax regime of a securitisation company will be based on the cash retention required under the securitisation arrangement, which largely reflects the existing situation and therefore provides continuity for the companies involved. The regulations provide certainty of tax treatment to enable those constructing deals to give tax opinions that will satisfy rating agencies. At the same time, they allow sufficient flexibility to accommodate a range of different structures; they also contain safeguards against abuse. As a result, we are confident that they will enable the securitisation industry to continue to play an important role in our economy.
This is a complex area, because securitisation often leads to complex arrangements, and the regulations cannot deal with all affected companies. We will therefore continue to work on further regulation to deal with additional types of securitisation such as those involving real estate and insurance. In the next finance Bill, we propose to extend the transitional regime that was introduced by the 2005 Act, so that those companies can remain under former UK accounting standards for tax purposes while we work on further regulation.
In the debates on the Finance Act 2006 that we had in the heat of the summer, we were urged to prioritise the expeditious introduction of the regulations, to give certainty to this important sector. We were also urged to undertake the fullest consultation to ensure that we got the detail right. I believe that we have done so: the regulations will be widely welcomed by the industry; they provide certainty and stability and will enable the securitisation industry to adapt to changes in accounting standards without unnecessary and destabilising changes to their tax arrangements. On that basis I commend them to the House.
10.34 am
Mr. Mark Hoban (Fareham) (Con): What a pleasure it is to serve under your chairmanship once again, Sir John. This is the third time in seven days that the Minister and I have debated and the third time, sadly, that we have agreed with each other, so he is doing something right.
This is not a contentious statutory instrument. It was announced at the time of the 2004 pre-Budget report and the interim measure was included in the Finance Acts 2005 and 2006. It is long awaited and much overdue.
I was intrigued to see in today’s Financial Times that the Minister has championed the adoption of permanent measures—he looks startled when things appear in the FT, which is very touching. He took the credit for championing the proposals, but my hon. Friend the Member for Chipping Barnet (Mrs. Villiers) and the Paymaster General also championed the introduction of permanent measures in the debate on the Finance Act 2006. Success has many fathers and mothers in this House.
I have three questions for the Minister. First, as we would both acknowledge that it has taken some time for this proposal to reach fruition, can he explain why it has taken quite so long, given that the PBR in 2004 was in late November or early December? It is only just being put on the statute book two years later.
Secondly, can the Minister tell the Committee when consultation on the proposal took place? Although I understand, as he said, that business is broadly happy with its content, is it happy with the time that it has taken to get to this point?
Thirdly, is the Minister confident that the measures set out in the Finance Act 2006 are sufficient for this financial year? Are they sufficient, too, for the real estate and insurance companies, which are not covered? The unfinished business of the proposal goes back to those companies. Can the Minister give us a commitment and say when the regulations will be introduced? Will we have to wait until the third anniversary of the 2004 PBR for those measures to appear on the statute book?
10.37 am
Mr. Colin Breed (South-East Cornwall) (LD): I shall be brief, as these measures are uncontentious and there was a prior announcement about them. We are discussing an important industry, which seems to be getting ever more complex. I am pleased that there was a very full consultation, but the Exchequer did not come out of it very well, as it has had no effect whatsoever. I am not certain what the industry is agreeing to.
At the heart of it all is the effect of new accounting standards, which I want to highlight. We need always to take a rigorous look at accounting standards as these are very complex instruments in a very complex industry. If there is to be more rigour in accounting standards there will be unintended consequences in respect of how taxation is treated.
I welcome the proposal, which is a move in the right direction. As we consider other types of instruments and parts of the finance industry and see that accounting standards will have to be refined and to become more rigorous, we will have to consider the matter more regularly. However, I have my doubts that it will end up as a permanent tax regime for everything. At the moment, I am pleased to support the measure.
10.38 am
Ed Balls: I should explain to the Committee that I was not surprised to find that I was a champion of the City financial services and the securitisation industry. I was, however, surprised to find that the proceedings of this important Committee were prefigured in the Financial Times. It was not brought to my attention by any Treasury press officer and I am pleased that the hon. Member for Fareham stepped into that role. He has a range of other responsibilities but I am grateful to him and I will look at the article in due course.
I am happy to put it on the record that the Paymaster General herself and the hon. Member for Chipping Barnet debated the issue at length in the Finance Bill. I say to the hon. Member for Fareham that by this stage in the Finance Bill everything seemed to be taking a long time. The comments made were to the point and consensual. It is good that Opposition Members are joining us in championing these reforms in what is a complex area.
The shift to international accounting standards, although it has important benefits, also brought out some complexities in the areas in which tax arrangements are made more complex by accounting changes. The Government responded very sensibly by putting in place transitional arrangements to retain the previous regime while consulting in detail with the industry to ensure that a forward regime would remove the unnecessary bureaucracy of having to run two sets of accounts—a set of tax accounts and a set of IAS accounts.
To be fair to the Government, the industry was keen that we should not move peremptorily, but that we should ensure that the tax changes would deliver the desired benefit of reduced bureaucracy without having consequences for credit ratings that would undermine Britain’s securitisation industry. That is why we took our time. We started to consult in 2005, and continued until November 2006. I have received no representations from the City that suggest that it thinks we took too long. Once one has the right answer, everybody agrees that it would have been better to reach it earlier. However, on such matters, if one can take the time to consult to get things right, ensuring in the meantime that one is not destabilising the industry by sticking to the previous arrangements, that is all to the good.
We are applying the same principle to insurance and real estate, in which cases the same sorts of problem arise. The relationships between their accounts and their tax accounts are even more complex than those in securitisation. We are consulting with the industries and hope to have a view on insurance by early 2007 and on real estate securitisation by next summer. It is appropriate to give the industry an assurance today that the transitional arrangements will stay in place for as long as necessary. That is why I am saying today that in next year’s Finance Bill we will continue transitional arrangements for real estate and for insurance. Then, if the consultation takes a little longer, we will have the time. It is best to get things right.
When we debated the issue in the summer in relation to real estate investment trusts, the Opposition complained that we had taken too long. However, we made the point that it is best to take the time to get things right, and that is what we intend to do in this case. I hope that, on that basis, the Committee will be able to pass these regulations.
Question put and agreed to.
That the Committee has considered the draft Taxation of Securitisation Companies Regulations 2006.
Committee rose at seventeen minutes to Eleven o’clock.

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