Schedule
11
Technical
provisions made by general
insurers
Ed
Balls:
I beg to move Government amendment No. 76, in
schedule 11, page 172, line 38, leave
out from first ‘the’ to ‘and’ in line 40
and insert
‘reinsurance
to close amounts of the
members,’.
The
Chairman:
With this it will be convenient to discuss
Government amendments Nos. 77 and 78:
Ed
Balls:
The schedule repeals complex mechanical tax rules
that were introduced in 2000 to limit any tax advantage if general
insurers’ provisions to meet policyholders’ claims were
greater than necessary. It provides for transition and a new set of
rules that will provide a more proportionate response for the tax risk.
The rules will be supplemented by regulations.
The Government amendments to the
schedule arise from discussion with Lloyd’s. Government
amendments Nos. 76 and 77 will substitute for “reinsurance to
close contracts” the term “reinsurance to close
amounts”. Reinsurance to close is a mechanism by which a
Lloyd’s syndicate closes its accounts. The commercial definition
of reinsurance to close has evolved over time. The amendments ensure
that the tax rule reflects the definition in Lloyd’s rules and
that the schedule has its intended scope.
Government amendment No. 78 is
a response to the concern of Lloyd’s that the schedule could
have unintended unfair results in particular circumstances. It will
enable the making of regulations to deal with those circumstances,
which include members leaving syndicates and members having their own
reinsurance arrangements in addition to arrangements that the syndicate
may have. Officials are discussing with Lloyd’s an appropriate
solution to the issue, so draft regulations are not yet available to us
or to the Committee. Any regulations that are passed under the new
power would reduce or eliminate the effects of adjustments that would
arise under the schedule. They will be discussed in detail with
Lloyd’s before they are laid. I commend the amendments to the
Committee.
Amendment
agreed
to.
Amendments
made: No. 77, in schedule 11, page 173, leave out lines 1 to 6 and
insert—
‘(a) the reference
to reinsurance to close amounts of any member of a Lloyd’s
syndicate is to any consideration which, in accordance with the rules
or practice of Lloyd’s, is given (or any amount which, in
accordance with those rules or practice, is treated as consideration
given) by the member in respect of the liabilities arising from the
member’s underwriting business in an underwriting year for the
purpose of closing the accounts of the business for that year,
and’.
No.
78, in
schedule 11, page 173, line 19, at
end insert—
‘(10A) The
Commissioners for Her Majesty’s Revenue and Customs may by
regulations—
(a) provide
in prescribed circumstances for paragraph 1 not to apply in relation to
any member of a Lloyd’s syndicate,
or
(b) provide in prescribed
circumstances for a reduction in relation to any member of a
Lloyd’s syndicate of the amount which (as a result of that
paragraph) is not to be taken into account in the calculation mentioned
in sub-paragraph (2) of that paragraph.’.—[Ed
Balls.]
Schedule
11, as amended, agreed
to.
Clause
s
42
and 43
ordered to stand part of the
Bill.
Schedule
12 agreed
to.
Clause
s
44
and 45
ordered to stand part of the
Bill.
Clause
46
Sale
and repurchase of
securities
Question
proposed, That the clause stand part of the
Bill.
Mr.
Hoban:
I think that there is a degree of consensus around
this clause, certainly from people in the industry. In its
representations on the clause, the
Chartered Institute of Taxation said that in the Budget press release,
BN15, it was implied by paragraph 3 that existing repos would be
“grandfathered”, but that is not mentioned in the Finance
Bill. It is seeking confirmation that it will be included in the
regulations made under subsection (3). I would be grateful if the
Minister could confirm whether that is the
case.
Ed
Balls:
Mr. Illsley, would it be
helpful to introduce schedules 13 and 14 as they are mentioned under
clause 46?
The
Chairman:
Again, I am in the hands of the
Committee. If it is the Committee’s wish or if it would be
easier to take a general debate on clause 46 and the Government
amendments to schedule 13, we can do
that.
With the stand
part debate, it will also be convenient to take Government amendments
Nos. 102 to 104 to schedule
13.
Ed
Balls:
Clause 46 introduces schedules 13 and 14. Schedule
13 constitutes a comprehensive new regime for the charge to corporation
tax of sale and repurchase transactions entered into by companies.
Those transactions are widely known as repos.
Schedule 14 contains a number
of consequential amendments to other provisions of the Income and
Corporation Taxes Act 1988 made necessary by the repeal of the existing
provisions for taxing repos and their replacement by the rules in
schedule 13.
The three
Government amendments make a minor modification to schedule 13. They
correct a defect that might have led to loss of tax. The new rules for
charging sales and repurchase agreements to corporation tax provide
that where a company sells securities under a repo, it is to be taxed
on income arising on the securities as if the sale had not taken place.
That is subject to the requirement that the company must recognise the
income in its accounts during the period of the
repo.
That requirement
may result in income falling out of the charge to tax in which the
borrower is taxed on a receipts basis in respect of income arising on
the securities. For accounts purposes, it recognises that income before
entering into the repo. In that case, it will not recognise the income
again during the repo. If the amendments were not made, the income
could not be charged to tax. The amendments, therefore, omit the
requirement that recognition of the income for accounts purposes must
take place in the same period in which the arrangement is in force.
That ensures that companies remain taxable on the income, provided that
that is reflected in their
accounts.
The
amendments allow us to move forward with schedules 13 and 14. Repos are
widely used in the financial markets as a form of secured loan. They
involve the sale by a person of securities—shares or
debentures—under an agreement that those will subsequently be
repurchased at an agreed date at a price agreed at the outset. The sale
of the securities realises cash that is economically equivalent to a
loan that is repaid with interest, in the form of an increased
repurchase price, when the securities are bought back.
As hon. Members know, at the
time of the pre-Budget report we made a formal announcement of our
intention to consult on new legislation in this area. Since then, there
has been detailed consultation. HMRC has sought the views of interested
parties on the way forward, including on the draft legislation. The
consultation has been very constructive; we believe that we have given
all interested parties an opportunity to ensure that the new
legislation works properly. However, if business representatives
consider that there are difficulties or strong reasons why the
commencement should not happen on 1 October as specified, we will
consider what they say.
This is a
complex area. However, given our consultation, we should be able to go
for commencement on 1 October. That will give business sufficient time
to prepare for the new rules and accounts and for how lenders will be
taxed. As I said, this is a modernisation of the interaction of tax and
accounting; it will reduce the amount of legislation devoted to repos
and simplify the current rules.
The answer to the question put
by the hon. Member for Fareham is yes. The details will be set out in
the regulations, which will follow in due
course.
Question
put and agreed
to.
Clause 46
ordered to stand part of the
Bill.
Schedule
13
Sale
and repurchase of
securities
Amendments
made: No. 102, in schedule 13, page 180, line 9, after
‘that’, insert ‘or any
other’.
No.
103, in
schedule 13, page 180, line 9, after
‘period’, insert
‘or taken into account in
calculating the amounts which are so
recognised’.
No.
104, in
schedule 13, page 183, line 21, after
‘that’, insert ‘or any
other’.—[Ed
Balls.]
Schedule
13, as amended, agreed
to.
Schedule 14
agreed
to.
Clause 47
ordered to stand part of the
Bill.
Schedule
15
Controlled
foreign
companies
Mr.
Hoban:
I beg to move amendment No. 108, in
schedule 15, page 196, line 5, leave
out from first ‘amount’ to end of line 7 and
insert
‘is created directly by genuine
business activities, and
which—’
The
Chairman:
With this it will be convenient to discuss the
following amendments: No. 109, in
schedule 15, page 196, line 11, leave
out subsection
(5).
No. 110, in
schedule 15, page 196, line 27, leave
out from ‘subsection (4)’ to end of line 33 and
insert
“genuine business
activities” means business activities
which—
(a) are actually carried on
in any EEA territory in which the controlled foreign company has a
business establishment in any part of the relevant accounting period,
and
(b) are actually carried on in that territory
through that establishment, having regard to premises, staff, equipment
and
assets.’.
No.
111, in
schedule 15, page 196, line 39, leave
out subsection
(9).
Mr.
Hoban:
Thank you, Mr. Illsley, for that rapid
canter through the provisions on insurance. Now I shall slow down the
Bill’s progress— [Interruption.] Well, I shall slow
it just a little, to ensure proper scrutiny of this important schedule
about how the Government have chosen to effect their response to the
Cadbury Schweppes judgment on controlled foreign companies.
It is worth starting with a
general point about the whole interaction between our taxes and EU law;
my hon. Friends will be keen for me to make it. We had a lengthy debate
on the issue in last year’s Finance Bill Committee, although we
do not intend to reprise that at any great length this
year.
As the European
Court of Justice judgment recognises, it is the sovereign right of
member states to determine their policies on direct taxes. However,
there are conflicts between that principle and other areas of EU
policy; later, when we consider some of the changes to the rules on
venture capital trusts, we shall come to another issue in which that
conflict
exists.
5.15
pm
If I might
summarise the European Court of Justice judgment on Cadbury Schweppes,
it is that where a company was incorporated to undertake a genuine
economic activity in another member state, the fact that the motivation
to do so—or to use a more familiar term, one of the main
purposes of so doing—is to enjoy the lower rates of tax in that
territory does not mean that the company’s profits should be
taxed at the higher rate applying in the UK. In particular, that issue
emerges when the mainstream rate of corporation tax in the UK diverges
from rates elsewhere in the
EU.
The Court ruled
that the profits of a business established in another European economic
area state can be taxed at the UK rate only if the arrangements were
wholly artificial. Let me quote from the Court
judgment:
“If
checking those factors leads to the finding that the CFC is a
fictitious establishment not carrying out any genuine economic activity
in the territory of the host Member State, the creation of that CFC
must be regarded as having the characteristics of a wholly artificial
arrangement. That could be so in particular in the case of a
‘letterbox’ or ‘front’
subsidiary.”
The
Government have taken the Court judgment and sought to apply it to UK
law; that is what schedule 15 seeks to achieve.
Indeed, when one examines the
schedule and particularly the guidance that was published at the time
of the pre-Budget report, one sees that the Government’s view is
that the only form of legitimate economic activity in the context of
CFC legislation is one that is based on labour, as it profits only from
labour that can fall outside UK taxation. If the profits are generated
by capital, then broadly they must be included within UK taxable
profits. So a company that decides to manage its intellectual property
in one
member state rather than in the UK would find that its profits from that
intellectual property were taxable at the UK rate. Even the definition of what the
Government consider to be labour for the purposes of the rules is
tightly defined. If a UK company sets up a subsidiary in another EU
state and that company outsources some of its functions, the value
created by the outsourcing does not count towards genuine economic
activities. It is to broaden that definition that we have tabled
amendment No. 111. Furthermore, the schedule also assumes that seeking
a lower tax charge is not a valid creator of economic value, which I
suppose is rather odd to all those companies that have sought to leave
the UK for lower tax rate jurisdictions elsewhere in the EU. Amendment
No. 109 would remove the relevant subsection from the
Bill.
In a way, it is
odd that we have this quite narrow definition of what constitutes
genuine economic activity, since it is predicated on the basis of
labour. As the hon. Member for Wirral, West perceptively pointed out,
the economy has changed somewhat since the second world war and we are
now a more knowledge-based economy. There is much more intensive use of
intellectual property and different types of assets to generate
revenue, so it seems rather strange to create the distinction between
profits from labour that is not outsourced, which is a good thing, and
profits from outsourced labour and from the utilisation of capital and
other assets, which are a bad thing.
What I have sought to do in
tabling amendments Nos. 110 and 111 is broaden in two ways the range of
activities that can be deemed to be genuine business activities.
Amendment No. 110 would define general business activities by reference
to the wording used in the Court judgment and amendment No. 111 would
eliminate a rather artificial and old-fashioned distinction between
staff employed by the company and other labour, in order to recognise
that a large number of companies seek to outsource part of their
activities as a way of maximising value.
Amendment No. 110 would also
change the period
from
“throughout the
relevant accounting
period”
to during the
accounting period, to ensure that where, say, something has been set up
or closed during the accounting period, its profits can be excluded
from UK taxation for the purposes of this
legislation.
The
wording that I have chosen in amendment No. 110 comes from the ECJ
judgment: it deals with an establishment having regard to premises
staff, equipment and assets and also reflects the Government’s
representations during the hearing. Let me quote from paragraph 66 of
that
judgment:
“That
incorporation must correspond with an actual establishment intended to
carry on genuine economic activities in the host Member
State”.
It is also worth
listening to the opening of the judgment. Paragraph 67
states:
“As
suggested by the United Kingdom Government and the Commission at the
hearing, that finding must be based on objective factors which are
ascertainable by third parties with regard, in particular, to the
extent to which the CFC physically exists in terms of premises, staff
and equipment.”
My amendment No. 100 reflects Government
representations made at the time. It is odd that they have not sought
to reflect those representations in their definition of economic
activities under schedule
15.
With your
permission, Mr. Illsley, I should like to make two further
comments to preclude the need for a stand part debate on schedule 15.
The schedule changes procedure so that a UK company has to make an
application for the profits of a EEA entity to be excluded from UK tax
computation. Seeking that approval increases uncertainty and could be
an impediment to reasonable tax planning. Could there not be a
pre-transaction clearance procedure? In the previous debate we
discussed one in respect of the insurance clause. The Government are
not dogmatic in their opposition to pre-clearance procedures, so
perhaps they could again demonstrate their flexibility by introducing
one.
The schedule
contains no deadlines setting out a time by which HMRC has to grant or
refuse approval. The Chartered Institute of Taxation suggested in its
submission that the onus should be on the tax authorities to show that
the arrangements are artificial, rather than on the company to persuade
the tax authorities that they are genuine. The CIOT also thinks that
the list in the appendix to the explanatory notes of the 20 items that
a business must provide to HMRC to get clearance is deliberately long
and unduly onerous and almost suggests that it is a disincentive for
people to apply for such
clearance.
I shall
conclude with an extract from the CIOT’s representations, which
captures part of the problem with the measure. Last year, we discussed
a similar problem when considering the treatment of group relief on the
Marks and Spencer case, where the Government took a fairly narrow
interpretation of the ECJ judgment which I think is now subject to
challenge. The CIOT is probably right in
saying:
“We
think the whole approach is fundamentally defective and unacceptable,
even as an interim measure pending conclusion of the discussions on the
reform
of...taxation”.
Even
given the further reforms that my hon. Friend the Member for Chipping
Barnet mentioned this morning, the schedule is defective and
unacceptable in the eyes of industry
experts.
Julia
Goldsworthy (Falmouth and Camborne) (LD): Again, echoing
the comments of the hon. Member for Fareham, I shall make observations
relating to the stand part debate so that we do not need to have the
same debate
again.
First, in
addition to the representations made by the Chartered Institute of
Taxation, the Institute of Chartered Accountants in England and Wales
has some serious concerns and has noted that the provisions in schedule
15 are identical to the draft schedule published at the time of the
2006 pre-Budget report in December last year. I should like the
Minister to confirm whether the schedule is identical to the draft
schedule, and if that is so, whether the Government took into account
the serious concerns of various professional
organisations.
Secondly,
I am trying to understand the basis on which the decision was made to
introduce the schedule as a stop-gap before more detailed, permanent
formulations
are introduced. I understand that a consultation is due to start in the
next few weeks. However, the Institute of Chartered Accountants has
stated that “we do not
believe it is appropriate to attempt to introduce UK domestic
legislation, even for a short period, which is contrary to the EC
Treaty as determined by the Judgment in the Cadbury Schweppes case.
Aside from the uncertainty and litigation that will inevitably follow,
the approach brings UK tax policy formulation into disrespect
internationally, undermining efforts to ensure that the UK remains an
internationally competitive location to do business.”
I should appreciate a more
detailed explanation from the Minister about why it was necessary to
introduce the stop-gap legislation now, rather than engage in proper
consultation that would have resulted in legislation that did not
provoke the number of concerns that organisations such as the Chartered
Institute of Taxation and the Institute of Chartered Accountants have
raised.
Mr.
Gauke:
As my hon. Friend the Member for Fareham mentioned,
we discussed at some length last year the consequences of ECJ judgments
on corporation tax. He will be pleased to know that I do not intend to
revisit that debate at any great length, other than to say that the
judgments collectively have cost the Exchequer billions of pounds; they
have on occasions caused complications for British business; and
Parliament has not at any point consented to direct taxation being
under the jurisdiction of the ECJ.
In holding that belief, as I
do, I can have some sympathy with a Government who wish only grudgingly
to implement ECJ judgments. However, the difficulty is that that leads
to uncertainty, and the remarks that my hon. Friend the Member for
Fareham and the hon. Member for Falmouth and Camborne made highlight
that point. The hon. Lady referred to a consultation document on the
taxation of foreign profits, which we discussed this morning. The word
from the Chief Secretary was that the document would be published
shortly; I do not know whether the Financial Secretary can be any more
precise about that point. The document was due to be published in the
spring, but we still do not have it. I do not know whether
“published shortly” means later this month or next month.
I understand that the Treasury is somewhat distracted by other matters,
but it would be useful to know whether there has been any
progress.
As the hon.
Lady mentioned, and as I believe is the case, the contents of the
schedule are the same as were published at the time of the pre-Budget
report in 2006. Several bodies have made representations highlighting
the difficulties with that situation. Since then, the ECJ has also made
its judgment on the thin capitalisation legislation, in respect of
which measures introduced by the House were again reviewed to check
whether they were appropriate and allowable. It covers similar ground
to that which we are discussing, particularly with regard to whether a
national measure restricting freedom of establishment may be justified
in particular circumstances. The ECJ’s judgment on 13 March was
that it may be so where it specifically targets wholly artificial
arrangements.
In
light of that judgment, I should be grateful to know whether the
Financial Secretary still considers
the schedule consistent with the attitude of the ECJ to the extent that
we can anticipate a future case on the matter, whether he thinks that
the thin capitalisation case can give us clues about whether the
schedule’s wording is appropriate and whether he has considered
revising that wording as a consequence of the
judgment.
The
Financial Secretary to the Treasury (John Healey):
May I
welcome you, Mr. Illsley, back to the Chair this afternoon,
and Committee members back to the proceedings? If the amendment is
pressed, I shall ask them to reject it, and I shall explain why in a
moment.
I shall first
deal with a couple of the points raised by the hon. Members for
Falmouth and Camborne and for South-West Hertfordshire, after which I
shall cover the purpose of the controlled foreign companies rules,
because that will put the matter into context and help explain why the
amendments tabled by the hon. Member for Fareham would not help, and in
some ways, would hinder the proper operation of the
rules.
5.30
pm
The hon. Lady
and the hon. Member for South-West Hertfordshire were both concerned
about consultation and the timing of the proposals. We published the
draft for the measure alongside the pre-Budget report for the purpose
of consultation and, since then, we have been in detailed discussions
with those with a direct and representative interest in the matter.
Most of the comments then were about the guidance that accompanies the
operation of the rules. We will be issuing revised guidance shortly to
reflect those comments. We have carefully considered the points that
were made and how they applied to the Bill, and it remains essentially
as it was set out in the pre-Budget report. That is not because we have
taken no notice of the responses that we received. We considered them
carefully, and we believe that we are taking the correct approach as I
shall explain.
In
response to the hon. Member for Falmouth and Camborne, I want to
explain that we are taking such an approach now rather than waiting for
the UK court judgment for two reasons. It is important that we act as
soon as possible after the judgment to be able to deal with any
potential uncertainty that can remain in light of the judgment if we do
not amend the rules. Moreover, it is a fact that the UK court may take
some time before it reaches it own judgment, and it does not seem
sensible to wait for
that.
I say to the
hon. Member for South-West Hertfordshire that we do not implement such
rules on the CFCs grudgingly. We implement them accurately and in a way
that we judge to be fully and rightly in accordance with the European
Court of Justice’s
judgment.
Mr.
Gauke:
A similar comment could be made about the real
estate investment trust relief provisions last year in the Marks and
Spencer case. Since then, a court judgment held that what the
Government did last year was inadequate to meet the ECJ’s
judgment on Marks and Spencer. I am merely pointing out that the same
thing might be about to happen.
John
Healey:
If a court such as the European Court of Justice
makes a judgment that has ramifications for, or is relevant to, our
legislation, we have to take it into account as we are doing under
schedule 15. We doing so in a way that we believe is entirely in
accordance with the judgment and as accurately as is necessary. We are
taking such action in that spirit, not
grudgingly.
I shall
now deal with the rules themselves after which I shall come to the
points made by the hon. Member for Fareham. They are designed to
prevent groups of companies from avoiding UK tax by diverting profits
artificially to low-taxed foreign subsidiaries and therefore play an
important role in protecting the UK tax base. Similar rules are in
place and are in common with those in many other major economies. Their
use is endorsed internationally by the Organisation for Economic
Co-operation and Development, which also helpfully provides established
principles for international
taxation.
Our rules
were subject to the challenge in the Cadbury Schweppes case at the
European Court of Justice. The judgment in 2006 confirmed that the CFC
rules are in principle compatible with European law providing that they
are not applied to profits from genuine activities undertaken in an
actual business establishment located in another member state. I may
keep coming back to that because it is at the heart of the principles
that the European Court of Justice affirmed in its
judgment.
Let me quote
from the judgment. The hon. Member for Fareham did, and I do not want
to miss out. It
states:
“By
providing for the inclusion of the profits of a CFC subject to very
favourable tax regime in the tax base of the resident company, the
legislation on CFCs makes it possible to thwart practices which have no
purpose other than to escape the tax normally due on the profits
generated by activities carried on in national territory...such
legislation is therefore suitable to achieve the objective for which it
was it adopted.”
The
court said that the parent company must be given an opportunity to
produce evidence that a controlled foreign company is established in
another member state and that its activities are genuine, which,
incidentally, is what our clearance process is designed to do. If that
is the case, the CFC rules must not be applied to the profits of those
genuine activities.
UK
rules already provide a number of generous exemptions to cover genuine
activity undertaken by controlled foreign companies. However, we
believe that there may be circumstances at the margins where the
application of the rules is not entirely clear in light of the court
judgment. For that reason, we announced our intention to amend the
rules in the pre-Budget
report.
It is
important to be clear about what the European Court of Justice did and
did not do; what it did and did not define. The ECJ did not define in
any detail what might constitute profits arising from genuine economic
activities undertaken in a business establishment in another member
state. To provide the clarification that is needed, schedule 15 first
establishes a clear and more certain application procedure through
which a UK company should produce the evidence to prove the extent of a
CFC’s genuine economic activities in a business established in
another member state. Secondly, the schedule provides clear statutory
tests on what constitutes such activities and, thirdly, it states how
to
calculate the profits arising from them. The schedule provides that
profits are those created for the group as a whole by staff working for
the controlled foreign company in a business establishment that has
genuine substance in another member
state. The clause and
the schedule have a particularly focused role: to provide clarity about
how the CFC rules will operate following the judgment. The legislation
achieves that without undermining the effectiveness of the existing CFC
rules in preventing as far as possible the artificial diversion of
profits from the UK. If I understood the remarks of the hon. Member for
Fareham correctly, he did not dispute the importance or the principle
behind having the CFC rules, but he was concerned about the practice of
their implementation. His amendments would increase the uncertainty of
the situation and the scope for the artificial diversion of profits. I
will say why in a
moment.
On the
particular points that the hon. Gentleman raised, when he quoted the
court, he talked about wholly artificial arrangements, which was a term
used in the judgment. At that level, it is not a term that can be taken
literally or can be considered outside the context of the rest of the
judgment, which focuses on the purpose of the freedom of the
establishment and the importance of ensuring that CFC rules do not tax
profits from genuine business activity. It is clear that when the
judgment was read in the round, the ECJ intended a meaningful
distinction between profits from genuine activities and artificial
transfers of profit within the same economic group. The legislation is
designed to achieve that
clarification.
The
hon. Gentleman also suggested that the definitions and the workings of
schedule 6 somehow entirely exclude the profits from capital. That is
not the case as long as they arise from genuine business activities
that are carried out in another member state and not from the
artificial diversion of profit to that member state. The ECJ has spoken
clearly about the purpose of the freedom of establishment and about the
objective factors that indicate that a business is genuinely
established and undertaking a genuine activity. The draft guidance
makes it clear that that implies a distinction between profits created
in another member state and profits diverted within the same economic
group so that they can be located artificially in a member state with a
lower tax rate.
The
hon. Gentleman posed two questions, one of which was: why not have
pre-clearance arrangements? Such arrangements are not normally
established in this sort of procedure, and I do not see any good
reasons to establish them here. There are established clearance
arrangements, which after all underpin the operation and the
application of the CFC
rules.
The hon.
Gentleman also asked about the idea of a timetable, set out perhaps in
statute, for HMRC to respond. HMRC operates very tightly according to
performance expectations. To a large extent, particularly in cases such
as this, its ability to come to judgments and assessments, which is
what we are discussing, depends on the quality and the
comprehensiveness of the information that it receives from
taxpayers.
The
amendments, as I think the hon. Member for Fareham said, attempt to
broaden the scope of the
exemptions and application of the CFC rules. He said that particularly
in relation to amendment No. 110, but more generally as well. He seems
to have attempted to frame the amendments using the type of general
language used in the ECJ judgment but when the ECJ hands down a
judgment, it is not writing legislation. It is our job to write
legislation in a way that captures the principles that underpin the
Court’s judgment and puts them in our own tax code. The reason
why we are introducing clause 47 and schedule 15 is to make explicit
how the rules will apply in accordance with those EU principles, so
that we have a firm basis for both HMRC and taxpayers to operate and
apply the rules in
practice. If the
clause and schedule were amended as the hon. Gentleman proposes, they
would have the opposite effect. They would leave the legislation in a
state that neither dealt with the uncertainty arising from the judgment
nor protected the UK tax base against the artificial diversion of
profits.
Amendment No.
109 appears to be explicitly aimed at facilitating the sort of tax
avoidance that we are concerned about, because it would delete the
provision in the schedule that excludes a reduction or elimination of a
tax liability from the scope of the new legislation. If we accepted
that, we would in effect be allowing some big businesses to avoid tax
by unfairly exploiting the ECJ’s decision, leaving the general
taxpayer to pick up the bill. It is not in the interests of business or
the Government to make the effect of the new legislation unclear and to
make it potentially open to abuse. I therefore hope that the hon.
Member for Fareham will not press his amendments to a vote. I ask my
hon. Friends to reject them if he
does.
Finally, I want
to emphasise the point with which I started. The Government are not
acting grudgingly to ensure that the ECJ’s judgments are given
proper effect in our rules. The potential revenues are very
significant. In the pre-Budget report, we identified the revenue impact
of the changes that we propose in this legislation. The forecast of our
tax revenues will be adjusted as a result of the changes that we are
making—from this year by £100 million and next year
£175 million, and by 2009-10 we are talking about a reduction in
the forecast tax revenues through the changes that we propose of
£0.25 billion. The sums potentially at stake are very
significant. Therefore, the onus on us is great to get the legislation
right in a way that gives effect to the principles of the ECJ judgment
but protects properly the UK tax base by preventing the artificial
location of
profits.
5.45
pm
The amendments
do not focus on genuine business activities. If they were made, groups
would be able to set up tax avoidance schemes within the new rules.
They would undermine our controlled foreign companies rules and would
put the public purse at substantial risk. They would also put the
measures at odds with aspects of the ECJ judgment. The proposed changes
would increase, not decrease, uncertainty for business and HMRC in
operating the
rules.
Mr.
Hoban:
I thank the Minister for his thorough and
well-reasoned response to the amendments and for
his justification of the Government’s activities. My hon. Friend
the Member for South-West Hertfordshire hit the nail on the head when
he went back to last year’s debate on the Marks and Spencer
case. The way in which the Government have sought to interpret and
implement that judgment through schedule 15 leaves them open to
challenge. People out there will push back and challenge the rules, and
they may well prove to be right, in which case the Government will have
to reconsider the matter.
It is difficult to strike a
balance between what is a genuine business activity and what is wholly
fictitious, to use the language in the judgment. In considering that
point, I looked at the draft guidance that was published at the time of
the pre-Budget report. Diverting profits to a controlled foreign
company using intra-group loans is given as an example that would
involve some deliberate tax avoidance through the structuring of the
transaction. I found the next example, about relocating intellectual
property in another European economic area member state, less clear. It
could be managed there, rights could be sold and value could be
generated, and the guidance says that there could be some profit
related to the administration of those activities. That example
illustrates the difficulty of putting the judgment into practice,
because I should have thought, from my reading of the judgment, that a
business could reposition a property in an EEA state and have all those
profits chargeable at the lower rate, rather than simply the return on
the administration costs.
Part of the problem with future
interpretations will lie with whether the Government have complied with
the ECJ judgment. This afternoon’s debate is partly intended to
probe the Government’s thinking; I suspect that the place where
the measures will really be scrutinised and tested is not here, in this
Committee Room, but in court. We might well come back to this topic
next year, just as we have been referred back, this year, to what
happened in the Marks and Spencer case. I beg to ask leave to withdraw
the amendment.
Amendment, by leave,
withdrawn.
Schedule
15 agreed
to.
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