Clause
52
Alternative
finance investment
bond
Ed
Balls:
I beg to move amendment No. 84, in
clause 52, page 33, line 32, leave
out sub-paragraph (ii) and
insert—
‘(ii) to make a
repayment of the capital (“the redemption payment”) to
the bond-holder during
or at the end of the bond-term (whether or not in
instalments),’.
The
Chairman:
With this it will be convenient to discuss
Government amendment No.
85.
Ed
Balls:
The clause introduces tax rules on a type of
Islamic bond known as a sukuk. In the Finance Acts of 2005 and 2006, we
introduced legislation that set out the tax treatment of several
sharia-compliant financial products, on which interest is not paid, but
an alternative financial return is paid instead. The broad principle of
the tax rules is that when a return paid to or by a saver or borrower
is economically equivalent to interest, it is taxed as though it were
interest.
Those
measures were part of our wider agenda to make the City of London a
global, wholesale financial centre for Islamic financial products and
to ensure that the Muslim community in our country has the widest
possible access to Islamic retail financial products. In pursuing our
agenda to take forward those twin, complementary objectives, we have
established a standing committee of Islamic finance experts, the first
meeting of which I chaired a few weeks ago.
At the meeting, there was
acclaim around the table for the consensual steps forward that we have
taken in this House in previous Finance Acts. I am sure that the signal
that the UK is changing its tax law in the whole Islamic finance area
to encourage the commercial issuing of sukuk has been widely welcomed
around the world. Our subsequent announcement that we are considering a
Government bond issue that is consistent with sukuk principles has also
been widely welcomed. That sends out a powerful
signal.
The amendments
make small but important technical changes, and were drafted as a
result of the consultation. Although sukuk are economically similar to
debt securities in law, they are not debts or loans, which gives rise
to difficulties with applying the tax rules that normally apply to
debts and loans. The interaction of the rules in the clause with
certain tax rules was not fully appreciated when the Bill was
published, and the amendments deal with some of those interactions. I
am happy to answer more detailed questions on the amendments, which
ensure that the Bill will achieve our announced
intentions.
Mrs.
Villiers:
I have a few remarks to make that embrace both
the amendments and the clause, which I welcome. They are intended to
enable UK-based companies to issue sharia-compliant bonds, which are
commonly known as sukuk. I welcome also the greater clarity that the
measures will bring to the tax treatment of people who invest in sukuk,
whether they are issued by UK or foreign companies.
During Committee debates on
clauses 95 and 96 of last year’s Finance Bill, on wakala and
musharaka finance, I recall drawing the Committee’s attention to
a range of other sharia-compliant financial products, including sukuk.
Indeed, I believe that that was the sole reference to the word
“sukuk” in the whole of Hansard until this
afternoon, although I must acknowledge that I made an error by
referring to the plural of sukuk as sukuks, which is
incorrect.
I pointed out last year the
growing importance of sukuk issuance, and I am therefore very pleased
to see that the Government have subsequently chosen to legislate to
make it easier for the City of London and UK-based operators to obtain
a share of that increasingly important market. On many occasions during
this year’s and last year’s Finance Bill proceedings, I
have had harsh things to say about the Government and their failure to
respond to people’s concerns, but I must say that I have had
extremely positive feedback about the Government’s efforts on
that issue and on the meeting to which the Economic Secretary referred.
The amendments under consideration today are a direct result of the
discussions at that meeting, which is why they are welcome.
I have only one qualification.
There is in one way in which the proposals have disappointed. The new
rules should assist people seeking to securitise Islamic mortgage
portfolios using a sukuk, and the focus on mortgages is demonstrated by
subsection (3)(b). It expands the definition of “financial
institution” in section 46 of the Finance Act 2005, but only in
relation to bond assets that fall within sections 47 and 47A, which
include the tax provisions that govern the two main structures used by
banks to provide Islamic mortgages.
I have received representations
that the clause’s focus on mortgage securitisation limits its
scope. The Treasury seems to view sukuk as the Islamic equivalent of
securitisation, rather than the equivalent of corporate bonds in
general. It is worth considering, perhaps for next year’s
Finance Bill, ways of broadening the scope of the provisions to make
them more usable for all companies that wish to raise long-term finance
using sukuk. It may be worth consulting further on that
point.
I appreciate
that the measure represents a new area and that we are in relatively
uncharted territory, so we must take care to ensure that changes that
are meant to facilitate sharia-compliant financial products neither
cause unintended consequences nor produce tax loopholes. However, if
the Government are genuinely enthusiastic about making London an
attractive destination for Islamic finance—and I believe that
they are—it is worth taking time to determine whether it is
possible to broaden the clause without causing any negative
consequences.
I
welcome the Economic Secretary’s announcement about considering
whether the Government should issue debt that is structured as a sukuk.
There is in the idea an interesting potential for gaining access to a
wider range of investors, and it would be useful to hear what progress
is being made with it. Some of the state governments in Germany have
issued sharia-compliant bonds, so there is a precedent for it. It will
be interesting to see what the progress the Government have
made.
Finally, I
recall again my speech last year on the issue, when I mentioned not
only sukuk but a range of Islamic financial products, including ijara
leasing transactions, ijara-wa-iqtina, which replicates hire purchase,
takaful insurance products and Islamic risk-mitigating instruments.
Just as the Government
responded to my comments last year about sukuk, I hope that they might
look into whether the tax structure might be adapted to facilitate
other sharia-compliant products, not only for the reasons of allowing
the City to take a significant share of the market, but for the reasons
to which the Economic Secretary has referred regarding the importance
of ensuring that financial inclusion is extended to all sectors of our
community, including those of the Muslim
faith.
Ed
Balls:
The issue to which the hon. Lady refers was also
raised at out Islamic finance working group. The initial reaction of
Islamic finance experts in the Treasury was that the proposal risks
opening up substantial tax-avoidance difficulties for us. One issue
that the group will consider in the coming months is precisely the
issue that she raises, so that if we could sensibly widen the scope
without causing difficulties, we
would.
On the wider
issue raised by the hon. Lady, I am pleased about the consensual and
cross-party nature of discussions about these matters, at least within
Treasury-brief circles, and I shall continue to work closely with all
Members of the House to take the agenda forward.
Amendment agreed
to
.
Amendment
made:
No. 85, in clause 52, page 35,
line 50, at end
insert—
‘(7) For the
purposes of section 417 of ICTA (close
companies)—
(a) a
bond-holder is a loan creditor in respect of the
bond-issuer;
(b) arrangements
falling within section 48A shall be disregarded in the application of
section 417(1)(d).
(8) For the
purposes of Schedule 18 to ICTA (group
relief)—
(a) a
bond-holder is a loan creditor in respect of the
bond-issuer;
(b) paragraph
1(5)(b) shall be disregarded in determining whether a person is an
equity holder by virtue of arrangements falling within section
48A.”’.—[Ed
Balls.]
Clause
52, as amended, ordered to stand part of the Bill.
Clause 53 ordered to stand
part of the Bill.
Clause
54
Trust
income
Question
proposed, That the clause stand part of the
Bill.
Mrs.
Villiers:
The clause provides a welcome correction for
some errors contained in the trust modernisation legislation that we
had the pleasure to consider in last year’s Finance Bill. I
confess that the error escaped my research in preparation for the
scrutiny of that Bill, although I recall that there was still a lengthy
list of problems on which we sought clarification.
The clause appears to achieve
the intended outcome. It will restore the mechanism that was in
operation prior to the 2006 Act by which trustees of a settlement who
receive a payment made by a company on the
purchase of its own shares are taxable only on the excess over the
original subscription payment for the shares. The drafting error in the
2006 Act would have meant that they were taxed on the entire
payment. Like me, the
Chartered Institute of Taxation welcomes the clause, but it has
expressed serious concerns on two points. First, it expresses regret
that the period for consultation was short. It pointed the problem out
on 3 August 2006, which should have given the Government a period for
consultation. Secondly, the CIOT highlights a more significant problem
with the approach taken to implementation, stating
that
“we reiterate our
concern at how HMRC intend to implement aspects of these changes, given
that the Notes and Tax Calculations for the 2006/07 Return are
inaccurate.”
It goes on
to state:
“It
is most unsatisfactory that Returns for 2006/07 submitted before Royal
Assent is given should be filed on the basis that the whole amount of
payment received on a buy-back of a company’s shares is taxable,
with a correction having to be made subsequently.
It is disappointing that our
comments on improving the clarity of Explanatory Notes to the
legislation have been
ignored.”
I have some
sympathy with the CIOT’s point of view. It does not seem to make
a great deal of sense to require that tax returns submitted before
Royal Assent have to comply with the existing and incorrect
legislation. The CIOT states that that
“is a recipe for muddle and
confusion”
that
is
“accentuated by
numerous piecemeal changes to the trust taxation regime over the past
few
years”.
Bearing
in mind that the provision will be backdated when the clause is
enacted, it seems pointless to require people to submit returns that
will have to be corrected. It also seems unfair to require people to
include in their tax return a sum of money—the excess over the
subscription price paid for the shares—that HMRC knows will not
be taxable once the Bill comes into effect. The CIOT
concludes:
“The
taxpayer should not be penalised through enactment of defective
legislation”.
If HMRC
will not accept returns submitted on the basis of the legislation as
corrected by clause 54, the notes to the 2006-07 return should at least
be amended to alert taxpayers of the need to delay
filing.
7.15
pm
In conclusion,
I should like to put on record a general comment about the provisions
in the 2006 Act on the income and capital gains tax treatment of
trusts, which the clause seeks to amend. The provisions were billed as
simplifications and modernisations, but this is one of the most
mind-boggling, opaque and complex structures it has ever been my
misfortune to read about—and that is even before one gets into
the twists and turns of the changes to the inheritance tax regime that
caused such controversy in relation to schedule 20. I suspect that the
Economic Secretary may return to this Committee in future years with
further corrections to this problematic
legislation.
Ed
Balls:
I hope that the next time the Minister responsible
returns to this piece of legislation, we will
be celebrating the return of the Paymaster General, who is far more of
an expert on these matters than
myself.
The clause
amends a minor omission in last year’s trust modernisation
legislation concerning payments received by trustees, as the hon.
Member for Chipping Barnet said. The omission in the Finance Act 2006
meant that in a buy-back the whole payment is taxed. The clause
corrects the position so that only the whole payment, less the original
subscription price, is taxable. Because the legislation that we are
correcting came into force on 6 April 2006, we are backdating the
clause to take effect from that date to ensure that nobody loses out.
HMRC consulted on the draft legislation, and representative bodies said
to us that they were content. A further minor omission in the same
legislation has been identified and is corrected by clause
55.
The omission is
regrettable but neither HMRC nor the representative bodies, nor any
other interested parties, picked it up during the passage of last
year’s Finance Bill. A small number of trusts will be affected.
Each year, an estimated 20 trusts, out of some 200,000 trusts that make
a return, will receive a payment from a company’s purchase of
its own shares. The return for 2006-07 had to be finalised by HMRC last
summer before it was aware of the omission. However, the return is
based on how the legislation was always intended to work, and is
rectified by the
clause.
HMRC issued
guidance advising trustees affected by the omission to wait until the
Finance Bill received Royal Assent before making their return. For the
small number of cases that are likely to be affected by the clause,
return guidance will lead trustees to enter an amount in accordance
with the legislation as was always intended. Therefore, taxpayers who
are not aware of the omission will not be disadvantaged. The
consultation did not last as long as we would have liked, but we are
satisfied that we consulted properly and, as a result, we have
addressed the omission that the hon. Lady
identified.
Mrs.
Villiers:
The Economic Secretary makes a reassuring point
that the HMRC is trying to get the information out to ensure that the
trusts affected know that they should not make their return before
Royal Assent. However, those who do not receive, or are not aware of,
the information will still be required to submit a return based on
incorrect legislation. Is that correct? I just wanted to check that I
have understood
correctly.
Ed
Balls:
I think I said that we will ensure that the
guidance for the 20 or so trusts operates so that people do not lose
out as a result of the process of correcting the omission. I do not
know whether we know the 20 trusts, but if we do that would mean fewer
letters to write than those sent to Committee members. We ought at
least to be able to manage
20.
Question put
and agreed
to.
Clause 54
ordered to stand part of the
Bill.
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