The
Chief Secretary to the Treasury (Mr. Stephen
Timms): It is a pleasure to serve under your chairmanship
again, Mr. Gale, and I, too, congratulate the hon. Member
for South-West Hertfordshire on his promotion to the Front
Bench. I am pleased
that the hon. Member for Chipping Barnet supports the
Government’s intention in the clause and, in a moment, I shall
provide some reassurance and clarification on the point raised by the
hon. Member for Birmingham,
Yardley. Our purpose
here is to ensure that the limitation period in which to make a claim
for the recovery of direct tax paid by reason of mistaken law is six
years from the date of payment. That follows a House of Lords judgment
on 25 October last year in Deutsche Morgan Grenfell Group plc v.
Her Majesty’s Revenue and Customs. The Lords held that in
certain circumstances the limitation period for claims does not begin
until the claimant has discovered the mistake, which means that
restitution is due in some cases for payments made more than three
decades ago. As we have discussed, interest might be due on those
payments as well.
That judgment leaves the
Government facing potential repayments of very large sums in other
cases,
which means that the general populous might pay a price through higher
taxes or reduced public spending for a disproportionate benefit to a
small number of groups and companies. In 2004, legislation was
introduced to protect the Exchequer from new claims arising on or after
8 September 2003. We are acting now on claims made before that date to
protect the wider public interest. The clause ensures that a
six-year limitation period applies from the date of payment. In other
words, the payment groups affected will still be entitled to six
year’s worth of repayments. That strikes a fair balance,
familiar to other parts of the legislation, as the hon. Lady rightly
said, between the general interest of the community and the protection
of the rights of claimants. It goes some way, as well, to restoring the
general symmetry thought to exist between the rights of claimants to
recover overpaid tax and those of HMRC to recover underpaid
tax. To clarify the
point raised by the hon. Member for Birmingham, Yardley, the clause
will not affect the claimant in the Deutsche Morgan Grenfell case, as
the hon. Lady acknowledged, or other claimants for whom that claim was
a test case. The clause affects other cases and will ensure that a fair
and proportionate limitation period of six years applies from the date
of payment. There have
been widespread discussions about a transitional provision, which was
raised by the hon. Lady. However, that misses the point of the clause.
I imagine that the purpose of a transitional provision is to allow for
an extra period in which claims can be made under the previous system.
However, the clause affects claims made before 8 September 2003 only.
In other words, all of the claims affected by the clause have been made
already. I do not think, therefore, that providing for a transitional
period in the clause would have any meaning.
It is my clear view that the
clause is compatible with the European convention on human rights and
strikes the right balance between the interests of the general taxpayer
and the claimant companies. We are absolutely confident that it is
proper to legislate in this way and we would defend robustly any
challenge to the legislation in the courts. It is important to affirm
that limitation periods are a matter for national legislation. Claimant
groups affected by the measure will still be entitled to six
year’s worth of
repayments. The hon.
Lady raised a question about people who might have acted differently in
the past. I am not sure that there is any great value in speculating
about what others might have done in the past. Given the amount of
revenue at stake, as she acknowledged, it is very important that the
Government take action. The House of Lords judgment in the Deutsche
Morgan Grenfell case was made prior to the announcement of the measure
before us. We are aiming simply to put things right by ensuring that
those claimants bound by that judgment under the terms of the group
litigation are unaffected by the legislation, as I have explained. I
hope that the clause will find favour with the
Committee.
Question put and agreed
to. Clause 106
ordered to stand part of the
Bill. Clauses
107 and 108 ordered to stand part of the
Bill.
Schedule
26Meaning
of “Recognised Stock Exchange”
etc 1.45
pm
Ed
Balls: I beg to move amendment No. 118, in
schedule 26, page 281, line 17, at
end
insert— ‘8A
In paragraph 4(2C)(b) of Schedule 26 to FA 2002 (derivative contracts:
contracts excluded by virtue of their underlying subject matter), for
“quoted” substitute
“listed”.’. Schedule
26 amends the legislation defining a recognised stock exchange to
enable a more competitive market. It will also modernise the rules and
definitions to provide greater clarity and consistency. Current rules
do not permit the extension of recognised status to any UK stock
exchange other than the London stock exchange. The measure will ensure
equal tax treatment for Financial Services Authority listed shares
regardless of which recognised investment exchange is used as the
primary
market. Amendment No.
118 will ensure that all known consequential amendments have been made.
As I said, the legislation’s aim is to ensure competition for
markets and to modernise the terminology used. This consequential
amendment, which was omitted from the original list, should now be
included. If it is not added to the list, it could create uncertainty
for the industry and unnecessary administrative burdens in clarifying
that there is no essential difference between “quoted”
and “listed” for the purpose of schedule 26. I commend
the amendment to the
Committee.
Mrs.
Villiers: I rise to ask a question that, now that I come
to think about it, probably would have been better directed to a
schedule stand part debate, but if the Committee will allow me, I shall
ask it. Does the schedule impact in any way on the tax benefits and tax
status related to shares listed on
AIM?
Ed
Balls: The answer is
no. Amendment
agreed
to. Schedule
26, as amended, agreed
to. Clauses 109
and 110 ordered to stand part of the
Bill.
New
Clause
2Trustee
residence ‘(1) Section 69 of
the Taxation of Chargeable Gains Act 1992 is amended as
follows. (2) In subsection (2D)
for the words after “were resident in the United Kingdom”
substitute the words “in relation to the settlement unless the
general administration of the trusts is ordinarily carried on outside
the United Kingdom.”.’.—[Mrs.
Villiers.] Brought
up, and read the First
time.
Mrs.
Villiers: I beg to move, That the clause be read a Second
time.
The new
clause aims to deal with quite a serious problem that has arisen for
the UK’s investment and legal services industry as a result of
changes made to the Taxation of Chargeable Gains Act 1992 by last
year’s Finance Act. The new clause would reverse one of the
changes that the 2006 Act made regarding
determination whether a trustee is resident in the UK or overseas by
restoring the definition that operated until 7 April this
year. According to a
note published on Tuesday by the technical committee of the Society of
Trust and Estate Practitioners, the new formulation introduced last
year has “given rise to
widespread uncertainty and
difficulty.” The
Chartered Institute of Taxation and the Law Society have also expressed
support for new clause 2 and the points made by STEP. Strong concern
has been conveyed to me by the representative bodies that HMRC has not
yet treated the issue seriously enough. That is a worry, considering
that the provisions came into force in April this year. One of the
reasons that I have tabled the new clause is to ensure that the points
expressed by concerned professionals are listened to and properly and
fully explored. Under
the old rules, no problem arose where foreign trustees delegated a
number of services relating to trusts to subsidiary firms or affiliates
in the UK. The rule was that a trust was resident in the UK unless two
conditions were satisfied: first, that the majority of trustees were
non-resident, and secondly, that the general administration of the
trust was ordinarily performed outside the
UK. However, the 2006
Act introduced a number of changes to the test for whether a trustee is
resident or non-resident. One of those was the insertion of a new
section 69(2D) into the TCGA to provide
that “A trustee
who is not resident in the United Kingdom shall be treated for the
purposes of subsections (2A) and (2B) as if he were resident in the
United Kingdom at any time when he acts as trustee in the course of a
business which he carries on in the United Kingdom through a branch,
agency or permanent establishment
there.” As STEP explains
in the note to which I have already referred, the difficulty with
section 69(2D) is the scope of the
words “branch, agency or
permanent
establishment”, which it
regards as unclear and broad.
The first problem is whether
all three terms apply to both corporate and non-corporate trustees.
Other legislation with similar provisions has, I understand, tended to
apply the “branch or agency test” to individuals and the
permanent establishment test to companies. If the Economic Secretary
gave us his view on that, it could provide some welcome clarification
for those grappling with the legislation. However, even if this matter
is resolved, the meaning of the three concepts remains unclear. We are
dependent on case law, much of which is relatively old, for the meaning
of “branch” or “agency”.
Assistance on determining what
amounts to a permanent establishment is found in section 148 of the
Finance Act 2003 and in article 5 of the Organisation for Economic
Co-operation and Development model tax convention on income and
capital, both of which refer to the concept of a “fixed place of
business”. That seems particularly relevant to the issues that
the Committee is
considering. The
approach suggested by the commentary onarticle 5 of the OECD
convention indicates that an overseas enterprise must have unrestricted
ability to use premises in the UK before those are capable of
constituting
a fixed place of business. I have been advised that a number of
activities carried on by non-resident trustees, which have caused no
problem in the past, could arguably now give rise to the conclusion
that a fixed place of business is being used and a permanent
establishment has been set up within the meaning of section 69(2D). I
have to stress that it is not clear that such activities would bring a
trustee under the terms of section 69(2D), but there is a substantial
risk that they would. That is certainly the advice that such people are
receiving from their legal advisers. Activities at issue, include the
regular use of office premises of a UK affiliate for discussions with
professional advisers and other meetings that are, perhaps, incidental
to the management of the trust and its investments. Another problem
area is the use of a UK affiliate’s accountancy services in
preparing trust accounts. That could cause a problem, as could the use
of an affiliate’s investment management services. The risk
remains even where the services and facilities are provided by the UK
affiliate at a market rate and on arm’s-length terms. The consequences of a trustee
falling within section 69(2D) and inadvertently becoming UK
resident are serious. Put simply, non-resident trustees who use UK
affiliates to carry out any back-office functions now risk bringing
their trust within the UK tax net when it would not otherwise be so.
The trust would therefore be within the scope of UK capital gains tax
on all future gains. The gravity of the problem becomes even more
apparent when one takes into account the fact that there is no CGT
uplift where a trust becomes UK resident. That means that all gains are
taxable on future disposals, including those accrued before the trust
became UK
resident.
Rob
Marris: I bow to the hon. Lady’s much superior
knowledge on this matter, but on reading the amendment and listening to
her it appears, prima facie, that she is arguing for a tax break for
the rich who have gone offshore. Is that
so?
Mrs.
Villiers: No, it is not. Just to pre-empt any
misunderstanding on what section 69(2D) is about, I make it clear that
I do not think it is about anti-avoidance. Obviously, we will hear from
the Economic Secretary, but there is, correctly in my view, extensive
legislation in place already to prevent UK residents from using
offshore structures—whether trusts or anything else—to
reduce their tax bill. It is right that we have that legislation. If
there are any remaining gaps in that anti-avoidance legislation, I
would support the Government in plugging them. However, I am not
persuaded that this measure is aimed at that
problem. We are
talking about whether the UK can retain a share in international trust
business, which is an important professional services market provided
to people from overseas setting up international trusts. It is not
primarily, or really at all, about UK residents. The current
anti-avoidance provisions are effective. This is an international
industry providing services to people who usually have little or no
connection with the UK. Again, I would be interested to hear what the
Economic Secretary has to say. He may be able to explain the
anti-avoidance aspect.
I pick up where I left off. If
the trustees fall under section 69(2D), they cannot solve the problem
by
becoming non-resident; if they do, all unrealised gains would become
chargeable. In its note of 5 June, STEP
says: “Non-UK
trustees will not take the chance of being deemed to be UK resident and
work which would otherwise come to UK professionals would be sent
elsewhere...And business once lost is hard to
regain.” We need to give
serious consideration to that warning.
The
Opposition fear that the adoption of a permanent establishment test is
inappropriate. It seems to have been lifted from corporation tax rules,
which provide that when a non-UK company carries on business in the UK
through a permanent establishment, the company will be taxed on profits
earned through the permanent establishment. That seems reasonable.
However, lifting the terminology into the context of trusts will have
serious and far-reaching results, although I suspect that they may be
unintended. If a trustee oversteps the mark only marginally, so that
his activities come within the scope of the permanent establishment
test, it would cause the trust to be UK-resident for all
purposes—all the gains that it made and all its income, whether
connected with the UK or not, would be
liable.
Adam
Afriyie (Windsor) (Con): It strikes me that the Government
recognise the international competition in corporation tax rates, and
to ensure that the UK remains effective, they have reduced them by 2
per cent. There is international competition also in the provision of
services to those who support and provide services for international
trusts. Does my hon. Friend agree that we run the risk of losing those
businesses if the provision goes through as it
is?
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