Mrs.
Villiers: I agree. My concern is that our competitiveness
will be undermined, but no clear reason has been given as to why that
step was taken in last year’s Finance Act. There may be a good
reason for UK jobs being lost—it may be worth the
price—but I am not yet persuaded of the justification for making
the change. I turn
again to the consequences of section 69(2D) remaining unamended. If one
took the same approach to international companies as the 2006 Act
applies to international trusts, companies that carried out only a few
back-office functions in the UK would have all their worldwide profits
and property dealt with under the UK tax system. That would be nonsense
for companies, and it is causing a problem in the trust context. All
the gains of trusts would be taxed here, even if they became resident
here for only one day.
New clause 2
seeks merely to restore the general administration test that applied up
until the Finance Act 2006. Not many would assert that the old test was
perfect—it had some well-known drawbacks—but it proved to
be workable for the 40 years that it was in operation. There seems to
be a degree of confidence in the test, given that it operated well in
most circumstances. Whatever interpretative problems there might have
been were significantly less serious than the concerns centred on
section 69(2D).
Issuing HMRC guidance is not
the answer. Although further guidance on what the provision
means—from HMRC, or indeed from the Economic Secretary this
afternoon—would be welcome, it would not resolve all
the uncertainties. It would provide insufficient protection for
trustees, given the significant liabilities involved if a trustee
inadvertently brought the trust within the UK tax net. Even if HMRC
stated clearly that none of the back-office functions that I have
outlined would trigger the operation of section 69(2D), the result
would still be less than satisfactory. In effect, the outcome would be
that trusts having no connection with the UK would be liable for UK tax
under section 69(2D), but would be let off—essentially
at the Revenue’s discretion. We should
remember that almost all trustees would be personally liable for the
extra tax that the trust had to pay as a result of changing residence.
Professionals would not take that risk. Indeed, as my hon. Friend the
Member for Windsor pointed out, the change in the law made under last
year’s Finance Act has significantly undermined the UK’s
ability to compete in the market for international trust business. I am
informed that the change is already leading to jobs being lost in the
United Kingdom. I
acknowledge that thus far my evidence is anecdotal, but I have received
a number of reports of accounting services being shifted offshore with
data inputting going to Bangalore and investment services going to
Geneva. For example, I have been informed that, following a meeting
with the Revenue to discuss the issue, one of the industry
representatives went straight back to his office afterwards and issued
redundancy notices to six bookkeepers on the spot and put in place
measures to close within six months the facilities that he used in
London with a loss of 40 jobs in
total. We
have special expertise in trust matters in the United Kingdom. After
all, it was an English invention. I shall spare the Committee my
treatise on the cultural jurisprudential importance of trust business,
given that it received it several times last year. The expertise has
given us a significant edge when competing for international trust
business. It is a large industry. It is a highly competitive and mobile
area of the international market for professional services. I am told
that our competitors overseas are delighted at the developments in our
law and are advising their clients not to use the UK for any
trust-related services. A significant number of jobs in the UK depend
on the business and they are being put in jeopardy for no good
reason. 2
pm We now reach
the key point, to which I referred in response to my hon. Friend the
Member for Windsor. It is simply not clear why the change to the
definition was made. If section 69(2D) was performing an important
anti-avoidance function, perhaps it would not matter if it meant that
jobs were lost in the UK and offshored to India and
Switzerland. I hope
that the Minister will accept the new clause. If not, I hope that he
will consider rectifying the matter on Report or at some future stage.
Failing that, he should at least explain why section 69(2D) is
necessary and say what important function it is performing, because I
cannot see what it is.
The STEP technical committee
appealed that
“the permanent
establishment test needs to be urgently reconsidered”.
I hope that the Minister will give us a
commitment that he will do as it
asked.
Ed
Balls: I know that the hon. Lady has expertise and a
detailed interest in trust matters. The tax rules for determining
trustee residency were amended under the Finance Act 2006 as part of
the trusts modernisation package. The new regime took effect from 6
April 2007. The new clause would amend the changes to trust residency
that were made into legislation last year. As she explained, the 2006
legislation replaced separate income tax and capital gains tax
residency tests with a common test to ensure that all trustees have the
same residence status for income tax and capital gains tax purposes to
make it easier to comply with the tax system for trusts. The changes
also dealt with concerns that professional trustees in overseas
institutions were able to develop a substantive UK presence while
remaining non-resident for tax
purposes. The new
residency test was introduced in the Finance Act 2006, but we made it
effective from April this year as we wanted to give trustees time to
reorder their affairs to retain the residence status that they wanted
and to avoid complex transitional provisions. There was considerable
consultation and time to prepare for such matters, and I am not sure
whether the employment practices described by the hon. Lady in one
instance are really the sort that any member of the Committee would
condone.
Adam
Afriyie: It strikes me that the Economic Secretary is
casting aside some of the genuine concerns about the UK’s loss
of competitiveness in the industry. Will he lay out the research on
which he based his statements? How many people does he estimate will be
affected by the
changes?
Ed
Balls: Given that I have not even said whether we will
accept the new clause, but have just stated what has happened during
the past year, the hon. Gentleman is jumping to conclusions. If he
gives me the opportunity to make my speech, perhaps he will then know
whether I have addressed that
question. The new
common residency test is based on the old income tax test. It was
chosen because it provides a simpler and clearer test to determine the
residence position of the trustees as a body. It includes a provision
that a non-resident trustee will be treated as a resident trustee for
tax purposes when he or she acts as a trustee in the course of a
business carried on through a UK branch, agency or permanent
establishment. We are
aware that the Society of Trust and Estate
Practitioners—STEP—the body that organises on behalf of
the practitioners, has expressed concern about the permanent
establishment test, and in particular its potential effect on
non-resident corporate trustees. I understand that such trustees may
well have an associated company in the UK whose offices are made
available for meetings with settlors, beneficiaries or investment
advisers or which are used as a base for other UK operations. The
legitimate concern appears to be that such activity could result in
non-resident corporate trustees doing business in the UK losing their
non-resident tax status.
The
Committee will be pleased to learn that HMRC is engaged in ongoing
discussions with STEP on that matter. Whether trustees will be regarded
as having a permanent establishment in the UK will depend on the
circumstances in each case and the extent to which that is legitimate.
To provide as much help as possible for taxpayers, following those
consultations, which have involved STEP and other practitioners for
some time, HMRC will, as a priority, issue guidance on the new rules to
ensure that legitimate business is not being captured. People engaged
in legitimate business would be better off waiting until the
consultation has ended and the guidance has been issued before they
issue redundancy
notices. As part of
the work on guidance, HMRC is carrying out detailed analysis of the
issues raised by STEP to ascertain the nature and extent of any issues
affecting non-resident corporate trustees. This is a complex area that
requires detailed discussion. The discussions are ongoing, and once the
analysis has been completed and studied carefully by HMRC, we shall
issue guidance. We shall not issue it until we have reached
conclusions, and no firm conclusions have yet been reached.
It is worth noting that the
trusts modernisation legislation in the Finance Act 2006, including the
new residency test, was consulted on twice before it was introduced.
Although many respondents, including STEP, agreed that a common test
was desirable, they expressed a preference for a rule different from
that eventually introduced. I have set out that for the purposes of
simplicity, and to ensure that proper practice was supported and
illegitimate practice was not, we legislated as we
did.
Adam
Afriyie: I hope that the Economic Secretary will not jump
down my throat as he did when I made a genuine inquiry about why he did
not appear to be concerned about the competitiveness of the sector, but
his comments once again seem to cast aspersions on anybody who makes a
decision to close their operations in the UK before the guidance is
issued. It is not wise, in an area of uncertainty, given that the
repercussions are enormous for businesses, for them to make decisions
early, even if there is no certainty about whether the decision is the
right one in view of when the guidance is issued? Such an approach
would seem to be sensible, as opposed to being a dodgy thing to do, as
he seems to be suggesting.
Ed
Balls: It is not for me to second-guess the business
decisions of any individual company agency, and the hon. Member for
Chipping Barnet did not tell us the precise circumstances. Our
intention is to ensure that people who are acting as offshore trustees
but who, for other purposes, legitimately have business dealings, and
therefore premises, in the UK are not unfairly discriminated against by
any change. Consultation and detailed discussion is taking place, so
anybody who is acting within the intent of the law will not be unfairly
impacted by these matters, whereas people who are clearly seeking to
use the arrangements to avoid tax will
be. I
say to the hon. Lady and to my hon. Friend the Member for
Wolverhampton, South-West that in this complex area there is the
potential for considerable tax avoidance. We do not intend to allow
that avoidance to occur. At the same time, the purpose of the
consultation
is to ensure proper and detailed guidance, so that
people are not unfairly and unintentionally caught by the
definition. The hon. Lady
asked whether the definitions apply equally to corporate and
non-corporate trustees, to which the answer is that branch, agency and
permanent establishment applies to both. She also asked about the OECD
test, which is used for working out the definitions of permanent
establishment for corporation tax purposes. She is right: the OECD
manual has the best definition, which sets out what is meant by
permanent establishment. Although the examples given in that manual
relate to companies, which is normal because most OECD members do not
legislate for trusts, the conclusions can be adapted for trust
business. The analysis that HMRC is preparing will examine the
definition and how it can be applied to trusts. HMRC will share that
analysis with STEP in the coming weeks as it consults on the detailed
guidance to which I have referred.
The hon. Lady
and the hon. Member for Windsor asked whether we are setting out to
damage the competitiveness of the UK as a financial centre. No, we
absolutely are not; we always intend to ensure that London maintains
its competitiveness as a global financial centre, across a range of tax
regulatory matters. London is highly respected around the world as a
global financial centre partly because it is a well-regulated, proper
place to do business, whose rules, legal system and tax system require
high standards of integrity and probity. It is important that there is
no ambiguity, which can send the wrong kind of messages. We have no
intention of doing anything to damage our competitiveness, but we need
to get the measures right.
STEP has provided HMRC with
individual cases in which it believes people have been unfairly caught.
HMRC is studying the analysis of those examples as it draws up the
guidance. I have no statistics on the extent of the potential tax
avoidance, but our integrity and probity depend on us taking a robust
approach towards it. Many opportunities for tax avoidance in this area
can be
prevented.
Mrs.
Villiers: Will the Economic Secretary give an example of
tax avoidance that will be countered by section 69(2D) of the Taxation
of Chargeable Gains Act
1992?
Ed
Balls: As I was going on to say, it is not the job of the
Government to anticipate on behalf of the industry where the
opportunities for tax avoidance might
arise.
Mrs.
Villiers: Will the Economic Secretary give
way?
Ed
Balls: If the hon. Lady would let me answer her previous
point, that might help her to prepare her next intervention. It is not
our job to lead the tax avoidance industry down such a road. There are
many sophisticated lawyers and accountants; many of them work in
legitimate business areas, but some of them seek ways in which the law
can be pressed in a particular direction. HMRC judges that this issue
could present many opportunities for tax avoidance, and that it would
be wrong for the Government to take measures that would further support
and advantage the offshore trust industry. That is not our intention.
As I have explained, the purpose of the consultation is to produce
guidance that will not damage in any way the legitimate offshore trust
industry.
Mrs.
Villiers: As the Economic Secretary could not give the
examples that I asked for, can he give any examples of tax avoidance
schemes that have been shut down as a result of section 69(2D) of the
1992
Act?
Ed
Balls: I chose not to give the hon. Lady, or the wider
public, examples of the kind of tax avoidance that HMRC believes might
be opened up by the proposed change. I do not think that that is the
role of Ministers; it is not for me to provide such an
advisory role.
John
Hemming: Is it not the role of Ministers to justify their
arguments? If the Economic Secretary cannot cite a loophole that the
new clause would create, he cannot justify his
argument.
Ed
Balls: To take the hon. Gentleman back to the beginning of
my speech, we legislated for the measure in last year’s Finance
Bill, not this year’s. We legislated following two lengthy
consultations, and we justified fully at the time why, in order to
simplify the tax system, to create a definition common to income and
capital gains and to ensure that we properly supported the legitimate
business of offshore trust practitioners without allowing people to get
around the rules, that was the better way to
go.
John
Hemming: Will the Economic Secretary give
way?
2.15
pm
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