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‘80 The amendments made by Part 1 of this Schedule shall have effect from the passing of this Act.’.
Amendment No. 10, line 37, at end insert—
‘(2A) Nothing in section 832 of ITTOIA 2005 (as amended by this Schedule) applies in relation to any of an individual’s relevant foreign income that—
(a) arose in tax year 2007/08 or any earlier tax year; and
(b) has been brought to, or received, or used in, the United Kingdom by or for the benefit of any relevant person at any time before 6th April 2008.’.
Government amendments Nos. 62 and 63.
Amendment No. 11, page 197, line 42, at end insert—
‘(5A) Where the qualifying property referred to in condition C of section 809L was gifted prior to 6th April 2008 one reads section 809L(4)(a) as follows: “is brought to or received in the United Kingdom by a relevant person.”’.
Amendment No. 12, line 42, at end insert—
‘(5A) Where the qualifying property referred to in condition C of section 809L was brought to the UK prior to 6th April 2008 one reads section 809L(4)(a) as follows: “is brought to or received in the United Kingdom by a relevant person.”’.
Government amendments Nos. 64 to 68.
Amendment No. 17, page 198, leave out line 38 and insert ‘or’.
Amendment No. 19, page 199, line 6, after ‘money’, insert
‘, or directed that the money be used,’.
Government amendments Nos. 70 to 75.
Amendment No. 96, page 201, line 41, leave out paragraph 98.
Amendment No. 97, page 204, line 10, leave out paragraph 105.
Government amendments Nos. 77 and 78.
Amendment No. 98, page 209, line 19, leave out paragraph 115.
Amendment No. 16, page 214, line 27, at end insert—
‘(11A) For the avoidance of doubt, where after 6th April 2008 a re-organisation has taken place which meets the conditions in section 127 of TCGA 1992, the new holding (or part of that holding) is a relevant asset if the condition in sub-paragraph (10)(b) or the conditions in sub-paragraphs (11)(b) and (c) would be met were the references there to the asset to be read as references to the new asset or the original asset.’.
Amendment No. 99, page 221, line 9, leave out paragraph 148.
Government amendments Nos. 80 and 81.
Amendment No. 100, page 223, line 14, leave out paragraph 161.
Government amendments Nos. 82 to 86.
Amendment No. 101, page 226, line 1, leave out paragraph 171.
Amendment No. 95, line 2, at end insert—
‘172 The amendments made by Part 2 of this Schedule shall have effect from 6th April 2009.’.
Mr. Hoban: We spent some time in the Public Bill Committee—virtually all of two sittings—discussing schedule 7, but interestingly, there is still enough material in it for a further debate on Report. A large number of amendments were tabled in Committee, and now on Report, because the schedule was very much a work in progress when the Bill was published. That was reflected by the fact that the order of consideration in Committee was varied so that schedule 7 and sections 22 and 23 were taken at the end of proceedings.
I still do not think, despite the volume of amendments being tabled, that the schedule is perfect. More work will be needed to ensure that it delivers the Government’s stated objectives, and one of the challenges for taxpayers is that they have to comply with the rules from 6 April this year, but legislation will only be finalised today. There is a great deal of other work to do, not just with the schedule itself, but to support implementation, and I want to come back to that theme when I address the amendments tabled by the Liberal Democrats.
I would like to begin with amendments Nos. 13 and 14. We touched on this point in Committee, but when I revisited the record, it did not appear to be fully dealt with. My concern is that the way in which proposed new section 809C(4) is drafted suggests that the claim is invalidated if an individual nominates foreign income or gains that result in a relevant tax increase that exceeds £30,000. That is a genuine and serious concern to taxpayers, and we ask that the amendments are accepted by the Government to provide comfort. On the possible ramifications with respect to a claim for foreign tax credit, we feel that a taxpayer who makes a mistake and nominates an excessive amount of foreign income or gains, or whose return is adjusted so that too much foreign income or too many gains have been nominated, should be informed that they have over-nominated and should be entitled to adjust their nomination.
Amendment No. 15 is a probing one, which seeks to examine the issue of mixed funds. We want to be sure that proposed new section 809Q is fit for purpose and proportional to any mischief at which it is aimed. We understand the principle that proposed new section 809R seeks to enact—namely, that where there is a transfer from an offshore account containing mixed funds to another offshore account, the funds transferred should be treated as containing the same proportion of the different categories of income and capital as the original account from which the funds were transferred. We believe that to be the case, but the drafting is complex and the legislation is not sufficiently clear.
In that context, a far-reaching anti-avoidance rule, such as that set down in proposed new section 809Q, appears wholly inappropriate in the context of mixed-fund accounts. The provision appears to provide HMRC with excessive power to challenge transfers from mixed-fund accounts, such that taxpayers will not be confident of their ability to self-assess. As the Financial Secretary said on a number of occasions in Committee, this is a matter of self-assessment. We have expressed the concern throughout the debates on schedule 7 that, although well-advised taxpayers will understand how the rules operate, those who are not as well advised will find it difficult to understand how some of the issues can be dealt with.
What I am looking for from the Government in respect of proposed new section 809Q is some sense that they believe that the anti-avoidance provision is necessary. It might be helpful if examples of the mischief that it is designed to counter were provided. Obviously, we do not want to encourage mischief, but we should try to strike a balance in our debate.
It has been suggested that, if the Government are minded to retain proposed new section 809Q, thought should be given to copying the Inheritance Tax (Double Charges Relief) Regulations 1987. In that case, as well as other explanations on which the taxpayer could rely, secondary legislation was enacted, setting out examples so that primary provision could be understood. That gave taxpayers further guidance to help them comply with complex provisions. Although there was some discussion in a previous debate about whether secondary legislation was appropriate—the hon. Member for Stoke-on-Trent, Central (Mark Fisher) had some robust views—even I concede that there are times when it would be helpful. It would be preferable to relying on non-statutory guidance, which could be put in place without proper parliamentary scrutiny.
7.15 pm
I shall go through the amendments in the order in which they appear on the selection list, not necessarily in the order of their importance. In Committee, there was significant debate on a matter about which there remains uncertainty among tax advisers and a wider coalition of concern than was perhaps evident when we discussed it there. Amendments Nos. 20 and 21 would create the means for the Government to tackle the treatment of fees for professional services. “Professional services” covers not only accountants and lawyers—although the Financial Secretary will not be surprised
to know that I have a problem with the position of accountants—but investment management services and others.
The Government took on board the concerns that the British Bankers Association expressed that, before amendment in Committee, the Bill put at risk extensive wealth management services in the UK. That is why the Government tabled an amendment to introduce proposed new section 809W, which grants an exemption from the remittance rules for services provided by UK-based firms with regard to property that is based wholly or mainly outside the UK. The bit about the location of the property is important because the Government have tried to look through the offshore trusts that might exist to the underlying property.
The provision about underlying property causes two concerns. First, it might discourage investment in UK equities. Secondly, it might have an impact on UK-based fund managers. A UK fund manager’s fees for managing a portfolio of non-UK shares in an offshore trust would not be treated as a remittance. Indeed, fees charged by a non-UK manager managing a portfolio of UK shares in an offshore trust would not be treated as a remittance. However, a UK manager managing a portfolio of UK shares on behalf of an offshore trust would find his fees treated as a remittance. That puts us in a position whereby we either discourage investment in UK equities if the portfolio is managed by a UK manager or end up discouraging the use of UK fund managers. It is not in the interests of the country to permit that. We have a strong fund management sector in the UK, which provides services to a wide range of individuals. We appear to have created an artificial distinction in the sort of shares or property that they manage by providing relief for non-UK property. I believe that, having responded to the initial concern and met the BBA’s approval, the Government need to think more carefully about how to deal with the current problem, which is partly due to the timing of the process.
I want to consider fees for professional services other than investment management. The Financial Secretary was helpful in Committee when I raised the matter. She said:
“The hon. Gentleman asked whether the fees exemption would apply to individuals who used a UK-based firm to advise on completing US returns and that could be within the terms of the exemption. However, it would depend on the details of each individual case.” ——[Official Report, Finance Public Bill Committee, 19 June 2008; c. 846.]
“Accountancy fees for preparing non-UK tax returns would also be covered providing the majority of the accountancy service relates to non UK property.”
That is quite a clear statement, but would UK tax advice pertaining to a non-dom’s UK tax exposure with respect to overseas property also be considered to fall within the exemption? This is a variation on a theme, but would a UK adviser advising on the UK tax implications of offshore property for a non-dom be covered within the exemption? That illustrates the complexity of the issue. I would ask the Financial Secretary to consider the position of all service providers in the UK and ensure that the exemption is worded in such a way that it enables UK-based accountants and investment managers to compete fairly with foreign
providers. We would therefore need to consider how the exemption could be worded.
As I acknowledged in Committee, the mischief that the Government seek to tackle is clear. They want to avoid a situation where people set up elaborate structures to pay domestic staff. I am fully on board with the Government’s approach, but it is not easy to do that, as I found out when a number of people came forward with amendments and suggestions of how I might phrase the proposal. It was difficult to word the provisions in such a way that enabled us to support the UK financial and ancillary services sector, but at the same time did not allow people to pay their driver through an offshore company. That is difficult to do within the confines of the Bill. Furthermore, I do not have parliamentary draftsmen to help me. That is why I have gone down the route, which the hon. Member for Stoke-on-Trent, Central tried earlier to persuade us not to go down, of throwing myself at the mercy of the draftsmen, the Treasury and HMRC, by suggesting that fees should be dealt with through secondary legislation. That would give us the opportunity to consult a wider range of affected businesses that provide services in the UK to non-doms, which would overcome the problem of the narrow consultation that took place during Committee.
Our proposal would also enable a much fuller and, I hope, more watertight description, which would distinguish the mischief that we want to stop from the need to ensure a level playing field for banks, investment managers and so on. I hope that the Financial Secretary will look kindly on that, because it addresses one of the important issues that, because of its sensitivity, remains unresolved. The UK has a successful professional service sector that exports its services, but we are in danger of putting that sector at a disadvantage in relation to others.
Let me deal with amendment No. 110, which is again about our competitiveness. The purpose of the amendment is to ensure that UK companies are not disadvantaged as compared with non-UK companies when operating employee share schemes for non-ordinarily residents and non-domiciled employees. Without amendment No. 110, UK companies will automatically have to operate pay-as-you-earn schemes and pay national insurance contributions where there are perhaps no underlying UK duties, which seems unfair if their non-UK counterparts do not have to do so. Amendment No. 110 keeps to the spirit of the changes, in that PAYE and NICs would apply only where there is a real remittance, but it does not assume that all payments in UK shares automatically constitute remittances.
Since tabling amendment No. 110, I have received a number of representations from UK multinationals that compete in global labour markets. They believe that the Government’s proposals represent a change in existing practice and a threat to their ability to recruit.
Let me deal with the change in practice. Historically, shares were still deemed to be offshore, despite having been issued by a UK company, if they were held by an offshore trust—usually in Jersey—either in the form of certificates or in a CREST account in respect of an offshore trust. Whether they were held electronically, on a dematerialised basis, or in the form of certificates, they were deemed to be offshore. In consequence, they were treated as being remitted only when they were brought onshore, by being either physically or electronically delivered to someone working in the UK.
The Bill as drafted will change that practice by looking at where the underlying securities were issued, rather than at where they were held. In a way, this harks back to our previous debate, in which we talked about looking through offshore trusts to see the underlying property. We have exactly the same situation here, in that the trust will be offshore but people will look through it to the underlying property. It is that ability to look through that is seen as the change of practice, and that is causing the problems.
The consequence of that change is that it could lead to a tax charge on a non-domiciled UK resident employee, but that would not apply to UK-based employees of non-UK companies. Let me give the House an example using, for the sake of argument, Lloyd’s. A non-dom employee with shares in Lloyd’s that were held in an offshore trust would pay NICs and PAYE on those share options. If such a person worked for Deutsche Bank in the UK, however, they would not have to make those payments so long as their shares remained offshore.
The Minister might tell me that there has been a misunderstanding and that both would be treated in the same way, but a number of people involved in this area are concerned that a distinction will arise between people working in the same categories but for UK and non-UK companies. Given that we are part of a global market for talent, and that many of the multinationals operate here and compete for the same people, there is a sense that UK-based companies might be at risk as a consequence of this provision.
The easy answer might be to say that the additional PAYE and NIC costs would fall to the employee, but that would soon become a problem for the employer. Non-dom employees in that situation would pay an additional tax charge, but they might expect the employer to meet that charge. Alternatively, employers might find that people would prefer to work for Deutsche Bank instead of Lloyd’s, for example. This is an important issue in regard to the competitiveness of the UK economy.
Amendments Nos. 111 to 113 also relate to securities income. Their purpose is to ensure that the relevant income can be apportioned to UK and non-UK duties on the basis of days worked in the relevant period, and that the relevant period itself can be adjusted on a just and reasonable basis. The approach to the new legislation is to work out the relevant share scheme gain, then to apportion it between UK and non-UK duties. First, it will be necessary to identify the period to which the share scheme gain relates. This is the “relevant period” referred to in new section 41B, which sets down the relevant period for each of the share scheme changes on a prescriptive basis.
Flexibility is required, however. I want to give the Minister three examples of where flexibility might be needed. First, let us assume that an employee is granted an option in company A, which is then taken over by company B at a time when he has not worked for company A long enough to exercise his option. The option is then substituted by an option in company B, which becomes exercisable in due course. At the moment, the legislation would look only to the time worked for company B—or company A; I am afraid that it is not clear to which it applies—when clearly the period to be taken into account should be capable of including the time worked for both A and B. That would clearly give a longer period of time over which to apportion the gains.
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