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In the second example, we might find that an employee had acquired a particular type of shares, known as forfeitable shares, and made an election to be taxed up front. As drafted, the legislation will take into account only duties undertaken on the day of acquisition itself, whereas the proper approach should surely be to apportion over the period in which the employee could lose the shares or the period in which they have been earned. There is a risk under this type of scheme that the proper apportionment is not open.
Thirdly, there is the example of where an employee receives an option that he can exercise immediately. Under currently proposed legislation, the relevant period would again take into account only the day of the award of the option, whereas the proper approach would be to look at the facts and work out whether it was awarded for work done or work to be done. The amendments are designed to bring about greater flexibility in working out the time period over which the gain from the shares and thus the PAYE and NIC can be apportioned.
The key point is that the flexibility is needed on the overall apportionment. The power to apportion once a relevant period is decided is already available, which goes some of the way towards addressing the problem, but there is currently no flexibility on calculating that relevant period. The provision will prevent the oddity I have set out from arising.
It is also worth bearing in mind the position of those who are not ordinarily resident in the UK, but still work here. Their employment income is apportioned between the time they work in the UK and the time they spend abroad. The point has been made to me that their participation in share option schemes is not treated on the same basis. Firms are increasingly moving the variable performance element of their remuneration packages away from cash to share option schemes. Treating that element as a source of remuneration in a different way from their salary could create an issue in terms of the apportionment of the charge.
On amendment No. 10, we understand that the Government feel it necessary to amend paragraph 86 of the transitional provisions to make it clear that the exemptions for property acquired by the relevant person before 12 March 2008 apply only to goods and not money. However, as a potential unintended consequence of the amending provisions, there is now concern that any money brought into the UK prior to 6 April 2008 that was not taxed when remitted could be deemed to be taxable in 2008-09. In view of the comments of the Government and, I understand, Treasury and HMRC officials, it is felt that this is not what the Government intended, but given the importance of the issue, we feel it is vital to amend the legislation to put that intention beyond any doubt.
The procedures on exporting and re-importing money after 6 April 2008 should be clarified. The amendments proceed on the basis that the Government do not intend individuals who have imported funds from successful source-ceasing exercises prior to 6 April 2008 to be taxed, should the funds be exported and then re-imported. The legislation prior to that date allowed the source-ceasing technique so individuals would have no reason to keep records. Given how mixed the funds could have become during their various transfers in and out of the UK, we feel that to seek to impose a tax charge in such situations would be completely impractical. I suspect that the
Minister’s response will be that amendment No. 62 is designed to tackle the same issue. I welcome that and on that basis I shall not press amendment No. 10. We are on the same page in trying to tackle the same issue.
Amendment No. 11 relates to the interaction between proposed sections 809N and 809L of the 2007 Act, which could unintentionally result in a tax liability arising when an individual has gifted foreign income on chargeable gains prior to 6 April 2008. The concern is that an individual can be a gift recipient prior to that date and that the use of the terms “used in” and “enjoyed by” in proposed section 809L(4)(a) is sufficient to apply to a situation where the gift occurred prior to 6 April 2008. For example, a gift of, say, employment income to a trust from which a settlor is excluded, which uses the funds to purchase a property for the wife before 6 April 2008 would be taxed as a remittance on the husband should he continue to use or enjoy the property by residing there with his wife after 5 April 2008. We believe that the intention is not to impose a tax charge with respect to gifts that occurred before 6 April 2008, even if the use or enjoyment occurred after 5 April 2008.
That, then, is the basis of amendment No. 11. To be helpful to the Minister, I tabled an alternative, amendment No. 12, which would apply if the Government wished the exemption to apply only when the property was brought to the United Kingdom before 6 April 2008 and any use or enjoyment occurred after 5 April 2008. In a spirit of co-operation, I have tried to give the Minister a variety of options.
I am pleased that the Government have chosen one of my amendments. It took me a while to work out that Government amendment No. 18 was my amendment, but I am grateful to the Chancellor for appropriating it. It is one of a long line of ideas that the Chancellor has appropriated from my party since the middle of last year—
Mr. Jeremy Browne: With mixed success.
Mr. Hoban: Indeed. I sometimes suspect that the Government found the draft rather than the final idea, but we will leave that to one side.
The three amendments that I tabled deal with offshore mortgages, which we debated in Committee. I appreciate that the Minister is not minded to extend the provisions to all pre-12 March 2008 offshore mortgages or to cases in which funds were used both to acquire an interest in the property and to finance enhancement work. We also know that she is not minded to remove or modify the conditions set out in paragraph 90(3). However, there is a lingering concern for the unrepresented taxpayer who may unwittingly take out a further loan and, by doing so, forfeit any entitlement to relief. I hope that the Minister will think again about the position of that unrepresented taxpayer, and consider whether it is fair that a minor variation in the loan terms—taking out additional loan funds secured on the property—should result in the loss of all relief.
The Minister did allow for relief when straightforward remortgaging took place before 12 March 2008, but one of the conditions is that the funds should have been received in the United Kingdom before 6 April 2008. We understand that in the case of at least two offshore mortgage providers it would be unlikely for the funds to
be received in the United Kingdom. It would be more likely for the new mortgage provider to transfer the funds straight to the original provider. It is on that basis that we tabled amendment No. 8, which the Government are minded to accept. That should ensure that the legislation works in those cases, but we are still concerned about the wording of line 6 of schedule 7. We feel that it should be made clear that the individual will benefit from the provisions when he or she directs a new offshore mortgage provider to use the funds to repay the original mortgage.
To my relief and, perhaps, that of others, amendment No. 16 is the last that I have tabled, although I will speak briefly about amendments tabled by the Liberal Democrats at the end of my speech. We are happy about that extensions have been made to re-basing as a result of the Government amendments. However, we have tabled an amendment to clarify the position when reorganisation has taken place under section 127 of the Taxation of Chargeable Gains Act 1992. Let me give an example.
Let us suppose that X offshore settlement has held 20 per cent. share in UK trading since 1990. The shares were worth £4 million immediately before 6 April 2008. On 17 May 2008, the company was acquired by Big plc in a share-for-share exchange, such that the provisions of section 127 of the Act applied and there was no disposal for chargeable gains tax purposes. The X offshore settlement sells its shares in Big plc on 25 October 2009 for £5 million. We would welcome the clarification that the provisions of section 127 of the 1992 Act mean that the holding of Big plc is identified with the original holding in UK Trading Ltd such that the terms of paragraph 127(10)(b) or (11)(b) and (c) of schedule 7 are deemed to have been met, and relief under that paragraph would be available, should the trust make a capital payment to a foreign domicile who remits funds to the UK.
Amendments Nos. 94 to 99 and 101 reflect the difficulty the Government have had in framing the legislation over the past few months. The problems have arisen not so much in respect of the charge—although that has created some amendments—but the steps the Government have taken to tackle various anomalies in the remittance rules, which has generated a series of concerns from, for example, trade bodies, the art market and investment management companies. They were triggered by the draft legislation, which led to an initial climbdown by the Government. The complexity of the Government’s proposed changes has led to the raft of amendments tabled not only today, but in Committee. A fuller and better consultation process could have dealt with some of the problems created by the Government’s desire to tackle the anomalies. Although we disagree with how the Government have developed their policy in this area, it is important to get this right, and I acknowledge that the Minister sought to do so and listened to the representations.
One of the drivers of our concerns throughout the process is that the proposed legislation will affect not only high net-worth individuals who have access to very good quality advice to help them comply, but migrant workers, Commonwealth soldiers serving in our armed forces and those working in our health care system—people who will need to understand the choices that they have made. The Minister made it clear in Committee that
people had a choice about whether to apply the remittance basis or the arising basis, but that to apply that choice they needed information, guidance and support. I know that the Financial Secretary said that that guidance was being prepared, but we are asking people to comply with legislation from 6 April that is only today to be finalised. Effectively, this is the final shape of the Bill. That is why there is continuing concern about this.
The Institute of Chartered Accountants said in its Committee stage brief, “We wish to place on record our concern that there has been insufficient time to achieve legislation that is fit for purpose and to inform taxpayers adequately of the changes that take effect from 6 April 2008. We are very concerned that in places the legislation we have currently works in a capricious or unintended manner and/or is either so complicated or so impractical that taxpayers will not be able to adequately self assess.”
I understand the thrust behind the Liberal amendments to defer the implementation of this, because I think there is a lot of work to be done. While the Government are right to say that that guidance will be available, it is not yet available and people are having to comply with the rules now. That is why interested bodies have consistently argued for a delay in commencement and that the remittance rules should be postponed to the start of the 2009-10 year. We argued about that in Committee. Some thought needs to be given to how these implementation issues will be debated and discussed in the future.
The Institute of Chartered Accountants has suggested a body to work in conjunction with HMRC and the Treasury, with representatives of stakeholder groups, to consider the issues that will be thrown up over the course of the next year. I would be glad if the Financial Secretary accepted that as a way forward—
The Financial Secretary to the Treasury (Jane Kennedy) indicated assent.
7.45 pm
Mr. Hoban: That is the spirit in which the Financial Secretary has approached our proceedings throughout.
The Government’s approach to this legislation has not been great, and all parties will learn from it. In the interests of compliance with the tax system, we need to ensure that people know what they are meant to comply with, and future legislation should be subject to better and earlier consultation. We need to get that right as soon as possible, because I fear that come this time next year we will still be talking about amendments to the schedule.
Mr. Jeremy Browne: I had resolved not to take any interventions during my brief speech, but sadly all those hon. Members who intervened so many times in my previous speech have lost interest in the Bill and I am left to speak to a less populated Chamber. I shall not detain the House for long.
In Committee, my hon. Friends and I raised several concerns and tabled an amendment specifically about foreign nationals in low-paid employment, small businesses employing foreign nationals, and higher education institutions. We had some useful discussion of those topics and an appropriate de minimis level for this area of the legislation. I shall not revisit that discussion today.
The purpose of the amendments that I have tabled, as the hon. Member for Fareham (Mr. Hoban) suggested, is to allow a longer period of time for those seeking to comply and thus to make it easier for them to do so. The drafting of schedule 7 runs to 55 pages or, I am told, 22,989 words. I have not counted them myself, so I cannot vouch for that statistic. It was supplied to me by the Low Incomes Tax Reform Group. The explanatory notes alone are 160 pages long and, given how many amendments the Government have tabled to it, this area of the legislation is clearly a work in progress, even at this late stage.
I have tabled eight amendments, but only two are substantial. Amendment No. 94 would prevent part 1 of schedule 7 from having effect until Royal Assent. The Institute of Chartered Accountants argues that taxpayers cannot be given guidance until Royal Assent, but the provisions in this part will apply before that happens. Taxpayers may therefore have acted in a way that, at the time, did not constitute a remittance, but will do so once the legislation is in force. The institute states:
“This uncertainty is likely to result in widespread confusion and non-compliance”.
That is likely to damage the UK’s investment reputation.
Amendment No. 95 would prevent changes in part 2 of schedule 7 having effect before 6 April next year. Again, the institute, to which I am indebted for its insights into this aspect of the legislation, states:
“We are concerned that there is insufficient time to scrutinise legislation of this complexity and that, despite the best efforts of all involved, complex legislation passed with such haste could contain errors.”
That is a polite way of putting it. If I had written that, I would have put “will” instead of “could”.
Amendments Nos. 96 to 102 are consequential amendments that follow on from amendments Nos. 94 and 95.
Let me conclude with a slightly broader point. A feature of this budgetary process and of the Finance Bill has been legislation undertaken in haste followed by long periods of revision in Committee and on the Floor of the House. I am thinking in particular about the 10p tax rate and the compensation mechanism, the changes to entrepreneurs relief in schedule 3 and the overhaul of HMRC powers. The best example of all is this schedule, which is still undergoing revisions and changes an hour after we were scheduled to have finished our debate on the legislation in totality. For that reason, amendments Nos. 94 and 95 seek to buy a bit more time and to give people who have an interest in such matters the opportunity to make the necessary adjustments.
Jane Kennedy: Since the pre-Budget report and throughout our proceedings on the Finance Bill, we have engaged actively with interested bodies. The amendments that we have tabled today—there are 48—reflect how we have listened and responded.
I accept what the hon. Member for Fareham (Mr. Hoban) said—namely, that the schedule might not yet be perfect. I want to make it clear that we will continue to listen. Given the technical nature of the proposals, I have asked HMRC officials to establish a joint committee in the way proposed by the Institute of
Chartered Accountants in England and Wales. I pay tribute not just to the ICAEW but to a number of the representative bodies that have made suggestions and enabled me to be reassured that the final shape of the Bill is close to, if not exactly, what we sought to achieve. The joint committee will be led by HMRC. It seemed a sensible suggestion and I will be kept up to date on its work. It will be established following Royal Assent and will review the operation of the legislation in practice to ensure that it is working as intended by Parliament.
Amendments Nos. 40 to 45, 52 and 53, like many of the amendments that we are discussing today, clarify how the rules will work in practice. I shall try to answer as many of the points as possible—all of them, if I can—as I go through my speech, but not necessarily in the order in which they were made.
Amendments Nos. 20 and 21 effectively ask the Government to draw up a list of services that will fall within the exemption and to formalise them by order and statutory instrument. I am resisting the urge to have some fun at the idea that the hon. Member for Fareham is suggesting such a route. I understand why he has suggested that change. I pay tribute to him for the thoroughness and attention to detail that he has applied to this complex area and I appreciate the way he has brought forward his arguments and pointed out the deficiencies where he has seen them. I have acknowledged some of them and, as he has recognised today, we have brought forward further amendments to respond to others.
We cannot support amendments Nos. 20 and 21 because, with the best will in the world, we would be unable to arrive at a list of qualifying circumstances that would cover every service that we would want to include. The process would prolong any uncertainty. Our amendments Nos. 52 and 53 address the same issue from what we believe is a more pragmatic direction. They identify particular circumstances in which a remittance will always take place even if one or both of the conditions for the exemption would otherwise be met.
The second set of Government amendments, which are amendments Nos. 46 to 49, deal with mixed funds and have also been introduced for the purpose of clarification. They provide for changes to the rules on the treatment of mixed funds to ensure that they are clear and comprehensive. We touched on that in Committee.
Amendment No. 15 would remove the anti-avoidance provision in the way described by the hon. Member for Fareham. The provision, which we have introduced, is absolutely necessary to ensure that the rules are workable. The rules provide clarity and, crucially, they also protect the vast majority of taxpayers from those who might seek to abuse the provisions. He asked me whether I could give an example of a possible abuse without laying out suggestions as to how somebody might get around the provisions. I shall offer one.
A non-domiciled individual could obtain a loan at the beginning of the tax year, put the loan capital into a mixed fund and then remit moneys up to the amount of the loan before repaying it. Under the ordering rules, the remittance would be capital for the year, and the anti-avoidance rule would prevent that manipulation of the mixed fund. I have no doubt that many other examples could be given, but that one might help to clarify the matter.
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