Finance Bill


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Schedule 12

Tax credit for certain foreign distributions
The Economic Secretary to the Treasury (Kitty Ussher): I beg to move amendment No. 123, in schedule 12, page 215, line 17, after ‘company,’, insert ‘provided that—
(a) the company is not an offshore fund (within the meaning of section 756A of ICTA),’.
The Chairman: With this it will be convenient to discuss Government amendments Nos. 124 and 125.
Kitty Ussher: As this is the first time that I have taken the floor this morning, it may be appropriate for me to respond to the point of order raised by the hon. Member for Fareham at the start of the sitting, if that would be in order, Mr. Hood. He rightly pointed out that the numbers of the amendments to schedule 17 used in the explanatory notes were different from those on the amendment paper. I am grateful to him for pointing that out. I am advised that a complete set of explanatory notes for all the Government amendments to schedule 17 is on its way to the room forthwith. Since we are a little time away from discussing schedule 17, I trust that that will be sufficient for the hon. Gentleman. I assure him that there was no intention to mystify any further what is a rather technical schedule.
By way of background to Government amendments Nos. 123, 124 and 125, I should explain that schedule 12 will introduce changes to the system of taxing individuals who receive dividend income from shareholdings in foreign companies. The changes have effect for the tax year 2008-09 and subsequent years.
Since the Bill was published, it has become clear that some collective investment schemes are seeking to exploit the extension of the non-payable dividend tax credit by locating their cash or bond fund ranges offshore, primarily to secure tax advantages for their UK investors. That behaviour could carry a significant Exchequer cost and was not the intention behind our policy. In order to prevent that tax leakage, the Government amendments will exclude distributions from all offshore funds from the extension of the non-payable dividend tax credit. An offshore fund is already defined in legislation. The amendments mean that the position for UK investors in offshore collective investment schemes will remain exactly as it was before 6 April 2008.
Mr. Hammond: It is a pleasure, Mr. Hood, to serve under your chairmanship for the first time on this Bill. The Minister has made the case for closing a gap that has opened up. We do not dissent from her view, but there is a concern here. The Minister indicated that some funds had already moved location to exploit what would have become a loophole. Clearly, their premature action has allowed the Government to intervene and amend the Bill during its passage through Parliament to close a loophole.
It is rather disconcerting that, with the vast resources that the Government have available, an avoidance opportunity of this nature was not spotted when the schedule was drafted. The Minister told us that substantial amounts of Exchequer revenue could be at stake. Presumably, if those seeking to exploit this loophole had been able to contain themselves for just another two months and not shown their hand until after the Bill had received its Third Reading, the Exchequer would indeed have suffered that loss of revenue as those avoidance opportunities were exploited and presumably then reversed in next year’s Finance Bill.
Can the Minister tell us, because it is not always clear how this works in government, what lessons the Government have learnt from this and what analysis of this problem has taken place within the Treasury? How are the Government moving to ensure that other such loopholes are not being opened up unintentionally in areas where the potential exploiters will not be so accommodating as to show their hand at a time when the Government are still in a position to deal with it?
Kitty Ussher: I am grateful to the hon. Gentleman for his question, which is very prescient. The answer is simple: we are in continuous dialogue with the various parts of the asset management industry. It is precisely because of that relationship of trust and close dialogue that they alerted us to the fact that this was taking place. Obviously, we have our own experts and lawyers and we seek to consult as widely as possible and as much as possible. We will always take prompt action where required.
Mr. Hammond: What armoury would the Treasury have had if this loophole had not been spotted? If the Bill had been passed into law without the amendment, and the loophole had then been exploited, would HMRC or the Government have any tools available to deal with it in the interim, or would it have had to be reversed in the next Finance Bill?
Kitty Ussher: The hon. Gentleman is talking about a hypothetical situation because we have spotted it and so there will be no loss to the Exchequer. It is always possible in Finance Bills to legislate retrospectively. So, hypothetically, we would have made it entirely clear that this was not the intention and would have sought to remedy it at the earliest opportunity. The point is absolutely clear. In response to industry concerns, we are using the opportunity to do the right thing. I am grateful for the hon. Gentleman’s support in that regard.
Amendment agreed to.
Amendments made: No. 124, in schedule 12, page 215, line 18, after ‘(b)’, insert ‘the person’.
No. 125, in schedule 12, page 216, line 40, after ‘company’, insert ‘that is not an offshore fund’.—[Kitty Ussher.]
Mr. Hammond: I beg to move amendment No. 71, in schedule 12, page 215, line 18, leave out ‘minority’ and insert ‘small’.
The Chairman: With this it will be convenient to discuss the following amendments:
No. 72, in schedule 12, page 216, line 17, leave out ‘minority’ and insert ‘small’.
No. 73, in schedule 12, page 217, line 8, leave out ‘minority’ and insert ‘small’.
No. 74, in schedule 12, page 217, line 9, leave out ‘minority’ and insert ‘small’.
Mr. Hammond: Section 31, which this schedule introduces, seeks to create a level playing field for the receipt by UK residents of dividends from foreign companies. That has become pressing, not because people in the UK are rushing out and investing in foreign companies more than they were, but because some companies have become foreign companies as a result of flight from the UK. Perhaps it is not always as a result of that, but it is a concern. It is also because of acquisitions such as that of Abbey by Banco Santander, and because of the re-domiciling of Shell. Many people who thought that they held solid old-fashioned British company stocks now hold shares in a foreign company. The measure is generally welcomed, in that it provides some clarity.
I hope, Mr. Hood, that if I stick narrowly to the amendments, we can have a brief clause stand part debate, and raise some slightly more general points about how the measure has been introduced and the next steps that the Government intend to take.
11.30 am
Amendments Nos. 71 and 72 to 74 are an unashamed attempt to embarrass the Government over their failure to use plain language. I accept that a Bill or any legal document contains definitions, and one can define things to mean what one wants them to mean. It would be perfectly possible for the Government to put into schedule 12 “black means of the colour white”. If that was what the definition said, everywhere that the word “black” was used in the schedule we would understand it to mean “white”. However, I have to suggest to the Economic Secretary that, with all the rhetoric about making legislation—especially tax legislation—simpler, it would not be a bad principle to try to stick to using words in their plain meaning, and where the plain meaning of a word is clearly one thing, to avoid using that word to mean something else.
The word “minority” to me has a plain meaning. It means “less than a majority”. It has a meaning in relation to shareholdings. The term “minority shareholding” is well understood. It therefore struck me as unsatisfactory to have the term “minority shareholding” defined as a shareholding of less than 10 per cent. That seems to be an arbitrary definition. Twelve per cent. is apparently not a minority shareholding. By extrapolation, I assume that the Economic Secretary would wish us to regard anything less than 90 per cent. as not being a majority shareholding. A holding of 89 per cent. in a company would not give you a majority, if 11 per cent. was not a minority.
My suggestion to the Government to avoid that nonsense is to use “minority” where it has its plain meaning and, where the meaning that the Government wish to import is not that which is normally understood, to use something different. I have suggested the novel approach of calling a 10 per cent. shareholding a small shareholding—[ Interruption. ] Well, my hon. Friend the Member for Weston-Super-Mare thinks that that might raise some issues, but my underlying point is serious, and I shall be interested to hear the Economic Secretary’s comments about that use of language, and whether she agrees with me that it is confusing.
More substantively, the underlying provision in the schedule is a result of a European Court decision—Manninen in 2002. The Government plan to introduce further measures in next year’s Finance Bill to extend the tax treatment—possibly with restrictions—to holders of what according to the Government’s definition is a majority shareholding in a company, namely, anything over 10 per cent. It will be interesting if the Economic Secretary can explain why there is a need for a two-stage process and why it is not appropriate to address the issues facing the holders of larger shareholdings at this time. What does she think the consequences of that would be? It will also be interesting to hear the Economic Secretary’s view on the implications of the Lasertec judgment—another ECJ judgment in 2004—which I believe suggests that the limit, if there is to be one, should be much higher than 10 per cent. and could be as high as 25 per cent.
While we are on the subject, I understand that HMRC is currently resisting claims for relief based on the Manninen decision—ahead of the schedule being enacted—and is seeking to distinguish the details of individual cases of claims brought by taxpayers from the precedent that Manninen sets. It is the view of the Law Society among others that in most, if not all, of those cases, the distinction that HMRC seeks to make is not justified. HMRC’s fear of the Manninen judgment appears to be the lack of a time limit on its application; I suppose that it is concerned that there could be back claims going back many years, perhaps running to tens of millions of pounds. Other European Court decisions in relation to tax, particularly value added tax, have opened up just that scenario.
Will the Economic Secretary explain to the Committee the retrospective effect of the provisions in the schedule? Will they apply only to new dividend distributions, or will they apply retrospectively to distributions received in previous years? If the provisions are extended in the 2009 Finance Bill to apply a similar treatment to larger shareholdings, is it the Government’s intention that that will be retrospective, at least to this year, or will the holders of larger shareholdings be disadvantaged in comparison to smaller shareholders?
It seems that there are two simple choices: either the Government can accept the logic of the Manninen judgment and use domestic legislation to regularise the position and deal with retrospective claims resulting from Manninen, or they can turn their back on the ECJ decision, legislate for the future only and require all those with historic claims to trudge through the courts in a process that is expensive and tedious for all concerned. It strikes me that the Government are not afraid to use retrospection—I had written that note before I heard the Economic Secretary not five minutes ago telling us that she would use retrospection if necessary to deal with any loopholes that appeared as a result of poor-quality drafting in the Bill. If retrospection is sauce for the Government goose, should it not also be sauce for the taxpayers’ gander, in a case such as this? I look forward to hearing what the Economic Secretary has to say about, in particular, the position of taxpayers with historic claims as a result of the Manninen judgment.
Kitty Ussher: I presume that these are probing amendments and they will not be pressed. There seems to have been some misunderstanding on the part of Opposition Members, which I hope I can clarify. On retrospection, I do not know whether the hon. Member for Runnymede and Weybridge misunderstood or did not understand what I said. In the hypothetical case to which he referred, I said that a very strong statement would be made because we always could use retrospection if required. That is different from landing an unexpected tax bill, which we should always avoid unless it is necessary, so the hon. Gentleman is making mischief, although the Committee will surely not agree with me on that.
The 10 per cent. shareholding limit is very simple. It is a generally accepted dividing line between small investments and those in which the shareholding is large enough for the shareholder to be more closely involved in company decision making. It is a proportion rather than an absolute amount. I counter the hon. Gentleman’s accusation that we are seeking to complicate the issue. It is a generally understood term.
Mr. Greg Hands (Hammersmith and Fulham) (Con): Can the Minister tell us who the 10 per cent. limit is generally accepted by?
Kitty Ussher: It is generally accepted by all our stakeholders, otherwise we would not have done it like this. There is no attempt to mystify—it is used in other legislation and I can provide details shortly.
Mr. Hands: Would she name some of these stakeholders who define the 10 per cent. barrier as representing a significant shareholding?
Kitty Ussher: Perhaps I need to go back to the basic point. Our intention is to provide clear legislation. The legislation states precisely what we mean and we consult on all these clauses. There is no attempt to mystify, we have no interest in mystifying and we are clearly setting out what we said that we would do in the Budget, which is deal with 10 per cent. holdings first and with larger holdings later on. I can provide a complete summary of all the responses that we have had, if the hon. Gentleman would find it helpful, but the term is generally accepted. I have said it about five times, and it remains the case. Perhaps I can now refer to the points that the hon. Member for Runnymede and Weybridge made.
The policy is to simplify things for people who hold shares in and receive dividends from foreign companies. The hon. Gentleman mentioned a number of European cases, and I am happy to explain them. We are aware of the Manninen and Meilicke cases, but they are not driving the taxation change in front of us. The Manninen case indicates that providing less favourable treatment for foreign dividends infringes the principles of freedom of establishment and free movement of capital, but the UK position is different from the position in Manninen.
We have many double taxation agreements designed to relieve taxation of income in more than one country. Manninen does not deal with foreign tax credit relief available in respect of foreign dividends. The changes to the tax treatment of foreign personal dividends that we are proposing from 6 April 2008—I hope that this answers the question that the hon. Member for Runnymede and Weybridge asked about when it comes into effect—have no effect on the past treatment of foreign dividend income.
The hon. Gentleman also mentioned the Lasertec judgment, which indicates that the relief should be up to 25 per cent. As I have stated on several occasions, we believe that the 10 per cent. figure is the generally accepted dividing line between small investments and those where the shareholding is large enough for the shareholder to be more closely involved with the business and to influence company decision making. The Lasertec case was about the freedom of establishment rules within the EC treaty and the 25 per cent. figure referred to the degree of shareholding that would confer determinative influence on the company’s decisions and activities. That is not the issue here because ECJ issues are not driving the policy—it is a simplification measure.
Mr. Hammond: It is interesting that when it suits Government Ministers, they refer to EU decisions, to which they are perfectly prepared to sign up, but they then say, “Actually we have a different view and our view will prevail”. The Minister used the term “small shareholding” in the last piece of brief that she read out. She has not addressed the substance of the amendment yet, and explain why the Government have chosen to use the word, “minority”, rather than “small”, which appears in her own briefing note. It is the more natural term to use and it conveys the meaning in question. Why is she choosing to use “minority” in a most unnatural sense?
Kitty Ussher: The hon. Gentleman is playing with semantics because he cannot engage with the issue. The legislation makes our definitions entirely clear in a way that the industry accepts. We can debate whether it should be higher than 10 per cent., but the intention in the schedule and the relevant clauses is absolutely clear.
The hon. Gentleman suggests that we are trying to be vague, but that is not the case at all. I have explained why it is 10 per cent. The legal drafting is precise and, therefore, accepting his amendments would cause far more confusion than we have at the moment.
Mr. Hammond: I am disappointed that on my first opportunity to engage with the hon. Lady, I have found her answer unsatisfactory. I thought that she would at least concede that it is a good idea to try to use language in its natural meaning to make tax legislation intelligible to the average reader, although I am not sure who the average reader of schedule 12 to the Finance Bill is. It is extraordinary that the Government have chosen to use a term that has a meaning and rather perversely define it differently for the purposes of this legislation.
11.45 am
Kitty Ussher: I put it to the hon. Gentleman that the word, “small”, could mean small in monetary terms, whereas the term “minority” always implies a proportion. Since it is a proportion for which we intend to legislate, does he not agree that his amendments would make the position more confusing?
Mr. Hammond: No. The hon. Lady has just said herself that a term can be defined. “Small” could be defined as 10 per cent. or less. I do not think that anybody would say that that is not the natural meaning of “small”. “Minority” has a meaning; it means a percentage of 49.9 recurring or less. That is my understanding, but perhaps she went to school in a different place from me—I am sure that she did so. [ Interruption. ] The Exchequer Secretary, from a sedentary position, wants to engage in a bit of class warfare.
Angela Eagle: Will the hon. Gentleman give way?
The Chairman: Order. The Committee is getting somewhat distracted.
Mr. Hammond: The Exchequer Secretary seemed to want to indulge in a bit of class warfare. Perhaps she wanted to probe whether the Economic Secretary’s comprehensive school was better than my comprehensive school.
Angela Eagle: I assumed that the hon. Gentleman went to an all-male school. There was no suggestion of class in my mind whatsoever.
Mr. Hammond: Well, she would be wrong on that as well. We will not embarrass the Economic Secretary by asking her to state her credentials.
I have made my point. I did not intend to undermine the Bill, but to obtain confirmation from Ministers that in general terms they would prefer things to be transparent and words to be used in their plain meaning. Unfortunately, we have not obtained that reassurance from the Economic Secretary, but I will not press the amendments further.
Mr. Colin Breed (South-East Cornwall) (LD): Broadly, I agree with the hon. Gentleman. Words are used within a context. In the context of shareholding, “minority” has a particular meaning. I do not think that the Economic Secretary has answered the question of why the people with a shareholding over 10 per cent. have to wait another year. That is the explanation that I would like to hear.
Mr. Hammond: Well, the Economic Secretary did not respond to that. If she would like to do so, I am be happy to give way. Related to the question of whether the measure has a retrospective effect for taxpayers who received foreign dividends before April, I specifically asked whether the extension to larger shareholders will be backdated to April so that they are treated similarly to minority shareholders. It does not appear that she wishes to intervene, so if we have the opportunity to hold a stand part debate, perhaps she would revert to the point. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendments made: No. 124, in schedule 12, page 215, line 18, after ‘(b)’, insert ‘the person’.
No. 125, in schedule 12, page 216, line 40, after ‘company’, insert ‘that is not an offshore fund’.—[Kitty Ussher.]
Mr. Hammond: I beg to move amendment No. 70, in schedule 12, page 219, line 16, leave out paragraph 24.
This is another probing amendment. It would delete from schedule 12 paragraph 24, which seeks to deny the use of the new tax credit on foreign dividends from non-UK companies for gift aid purposes. While addressing the need to create a level playing field across EU and European economic area companies for most purposes, the Government have sought, for reasons that I do not understand, to carve out an exception for the gift aid scheme. As drafted, the Bill excludes the use of dividends received from European companies or tax paid in respect of dividends received from EU companies in the gift aid scheme. Does not that infringe European Union treaty requirements by discriminating between EU companies and interfering with the free movement of capital?
The Minister sought to convince the Committee earlier that the Manninen judgment had nothing to do with the introduction of schedule 12, but that is not our understanding of the situation. It seems that the Manninen judgment would apply to the gift aid exemption that paragraph 24 will exclude. I do not know whether that is the result of sloppy drafting, or the first sign of a hitherto unannounced Government campaign to challenge the EU treaties.
Mr. Bone: Hear, hear.
Mr. Hammond: My hon. Friend is getting excited about that. Quite honestly, nothing would surprise us these days, but in accordance with the long-termism that the Prime Minister espouses, if that is the Economic Secretary’s intention, she will need to get the policy into the public domain in the next 48 hours if it is to comply with the Prime Minister’s time-scale agenda. I look forward to hearing what she has to say, and perhaps we can pick it up again once we hear her response.
Kitty Ussher: I must admit to having a little bit of a chuckle at the Opposition parties, which are yet again reverting to type by wishing to see everything through the prism of some kind of battle with the European institutions. Nothing could be further from the case. I shall explain why we have made an exemption for gift aid, and why I do not propose to accept the amendment.
The amendment would allow donors to use the new tax credits on dividends from non-UK companies to frank donations to charity under the gift aid scheme. The key principle that underpins gift aid is that donors can redirect UK tax that they have paid to charities. Where UK income tax is paid on dividends received from abroad, the principles behind gift aid allow UK tax paid by donors to frank gift aid donations. The new dividend tax credit, however, reflects tax paid outside the UK, so the schedule’s provisions simply reflect the fact that there is no UK tax to redirect. Therefore, I ask the hon. Gentleman to withdraw his amendment.
Mr. Hammond: I understand the Minister’s point, but having accused us of reverting to type, which is nonsense, she has now adopted a “little England” approach on this. She has talked about the UK tax deducted and about making it available for the gift aid scheme. Does she have advice, in the light of the Manninen judgment, that the terms of paragraph 24 of the schedule are in fact compliant with the EU treaties and do not fall foul of the free movement of capital provisions? I understand her concern about the possibility that the UK Treasury would essentially be reimbursing to a charity revenue that it had not received from the taxpayer in the first place—my hon. Friend the Member for Wellingborough, who was very interested in what I said earlier, would no doubt entirely support that view. However, it is in the nature of the arrangements that we have with the EU that there will be occasions on which one national Government will effectively subsidise another because of the free movement arrangement.
I shall just ask the Minister a simple, factual question. Is the drafting of paragraph 24 based on specific legal advice that it will not fall foul of the treaty provisions? She made her case to the Committee very clearly, but it will not astonish her to know that I did not dream up this challenge to paragraph 24 on my own. There are serious professional bodies out there that doubt whether the measure will survive a challenge in the European courts. While it may be clear in her mind, it is not clear to professionals outside who take an interest in these things. It would be useful to know what legal advice she has received.
Kitty Ussher: We consult all the relevant bodies. I understand that there is a convention not to mention them specifically, but we consult all of them. I am aware of the organisation to which the hon. Gentleman refers, but we simply do not agree with it on this point. Preventing the new tax credit from franking gift aid does not place a bar on the free movement of capital. We believe that it is perfectly consistent with the way that the EU treaties currently work. We are always exploring definitional points in this area.
Mr. Hammond: I asked a specific question. Does the Minister have legal advice to that effect.
Kitty Ussher: We have our own internal legal advice.
Mr. Hammond: To that effect?
Kitty Ussher: Yes.
Mr. Hammond: The Minister has heard the point and has made her response. Those who have a different view will no doubt now communicate with members of the Committee. If necessary, we will come back to this issue at a future point in our consideration of the Bill. In the meantime, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Question proposed, That this schedule, as amended, be the Twelfth schedule to the Bill.
Mr. Hammond: There are a couple of other points that I should like the Economic Secretary to clarify for us. Will a taxpayer be able to claim the credit against the higher rate tax due for any foreign tax deducted in respect of the dividend, in addition to the deemed tax credit? Unless credit is available for all or part of the foreign tax paid, the taxpayer will have an increased tax liability compared with that of a holder of shares in a UK company.
12 noon
Let me draw a couple of minor points to the Minister’s attention. The Income Tax Act 2007 contains a definition of grossing up. It states that the grossed-up amount is
“the amount produced by adding to a net amount that net amount multiplied by the fraction r รท (100-r)”.
That is a different calculation from the one envisaged in new section 397A. That will be rather confusing. We will have one definition of grossed-up amounts in new section 397A(2), but in new section 399 of the Income Tax (Trading and Other Income) Act 2005, we will have a different definition using the definition in the Income Tax Act 2007. It returns to the earlier point about trying to make all this understandable. Does it make sense to have a different definition of grossing up in new sections 397 and 399 of an Act? Could we not have avoided that by more careful use of language in drafting?
Finally—this is related point, although it is not a definitional one—the definition of grossed-up distribution is the distribution increased by tax withheld at source. The definition in the schedule says, “including special withholding tax”. Will the Minister explain why those words are necessary? Surely, a special withholding tax will always be included in the definition of a tax deducted at source. Since provision is already made in the definition of grossed-up distribution to deal with tax withheld at source, why do we need a separate reference to special withholding tax? Is there some special significance that other members of the Committee and I have missed?
Mr. Breed: I intervened on the hon. Member for Runnymede and Weybridge a moment ago, and I wonder if the Minister would clarify the position regarding those people with shareholdings above 10 per cent. who will now experience a delay. Why are they being delayed for a year? Will the benefit be retrospectively applied?
Kitty Ussher: As we are on the schedule stand part debate I want to explain the basic effect of the measure, which is to simplify the system for people with shares in foreign companies. More than 95 per cent. of UK individuals in receipt of dividends from a foreign company will be entitled to the non-payable dividend tax credit. That will simplify the tax system for about 300,000 people. It is somewhat predictable, given the interventions of Opposition Members, who all posed valid questions that I will answer, that there should not be a general point of principle saying that they welcome the simplification and the deregulatory principles behind it. The provisions are welcome.
Mr. Hammond: The Minister may have forgotten—she will be able to check the Committee report—but my opening words in addressing amendments Nos. 71 to 74 identified the purpose, and I said that the measure was generally welcome.
Kitty Ussher: I am delighted that that is now on the record so that everyone can see that the proposal is welcomed by all political parties.
As for hon. Members’ specific questions, the reason we are tackling 10 per cent. shareholdings now and moving on later is that we wish to proceed at a proportionate pace in consultation with the entire industry. We had reached a consensus by the time of the Budget on 10 per cent. shareholdings, so we thought it appropriate to make our decision then. We will continue to consult in the months that follow in order to put our general proposals forward.
Mr. Hammond rose—
Kitty Ussher: I will give way to the hon. Gentleman, but he should have the courtesy to let me finish my sentence. We shall put forward our general points for larger shareholdings at the appropriate time.
Mr. Hammond: It is customary in this place to indicate a wish to intervene at the point at which that wish arises. It is up to the hon. Member who has the floor to decide if and when to give way.
The hon. Lady says that she is consulting with the industry—which industry? We are talking about shareholders who hold shares in foreign companies, so it is not obvious with which industry she would be consulting. Presumably, she is not consulting with foreign companies about how they would like their UK shareholders to be treated.
Kitty Ussher: We always consult with all interested parties, and I have already said that I do not intend to list for the Committee exactly who we are talking to. The hon. Gentleman has listed representations from many outside bodies and we will work with those and others.
Mr. Hands: Will the Minister give way?
The hon. Member for Runnymede and Weybridge mentioned interaction with non-UK domicile rules. The schedule does not seek to change in any way the position for non-domiciled individuals who invest in offshore funds. I am delighted that the hon. Gentleman has read in some detail new section 397A of the Income Tax (Trading and Other Income) Act 2005. He makes the point that we have two separate definitions of “grossed-up”, but he is incorrect in his supposition. The definition in the Income Tax Act 2007 is a general tax provision; by convention a specific provision such as new section 397A, on which he is now an expert, overrules a general provision, so that is entirely clear in law. He asked if we think that the way in which we tax individuals using the remittance basis is legal. Of course we think that it is legal; that is why we are doing it. The new dividend tax credit will apply to dividends paid to remittance-based taxpayers to the extent that for such dividends brought into the UK and charged a tax, when taken with the change in the headline rate of tax for higher-rate taxpayers to 40 per cent., it will give a new effective rate of tax of 33.3 per cent.
In his detailed reading of new section 397A, the hon. Gentleman queried the point about deductions. I am advised that “deductions” in this part of the schedule means relief under UK tax law for things such as interest. It does not mean foreign tax that another country has deducted from a dividend, and that is the point of that part of the schedule. I trust that with those answers we can now proceed.
Mr. Hammond: Will the hon. Lady give way?
Kitty Ussher: I should be delighted to give way to the hon. Gentleman, and I have also promised to do so for the hon. Member for Hammersmith and Fulham.
Mr. Hammond: I am not sure whether the last point that the hon. Lady made was intended to address my question about why there was a need for words referring to special withholding tax, or whether it was not in fact included in the more general reference to deductions. I am not sure whether that point remains to be answered.
Kitty Ussher: I have explained to the hon. Gentleman the best advice that I have had on that point, which is that “deductions” does not mean foreign tax that another country has deducted from a dividend. On his specific technical point, I shall reflect further and write to him.
Mr. Hands: May I take the Minister back to the consultation? She gave an abbreviated response to my hon. Friend the Member for Runnymede and Weybridge about whether it will include foreign companies. Presumably, she must have some idea about whether the consultation will include tax lawyers, tax accountants, small stockbrokers or bulge-bracket firms, and can give us some sort of steer on who will be consulted.
Kitty Ussher: I am interested in the issue that Opposition Members keep raising. We have no desire not to consult anyone on changes to the law, such as the one under discussion. We shall, of course, consult all the groups that the hon. Gentleman has mentioned. In addition, my right hon. Friend the Financial Secretary has set up a group specifically to look from a company—rather than an individual—point of view at the competitiveness of the UK taxation system. The door is always open, and I hope that that message goes out loud and clear.
Question put and agreed to.
Schedule 12 , as amended, agreed to.
 
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