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
years 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. Gentlemans 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
legislationespecially tax legislationsimpler, 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 Secretarys 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 decisionManninen in 2002. The Government plan
to introduce further measures in next years Finance Bill to
extend the tax treatmentpossibly with
restrictionsto holders of what according to the
Governments 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
Secretarys view on the implications of the Lasertec
judgmentanother ECJ judgment in 2004which 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 decisionahead of the schedule being
enactedand 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. HMRCs 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 Governments 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 retrospectionI 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. Gentlemans 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
mystifyit 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 2008I hope that this answers the question that
the hon. Member for Runnymede and Weybridge asked about when it comes
into effecthave 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 companys decisions
and activities. That is not the issue here because ECJ issues are not
driving the policyit 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 meI 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 Secretarys 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.
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 Secretarys 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 Ministers 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
schedules 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 Ministers 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 placemy 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?
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.
Can the Minister confirm that
section 397A(3) of the Income Tax (Trading and Other Income) Act 2005
does not refer to deductions by way of foreign tax?
Section 397A(7), which the schedule imports into the Act, deals with
deductions by way of foreign tax. It is therefore important to confirm
for the record that section 397A(3) does not refer to the foreign tax
deductions that have been dealt with in the newly inserted section
397A(7). Parity of treatment, which lies behind the schedule, does not
apply to individuals who will be claiming the remittance basis of
taxationin other words, non-domsin line with the
revised provisions of the 2005 Act. In those cases, following other
changes proposed in clause 65, there will still be a discrepancy
between UK and foreign dividends. A higher rate taxpayer who is a
resident non-dom will be subject to an effective rate of 25 per cent.
on UK dividends, but a rate of 33? per cent. on foreign dividends, as
they are charged at the higher rate of 40 per cent. on remitted
dividends rather than the special 32.5 per cent. dividend rate, which
applies to dividends that are taxed on an arising basis. Do the
Government have legal advice on this, or is it their considered
position that that discrimination between the dividends of UK companies
and EU companies in respect of resident non-dom shareholders is lawful
under the EU
treaties?
12
noon
Let
me draw a couple of minor points to the Ministers 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?
Finallythis is related
point, although it is not a definitional
onethe 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 forgottenshe will
be able to check the Committee reportbut 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.
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 industrywhich
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?
Kitty
Ussher:
No, I am going to make some progress. I will give
way to the hon. Gentleman shortly. Turning to the specific points, the
second part of this reform
will not be retrospective, and we will make
announcements in due course with clarity. The hon. Member for Runnymede
and Weybridge mentioned the way in which the provision relates to the
higher-rate tax credit and a withholding tax. There is no effect on
foreign tax credit relief; both types of credit are non-payable and
therefore act only to offset UK tax liability due. According to
statute, credit for withholding tax will be given before the dividend
tax credit. After foreign tax credit relief has been offset against any
liability to income tax the dividend tax credit will be deducted from
any remaining tax liability. If the total credit relief available
exceeds the UK income tax liability the excess is lost; it is not
re-payable and cannot be used to offset other tax
liabilities.
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 companyrather than an
individualpoint 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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