Finance Bill

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Schedule 16

Non-residents: investment managers
Mr. Hoban: I beg to move amendment No. 78, in schedule 16, page 232, line 14, leave out paragraph 2.
The Chairman: With this it will be convenient to discuss the following amendments: No. 79, in schedule 16, page 232, line 28, leave out paragraph 3.
No. 80, in schedule 16, page 232, line 28, leave out paragraphs 3 to 6.
Mr. Hoban: I want to speak to amendments Nos. 78 and 80 because amendment No. 79 is made redundant by amendment No. 80—as no doubt the Minister will point out. These amendments are about a point of principle rather than the underlying tax treatment. There needs to be certainty in the tax system and an appropriate process by which tax law is made and changed. Those matters are relevant to the schedule.
The investment management exemption enables UK-based fund managers managing overseas domiciled funds to avoid any income or corporation tax charges on profits made on the funds that would otherwise arise. For a fund manager to qualify for the exemption, transactions that they undertake must fall within the definition of an investment transaction set out in section 127(13) of the Finance Act 1995. That provision has been supplemented by four statutory instruments and augmented by a statement of practice; in this case it is SP1/01, which gives further guidance on the application of the exemption.
The fund management industry has argued that using primary and secondary legislation to define an investment transaction is not flexible enough to deal with the rate of innovation in the industry, so an alternative approach needs to be found. The proposal in the schedule is, therefore, to repeal the primary and secondary legislation and, in effect, to give HMRC’s commissioners the power to determine what constitutes an investment transaction.
As I understand it from representations on the provision from the Investment Management Association, the expectation is that HMRC will publish on a website transactions that it considers to be investment transactions, therefore qualifying to secure the exemption. That will mean that investment managers will not need to seek pre-clearance as often as they do now, because there will be much greater transparency about what qualifies under the rule, and they will be able to consult the website to see whether clearance has been given, and will need to approach HMRC only when a new type of transaction that has not been dealt with before comes into view, and they want to use it.
12 45 pm
So the approach of the schedule is to remove inconsistencies between the legislation and the statement of practice not by refining legislation or making sure it is up to date, or redrafting it in a more encompassing and clearer way, but just by scrapping legislation that, it would appear, is inconvenient. I do not think that that is how this Parliament makes tax law. We believe that it is for Parliament, not the commissioners, to decide on tax. The schedule removes Parliament’s right to do so.
Parliament should have the right to scrutinise changes in tax policy, through scrutiny of primary and secondary legislation, and it is in the interest of proper, considered debate that the making of the changes should be scrutinised in public by Parliament, not discussed behind closed doors. Furthermore, it is in the interest of certainty that the principles of what is or is not an investment transaction should be laid down in statute. How would investment managers be able to challenge, argue or discuss the decisions reached by HMRC without a statutory framework within which to work?
Although in the short term certainty will be achieved by the elimination of primary and secondary legislation, the lack of clear, consistent statutory principles will, in the long term, create uncertainty if contradictory or ambiguous conclusions are reached. We had debates last year on guidance produced by HMRC with respect to capital losses; despite two iterations when we debated it in Committee, ambiguous conclusions were still reached about whether certain types of transaction fell within the laws. Guidance itself is not perfect in bringing about a considered view.
London has a poor reputation in the financial services sector for uncertainty. Our competitive position in the long term is strengthened by clear, consistent legislation that is properly drawn up. If there is a problem for fund managers, arising from the gap between legislation and the statement of practice, the answer is to refine the legislation rather than scrap it. That is the purpose of amendments Nos. 78 and 80—to restore or maintain the status quo and ensure that the changes are dealt with through proper legislative means, with full parliamentary scrutiny, rather than by the commissioners for Revenue and Customs.
Kitty Ussher: As the hon. Gentleman has just said, the amendments would remove from schedule 16 the provisions replacing the current definition of “investment transaction” in primary legislation with a new power, allowing the commissioners for HMRC to designate in regulations any transaction as an investment transaction.
It may be of use to Opposition Members if I say that our approach is favoured both by the Alternative Investment Management Association and the Investment Management Association, which, together, represent the overwhelming majority of industry participants. During the consultation, AIMA said that the industry wanted a new approach that would
“amend the legislative procedure to simplify/speed up the approval process”
for new transactions, and noted that the
“ability of the UK tax authorities to respond quickly to changes is important in a rapidly evolving industry”.
Schedule 16 delivers those benefits and is what the industry wants.
I take the general view that the City of London and the financial services sector is a jewel in Britain’s crown and one of our most important industry sectors, employing more than 1 million people throughout the country. Currently, about $400 billion is under management in the UK, and we are No. 2 in the world in the sector. Hundreds, perhaps thousands, of people are employed, so when the main industry bodies say that we can do something to make us as attractive, if not more attractive, to investment and expansion in the future, that is something that Governments of any colour should listen to. The amendments would undermine the approach that we are taking and leave the law exactly as it is. That is contrary to what the industry expressly sought during consultation and would mean that we could not deliver the simplification and speedy response to product innovation that are the drivers for what we are trying to do here.
I understand the general point that the hon. Gentleman makes. It is good government to scrutinise as much as possible in Committee and on the Floor of the House. We have sought to square the circle by giving positive assurances. HMRC has already given assurances as to how this power will be used. It is important that these are on the record, so I shall briefly reiterate them. All transactions that currently meet the definition of “investment transaction” in primary legislation will be included in the regulations made under the new power, so investment managers can be reassured that all transactions that currently qualify will continue to do so. HMRC has also said that it will agree with the industry and publish in guidance a statement of assurance about handling any future changes to the transactions that qualify for the investment manager exemption.
HMRC is also committed, as indeed am I, to maintaining the dialogue with the industry and its representative bodies in relation to this and other issues of interest or concern—the dialogue out of which these proposed legislative changes have themselves arisen. It may be helpful if I set out how I see this working in practice. HMRC would not spontaneously decide that a new type of product should be added to the list, but the industry would tell us about an innovation or a new type of derivative that it wants to trade in because it thinks that it would help its business. The product would not be doing any harm to anyone else, and industry will ask us to clarify that the rules mean that it is still exempted. We will have a look and say yes.
Mr. Hoban: Will the Minister outline what principles HMRC will use in determining whether the proposed product would meet the criteria and so be acceptable?
Kitty Ussher: I am sure that the hon. Gentleman will agree that it is not for me to say that right now. I have said that HMRC will be working with the industry to produce this. It will be done collaboratively. The process has not yet finished. The whole aim is to simplify and speed up, and to make sure that we can retain our comparative advantage in this area. I therefore urge the Committee to resist the amendment and to allow the legislative changes sought by the investment management industry to proceed.
Mr. Hoban: While I share the Minister’s view about the importance of the financial services sector—it is a tremendous contributor to Britain’s tax revenues, to employment and to economic growth, and it has grown faster than the economy as a whole in recent years—we need to be careful about introducing changes such as this. There are other features about the environment in which businesses work that are important. One of those relates to certainty. In the study produced recently by the City of London Corporation on tax as a motivation for the location of business in the financial services sector, one of the areas in which the UK rated poorly was certainty of tax law. While it may be convenient for the industry now to offer this approach, in the long term is it appropriate to proper governance to go down this route? That is why I asked about the principles that HMRC will use to determine whether new products satisfy the rules.
Kitty Ussher: Does the hon. Gentleman suggest that we should set out what type of transactions fall under the new power without consulting with industry first?
Mr. Hoban: Far from it. We have seen plenty of examples of where lack of consultation caused the Government problems. We shall come on to some of those later. There should be proper consultation, but my argument is about determining some clear, unambiguous principles that are accepted by both industry and HMRC as to what transactions will qualify as investment transactions. If all of those criteria can be satisfied, why not have them set out in primary legislation? Why not have those principles set out in the Finance Bill, or even in a statutory instrument, rather than in guidance, which Parliament has no opportunity to scrutinise through this process or in a delegated legislation Committee? That is what I am trying to get at.
The Minister is at risk of failing to observe proper parliamentary process or to consider whether there are ways in which the same aim could be obtained through primary legislation rather than relying on guidance. That is the area that I am trying to explore, and I am yet to be convinced that I should withdraw the amendment. The Minister has not been convincing or persuasive as to whether the Government considered an appropriate legislative framework rather than reaching for guidance first.
Mr. Bone: I urge my hon. Friend to press his amendment to a vote, because it is a major leap into the dark to give the Revenue decision-making powers without establishing the principles in the first place. The Minister gave no assurance that there would be any principles. It seems that the Revenue will simply come to a decision.
The Chairman: I call Peter Hoban.
Mr. Hoban: Mark Hoban.
The Chairman: I am sorry, Mark Hoban.
Mr. Hoban: We are easily confused on this side of the House.
My hon. Friend makes an important point. The Minister said that HMRC would seek to come up with some principles in collaboration with industry, and that is the right way to do it. The process should be consultative and collaborative, which is in the best interests of HMRC, the Treasury and industry. However, we should not cast to one side the proper process, which is through primary and secondary legislation, to reach a point that is acceptable to both industry and the Treasury. Does the Minister have anything to add?
Kitty Ussher: Absolutely. In the interest of my work, I am delighted that the Conservatives are pursuing this approach because it seems to be proof, if any were needed, that they do not understand the sort of derivative products that we are discussing. Huge principles are not required because we are talking about technical derivative products and whether they are added to a list. What is happening is simply that Britain is losing out because of the process that would otherwise be required. We would have to sit here and debate incredibly complicated matters that have no wider principles that need to be discussed at parliamentary level. I am absolutely clear that what we are doing is right for the City of London and for the financial services sector. There are precedents for it, and it is being used in other areas, such as in relation to the power given to commissioners of HMRC to designate the Stock Exchange as a recognised stock exchange.
I do not seriously think that what we are doing today would undermine the role of Parliament, because these are fairly mathematical transactions and we would slow down the City of London’s competitiveness by not pursuing this approach. That is what the industry unanimously said, and I would be delighted if the hon. Gentleman pressed his amendment to a Division, because it would show that he simply did not understand.
Mr. Hoban: Well, that was an impassioned outburst from the Economic Secretary on what is an abstruse technical issue. If principles can be determined as part of the whole process of reassurance, is it not possible for those principles to be converted into primary or secondary legislation? That is the point that I want to tease out and we are getting a better understanding of the issue, but why does the Minister believe that primary legislation cannot be used? If HMRC and the industry bodies are looking to produce a statement of principles, why can they not be converted into legislation?
Kitty Ussher: The hon. Gentleman is not intervening on me. I have made my point.
Mr. Hoban: I asked the Minister a question and I was hoping that she might respond. We are talking about a change in the existing process—
It being One o’clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.
Adjourned till this day at half-past Four o’clock.
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