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.
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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