Schedule
18
Friendly
societies
Kitty
Ussher:
I beg to move amendment No. 117, in
schedule 18, page 253, line 39, after
‘above,’ insert
‘or not so
exempt by virtue of subsection (3)
above,’.
The
Chairman:
With this it will be convenient to discuss
Government amendment No.
118.
Kitty
Ussher:
Government amendments Nos. 117 and 118 strengthen
and revise the regulation-making powers governing the allocation of
income gains, losses and expenses between taxable and tax-exempt
businesses of friendly societies, so that those powers cover all
circumstances in which an apportionment is required. Friendly societies
are entitled to exemption from corporation tax on profits arising from
life or endowment business and on profits from other business. Those
exemptions are subject to statutory limits. Business written outside of
those limits is taxable. To compute the taxable profits of a friendly
society, it is necessary to apportion income gains, losses and expenses
between taxable and tax-exempt business.
Mr.
Hoban:
I would be grateful if the Minister clarified for
the Committee which products offered by friendly societies are
taxable.
Kitty
Ussher:
I am coming to that. Under current law, a friendly
society may have taxable or tax-exempt other business, but not both.
However, schedule 18 allows the transfer of other business between
friendly societies without its impacting on the taxable or tax-exempt
status of a transferred business. That means that it will become
possible for a friendly society to have both taxable or tax-exempt
other
business.
Currently,
there are no rules to divide income gains, losses or expenses between
taxable or tax-exempt other business. Schedule 18 includes a
regulation-making power to allow those rules to be made. However, the
HMRC solicitor drawing up the regulations to do this has advised that
the regulation-making power is insufficient to cover all situations.
Therefore, Government amendment No. 117 strengthens the
regulation-making power included in schedule 18, and Government
amendment No. 118 extends the existing regulation-making power in
section 463 of the Income and Corporation Taxes Act 1988, so that all
situations are now covered.
The hon.
Gentleman asked for examples of taxable or tax-exempt business.
Sickness policies are an example of taxable business.
Amendment
agreed
to.
Amendment
made: No. 118, in schedule 18, page 254,
line 4, at end
insert—
‘Extension of section
463
3A In subsection (1) of section
463 (application of Corporation Tax Acts to life or endowment business
carried on by friendly societies), for “the life or
endowment” substitute “long-term”; and,
accordingly, in the title of that section, for “Life or
endowment” substitute
“Long-term”.’.—[Kitty
Ussher.]
Schedule
18
, as amended,
agreed
to.
Clause
42
Homes
outside UK owned through company
etc
Question
proposed
, that the clause stand part of the
Bill.
Mr.
David Gauke (South-West Hertfordshire) (Con): Clause 42
relates to property abroad held by a company and to the tax
consequences resulting from that. A requirement for a UK resident to
hold a property abroad through a company is not uncommon, or it is, at
least, to their advantage. For example, in Bulgaria it is necessary for
all properties to be owned either by Bulgarian nationals or by a
Bulgarian company. In France there are certain advantages to holding
property through a company because of inheritance rules and in the US
it is advisable to hold it through a limited liability company because
of legal liability. Therefore, it is a common
circumstance.
For
some time, the problem has been that in those circumstances any income
from that property, if it is rented out, would be treated as a benefit
in kind. The Treasury has been trying to address that issue for some
time. The difficulty has been distinguishing between domestic
arrangements and employee benefits, which is the problem that we have
here. We therefore welcome and support the objective of clause 42, but
I have some detailed questions for the Economic
Secretary.
The
wording in the clause, and particularly in new section 100A of the
Income Tax (Earnings and Pensions) Act 2003, relates to a property
owned by a company—I think that the previous draft referred to
“body corporate”. I understand that it has been changed
to “company” to ensure that French sociÃ(c)tÃ(c)s
civiles immobilières and US limited liability companies are
included in the exemption, and I would be grateful for confirmation of
that. Under new section 100A(1)(a), all the shares of the company have
to be held by individuals. That begs the question, why not trusts?
Trusts are a common manner in which property is held. The traditional
objection to trusts is that they can be used as an anti-avoidance
mechanism. I acknowledge that, but new section 100B(4) would appear to
prevent that difficulty from arising, because it excludes from the
regime an arrangement of which one of the main purposes is the
avoidance of tax or national insurance contributions. Therefore, is
there a good reason why a trust should not be able to hold shares in
the relevant company? It also excludes a local management company,
perhaps acting as a nominee. There is doubt as to whether a local
management company as nominee for an individual would be able to hold
shares in the company. Again, we would be grateful if the Economic
Secretary could clarify
that.
Another
potential difficulty is that new section 100A(1)(a) refers to the fact
that the director and the shareholder, or the property owner, will be
the same person. It might be that the director of the company will be
one spouse and the owner of the shares the other. That would
appear to be excluded from the wording in new section
100A(1)(a).
Turning
to new section 100A(2), the conditions on the company owning the
property include that the property must be the company’s main or
only asset. That is usually interpreted as more than 50 per cent.
of
the company’s assets, but it does not necessarily need to be more
than that. Professional advisers have raised the point that the company
may hold cash to secure borrowing, or have an overseas bank account
which is used for running costs and/or to receive rent. So
clarification as to what “main or only asset” means in
that context would be helpful. Would the activities set out in new
section 100A(2)(c) exclude activities relating to the management of
minor assets? Can the Economic Secretary clarify the intention
here? The
structure proposed by new section 100A(3) would appear to allow for a
holding company on top of the company that owns the property, but that
holding company has to be owned by the individuals in question. It has
to own all of the company that holds the property. Professional
advisers—the Institute of Chartered Accountants, I
think—have asked what happens if two sets of friends own a
property through two holding companies. Why deny the relief in such
circumstances? It would seem to be possible to structure in such a way
that that problem disappears, but is there any particular reason why
such restrictions on a holding company are in
place?
6.15
pm
Proposed
new section 100A(4) relates to the relevant interest in the property
and states that it must
be
“a
right to exclusive possession of the property at all times and at
certain
times.”
Just
for clarification, I would be grateful if the Minister could confirm
that that does not cause a problem if the property is rented out,
particularly with a timeshare arrangement, when the owners would have
exclusive possession only at particular times, which would fall within
the definition of “certain times”? Would that fall within
the regime as set out in clause
42?
Finally,
given that the issue is of long standing and has taken some time to be
resolved, I understand that the position of HMRC is that it will not
pursue tax liabilities in certain circumstances. The criteria are as
follows: the property is owned by a company owned by individuals; the
company’s only activities are ones incidental to its ownership
of the property; the property is the company’s only or main
asset; and the company is not funded directly or indirectly by a
connected company. Again, will the Minister confirm that that is the
policy approach of HMRC in such circumstances, while we wait
for the terms of clause 42 to come into
effect?
Kitty
Ussher:
As the hon. Gentleman said, clause 42 will ensure
that individuals who have used their own money to buy—or who
will buy—a home abroad through a company will not face a benefit
in kind tax charge for any private use of the property. Some
UK-resident individuals have set up or acquired companies to own a
property abroad, generally for holiday use. They will often have done
so on the advice of their professional advisers, because of the
specific laws in the country where the property is located. The hon.
Gentleman mentioned Bulgaria. If those resident individuals direct the
company’s affairs, they could be within the scope of the living
accommodation benefit in kind tax charge, although they may not have
been aware of that. They may have considered that no tax charge arose
in such circumstances and have not therefore reported the matter to HM
Revenue and Customs.
The measure
before us will remove that benefit in kind tax charge if certain
qualifying conditions are satisfied. It will apply where an overseas
property is owned by a company that is owned by individuals and the
sole activity of which is holding that property for occupation and/or
letting. That will include ownership through foreign companies, such as
French SCIs, as the hon. Member for South-West Hertfordshire mentioned.
The measure will have retrospective effect. It is right that we should
remove the tax charge that would otherwise arise in those
circumstances. It is not fair that those who have decided to buy a
property abroad, out of their own taxed income, should face a bill
simply because they did so through a
company.
The
hon. Gentleman asked a number of specific questions. A general point is
that eligibility will be considered against the rules that have been
laid out—we expect those rules to be clear, but we may need to
look at the specifics of a specific situation in order to be able to
judge, so I do not want to give any misleading impression today. I can
respond in some general
ways.
The
hon. Gentleman asked whether companies owned by a trust were covered by
the exemption. The exemption will not apply where the property-holding
companies are owned by a trust. The limited exemption is intended to
remove the benefits tax charge in certain circumstances—where an
individual had incurred the charge without realising it. The Government
feel that the current qualifying criteria strike the right balance in
that
regard.
The
hon. Gentleman asked about a situation in which management companies
are nominees. The legislation covers the situation in which the company
owning the property is held by another company, and that can include a
management company if it is within that definition. He also mentioned a
situation in which property is rented out. If the property is rented
out and the owner makes a profit, it will be treated as any other
rental income. Obviously, if an individual has difficulty with a
specific situation, they should contact HMRC and look at how that
situation relates to general policy. The hon. Gentleman mentioned
timeshare. I have already explained what would happen if property was
rented out and the same applies to timeshare, so there is no issue
there.
If two
friends buy a property, the exemption applies regardless of whether the
property is owned by a single person or with someone else. The
legislation applies where the accommodation is provided to a director
or their spouse, and the fact that both spouses own shares in the
company will not affect whether they are covered by the exemption. The
legislation includes only a benefit that arises from the owner’s
private use—running costs for the rental of the property would
be allowable as usual. I think that I have answered all of the hon.
Gentleman’s questions.
Mr.
Peter Bone (Wellingborough) (Con): I should declare an
interest because we sell overseas property. The Minister did not speak
about the incidental element of the question. Often, the company will
have a bank account in a foreign country. There may be a substantial
amount of money in it because the owner will bring across money,
depending on the exchange rate. That might fall foul of the incidental
provision.
Kitty
Ussher:
I will have to write to the hon. Gentleman. I am
sure that he will use my letter to make whatever appropriate domestic
arrangements he sees fit.
Mr.
Gauke:
I am grateful to the Minister for providing
clarification on a number of points, but I would like to return to the
trust issue. As I said earlier, if a company’s shares are held
via a trust, I do not think that it will benefit. The question remains
why not? I was concerned about a situation in which all the shares are
owned by one spouse, although the other spouse is the director of the
relevant company. Would that situation be protected? Although I have
those concerns, on the whole we welcome the clause.
Question
put and agreed
to.
Clause
42 ordered to stand part of the
Bill.
Clause
43
In-work
and return to work credits and
payments
Question
proposed, That the clause stand part of the
Bill.
Mr.
Gauke:
The clause relates to the tax treatment of in-work
credit, return-to-work credit, in-work emergency discretion funds, and
emergency fund payments. A pilot scheme was rolled out nationally, and
although that pilot scheme benefited from being exempt from income tax,
that would not be the case for the national scheme but for this clause.
How wide were the pilot schemes, what percentage of the country was
covered by them, and when will the national schemes be
introduced?
Kitty
Ussher:
As the hon. Gentleman said, clause 43 exempts
in-work credit, return-to-work credit, the in-work emergency fund and
the in-work emergency discretion fund from income tax. Such schemes are
designed to encourage lone parents and incapacity benefit claimants to
take up, and stay in, employment. The income tax exemption will apply
to payments made on or after 6 April. In-work credit and return-to-work
credit are weekly in-work payments for up to a year, to help the
transition into work for lone parents and people with a disability or
health condition. Lone parents in work can also receive discretionary
payments from the in-work emergency discretion fund in Great Britain,
and the in-work emergency fund in Northern Ireland, to help overcome
unexpected financial barriers to work. The income tax exemption will
ensure that payments under the scheme provide a clear, simple and
transparent boost to income, ensuring the greatest possible impact on
work incentives.
The hon.
Gentleman asked about the effects of the pilots. The scheme was piloted
as part of the pathways to work programme, which was piloted in 21
Jobcentre Plus districts. We announced in January 2006 in the welfare
reform Green Paper that pathways to work would be rolled out nationally
by April this year and we believe it will lift around 9,500 children
out of poverty each
year.
Question
put and agreed
to.
Clause
43 ordered to stand part of the Bill.
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