Finance Bill

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Jane Kennedy: This has been a helpful, brief discussion. All the proposals made during the consultation were considered and discussed across government. I met a number of organisations that made representations. The proposals are complex, requiring a full assessment of any risks to the current system and the funds that flow to charities through it. We are continuing to develop our thinking on gift aid, but at present our priority is to protect the status of this popular tax relief, rather than risk losing the benefits of the system.
We carried out a full and open consultation. As one might expect in such a broad area, views vary widely across the charitable sector. We responded to issues on which there was consensus: transitional relief, the provision of better guidance—and there has been a lot of effort from HMRC to offer a simpler approach, and tools to help charities drive up gift aid. In response to my hon. Friend the Member for Broxtowe, the consultation showed that opinions on higher-rate gift aid varied widely, with some people believing that the relief should go directly to the charity, and some people believing that basic rate relief should also go to donors. There was a wide divergence of opinions.
The transitional period is a three-year breathing space to allow charities to adjust to the change in the basic rate tax without it affecting their existing expenditure plans. During that period, charities can drive up more gift aid income with support from the rest of the gift aid package announced in the Budget. In addition, we will work with donors and charities to develop an understanding of donor behaviour, using that to inform further thinking about gift aid—again, in order to continue driving up the take-up.
The hon. Member for Runnymede and Weybridge asked specifically about condition D, and posed a fair question. The transitional relief will be due to a charity where only the underlying donation and claim meet the requirement of the gift aid scheme—it is an application. Condition D in paragraph 1 ensures that transitional relief will not be payable when the underlying claim is invalid. A claim for gift aid may be invalid for a number of reasons—for example, the claim form may not contain the required information. HMRC cannot be expected to pay the aid in those circumstances and it would be unsustainable to make transitional relief payable, but not the underlying gift aid, in such circumstances
Without the provision, if donor behaviour remained as it is today, it has been estimated that losses for charities would be significant across the whole sector, running to more than £100 million next year. The amount received by charities from the supplement will be proportionate to their eligible gift aid claims. For every £1 of gift aid that is donated, charities will receive 3.2p in supplements, so the charities will continue to receive 28.2p in total for every £1 donated under gift aid.
The proposals in the Budget were widely welcomed by the sector. I acknowledge that, for some, there was a feeling of relief that they could have certainty going forward. There is continuing dialogue with the sector, which was as keen as we were to maintain the nature of gift aid. That formed the basis of much our discussions, and I am sure that there will be a continuing dialogue in the area.
Mr. Hammond: I shall respond to the Minister’s specific comments on paragraph 1(5). I understand the thinking behind it, but I ask her to consider the language. If she is seeking to say, in that provision, that the underlying claim must be valid, that is already taken care of, because condition A in paragraph 1(2) is that a
“gift aid donation is made”.
According to the definitions in paragraph 7, a gift aid donation means
“a gift which is a qualifying donation”.
If she is telling us that the gift aid claim has to be properly made, we understand that as well.
However, the word “allowed” implies a degree of discretion. The Minister, perhaps unintentionally, has not confirmed for the record that a valid claim is automatically allowed and that there is no discretion.
Jane Kennedy: I accept the hon. Gentleman’s point. If a claim is properly made by a charity within the law and within the terms of the gift aid scheme, the claim will be allowed. When a claim is allowed, the supplement will automatically be allowed.
Mr. Hammond: I think that the Minister has given the Committee the necessary reassurance.
Question put and agreed to.
Schedule 19 ordered to stand part of the Bill.

Clause 51

Community investment tax relief
Question proposed, That the clause stand part of the Bill.
Mr. Hammond: I have a brief question on clause 51. It appears from the wording that the clause seeks to close an unintended loophole against devious mischief that the Government, the Treasury or HMRC have spotted. Would the Exchequer Secretary explain to the Committee what has given rise to the clause? What mischief has occurred that requires the provision to be introduced and, unusually, to be treated as if it has always had effect?
The Exchequer Secretary to the Treasury (Angela Eagle): I am happy to explain to the matter to the Committee. I would call it an unintended kink, rather than mischief. I do not think that there is any blame intended or that underhand behaviour has gone on that has led to the clause. My brief refers to a “minor deficiency”, but I think that quite a good way of putting it is that there is an unintended kink in the community investment tax relief scheme legislation that could prevent a bank from obtaining tax relief under the scheme if it invested money with one of its own customers. The Committee may not be aware that the scheme is intended to encourage companies and individuals to invest in community development finance institutions, which provide finance to enterprises in economically disadvantaged communities, helping to reduce economic disparities throughout the UK.
The tax relief is generous. It is worth up to 25 per cent. of the investment spread over five years, so it is right that the rules restrict relief to cases in which there is genuine investment of new money in the community development finance institution. There is no relief if the investment is returned to the investor, for obvious reasons, or if it is funded from money that originally came from the community development finance institution.
An obvious funding source for a community development finance institution is its own bank, and the most obvious home for any funds raised by such an institution for the period between raising the funds and investing them in the enterprises that it wishes to finance is the same bank. However, under the current rules, bank deposits made by a community development finance institution in the course of its ordinary banking transactions may reduce or eliminate the value of any relief available to the bank in respect of investments made under the scheme. That is the kink. It is not an intended result, because it means that to secure funding from its bank under the community investment tax relief scheme, a community development finance institution must in effect sever its existing business relationship with its bank and re-establish that business elsewhere. That was not intended when the scheme was put together, nor is it sensible. The change, which is entirely beneficial to community development finance institutions and banks, will have a retrospective effect, because an unintended wrinkle in the structures has created an anomaly.
Mr. Hammond: I thank the Exchequer Secretary for her lucid explanation. I am sorry if I detected mischief and underhand behaviour where there is none. I am glad that she does not see mischief and underhand behaviour in every kink in the arrangements. I have some experience of dealing with predecessors of hers who often were more inclined to see mischief and underhand behaviour wherever kinks occurred in the tax code. Was the introduction of the clause prompted by an instance of relief being denied to an institution, or has the issue merely been flagged up and is being pre-emptively resolved?
Angela Eagle: CITR was introduced in 2002. We examined how it had worked and talked to, and liaised with, the stakeholders in the sector—both those who wished to lend and the institutions that had developed to take advantage of the tax exemption. The issue came up in that discussion. We realised that the points that were made had merit, which is why the clause has been included in this year’s Finance Bill. I hope that, with that explanation, the Committee is happy to let clause 51 stand part of the Bill.
Question put and agreed to.
Clause 51 ordered to stand part of the Bill.
Clause 52 ordered to stand part of the Bill.

Schedule 20

Leases of plant or machinery
Jane Kennedy: I beg to move amendment No. 126, in schedule 20, page 264, line 36, leave out paragraph (a).
The amendment omits unnecessary words in paragraph 6 of the schedule. It is straightforward and technical, but I am happy to answer any questions about it.
Amendment agreed to.
Schedule 20, as amended, agreed to.
9.30 am

Clause 53

Sale of lessor companies etc
Question proposed, That the clause stand part of the Bill.
Mr. David Gauke (South-West Hertfordshire) (Con): Thank you, Mr. Hood. It is a pleasure to serve under your chairmanship once again.
During a debate on the Finance Bill two years ago, a concern about the internal restructuring of partnerships was raised in relation to paragraph 23 of schedule 10. Whereas paragraph 13 of schedule 10 of the Finance Act 2006 contained an exemption from the regime for a group of companies, there was no equivalent provision regarding a group of partnerships. With a further two years’ experience following the 2006 Act, and given that wrinkle regarding partnerships, will the Minister say whether any concerns have arisen on that issue and whether any group of partnerships involved in an internal restructuring has been caught, perhaps inadvertently, within the regime although that was not the original intention? Subject to that query, we have no other concerns about the clause.
Jane Kennedy: It was acknowledged in the pre-Budget report that the schedule was having a detrimental effect on some transactions where there is no risk of a tax loss. It is difficult to deal with such transactions without opening up new opportunities for tax loss, and any action that we take must be taken in close consultation with the industry. We intend to do that, and we are looking closely at the problem.
The hon. Member for South-West Hertfordshire asked some thoughtful questions. The legislation in schedule 10 dealing with partnerships is complex because the partnership structures used by companies are complex, and the schedule had to deal with those complexities. Where a business is carried on by companies in partnership, the charge and relief are allocated to the partner in proportion to their shares in the partnership profits. That gives the right result as long as the business continues to be carried on by a partnership, but not where a business is transferred from a partnership to a single company. In that situation, the selling partners are charged for tax, but there is no mechanism for delivering relief to the successor company because it is not a partner.
More generally, clause 53 makes minor amendments to the anti-avoidance provisions introduced by schedule 10 of the 2006 Act. A minor defect means that the schedule does not work fairly when the whole trade is transferred by a partnership to a single company. The clause will ensure that schedule 10 operates fairly, even in that unusual situation. Furthermore, to ensure that no one can have been adversely affected, the changes introduced by the clause will be deemed always to have had effect. That degree of retrospectivity has been warmly welcomed.
Question put and agreed to.
Clause 53 ordered to stand part of the Bill.

Clause 54

Double taxation relief
Mr. Gauke: I beg to move amendment No. 133, in clause 54, page 27, leave out lines 14 to 16 and insert—
‘(a) a transaction or arrangement entered into on or after 12th March 2008, or
(b) an asset acquired on or after 12th March 2008,but does not relate to an asset acquired on or after that date pursuant to a pre-commencement contract (see subsection (5)).
(5) For the purposes of subsection (4) a contract is a “pre-commencement contract” if—
(a) the contract is a contract in writing made before 12th March 2008;
(b) no terms remain to be agreed on or after that date;
(c) under the terms of the contract the acquisition of the asset on or after that date had already become obligatory on that date; and
(d) the contract is not varied in a significant way on or after that date.’.
I share the desire to get through some of the clauses as quickly as possible, but I am grateful that we can turn to amendment No. 133. With your permission, Mr. Hood, I will take this opportunity also to make one or two remarks about clause 54 in general, as that would, from my perspective, avoid the need for a full stand part debate.
The objective of clause 54 is to ensure that credit for any foreign tax paid on trade or professional earnings is no more than the UK income tax due on the same earnings. That is not an unreasonable objective, but we query the element of retrospectivity. However, I do not want to overstate that, and we will debate retrospective legislation at greater length when we discuss clause 55, which deals with a much more serious issue. The element of retrospectivity as regards clause 54 relates to the fact that subsection (4) applies to the
“payment of foreign tax on or after 6 April 2008, or...income received on or after that date in respect of which foreign tax has been deducted at source.”
That is retrospective in nature. An individual might have invested in long-term, income-generating assets, such as overseas properties, on the basis of the existing tax position but then find that they fall within the new regime very quickly—after 6 April 2008—and therefore get a different tax treatment than that which they anticipated when they made the investment. Amendment No. 133 proposes that we should instead consider the date on which the relevant transaction was entered into. If it was made after 12 March 2008, it should fall under the regime set out in clause 54, but if not, the person should continue to benefit from the existing provisions.
The amendment was tabled, in a slightly probing manner, for two reasons. First, and most importantly, there is a danger of creating a parallel system with two different tax regimes, the application of which would depend upon when the transaction was entered into, and that would create unwelcome complexity. Secondly, the Government argue that the changes confirm the existing practice but set aside doubts that have been expressed about how foreign tax credit is calculated following recent case law. I will take the words in the explanatory notes at face value, but perhaps the Minister could elaborate on the existing case law so that we can assess the level of those doubts, which can sometimes be more substantial than the Government are prepared to concede. I should like to test their position on that. We should tread carefully where there is an element of retrospectivity in legislation, and the onus is on the Government to justify the provisions that they have made.
The objective of the clause is to ensure that relief for foreign tax is given once and once only. There can be circumstances where the equivalent does not apply. For example, a UK investor in an overseas asset such as a US limited liability company might find that he was liable to tax overseas but would not benefit from any kind of relief. The Institute of Chartered Accountants has raised that point with the Treasury, giving the example of a UK business that has an interest in a US LLC. Under current law, no relief is available in the UK for tax paid in the US unless the LLC’s income is distributed, notwithstanding that the UK shareholder of the LLC will be subject to US tax on the LLC’s income as it arises—in other words, irrespective of whether it is distributed. Has the Minister considered that?
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