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
51Community
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
20Leases
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
53Sale
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.
Clause 53
ensures that anti-avoidance legislation applies fairly where a
partnership carrying on the business of leasing plant or machinery
transfers that business to a
single company. As such, we welcome it. It corrects schedule 10 of the
Finance Act 2006, which addressed a concern about how leasing
arrangements could be used as a tax-avoidance mechanism, incurring
losses in the early years and then transferring them so that there was
a permanent deferral of tax. The mechanism ensured that sellers would
face a charge, with relief being provided to the purchasers of the
leasing company. That worked well in a partnership-to-partnership
arrangement but, due to various technical reasons and definitions, it
did not work for a partnership-to- single company arrangement, as there
would be a charge to the departing partners but it would not deliver
relief to the successor company. 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
54Double
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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