Jane Kennedy: I assume that the hon. Gentleman would want a written exchange before Report so that he had an opportunity to look at the detail. I am happy to undertake to do so, if that would be helpful.
Mr. Hammond: That would be extremely helpful, and would allow us to take the Financial Secretarys concerns back to those who have raised the issues with us. We could look at those concerns with them and perhaps come back to her in correspondence to see whether there was something that could be done, or whether she could give on Report a specific assurance that would deal with that concern. On that basis, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
10A (1) In section 91B(5)(a) of FA 1996 (debits and credits to be brought into account where Condition 3 in section 91E is satisfied), omit by the investing company.
(2) The repeal made by sub-paragraph (1) has effect in relation to credits and debits relating to any time on or after 16 May 2008..
The Chairman: With this it will be convenient to discuss the following: Government amendments Nos. 130 and 131,
Amendment No. 143, in schedule 22, page 284, line 28, at end insert
(2A) In section 91A(7) FA 1996 omit the words (see section 103(3A))..
Jane Kennedy: Since the publication of the Bill on 29 March, HMRC has listened to representations that in some cases the legislation might have unintended results. Government amendments Nos. 129 to 131 will therefore ensure that the legislation works as intended. In particular, it will not result in double taxation or double relief because the amendments clarify which companies have to bring profits and losses into account, disapply the legislation where companies have already been charged a tax in respect of the amounts that are equivalent to interest and omit a redundant reference to another provision. Amendment No. 143 would repeal a redundant reference.
Jane Kennedy: It is the same as Government amendment No. 131 and is therefore unnecessary. I hope that the Committee will agree and that we can make swift work of this group.
Mr. Hammond: I am grateful to the Minister for clarifying the situation. She is basically saying that after publishing the Bill, the Government have listened to concerns about an anomaly in the shares as debt rules that were introduced in 2005. They have come forward with a means of correcting that. We should be clear that this has become a pressing issue because of the change in the definition of commercial rate of interest introduced in the Bill, which will make the anomaly more widely felt than it was previously. This is therefore a necessary measure and not just a tidying-up exercise.
I must raise one point with the Financial Secretary. For some odd reason, the correction is effective only from 16 May 2008. Companies that are caught by the widened definition of commercial rate of interest and subsequently rescued by the amendment will therefore be within the shares as debt rules from 12 March 2008 and come out again on 16 May 2008. That will lead to some anomalous and arguably unfair results. My understanding is that such companies will be taxed not only on the income accruing between 12 March and 16 May, but on a deemed capital gain on 12 March. That seems to be a bizarre and, frankly, unnecessary problem that could easily be resolved by the Government aligning the two dates. It does not matter whether they are aligned on 12 March or 16 May, but it seems utterly bizarre to have the two dates, which produce this odd little bit of income that will be caught in what is effectively a double taxation.
On amendment No. 143, the Government clearly spotted the error before or at the same time as we were alerted to it. Government amendment No. 131 will take care of the problem and we are happy to support it.
Jane Kennedy: The Government amendments were drafted in response to representations from business, as I have said. However, business has not been able to provide any examples of where these unintended consequences have arisen. We decided to table the amendments to eliminate even the remotest possibility of double charges arising. Retrospection is not an option in this case, even if we wanted to introduce it. There could be losers if retrospection were used. HMRC does not accept that the review of interest makes a difference. I think that this group is fairly straightforward and that it should be given a prompt fair wind.
Amendment agreed to.
Amendments made: No. 130, in schedule 22, page 280, line 40, at end insert
Income producing assets
10B (1) In section 91C(3) of FA 1996 (assets which are income producing), for paragraph (c) substitute
(c) any share as respects which the condition in section 91D(1)(b) below is satisfied;.
(2) The amendment made by sub-paragraph (1) has effect in relation to times on or after 16 May 2008.
No. 131, in schedule 22, page 284, line 28, after Accordingly, insert
(a) in section 91A(7)(a) of FA 1996, omit (see section 103(3A)), and
(b) .[Jane Kennedy.]
Question proposed, That this schedule, as amended, be the Twenty-second schedule to the Bill.
Mr. Hammond: I wish to raise a few matters that we have not yet covered in these debates, and I make no apology for delivering them as a series of points.
The concern is that the proposed amendments to sections 91A and 91B introduced by paragraph 4, which prevent debits from being brought into account, create a risk of double taxation when shares such as fixed-rate preference shares are treated by those sections as loan relationships and are taxed on the basis of notional fair value accounting. For example, market fluctuations in interest rates could result in fair value losses on shares in some periods and gains in others. The disallowance of debits representing fair value losses could lead to double taxation to the extent that there were credits representing equal and opposite gains in other periods.
Net debits are more likely to arise in intra-group preference share arrangements, as those are often long-term arrangements. A helpful suggestion might be to introduce something similar to the provision that I am told exists in paragraph 23 of schedule 26 of the Finance Act 2002the Financial Secretary will be familiar with itwhich effectively taxed only the cumulative net credits arising from exchange rate fluctuations. Obviously in this case we are not talking about exchange rate fluctuations, we are talking about interest rate fluctuations. Similarly, if shares are denominated in foreign currency, the fair value will fluctuate with the exchange rate movements. The disallowance of debits representing fair value losses would, on my understanding, lead to double taxation to the extent that there were credits representing equal and opposite gains in other periods. I would be grateful if the Financial Secretary could address that point and, if she has some reassurances, let the Committee know what they are.
There is concern about proposed section 91D (2), which is introduced by paragraph 11 of schedule 22. It extends the definition of redeemable shares to any share where
it is reasonable to assume that the investing company will or might become entitled to qualifying redemption amounts.
When that is coupled with the proposed repeal of the definition of the commercial rate of interest in sections 103(3)(a) and (b) of the Finance Act 1996, introduced by paragraph 15, virtually any preference shareholding could be argued as being within the scope of section 91D and therefore taxable as a loan relationship unless proven to have been acquired for a purpose other than tax avoidance.
No one wishes to support tax avoidance, but that places a lot more pressure on the motive test than we have under the current rules. Almost any preference share may be caught, unless the taxpayer can be
A third concern is that there is no holdover relief for shares coming into section 91A or 91B for the first time. The schedule will extend the scope of sections 91A and 91G of the Finance Act 1996 and shares newly brought within their scope are treated under the terms of section 91G as having been disposed of and reacquired on 12 March 2008 at fair value, but there is no provision for holdover of any chargeable gain, or indeed, allowable loss that is crystallised by the deemed disposal. That is in contrast to shares held at the time that sections 91A and 91B were first introduced in 2005. The gradual extension of the rules to catch what are known as sidestepping transactions, which we have seen in the last few amendments to the section 91B regime, has generally been so closely defined that disguised interest-type transactions only were caught and consequently, the resulting capital gains were not significant or at least were uncontroversial. By contrast, the current proposals are so wide in scope that they will catch many shareholdings where the shareholding has been in place for a long period and the shareholder has had no reason to believe that the section 91B regime might be extended to include them because there was no intention to create disguised interest. Consequently, there is much more scope for an unfair capital gain to arise and in some cases the resulting tax liability could do material financial harm to a company.
I have two other points to make. The effect of the amendment to section 91C(6), which is introduced at paragraph 9(3) of the schedule, is to bring within the scope of section 91B shares that would be caught but for the fact that the assets of the company were changed to prevent the shares appreciating in an interest-like way. Once the shares are within the scope of section 91B as a result of the amendment, they are taxed without regard to the effect of the changes to the value of the assets so the interest-like return only is caught. However, the transitional provision does not disregard the return-varying assets, so the section 91G capital gain or loss at the time the company comes into section 91B would be increased or decreased by the fair-value movement on the introduced assets. In a typical case, the interest-like appreciation may be avoided by transferring a derivative contract into the company that issued the sharesI hope the Minister is following this. Gains and losses on the derivative would be taxed under the derivative contracts rules, quite obviously, but under section 91G, the cumulative gain or loss would also be taken into account in computing the chargeable gain or loss arising on 12 March 2008. The point of all this is that the gain or loss at the time of its coming within the scope of section 91B would be double-taxed; once under these arrangements, and
I want to raise an issue that the Chartered Institute of Taxation has raised. In addition to the types of arrangements that have been notified under the anti-avoidance notification provisions, the use of bonus issue debentures occurs in a private equity context where a creditors ranking in the debt waterfall is upgraded from preferred equity to subordinated debt. There is some doubtthis is an important point that the Minister can answer with a yes or no if advice comes to her in due courseabout the applicability of section 209 of the Income Tax Act 1988, and therefore, whether section 212 of ICTA 1988 will apply in those circumstances. Many advisers take the view that section 212 is not applicable, and it would be helpful if the Minister confirmed that if the payer of the interest is paying additional tax because of the non-deductibility of the interest, the fact that the payee is not paying tax on the interest will mean that a main purpose of such arrangements will not be regarded as securing a tax advantage for the purpose of proposed new sub-paragraph (1A) of schedule 9 to the Finance Act 1996. The hope is that the Ministers officials might have been made aware of that concern following a representation that they have received and that the Minister might therefore be able to confirm in simple language whether those bonus issue debentures are caught.
Jane Kennedy: Here goes. The hon. Gentleman asked me to answer yes or no on ICTA 1988, and I say, yesa qualified yesprovided that tax paid by the company paying the interest is equal to, or more than, the tax saved by the company that receives it. He asked about transitional provisions regarding varying assets. HMRC considers that that is a theoretical issue only: no one has been able to find any example of it happening. HMRC guidance makes it clear that the payment of dividends does not give rise to fair-value losses, since the dividend is part of the fair-value return. Nor are any exchanged losses likely to reduce the overall return below nil. That means that it is unlikely that there could be debits.
The hon. Gentleman asked about redeemable shares, and he was concerned about what would be caught. There are a number of circumstances in which it is not reasonable to assume that the holder would be entitled to such amounts. For instance, if the subsidiary shares are held as part of the groups core activities, it is not reasonable to assume that the investing company would sell those shares. There might also be regulatory reasons why it is not possible for certain shares held within a group to be sold off. The tax avoidance test provides protection for the taxpayer.
I hope that I can reassure the hon. Gentleman that HMRC will give case-by-case advice in accordance with its existing code of practice. It will advise companies on the application of the law to a particular transaction if the full facts and circumstances are set out. We have seen no evidence of any legitimate business transactions that rely on the upfront payment of interest. The announcement of this action in the 2007 pre-Budget report was accompanied by consultation with business, during which no evidence of such structures was received.
I might have missed one, two or possibly more of the detailed questions that the hon. Gentleman asked, but I undertake to write to him if that is the case, and I hope that we can see schedule 22 through to legislation.
Question put and agreed to.
Schedule 22, as amended, agreed to.
Clause 60 ordered to stand part of the Bill.
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