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 Secretary’s 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withdrawn.
Jane
Kennedy: I beg to move amendment No. 129, in
schedule 22, page 280, line 40, at
end
insert— ‘Non-qualifying
shares 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.
Mr.
Hammond: It is the same.
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.
3.30
pm
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 2002—the Financial
Secretary will be familiar with it—which 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
confident that there is no aspect of its history that HMRC could
characterise as “avoidance” of any sort. It seems to give
excessive discretion to HMRC and a corresponding lack of certainty to
the taxpayer. In the absence of any change to the legislation, HMRC
will either have to apply the rule universally, or it will have to
untax many companies by non-statutory discretion, meaning more
complexity and more uncertainty for business. We believe that
legislation that goes over the top and relies on a non-statutory
discretion by HMRC is, quite frankly, bad legislation. 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 shares—I 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
once under the derivative contracts rules. Those are areas of concern,
and I would be grateful if the Minister addressed them. 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 creditor’s ranking in the debt
waterfall is upgraded from preferred equity to subordinated debt. There
is some doubt—this is an important point that the Minister can
answer with a yes or no if advice comes to her in due
course—about 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 Minister’s 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, yes—a qualified
yes—provided 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 group’s 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.
He is right that there will be no hold-over relief. The absence of
hold-over provision is not new, however, and was a feature of rules
when they were first introduced in 2005. Although schedule 22 is large
and complex, it deals with a number of aggressive avoidance schemes.
Numerous financial product disclosures received under the regime
introduced in the Finance Act 2004 show that the avoidance industry
continues to be active. The tax at risk runs to hundreds of millions of
pounds, so we believe that it is right to act in the interests of the
public services and those taxpayers who comply with their
obligations. 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.
| 
