Finance Bill

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Schedule 23

Manufactured payments: anti-avoidance
3.45 pm
Question proposed, That this schedule be the Twenty-Third schedule to the Bill.
Mr. Hammond: I will detain the Committee for no more than a moment. In fact, after reflecting on my notes, I will not detain the Committee at all.
Hon. Members: Hear, hear.
Question put and agreed to.
Schedule 23 agreed to.

Clause 61

Controlled foreign companies
Amendments made: No. 119, in clause 61, page 30, line 26, leave out paragraph (b) and insert—
‘(b) any income which accrues during that period to a partnership of which the company is a partner, apportioned between the company and the other partners on a just and reasonable basis.’.
No. 120, in clause 61, page 30, line 33, at end insert—
‘(4D) In sub-paragraph (4B)(b), “partnership” includes an entity established under the law of a country or territory outside the United Kingdom of a similar character to a partnership; and “partner” is to be read accordingly.”’.
No. 121, in clause 61, page 30, line 42, leave out paragraph (b) and insert—
‘(b) any income which accrues during that period to a partnership of which the company is a partner, apportioned between the company and the other partners on a just and reasonable basis.’.
No. 122, in clause 61, page 30, line 48, at end insert—
‘(5E) In sub-paragraph (5C)(b), “partnership” includes an entity established under the law of a country or territory outside the United Kingdom of a similar character to a partnership; and “partner” is to be read accordingly.”’.—[Jane Kennedy.]
Question proposed, That the clause, as amended, stand part of the Bill.
Mr. Hoban: It is a pleasure, Mr. Hood, to serve under your chairmanship for the first time. There are a number of issues that I could have raised in the debate on the previous set of amendments, but I thought that I would focus on clause 61. It is worth bearing in mind the fact that a consultation on the control of foreign companies regime is being carried out at the moment. That is relevant to the clause, because one representative body questioned why changes needed to be made, given that significant reforms are expected in the 2009 Finance Bill. I am sure that the Minister will highlight some mischief that she and the Government wish to stop.
The consultation has moved away from looking at the status of individual entities to focus much more on income streams from things like finance payments, royalties and so on, and that focus seems to be creeping into the clause. There is a shift in definition from the emphasis on control of a company to some of the income that arises. The Law Society, in its comments on the clause, points out that subsection (3) discusses the concept of persons possessing, or entitled to acquire,
“the whole of the income”
of a company. The explanatory notes state that
“a person controls a CFC if they hold a majority of the rights to the CFC’s income or assets”.
The usual definition of control that applies is set out in section 416 of the Income and Corporation Taxes Act 1988, and focuses on someone’s ability to exercise, or be entitled to acquire, direct or indirect control over the company’s affairs. There appears to be a shift away from control, as we would normally see it, as being about the exercise and the power to intervene in the way that a company is run, to the economic rights that come from the income flows and who benefits from them. Would the Minister comment on what appears to be a shift in approach and almost a prelude to some of the things that were floated in the consultation paper? I suspect that the perception is that there is a bit of rowing-back.
Will the Minister define income for the purposes of subsection (3)? Is it distributable profits? If so, why has that not been emphasised in the Bill, and which generally accepted accounting practice applies? If it is not, what is it? Is it the gross income of a company, or is it some definition of chargeable profits? It would be helpful to have some clarification. Given that control appears to depend on who has the majority of the share of income, it would be useful to understand when the test of control applies. If, for example, there are fixed-rate preference shares, the income would accrue evenly over the year. If the company’s profits accrued unevenly and all arose in the second half of the year due to seasonal trade, it would appear that during the first part of the year, the holders of fixed rate preference shares would control the company because they are entitled to the majority of its income if the definition is about profits. In the second half of the year, those holders would lose control.
An alternative scenario is that if the profits of the company were low in one year, the preference shareholders would control the company, because they have the right to the majority of the income, but in a more profitable year, they would lose control of the company. There does not appear to be much certainty in this situation about where control is, because of the lack of definition regarding income. What would happen if someone owned 60 per cent. of the economic rights, but somebody else controlled 60 per cent. of the voting rights? How would income be appropriated between the two holders?
I have a couple of other points to make. The first refers to a previous group of amendments, but the issue flows through this clause. Proposed new subsection (7) refers to income being allocated
“on a just and reasonable basis”,
particularly where
“there is more than one settlor or beneficiary”.
However, “just and reasonable” is not an objective measure and could create uncertainty. The explanatory notes speak of guidance being produced to assist taxpayers. It would be helpful to know what that guidance will consist of, and whether there is a clearer rule that could be reflected in the Bill, rather than through guidance. Such a rule must not lead to opportunities for mischief at a later stage. Proposed new paragraph (ab) in subsection (2)(a) will create two new accounting periods: one that ends on 11 March 2008 and one that starts on 12 March 2008. If a dividend is received between 12 and 31 March, will it be accounted for on a receipts basis or can some of it be allocated to a prior period? Without that allocation, it will be possible for a company to fail the exempt test for the first period.
Finally, I want to raise the implications for the acceptable distribution policy. As I understand it, dividends paid under the acceptable distribution policy can be paid up to 18 months after the year end to which they relate. If a dividend was paid between 12 and 31 March 2008, it could be in respect of an accounting period ending on 30 September 2006. One of the issues is whether the changes under the clause will require people to go back and revisit the level of dividend and tax paid at that point.
It is perhaps worth explaining a bit about the acceptable distribution policy. To be exempt under controlled foreign companies legislation, a company has to distribute 90 per cent. of its profits by dividend. Under the changes, we think that the definition of income could expand so that 90 per cent. will be a percentage of a larger figure, which will require a larger dividend to be paid and therefore incur a larger tax bill. Because of the way in which the changes will interact with the acceptable distribution policy, it is not entirely clear whether people will have to reconsider the amount of dividend that they are paid. Of course, they determine that dividend on the basis of profits incurred before the legislation is introduced. There is therefore a sense of retrospectivity creeping in, because businesses that thought that they knew what their tax liabilities were will have them reassessed as a consequence of the clause. I could carry on discussing the wider issues around controlled foreign companies legislation and some of the problems that the Government have with it, but I am sure that the Committee would welcome the Minister’s response.
Further consideration adjourned.—[Mr. Blizzard.]
Adjourned accordingly at five minutes to Four o’clock till Tuesday 3 June at half-past Ten o’clock.
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