Schedule
23Manufactured
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
61Controlled
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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