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Session 2007 - 08
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Finance Bill

Finance Bill

The Committee consisted of the following Members:

Chairmen: Frank Cook, Mr. Jim Hood, Sir Nicholas Winterton
Atkins, Charlotte (Staffordshire, Moorlands) (Lab)
Blackman-Woods, Dr. Roberta (City of Durham) (Lab)
Blizzard, Mr. Bob (Waveney) (Lab)
Bone, Mr. Peter (Wellingborough) (Con)
Breed, Mr. Colin (South-East Cornwall) (LD)
Browne, Mr. Jeremy (Taunton) (LD)
Cable, Dr. Vincent (Twickenham) (LD)
Chapman, Ben (Wirral, South) (Lab)
Eagle, Angela (Exchequer Secretary to the Treasury)
Efford, Clive (Eltham) (Lab)
Field, Mr. Mark (Cities of London and Westminster) (Con)
Gauke, Mr. David (South-West Hertfordshire) (Con)
Greening, Justine (Putney) (Con)
Hall, Patrick (Bedford) (Lab)
Hammond, Mr. Philip (Runnymede and Weybridge) (Con)
Hands, Mr. Greg (Hammersmith and Fulham) (Con)
Hesford, Stephen (Wirral, West) (Lab)
Hoban, Mr. Mark (Fareham) (Con)
Hosie, Stewart (Dundee, East) (SNP)
Joyce, Mr. Eric (Falkirk) (Lab)
Kennedy, Jane (Financial Secretary to the Treasury)
Morden, Jessica (Newport, East) (Lab)
Newmark, Mr. Brooks (Braintree) (Con)
Palmer, Dr. Nick (Broxtowe) (Lab)
Penrose, John (Weston-super-Mare) (Con)
Pound, Stephen (Ealing, North) (Lab)
Pugh, Dr. John (Southport) (LD)
Sharma, Mr. Virendra (Ealing, Southall) (Lab)
Simon, Mr. Siôn (Birmingham, Erdington) (Lab)
Thornberry, Emily (Islington, South and Finsbury) (Lab)
Todd, Mr. Mark (South Derbyshire) (Lab)
Ussher, Kitty (Economic Secretary to the Treasury)
Viggers, Peter (Gosport) (Con)
Wright, David (Telford) (Lab)
Alan Sandall, James Davies, Committee Clerks
† attended the Committee

Public Bill Committee

Tuesday 3 June 2008


[Frank Cook in the Chair]

Finance Bill

(Except clauses 3, 5, 6, 15, 21, 49, 90 and 117 and new clauses amending section 74 of the Finance Act 2003)

10.30 am
The Chairman: Before we commence this morning’s business, I ought to draw the Committee’s attention—this is perhaps more relevant to the Government side—to the fact that the timepiece above the door is way out, by about eight and a half or nine minutes. If Members are getting breathless and looking for a lack of extra time, they should use the annunciator screen clock.

Clause 61

Controlled foreign companies
Question proposed [22 May], That the clause, as amended, stand part of the Bill.
Question again proposed.
The Financial Secretary to the Treasury (Jane Kennedy): It is a pleasure to see you back in the Chair, Mr. Cook, and I look forward to serving under your chairmanship this morning. Before I start, may I offer my best wishes to my hon. Friend the Member for Staffordshire, Moorlands and her husband, who I understand is poorly and in hospital? We send our best wishes to her and hope that her husband has a speedy recovery.
I would like to answer a number of the questions that the hon. Member for Fareham asked about the clause during the Committee’s previous sitting. I had a close look at what he said and hope to be able to respond to most of his concerns. The clause deals with an area that is the subject of intense interest and debate. Its specific role is to amend the controlled foreign company rules to block some tax avoidance schemes that were brought to our attention as a result of the disclosure legislation introduced in 2004.
Those rules are an important part of the UK’s defences against tax avoidance and are designed to prevent UK multinationals from avoiding UK tax on their profits by artificially moving profits to offshore companies that they control and that are based in low-tax countries. A number of highly artificial tax avoidance schemes that use partnerships and trusts have been marketed in an attempt to avoid the effect of the rules.
For a foreign company to be within the scope of the rules, it must be controlled by UK residents. Another scheme involves a UK group arranging for the majority of shares in one of its controlled foreign companies to be transferred to an unconnected party, even though all of its profits continue to belong to the group. The clause will ensure that, where that happens, the profits remain within the scope of the controlled foreign company rules.
The income of a controlled foreign company is exempt from UK tax when 90 per cent. of the profits in any one accounting period are distributed to the UK. A third scheme seeks to qualify for this exemption by meeting this distribution requirement using profits sourced from other accounting periods. Those profits carry overseas tax credits, which means that no UK tax will be paid on them. The clause will ensure that were that happens, the exemption is not available.
Finally, a foreign holding company of a UK group that owns trading companies that are exempt from the CFC rules will be similarly exempted when at least 90 per cent. of its income in an accounting period is made up of dividends from those trading companies. An avoidance scheme seeks to exploit that exemption by diverting income to a partnership in which the holding company has a majority interest. The company then claims that the income of the partnership does not belong to the holding company. The clause puts it beyond doubt that the profits do belong to the holding company for the purposes of the exemption so that, where that happens, the exemption is not available.
It is important to be aware that the clause is not intended to catch wholly commercial transactions. Nevertheless, where their use is driven substantially by commercial considerations, such arrangements should qualify for the motive test exemption. At our last sitting, the hon. Gentleman raised a number of questions. He probed around the definition of control and questioned whether we were taking further steps in that respect. The avoidance schemes targeted by the clause use highly artificial structures that are unlikely to be used for commercial purposes. Her Majesty’s Revenue and Customs has discussed these changes with representative bodies and is satisfied that few, if any, wholly commercial transactions will be affected by the redefinition of control. Nevertheless, as a back-stop, such legitimate arrangements will qualify for exemption from the control of foreign company legislation where their use is driven substantially by commercial considerations—the motive test exemption. In the unlikely event that the redefinition of control would bring a straightforward loan by a third party, such as a UK bank, to a foreign company within the scope of the rules, one of the exemptions—again, the motive test from the rules—would apply.
The wording used in the extended test for control mirrors closely that in the usual definition of control in section 416 of the Income and Corporation Taxes Act 1988. As in that section, income for the purpose of clause 61 is defined as the income of the company that is available for distribution to its shareholders. The wording used in the extended test for control is therefore consistent with other definitions of control in the 1988 Act. HMRC is not aware of any difficulties caused by the wording of section 416 and does not expect there to be any difficulties with the comparably worded clause 61.
The hon. Gentleman asked me what would happen when control changes during an accounting period. Provided that the company continues to be controlled by UK residents, under any of the tests available, it will be regarded as a controlled foreign company throughout the accounting period. If the company begins or ceases to be controlled by UK residents during the accounting period, the existing period will end and a new one will begin when the change of control takes place.
Mr. Mark Hoban (Fareham) (Con): I am grateful to the right hon. Lady for giving way and for the detailed approach she is taking to the questions I raised before the recess. Regarding change of control during the course of the year, one of the points raised with me by one of the representative bodies related to the way in which income might accrue over the course of a year. Looking at control in the context of voting rights, that would change if more shares were issued or shares were transferred from one owner to another. In the present case, however, the issue is the rate at which income or distributable profits accrue over the course of the year. In our last sitting, I talked about fixed-rate preference shares. It may be that for part of the year income accrues in a way that would give control to one organisation—fixed-rate preference share holders—and accrue in a different way later in the year, which could shift control to the ordinary share holders. I wanted clarification from the Minister on control and change of control.
Jane Kennedy: I am about to come to some of the detail that the hon. Gentleman raised before the recess.
There are a number of ways for a person to have the power to direct how a company is run. It is not uncommon, under the existing test for control, for more than one person to be treated as controlling a controlled foreign company. In such circumstances, each person is treated as having control. There are separate detailed tests in the rules for determining how a controlled foreign company’s profits are to be apportioned to those companies that have an interest in the CFC. Where the complexity of ownership makes those tests inapplicable, the rules provide for the profits to be apportioned to such companies on a “just and reasonable” basis. The hon. Gentleman might argue that that is not an objective measure and that it could create uncertainty—indeed, I think he did so. However, I am sure that he accepts that “just and reasonable” is a widely used term in tax legislation—for example, it appears 53 times in the 1988 Act.
What is “just and reasonable” will depend on all the relevant facts and circumstances. Examples of “just and reasonable” apportionment and the factors to be taken into account can be found in the published guidance on the HMRC website. As promised, further guidance in support of the Bill and the clause will be published soon, probably during the summer recess—the usual practice in the event of an anti-avoidance measure being introduced. I think that the hon. Gentleman used an example of someone owning 60 per cent. of the economic rights but someone else controlling a different proportion of the voting rights. There are detailed tests for determining how a controlled foreign company’s profits are to be apportioned. The answer that I gave to the hon. Gentleman about “just and reasonable” apportionment—that the matter would be considered on a case-by-case basis—would, I am sure, reassure those who would be advising in such cases. There are detailed examples, and further information can be obtained from HMRC.
Only where clause 61 applies will it be necessary to divide an accounting period into the period before and the period beginning on or after 12 March. Because the clause is targeted at highly artificial tax avoidance schemes, there will be a division into two periods only for schemes designed for the purposes of avoidance. If there are two accounting periods, dividends received after 12 March 2008 will be treated as arising after that date. A charge to UK tax on the income of a controlled foreign company will arise only where that company exists to avoid UK tax, since the motive test exemption will otherwise prevent such a charge. The clause does not have effect before 12 March 2008. It will not increase chargeable profits before that date, so there will be no need for companies to reconsider what dividends need to be paid to pursue an acceptable distribution policy for earlier periods.
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