Finance Bill


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Mr. Hoban: Will the right hon. Lady confirm that if a dividend is paid after 12 March 2008 and it is 90 per cent. of the income of the CFC for an earlier accounting period—say, to 30 September 2007—the company will not have to recalculate the acceptable distribution policy?
Jane Kennedy: I believe that that is correct. I will take advice, and if I am wrong I will certainly communicate that to the hon. Gentleman and the Committee. I believe that what he said is in line with my response to his earlier questions. Under the clause, the cumulative income for the entire accounting period would be examined when determining control of the company. This is a complex matter and I have given considerable thought to the points that he made at the start of the clause stand part debate.
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Mr. Hoban: Will the right hon. Lady take the opportunity of this discussion about controlled foreign companies to clarify the status of the consultation? A question that was raised with me was why this is being done in the Finance Bill 2008 when further legislation on CFCs is expected in the Finance Bill 2009—although press reports suggest that people are now talking about the Finance Bill 2010. The Committee would be grateful for clarification on the record of when the Treasury thinks that legislation will be introduced, as this matter is causing a great deal of uncertainty in the business community.
Jane Kennedy: The hon. Gentleman is in danger of taking me wider than the clause. However, I am happy to put it on the record that the purpose of the business group that I will chair is to enable Ministers and officials in the Treasury and HMRC to engage with a representative group—not people who are representatives, but a representative group—of British multinational corporations to consider further the work that has been done and the proposals in the public arena on controlled foreign companies. We must ensure that any consultation paper is right for the circumstances of the British economy. As chair of the group, it is my intention to encourage discussion that will enable businesses to share their experiences and opinions and for myself as a Treasury Minister and officials to benefit from the advice and experience that they will bring.
Mr. Hoban: Does that mean 2009 or 2010?
Jane Kennedy: I was careful not to be specific and I do not intend to be any more specific. I am looking forward to working on this subject. I know that we will debate it further in the course of our consideration of the Bill and on other occasions. For today, what I have said is sufficient.
Mr. Hoban: I thank the Financial Secretary for her detailed responses to most of my questions. She gave a non-specific response to my final question—I think I heard the sound of the ball being kicked into the long grass—but she has provided some very important clarification on the functioning of the clause. I appreciate that it is designed to tackle particularly complex and artificial arrangements. She has assisted practitioners’ understanding of the detail. On issues such as income, it would have been helpful to have the definitions that she used in the clause. Perhaps she will consider inserting them on Report.
Question put and agreed to.
Clause 61, as amended, ordered to stand part of the Bill.
Clause 62 ordered to stand part of the Bill.

Clause 63

Repeal of obsolete anti-avoidance provisions
Question proposed, That the clause stand part of the Bill.
Jane Kennedy: The clause repeals a number of provisions relating to shares and securities, and is particularly relevant to companies such as banks, insurance companies and others that deal in shares and securities as part of their business. The hon. Gentleman refers specifically to repeals of provisions dating from 1997, but they are mostly about the exploitation of tax credits on dividends and the creation of losses. Tax credits on dividends are no longer payable to companies, so the protections given by those rules are not needed. Since 1995, such companies have not been able to create losses in the way that they used to. All of the provisions repealed are almost entirely redundant.
The hon. Gentleman asked about process. I confess that I am not clear what point he is making. We involved the industry before making the proposals on repeals.
Mr. Hoban: My point was connected with exempt bodies, and relates to companies that bought shares with dividends and generated a trading loss. There are exempt bodies that have had to continue to submit returns without being able to reclaim the tax credits. The change should have gone through in 1997 when the laws on tax credits were changed, yet provisions have been in place until this year’s Finance Bill. My question about processes is why was that change not put through at the time and why has the provision remained on the statute book for so long? There is no benefit to the exempt bodies and submitting the returns is a cost to them, and there is no benefit to the Exchequer from having the returns submitted annually.
Jane Kennedy: That is a good question. I am not in a position to answer, other than to say that the purpose of the anti-avoidance simplification review is to examine legislation to ensure that we remove from the statute book rules and legislation that is unnecessary. All that I can say is that I introduced the measure at the earliest opportunity.
Question put and agreed to.
Clause 63 ordered to stand part of the Bill.

Clause 64

Income of beneficiaries under settlor-interested settlements
Question proposed, That the clause stand part of the Bill.
The Finance Act 2006 changed the way in which the settlor was charged on that income: trustees now pay tax on the settlement income at 32.5 per cent. on dividend income and at 40 per cent. on all other income, and the settlor gets a credit for the tax that the trustees have paid. If a beneficiary who is not included in the group of people I listed receives a discretionary payment from a settlor-interested trust, the beneficiary is also taxable on the payments.
Provisions introduced in the Finance Act 2006 provided that, as the settlor has already been taxed on the income, the discretionary beneficiary is given a non-refundable tax credit of 40 per cent. Under the present rules, income from a trust is taxed before savings and dividend income—apparently, that is known as the statutory ordering. The effect of the ordering provisions is that a beneficiary may be chargeable to a higher rate of tax on other savings or dividend income than they would otherwise be liable to where they also receive income a settlor-interested trust. Apparently, that was not the intended impact of the measure.
The clause proposes that the trust payments be treated as the highest part of the beneficiary’s income, except in respect of top-slicing relief on income gains from life insurance contracts. If my understanding is correct—the Financial Secretary will be able to confirm this—that effectively sets aside the provisions of schedule 1 in relation to the starting rate of tax on savings and the ordering provided in relation to that in the Income Tax Act 2007, as amended by schedule 1.
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The changes are backdated to 6 April 2006. That is supposed to ensure that beneficiaries are not disadvantaged by the mistake in the drafting of the Finance Act 2006. I should be interested to know when the problem was first spotted and why we have had to wait two years for a correction. It may not have been identified until tax returns in respect of 2006-07 were received and processed—I hope that the Minister can confirm that that is the case. Some sort of quality audit process is needed, particularly in relation to Finance Acts, so that when things go wrong and have unintended consequences. some attempt is made to analyse the process and to ensure that we get it right the next time.
The Institute of Chartered Accountants has raised a second anomaly which it says it raised with the Government back in 2006. Although the Government have addressed one problem in clause 64, they have not dealt with that second anomaly. Will the Financial Secretary turn her attention to the fact that including a discretionary payment from a settlor-interested trust in the net income of a non-settlor beneficiary who is entitled to age-related allowance will adversely affect that beneficiary’s entitlement to age-related allowance? This is a person who is not included in the list of settlor, settlor’s spouse, civil partner or unmarried minor children. This is another beneficiary who receives a discretionary payment from a settlor-interested trust. Because he is otherwise entitled to age-related allowance, that entitlement will be adversely affected.
Where this adverse effect occurs, the payment will effectively be taxed twice: once in the hands of the settlor, as is intended by the legislation, and again in the hands of the non-settlor beneficiary who would otherwise have been entitled to age-related allowance. Such income is also taken into account when assessing the beneficiary’s entitlement to tax credits and pension credits. This seems unfair and probably an unintended consequence. Can the Financial Secretary tell the Committee whether she is aware of this issue, what representations she has received about it and why it has not been addressed along with the perhaps rather larger error that is being addressed in clause 64?
The Economic Secretary to the Treasury (Kitty Ussher): Welcome back to the Chair, Mr. Cook.
The hon. Member for Runnymede and Weybridge asked whether his understanding of the clause is correct. It seems to me broadly correct, although he mentioned that he thought there was a relationship between the clause and schedule 1. I just wanted to clarify that it has no effect on schedule 1 of the Bill or any ordering provision. Apart from that, my understanding is the same as his.
Mr. Hammond: Will the Financial Secretary give way?
Kitty Ussher: Economic Secretary, but I will give way.
Mr. Hammond: Sorry—Economic Secretary. The shuffling of jobs gets more and more confusing.
My understanding was that schedule 1 amends the ITA 2007 in order to define the ordering for the purposes of the starting rate of tax on savings. This provision deals with the ordering in respect of payments to non-settlor beneficiaries from settlor-interested trusts and puts them at the top of the pecking order, as it were, as the first tranche of income. That was my understanding. I wondered how the two measures interacted.
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Kitty Ussher: My understanding is that this is a specific provision for those specific circumstances and that there will be no effect on the broader provisions in schedule 1. If I am advised differently, I will return to this point.
On timing, trust legislation is a complex area. The trust modernisation legislation was consulted on widely, but this omission was not picked up by the trust industry at the time. Ministers became aware of the issue at the end of last year and action will be taken as soon as possible to ensure that no beneficiary in this situation will be adversely affected.
The hon. Gentleman also mentioned age-related allowances. That is a different type of benefit. The primary focus of age-related allowances is to provide additional support for those on lower incomes. The income used to determine entitlement is the individual’s total income for the tax year from all sources of income. That focus would be disturbed if settlor-interested trust income that has a tax credit covering the income tax liability was exceptionally excluded from the total income. We feel that that would be inappropriate.
Mr. Hammond: Does the Economic Secretary agree that in that example given there is effectively double taxation? There is taxation in the hands of the settlor and in the hands of the recipient. After the correction in the clause is made, does she agree that the person in receipt of the age-related allowance is effectively unique in being double taxed on that income distribution?
Kitty Ussher: The hon. Gentleman rightly makes the point that has been made by the Institute of Chartered Accountants in England and Wales. That point has been made to us as well. Our response is that this is a matter of consistency. The focus for the age-related allowance would be disturbed if settlor-interested trust income that has a tax credit covering the income tax liability was exceptionally excluded from total income. We do not agree with the view of the ICAEW that it is double taxation, but the taxation will be increased. We are happy to pursue this point with the ICAEW offline.
To clarify the point that the hon. Gentleman raised on the relationship of this provision with schedule 1, non-settlor interested income is pushed to the top of the ordering.
Question put and agreed to.
Clause 64 ordered to stand part of the Bill.

Clause 65

Income charged at dividend upper rate
Question proposed, That the clause stand part of the Bill.
Mr. David Gauke (South-West Hertfordshire) (Con): It is a pleasure to serve under your chairmanship again, Mr. Cook.
I will discuss the clause briefly. I do not think that it will be controversial. The clause concerns the taxation of foreign dividends that are taxable only if remitted to the United Kingdom. Until 2005, they were taxed at the higher tax rate, which is currently 40 per cent. Through a drafting error in the Income Tax (Trading and Other Income) Act 2005, they were instead taxed at dividend rates so that the upper tax rate became 32.5 per cent. That applied for 2005-06, 2006-07 and 2007-08, but it is being corrected for any remittances of foreign dividends made after 6 April 2008. Will the Economic Secretary say what that drafting error has cost the Exchequer?
The error resulted from the tax law rewrite project. It is probably inevitable that some errors will be made from time to time as previous Acts are re-enacted in language that is supposedly easier to understand. However, I cannot help noticing, just from the clauses that I have looked at in the Bill, that this is the second example of an error arising as a consequence of the tax law rewrite project. Clause 46, relating to employment-related securities, is another example.
I do not take a zero tolerance approach; such errors will occur from time to time. However, I would be grateful if the Economic Secretary—if not now, at some point—gave the Committee the running total of identified drafting errors with regard to the tax law rewrite project. A year or so ago, I asked a parliamentary question on that point to the right hon. Member for Bristol, South (Dawn Primarolo), when she was Paymaster General. Nine errors had been identified and corrected in the Capital Allowances Act 2001 and 18 in the Income Tax (Earnings and Pensions) Act 2003. Four errors had been corrected in each of the Income Tax (Trading and Other Income) Act 2005 and the Income Tax Act 2007. I have also heard it suggested that the tax law rewrite project identified some errors in the existing law. That is entirely understandable. Will the Economic Secretary tell us whether that is true, and if so whether it has resulted in any broader changes in the law? Subject to those comments, we have no objection to clause 65.
 
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