Finance Bill

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Kitty Ussher: There obviously is a demand for more detail about the amendments, so I am happy to provide it. With your permission, Mr. Cook, I will describe the purpose of the clause, then go on to the technical amendments. If the Committee is in agreement, perhaps we can hold the clause stand part debate at the same time.
Clause 148 introduces stamp duty and stamp duty reserve tax rules for alternative finance investment bonds, sharia-compliant versions of which are commonly known as sukuk. The three most recent Finance Acts have introduced rules for direct tax treatment of a number of sharia-compliant alternative finance products. Such products, as we have heard, prohibit the payment or receipt of interest, but pay an alternative finance return instead. The broad principle of our tax rules is to ensure that where a return that is paid to, or by, an issuer or investor is economically equivalent to interest, it should be treated as if it were interest. For stamp duty purposes, that principle is extended so that where a financial instrument is economically equivalent to a debt instrument it will be treated as if it were a debt instrument. Where the arrangements are in substance the same as those for a company raising finance by issuing a conventional debt security, the stamp duty rules will treat the instrument as if it were loan capital, thereby enabling the instrument to be exempt from stamp duty on transfer in the secondary markets.
Some alternative finance arrangements, however, are closer in substance to holding shares in a company or to a profit-sharing arrangement, and the new stamp duty rules will not apply to those types of arrangement. The extension of the definition of loan capital for securities which are classified as alternative finance investment bonds that we are attempting to make will allow businesses and individuals to access a wider range of alternative finance products while helping to create a broadly level playing field between those products and their conventional equivalents for this important and growing market. We are in uncharted territory, and after the Finance Bill was published, we found that we needed to tweak the drafting, because the interaction of the rules in the clause with existing tax rules was not fully anticipated. Our amendments are not intended to change the substance of our proposal at all, but simply to make sure that it is completely watertight.
As for the details, Government amendment No. 309 amends clause 148 to ensure that alternative finance investment bonds may benefit from the stamp duty exemption provided by section 79(7)(b) of the Finance Act 1986 on an equivalent basis to securities raised on conventional terms. Amendments Nos. 310 to 312 amend clause 148 to ensure that alternative finance investment bonds may benefit from the stamp duty exemption provided by section 79(7)(b) of the Finance Act 1986 on an equivalent basis to securities raised on conventional terms. That is achieved by amending the definition of capital market investment and capital market arrangements where the loan capital concerned is raised under alternative finance principles. I regret that we have had to amend the Bill to make it completely perfect, but I hope we have the Committee’s support in so doing.
Amendment agreed to.
Amendments made: No. 310, in clause 148, page 90, line 42, leave out first ‘a right to’.
No. 311, in clause 148, page 90, line 42, leave out second ‘a right to’.
No. 312, in clause 148, page 90, line 44, at end insert—
‘(c) subsections (7B) and (13) also have effect as if—
(i) references to a capital market investment were references to the loan capital falling within paragraph (d) of section 78(7), and
(ii) references to a capital market arrangement were to the arrangements under which that loan capital is raised.’.—[Kitty Ussher.]
Clause 148, as amended, ordered to stand part of the Bill.
Clause149 ordered to stand part of the Bill.

Clause 150

Alternative finance arrangements: power to vary Chapter 5 of Part 2 of FA 2005
Question proposed, That the clause stand part of the Bill.
Mr. Greg Hands (Hammersmith and Fulham) (Con): May I welcome you, Mr. Cook, to the Chair? I shall speak at some length about clause 151, but first I wish to compare it with clause 150, and ask the Minister a question about one single word. Clause 150(4)(6) includes the words,
“involves the payment of interest, and...achieve a similar effect”.
In clause 151(8), the same phraseology is used, but instead of the word, “and”, the word, “but”, is used. I think that that may change the meaning of the clause significantly and I would be grateful for clarification as to why that is the case.
Kitty Ussher: I am extremely grateful to the hon. Member for Hammersmith and Fulham for raising that point, which appears to be a legal drafting point. If we are moving on to clause 151, with the Committee’s permission, since this question relates to both clauses, I shall answer his question during that debate.
Mr. Hammond: On a point of order, Mr. Cook, the Committee will be asked to approve clause 150, and while I understand that the Minister will be better able to answer the question asked by my hon. Friend the Member for Hammersmith and Fulham at a later point, it will clearly not be much use to us if we find that the defect is in fact in clause 150. May I suggest that if the Minister is unable to answer the question that we adjourn for five minutes, to enable her to obtain an answer before we vote on clause 150?
The Chairman: The question is that the Committee adjourn for no more than five minutes.
Mr. Bob Blizzard (Waveney) (Lab): On a point of order, Mr. Cook. [Interruption.]
The Chairman: I stand corrected. I shall suspend the sitting for five minutes.
11.10 am
Sitting suspended.
11.15 am
On resuming—
Kitty Ussher: I am somewhat emboldened now that I have no civil servants whatsoever in the room. I am delighted to be able to clarify the intention of both phrases, which is to achieve exactly the same effect—my understanding is that they are legally equivalent. I will go back and check, and if that proves not to be the case, we will introduce changes to make that intention clear. I hope that that is sufficient for the Committee to be able to agree to the clause, as the phrase in the clause will have the same effect as its equivalent in clause 151. We will make sure that they are the same before Royal Assent.
Mr. Hands: I am not entirely happy with that, but we will have to accept it at face value and move on.
Question put and agreed to.
Clause 150 ordered to stand part of the Bill.

Clause 151

Government borrowing: alternative finance arrangements
Question proposed, That the clause stand part of the Bill.
Mr. Hoban: I think the Minister may regret using the phrase, “completely perfect”, about the drafting of these provisions. The clause seeks to give the Treasury powers to facilitate the issue of government-backed sukuk bills. I think we are the first non-Islamic country to wish to go down this route. As debate on previous clauses has indicated, there is a grey market for sharia-compliant products for both the retail and wholesale markets, for which London has become a recognised centre.
A number of practitioners in the market have commented on the advantage that a Government-issued sukuk product would offer by providing a benchmark, keeping liquidity, and providing another asset class for investment. However, as we discussed in relation to clause 148, these are not straightforward products, which is reflected in the Government’s response to the consultation on the issuance of Government-backed sukuk products. Clause 150, and schedule 46, will facilitate the Government’s issuance of such products in future.
We identified the complexity of those products in previous clauses, so there is a need for proper parliamentary scrutiny of them. I am disappointed that the Government have gone down the route of secondary legislation, rather than introducing fuller legislation in the Bill, or a subsequent Finance Bill, because there are difficult issues that must be resolved. I would like to highlight them for the Minister, before the Committee considers giving the Government powers to facilitate the issuance of those bills.
The issues were outlined in a Government consultation paper, and the Minister has a copy of the response published by the Government at the beginning of this month, including the draft legislation we are debating today. Clearly, that paves the way for the Government to issue these products. I want to discuss a number of issues with the Economic Secretary so that I can understand the Government’s approach to the regulations, which we will debate in future.
An essential step for private sector companies developing sharia-compliant products is to seek approval from a board of Islamic scholars before they are marketed. The scholars will determine whether a product complies with sharia law. Will the Economic Secretary say whether the Government think that the issue of sukuk products by the Government depends on obtaining approval from those scholars? Do the Government have an alternative route that they could adopt to ensure that products pass the requisite tests in sharia law for the benefit of those interested in buying them?
As was identified in the debate on clause 148, sharia law prohibits the payment of interest, but it permits people to share risk and the returns that come from it. In a conventional bill, holders are paid a coupon, which is straightforward. As I understand this case, the Government envisage a sukuk bill with an underlying lease. In effect, the proceeds from the issuance of the bill will be used to acquire an asset, which will be leased, and the lease payments will provide the return for the bill holders. Will the Minister expand on the type of assets that will form the basis of the lease, given that those assets must be sharia compliant?
The Government’s preferred route for dealing with the issue is to provide sukuk bills, rather than bonds. Bills, by their nature, have relatively short maturities. The consultation paper suggested maturities of one, three and six months. What sort of assets does the Minister expect will be part of the leases? If the Government went down the route of issuing sukuk bonds with longer maturity rates, they might consider including in the lease assets, for example, for private finance initiative projects where, typically, the lease is for a period of 30 years.
Mr. Hammond: I am listening carefully to my hon. Friend, who has researched the subject in great detail. He has explained how sharia law prohibits the payment of interest, but allows the sharing of risk. As he has developed his case, I understand that the lessee in the leases will be the Government. Will he explain to the Committee what risk is to be shared when the lessee is a sovereign Government?
Mr. Hoban: My hon. Friend raises an interesting point. I will come on to the issue of risks and returns, because one of the challenges faced by the Government and the public sector in designing these products is securing a degree of equivalence. The point that my hon. Friend the Member for Hammersmith and Fulham highlighted under clause 151(8) deals with the point of equivalence.
For people who are seeking to invest, the bills must comply with sharia law, and there must be some risks, which is why the underpinning of the bills by assets is important. For example, on private finance initiative contracts, the operator of the hospital bears some risks on maintenance. The rental stream that they earn is offset by the costs that they incur, so there is some risk. The risk might not be in default—the point to which my hon. Friend the Member for Runnymede and Weybridge alluded—because, on the whole, Governments do not default on bills. However, some operational risk underpins the element of risk in a sukuk bill. If there is no risk, I am intrigued to find out why the Minister believes that the measure is sharia compliant? That is an important point, so I should be grateful if the Minister would make it clear and indicate what type of assets will underpin a sukuk bill issuance? Will she explain what control will be exercised over those assets? The special purpose vehicle will act as the issuer of the bill, as I understand it from the consultation document, and will use the proceeds to acquire the assets which are going to be leased. Who will control the assets while they are owned by the special purpose vehicle?
Mr. Hammond: I am interested in the way in which my hon. Friend is developing his theme. The clause provides for money to be raised in sterling or in currencies other than sterling. Presumably, if money were raised in a currency other than sterling, payments made under the lease would have to be denominated in that currency. Is it his understanding that the Government already have the power to make such payments in a currency other than sterling, or are they taking such power? Does he see some dangers to the Exchequer and loss to the taxpayer in going down that route?
Mr. Hoban: My hon. Friend makes an interesting point. In their response to the consultation document, the Government deal with the issue of the denomination of the bonds and the payments under those bonds, and they opt for sterling, notwithstanding my hon. Friend’s comments. The enabling clause that we are going to debate in a moment gives them the power to vary between sterling and other currencies. If they make payments in other currencies, we are exposed to exchange rate risk, which would have to be managed.
Mr. Hands: This raises a number of important questions. First, as it is likely that a large number of target investors for this type of instrument are based in the middle east, there will be a demand for a US dollar-denominated asset. It is by no means clear whether the UK Debt Management Office in the Treasury would want those dollar-denominated funds. I think we need some clarity as to whether the UK as an issuer would want to keep the US dollar proceeds, or might wish to swap them back into sterling. At the moment, as I am sure my hon. Friend agrees, the whole thing is unclear.
Mr. Hoban: My hon. Friend is right. We need some clarity on these matters, which is why I have taken the opportunity in our debate on clause 151 to raise them, as it is important that we know what we are going to approve later on.
The target market for these bills raises an important issue. Having talked to a number of people in the private sector who issue sharia-compliant products, I understand that there is a significant number of such products in the UK. They provide an alternative asset class in which to invest, with the security that comes from being, in effect, a sovereign issuer. There is a certain amount of such investment in the UK, and it may well be the case that there are investors elsewhere who will seek to take advantage of the market, including the City of London, which takes a close interest in these issues and is keen to see London develop as a wholesale market for those products, attracting money from other jurisdictions. It may well be the case that, as the bill issuance programme develops, there will be demand from people overseas. Returning to the issue of denominations, it would be useful if the Minister clarified the Government’s thinking, and explained whether they will seek to use the power to issue bills in currencies other than sterling, and what further obligations that imposes on the Debt Management Office.
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