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
150Alternative
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
151Government
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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