Mr.
Hoban: This is an extensive group of amendments and the
nature of them means that there are a number of issues to be discussed.
All of them are of interest to outside bodies in terms of seeking
clarification on the way in which the Government would interpret the
rules around
residence. Amendment
No. 363 picks up an issue that we will come back to in a later group of
amendments, as there is a Government amendment that covers that area.
Therefore, I will keep remarks on that point relatively brief and talk
at greater length later.
Amendment
No. 363 deals with the issue that, where fees are incurred, the rules
at the moment focus on where the services arise. The amendment shifts
that focus from where the services are performed to where the services
are enjoyed. Under current rules, where a UK-based investment manager
manages an offshore trust, the payment of his fees is treated as a
remittance and therefore subject to tax.
Our amendment
would say that, as the trust is offshore, when fees are settled they
are not treated as remittance and therefore do not form part of the tax
liability of the UK resident non-dom. There may also be a remittance if
trustees of an overseas trust pay fees to investment advisers in the
UK, or pay for UK legal accounting or other professional advice
provided in the UK. In all those cases, the individual has not
benefited, and those are not the circumstances, I believe, that the
Government had in mind. I understand that the Government amendments
that introduce new section 809SA seek to address those issues and I
will come back to that when we debate the relevant amendments
later.
The changes
created widespread concern among the investment management industry and
elsewhere. I know that British Bankers Association wrote to the
Minister on 20 March highlighting its concerns about the extended
definitions of remittances as set out in new section 809H. It indicated
that one of its private banking members was considering moving a
significant part of its operations overseas as a consequence of the
effect of new section 809H. We want to try to refocus that by saying
that, rather than looking at where the service is performed, we should
look at who is enjoying the service and where those services are
enjoyed. That is why we believe that any fees paid by an offshore trust
would not be deemed to be a remittance.
That is an
important issue. In the UK we are very skilled at providing investment
management expertise and there was a concern that as new section 809H
was drafted that would significantly impact on the effectiveness of
London as a place to do business and would potentially affect the
investment in equities in the UK and other assets. As a consequence, we
seek to shift that focus from where the service is provided to where it
is enjoyed, in a relatively simple way, to avoid a tax being charged on
remittances to pay those fees.
I move on to
amendments Nos. 364 to 374. As well as introducing a £30,000
charge for non-doms who have been in the UK for at least seven of the
last 10 years, the Bill makes radical changes to the way in which the
remittance basis will operate. It allows individuals who are resident
for tax purposes in the UK but not domiciled here to be taxed on income
and gains from outside the UK only to the extent that such income and
gains are received or enjoyed—that is, remitted to the UK.
Clearly the Government have taken the opportunity of the introduction
of the charge to deal with various loopholes and anomalies, which they
consider would allow remittance users to bring funds into the UK
without paying UK tax on their overseas income and gains. In
particular, the Government have sought to change the law to prevent
individuals from giving away overseas taxable income and gains to a
third party, such as a relative, who can then arrange for the
individual to use or enjoy those funds in the UK without a tax
liability arising.
To deal with
that potential source of mischief, in proposed new section 809L on page
157, there have been wide-ranging changes so that where such funds are
brought to the UK by a relevant person, which is defined to include
many of an individual’s relatives as well as trusts and
companies with which the individual
has a connection, that will be treated as a remittance by the individual
of income or gains and therefore may be taxable. There are
some practical issues around that that I want to explore. It leads to a
situation where there are transactions taking place which are not
intended to achieve a tax advantage, and I think that that partly stems
from the fact that the definition of a relevant person is too wide and
results in a number of problems. As a consequence, our amendments Nos.
364 to 374 seek to narrow the definition of who a relevant person is
and restrict the definition to close family members only.
Let me give
some examples where the current rules give rise to some problems. The
first is grandchildren under the age of 18. A relevant person does not
include a child over the age of 18 but does include a grandchild under
the age of 18—that is in new section 809L(2)(d). That could
impose considerable burdens of compliance, since an individual will be
taxed by reference to the actions of others, of which the individual
will be completely unaware. For example, it would require an individual
who has given funds to their adult child outside the UK to report a
remittance if that adult child provided a benefit to their own minor
child in the UK. One example has been given—funds to purchase a
railway ticket for them—but clearly there are much wider
examples than that. It means that the grandparent would be responsible
for reporting transactions that his grandchild might undertake, without
necessarily having knowledge of what the grandchild’s parent, or
the child, will actually do. There is an issue there about compliance
that we need to think about
carefully. On
charitable trusts, new subsection (2)(g) adds a further new category of
relevant person:
“the trustees
of a settlement of which a person falling within any other paragraph of
this subsection is a settlor or
beneficiary” That
again could cause a number of problems. I will focus on one now which
will create particular problems for charitable trusts established by
non-domiciled, but UK-resident settlors. The concern is that that would
deter the trustees of such a charity from investing in UK assets, so as
not to give rise to a remittance for the settlor. From a practical
point of view for the settlor, they are in an invidious position. They
could never be in a position to complete a self-assessment return
without having had detailed information regarding the investment
activity of any trust that they have established since 5
April 2008 and where they have used unremitted foreign income or gains
to do so.
I am sure
that I could come up with further examples, but I do not think that it
is necessarily in the interests of the debate to go down that route.
However, it shows that the current definition of related person in new
section 809L is very widely drafted. I understand that it is drafted
widely to prevent new loopholes arising, but it creates problems for
compliance in the two examples that I have quoted. That is why
amendments Nos. 364 to 374 replace the broader definition of relevant
persons to one that covers immediate family members, so that the tax
liability will arise only in circumstances in which that individual,
his spouse or other minor children receive a benefit other than an
incidental, or otherwise minor, benefit.
1.15
pm I
now turn to amendment No. 374 on mixed funds. The schedule sets out a
particular order in which funds should be deemed to be remitted and
that is a change from the previous guidance on mixed funds. Mixed funds
are derived from various sources such as funds from before the
individual became a UK resident, gifted funds, funds derived from UK
income and gains and funds derived from foreign income and gains. In
the tax years prior to 2008-09, there were no statutory rules on the
treatment of remittances from mixed funds and one followed the
prevailing non-statutory practice. Now we have the statutory provisions
in the Bill which will apply to transfers from mixed fund accounts
where the foreign income or foreign gains have arisen after 6 April
2008. I
will not go through the order in which these funds are remitted, but
they start with employment income subject to UK tax, relevant foreign
earnings where there is no foreign tax credit, foreign-specific
employment income where there is no foreign tax credit, relevant
foreign income where there is no foreign tax credit and so on. Towards
the end of the list, in (f), (g) and (h), the funds are deemed to be
from sources that are subject to foreign taxes. My amendment changes
the order so that where there is income or gains from overseas that has
been subject to foreign tax, it is deemed that they are remitted first,
in preference to the untaxed income or gains. This reflects the current
treatment and was set out in statement of practice 5/84. That statement
of practice is more favourable to the taxpayer than the current order
set out in new section
809P(4). We
do not believe that this unfavourable change has been adequately
highlighted in the explanatory notes. We think that it is
counter-intuitive and that it is penal to tax previously untaxed income
before income that has already suffered tax. There is also a risk that
taxpayers will not understand the rules. Well advised taxpayers will
not operate mixed accounts, so it will be unrepresented taxpayers and
those who make mistakes whose tax liability will be increased under
these
provisions. Leaving
aside the problems with the order of identification in new section 809P
(4), I believe that the proposals are over-complex. The record keeping
required to identify all sources of funds so as to categorise them
correctly will present a problem for the unrepresented taxpayer,
identifying remittances from mixed funds has always been extremely
difficult, but codifying a rigid set of matching rules takes away the
flexibility and ability to be pragmatic that existed previously. There
is, therefore, a significant danger of inadvertent compliance, which is
heightened by the fact that the rules apply from 6 April 2008, so there
is no time to educate affected taxpayers in advance—by the time
this Bill receives Royal Assent, we will be a quarter of the way
through the tax year and people may well have made remittances from
mixed funds without knowing and understanding the new rules. It would
be helpful if HMRC would publish a statement as to how it plans to
assist taxpayers with the additional compliance burden that this brings
about.
Another
weakness in this area is how overseas expenditure transfers between
overseas accounts or gifts made overseas from mixed accounts is to be
treated. I think that this has already been raised with HMRC and I do
not know whether there will be further amendments, but we hope that the
Minister will be able to clarify that the interaction of new
section 809Q(2) and new
section 809P means that the amount of income or capital of the
individual for the relevant tax year in mixed account immediately
before the transfer does not include funds that have been removed from
the account by earlier transfers or payments either to the UK or
overseas. In
response to the treatment of mixed funds and the change in the order in
which they are to be remitted, our proposal would put in place the
concession that has existed in statement of practice 5/84 and reflects
the fact that that treatment was more favourable to the taxpayer than
the new rules are designed to
be. On
amendment No. 495, it is not clear what happens if overseas earnings
from employment income are used to pay the £30,000 remittance
charge by means of a cheque payable to HMRC drawn on an overseas bank
account. This is quite a technical point, so I will go slowly. On the
face of it, such an example would not be a remittance under new section
809S. However, while amendments to the Income Tax (Earning and
Pensions) Act 2003 specifically import new sections 809K to 809Q of the
Income Tax Act 2007 into it, no mention is made of new section 809S. As
those are two separate Acts, that suggests that new section 809S does
not apply in determining whether relevant foreign earnings have been
remitted. Is that
clear?
Jane
Kennedy: The hon. Gentleman is getting his own
back.
Mr.
Hoban: I am indeed. If that explanation is right, it would
have been highly misleading of HMRC not to have made that point clear
when it said that the direct payment of £30,000 would not create
a remittance. It may be that new section 809S is for reassurance only
and that the direct payment would not in any event create a remittance
under new sections 809K to 809Q. The payment is not a remittance of
cash by the taxpayer, HMRC is not a relevant person and the payment is
not a gift to the UK Government. Perhaps the Government would like
there to be more gifts like that, but it is certainly not the case in
this
example. We
also doubt whether in this example the amount will be a relevant debt,
as it will be brought into the UK by HMRC for the benefit of the
Exchequer, not for the benefit of the taxpayer. HMRC will not be
providing a service to the
taxpayer. The
position is unclear. It would be helpful if the Financial Secretary
could provide clarification. Amendment No. 495 would provide some
clarification by inserting “and 809S” after
“809Q” on line 30 of page 202 in schedule 7. I hope that
she will comment on that and provide clarification and
reassurance.
Jane
Kennedy: It would be great if the immediate answer to that
question was simply yes or no, but I fear that it will be somewhat more
lengthy.
Before I get
into the detail of the group, will the hon. Member for Fareham permit
me to give a more substantive response to his questions about fees when
we come to discuss Government amendment No.
354? The
Government amendments in this group deal with a number of issues that
were raised in consultation. First, Government amendment No. 483
narrows the scope of the definition of “relevant person”.
Under the
original wording, trustees of settlor-interested trusts were
automatically treated as relevant persons, even if the individual or
his close family members were not beneficiaries. This change will be
particularly helpful for charitable trusts, a point that the hon.
Gentleman asked about specifically. Following representations, we are
amending the definition of “relevant person” to ensure
that remittances to the UK by genuine charitable trusts will not be
taxable upon a settlor. The change we are making removes the risk that
the existing legislation might catch donors who did not arrange to make
a donation in a particular
way. Amendment
No. 486 prevents tax arising on remittance to the UK in certain
circumstances where items are remitted to the UK before the income or
gain to which they relate is treated as arising. Under the original
wording, such payments might in certain circumstances become chargeable
before the tax year in which they arose. The amendment ensures that
that cannot now happen. Amendments Nos. 463 and 465 to 468 change the
mixed funds rules, clarifying how transfers between offshore funds are
treated. This change is being introduced in direct response to
representations
received.
Mr.
Hoban: Will the Minister give
way?
Jane
Kennedy: I am going to say more on mixed funds rules in a
moment.
Mr.
Hoban: I have a quick question on Government amendment No.
468. The Minister may well be coming on to this, but could she tell us
how people are meant to self-assess as a consequence of that
amendment?
Jane
Kennedy: I shall come to that. Amendment No.
468 is a direct attempt to deal with potential anti-avoidance
risks.
The hon.
Gentleman’s amendments address issues that have been raised,
some of which we have already sought to address. We have some sympathy
with their aims. I realise that the “relevant person”
provisions have caused considerable debate. It has been said that the
changes will harm UK investment. I do not believe that our response to
those concerns has meant that that is still the case. If there was a
risk, I believe that we have reduced it substantially. The fundamentals
of the remittance basis remain in place. Non-domiciles can still bring
into the UK underlying capital and any taxed income and gains without
incurring a charge under the remittance basis. Our changes make the
remittance basis more sustainable.
Mr.
Greg Hands (Hammersmith and Fulham) (Con): Has the
Minister seen the report in today’s Financial Times of
the latest CBI/KPMG London business survey, which says that the threats
to capital’s competitiveness have doubled in the last year and
that top of the list of complaints is the uncertainty surrounding the
regulations on
non-doms?
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