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 enjoyedthat 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 individuals relatives as well as trusts and companies with which the individual
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 18that 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 givenfunds to purchase a railway ticket for thembut 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 grandchilds 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.
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 advanceby 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
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?
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
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: 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. Gentlemans 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 todays Financial Times of the latest CBI/KPMG London business survey, which says that the threats to capitals 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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