Finance Bill

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I should like to comment briefly on the question of fees paid by offshore trusts and whether they should count as a remittance. If the fees paid were exempt, it would be possible for UK residents to fund their UK lifestyles, such as school fees, medical fees—I hesitate to say nanny’s fees—which non-remittance basis users patently could not. I believe that that is an unfair outcome, but neither would it make any clear contribution to competitiveness, which the Government amendments do.
Mr. Hoban: I just wanted to touch on the issue of fees. My amendment, which leads the group, says that because the services of the driver, the nanny, the cook or the butler happen to be undertaken and enjoyed in the UK, they would still be covered by the remittance rules. However, where services are enjoyed offshore, for example if a trust managing UK-based investments is based offshore, they will not be covered. Services enjoyed in the UK would be caught, but not the investment fees charged to an overseas trust. We may have a longer debate on that later.
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Jane Kennedy: I would rather do that later, and it is likely that we will.
Our changes in response to representations make the remittance basis more sustainable. Following consultation, we have made some changes. For example, we have introduced certain exemptions for existing funds. Those set up before 6 April will continue to be able to invest tax free with their existing funds, as long as the individual does not provide further funds.
The argument about the definition of “relevant person” is interesting. The relevant person rule prevents a significant amount of tax avoidance, whereby people could simply give something to another individual to import. Stopping that abuse was always going to be unpopular, but we had to strike a balance. We have got the balance right by focusing the rules on close individuals and immediate family, rather than using the much wider definition that we originally proposed. The inclusion of a minor grandchild as a relevant person follows broadly the same approach as that used to determine whether a non-resident trust is settlor-interested, except that the non-resident trust rules also include adult grandchildren. Individuals giving unremitted money or assets offshore to a relevant person would need to make arrangements with that person, to enable them to keep track of any remittances to the UK. I acknowledge that there is complexity there for the taxpayer.
Amendment No. 374 would cut across the Government’s amendments in this area by changing the ordering rule within the mixed-fund rule. There are various ways in which the mixed-fund rule could be ordered, and the way we have chosen again strikes a balance between fairness and simplicity. The ordering treats employment income as arising first and is therefore favourable to the taxpayer, as the hon. Member for Fareham suggests. That income has already been taxed and cannot be taxed again. However, it discourages avoidance by making untaxed income and gains come out next. Representative bodies obviously would prefer the ordering rule to treat untaxed and already taxed income and gains as remitted first, but that would prolong an avoidance. Taxpayers still have the choice about whether they use a mixed fund. If they do not, the rule does not apply.
Mr. Hoban: Well-advised taxpayers—the sort of people who might seek to use the rules for avoidance—would tend not to have mixed funds. I am particularly concerned that those people who are not represented, who know what the previous rules were, would find it potentially more difficult to comply with these rules. Changing the ordering may make it more difficult for the unrepresented taxpayer to comply.
Jane Kennedy: The hon. Gentleman makes a fair point. My understanding is that the vast majority of those using the funds would not be in that position; they would be getting good advice. However, I would want to consider whether his point is valid.
I understand the purpose of amendment No. 495, and would like to assure hon. Members that the exemption in new section 809S applies to untaxed foreign employment income as it does to other untaxed foreign income, because of the provisions in new section 809J(1). I knew that it was not a yes or no answer. As long as the payment is made directly to HMRC, it will not be treated as taxable remittance. The hon. Gentleman’s amendment is technically deficient as it would be made to the accrued income scheme provisions. However, I realise that the legislation on that point might justifiably be described as a little unclear. I am grateful to the hon. Gentleman for his suggestion, but if he will withdraw his amendment, I shall give serious consideration to whether an amendment on Report would bring the desired clarity to this point.
I shall make one or two final points. The ordering rule, on which he pressed me earlier, applies to funds remitted to the UK and so it is irrelevant whether funds have gone elsewhere—as long as it is not within the UK. On amendment No. 468, I do not really understand why he believes that there is a problem with how people are supposed to self-assess. If he has examples of where that might be a problem, he can write to me and I would be happy to give that some detailed consideration and reply to him in relation to a more specific case.
Finally, the hon. Member for Hammersmith and Fulham drew my attention to the article in the Financial Times, and I know that others have seen both that article and the report. However, on the survey, I shall simply say that a survey by Barclays Wealth states that the residence and domicile tax changes as they now stand, have not led to non-doms leaving the UK—that has not come from Government sources but from independent sources. The report to which he is referring states that the UK remains the most attractive place in the world for non-domiciles. I hope that he will accept that reassurance. We are conscious of the concerns in the business community about the changes that we have proposed. I believe that our response has been measured and responsible and I hope that the Committee will acknowledge that.
Jane Kennedy: I do not wish to prolong the debate, but on the point about clarity, will he accept that the remittance basis remains a complex area. We have gone a long way to try to help clarify that, but there will still be many instances where people with complex arrangements will probably need a lot of professional advice on how they manage their affairs.
Mr. Hoban: I am sure that outside advisers will be delighted to hear that people using remittance basis will continue to need to use their services—they will be reassured about that. I might touch on some of these issues in the next group of amendments, but I suspect that there is more work to be done in this area and that some of the matters relating to the way in which this debate has developed in recent months do give rise to some problems. I am grateful to the Minister for agreeing to look into amendment No. 495 and how that might be dealt with.
On amendment No. 365, although the Minister prays in aid precedents from trust legislation, I still believe that we are in danger of potentially creating quite a difficult regime for people to comply with. Although the wealthier end of the non-dom market might be able to find advice and put structures in place to ensure that their adult children report to them gifts or transfers that they have made to grandchildren, the legislation captures so many people that some taxpayers will inadvertently be caught in this net—through no fault of their own, but because of the complexity of the rules. It would be better to have a more restricted definition of relevant persons. I am disappointed that the Minister has not moved on that. However, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendments made: No. 482, in schedule 7, page 157, line 39, at end insert—
‘(9A) The cases in which income or chargeable gains are used in respect of a debt include cases where income or chargeable gains are used to pay interest on the debt.’.
No. 483, in schedule 7, page 158, line 12, leave out ‘settlor or’.
No. 463, in schedule 7, page 163, leave out lines 20 to 23 and insert—
‘(2) If property which derives (wholly or in part, and directly or indirectly) from an individual’s income or gains within a relevant paragraph (and for a tax year) is transferred to a mixed fund, treat the transfer as consisting of or containing the income or gains.’.
No. 464, in schedule 7, page 163, line 25, leave out ‘has been’ and insert ‘is’.
No. 484, in schedule 7, page 163, line 26, leave out ‘capital’ and insert ‘gains’.
No. 485, in schedule 7, page 163, line 29, leave out ‘capital’ and insert ‘gains’.
No. 465, in schedule 7, page 163, line 30, leave out from ‘treat’ to end of line 31 and insert
(3A) Treat an offshore transfer from a mixed fund as containing the appropriate proportion of each kind of income or capital in the fund immediately before the transfer.
“The appropriate proportion” means the amount (or market value) of the transfer divided by the market value of the mixed fund immediately before the transfer.’.
No. 466, in schedule 7, page 163, line 33, leave out ‘(d)’ and insert ‘(h)’.
No. 467, in schedule 7, page 163, line 33, at end insert—
‘(4A) A transfer from a mixed fund is an “offshore transfer” for the purposes of subsection (3A) if and to the extent that section 809P does not apply in relation to it.
(4B) Treat a transfer from a mixed fund as an “offshore transfer” (and section 809P as not applying in relation to it, if it otherwise would do) if and to the extent that, at the end of a tax year in which it is made—
(a) section 809P does not apply in relation to it, and
(b) on the basis of the best estimate that can reasonably be made at that time, section 809P will not apply in relation to it.’.
No. 468, in schedule 7, page 163, line 38, at end insert—
‘809QA Section 809P: anti-avoidance
(1) This section applies if, by reason of an arrangement the main purpose (or one of the main purposes) of which is to secure an income tax advantage or capital gains tax advantage, a mixed fund would otherwise be regarded as containing income or capital within any of paragraphs (f) to (i) of section 809P(4).
(2) Treat the mixed fund as containing so much (if any) of the income or capital as is just and reasonable.
(3) “Arrangement” includes any scheme, understanding, transaction or series or transactions (whether or not enforceable).
(4) “Income tax advantage” has the meaning given by section 683.
(5) “Capital gains tax advantage” means—
(a) a relief from capital gains tax or increased relief from capital gains tax,
(b) a repayment of capital gains tax or increased repayment of capital gains tax,
(c) the avoidance or reduction of a charge to capital gains tax or an assessment to capital gains tax, or
(d) the avoidance of a possible assessment to capital gains tax.’.—[Jane Kennedy.]
Mr. Hoban: I beg to move amendment No. 375, in schedule 7, page 164, line 2, at end insert—
‘(3) This section shall not have effect with respect to gains accruing to an individual on the disposal of an asset if the disposal took place prior to 6 April 2008.’.
The Chairman: With this it will be convenient to discuss the following amendments:
No. 399, in schedule 7, page 184, line 37, leave out ‘2008’ and insert ‘2009’.
No. 400, in schedule 7, page 184, line 39, leave out ‘2008-09’ and insert ‘2009-10’.
No. 401, in schedule 7, page 184, line 39, at end insert
‘, except for the amendment made by paragraph 1 to insert a new section 809G in Part 14 of ITA 2007, which has effect for the tax year 2008-09 and subsequent tax years.’.
Mr. Hoban: There is one issue that I want to raise under amendment No. 375; and then, under amendments Nos. 399 to 401, I shall deal with some broader concerns about the handling of the legislation.
On amendment No. 375, the accepted position prior to 6 April 2008, where a foreign-domiciled individual gifted foreign-sited assets, was that once the deemed gain was realised, it could not be remitted, as the gain was not represented by any money or money’s worth in the hands of the individual making the gift. Accordingly, provided that there was a genuine gift, with the donee—who could be the trustee of an offshore settlor-interested trust—assuming full and unfettered control of the property gifted, the gain arising on the making of the gift could never be accessible. The HMRC capital gains tax manual, at CG25331, sets out the position as follows:
“Where an individual assessable on the remittance basis has gifted foreign assets to another person and has not received any disposal proceeds he or she may still be deemed to have realised a gain on the disposal. As that gain is not represented by any money or moneys worth in the hands of the individual making the gift, it is not possible for the individual to remit the gain. The gain arising on the making of the gift can therefore never become assessable.”
That is, I think, a clear statement of where practice prior to 6 April 2008 led people.
The new section 809R set out in schedule 7 creates some uncertainty in the minds of advisers as to meaning. The optimistic, preferred best interpretation is that new section 809R does not apply in relation to gains that arose prior to 6 April 2008. It is understood that that is also the view of HMRC. Accordingly, the old legislation states that, provided that there was a genuine gift, there would be no tax liability on the gain that arose when the gift was made. While it has been helpful for HMRC to have made its view known, doubt and concern still remain.
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The potential sums will often be significant, and it is likely that inadequate records will have been kept to establish the position since, at the time, the law was clear that there could never be a tax charge as a result of the gift. Accordingly, taxpayers who made gifts of foreign assets offshore prior to 6 April 2008 will be concerned by the split in opinion; some suggest that new section 809R could exist retrospectively. Taxpayers who made absolute unfettered gifts of foreign assets offshore prior to 6 April 2008 had a legitimate expectation that the gain deemed to have been realised on the making of the gift would never come into charge. The new legislation should be clear, which is why amendment No. 375 seeks to insert:
“This section shall not have effect with respect to gains accruing to an individual on the disposal of an asset if the disposal took place prior to 6 April 2008.”
That makes the position clear so it is beyond doubt that new section 809R is not meant to have a retrospective impact. Advisers would be grateful for that conformation, and would perhaps be even more grateful—as would I—if the Minister felt obliged to accept the amendment, but when she hears what I am about to say next, she probably will not.
I am concerned about the process that we have gone through to get to this point, which is why amendments Nos. 399 to 401 seek to defer the commencement of major parts of the schedule to the start of the 2009-10 tax year, with one exception. Assuming that my drafting is correct, the amendments do not seek to defer the £30,000 charge. We have different views about the amount of and the timing of the charge. Although we do not believe that it should be deferred, the complex rules surrounding the changes should be. Today’s debate is proof of why deferral of commencement is important.
Last Thursday night the Government tabled, I think, 90 amendments to the schedule, in addition to several earlier batches of amendments. Can the Minister tell the Committee how many amendments have been tabled to schedule 7 and whether that is a record number of amendments to a schedule in a Finance Bill? The volume of amendments is indicative of two things: first, the willingness to listen to the concerns raised by representative bodies during this process, and I give credit for that; and secondly, the state of the legislation when it was first published a couple of months ago. I suspect—I think that the Minister may have confirmed it this morning—that this is not the end of the amendments to the schedule and that we will see more tabled on Report.
The overall volume of amendments tabled is, in a way, reflected in the volume of amendments that I have tabled to the schedule. It reflects how the changes to very complex areas of taxation have been dealt with in a tight time scale. In October, the Chancellor announced a series of measures in the pre-Budget report: on the charge, the denial of allowances, changes to day-counting rules and on addressing anomalies in the rules on remittances. He promised consultation, and a document was published on 6 December 2007—just four months before the rules were to come into effect. Draft legislation was published on 18 January, which triggered much of the outcry about the Government’s intentions. John Cullinane of the Chartered Institute of Taxation said:
“but one of the unfortunate things is the way in which these proposals came in unannounced, caused brouhaha, and then were subject to a lot of compromises and have generally gone off at half cock. The result of all that is that any kind of genuine, rational, consultative look at the whole thing, to see how we can best give effect to this principle, that the greater your connection with the UK the more of a burden you should bear, has just been ruled out and we have a very complicated regime with as many anomalies as before”.
Those are quite harsh words from someone who is known to be measured in his comments about Government tax policy.
Malcolm Gammie from the Institute for Fiscal Studies said that the draft legislation
“apparently went very much further and had a very much greater impact than had generally been anticipated”.
He summarised the problem as follows:
“I think that really the general uncertainty it generated as to what precisely the rules were going to be, how wide-ranging they were going to be, really led to the degree of outcry that there was and the publicity it obtained”.
I think that that is a fair statement. The volume of comment in the aftermath of the publication of those draft rules was significant, and there was a sense that they went further than the Chancellor’s original intentions. As a consequence of opposition from investment managers, tax advisers and the art market, Dave Hartnett was forced to publish a letter clarifying the changes on 12 February, which was widely seen as yet another climbdown by the Government on their tax policy.
In the Budget, there were further concessions on assets to be remitted into the UK and the applicability of the charge on children and spouses. The de minimis limit was increased from £1,000 to £2,000, as we discussed earlier, and there were relaxations on CGT and offshore mortgages.
One might have thought that that was a settled position and that after that the consultation would be perfect, but from the moment the Bill was published it was recognised that the content was incomplete. The explanatory notes flagged that up:
“Some of the clauses in the published version of the Finance Bill 2008 are not wholly complete.”
That is an understatement, given the volume and complexity of amendments that have been tabled. The explanatory notes went further and stated that there would be further discussions with interested parties, and there was an open day for advisers at the beginning of this month. The explanatory notes stated:
“Further changes will be introduced by way of Government amendments during the course of the Bill.”
That is where we are today, discussing a long series of amendments that arose from that process.
The Institute of Chartered Accountants, when commenting on the schedule, said:
“We are however concerned that a significant part of the legislation remained unfinished even as it came into effect on 6 April 2008. We understand that this is to enable the final legislation to be comprehensive and workable but are surprised that it was thought appropriate to lay before Parliament legislation that is admitted to be ‘incomplete.’”
The way in which the changes have been made has also caused concern. Ian Menzies-Conacher from the British Bankers Association summed it up very well when he gave evidence to the House of Lords Committee on Economic Affairs, saying that
“on balance it would have been better to have deferred [the proposals] for a year to allow a lot of the detailed problems that they are now seeing emerge to be resolved properly...we are rapidly running out of time in the present Finance Bill.”
Here we are, debating those two hours before the Committee is scheduled to adjourn. Some constructive discussions are taking place with officials and problems have been addressed, but late in the process. There is a great danger in drafting against rigid timetables, as we are almost as likely to create new problems as we are to solve old ones—that is the nature of drafting in a hurry. That concern was flagged up in February when the Institute of Chartered Accountants said:
“HM Treasury confirmed to us in a meeting in February 2008 that the overwhelming message from the representations that they had received had recommended deferring the more complex measures to enable workable legislation to be drafted.”
When the rules are finally determined, they will apply from 6 April 2008. Yet no one knows what they are going to be, as they are subject to further changes. This is an unreasonable situation for taxpayers. It will lead to confusion as the rules settle down and could lead to significant non-compliance in a system that is known for a very high degree of compliance. Many taxpayers will be making remittances without knowing their effect, which could turn out to be expensive if they make the wrong choice.
If the Government are not willing to postpone the changes until 6 April 2009, an alternative would be to ensure that the rules apply only from the date of Royal Assent and that remittances prior to that can be ignored. This is hastily drafted legislation which people have had relatively little time to digest, and there is concern that even the amendments tabled by the Government in response to concerns raised by tax advisers do not appear to address adequately all the underlying concerns.
I fear that, by the time we get to Royal Assent, some issues will be left unresolved, and we will then be in a situation where we rely upon guidance being generated. People will look to the “frequently asked questions” section of the HMRC website for answers. There is a lot of work to be done to enable taxpayers to comply with these rules, and the Minister gave an indication of the type of work that needs to be done during the earlier debate about de minimis limits.
No one underestimates the amount of work that has taken place so far and the amount that needs to be done going forward to make this work. We are in a situation, a quarter of the way through the tax year in which the Finance Bill gains Royal Assent, where there has been significant uncertainty about how the rules will apply. The Government should step back from this and understand some of the concerns they have created by the way the legislation has been introduced. There are lessons to be learned about how these changes should have been made. Consultation in this area has apparently been going on since 2003, and there has been a sudden acceleration and pick-up in pace since the pre-Budget report. I am not quite sure what triggered that interest in amending these rules, but clearly a lot of work has had to be done and is not entirely finished. It is a lesson that we should all learn, on both sides of the House, about how not to make tax policy.
Mr. Mark Field (Cities of London and Westminster) (Con): My hon. Friend the Member for Fareham is too polite to say that there has been a little too much politics involved in some of these proposals. While I accept that elements of this have been in play for five years since the initial consultation process in 2003, breakneck speed has apparently been required since October 2007 in order to get changes on to the statute book.
As I mentioned earlier, I have considerable sympathy with elements of what the Government are trying to achieve. I represent a constituency that contains the City of London, and have therefore heard some of the somewhat hysterical response to changes regarding non-doms. Some of the points raised are true, but other elements have been overplayed, not least because there is a level of uncertainty, about which I will say more later.
I also represent a large residential population in some of the most expensive real estate in the country, and it is a big concern, not only in the City of London, Westminster and Greater London, but beyond, in the home counties. There is real concern among people I speak to, particularly those in their 50s and 60s, who worry about how on earth their children are ever going to be able to have a quality of life akin to the one that they themselves have been accustomed to, particularly in relation to house prices. There is a sense that much of the concern has been focused unduly and slightly unfairly on the non-dom community as an extremely wealthy group, which is regarded as not paying its way. There is an element of truth in that, and those of us in the political world have to understand that that sense of inequality could be very damaging to the country if it is allowed to persist for long.
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However, a significant number of non-domiciled individuals who live and work in this country do not earn huge amounts of money. Their voices have been almost silenced in this debate because it has focused on multi-millionaires. Their influence and the fact that they appear to pay little in direct tax because of the arrangements that they are able to work with HMRC are resented by an increasingly large number of people—not just the usual suspects, but relatively well-educated, middle-class, professional people who feel that they are being priced out of the property market and private schooling.
This matter needs to be addressed. The Government sensibly began this process in 2003, but it should have been an ongoing process and not accelerated as it has been in the past nine months. As my hon. Friend the Member for Fareham has rightly pointed out, when the Bill gets Royal Assent and as we approach the next Budget, we are still likely to have a whole range of uncertainties as people are being taxed. The risk is that we end up with the worst of all worlds and people will assume the worst rather than consider what is actually happening.
I have some sympathy with what the Government have tried to do. My party suggested a sensible and relatively straightforward approach at the last Budget. Rather than potentially open a can of worms by looking at the arrangements for individuals overseas, we should have had a simple, straightforward, one-off or annual charge for those with non-domiciled status. I fear that politics have played too big a part in this issue. I understand that we live in a political world, but we are, unfortunately, also at a time in the economic cycle when these things matter rather more than might have been the case two, three or four years ago.
Many of the changes have not been properly thought through. The real risk to the Government’s credibility and, more importantly—dare I say it—to the marketability of the UK across the world, is the sense of uncertainty and almost incompetence that seems to be an everyday part of the way in which the Government are addressing this issue. That is regrettable. Representing the seat that I do, I can see both sides of the argument. Time and again, I hear from people in the City who say, “This is appalling; we are going to lose loads of non-doms.” I do not think that there has been much evidence of that happening yet, although my hon. Friend the Member for Fareham might be right that the rather stagnant state of the property market could be playing a part in that.
It is wrong that we should be held to ransom by any group in society, such as the very rich, or by any organisation. We need to get the balance right, which means that we must think through the implications of this sort of legislation. My hon. Friend has skilfully pointed out time and again things that have not really been thought through. There will be a total lack of certainty. We live in a world and have a global economy in which labour has been at its most mobile in human history. We cannot afford to lose some of the brightest and best people. Those affected will not all be the richest individuals, although some inevitably will be, and will make a contribution beyond paying tax. Some of the very wealthy pay significant amounts of tax, such as council tax and VAT on their purchases, and often employ many people. The non-domiciled sector therefore brings a range of benefits to our economy. That argument must be put forward if there is to be a balanced approach, which the Government have slightly lacked.
I have made some rather general points, and my hon. Friend has put his finger on more specific points. I fear that we are putting in place an ill-thought-through, rather uncertain framework, which will create the worst of all worlds. It will probably raise relatively little money and will dissuade people who would otherwise come to our shores from coming here. One has to remember that there are 20 million people a year emerging in the middle classes in India and China together. Those two countries have 4 million graduates a year. We would hope to attract, if only for a short period, some of the brightest and best of that talent. The real risk is that we are perhaps putting in place an ill-thought-through and uncertain programme on non-domiciles which will dissuade those people from coming here. There are other options and they might go to Singapore, New York or Dubai. Such places will seem attractive in the short or even the medium term. That is our broadest concern.
I hope that the Government will give real thought to the timetabling. We can try to put back the implementation of this so that there is a proper and rigorous system that will stand the test of time. The worst of all worlds would be for us to reassemble here next year and the year beyond and have to rewrite many of these provisions, not least because of the unworkability that may have been introduced. We will be advised by too many tax advisers about the loopholes that should have been thought through at the outset.
Thank you for your indulgence, Sir Nicholas. I am sure that we will not have a stand part debate. I hope that the Government and the Minister will give us some assurances about exactly how see they this playing out in the months and years ahead.
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