Mr. Hoban: The Government have tabled an important amendment because it addresses the wider concerns about the impact of changes in the Bill on the competitiveness of the UK financial services sector. It is important we get these things right and I want to tease out some of the issues from the Minister.
The amendment introduces two new conditions which, if met, mean that a payment for a service does not become a remittance and therefore is not subject to tax. Condition A is that the relevant UK service relates to property situated outside the UK, and condition B is that the consideration is given by way of payments to one or more bank accounts held outside the UK by the person who provides the relevant UK service. What constitutes property situated outside the UK? I am clear in my own mind that it includes shares in overseas companies held by an offshore trust, but I am not clear whether UK shares held by an offshore trust would meet the definition as
wholly or mainly property situated outside the UK.
If UK shares held by an offshore trust do not meet that condition, investment management fees charged by a UK fund manager will be a remittance. My amendment No. 363 sought to get around that by saying that as the fees related to an offshore trust, the fees paid would not constitute a remittance.
What is a service? There has been considerable debate about what a service is in the context of VAT legislation, but one example that has been suggested to me is whether travel in or out of the UK would count as a service performed in the UK? Clearly checking in for a flight is more than an incidental activity, but it is not
Condition B states that the payment must be made to an offshore bank account. Will the Minister tell us why a UK-based service provider needs an offshore bank account. Surely the main point is that the payment for the service should go directly to the service provider. I am concerned that the Governments proposals are in danger of becoming unnecessarily onerous.
In new section 809SA (1)(b), may I also raise an issue about the service being provided in the UK? It is common in many multinational service companies for a client to be sent a single bill for all the firms activities on their behalf, but the subsection would require those firms to issue separate bills. Is that really what the Government are expecting people to do? My understanding is that for the convenience of their clients, large, multinational accountancy firms would try to raise a single bill to a client for services rendered by a range of offices across the world, including their office in the UK, rather than separate bills. Their own internal accounting arrangements would deal with the rest. Is the Government really expecting companies to raise a series of separate invoices?
There are practical issues, too. For example, if a US citizen resident in the UK asks a UK-based firm of tax advisers to prepare their US tax return and their fees are paid from offshore income or gains, does that count as remittance, even though the work relates to an offshorenon-UKtax return? How is advice on gains and investment income that could be linked back to offshore assets treated, compared to advice on earned income? Would a UK-based firm advising on that tax return have to submit different bills for different parts of the advice? Should work on assets as opposed to employment income be billed separately? There is a conflict, which I think the Financial Secretary is trying to address. She alluded to it earlier when we touched on payment for services received in the UK, where a non-dom might seek to establish a service company as a means of paying the costs of nannies, drivers and other personal staff.
I can see that the Financial Secretary is trying to close that loophole, on this side of the equation. I understand the purpose of that. However, on the other side, she is making it complicated for certain professional firms to comply with the rules in a way that is cost-effective and efficient for their clients. There is a tension there that we have not resolved. While new section 809SA may deal satisfactorily with the concerns of people in the investment management communitythe issue of UK equities is still to be addressed by the Financial Secretaryit may create a ripple effect in other professional services firms, which may be important to understand. I appreciate that there is a challenge there for the Financial Secretary to address.
The Law Society has raised with me some points about private equity. They include the management fee, how the fees paid to the general partner might be dealt
Jane Kennedy: The hon. Gentleman asks a number of questions. It became clear only recently that the issue he raises might be a problem. As soon as I became aware of that, I moved quickly to address what might have become a significant problem along the lines that the hon. Gentleman described. It has been longstanding practice that the payment for professional services under new section 809SA must be made outside of the UK. We specifically asked representatives of the financial services industry whether that would cause a problem, and they confirmed that it would not. The provision of travel is not the provision of a service in relation to a property outside of the UK.
The hon. Gentleman asked whether the fees exemption would apply to individuals who used a UK-based firm to advise on completing US returns. That could be within the terms of the exemption. However, it would depend on the details of the individual case. I am not deliberately trying to avoid the question; it genuinely will depend on the individual circumstances when the work is considered.
Mr. Hoban: I am grateful to the Financial Secretary for the honesty of that answer. Could she expand on what factors people should bear in mind when thinking about these invoices? To say that it depends on the circumstances of the case is not terribly helpful to professional advisers in that area. Some clarity this afternoon would be helpful. Perhaps she might be able to say how HMRC intends to go beyond what she says this afternoon in terms of providing support to professional firms.
Jane Kennedy: The amendments intention was to construct a change that would address all the concerns of the financial services industry, the British Bankers Association and the City of London regarding the impact of fees potentially becoming tangled up in the remittance basis and the possible damage that that might do to the City of London and the financial services industry, who receive a great deal of business from resident non-domiciles even under the rules as they stand. I do not want to be drawn into too much detail in Committee where I, as a non-expertI freely admitmay give an answer that is either wider than intended or may mislead. My intention was always to provide a response that met the concerns of the BBA, which was the first to raise these issues, as well as the other organisations.
The hon. Member for Fareham asked for the definition of property held offshore, and if UK assets are involved. The key point is that the trust is offshore and that its assets, in whatever formwhether shares or other propertyare also offshore. Property takes its natural meaning but certainly does cover shares, real estate, investments and other assets. Again, what constitutes a service takes its natural meaning.
We have to recall that this is a self-assessment system; it is not one where definitions apply directly to cases, but there will be guidance available. It will, however, be up to the individual to self-assess. As I have said, our aim in reforming the remittance basis and tabling this amendment was to address the concerns raised with us by representatives, particularly when it became clear that the definition of remittance had the effect of treating the fees paid to the UK service providers in respect of, for example, offshore investments, as a remittance. I am assured that our amendment fulfils my commitment to address that concern. The payment for the service must also be made outside the UK for the exemption to apply.
Mr. Hands: How much are we talking about here? Are there very small sums of money in these remittances, or something really quite large? It would be helpful for the Committee to get some idea of the magnitude of the sums involved in the amendment.
Jane Kennedy: It is clear to me that our original proposals were very much wider than we originally intended. So, where we sought to prevent the payment of services that included the payment of school fees and fees for other services, where it could be defined as a service, people were paying with offshore funds and avoiding tax as a result. We sought to prevent that as we did not think that that was fair.
Our original drafting caught the very proper financial advice being offered by the City of London about the fact that UK advisers would have become uncompetitive in comparison with other financial centres and financial advice that could be obtained abroad. We shifted the definition in response to that criticism. All I can do is repeat the fact that I am assured that this amendment addresses those concerns.
It does not mean that we would allow the payment of fees for the types of services that I have described, which I do not think that the constituents that the hon. Gentleman and I represent, who pay their taxes through the arising basis without having the opportunity to use the remittance basis, would consider to be fair. I believe that the amendment is a good one and hope that it sees its way on to the statute book.
Mr. Hoban: I am not sure that the amendment goes far enough. In addressing the concerns raised by the BBA about investment management and private banking fees, the Financial Secretary has gone much of the way towards tackling this issue. However, there are further considerations, such as the issue of US tax returns. I am a little uncomfortable with her answer about assets based wholly or mainly offshore. It appears that her proposal will restrict the ability of offshore trusts to invest in UK equities, properties and so on. That was the sense that I got from her remarks, but I do not intend to oppose the amendment. However, I will look at her remarks in Hansard and we may wish to retaliate and table amendments on Report.
Amendment agreed to.
Jane Kennedy: I beg to move amendment No. 355, in schedule 7, page 164, line 19, leave out from rule to end of line 28 and insert
(see sections 809V and 809VA).
(4) Clothing, footwear, jewellery and watches that derive from relevant foreign income are exempt property if they meet the personal use rule (see section 809VB).
(5) Property of any description that derives from relevant foreign income is exempt property if
(a) the property meets the repair rule (see section 809VC),
(b) the property meets the temporary importation rule (see section 809W), or
(c) the notional remitted amount (see section 809X) is less than £1,000..
The Chairman: With this it will be convenient to discuss the following amendments: No. 376, in schedule 7, page 164, line 21, leave out
that derive from relevant foreign income.
No. 377, in schedule 7, page 164, line 24, leave out
that derives from relevant foreign income.
Government amendments Nos. 487 to 489.
No. 378, in schedule 7, page 165, line 4, at end insert
(6) For the purpose of subsection (4) property is to be treated as not ceasing to meet a relevant rule if it is lost, stolen, destroyed, scrapped or otherwise ceases to exist or it is disposed of by way of gift other than to a relevant person; and property gifted to a relevant person that is exempt property in the hands of that person immediately after the gift shall not be treated as ceasing to be exempt property solely by reason of that person subsequently ceasing to be a relevant person.
(7) If exempt property ceases to meet one of the relevant rules because it is sold to someone other than a connected person, the amount chargeable to tax shall be the sale proceeds received and not the amount referred to in section 809O above..
Government amendment No. 356.
No. 379, in schedule 7, page 165, leave out lines 10 to 20 and insert
it is for the purpose of public display at a museum, gallery or other premises within subsection (8) below..
No. 380, in schedule 7, page 166, line 1, leave out from is to end of line 4 and insert
any museum, gallery or other premises at which it is usual to display items for access to the public and where the item will be on display to the public throughout the normal opening hours of that place or where throughout such times it will be available for public access..
Government amendments Nos. 490 and 357.
Jane Kennedy: The Government amendments, apart from No. 357, arose from discussions about the rules for the remittance basis treatment of moveable property brought to the UK. Government amendment No. 357 ensures that a reference to the Commissioners is supported by an appropriate definition. I say that as a brief opening comment and look forward to listening to the debate.
Mr. Hoban: I rise to speak to amendments Nos. 376 to 380 that stand in my name and those of my hon. Friends. Amendments Nos. 376 and 377 relate to new sections that exempt certain property from remittance provisions. I have a number of concerns about the interaction of these sections, particularly in the case of property brought into the UK for personal use. My overriding concern is that, with the exception of property
I am unable to understand the logic of that restriction. It appears to complicate the law unnecessarily, particularly for the unrepresented taxpayer, who may well not appreciate the distinction. For example, when a Polish builder flies into the country, he will have to think about whether he is wearing a watch that he bought from the proceeds of the sale of his flat, rather than with relevant foreign income. It would aid compliance with the rules if he or she were able to exclude clothing, jewellery and watches bought from any source of income. I would like justification from the Financial Secretary of why relevant foreign income is so important in this matter.
On amendment No. 378, the provisions on exempt property are currently far too complicated. They are difficult to understand and are unlikely to be workable in practice. I should like to illustrate, using a few examples, some of the anomalies that might arise with items of personal use property.
Such property, which is defined as clothing, footwear, jewellery and watches costing under £1,000, is exempted under new sections 809T(4) and 809T(5)(a). Under new section 809U(3), if the item is sold whilst in the UK, there is remittance of the original cost at the time of sale even if the item is sold for £1. If it is sold in the UK while it is physically overseas, there is no remittance. There is no remittance if the item is scrapped or gifted in the UK or if it is stolen. That remains the case even if it is insured and moneys are received in settlement of an insurance claim.
An item of personal use property that costs more than £1,000 is exempt only under new section 809T(4). If it is gifted while in the UK to anyone other than a relevant individual, even to a charity shop, the cost of the item becomes a remittance at that date under new section 809U(4), but there is no remittance if the item is gifted to an overseas charity shop while abroad. There is remittance of the cost of the item if it is scrapped or stolen in the UK, but not if it is scrapped or stolen overseas. If, however, it had been in the UK for fewer than 275 days and the non-domiciled individual could show that it was taken overseas after it was stolen, which is, admittedly, unlikely, there will not be remittance.
If a gift is made of the item by a non-domiciled individual to their infant child, there is no remittance as it continues to meet the personal use rule under new section 809W(2). When that child reaches 18, however, a remittance will arise if the property is in the UK, but not if it is overseas on that day, even if it is brought back to the UK on the following day. Those provisions are not very straightforward, and I hope that my amendments would make them more comprehensible and accessible to the taxpayer, although I suspect that my explanation might not be particularly comprehensible or accessible to the average taxpayer.
On amendments Nos. 379 and 380, many of the original rules on public display, and in the Ministers amendments, mirror the VAT treatment of relevant items. I should be interested to hear why the VAT
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