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
wholly, or indeed mainly the activity, yet there is an element of the
cost that would be a UK service. Would payment for that element
constitute a remittance? Would the treatment differ if the travel was,
say, to an overseas property owned by the non-dom? 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
Government’s 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
firm’s 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
offshore—non-UK—tax 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. 2.30
pm 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
community—the issue of UK equities is still to be addressed by
the Financial Secretary—it 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
with, and whether investing in property wholly or mainly situated
outside the UK might disadvantage UK investments, as people may be less
inclined to invest in a UK partnership or UK assets. I suspect that
those representations have also been made to the Financial Secretary,
so hopefully she will be able to offer some clarification, rather than
my expanding on the points at
length. 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 amendment’s 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-expert—I freely admit—may 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 form—whether shares or
other property—are 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
brought in for public display, the exemptions apply only if the property
derives from foreign income; that excludes things like
gains. 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.
2.45
pm 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 Minister’s amendments, mirror the VAT
treatment of relevant items. I should be interested to hear why the VAT
treatment should be used as a basis. My amendment No. 380 would broaden
the location type beyond museums to any place where there is public
access. I understand that the Treasury runs a scheme for other assets
in which tax is waived or held over if an asset is available for public
access. For example, we have artwork in the House, which has
arrangements for people to visit, but it is not deemed to be a museum.
Could the exemption be extended to cover such arrangements? I should
like to go beyond the Government’s amendment, which extends the
exemption to commercial auction houses. Could we go further than
that? | 
