Mr.
Hoban: The first amendment deals with a particular area of
tax planning that the rules on remittance facilitate. It is a concept
called source ceasing, which is an interesting way in which people can
tackle their tax affairs. For people who remitted to the UK an amount
of income for which the source did not exist in the year in which it
was remitted, it was untaxed. That enabled people to do all sorts of
tax planning. The fact that this sort of thing was possible was in
itself a revelation and an education. I do not think that there is any
great dispute with the Government’s changes in the Bill. I get
no sense from talking to representative bodies and others that there is
any great outcry about the closure of that loophole, at least not in
principle.
However—this
is where my amendment comes into play—there is concern about the
practical problems arising from the fact that HMRC has long recognised
and accepted the source ceasing provision. It has, I understand, been
widely used and it is a perfectly legal process. The problem that the
change will potentially give rise to is one of identification. As
drafted, any sum that is income would be taxed as income in the year in
which it was remitted. The argument is that it would be difficult if
not impossible correctly and accurately to identify these sums as they
might have been treated as capitalised, assimilated into other funds or
reinvested into other assets. How will it be possible for a taxpayer to
link up any incomes remitted to sources that may have ceased in
previous years? What happened when those sources ceased; where has the
money gone? All of those identification and record-keeping issues will
be raised.
The problem
is particularly exacerbated by the fact there was no requirement at the
time to keep records of those transactions and it might not be possible
for many taxpayers to comply with the provision and complete correctly
the self-assessment form. The Minister has said on a number of
occasions that it is a self-assessment process. We want taxpayers to be
able to do the best that they can in completing that form. However, it
may be that through no fault of their own, given that this is a
long-established HMRC approach to tax planning, they do not have
adequate records to enable their compliance. That is why my amendment
would delimit that situation by stating that the provision applies only
where the source ceased after 5 April 2007. The Minister might come
back and suggest that there are other alternative points at which that
delimitation might come into effect, but I propose 5 April 2007. It
would be easier for taxpayers to comply and for the self-assessment
process to work correctly. I would be interested in the
Minister’s comments on how we might make this practice work,
given that it has been acceptable and legal to do it for some time in
the past. That is amendment No. 381, which is a straightforward
issue.
3.15
pm I
turn to amendment No. 382. The position prior to 6
April 2008 was that deductions were not generally allowed from a
relevant foreign income charter tax on the remittance basis. One
exception to that rule was where the income in question was from a
trade profession or vocation carried out outside the UK. The
restriction and the exemption are in section 832(4) of the Income Tax
(Trading and Other Income) Act 2005. This provision is being carried
forward into new section 832B in the Bill. It would appear illogical
and unfair that deductions
are not allowed from overseas property income for legitimate expenses
that would have been allowed if the taxpayer were taxed on an arising
basis. Again, it is not appropriate that an unrepresented taxpayer is
expected to realise that he will be taxed on income received without
the benefit for deductions. It does not seem fair that this should be
so. Let
me give the Committee an example. Mr. X is UK resident and domiciled in
Switzerland. He has a cottage in France which in the year to 5 April
2009 he rents out at €600 a month. He does not have a French
bank account and the income is paid straight to his UK bank account.
When legitimate income deductions are taken into account such as for
the interest on the loan to purchase the property and agents fees, he
would have a taxable profit of €3,600 if taxed on an arising
basis. However, it is not in his interest to be taxed on an arising
basis as he has significant Swiss investment income and trust income
that he does not remit. Accordingly, he makes a remittance claim. The
consequence of that is not that he would be taxed on the taxable profit
of €3,600, but on the €7,200, which is the rental value,
not taking into account any
deductions. It
appears from the frequently asked question on the HMRC website that the
Government agree that the position is as I have set it out. Can the
Minister clarify this? We think that amendment No. 382 will make the
necessary clarification to this Bill to allow that interest and any
expenses to be offset against the rental
income.
Jane
Kennedy: If people choose to bring income from a ceased
source, which is not a phrase that trips easily of the tongue, into the
UK after 5 April 2008, they should pay tax on that untaxed income. The
amendment would allow that any account closed before 5 April 2007 could
still be remitted tax free at any time in the future. I appreciate that
in some cases people may no longer have all the records to make a full
and complete return. In such cases the individual will need to complete
their tax return to the best of their ability and to explain their
problem in the white space that is available on the tax return for that
purpose. If HMRC inquires into the
return— [Interruption.] Well, the hon.
Gentleman asked what they would have to do. The individual and HMRC
will need to work together to establish the correct figure, based on
the facts which the individual is
declaring. I
am confident that such problems can be dealt with pragmatically by HMRC
and if problems arise in practice I am sure that they will be brought
to my attention. Amendment No. 382 seeks to clarify that certain
deductions are allowed in arriving at the tax amount of a remittance.
The hon. Gentleman uses the example of rental income. I can assure the
Committee that the current legislation already delivers what his
amendment seeks to achieve. For the sake of clarity, I should point out
that a deduction for expenses paid, such as interest on let property,
is already given in arriving at the amount treated as remitted to the
UK. It has been clarified in HMRC guidance. I am assured by my advisers
that there is no need for an amendment along the lines that the hon.
Gentleman has described. I know that it was a probing amendment, but I
hope I have addressed the concern that he
raised.
Mr.
Hoban: In the example I outlined, the gross amount was
remitted—the rent, because it was received into the UK and not
held in a French bank account. I
suspect that the interest payments on that mortgage would have been paid
out of the same UK bank account. I think that the Financial Secretary
is saying that the net will be the remittance, rather than the gross,
so I would be grateful for that
clarification. David
Wright (Telford) (Lab): That is
correct.
Jane
Kennedy: My hon. Friend the Member for Telford assures me
that the hon. Gentleman is right and I have no reason to doubt him. I
believe that the hon. Gentleman’s description of the problem and
its treatment is accurate. When I read Hansard, if I believe
that something needs further clarification, I will be happy to provide
it.
Mr.
Hoban: With regard to amendment No. 382, I am grateful for
the clarification that the hon. Member for Telford gave. His talents
are wasted sitting behind the Minister. He could be either an official
or a Minister, and I think I know which he would prefer—perhaps
that recommendation from the Opposition Front Bench has ended his
chances of ministerial office. I am grateful for that clarification,
which tackles a particular concern.
I am less
comfortable with the clarification that the Minister gave on source
ceasing. I think we will be in difficult territory on a range of issues
that we have discussed. There will have to be discussions between HMRC
and the taxpayer in those situations, and I am anxious about where the
balance will sit in those discussions. I would feel instinctively more
comfortable with a hard and fast date than I would with having to fill
out white space on a tax form—I am not sure what the on-line
equivalent of the white space is, but I am sure there is one. I would
rather have a delimitation on time than the Minister’s
reassurance.
Jane
Kennedy: I hesitate to prolong the discussion, but cannot
see how shifting the date by a year would remove that requirement in
cases where an individual does not have the records to indicate that on
a return.
Mr.
Hoban: The taxpayer will be dependent on a discussion with
HMRC on whether it is comfortable with the explanation that is given on
their return, and I think that it is reasonable to expect a taxpayer to
have kept records that date back a year and from the previous tax year.
It would be unreasonable to expect a taxpayer to have kept records from
10 years ago, but there is a continuum between 10 and one and I chose
one year as a way of probing to get an explanation. The further back we
allow that to go, the greater the uncertainty and risk that the
taxpayer will have insufficient records to reassure HMRC that they are
being open and transparent about source ceasing, and that is where the
problem arises in having a cut-off point. It is more reasonable to
expect taxpayers to have records relating to more recent transactions
than records relating to historical ones, but it would be better to
have that in the Bill, rather than leave it as an area for negotiation
between HMRC and the taxpayer.
We are keen
to see some certainty in a number of those areas, and I think that
source ceasing would be a good area in which to see some of that
certainty. Perhaps I have persuaded the Financial Secretary
to
come back on Report with an amendment to put that limitation in.
However, having had the explanation from her, I beg to ask leave to
withdrawn the
amendment. Amendment,
by leave,
withdrawn. Amendments
made: No. 348, in schedule 7, page 180, line 25, at end
insert— ‘(3A) Sections 42
and 43 of the Management Act (procedure and time limit for making
claims), except section 42(1A) of that Act, apply in relation to an
election under this section as they apply in relation to a claim for
relief.’. No.
335, in schedule 7, page 182, line 40, at end
insert— ‘58A In section 119A
(increase in expenditure by reference to tax charged in relation to
employment-related securities), after subsection (5)
insert— “(5A) See
also section 119B (unremitted foreign securities
income).” 58B After that
section
insert— “119B
Section 119A: unremitted foreign securities
income (1) For the purposes of
section 119A reduce the amount that counts as employment income by so
much of that amount (if any) as is unremitted foreign securities
income. (2) In this section
“unremitted foreign securities income” means income
that— (a) is foreign
securities income for the purposes of section 41A of ITEPA 2003
(employment income from ERS charged on remittance basis),
and (b) has not been remitted
to the United Kingdom by the end of the tax year in which the disposal
mentioned in section 119A(1)
occurs. (3) The following
provisions apply if any of the unremitted foreign securities income is
remitted to the United Kingdom after the end of the tax year referred
to in subsection (2)(b). (4)
The person liable for the capital gains tax on any chargeable gains
arising on the disposal may make a claim for section 119A(2) to have
effect as if the remitted income had been remitted before the end of
that tax year. (5) All
adjustments (by way of repayment of tax, assessment or otherwise) are
to be made which are necessary to give effect to a claim under
subsection (4). (6) Those
adjustments may be made at any time, despite anything to the contrary
in any enactment relating to capital gains
tax.”’. No.
349, in schedule 7, page 184, line 6, leave out paragraph
70. No.
350, in schedule 7, page 184, line 20, leave out paragraph
73. No.
336, in schedule 7, page 184, line 35, leave out ‘and 32’
and insert ‘to 32, 34C and 58B’.
No. 337, in
schedule 7, page 184, line 37, at end insert
‘(except employment-related securities
acquired pursuant to a securities option acquired before 6 April
2008).’. No.
491, in schedule 7, page 186, line 25, at end
insert— ‘(6) In this
paragraph “property” does not include
money. (7)
“Money” has the same meaning as in section 809U of ITA
2007.’.—[Jane
Kennedy.]
Mr.
Hoban: I beg to move amendment No. 383, in schedule 7,
page 187, leave out lines 1 to 9 and insert ‘,
and (b) before 6 April 2008 the money was
received in the United
Kingdom.’.
The
Chairman: With this it will be convenient to discuss the
following amendments: No. 386, in schedule 7, page 187,
leave out lines 1 to 3 and
insert— ‘(b) the loan was
made for the purpose of enabling the individual
to— (i) acquire an
interest in residential property in the United
Kingdom, (ii)
carry out a remortgaging exercise with respect to residential property
in the United Kingdom, or (iii)
furnish, decorate, repair or enhance a residential property in the
United Kingdom,
and’. No.
387, in schedule 7, page 187, line 6, leave out from
‘money’ to ‘and’ in line 7 and
insert ‘for any of the purposes
referred to in subsection
(1)(b),’. No.
384, in schedule 7, page 187, line 10, leave out ‘Relevant
foreign income’ and insert ‘Foreign income
gains’. No.
388, in schedule 7, page 187, line 10, leave out ‘Relevant
foreign income’ and insert ‘Foreign income and
gains’. No.
385, in schedule 7, page 187, leave out lines 13 to
21. No.
389, in schedule 7, page 187, leave out lines 13 to
19. Government
amendments Nos. 492 and
493.
Mr.
Hoban: I thought that I should give the Committee a break
from the 10th group of amendments on schedule 7, and so did
not seek any explanations from the Financial Secretary on amendment No.
491. Doubtless I will find out later today that there is something in
that group that we should have asked about, but we can tackle any such
issues on Report if
necessary. This
is the 11th and penultimate group of amendments on the schedule. Group
12 is lurking. This group goes back to the issue of foreign property.
Just to clarify for the Financial Secretary, I have tabled two sets of
amendments in this group to tackle the same issue. Amendments Nos. 383
to 385 would provide an exemption for all property, meaning buildings
rather than the wider definition of property. Amendments Nos. 386 to
389 apply simply to residential property.
I will give
some background. Prior to 6 April 2008, someone repaying a capital
element of an offshore-linked debt out of foreign income or gains
constituted a remittance. For that purpose, UK-linked debt
meant “a
debt for money lent to the person in the United Kingdom, or for
interest on money so
lent” or “a
debt for money lent to the person outside the United Kingdom and
received in the United Kingdom”.
It could also be to
repay a debt lent initially to the individual in the UK or subsequently
received in the UK. If the funds were brought to the UK after the loan
was paid off, that would also constitute a
remittance. 3.30
pm The
settlement offshore from foreign income or foreign gains of the
interest as it fell due did not, however, constitute a remittance, as I
understand the existing legislation. However, the Government have made
it clear that, from 6 April 2008, the Finance Bill is to extend the
debt provision. As well as catching the
repayment of UK-linked debt, the payment offshore of the interest on a
UK-linked debt will constitute a remittance. That was not the case
prior to 6 April
2008. The
Government have recognised some issues around that and introduced
limited transitional provisions. To fall within the scope of those
provisions, the loan must be a qualifying loan—the funds were
lent prior to 12 March 2008, the date of the
Budget—and must have been made for the sole purpose of enabling
the individual to acquire an interest in UK residential property. Also,
before 6 April 2008, loan funds must have been received in the UK,
applied to acquire an interest in UK residential property and the loan
itself secured on that property. Interest on the offshore loan must be
paid offshore from relevant foreign income. That does not include funds
representing the proceeds from offshore income
gains. Provided
that all those conditions are met, the payment of loan interest would
not constitute a remittance. Unless entitlement to the relief is
forfeited, the transitional period will last until the repayment of the
loan, or 5 April 2008 if earlier. Paragraph 86(3) provides
that all entitlement to relief would be lost should the following occur
after 11 March 2008: any term upon which the loan was made is varied or
waived; the debt ceases to be secured on the residential property; or
any other debt is secured on the residential property. The last point,
which corresponds to paragraph 86(3)(c), goes further than the Budget
day material, in that taking out an entirely new loan would mean that
the entitlement to transitional provisions was forfeited. There appears
to have been a tightening up from the Budget day proposals to the Bill
proposals. The
problem identified is that non-doms could have taken out
offshore-linked loans with the legitimate expectation that they could
service the interest costs from foreign income and gains without that
constituting a remittance. Given that, the transitional provisions
appear to be very restrictive. For example, if any term of the loan is
varied, the benefit of the transitional provisions will be lost and the
interest payment will be treated as a remittance. We are not sure why
the transitional provisions do not allow relief for interest paid
overseas from foreign earnings on capital gains, where those could have
been used under the old rules to pay interest on offshore mortgages
secured on UK property, without that resulting in a
remittance. Although
we understand that a special economic case can be made for allowing
relief with respect to residential properties, that seems harsh on
individuals who took out loans, say, to fund a UK business, as they may
have borrowed more than they could normally afford, because they were
going to be able to pay that interest from untaxed foreign income or
gains. Even considering residential property, the subject of four out
of the seven amendments in the group, the provisions appear unduly
narrow, as they deny relief where there has been a remortgaging
exercise, or part of the loan funds have been used to repair, renovate,
decorate or furnish the
property. It
has been further suggested that there is a problem with paragraph
86(1)(c)(iii), which specifies that there will only be relief where the
debt is secured on the UK property. That is very restrictive, as in
practice many offshore lenders prefer to have security over assets
under management with them. Nevertheless, the loan
can be demonstrated as being for the purpose of purchasing the interest
in the land that was acquired. Therefore, the provisions in paragraph
86(3) seem a little unnecessary and could result in foreign
domiciliaries accidentally breaching the conditions to qualify for
relief. Again, that goes back to a problem that we have highlighted
previously. It seems unfair to tax those who perhaps do not have the
access to special advice and could inadvertently be caught out by the
provisions. It is the unrepresented taxpayers who could be the losers.
It is particularly harsh because the restriction was not announced on
Budget day. In summary,
my amendments Nos. 383 to 385 create much more flexibility for all
property, but amendments Nos. 386 to 389 create flexibility only in
respect of residential
property.
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