Finance Bill

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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.
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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.
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”
“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.
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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.
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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