Mr. Hoban: I have a couple of quick questions for the Minister about the schedule, which arise from representations made by outside bodies. The first is about capital gains and losses that arise as a consequence of the operation of foreign exchange matching rules. The Institute of Chartered Accountants has expressed the concern that these seem to fall outside the scope of the schedule. It believes that they should fall within it, as those gains and losses accrue as a result of the operation of statutory provisions. Can the Minister comment on that?
There is concern about the drafting of new sections 171A(5) and 179A(5) to the Taxation of Chargeable Gains Act 1992 inserted by schedule 12. We have received comments that they would totally negate an election. We would have thought that the correct result would be that they would negate an election to the extent that it took the total amount over the actual gain or loss. There would be a difficulty if there were two or more simultaneous elections that transferred parts of the same gain or loss to two or more different companies, so there would be a choice as to which election to negate, but where there is no choice, surely the election should be reduced rather then simply negated.
Ian Pearson: On the question of foreign exchange, the reference in the schedule to in respect of an asset will exclude chargeable gains or losses in respect of liabilities such as those arising from forex hedging from the
The hon. Gentlemans second question was on multiple elections. It is correct that where two or more elections are made simultaneously that specify more than the gain or loss, none of those elections has effect, as a result of the new wording of new section 179A(5). The main issue that the new subsection addresses is the possibility of simultaneous elections where a subsequent election is made in respect of the same gain or loss. HMRC expects that it will be very rare for a group to make such an oversight. On the rare occasions that an oversight may happen, it is right that the group is able to submit correct elections that specify where it wants the gain or loss to go, rather than be subject to a statutory rule that may not achieve the best result on a case-by-case basis.
Question put and agreed to.
Schedule 12, as amended, accordingly agreed to.
Clause 32 ordered to stand part of the Bill.
Chargeable gains in stock lending: insolvency etc of borrower
Ian Pearson: I beg to move amendment 90, in schedule 13, page 131, line 28, after treated insert under subsection (5).
Ian Pearson: The new rules in schedule 13 provide that, to the extent that collateral is inadequate to replace all the lent securities lost in the event of a borrowers insolvency, the lender is treated as making a disposal but receiving no consideration so that, effectively, a capital loss arises. The borrower then has a debt to the lender for the remaining value of the securities at the time of the insolvency, but because of that insolvency the debt is likely to be bad. In certain circumstances, it is possible that, in addition to the capital loss provided for by the schedule, a life insurance companys profits might be reduced by the amount of that bad debt, which results from the interaction of special rules for computing the profits of life insurance companies and the rules relating to the debts of companies, which are known as the loan relationships rules. The schedule contains a provision that intends to stop a debt being classed as a loan relationship if it results from the insolvency of a stock borrower and an inadequacy of collateral to fully replace stock. The effect is to prevent an unintentional double allowance for life insurance companies as a capital loss and as a bad debt.
The provision in the Bill as drafted contains an error. The drafting provides a formula for arriving at the amount of the debt that is not to be treated as a loan relationship, but unfortunately the formula does not produce the correct result. The cross-references to the rest of the provision do not work as they should. Government amendments 90 and 91 correct that error. Government amendment 90 adds a cross-reference to clarify the effect of another part of the change made to the capital gains rules. Government amendment 91 replaces the incorrect formula for arriving at the debt in question with a reference to a description of that debt elsewhere in the new legislation. The amendments do not change the legislations intended effect; they merely correct a drafting error.
Amendment 90 agreed to.
Amendment made: 91, in schedule 13, page 131, leave out lines 30 to 34 and insert
The liability mentioned in subsection (7).(Ian Pearson.)
Schedule 13, as amended, agreed to.
FSCS payments representing interest
Question proposed, That the clause stand part of the Bill.
Mr. Hoban: I have a quick question. I understand the clauses intentions; the Minister and I have discussed the Financial Services Compensation Scheme in other arenas on more occasions than I care to remember.
The clause centres on the tax treatment of interest and assumes that a depositor will get back their funds in full from the FSCS, which is the way in which the scheme has operated during the current financial crisis; in effect, the Government have issued an unlimited guarantee where the scheme has been called upon for retail depositors. However, the schemes rules, as outlined in the Financial Services Authoritys handbook, actually limit compensation to £50,000. If we return to a more stable financial climate and the £50,000 rule applies, a depositor with a deposit of £60,000 will only get £50,000 back, but will earn some interest on that money from the date that the scheme comes into force, in respect of their institution, and the date that the money is paid to the depositor. Will the interest they receive be treated as compensation, and therefore free of tax, or as interest and be taxable?
Ian Pearson: This clause deals with one aftermath of the default of a number of banks. Because of these bank failures the Financial Services Compensation Scheme has paid out more than £3 billion of compensation to bank customers. The hon. Gentleman is correct. We have discussed a number of the general principles surrounding this on many occasions. The compensation paid included not only the principal on the accounts but also a sum representing interest that the customers would have received had the bank not defaulted. The sum representing interest is the subject of this clause.
To ensure that customers are in the same position as they would have been in had the bank not defaulted, it is necessary to tax the sum representing interest as if it were interest for tax purposes. Without this clause the
The FSCS has rightly calculated the compensation it has paid by taking into account whether or not the customer was a taxpayer. If they were, then it deducted from the amount equivalent to interest, a sum equivalent to income tax, just as tax is deducted from interest paid by the bank. Without this clause non-taxpayers will not be able to claim repayment of the amount deducted by the FSCS, and customers of the defaulted bank, who are liable to higher rate tax, cannot be charged that higher rate tax. That is why the clause is needed.
The hon. Member for Fareham asked whether, if an FSCS payment is less than the original capital, any part of that payment will be treated as interest. Whether the original capital has been repaid is an issue that falls outside the scope of the clause. The amount and nature of the compensation paid by the FSCS is a matter for the rules of the FSCS. He will be well aware of that.
Mr. Hoban: The clause affects the tax treatment of payments made by the FSCS. While the amount of compensation is a matter for the FSCS, where the payment received by the depositor is less than the amount they originally deposited, is it possible to treat the interest payable as being effectively not subject to tax because they have lost so much money? Should not the interest be seen as a form of compensation rather than a receipt to be taxed?
Ian Pearson: Our aim in the clause is to put depositors back in the situation that they would have been in, had the bank not defaulted. There is obviously a technical definition of compensation and how it applies. It is right to say that when the FSCS pays interest it is taxable, just as interest is. We are simply trying to bring people back to the circumstances that they would have been in. It is for the FSCS to determine the rules of its own compensation scheme and whether there should be a £50,000 limit or a higher one, as the hon. Gentleman understands.
Question put and agreed to.
Clause 33 accordingly ordered to stand part of the Bill.
Corporation tax treatment of company distributions received
Question proposed, that the clause stand part of the Bill.
The Financial Secretary to the Treasury (Mr. Stephen Timms): I add my welcome to you, Mr. Hood, as Chair of the Committees deliberations this morning.
Clauses 34 to 37 introduce a significant package that modernises corporate tax rules for foreign profits. It will make the UK a more attractive headquarters location for multinational businesses by enabling a groups worldwide profits to be repatriated to the UK without tax being charged and without need for complex double taxation relief calculations. It is a major change to a more territorial system of business taxation in which we are essentially concerned with applying tax to profits earned in the UK and not to profits earned overseas. The key element of the package offers generous dividend exemptions compared with competitor jurisdictions, available to all companies regardless of the level of shareholding.
The package comprises four linked parts with one in each of the four clauses: first, a broad exemption for company distribution; secondly, a reasonable restriction on our generous interest-relief rules in the UK; thirdly, consequential changes to the controlled foreign company rules, and fourthly, the replacement of the Treasury consent rules with a much simpler reporting requirement. These have all been subject to substantial widespread consultation which has shaped what is before the Committee.
I shall say a little more about each of the four elements. Clause 34 introduces schedule 14, which provides exemption from tax for foreign profits. It reduces administrative costs and it meets businesss call for exemption in the Finance Bill. The result of these rules is that the great majority of distributions for small, medium and large companies will be exempt from corporation tax. That change has been widely welcomed, as has the fact that we have been able to deliver it in this Bill.
Clause 35 introduces schedule 15, which prevents excessive advantage being taken of our interest-relief rules, particularly in the context of dividend exemption. This debt cap applies only where groups put more debt in the UK than they borrowed for their entire worldwide business. It is a reasonable restriction and will allow generous tax deductions for interest, notwithstanding the move to dividend exemption.
Clause 36 introduces schedule 16, which makes three consequential changes to the controlled foreign company rules. The first two relate to introduction of dividend exemption and remove some of the exemptions within the controlled foreign company regime, which will no longer be appropriate. Part 3 of the schedule includes a provision to ensure that the debt cap cannot interact with the controlled foreign company rules in a way as to cause double taxation.
Clause 37, introducing schedule 17, removes existing Treasury consent legislation and replaces it with a modernised, post-transaction reporting requirement targeted at transactions where there is a substantial risk of tax avoidance activity. The old rules have been replaced because they are out of date and are not in line with modern practice. The new requirement will apply to material transactions that pose significant risk of tax avoidance, reducing the administrative burden on business but ensuring that HMRC can focus on serious avoidance. We have also committed to examine the controlled foreign company rules in more detail separately. The review aims to modernise the current
This package represents the outcome of nearly two years of extensive and constructive consultation. I want to thank all those who have contributed in the past couple of years. Businesses have consistently said to us that it is important for the UK to have dividend exemption. They have asked for it to be included in this Finance Bill rather than being delayed any further, to enhance the competitiveness of the UK tax system. I am very glad that we have been able to do that.
Dr. John Pugh (Southport) (LD): This is a very important part of the Bill, as the Minister has underlined; it is very technical but also very important. I want to congratulate him on having introduced this package of measures. It is a crucial package, as it is an attempt to show how a modern taxation system can cope with the global nature of modern commerce.
I want to start by being wholly positive, because I am afraid that I will have to be just a little bit critical later on. Schedule 14 immediately follows and I will make a few general remarks about it. It is definitional and loophole-closing; it is based on a study of real-time transactions, and it definitely has an eye on preventing further abuses of similar ilk.
The effectiveness of this type of legislation depends on the post-hoc scrutiny, the retrospective examination by people within the Treasury who must have adequate skills and abilities to do so. I am a little encouraged, not only by what the Minister has said but by the endeavours of HMRC to recruit appropriate people to police the type of activity that we are discussing on a more regular basis.
In one way, we are looking at a game of chess. On the companies side there are very clever people trying to make the best of the exemptions that are available and on the Governments side there are people trying to close every conceivable loophole. Life has been made enormously more difficult for those people who want to avoid tax by the Governments imposition of an obligation on businesses that insists that they must declare any tax schemes well in advance. However, the real test of the Bill is whether or not adequate ground rules are laid down to prevent further abuse and further misuse of tax exemptions. We will have to judge whether the Bill has passed that test when we look at the next clauses.
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