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
provision. The treatment of such gains and losses within the Exchange
Gains and Losses (Bringing into Account Gains or Losses) Regulations is
already under consideration in the forex matching discussions that are
ongoing between HMRC and business representatives, and we have talked
to business representatives about this. We intend to address that point
in the next round of forex matching changes later in the year.
Proceeding in that way will ensure that the whole regime is considered,
rather than that one item being taken out of context. The industry is
satisfied with the approach that we are taking.
The hon.
Gentleman’s 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.
Schedule
13Chargeable
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)’.
The
Chairman: With this it will be convenient to discuss
Government amendment
91.
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 borrower’s 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
company’s 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 legislation’s 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.
Clause
33FSCS
payments representing
interest Question
proposed, That the clause stand part of the
Bill.
Mr.
Hoban: I have a quick question. I understand the
clause’s 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
scheme’s rules, as outlined in the Financial Services
Authority’s 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
sum representing interest paid by the FSCS would not be taxed in the
same way as interest paid by the banks is taxed. This would lead to
unfairness between those customers of the defaulted bank whose accounts
had been transferred to another bank or building society and those who
receive FSCS compensation. The customers whose accounts were
transferred would still be taxed on interest received from their new
bank or building society but the customers receiving compensation from
the FSCS would not be taxed on the sum relating to interest. 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.
Clause
34Corporation
tax treatment of company distributions
received 11.15
am 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 Committee’s 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 group’s
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 business’s 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
rules. It will be consistent with the move that I have described towards
a more territorial approach of taxing foreign subsidiaries. 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 Government’s 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 Government’s 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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