Mr.
Hoban: As the Financial Secretary said, the Government
have undertaken quite a thorough consultation process on this issue in
the past couple of years. As a consequence of that consultation
process, there have been a number of changes of tack by the Government
on the taxation of foreign profits. I just wanted to explore that issue
a little further.
When the
Government published their consultation in 2007, they produced a fair
summary of the issue that we face when they
said: “The
current system of taxing foreign dividends and relieving double
taxation through crediting foreign tax produces only a modest amount of
direct tax yield, but together with the Controlled Foreign Companies
(CFC) regime, provides safeguards to ensure that profits from economic
activity are properly taxed in the UK.”
It is a question of
getting that balance right, which provides a link to some of the later
thoughts that the Government had. The document went on to
say: “The
case for change rests largely on supporting large and medium business
operating in rapidly growing global markets by simplifying and
modernising the current
regime”. The
challenge that the Government had to face was that a number of
multinationals were taking the view that the UK was not a good place
for them to be based and they were exploring whether or not they could
move to other jurisdictions where there was a better regime for the
treatment of foreign dividends.
The
consultation process also hit upon the issue of ensuring that profits
from economic activity were properly taxed in the UK. That led the
Government to consider the issue of a proposed controlled companies
regime to avoid the potential mischief of companies seeking to shift
income streams offshore, particularly what were described as mobile
income streams, which are financing income and royalties. When the
Government floated that idea, however, there was a significant outcry
from industry about the consequences, certainly about the
administrative cost, and it triggered a further wave of concern from
companies that look to redomicile overseas. The further concern was
about whether the rules that the clause seeks to change led to a
sub-optimal allocation of capital in an international group—that
when it was not necessary for an overseas subsidiary to pay a dividend
to its UK parent for the purpose of making a dividend, those dividends
and that capital would be trapped in an offshore location. There was
concern that the Government’s rules got in the way of the
efficient use of capital in businesses because businesses felt that it
would be better to keep profits in a low-tax jurisdiction rather than
repatriate them to the
UK. One
of the issues that has most exercised the Government, and on which I
would be grateful for further clarification from the Minister, is cost.
Cost was a feature of the technical note published in July last year by
the Minister’s predecessor, the right hon. Member for Liverpool,
Wavertree (Jane Kennedy), who expressed concern that the potential cost
of the dividend exemption would act as a barrier to taking it forward.
That technical note, published at the conclusion of our deliberations
on the Finance Bill 2008, set out that in 2005-06
£200 million was collected in corporation tax paid on
foreign dividends, £100 million was paid on portfolio dividends
and £100 million was paid on direct dividends. The
assessment was that by 2012 the yield on foreign dividends would be
about £300 million. However, the technical note suggested that
the tax loss to the Exchequer that could arise from introducing the
dividend exemption had a central estimate of about £600 million,
within a range of £200 million to £1.1 billion, depending
on the behavioural responses. There was a suggestion that the tax take
could increase because of the repatriation of cash to the UK, which
would then be used to reduce indebtedness. The Government were
sceptical that that was an issue, and felt that there were ways in
which companies could repatriate those profits without incurring a
corporation tax
charge. Cost
was clearly a barrier at that point, but it no longer appears to be a
barrier to the Government’s changes. The impact assessment
published after last year’s pre-Budget report suggested that the
package of
measures would cost about £275 million. That is a significant
shift from the estimate that the Government produced in July last year,
and I shall be grateful if the Minister can provide a breakdown of the
figures, to explain the sources of revenue. I suspect that the cost of
the dividend exemption remains broadly unchanged but that the changes
the Minister referred to in his opening remarks to things such as the
debt cap and Treasury consent may be yielding more income. It is
important that there be greater clarity about how the Government were
able produce a revised estimate that made the dividend exemption more
affordable. 11.30
am As
I mentioned earlier, the proposals set out in 2007 looked at a move to
an income-based regime, to ensure that businesses did not use the
opportunity of the dividend exemption to restructure their operations
and move various sources of income overseas for tax purposes, rather
than as a consequence of how their businesses operated. That led to a
significant outcry from businesses. Deloitte stated
that “in
our view, this could significantly detract from the UK’s
competitiveness, both from a financial and an administrative point of
view, and could dissuade companies from locating holding companies
here”.
Ernst and Young
commented on the potential compliance burden that would arise from
that, stating that the proposals would
“neither
improve clarity and transparency, nor make the rules more certain and
straightforward in application—they are in fact a significant
move in the opposite
direction”. The
outcry prompted the Government to move, as there was a big concern that
moving from an entity-based stream to an income-based stream would
require businesses to rework the basis on which they submit information
to the Treasury. Companies currently account on an entity basis and so
would have to revisit how they structure their reporting to deal with
it on an income basis. Clearly, the concern that businesses will seek
to move certain income streams offshore to lower-tax jurisdictions
still exists, as there might be a particular incentive in relation, for
example, to intellectual property rights or to finance income. Is the
Minister content that the anti-avoidance measures in schedule 14 are
sufficient to tackle those issues relating to mobile income streams, or
is that still a potential gap that will need to be addressed
later?
Another
point I want to raise relates to the structure of the exemption and the
way in which it is given. Schedule 14 starts with the premise, as set
out in proposed new section 930A, that all distributions received will
be subject to tax. The existing legislation is framed differently: the
assumption is that all distributions received in relation to UK shares
are not taxed, but those in relation to overseas shares are taxed. We
have now moved to a basis on which all dividends and distributions are
taxed unless there is an exemption. Could the Minister explain why that
change has been made? It has been suggested to me that, given the
increased importance of the European Union in matters of direct
taxation, because of issues relating to the freedom to establish and
freedom of movement, that means it is difficult to distinguish the
dividends and distributions of UK companies from those of non-UK
companies.
Therefore, we
have made the regime more challenging for UK companies than it was
before, and I shall be grateful if the Minister can provide some
clarification on that. Will that change, which we will debate in
greater detail when we come to schedule 14, increase the compliance
cost to UK business as a consequence? There is a concern about how the
legislation has been structured, so it would be helpful if the Minister
would explain why that move from a distinction between UK and non-UK
distributions has been changed, because I think that that will have a
knock-on effect, as we will debate later.
We
are broadly content with the concept to which the Government have
moved: that there should be a dividend exemption for foreign dividends.
I think that that will help to address the issues of competitiveness
that the UK faces as a location for holding companies. It has taken a
long time to get that—two years—and at one stage last
year I thought we might never see it. It is good that the exemption
will make it on to the statute book, but an understanding of how the
Government’s objections on the grounds of cost have been
overcome would be
helpful.
Mr.
Timms: I am grateful to both Opposition spokesmen for
their support for the principle of what we are doing and the approach
we have taken. Consultation has been broad, and as the hon. Member for
Fareham pointed out, the proposals have been substantially modified in
the light of our discussions. As we go through this part of the Bill
there will be several technical discussions on the details, which will
be important, but I am glad that the principle has been so strongly
supported. The hon. Member for Southport was right to highlight the
importance of our ability to continue to bear down on avoidance, and we
will debate the issue later.
The hon.
Member for Fareham asked about the costs involved. He is right to say
that our initial intention was to make the change in a fiscally neutral
way. As he indicated, there is a degree of uncertainty about precisely
how companies will react to the changed framework introduced by the
clause, so one cannot be too definitive about exactly what the fiscal
impacts will be. However, as discussions have developed and as we have
listened to the concerns that have been raised, we have relaxed the
requirement that the change should be fiscally neutral. Consequently,
while the initial intention was for the package to be revenue-neutral,
it now has a
cost. On
next year’s expectation, dividend exemption will lead to a tax
reduction of £500 million and we expect that to be offset by
£200 million from the impact of the debt cap, which we will
discuss in relation to the changes to the controlled foreign companies
rules in clause 36. We also expect a loss of revenue of £50
million as a result of the abolition of the Treasury consents rule. All
of those changes mean that we expect an overall loss of revenue of
£150 million, which will grow as time goes by and companies
increasingly reorganise their activities in the light of the
changes. The
big difference is that, whereas we initially envisaged the debt cap as
centring on a company’s net debt, it now centres on gross debt.
That is the big change both in the structure of our proposals and in
the fiscal
impact.
Mr.
Hoban: The right hon. Gentleman says he expects the cost
of the package to increase over time. I assume that there will be a tax
loss as companies restructure
their activities and repatriate profits. Does he anticipate that
businesses will also look at the way in which they structure their
financing to reduce the additional tax, or will they pay the
consequence of the introduction of the debt
cap?
Mr.
Timms: I am not sure whether the hon. Gentleman is
thinking about a particular kind of change, but I am certain that, with
a substantial change of this kind, companies will want to look at
potential opportunities for them to change the way in which they
organise themselves in order to take advantage of the provision. That
is perfectly appropriate. He was right to raise concerns about
potential avoidance opportunities and we will debate a general
anti-avoidance rule later in relation to a Government amendment. We
certainly need to keep a close eye on avoidance activity, but in
response to an earlier question of his, I believe that the measures
under consideration will do the
job. The
hon. Gentleman asked why some UK to UK dividends will be taxed for the
first time. We need to provide equality of treatment for UK and non-UK
dividends, as the previous inequality was not appropriate. In fact, the
impact of the proposals on UK dividends will be pretty minor. We need
to be certain that there is no risk of a challenge under EU law,
because challenges of that kind lead to damaging uncertainty that is in
nobody’s interest. The legislation’s structure gives us a
helpful guarantee on that front.
Question
put and agreed
to. Clause
34 accordingly ordered to stand part of the
Bill.
Schedule
14Corporation
tax treatment of company
distributions
Mr.
Hoban: I beg to move amendment 43, in
schedule 14, page 133, line 15, after
‘nature’, insert ‘other than in
the case of a distribution within the meaning of section 209(2) of
ICTA.’.
The
Chairman: With this it will be convenient to discuss the
following: Government amendments 92, 93 and
99. Amendment
48, in
schedule 14, page 140, line 36, leave
out ‘is in’ and insert
‘was in the accounting period
ending immediately
before’. Government
amendments 101 and
102.
Mr.
Hoban: I shall speak to amendment 43 first. This touches
on a point I raised in the clause stand part debate about the treatment
of UK to UK dividends. Under existing rules all distributions from UK
companies are non-taxable, but new section 930A presumes that they are
taxable unless they are exempt. The Minister acknowledged that it was
the threat of challenge under EU rules that gave rise to that equality
of treatment between UK and non-UK distributions. That is a topic that
I will come back to under the next clause as
well. Having
established that all distributions are taxable, there is then a series
of exemptions from that tax. If an exemption is met, no tax is payable
on those dividends.
That is very straightforward. Where the problem arises is that in some
cases there is a difference in treatment between distributions and
dividends. The titles of the five exempt classes demonstrate that.
There are three related distributions, which relate to controlled
companies, non-redeemable ordinary shares and portfolio holdings, but
also limited dividends from transactions not designed to reduce tax and
dividends in respect of shares accounted for as liabilities. The issue
stems from the exclusion, in new section 930A(2), of a distribution of
a capital nature. The feedback I have received is that the principles
for that exclusion are relatively untested. To determine whether a
distribution is of a capital nature, they would have to be tested
against some very unclear case law. There are certainly some cases
where distributions that were previously exempt will no longer be so
under the new provisions and that will increase uncertainty in some
fairly common transactions. Amendment 43 says that all distributions
currently falling under section 209 of the Income and Corporation Taxes
Act 1988 should continue to be exempt, so that there is a continuity of
treatment between the old regime and the current regime.
Amendment
48, which I have also tabled in this group, deals with a small
companies exemption. Schedule 14 provides for two regimes:
one for small companies and one for medium and large companies.
Schedule 14 provides a definition of a small company in new section
930R. However, it creates a degree of uncertainty as to whether a small
company is a small company in the year of the dividend accounting
period. My amendment seeks to create some certainty by referring back
to the accounts of the previous accounting period to determine whether
a small company is a small company. Rather than the uncertainty of new
section 930R inserted by the schedule, which looks at the current
accounting period, amendment 48 refers to the previous accounting
period to give the taxpayer greater
certainty. 11.45
am
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