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Session 2008 - 09 Publications on the internet General Committee Debates Finance Bill |
Finance Bill |
The Committee consisted of the following Members:Liam Laurence Smyth,
Committee Clerk † attended
the Committee Public Bill CommitteeTuesday 9 June 2009(Afternoon)[Mr. Jim Hood in the Chair]Finance Bill(Except clauses 7, 8, 9, 11, 14, 16, 20 and 92)4.30
pm
The
Chairman: When we adjourned, the Financial Secretary had
just given way to an intervention from the hon. Member for
Wellingborough.
Clause 35Tax
treatment of financing costs and
income Question
(this day) again proposed, That the clause stand part of the
Bill. Mr.
Peter Bone (Wellingborough) (Con): I am grateful to the
Minister for giving way over such an extended period. We were talking
about the different dates: 1 July and 1 January. The Minister had
linked the two issues of the treatment of dividends and the debt cap. I
wondered why the dates had not been coterminous. The subsequent point
about 1 July is that this will come into effect before the Bill is
enacted. If we get past that date and the Government call a general
election, where does that leave people? Is it law or
not?
The
Financial Secretary to the Treasury (Mr. Stephen
Timms): Welcome back, Mr. Hood. I can reassure
the hon. Gentleman that I do not expect that that will happen. But the
Bill will not become law until it secures Royal Assent. He asked why we
do not have the same date for the implementation of dividend exemption
and the new debt cap requirement. It was the original intention, but in
our discussions with businesses there was a strong sense that it would
be helpful if there was a period between the two. They will undoubtedly
want to make some changes and introducing the six months between the
two gives a period of grace that enables them to do that. That has been
widely welcomed. It is one of the improvements that we have made as a
result of the consultation over the last few
months. I
was answering a number of questions raised by the hon. Member for
Fareham about the thinking behind the changes that we have made. As he
said, there would have been a number of ways to tackle the issue that
we are dealing with in the schedule. In terms of moving towards a
territorial tax system, one view would be that as a matter of
principle, interest to fund foreign equity investment should not be
relieved when the dividends from those investments are exempt. Taking
that view would suggest that dividend exemption should be accompanied
by strict interest allocation or a limitation of interest for outward
investment.
Either of
those would have a very big impact on multinational companies,
particularly on UK-headed groups. We discussed them both with
businesses. Both
were disliked, particularly interest allocation and the associated
complexity and administrative burden that accompanies it, as has been
found in the operation of that arrangement in the United States.
Companies were very keen that we should not go down that road. So the
debt cap measure is a less far-reaching but principled measure to
accompany dividend
exemption. The
hon. Gentleman suggested that another way might have been to tighten
the thin capitalisation rules. That is where, typically, a UK
subsidiary of a foreign multinational is funded with too little share
capital and too much debt, thereby attracting a higher tax allowance
than would otherwise be the case. That is countered at the moment using
the UK transfer pricing rules which adjust the profits of a company
that is thinly capitalised to reflect the profits it would have made if
it had been capitalised in accordance with the arm’s length
principle. A tightening of the UK rules to counter cases where there is
excessive debt in the UK would mean abandoning the arm’s length
principle. Instead we could have looked to counter thin capitalisation
using different rules, but the alternative methods would have an impact
on many more cases than the debt cap measure does.
In the end,
we concluded that this is a principled and effective approach that
deals with the problem. It is a clear principle. It is readily
understood. In December, following the pre-Budget report, we issued
draft legislation on the foreign profits package, so that people could
see our intentions. There were concerns and lots of discussions
arose. At
the beginning of April, Her Majesty’s Revenue and Customs
published a technical note setting out current thinking on the debt cap
with high level design changes, which have been welcomed. When the
Finance Bill was published at the end of April, large parts of the debt
cap legislation had been revised, but there were areas that required
more time to ensure that the proposals were appropriate, so they were
not in the Bill. There have been further discussions with interested
parties since then. That is the background to the Government amendments
to schedule 15.
The hon.
Member for Fareham’s final question was about the gateways for
outbound investors for UK-headed groups. He is right; we had hoped to
have more than one gateway to keep administrative burdens on business
as small and as light as possible. He anticipated part of my answer:
throughout the package, as I have mentioned, we have had to take
European Union legal requirements into account, and consequently we
could only make one gateway available. However, the improvements to the
debt cap design, particularly the switch from net debt to gross debt,
exclude more groups from the debt cap anyway. Other changes reduce the
administrative burden on any group that has to comply with the
rules.
Mr.
Mark Hoban (Fareham) (Con): Is there a workaround that
HMRC could introduce? As I said in my remarks, a purely UK company
would still have to work out whether it passed the gateway test even
though it had no overseas parent or overseas
external debt. Is there guidance? I hate asking for HMRC
guidance and I argued against it last year. Is there a
pragmatic solution that would say that a UK-only group need not go
through the calculations set out in the gateway
test?
Mr.
Timms: We have taken steps to reduce to a minimum the
administrative burden that any group will have to assume to meet the
requirements. Certainly, we are open to doing what we can to help. I do
not want to give the impression that there will not be an
administrative burden; there clearly will be, but we have taken the
steps that we can to keep it to a
minimum.
Mr.
Bone: To be clear, is the Minister saying that if it were
not for EU regulations, things would be better, more efficient and less
bureaucratic for British companies?
Mr.
Timms: No, that is not what I was saying. I am aware that
the hon. Gentleman’s party is heading rapidly to the outer
extremes of the European Parliament. That is not a sensible or wise
view. It is important that the arrangements are safe from challenge
under European law, which these are. We have designed them carefully
with that in mind.
Mr.
Hoban: I do not want to extend the debate unnecessarily,
but a philosophical point arises from the discussion that we have had
on the previous clause and schedule and from other aspects of Finance
Bills in recent years. The Marks and Spencer case, for example, was
another case in which EU law about freedom of movement and freedom of
establishment principles came into play. Have the Government looked
more broadly at how aspects of UK tax law need to be reformed to take
into account the growing trend of businesses to consider opportunities
to arbitrage UK tax and the broader principles underpinning EU laws
generally?
Mr.
Timms: No, there is no general review going on, although
we increasingly have to take account of issues that might be raised by
European law when we design our legislation, as we have in this
case. Going
back to the hon. Gentleman’s point about a light touch for UK
companies, there could be a danger of that kind because it appeared
that UK companies and EU companies were treated differently. We might
have run into difficulties on that and we need to ensure that we do
not. As he may have been suggesting, from time to time, issues that are
raised by court decisions require us to look again at features of the
legislation. I
hope that I have satisfied the Committee that the clause is an
appropriate measure to sit alongside the dividend exemption that we
debated before lunch and I commend it to the Committee.
Question
put and agreed to.
Clause 35
accordingly ordered to stand part of the
Bill.
Schedule 15Tax
treatment of financing costs and
income
‘(4A) Part 5A
contains rules connected with tax
avoidance.’.
The
Chairman: With this it will be convenient to discuss
Government amendments 116, 138, 139, 151 to 153 and
157.
Mr.
Timms: In my remarks a few moments ago, I indicated the
background to this series of Government amendments. I apologise to you,
Mr. Hood, and to the
Committee, because I will need to take a little time to explain what is
happening and the reasons for the
measures. The
debt cap principle is simple in concept, as we discussed. It requires
comparison of the interest and other finance expense payable in the UK
by a group’s net interest-paying companies, which is referred to
as the tested expense, with the consolidated gross finance expense
payable by the worldwide group, which is referred to as the available
amount. When the tested expense amount exceeds the available amount,
the excess is disallowed for tax purposes. If other UK group companies
have net interest receipts, the equivalent amount of those receipts
becomes non-taxable, to prevent, effectively, double
taxation. The
legislation is targeted at abuse of generous UK rules on deductibility
of interest by multinational businesses. For that reason, it applies
only to large businesses and companies for which the net interest
expense exceeds £500,000, so many companies will not need to
consider the debt cap legislation at all.
The debt cap
can apply to both inbound and outbound investors, but it can also count
as exploitation of the interest relief rules when upstream loans are
made to the UK parent by its subsidiaries. Not all upstream loans are
offensive, as we were saying before lunch, but some are tax-driven,
with the interest payment removing profits from the scope of UK
taxation and with the interest receipt arising in a company where it is
effectively either not taxed or taxed at a low rate.
The
legislation contains a number of exclusions which, taken with the other
changes that we have made, ensure that the debt cap is carefully
targeted. I will go into some of those in more detail, but I shall
first list them. First, the financial services exclusion recognises
that the different role of debt in financial groups is being introduced
by amending the Bill. Secondly, there is a group treasury exclusion,
which applies where group companies lend money to a UK group treasury
company and that company then lends on the money at profit. Thirdly,
there is a short-term debt exclusion, which recognises that short-term
upstream loans are not likely to be tax-driven but are made to enable
groups to manage their short-term cash position better, for example by
allowing a group to operate a cash pooling arrangement to reduce
banking costs.
Fourthly,
there are exclusions for companies within the ring-fenced oil regime,
the shipping tonnage tax regime and the real estate investment trust
regime, as the regimes already address the taxation of those
activities. Finally, there are exclusions to deal with payments of
finance expense by trading subsidiaries to their UK parent where that
is a charity or some other exempt
body. 4.45
pm Two
of the exclusions deserve a bit more explanation. The financial
services exclusion applies when substantially all of a group’s
income or the income of UK members of the group derives from a
particular financial services activity. Banks, for example, borrow at
interest so they can lend to their customers, and it would be
inappropriate to apply the debt cap to them. As I said in my letter of
30 April, the financial services exclusion was not included in the Bill
at publication, as we wanted more time to
ensure that our proposals were effective and discuss them with those
affected. The exclusion is now being introduced by way of Government
amendments. The
group treasury exclusion is appropriate because in cases where group
companies provide internal lending facilities for other members of the
group and manage cash pooling arrangements on behalf of the group, the
facilities provided by the group treasury company generate UK-taxable
profits rather than removing profits from the scope of UK taxation. The
exclusion is therefore
appropriate. Schedule
15, as we were discussing, includes a gateway test. If it is satisfied,
a group need not consider the application of the debt cap rules any
further for the accounting period concerned. I should mention in
passing that the legislation requires anti-avoidance rules to deter
companies from entering into or being party to schemes that seek to
prevent the operation of the debt cap. The rules were not included in
the Bill on publication, again so that we could have more time for
discussion. They, too, are now being introduced by way of Government
amendments. Earlier,
we discussed the implementation date for the debt cap. As I said, after
discussions with business, the debt cap legislation will apply to
accounting periods beginning on or after 1 January 2010. I should make
that point clear: it applies to accounting periods starting on or after
that date. That means that we have removed the need for companies to
apportion the results of an accounting period, as would be required if
the debt cap legislation simply applied with effect from a particular
date. If it applied from 1 January 2010, any accounting period
straddling that date would require apportionment, which would be
complicated. We have avoided that difficulty. The implementation date
also provides an interval following the introduction of dividend
exemption that enables groups to pay up dividends and then unwind
upstream loans, and it allows businesses time to become familiar with
the
legislation. Our
amendments to the design of the debt cap, which I am about to explain
in more detail, will result in a simpler regime with greater scope for
business to avoid the impact of the debt cap. Without anti-avoidance
rules, groups that would pay additional corporation tax as a result of
the debt cap might rearrange their borrowings to avoid the rules.
Although the same borrowings might remain in substance, the form of the
borrowing and other arrangements could reduce the UK net finance
expense amounts or increase the worldwide figure of gross finance
expense. The
anti-avoidance rules are split into three parts. The first part
counters schemes intended to arrange for the group to satisfy the
gateway test. The second part counters schemes intended to secure that
the available amount, the worldwide group gross finance expense, is
greater than it otherwise would be; or that the tested expense amount
is less than it would otherwise be; or that the amount of financing
income exempted for UK group companies is greater than it would
otherwise be. It also counters schemes where a UK company is a
beneficiary of the scheme but is not actually a party that has
transactions that make up the scheme. Again to ensure that the debt
rules are compliant with EU law, the debt cap allows UK companies to
exempt financing income received from another group company resident in
another part of the European economic area, where
that company is subject to a disallowance or that payment in its own
country of residence. The third part of the anti-avoidance rules
ensures that the amount of financing income that can be exempted by a
UK company cannot be increased as a result of an avoidance
scheme.
Each of these
anti-avoidance rules incorporates a purpose test, providing that the
rules apply only where the main purpose, or one of the main purposes,
of the scheme is to secure a result that frustrates the intention of
the debt cap rules. The scope of the schemes potentially caught by the
rules is necessarily wide. The alternative would be to attempt to
define the schemes that might be put in place to frustrate the debt cap
rules, but it would be very difficult to anticipate all the potential
avoidance schemes. The approach we have taken is the right one, but we
recognise that some schemes will feature arrangements that are not
designed to frustrate the debt cap rules. We have addressed that by
providing that if the profits of the UK members of the group are
greater or the losses lower than they would be if the arrangements were
not in place, the anti-avoidance rules will not apply.
HMRC will be
available to define, by regulation, schemes that consist of particular
types of arrangements or schemes bearing particular hallmarks that will
not be subject to the anti-avoidance rules. HMRC expects to develop
those in discussion with companies. The new targeted anti-avoidance
rules for the debt cap are inserted by way of a new part to schedule
15, requiring Government amendment 105 to update the overview in part 1
and Government amendment 116 to insert the new part.
The
provisions as published already contain a targeted anti-avoidance rule,
at paragraph 68(7) and (9), to prevent a UK group company from being
artificially removed from the scope of the debt cap. I have mentioned
that such a scheme will be caught by rules introduced through
Government amendment 116. That allows for the existing rule to
be removed, and Government amendments 138 and 139 achieve
that.
In response
to calls from business, the debt cap now applies to a group for its
first accounting period beginning on or after 1 January 2010. We would
expect a group with an accounting period due to end on 31 December 2009
to apply the debt cap measures with effect from 1 January
2010. However, such a group could shorten its accounting period by one
day to 30 December 2009 and the debt cap would not apply till the
following accounting period, which starts on 31 December 2009. We want
to stop such forestalling activity. The change to the commencement date
made to accommodate businesses therefore requires us to introduce
Government amendments 152 and 153 to counter such activity. The
amendments move the commencement day for the debt cap rules forward
where a group changes its accounting period and the main purpose, or
one of the main purposes, of doing so is to delay the application of
the debt cap.
On Government
amendment 157, consequential changes are required to prevent double
taxation. The debt cap disallows some finance expense where the net
finance expense of the UK members of a group exceeds the group’s
gross external finance expense. In some cases, the finance expense
disallowed may be interest payable to an overseas subsidiary of a UK
group company that is taxable on the UK parent company under the
controlled foreign company rules. To prevent effective double taxation,
Government amendment 157 adds new rules to the CFC legislation that will
allow a group to apply for otherwise taxable CFC profits that are
apportioned to a UK group company to be consequentially
reduced.
Government
amendment 151, on UK transfer pricing rules, applies the
arm’s-length principle so that finance expense payable by a UK
group company to another group company can be claimed as a deduction
only if it is the amount that would have been payable to a third party.
Equally, financing income receivable by a UK group company from another
group company must reflect the amount that would have been receivable
if it had come from a third party.
The debt cap
can result in finance expense being disallowed and financing income
exempted. It is possible in some cases that the transfer pricing rules
could reinstate such adjustments. To address that problem, we need to
make clear that the debt cap rules operate after any necessary
adjustments under the transfer pricing rules have been made. Government
amendment 151 makes a change to the transfer pricing rules that makes
the primacy of the debt cap rules explicit.
I apologise
to the Committee for having taken up so much time with that
explanation, but I hope that I have made clear our reasons for tabling
the new anti-avoidance provisions at this stage. They have been widely
discussed and considered, and I hope that the Committee will be happy
to accept the Government amendments.
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