Dr.
Pugh: I thank the Minister for that thoughtful response. I
totally accept that we have to move away from a consent system to a
reporting system in an age when millions of pounds can be transacted at
the touch of a computer button. I also accept that modern business
needs a different system and agree with him that it needs to be a
robust and stringent system that ensures that everyone pays due tax and
that, none the less, business functions as efficiently as it
can.
As for
pathetic nature of the fine, we explored the possibility of tabling an
amendment on that. I understand that there are some technical reasons
why that might be difficult, but it is still a preposterous penalty.
Although we were unable to table an amendment, we might need to take
another look at what we can do to beef up the penalties for people who
flagrantly disregard the legislation as the Minister wishes it to work.
I do not think he really responded to my point that the reporting
regime is lax, and nor did he really respond to my point that in
paragraph 9 we are not so much closing loopholes as drilling more. We
will have to revisit that topic on Report.
The Minister
has made some interesting points that are pertinent to my amendments.
He discussed how HMRC is best to conduct itself when investigating tax
avoidance and what is the most efficient use of the Revenue. That is
certainly an issue that has cropped up in the Public Accounts
Committee. I am aware that HMRC wants to target those areas where it
will get the best results, although it remains the case that tax
avoidance, at any level, should be prevented, and big companies should
certainly be prevented from parcelling up their businesses into smaller
units to avoid the reporting restrictions.
Underlying
that is the other question of how business and the taxation system can
best exist in the modern world, and the Minister, reasonably, is trying
to suggest that he has the recipe right, but I am not completely
convinced. He has pointed out that some of the evils to which I am
drawing attention and that appear to be omitted by schedule 17 are
addressed in some way and in other parts of Bill. I will have to go
away and investigate that and consider whether that claim is fairly or
adequately made. For the moment, however, I beg to ask leave to
withdraw the amendment.
Amendment,
by leave,
withdrawn.
6.45
pm
Mr.
Hoban: I beg to move amendment 161, in
schedule 17, page 190, line 10, at
end insert
‘or’.
The
Chairman: With this it will be convenient to discuss the
following: amendment 160, in schedule 17, page 190, line 12, leave out
from ‘partnership’ to end of line
14. Amendment
162, in
schedule 17, page 190, line 33, leave
out ‘a’ and insert ‘an event
or’. Amendment
163, in
schedule 17, page 191, line 38, at
end
insert— ‘“debenture”
does not include a
guarantee; “transfer”
does not include a transfer by way of
security.’. Amendment
164, in
schedule 17, page 192, line 9, at
end insert ‘or six
months after the regulations referred to in paragraph 4(2) are made,
whichever is the
later’. Amendment
165, in
schedule 17, page 192, line 10, after
‘Schedule’, insert
‘(with exception of those made
under paragraph
8(2)(e))’.
Mr.
Hoban: These are relatively small amendments, so I will
not spend a huge amount of time talking about them. The objective of
the group of amendments is to try to tighten the rules for reporting
transactions and to be clear about the circumstances in which
transactions will be
reported. Amendment
161 would simply insert the word “or” between
sub-paragraph (2)(c) and (d) in paragraph 8 on page 190. Sub-paragraph
(2)(c) and (d) refer to a transfer of an economic interest. It would be
one type of transfer or another, rather than (c) and (d) applying
sequentially. Amendment
160 would create some certainty that commissioners will not seek to
expand the event or transaction set out in paragraph 8(2)(a) to (d)
unless they do so through primary legislation. This is a probing
amendment. I am interested in understanding a bit more from the
Minister as to why he feels that the power in sub-paragraph (2)(e) is
necessary. Amendment
162 is a drafting amendment. Paragraph 4(2) refers to an
“event or transaction”, whereas paragraph 9 on
page 190 refers to a transaction. Should it refer to an “event
or transaction”? This is very much a drafting
amendment. Amendment
163 would provide some clarity that there is no obligation to report
the creation of a legal or equitable mortgage over the shares of a
foreign subsidiary or the giving of a guarantee to a foreign
subsidiary. If they were specifically excluded, it might reduce the
number of transactions that could be reported. The Minister may suggest
that such an exemption might give rise to some tax-paying
opportunities. I would like to hear his thoughts on the
matter. Amendments
164 and 165 relate to the transitional provision in paragraph 14. I
would like to hear from the Minister how he expects it to work in
practice. On amendment 164, the problem is that companies have six
months from the day on which transactions took place to report them.
Regulations may be introduced that lead to that reporting period being
eroded. It may be less than six months—in effect, a kind of
technical retrospection. I am not sure whether that is the
Government’s intention in paragraph 14(1).
Amendment 165
seeks to tighten up reporting on the transition, again in respect of
regulations that are made under the schedule. In part, these are
probing amendments, to see if we can focus on the schedule to try to
reduce the volume of transactions that can be reported and to ensure
that companies are not caught out having to report transactions in less
than a six-month period because of regulations that may be
made.
Mr.
Timms: I shall be brief. Amendments 160 to 162 concern the
regulation-making powers in the schedule. The first two would remove
HMRC’s power to widen the scope of the reporting requirement in
the light of commercial or legal developments. The new post-transaction
reporting requirement is targeted at areas that pose a significant risk
of tax avoidance in order to ensure that HMRC receives the information
that it needs to deal with tax avoidance, but amendments 160 and 161
would remove the ability to ensure that those provisions track
commercial or legal changes. That could give rise to new tax avoidance
opportunities and undermine the purpose of the requirement. We want to
be sure that the schedule can target areas of significant avoidance
risk, and that it can be used for future avoidance opportunities as
they arise.
Amendment 162
would give HMRC additional powers to narrow the scope of the reporting
requirement by extending the excluding power in paragraph 9 to cover
events as well as transactions, but the only event reportable under
schedule 17 is a foreign subsidiary entering into a partnership. For
the provision to be effective, HMRC would first have to introduce new
reportable events using the regulatory power in paragraph 8(2)(e). In
effect, the amendment would give a circular result, which makes it
unnecessary.
Amendment 163
seeks to insert two additional definitions in the schedule that would
exclude guarantees and transfers by way of security from the reporting
transactions. The schedule already contains exclusions for giving
securities to financial institutions, including guarantees and
transfers of securities in that context, so the additional definitions
are not necessary.
As the hon.
Member for Fareham explained, amendments 164 and 165 are about the
transitional provisions in paragraph 14 of schedule 17.
Amendment 164 would ensure that companies have at least six
months to make a report under the new rules in the event that
regulations are not in force by 1 July. I reassure the hon. Gentleman
that the amendment is not necessary. The regulations have been drafted
and were sent to the House last Thursday, after the amendment was
tabled. We can therefore be confident that the regulations will come
into force on 1 July, when the schedule’s provisions commence.
The transitional provision also allows for regulations made under the
schedule within one year of the Bill’s enactment to have effect
from 1 July 2009. Amendment 165 would prevent that from applying to
additional categories of reportable transactions specified by the
regulations. However, it is appropriate for the transitional provision
to apply evenly to all the regulation-making powers in the event that a
new avoidance opportunity was detected by HMRC in the next year, which
is quite
possible. How
will the retrospection interact with the deadlines for reports if HMRC
included a new reportable transaction? We would be happy to abide by
the six-month time
limit. For example, if the regulations were amended on 1 June 2010 to
include a new reportable transaction, it would apply only to
transactions undertaken after 1 December 2009. That might be of
some reassurance. In practice, I would not expect new reportable
transactions to be added in the next 12 months, but we need to be sure
that we can address tax avoidance and protect the Exchequer if the need
arises. Mr.
Hoban: I am grateful to the Minister for his comments on
the various amendments. He has made a reasonable case for me not to
press the amendment to a vote. I beg to ask leave to withdraw the
amendment.
Amendment,
by leave, withdrawn.
Schedule
17 agreed to.
Clause 38
ordered to stand part of the Bill.
Schedule
18 agreed to.
Clause
39Certain
distributions of offshore funds taxed as
interest
Mr.
Hoban: I beg to move amendment 171, in
clause 39, page 19, line 14, at
end insert ‘and
accordingly section 397A shall not apply in respect of such
dividend’.
The
Chairman: With this it will be convenient to discuss the
following: amendment 174, in clause 39, page 19, leave out lines 15 to
18 and insert— ‘(3) For the
purposes of this section and subject to subsections (3A) and
(3B) below, an offshore fund satisfies the qualifying investments test
if, on the last day of each quarter of the offshore fund’s
relevant period of account, the market value of the fund’s
qualifying investments does not exceed 60% of the market value of all
of the assets of the fund (excluding cash awaiting
investment). (3A) The offshore
fund shall not satisfy the qualifying investments test if it makes any
arrangements with regard to its investments where the purpose of such
arrangements is wholly or mainly to satisfy the qualifying investments
test on such relevant quarter date and where, having regard to the
offshore fund’s overall investment strategy, the offshore fund
would have been unlikely to satisfy the qualifying investments test had
the test been applied on any other
date. (3B) Where any of the
investments held by the offshore fund are “qualifying
holdings” (as defined in section 495 of the CTA 2009), such
qualifying holding shall not constitute a qualifying investment if the
company, scheme or fund which might otherwise constitute the qualifying
holding has, for the 12 month period preceding the date that the
dividend is paid, provided written confirmation on a quarterly basis to
the offshore fund that its investment strategy is to invest in assets
which the company, scheme or fund anticipates will meet the qualifying
investments test and it is not aware that this strategy has been
breached.’. Amendment
175, in
clause 39, page 19, line 23, leave
out from ‘means’ to end of line 31 and insert
‘the accounting period ending
prior to payment of the
dividend.’. Government
amendment
89. Amendment
172, in schedule 19, page 200, line 28, after
‘(6)’, insert ‘, section
378A’.
Mr.
Hoban: I will give some background before dealing with the
individual amendments. Clause 39 deals with a technical aspect of the
rules and is meant to tackle the issue that certain distributions from
offshore funds are economically similar to payments of interest. It is
intended to ensure that distributions of that type are taxed as if they
are payments of
interest. The
issue arises because of the differential in the tax rates for UK
residents and domiciled individuals between dividends, which are taxed
at 32.5 per cent., and other forms of income, which are taxed at 40 per
cent. Until now, offshore funds, particularly those formed as
corporates, were able to pay out a dividend to UK investors that would
be taxed at 32.5 per cent. That was the case even when the offshore
fund was invested primarily in debt assets that in substance paid out
an interest return. In contrast, UK funds are required to distinguish
between dividend distributions and interest distributions, with
interest distributions being taxed at 40 per
cent. Clause
39 seeks to address that disparity by introducing a bond fund test for
offshore funds. Individual UK investors will be required to distinguish
between distributions received from bond funds and from non-bond funds
for any distributions paid on or after 22 April 2009. The bond fund
test is derived from the test that UK corporates are required to apply
to their investments. Broadly, an offshore fund that at any point
during an accounting period has more than 60 per cent. of its assets
invested in interest-bearing securities will be deemed a bond fund. The
impact of that is that any decision made by a bond fund in relation to
the profits of that period will be deemed an interest distribution.
That will help the UK investment management industry by reducing the
disparities in the taxation of distributions from onshore and offshore
funds. Budget
notes 21 and 22, which underpin this measure, state that the intentions
behind these changes are to enable individuals with holdings of 10 per
cent. or more in non-UK resident companies to become entitled to a
non-payable tax credit on dividends from such holdings, and to restore
the non-payable dividend tax credit for offshore funds that are largely
invested in equities, subject to certain conditions. However, as the
clause is drafted, it is not clear whether the tax credit is available
in respect of a distribution from an offshore fund that fails to meet a
non-qualifying investments test where a distribution is made to a
minority shareholder in an offshore fund with authorised share
capital—that is condition A—or an offshore fund in a
qualifying territory—that is condition C. Amendment 171 would
make clear the application of
that. Amendment
174 addresses the problem that requirements to measure whether an
offshore fund fails to meet the qualifying investments test at any time
during an accounting period are over-burdensome. It is likely to prove
impossible for funds to comply with those requirements in practice. It
is the “at any time” point that I am trying to address
with the amendment. It is quite a lengthy amendment because it would
introduce new subsections (3), (3A) and (3B) to try to make the process
smoother. New
section 378A will introduce to the Income Tax (Trading and Other
Income) Act 2005 a tax credit for dividends paid by offshore funds.
However, as I said, the tax rate is not available if the offshore fund
fails the qualifying investments test at any time during the accounting
period. If the test is failed, the dividend will be taxed at
the income tax rates applicable to interest. As I said earlier, the
offshore fund will fail the qualifying assets test if, at any time
during its accounting period, the market value of the qualifying
investments exceeds 60 per cent. of the market value of all
its investments. “Qualifying
investments” means interest-bearing instruments and instruments
such as derivatives that relate to the performance of interest-bearing
investments. The definition of qualifying investment also includes
interest on funds that could fail the qualifying investments test. When
paying a dividend, an offshore fund will need to let its shareholders
know whether the test has been failed so that it can file proper tax
returns and pay the appropriate rate of
tax. 7
pm An
offshore fund may hold a complex, extensive and constantly changing
portfolio of assets. To ensure that the qualified investment test is
met at any time, the fund will have to ascertain daily the market value
of each underlying asset, which is over-burdensome. For a fund of
funds, such a level of monitoring would prove impossible. It will not
have the information on the underlying funds.
A similar
test exists in relation to offshore funds held by UK companies. In
practice, that may be invoked relatively infrequently, because a UK
company is not a common vehicle through which investments in offshore
funds are made. Extending a test to apply to all shareholders in an
offshore fund will require many more funds to operate those
requirements. The amendment would impose a workable monitoring
requirement that remains sufficiently rigorous to leave little or no
scope for
abuse. Amendment
175 asks whether a requirement to measure whether an offshore fund
fails to meet the qualifying investments test during a relevant
accounting period is over-complicated. In this case, the problem stems
from the definition of a relevant period of accounting, which is either
the accounting period ending prior to the payment of the dividend if
there are undistributed profits available to that period or, otherwise,
the accounting period in which the dividend is paid. That is quite a
complex definition because it will require significant record keeping
on the part of the offshore fund. It may result, in relation to the
second limb of the test, in a mismatch between the data on which the
fund is able to inform its shareholder that the qualifying test has
been met or failed, and the data on which an investor must file a tax
return. To
use 2009 as an example, if a fund had a calendar-based accounting
period and paid a dividend in January 2009, it will not know until some
time after 31 December 2009 whether the qualifying investments test was
met for the period. However, the dividend must be included in the tax
return for the year ending 5 April 2009. That could give rise to a
situation in which a fund is not given enough time in which to carry
out its calculations and report to investors before the tax return is
due.
Amendment 175
would alter the Bill so that an offshore fund could measure whether it
has satisfied the qualifying investment test by reference to its
investment strategy in the accounting period immediately prior to the
payment of the dividend. We are trying, with the amendments, to
simplify things for investors in the funds while maintaining the spirit
and purpose of the clause.
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