Finance Bill

---

The Committee consisted of the following Members:

Chairmen: Mr. Peter Atkinson, †Mr. Jim Hood, Sir Nicholas Winterton

† Bailey, Mr. Adrian (West Bromwich, West) (Lab/Co-op)

† Barlow, Ms Celia (Hove) (Lab)

† Binley, Mr. Brian (Northampton, South) (Con)

† Blackman, Liz (Erewash) (Lab)

† Blizzard, Mr. Bob (Waveney) (Lab)

† Bone, Mr. Peter (Wellingborough) (Con)

Breed, Mr. Colin (South-East Cornwall) (LD)

Brown, Mr. Russell (Dumfries and Galloway) (Lab)

† Browne, Mr. Jeremy (Taunton) (LD)

Cable, Dr. Vincent (Twickenham) (LD)

† Dobbin, Jim (Heywood and Middleton) (Lab/Co-op)

† Duddridge, James (Rochford and Southend, East) (Con)

Engel, Natascha (North-East Derbyshire) (Lab)

† Field, Mr. Mark (Cities of London and Westminster) (Con)

† Flello, Mr. Robert (Stoke-on-Trent, South) (Lab)

† Gauke, Mr. David (South-West Hertfordshire) (Con)

Hands, Mr. Greg (Hammersmith and Fulham) (Con)

† Hoban, Mr. Mark (Fareham) (Con)

Hosie, Stewart (Dundee, East) (SNP)

Howell, John (Henley) (Con)

† Jenkins, Mr. Brian (Tamworth) (Lab)

† Joyce, Mr. Eric (Falkirk) (Lab)

† Moffatt, Laura (Crawley) (Lab)

† Pearson, Ian (Dudley, South) (Lab)

† Pugh, Dr. John (Southport) (LD)

† Robertson, John (Glasgow, North-West) (Lab)

† Roy, Lindsay (Glenrothes) (Lab)

† Seabeck, Alison (Plymouth, Devonport) (Lab)

† Soulsby, Sir Peter (Leicester, South) (Lab)

Stuart, Mr. Graham (Beverley and Holderness) (Con)

† Syms, Mr. Robert (Poole) (Con)

† Timms, Mr. Stephen (East Ham) (Lab)

Todd, Mr. Mark (South Derbyshire) (Lab)

† Ussher, Kitty (Exchequer Secretary to the Treasury)

Liam Laurence Smyth, Committee Clerk

† attended the Committee

Column number: 321

Public Bill Committee

Thursday 11 June 2009

(Morning)

[Mr. Jim Hood in the Chair]

Finance Bill

(Except clauses 7, 8, 9, 11, 14, 16, 20 and 92)

9 am

Clause 40 ordered to stand part of the Bill.

Schedule 19

Income tax credits for foreign distributions

The Economic Secretary to the Treasury (Ian Pearson): I beg to move amendment 158, in schedule 19, page 201, line 2, leave out from ‘fund’ to end of line 3.

Good morning, Mr. Hood. It is a pleasure to serve under your chairmanship in this, the ninth sitting of the Finance Bill Committee.

Amendment 158 was tabled by my right hon. Friend the Financial Secretary and the hon. Member for Fareham, so I think that it will prove to be uncontroversial. The amendment will delete an inconsequential signpost attached to condition B of proposed new section 397AA to the Income Tax (Trading and Other Income) Act 2005, which was included to help taxpayers to interpret the legislation by alerting them to the changes made in clause 39. However, it has been suggested that the wording could be misinterpreted. To remove any doubt, the amendment will remove the wording in question.

Amendment 158 agreed to.

Mr. Mark Hoban (Fareham) (Con): I beg to move amendment 169, in schedule 19, page 202, line 15, leave out from ‘397AA’ to end of line 18.

I hope that this amendment will sail through as easily as the first one that we debated this morning. However, as the Financial Secretary has not appended his name to it, I suspect that it will run into heavier water.

Since 6 April 2008, individual shareholders with holdings of less than 10 per cent. in non-UK-resident companies have been entitled to a non-payable dividend tax credit. However, that tax credit was disapplied for dividends received from offshore funds in the Finance Act 2008, to counter the inequality of treatment of distributions received from onshore and offshore bond funds. Schedule 19 will restore the non-payable dividend tax credit for distributions received from corporate offshore funds that are largely invested in equities.

The 10 per cent. ownership threshold is removed for dividends paid by offshore funds, subject to anti-avoidance rules. However, when an offshore fund invests more than 60 per cent. of its assets in interest-bearing assets, or those that are economically similar, individuals receiving distributions will be treated for tax purposes as having

Column number: 322

received interest income and not a dividend or other type of distribution. As a result, no tax credit will be available and the tax rates applied will be those that apply to interest. Those rules will have effect from 22 April 2009. That starting date is the subject of amendments 167, 166 and 168, which are in the next group.

Amendment 169 relates to the provision of tax credits to individuals in receipt of dividends in non-UK resident companies, subject to certain provisions. Under the new provisions, a tax credit will be made available to shareholders in a company resident in a qualifying territory. The amendment would give certainty that, once a territory is designated as a qualifying territory and has passed the legislative test, the Treasury will not be able by regulation to disqualify it. The amendment would provide greater certainty for taxpayers that, once a qualifying territory has passed the legislative test, there can be no subsequent change to its status.

Ian Pearson: The Government take a different view of amendment 169. We believe that it would remove one of the anti-avoidance provisions that we are making in new section 397BA of ITTOIA. The purpose of this part of the legislation is to provide the Treasury with the flexibility to change the classification of an otherwise qualifying territory to non-qualifying, so that the UK’s tax system can reflect and respond to future changes in foreign tax systems. It would, for example, allow the Government to respond to the development of a new regime in a tax haven.

The Government do not intend to exercise the power unless exceptional circumstances arise in which there is a substantial risk of loss to the Exchequer, and any changes would be subject to the affirmative procedure. A similar provision exists in the transfer pricing rules, so the approach is well understood. It has never been necessary to use the provision in the transfer pricing rules, but we believe that it acts as an important deterrent to prevent the most blatant forms of avoidance.

Mr. Hoban: For whom does it act as a deterrent? The Minister is referring to changes that may take place in a tax jurisdiction, so will it be a deterrent to a sovereign Government who might want to change their tax rules? Is that an appropriate use of British power?

Ian Pearson: We believe that the legislation is an appropriate use of British power and, as I explained, that the UK’s tax system needs to reflect and respond to future changes in foreign tax systems. The hon. Gentleman will be aware of the regimes that may operate in tax havens.

We have never had to use the rule on transfer pricing, but we believe that it has acted as a deterrent. Amendment 169 would remove flexibility and curtail the Government’s ability to respond to changes in tax systems abroad, so I ask the hon. Gentleman to withdraw the amendment.

Mr. Hoban: One of my predecessors as Member of Parliament for the area of Hampshire that I represent was Lord Palmerston, who was a great believer in gunboat diplomacy, as well as the builder of Palmerston’s folly across the top of Portsdown hill. I thought that the days of gunboat diplomacy had passed, but we have

Column number: 323

here the tax equivalent in a power that is intended to deter sovereign Governments, or perhaps former British colonies, from changing their tax regime. It is curious that the Government should have such a power, that a Minister should suggest that we threaten other Governments with it, and that it should be a deterrent. The provision suggests that there may be a more martial spirit in the Treasury than we suspected.

I take on board the fact that the power has not been used in the transfer pricing regime, and that it will be subject to the affirmative procedure. I am sure that tax havens are quaking in their boots because the measure has been included in the Bill. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr. Hoban: I beg to move amendment 166, in schedule 19, page 204, line 14, leave out ‘22’ and insert ‘6’.

The Chairman: With this it will be convenient to discuss the following: amendment 167, in schedule 19, page 204, line 16, leave out ‘22’ and insert ‘6’.

Amendment 168, in schedule 19, page 204, line 18, leave out ‘22’ and insert ‘6’.

Mr. Hoban: Having disposed of the threat from sovereign Governments, we now come to the threat from taxpayers. The amendments are relatively simple, and would replace “22” with “6”. Hon. Members who have not perused the detail of the schedule may wonder why I tabled the amendments.

The changes in schedule 19 apply from the date of the Budget, but some tax advisers suggested that it would be better if the rules were applied from the start of the tax year. That would be advantageous for taxpayers because the rules applying from 22 April are better than the previous rules. There was some surprise among tax advisers that the measure was not made effective from 6 April 2009, in line with the announcement in the 2008 Budget, on which taxpayers may have relied.

The Chartered Institute of Taxation has noted that the draft legislation published in January 2009, which continued to be available on the HMRC website until 16 May last month, included the proposal that these changes should

“have effect in cases in which a relevant distribution arises, is paid over or is treated as paid in the tax year 2009-2010.”

When the Bill was introduced, there was some surprise that it had the date of 22 April in it. I know that that question was raised during the Finance Bill open day, when CIOT asked:

“Will the new measure to extend the entitlement to a non-payable dividend tax credit to individuals with holdings of 10% or more be made effective from 6 April 2009 rather than 22 April 2009 in line with the previous announcement in Budget 2008 upon which taxpayers may have reasonably relied?”

It went on to ask whether HMRC will be able to able to grant concessionary treatment to someone who in good faith has relied on last year’s Budget announcement.

The argument that HMRC used at the time was that the announcement was only general and should not have been relied upon by taxpayers. Normally, the Budget would have been expected to have taken place in March and the change would have been effective from 6 April—the start of the tax year. The delay in the Budget has created a disconnect and changed taxpayers’ reasonable expectation, which were—in line with the

Column number: 324

draft legislation published at the start of this year—that the commencement date would be the start of the tax year. That would reflect the general statement of intention made by the Government in the Budget 2008 when the changes were outlined.

Ian Pearson: It is true that, as the hon. Gentleman says, the Budget note from last year’s Budget stated that the extension of the shareholdings of 10 per cent. or more in foreign companies would be made effective from 6 April 2009. It is the convention to make tax changes effective from the beginning of the tax year, and with that assumption date stated in the Budget note was 6 April. However, as he knows, because the Budget did not take place until 22 April, the changes to the non-payable dividend tax credit could not be made earlier without the measure including retrospective legislation. That is why the legislation is effective from 22 rather than 6 April. Given the hon. Gentleman’s point that some individuals might have relied on that to determine their tax affairs, HMRC would examine any hard cases on their individual merits, although it cannot offer concessionary treatment.

It is true that, for the legislation to come into effect before the Budget date—when it was announced—we would have to have evidence of extraordinary circumstances, such as the existence of damaging tax avoidance. That is not the case in this instance. Also, it is right to recognise that making the measure effective from 6 April could disadvantage some taxpayers—for example, those who were affected by the class of share definition—retrospectively. Again, that is why the Government decided that 22 April should be the date on which the legislation should come in to effect: to ensure that the legislation is compliant with the Human Rights Act 1998.

I have sympathy with the hon. Gentleman’s arguments. The issues to which he referred are a result of the Budget being later than normal. I have discussed how HMRC might examine any hard cases on their individual merits, and I hope that with those comments in mind, the hon. Gentleman will seek leave to withdraw his amendment.

9.15 am

---

Prepared 12 June 2009