Mr.
Hoban: I am grateful to the Minister for his response,
particularly for his comments on how HMRC will look at hard cases.
However, the Government clearly set out their intention to apply the
changes from the start of the tax year and it was reasonable of
taxpayers to assume that that would be the case. Solely for political
reasons, with the delay of the Budget, taxpayers lost out. They did not
lose out through their own activity, but because of the decision taken
by the Chancellor to timetable the Budget for after the G20 summit. The
Government should reflect on that, because they
have—“misled” is not the right word—given
the impression that something would happen from the start of the tax
year. That has not happened for political reasons, rather than for any
other good fiscal reasons, and that point should be taken on board by
the Government.
In the light
of remarks made by the Minister regarding the treatment of hard cases,
I beg to ask leave to withdraw the
amendment. Amendment,
by leave,
withdrawn. Schedule
19, as amended, agreed
to.
Clause
41Loan
relationships involving connected
parties Question
proposed, That the clause stand part of the
Bill.
Mr.
Hoban: I have just a couple of comments on schedule 20,
which the clause introduces. First, a word of praise, which does not
come very readily from my lips on these occasions, but there has been
some very positive comment on the consultation for clause 41 and
schedule 20. That consultation has worked well and improved the
schedule. However, one or two issues have been raised with
me.
Companies
have used the late interest rules to get a tax reduction for interest
expenses when they have needed it. That has particularly been the case
with part equity-backed businesses. If an interest reduction cannot be
used in the current year, it will be carried forward as a non-trade
debit that can be offset against non-trade credits. That was not felt
to be particularly useful, so companies would therefore trigger the
debit when they could use it or needed it. The schedule takes the
flexibility away on timing for finance costs.
The
Government’s counter-argument might be that, as the legislation
has been partly introduced for anti-avoidance purposes, that might well
be the purpose of removing that flexibility. However, companies could
still obtain tax relief when the interest is paid using
companies’ non-qualifying territories—for example,
Jersey. That means that they cannot refer an accruals basis for tax
relief when they need to. Will the Minister comment on the interaction
between the schedule and the debt cap rules? Some clarity is required
and I would be grateful for his thoughts on how that clarity
might be
introduced.
Ian
Pearson: First, I acknowledge the comments made by the
hon. Gentleman on how the consultation was handled. I am sure that that
statement will be welcomed by my officials who have undertaken the
consultation exercise. He is right to point out that there is
widespread recognition for what the Government are doing; there were
only some minor points raised regarding the issue of loan relationships
involving connected parties.
He pointed to
the issue of private equity companies. As he is aware, the legislation
contains an election to enable a company to stay on a pay basis for a
year after the change. That should give companies time to rearrange
loans if they think they need to. The private equity industry has
raised some practical difficulties with HMRC, where interest is payable
to a company controlled by a number of private equity investors. Those
are matters that we believe are best dealt with in guidance and HMRC is
discussing them with the private equity
industry. Mr.
Mark Field (Cities of London and Westminster) (Con): In
the current economic circumstances, was any consideration given by the
Treasury to extending the period of 12 months? The Minister will be
aware that, particularly given the potential difficulty of acquiring
funding, it may well be that that period, which might normally seem
quite a sensible transition period, will
not prove long enough for the reorganisation of finances for private
equity companies in this difficult economic
situation.
Ian
Pearson: Well, we always consider these matters carefully.
It is our judgment that a period of 12 months is a reasonable period of
time to allow companies to rearrange loans if they need to do
so.
The point was
made about whether or not an election should be allowed for private
equity groups to deduct interest on a paid basis, if they want to. In
response, I would say that allowing companies the choice to deduct
interest, either when it accrues or when it is paid, would go against
one of the key principles of the corporation tax rules on the taxation
of interest. Interest is taxable and relievable as it accrues in the
accounts. We are not persuaded that an exception needs to be made for
private equity. However, HMRC will work with the industry in improving
its guidance in this area.
The point
about the interaction with the debt cap was made by the hon. Member for
Fareham. Specifically on that point, I can say to him in response that
ordinary loan relationship rules, such as late interest, are applied
before the debt cap applies. That is another matter that we will cover
in the guidance.
As I have
said before, HMRC is in discussions with the private equity industry
about these matters and we believe that they can be satisfactorily
addressed through guidance. The industry is happy with that.
Question
put and agreed to.
Clause 41
accordingly ordered to stand part of the Bill.
Schedule
20 agreed to.
Clause
42Release
of trade etc debts
Question
proposed, That the clause stand part of the
Bill.
Mr.
Hoban: I wish to raise an issue about the clause. The
changes in the clause enable transactions between rated parties so
that, where there is a waiver of a property or trade debt, these
releases will not be taxable in the debtor company nor will there be a
tax relief in the creditor company. So, within the group these changes
are tax-neutral.
However,
there are other inter-company balances that arise other than through
trade or property debts. It has been suggested that it might be helpful
to enable long-standing inter-company balances to be written off and
relief to be given, so that there is no taxable transaction taking
place in the debtor company nor is the tax relief given in the creditor
company. I just wonder whether the Government have thought about
extending the relief to companies in those
circumstances.
Ian
Pearson: I am not sure that I have a direct answer to the
hon. Gentleman’s question at this point in time. He will be
aware of what we are trying to achieve through the clause. He will also
be aware that the clause covers trade and property business debts. He
asked why there could not be releases of any money debts between group
members and he specifically made the point about the period of time.
Covering other sorts of debts,
such as those relating to the management expenses of investment
companies, would have made the clause considerably longer and more
complicated, and the representations that have been made to the
Government have not suggested that, in practice, such debts cause as
many problems as trade debts. However, we have not ruled out the
possibility of further changes in the future. We believe that we have
covered most of what needs to be done, but we would be happy to receive
further representations from business and the professions about any
real life problems involving money debts that are not within the
clause’s
scope. Question
put and agreed to.
Clause 42
accordingly ordered to stand part of the Bill.
Clause
43 ordered to stand part of the
Bill.
Schedule
21Foreign
exchange:
anti-avoidance Question
proposed, That the schedule be the Twenty-first schedule to the
Bill.
Mr.
Hoban: I have just one question about schedule
21. Paragraph 2 states
that “the
arrangements cause the company or any other company to gain a tax
advantage (other than a negligible tax
advantage).” Schedule
21 introduces anti-avoidance provisions, but why is there not a more
traditional motive test? Paragraph 2 offers a very broad
definition, but when anti-avoidance is involved, one normally expects
the more traditional wording where the main purpose involves tax
avoidance. Paragraph 2 might cover a much broader range of transactions
than would normally be covered by a targeted anti-avoidance
measure.
Ian
Pearson: This is an important schedule in relation to
targeting anti-avoidance. It is designed to stop schemes that involve
abuse of the tax rules for what is known as forex matching. A number of
such schemes have been disclosed to HMRC, and have been widely used in
practice. It is estimated that stopping such avoidance will bring in
additional corporation tax of £20 million a year and prevent
further losses to the Exchequer of approximately £120 million a
year. It is therefore important that we introduce
legislation. The
hon. Gentleman has asked why the legislation does not contain a purpose
test. Existing provisions in the tax rule for loans and derivatives
deny relief for losses where the loan or derivative has a tax-avoidance
purpose. Although those provisions may deny relief for losses generated
by forex matching schemes, they can involve some very difficult and
long drawn-out arguments between HMRC and the businesses concerned. The
Bill aims to put it beyond doubt that such schemes do not work, even
where they are designed to reduce the risk of a purpose test challenge.
The tax avoidance purpose rule would therefore be counter-productive.
It would not give certainty to compliant companies, because experience
suggests that such companies are likely still to be concerned about
whether their purposes could be perceived as unallowable. It might also
provide avoiders a loophole through which they could escape, where
contemporaneous evidence of a company’s purpose is
lacking. We considered a purpose test, but there are clear reasons why
we deliberately rejected it. Our approach is more
robust. Question
put and agreed to.
Schedule
21 accordingly agreed
to. Clause
44 ordered to stand part of the
Bill.
Schedule
22Offshore
funds Question
proposed, That the schedule be the Twenty-second schedule to the
Bill.
9.30
am
Mr.
Hoban: I have just a couple of questions about the
schedule. The first relates to the clarity of the guidance that has
been issued so far on the matter. My second and more substantive
concern may seem a curious one for me to raise given my earlier remarks
about the way in which the rules on the debt cap and dividend exemption
seem to be driven by the EU, and the fact that the Government have
assured us that they were robust to challenge. However, it has been
suggested that the rules on schedule 22 may not be robust and
may be challenged on whether or not they comply with EU
rules.
Let me deal
with the guidance point first. There is concern that although some
guidance has already been issued by HMRC it does not address all the
questions raised by industry during the consultation on
schedule 22. The grandfathering rules that apply until 1
December 2009 are helpful, but they should address immediate industry
uncertainty. The
characteristics-based definition is potentially so wide-ranging that
instead of providing greater certainty, it is likely to make the
position even more unclear. It is suggested that there may be a range
of offshore arrangements that are not, in substance, funds, but that
may be subject to the rules. There is concern regarding interpretation
around offshore companies’ fixed lives, shared buy-back
arrangements and liquidation exit routes as well as special purpose
vehicles under partnership. It may be the Government’s intention
to ensure that such areas are not caught by schedule 22, but, as they
stand, the broad nature of the rules catches those entities.
This schedule
introduces into legislation the definition of an offshore fund. It can
be “a
mutual fund constituted by a body
corporate” or
“a mutual fund
under which property is held on trust for the participants where the
trustees of the property are not resident in the United
Kingdom” or
“a mutual fund
constituted by other arrangements that create rights in the nature of
co-ownership” where
those arrangements are affected by non-UK law. The schedule then sets
out some conditions that a mutual fund might need to satisfy to then be
defined as an offshore fund. Therefore, some certainty is required.
Uncertainty does not only impact on UK investors; it also creates
additional complexity and administrative
burdens for the offshore asset management industry, which already has
quite a lot to do in getting its funds in shape to meet the
rules. The second
issue goes back to the breadth of the funds that might be caught. The
offshore funds’ tax regime does not comply with the UK’s
obligations under agreements that create the European economic area.
Previous legislation linked the definition of offshore funds to the
regulatory definition, as in sections 235 and 236 of the Financial
Services and Markets Act 2000, and was unlikely in practice
to apply to mainstream retail investments. However, the proposed
definition set out in schedule 22 appears to bring a far greater range
of investments within the definition of an offshore fund—that
was the comment I made in the first part of my remarks about trying to
have greater clarity. The definition is so broad that the question of
the regime’s non-compliance with EC law arises in
practice.
I have been
given the following example, in which a UK bank offers, as a retail
investment, “a
debt security which redeems at any time after a minimum holding period
of, say, 12 months by reference to the FTSE 100 (though any chargeable
asset, or index of chargeable assets, for capital gains tax purpose
would provide the same
result). In
the absence of complicating factors, such an investment should be
regarded as a capital gains asset for tax purposes, with any gains,
made on disposal of the investment subject to tax at 18%. The offshore
funds rules will not apply because the mutual fund is constituted by a
UK resident
company.” However,
if the same debt security
is “issued
by a French or a Luxembourg financial institution under the proposed
new
definition”, that
definition is sufficiently broad to cause that identical investment to
be subject to different rules, which would result in any gains being
treated as income and therefore taxed at the higher rate. Therefore, if
the Government introduce their plans for a 50 per cent. tax rate, those
gains could be subject to tax at that rate, whereas the same security
issued in a UK resident fund would be taxed as capital gains at 18 per
cent. There appears, therefore, to be a difference between UK issuers
of investments and non-UK issuers of investments, which constitutes
discrimination. That, it is argued, then constitutes a restriction in
the free movement of capital from UK resident investors to financial
institutions resident in other EEA member states, which would be
unlawful. I would be grateful if the Minister could comment on whether
the Treasury believes that that differential treatment renders the
rules in breach of EU
law.
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