Ian
Pearson: Schedule 22 is in two parts. The first part deals
with a new definition of an offshore fund for tax purposes and the
second part deals with the capital gains tax treatment of participants
in certain offshore funds. The hon. Member for Fareham has concentrated
on the first part, and, as I think that we agree on the second part, I
will not specifically refer to
it. As
the hon. Gentleman knows, following extensive consultation last year
the Government introduced powers, in the Finance Act 2008, to modernise
the offshore funds tax regime. At that time, we said that we would
consult further with industry on a new definition for offshore funds,
with a view to including that in the Finance Bill 2009.
Additional
consultation has led to the inclusion of a new offshore funds tax
definition, in part 1. With the new offshore funds tax definition, the
Government aim to provide more certainty to UK investors and funds; to
achieve, to the extent possible, economic parity with the position of
UK investors in UK-authorised funds; and to strengthen existing
anti-avoidance rules so that UK investors who choose to invest in
offshore funds do so based on a commercial decision, rather than for
tax purposes. The new definition uses a characteristics-based approach,
which the hon. Gentleman referred to. That aims to counter unintended
tax advantage being obtained when offshore arrangements are technically
outside the current definition of an offshore fund but are economically
the same as such a
fund. I
shall now turn briefly to the substance of the schedule, before
responding directly to some of the hon. Gentleman’s questions.
Paragraph 40A defines the type of body that will be an offshore fund if
it meets the characteristics defining a mutual fund. Paragraph 40B sets
out three conditions that must be satisfied for a fund to be a mutual
fund. There are powers to make regulations to amend the third
condition, using the affirmative procedure. In addition, certain
closed-ended entities are
excluded. Exclusions
apply for those investors in closed-ended entities who can effectively
redeem their investment only on the winding-up of the arrangements.
Those exclusions are applicable when either the arrangements have no
pre-determined termination date or are only generating a capital return
and do not give rise to any income, or when all income generated is
paid to credit to the investor and is taxed as income. The powers in
this part allow for future changes to the legislation by regulations,
and the Government will continue to monitor the area for avoidance and
will use those powers if it becomes evident that schemes are being
devised to convert returns that would otherwise be income into capital
gains. The Government will also be prepared to make changes in the
future if it is clear that certain arrangements should be excluded from
the tax
definition. This
part also amends the regulation-making powers introduced by the 2008
Act to repeal the existing offshore tax funds legislation and to ensure
that existing investors in arrangements that do not meet the current
definition of offshore funds are not adversely impacted by the change.
We have made draft regulations available to the Committee, and they set
out certain exceptions for UK investors from the tax charge to an
offshore
gain. The
hon. Gentleman made some points about guidance. As he knows, the
guidance has been published by HMRC as a draft for consultation and is
based on the offshore funds definition. I confirm that further guidance
will be published on the operation of the rules. HMRC is happy to make
the guidance clearer, following consultation responses on specific
issues. It
is also right to emphasise the Government’s position, which is
that we believe that there is no discrimination here with regard to the
treatment of schemes and how they comply with EU rules. We intend to
treat investors in funds that provide taxable income to investors as
authorised UK funds in a similar way to investors in UK-authorised
funds. So there is no
discrimination.
Mr.
Hoban: I am grateful for the Minister’s comments
about the compliance with EU law, but does he believe that, in the
example that I gave, where a UK bank
officer reads as a retail investment a debt security that redeems at any
time after, say, a minimum holding period and that return is subject to
the movements of the FTSE, for example, which is not dissimilar to
condition C in new section 40B, that return would be treated as income?
The industry believes that that would be treated as a capital return
and taxed at 18 per cent., not at the investor’s highest rate of
income
tax.
Ian
Pearson: I do not want to be drawn into commenting on
specific examples and giving rulings on them. I want to rest on the
fact that we believe that what we are doing is compliant with EU law.
Having heard what the hon. Gentleman says with regard to
industry’s concerns about the treatment, I will see whether I
can clarify matters, whether through correspondence or other
routes. Mr.
Peter Bone (Wellingborough) (Con): What practical steps do
the Government take in relation to the general issue of compliance with
EU regulation? Do they go off to somewhere in Europe with the draft
Bill and say, “Is this okay? Does it tick the boxes?” Or
is it solely opinion from here? What consultation goes on with
Europe?
Ian
Pearson: As the hon. Gentleman is aware, extensive
financial and legal expertise is available to the Government. When
drafting legislation, the experts are aware of EU law that is extant in
this and other areas. When drafting legislation we always seek to
ensure that it will be
EU-compliant. The
policy is to exclude partnerships where they are tax-transparent for
both income and capital gains purposes. If we receive representations
saying that certain partnerships are included in the definition but
should fall outside it the Government will be happy to address that in
regulation. On
debt securities issued by EU institutions, debt will not be treated as
a participating interest in an offshore fund, unless it gives the right
to participate in profits. That point is addressed in the extract of
regulations previously provided to the Committee. I am more than happy
to provide, in correspondence, further clarification, if it is
required, on the specific point raised by the hon. Member for
Fareham. Question
put and agreed
to. Schedule
22 accordingly agreed
to. Clauses
45 and 46 ordered to stand part of the
Bill. Schedule
23 agreed
to.
Clause
47Equalisation
reserves for Lloyd’s corporate and partnership
members 9.45
am Question
proposed, That the clause stand part of the
Bill.
Mr.
Hoban: The clause has found widespread support within the
insurance sector. There was a differential in the tax treatment of
equalisation reserves between conventional insurance companies and
those people who participated at Lloyd’s, particularly the
corporate partnership members. The clause tries to address an important
issue that has emerged over the past couple
of years: for a certain group of reinsurers, it has become increasingly
more attractive, for tax and regulatory reasons, to move their
redomicile activities from the UK to Bermuda. The clause should help to
redress some of the competitive issues. Will the Minster say a little
more about what else the Government are doing to address the
competitive challenge that exists in reinsurance, because London has
been seen as the primary insurance market? Lloyd’s has a strong
brand globally and is an important part of our financial services
sector, but there has been that shift from London to Bermuda, and
several people have questioned whether the Government are doing enough
to reverse that
move.
Ian
Pearson: The hon. Gentleman is absolutely right that that
provision has been welcomed by the reinsurance industry, which has
certainly been pressing us on this for a considerable time. The clause
will put in place Treasury power to make regulations that will extend
the benefit of tax relief on making equalisation reserves to corporate
and partnership members of the Lloyd’s insurance market. He is
right to point out that general insurance companies currently benefit
from relief when they are required by the Financial Services Authority,
as the insurance regulator, to make equalisation reserves, but
Lloyd’s members are not required to do so. Essentially, we are
seeking to level the playing field, and that has been welcomed by
Lloyd’s.
The
regulations—a draft is available to the Committee—follow
the existing rules that apply to general insurance companies and are
suitably adapted to grant tax relief where Lloyd’s members
choose to maintain notional reserves equivalent to the equalisation
reserves maintained by general insurance companies. The clause
increases fairness and helps the competitiveness of the UK insurance
market. More
generally on competitiveness, the hon. Gentleman will be aware that
groups take into account a range of factors when reviewing their
domicile, including regulation and its effect on credit ratings, the
availability and quality of local staff, professional support services,
infrastructure and also tax. We believe that London shapes up well as
an attractive environment and a world-leading, professional centre with
support and an unsurpassed insurance industry presence and
experience.
The UK
corporate tax burden compares favourably with those of similarly
developed countries. Luke Savage, the finance director of
Lloyd’s, has expressed strong support for the measure, which is
expected to make a significant difference to members’ tax bills
and improve Lloyd’s market competitiveness compared with other
general insurers. That addresses the hon. Gentleman’s point
about Bermuda and other jurisdictions. The Government will always want
to keep these matters under review, but the clause has been welcomed by
Lloyd’s and the industry. We are acutely aware of the need for a
competitive regime, but tax is not the only
consideration.
Dr.
John Pugh (Southport) (LD): Does the Minister recognise
that Bermuda, like the Cayman Islands, is a Crown dependency and that
there is unfinished work to be done? It is not just a question of
making a competitive environment; it is about doing something about a
regime over which we have some control.
Ian
Pearson: I accept the hon. Gentleman’s point. He
will be aware of the work being done on tax havens and other
jurisdictions, and of the extensive amount of work involved in
insolvency. It is important that we, as a Government, continue to work
closely with the industry to discuss the impact of the proposed
solvency II changes, and the competitive position more generally, and
to take appropriate action where needed to ensure that the UK maintains
its pre-eminent position in the world’s insurance
markets. Question
put and agreed
to. Clause
47 accordingly ordered to stand part of the Bill.
Clause 48
ordered to stand part of the Bill.
Schedule
24Disguised
Interest Mr.
Jeremy Browne (Taunton) (LD): I beg to move amendment 176,
in
schedule 24, page 233, line 16, leave
out ‘485B’ and insert
‘486B’.
The
Chairman: With this it will be convenient to discuss
Government amendment
159.
Mr.
Browne: I shall be extremely brief. We sometimes have
debates by proxy through various interest groups that are knowledgeable
in a field making representations to the Government and Opposition.
Amendment 176 was suggested by the Chartered Institute of Taxation as a
more preferable form of drafting. I want to give the Minister the
opportunity to consider what seems to be a reasonable representation
and to find out whether he concludes that the proposal is superior to
the current drafting.
The
Financial Secretary to the Treasury (Mr. Stephen
Timms): Welcome back to the Chair, Mr. Hood. I
would like to say a few words about clause 48 and schedule 24 before
responding to the hon. Gentleman’s
amendment. Current
tax law contains targeted anti-avoidance rules to ensure that amounts
economically equivalent to interest are charged corporation tax in the
same way as interest, instead of in a lower tax way. Clause 48 and
schedule 24 replace those piecemeal measures with a rule that sets out
the principle comprehensively. It is the result of consultation over
the past couple of years on the use of principles-based legislation to
tackle avoidance involving disguised interest. Subject to some
exclusions, a return equivalent to interest will be charged to
corporation tax as interest in all circumstances where it would not
currently be taxed as income.
The schedule
ensures that companies party to arrangements that produce interest for
them in a disguised form are subject to corporation tax in the same way
as if they had received actual interest. It replaces a range of
targeted rules with the comprehensive rule that I have described, which
charges companies corporation tax on all returns equivalent to interest
in the same way as on interest, unless a specific exemption covers the
returns. There are specific exceptions for arrangements where it is
reasonable to assume that avoiding corporation tax is
not the main purpose, or where the return simply results from an
increase in the value of certain shares held by the
company. Mr.
Hoban: One of the representations that we received from
outside bodies was about the
phrase “it
is reasonable to
assume” in
proposed new section 486D(1). The concern is that that is a subjective
test, whereas normally a much more robust test is used for
anti-avoidance measures. In such cases, the principal purpose is to
avoid tax, and that is demonstrable. Here, Inland Revenue or Her
Majesty’s Revenue and Customs might think that “it is
reasonable”. However, others might disagree about whether it is
reasonable to make such an assumption. Will the Financial Secretary
give some clarity as to why that wording was chosen, particularly as it
was not the wording in the original drafts that were consulted
on?
Mr.
Timms: There certainly has been some interest on this
point, as the hon. Gentleman says. Tax legislation already uses the
words “reasonable to assume” in a wide variety of
contexts, and HMRC has taken legal advice on legislation containing
those words on several occasions. However, the advice would not have
relevance to disguised interest legislation because of the different
context.
The words in
the schedule are words of limitation and would be interpreted as such
by the courts. In practice, “reasonable to assume” will
only rarely make a difference to the way in which the test is applied,
since an unsupported assertion as to purpose would, in any case, not be
accepted by HMRC as establishing true purpose, if objective evidence
pointed to the contrary. Any tax avoidance test based on purpose
already implicitly contains a reasonable assumption requirement. The
wording in the schedule simply makes that fact explicit. We have
thought about this point and discussed it with several outside
organisations. We think that it is helpful to have the words for
clarity. There
has been extensive consultation on that narrow point and also on the
wider point of using principles-based legislation to tackle avoidance.
The aim of such legislation is to stop avoidance activity in the area
concerned and to allow the repeal of traditional legislation that sets
out a series of detailed conditions to be met before the legislation
can
apply. The
traditional approach can, in effect, allow avoidance, because taxpayers
can seek to sidestep the detailed conditions. It is much more difficult
to sidestep an approach based on a comprehensive principle with
exceptions built in. We are turning around the way in which the
legislation operates, and we think that that approach will be more
effective. There has been a great deal of discussion about
it. The
new legislation allows the removal of 30 pages of existing detailed
anti-avoidance legislation—it will be replaced with the 11 pages
here—and signals that we think that the principles-based
approach, which has been widely discussed, can be made to work, and
that we will in future consider its use in appropriate areas of
legislation as a means of tackling persistent attempts at
avoidance.
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