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Mr. Timms: Again, I welcome the support of both Opposition spokesmen for the clause. It contains further clarification of the double taxation relief rules to prevent the abuse of those rules by banks through tax avoidance schemes. This is the last of the four clauses that deal with double taxation relief. The double taxation relief rules are designed to give relief in the UK for foreign tax paid on foreign profits and to ensure that UK tax paid on profits earned in the UK is not reduced by foreign tax. Some companies, banks in particular, devised sophisticated schemes to abuse those rules by using foreign tax to reduce the UK tax payable on profits.
The hon. Member for Southport has drawn attention to the general public view of behaviour of that kind. There has been some press coverage of it in recent months, which the banks are sensitive to. I am not able to name names in this debate, as he knows, but the Chancellor has announced that we will publish for consultation a code of conduct for banks in this area in the hope of changing some of the practices that have grown up over the years.
Mr. Hands: Will the code of conduct apply just to partly or fully state-owned banks or to all banks? When will it be published?
Mr. Timms: The code of conduct will be published shortly. The intention is that all banks will sign up to it. It will be a voluntary code, but I am pleased to say that broad support has been indicated across all banks.
Some banks have attempted to avoid the intention of the double taxation relief legislation by separating foreign receipts from the expenses of earning them to maximise their double taxation relief claims, hence the fragmentation. One method has been to divert what is in substance trade income into investment subsidiaries that are not subject to the same requirements. Another is to purport to fund avoidance schemes involving receipt of foreign income with money that does not have an associated funding cost, such as customers’ deposits in non-interest bearing current accounts.
The clause will amend rules introduced in the Finance Act 2005, as hon. Members have said. That legislation is working well, but the clause will clarify its intention by putting two matters beyond doubt. First, where there is an avoidance scheme, the assumption is that any income received by a member of a banking group is trade income, unless that assumption is not reasonable. Secondly, a bank’s funding costs should always be taken into account when calculating the double taxation relief due.
The clause will apply to avoidance schemes, and I believe only to avoidance schemes. Its effect in all cases will be to ensure that a fair amount of tax credit is given. There are no circumstances in which double taxation relief should be given without regard to bank funding costs, so a restriction to avoidance schemes or arrangements is not necessary. My concern about amendment 218 is that, since the aim of the clause is to put the matter wholly beyond doubt, the additional requirement that it applies only in cases of avoidance would be an unnecessary obstacle to its proper implementation.
Mr. Hands: I expect that the Minister knows more about motive clauses than I do. Given the fact that there are a lot of motive clauses on anti-avoidance measures, what kind of parameters have the Government used? I think that he is saying that it would be too burdensome or difficult to have the motive clause in the case under discussion. Is there a particular point at which the motive clause makes sense and another point at which it becomes too administratively difficult?
Mr. Timms: The hon. Gentleman is right that those tests are appropriate in a range of circumstances, but they are not appropriate in the case under discussion because the purpose of the clause is to make things absolutely clear. To apply a test in this case would add uncertainty, which the clause exists to remove. To add an avoidance purpose test risks undermining the clause’s aim of ensuring that the point is unarguable.
Mr. Field: The Minister, in the course of our discussions on this and previous clauses on double taxation and avoidance, has referred to avoidance as undesirable, and he has also referred to the abuse of rules. We are trying to clarify the Treasury’s position. One of our concerns, both moral and ethical, is also a concern that we hear loud and clear from outside interest groups, and it does not relate to a lack of certainty. I appreciate that our amendment adds an element of uncertainty by discussing the main purpose, but the issue is surely that some emphasis should be placed on intentions, as well as outcomes.
The Government’s strong view on the undesirability of any sort of tax avoidance, which has manifested itself in some of the retrospective and retroactive legislation of recent years, effectively centres just on outcomes, rather than on intentions. Is it the case that the Treasury, not only in relation to clauses such as this but also more generally, wants to remove motive-type clauses in order to produce total certainty? If that is the case, no attention whatever is being paid to the intention of the main purpose; it is being paid, rather, towards the outcome of the avoidance of tax, which is wholly undesirable from the Government’s perspective.
Mr. Timms: I do not think that that is an accurate description of what has happened. For example, we have had a debate about principles-based legislation in relation to the Bill, and a very clear statement has been included in it about the intended principles. We had a debate about whether uncertainty was being created by that, so I do not think that the general direction described by the hon. Gentleman is right. However, in the case under discussion, the clause will apply to avoidance schemes only. There may well need to be a motive test in a case in which there might be a risk of inappropriate application, but there is no such risk in this particular case. It is a fair result in all cases, so there is no need for the test to be added.
Mr. Hands: I think I understand what the Minister is saying, but there seem to be two ways of looking at the issue. Option A is that such practice never happens unless it is done through deliberate anti-avoidance, and option B is that, if such practice does happen, the party involved may have innocently carried out the transaction, but such transactions should be forbidden to prevent similar avoidance schemes. The clause seems to conform to option A, which states that such transactions never happen unless they are wilful and deliberate avoidance.
Mr. Timms: Double taxation relief for a bank should always take account of the bank’s cost of funding. The clause does no more than ensure that that is the case. If the qualification was added, it would give tax avoiders an excuse for arguing that the legislation should not apply and, for as long as they carried on arguing the point, they would not be paying their tax. I therefore hope that the hon. Gentleman will withdraw the amendment.
The Government amendments avert a risk of an excessive reduction in tax credit. The clause requires a bank or a company associated with a bank to use the average costs that the bank would incur to fund a transaction, known as its notional funding costs, for the purposes of its DTR claim, rather than the funding costs actually used in its calculations, where the notional funding costs are significantly higher. Normally, banks fund all their transactions from a single undifferentiated pool of assets, but in very limited circumstances a company associated with a bank may fund a particular transaction with a loan taken out for that specific purpose and thus have legitimate direct funding costs.
The amendments ensure that all funding costs, whether direct or indirect, will be taken into account in the DTR calculation, so relief will not be restricted where companies associated with banks have incurred legitimate direct funding costs. I hope that the Committee will feel able to accept the Government amendments and the clause.
Mr. Hands: I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendments made: 209, in clause 60, page 29, line 36, leave out ‘paragraph (b) and (c)’ and insert ‘subsection (3)’.
Amendment 210, in clause 60, page 30, line 4, leave out ‘paragraph (b) and (c) total’ and insert
‘subsection (3) total (before the application of subsection (3B))’.
Amendment 211, in clause 60, page 30, leave out lines 11 to 13.
Amendment 212, in clause 60, page 30, line 15, at end insert—
‘“subsection (3) total” means the amount to be taken into account under subsection (3) for the purposes of section 797(1).’.—(Mr. Timms.)
Clause 60, as amended, ordered to stand part of the Bill.

Clause 61

Financial arrangements avoidance
Question proposed, That the clause stand part of the Bill.
Mr. Hands: My contributions so far to this year’s Finance Bill seem to be in inverse proportion to the length of the material in front of us. Schedule 30 is extremely lengthy—six pages from page 258 to 264. As they continue the anti-avoidance theme of the clauses that we discussed earlier, I do not intend to speak at length on it.
The Lord Commissioner of Her Majesty's Treasury (Mr. Bob Blizzard): On a point of order, Mr. Atkinson. I thought that we were discussing clause 61.
The Chairman: We are discussing clause 61, which introduces schedule 30. It would be perhaps more convenient for the Committee to discuss them together, given that clause 61 is simply a one-line clause introducing schedule 30. The Chair is content with that.
Mr. Hands: Thank you, Mr. Atkinson. It would certainly be more convenient, but I must commend the Government Whip for being on the ball. I was lost in schedule 30 before I realised that we were officially debating clause 61.
The schedule proposes, in some detail, various new measures to stop specific tax avoidance schemes and practices, which seem to arise from the tax avoidance disclosure regime of recent years. It is a bit of a motley schedule—paragraphs 2 to 5 could make some sense together, but paragraph 1 appears to be something rather different, at least in my interpretation.
Paragraph 1 relates to various structures akin to the previously favoured film partnership structures, which were tackled, I think, in the Finance Act 2006. Interest paid on qualifying loans, such as loans taken out to buy into a partnership or shares in a close company, is deductible. It was announced on 19 March 2009 that legislation would be introduced in the 2009 Finance Bill to deny individuals relief for loan interest on investments in partnerships or close companies, where the interest is paid as part of an arrangement and the deductibility of the interest means that the investor is guaranteed to make a profit. In other words, it is a no-lose investment scheme. Draft legislation was released on 19 March and will be retrospective to that date.
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It is understood that that anti-avoidance measure is principally aimed at several arrangements that were being offered to partners in old sale and leaseback film partnerships—people who had previously gone down that road of tax avoidance. They purported to produce an interest deduction for borrowings to participate in the new arrangement, which could then be used to offset the reverse in film sale and leaseback income. There were other arrangements whereby a significant loss, funded by debt rather than personal investment, would be generated in the first year that an individual joined a partnership and would then give a “guaranteed” return of funds over the life of the partnership. Put another way, some companies had been getting full tax relief for making only a partial investment. As I understand it, the legislation is not intended to affect genuine commercial investments in businesses where there is uncertainty as to the return that will be produced from the arrangements.
Paragraphs 2 and 3 relate to amounts not fully recognised for accounting purposes. Their provisions block certain tax avoidance schemes that involve derivatives. Under a certain scheme and its variants, a company would derecognise in its accounts a derivative that is carried at fair value, with the result that profits arising to the company on that derivative fall out of the account for tax purposes. Where a derivative contract of a company is matched with shares, securities or fixed income instruments issues by it, it might be permissible under generally accepted accounting principles for the contract or amounts arising in respect of the contract not to be recognised in determining the company’s accounting profits or losses for the period. The new legislation requires the profits and losses on the derivative to be fully brought into account for tax purposes, even if they are recognised separately or not at all in the account.
Paragraph 4 relates to amounts not fully recognised for accounting purposes. That is another scheme that involves an intra-group convertible loan that is highly likely to convert into shares of the issuing company. The debtor company accrues and obtains a tax deduction for more than the corresponding taxable amount in the creditor company. The new legislation will input additional taxable credits into the creditor company to make the tax treatment symmetrical.
Paragraph 5 deals with credits and debits for manufactured interest. Again, as announced on 27 January by the Financial Secretary, the paragraph is being introduced to ensure that the tax treatment of manufactured interest payments is consistent with the treatment of such payments in company accounts prepared in accordance with UK GAAP. The announcement followed a decision in the High Court—DCC Holdings (UK) Ltd v. HMRC—relating to the treatment of deemed manufactured payments. It was felt that that decision could result in payers of real manufactured interest obtaining excessive deductions and recipients being taxed on amounts greater than those they actually received.
The legislation will apply to real manufactured interest payments made both before and after 27 January and to manufactured interest payments deemed to be made on or after 27 January. HMRC has indicated that the legislation is not intended to apply to the type of deemed manufactured payments that were the subject of the High Court case. I would be grateful if the Minister would confirm that that is correct.
We look forward to the Minister’s explanation for those proposals, to check that we understand schedule 30 correctly. There is, however, one area on which we would especially like to question the Minister: the retrospective nature of the provision in paragraph 5 following the DCC Holdings case. As I understand it, there was a widely held, but not universal, view on how the legislation should apply, but that did not accord with the Court’s decision on the case. The Chartered Institute of Taxation argues that neither taxpayers who have followed the letter of the law, nor taxpayers who have followed the accepted practice, should be penalised. I would be grateful for the Minister’s view on that.
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