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
61Financial
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.
12.45
pm 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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