Mr.
Timms: The origins of the UK real estate investment trust
model go back to Kate Barker’s review of the housing market,
which recommended that there was merit in considering a vehicle that
was based on the US REIT model. Such a model has been introduced
elsewhere, as the hon. Member for South-West Hertfordshire rightly
mentioned, to encourage increased institutional investment in housing.
We implemented that proposal and extended its scope to include
commercial property. The main objectives of the model, which was
launched at the beginning of 2007, was to promote greater efficiency in
property investment and to provide smaller-scale investors with access
to commercial property returns.
We have seen
that the model works well. Some 21 companies so far have announced that
they have become UK REITs, including most of the big listed UK property
companies. The scheme is still less than three years old, and we expect
other companies to join in the future, as investors become more
confident in the UK REIT
market. Effectively,
the regime removes the tax distortion between investing in property
directly and investing in property indirectly by exempting both income
and gains made on property from corporation tax provided that the
company or the group meets some specified conditions.
5.15
pm We
announced in the pre-Budget report that the Bill would amend the
conditions to be met by a company or group in the UK real estate
investment trust regime to ensure that those conditions could not be
circumvented by the artificial creation of new group structures. The
conditions include the requirement that at least 75 per cent. of total
profits must come from the rental of property to tenants. We confirmed
our intention to legislate in the Budget.
Schedule 34,
which is introduced by clause 65, amends part 4 of the Finance Act 2006
to introduce a power for the Treasury to make regulations concerning
the use of artificial structures to circumvent the existing UK REITs
legislation. The regulations, which are available in draft form
alongside the clause, are to be made by the affirmative procedure.
Regulations to exclude owner-occupied properties from the REITs regime
have also been made using existing powers under schedule 6 to the 2006
Act. Schedule
34 also amends the 2006 Act so that section 98 of the Income
and Corporation Taxes Act 1988 is disqualified for companies or groups
of companies seeking to join the REITs regime. That will allow a
business with tied premises—a pub business, for
example—to treat the rental income from those premises as part
of the property rental business of a REIT. Tied premises are those
where a company supplies goods to a third party for sale on a premise
that the company rents to the third party. Before the amendment, such
income would not have been treated as rental income. That created an
arbitrary barrier to the REITs regime, which schedule 34
removes. In
addition, following discussions with the industry, schedule 34 makes
minor amendments to UK REITs legislation that will have effect on and
after 22 April 2009. They address some of the points raised by the
British Property Federation, although there are other points that it
wishes to promote, a number of which have been mentioned by the hon.
Member for South-West Hertfordshire. The minor amendments allow UK
REITs to issue an additional type of share; provide a consistent
definition of asset; clarify how apportionment of funds between the
tax-exempt and non-tax-exempt part of the business should operate; and
ensure that the regime’s requirements do not create unnecessary
barriers to
entry. The
hon. Gentleman asked about the extension to convertible preference
shares. The extension allows REITs to use such shares where they
previously could not, and is made in response to a consultation with
the industry. On the general question whether we can do more to help
REITs, it is certainly true that UK REITs, along with other parts of
the economy, are struggling in the current economic climate. We have
announced a wide range of policies to support businesses through what
is a difficult period for them and, indeed, for households. The
measures will provide help to all parts of the UK economy, and I expect
UK REITs to benefit as well. I am less certain that there is a need for
very targeted help for UK REITs beyond what we have done to support
businesses in general, but we are very happy to listen to
representations that people may wish to make to
us.
Mr.
Gauke: One of the BPF’s proposals that I have
outlined may involve the deferral of tax revenue, but the other two are
likely to be fiscally neutral. Indeed, one of them may raise some
revenue. The Government may therefore be able to address the issue
without a cost, so I urge the Minister to look at the matter very
closely.
Mr.
Timms: We will certainly be happy to look at those
representations. No amendments have been tabled, but we will, of
course, look at
proposals. The
hon. Gentleman also asked why we had not relaxed the profit financing
cost ratio restriction. The restriction on gearing helps to ensure that
profits are
available to be distributed in the first place, which helps to protect
both the Exchequer and the investor, but we will continue to talk to
the BPF on the detail of the profit financing cost ratio. He made the
point that stock dividends do not cost anything and asked whether there
had not, therefore, been an opportunity for the Government to act.
Allowing REITs to issue stock dividends as part of their mandatory
income distribution could harm some investors. For instance, any
investor who elected to receive cash would see their percentage stake
in the company reduced by those electing to receive stock. There is a
debate to be had on that proposition. Mr.
Gauke: I acknowledge the Financial Secretary’s
point, but does he not accept that REITs will have their own incentives
to keep investors happy and that the management of a REIT would be
careful about pursuing a route that could cause them disadvantage with
an investor, because of commercial pressures if nothing else? I
acknowledge his concern, but that flexibility would probably not result
in the management of a REIT acting recklessly, as far as the interests
of investors are concerned.
Mr.
Timms: I take the hon. Gentleman’s point. My point
was simply that there are issues to be weighed when considering a
change of that kind, and the effect on investors is one of them. It is
not necessarily a showstopper, but it needs to be taken into
account. The hon.
Gentleman asked why the Government had not allowed deferral of part of
the distribution requirement. It is important to note that each of the
conditions of the regime is in place for good reasons. The requirement
to distribute 90 per cent. of the profits from the property rental
business within 12 months of the end of each accounting period helps to
ensure that profits are distributed to shareholders who then pay tax on
them, and it also helps to ensure that the investor gets a good
deal.
We touched on
the use of REITs for residential property investment, but there are
difficulties with that in the current economic environment. Doing much
about that problem would require significant changes to the regime, and
we could then run into some EU state aid difficulties, which is another
factor to be borne in
mind.
Stewart
Hosie: All of the criteria for being a real estate
investment trust, such as the profit distribution and the residential
qualification, are met, so what EU state aid barrier could there be
that would be different for residential property than exists for
commercial
REITs?
Mr.
Timms: The current difficulty is the cost of setting up a
REIT for investment in residential property. The model currently works
fine for commercial REITs, but there is a cost problem for setting up a
REIT for residential investment, and changing that so that is was more
attractive for residential investment could lead us into difficulties
with EU state aid. The barrier is a cost barrier, but fixing it could
cause problems with state aid. Certainly, there would have to be some
work to address that.
The hon.
Member for Dundee, East asked whether other connected persons would be
obliged to follow the REITs conditions. We want the connected person to
be part of the existing REIT, rather than a separate REIT, so they
would not need to meet all the conditions of the regime. The purpose of
that legislation is to prevent a group artificially meeting the
requirements of the regime by bringing into the REIT any part of the
group that has been artificially removed. I hope that that is helpful
and commend the clause and schedule to the
Committee. Question
put and agreed
to. Clause
65 accordingly ordered to stand part of the Bill.
Schedule
34 agreed
to.
Clause
66Deductions
for employee
liabilities Question
proposed, That the clause stand part of the
Bill.
Mr.
Gauke: I have one brief question on clause 66. It has
something in common with clause 67, and our debate will focus on that
clause. Both clauses relate to anti-avoidance provisions. The test that
is inserted for arrangements that fall foul of those provisions is
that
“the main
purpose... is the avoidance of
tax”. Most
new avoidance legislation seems to include in its main purpose test the
phrase “obtaining a tax advantage” or something similar.
What is the reason for the change in terminology? Is this the
terminology that we can expect to see in future in these anti-avoidance
provisions and is there not a danger of some complexity or confusion
here? The phrase “the avoidance of tax” seems narrower. I
do not know whether that is the
intention.
Mr.
Timms: Clauses 66 and 67 are an interesting case. Early in
the new year, HMRC received information about a particularly abusive
avoidance scheme, which relied on deliberate default to generate
artificial liabilities, which are then set against the otherwise
taxable income of the individual concerned at a potential cost to the
Exchequer of about £200 million in the first instance. So on 12
January, to head off this threat to the public finances, I issued a
ministerial statement announcing the closure of this scheme with effect
from that date.
Following
that announcement, HMRC received further information that a variant of
the scheme—this time involving the legislation on
employment-related losses—was being used to similar effect at a
potential loss to the public purse of at least £200 million in
the first instance. So I took further action on 1 April, but also
effective from 12 January, to close this down. We will come to that in
the debate on the next clause.
Clause 66
gives effect to the original 12 January statement. It works by amending
sections 346 and 555 of the Income Tax (Earnings and Pensions) Act
2003. As they stand, these sections allow relief to employees where
either they, or their employer on their behalf, meet the costs of
insuring against employment-related liabilities, or the actual cost of
those liabilities, such as damages relating to their jobs or legal
costs to defend against such damages.
The particular
scheme that clause 66 addresses took a rather tortuous route to exploit
these provisions and make sure there was no real loss to the scheme
users. The arrangements would have involved the use of a number of both
companies and trusts, some of them offshore. A key element was the
creation of a contrived employment, the duties of which included
entering into financial arrangements with another party. During the
course of the contrived employment, the individual would deliberately
default on some aspects of the financial arrangements. Under the terms
of the arrangement, this would trigger automatic damages payable by the
individual. The individual would borrow the money to pay the damages,
through a loan made by another entity in this rather complex structure,
and in reality the individual would not need to repay the
loan. I
have gone into that in detail so the Committee has a sense of what we
are dealing with and of the degree of contrivance and
artificiality. 5.30pm It
is a highly abusive, completely contrived arrangement, with the sole
aim of avoiding paying the tax due to the Exchequer. We are providing
that that relief be allowed only where there are not arrangements in
place designed to avoid tax. Any real employment-related liabilities
will still be eligible for relief in the normal way.
The hon.
Member for South-West Hertfordshire asked why the main purpose test in
the clause uses the
phrase “the
main purpose...of which is the avoidance of
tax.” when
most new avoidance legislation uses the tax advantage test, as he
rightly said. The main goal is to ensure that all wording is effective
in achieving its primary purpose, which we are satisfied that the
wording achieves. The words used are in keeping with those used
elsewhere, such as the Income Tax (Earnings and Pensions)
Act 2003, so they are not novel.
By taking
swift action, we are preventing exploitation of the tax system by the
schemes of a small number of wealthy people. Honest taxpayers rightly
expect the Government to identify such schemes quickly and block them
effectively. That is what we have done.
Question
put and agreed to.
Clause 66
accordingly ordered to stand part of the
Bill.
Clause
67Employment
loss
relief
Mr.
Gauke: I beg to move amendment 73, in
clause 67, page 32, line 6, leave
out ‘12 January’ and insert ‘1
April’.
The
Chairman: With this it will be convenient to discuss
amendment 74, in
clause 67, page 32, line 7, leave
out subsections (3) and
(4).
Mr.
Gauke: I thank the Financial Secretary for setting out
details of the arrangements. He describes them as particularly abusive,
which is perfectly accurate given that it is a deliberate default in
relation to arrangements entered into during employment to create
employment income offsets that can reduce tax on personal income.
It is highly contrived. I want to make it clear that we fully support
his statement that such loopholes and such contrived and artificial
arrangements should be identified quickly and blocked effectively, so
we support clauses 66 and 67 in their attempt to do that. We are
concerned about the potential retrospective element—I wish to
stress that that is a narrow concern—which is the purpose behind
tabling these amendments. I know that we will debate the extent to
which it is retrospective
later. This
is not the first time that the some of us have debated retrospective
taxation. On 22 May last year, I debated the issue with the Financial
Secretary’s predecessor, the right hon. Member for Liverpool,
Wavertree (Jane Kennedy)—may I say on behalf of the Opposition
that we hope that she is safe and well? A similar point was raised in
the context of double taxation treaties and retrospective provisions on
Isle of Man partnerships. It would be fair to say that the case against
the Government then was stronger than it is today, because then we
looked at retrospection going back 21 years for something that HMRC had
known about for a long time and not sought to address. One could argue
that the arrangements that we debated last year were less abusive then
the arrangements that we have today. None the less, there is a
principle to do with the nature of retrospective legislation in this
field. Last year, the right hon. Member for Liverpool, Wavertree
said: “The
Government understand some of the concerns about retrospectivity. It is
right to be concerned about the use of that, and it is right for the
Government to justify every
case.”——[Official Report, Finance Public
Bill Committee, 22 May 2008; c.
371-372.] I
therefore make no apology for raising this issue, notwithstanding the
aggressive and abusive nature of the loophole that the Government are
closing. The point is whether the announcement of 12 January 2009 to
which the Financial Secretary referred was sufficient to close the
loophole or whether this matter was not addressed effectively until 1
April
2009. When
debating the retrospective nature of taxation, it is customary to refer
to the Rees rules, which date back to the Finance Act 1978. The shadow
Chief Secretary of the time stated that it is important that clear and
specific warning is given prior to a Finance Act implementing any such
legislation. My right hon. Friend the Member for Charnwood
(Mr. Dorrell) went on in the early 1990s to argue that in
addition to those clear and specific warnings being given in advance,
there must be exceptional circumstances for legislation to be
retrospective. It may well be that the abusive nature of these
arrangements and the considerable potential cost to the Exchequer are
exceptional
circumstances. I
will turn to what the Government said in considering whether the Rees
rule was met. In the press release of 12 January 2009, HMRC
stated: “The
specific avoidance arrangements of which the government is aware aim to
exploit the provisions of sections 346 to 348 and 555 to 559 Income Tax
(Earnings and Pensions) Act 2003,
(ITEPA).” Those
references are picked up in clause 66, which we debated earlier.
Paragraph 9 of the press release
states: “The
specific avoidance arrangements being countered are outlined above but
the government is aware that it might be possible to use different
structures to achieve a similar outcome. As a result the proposed
legislation will deny any deduction under section 346 or section 555
ITEPA where the liability in respect of
which the deduction would otherwise be due has been paid in connection
with arrangements the main purpose, or one of the main purposes, of
which is the avoidance of
tax.” The
press release, which reflects the Financial Secretary’s written
statement, highlights certain specific arrangements and broadens it
further. However, it does not broaden the identification of the scheme
used in the loophole as widely as the subsequent press release and
technical note of 1 April 2009, to which the Minister
referred. That
press release announced further action and was entitled
“Government taking further action to prevent artificial
avoidance schemes”. Having outlined the contents of the January
provisions, in paragraph 5 the technical note goes on to
state: “The
Government is aware of a similar scheme or schemes that seek to exploit
S11 ITEPA 2003 and S128 ITA
2007.” The
essential point is that we are concerned about backdating those
anti-avoidance provisions to 12 January, when that announcement
addressed certain specific arrangements; indeed it slightly broadened
it out to beyond the arrangements of which it was aware, but was not as
broad as the 1 April arrangements. We consider that the risks of
retrospective legislation are very considerable. That is important as
it damages stability and certainty in the UK tax system. If we have a
tax system that is unpredictable, it undermines confidence. We are
therefore concerned that by backdating the effect of clause 67 to 12
January as opposed to 1 April, the Government are going beyond what we
accept as allowable under the Rees rules, the Dorrell doctrine and,
indeed, by the statement made by the former Paymaster General, the
right hon. Member for Bristol, South (Dawn Primarolo). In December
2004, she referred to remuneration planning, an area where there has
been retrospective legislation for some time. This would appear to be
broader than that and my attention has been drawn to comments made by
the right hon. Lady on 6 June 2006. I interpret her remarks
to mean that the approach to remuneration planning applied merely to
the extraction from a company of income otherwise taxable in the form
that was rendered free of national insurance, PAYE and income tax. I do
not think that this is quite what we have here, so we are concerned
about these provisions.
Perhaps I can
take this opportunity to ask the Minister where the Government stand on
retrospectivity in general. In what circumstances do the Government
consider that a retrospective provision is justified? Does the Minister
recognise that there is a risk that HMRC may use this as a fallback
against its mistakes? That was very much the nature of our case last
year on partnership income and Isle of Man partnerships. HMRC should
have addressed that matter much earlier and it sought to address it
through retrospective legislation. What constraints are there on the
use of retrospective legislation and do the Government recognise that
there are problems caused to the UK tax system if it is overused? It
may well be that the Minister’s remarks today can provide some
reassurance, but it would be a damaging attribute to our tax system if
there was frequent use of retrospective legislation in this
area.
More
specifically, on clause 67 and amendments 73 and 74, may I ask the
Minister why the announcement on 12 January was thought to cover more
than that
which is specifically mentioned in that announcement? I suppose the
question that should be asked is why section 11 was not mentioned in
it. How does the Minister justify including section 11 in something
that was not mentioned for another two and a half months or so? With
those questions—I have tried to present this case in a probing
manner—I have to warn the Financial Secretary that we may well
seek to divide the Committee. We are concerned about this use of
retrospective legislation. We are not convinced by what we have heard
so far that the Government are fully justified in dating the provisions
back to 12 January rather than 1 April, notwithstanding the fact that
the Government are absolutely right to seek to close that
loophole. 5.45
pm Mr.
Brian Binley (Northampton, South) (Con): May I say what a
pleasure it is to serve under your chairmanship, Mr. Hood? I
am grateful to have the opportunity to speak on the clause, and I
congratulate my Front Bench colleagues on emphasising its importance.
It seems to me to be one of the most disturbing clauses in the Bill,
not least for the wider reasons. My hon. Friend the Member for
South-West Hertfordshire made the point that an announcement on certain
issues was made on 12 January 2009—indeed, I am told
that it was made clear that the rules would not apply to payments made
after the date of the announcement—and the industry ceased to
use the scheme. That is the information that I have received.
The crime comes when we consider the announcement
of 1 April 2009, when the Government widened the scope of the provision,
and did so retrospectively and without notice. It is said that the measure
will impact upon only 600 people, but retrospective legislation that
impacts upon one person, particularly in such an activity, is not good
enough. For 600 people, of course it is not good enough. However, it
is the wider questions of perception and the breaking of what many businesses
see as a genuine understanding between business and the Department that
is the real danger inherent in the provisions.
I understand
that the hard-working people of the Treasury are keen to protect the
interests of the Government and the nation by stopping tax avoidance.
To most people, tax avoidance is unacceptable. I would love to get
certain people who live on certain islands and then, through their own
newspaper organs, make their own moral judgments, and many Members of
the House would agree. In this instance, however, we are not talking
about the normal practice of announcing a measure and giving people due
warning. We are talking about the Department making an announcement,
with no warning, of a measure that would be used retrospectively.
Therein lies our concern.
To date, it
has been generally accepted practice to apply retrospective tax
legislation only when HMRC has announced that it will do so. It is that
element that has been broken in the clause. I do not need to tell the
Committee that retrospective legislation is bad legislation, no matter
what the issue, as it is a fundamental requirement that legal
frameworks should provide certainty for individual behaviour at the
point when that behaviour takes place and not retrospectively. That is
generally accepted as good, fair and proper government. It is the
undermining of that concept that is so damaging in the wider
sense.
It is the
question of perspective that concerns me immensely. I come from a world
where certainty is vital—the business world. I come from a world
that believes that treatment between business and the Department is
fair and proper. Action of this sort undermines that concept. If it
happens more and more, business will begin to think that it cannot
trust the Department, and therein lies the real danger. The perception
of HMRC itself is under threat when the Government decide to act
retrospectively in such a fashion. I recognise that accountants rarely
take perception into account, but business men do, because the
perception of their business is vital to the well-being of their
customers. That is the point that I fear the Treasury is unable to
grasp, and which I would particularly like the Minister to
address. The
Government tell us that the measure will prevent a loss to the economy
of some £200 million. That is pure accountancy talk; it fails to
take into account the image of this country doing good and fair
business. It is another little brick in that wall that will prevent
more and more people from wanting to do business here. What assessment
has there been of the impact on people who might want to come to the UK
to do business, but might be put off by the thought that they could be
taxed retrospectively without their knowledge? That also needs to be
taken into
account.
| 
