Mr.
Hoban: In Committee on last year’s Finance Bill, we
had a lengthy debate with the then Economic Secretary in which we spoke
a lot about sovereign sukuk. My hon. Friend the Member for Hammersmith
and Fulham and I expressed concern about the cost, compared with other
conventional methods of funding Government debt. The Minister has
referred to the difference in cost. A number of people have said to me
that it would be helpful to those interested in Islamic finance if the
Government provided the data underpinning the argument that it would be
too expensive to use sovereign sukuk. Would he be open-minded about
publishing the
data?
Ian
Pearson: I am always open-minded when considering
publishing data. The decision that we took and announced in October
last year was based on a number of factors. Clearly, given the
financial climate at the time, issuing sovereign sukuk would
demonstrably have had its difficulties. We did not believe that it
would have offered good value for money. However, we shall continue to
keep that under review, and, as I have indicated, I envisage strong
advantages in the UK issuing sovereign sukuk when circumstances
allow.
Mr.
Hands: Will the Minister tell us about the decision-making
process? Why was a decision taken last October not to do that? Is the
decision not to do something made every month or quarter? How
frequently the decision made? It seems extraordinary to have a
decision-making process not to do something. What sort of policy is he
following?
Ian
Pearson: I said that we would keep the matter under view,
as is normal Government
procedure. The
clause introduces the legislation in schedule 61 on stamp duty land
tax, capital gains tax and capital allowances relating to alternative
finance investment bonds. It deals with anomalies in the tax treatment
arising between AFIBs backed by land and conventional bonds backed by
land. More specifically, when the transfer of such property forms part
of the arrangements for issuing an AFIB, the transfer could be liable
to stamp duty land tax. However, a conventional bond issued in
essentially the same economic circumstances would not be
liable.
In an effort
to level the playing field, stamp duty land tax will not be charged
when an AFIB is issued. The legislation will also remove charges for
tax in respect of capital gains that might arise on the transfer of
property under the same circumstances. The legislation will also
ensure that the entity using an AFIB to raise finances will retain its
rights to claim capital allowances relating to property transferred
under the arrangements for issuing the bond. We have consulted quite
extensively with those interested in offering such products, and our
efforts to level the playing field have been widely welcomed by
them. As
part of the conditions for the relief accorded by the legislation and
to protect Exchequer revenue in the event of default, a charge in
favour of HMRC must be registered against the title of the property
used in the alternative finance bond arrangements. That means that HMRC
has an interest in the property registered with the relevant Land
Registry. The charge will enable it to recover any SDLT and related
interest and penalties that might be due in the event of default or
avoidance. Without the amendments, the legislation would not function
in all the Land Registry regions in relation to the registration of the
charge. The amendments do not increase the scope of the
legislation’s anti-avoidance provisions, but simply mean that
the provisions will work as intended in all three of the Land Registry
regions. I believe that they are uncontroversial, but I hope that my
wider comments on schedule 61 will be of benefit to the
Committee.
Mr.
Hoban: I, too, welcome you to the Chair of this final
Committee sitting, Mr. Atkinson. I listened to the
Minister’s broad remarks about Islamic finance. I do not have
any remarks to make about the amendments, but I have some questions
about the schedule. I hope, therefore, that this can be rolled into a
schedule stand part debate. There is a broad agreement on the
matter— 1.55
pm Sitting
suspended for a Division in the
House. 2.10
pm On
resuming—
Mr.
Hoban: —between both Front Benches, Mr.
Atkinson. [Laughter.]
The Financial
Secretary and I, along with the hon. Member for Leicester, South, took
part in a panel discussion on Islamic finance at the East London Muslim
Centre a few months ago. There is a broad degree of understanding
across the House about the right approach to Islamic finance and the
importance of it, not just to the Muslim community in this country, who
are able to purchase products that they would not otherwise be able to
obtain, but to the financial services sector.
When at the
East London Muslim Centre, I remarked that we were within sight of the
Square Mile. A number of investment banks and other businesses have
sharia-compliant products on sale through windows, as well as having
the stand-alone institutions that the Economic Secretary referred to.
It is right to highlight the fact that London is leading the western
world in this area, based not only on the innovation and skills that we
see in the City of London, but the regulatory and tax approach that has
been adopted. The Financial Services Authority has described its
approach
as: “no
obstacles, no special favours”.
Sharia-compliant
products should therefore be on a level playing field for both tax and
regulation. That sentiment was echoed in the 2008 Treasury document
which
said, “We
will not champion Islamic finance over conventional finance, but will
instead strive to create a level playing field between Islamic and
conventional
finance.” We
support that approach.
This is the
fourth Finance Bill where these matters have been debated and we have
always sought a degree of consensus. The only area where there has not
been consensus—it is more a matter of emphasis than fundamental
disagreement—is the issue of the sovereign sukuk product, on
which I intervened on the Minister. Last year’s Finance Bill
Committee debated the loose ends around the product when the Government
introduced paving legislation in that Bill to introduce a sovereign
issue. One loose end was cost. Time and again, people who specialise in
the area make the point that it would assist the wider market if there
were a sovereign sukuk issuance. We need to ensure, if people go down
that route, that we fully understand the product and its cost
implications. Schedule
61 is a development of legislation established over recent years. A
basic tax framework was set out in the Finance Act 2007 so that income
payments on alternative finance and investment bonds are treated as a
tax deductible expense of the payer and income of the recipient and
receive the same tax treatment as interest. However, there were three
outstanding issues. The first was the treatment of the sale of property
and whether that was subject to stamp duty land tax. There would be a
charge on the initial sale to a special purpose vehicle and a further
charge when the special purpose vehicle sold the building back to the
originator. If a conventional bond had been used, no stamp duty land
tax would have been charged on the second purchase.
The second
outstanding question was whether there is a capital gains tax charge on
that sale to the special purpose vehicle and whether a further charge
would arise on the appreciation in value of a building while it was
being held by special purpose vehicle. Again, the issue and redemption
of a secured conventional bond would not have given rise to that second
charge on disposal. Finally, there was the matter of capital
allowances, which the Minister has referred to. The structure of the
bond gave rise to a number of possible additional tax charges that
would not have occurred on a conventional product. It is right to
ensure that the treatment is the same, not just for the interest but
for all the underlying taxes that might be triggered by one of the
bonds.
In the 2008
Budget, the Government announced they would issue a consultation
document on stamp duty land tax. That and the impact assessment
highlighted that the SDLT places an additional barrier to issuers,
compared with the conventional equivalent. That extra charge therefore
puts the structure at a considerable disadvantage relative to
conventional securitisations. The principle behind this year’s
changes is to facilitate the use of AFIBs on real property, so that
those bonds will not incur SDLT, and so that entitlements and capital
allowances will be preserved.
2.15
pm The
legislation is detailed, but I will not go through the schedule in
detail—the Committee will be relieved that to hear at quarter
past 2 on a Thursday afternoon, with the end of our proceedings in
sight. However, a couple of points have been made to me in relation to
the detail, and I would like to explore
them. Paragraphs
3(2) and 20(2) use the word “control” and risk rendering
the definition of “acquiring control” to be somewhat
circular. Would not
“the right to
manage or direct the disposal of bond
assets” be
a better phrase than
“the right of
management and control of the bond
assets”? Paragraphs
4(2) and 21(2) use the phrase “transfer sufficient
rights”, which appears to mean that the bond holder must
transfer ownership of the bond. However, it has been suggested that it
would be preferable, and as effective, if bond holders could also waive
part or all of their control rights, rather than have to divest
themselves of economic ownership to satisfy the
exclusion. Paragraphs
4(3) and 21(3) refer to a bond holder underwriting a public offer.
Should the definition not include sub-underwriting as
well? Paragraph
5(9) sets out the quantum of the charge, that being the SDLT that will
be payable, plus interests and penalties, assuming that SDLT is due and
payable but not paid. The inclusion of penalties creates some
uncertainty in determining the amount of the charge, particularly as
the imposition of a penalty and the level at which one might be imposed
are dependent on a number of factors; the penalty is therefore not
easily predicted. The removal of penalties from the quantum of the
charge would not prevent the imposition of penalties in appropriate
situations, so penalties could still be levied, which is important, but
it would pre-empt commercial uncertainty in the operation of
satisfactory charge, which is a condition of
relief. In
the event that SDLT relief is withdrawn, paragraph 7(4) provides for
the amount chargeable to SDLT to be the market value of the interest at
the time of the first transaction. The substitution of market value for
actual consideration normally applies when the purchaser and vendor are
connected. Transactions between non-connected parties are generally
based on actual consideration. It is unclear why the apparently penal
approach of applying market value regardless of the connection has been
adopted. Perhaps the Minister could clarify
that. Paragraph
17 provides for the transfer of an asset by Q to any person other than
P to be treated as a disposal or balancing event in relation to P for
capital allowances purposes. However, if Q transfers the assets to
P’s group member, there should be provision in the legislation
for P and the group transferee to make the same elections for capital
allowances purposes that would be available had a transfer been made by
P directly to another company. I suppose that this is one of those
paragraphs where one has to mind one’s Ps and Qs—I
couldn’t resist that one. [Hon. Members:
“Try harder.”] I will try harder. I only have another two
paragraphs to go, so the possibility of further bad jokes about
schedule 61 is quite
limited. Paragraph
22 sets out an anti-avoidance test for the reliefs provided under the
schedule. We do not have any objections to a test, but will the
Minister consider
whether there should be a statutory clearance mechanism? The Minister
has already indicated that he is very open-minded in considering these
matters; I want to push him further and ask him to tell us the outcome
of his consideration. Given the sums involved in the issue of the bonds
and the time that goes into such matters, rather than there being some
uncertainty about anti-avoidance measures, it would be helpful if there
was some mechanism to get clearance from HMRC to ensure that it is
happy with the bond. The same sort of logic is used for transactions of
securities or indeed share exchange. There are
some very detailed points to consider. However, we go back to the
importance of ensuring that there is a level playing field for
alternative finance investment bonds compared to conventional bonds. We
must see whether we can continue to harness the ingenuity of those who
work in the City to maintain the promotion of London as a centre for
Islamic
finance.
Ian
Pearson: There has been a widespread welcome for the
actions that the Government have taken previously and in this Finance
Bill with regard to Islamic finance. To quote a partner from Norton
Rose:
“These
tax changes will give a considerable boost to the UK Islamic Finance
initiative and ensure that in these difficult times alternative sources
of finance will be available in the
UK”. I
could quote a number of other comments. Clearly, people who follow
these matters have been very supportive of what we have been trying to
achieve as a Government and there has been an ongoing process of
discussion and dialogue between policy officials and experts
in this area.
Let me
respond specifically to the comments made by the hon. Member for
Fareham. First, on the point of control and the waiving of rights,
investors can hold as many bonds as they wish, provided that those
bonds do not carry the right of management and control of the bond
assets. The ability to waive the rights of management and control
subsequently would require the agreement of the bond issuer and it
would potentially create two classes of bond, which could relate to
uncertainty among investors, the bond issuer being Q as opposed to P,
who would be the originator, as is explained in the Bill.
HMRC has been
advised that there is no requirement within Islamic law for these bonds
to provide for management and control of the bond assets. If such
rights are then provided, they can open up significant anti-avoidance
possibilities. So we believe that the proposals contained in the Bill
are clear and unambiguous, providing the certainty that is requested by
industry.
He suggested
some alternative wording. I note that the hon. Gentleman did not table
an amendment, but officials will have noted what he has said. If there
is any way in which the wording of the clause could be improved to make
it clearer we would certainly look at that, although at the moment I
doubt that improving the wording would be possible.
The Bill
provides relief for sub-underwriters. It defines an underwriter as
anyone in the context of the offerer of rights under a bond who
will: “agree
to make payments of capital under the bond in the event that other
persons do not make those
payments.” That
definition includes
sub-underwriters. On
the issue of penalties and why they are included in the charge, I again
want to say that there are significant avoidance risks associated with
this relief, which HMRC
has sought to address by introducing the charge as a deterrent to the
abuse of the legislation. The charge provides a security required to
protect Exchequer revenue. In the event of avoidance or in the event of
the conditions of the relief not being complied with, the relief may be
withdrawn. In such circumstances, the charge over the land will ensure
that any tax that is due can be
collected. On
the point about market value, the market value rule is again an
anti-avoidance provision, which is intended to ensure that the
arrangements are not used to transfer land to a third party without the
payment of the right amount of stamp duty land tax. Without that rule,
the value of the land could be artificially suppressed and any
subsequent default leading to the withdrawal of relief would result in
SDLT being paid on the suppressed value, which obviously would not be
right.
On
anti-avoidance in general and the point about the statutory clearance
mechanism that the hon. Gentleman raised, I can confirm that HMRC
operates some statutory clearance systems. In addition, it operates
non-statutory clearance systems to provide certainty for businesses
operating in the UK. Where there is material uncertainty about the tax
consequences of a transaction or event, businesses can use the service
to obtain written confirmation of HMRC’s view of the application
of tax law to that specific transaction or event. That arrangement will
cover alternative finance investment bonds. I know that some experts
are concerned about statutory clearance, but I hope that my
clarification is of use and that it makes the position very
clear.
I think that
I have covered the points raised by the hon. Member for Fareham.
Alternative finance investment bonds are an important area, and it is
right that that market continues to develop. The legislation before us
today will help that to happen.
Amendment
321 agreed
to. Amendments
made: 322, in
schedule 61, page 424, line 15, at
beginning insert ‘in England and
Wales,’. Amendment
323, in
schedule 61, page 424, line 23, leave
out paragraphs (a) and (b) and
insert— ‘(a) is a first
charge on, or a security ranking first granted over, the interest
transferred to Q, (b) is in
favour of the Commissioners for Her Majesty’s Revenue and
Customs,
and’. Amendment
324, in
schedule 61, page 426, line 12, leave
out ‘imposed or security granted’ and insert ‘or
security
registered’. Amendment
325, in
schedule 61, page 430, line 19, leave
out ‘imposed on it, or security granted over it,’ and
insert ‘or security
registered’. Amendment
326, in
schedule 61, page 430, line 20, leave
out ‘that condition is complied with’ and
insert— ‘(a) Q provides HMRC
with the prescribed evidence that condition G is met in relation to the
original land, and (b)
condition D is
met’. Amendment
327, in
schedule 61, page 430, line 23, leave
out ‘imposed on it, or security granted over it,’ and
insert ‘or security
registered’. Amendment
328, in
schedule 61, page 430, line 25, after
‘that’,
insert— ‘(a) condition G is
met in relation to the original land,
and (b)
’.
Amendment 329,
in
schedule 61, page 430, line 36, after
‘charge’, insert ‘on land in England and
Wales’. Amendment
330, in
schedule 61, page 430, line 38, leave
out
‘and’. Amendment
331, in
schedule 61, page 430, line 39, after
‘security’, insert ‘granted over land in
Scotland’. Amendment
332, in
schedule 61, page 430, line 40, at
end insert ‘and ‘(c) in the
case of a charge on land in Northern Ireland, notify the Registrar of
Titles of the discharge.’.—(Ian
Pearson.) Schedule
61, as amended, agreed
to.
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