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House of Commons
Session 2009 - 10
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Public Bill Committee Debates



The Committee consisted of the following Members:

Chairman: Mr. Nigel Evans
Austin, John (Erith and Thamesmead) (Lab)
Bailey, Mr. Adrian (West Bromwich, West) (Lab/Co-op)
Breed, Mr. Colin (South-East Cornwall) (LD)
Browne, Mr. Jeremy (Taunton) (LD)
Duddridge, James (Rochford and Southend, East) (Con)
Hoban, Mr. Mark (Fareham) (Con)
Hopkins, Kelvin (Luton, North) (Lab)
Jenkin, Mr. Bernard (North Essex) (Con)
McCarthy-Fry, Sarah (Exchequer Secretary to the Treasury)
Mudie, Mr. George (Leeds, East) (Lab)
Plaskitt, Mr. James (Warwick and Leamington) (Lab)
Prosser, Gwyn (Dover) (Lab)
Purchase, Mr. Ken (Wolverhampton, North-East) (Lab/Co-op)
Scott, Mr. Lee (Ilford, North) (Con)
Twigg, Derek (Halton) (Lab)
Walter, Mr. Robert (North Dorset) (Con)
Sarah Davies, Committee Clerk
† attended the Committee

Second Delegated Legislation Committee

Monday 7 December 2009

[Mr. Nigel Evans in the Chair]

Draft Real Estate Investment Trusts (Prescribed Arrangements) Regulations 2009
4.30 pm
The Exchequer Secretary to the Treasury (Sarah McCarthy-Fry): I beg to move,
That the Committee has considered the draft Real Estate Investment Trusts (Prescribed Arrangements) Regulations 2009.
It is a pleasure to serve under your chairmanship, Mr. Evans.
The Government announced in the 2008 pre-Budget report that they would legislate in the 2009 Finance Bill to make changes to the UK real estate investment trusts—REITs—regime. The regime removes the tax distortion between investing in property directly, and investing in it indirectly, by exempting from corporation tax both income and gains made on property, provided the company or group meets certain conditions. Those conditions include the requirement that at least 75 per cent. of total profits comes from the rental of property to tenants.
The Government announced that measures in the 2009 Finance Bill would amend the conditions to be met by a company or a group in the UK REITs regime to ensure that they could not be circumvented by the artificial creation of new group structures. Schedule 34 to the Finance Act 2009, which was introduced by clause 66 of the Act, fulfilled that commitment by amending part 4 of the Finance Act 2006 to include a power for Her Majesty’s Treasury to make regulations concerning the use of artificial structures to circumvent the existing UK REITs legislation, and by providing for regulations to be made to exclude owner-occupied properties from the tax exempt business of UK REITs. Schedule 34 was considered in detail as part of the Finance Bill process, and concerns regarding the proposed regulations, and the UK REITs regime more generally, were fully debated. The regulations to exclude owner-occupied properties have been made.
Schedule 34 also amended the Finance Act 2006 so that section 42 of the Corporation Tax Act 2009 would be disapplied for companies or groups of companies seeking to join the UK REITs regime. That allows a business with tied premises to treat the rental income from those premises as part of the property rental business of a REIT. When a company supplies goods to a third party for sale on premises that the company rents to a third party, those premises are tied. Before the amendment, such income would not have been treated as rental income, and that created the arbitrary barrier to the UK REITs regime that schedule 34 to the Finance Act 2009 has removed.
The regulations that we are considering are being made using the power introduced by schedule 34 to the Finance Act 2006, which required that regulations made under the new power be approved by a resolution of the House of Commons. Her Majesty’s Treasury and Her Majesty’s Revenue and Customs have held constructive discussions with the property industry, which have helped to ensure that the regulations will work as intended and will not create any unintended consequences.
Mr. Mark Hoban (Fareham) (Con): Will the Minister clarify exactly to whom in the property industry officials have spoken? I understand that there was no formal consultation.
Sarah McCarthy-Fry: There was no formal consultation, but there was extensive informal consultation with all interested parties for over a year—from before the last PBR. The discussions were held with individual REITs, the British Property Federation—the industry’s representative body—all the interested pub chains that we were aware of, and tax advisers. There were telephone conferences and many face-to-face meetings. There is an e-mail chain, and we published the draft legislation on HMRC’s website so that the interested parties were able to comment on it.
Mr. Hoban: Given that there has been what appears to be sofa-style consultation, how are Members meant to be able to scrutinise the regulations? We do not know the detail of the discussions, and there seems to be no formal record of them.
Sarah McCarthy-Fry: I suppose that the hon. Gentleman will have to take my word that the discussions took place, and if he wishes to write to me, I will provide him with the details. I wait to hear his comments. If he has evidence that people were not consulted, I would be interested to hear it, and we could respond at that point.
Mr. Hoban: The problem is that we do not have clarity about the process, or any public evidence, other than the Minister’s assurances, that the process has taken place. I have no reason to doubt the Minister’s word, but there is no public audit trail to show us what has happened, and that is to the detriment of proper scrutiny in this place.
Sarah McCarthy-Fry: As this is an anti-avoidance procedure, it would not have been normal to have a written consultation. However, extensive informal consultations took place, and if any interested parties feel that they were not consulted, I would be more than happy to take up the matter with them.
The regulations ensure that the conditions of the UK REITs regime cannot be circumvented. In particular, they ensure that it is not possible to become a UK REIT unless at least 75 per cent. of the company’s or group’s profits comes from the rental of property to tenants. When arrangements are made to circumvent the UK REITs conditions by artificially taking part of the group outside the ring fence to which the REIT conditions are applied, HMRC may take action to ensure that the REIT conditions apply to the whole group. That ensures that artificial restructuring cannot be used to meet the requirements of the REIT regime.
When arrangements are made for genuine commercial reasons, or between persons dealing at arm’s length, the regulations say that they are not prescribed arrangements. The regulations also provide that if a company joins the UK REITs regime and then enters into prescribed arrangements during the first accounting period, it will be given notice to leave the regime, and the entry charge paid will be credited against the corporation tax that would become due as a result of leaving the UK REITs regime. The regulations also provide for a right of appeal against the notice.
The purpose of the regulations is to remove arbitrary barriers to entering the UK REITs regime, while ensuring that the regime meets its original objectives and that the conditions of the regime cannot be circumvented. I commend the regulations to the Committee.
4.37 pm
Mr. Hoban: It is a pleasure to serve under your chairmanship, Mr. Evans, for what I think is the first time.
The Minister gave a fairly comprehensive account of the purpose behind the statutory instrument, so I do not want to go over it in endless detail. However, I wonder whether she will give us some clarity on one aspect of it. Regulation 4 states:
“For the purposes of these Regulations, arrangements are not prescribed arrangements if at least one of the following conditions is satisfied...Condition 1 is that the arrangements have been effected solely for genuine commercial purposes...Condition 2 is that the arrangements are made between persons dealing at arm’s length.”
Those are fairly broad statements of the conditions.
The Minister said that, to date, the consultation has been rather informal. The next stage is clearly the publication of guidance on HMRC’s website to enable people to determine, in the context of such transactions, what is meant by arrangements that
“have been effected solely for genuine commercial purposes”
and arrangements that
“are made between persons dealing at arm’s length.”
Will the Minister explain how far the HMRC has got in producing that amended guidance? Has the guidance been issued for consultation, and what has been the response?
The Minister is right to say that the regulations represent an anti-avoidance measure, but to get the process right requires some consultation with the industry so that transactions that are made for genuine commercial reasons, or made between persons dealing at arm’s length, are not caught. It would be helpful for the guidance to be clarified. It would also have been helpful if the Committee had seen the guidance prior to this sitting. When we consider Finance Bills, we are keen to see draft regulations so that we can talk about them in the context of our debates.
Ever more often in the formation of tax law, much of the detail that is of interest is hidden away in guidance that does not have statutory force. There are examples of draft guidance that is inconsistent with the primary and secondary legislation that it is meant to interpret. It would be helpful if the Minister told us exactly where we are with the preparation of the guidance. Who is going to be consulted on it, and when will it become final, given that the measures came into force in May 2009? Clearly, some transactions between May and now might inadvertently be caught by the regulations, as might some transactions between now and when the guidance becomes final. HMRC should be required to be clear about that guidance and to ensure that it is publicised and debated more widely than appears to have been the case for the regulations.
4.41 pm
Mr. Jeremy Browne (Taunton) (LD): I can confirm that there is cross-party consensus on the pleasure derived from serving under your chairmanship, Mr. Evans.
My party supports the regulations and thinks that they are a useful way of closing an avoidance loophole, so I should say from the outset that we will not use our considerable political muscle to frustrate the Minister’s will on this occasion. However, the Committee would be interested to know the answer to a couple of questions, some of which follow on, unsurprisingly, from the points made by the hon. Member for Fareham. I should be interested to know how many businesses are currently registered with the REIT regime that the Minister identified and how many businesses the Government have identified as having artificially restructured to claim the exemption, because surely that is the relevant consideration when assessing the impact of the changes on business and the potential revenue yield.
If the businesses that the regulations are designed to catch are not really concerned with property rental, how much do they make by restructuring to avoid tax on any profit that they do make from property rental? Businesses could be structured to minimise their liabilities and these changes would have an impact on that. The regulations might affect businesses that deliberately restructured because of the previous regime.
Finally, on timing, which the hon. Member for Fareham mentioned specifically, will the Minister assure us that people will know where they stand as this regime laboriously and incrementally gets put into place? Why was there a delay? The announcement was made in 2008, the Finance Bill was published on 22 April 2009, the draft regulations were published on 7 May 2009, and the Committee is sitting today on 7 December. I appreciate that the Minister has not been in the Department for the duration of that tortuous process, but I hope that she can tell us why it has been so laborious and how we can go forward in a rather more sprightly and efficient way.
4.43 pm
Mr. Ken Purchase (Wolverhampton, North-East) (Lab/Co-op): It is a pleasure to serve under your chairmanship, Mr. Evans. I want to make just a short point.
Under the statutory instrument, arrangements should be made for “genuine commercial purposes”. The regulations will be welcomed widely, but notwithstanding that, the oldest rule in the taxation book is to render unto Caesar that which is Caesar’s, and we might expect clever taxation experts to find ways and means to avoid a particular set of circumstances.
Will the Minister say a little bit more—if there is anything to say at all—about an appeals system, because we might judge a little hastily some accountants and tax experts who try to find a way around things and confuse them with the genuine article, for whom a real case could be made to be part of the REIT regulations? If the Minister said a little more about the possibilities of appeal, that would put those minds that are troubled by this matter at rest.
4.44 pm
There has been some concern about how the regulations will be applied. HMRC will not use the regulations lightly. It will use them only if required to maintain the regime for those companies renting property to third parties. To answer my hon. Friend the Member for Wolverhampton, North-East, a REIT has the right of appeal against being removed from the regime. REITs are able to have their proposals considered in advance by HMRC under the non-statutory clearance scheme, and most REITs have taken advantage of the clearance scheme to ensure that they understand the existing legislation.
There are currently 20 REITs in operation. In answer to the hon. Member for Taunton, no business has artificially restructured. HMRC was approached by a small number of pub companies that were contemplating restructure. It came to light when they approached HMRC that the regulations would be needed. Guidance will be prepared in the near future and will be shared with the relevant representative body, the British Property Federation, which was involved in a great deal of the consultation. That will clarify which arrangements are to be treated as commercial and at arm’s length, and those two conditions were agreed following consultation with the BPF. With those remarks, I commend the regulations to the Committee.
Question put and agreed to.
4.47 pm
Committee rose.
 
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