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 trustsREITsregime. 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
Majestys 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 Majestys Treasury and Her Majestys
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 yearfrom before the last PBR. The discussions
were held with individual REITs, the British Property
Federationthe industrys representative bodyall
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
HMRCs 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 Ministers
assurances, that the process has taken place. I have no reason to doubt
the Ministers 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 companys
or groups 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 arms 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 arms
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 HMRCs
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 arms
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
arms 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
Ministers 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 Caesars,
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 moreif there is anything to say
at allabout 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
Sarah
McCarthy-Fry: We have had a small but perfectly formed
debate and I will attempt to answer the questions raised. There were a
couple of questions about timing
and why the process has taken so long. HMRC wanted to consult with the
industry on the proposed regulations, and the regulations could not be
laid before Royal Assent of the Finance Act 2009. The regulations were
published on the HMRC website because they will apply retrospectively
to all arrangements made on or after 7 May 2009.
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 arms 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.