House of Commons portcullis
House of Commons
Session 2009 - 10
Publications on the internet
Public Bill Committee Debates



The Committee consisted of the following Members:

Chairman: Mr. Martyn Jones
Abbott, Ms Diane (Hackney, North and Stoke Newington) (Lab)
Breed, Mr. Colin (South-East Cornwall) (LD)
Clelland, Mr. David (Tyne Bridge) (Lab)
Creagh, Mary (Wakefield) (Lab)
Dorries, Nadine (Mid-Bedfordshire) (Con)
Duddridge, James (Rochford and Southend, East) (Con)
Gauke, Mr. David (South-West Hertfordshire) (Con)
Heald, Mr. Oliver (North-East Hertfordshire) (Con)
Hollobone, Mr. Philip (Kettering) (Con)
Kelly, Ruth (Bolton, West) (Lab)
McGovern, Mr. Jim (Dundee, West) (Lab)
Marsden, Mr. Gordon (Blackpool, South) (Lab)
Pugh, Dr. John (Southport) (LD)
Soulsby, Sir Peter (Leicester, South) (Lab)
Stewart, Ian (Eccles) (Lab)
Timms, Mr. Stephen (Financial Secretary to the Treasury)
Adrian Jenner, Committee Clerk
† attended the Committee

Fifth Delegated Legislation Committee

Tuesday 8 December 2009

[Mr. Martyn Jones in the Chair]

Draft Corporation Tax (Exclusion from Short-Term Loan Relationships) Regulations 2009

4.30 pm
The Financial Secretary to the Treasury (Mr. Stephen Timms): I beg to move,
That the Committee has considered the Draft Corporation Tax (Exclusion from Short-Term Loan Relationships) Regulations 2009.
Mr. Jones, I bid you a warm welcome. It is a pleasure to serve under your chairmanship. The regulations relate to the worldwide debt cap introduced in this year’s Finance Act to reform taxation of foreign profits, a measure welcomed widely in the House and elsewhere.
The debt cap restricts how much relief UK companies in a group may claim for interest payments where their financing costs exceed the financing costs of the worldwide group as a whole. In particular, it targets situations where UK companies have borrowed money from their overseas subsidiaries in so-called upstream loans, often to take advantage of generous interest relief rules in the UK tax system rather than for any real business purpose.
It was made clear in consultation, however, that UK companies may well borrow from their subsidiaries for genuine commercial reasons. Cash pooling is one particular example: a subsidiary might lend surplus funds to a parent company so that the pooled funds can be placed on short-term deposit at the most advantageous rate. We certainly have no intention to penalise groups with short-term arrangements of that kind, so where interest on short-term debt is paid between group companies, the main debt cap rules allow payer and recipient to make a joint election, and the interest is ignored for debt cap purposes.
“Short-term” means loans or debts to be settled within 12 months, but without some further provision, it would be fairly easy for groups to get around the debt cap by disguising what are actually long-term structural borrowings as short-term debt. That is where the regulations come in. They protect the Exchequer by providing for two scenarios to be excluded from qualifying as short-term debt. The first scenario is one in which the debt serves a long-term funding purpose. The regulations contain an anti-avoidance provision to ensure that where short-term loans are continually rolled over with the main purpose of bringing the funding arrangements into the short-term debt exclusion, the arrangement is treated as long-term.
The second scenario is one in which two companies have a running account, like an overdraft facility, where the borrower may draw down amounts and make repayments at will. That is perfectly normal, but it might give rise to uncertainty as strictly, each individual advance is a separate loan. The regulations will resolve the uncertainty by providing that the facility as a whole is considered rather than the individual advances. If the facility as a whole lasts for more than 12 months, companies cannot claim that individual advances are short-term loan relationships.
The regulations were published in draft for comment in June. Their final form reflects comments received from businesses and advisers. If approved by the Committee, the regulations will come into force on 1 January 2010—the start date for the debt cap legislation as a whole. I commend the regulations to the Committee.
4.33 pm
Mr. David Gauke (South-West Hertfordshire) (Con): It is a great pleasure to serve under your chairmanship, Mr. Jones. As the Minister said, the regulations relate to schedule 15 to the Finance Act 2009, which imposes a worldwide debt cap to restrict interest relief as part of the overall foreign profits package. The principle of the worldwide debt cap is to restrict financing costs within a worldwide group by reference to the group’s external financing costs.
As the Minister said, however, amounts in respect of short-term loan relationships are excluded from financing costs for those purposes. The purpose of the regulations is to set out an exclusion from the exclusion. Arrangements for a long-term funding purpose or as part of a long-term aggregated loan arrangement will not be treated as a short-term loan relationship for the purposes of paragraph 62 of schedule 15. Therefore, financing costs will count towards the debt cap.
I have one or two questions about the regulations. First, the regulations state that, if it is made for a long-term funding purpose, “any part or all” of the finance arrangement will be excluded from paragraph 62. I want to put one scenario to the Minister. If two group companies enter into a series of short-term loan arrangements, but one of those short-term loans falls within the definition set out in regulations 3 and 4, will all short-term loans between these two entities fall within the exclusion of the definition of short-term loan relationships? In other words, if there is one loan arrangement that fits within the definition contained in these regulations, does it contaminate all arrangements between those two parties? I think that that depends on the definition of “arrangement” in the regulations. However, if the Minister can provide some clarity on that point, it would be helpful.
The Minister outlined two scenarios in the regulations, and there is a purposive test if they are to fall within the long-term funding exclusion. In other words, one of the main purposes of the arrangements is to characterise a loan relationship as a short-term loan relationship. There is not a similar purposive test for long-term aggregated loan relationships. Can the Minister explain why a purposive test is necessary in one scenario but not in the other? I suspect that there is no particular problem and that there is a certain logic at work, but it would be helpful if the Minister could just explain the thinking.
Paragraph 62 of schedule 15 always envisaged that the Treasury would be able to amend the definition of “short-term loan relationships”. However, given that the relevant legislation was passed only a few months ago and, as the Minister has said, it could be fairly easy to abuse the exclusion for short-term loan relationships, why were the measures not included in the primary legislation?
The Minister said that the debt cap was widely welcomed—and it would be fair to say that the reforms to the treatment of foreign profits were, by and large, welcomed—but reservations were expressed about the worldwide debt cap. There were concerns that these measures were being rushed through. The report by the House of Lords Economic Affairs Committee on the Finance Act 2009 stated:
“Throughout the...consultations on Foreign Profits reform the CBI expressed concern that there was insufficient time to cover both Dividend Exemption and a Debt Cap in such a way as to have properly worked up legislation in the Finance Bill when laid before Parliament.”
The CBI told the Economic Affairs Committee:
“Unfortunately, events have proved our concerns to be well founded.”
I appreciate that there a number of reforms and amendments were made in Committee to the Finance Act 2009, which the Minister debated with my hon. Friend the Member for Fareham (Mr. Hoban). However, there was a concern that some of the proposals were somewhat rushed. Does that explain why these measures were not included in the primary legislation? I also want to ask the Minister a wider question in relation to the debt cap. There is an argument for delay, as the House of Lords Economic Affairs Committee expressed concerns about the debt cap in its report. It highlighted the fact that although the debt cap rules are related to the dividend exemption rules, the latter rules were put in place on 1 July, while the debt cap rules are not due to be put in place until 1 January, so there has already been a break. The Committee said:
“It seems to us that it would not be serious if the implementation of the debt cap rules were to be delayed by a further few months if there are issues that cannot be resolved during the passage of this year’s Bill.”
The Minister will doubtless say that all those issues were resolved during the passage of the Finance Bill, but is he satisfied that some of the concerns about the complexity of the debt cap have been addressed?
As a consequence of the debt cap rules, there are wider concerns about the move away from the arm’s length principle and a UK company’s taxable profits being heavily influenced by transactions entered into elsewhere in the worldwide group. I do not intend to reopen all those issues, but I would be grateful if the Minister updated the Committee more generally on progress in this area and on whether major concerns remain about the operation of the debt cap.
Finally, we all recognise the need to restrict interest relief, given the dividend exemption, but is not the long-term solution to move towards a purely territorial system, whereby tax relief is given only for expenses that relate to activity in the UK? What consideration has the Treasury given to moving towards such a system? Subject to satisfactory answers to those questions, my colleagues and I have no objections to the regulations. We would be grateful to know whether the Exchequer will save a particular sum as a consequence of the regulations, but we do not intend to oppose them.
4.42 pm
All that the regulations seem to do is closely define short-term loan relationships that are permitted exceptions, which is to be approved of, and long-term aggregated loan relationships. That is wholly in line with the intent of the law, whether we agree with it or not. The regulations also further define tax avoidance, and we clearly all agree with that. In so far as I can understand it, the rationale given by the Minister is satisfactory.
4.43 pm
James Duddridge (Rochford and Southend, East) (Con): I apologise for not raising this in an intervention, but will the Minister explain exactly what he means by fund pooling? Is he talking about an offset arrangement, whereby money stays in multiple jurisdictions and is offset with debt in other jurisdictions, or about another common arrangement, whereby money moves from several jurisdictions to another jurisdiction at the close of business to offset debt overnight, before being returned the next morning?
4.44 pm
Mr. Timms: I am grateful to all three hon. Gentlemen who have spoken, as they are broadly supportive of the regulations.
Let me comment first on the two questions from the hon. Member for South-West Hertfordshire. First, where one specific transaction is caught, does that taint the others? The answer is no, it does not. Each financing facility between the companies is treated as separate. If there is an inter-company account, all advances under that account are aggregated, but if the companies have a separate short-term loan, it is not tainted.
Why is there a main purpose test in the first instance but not in the second? As I have said, aggregate loan relationships are similar to an overdraft operating between the two group companies. Those are standard arrangements and well understood, so an anti-avoidance main purpose test is not necessary. Why did we not do that in the original legislation? Where new tax rules are introduced for the Finance Bill, it is common to set out the overall structure and for points of detail to be set out in secondary legislation. That is what we are doing here; it is standard procedure.
I am satisfied that the issues have been addressed. There is a need to press forward with the package, so that businesses can be certain what the tax requirements are, rather than things being delayed until absolute perfection has been achieved. The main issues have been addressed, but that does not mean that no one has any concerns—some people clearly feel that they are somewhat less well off under the new arrangement than they were under the old one. However, as the hon. Gentleman acknowledged, the dividend exemption has been widely welcomed.
The hon. Member for Rochford and Southend, East asked about cash pooling, which is where a group of companies pool their cash at the close of business. It is usual for such pools to be placed in overnight deposits with a bank, so as to maximise interest income to the group. We would not wish people to be disadvantaged by provisions such as the debt cap in either of the scenarios that the hon. Gentleman described, and the regulations therefore safeguard that position. I am grateful to the Committee for its support.
Question put and agreed to.
4.48 pm
Committee rose.
 
Contents

House of Commons home page Parliament home page House of Lords home page search page enquiries ordering index


©Parliamentary copyright 2009
Prepared 9 December 2009