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 years 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 2010the 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 groups 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 welcomedand it would be fair
to say that the reforms to the treatment of foreign profits were, by
and large, welcomedbut 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 years
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 arms length principle and a UK
companys 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
Dr.
John Pugh (Southport) (LD): In the spirit of consensus, I
will be brief because my party has no real objection to the
regulations. We could go right back to the issue of the debt cap and
controlled foreign company
legislation, as well as the whole issue of foreign dividends,
multinationals, tax avoidance and so on, and there is plenty in the
explanatory notes to tempt us in that direction. If we focus more
narrowly, however, the regulations are a simply requirement of schedule
15 to the Finance Act and a minor expansion of section 35. As such,
they are very narrow.
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 concernssome 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.
We must now
press on to secure the reform of the controlled foreign company rules,
and there is a lot of concern that we should not hang around with that.
I hope that we can publish material for consultation before
the end of the yearnot tomorrow, but it will be not long
afterwards. I agree with the hon. Gentleman that the territorial
principle is the right guide for the direction in which we should be
moving, and I hope that when we publish that consultation document, he
will see that that is reflected in our thinking on the controlled
foreign company rules. He knows as well as I dothere was some
coverage of this on the radio this morningthat people want to
see us make progress with reform quickly, just as we have done with the
debt cap.
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.