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Session 2009 - 10
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Public Bill Committee Debates



The Committee consisted of the following Members:

Chairman: Mr. Clive Betts
Browne, Mr. Jeremy (Taunton) (LD)
Buck, Ms Karen (Regent's Park and Kensington, North) (Lab)
Cable, Dr. Vincent (Twickenham) (LD)
Cruddas, Jon (Dagenham) (Lab)
Duddridge, James (Rochford and Southend, East) (Con)
Gauke, Mr. David (South-West Hertfordshire) (Con)
Havard, Mr. Dai (Merthyr Tydfil and Rhymney) (Lab)
James, Mrs. Siân C. (Swansea, East) (Lab)
Lilley, Mr. Peter (Hitchin and Harpenden) (Con)
Mudie, Mr. George (Leeds, East) (Lab)
Murphy, Mr. Denis (Wansbeck) (Lab)
Seabeck, Alison (Plymouth, Devonport) (Lab)
Soames, Mr. Nicholas (Mid-Sussex) (Con)
Southworth, Helen (Warrington, South) (Lab)
Timms, Mr. Stephen (Financial Secretary to the Treasury)
Tredinnick, David (Bosworth) (Con)
Ben Williams, Committee Clerk
† attended the Committee

Seventh Delegated Legislation Committee

Wednesday 2 December 2009

[Mr. Clive Betts in the Chair]

Draft Distributions (Excluded Companies) Regulations 2009
2.30 pm
The Financial Secretary to the Treasury (Mr. Stephen Timms): I beg to move,
That the Committee has considered the draft Distributions (Excluded Companies) Regulations 2009.
The Chairman: With this it will be convenient to consider the draft Tax Credits (Excluded Companies) Regulations 2009.
Mr. Timms: I bid you a warm welcome to the Chair of the Committee, Mr. Betts. I think that it is the first time that I have served under your chairmanship, and I am delighted to be doing so, as I am sure every member of the Committee is.
The two sets of regulations build on the personal and corporate dividend tax reforms completed in the Finance Act 2009. I shall briefly outline the context before explaining what the regulations do.
First, on personal dividend tax reform, in the past couple of years we have extended the dividend tax credit to investors receiving dividends from foreign companies. The extension was not unconditional. The purpose of the dividend tax credit is to compensate for tax already paid at the company level through corporation tax. However, some foreign tax regimes do not levy taxes on profits, and for those regimes the extension of the tax credit is not justified.
The Finance Act 2009 put into place a qualifying condition under which dividends from countries that have conventional corporate tax structures will qualify for the credit. Some countries that have a headline tax of a significant level may nevertheless have niche regimes in which some companies do not pay tax. Companies that take advantage of those niche regimes pay little or no corporation tax, so there is no justification for extending the dividend tax credit to dividends from them.
The legislation includes regulatory powers that allow us to deny the tax credit to dividends from certain types of company, even though the territory in which the company is located would normally meet the qualifying condition. The regulations setting out company types that will be denied the tax credit are the draft Tax Credits (Excluded Companies) Regulations 2009.
The company types specified in the regulations are those that are excluded from the benefits of our double tax agreement with the relevant territory. They are commonly used for tax avoidance purposes. Dividends from other types of company resident in those territories—ordinary trading and manufacturing companies—will still be eligible for the tax credit.
Secondly, on corporate dividend tax reform, the Government announced in the 2009 Budget that the dividend exemption previously proposed only for medium-sized and large companies would also be extended to small companies. We need to ensure that the rules for small company exemptions are aligned with those for the personal dividend tax credit, so that incorporated and unincorporated small businesses will be treated consistently with each other. For that reason, the draft Distributions (Excluded Companies) Regulations 2009 amend the scope of dividend exemption for small companies in exactly the same way as I have described for the personal dividend tax credit.
It might reassure the Committee to know that the proposed regulations have been published on Her Majesty’s Revenue and Customs website since 16 June, in the case of the tax credit regulations, and since 5 June in the case of the exemption regulations. In neither case has there been any negative comment.
2.33 pm
Mr. David Gauke (South-West Hertfordshire) (Con): It is a great pleasure to serve under your chairmanship, Mr. Betts. Like the Financial Secretary, I think that this is the first time I have served under your chairmanship, although I suppose that that is not entirely a coincidence, given that the right hon. Gentleman and I tend to attend the same statutory instrument Committees.
Most of my remarks will relate, as did the Financial Secretary’s, to the personal dividend tax credit and the draft Tax Credits (Excluded Companies) Regulations 2009. The other regulations to a large extent follow as a consequence. As the Financial Secretary said, from 22 April, an individual who owns a 10 per cent. or greater shareholding in a non-UK resident company and is in receipt of dividends will be entitled to a dividend tax credit if the dividend-paying company is a resident of a qualifying territory. Section 397BA of the Income Tax (Trading and Other Income) Act 2005 defines “qualifying territory” and gives the Treasury the power to designate a territory as non-qualifying, even if it is covered by the definition. That was debated during the Committee stage of the Finance Act 2009, when my hon. Friend the Member for Fareham (Mr. Hoban) raised some concerns with the Economic Secretary, one of which was the possible uncertainty faced by an individual with an investment in a qualifying territory, because that territory’s status might change and the investment would no longer qualify. I would be grateful if the Financial Secretary could respond to that.
When my hon. Friend raised that concern on 11 June 2009, the Economic Secretary’s response was that the Treasury would make use of its powers to amend the definition of “qualifying territory” only in exceptional circumstances. Let me quote him directly:
“The Government do not intend to exercise the power unless exceptional circumstances arise in which there is a substantial risk of loss to the Exchequer, and any changes would be subject to the affirmative procedure.”
Another feature of the debate on 11 June was discussion of the unusual starting date for the implementation of the new regime. That date was 22 April, as opposed to the beginning of the tax year on 6 April, for the reason that this year’s Budget was unusually late. However, my hon. Friend the Member for Fareham again raised the point that the 2008 Budget note stated that the extension for the shareholdings of foreign companies of 10 per cent. or more would be made effective from 6 April 2009. As it transpired—I think there were good reasons for this—the new regime did not come into effect until 22 April. There was, however, a concern that some individuals might have relied on the Budget note and suffered detrimentally as a consequence. The Economic Secretary said that if some individuals had relied on the Budget note to determine their tax affairs,
“HMRC would examine any hard cases on their individual merits”.——[Official Report, Finance Public Bill Committee, 11 June 2009; c. 322-24.]
I would be grateful to know whether any such circumstances have materialised and, if so, what HMRC’s response was.
Finally, the regulations relate to the overall treatment of foreign profits, which is a hugely important issue for a number of multinationals and for attracting businesses to the UK. Although the participation exemption has been broadly welcomed, the Minister will be well aware of concerns about controlled foreign companies. I am sure that he is conscious that the matter has not gone away. I detect a continued unease in a number of multinational businesses as to where the UK is going in this area. Businesses such as WPP and Shire left the UK some months ago because of such concerns. Can the Minister say anything to the Committee today that might provide further information as to where the Government are going, or give us a general update on the issues relating to the taxation of foreign profits?
Subject to those points—they relate principally to one set of regulations rather than the other—we have no objection to the regulations. They appear to represent a tidying-up exercise on a very technical matter. However, it will help the Committee if the Minister can shed some light on my questions.
2.42 pm
Mr. Jeremy Browne (Taunton) (LD): May I be the third Member to express considerable pleasure at serving under your chairmanship, Mr. Betts? I do not wish to detain the Committee for long because, as we just heard, the regulations appear to be fairly uncontroversial.
I want to ask a few questions, however, because when one is not in government, it is always difficult to get a sense of how much scope measures have and how many individuals or companies will be affected. In particular, I was interested to know what constitutes a “qualifying territory”, as designated by the Treasury. The explanatory note to the tax credits regulations says:
“Section 397BA defines ‘qualifying territory’ and...gives the Treasury power to...designate a territory as...non-qualifying”.
However, at no point, unless I have to refer to another document, is there any sense of what those territories are by name, or which territories the Treasury is minded to reclassify as it sees fit. Obviously, the number of affected territories is relevant to our considerations.
I will also be interested to learn how many companies will be affected by the regulations. Again, the scale of the impact of the measures is relevant.
Finally, I must ask the question that hangs over everything that we consider: what are the revenue implications? I realise that that is a matter of prediction, but are we talking about millions, tens of millions or hundreds of millions? I appreciate that the answer would not make us any more or less minded to support the statutory instruments, perhaps because in principle they are good policy to bring before the House. Nevertheless, it would be helpful if the Committee could have a sense of the financial scale of the proposals.
2.44 pm
Mr. Timms: I am grateful to the hon. Members for South-West Hertfordshire and for Taunton for their general support for our proposals.
Let me first pick up the point made by the hon. Member for South-West Hertfordshire about the importance of the arrangements for foreign profits taxation to UK competitiveness. I completely agree with his point. As he said, the dividend exemption that we have introduced has been widely welcomed, including by Conservative Members, and I am grateful for that support.
The hon. Gentleman is also right that proposals on controlled foreign companies are eagerly awaited. Our proposed next step is to publish a consultation document by the end of the year—I anticipate that it will be brought out not before the pre-Budget report, but shortly afterwards—so that people will be able to see the direction of our thinking for the next stage of what he rightly says is an important exercise.
The hon. Gentleman rightly made the point that the regulations were implemented from Budget day— 22 April. On the question of the minority shareholder definition and how people will know whether they own more or less than 10 per cent. of a class of share, the great majority of shareholders own ordinary shares and so do not have to worry about the change. Only investors who own a large quantity of non-standard shares, such as preference shares, will need to consider the class-of-share rule. Normally investors can be expected to know whether they own more than 10 per cent. of a class; if they do not, the information is readily available from company accounts. The regulations exclude certain company types that are located in qualifying territories that are excluded from the terms of the relevant double tax treaty. Such types of company can be exploited for avoidance purposes.
I do not think that any circumstances giving rise to a detriment have arisen as a result of the start date of 22 April. I was asked how much revenue was at risk, but I do not have a figure. The regulations are designed to deter avoidance, but it is difficult to estimate what the likely avoidance would be in the absence of such regulations. All I can say is that we think that the risk is significant and something that needs to be addressed, which is what we are doing.
We always intended to deal with this aspect of the process through regulations, because that approach gives us flexibility. If other countries change their tax regimes, we will not have to change primary legislation.
Mr. Gauke: The Minister’s colleague, the Economic Secretary, stated that the provision would be used only in exceptional circumstances. These circumstances do not appear to be exceptional, but something that could have been predicted. Perhaps there is a need to clarify what was previously said about how such an approach was meant to be used.
Mr. Timms: Unfortunately, I did not have the opportunity before our sitting to look at the earlier debate. However, I shall endeavour to respond to the hon. Gentleman’s question in a moment.
The hon. Member for Taunton also asked about the extent or impact of the regulations. Only a handful of people will be affected by the personal dividend tax credit regulations. As I have indicated, it is difficult to say how many companies will be affected, but they are the kind of companies to which I referred a moment ago.
During the Committee stage of this year’s Finance Bill, my hon. Friend the Economic Secretary referred to the exclusion of other territories rather than company types, which is what we are dealing with in these measures. I am grateful for the support of Opposition Members and I commend the regulations to the Committee.
Question put and agreed to.

draft tax credits (excluded companies) Regulations 2009

Resolved,
That the Committee has considered the draft Tax Credits (Excluded Companies) Regulations 2009.—(Mr. Timms.)
2.51 pm
Committee rose.
 
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