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 territoriesordinary trading
and manufacturing companieswill 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 Majestys 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 Secretarys, 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
territorys 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
Secretarys 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.
To
be fair, one could interpret those remarks as being in the context of a
territory ceasing to be qualified. The regulations are much more
limited, as they centre on the disapplication of the regime in certain
narrow circumstances in which a double taxation treaty would not apply.
Why, however, was such a measure not included in this years
Finance Bill? What has provoked the Government to
change a regime that was enacted only a few months ago? Does the
Minister have any particular circumstances in mind that need to be
addressedit would be helpful if he could shed some light on
that? Moreover, what are the potential revenue implications if the
regulations do not come into effect? The Economic Secretary stated that
the powers to amend the relevant section of ITTOIA would be used in
exceptional circumstances in which there would be a substantial risk of
loss to the Exchequer, but I am not awarealthough I am willing
to be persuadedthat those circumstances necessarily
apply.
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 years 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 transpiredI think there were good reasons for
thisthe 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 HMRCs 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 pointsthey relate principally to one set of
regulations rather than the otherwe 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 yearI anticipate that
it will be brought out not before the pre-Budget report, but shortly
afterwardsso 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.
Picking
up the question asked by the hon. Member for Taunton about qualifying
territories, the qualifying territory list follows the transfer pricing
rules, which are well understood by taxpayers. That point was discussed
during debates on previous legislation. Companies that
are excluded for the purposes of the draft regulations include those
established under the international business companies Acts of Antigua
and Barbados. Persons entitled to any special tax benefits under
various Cyprus enactments are excluded from benefiting from
treaty-reduced rates or exemption of UK tax on dividends, interest and
royalties. There are other examples covering Jamaica, Luxembourg,
Malaysia and Malta. In the case of Luxembourg, for example, excluded
companies are holding companies established under that countrys
1929 and 1937 Acts
[Interruption.] This is
illuminating. Companies are also excluded when there are double tax
treaties with non-discrimination articles. Our approach is consistent
with that set out in the Finance Act
2009.
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 Ministers 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. Gentlemans 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 years 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.