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Session 2009 - 10
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Taxation (International and other provisions



The Committee consisted of the following Members:

Chairman: Mr. Gary Streeter
Ainsworth, Mr. Peter (East Surrey) (Con)
Allen, Mr. Graham (Nottingham, North) (Lab)
Bacon, Mr. Richard (South Norfolk) (Con)
Burt, Lorely (Solihull) (LD)
Cable, Dr. Vincent (Twickenham) (LD)
Devine, Mr. Jim (Livingston) (Lab)
Flynn, Paul (Newport, West) (Lab)
Gauke, Mr. David (South-West Hertfordshire) (Con)
McCarthy, Kerry (Bristol, East) (Lab)
Murphy, Mr. Paul (Torfaen) (Lab)
Newmark, Mr. Brooks (Braintree) (Con)
Prentice, Mr. Gordon (Pendle) (Lab)
Reid, John (Airdrie and Shotts) (Lab)
Ruane, Chris (Vale of Clwyd) (Lab)
Smith, Chloe (Norwich, North) (Con)
Timms, Mr. Stephen (Financial Secretary to the Treasury)
Gosia McBride, Committee Clerk
† attended the Committee

Second Reading Committee

Tuesday 15 December 2009

[Mr. Gary Streeter in the Chair]

Taxation (International and Other Provisions) Bill
4.30 pm
The Financial Secretary to the Treasury (Mr. Stephen Timms):
I beg to move,
That the Committee recommends that the Taxation (International and Other Provisions) Bill ought to be read a Second time.
I bid you, Mr. Streeter, a warm—rhetorically if not physically—welcome, as Chair of our proceedings. I know that you will apply your customarily fair and firm approach to our discussion.
The Bill includes provisions with an international theme covering double taxation relief, transfer pricing, advance pricing agreements, and tax arbitrage. It relocates and, where appropriate, rewrites provisions that would otherwise have been left unhelpfully in an Income and Corporation Taxes Act or a Finance Act. It is the seventh and final Bill produced by Her Majesty’s Revenue and Customs tax law rewrite project. As with previous Bills produced by the project, it continues to modernise direct tax legislation so that it is clearer and easier to use.
The project was set up—as we debated this morning—in 1996 by the then Chancellor, the right hon. and learned Member for Rushcliffe (Mr. Clarke), to rewrite the UK’s direct tax code following a defeat of the then Government in a vote in a Finance Bill Committee, of which I was a member. From the outset, it has enjoyed cross-party support. Its aim is to make legislation clearer and easier to apply without changing the meaning of the law, except in very minor and agreed ways.
The first of the project’s Bills became the Capital Allowances Act 2001, and three Income Tax Acts followed between 2003 and 2007. Last year, it produced the Corporation Tax Bill, which became the Corporation Tax Act 2009, and a further and final Corporation Tax Bill had its Second Reading this morning, and was debated by the hon. Member for South-West Hertfordshire and me. In addition, during its work on primary legislation the project has rewritten the pay-as-you-earn regulations to meet requests from users and representative bodies.
The project’s work has been widely welcomed. Changes in tax policy are outside its scope, and will always be matters for a Finance Bill, but its work encompasses minor changes, such as removing ambiguities or minor anomalies. Fifteen such minor changes are made in the Bill, none of which are expected in practice to change the amount of tax that anyone must pay.
The strategy for the project was set by an independent steering committee, appointed by Ministers, and chaired initially by Lord Howe, and currently by Lord Newton of Braintree, the predecessor of the hon. Member for Braintree whom I am pleased to see in his place this afternoon. I express my thanks particularly to Lord Newton, which is appropriate as this is the final Bill that the project will produce. Members of the committee come from both Houses of Parliament, the judiciary, the legal and accountancy professions, business and consumer groups.
A consultative committee, which draws its members from tax and business representative bodies, ensures continuous and detailed consultation on the draft provisions. The consultation process is lengthy and thorough, and it goes through a number of iterations. We are extremely grateful to all those who have contributed to the consultation on the Bill.
Paul Flynn (Newport, West) (Lab): I welcome the Government’s attempt to introduce greater clarity into legislation. Will the Minister enlighten me about page 113 of the explanatory memorandum to the Bill, which states that sections 614BG to 614 BK
“achieve their purpose by requiring running totals to be kept of aggregate differences between accountancy rental earnings and the normal rents. Any aggregate excess of accountancy rental earnings over normal rents arising in past periods can then be set against any current excess of normal rents over accountancy rental earnings. Conversely, any aggregate excess of normal rents over accountancy rental earnings arising in past periods can be set against any current excess of accountancy rental earnings over normal rents.”
What does that mean?
Mr. Timms: My hon. Friend should have seen it before it was rewritten. Of course, in rewriting legislation one cannot entirely avoid a degree of complexity, but I assure him that the rewritten legislation under discussion is a great deal clearer and easier to use. I confess that the section he quotes is not familiar to me—unlike many of the others, I hastily add.
Moving quickly on, the Bill has two central themes. First, it rewrites and groups together a number of provisions dealing with international tax matters. Secondly, to help those who are using it, it rewrites and relocates provisions that would have been left behind, unhelpfully, in the Income and Corporation Taxes Act 1988 or one of the Finance Acts. In rewriting the international provisions, the Bill, unlike previous rewrite Bills, does not separate them for income tax and corporation tax purposes. That approach was agreed in consultation with users represented by the independent committees that oversee and support the work of the project.
No minor change in the law is included in the Bill unless it has been approved by both the project’s committees. Responses to consultation papers and to the draft Bill were detailed in published response documents that set out how the project took them into account. The draft Bill for consultation was published in March 2009. A response document was published in August, together with an updated version of the Bill, reflecting not only the changes made as a result of the consultation but also changes and new provisions arising from the Finance Act 2009. In addition, the project published papers and draft clauses that had not been included in the draft Bill, so that they, too, had the benefit of detailed consultation.
As was said in the debate this morning, some tax professionals familiar with the old legislation will no doubt find that this new legislation will take a little getting used to, including the section to which my hon. Friend the Member for Newport, West has just referred. But companies, lay people and those starting out on a professional tax career will find this new legislation a good deal clearer and easier to use than the old.
I commend the Bill to the Committee.
4.37 pm
Mr. David Gauke (South-West Hertfordshire) (Con): Thank you, Mr. Streeter, it is a great pleasure to serve under your chairmanship.
As the Financial Secretary has rightly stated, this is not the first time that we have debated a Bill that has resulted from the tax law rewrite process: we did so in respect of the Corporation Tax Act 2009 on Second Reading on 15 January and on Third Reading on 3 March, and we debated the Second Reading of the Corporation Tax Bill this morning. Rather than deliver a full speech, I am tempted simply to say that I refer the Committee to the speech that I gave some hours ago. [Hon. Members: “Hear, hear.”] Tempted, but not that tempted.
Given the Minister’s assurances, following the intervention by the hon. Member for Newport, West, that he was by and large familiar with all the technical provisions contained in the Bill, I was also tempted to throw some 30 or 40 other examples at him. However, I am so confident that he would be able to deal with them all that I will not pursue that route.
I put on the record again my thanks to those involved in both the steering committee and the consultative committee, and all the various consultees, for progressing this matter and for their high level of involvement in what is clearly a significant task. However, the Bill pales into insignificance when compared with some of those we have debated already—it is only 382 clauses long, compared with the Corporation Tax Bills, which were in excess of 1,000 clauses.
I have no intention of running through the arguments I have made on previous occasions, on how the tax law rewrite process is good as far as it goes but does not get to grips with some of the complexity in the substance of tax law. Also, the mechanism involved in bringing together the tax professions and HMRC officials to work to address some of the complexity in the language could be built upon to address complexity in substance, and an office of tax simplification would address that—the Financial Secretary and I had that argument this morning. However, I will take the opportunity to ask him about another point that I raised this morning—I have a feeling he might be able to oblige the Committee with an answer—on the overall cost of the tax law rewrite process for the seven Bills. We are not yet at the end, but it is in sight, so perhaps it would help the Committee to have some guidance on that.
My second point is that the Bill relates to the international aspects of tax law, which is highly important in a globalised world. The Financial Secretary will recall vividly that several companies declared that they would relocate out of the UK during 2008, in part as a general response to concerns about tax complexity and uncertainty. Specifically, there were concerns about the Government’s consultation on the taxation of foreign profits. Since then, there have been some changes in the process, which has provided some reassurance, but concerns remain about where the Government are going with regard to controlled foreign companies. He and I debated that issue recently in a separate forum, and he anticipated that the further consultation on controlled foreign companies would be published by the end of the year. I would be grateful if he updated the Committee on that.
More widely, the Bill relates to international taxation, so I would be grateful if the Financial Secretary provided an indication on the Government’s thinking on moving towards a more territorial system. We debated that recently as well, and I think that he is sympathetic to that approach. We have certainly received representations suggesting that, were we to move to a purely territorial system whereby the interest costs relating to activities undertaken overseas were no longer deductible for tax purposes, that would result in a considerable revenue benefit to the Exchequer. Were that to be recycled into a cut in corporation tax, there would be the potential for a substantial reduction in the corporation tax rate. That point was made to the House of Lords Economic Affairs Committee in its report on the Finance Bill in 2009, and it is certainly worth exploring carefully. I would be grateful to know the extent to which the Government are reviewing that proposal and whether there will be an opportunity to reduce substantially the corporation tax rate.
Finally, I am afraid that I have a somewhat formulaic and traditional question relating to the Henry VIII provisions included from clause 375 onwards, which set out circumstances in which the Government may amend primary legislation by regulation. That point was highlighted by HMRC to the House of Lords Select Committee on Delegated Powers and Regulatory Reform. As far as I can see, the usual restrictions on those powers apply. However, it would be helpful if the Minister restated that to the Committee.
Subject to those comments, we welcome the greater clarity. However, as the hon. Member for Newport, West demonstrated, clarity in tax law is a relative concept. We believe that the progress in addressing the language could be extended to address the substance as well.
4.45 pm
Lorely Burt (Solihull) (LD): I welcome your wise guidance on the Bill, Mr. Streeter. There is certainly enough of it. As I prepared for the Committee, I looked up in Hansard the discussion on the corporation tax side of the Bill. A discussion ensued on whether it was the longest Bill in parliamentary history. I always thought that the Companies Bill, of which I am a veteran, was the longest Bill in history. The Committee stage of that Bill took six weeks. I am relieved that this Committee’s discussions are not expected to go on for that long, as the Bill is a rewrite. It contains no major new legislation, although the Minister has implied that there are some minor new provisions.
It is a shame that we are not discussing new provisions that would make our tax system fairer and simpler. For example, it would be fair to introduce legislation on international taxation to make non-doms pay capital gains tax on the property and other assets that they buy and sell. We could also close the loophole that allows individuals to move their houses offshore for tax purposes and pay only 0.5 per cent. stamp duty. Those are two examples of the type of loophole closure that, as the hon. Member for South-West Hertfordshire said, through increasing revenue would allow us to reduce corporation tax. I applaud such an aim.
It is a shame that the Bill is not shorter. It seems to me that the tax rules are too long and complex. The hon. Member for Newport, West used a beautiful example to show that although the Bill purports to use much simpler language, its meaning is beyond many. I did not understand the meaning of the example he read out. I have just one question for the Minister. We support any measure that puts all the relevant legislation together in one place, as the Companies Bill did. Will he say when the Government intend to make tax law in this area simpler and fairer?
4.49 pm
Mr. Timms: I am grateful to both hon. Members who have spoken for their support for the Bill.
I reassure the hon. Member for Solihull that we are making the tax system fairer and closing loopholes. We are currently undertaking a number of tax simplification reviews, although I accept that we are not dealing with any of that this afternoon. We are rewriting the legislation with a particular brief that was set out when the project was initiated in the mid-1990s. She might be heartened to know that the recent World Bank report, “Paying Taxes 2010”, designates the UK as No. 1 in Europe for ease of paying taxes. Therefore, some encouragement is to be derived from the comparisons that the World Bank has made between Britain and other countries.
I want to respond to the points raised by the hon. Member for South-West Hertfordshire. First, he made a point about the powers in this Bill. As he said, we had an exchange about that issue during our consideration of the Corporation Tax Bill this morning. The powers, which are in clauses 375 to 377, are of the same sort that we have seen in previous tax law rewrite Acts. They enable consequential amendments to be made when they have been overlooked; they provide for errors in the Act to be corrected; and they enable transitional or saving provision to be made without recourse to a Finance Bill.
As before, the powers cannot be used to change the law in relation to periods before the Bill comes into force. The powers to make consequential provision and to correct errors are also time limited. I can confirm that, as before, these powers will not be used unless the tax law rewrite project’s consultative and steering committees both agree. The committees will remain in existence for that purpose even though the project will come to an end in March 2010.
The hon. Gentleman also asked me how much that project has cost since 1996. The answer is that the total cost in producing the seven rewrite Acts, plus the PAYE regulations, over a period of almost 14 years, has been approximately £37 million. That total is arrived at by adding up the impact assessment figures for each exercise.
For this particular measure, the cost is a relatively modest £0.8 million. As the hon. Gentleman said, that partly reflects the measure’s lesser length, in comparison with other measures. I think that it also reflects greater efficiency in the project. However, the benefits of this measure are estimated by those who use the legislation as being £1.6 million per year.
Quite properly, the hon. Gentleman asked a question about the proposed consultation on the controlled foreign company rules. I know that he and other members of his party have welcomed the dividend exemption that we introduced as stage 1 of the reform. That is certainly a move in a territorial direction for taxation.
The hon. Gentleman is quite right that I indicated not long ago that we hoped to publish before the end of the year the consultation on the controlled foreign companies regulatory reform. We will not now publish that consultation before the end of this calendar year, but we will publish it early in the new year. I think that it will produce a pretty clear indication of the direction that we will be taking in this area of policy, showing that we want the new rules to produce a better outcome for businesses than the current controlled foreign company rules have. Following working groups that have been held this year, it will set out how we propose to deal with the two most difficult areas, which are money and intellectual property. We are taking a little longer than we had originally planned, because we know how important those rules are and it is very important that we get the judgments in the document right.
The controlled foreign company process to date has involved and will continue to involve a lot of consultation with business. We have received positive feedback on the approach that we have taken and I hope and expect that there will be a positive response to the new document when it is published.
As before, the aim is to strike the right balance between enhancing UK competitiveness and providing sufficient protection for the UK tax base. Again, the new regime will move towards a more territorial approach, by more closely targeting artificial diversion of profits from the UK, and it is the potential to carry out that artificial diversion that is the reason for having rules. The rules cannot be abandoned, but I hope that we can achieve greater competitiveness and a benefit for business.
With those additional remarks, I commend the Bill to the Committee.
Question put and agreed to.
Resolved,
That the Committee recommends that the Taxation (International and Other Provisions) Bill ought to be read a Second time.
4.54 pm
Committee rose.
 
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