Draft Taxation of Regulatory Capital Securities Regulations 2013


The Committee consisted of the following Members:

Chair: Mr Charles Walker 

Aldous, Peter (Waveney) (Con) 

Dakin, Nic (Scunthorpe) (Lab) 

Field, Mr Frank (Birkenhead) (Lab) 

Field, Mark (Cities of London and Westminster) (Con) 

Godsiff, Mr Roger (Birmingham, Hall Green) (Lab) 

Hart, Simon (Carmarthen West and South Pembrokeshire) (Con) 

Hemming, John (Birmingham, Yardley) (LD) 

Jamieson, Cathy (Kilmarnock and Loudoun) (Lab/Co-op) 

Javid, Sajid (Financial Secretary to the Treasury)  

Jones, Mr Marcus (Nuneaton) (Con) 

McGuire, Mrs Anne (Stirling) (Lab) 

Pearce, Teresa (Erith and Thamesmead) (Lab) 

Robinson, Mr Geoffrey (Coventry North West) (Lab) 

Rudd, Amber (Hastings and Rye) (Con) 

Shannon, Jim (Strangford) (DUP) 

Stevenson, John (Carlisle) (Con) 

Stewart, Rory (Penrith and The Border) (Con) 

Williams, Roger (Brecon and Radnorshire) (LD) 

Matthew Hamlyn, Committee Clerk

† attended the Committee

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Second Delegated Legislation Committee 

Monday 16 December 2013  

[Mr Charles Walker in the Chair] 

Draft Taxation of Regulatory Capital Securities Regulations 2013

4.30 pm 

The Financial Secretary to the Treasury (Sajid Javid):  I beg to move, 

That the Committee has considered the draft Taxation of Regulatory Capital Securities Regulations 2013. 

It is a pleasure to serve under your chairmanship, Mr Walker. A number of changes have been made in the EU following the banking crisis to make banks more able to resist future financial crises. Basel III, which will be implemented via the capital requirements directive IV and the capital requirements regulation, has introduced many financial reform measures designed to increase the resilience of financial institutions. One such measure is the introduction of a new type of regulatory capital instrument, called additional tier 1. That instrument replaces the old innovative tier 1 instruments, and includes a number of features designed to increase loss-absorbing properties. In addition, tier 2 capital instruments are now required to contain similar features, to ensure that tier 2 is more loss absorbing if a bank finds itself in a position of financial stress. 

The old innovative tier 1 instruments and the tier 2 instruments have historically been treated for tax purposes as debts and, as a result, the coupon payment has been deductible for corporation tax purposes. The new additional tier 1 and tier 2 instruments include features that ensure compliance with the forthcoming EU capital requirements directive, which is known as CRD IV, relating to capital adequacy in the UK. The new regulatory requirements are designed to ensure that instruments better absorb losses and protect depositors and the taxpayer. The new requirements come into effect from 1 January 2014. 

The new instruments are subordinated, unsecured debt that forms a key part of financial institutions’ regulatory capital. The instruments strengthen the capital positions of financial institutions and facilitate onward lending to the wider economy. As a consequence of the new regulatory, prescribed features, neither instrument is a traditional debt or equity instrument, but instead a hybrid with features of both debt and equity. The tax treatment of additional tier 1 and tier 2 instruments under current rules is uncertain because existing tax law predates CRD IV and was not written with those types of instruments in mind. 

The Government are now exercising the powers provided by the Finance Act 2012 to make regulations to prescribe the tax treatments of the instruments now that CRD IV has been finalised. The regulations clarify that additional tier 1 and tier 2 regulatory capital securities will be taxed as debt, retaining the existing tax treatment for regulatory capital securities. The changes made by the regulations mean that the instruments will be treated

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for tax purposes as a debt instrument. For example, the coupon will not be prevented from being deductible in computing taxable profits. 

The changes will not apply if the loan forms part of a scheme or arrangement where the purpose or one of the main purposes of the scheme is the avoidance of tax. I emphasise that, consistent with long-standing rules that apply across the economy, capital raised in the form of shares will not be deductible for tax purposes, preserving the distinction between debt and equity for tax purposes. An exception to that is building societies. They must replace their existing tier 1 tax deductible permanent interest-bearing shares with additional tier 1 capital, which has to be in the form of deferred shares. 

The regulations clarify that additional tier 1 and tier 2 securities will continue to be subject to the existing and long-standing tax treatment for those types of regulatory capital. The legislation does nothing more or less than clarify what is already in place. We believe that position is fair and consistent and removes any uncertainty for issuers and investors that would otherwise negatively impact on an institution’s ability to issue new forms of better-quality capital. I ask the Committee to join me in supporting the regulations. 

4.35 pm 

Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op):  The Minister has carefully outlined the changes that the regulations will bring in. I do not intend to repeat all the information that is available in the explanatory memorandum, but I would like confirmation from him on a couple of points. He mentioned tax avoidance. The explanatory memorandum and the consultation that preceded the regulations, to which he has referred, said that the measure would not apply to a regulatory capital security if there are arrangements of which 

“the main of one of the main purposes is to obtain a tax advantage in respect of that security.” 

What measures are to be put in place to look at that and ensure there are no loopholes? If any emerge, how will they be filled? 

I understand that, when the consultation was first put out, there was some discussion about whether transitional provisions would be required, for example for any securities issue before the regulations come into force that would meet the definition of regulatory capital security. It would be helpful if the Minister could say whether he has had to look at that further and, given the time scales, whether any transitional provisions need to be brought forward. 

My final point is on the review of regulations, which the Opposition regularly raised in debates on the Finance Act 2012. I understand that, in this case, Her Majesty’s Revenue and Customs will monitor the instrument and ensure, as the explanatory memorandum states, that it operates as intended. That will form part of the review of AT1 and tier 2 securities in 2017. Can the Minister tell us whether there are any staging posts on the way to 2017 and what he intends to do to look at the matter in the meantime? 

We do not have any particular problems with the regulations. It seems sensible to deal with any potential ambiguities in the legislation and to minimise the scope for avoidance. We broadly support the regulations, but it would helpful if the Minister could answer my questions. 

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4.37 pm 

Sajid Javid:  I thank the hon. Lady for her broad support. On her specific questions, she has rightly identified that tax deductibility will not apply if HMRC believes that a scheme is designed for tax avoidance, as I have said. I am sure she will be familiar with cases in which HMRC has dealt with similar situations. HMRC has a methodology to identify such schemes. New legislation has already gone through on getting tax advisers to disclose schemes in advance. I do not think it would be proper for me to go into detail about HMRC’s work on that, but it is ensuring that enough compliance resources are applied. 

The rules come into effect from 1 January 2014 and I am not expecting to introduce other transitional provisions. I do not believe they are necessary. We anticipated such provisions but, as far as I am aware, they have not proved necessary. Banks have known for some time of the time scale—they have known since CRD IV was originally agreed by EU countries—so I do not anticipate any change in that situation. 

The hon. Lady has rightly identified that there will be a review of such capital instruments at some point in time, but that should not affect the tax deductibility or the tax treatment of the securities. If any future review led to a change, or demand for a change, by regulators in how securities absorb capital losses, it would not affect the principle embedded in the regulations, which is allowing tax deductibility for those types of securities generally. If a change were required in future because of a change in the types of securities—if a new type of

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similar regulatory capital security were introduced that is not contemplated today—the Treasury would introduce similar measures to allow tax deductibility. 

Mr Geoffrey Robinson (Coventry North West) (Lab):  Why in this case is it not necessary to consolidate this instrument? 

Sajid Javid:  I am not sure I exactly follow the hon. Gentleman’s question. Perhaps he could elaborate. In what sense is the instrument not consolidated? 

Mr Robinson:  It is not consolidated in the sense mentioned in the Minister’s documents, which state: 

“This instrument will not be consolidated.” 

Instruments normally are consolidated. This one affects capital taxation and regulations. This is why our taxation code gets so complicated. We need to consolidate and modify as more regulations are introduced. The question is why we are not consolidating in this case. It is a simple question. 

Sajid Javid:  If I have understood the hon. Gentleman’s question correctly, the answer is that, as the instrument is of a new type, consolidation will be looked at in secondary legislation. 

Question put and agreed to.  

4.41 pm 

Committee rose .  

Prepared 17th December 2013