Clause 26 - Receipts cases

Finance Bill – in a Public Bill Committee am 4:30 pm ar 23 Mehefin 2005.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury 4:30, 23 Mehefin 2005

I beg to move amendment No. 36, in clause 26, page 24, line 6, leave out 'E' and insert 'G'.

Photo of Frank Cook Frank Cook Llafur, Stockton North

With this it will be convenient to discuss the following amendments: No. 38, in clause 26, page 24, line 22, after 'income', insert

', capital gain, or chargeable profits computed under section 747(3) of ICTA,'.

Government amendment No. 75

No. 39, in clause 26, page 24, line 38, leave out from 'company' to end of line 39 and insert

'in an accounting period within two years from the date on which the qualifying payment was made.'.

Government amendment No. 76

No. 40, in clause 26, page 24, line 41, leave out 'a corresponding' and insert 'an'.

No. 41, in clause 26, page 24, line 41, after 'period', insert

'ending within two years from the date on which the qualifying payment was made.'.

Government amendment No. 77

No. 42, in clause 26, page 24, line 41, leave out 'or'.

No. 43, in clause 26, page 24, line 45, after 'obligations)', insert ', and

(d) income or gains which are included within chargeable profits of a controlled foreign company and the company is subject to a charge in accordance with section 747(4)(a) of ICTA or is exempt from an apportionment under section 747(3) ICTA due to the company meeting the conditions of section 748(1)(a) ICTA.'.

No. 44, in clause 26, page 25, line 2, leave out 'benefit' and insert 'UK tax advantage'.

No. 45, in clause 26, page 25, line 3, at end insert—

'(10A) Condition F is that the main purpose of the scheme is to achieve a UK tax advantage for the company.

(10B) Condition G is that the amount of the UK tax advantage in question is more than a minimal amount'.

No. 37, in clause 27, page 25, line 24, leave out 'E' and insert 'G'.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

I shall deal with the group of amendments in three separate sub-groups, because they deal with three separate things.

Amendments Nos. 36, 37 and 45 seek to insert into clause 26 a motive test similar to the one that is already evident in clause 24. It is the same test, but a UK tax advantage is gained that is not minimal. I know that the Revenue's suggestion in the explanatory notes is   that that is unnecessary, because there will always be a tax advantage motive in receipts cases. Even if that were true, however, the Revenue could know that only by examining existing disclosed cases.

The suggestion is that the amendment would give the taxpayer another layer of protection, even if the motive test were satisfied in every case, but it would also futureproof the legislation. The Paymaster General told us today about terrible things that have been disclosed under the Finance Act 2004, which evidently were not known to the authorities before because the Revenue has had to rush to legislate to deal with them. It is rather drastic to say that everything that falls within the scope of clause 26 will necessarily always have a main purpose of gaining a UK tax advantage.

I therefore urge the Paymaster General both to futureproof the legislation and to avoid preventing newly developed structures that do not have a principal purpose of gaining a UK tax advantage from being caught by the legislation. I do not know what those structures might be, but we have a very innovative financial community, and it would be a brave person who said that, because this is an empty set at the moment, it will always remain empty.

Amendments Nos. 38 and 43 seek to prevent double counting and ensure an appropriate priority of application of the legislation, by providing that the rules do not apply where the receipt side of the transaction is already taxed as capital gain or under CFC—controlled foreign company—legislation. That would be done by inserting new subsection (9)(d), defining an additional class of non-qualifying payments.

Amendment No. 44 is a probing amendment and substitutes ''UK tax advantage'' for ''benefit'' in subsection (10), which is consistent with what we seek in amendments Nos. 36, 37 and 45. Can the Minister confirm what we are to understand by ''benefit'' in subsection (10), if it does not refer to UK tax advantage?

Amendments Nos. 39 and 42 seek to counter the requirement that to be outside the rules a receipt must be taxed in the year of deduction. There might be reasons why the taxation of a receipt takes place, for example, the following year. Unless the Paymaster General has a precise reason why, in order to prevent further avoidance, a rule should specify that the receipt must be taxed in the year of deduction, we propose a provision that allows the period to be extended by up to two years after the year of the assessment of the deduction. The important thing is that there should be a corresponding taxable receipt. Whether it comes in the same year or the following year is less important.

The Government amendments seem unexceptionable and even slightly beneficial in that, if I interpret them correctly, they narrow slightly the scope of the provisions.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 4:45, 23 Mehefin 2005

Clause 26 sets out the conditions that must apply before a receipt is caught by the provisions. There are five conditions, which result in   the provision having a much narrower application to receipts than to deductions. The Government have taken targeted action to tackle particular avoidance schemes that we have identified, so that we have direct and specific rules. That relates to a point that the hon. Gentleman raised in an earlier debate about why all legislation was not drafted in that way. As I told him then, the question is: what is the most appropriate way to deal with the disclosure before us?

The clause identifies payments that are allowable as a deduction for the payer which adds the capital value of the recipient, but which would not otherwise be taxable for the recipient. As with deductions, the rules will apply only where a notice has been issued to the company by HMRC. There is an overlap between the operation of those rules and those proposed in clause 39, on financial avoidance. The Government are not necessarily concerned if a transaction is caught by more than one piece of anti-avoidance legislation. To paraphrase Oscar Wilde, to be caught by one anti-avoidance rule might be looked on as a misfortune; to be caught by two looks like carelessness.

However, the Government also recognise that the existence of a double charge to remedy the avoidance is inappropriate where one charge can be eliminated without putting the other at risk. The elimination of the arbitrage charge where there was already a charge under the financial avoidance legislation was made clear in the statements published when the legislation took effect. However, there is a difference between the two sets of rules, both in method and in terms of the person on whom the charge can fall.

The Government amendments ensure that that difference is correctly identified by the legislation, and that no charge will arise under the arbitrage rules if the financial avoidance rules are in point. Business has asked for certainty on this matter, and the amendments provide that.

There are 10 Opposition amendments, all of which would amend or add to the conditions that need to be met for the receipts part of the provision to apply. Amendments Nos. 36, 37, 44 and 45 seek to amend condition E, and to add new conditions F and G. The overall aim is to introduce a main purpose test into clause 26. We have already discussed the purpose-based provisions relating to deductions, but the Government do not consider that any purpose test is needed or appropriate in the context of the receipts rules. In the narrow circumstances set out in the clause, it is appropriate that the receipt should be taxed in the normal way. The receipts rules will apply in similar situations as the financial avoidance rules, where a UK company receives shares on deferred payment terms. The company acquiring the shares pays more to compensate the UK company for the late payment.

In that situation, it is right that the UK company receiving the additional amount should be taxed to reflect its receipt or compensation for the late payment. There is no need for a purpose test. As with the financial avoidance rules, the legislation identifies that it is proper to tax, and brings an appropriate amount into charge—it is targeted.  

Amendment No. 38 seeks to amend condition C. Condition C requires the qualifying payment to be tax deductible. That reflects the fact that the provisions are targeted at deliberate exploitation of arbitrage—in this case, the exploitation of potential mismatches between taxable deductions and non-taxable receipts.

There is an exemption in the legislation for financial traders who buy and sell shares on trading accounts. Without the exemption, they might be inadvertently caught by the rules when they purchase shares by way of their trade and receive a tax deduction for the cost. The amendment seeks to extend that exemption to all payments that are set against any capital gains or CFC profits.

The inclusion of such additional payments would undermine the purpose of condition C itself, making the clause inoperable as a large number of schemes would fall outside the scope of the rules. There is no reason to treat capital gains more favourably than income, and it is unclear in what circumstances the suggested exemption for CFCs would be needed. In any case, there can be no justification for treating a CFC, which is by definition set up for tax avoidance purposes, more favourably than other companies.

Amendments Nos. 39 to 43 would amend condition D, which excludes amounts that are taxed in a corresponding accounting period—defined as any identical or overlapping accounting period. Amendments Nos. 39 to 41 seek to extend that, so that receipts are excluded if they are taxed in any accounting period ending within two years of the qualifying payment being made. Amendments Nos. 42 and 43 seek to extend it to include receipts brought into account by virtue of the UK's CFC rules.

There is no good reason to extend the time limit in that way. To do so would cause considerable uncertainty and might make the rules unworkable. It would also give rise to timing mismatches, which in the case of large amounts could be valuable in themselves. The rules are drafted so that HMRC will be in a position to know, when the company makes its return, whether a receipt is already within the charge to tax, and to issue a notice if necessary. If the period is extended to two years, as proposed by the amendments, HMRC will not know that at the time of the making of the return and may not know until after the 12-month period for making an inquiry has come to an end.

There is similarly no good reason to extend the category of receipts to include those brought into account by virtue of the UK's CFC rules. Condition D is designed to prevent double taxation of the same receipts. The CFC rules are designed to prevent tax-motivated diversions of profits outside the UK tax net. If the receipt is taxed under clause 26, the profits will not have been diverted outside the UK tax net, so there is no reason why the CFC rules will apply and, therefore, no potential double taxation.

I commend the Government's amendments to the Committee. I have dealt with amendment No. 44. If   the hon. Gentleman seeks to press his amendment to a vote, I will ask my hon. Friends to vote against.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: No. 75, in clause 26, page 24, line 35, after '(9)', insert 'or (9A)'.

No. 76, in clause 26, page 24, line 39, at end insert 'or'.

No. 77, in clause 26, page 24, line 41, leave out from 'period' to end of line 45 and insert—

'(9A) This subsection applies to an amount that is taken into account in determining the debits and credits to be brought into account by a company for the purposes of Chapter 2 of Part 4 of FA 1996 as respects a share in another company by virtue of section 91A or 91B of FA 1996 (shares treated as loan relationships).'.—[Dawn Primarolo.]

Question proposed, That the clause, as amended, stand part of the Bill.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

I have a couple of questions for the Paymaster General. Would the wording of subsection (12) have the same meaning and, perhaps, be clearer if it read that for the purposes of this section a payment is a qualifying payment in relation to a company if and only if it constitutes a contribution to the capital of the company? That is clearly what the guidance notes suggest. A possible and initial interpretation was that it possibly added to the scope, and certainly defined the scope of a qualifying payment, not necessarily excluding any other type of payment. Clarification by the Paymaster General would be helpful.

Can the Paymaster General clarify whether a contribution to the capital of the company, which the guidance notes suggest means an increase in the capital of the company, is to be read narrowly in terms of the share capital of the company, in a straightforward, conventional sense? In particular, can she clarify that it is not the case that any increase in profits that increases shareholders' funds by way of retained profit could be argued to be an increase in capital? I think that she will have no difficulty giving me that assurance, but I would be grateful.

The broader question underlying clause 26 that concerns us is how much these structures that are now being attacked provide UK-based investors with an advantage that overseas investors already have when competing for third country outward investment opportunities. I understand entirely that Treasury Ministers do not like structures that allow the creation of a UK tax advantage. However, in the world we live in, if our companies are competing to make investments in third countries where multinational competitors have such tax advantages, and we deny them to our companies, we have to accept that there will be consequences, in terms both of the success of UK-based companies and of the attractiveness of the UK as a location for such multinational outward investors.  

The Paymaster General will see that legislation such as that on the substantial shareholding relief, which was introduced to encourage companies to use the UK as a base for head office operations and holding operations for overseas subsidiaries, tends to pull in the opposite direction from the thrust of the clause. Will she tell the Committee, with hand on heart, that the clause will not act as a deterrent to multinational companies to base their regional operations for outward investment in the regions of the United Kingdom? The UK has a significant relative advantage in this important are as a result of the English language and of its sophisticated capital markets.

The Paymaster General might like to close the opportunity to obtain interest relief that she feels is unjustified. However, the question is not whether it is justified, but whether our competitors are able to obtain that relief in other jurisdictions and whether we are putting ourselves at a disadvantage by doing so. That is my concern.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 5:00, 23 Mehefin 2005

On the first point, the answer is no. If the relief is something else, that does not mean it stops being a contribution to capital.

I hesitate before dealing with the hon. Gentleman's other points. In opposition, I sat on three Finance Bills that proposed wide anti-avoidance measures. Conservative Ministers rightly argued that we need a fair tax system in the UK for all taxpayers.

I have never heard a Conservative spokesperson argue that tax avoidance gives the United Kingdom a competitive advantage, so I am perplexed that the hon. Gentleman keeps returning to the matter. He supports the disclosure rules and agrees that action should be taken under them. He prefers the rules to be targeted whenever possible, as they are under the clause, and he accepts the difficulties of purpose tests when that cannot be achieved. He has been reassured that appeal rights are in place, that companies will be properly notified and that innocent parties will not be hit, yet still he argues that allowing avoidance somehow ensures that our economy is competitive. I do not agree with him and do not propose, if he raises the matter again, to respond to his points.

Question put and agreed to.

Clause 26, as amended, ordered to stand part of the Bill.