Clause 34 - Location of assets etc

Finance Bill – in a Public Bill Committee am 11:45 am ar 28 Mehefin 2005.

Danfonwch hysbysiad imi am ddadleuon fel hyn

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

Photo of John Healey John Healey The Financial Secretary to the Treasury

The clause brings into effect schedule 4. The clause and schedule together introduce a further anti-avoidance measure relating to capital gains tax by providing additional rules to determine where assets are situated for the purposes of tax on capital gains.

In most circumstances UK taxpayers are liable to tax on their capital gains regardless of where the asset in question is situated, but if individuals who live in the UK are domiciled abroad, their gains on disposals of assets situated outside the UK are liable to capital gains tax only if they remit the disposal proceeds to the   UK. People who are resident abroad but carry on a business in this country are liable to tax on capital gains only in respect of disposals of business assets that are situated in the UK. The current tax rules for determining where assets are situated do not cover every circumstance. Where there is no specific rule in the tax code, the provisions and principles of common law apply to determine the situation of an asset. People have exploited some gaps in the tax rules to avoid tax on gains arising from the sale of assets abroad.

Photo of Nicholas Winterton Nicholas Winterton Ceidwadwyr, Macclesfield

Order. The Minister appears to be trespassing into the schedule as well as the clause. If he intends to do that, I am inclined to have the schedule taken formally when we come to discuss it. I hope that the Committee accepts that. I am happy that he should talk to the schedule, if he wishes.

Photo of John Healey John Healey The Financial Secretary to the Treasury

I am grateful for your guidance, Sir Nicholas. I thought it sensible to combine the two matters, given that the clause simply gives effect to schedule 4 and given the substance at stake.

I was explaining how the avoidance practices mean that the taxes avoided on assets ought, in any reasonable view, to be regarded as UK assets and should attract a UK tax charge. The measure stops exploitation in two ways. First, shares in companies incorporated in the UK will generally be regarded as situated here. Secondly, unless an existing tax rule already specifies their location, intangible assets, such as options or rights over other assets, will now be treated as being situated in the UK for the purposes of tax and capital gains if they are subject to UK law at the time that they are created. The rules for futures and options that are not subject to UK law at the time they are created will take account of the location of the underlying subject matter.

The measure is designed to frustrate the schemes arising on the disposal of assets related to the UK outside the scope of UK tax on capital gains. It does not deal with assets that are unrelated to the UK—for example, shares in an overseas incorporated company that are registered abroad as UK assets—and it strikes a fair balance as it closes a lucrative avoidance scheme. I trust and hope that the Committee will accept it.

Photo of Richard Spring Richard Spring Shadow Minister, Treasury

I am grateful to the Minister for his explanation. The measure is perfectly legitimate and sensible, and we are happy to support it.

Photo of Mark Field Mark Field Shadow Financial Secretary

I accept that the measure is a sensible decision. However—I do not expect the Minister to go into any great detail on this—I hope that the Treasury is entirely aware of the situation in what is clearly and inevitably a fast-moving world. In particular, a large number of transactions take place over the internet and it is sometimes difficult to gauge the companies involved in such transactions and the legal rights of customers and companies.

It strikes me that we are talking about an area in which a great deal of detailed academic thinking will have to come into play, probably in the very near future but certainly within the next decade or two, if we are to ensure that there is a proper tax regime and that   sufficient proceeds are coming through to the Treasury. My question is not what specifically is being done, but whether, in a more general sense, thought is going into the increasing amount of trade taking place over the internet. That might have an impact on a range of taxes—initially, obviously, sales tax, but potentially capital gains tax, too.

I represent the west end of London, where a number of our retailers have some woeful stories. I suspect that the problem is not only the congestion charge, but the fact that, increasingly, a great amount of their money is taken away because of the number of transactions and sales that take place over the internet. Is there some blue skies long-term thinking going on in the Treasury about the future nature of taxation and the taxation burden, especially for capital gains tax? We live in a world where the obvious boundaries of nation states are becoming far more blurred as far as such transactions are concerned, and I hope that something new is being done. I guess that any new measure will be supranational, involving the EU countries and, increasingly, the United States—which, as ever, is likely to be one step ahead of the game—to make sure that we close any loopholes before they become apparent to highly paid tax advisers.

Photo of Christopher Huhne Christopher Huhne Shadow Minister, Treasury

Over many years, I have listened to interesting discussions between the Treasury and various non-UK domiciled communities in the UK. Periodically, the Chancellor of the Exchequer tries to clarify the situation and hears representations to the effect that doing so would lead to a substantial exodus from the UK. I gather that the provisions are mainly aimed at that non-UK domiciled but UK-resident community. In the Minister’s view, is the potential use of bearer shares in UK companies likely to be significant enough to precipitate such a move? We are dealing with a sanctified tax avoidance measure—that is, the use of non-domicile status—that has been on the UK statute book for many years. The Government are clarifying a rather small element of it, but is the Minister certain that the provision will not lead to a substantial group of people leaving the UK for other jurisdictions?

Photo of John Healey John Healey The Financial Secretary to the Treasury

The hon. Member for Cities of London and Westminster (Mr. Field) made a number of telling points. As he said, we are indeed talking about a very fast-moving world and, as he would expect, we are giving careful thought to the sort of issues that he raised. It would not be responsible for the Treasury or Her Majesty’s Revenue and Customs to do otherwise. So I can in general terms give him some assurance on that. He is right to suggest that the provision is a targeted approach to a specific avoidance problem. In a sense, that addresses the concerns of the hon. Member for Eastleigh. The fears that he expressed are unlikely to arise because the provision is targeted.

We have targeted the provision in schedule 4 and clause 34 on the schemes that are promoted most commonly and aggressively, and that cost the   Exchequer the most. With this set of provisions, we are not trying to craft a total solution to the general range of avoidance activities in relation to capital gains tax. To do so would clearly be complex, comprehensive and involve a huge amount of lengthy legislation, and that is not our purpose. Our purpose is to close down this sort of common and commonly promoted tax avoidance scheme.

One of the top 20 accountancy firms, the Tenon Group, caught the purpose very well when it commented:

“These changes will severely restrict the ability of non-domiciled individuals to avoid Capital Gains Tax on what are, in economic terms, UK assets.”

That goes to the heart of the matter: this is an avoidance scheme that avoids the tax charge on what, in any reasonable view, are UK economic assets. The purpose of the clause and the schedule is to change that.

Photo of Christopher Huhne Christopher Huhne Shadow Minister, Treasury

I understand the purpose of the clause, and the Financial Secretary will be aware of the history of representations made, in particular, by the Greek shipowning community in London over many years and the various little pas de deux that have gone on between that community and the Treasury. What I asked was whether he thought that the provision was likely to lead to the exodus of any particular parties who might decide that, for the purposes of taking gains on UK assets, they would prefer to be resident in Piraeus rather than London.

Photo of John Healey John Healey The Financial Secretary to the Treasury

The short answer to that is that we shall see. We do not expect the impact to be significant, but overriding everything is our principal purpose of closing down a tax avoidance scheme that is not legitimate and that allows taxpayers who ought to be subject to a UK capital gains tax charge on assets to avoid that charge. On that basis, we believe that this is a reasonable measure that strikes the right balance between the factors that we have had to take into account.

Question put and agreed to.

Clause 34 ordered to stand part of the Bill.

Schedule 4 agreed to.