Clause 20 - Remittance basis: exempt property

Finance Bill – in a Public Bill Committee am 11:00 am ar 21 Mai 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

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

Photo of David Crausby David Crausby Llafur, Bolton North East

With this it will be convenient to discuss that schedule 7 be the Seventh schedule to the Bill.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

Thank you, Mr Crausby, for giving me the opportunity to come back to the Minister, who replied to all of the concerns raised in relation to clause 19. We now move on to clause 20 which introduces schedule 7. Like the previous clause and schedule, it deals with the taxation of remittances to the UK. As I am sure Committee members will know, section 47 and schedule 12 of the Finance Act 2012 saw a number of changes to the remittance basis of taxation provided by chapter A1 of part 14 of the Income Tax Act 2007. I see Government Members nodding enthusiastically.

Schedule 7 effectively serves to tidy up those changes in relation to inadvertent remittances arising in certain circumstances. It is designed to ensure that property acquired overseas, using foreign income and gains and therefore not constituting a taxable remittance under last year’s changes, will also not trigger a taxable remittance to the UK if any compensation payment relating to the loss, theft or destruction of the property is received, provided that such payments are either taken offshore or used to make a qualifying investment in the UK within 45 days of receipt.

Schedule 7 also makes changes to the public access rule, which currently sees property exempted from UK taxation if it is remitted to the UK and meets four conditions. The first condition is that it is defined as a work of art, a collectors item, or an antique, as defined in annex IX of Council directive 2006/112/EC. The second is that it is available for public access at an approved establishment, or is in transit to or from or in storage at an approved establishment. An approved establishment is an approved museum, gallery or other institution within the meaning of group 9 of schedule 2 to the Value Added Tax (Imported Goods) Relief Order 1984.

“Available for public access” is an important definition. It means that it must be on display at the establishment, or held at the establishment and made available to the public on request, or held by the establishment for public exhibition in connection with the property’s sale. I recall many interesting discussions last year on tax avoidance schemes that had been identified by the press in relation to some works of art.

The third condition is that the property is available for public access for no more than two years, or such longer period as the HMRC commissioners may specify. The fourth is whether the property attracts a relevant VAT relief.

Schedule 7 will still require property remitted to the UK to fulfil three of the above conditions if it is to be exempted from UK taxation, but the public access rule will include all property, and not just works of art, collectors items and antiques.

On the first issue dealt with by clause 20 and schedule 7—the tidying up legislation made last year—can the Minister confirm that he is confident about how the 2012 changes to the remittance basis of taxation are working? Does he envisage further legislative changes having to be made in future finance Bills?

On changes to the eligibility for exemptions under the public access rule, I am keen, in light of my earlier points, to hear why these changes have been introduced. It would be helpful if the Minister elaborated on and clarified the matter. What sort of items does the Minister expect to be included, beyond those currently defined as works of art, collectors items or antiques? How many items of property and individual owners does he expect the change to impact on each year? The tax information and impact note suggests that the change will be made at no cost to the Exchequer, but what specific measures or checks does HMRC have in place to ensure that the exemption, and the extension to it, will not be used as an avoidance loophole? That is a key concern of Members of this House and, in particular, of members of the public.

Photo of David Gauke David Gauke The Exchequer Secretary

As we have heard, clause 20 introduces schedule 7, which makes changes to the remittance basis rules as they apply to exempt property. The changes reflect concerns expressed about the rules during consultation on the remittance basis. As I outlined in the debate on clause 19, the remittance basis is an alternative basis of taxation. It is available to individuals who are resident but not domiciled in the UK.

The current remittance basis rules were legislated for in the Finance Act 2008 and significantly amended in 2012, as the hon. Member for Newcastle upon Tyne North said. Most notably, a new incentive was introduced to encourage those who are taxed on the remittance basis to bring their money from overseas to invest in UK businesses. At that time, the Government also made a commitment to consider extending the existing rules for exempt property to cover situations where such property is lost, stolen or destroyed. The clause and schedule deliver on that commitment; the exempt property rules apply to any property that an individual who is taxed on a remittance basis has acquired overseas by using their foreign income and gains that is subsequently brought to the UK. In the absence of those rules, bringing such property here would trigger a taxable remittance in the UK.

The rules allow property to be brought to the UK without creating tax liability, provided that certain conditions are met. Examples include cases in which the property in question is a work of art that has been imported to be displayed at a public gallery or museum, or where the property has been brought here temporarily for repair or renovation.

It has been pointed out that the exempt property rules do not cater for situations in which exempt property is lost, stolen or destroyed while in the UK. That means  that if someone has brought to the UK a painting that they acquired overseas to lend to a gallery for public display, they could become liable for tax should it be destroyed.

The same consequence would arise if the property in question was brought to the UK for repair but was stolen before the repair was completed. As the hon. Lady pointed out, clearly that would not be reasonable and it was never the intention to make people liable for UK tax in respect of property that they could not enjoy because it had been lost, stolen or destroyed. The clause and schedule ensure that that is no longer the case by providing rules that remove any tax charge that would otherwise arise when exempt property was lost, stolen or destroyed while in the UK. They also go further than that by making a series of other changes to the exempt property rules, which reflect concerns expressed by external stakeholders. They remove the restrictions that currently apply to the types of property that can be brought to the UK for public display and correct some minor technical defects in the rules. Those changes reflect concerns raised in consultation and have been broadly welcomed.

To respond to the questions raised, first, on the impacts, we do not expect an Exchequer impact. The proposals affect only resident non-domiciled individuals who are taxed on the remittance basis; in 2009-10, approximately 45,000 individuals elected to pay on that basis. The proposals’ objective is to reduce the complexity of the calculations that individuals and their advisers have to make to comply with those rules.

The hon. Lady asked what items were included under exempt property. As I said, under the current rules, that applies to works of art or antiques, but not other items that might be displayed in public such as sporting memorabilia or theatrical costumes. This measure will remove that restriction and allow any property to benefit from the public access rules, although the condition will remain that such property needs to be displayed at an HMRC-approved establishment, such as a gallery or museum.

Photo of John Cryer John Cryer Llafur, Leyton and Wanstead 11:15, 21 Mai 2013

The Minister may not have this information to hand, so he may want to write to me at a later date, but what is the definition of public access? Many years ago there was some controversy over this matter. Would the definition of what constitutes public access, so that people can take advantage of the scheme, be 10 days or 20 days, for example?

Photo of David Gauke David Gauke The Exchequer Secretary

I am very happy to answer the hon. Gentleman’s question. The public access rule allows exempt property to be brought to the UK without creating a taxable remittance where the property in question is brought to the UK for the purpose of being displayed in a recognised establishment, such as a museum or gallery. Specifically, the public access rules allow exempt properties to be on display in the UK for up to two years.

It is quite difficult to say how many items will be affected. We do not have any data on the number of items of exempt property in general, nor on the effect of the clause on that number. By their nature, exempt items do not need to be reported to HMRC, so HMRC does not have data on that.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

The Minister’s response about the length of time that an item may be on display did not deal specifically with the question raised by my hon. Friend the Member for Leyton and Wanstead. How accessible an item has to be is an interesting and key question for many members of the public. How open to members of the public do the approved premises need to be to qualify for the tax exemption? Does the Minister have that information readily to hand? If not, will he write to my hon. Friend and me?

Photo of David Gauke David Gauke The Exchequer Secretary

The exemption is designed for where a property is displayed at a recognised establishment, such as a museum or gallery. I suspect that part of the concern is that it should not apply to, for example, a private home that is open to the public for a small number of days a year. We are talking about recognised establishments such as museums and galleries. For example, if a painting is lent to the National Gallery, that clearly would be on public display. HMRC has to give its approval, so the exemption is not designed for private locations that are open for only a small number of days.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

I thank the Minister for that clarification, but are there potential loopholes, whereby a wealthy individual could set up a small establishment and receive HMRC approval? It would be interesting and useful for hon. Members to have clarity on exactly what the requirements are to gain approval from HMRC to become approved premises.

Photo of David Gauke David Gauke The Exchequer Secretary

Let me write to hon. Members to set out further details about HMRC’s policy on approving particular institutions. I hope that that will be helpful to the Committee.

The hon. Lady asked whether the changes that were made—she will remember them well from last year’s Finance Bill—are working. We are confident that the reforms will ensure that some minor anomalies in the remittance basis rules are removed.

We are also confident that the remittance basis rules are appropriate. The complexity of the rules is unavoidable and flows from the need to ensure that the rules are not abused. However, we do not anticipate further changes. We made a commitment in 2012 not to make any further changes to the remittance basis for the lifetime of this Parliament other than tidy-up measures, such as those before us today, and that commitment remains in place.

Taken together, the changes made by clause 20 and schedule 7 ensure that the exempt property rules work properly, while removing an unintended tax charge.

Question put and agreed to.

Clause 20 accordingly ordered to stand part of the Bill.

Schedule 7 agreed to.

The Chair adjourned the Committee without Question put (Standing Order No. 88).

Adjourned till this day at Two o’clock.