Clause 26 - Transfer of assets abroad

Finance Bill – in a Public Bill Committee am 3:45 pm 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 the following:

Government amendments 21 and 22.

That schedule 10 be the Tenth schedule to the Bill.

Photo of David Gauke David Gauke The Exchequer Secretary

Schedule 10 makes changes to the transfer of assets abroad provisions. The provisions are designed to prevent UK resident individuals from avoiding tax by transferring assets of any kind, so that income arises to a person abroad while the UK individual is still able to enjoy the benefit of the income, directly or as a capital sum. The legislation may also apply where the arrangements result in someone in the UK other than the actual transferor being able to benefit as a result of the transfer.

This is essentially anti-avoidance legislation which will deter people from sheltering income from UK tax by artificially arranging for it to arise to a person offshore. However, there are, quite rightly, exemptions from the rules. These are where tax avoidance is not a main purpose, and also where it is no more than an incidental purpose and the arrangements are commercial. Both of the existing exemptions depend on an element of tax avoidance purpose being identified.

The Government consider that the way in which the existing exemptions are applied in practice is consistent with EU law. But in order to be more clearly compatible with EU law, the legislation introduces a new and alternative objective exemption. Rather than looking at the purpose of the arrangements and whether they were put in place to avoid tax, as the existing exemptions do, the additional exemption focuses, in accordance with EU law, on objective features of the transactions. It will ensure that income attributable to transactions that are genuine and serve the single market—for instance, by contributing to real economic activity in another member state—are not subject to a transfer of assets charge.

The legislation gives particular illustrations of what is accepted as genuine, based on past cases in the European courts. A genuine transaction is one that is on arm’s-length terms, or forms part of the activities of a foreign business establishment which meets specified commercial pointers aimed at excluding artificial, so-called brass plate, arrangements.

The new exemption excludes gifts made for personal reasons which are inherently not at arm’s length but which are only of personal benefit to the recipient. In order to ensure that the legislation is proportionate, and does no more than exclude the artificial aspects of the arrangements, there is provision to apportion income between the part of a transaction that is genuine and the part of the transaction that is artificial. Similarly, the legislation allows that where an asset is used for genuine commercial purposes the transaction may fall within the exemption.

The Government do not consider that the exemption’s introduction will reduce the effectiveness of the legislation, given the way it is already applied in practice. The new exemption is more objective, as EU law requires. It remains targeted at artificial arrangements that avoid tax. The cost of introducing the new exemption is estimated at £10 million per annum, compared with the £340 million per annum that we believe the legislation protects from Exchequer loss due to abusive arrangements.

The measure was formally consulted on between 30 July and 22 October 2012. A further version of the draft legislation was published in December for consultation. In response to suggestions from stakeholders on the existing legislation, further amendments were proposed as part of the consultation, with the aim of clarifying rather than changing the way in which certain aspects of the provisions operate. In the light of the responses, the schedule introduces additional rules to provide greater clarity about the prevention of double charging, which may arise as a result of income being subject to income tax under both the transfer of asset rules and another part of the Taxes Acts. A further change will clear up any misunderstanding over the interaction of the transfer of asset rules with double taxation agreements and thus stop claims for what is tantamount to double non-taxation.

A third change proposed in the consultation, to recast the matching rules, has been deferred until the Finance Bill 2014. The matching rules are used to calculate the amount of income that is chargeable where someone other than the transferor receives a benefit caught by the transfer of assets rules. The postponement of that change is to allow for further consultation over the summer in order to ensure that the amended rules are clear, workable and fair.

Amendments 21 and 22 to the schedule are minor and technical. One of the changes introduced by the schedule is that companies incorporated outside the United Kingdom but nevertheless resident in the United Kingdom for tax purposes will no longer be automatically treated as a “person abroad” for transfer of asset purposes. The amendments will ensure that schedule 10 fully delivers that outcome. Currently, the legislation specifically provides that companies incorporated abroad but UK resident are persons abroad, and the schedule omits that specific provision with effect from 6 April 2012. However, for this change to be effective, the legislation also needs to be clear that a company’s domicile is not relevant in deciding whether the company is a person abroad. The amendments are to achieve that result and ensure that the announced policy change, which was welcomed by stakeholders, is delivered. A company will be a person abroad only when it is resident outside the United Kingdom.

Schedule 10 introduces changes that are aimed at improving the operation of the existing anti-avoidance provision, either by adding clarity for interested parties or maintaining their compatibility with EU law.

Photo of Nigel Mills Nigel Mills Ceidwadwyr, Amber Valley 4:00, 21 Mai 2013

At the risk of inviting the Minister to come over all swivel-eyed, does the Minister agree that the provisions have always been perfectly sensible anti-avoidance rules, and that the European Court’s decision that they somehow contravene the treaties is utterly ridiculous and trespasses into areas of tax policy that were never meant to be in the EU’s sphere of influence? It has forced us to give away £10 million a year to tax avoiders who have no commercial purpose for what they are doing.

Photo of David Gauke David Gauke The Exchequer Secretary

My hon. Friend makes his point forcefully. Were he to look back at one or two Finance Bill debates in previous years, he may find that I have made similar points. I note his objections, which he put across well.  From the position that we are in, it is worth pointing out that the vast bulk of the revenue that we are protecting continues to be protected—our intention to prevent avoidance in this area has not been undermined, and the legislation is an attempt to meet the concerns raised by the EU in a measured and proportionate way.

The regime remains robust against abuse, and schedule 10 is one of a number of measures in the Bill designed to ensure that individuals cannot exploit loopholes in tax legislation to avoid paying their fair share of tax. With those comments, and in anticipation of any queries that Members may want to raise, I commend the clause and the schedule to the Committee.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

I wish to comment on clause 26 in its entirety, and briefly on the Government amendments tabled by the Minister at a late stage, despite being warned about the issue to which the amendments relate by the Chartered Institute of Taxation as early as 1 May. I will return to that later in my remarks.

Amid the Government’s current swivel-eyed difficulties on Europe, and as the Minister alluded to, clause 26 has been introduced in an attempt to satisfy the European Commission. That is probably vexing many Government Members in the Committee, and perhaps some in the Opposition.

As the Minister explained, the clause introduces schedule 10 to make changes to the transfer of assets anti-avoidance legislation in chapter 2, part 13 of the Income Tax Act 2007. As the explanatory notes make clear, the legislation applies to UK-resident individuals who have transferred assets so that income has become payable to an overseas person, while the UK-resident individual continues to be able to enjoy the income of the person abroad, or receive a capital sum directly or indirectly from that income.

The legislation also applies to UK-resident individuals who have not made the transfer that results in the income arising to the person abroad, but who can benefit directly or indirectly from the income arising. Generally, the transfer of assets rules impose a charge to income tax on individuals who find themselves in such circumstances.

However, on 16 February 2011, the European Commission formally requested the UK Government to amend the anti-abuse legislation on the grounds that it was discriminatory, stating:

“Under this legislation, if a UK resident individual invests in a company by transferring assets to it, and if this company is incorporated and managed in another Member State, then the investor is subject to tax on the income generated by the company to which he/she contributed the assets. However, if the same individual invested the same assets in a UK company, only the company itself would be liable for tax…the Commission considers there to be discrimination, seeing as investments outside the UK are taxed more heavily than domestic investments. The difference in tax treatment between domestic and cross-border transactions restricts two fundamental principles of the EU’s Single Market, namely of the freedom of establishment and the free movement of capital”.

The formal request by the Commission took the form of a reasoned opinion—the second step of the infringement procedure—and incorporated similar concerns about the compliance of the legislation on the regime on the attribution of gains to members of non-UK-resident companies, which we will deal with under clause 61.  Clause 26 aims to reform the transfer of assets legislation to ensure compatibility with the Commission’s request.

The Government responded to the situation by announcing in December 2011, through a written ministerial statement, that there would be a consultation on the proposed amendments to the provisions, and the position was confirmed at Budget 2012. The consultation was published in July 2012, and the response to it was published alongside draft legislation in December 2012.

Exemptions to the transfer of assets rules already exist where there is no tax avoidance purpose or where the transactions are genuine commercial transactions and any tax avoidance purpose was incidental. That is defined by the Government as meaning that business transactions are not regarded as genuine unless they are on arm’s-length terms and, in the case of transactions for the purposes of a business establishment, give rise to income attributable to economically significant activity that takes place overseas.

The Government’s remedy to the European Commission’s request is to add a new exemption to the legislation through clause 26 and schedule 10, which operate where the EU treaty freedoms are engaged. It focuses on whether the nature of the transactions is genuine and whether they serve the purpose of the freedoms. An exemption will provide for genuine commercial business activities overseas, and also for transactions that do not involve commercial activities but that are, nevertheless, genuine transactions protected by the single market.

As I have said, the Government have consulted widely on the matter, but several serious concerns remain about their attempts to make the transfer of asset rules EU-compliant. On 1 May, the Chartered Institute of Taxation wrote to HMRC to express three main concerns about clause 26 and schedule 10. Two of those concerns were technical; the CIT believed that a flaw in the drafting of the Bill—specifically, confusion about the definition of the term “person abroad”—meant that it would not deliver the Government’s stated purpose. Government amendments 21 and 22 are designed to resolve that uncertainty, although they have been introduced rather late in the day, given the importance of that definition to the outcome of clause 26.

I understand, however, that the CIT also seeks further clarity on the phrase

“provision…of goods or services” in proposed new section 742A(8) of the Income Tax Act 2007, because it is not clear whether goods and services are meant in the VAT sense or in the everyday sense. If the Minister is aware of those concerns, will he provide additional clarity in his concluding remarks?

During the consultation, the CIT voiced the more general concern that

“these provisions do not achieve the objective of ensuring that UK law complies with EU law...the changes to the transfer of asset abroad provisions are strange because they purport to create a welcome exception when a transfer contravenes EU law, but then seek to impose additional conditions before reliance can be placed on this exception.”

The Institute of Chartered Accountants agreed:

“It is our view that the amendments made to the draft legislation as published on 11 December 2012 do not increase the likelihood of the UK law being EU compliant; if anything the position is worse than previously...EU law makes no distinction between trading and investment activities. It is the actual substance of an  activity that is relevant and should determine whether s13 and/or the transfer of assets abroad (TOAA) provisions apply. There is concern that active investment companies may not fall within the definition of economically significant activities; the definition should expressly include the letting of property and dealing in property and dealing in shares and other investments...There is no de minimis for the TOAA provisions. In theory, the transfer of only £1 could result in a potential charge on the transferor on income of an offshore structure.”

KPMG has highlighted the complexity of the issue:

“The new exemption relies upon knowledge of provisions of the Treaty on the Functioning of the European Union. By making reference to EU law, which itself is subject to decisions in the European Court of Justice, it will be difficult for taxpayers or their advisers to ascertain with certainty whether or not they fall within the new exemption.”

Many organisations have expressed their disappointment that the Government appear to have ignored the concerns expressed in consultation about the proposed change, and I would be grateful if the Minister could address those concerns. It is vital that the Government get the proposals right, or further legislation will be required. The CIT has asked on what basis the Government

“rejects our EU law analysis of the provisions. Is it willing to share its analysis/legal advice on which it is basing the contention that the amended rules will ensure compliance with EU law?”

An answer from him on that would be helpful.

Finally, the tax information and impact note indicates that this move will cost the Exchequer £10 million a year from 2015-16 to 2017-18 and it would be useful to understand the basis on which those figures were reached. Does the Minister expect avoidance activity to increase as a result of the changes, or does this measure simply incorporate tax charges that should not have been made in the spirit of the single market? I would be grateful if he would respond to those concerns.

Photo of Nigel Mills Nigel Mills Ceidwadwyr, Amber Valley 4:15, 21 Mai 2013

I do not want to speak for long. I have great sympathy for the Government, who have ended up in the ludicrous situation of having some perfectly reasonable anti-avoidance provisions being threatened by a rather perverse EU judgment that says that they have gone too far. The crime that the Government allegedly committed is that if someone, in an attempt to avoid tax, transfers assets overseas from which they still get some benefit in the UK, such as use of income, we subject them to income tax on that benefit, whereas if they had just transferred those assets within the UK we would not have done that because we would have been taxing them where they were transferred to. What are the Government expected to do in that situation? Are they expected not to do anything?

We have ended up in a perverse situation and we have had a few of these over the years. We now have the ridiculous situation that if a UK company’s subsidiary makes a trading loss in another EU jurisdiction, it can have that loss set against its UK profits. I thought that we all agreed now that multinationals should be taxed on the profits that they make in the UK, so it seems bizarre that we have been forced into that situation as well.

It is worth stressing that within the provisions we already have exemptions for where tax avoidance was not the main purpose; where, viewed objectively, the transaction can be considered to be genuine. We also had a provision for where the transaction was not more  than incidentally designed for purposes of avoiding liability for taxation. Therefore, we already had the exemptions for purely commercial transactions; it is not as though we had a general blanket rule that provided a disadvantage to people transferring things around the EU with us taxing them regardless. Those measures only kicked in if transactions were not commercial.

We have been forced to add another exemption, in bafflingly complex language, which effectively says, “This does not apply if it would contravene EU law.” We have ended up with an EU Court telling us that we cannot take this action because it contravenes EU law, and now we are saying, “Okay, we will not do it if it contravenes EU law.” For anyone conducting a transaction, it will be interesting to try to work their way through that, because rather than it being clear where our domestic law applies with various fundamental freedoms of the EU that might disapply those UK rules, we now have a UK rule that brings in those EU rules—whatever they are, and whatever they might become in the future—and overrides UK legislation without us actually knowing exactly what they are or how they are to be applied.

We have ended up in a perverse situation with an exemption that I cannot imagine any taxpayer will be able to rely on with any kind of certainty. That may well be the idea: we can go back to the European Court and say, “Look, we have made our rules comply with what you wanted.” What we have done is probably utterly pointless, but it complies with the letter of what the EU is stupidly saying to us. If that is the case, I wholeheartedly congratulate the Government on doing that. I would not recommend that they admitted that, as it probably would not help their case, but, as a principle, we should set out that taxation is a matter for member states, not the EU, and unless we are doing something that is wholly unreasonable or wholly uncommercial, or that clearly infringes on sensible things that people do, we should be saying, to put it into layman’s language, “This is not for you to be getting involved in. There is no risk here to an ordinary commercial transaction. This is for us to decide. Keep your nose out.”

Our tax system will end up in an unfortunate situation if we let the EU keep creeping into these matters. EU directives were not meant to encourage tax abuse and the Government are allowed to impinge on freedoms if they are trying to tackle that. Somehow, the system has gone wrong. I have no objection to what the Government have to do here as this measure is probably to fix rules that protect a valuable amount of income and stop some heinous tax avoidance. I will support the measure, but we have been forced into a wholly unnecessary situation.

Photo of David Gauke David Gauke The Exchequer Secretary

Let me see whether I can deal with the various points raised in the debate. First, let me deal with why the amendment was tabled when it was. It would be fair to say that the issue that the amendment deals with came to light relatively recently, and it required technical analysis. It was necessary for Her Majesty’s Revenue and Customs and the Treasury to ensure that the points that had been raised were technically correct and delivered the intended policy, and that is why the amendment was tabled when it was.

Those of us who served on Finance Bill Committees during the previous Parliament—I look at my hon. Friends the Members for Braintree and for Chelsea and Fulham—will be aware that in the past it was customary for the Government to come forward with lots of amendments as a consequence of points that had been raised by the likes of the Chartered Institute of Taxation. The fact that we publish legislation first in draft form means that many such points can be addressed, but from time to time it is necessary to respond to submissions, fully investigate and analyse concerns, and amend legislation where necessary.

Regarding whether the amended legislation will be wholly compliant with EU rules, we believe that we fully address the European Commission’s concern that the legislation as it stands might not comply fully with EU law. Nevertheless, EU law on that matter is not well defined and is still developing. The European Commission might wish to test the application of EU law and decide to take forward proceedings in the European Court of Justice with that aim in mind. The Government, however, believe that we are complying.

I was asked whether the Government would share the legal advice they have received on the matter, and I will give the customary response that Ministers have given through the ages, which is that legal advice will not be published. It is worth pointing out that we have consulted widely, met with interested parties and listened to concerns in the evolution of the legislation. Our position is that the provisions comply with our European obligations, even though that might be subsequently tested.

I shall deal with some of the technical points that were raised by the hon. Member for Newcastle upon Tyne North, many of which were brought to her attention by the Chartered Institute of Taxation. Regarding the concern that the definition of “goods and services” might be unclear, the term will have its everyday usage applied in the circumstances, but HMRC will also publish guidance for consultation, which I hope will provide greater clarity.

I was asked why the legislation makes a distinction between trading and investment activities when the EU does not. The legislation does not distinguish between trading and investment activities as such. It specifies that if there is an overseas business establishment the activities must consist of the provisions of goods or services on a commercial basis. The threshold for commercial activity can be met by an investment or holding company that provides services, as well as a trading entity. If unusually an investment or holding company does not carry out its activities though an overseas business establishment, a transaction may still be genuine, and the activities will not be subject to the test in subsections (7) and (8) of proposed new section 742A, but will be subject to the rest of the proposed new section and will be exempted if genuine. That means that it will always be possible for an investment or holding company to be exempt in accordance with EU law, if the overall arrangements are genuine and serve EU treaty aims.

I was asked why we do not introduce a de minimis exemption. We do not believe that one is needed. This is anti-avoidance legislation and genuine transactions are not subject to a tax charge. I was also asked why there is a £10 million cost each year as a consequence of the changes. The estimated £10 million reduction in tax  receipts does not represent the tax loss from tax avoidance schemes, but the tax on income attributable to transactions with genuine economic substance that have been structured so as to result in a lower tax bill. The legislation will help to ensure that the rules operate as has always been intended by the exemption of genuine business transactions.

It is not necessary for the legislation to specify that property letting and active investment transactions may be genuine. It has been drafted so that it is entirely open to a taxpayer to show that any transaction is genuine in relation to treaty freedoms. As is reflected in the legislation, all relevant circumstances and objective features of the arrangements will be taken into account in deciding whether a transaction is genuine.

Finally, my hon. Friend the Member for Amber Valley, who expresses his views firmly, made an interesting point about where the jurisdiction of European institutions should lie in direct tax matters, and has opened up a much larger debate. I shall attempt to resist entering it, but I am sure that we will return to it. I hope that clause 26 can stand part of the Bill.

Question put and agreed to.

Clause 26 ordered to stand part of the Bill.