Clause 40 - Derivative contracts: property total return swaps etc

Part of Finance Bill – in a Public Bill Committee am 3:15 pm ar 4 Mehefin 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury) 3:15, 4 Mehefin 2013

As my hon. Friend says, he needs extra staff for that work load: I am sure the Independent Parliamentary Standards Authority will be supportive.

In a total return swap, the party receiving the total return will receive an income generated by the asset, as well as the benefit if the price of the asset appreciates over the life of the swap; in return, the total return receiver must pay the owner of the asset the set rate over the life of the swap. The clause, I am told, responds to tax avoidance schemes involving property return swaps and is designed to stop firms exploiting the property total return swaps legislation to convert capital losses into trading losses.

Companies are apparently abusing the current law by entering into swaps between different members of a group of companies in order to convert capital losses into income losses, even though the swap does not result in the group obtaining any net exposure to property. Clearly, therefore, the clause is important as it is needed to deal with that loophole. The clause rules out any capital return where the swaps are intra-group and limits any capital return to the actual return in the contract.

Tackling such opportunistic tax avoidance schemes is clearly an important goal and one which the Opposition support, especially given the context of the wider size of the derivatives market. When trying to keep track of financial innovation, as it is sometimes known, legislators and policy makers have often struggled to keep pace. Given that the derivatives market is now something of the order of $1.2 trillion, we have to get these matters right.

I have some questions for the Minister on the clause. First, there must surely be some enforcement complexities involved in watching and overseeing some of the derivative tax arrangements. How will HMRC—particularly given the pressures that it is under, with 10,000 staff lost and resources depleted across the organisation—police the arrangements in the clause? Who will be carrying out that enforcement activity—does responsibility for it fall to a particular unit in HMRC?

Will the Minister set out the extent of the current abuse of the loophole—did a particular case prompt the clause? How much do the Government anticipate gaining by closing the door on the practice? Finally, given that the United Kingdom is host to around 75% of the EU’s derivatives market, how will the clause apply to foreign companies with subsidiary operations in the UK? We are talking about intra-group arrangements, and so some cross-border issues crop up with regard to corporate form and corporate governance: have the Minister and his officials addressed the international dimension to the clause?