Clause 40 - Derivative contracts: property total return swaps etc

Part of Finance Bill – in a Public Bill Committee am 3:30 pm ar 4 Mehefin 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of David Gauke David Gauke The Exchequer Secretary 3:30, 4 Mehefin 2013

Clause 40 makes changes to ensure that the legislation that applies to property total return swaps cannot be exploited for tax avoidance and that the tax outcome of the legislation matches genuine exposure to the property market.

I will briefly set out some background to the clause. Property return swaps can be used to give investors exposure to the property market without actually investing in properties, or to allow property investors to hedge their exposure. The tax legislation covering swaps aims to match the treatment of actual investment in property, in particular by providing that returns from swaps may be taxable as capital gains where they are linked to a property index.

Some avoidance schemes exploit this legislation with the use of contracts that do not give genuine exposure to movements in both directions in the property market, and that generate capital returns that exceed those that arise from movements in actual property values.

The aim of these schemes is artificially to convert capital losses into trading losses, which can then be set against other profits in ways not intended by the legislation. We do not accept that these schemes achieve the results claimed, but this legislation will put the tax position beyond doubt.

Changes made by clause 40 will prevent avoidance in three different ways. They will provide that capital gains treatment will not be available when swaps are entered into between companies in the same group. They will provide that any tax charges are linked to genuine movements in the property market, and not limited with the use of any artificial arrangements; and they will provide that capital gains treatment will not be available where tax avoidance is involved.

The hon. Member for Nottingham East asked whether HMRC would be able to cope with dealing with derivatives such as those we are talking about. Schemes would be disclosed under routine enforcement, and the changes are relatively minor in relation to the 2009 legislation. Those matters will be monitored by inspectors looking at company accounts and by specialist teams.

I am tempted to get into a debate with the hon. Gentleman about job reductions in HMRC, for which he quoted a number of 10,000. I do not know why he did not quote a number of 30,000, because that is what occurred under the previous Government. To be fair to the previous Government, there have been opportunities  to reduce the number of people working in HMRC in particular areas, with the use of new technology and improved efficiency. It is not just about numbers. That is the approach that we have certainly taken, and HMRC’s yield is increasing significantly over the course of this Parliament. However, I digress.

The hon. Gentleman also asked how overseas companies will be affected. Where foreign companies fall within the corporation tax regime, because they have a permanent establishment in the UK that is chargeable to corporation tax, normal corporation tax rules will apply. As for how many companies are likely to be involved and how much tax, HMRC is aware of three companies that have used the scheme four times in total. The estimated loss was in the region of £100 million per year.

My hon. Friend the Member for Wycombe asked about the application of the IFRS. I can assure him that HMRC is working actively on its adoption to ensure that legislation keeps up to date. I do not intend to discuss the wider issue to which he referred, but I hope that he is reassured by my remarks.

With those comments and, in summary, I want to make it clear to the Committee that the three changes will ensure that the tax treatment continues to provide a fair outcome for genuine users of swaps linked to the property market, but that the policy cannot be used for tax avoidance. I trust that the clause will stand part of the Bill.