Clause 43 - Financing costs and income: group treasury companies

Finance Bill – in a Public Bill Committee am 11:30 am ar 6 Mehefin 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

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

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Good morning, Mr Amess. It is not that warm in the Committee today; it might well get heated, but we can only hope for some excitement over the course of the day. Many Members will have been excited when they saw that clause 43 would be the first item to arise in Committee. If my hon. Friends could hold back their interventions for a short time while I get some of my points out, I will be grateful.

The clause changes the worldwide debt cap exemption for group treasury companies and tackles issues that have allowed companies that do not have a treasury function to make a group treasury company election. The debt cap rule, as it is known, imposed a limit on tax deductions for interests for UK members and branches of a worldwide group. The rules were introduced with effect from January 2010. Broadly, the rules restrict a group’s UK treasury deductions for finance costs to the worldwide group’s third-party finance expenses. The rules are complex in their application and require tests to be met, which involve looking at the financing income and financing expenses of UK group members and comparing that with the worldwide external borrowings of the group as a whole.

The Institute of Chartered Accountants in England and Wales says that the worldwide debt cap introduced back in 2009, when UK groups were exempted from tax on dividends received from their overseas subsidiaries, has, in broad terms, capped the amount of interest deductible in the UK, if the UK debt is greater than the particular group’s external worldwide debt level. The intention was to discourage upstream loans and excessive debt in the UK. Group treasury companies can elect to be exempt from the worldwide debt calculations, but in future, to be able to do so, all or substantially all, of the activities must be treasury activities. If they fail  to meet that new “substantially all” condition, only the financing expenses and financing income that relate to the treasury activity will be included in the election. It appears that hitherto, treasury companies may have been distorting some of their income and expenses with non-treasury income and expenses.

I would like the Minister to help the Committee with some questions. They are difficult questions with which to grapple, but just because they are difficult, that does not mean that we should not try to clarify them so that matters are understandable. Can the Minister—and this is a very basic question—give examples of what group treasury companies are and what they do in the real economy, so that we are all speaking the same language, we know one when we spot it and we know what they are in layman’s terms? Are we talking about international finance houses; some sort of shadow banking hedge-fund institution; or the financing subsidiaries of larger corporate groups, where genuine real-world output is financed from intra-group lending? In the panoply of large multi-armed international and multinational organisations, a parent group or a subsidiary may sometimes have a treasury function and undertake various activities on behalf of the company that does the work. I am trying to paint in my mind’s eye a map of what exactly we are talking about, so I would be grateful if the Minister could help to explain that landscape, I would certainly be grateful.

In such circumstances, there is sense in restricting the tax deductibility of financing costs and expenses, including interest on loans, with a debt cap, especially if the group’s UK debt is bigger than the debt it holds elsewhere. Otherwise—I think that the clause is aiming at this—there would be a perverse incentive to locate corporate debt in the UK for reasons of tax efficiency. However, this carve-out or exception is made for treasury companies. Will the Minister explain the new distinction being made for group treasury companies?

The clause seems to change the definition of treasury companies so that only those that are wholly or mainly involved in certain activities can elect for exemption from the worldwide debt cap. That prompts me to ask what sort of businesses and how many of them will be affected. I would be grateful if the Minister could help to illuminate that matter by shedding a little light on this opaque area of tax law.

Photo of David Gauke David Gauke The Exchequer Secretary

It is a great pleasure to welcome you back to the Chair, Mr Amess.

Clause 43 makes changes to the debt cap rules to close tax planning opportunities. The changes will revise how group treasury company election operates to ensure that tax planning is minimised, and they will take effect for periods of the accounts of a worldwide group that began on or after 11 December 2012.

It may help hon. Members if I provide some background. The debt cap rules were introduced in 2010 to limit the tax deduction that a UK company can claim for interest and other finance expenses at the level of the overall worldwide group. There are circumstances in which certain categories of companies can be partly or wholly removed from the debt cap rules, one of which is use of group treasury company election. A group treasury company’s finance income is usually almost matched by  its financing expenses, so that the company has little impact on the overall position of the whole group for debt cap purposes.

The original intention of group treasury company election was to reduce the administrative burden on companies that have a treasury function in a group by allowing them to opt out of the debt cap rules. However, elections have been made by companies that do not have a treasury function, enabling them to shelter finance expenses that, without election, might be disallowed for UK tax purposes.

The clause has been designed to ensure that tax planning is minimised. It will make changes to chapter 7 of the Taxation (International and Other Provisions) Act 2010 to resolve the issue that has arisen about group treasury company election rules. In some cases, elections have been made by companies that do not have a treasury company function to circumvent the debt cap rules and avoid the payment of an additional tax charge.

For a company not to be subject to the debt cap rules, it must make a group treasury election and meet two criteria: first, most of its activities must be treasury ones; and secondly, most of its assets and liabilities must relate to those activities. If both conditions are met, all the company’s financing expenses and financing income fall outside the debt cap rules. However, if a company cannot meet the criteria, only financing expenses and financing income relating to its treasury activities will fall outside the debt cap, and an additional tax charge may apply. The measure is expected to increase receipts by approximately £40 million per annum. It will affect only the large groups of companies subject to the debt cap rules.

To answer the question of the hon. Member for Nottingham East, a group treasury company is one that arranges financing for the group from external borrowers and on-lends the external funds to fellow group companies. In effect, it is a conduit for finance for the group, and interest income received from the group companies to which it has lent funds is used to meet its own interest obligation to the external lender.

As I say, this change will affect only those large groups that have exploited this tax planning opportunity. Because of HMRC’s risk assessment and the time scales, we cannot say how many groups have exploited this opportunity, but none the less we believe that it is right to close it.

Photo of Nigel Mills Nigel Mills Ceidwadwyr, Amber Valley

I have no problem with the clause. However, as I think I wrote to the Minister before, these rules are particularly complicated and burdensome for most innocent groups to try to comply with, and there are bizarre concepts. A company can be 5% of the global group in terms of trade but still have 100% of the finance deduction, and I am not sure quite why that was done. I think that these rules have been around for a few years. Could he write to me to set out how many groups have had to make an adjustment under these rules and say roughly what the annual tax take is, just so we can check whether the burden is really worthwhile?

Photo of David Gauke David Gauke The Exchequer Secretary

I will certainly provide my hon. Friend with as much information as I can. He is right to say that the worldwide debt cap is a complex area of law.  From time to time since 2010, amendments have been made to the cap. In truth, the group treasury company election was not working as intended and the changes that we are making will ensure that only those financing expenses in income generated by group treasury activity will be excluded from the debt.

Where loopholes in the UK tax system are identified, obviously we seek to address and close them. None the less, there would be considerable risk if we were to abandon the worldwide debt cap. As my hon. Friend said, this is a complex area and we seek to eliminate complexity where we can. However, there would also be considerable Exchequer risk if we were not to have some rules in place in this particular area.

It is also worth pointing out that HMRC is undertaking a review this year, to establish the facts that my hon. Friend has particularly asked for. So, probably the answer to his question is that I am very happy to write to him on this matter but not just yet. When I have the information to provide greater clarity on this particular point, I will certainly let him know. I know that he follows these matters very closely.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I know that this is a slightly dry topic, but it is important that at some level we get a little more feedback—perhaps an interim note from the Minister on the progress of that particular review—because there are a number of questions that pop up every now and again about these intra-group financing arrangements. For example, there are issues to do with the quoted eurobond exemption arrangements and withholding tax in relation to other tax haven arrangements, which have come up regarding some of the utility companies and their intra-group financing arrangements.

Some serious questions are being asked about whether there are tax loopholes in this area that ought to be addressed from time to time, and it would be quite helpful just to get some information back from the Minister about what the Treasury’s strategy is when it comes to ensuring that we have a fair and a reasonably transparent process for operating some of these deductibility arrangements, but not one that unwittingly creates new loopholes or devices for companies to circumvent the rules.

Photo of David Gauke David Gauke The Exchequer Secretary

I will perhaps repeat what I said a moment or so ago. HMRC is undertaking a review of the impact of this arrangement, the groups that have made use of it and so on. That review is under way. I will certainly add the hon. Gentleman’s name to the list of recipients of the letter I will send about this issue. I suspect that this Committee may no longer be in place by the time that we are in a position to provide the details asked for by my hon. Friend the Member for Amber Valley, but I will certainly ensure that he is aware of the progress that we make in this area.

In conclusion, the changes close a tax planning opportunity by making changes to the group treasury company election to ensure that only finance, income and expenses generated by genuine group treasury activity are excluded from the debt cap. I commend the clause to the Committee.

Question put and agreed to.

Clause 43 accordingly ordered to stand part of the Bill.