Clause 214 - Unauthorised unit trusts

Finance Bill – in a Public Bill Committee am 4:15 pm ar 18 Mehefin 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

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

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

The clause will provide the Treasury with a power to introduce regulations on the tax treatment of trustees or unit holders of unauthorised unit trusts at a future date, with effect from Royal  Assent of the Bill. Its aim is to counteract their use for avoidance purposes, which is an aim that the Opposition support.

The tax information and impact note suggests that the provision is intended to help close a tax gap, which is welcome. However, it also suggests that the measure will have a negligible impact on the Exchequer. Given the limited information set out in the note about the tax avoidance aspect of the measure, will the Minister outline how widespread the problem that the measure is intended to deal with is? That would be helpful to the Committee. How much tax does he estimate has been lost or avoided through the use of unauthorised unit trusts? Given that they are expected to have a negligible impact, it would be interesting to see what those calculations have been. In view of HMRC’s low estimate of the tax gap, which currently stands at £32 billion, and given that the tax information and impact note states that this measure will help to reduce it, could the Minister tell us by how much? I appreciate that these measures will be introduced via secondary legislation, given the fast moving nature of collective investment funds. As the use of regulations allow for the changes to be made more quickly, could the Minister give us an estimate of the time scales for the introduction of these measures?

Photo of David Gauke David Gauke The Exchequer Secretary

Clause 214 will enable us to introduce new tax rules for unauthorised unit trusts and their investors. UUTs are pooled investment vehicles. Most UUTs are used solely by exempt investors such as pension funds that are not required to pay tax on any gains they realise. However some have been used by non-exempt investors in abusive avoidance schemes. We therefore announced in our paper “Tackling tax avoidance” at Budget 2011 that UUTs would be included in the review of high-risk areas in the tax code. At the same time, the Government committed to simplify the rules and reduce administrative burdens for exempt investors. The changes made by the clause provide the Treasury with the power to set out the tax rules and administrative machinery for UUTs and their investors in regulations. This is consistent with the approach used for other forms of collective investment vehicle, the principal benefit being the ability to respond quickly to commercial or regulatory change.

The clause provides a power to make further changes through regulations. These proposed changes have been subject to full consultation, initially on broad options in June 2011 and on detailed proposals in May 2012. A summary of responses, a draft Finance Bill clause and draft regulations were published for comment in December 2012. The changes were broadly welcomed by the industry, but, where appropriate, amendments were made in response to concerns about some of the proposals. Those principally concerned sanctions that might apply in the case of minor and inadvertent breaches of the rules and ensuring that investment in UUTs remained tax efficient for pension funds and other exempt investors.

The first regulations provided for by the clause will be subject to the affirmative procedure and are expected to be introduced after the summer recess. A draft of regulations has been published for further comment and is available to the Committee. I have set out the process of consultation that we have undertaken. The question of why it has taken so long to address this matter of tax avoidance has been raised. It is worth pointing out that the Government acted immediately in 2010 to close down  an abusive avoidance scheme that was disclosed to HMRC. However, reform is still necessary to simplify rules that have become increasingly complex. That will help to protect against future abuse. The Government have consulted and officials have been working with industry to make sure that any changes do not adversely affect exempt investors such as pension funds.

The hon. Lady asked how much tax would be safeguarded by this measure. It is correct to say that there is no scorecard figure for revenue protection, as avoidance schemes tend by their nature to be novel and do not always work as intended. However, previous schemes that have sought to exploit the UUT rules involve tax risk in the hundreds of millions. The measures introduced in regulations will simplify and make fundamental changes to the rules that will remove opportunities for avoidance.

The hon. Member for Newcastle upon Tyne North raised the issue of the tax gap. The approach that the Government have taken on the tax gap calculation is consistent with that of the previous Government. The numbers are looked at carefully. I remember the right hon. Member for East Ham (Stephen Timms) when he was Financial Secretary in the previous Government defending the methodology for that tax gap calculation. There have been no changes. I am sure that the hon. Lady is aware of some of the weaknesses in the methodology used in one of the more prominent alternative calculations.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

The Minister has misinterpreted my query. I was not questioning HMRC’s method of calculating the tax gap, but pointing out that others would deem it a conservative estimate. There are many other areas of tax avoidance that, by common agreement, should be addressed. The G8 meeting under way now is looking at some of those issues. We should always bear in mind when talking of the official tax gap that it is a conservative estimate. Other revenue is potentially there that members of the public would like to see collected and for the necessary changes to be made to do that.

Photo of David Gauke David Gauke The Exchequer Secretary

I am tempted to go quite a long way down that road because there are a number of issues there. There are different definitions of tax avoidance. Some behaviour that is consistent with the law may still be considered by some to be unacceptable and be included in that calculation. I strongly defend the HMRC assessment as a proper tax gap, but there are of course policy choices for Governments to address some of those points.

This particular provision protects revenue and is an important part of what we are doing to address tax avoidance, along with a large number of other measures, including support for HMRC. The G8 meeting in Lough Erne, now completed, has demonstrated further progress in dealing with tax avoidance and evasion. I am pleased with that further progress today.

The clause supports the Government’s objective of closing the tax gap. It will also enable simplification of a complex part of the tax code and reduce burdens for business and exempt investors. I hope that it can stand part of the Bill.

Question put and agreed to.

Clause 214 accordingly ordered to stand part of the Bill.