Loan relationships and derivative contracts

Finance Bill – in a Public Bill Committee am 3:00 pm ar 30 Mehefin 2016.

Danfonwch hysbysiad imi am ddadleuon fel hyn

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

With this it will be convenient to discuss the following:

Amendment 9, in schedule 7, page 305, line 3, leave out

“the preceding provisions of this section”

and insert

“Part 4 of TIOPA 2010”.

Amendment 10, in schedule 7, page 305, line 9, leave out

“the preceding provisions of this section”

and insert

“Part 4 of TIOPA 2010”.

That schedule 7 be the Seventh schedule to the Bill.

Photo of Rob Marris Rob Marris Shadow Minister (Treasury)

I rise to address amendments 9 and 10, which are technical amendments. Schedule 7 is a technical area about which I know little.

I have never known that to stop the hon. Gentleman.

Photo of Rob Marris Rob Marris Shadow Minister (Treasury)

That is indeed the case. I will now proceed to address the Committee at some length—well, appropriate length.

The amendments have been suggested by our old friends at the Chartered Institute of Taxation. The schedule is designed to address three particular scenarios in which I understand previous legislation has had unintended consequences in relation to notional finance costs, credits arising on reversal of debits—of course, you are intimately familiar with that part of the financial world, Mr Howarth—and, finally, amounts excluded from taxation under our old friends, the transfer pricing rules. On the first two issues—non-market loans and transfer pricing—the world has changed since the legislation was introduced. The UK accounting standards have changed and the Bill, in a sense, is matching up the standards with what will be in statute.

On the third area—exchange gains and losses—the explanatory notes helpfully state:

“A particular concern has been identified with those provisions, as a result of which they can introduce a foreign currency exposure for corporation tax purposes even though none exists commercially or in the accounts.”

It seems a strange state of affairs that a company can suddenly have notional foreign currency transactions that do not really exist. Such things can happen in the wonderful and weird world of finance, but it is not a good idea and the Bill will helpfully sort that out.

The amendments were suggested by the CIOT, and the Minister, with his excellent knowledge and information, will no doubt say whether they will work as intended—they might not. That is not to doubt the CIOT, as I may have mixed things up in translation when tabling the amendments. I have a whole page of technical information, Mr Howarth, but you will be pleased to know that I do not propose to read it out unless members of the Committee wish me to do so.

The excellent research by Imogen Watson shows that the amendments would make it clear that, in each case, the references in paragraphs 3 and 4 of schedule 7 are to debits that have been left out of accounts for the purposes of sections 446, on loan relationships, and 693—as all hon. Members will recall, section 693 is on derivative contracts—of the Corporation Tax Act 2009 as a result of the application of part 4 of the Taxation (International and Other Provisions) Act 2010. I am told that the amendments are not controversial, although the Minister may tell me otherwise, and they are intended merely to refer to the provisions that have resulted in debits not being brought into account as debits.

It is unusual for the Government to accept Opposition amendments. It may be that I get a result today because of the technicalities, but after looking at the Minister’s face I am not optimistic. No doubt he will explain, with his usual patience and helpfulness, either why he thinks they should not be made, or that what I am seeking to do does not need doing or would not, in fact, be done by the amendments.

Photo of David Gauke David Gauke The Financial Secretary to the Treasury 3:15, 30 Mehefin 2016

Clause 45 introduces schedule 7, which deals with three different issues that can arise from interactions between accounting rules and tax rules. These changes will prevent some unintended and unfair outcomes. I welcome the opportunity to debate amendments 9 and 10, tabled by the hon. Member for Wolverhampton South West, which are linked to the clause and which I will turn to later.

All three of the issues being addressed arise when loans made by companies are interest-free or otherwise involve financial instruments on non-market terms. Typically, those will happen in the context of commercially driven funding arrangements where loans are between companies that have some connection. Some of the issues have come about because of recent changes to accounting standards. The changes will support the Government’s policy of simplifying taxation, ensuring businesses pay the right tax at the right time.

Accounting standards can now require an interest-free loan, or other loan taken out on non-market terms, to be recognised in accounts at a lower value than the actual amount of the loan. That can lead to an interest cost being shown in the accounts of the borrower, even when no interest has actually been paid. This cost can lead to a tax deduction for the borrower, but no matching tax liability for the lender. That is an unfair outcome. The changes made by schedule 7 address this unfair situation by putting the borrower back in the position that applied before the changes to accountancy rules, to make sure that they do not benefit unfairly from the new rules.

The second issue also involves adjustments that apply when a loan or financial derivative is not made at arm’s length. Tax law means that an adjustment is made to the amount brought into account for tax on the loan. The adjustments can have the effect of restricting the deductions that can be claimed by the company for tax purposes. However, under the current rules a corresponding amount can be taxed in full later. The changes made by schedule 7 ensure that in these circumstances the company will not be taxed on amounts if it has not been given a tax deduction for corresponding amounts previously. Again, this restores the position before the accounting changes were made.

The final issue addressed by schedule 7 concerns the application of the transfer pricing divisions to exchange gains and losses. In some circumstances these provisions can give companies a tax charge or benefit from foreign exchange movements, even when there is no commercial exposure to foreign exchange. Schedule 7 will make minor technical changes so that the transfer pricing will not create an overall foreign exchange exposure for tax purposes in cases where the company is commercially hedged.

The changes made by schedule 7 ensure that the rules operate as intended. The impact on the Exchequer will be negligible. Only companies or other corporate bodies will be affected by the changes, and the impacts will be negligible as companies learn the new rules. Moving forward, we expect companies’ costs to be reduced as the legislation will be simpler to use in practice.

Let me take the opportunity to discuss amendments 9 and 10, which concern paragraphs 3 and 4 of schedule 7 respectively. They propose that the new legislation dictating the tax treatment of loan relationships and derivative contracts be linked directly to the transfer pricing rules. The Government have looked closely at that suggestion but concluded that the amendments are unnecessary.

Transfer pricing adjustments in respect of loans and derivatives are already given effect by sections 446 and 693 of the Corporation Tax Act 2009 respectively. That includes a situation in which deductions are decreased. This point was considered and confirmed by the tax tribunal last year, in the case of Abbey National Treasury Services plc v. Her Majesty’s Revenue and Customs. It is therefore right that the changes introduced by clause 45 do not refer directly to the transfer pricing rules but instead refer to sections 446 and 693, which apply them to loans and derivatives. To be clear, the exclusion of credits as a result of paragraphs 3 and 4 of schedule 7 applies to cases where deductions have been reduced as a result of the transfer pricing rules operating through sections 446 and 693 respectively. The rules therefore work as currently drafted.

The amendments could give rise to problems. In particular, they could have the effect of the exclusions applying more widely than intended. In addition, the amendments would go against the decision in the Abbey National case. For those reasons, it is important that the limitations link through sections 446 and 693.

Schedule 7 addresses three situations in which the interaction of accounting and tax rules may lead to unintended and unfair outcomes. It supports the Government’s policy of simplifying taxation by giving certainty to the rules and making them easier to comply with, and I therefore invite the hon. Gentleman to withdraw the amendment. I am grateful for the opportunity to provide some clarity to the Committee on the technical concerns that have been expressed. I hope that clause 45 and schedule 7 will stand part of the Bill.

Photo of Rob Marris Rob Marris Shadow Minister (Treasury)

I had forgotten about the legal case to which the Minister referred. I will not press either of my amendments.

Question put and agreed to.

Clause 45 accordingly ordered to stand part of the Bill.

Schedule 7 agreed to.

Clauses 46 to 49 ordered to stand part of the Bill.

Photo of Rob Marris Rob Marris Shadow Minister (Treasury)

On a point of order, Mr Howarth. I want to put on record my thanks to the Chartered Institute of Taxation, the Association of Tax Technicians, members of the Committee and my researcher, Imogen Watson. I thank the Minister for the patience he has shown and the excellent support and help he has given me. I thank you, Mr Howarth, and Sir Roger Gale, because I am resigning as the shadow Financial Secretary to the Treasury forthwith, and I will not be before this Committee unless there is a change of leadership in the Labour party.

I am grateful to the hon. Gentleman. He has effectively taken himself out of the Committee. Strictly speaking, it is not a point of order, but the Committee is grateful for the information he has given, because obviously it will affect the future conduct of the Committee.

Strictly speaking, that was not a point of order and there should not even be a “Further to that point of order”, but in these exceptional circumstances I will stretch the point.

Photo of David Gauke David Gauke The Financial Secretary to the Treasury

Further to that non-point of order, Mr Howarth. I want to put on the record my thanks to the hon. Member for Wolverhampton South West. He has performed his role with great diligence, good humour and common sense. He has performed the role extremely well in sometimes difficult circumstances. Whatever the future holds for his party, I wish him well. I am sure he will continue to be an excellent and dedicated Member of Parliament.

On behalf of Sir Roger Gale and myself and the Officers of the House, I thank the hon. Member for Wolverhampton South West for his kind words.

Photo of Mel Stride Mel Stride The Lord Commissioner of HM Treasury

May I also associate myself with the generous comments that have been made?

Ordered, That further consideration be now adjourned. —(Mel Stride.)

Adjourned till Tuesday 5 July at twenty-five minutes past Nine o’clock.