Co-ownership authorised contractual schemes: capital allowances

Finance Bill – in a Public Bill Committee am 2:45 pm ar 19 Hydref 2017.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury) 2:45, 19 Hydref 2017

I beg to move amendment 32, in clause 40, page 58, line 31, at end insert—

(1) Within fifteen months of the passing of the Finance (No. 2) Act 2017, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the operation of the new provisions for co-ownership authorised contractual schemes.

(2) The review shall, in particular, consider the operation of these provisions in relation to master funds.

(3) In this section, “the new provisions for co-ownership authorised contractual schemes” means—

(a) sections 262AA to 262AF of this Act, and

(b) regulations made under sections 41 and 42 of the Finance (No. 2) Act 2017.

(4) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons within three months of its completion.”

This amendment would make statutory provision for a review of the operation of the new provisions for co-ownership authorised contractual schemes.

With this it will be convenient to discuss clauses 40 to 42 stand part.

Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury)

As colleagues will have noted, the Opposition are requesting a review of the operation of the new provisions for co-ownership authorised contractual schemes. Authorised contractual schemes, previously referred to as tax transparent funds, can be established as either limited partnerships or co-ownership schemes, although this discussion will focus on the latter.

The schemes were introduced in 2013 to aid the establishment of UCITS—undertakings for collective investment in transferable securities—master funds in the UK. A number of the new rules appear relatively sensible from my perspective—for example, in clause 41, the provision of additional information by schemes to their investors—but I have some concerns, particularly about clauses 40 and 42. That is why we have suggested that a review would be helpful.

Clause 40 focuses on reducing the administrative burdens of such schemes. I am concerned that additional consideration should be given to the potential for tax avoidance now that the Government are loosening rules. Luxembourg and Dublin already provide tax transparent vehicles. Surely, in our focus on ensuring that Britain is an attractive destination for investment, we must ensure that our offer is based on our investment expertise and the investment opportunities available here, rather than any artificial factors. Furthermore, I do not feel from what I have examined that I have sufficient understanding of the rationale for enacting some of the provisions through secondary legislation. It would be helpful to understand how the Minister will ensure that the measures are discussed with an appropriate degree of accountability.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General 3:00, 19 Hydref 2017

Before I respond to the amendment tabled by Labour Members, I would like to set out for members of the Committee the overall aims as they relate to this particular piece of legislation.

Clauses 40, 41 and 42 make changes to ensure that the tax system works effectively for investors in co-ownership authorised contractual schemes, which I will refer to as COACS for short. COACS are UK collective investment schemes authorised by the Financial Conduct Authority. They were introduced in 2013 to make the asset management industry more competitive internationally, to reduce industry costs and to increase returns to investors. These schemes are transparent for tax on income. That means that the income generated by the scheme is taxed on the investors, not on the scheme. Investors are taxed as if they had invested directly rather than through the scheme.

COACS have been welcomed by investors, which are predominantly institutions such as pension funds and life insurance companies. Following consultation last year, the Government are now making three changes to simplify the tax rules for investors in COACS and to align them with rules for other types of investment funds so far as is practical.

Amendment 32 would require HMRC to complete a review of the operation of COACS by early 2019. I reassure the hon. Member for Oxford East that the Government have consulted extensively on the measure. There was a formal consultation in summer 2016, in which the industry participated fully and constructively. The consultation process also included a well-attended open forum of interested parties in September 2016 to investigate and evaluate options. In addition, the Government have held regular discussions with industry representatives. It was in those discussions that the issue that clause 40 seeks to address was first highlighted. The Government will continue to engage with the sector on COACS and the practical implementation of the rules governing the schemes.

The hon. Lady referred to master funds, which are a fund structure where a fund has a number of separate feeder funds as its investors. They were not the subject of any response to the consultation, but HMRC stands ready to engage further with industry, should it have any questions related to COACS and master funds. The hon. Lady suggested that there may be a possible means of tax avoidance here. Income accruing to a master fund that is a co-ownership authorised contractual scheme is treated as the income of the investors, so UK investors cannot avoid tax on it. Clause 42 and its related secondary legislation will help to protect revenue. The measure as a whole is robust against potential tax avoidance, but HMRC will of course continue to be vigilant.

Photo of Kirsty Blackman Kirsty Blackman Shadow SNP Spokesperson (Economy), SNP Deputy Leader, Shadow SNP Spokesperson (Economy)

The Minister has been positive about the transference of accountability with COACS. I want to raise a query. Will he confirm that the changes being made will not erode the transparency and accountability of the scheme as it is? Will that be kept under review ?

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

Absolutely. All these matters will be kept under review. It is not the Government’s belief that the changes will erode the scheme; we believe that the changes will facilitate and ease the operation of these particular schemes to the advantage of pension funds and others that typically make use of them.

In the light of the extensive consultation held and the Government’s continuing commitment to work with industry on the implementation of rules governing COACS, I hope that the hon. Member for Oxford East will withdraw the amendment.

I turn now to the background to the clauses. COACS are not subject to tax, but the operators of the schemes hold information needed by investors to complete their own tax returns and to claim any capital allowances to which they are entitled. The calculation of capital allowances falls in practice on the investors and can be extremely complex. In addition, operators hold information that would help HMRC to check that investors’ tax returns are accurate, but at the moment there is no statutory requirement for COACS to provide tax information to either investors or HMRC. That is one example of the easements, from the investors’ and HMRC’s point of view, that the hon. Member for Oxford East may be interested in. Further, where a COACS holds investments in offshore funds, the rules that normally apply to ensure that offshore income is taxed appropriately on UK investors do not work as they should.

Clause 40 introduces new rules that allow the operator of a COACS to elect to calculate any capital allowances due, benefiting investors by avoiding the need to exchange large amounts of information with the operator of the COACS. The election can be made for periods that start on or after 1 April 2017. Clause 41 enables the Treasury to make regulations that will do three things to help to ensure that the right tax is paid on investments in COACS. First, the regulations will require the operator of a COACS to provide sufficient information to investors for them to complete their own tax returns. Secondly, they will require the operator to provide information to HMRC about the income arising to investors each year, and provide HMRC with a power to request copies of any other information provided to investors. Thirdly, they will impose penalties if scheme operators do not comply.

Clause 42 enables the Treasury to make regulations that will require a COACS that has invested in an offshore fund to ensure that all of the offshore fund’s income is treated as its investors’ income, regardless of whether it is actually distributed to them. This removes the risk of income rolling up offshore without being taxed as it arises. It also brings the treatment of investors in COACS into line with the treatment of UK investors in offshore funds generally.

These targeted measures will help to ensure that the tax system works efficiently for investors in COACS, and that they pay the right tax on their investments. I hope that the hon. Lady will withdraw the amendment, and that clauses 40, 41 and 42 will stand part of the Bill unamended.

Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury)

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clauses 40 to 42 ordered to stand part of the Bill.

Ordered, That further consideration be now adjourned. —(Graham Stuart.)

Adjourned till Tuesday 24 October at twenty-five minutes past Nine o’clock.

Written evidence reported to the House

FB 17 An individual who wishes to remain anonymous

FB 18 Chartered Institute of Taxation further submission (clauses 60, 61 and 62, and schedule 14)

FB 19 Nathan Hamilton

FB 20 Taylor Wessing LLP