Standing Committee F
Thursday 13 June 2002
Mr. Roger Gale
(Except clauses 4, 19, 23, 26 to 29, 87 to 92, 131 and 134 and schedules 1, 5 and 38)
The Chairman: Good morning, ladies and gentlemen. I am pleased to see that you have made rapid progress during my absence.
Mr. Howard Flight (Arundel and South Downs): I beg to move amendment No. 119, in page 324, line 31, at end insert
'(3) Nothing in this Schedule shall cause or require the recognition of income chargeable to tax by reason of any transactions involving futures or options by the trustees of an authorised unit trust or by an open-ended investment company, and ''company'' and ''derivative contract'' shall be interpreted accordingly.'.
I warmly welcome you back to the Chair, Mr. Gale.
Amendment No. 119 is essentially a probing amendment. It seeks to ensure that the tax treatment of dealings in derivatives by open-ended collective investment schemes is clear so as not to both discourage their usage and incur unnecessary accounting problems. The current position for unit trusts and pension funds contrasts sharply with the unclear tax treatment of derivatives for investment trusts. Consequently, derivative activity in closed-ended funds is mostly conducted by funds based outside the UK. In principle the repeal of the relevant sections will not have an adverse tax effect on existing unit trust and pension schemes, which is the first logical point for repealing them.
The key point is the risk that, at the end of the year, accountants will want to see an audit trail of decision making behind every derivative transaction. That is not currently required because open-ended schemes rely on section 468AA of the Taxes Act 1988, which provides a blanket exemption from tax issues. Not only would the necessary audit trail be administratively burdensome but it could deter open-ended funds from using derivatives, which is not the intent behind the schedule.
A further complication is that open-ended vehicles are bought daily by investors, and the price of those vehicles also changes on a daily basis. It would be extremely complicated if, at the end of an annual audit, the auditor were to decide that the tax treatment was not as originally envisaged by the fund manager or trustee. That would mean that the prices at which many transactions had taken place were wrong, and
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correcting that would be a nightmare. I hope that the Government have a ready answer to deal with that important practical point.
The Paymaster General (Dawn Primarolo): Good morning, Mr. Gale. It is nice to see you back in the Chair. We worked hard in your absence so that you would be pleased on your return by the progress that we had made, and we will continue to make progress under your guidance.
The hon. Member for Arundel and South Downs (Mr. Flight) raises an important point. This area is hugely complex and there is a long history of attempts to ensure that the tax rules in it are correct. At every opportunity the previous Government and our Government tried to ensure that the rules taxed appropriately without adding constraints or creating uncertainty for that highly complex market. I appreciate the point behind the hon. Gentleman's amendment about the tax position of authorised unit trusts and open-ended investment companies.
I appreciate also that over the past few weeks companies have been in doubt about whether the clause offered the certainty that they previously thought it did. As the hon. Gentleman pointed out, that has happened because certain sections of tax law, which appeared to give certainty, were repealed and their absence appears to give less certainty.
I am sure that the Committee will be mightily relieved to hear that the hon. Gentleman and I do not intend to have a technical debate on the clause. I am particularly reluctant to have such a debate because I know that the hon. Gentleman is something of an expert in the area and has written a book about it, which is out of print.
Chris Grayling (Epsom and Ewell): The Paymaster General has been trying to find a copy.
Dawn Primarolo: Indeed. At one stage, I thought that it might be wise to track down a copy.
I fully appreciate that the funds need the certainty that capital profits will not be taxed. I also understand the concern that the removal of the protection that the funds enjoyed under section 468AA should not allow the Revenue to tax funds by using the argument of trading. We accept that. Since the amendment was tabled, we have had the opportunity for further discussions with the industry, and I shall explain their conclusions.
I shall first state why we believe that concerns are unfounded. The new rules will give authorised funds greater certainty than they currently enjoy about the treatment of profits from a wider range of derivative contracts . As well as applying to futures and options, the new exemption extends to contracts for differences such as swaps. Relief from taxation on capital profits is therefore being extended. The rules are explicit that where a fund accounts for profit as capital under its accounting laws it cannot be taxed. The amendment is not necessary because that position is clear.
Where income is available to distribution to unit and shareholder trusts, the situation becomes more complicated, because that carries a tax credit. The
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amendment would create a mismatch, and an opportunity for avoidanceI accept that that is not the hon. Gentleman's intentionand therefore a loss to the Exchequer. It would not be correct for investors to be able to gain a tax credit when no tax had been paid on the fund.
The Inland Revenue met the relevant representative bodies to discuss the matter. It agreed, after it explained to the companies how the system would operate, that it is crucial that the guidance, which deals specifically with some of the issues that the hon. Gentleman raised, is clear. With all the changes to the clauses, the Revenue, with the companies and representative organisations, is focusing on the guidance to ensure that it is very clear. The Revenue officials and I are grateful for the helpful suggestions that have been made. We are more than happy to take them into account to ensure that the position as the Revenue understands it, which is that there is greater certainty, is clear with respect to the tax rules. As I understand it, the interests concerned with that proposition are now satisfied.
It is always important when dealing with complex matters to ensure that the consultation on changing the rules is correctly conducted and that people are able to comment fully on all the procedures. Originally, the unit trust industry decided that it wanted to stay under the old rules rather than be included in the new arrangements. We were perfectly happy to accommodate it. Late in 2001 it decided that it would be better to be included in the new rules, which are an improvement, so we have not been able to spend quite as much time as we might have done consulting other interested parties.
I believe, however, that the consultation has now reached a successful conclusion. I hope that that is the information that has reached the hon. Gentleman. I am happy to put on record an acknowledgement of the issues that were raised. We believe that they have been dealt with by guidance that makes the matter absolutely clear, and on that basis I hope that the hon. Gentleman will be prepared to withdraw his amendment.
In conclusion, because of the complexity of the issue, it is important that the Government continue to draft guidance, discuss how the rules operate and keep an open mind about any fine-tuning that may be needed in future. I hope that none will be necessary, because the Revenue officials, to whom I would like to pay tributeeven though it is perhaps unusual to do sohave undertaken a splendid and detailed consultation, which I believe has been recognised and appreciated by everyone involved in the markets. As I said, I hope that the hon. Gentleman feels happyat this stage, at leastand will agree to withdraw his amendment. If not, we would reluctantly have to oppose it, and that would be a bad start to the morning.
Mr. Flight: May I echo the Minister's comments about the Inland Revenue? Despite the complexity of the issue, an amazing effort has been made to sort out
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highly complex tax matters. I am pleased to hear the Minister's assurances that this latent issue has been addressed and, therefore, beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendments made: No. 174, in page 332, line 27, leave out from 'which' to 'or' in line 28 and insert ', if the future were to run to delivery, would fall to be delivered at the date and price agreed when the contract is made,'.
No. 175, in page 332, line 33, leave out paragraph (a) and insert
'(a) where the contract for differences relates to fluctuations in the value or price of property described in the contract, the property so described, or'.
No. 176, in page 333, line 18, leave out 'referred to' and insert 'described'.
No. 177, in page 333, line 23, at end insert
'( ) a future;
( ) an option;'.
No. 178, in page 334, line 4, leave out from 'terms' to 'not' in line 8 and insert
(a) that, after setting off their obligations to each other under the contract, a cash payment is to be made by one party to the other in respect of the excess, if any, or
(b) that each party is liable to make to the other party a cash payment in respect of all that party's obligations to the other under the contract,
No. 121, in page 337, line 13, leave out second 'or' and insert
'(aa) so much of any exchange gain or loss arising to a company as results from any translation from one currency to another pursuant to section 93A(4) of the Finance Act 1993 (c.34) of the profit or loss of part of the company's business and falls within sub-paragraph (5A), or'.
No. 122, in page 337, line 18, at beginning insert 'For the purposes of sub-paragraph (3)(a),'.
No. 123, in page 337, line 29, at end insert
'(5A) For the purposes of sub-paragraph (3)(aa), an exchange gain or loss falls within this sub-paragraph to the extent that, in accordance with generally accepted accounting practice, an amount representing the whole or part of it is carried to or sustained by a reserve maintained by the company.'.
No. 124, in page 341, line 28, at end insert
'(3) Sub-paragraph (4) has effect where, in the case of a derivative contract of a company,
(a) the company uses, as respects the contract, a basis of accounting other than an authorised mark to market basis of accounting for an accounting period (the ''preceding period''), but
(b) by virtue of sub-paragraph (2), the company must for the succeeding accounting period (the ''first mark to market period'') use, as respects the contract, an authorised mark to market basis of accounting as its authorised accounting method for the purposes of this Schedule.
(4) Where this sub-paragraph has effect in relation to a derivative contract of a company, the company shall be deemed
(a) to have disposed of the contract immediately before the end of the preceding period for a consideration of an amount equal to the fair value of the contract at that time, and
(b) to have reacquired it for the same consideration immediately after the beginning of the first mark to market period.'.
No. 125, in page 344, line 40, at end insert
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'(3) No debit may be brought into account by virtue of this paragraph if it is taken into account in arriving at the amount of expenditure in relation to which a debit may be given by Schedule 29 to the Finance Act 2002.'.
jf1ƯNo. 126, in page 345, line 17, at end insert
'(4A) In this paragraph ''option'' has the same meaning as in paragraph 12, apart from sub-paragraph (10).'.
No. 120, in page 360, line 42, leave out sub-paragraph (3) and insert
(b) profits or losses arise to the company from the derivative contract or a related transaction in the cessation period, and
(c) the credits or debits brought into account for the purposes of this Schedule for the cessation period do not include credits or debits which represent the whole of those profits or losses, credits or debits in respect of so much of those profits or losses as are not represented by credits or debits brought into account for the cessation period shall continue to be brought into account under this Schedule over one or more subsequent accounting periods (''post-cessation periods'') as in the case of a derivative contract to which the company is party in those periods and sub-paragraphs (3A) and (3B) shall apply.
(3A) In any case falling within sub-paragraph (3), any question
(a) whether, in a post-cessation period, the company is, or is to any extent, party to the contract for the purposes of a trade carried on by it, or
(b) whether, in a post-cessation period, the contract is to any extent referable to a particular business, or a particular class, category or description of business, carried on by the company, shall be determined by reference to the circumstances immediately before the company ceased to be party to the contract instead of the circumstances in the post-cessation period.
(3B) In any case falling within sub-paragraph (3), any question
(a) whether the contract has to any extent a particular purpose in a post-cessation period, or
(b) whether there is a connection between the company and any other person for a post-cessation period,
shall be determined by reference to the circumstances in the cessation period instead of the circumstances in the post-cessation period.'.[Dawn Primarolo.]
Schedule 26, as amended, agreed to.
Schedules 27 and 28 agreed to.