Finance Bill |
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Mr. Spring: I am grateful for the Minister’s explanation. We will wish to make a contribution to the review. I suggest that if he wants to get some excellent personal feedback and experience on trusts and their efficacy and ability—particularly offshore trusts—to help him reduce tax bills, he might wish to consult his noble Friend Lord Drayson, a Minister who appears to be expert beyond parallel in these matters. Question put and agreed to. Clause 33 ordered to stand part of the Bill. Clause 34 Location of assets etc 11.45 amQuestion proposed, That the clause stand part of the Bill. John Healey: The clause brings into effect schedule 4. The clause and schedule together introduce a further anti-avoidance measure relating to capital gains tax by providing additional rules to determine where assets are situated for the purposes of tax on capital gains. In most circumstances UK taxpayers are liable to tax on their capital gains regardless of where the asset in question is situated, but if individuals who live in the UK are domiciled abroad, their gains on disposals of assets situated outside the UK are liable to capital gains tax only if they remit the disposal proceeds to the
The Chairman: Order. The Minister appears to be trespassing into the schedule as well as the clause. If he intends to do that, I am inclined to have the schedule taken formally when we come to discuss it. I hope that the Committee accepts that. I am happy that he should talk to the schedule, if he wishes. John Healey: I am grateful for your guidance, Sir Nicholas. I thought it sensible to combine the two matters, given that the clause simply gives effect to schedule 4 and given the substance at stake. I was explaining how the avoidance practices mean that the taxes avoided on assets ought, in any reasonable view, to be regarded as UK assets and should attract a UK tax charge. The measure stops exploitation in two ways. First, shares in companies incorporated in the UK will generally be regarded as situated here. Secondly, unless an existing tax rule already specifies their location, intangible assets, such as options or rights over other assets, will now be treated as being situated in the UK for the purposes of tax and capital gains if they are subject to UK law at the time that they are created. The rules for futures and options that are not subject to UK law at the time they are created will take account of the location of the underlying subject matter. The measure is designed to frustrate the schemes arising on the disposal of assets related to the UK outside the scope of UK tax on capital gains. It does not deal with assets that are unrelated to the UK—for example, shares in an overseas incorporated company that are registered abroad as UK assets—and it strikes a fair balance as it closes a lucrative avoidance scheme. I trust and hope that the Committee will accept it. Mr. Spring: I am grateful to the Minister for his explanation. The measure is perfectly legitimate and sensible, and we are happy to support it. Mr. Mark Field (Cities of London and Westminster) (Con): I accept that the measure is a sensible decision. However—I do not expect the Minister to go into any great detail on this—I hope that the Treasury is entirely aware of the situation in what is clearly and inevitably a fast-moving world. In particular, a large number of transactions take place over the internet and it is sometimes difficult to gauge the companies involved in such transactions and the legal rights of customers and companies. It strikes me that we are talking about an area in which a great deal of detailed academic thinking will have to come into play, probably in the very near future but certainly within the next decade or two, if we are to ensure that there is a proper tax regime and that
I represent the west end of London, where a number of our retailers have some woeful stories. I suspect that the problem is not only the congestion charge, but the fact that, increasingly, a great amount of their money is taken away because of the number of transactions and sales that take place over the internet. Is there some blue skies long-term thinking going on in the Treasury about the future nature of taxation and the taxation burden, especially for capital gains tax? We live in a world where the obvious boundaries of nation states are becoming far more blurred as far as such transactions are concerned, and I hope that something new is being done. I guess that any new measure will be supranational, involving the EU countries and, increasingly, the United States—which, as ever, is likely to be one step ahead of the game—to make sure that we close any loopholes before they become apparent to highly paid tax advisers. Chris Huhne: Over many years, I have listened to interesting discussions between the Treasury and various non-UK domiciled communities in the UK. Periodically, the Chancellor of the Exchequer tries to clarify the situation and hears representations to the effect that doing so would lead to a substantial exodus from the UK. I gather that the provisions are mainly aimed at that non-UK domiciled but UK-resident community. In the Minister’s view, is the potential use of bearer shares in UK companies likely to be significant enough to precipitate such a move? We are dealing with a sanctified tax avoidance measure—that is, the use of non-domicile status—that has been on the UK statute book for many years. The Government are clarifying a rather small element of it, but is the Minister certain that the provision will not lead to a substantial group of people leaving the UK for other jurisdictions? John Healey: The hon. Member for Cities of London and Westminster (Mr. Field) made a number of telling points. As he said, we are indeed talking about a very fast-moving world and, as he would expect, we are giving careful thought to the sort of issues that he raised. It would not be responsible for the Treasury or Her Majesty’s Revenue and Customs to do otherwise. So I can in general terms give him some assurance on that. He is right to suggest that the provision is a targeted approach to a specific avoidance problem. In a sense, that addresses the concerns of the hon. Member for Eastleigh. The fears that he expressed are unlikely to arise because the provision is targeted. We have targeted the provision in schedule 4 and clause 34 on the schemes that are promoted most commonly and aggressively, and that cost the
One of the top 20 accountancy firms, the Tenon Group, caught the purpose very well when it commented:
That goes to the heart of the matter: this is an avoidance scheme that avoids the tax charge on what, in any reasonable view, are UK economic assets. The purpose of the clause and the schedule is to change that. Chris Huhne: I understand the purpose of the clause, and the Financial Secretary will be aware of the history of representations made, in particular, by the Greek shipowning community in London over many years and the various little pas de deux that have gone on between that community and the Treasury. What I asked was whether he thought that the provision was likely to lead to the exodus of any particular parties who might decide that, for the purposes of taking gains on UK assets, they would prefer to be resident in Piraeus rather than London. John Healey: The short answer to that is that we shall see. We do not expect the impact to be significant, but overriding everything is our principal purpose of closing down a tax avoidance scheme that is not legitimate and that allows taxpayers who ought to be subject to a UK capital gains tax charge on assets to avoid that charge. On that basis, we believe that this is a reasonable measure that strikes the right balance between the factors that we have had to take into account. Question put and agreed to. Clause 34 ordered to stand part of the Bill. Schedule 4 agreed to. Clause 35 Exercise of options etc Question proposed, That the clause stand part of the Bill. John Healey: I seek your guidance, Sir Nicholas. The clause refers to schedule 5. Do you wish schedule 5 to be discussed now, or do you wish to have a specific debate on that schedule? The Chairman: I am in the hands of the Committee. What I do not want is for two debates to take place, one of which is a repetition of the other. If the Financial Secretary wishes to have a debate on clause 35 and the appropriate schedule, then so be it if that is also the wish of the Committee. [Interruption.] I have
12 noonJohn Healey: I felt that I needed to be sure of my ground before offering the Committee a brief introduction to clause 35 and schedule 5, which I am happy to do. The clause and the schedule introduce another anti-avoidance measure and correct a defect in the capital gains tax rules for assets that are bought or sold under options contracts. That loophole has been exploited to avoid tax, and we announced our intention to close it in the pre-Budget report of 2 December 2004. The defect in the rules might have allowed people to avoid tax on capital gains by using options to dispose of assets at uncommercial prices. For example, someone might want to transfer an asset worth £1 million to their family trust. If they transferred it directly to the trust, they would be taxed by reference to the value of the asset—£1 million. Instead, they could use an option that set the sale price at, say, £1,000. They would then be taxed by reference to the uncommercial option price of £1,000 and not on the true £1 million value of the asset. Using the option in that way would enable them to give away an asset effectively tax-free. Companies could enter into similar option deals—for instance, they could transfer an asset at an uncommercially low option price to an overseas company in the same worldwide group of companies, because the asset would remain in the economic control of the group as a whole. The group would incur no economic loss. People might also have been able to use options to buy an asset at an uncommercially high price from, for example, their offshore trust. The trustees would not be liable to capital gains tax because the trust would be offshore. The person who bought the assets from the trustees could sell them and create an artificial tax loss because of the unrealistically high price that they had paid. That, of course, would be used to compute the gain or loss arising on that sale. Alternatively, if that person disposed of the asset after its value had increased, the full increase in value would not be taxed because the gain on the disposal would be computed using the artificially high price paid. The proposed measure puts such cases back on the correct footing. Mr. Philip Hammond: I have not spent any time studying this part of the Bill, but is not the example of an asset purchase at an artificially high price already covered by existing transfer pricing legislation? Would such legislation not effectively eliminate, or capture the tax gain from, any advantage derived from that? John Healey: If it did, we would not need to introduce the clause. In the context of the operation of the capital gains tax rules, the transfer pricing mechanism does not cover the problem. Under these measures, the tax liability will be based on the value of
The measures are targeted at people who use that device to avoid tax. Companies and individuals who exercise options at arm’s length on normal commercial terms will not be affected and will face no additional compliance burden. Employees who participate in approved company share option plans will also be unaffected. Mr. Spring: As we heard from the Minister, the provisions are anti-avoidance in nature and block a loophole caused by amending legislation passed in the Finance Act 2003. My hon. Friend the Member for Runnymede and Weybridge was right to raise his point, and I hope that the Minister was correct in his assertion. The blocking mechanisms are fairly well targeted, if not extremely lengthy and comprehensive, to say the least. We are willing to accept them, but with a qualification about competence. Why are the Government having to amend something passed as recently as 2003? Is it because they introduced a tax avoidance structure rather than closed one down? This is all part of the culture of hideous micro-management, which is a characteristic of the taxation legislation of the Government. Question put and agreed to. Clause 35 ordered to stand part of the Bill. Schedule 5 agreed to. Clause 36 Notional transfers within a group Question proposed, That the clause stand part of the Bill. Mr. Spring: The clause tidies up existing legislation so that an existing relieving provision can be used by UK branches of overseas companies with capital losses. The context is the rules for offsetting capital gains and capital losses within a group of companies. There is no group relief as such for capital losses. Group relief gives scope for offsetting losses and profits only on trading losses, management expenses and so on. To offset capital losses, which in any case can only be offset against capital gains, traditionally the asset being disposed of had to be transferred to another group member so that the losses and profits could be realised within the same company. However, the Finance Act 2000 inserted what is now section 171A of the Taxation of Chargeable Gains Act 1992, which allows that transfer to happen notionally. Companies can elect for the transfer to be deemed to have happened and thus the capital loss and capital gain are suitably matched. Clause 36 extends section 171A. It covers a branch situation and thus allows a notional transfer in a situation in which A and B are both 100 per cent. subsidiaries of C, B has a branch in the UK, A is about
I have one further point. A number of other countries permit such a use of capital losses—for example, Belgium, Norway, Spain, Italy, Switzerland, Greece, Austria and most of eastern Europe. New Zealand and Hong Kong do not tax capital gains or losses at all. That comes back to the issue that underlies so much of our proceedings: the weight of taxation in this country versus that in other parts of the world with which we compete. Question put and agreed to. Clause 36 ordered to stand part of the Bill. The Chairman: We now come to another chapter. May I advise the Committee that clause 37 introduces schedule 6? Following what we have just experienced, it might be appropriate to debate that schedule with clause 37, or to have a very brief debate, if necessary, on clause 37 and to have a longer debate on the schedule. I am in the Committee’s hands. I am inclined to reverse what we have just done, and to have the debate on the schedule. Mr. Field: Perhaps I might make a suggestion, Sir Nicholas? We are entering a new chapter, so all the rules that we have previously worked to go out of the window. Given that we will discuss two different groups of amendments on schedule 6, it might be more appropriate to have a stand part debate on schedule 6 after the amendments have been dealt with. The Chairman: I am perfectly happy to accept that. Clause 37 ordered to stand part of the Bill. Schedule 6 Accounting practice and related matters Mr. Philip Hammond: I beg to move amendment No. 114, in schedule 6, page 84, line 35, after ‘company’, insert
The Chairman: With this it will be convenient to discuss amendment No. 115, in schedule 6, page 85, line 18, after ‘company’, insert
Mr. Hammond: The amendments would confirm explicitly that the accounts referred to in the schedule must be prepared under United Kingdom generally accepted accounting practice. That would ensure that the schedule operates as intended and that the
The Paymaster General wants to prevent leakage of tax from the system. I am sure that her officials are aware that people in the big, wide world who specialise in such matters are already looking at using companies when local company law requires them to use particular accounting treatments that give a result, which is convenient to them from a tax point of view. It is considered appropriate therefore for there to be an explicit reference to the accounts being prepared in accordance with generally accepted accounting procedure. Dawn Primarolo: Before referring directly to the amendments, it would be helpful if I set certain matters in context as that would deal with the issues raised by the hon. Gentleman. The schedule will continue the work of adapting tax legislation to take account of the adoption by UK companies of international accounting standards and the new UK standards that follow the IAS closely, a point that will be important to bear in mind when I come to the amendments. The schedule builds on the legislation that was included under the Finance Acts of 2005 and 2004. The IAS are developing all the time and, as companies are grappling with converting to those standards, it is not surprising that further tax issues keep emerging. To cope with the rapid change and to make sure that tax legislation keeps up with the demands of the growth economy and fast-changing competitiveness, the schedule continues the trend to include regulation-making powers to enable the Government to react quickly to changes and to consult about them outside the usual Finance Bill timetable. I have written to the Committee and have described the way in which we intend to use such powers. Reservations are always expressed about the use of regulations, but I hope that Opposition Members will accept that the use of regulations is necessary in a complex and evolving situation. The schedule reacts also to representations about a late change made under the Finance Act 2005. The change was made to stop avoidance and to block unintended loopholes. However, some experts who are working closely with Her Majesty’s Revenue and Customs in such areas said that the change may inadvertently have gone too far. That returns to our earlier debate about how the Government try to strike a balance. Because the change may have gone too far, there was a possibility that it would inhibit some types of corporate rescue. The Government acted swiftly to relax the rule without destroying its original aim. 12.15 pmI mentioned the close working between HMRC and the experts. I pay tribute to those from business and the professions who engaged in the consultative groups that HMRC set up precisely to try to curb problems for both business and tax authorities in this
Having set the scene to show how the Government have put in place a process to deal with changing circumstances, I come to amendments Nos. 114 and 115. I recognise that the intention behind the amendments is to be helpful, but I reassure the hon. Gentleman that they are unnecessary. They seek to ensure that where the legislation being amended under the schedule refers to the “carrying value” of a loan relationship in a company’s accounts, the accounts are those prepared in accordance with generally accepted accounting practice. However, it is highly unlikely that the accounts of a company would not be prepared in that way. The hon. Gentleman touched on what might be the one exception; a company, based in another country, using that country’s accounting standards. The loan relationships legislation already provides that if a company does not draw up accounts in accordance with UK generally accepted accounting practice, for tax purposes it must be assumed that it has used the UK generally accepted accounting practice. So, the amendments are unnecessary because the Bill already copes through its interaction with loan relationships legislation; that addresses the point that the hon. Gentleman made. Having put that clearly on the record, I hope that the hon. Gentleman accepts that on this occasion the Government are trying to work closely with business to respond to international accounting standards, the new UK standards, and the transition from one to the other. Mr. Hammond: I am grateful to the Paymaster General. It might be considered slightly optimistic to say that the schedule builds on the Finance Act 2005. In fact it corrects the defects in that Act, which necessarily went through the House at great speed; all stages were conducted in a single afternoon. That probably underpins the point that we have tried to make; there really is need for extensive consultation with business on these matters. The Paymaster General herself spoke of the benefit that such a consultative relationship can have. The bottom line is that although it may be sometimes tempting to think that all people who plan corporate tax schemes are simply trying to do the Treasury down, the truth of the matter is that they are anxious to keep the line between permissible planning and unacceptable avoidance clear. Provided that the Government’s intentions are not grossly unreasonable, if they make their end target clear the industry and the specialists will rally round and try to
The problem, to which the Paymaster General alluded, is that because there is an emotion that we can perhaps only describe as paranoia surrounding this whole process, there is no pre-consultation. Announcements are sometimes made immediately prior to the Budget, with Budget day as the date when they come into effect. That results in everyone running to catch up, rather than quietly discussing the issues, assessing what the Government’s real policy objective is and helping the Inland Revenue and Treasury officials to draft effective legislation. Rob Marris: Is the hon. Gentleman saying that the explanatory notes to schedule 6 are wrong? They state:
That seems to me to refer to consultation, and therefore directly contradicts what the hon. Gentleman has just said about a lack of consultation on these sorts of matters. Is he saying that that statement in the explanatory notes is incorrect? Mr. Hammond: In the context of the introduction of international financial reporting standards, there will be ongoing consultation with industry. I was making a more general point about hasty legislation and the temptation not to consult, which the Paymaster General referred to in her remarks on anti-avoidance legislation. The danger of that is that things might then be got wrong and have to be unwound later. The Paymaster General also made some important points about the broader structure of schedule 6 and the regulations that will in due course be made under paragraphs 10 and 11. I anticipate that there will be a stand part debate, and it might be sensible for me to comment on the provision in general then. For now, I will confine my remarks to the two amendments. The Paymaster General has given a clear assurance that the concern that underlay those amendments is misplaced and that there are other legislative measures that will deal with it, and I am grateful to her for that. She has satisfied me that they are unnecessary. Therefore, I beg to ask leave to withdraw the amendment. Amendment, by leave, withdrawn. |
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