Mr.
Timms: Schedule 14 provides the new exemption, which we
have been discussing, from corporation tax for dividends and other
distributions from foreign companies. It amends the rules on taxation
of distributions received from UK companies. The exemption will remove
the need for groups to make complex double tax relief calculations and
will allow profits to be repatriated, even in circumstances in which
there would not have been enough double tax relief to eliminate a UK
tax liability. Until now, when there was insufficient credit for
foreign tax, overseas profits would typically stay offshore, with cash
possibly being returned in the form of an upstream loan. Alternatively,
groups might have adopted complicated, artificial ways of repatriating
such profits other than through a dividend. Exemption will sweep all
that away and allow for immediate repatriation of profits and the
return of cash by dividend. That will enhance the attractiveness of the
UK as a location for the headquarters of multinational
businesses. The
rules will apply to distributions received by all companies in the UK,
including small companies, which was not part of the original proposal.
The rules for small companies are distinct from the rules for medium
and large companies, but, in each case, the vast majority of all
dividends and other distributions will benefit from the exemption. That
protection, alongside that
contained in clause 40 and schedule 19, which deal with personal
dividend taxation, are a proportionate response to the risk of abuse of
the exemption by small companies—the protection set out in the
schedule. However, we will keep a close eye on the matter and take
immediate action if any avoidance activity is
identified. The
hon. Member for Fareham moved amendment 43 on capital distribution.
Schedule 14 applies only to distributions of an income nature. The
amendment would increase its scope so that it applied to most capital
distributions as well. However, schedule 14 is concerned only with the
taxation of distributions that represent income. Nothing in the
schedule will cause any capital distribution that is currently exempt
to become taxable, so there is no reason to extend the scope of the
exemption as suggested. The legislation does nothing to alter the
taxation of capital distributions that are excluded from the scope of
proposed new part 9A of the Corporation Tax Act 2009. There is already
an exemption for capital distributions, known as the substantial
shareholdings exemption. It is not part of this Bill to change in any
way the scope of that exemption, so I hope that he will accept that the
amendment is not
appropriate. As
the hon. Gentleman explained, amendment 48 would alter the definition
of a small company. However, in doing so, it would change the standard
definition used to determine whether exemption follows the small
company rules or the rules applicable to larger companies. The
legislation uses the standard European Commission definition of a small
company, which includes a time lag whereby a company that changes from
small to medium sized retains the status of “small” in
the transition year but becomes a medium company the following year. A
similar rule applies if a company moves down in size from medium to
small. The amendment would delay the change of status by a further full
year. That would be an additional complication and make it less likely
that the appropriate legislation for that size of company was applied.
I hope the hon. Gentleman will accept that that is an unhelpful
additional complication.
Several
Government amendments in this group are concerned with a rule that
denies exemption if a foreign tax deduction is given for the
distribution, on the basis that a distribution that is tax deductible
represents a deduction from taxable profits rather than distribution of
those profits. Therefore, it is closer to an interest receipt than a
distribution and would be expected to give rise to a taxable receipt
for the recipient. The rule denying exemption is extended to cases
where amounts determined by reference to a distribution are tax
deductible. That ensures that the rule cannot be side-stepped by the
use of indirect tax deductions obtained through avoidance schemes. The
change will also enable some simplification of the manufactured
dividend rules, which no longer require a specific exception. I
therefore recommend that Government amendments 92, 93, 99,101 and 102
to schedule 14 be accepted. I hope that the hon. Gentleman will not
press amendments 43 and 48.
Mr.
Hoban: I am grateful to the Minister for his comments,
particularly on amendment 48 and the transitional year which dealt with
the issue that I was seeking to tease out. I have a residual concern
about amendment 43. My understanding is that certain distributions that
would have been untaxed under the
existing rules, because of the UK to UK rules, are taxable now. I will
go back and think carefully about whether any issues ought to be drawn
to the Minister’s attention and be the subject of further debate
on Report. I beg to ask leave to withdraw the
amendment. Amendment,
by leave,
withdrawn. Amendments
made: 92, in
schedule 14, page 134, line 1, leave
out
‘any amount
determined by reference
to’. 93,
in
schedule 14, page 135, line 17, leave
out
‘any amount
determined by reference to’.—(Mr.
Timms.)
Mr.
Hoban: I beg to move amendment 44, in
schedule 14, page 135, line 32, leave
out ‘subsection 6(c) and (d)’ and insert
‘the words “is resident in
the United Kingdom and” after “person who” in each
of paragraphs (c) and (d) of subsection
(6)’.
The
Chairman: With this it will be convenient to discuss the
following: amendment 45, in
schedule 14, page 135, line 36, leave
out from ‘of’ to end of line 38 and insert ‘an
ordinary
share.’. Amendment
170, in
schedule 14, page 136, line 19, after
‘dividend’, insert ‘or other
distribution’. Amendment
49, in schedule 14, page 141, leave out
lines 29 to
34.
Mr.
Hoban: The amendments cover several issues. Amendment 44
deals with the exemptions in proposed new section
930E—“Distributions from controlled companies”. I
am concerned that in introducing this measure the Government have
omitted some of the existing tests for controlled companies. It refers
to holdings which, for a variety of reasons, may be split between
various groups of companies but in aggregate mean that the company has
control. The
existing tests
read: “(c)
if the person is resident in the United Kingdom, rights and powers of
any person who is resident in the United Kingdom and connected with the
person;
and (d)
if the person is resident in the United Kingdom, rights and powers
which for the purposes of subsection (5) above would be attributed to a
person who is resident in the United Kingdom and connected with the
person (a ‘UK connected person’) if the UK connected
person were himself the
person.” The
situation here is that the ownership of subsidiaries may be split so
that neither of the owners have control within the basic provisions of
controlled foreign companies legislation, but taken together they would
have control. If we do not replicate this in subsections 6(c) and (d),
those dividends would fall outside the exemption and would therefore be
taxable. It is not clear why the change has taken place. The
explanatory notes suggest that the definitions replicate the CFC rules,
but this exclusion for indirect ownerships suggests that that is not
the case. The amendments try to address that by enabling shareholdings
held through non-resident affiliates to be aggregated
together.
Amendment 49
refers to the issue of redeemable shares. In the UK ordinary shares are
assumed not to be redeemable. One concern is that the law in other
jurisdictions is not as clear as in the UK, so there would be a risk
that a distribution might be taxable when it should not be. My
amendments seek to clarify that point and I would be grateful for the
Minister’s comments. If there is an issue about people using
redeemable ordinary shares, is it not better to tackle it through an
anti-avoidance route rather than the provisions in proposed new section
930F? Amendment
170 is a drafting amendment that seeks alignment: subsection (1) of
proposed new section 930H refers to a dividend only, whereas subsection
(1) of proposed new section 930G refers to a “dividend or other
distribution”. Assuming that there is no reason for this
difference, the amendment would simply correct a drafting
error.
Dr.
Pugh: I wish to speak against amendment 44. I understand
that it replaces reference to Income and Corporation Taxes Act 1988
provisions with the words,
“is
resident in the United Kingdom”
and “person
who”. This is undesirable because the vagueness of UK residency
requirements can lead to individuals exploiting distributions from
controlled foreign companies and achieving tax advantages. The
legislation is best left as it stands. I understand that there are
difficulties at the moment in equating certain well-known Tory
donors’ residency with their tax situation, and bringing
residency into this is
unsatisfactory.
Mr.
Timms: Chapter 3 of the schedule introduces a set of
exempt classes, and the amendments in this group, as we have heard, all
act to increase the scope of the exempt classes in various ways. The
idea of the exempt classes is to give exemption in circumstances where
the risk of avoidance is low. The benefit is that the anti-avoidance
rules can be targeted at narrow situations rather than being of general
application. That is a significant benefit and I am cautious about
extending exempt classes because of the risk of losing some of that
benefit.
Amendment 44
would increase the scope of the exempt class for controlled companies
in a way that would allow a distribution to fall within an exempt class
even if the payer of the distribution was not within the scope of the
CFC legislation. That exempt class gives exemption to more than 90 per
cent. of dividends by value. It takes a simple and direct route to
exemption for controlled companies, which is possible because the CFC
rules protect against artificial diversion of profits. The protection
reduces the risk that this exempt class might be abused by avoidance
schemes and allows it to be free of any other conditions for
exemption.
The effect
of the amendment would be to allow the rights and powers of a connected
foreign company to be taken into account in determining whether the
payer of a distribution is a controlled company. Therefore, a
distribution paid by a company controlled outside the UK—and
therefore outside the scope of CFC defences—could be brought
within this exempt class, so there is a potential danger of an
unacceptable fiscal risk. The attribution was limited to UK companies,
and that brought the risk of another EU legal challenge. The extension
of that to all companies would have brought unacceptable risks and
hence we removed it
altogether.
12
noon
Mr.
Hoban: Is the Minister certain that a significant risk is
attached? I understand that the rules were in place under the existing
regime. They allowed non-UK affiliates to be taken into account in
determining whether the basic control rules were met. We seem to have
shifted away from that. I am concerned that the Minister is taking a
potential threat and using it in support of the changes, rather than
recognising that the rules currently permit that aggregation to assess
whether control has been in place. He has not justified as robustly as
we would expect why we should move away from that
position.
Mr.
Timms: What I understand the hon. Gentleman to be asking
is whether there is a real risk of EU challenge from the arrangement as
it was. We have been very careful throughout the exercise to ensure
that we are absolutely secure from any challenge under EU law, because
such a challenge would create uncertainty which would be in
nobody’s interest. I am not aware of anyone proposing to mount a
challenge, but the way in which we have arranged this now means that we
can be absolutely certain that there will not be a challenge. That is
an important bolstering of the confidence with which people will be
able to operate once the arrangements are in place, and is a worthwhile
protection against
challenge. Amendments
45 and 49 would remove one of the two conditions required for exemption
in the second class, which applies to distributions paid on
non-redeemable ordinary shares. This class is relevant where the first
class is unavailable because the CFC rules do not apply. An ordinary
share is one that carries no preferential rights. The reason for the
restriction is that in the absence of CFC defences, preferential rights
attached to shares may be used to allow distribution exemption to be
used to convert what would otherwise be taxable profits into exempt
dividends. We need that when ordinary shares are not redeemable, since
the right to redeem share capital might otherwise be used to provide an
alternative form of preference for the shareholders, and we think that
that would represent an unacceptable fiscal
risk. I
should remind the Committee that a dividend that does not fall into the
exempt class can still qualify for exemption. A dividend will always be
exempt if it is not derived from transactions designed to reduce UK
tax. That is the effect of the later part of chapter 3. The exempt
class provides a simple route to exemption for many dividends, but it
is not the only route—there is also a fall-back. I suggest that
the amendments are not necessary and would create a significant
avoidance
risk. Finally,
turning to amendment 170, I should say again that there is a fall-back
exempt class that ensures that dividends paid in wholly commercial
circumstances are always exempt. The exempt class is based on a test of
the profits out of which a dividend is paid. Exemption is given,
provided that the profits do not derive from transactions designed to
reduce UK tax. A dividend is necessarily paid out of profits, but the
same cannot be said for other types of distribution. Since the class is
a test of profits and not directly a test of the distribution, it is
limited to
dividends. I
am satisfied that amendment 170 is not necessary to enable all
commercially derived profits to be repatriated in a tax-free form,
which is our aim. The extension to
non-dividend distribution would create risks because of the lack of a
necessary link between the distribution and the profits. I hope that on
that basis the hon. Gentleman feels able to withdraw the
amendment. Mr.
Hoban: The areas that we are seeking to legislate on are
obviously complex. The Financial Secretary has said that there are
fall-backs that would allow distributions to be exempt in particular
circumstances. It would have been helpful, where possible, to have
drawn together on that. I do not understand why he objects to amendment
170; if a distribution is not designed to reduce tax, why is that not
part of the clause? There is a danger that the dividing line that the
Minister is seeking to draw between what should and should not be
exempt will become quite
complex. The
Financial Secretary is yet to give a robust explanation for why it is
not appropriate, in relation to amendment 44 for example, to repeat the
foreign affiliates rules in the existing CFC legislation, but we will
not dwell on that. Part of the challenge with schedules 14 and 15 is
that they have been heavily amended in the past few days, and I think
that people need more time to think through some of the consequences. I
am sure that that will be one of the themes that will emerge in later
consideration. We are in danger of giving outside bodies insufficient
time to think about the consequences of those changes and the knock-on
effects. Having said that, I beg to ask leave to withdraw the
amendment.
Amendment,
by leave,
withdrawn.
| 
