Mr.
Hoban: I am grateful to the Minister for his explanation
of the amendments and the general background. I wish to put one point
on record at the start. It is a complaint widely voiced by professional
advisers, who are concerned about the raft of amendments being tabled
at this stage. I understand that some were circulated in draft form in
the middle of last week, but they were tabled formally only on
Thursday. A number of people to whom I have spoken over the past few
days expressed concern that they have not necessarily got to the bottom
of the changes, and that further issues may need to be resolved. It is
a pity that we have to discuss the amendments so soon after their
publication. I suspect that we may see further amendments being made on
Report, or even that the matter will have to be revisited in next
year’s Finance Bill, as people work their way through some of
the changes.
I shall speak
first about the anti-avoidance measures. The Minister says that they
are targeted measures, but there is some concern they are not
targeted—that they are instead quite broad in their approach.
The Minister said that the Treasury wanted to avoid being too specific,
so that people did not try to get around detailed provisions, but I
wonder whether we have gone to the other extreme. What sort of
activities can businesses undertake to reduce their tax charge that
will be deemed reasonable by HMRC? One expects taxpayers, when
confronted with a higher tax bill as a consequence of such provisions,
to take steps to reduce their tax bill. It is something that most of us
would do, and I believe that companies will look to restructure their
external debt to reflect the provisions.
A number of
issues create the backdrop to the change. The fact that the gateway
test is much narrower than anticipated is a problem, as is the fact
that the net receivables of a company cannot be offset against net debt
in other group companies. I believe that people
would try to structure their activities so that they could be netted off
in the same company if no exemption were available to match those
amounts in the group as a whole. Would HMRC expect to see and be happy
with that level of restructuring in the run-up to commencement, with
tidying up going on to get net receivables under the maximum debt in
the same company in order to enable that
offset? 5
pm The
other aspect is the exemptions referred to by the Minister in the
anti-avoidance clause to be inserted under Government amendment 116.
New paragraphs 38B to 38E will prevent groups from
structuring their financing so as to minimise any disallowance that
they could suffer as a result of applying the debt cap legislation,
unless the arrangement meets the definition of an excluded scheme. In
trying to get to that point, however, some of the decisions that
businesses need to review require a group to look at some hypothetical
comparator transactions and deduce which of them it would be more
likely to undertake in the absence of the debt cap rules and then
calculate the test of debt expense, the available amount, the test of
income amount and the group’s profits chargeable to tax that
would arise if the hypothetical transaction had taken place. That is
covered in new paragraph 38D(2)(b), which
says: “instead,
anything that is more likely than not would have been done or not done
had this Schedule not had effect in relation to the relevant period of
account, was done or not
done.” That
may be perfect drafting from a parliamentary draftsman’s point
of view, but I am not entirely sure what would be required unless
someone explained it to me. However, there appears to be a test of
looking at how a company might have acted if the rules had not been in
place. I question whether the anti-avoidance measures are sufficiently
opaque—sorry, I mean sufficiently transparent, although they are
certainly opaque—to enable businesses to take reasonable
decisions on how to restructure their affairs legitimately to take the
new rules into account. There may be a raft of potential comparative
transactions that a business could undertake, so how can a business
prove to HMRC that it can satisfy the provisions outlined in new
paragraph 38D(2)(b)? I think that the measure will cause some problems
to business.
We need to
think about quite carefully the breadth of the measure, including what
sort of transactions it might inadvertently capture. For example, there
might be a scheme whereby an inbound investor is debt financing a
machinery replacement programme in its UK subsidiary to increase
production and thereby increase UK profits. However, if an investor
decides to reduce the amount of financing that is to be provided so
that the cost of capital is not increased by a disallowance under the
debt cap, conditions A and B of new paragraph 38B might well have been
met, because one of the investor’s main purposes was to ensure
that there was no disallowance under the debt cap, and UK profits would
be lower than they would otherwise have been because less machinery is
in place and consequently production and profits are not as high as
they would have been if the full replacement programme had been
implemented.
We assume
that such a transaction is not the target of the anti-avoidance
provisions. It is not an unreasonable transaction to undertake, but it
would appear to satisfy conditions A and B of new paragraph 38B, so one
would assume that it would fall within the definition of an excluded
scheme. Again, the breadth of the measures is causing part of the
problem. The definition of an excluded scheme is actually quite
important in establishing what is intended to be targeted by the
anti-avoidance provisions and what is not intended to be
targeted. We understand
that the excluded schemes will appear in secondary legislation.
However, until we have a chance to look properly at that secondary
legislation, which is being consulted upon, it is very hard to know
what schemes will fall inside or outside the anti-avoidance provisions
of the Bill. This is an important issue, because a number of groups
will seek to use the period between now and the commencement of the
regime to look at the nature of their activities, to decide what their
financial arrangements should be and to see whether they may be caught
by what appears to be quite a broad-brush anti-avoidance
rule.
Mr.
Timms: There has been a great deal of discussion with
businesses over the past couple of years about everything that we are
considering this afternoon, including how anti-avoidance should be
handled. I do not want the Committee to get the impression that this
measure has come out of nowhere, hence my statement that there has been
a lot of discussion leading up to this point in the
process. The
anti-avoidance rules have indeed been designed with a wide scope. That
is to ensure that all schemes designed to frustrate the intention of
the debt cap rules are caught. I made the point earlier that the
alternative would have been to identify specific schemes that would be
caught by the rules, but that would have run the risk of not catching
schemes that nobody had thought of, or because specified schemes were
changed before being used. However, the anti-avoidance rules contain
filters that will ensure that they apply only to those schemes that are
intended to frustrate the debt cap
rules. The
hon. Member for Fareham asked how a company is supposed to establish
the most likely outcome if the anti-avoidance rules apply, and what its
profits ought to be. In many cases it will be straightforward to work
out the most likely outcome. For example, when the avoidance is
targeted at increasing the gross consolidated finance expense of the
group while leaving the borrowing costs associated with that scheme
more or less unchanged, the most likely alternative outcome will be to
ignore the increase in those expenses. I do not know whether the hon.
Gentleman will find this reassuring, but HMRC will in due course
publish guidance to help to explain the factors that need to be taken
into account and assessed when establishing the most likely alternative
outcome. As it develops the guidance, HMRC will certainly talk to
businesses about that, and in cases of real difficulty, which I think
will be rare, it will be happy to discuss the most likely outcome with
the
group. We
cannot allow set-off between group companies because that would not be
EU-law compliant. However, putting receipts of interest into the
company with expense is not offensive, because the company then does
not have so much interest expense to claim as a
deduction. As
I said, we will publish detailed draft guidance before the Bill
receives Royal Assent, and will discuss it with businesses. That will
help us to come up with specific examples that should not be caught,
which might be helpful in some of the situations that the hon.
Gentleman has in mind.
Mr.
Hoban: I am not hugely reassured by the statement that
HMRC will produce guidance. There were various attempts during last
year’s Finance Bill to get HMRC to produce guidance, which
effectively would have enabled people to be taxed by legislation but
untaxed by guidance. There is a lot of concern about that approach
among tax professionals more broadly. They are concerned that guidance
does not have statutory force, does not necessarily have to go through
a proper consultation process, and offers less security to taxpayers
than primary or even secondary
legislation. The
Minister should not be in any doubt that people will be content if
guidance is published, but it is better to get primary and secondary
legislation right than to tax people by guidance. Will he reassure the
Committee that regulations will be introduced to define excluded
schemes and that the guidance will give the context of what schemes are
deemed to be excluded? It might give a bit more certainty to taxpayers
if the guidance is simply an elaboration of what is in secondary
legislation, rather than something that exists independent of
it.
Mr.
Timms: We will publish the detailed draft guidance before
Royal Assent and discuss the content with business. HMRC will consult
with business to consider particular schemes that are not intended to
frustrate the debt cap rules. It will then consider whether such a
scheme can be defined by, for example, particular hallmarks that
characterise a scheme, which we can set out up front by outcome or by
other criteria, and then publish draft regulations for comment. The
intention is to achieve a progressive process with excluded schemes
added over a
period.
Mr.
Bone: On the general principle of specifically outlawing
schemes rather than having a wider catch-all, is it not better to have
specifically outlawed schemes, so that taxpayers know where they stand?
Is it not the role of Government to outwit the accountants each year?
What will happen is that accountants will look at the provision and try
and get round it, and we will be back here again next year outlawing
schemes in the next Finance Bill. By specifying schemes, one can at
least argue with some certainty, rather than going off to tribunals or
court
cases.
Mr.
Timms: I think the hon. Gentleman’s argument
actually supports the approach that we have taken. He is absolutely
right: some very ingenious people will no doubt try to find a way round
some of the provisions. However, if the approach we took was to try to
work out what kind of schemes might be dreamt up and then list them all
or set them all out in the legislation, that would be an invitation to
someone to think of a slightly different version, or to come up with
something new. It is therefore better to design the anti-avoidance
rules as we have done, with a wide scope, so that all schemes that are
designed to frustrate the intention of the debt cap rules are caught.
He is right about the ingenuity that will be applied, but I think that
the conclusion he draws is not correct. It is better to have the wide
scope that allows us to deal with whatever is
invented. Amendment
105 agreed
to.
Mr.
Timms: I beg to move amendment 106, in
schedule 15, page 150, line 1, at
end insert—
‘(1A) But a period of account that is within
sub-paragraph (1) is not a period of account to which this Schedule
applies if the worldwide group is a qualifying financial services group
in that period (see paragraph
6A).’.
The
Chairman: With this it will be convenient to discuss
Government amendments 110 and
150.
Mr.
Timms: I can be a bit briefer with this group of
amendments, as I have already set out the aim of the debt cap
legislation. I mentioned that some businesses cannot operate without
the use of debt—for example, banks borrow from their depositors
to lend on to customers—and the debt cap has never been intended
to apply to businesses for which debt is integral to what they do. The
draft clauses published in December contained exclusions for financial
business where debt was an integral part of that business, but
subsequent discussions established that those rules, as set out at that
time, would have been very difficult to operate in
practice.
5.15
pm
In my 30
April letter, we explained to the financial services industry why the
Bill would not exclude this exclusion on publication. We have been
working with business to develop workable solutions since then. The new
financial services exclusion rules work by excluding a group as a whole
from being subject to the debt cap where substantially all of the
group’s income, or the income of UK members of the group taken
together as a mini consolidated group, is derived from qualifying
activities. In that context, “substantially all” will be
taken to mean around 90 per cent. Qualifying activities are lending
business, insurance businesses and trading in financial instruments.
The rules recognise the need for flexibility so that they can be
applied by financial services groups in a straightforward way. The
rules allow groups to take account of other types of income generated
by way of the qualifying activities and deal with cases in which some
of those activities might produce losses. The amendments introduce the
financial services exclusion in a form that delivers the intended
policy, while rightly excluding financial services businesses. It is
also practical for the
industry.
Mr.
Hoban: The Minister is right that these are important
amendments. Last year, when I discussed the debt cap with those in the
banking sector, this was identified as being an important issue to get
right, because of the nature of their financing. I want to raise some
issues that have been brought to my attention in the relatively short
time since these clauses were published. Some of them have been
discussed with the Treasury already.
The first
issue relates to qualifying activities. To qualify for the exemption,
all or a substantial amount of a group’s income must be aimed at
qualifying activities. The Minister said that that means 90 per cent.
of the group’s income must be in a qualifying activity—a
proportion used elsewhere, I think. However, that means that groups
with a combination of qualifying and non-qualifying activities might
have a problem. Let us consider how some businesses in the financial
services sector are currently developing. For example, retailers are
increasingly moving into financial services. The financial services
income might constitute a relatively small proportion of a
group’s total income, which means that it would not qualify
under this exemption because neither all nor a
substantial part of its income will derive from a qualifying activity.
The vast majority will come from retailing, selling petrol or whatever.
This provision might place an extra burden on groups seeking to
diversify into financial services and act as a barrier, or a further
disincentive, to them doing
so. I
understood that, at one stage, the Treasury or HMRC were considering an
exemption that would enable them to ring-fence sub-groups
wholly engaged in qualifying activities as a means of getting around
this particular issue. I would be grateful if the Minister could
explain why that route has not been pursued and why the level has been
set at such a high level of 90 per cent. I hope that this does not, as
has been suggested, take us back to our old friend “EU
rules”. My first concern, therefore, is about what happens with
hybrid groups. Can the rules be amended to reflect the diversity of
some groups involved in some financial services and other
activities? The
second concern relates to the treatment of insurance premiums. The
Minister will be aware that premiums on investment contracts will be
accounted for in a group’s balance sheet, rather than its income
statement. Will those premiums be included in the gross income test
under proposed new paragraph 6G(3)(B)? My understanding is that that
point has been made and accepted by HMRC but is not reflected in the
drafting of the
amendment. My
second point on insurance premiums relates to the way in which they are
disclosed in sets of accounts. Looking at the gross income for the debt
cap test, will the Treasury expect insurers to report their premiums
gross of reinsurance premiums, as that would be the appropriate measure
for discerning the gross income test? As I understand it, as a matter
of presentation several insurers show their turnover net of reinsurance
premiums but disclose by way of note the gross premium. Could the
Minister clarify how insurance companies will be able to calculate
their gross income? The substantive point that concerns me at present
is the question of how the exemption for financial services will take
into account those groups whose financial services activity is perhaps
a significant element but nowhere near the 90 per cent. test the
Government have set out in the schedule and in the
amendments.
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