This is the sixth of a series of reports on the progress of this year's Finance Bill, as it goes through its various parliamentary stages.
This report covers sittings 9-13 of the standing committee on the Bill, which sat on Tuesday 12, Thursday 14 and the morning of Tuesday 19 June. As previously noted, these reports focus on the aspects of the debates most relevant to the CIOT and our members, which is primarily the technical elements of the Bill, although the reports will aim to give a flavour of the main issues debated, which will often be more political.
A note on the stages the Finance Bill goes through appears here.
Links to the various debates are available here.
The 18th and final committee sitting will be on Tuesday 26 June.
Finance Bill Standing Committee – Sitting 9 – Tue 12 June (am)
Pace still rather slow. Clauses on qualifying time deposits, patent box and R&D relief were approved without amendment.
LITRG’s recommendations were at the centre of debate on qualifying time deposits. Labour’s spokeswoman, Catherine McKinnell, quoted LITRG extensively and their recommendations that (1) HMRC should encourage banks and building societies to provide info more proactively about possibility of registering R85s and that all deposit takers should stock up to date copies of the form and help sheet; (2) deposit takers issue certificates of tax deducted automatically to taxpayers; (3) HMRC’s tax back campaigns need to go further. She proposed an amendment (defeated in a vote) calling on HMRC to draw up plans to promote the change.
Responding, the minister said this was a relatively straightforward measure that would merely simplify and would not create a new tax burden. It would brings QTDs into line with comparable products. People can register with their provider to continue to receive interest. The amendment was not necessary; HMRC already takes steps to make people aware – website guidance, contact centres, help sheet, tax checker. LITRG suggestion that account providers should pay a more active role is right.
On the patent box, Labour claimed credit for its introduction and proposed an amendment calling for a report on the impact of the proposal on business and whether there are other similar opportunities to increase competitiveness. Conservative backbencher Nigel Mills also spoke in support of the patent box but noted that what sounded like a simple idea to let companies with profits from patents be taxed on that income at 10% had turned into about 40 pages of legislation and 80 pages of guidance. He observed that there are important growth industries that are producing complicated pieces of computer software in code. It is not possible to have a patent on software or code under UK laws, but in the US and some other places it is possible to patent code. The minister responded that a ‘broader box’ would be very expensive as most companies hold some kind of intangible assets.
On R&D tax credits, Nigel Mills put forward an amendment (later withdrawn) looking at whether there is a risk that R&D tax credits and incentives could effectively incentivise offshore entities to have their research done in the UK without the valuable intellectual property that may result being owned in the UK and generating tax receipts. “I am asking that the IP be effectively owned in the UK, or at least that the income that it generates is within the charge to UK tax,” he said. The Exchequer Secretary sympathised with Mills’ concerns, but said any move in that direction “would be ineffective, and would result in the denial of relief to claimants that we all want to continue to support. In particular, such a change would certainly be detrimental to the UK’s thriving contract research sector.” Labour’s John Mann was unhappy that too much support for innovation was compartmentalised (as with the patent box). Catherine McKinnell said the above-the-line R&D tax credit was a welcome step towards attracting businesses to invest in R&D but was concerned that reliefs would be paid for by the removal of the manufacturing investment allowances.
There was also time in the session for the start of a short debate on real estate investment trusts (REITs). Cathy Jamieson, for Labour, noted that the REITs initiative was introduced by the Labour Government, but said the opposition wanted to see improvements to the regime.
Finance Bill Standing Committee – Sitting 10 – Tue 12 June (pm)
The pace of debate picked up, with 12 clauses debated and approved in the session including those on loan relationships, lessor companies and the debt cap.
Clause 23 (Loan relationships: debts becoming held by connected company) contains retrospective anti-avoidance provisions designed to deal with a scheme operated by Barclays Bank, closed down with much media fanfare in February. There was no opposition to the clause but Conservative MP Nigel Mills, a professional tax adviser before he entered Parliament, started a debate around the use of retrospective tax legislation more generally. “There is a real principle here about whether the Government should use retrospective taxation effectively to change the law to make it apply in a way that is different from how the person thought it would apply when they entered into a transaction,” said Mills. He called on the minister to set out the Government’s policy on the use of retrospective legislation - when they think it is appropriate, and what criteria they use to decide that it is necessary - so that we can be sure that it is used only in exceptional circumstances where there is really abusive behaviour and significant amounts are at stake, and that it does not creep into being a general approach to tax policy. Exchequer Secretary David Gauke agreed that it was right “to make it clear that retrospection should be used only in wholly exceptional circumstances.” He referred Mills to the Government’s protocol on unscheduled announcements of changes in tax law. For Labour Catherine McKinnell said retrospective legislation was not ideal but was sometimes necessary.
Eight government amendments were passed to clause 24, on the sale of lessor companies. These were the first amendments to be passed to the Bill. The Exchequer Secretary explained that these were in response to concerns from representatives of the shipping industry who had pointed out that the Government’s proposals could have unintended consequences in relation to some companies that enter the tonnage tax. The amendments would, he said, also prevent the possibility that profits could be taxed twice. Labour’s spokeswoman criticised the lack of formal consultation on the proposals but accepted that the amendments fell within the remit of clarification rather than of U-turn.
Clause 31 amends legislation on the taxation of financing expenses and financing income (the ‘debt cap’). The shadow chief secretary, Rachel Reeves, and her Labour colleague Fabian Hamilton, both used the debate to raise the controversy over Vodafone’s tax bill. Reeves asked the minister “whether schemes such as the one set up by Vodafone, which has caused such an outcry over the past few days, will fall under the rubric of this amendment and whether its tax affairs would be changed in any way by the debt cap changes that we are debating”. Responding, David Gauke said he could not comment on affairs of individual taxpayers, but noted that the Government did not expect this to be a revenue-raising measure. He cited the CIOT among a number of organisations and firms who had commented favourably on the Government’s engagement on this matter. Earlier, Nigel Mills had suggested that the whole idea of the debt cap was a mistake: “While I was still in practice, I had the misery... of trying to interpret how such rules would affect various groups of companies that were doing nothing remotely aggressive or making any attempt to avoid tax, but merely had a normal commercial level of debt and happened to be a subsidiary of a foreign group.” He asked: “Can the whole worldwide debt cap now be consigned to history as a badly conceived idea that was very hard to implement and very hard to comply with?”
A number of other clauses, covering REITs, manufactured overseas dividends, taxation of corporate members of Lloyd’s, claims equalisation reserves and group relief, were approved with minimal debate and no opposition.
Finance Bill Standing Committee – Sitting 11 – Thur 14 June (am)
A fairly quiet session, with a series of short debates, mostly relating to CGT, consisting largely of requests for clarification from the Government.
Clause 34 links the increase in the CGT annual exempt amount to CPI rather than RPI. Labour’s spokeswoman said this was a stealth tax increase and would be regressive. She proposed an amendment (rejected in a vote that went along party lines) calling on the Chancellor to review the impact of the section on the number of taxpayers brought into Capital Gains Tax. Lib Dem Ian Swales asked for a coherent statement on the use of inflation in public finances “so that we can justify what the Government are doing and, in particular, try to kill the idea that fiscal drag, with CPI applied to items that cost money and RPI applied to items that bring in money, is a hidden policy underneath what we are doing”. Exchequer Secretary David Gauke said the change reflected the Government’s intention to move the underlying indexation assumption for all direct taxes from RPI to CPI.
Clause 36 and clause 215 were debated together as each relates to collective investment schemes – in particular they facilitate the launch of tax transparent funds in the UK. They were passed without opposition, as were clause 33, on company distributions, clause 37, which preserves the availability of roll-over relief on entitlements under the EU single payment scheme, and clause 35, which simplifies the CGT rules on foreign currency bank accounts. On the latter the Exchequer Secretary quoted the CIOT’s description of the clause as “a victory for common sense”. He reassured the opposition spokeswoman that it would not open up an opportunity for avoidance.
MPs also began debating the seed enterprise investment scheme (SEIS). Rachel Reeves, Shadow Chief Secretary, cited concerns raised by advisers about the complexity of the scheme. What is the Minister doing to ensure that small businesses know about the steps they must go through, she asked. Two Labour backbenchers made speeches about the importance of investment in small business across the whole of the UK. The Exchequer Secretary explained why the Government had tabled nine amendments to this part of the Bill, to ensure the measure is not abused: “First, it will prevent arrangements where the aim is to deliver to investors a tax mitigation product with no other commercial purpose. Secondly, it targets arrangements that aim to provide the benefit of tax advantage investment to entities or projects that do not themselves qualify under the schemes, or whose owners want the benefit of cheap financing without relinquishing equity.”
Finance Bill Standing Committee – Sitting 12 – Thur 14 June (pm)
Great progress on uncontentious parts of the Bill, with the committee approving 17 clauses after a series of short debates, and reaching the end of part one of the Bill (clause 54). There were no contested clauses or amendments. 60 government amendments were passed without opposition and amendments from the opposition (and one from a Conservative backbencher) were not pressed to the vote.
There were 24 government amendments passed to the enterprise investment scheme (EIS) and venture capital trust (VCT) schedules. These were designed to effectively target the anti-abuse provisions and to ensure that a VCT may not make an investment in a company over the limit agreed with the European Commission, in view of state aid rules, plus a minor drafting correction to the commencement provisions. Rachel Reeves, Shadow Chief Secretary to the Treasury, said the Government’s amendments were “yet more evidence of ill-thought-through policy that has had to be changed”. Labour proposed amendments to increase the annual investment limits that apply to the EIS and VCT from £5m to £10m but did not press them to the vote. David Gauke, for the Government, said that £5 million was “the figure that most closely describes the equity gap at present; it is the figure at which a majority of companies could be expected to benefit.”
24 government amendments were passed to clause 48 and schedule 13 on employer asset-backed pension contributions. Financial Secretary Mark Hoban explained that the amendments removed the unintended consequences to ensure that the relief given to the employer under such an arrangement accurately reflects, but does not exceed, payments made to the registered pension scheme. Nine government amendments were to schedule 6, on the seed enterprise investment scheme, to prevent abuse of the provisions. Three government amendments were to clause 46, dealing with the leasing of plant or machinery under a long funding lease. These were to deal with unintended consequences of the anti-avoidance measure highlighted during discussions with accounting firms.
Three anti-avoidance clauses relating to plant and machinery capital allowances were passed, with opposition support. Conservative backbencher Nigel Mills proposed an amendment in an attempt to persuade the Government to get the Office of Tax Simplification to review the whole capital allowances regime. He explained: “Each year, we have to tinker with the capital allowances regime to add a few new anti-avoidance bits... We have ended up with a complex scheme that does not encourage business to do what we want it to do... [and] opens up a load of avoidance potential because of the underlying complexity”. Responding, the Exchequer Secretary said that the possibility of switching from capital allowances to use of accounts depreciation had already been looked at by the last government, and had not commanded business support. The issue had also been considered by the OTS in its small business report. A disappointed Mills withdrew the amendment but said the issue would need to be looked at again at some point.
Clause 47 relates to taxation of foreign income and gains for non-doms. Labour proposed eight amendments to the part of the legislation introducing a new incentive to encourage non-doms to bring money to the UK to invest in businesses here, with the aim of reducing from 45 to 30 days the period in which investors need to make an investment after bringing the money to the UK. The minister said the amendments would make the incentive less attractive to potential investors, and they were withdrawn.
In addition to those mentioned above, other clauses passed during the session related to allowances for energy-saving plant and machinery, gifts to the nation, repeal of the self-assessment donate scheme, gift aid for community amateur sports clubs, site restoration payments and changes of accounting policy.
Finance Bill Standing Committee – Sitting 13 – Tue 19 June (am)
Having taken 12 sittings to approve 51 clauses, the committee approved the next 125 in just under an hour. These were parts two and three of the Bill, setting up a new tax regime for life insurance companies and friendly societies. The Financial Secretary introduced these parts of the Bill, explaining that the clauses represent “a wide-ranging and fundamental revision of both the basis on which life companies’ taxable profits are computed and the detailed rules by which those profits are taxed.” He said the changes would make the tax system more effective and bring the taxation of life companies more in line with that of other companies, as well as with the commercial realities of the life insurance business. In addition, the changes supported the Government’s policy of reducing complexity in the tax system. The Financial Secretary was proud that the Government was cutting the number of pages of regulations for existing friendly societies from 38 to 7.
The opposition supported the changes, describing them as non-contentious. Shadow Economic Secretary Cathy Jamieson proposed amendments which would prevent the making of regulations without prior consultation with interested parties. These were not pressed to the vote. A number of government amendments were passed generally to deal with possible unintended consequences.
The remaining two thirds of the sitting saw debate on clause 180 and schedule 20, on controlled foreign companies (CFCs) and foreign permanent establishments. The debate was opened by Lib Dem MP Stephen Williams who proposed an amendment that the legislation should not come into force until a full impact assessment has been prepared, reviewing the effect on developing countries’ tax revenue, and details of aid and technical assistance being provided to developing countries. He explained he wanted to encourage HMT and DFID to co-operate to build the tax gathering capacity of overseas governments.
More than 45 minutes was taken up with a speech from David Gauke introducing the proposals, discussing the various amendments and responding to a large number of interventions. Gauke said it was not feasible to produce the assessments proposed by either Stephen Williams or the opposition (see below). Any assessment of the impact of CFC reform on developing countries would require a full understanding of the interaction between MNCs and the tax regimes in the developing countries in which they are located, which the UK Government does not have. In response to an intervention, he said that estimates produced by NGOs were not accurate. E.g. ActionAid estimates £4bn impact on developing countries of the legislation, but this is based on assumption companies liable to pay the headline rate of tax in that country; many developing countries offer tax holidays or incentives to foreign businesses to encourage them to operate there. According to PwC, headline rates are broadly 30% in Kenya, Rwanda and Tanzania, but those three countries provide for an effective 0% tax rate for companies investing in designated zones, subject to some conditions. CFC rules should be focused on how we protect our tax base. If there is some benefit in the old CFC rules for developing countries, that is incidental and not what they were designed to do. Gauke said government amendments arise from discussions with business: some prevent a CFC charge from arising when the CFC’s profits are already taxed in the UK by other means, some ensure that the rules that establish whether a company is a CFC work properly and have the intended scope, some ensure that the finance company rules work as intended, in particular in their application to banks and insurance companies.
For Labour, Catherine McKinnell said the party supported the principle of the legislative proposals. Labour in government had been committed to moving towards a more territorial regime. “We have grave concerns, however, that the Government have not properly thought through the detailed consequences of some of the proposed changes. Unfortunately, the Minister has compounded those concerns because he is not willing to provide data or analysis on the potential implications, particularly for developing countries.” Quoted ICAEW description of the schedule as ‘appallingly dense’. Labour amendment (not pressed to the vote) would have required HMRC to publish an assessment of the impact of the changes for each of the first three years of operation, including the impact on developing countries.
Amendments debated in the four sessions
Due to the large number of amendments tabled only contentious amendments are included here. A large number of uncontested government amendments were also passed.
Amendment 23 (Lab Treasury team)
Clause 18, page 11, line 30, at end add—
‘(3) HM Revenue and Customs shall draw up plans to ensure that investors who are eligible to receive interest payments gross are made aware of the need to register with their account provider, to ensure that they do not overpay income tax.’.
Vote: Ayes 12, Noes 17
Amendment 24 (Lab Treasury team)
Clause 19, page 11, line 36, at end add—
‘(2) The Chancellor of the Exchequer shall review the impact of this provision on businesses and shall consider where there are other opportunities to introduce targeted support for business. A copy of the report shall be placed in the House of Commons Library.’.
Vote: Ayes: 13, Noes 17
Amendment 32 (Nigel Mills (Con))
Clause 20, page 12, line 3, at end add—
‘(2) The Chancellor of the Exchequer shall review the extent to which intellectual property created as a result of research and development expenditure which falls within Part 13 of CTA 2009 is vested in companies whose income is not within the charge to corporation tax, and place a copy of the report in the House of Commons Library.’.
Amendment 42 (Labour Treasury team)
Clause 34, page 24, line 2, at end add—
‘(8) The Chancellor of the Exchequer shall review the impact of this section on the number of taxpayers brought into Capital Gains Tax, and will lay a report of his review in the House of Commons Library.’.
Vote: Ayes 13, Noes 17
Amendment 43 (Labour Treasury team)
Schedule 7, page 260, line 34, leave out ‘£5 million’ and insert ‘£10 million’.
Amendment 44 (Labour Treasury team)
Schedule 8, page 270, line 37, leave out ‘£5 million’ and insert ‘£10 million’.
Amendment 34 (Nigel Mills (Con))
Clause 42, page 27, line 2, at end add—
‘The Chancellor of the Exchequer shall instruct the Office of Tax Simplification to prepare a report considering whether reforming the capital allowances regime, including by switching to using accounts depreciation, would be a more effective method of tackling avoidance. The report shall be placed in the House of Commons Library.’.
Amendment 45 (Labour Treasury team)
Clause 44, page 27, line 8, at end insert—
‘(2) The Chancellor of the Exchequer shall review the impact of his capital allowances policies on long-term investment, and will lay a report of his review in the House of Commons Library.’.
Amendment 177 (Labour Treasury team)
Schedule 12, page 294, line 27, leave out ‘45’ and insert ‘30’.
Amendment not pressed to the vote
[plus a number of related amendments]
Amendment 185 (Labour Treasury team)
Schedule 12, page 310, line 38, at end add—
‘(2) HMRC will monitor the extent to which income and chargeable gains used to make qualifying investments under this Part of the Schedule have been taxed in other jurisdictions and will assess the implications of this for UK domiciled investors.’.
Amendment not pressed to the vote
Amendment 195 (Labour Treasury team)
Clause 151, page 89, line 20, at end add—
‘(7) Consultation shall be undertaken with interested parties prior to the enactment of regulations under this section.
(8) The Chancellor of the Exchequer shall review the impact of the regulations under this section on friendly societies and shall lay a report of his review in the House of Commons Library.’.
Amendment not pressed to the vote
Amendment 196 (Labour Treasury team)
Clause 152, page 90, line 2, at end add—
‘(6) Consultation shall be undertaken with interested parties prior to the enactment of regulations under this section.
(7) The Chancellor of the Exchequer shall review the impact of the regulations under this section on friendly societies and shall lay a report of his review in the House of Commons Library.’.
Amendment not pressed to the vote
Amendment 2 (Stephen Williams (Lib Dem))
Clause 180, page 105, line 19, at end add—
‘(2) Notwithstanding the provisions of Part 4 of Schedule 20, the Schedule will not come into force until a full impact assessment has been prepared in conjunction with the Department for International Development reviewing the effect on developing countries’ tax revenue, and details of aid and technical assistance being provided to developing countries in order to increase the capability and technical expertise in their tax regimes to collect the taxes that are due in their countries, has been laid before and approved by the House of Commons.’.
Debate still taking place at end of session 13
CIOT External Relations Manager
Thursday 21 June 2012