LIVEBLOG: Finance Bill (No.3) 2018 - Public Bill Committee 4th sitting

MPs have debated clause 21 on permanent establishments: preparatory or auxiliary activities; clause 24 on Group relief etc: meaning of “UK related” company; clause 25 on intangible fixed assets: exceptions to degrouping charges etc; clause 26 and schedule 9: Corporation tax relief for carried forward losses; clause 27 and schedule 10: Corporate interest restriction; clause 28 and schedule 11: Debtor relationships of company where money lent to connected companies; clause 30: Special rate expenditure on plant and machinery; and Clause 31: Temporary increase in annual investment allowance.

You can read the amendments tabled for debate here. You can listen to the debate here.

Clause 21 - Permanent establishments: preparatory or auxiliary activities

This clause modifies the definition of permanent establishment (PE) by restricting the exemption for preparatory and auxiliary activities in section 1143 CTA 2010. It denies that exemption when non-resident companies artificially fragment their operations to take advantage of the exemption.  The change has effect from 1 January 2019. This clause is an outcome of the OECD and G20 BEPS programme. It deals with their avoidance of permanent establishment by the splitting up of activities between locations or between related parties to take advantage of the exemption for preparatory or auxiliary-type activities.  It makes effective the same change to the UK’s tax treaties which the UK has adopted through the Multilateral Instrument and which took effect on 1 October 2018.  

Amendment 47 (Labour) would require the Chancellor of the Exchequer to review the revenue effects of the changes made by Clause 21 - WITHDRAWN
Amendment 48 (Labour) would require the Chancellor of the Exchequer to publish a list of all additional permanent establishments created as a result of the changes made by Clause 21 three months after the passing of the Act and annually thereafter - WITHDRAWN

Speaking to amendments 47 and 48, Anneliese Dodds said Labour's amendments would improve the accountability of the tax system. As the USA's approach to corporate taxation is "in flux", Ms Dodds said there was a need to increase the scrutiny and efficacy of the measures put forward by the UK Government. Reviewing the revenue effects would help to understand how effective the system is in securing tax revenues and improve understanding.

Speaking to Clause 21 and the amendments put forward by the opposition, Mel Stride, the Financial Secretary to the Treasury (FST), said clause 21 would replicate the effects of international tax treaties into UK law, sending a signal of the government's intent to tackle tax avoidance by multinational companies. The FST said he could not support amendment 47 as revenue data would not be available within the 6 month timeframe proposed by the opposition. He said that amendment 48 could not be supported as the information required by HMRC could not realistically be obtained and would be an impractical use of HMRC's investigatory powers. Anneliese Dodds said that on this basis, the opposition would withdraw its amendments.

Clause 24 - Group relief etc: meaning of “UK related” company

Extends the definition of “UK related” company for the purposes of group relief to include non-UK resident companies that are within the charge to Corporation Tax.  To ensure that a non-UK resident company carrying on a UK property business, when within the charge to corporation tax, can be regarded as a UK member of a group of companies for group relief purposes. The clause also ensures that this applies to non-UK companies that fall within the scope of Part 8ZB of CTA 2010. (Goes with clause 17)

Amendment 51 (Labour) would require the Chancellor of the Exchequer to review the revenue effects of this Clause, as far as they relate to section 134 of the Corporation Tax Act 2010 and report on those changes by the end of the tax year 2019-20 - WITHDRAWN

Amendment 52 (Labour) would require the Chancellor of the Exchequer to review the effects of this Clause, as far as they relate to section 134 of the Corporation Tax Act 2010, on the property market and report on those changes by the end of the tax year 2019-20 - WITHDRAWN

Amendment 53 (Labour) would require the Chancellor of the Exchequer to review the revenue effects of this Clause, as far as they relate to section 188CJ of the Corporation Tax Act 2010 and report on those changes by the end of the tax year 2019-20 - WITHDRAWN

Amendment 54 (Labour) would require the Chancellor of the Exchequer to review the effects of this Clause, as far as they relate to section 188CJ of the Corporation Tax Act 2010, on the property market and report on those changes by the end of the tax year 2019-20 - WITHDRAWN

Anneliese Dodds said that Labour's amendments would provide a clearer and broader indication of the potential revenue costs to the Exchequer of the government's proposals and provide an indication of the potential impacts (both positive and negative) to the UK property market by extending these rules to non-UK resident companies . Mel Stride said that the changes proposed by the government would ensure that the UK tax regime does not discriminate against non-UK resident companies, would provide equal treatment to UK and non-UK companies and come at a negligible cost to the taxpayer. Having provided an explanation of the govenrment's approach, Ms Dodds withdrew the Labour amendments.

Corporation tax: misc

Clause 25 - Intangible fixed assets: exceptions to degrouping charges etc

Reforms the degrouping rules in Part 8 of the Corporation Tax Act 2009. It provides that where a company leaves a group as a result of a qualifying share disposal no charge or allowance shall arise. This clause is intended to remove an obstacle to commercially-motivated merger and acquisition activity.  It aligns the Part 8 degrouping rules with the equivalent provisions in the chargeable gains code.

Mel Stride moved the clause, noting that it would amend the coportate intangible fixed assets regime. The clause was developed in response to concerns raised during consultation that the IFA regime was distorting how genuine transactions were structured. He described this as a "sensible" change to the regime, responding to legitimate business concerns.  Jonathan Reynolds (Labour) said the provisons were the "latest in a long line" of changes to the regime involving IFA's that have been in place in 2002. He said that the opposition had no objection in principle to the government's proposals. Mr Reynolds then spoke in broader terms about concerns his party had with the IFA regime and the ways in which these new measures would operate. He asked the FST what impact the proposals were likely to have on foreign inward investment, mergers and acquisitions activity involving foreign companies as well as the impact on the UK intellectual property market. He expressed concerns over unscrupulous actors taking advantage of the regime to avoid their liabilities. While Labour had supported the restriction of goodwill relief for the purposes of anti-avoidance and anti-evasion, Mr Reynolds said that it had been fed back to his party that some of these measures had dampened commercial transactions and reduced the attractiveness of the UK as a place to invest. He therefore chellenged the FST to outline the ways in which this could be alleviated and plans for its future treatment. The attractiveness of the UK as a place to invest had never been more important, he argued, in the face of the UK's departure from the EU.

The FST said the measures were likely to facilitate foreign investment and represented a positive development. On questions related to avoidance, Mr Stride recited a series of government actions already underway (albeit out of scope of the measures being considered). On goodwill, he said that the government was introducing a targeted relief, which would be legislated for during report stage of the Bill and which would impact acquisitions involving eligible intellectual property. This will allow a short consultation to take place.

Clause 26 and Schedule 9 - Corporation tax relief for carried-forward losses

This clause and Schedule make changes to the loss reform legislation in Part 7ZA of the Corporation Tax Act 2010 (CTA 2010) (introduced in FA2017) to ensure that it meets the policy objectives which are to restrict relief for certain carried-forward losses and also allow these to be used more flexibly. The Schedule changes the way in which restricted losses are calculated by all companies and how the regime applies to insurers within the Basic Life Assurance and General Annuity Business (BLAGAB) in order to prevent companies accessing an excessive amount of the deductions allowance. The Schedule also makes amendments to:  (a) the allocation of the deductions allowance where a company is a member of more than one group,  (b) the calculation of terminal relief within section 45F CTA 2010, (c) prevent carried-forward shock losses of insurance companies being surrendered as group relief,  (d) increase the cap on profits against which group relief for carried-forward losses may be allowed in certain circumstances, and (e) other provisions that are minor and consequential in nature.

The FST said that these were technical amendments (some relatively minor) to ensure that the rules introduced in 2017 operate as they were intended to and to protect revenues by preventing businesses from obtaining excessive reliefs. Jonathan Reynolds spoke briefly to the clause on behalf of Labour and questioned why a legislative correction was needed to soon after its introduction in 2017. He suggested that this showed HM Treasury didn't have a grip on the policy. Mr Reynolds then quoted extensively the concerns of the Chartered Institute of Taxation; namely, that the legislation had not been given proper due consideration, with inefficient time for proper parliamentary scrutiny. The CIOT's comments, he said, had been proved to be "exactly correct". Continuous tweaks to legislation failed to inspire confidence among businesses who were reliant on the framework.

Mel Stride said it was perfectly fair to pose the question of why amendments were needed and said that answer very probably lay in Mr Reynold's observations around the complexity of the legislation. 

Clause 27 and Schedule 10 - Corporate interest restriction

This clause and Schedule make certain technical amendments to the Corporate Interest Restriction (CIR) rules in Part 10 and Schedule 7A of the Taxation (International and Other Provisions) Act (TIOPA) 2010 to ensure that the regime works as intended. The CIR rules were enacted in FA2017 and were subject to minor amendments in FA2018. As a result of further engagement with affected businesses, certain technical amendments to the legislation have been identified that are necessary for the regime to work as intended. 

Jonathan Reynolds, while supporting the measures, again noted the need for corrections to legislation so soon after originally enacted. The FST provided the same answer (complexity and volume of legislation) as he did when considering clause 26. There then followed a wider discussion arond the taxation of international corporations and in particular, online businesses such as Facebook, which Mr Reynolds said continued to pay relatively low levels of tax. Mr Stride sought to reassure Mr Reynolds of the government's commitment to ensuring that all businesses paid their fair share of tax, noting that at any given time, at least 50 per cent of the UK's top 200 businesses were being actively checked to ensure they paid the correct amount of tax owed.

Clause 28 and Schedule 11 - Debtor relationships of company where money lent to connected companies

Introduced to ensure that the tax treatment of linked loan relationships is aligned.  Otherwise, when a company borrows funds and lends them on to other companies in the same group, so that it bears little economic exposure to the loans in combination and reports minimal profit or loss in its accounts, it could nevertheless be taxed on movements in the fair value of the external loan.

Jonathan Reynolds again spoke for Labour, describing this as a "relatively straightforward measure". He asked for reassurances that consultation had take place with business and the need for clear, consistent legislation. Mel Stride offered reassurances that consultation had been ongoing on an informal basis with selected advisers and stakeholders, in spite of the lack of a formal consultation period.

Clause 29 - Construction expenditure on buildings and structures

Amends the Capital Allowances Act 2001 to provide for allowances under that Act for qualifying expenditure incurred on or after 29 October 2018 on the construction of a building or structure in qualifying use.  Provision (for a new Structures and Buildings Allowance (SBA)) will be substantively made through regulations made subsequently after this Finance Bill. It is intended explicitly to stimulate investment in commercial activity – specifically on new commercial structures and buildings, the necessary works to bring them into existence and the improvement of existing structures and buildings, including converting existing premises to qualifying use

Amendment 57 (Labour) would require the Chancellor of the Exchequer to report on the consultation undertaken on Clause 29 - WITHDRAWN

Amendment 58 (Labour) would require the Chancellor of the Exchequer to review the revenue effects of the changes made by Clause 29 - WITHDRAWN

Amendment 59 (Labour) would require the Chancellor of the Exchequer to review the uptake of this relief among micro-businesses, SMEs and large companies - DEFEATED

Amendment 60 (Labour) would require the Treasury to carry out a consultation with stakeholders on the qualifying arrangements for this allowance - WITHDRAWN

Moving Labour's amendments, Jonathan Reynolds said allowances such as this "weren't free" and needed to be judged on which provided the best value for money. He aso said that these changes were many and represented a "chopping and changing" of reliefs, causing further uncertainty and a "shifting of the goalposts" for businesses looking to invest in the UK. The Red Book estimated that this was a major expense for government, estimated to cost upwards of half a billion pounds by 2023/24. Speaking to amendment 58, Mr Reynolds said that this would enable the government to fully assess its costs. He bemoaned the lack of consultation and engagement from the government up until this point, which was "a strange way to encourage investment". He said he understood the rationale for the government no consulting in advance of the introduction, which could have caused forestalling in the economy, but warned that this risked bsuiness confidence and certainty.

Mr Reynolds also said "tax professionals" had warned that the relief would introduce another type of asset classification for tax purposes, something advised against by the OTS in its review of capital allowances. Mr Reynolds said this "flew in the face" of the recommendations of the government's own advisers.

Kirsty Blackman said "useful and interesting" questions had been posed by the opposition and that the SNP would support these amendments if pressed to a vote.

On the level of pre-announcement consultation, Mel Stride said the government needed to balance investment in the UK with legislative certainty.

Clause 30 - Special rate expenditure on plant and machinery

Reduces the rate of special writing down allowance for new and unrelieved expenditure from the relevant date of 1 April 2019 (corporation tax) or 6 April 2019 (income tax). The special rate is reduced from 8% to 6%. For chargeable periods spanning the relevant date, the rate of writing down allowances will be a hybrid of the rates before and after the change. The main rate of writing down allowances remains at 18%. Similarly, the special rate of writing down allowances within ring fence trades remains at 10%. 

Amendment 61 (Labour) would require the Chancellor of the Exchequer to review the effects of this Clause on CO2 emissions from plant and machinery, and report on those changes by the end of the tax year 2019-20 - WITHDRAWN

Amendment 62 (Labour) would require the Chancellor of the Exchequer to review the effects of this clause on the cost of heating, electricity and insulation material and report on those changes by the end of the tax year 2019-20 - WITHDRAWN

Amendment 63 (Labour) would require the Chancellor of the Exchequer to review the effects of this Clause on the automotive market in the UK and report on those changes by the end of the tax year 2019-20 - WITHDRAWN

Amendment 64 (Labour) would require the Chancellor of the Exchequer to review the effects of this clause upon business decisions to invest in eligible plant and machinery made before April 2019 and report on those changes by the end of the tax year 2019-20 - WITHDRAWN

Amendment 65 (Labour) would require the Chancellor of the Exchequer to report on any consultation undertaken on the provisions in this clause - WITHDRAWN

Jonathan Reynolds said the government's measures represented yet more uncertainty for businesses, extensively citing the concerns of the CIOT over the retrospective nature of the measures and their impact on the stability and certainty of the tax system.He again sought clarification from the government on the consultation and engagement that had taken place with businesses prior to their introduction. Mel Stride spoke to the measures contained in the clause, which would align rates and provide businesses with the same amount of relief, but over a longer period of time. He also said that the vast majority of business would not be impacted by these changes thanks to other measures within the tax system, such as the annual investment allowance. These changes will provide greater support for businesses, he said. He rejected amendments 61 to 63 on the basis of the fact that a TIIN for this proposal had already been prepared. He further added that robust information was already provided to parliament, further reducing the need for additional reviews. Following consideration of the amendments, Mr Reynolds agreed to withdraw these.

Clause 31 - Temporary increase in annual investment allowance

Increases the maximum amount of the annual investment allowance (AIA) to £1,000,000 for a temporary period from 1 January 2019 to 31 December 2020. The temporary increase is designed to stimulate growth in the economy by providing an additional, time-limited incentive for businesses (particularly medium-sized businesses) to increase, or bring forward, their capital expenditure on plant or machinery.

Amendment 66 (Labour) would require the Chancellor of the Exchequer to report on the estimated impact of the provisions of this clause, and compare them to the estimated impact of extending the temporary AIA relief for an additional year - DEFEATED

Amendment 67 (Labour) would require the Chancellor of the Exchequer to review the impact of the provisions of this section and report on that impact by the end of the tax year 2019-20 - WITHDRAWN

Amendment 68 (Labour) would require the Chancellor of the Exchequer to review the costs and benefits of extending the increase in AIA relief beyond two years - WITHDRAWN

Amendment 69 (Labour) would require the Chancellor of the Exchequer to report on any consultation undertaken on the provisions in this clause - WITHDRAWN

Amendment 70 (Labour) would require the Chancellor of the Exchequer to make a statement on the evidence base for the temporary AIA increase - WITHDRAWN

Amendment 71 (Labour) would require the Chancellor of the Exchequer to lay before the House of Commons an analysis of the distributional and other effects of the provisions of this section on companies of different sizes - WITHDRAWN

Jonathan Reynolds suggested that the government's decision to provide for a temporary increase in the annual investment allowance for introduced to lessen the damage caused by the government's Brexit negotiations. He again referred to the constant "chopping and changing" of legislation, which could mitigate the benefits to businesses of the allowance. By his reckoning, he said that the rules underpinning the investment allowance had changed 5 times over the last 10 years.

This legislative uncertainty made it harder for businesses to plan ahead with certainty and came at huge cost to the taxpayer, the Red Book suggesting that the allowance cost HM Treasury £1.24 billion (although he admitted that some of this could be recouped).

Returning to an earlier theme. Mr Reynolds said that the measure appeared to favour bigger businesses and could even penalise some smaller businesses who may be prevented from spending the lower £200,000 allowance. This was a situation he described as "ludicrous".

The legislation, he argued, had been poorly drafted with a disregard for smaller businesses. Labour's could have tabled an amendment to easily address these concerns, however the government's "undemocratic" approach to consideration of the Bill meant that the opposition could put forward little more than the offer of a review. As a result, Mr Reynolds said that he would use his contribution to urge Mr Stride and the Treasury to consult on a "simple change to the legislation".

Mr Reynolds noted that the limited scope of the temporary annual investment allowance increase could be unhelpful to busniesses operating to different accounting periods. In cases where the period of the allowance was mismatched with the accounting period, they would have to perform a straddling calculation over split time periods. He then provided a practical example of how this might work. He suggested that these problems could have been identified at an earlier stage of consultation and said that it might be possible to give small businesses a chance to opt-out to ensure that they aren't penalised. Concluding his comments, Mr Reynolds said his party's amendments would allow disclosure of the impact that these changes would have on businesses.

Mel Stride said that these measures were developed in response to the needs of the business community and through its temporary nature, would achieve a balance between the government's tax and fiscal objectives and the need to reduce debt and grow the economy.

The meeting concluded at 4.02pm.

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