Clause 78 - Attribution of gains of non-resident companies
Finance Bill
10:00 am
Mr Howard Flight (Arundel and South Downs, Conservative)
We return to territory that is familiar from last year's Finance Bill. At Report stage of that Bill, the Opposition thought that we had persuaded the Paymaster General to accept the reasonableness of some of our key points on the provision. The Paymaster General instituted a process of inquiry, and the measures in the clause are an endeavour to be helpful.
I wish to raise two points before addressing the amendments. First, the clause appears to apply to some important businesses that did not know about the consultation process in due time; it was over before they could have their say. Secondly, the basic point of principle is that the underlying legislation had been introduced to block a particular tax so that a certain capital gains tax avoidance scheme, which I described last year as the Belgian wheeze, could not occur. I am sure that the Government's intent is not to damage or disadvantage the bona fide commercial interests of British groups or employee trusts or charities. The amendment increases the de minimis level from 5 per cent. to 10 per cent., which is helpful, but it does not address a situation in which 60 per cent. of an overseas closed company is owned by a particular shareholder and the 10 per cent. United Kingdom shareholder has no powers. A closed company is one that is controlled by five or fewer individuals, and I assume that the Government's 10 per cent. figure was conceived as being one fifth of the 50 per cent. needed for control. However, 10 per cent. is far too low to be a significant influence; a more credible level would be 25 per cent., as in most jurisdictions the shareholder has negative control and can block special resolutions and so acquire some power of influence.
Amendment No. 37 deals with slightly different territory. The part of clause 78 to which it relates is intended to be helpful, widening the range of assets that are exempted where tangible assets, used only for the purpose of a trade outside the United Kingdom, are replaced by any asset used only for the purposes of a trade outside the UK. However, there is a problem: section 13 of the Taxation of Chargeable Gains Act 1992 is an anti-avoidance section and, as we argued last year, surely it should be expressly confined to cases of tax avoidance. The amendment is based on section 137 of the same Act, giving clearance for reconstructions or amalgamations. The form of words will be familiar in many contexts; it has been widened to cover income tax, capital gains tax or corporation tax, to mimic the words in clause 78(4). Anti-avoidance measures should be fundamentally about purpose.
The changes in clause 78 to which amendment No. 38 relates are designed to be helpful in inserting new subsection (5A) of section 13, so that when a shareholder incurs a charge on an offshore closed company he will be permitted a subsequent credit against the repatriation of the proceeds of such gains. That would give taxpayers the ability to repatriate funds to meet the tax liability, and so to avoid double taxation. The problem is that the repatriation is limited to a period within three years of the end of the accounting period in which the gain occurred, or four years from the day on which the gain itself occurred. That could result in unfairness and double taxation, because it may not be possible for some shareholders to arrange for repatriation within the three or four-year period; that harks back to the situation in which there is 60 per cent. control by another party, but the Revenue can go back six years to assess tax liabilities on taxpayers. It means that a taxpayer might be ignorant of such a liability or unable to calculate it because of genuine compliance difficulties in overseas businesses that he does not control; the time limit under new subsection (5B) could thus expire before the Inland Revenue discovered the facts and made an assessment. It would be much fairer to extend the period for credit for repatriations to shadow the period in which the Revenue can make that assessment; a six-year period should be sufficient for the United Kingdom shareholder, one way or the other, to be able to repatriate the funds from closed companies that he does not control.