Clause 78
Finance (No. 2) Bill
5:15 pm
Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)
I hope that the Committee will bear with me as I introduce clause 78. It is important that I put some points on the record to assist everybody using our deliberations and the Government’s clarifications.
Clause 78 deals with controlled foreign company legislation and is designed to prevent UK companies from diverting profits to low-tax regimes. It is important to remember that the only companies that face a charge under CFC legislation are those that divert profits from the UK to avoid UK tax. Unfortunately, CFC legislation is constantly under attack from those who seek to avoid Parliament’s intentions. This Government and previous Governments have had to add additional anti-avoidance rules to ensure that it remains fit for purpose.
Clause 78 will block a loophole in one such piece of anti-avoidance legislation, section 90 of the Finance Act 2002. The particular mischief that concerned the Government then and now was that companies can artificially migrate to another country simply to avoid the effect of the CFC rules by using the provisions of a double taxation treaty.
It was widely accepted at the time that such migrations might have become possible as a consequence of the exemption from corporation tax of companies’ chargeable gains from substantial shareholdings, which came into effect on 1 April 2002. The exemption was welcomed by business, which was also fully involved in developing section 90. Companies that migrated before 1 April 2002 were excluded from section 90, not least because they did not have the benefit of the substantial shareholdings exemption when they migrated.
The Government have since become aware that some excluded companies are being used in tax avoidance schemes, and clause 78 seeks to counter such schemes. We have targeted the clause as tightly as possible to avoid leaving open unacceptable risks of continued avoidance on one hand and, on the other, to continue to exclude companies not involved in tax avoidance. The clause does so by focusing mainly on the type of company used in marketed tax avoidance schemes.
Condition A focuses on companies that have never owned any subsidiaries and are available to use as special purpose vehicles in avoidance schemes. If we left it there, we suspect that, such is the ingenuity of tax planners’ imaginations, it would not be long before companies that happened to own a subsidiary or two were used instead, so condition B aims to forestall all such manipulation.
Condition B is designed specifically not to catch migrated companies that are already the parent of multinational groups and continue to act as the parent of the same group. Such companies are outside the scope of the clause and will not be affected by it when the group makes acquisitions, including sizeable acquisitions, within its own sector in the normal course of its business. Any company that is in doubt as to how the clause will apply should seek clarification from HMRC, but I hope that I have put clearly on the record what is outside the scope of the clause and that no further clarification will be required.
The changes introduced in the clause ensure that from 22 March 2006 the position is returned to that intended in 2002. The clause will prevent tax avoidance and ensure greater consistency between companies that became non-resident at any date. I commend the clause to the Committee.