Schedule 7
Finance (No. 2) Bill
5:45 pm
Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)
I shall raise several concerns, particularly from the Law Society, about the operation of schedule 7. Some of them touch on the points that my right hon. Friend the Member for North-West Hampshire (Sir George Young) made. The Institute of Chartered Accountants in England and Wales has also expressed some concerns about the operation of schedule 7.
Schedule 7 amends the exemptions for bona fide transactions from sections 739 and 740 of the Income and Corporation Taxes Act 1988. However, representations from the Law Society suggest that in several respects the schedule goes too far, narrowing unnecessarily the scope of the exemption and imputing on to the taxpayer the motives of the tax adviser.
My right hon. Friend referred to the two tests—conditions A and B. The Institute of Chartered Accountants in England and Wales would welcome some guidance on the circumstances in which HM Revenue andCustoms believes that condition A would be satisfied. Paragraph 60 of the consultation document, “Transfer of Assets Abroad—Technical Notes on Draft Clause”, sets out the Revenue’s view that the new provisions will require all relevant circumstances of the case to be considered, including the
“actual objective outcome of the transactions”.
The purpose of the amendments is to move away from a subjective test of what happens when assets are transferred abroad, to a more objective test of the motives behind it.
If the objective outcome of the transactions is no reduction in the amount of UK tax payable, arguably there will be no need for the Revenue to invokethe provisions in section 739 of the 1988 Act, thus rendering the exemption of proposed new section 741A redundant. The ICAEW requests clarification about whether the Revenue envisages any scenarios in which the objective outcome of the transaction results inthe reduction of UK tax, but the exemption under proposed new section 741A(1)(a) is still allowed, by virtue of condition A being satisfied.
Condition B is a broader test of the transactions. It requires all transactions to be commercially valid, and requires that the steps in the transaction are no more than incidentally designed to avoid the liability for tax. Subsections (5) and (6) of this schedule then give further details of the definition of commercial transactions.
The Law Society believes that transactions by individuals are unlikely to benefit from the exemption in condition B. In a clear example, it shows that if a transferor transfers assets into a trust for investment, the transfer will not be at arm’s length, and it will therefore fall outside the exemption. Indeed, that would be true if an individual invested directly into an overseas fund, since although the fund would meet the conditions of subsection (5), the personal investor would not.
Furthermore, the Law Society is concerned that subsection (6) is overly focused on the structure of the transaction. It provides that
“the making and managing of investments...is not a trade or business except to the extent that—
(a) the person by whom it is done, and
(b) the person for whom it is done,
are independent”.
For that purpose, independent means that the persons concerned are not connected within the meaning of section 839 of the 1988 Act. The provision puts to one side whether transactions are done on an arm’s length basis, and it focuses on whether the people involved are connected.
The person for whom the investment is done can be the transferor or the person who receives the benefit of the investment, or the offshore entity, or the fund itself, because the investment manager will often be contracted by or on behalf of the fund rather than the investment. One can imagine a situation, particularly in a corporate structure, in which the investment manager could be connected with the offshore fund.
The Law Society believes that it would be difficult for a transaction to satisfy the independence element of subsection (6) of this schedule. It suggests that the real test should not be about the structure of the transaction, because that is likely to result in subsection (6) not applying in a huge range of circumstances. Instead, it suggests asking whether the transaction between investor and manager is at arm’s length. Will the Paymaster General comment on that? Because if the criterion is one of structure rather than an arm’s length test, the exemption may be redundant.