Schedule 16
Finance Bill
12:30 pm
Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)
I want to speak to amendments Nos. 78 and 80 because amendment No. 79 is made redundant by amendment No. 80—as no doubt the Minister will point out. These amendments are about a point of principle rather than the underlying tax treatment. There needs to be certainty in the tax system and an appropriate process by which tax law is made and changed. Those matters are relevant to the schedule.
The investment management exemption enables UK-based fund managers managing overseas domiciled funds to avoid any income or corporation tax charges on profits made on the funds that would otherwise arise. For a fund manager to qualify for the exemption, transactions that they undertake must fall within the definition of an investment transaction set out in section 127(13) of the Finance Act 1995. That provision has been supplemented by four statutory instruments and augmented by a statement of practice; in this case it is SP1/01, which gives further guidance on the application of the exemption.
The fund management industry has argued that using primary and secondary legislation to define an investment transaction is not flexible enough to deal with the rate of innovation in the industry, so an alternative approach needs to be found. The proposal in the schedule is, therefore, to repeal the primary and secondary legislation and, in effect, to give HMRC’s commissioners the power to determine what constitutes an investment transaction.
As I understand it from representations on the provision from the Investment Management Association, the expectation is that HMRC will publish on a website transactions that it considers to be investment transactions, therefore qualifying to secure the exemption. That will mean that investment managers will not need to seek pre-clearance as often as they do now, because there will be much greater transparency about what qualifies under the rule, and they will be able to consult the website to see whether clearance has been given, and will need to approach HMRC only when a new type of transaction that has not been dealt with before comes into view, and they want to use it.
So the approach of the schedule is to remove inconsistencies between the legislation and the statement of practice not by refining legislation or making sure it is up to date, or redrafting it in a more encompassing and clearer way, but just by scrapping legislation that, it would appear, is inconvenient. I do not think that that is how this Parliament makes tax law. We believe that it is for Parliament, not the commissioners, to decide on tax. The schedule removes Parliament’s right to do so.
Parliament should have the right to scrutinise changes in tax policy, through scrutiny of primary and secondary legislation, and it is in the interest of proper, considered debate that the making of the changes should be scrutinised in public by Parliament, not discussed behind closed doors. Furthermore, it is in the interest of certainty that the principles of what is or is not an investment transaction should be laid down in statute. How would investment managers be able to challenge, argue or discuss the decisions reached by HMRC without a statutory framework within which to work?
Although in the short term certainty will be achieved by the elimination of primary and secondary legislation, the lack of clear, consistent statutory principles will, in the long term, create uncertainty if contradictory or ambiguous conclusions are reached. We had debates last year on guidance produced by HMRC with respect to capital losses; despite two iterations when we debated it in Committee, ambiguous conclusions were still reached about whether certain types of transaction fell within the laws. Guidance itself is not perfect in bringing about a considered view.
London has a poor reputation in the financial services sector for uncertainty. Our competitive position in the long term is strengthened by clear, consistent legislation that is properly drawn up. If there is a problem for fund managers, arising from the gap between legislation and the statement of practice, the answer is to refine the legislation rather than scrap it. That is the purpose of amendments Nos. 78 and 80—to restore or maintain the status quo and ensure that the changes are dealt with through proper legislative means, with full parliamentary scrutiny, rather than by the commissioners for Revenue and Customs.