Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

I beg to move amendment No. 81, in clause 38, page 18, line 33, at end insert

‘or otherwise altering or amending the definition of an interest in an offshore fund and the circumstances in which an investor is treated as disposing of an interest in an offshore fund’.

The amendment is relatively straightforward. Clause 38 is an enabling clause and will allow the Government, through statutory instruments, to establish the new offshore funds regime. I shall return to that on clause stand part. The process set out in subsections (4) and (5) requires that the first statutory instrument, creating the new regime, must be dealt with by the affirmative procedure. We welcome that level of parliamentary scrutiny. However, subsequent statutory instruments will be dealt with by the negative procedure. Having spent some time talking about the rights of Parliament, I shall not discuss the relative merits of the affirmative and negative procedures, but I do want to highlight an issue that one representative body has raised.

In the amendment, we accept that the negative procedure should be used for subsequent changes to the initiating instrument, if that is the right word, but we suggest that changes to the core definition of circumstances in which an investor will be taxed on offshore funds should be dealt with by the affirmative procedure. That definition is at the heart of the changes to the rules on offshore funds, and there should be proper legislative scrutiny of changes to it.

The draft instrument with which the Minister kindly provided the Committee contained significant parts about administrative arrangements, including on the provision of written information to Her Majesty’s Revenue and Customs, the inquiries that HMRC can make into a reporting fund and breaches of reporting fund requirements. Those are all important, but we accept that it might be appropriate for them to go through the negative procedure. However, we believe that a substantive change to the rules on offshore funds should go through the affirmative procedure. The amendment is intended to carve out that core definition and ensure that it continues to be dealt with through the affirmative process.

Kitty Ussher (Economic Secretary, HM Treasury; Burnley, Labour)

The hon. Gentleman has explained the effect of the amendment, so I shall not repeat that. I do not feel that the amendment is necessary for two reasons. First, it is normal in tax legislation for regulation-making powers to be introduced. The first exercise of the power is made by affirmative resolution. That is what form a substantive debate on the new scheme would take. Subsequent exercises are made by negative resolution. That follows the same format as that for UK authorised investment funds introduced in 2005. It is simply standard procedure.

Concerns have been raised that we might use this power to change the tax definition of what constitutes an offshore fund. That is not the case. I reassure hon. Members that the Government have no intention of changing the tax definition of what constitutes an offshore fund by means of secondary legislation. Indeed, the Government decided not to change the definition this year, having listened to industry, and are committed to further discussions before changing the definition in next year’s Finance Bill. It will therefore be properly scrutinised at that stage. I ask the hon. Gentleman to withdraw the amendment because it is unnecessary.

Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

I am grateful to the Economic Secretary for her reassurances about how the changes to the definition will be dealt with in next year’s Finance Bill, and that it is not the Government’s intention to change the rules about the characteristics without proper legislative scrutiny through primary legislation. In light of the assurances given, I beg to ask leave to withdraw the amendment.

Jimmy Hood (Lanark & Hamilton East, Labour)

Thank you very much to those who helped Sam. He is fine now and he is on his way home. It was a bit of a scare, but thank you to everybody who acted as they did, and we wish him all the best.

Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

We were debating whether clause 38 should stand part of the Bill. I have a series of questions to put to the Minister, which are based on representations made by a number of different bodies.

The first question is quite fundamental to the legislation. One of the concepts that underpins this framework is the distinction between income and capital, and the fact that they are taxed in different ways. There has been some comment that that distinction is in danger of outliving its usefulness, particularly in the convergence on accounting standards and the new and more complex products that will be included in offshore funds. It would be quite useful if the Minister would explain why the Treasury believes that this distinction is still appropriate. Furthermore, what implication does the Minister think would arise from the abolition of the distinction between capital and income?

Secondly, the new rules require an offshore fund to report 90 per cent. of its income. It has been suggested that the calculation may use the existing UK EP rules. However, there have also been suggestions that, given the fact that some of these funds are domiciled elsewhere, there are alternative accounting practices that could be used instead to reduce the cost of complying with these rules. I wonder if the Minister could explain the framework that she expects to be in place for the calculation of the income to be reported.

The approach that has been taken is that funds should seek advance certification to obtain reporting fund status. However, there is concern that the annual submissions required by HMRC will create uncertainty; I certainly hope not, and I hope that the fund continues to qualify. We might therefore introduce an element of retrospectivity into the way in which funds are granted reporting fund status. Has the Minister given any thought to how the issue might be addressed and whether there is a mechanism that could reduce the uncertainty?

My next point relates to the role of participants. In its submission, the Institute of Chartered Accountants notes that there is a contradiction between clauses 38 and 39. Clause 38 states that the new rules are about the tax treatment of participants in offshore funds, but clause 39 focuses on the treatment of the funds themselves. Under the new rules, only the fund itself can apply for reporting fund status. Under the existing rules for offshore funds, the participant can request that the Treasury treat the fund as a distributor fund so that it can keep the current favourable tax treatment. Has the Treasury given any thought to the participant being able to apply for the fund to have reporting fund status?

Clearly, offshore funds marketed in the UK will have an incentive to apply for reporting fund status, but other funds that people acquire will not have that status. A fund may derive no benefit from seeking reporting fund status if its main market is in the US, but an investor might want it to have that status because that might be advantageous in a tax sense. Non-UK nationals resident in the UK who hold funds that invest in their original jurisdiction might, for example, want to apply for reporting fund status. Similarly, an expat who has  bought funds in the US and moved back to the UK might welcome the possibility of that fund having reporting fund status. If the fund itself did not apply for it, however, there would be no rules to enable the participant—the fundholder—to do so themselves. That option is available under the current rules, and I just wondered why it had not been carried forward into the new rules.

Kitty Ussher (Economic Secretary, HM Treasury; Burnley, Labour)

Let me say just a couple of general words before addressing the specific points raised by the hon. Gentleman.

As we have discussed, the clause provides a regulation-making power to allow the tax regime for UK investors investing in offshore funds to be modernised and simplified. The offshore fund legislation seeks to prevent UK investors from gaining beneficial tax treatment by investing in offshore vehicles, where income flows could be converted into capital to gain tax advantages.

The marketplace for investment in offshore funds has changed significantly since the rules were originally introduced in 1984. The Government have worked to modernise the rules, while retaining the original objective. The modernised tax regime for offshore funds has been developed through extensive consultation with stakeholders. A paper with policy proposals was issued in October 2007. That was followed by summary of responses and further policy proposals in March. The draft regulations are in the public domain for consultation, and copies have been circulated to members of the Committee, as the hon. Gentleman was kind enough to mention. The final version will be published in the autumn, with a view to laying them before the House around the end of the year. As we have discussed, the regulations will be made under the affirmative procedure, so they will be subject to full scrutiny by the House.

The hon. Gentleman made several points. He asked why clause 39 allows for a retrospective effect, and she aid that that would perhaps lead to uncertainty in the industry. The clause permits a retrospective effect only in limited circumstances, and it will be used only if it becomes clear following further consultation on the regulations that the industry wants them, or parts of them, to take effect earlier than the date on which they are laid in the House of Commons. I want to make that clear to the Committee to remove any uncertainty.

The hon. Gentleman also asked whether moving to a new regime would lead to additional costs for funds, because systems will have to be updated and so on. The changes that we are making follow representations from the industry have been developed through consultation. That is a running theme in much of today’s debate. Broadly speaking, we may need to make adjustments to offshore fund systems to reflect the modernisation changes, but because we are working in tandem—shoulder to shoulder—with industry we envisage that the changes will lead to long-term benefits.

The hon. Gentleman also asked why an investor cannot apply for reporting fund status on behalf of an offshore fund. That issue will be considered as part of the consultation on the offshore funds tax regime. In March this year, we stated in our most recent publication on the subject that the Government will consider exploring the feasibility of responses on that issue in relation to investment by UK investors. HMRC receives approximately  six applications a year from UK investors who wish to treat their offshore fund investment as if it were a distributor status offshore fund. We will consider the evidence on whether to replicate similar rules in the modernised offshore funds tax regime.

The hon. Gentleman asked about the framework for the calculation of the income to be reported. Again, in the document “Offshore Funds: the Next Steps” that we published in March, we set out our thoughts on that and on how the computation of income should operate. The process will be based on acceptable accounting standards and information, as set out in the regulations that are subject to consultation. He also asked why the figures are 90 per cent. in relation to reporting. In principle, it was agreed that 100 per cent. was appropriate, and the reduction to 90 per cent. was to deal with cases where the amount could not be easily estimated—it is a practical, administrative issue. I hope that I have answered the questions he has asked. If I have not responded to all the hon. Gentleman’s points, I am happy to do so in correspondence.