Clause 54
Finance Bill
9:30 am
David Gauke (Shadow Minister, Treasury; South West Hertfordshire, Conservative)
I beg to move amendment No. 133, in clause 54, page 27, leave out lines 14 to 16 and insert—
‘(a) a transaction or arrangement entered into on or after 12th March 2008, or
(b) an asset acquired on or after 12th March 2008,but does not relate to an asset acquired on or after that date pursuant to a pre-commencement contract (see subsection (5)).
(5) For the purposes of subsection (4) a contract is a “pre-commencement contract” if—
(a) the contract is a contract in writing made before 12th March 2008;
(b) no terms remain to be agreed on or after that date;
(c) under the terms of the contract the acquisition of the asset on or after that date had already become obligatory on that date; and
(d) the contract is not varied in a significant way on or after that date.’.
I share the desire to get through some of the clauses as quickly as possible, but I am grateful that we can turn to amendment No. 133. With your permission, Mr. Hood, I will take this opportunity also to make one or two remarks about clause 54 in general, as that would, from my perspective, avoid the need for a full stand part debate.
The objective of clause 54 is to ensure that credit for any foreign tax paid on trade or professional earnings is no more than the UK income tax due on the same earnings. That is not an unreasonable objective, but we query the element of retrospectivity. However, I do not want to overstate that, and we will debate retrospective legislation at greater length when we discuss clause 55, which deals with a much more serious issue. The element of retrospectivity as regards clause 54 relates to the fact that subsection (4) applies to the
“payment of foreign tax on or after 6 April 2008, or...income received on or after that date in respect of which foreign tax has been deducted at source.”
That is retrospective in nature. An individual might have invested in long-term, income-generating assets, such as overseas properties, on the basis of the existing tax position but then find that they fall within the new regime very quickly—after 6 April 2008—and therefore get a different tax treatment than that which they anticipated when they made the investment. Amendment No. 133 proposes that we should instead consider the date on which the relevant transaction was entered into. If it was made after 12 March 2008, it should fall under the regime set out in clause 54, but if not, the person should continue to benefit from the existing provisions.
The amendment was tabled, in a slightly probing manner, for two reasons. First, and most importantly, there is a danger of creating a parallel system with two different tax regimes, the application of which would depend upon when the transaction was entered into, and that would create unwelcome complexity. Secondly, the Government argue that the changes confirm the existing practice but set aside doubts that have been expressed about how foreign tax credit is calculated following recent case law. I will take the words in the explanatory notes at face value, but perhaps the Minister could elaborate on the existing case law so that we can assess the level of those doubts, which can sometimes be more substantial than the Government are prepared to concede. I should like to test their position on that. We should tread carefully where there is an element of retrospectivity in legislation, and the onus is on the Government to justify the provisions that they have made.
The objective of the clause is to ensure that relief for foreign tax is given once and once only. There can be circumstances where the equivalent does not apply. For example, a UK investor in an overseas asset such as a US limited liability company might find that he was liable to tax overseas but would not benefit from any kind of relief. The Institute of Chartered Accountants has raised that point with the Treasury, giving the example of a UK business that has an interest in a US LLC. Under current law, no relief is available in the UK for tax paid in the US unless the LLC’s income is distributed, notwithstanding that the UK shareholder of the LLC will be subject to US tax on the LLC’s income as it arises—in other words, irrespective of whether it is distributed. Has the Minister considered that?