Clause 54
Finance Bill
9:30 am
Jane Kennedy (Financial Secretary, HM Treasury; Liverpool, Wavertree, Labour)
The ICA wrote to us with several detailed requests for changes, but I do not want to be drawn into those as they are outside the scope of the clause. However, I would be happy to write to the hon. Gentleman with details of the consideration that is being given to those proposals and circulate that correspondence to members of the Committee.
The clause does not affect the entitlement to credit for any foreign tax paid before 6 April 2008, so it does not have the retrospective effect that the hon. Gentleman fears. It re-establishes a rule for foreign tax credit that has always been the accepted method prior to recent case law. I shall explain that in more detail in a moment. This is the internationally accepted method for calculating credit relief, and there has never been any basis for believing that the UK Government should allow unrestricted foreign tax credit. In that context, there is no justification for a change that would add substantial complexity and uncertainty to the rule. That is what the amendment would do, although I appreciate that it was tabled in a slightly probing fashion.
The Government have done nothing to encourage people to plan on the assumption that high rates of foreign tax will be subsidised by the Exchequer. We have always made it clear that the purpose of foreign tax credit is to eliminate double taxation and not to go any further than that. The clause merely restores that long-established view of how the law on tax credits applies. The case that has been mentioned involved Legal and General; it was a corporation tax case heard in 2006. The corporation tax position was restored by legislation in 2005, and the clause makes a parallel change for income tax. There is no justification for delaying the implementation of the clause, as the amendment proposes. That would introduce considerable complexity and uncertainty whereby different rules would apply to different foreign tax payments. The amendment would mean that for assets or contracts that fell outside the scope of the clause, foreign tax credit would be unrestricted, putting at risk tax due from wholly UK-based activities.
I will give some background to the clause, since we will have, as you have indicated, Mr. Hood, the main debate now. The effect of the clause is to restore the way of calculating foreign tax credit that was generally accepted before the recent case law. The rule that the clause re-establishes is endorsed by the OECD and overwhelmingly used by those countries that give foreign tax credit against foreign earnings. The clause amends how the maximum credit for foreign tax is calculated, when the foreign tax is paid on trade or professional income of an individual. The purpose of the clause is to ensure that the credit that we give for foreign tax is sufficient to eliminate double taxation, which is a risk. It does not go any further.
In particular, the clause prevents foreign tax credit being set against income tax due on UK earnings. For example, if a musician earns income from a performance abroad, he or she is likely to have to pay foreign tax on those earnings. The foreign tax can be set against the UK tax due in respect of the same earnings—those attributable to the foreign performance—but should not be set against income tax due on earnings from performances in the UK during the same tax year. The clause enables the year’s income to be subdivided, so that each activity that gives rise to foreign income is ring-fenced from other activity for the purpose of calculating credit due for foreign tax paid. The clause also ensures a result that is fair to the taxpayer, while placing a necessary constraint on credit for foreign tax to prevent it from spilling over into other activity, including wholly UK-based parts of the trade.
The amendment would require separate identification of the foreign tax paid by an individual in respect of contracts, arrangements, assets and so on, entered into or acquired before 12 March—Budget day—this year. That foreign tax would be given as a credit against income tax no matter how much or how little UK tax arose out of the contract or asset. That would mean that foreign tax would reduce UK tax on other earnings unrelated to the foreign tax payment, including wholly UK-based activity.
The amendment adds complexity and is unjustified. I appreciate that it was moved in a probing and questioning way. Nobody should expect the Exchequer to subsidise rates of foreign tax that exceed its own, or to allow foreign tax to reduce income tax arising on UK earnings. That is a reasonable position, and I hope that the hon. Member for South-West Hertfordshire will accept it and withdraw the amendment. If he does not, we will have to resist.