New Clause 15
Finance Bill
6:15 pm

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

I beg to move, That the clause be read a Second time.

The clause covers an important issue in the context of the future direction of tax policy. I know that the Financial Secretary is engaged in the debate to see a way forward as chairman of a working party of businesses—I think that there is a trade union member as well. I am grateful that the Government have taken the issue seriously. When I raised it two years ago in a Finance Bill debate, the reaction from Treasury Ministers was that the companies were crying wolf, and that they were not raising a genuine and serious concern, but seeking to put pressure on the Government. I thought that the Treasury was unwise to draw that conclusion, having learnt, from conversations with businesses and tax advisers, that that issue had been on their agenda from an early stage. Having renewed those discussions recently, I understand that businesses are seriously considering relocating their headquarters owing to the uncompetitive nature of the corporation tax regime in this country and, in particular, the way in which it deals with foreign subsidiaries of UK companies.

Earlier this year, Shire and United Business Media, which owns The Daily Telegraph, The Sunday Telegraph and others, announced that they would move their tax domicile from the UK to jurisdictions more favourable  to multi-national companies with significant offshore interests. That triggered a widespread debate in business circles, and a number of companies indicated that they were seriously considering relocating their tax domicile to other more favourable jurisdictions. That announcement also triggered renewed interest in the Government and the working party that the Minister chairs. The Government started a consultation on the taxation of foreign profits and the participation exemption, and debate in general revealed some of the complexities of the issues involved in moving towards a participation exemption, where UK tax is not charged on dividends remitted from overseas subsidiaries to the UK. Of course, once the Treasury removes that tax, there is an incentive for companies to move their operations to jurisdictions with lower tax rates. Both we and the Government recognise that concern.

We could go down one of two routes. First, we could build on the existing structure under the control of foreign companies legislation, which has worked relatively well, despite some of the challenges that it has faced from the European Courts and companies seeking to use the provisions of various European treaties to attack and undermine it. I shall not rehash debates from previous Finance Bills, but the Committee will be aware of cases involving Marks and Spencer, and Cadbury Schweppes, which are symbolic of the way in which people have used European treaties to undermine that regime. The concern of companies such as UBM and Shire was triggered by the Government’s consultation document, which relates to subsection (3)(f) of my new clause, which deals with

“the extent to which special measures would be needed to protect against diversion of profits through countries with a low rate of corporation tax.”

We could go down a second route: the Government’s consultation document mooted the idea of controlled income, which we touched on in an earlier debate on partnerships. Control of foreign companies rules focus on entities, whereas the Government’s proposals looked at income streams and distinguished two different sources: the first was passive income such as dividends, interest, annuities, royalties and rents. That was because of the recognition that they are often sources of income with operations more susceptible to being structured—I do not want to use the word manipulated—in offshore low-income jurisdictions. The other income stream is active income, where the income arises from trading activity. Of course, that is a much more difficult source of income to structure, and move into a low-tax environment. There are many more issues in deciding where to locate trading operations. Whether one is talking about factories, offices, or plant, there are a whole host of considerations that one might want to take into account. It is more likely that decisions on active income are taken in the much broader context of a genuine commercial decision, rather than in relation to a form of tax structuring.

Many businesses raised concerns about that. The issue goes back to how effective we need to be, and what we need to do to prevent a diversion of income. Many businesses felt that the rules proposed by the Government were intrusive and expensive, and went against the grain in relation to how businesses structure their operations and how they report income from overseas entities into the UK. That potential administrative or compliance  burden prompted a number of UK companies to decide to move their operations overseas in advance of what they saw as being the direction of travel in Government policy.

When we debate the issue of participation exemption and the taxation of those companies, we need to think carefully about how we put in place the right structure to prevent the artificial diversion of profits to low-tax jurisdictions. That is an important aspect of thinking through these changes. I am sure that it is something that the Minister and the members of her working party are thinking about. If we get the measure right, it will strengthen the UK as a place to do business.

In thinking about the right reforms to introduce, we need to address the important issue of the impact on public finance because, in the current conditions, we do not want to introduce a series of reforms that cannot be funded from tax revenues. It is difficult to think about the matter carefully and understand what the likely costs will be. The challenge is to understand what the cost of a participation exemption will be. A few years ago, one firm of accountants estimated that it was about £1 billion. That would clearly be a significant loss to the Exchequer. It has also been said that that cost has fallen to about £0.5 billion, and could fall further without Government intervention. As the rate of corporation tax falls, the cost of the participation exemption itself will also fall. It would be helpful to hear the Government’s explanation, as it is one of the issues on which they must be able to report when they consider the impact of moving to a participation exemption. There are other interactions, too, in relation to how they intend to tax foreign profits.

There are two more matters that we would like the Government to address in a report before the publication of the 2008 pre-Budget report are. I shall draw them together for the ease of the Committee, and they appear in subsections (3)(b) and (e) of the new clause. One concern that flows directly from subsection (3)(e) is what is happening at the moment when people choose not to remit foreign profits into the UK? If a company is not prepared to pay the additional corporation tax on that remittance, the profits it has made in overseas jurisdictions are in effect stranded there. They are not necessarily used to benefit the operations of the group as a whole. They may be stuck in a low-tax jurisdiction where there are no investment opportunities to warrant the profits remaining there, but the company is concerned that it will have to pay an additional charge on that remittance, so it is not prepared to pay the dividends into the holding company. The company will receive enough dividends from other group companies to have sufficient reserves to pay a dividend to its shareholders, but it will not go any further than that.

In overseas jurisdictions that have gone down that route, there has been an unlocking of those stranded funds, which have flowed back into the parent companies. If my recollection is correct, that was tried in the States. It was a temporary relaxation, and within a year something like $1 billion flowed into the parent companies. In the case of the UK, what would those parent companies do with the dividends? Would they choose to invest them in UK operations, which would be a good way to seed the growth of the UK economy? Would they feel able to use them to expand in other jurisdictions? Would they decide, if the investment opportunities in the UK were  already covered by their funds and they could not make better returns with the remitted profits from overseas, to return the dividends from overseas subsidiaries to their shareholders, in the form of the share buy-back or a special distribution?

It is important when looking at the changes that we understand their impact on the behaviour of parent companies in the UK, because that would provide a broader macro-economic backdrop against which to consider them. In this country, we do not look at the dynamic modelling of tax changes on tax revenues, and a static analysis is undertaken. However, it would be helpful to understand what that macro-economic backdrop is when justifying any decision to scrap the participation exemption.

I want to touch on subsections (3)(c) and (d), which deal with the competitiveness of the UK economy and the attractiveness of the UK as a location for multinational headquarters. On both sides of the Committee—and in the discussions and meetings that I have participated in with the Economic Secretary—there is a recognition that business is mobile, and that people, capital and business can be moved around. The Economic Secretary and I see that particularly in the context of the financial services sector, where businesses can quickly move outside the UK, or into the UK. It is therefore important that we have a tax system that reinforces our competitive position and gives people a reason to come to the UK. Some of that is about the headline rates, and some of it is about the certainty, predictability and stability of the system. We have elaborated on those themes in Committee.

We also need to focus on the structure of taxation for multinationals. In many of our constituencies, the bedrock of the business base is small and medium-sized enterprises; all our constituencies have a long tail of small companies. However, we are dependent on multinationals’ help in growing our economy, and if we are able to produce a participation exemption that helps to keep headquarters of multinational companies here, that is to our benefit. It is easy to dismiss companies moving their headquarters overseas as only a few people and a couple of offices, but it changes the mindset of the company. The company then thinks about where to locate operations. Perhaps its preference would instinctively be the UK, but if the company locates its headquarters in Ireland, it might think that that is not a bad place to do more business. We then start to see an erosion of our tax base. Part of the challenge is to broaden the tax base, by getting more companies into this country and ensuring that those that we have do not go overseas.

Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede and Weybridge, Conservative)

I am sure that my hon. Friend has discussed this matter with accountancy firms in the City; I certainly have. They tell me that management may be very comfortable with being in the UK, but that shareholders increasingly insist that regular analyses of the options are conducted. I was quite shocked to be told by one of the big accountancy firms at a meeting a few weeks ago that every single one of its FTSE 100 clients had sought advice at some time in the past year, or was currently seeking advice, on the options open to them. That did not imply that they were all moving, but that they were all alert to the need constantly to test the logic of their domicile in the UK.

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

My hon. Friend makes two important points. First, the debate has evolved over the past two or three years from companies simply talking about that change to their spending serious money with their advisers in looking at how they might effect the change. Companies are much more up front about this matter. In the past, a number of them have relocated their tax domicile overseas as part of a wider transaction. The flotation of Experian is an example. It was listed in the UK market, and used flotation as an opportunity to move its tax domicile from the UK to Dublin.

The second important point made by my hon. Friend is that the barriers to moving have become much lower. One of the arguments that shareholders might have used in the past against changing domicile was that they could not list their shares on the UK stock exchange. However, as Experian showed, a company can have all the benefits of a London listing, but seek a low-tax domicile for its place of incorporation and its headquarters. It is much easier for shareholders to put pressure on management to look at their overall tax charge and at ways of managing it, in the knowledge that there are steps the company can take that do not require it to lose its listing in London. We must remember that important point, because it is another example of the mobility of multinational businesses.

On the issue of the mobility of multinationals, the UK is the location of choice for multinationals’ European headquarters. Google had its European headquarters in the UK. We have a common language and a common approach to many issues of regulation, so it was comfortable doing business here. However, Google, too, has moved its headquarters out of the UK and into Ireland. Kraft Foods has moved its headquarters from the UK to Switzerland. There is significant evidence of companies responding to those pressures and changing the location of their headquarters.

I accept that we cannot have a tax system that is skewed towards multinationals. We must have a level playing field. I well remember people highlighting the benefits of other jurisdictions in my days as a practising accountant. The example of Dutch mixer companies was trotted out on a regular basis. I am not sure that we will ever get to the situation where our tax regime is as favourable for multinationals as the Netherlands or Ireland. However, we need to think about what we can do to minimise the competitive disadvantage that we suffer, which is why we are keen to understand properly, through the proposed report, the impact of changes to the participation exemption on the attractiveness of the UK as a location for multinational headquarters.

I am conscious that this has been a longish speech, but this issue dominates the corporate agenda. It has been helped along by the Minister’s working group, but its importance means that we should have a considered debate, which takes into account the full consequences of the participation exemption. The area is clearly one in which both major parties have expressed a desire to see some form of change. It would be helpful for the long-term planning of businesses to have a much more open debate than we have had so far. I hope that the report that proposed in new clause 15 would create the backdrop for that debate. It would also ensure that the Minister’s working party has a deliverable objective, and does not just become somewhere where people have a chat about the issues. It could have an output, which  could form part of the wider debate. With that in mind, I hope that the Minister is inclined to accept new clause 15 or, if nothing else, the spirit in which it was moved.

Jane Kennedy (Financial Secretary, HM Treasury; Liverpool, Wavertree, Labour)

The hon. Gentleman alluded to the forum that I chair and which met for the first time on 9 June. It allows business representatives at the highest level to provide input into the development of policy in the area. I am not going to be drawn on the detail and direction of our discussions. Any changes to the rules for the taxation of foreign profits will be taken forward in post-consultation with businesses, to produce a consultation document in due course. I am focused on that objective, and a report of the nature requested in the new clause is not necessary.

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

I understand the Minister’s reluctance and I am disappointed by it. I think this is an important issue, and there is a lot of focus on it. I am concerned that the committee is a way of kicking the issue into the long grass of taxation.

Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede and Weybridge, Conservative)

I am surprised by the Minister’s failure to take the opportunity to say something about the foreign profits taxation problem, which is clearly recognised by the Government. There is a feeling in the business audience, which the Financial Secretary and the Economic Secretary may have picked up in their dealings with it, that the Government have kicked the foreign profits taxation consultation into the long grass, because it had too many difficulties—it had ruffled the feathers of the business community—on too many fronts. What we need to establish for the interests of UK plc—the matter is not about the Labour party’s relations with business, but about the UK’s attractiveness to business as a location—is some clarity and certainty. Effectively deferring the issue for another year or 18 months leaves business in the same uncertainty that it has been in since the Government’s intention to look at the taxation of foreign profits was announced. For every person out there who hopes that the result of the exercise is a participation exemption, there is someone else who fears that there may be an even more heavy-handed treatment of taxation of foreign profits than we have now.

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

My hon. Friend made a series of points in that intervention. The one that I would focus on is uncertainty, because we are left in a degree of limbo. The Government had proposed some measures in the consultation document. We had expected a further consultation document to be published in June or July—I am not clear about the status of that consultation document now, given the Minister’s response. It is heard to see what lessons business should take away from that, and what they could expect, in terms of the future shape and direction of Government policy on the taxation of foreign profits. To leave people in that degree of limbo and uncertainty, given that the Government have progressed a certain way down the route, is regrettable. I appreciate that the Government have been facing some flak from business over recent months over taxation, but progress could be made by having a proper public debate. I am sorry that the Financial Secretary does not see the need to publish a report like this, but I suspect that the absence of such a report will cause a great deal more speculation, concern and uncertainty. It is disappointing. I beg to ask leave to withdraw the motion.