Clause 34
Finance Bill
11:15 am
Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)
I add my welcome to you, Mr. Hood, as Chair of the Committee’s deliberations this morning.
Clauses 34 to 37 introduce a significant package that modernises corporate tax rules for foreign profits. It will make the UK a more attractive headquarters location for multinational businesses by enabling a group’s worldwide profits to be repatriated to the UK without tax being charged and without need for complex double taxation relief calculations. It is a major change to a more territorial system of business taxation in which we are essentially concerned with applying tax to profits earned in the UK and not to profits earned overseas. The key element of the package offers generous dividend exemptions compared with competitor jurisdictions, available to all companies regardless of the level of shareholding.
The package comprises four linked parts with one in each of the four clauses: first, a broad exemption for company distribution; secondly, a reasonable restriction on our generous interest-relief rules in the UK; thirdly, consequential changes to the controlled foreign company rules, and fourthly, the replacement of the Treasury consent rules with a much simpler reporting requirement. These have all been subject to substantial widespread consultation which has shaped what is before the Committee.
I shall say a little more about each of the four elements. Clause 34 introduces schedule 14, which provides exemption from tax for foreign profits. It reduces administrative costs and it meets business’s call for exemption in the Finance Bill. The result of these rules is that the great majority of distributions for small, medium and large companies will be exempt from corporation tax. That change has been widely welcomed, as has the fact that we have been able to deliver it in this Bill.
Clause 35 introduces schedule 15, which prevents excessive advantage being taken of our interest-relief rules, particularly in the context of dividend exemption. This debt cap applies only where groups put more debt in the UK than they borrowed for their entire worldwide business. It is a reasonable restriction and will allow generous tax deductions for interest, notwithstanding the move to dividend exemption.
Clause 36 introduces schedule 16, which makes three consequential changes to the controlled foreign company rules. The first two relate to introduction of dividend exemption and remove some of the exemptions within the controlled foreign company regime, which will no longer be appropriate. Part 3 of the schedule includes a provision to ensure that the debt cap cannot interact with the controlled foreign company rules in a way as to cause double taxation.
Clause 37, introducing schedule 17, removes existing Treasury consent legislation and replaces it with a modernised, post-transaction reporting requirement targeted at transactions where there is a substantial risk of tax avoidance activity. The old rules have been replaced because they are out of date and are not in line with modern practice. The new requirement will apply to material transactions that pose significant risk of tax avoidance, reducing the administrative burden on business but ensuring that HMRC can focus on serious avoidance. We have also committed to examine the controlled foreign company rules in more detail separately. The review aims to modernise the current rules. It will be consistent with the move that I have described towards a more territorial approach of taxing foreign subsidiaries.
This package represents the outcome of nearly two years of extensive and constructive consultation. I want to thank all those who have contributed in the past couple of years. Businesses have consistently said to us that it is important for the UK to have dividend exemption. They have asked for it to be included in this Finance Bill rather than being delayed any further, to enhance the competitiveness of the UK tax system. I am very glad that we have been able to do that.