Schedule 15
Finance Bill
4:45 pm
Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)
I am grateful to the Minister for his explanation of the amendments and the general background. I wish to put one point on record at the start. It is a complaint widely voiced by professional advisers, who are concerned about the raft of amendments being tabled at this stage. I understand that some were circulated in draft form in the middle of last week, but they were tabled formally only on Thursday. A number of people to whom I have spoken over the past few days expressed concern that they have not necessarily got to the bottom of the changes, and that further issues may need to be resolved. It is a pity that we have to discuss the amendments so soon after their publication. I suspect that we may see further amendments being made on Report, or even that the matter will have to be revisited in next year’s Finance Bill, as people work their way through some of the changes.
I shall speak first about the anti-avoidance measures. The Minister says that they are targeted measures, but there is some concern they are not targeted—that they are instead quite broad in their approach. The Minister said that the Treasury wanted to avoid being too specific, so that people did not try to get around detailed provisions, but I wonder whether we have gone to the other extreme. What sort of activities can businesses undertake to reduce their tax charge that will be deemed reasonable by HMRC? One expects taxpayers, when confronted with a higher tax bill as a consequence of such provisions, to take steps to reduce their tax bill. It is something that most of us would do, and I believe that companies will look to restructure their external debt to reflect the provisions.
A number of issues create the backdrop to the change. The fact that the gateway test is much narrower than anticipated is a problem, as is the fact that the net receivables of a company cannot be offset against net debt in other group companies. I believe that people would try to structure their activities so that they could be netted off in the same company if no exemption were available to match those amounts in the group as a whole. Would HMRC expect to see and be happy with that level of restructuring in the run-up to commencement, with tidying up going on to get net receivables under the maximum debt in the same company in order to enable that offset?
The other aspect is the exemptions referred to by the Minister in the anti-avoidance clause to be inserted under Government amendment 116. New paragraphs 38B to 38E will prevent groups from structuring their financing so as to minimise any disallowance that they could suffer as a result of applying the debt cap legislation, unless the arrangement meets the definition of an excluded scheme. In trying to get to that point, however, some of the decisions that businesses need to review require a group to look at some hypothetical comparator transactions and deduce which of them it would be more likely to undertake in the absence of the debt cap rules and then calculate the test of debt expense, the available amount, the test of income amount and the group’s profits chargeable to tax that would arise if the hypothetical transaction had taken place. That is covered in new paragraph 38D(2)(b), which says:
“instead, anything that is more likely than not would have been done or not done had this Schedule not had effect in relation to the relevant period of account, was done or not done.”
That may be perfect drafting from a parliamentary draftsman’s point of view, but I am not entirely sure what would be required unless someone explained it to me. However, there appears to be a test of looking at how a company might have acted if the rules had not been in place. I question whether the anti-avoidance measures are sufficiently opaque—sorry, I mean sufficiently transparent, although they are certainly opaque—to enable businesses to take reasonable decisions on how to restructure their affairs legitimately to take the new rules into account. There may be a raft of potential comparative transactions that a business could undertake, so how can a business prove to HMRC that it can satisfy the provisions outlined in new paragraph 38D(2)(b)? I think that the measure will cause some problems to business.
We need to think about quite carefully the breadth of the measure, including what sort of transactions it might inadvertently capture. For example, there might be a scheme whereby an inbound investor is debt financing a machinery replacement programme in its UK subsidiary to increase production and thereby increase UK profits. However, if an investor decides to reduce the amount of financing that is to be provided so that the cost of capital is not increased by a disallowance under the debt cap, conditions A and B of new paragraph 38B might well have been met, because one of the investor’s main purposes was to ensure that there was no disallowance under the debt cap, and UK profits would be lower than they would otherwise have been because less machinery is in place and consequently production and profits are not as high as they would have been if the full replacement programme had been implemented.
We assume that such a transaction is not the target of the anti-avoidance provisions. It is not an unreasonable transaction to undertake, but it would appear to satisfy conditions A and B of new paragraph 38B, so one would assume that it would fall within the definition of an excluded scheme. Again, the breadth of the measures is causing part of the problem. The definition of an excluded scheme is actually quite important in establishing what is intended to be targeted by the anti-avoidance provisions and what is not intended to be targeted.
We understand that the excluded schemes will appear in secondary legislation. However, until we have a chance to look properly at that secondary legislation, which is being consulted upon, it is very hard to know what schemes will fall inside or outside the anti-avoidance provisions of the Bill. This is an important issue, because a number of groups will seek to use the period between now and the commencement of the regime to look at the nature of their activities, to decide what their financial arrangements should be and to see whether they may be caught by what appears to be quite a broad-brush anti-avoidance rule.