Schedule 22
Finance Bill
9:30 am
Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)
I have just a couple of questions about the schedule. The first relates to the clarity of the guidance that has been issued so far on the matter. My second and more substantive concern may seem a curious one for me to raise given my earlier remarks about the way in which the rules on the debt cap and dividend exemption seem to be driven by the EU, and the fact that the Government have assured us that they were robust to challenge. However, it has been suggested that the rules on schedule 22 may not be robust and may be challenged on whether or not they comply with EU rules.
Let me deal with the guidance point first. There is concern that although some guidance has already been issued by HMRC it does not address all the questions raised by industry during the consultation on schedule 22. The grandfathering rules that apply until 1 December 2009 are helpful, but they should address immediate industry uncertainty.
The characteristics-based definition is potentially so wide-ranging that instead of providing greater certainty, it is likely to make the position even more unclear. It is suggested that there may be a range of offshore arrangements that are not, in substance, funds, but that may be subject to the rules. There is concern regarding interpretation around offshore companies’ fixed lives, shared buy-back arrangements and liquidation exit routes as well as special purpose vehicles under partnership. It may be the Government’s intention to ensure that such areas are not caught by schedule 22, but, as they stand, the broad nature of the rules catches those entities.
This schedule introduces into legislation the definition of an offshore fund. It can be
“a mutual fund constituted by a body corporate”
or
“a mutual fund under which property is held on trust for the participants where the trustees of the property are not resident in the United Kingdom”
or
“a mutual fund constituted by other arrangements that create rights in the nature of co-ownership”
where those arrangements are affected by non-UK law. The schedule then sets out some conditions that a mutual fund might need to satisfy to then be defined as an offshore fund. Therefore, some certainty is required. Uncertainty does not only impact on UK investors; it also creates additional complexity and administrative burdens for the offshore asset management industry, which already has quite a lot to do in getting its funds in shape to meet the rules.
The second issue goes back to the breadth of the funds that might be caught. The offshore funds’ tax regime does not comply with the UK’s obligations under agreements that create the European economic area. Previous legislation linked the definition of offshore funds to the regulatory definition, as in sections 235 and 236 of the Financial Services and Markets Act 2000, and was unlikely in practice to apply to mainstream retail investments. However, the proposed definition set out in schedule 22 appears to bring a far greater range of investments within the definition of an offshore fund—that was the comment I made in the first part of my remarks about trying to have greater clarity. The definition is so broad that the question of the regime’s non-compliance with EC law arises in practice.
I have been given the following example, in which a UK bank offers, as a retail investment,
“a debt security which redeems at any time after a minimum holding period of, say, 12 months by reference to the FTSE 100 (though any chargeable asset, or index of chargeable assets, for capital gains tax purpose would provide the same result).
In the absence of complicating factors, such an investment should be regarded as a capital gains asset for tax purposes, with any gains, made on disposal of the investment subject to tax at 18%. The offshore funds rules will not apply because the mutual fund is constituted by a UK resident company.”
However, if the same debt security is
“issued by a French or a Luxembourg financial institution under the proposed new definition”,
that definition is sufficiently broad to cause that identical investment to be subject to different rules, which would result in any gains being treated as income and therefore taxed at the higher rate. Therefore, if the Government introduce their plans for a 50 per cent. tax rate, those gains could be subject to tax at that rate, whereas the same security issued in a UK resident fund would be taxed as capital gains at 18 per cent. There appears, therefore, to be a difference between UK issuers of investments and non-UK issuers of investments, which constitutes discrimination. That, it is argued, then constitutes a restriction in the free movement of capital from UK resident investors to financial institutions resident in other EEA member states, which would be unlawful. I would be grateful if the Minister could comment on whether the Treasury believes that that differential treatment renders the rules in breach of EU law.