Schedule 22
Finance Bill
9:30 am
Ian Pearson (Economic Secretary, HM Treasury; Dudley South, Labour)
Schedule 22 is in two parts. The first part deals with a new definition of an offshore fund for tax purposes and the second part deals with the capital gains tax treatment of participants in certain offshore funds. The hon. Member for Fareham has concentrated on the first part, and, as I think that we agree on the second part, I will not specifically refer to it.
As the hon. Gentleman knows, following extensive consultation last year the Government introduced powers, in the Finance Act 2008, to modernise the offshore funds tax regime. At that time, we said that we would consult further with industry on a new definition for offshore funds, with a view to including that in the Finance Bill 2009.
Additional consultation has led to the inclusion of a new offshore funds tax definition, in part 1. With the new offshore funds tax definition, the Government aim to provide more certainty to UK investors and funds; to achieve, to the extent possible, economic parity with the position of UK investors in UK-authorised funds; and to strengthen existing anti-avoidance rules so that UK investors who choose to invest in offshore funds do so based on a commercial decision, rather than for tax purposes. The new definition uses a characteristics-based approach, which the hon. Gentleman referred to. That aims to counter unintended tax advantage being obtained when offshore arrangements are technically outside the current definition of an offshore fund but are economically the same as such a fund.
I shall now turn briefly to the substance of the schedule, before responding directly to some of the hon. Gentleman’s questions. Paragraph 40A defines the type of body that will be an offshore fund if it meets the characteristics defining a mutual fund. Paragraph 40B sets out three conditions that must be satisfied for a fund to be a mutual fund. There are powers to make regulations to amend the third condition, using the affirmative procedure. In addition, certain closed-ended entities are excluded.
Exclusions apply for those investors in closed-ended entities who can effectively redeem their investment only on the winding-up of the arrangements. Those exclusions are applicable when either the arrangements have no pre-determined termination date or are only generating a capital return and do not give rise to any income, or when all income generated is paid to credit to the investor and is taxed as income. The powers in this part allow for future changes to the legislation by regulations, and the Government will continue to monitor the area for avoidance and will use those powers if it becomes evident that schemes are being devised to convert returns that would otherwise be income into capital gains. The Government will also be prepared to make changes in the future if it is clear that certain arrangements should be excluded from the tax definition.
This part also amends the regulation-making powers introduced by the 2008 Act to repeal the existing offshore tax funds legislation and to ensure that existing investors in arrangements that do not meet the current definition of offshore funds are not adversely impacted by the change. We have made draft regulations available to the Committee, and they set out certain exceptions for UK investors from the tax charge to an offshore gain.
The hon. Gentleman made some points about guidance. As he knows, the guidance has been published by HMRC as a draft for consultation and is based on the offshore funds definition. I confirm that further guidance will be published on the operation of the rules. HMRC is happy to make the guidance clearer, following consultation responses on specific issues.
It is also right to emphasise the Government’s position, which is that we believe that there is no discrimination here with regard to the treatment of schemes and how they comply with EU rules. We intend to treat investors in funds that provide taxable income to investors as authorised UK funds in a similar way to investors in UK-authorised funds. So there is no discrimination.