Clause 22 - Treatment of the receipt of manufactured overseas dividends
Catherine McKinnell (Newcastle upon Tyne North, Labour)
It is a pleasure to serve under your chairmanship again this afternoon, Mr Bone.
I seek a couple of points of clarification from the Minister on clause 22. The clause seeks to clarify the legislation on manufactured overseas dividends, thereby blocking a tax avoidance scheme. The legislation provides that, where MODs are received under deduction of tax, some or all of that tax may be treated as overseas tax. The clause makes it clear that, where there is a difference between the tax deducted and the tax treated as overseas tax, the difference is not treated as income tax. The clause makes a similar change for deemed manufactured payments under some stock lending arrangements.
The clause affects overseas dividends received on or after 15 September 2011, and I seek clarification on that date. Under the avoidance scheme, the recipient of a manufactured overseas dividend claims to have received it under deemed deduction of UK income tax, and seeks to set off the dividend against its corporation tax liability via double tax relief. Will the Minister clarify when the scheme was first disclosed to Her Majesty’s Revenue and Customs? How soon after that disclosure did the Government take the action that they are now putting into statute to clamp down on the avoidance? What receipts are expected from the measure?
David Gauke (Exchequer Secretary, HM Treasury; South West Hertfordshire, Conservative)
It is a great pleasure to serve under your chairmanship this afternoon, Mr Bone, just as it was this morning.
Clause 22 will ensure that manufactured overseas dividends cannot be used to claim repayment or to set off income tax that the Exchequer does not receive. The changes were announced in a written ministerial statement on 15 September 2011 and take effect from that date.
We introduced the clause to block an aggressive avoidance scheme that HMRC had been notified of under the rules requiring disclosure of avoidance schemes. The scheme involved the receipt of a manufactured overseas dividend that, it was claimed, entitled the recipient to repayment of income tax that had been notionally deducted from the dividend but that had not, in fact, been paid.
Clause 22 ensures that, with effect from 15 September 2011, companies cannot use MODs to obtain repayment of income tax that has never been paid. The changes affect only companies engaged in tax avoidance schemes involving MODs. The changes are expected to increase receipts by approximately £40 million per annum and also to protect against future revenue losses.
The Government launched a consultation on 27 March aimed at simplifying the tax rules on MODs and manufactured payments generally, with a view to making avoidance more difficult in future. Any changes following the consultation will not take effect before the Finance Act 2013. The hon. Lady asked when this particular arrangement was disclosed. It was disclosed in June 2011 and the statement was made on 15 September. The clause ensures that the MODs legislation works in the way that businesses not engaged in tax avoidance understand it to work. By blocking the disclosed avoidance scheme, it promotes fairness for all taxpayers.