Clause 47 - Foreign income and gains
David Amess (Southend West, Conservative)
With this it will be convenient to discuss the following:
Amendment 177, in schedule 12, page 294, line 27, leave out ‘45’ and insert ‘30’.
Amendment 178, in schedule 12, page 294, line 31, leave out ‘45’ and insert ‘30’.
Amendment 179, in schedule 12, page 295, line 1, leave out ‘45’ and insert ‘30’.
Amendment 180, in schedule 12, page 295, line 4, leave out ‘45’ and insert ‘30’.
Amendment 181, in schedule 12, page 295, line 8, leave out ‘45’ and insert ‘30’.
Amendment 182, in schedule 12, page 295, line 10, leave out ‘45’ and insert ‘30’.
Amendment 183, in schedule 12, page 295, line 14, leave out ‘45’ and insert ‘30’.
Amendment 184, in schedule 12, page 295, line 21, leave out ‘45’ and insert ‘30’.
Amendment 185, in schedule 12, page 310, line 38, at end add—
‘(2) HMRC will monitor the extent to which income and chargeable gains used to make qualifying investments under this Part of the Schedule have been taxed in other jurisdictions and will assess the implications of this for UK domiciled investors.’.
That schedule 12 be the Twelfth schedule to the Bill.
David Gauke (Exchequer Secretary, HM Treasury; South West Hertfordshire, Conservative)
Clause 47 introduces schedule 12, which contains provisions about the taxation of foreign income and gains. It makes three main changes to the tax regime for resident non-domiciled individuals. First, it ensures that the non-domiciles who have been resident in the UK the longest make a fairer tax contribution. Secondly, it introduces a new incentive to encourage non-domiciles to bring money to the UK to invest in businesses here. Finally, it simplifies aspects of the existing rules to remove unnecessary complexity and reduce administrative burdens.
Non-domiciles who are resident in the United Kingdom are entitled to use a tax regime that provides for beneficial treatment of their foreign income and gains. This regime is known as the remittance basis. The remittance basis also applies to the foreign income of individuals who are resident but not ordinarily resident in the UK for tax purposes. The remittance basis was last reformed in 2008 and an annual charge of £30,000 was introduced for non-domiciles who have been resident in the UK for at last seven years and wish to make use of the beneficial tax regime. The Government recognise that non-domiciles can make a valuable contribution to the UK economy. Indeed, according to preliminary data, they paid at least £6.3 billion in income tax and capital gains tax in 2009-10, and a further £1.8 billion in national insurance contributions.
The changes made by part 1 of the schedule will increase the annual charge to £50,000 for non-domiciles who have been UK resident in 12 or more of the preceding 14 tax years. The £30,000 charge will remain for those who have been resident in at least seven of the preceding nine tax years, but fewer than 12 years. The Government estimate that 3,500 individuals will choose to pay the higher £50,000 charge in 2012-13. The charge is not mandatory, and those who do not wish to pay can instead choose to be taxed on all their worldwide income and gains. We estimate that, as a result of introducing the higher charge, a further 3,500 individuals will choose to be taxed on their worldwide income and gains, and hence pay more tax than they do currently.
Taken together, the introduction of the higher charge is expected to raise approximately £80 million a year. The Government believe that the level of the increase is right, and that it would be counter-productive to introduce more stringent measures that could drive non-domiciles away, or deter them from coming in the first place.
The changes will also remove the tax charge on foreign income and gains when they are brought to the UK for the purpose of commercial investment in business. The business investment incentive is widely drawn to maximise the amount of investment. That will help attract investment in businesses of all sizes across a diverse range of sectors. Foreign income and gains will continue to be liable to UK tax when they are brought to the UK for other purposes, such as personal expenditure. It is vital that the incentive is not open to abuse or used for the direct personal benefit of the investor. Therefore, the changes include clear anti-avoidance provisions to prevent such abuse, and make certain that the incentive is used only for its purpose of generating genuine business activity.
In response to consultation, the Government have made changes to improve the legislation as regards creating incentives for investment. In particular, a broader range of company structures will now qualify for investment. The schedule also includes new provision to allow individuals who take advantage of the investment incentive to retain some of the proceeds from the disposal to meet the capital gains tax liability on that disposal. Again, that follows representations made during consultation. The provision will apply only in situations where the individual might otherwise have to bring additional money to the UK to meet the CGT liability.
Finally, the changes made by part 3 of the schedule will simplify the remittance basis in two ways. The changes will simplify certain aspects of the nominated income rules that can apply to individuals who pay the £30,000 or £50,000 charge. That has been strongly welcomed during consultation. The simplifications have no cost to the Exchequer. The Government have considered and rejected other suggestions for simplification on the grounds that they would open up avoidance opportunities, create a direct cost to Exchequer or deliver insignificant benefits. However, the Government will give further consideration to a limited number of other simplifications with a view to possibly legislating in next year’s Finance Bill.
All the amendments relate to the business investment incentive that I have already gone through. I look forward to hearing the remarks of Opposition Members, and will respond to them accordingly. I will also respond to amendment 185 when I have heard the remarks of the hon. Member for Newcastle upon Tyne North.
Taken together, the measures deliver a balanced package of reforms that will increase the tax contribution from non-domiciles while providing a significant incentive to invest in the UK; that will contribute to our priority, economic growth. They are sensible changes that will benefit taxpayers and the UK as a whole.
Catherine McKinnell (Newcastle upon Tyne North, Labour)
It is a pleasure to serve under your chairmanship, Mr Amess.
Clause 47 makes various changes, which the Minister helpfully set out. A key change is a new method for non-domiciled individuals to bring their non-UK income into the UK without it being classified as remittance, and therefore chargeable to UK tax. The stated aim, as the Minister set out, is to bring more investment into the UK. Currently, overseas income or capital gains remitted in the UK by individuals claiming the remittance basis are liable to UK tax, regardless of the purpose for which they are used. The current system has been regarded as a disincentive for non-domiciles to bring funds into the UK to invest in trading and commercial property companies.
It is right that the aim of incentivising non-domiciles to bring money into the UK to invest in companies should be limited to qualifying businesses. However, it has been questioned whether that method of bringing investment into the UK has been properly thought through by the Government. Certain investment vehicles, such as limited liability partnerships, have been omitted, and the legislation does not appear to have got fully to grips with the complexities of companies in practice. The complexity of the legislation laid before Parliament has also raised numerous concerns.
Some of the benefits of the measure will be limited by the fact that the investment can be made only in corporate bodies and not in other investment vehicles, some of which are likely to be more attractive to non-domiciles. The Institute of Chartered Accountants in England and Wales, a very respected organisation, has stated that in its view, such an extension would result in a significant increase in the number of investments made. Is it likely that any amendments will be made to the rules to stretch them to allow investment in other investment vehicles apart from UK corporates such as limited liability partnerships?
As I said, the Bill is long and complex, and it is assumed that the measures are intended to address some of the complexities that will inevitably arise from the Government’s proposals. What reassurances can the Minister give that the regime can be properly monitored and enforced? Will HMRC have the necessary resources to ensure that the measures are not simply used as another tax-avoiding loophole? Can he provide reassurance that they will genuinely bring investment and benefit to the UK, not just tax advantages for the non-domiciles who use them? The ICAEW has also registered its concerns that the meaning of the legislation should be as clear as possible to ensure that potential investors have the certainty that they require to make those investment decisions.
The measures prescribe that when income or gains are brought to the UK to be invested, those investments must be made within 45 days to receive tax relief. Amendments 177 to 184 seek clarity on that matter. Given that the period originally set out in the consultation was 30 days, and having looked at the responses received in the consultation, will the Minister explain why it was decided that 45 days would be more appropriate? That has not been made clear.
Our amendments suggest a return to the original time limit of 30 days. It is therefore incumbent on the Minister to explain to the Committee why the Government believe that a 45-day period is more appropriate. Surely the longer the period given for investments to be made, the greater the avoidance concerns. Will he confirm that income or gains could be brought into the UK and used for up to 44 days without triggering the clause? If so, what safeguards have been put in place against that?
When an investment decision is made, administrative processes must be gone through in order to draw down the investment into the UK, but does that require 45 days? I would be grateful if he commented on why 45 days is deemed necessary. Will he also explain why the Treasury appears not to be concerned about the possibility that non-domiciles might make use of a longer period for tax avoidance purposes?
Concerns have been expressed that the change might put British investors at a disadvantage. Non-domiciles will, obviously, be able to make qualifying investments in the UK without paying the same taxes that a British investor will be obliged to pay. Has the Minister explored whether that could put British investors at a competitive disadvantage? What assessment have the Government made of that potential, and what reassurances can he give to British investors today?
The clause sets out a remittance charge of £50,000 for non-domiciles who have been resident in the UK for 12 of the last 14 years. The £50,000 charge is not as high as initially feared. Concerns were expressed that it would be £100,000, and the general view, voiced by the Minister today, is that the majority of non-domiciles will choose to pay the £50,000 charge. Those who do not wish to pay the annual charge can either choose to leave the UK, or move to paying UK tax on their worldwide income. As the Minister set out, estimates suggest that 3,500 non-domiciles will choose to pay the £50,000 charge, while 3,500 will not pay at all, instead opting to pay UK tax on their worldwide income. Will the Minister explain how those figures have been estimated? The impact note states that a small number of the 3,500 may opt to leave the UK instead, but how has the Minister arrived at that estimate?
Given that only a small amount will be raised through the measure, what are the Government seeking to achieve by requiring non-domiciles to pay the annual charge? It is important that members of the public understand why the charge is being levied, to avoid any perception, for example, that it could be politically motivated. The statutory residence test that was initially due to be included in this Finance Bill has also been omitted, and concern has been expressed that that was done without explanation. We were told that the Government have decided to allow more time to finalise the test’s detail, yet it is a key area, and one of the most contentious in UK tax rules. The general consensus is that the issue needs to be addressed; it is one of the most important connecting factors between individuals and the UK tax system, and at the moment, we rely on a plethora of case law guides that give clarity on the residency rules; it is complex and very subjective.
A key part of what the Bill aims to achieve is clarity and simplification of the tax system in this area, so the Government’s failure to deal with the statutory residence test at this stage has caused concern. Will the Minister explain what has delayed the clarity that was due to be provided by this Finance Bill, and why the move has been postponed until 2013?
David Gauke (Exchequer Secretary, HM Treasury; South West Hertfordshire, Conservative)
Amendments 177 and 178, if adopted, would reduce the time limit for making a qualifying investment. An individual is currently required to make their investment within 45 days of bringing their foreign income and gains to the UK if they are to qualify for the incentive. That reflects the economic and commercial realities of making an investment, particularly when significant sums are involved.
The obvious effect of reducing the time limit to 30 days, as the Opposition propose, would be that the incentive was less attractive to potential investors, and therefore, it would be less effective as a means of encouraging inward investment. I am sure that the Opposition would not support that outcome.
For larger investments, complex and detailed arrangements will often need to be agreed and negotiated before an investment is made. That is the commercial reality, and it is therefore only right to allow a reasonable period of 45 days in which an investor is required to make a final decision.
Amendments 179 to 184 would reduce another time limit from 45 days to 30 days; in that case, the time limit would apply when an individual brought their foreign income and gains to the UK with the intention of making a qualifying investment, but the investment proved to be abortive. In such cases, the individual is required to take their foreign income and gains back offshore within 45 days. As part of the Government’s new tax policy-making process, draft legislation was published for consultation on 6 December 2011. That legislation did not cater for situations in which an individual brings their foreign income to the UK with the intention of investing, but that investment fails to take place.
A point made forcibly during consultation was that it was not uncommon for investments to fall through at the last minute for genuine commercial reasons. Therefore, the absence of rules dealing with abortive investments would be a serious defect in the new incentive. It would mean that an individual could become subject to UK tax on the remittance of their foreign income and gains, where they fully intended to invest in the UK business, but that investment was not made, including where things fell through for reasons outside their control.
The revised legislation set out in the Bill therefore contains new provisions to deal with abortive investments. They require foreign income and gains to be sent back offshore within 45 days of being brought to the UK. I will repeat this: it is only right to allow a reasonable period for an investor to make a proper commercial assessment of a potential investment before making a final commitment. It follows that it is also right to allow for cases in which a potential investor decides in the end that a business is not sufficiently commercially attractive to warrant an investment.
Catherine McKinnell (Newcastle upon Tyne North, Labour)
The Minister used the term “reasonable” to describe the period of 45 days in respect of amendments 181 to 184 and amendments 177 to 180 previously. Will he elaborate on why 45 days is reasonable whereas 30 days is not?
David Gauke (Exchequer Secretary, HM Treasury; South West Hertfordshire, Conservative)
That is always a question of judgment. My main point, as I said a moment ago, is that often, investments, particularly larger ones, have complex and detailed arrangements to be agreed and negotiated on before they are finalised. A deal could collapse quite late in the process, and there should be an opportunity to ensure that a potential investor is not inadvertently hit. There is always a question of judgment as to what the right length of time is. Given the complexity of some deals, the flexibility provided by 45 days is one that we think strikes the right balance. Having listened to representations that we received, following the consultation and the publication of draft legislation last December, that is our assessment, striking the best balance in protecting the Exchequer from avoidance activity while ensuring that there is a sufficiently attractive regime for the investment that we all want to see.
Amendment 185 would impose a new obligation on HMRC to monitor tax paid in overseas jurisdictions on the income and gains used to make a qualifying investment. Unfortunately, HMRC simply could not do that. It is responsible only for the UK tax system and does not have authority for tax systems elsewhere. There is absolutely no point in introducing obligations for HMRC that they would be unable to meet. Even if it were possible for HMRC to monitor the amount of tax paid overseas, I am doubtful of the value of such information. The whole point of the business investment incentive is to have no UK tax charge when the funds are brought to the UK to make an investment. I fail to see what value would be served by knowing how much tax had been paid on foreign income and gains in another jurisdiction.
The hon. Member for Newcastle upon Tyne North asked about the yield from the £50,000 charge and our estimate that 3,500 people would pay the charge and a further 3,500 people would choose to be taxed on their worldwide income rather than pay the charge. We based those assessments on the self-assessment data provided to HMRC, and the numbers have been agreed by the Office for Budget Responsibility.
The hon. Lady asked whether the regime would result in preferential treatment for non-dom investors over UK-domiciled investors, who have to invest their taxed income. One effect of the remittance base is that it encourages non-doms to leave their money outside the UK. By introducing the business investment incentive, the Government will remove the barriers that prevent non-doms from wanting to invest here. That is the purpose of the policy. Of course, non-doms will only be able to bring in moneys that they invest in UK business. They will continue to pay UK tax on their foreign income and gains that they bring to the UK for any other reason.
The hon. Lady asked whether the business investment incentive was too complex. We believe that the incentive strikes an acceptable balance between encouraging maximum inward investment and preventing abuse. It has been widely drawn with few restrictions to ensure that it is accessible to all non-doms and to a wide range of businesses and sectors. It is also necessary to include specific provisions to ensure that the relief is not abused as a means of sidestepping the remittance basis and allowing individuals to enjoy their foreign income and gains in the UK tax free. Although that inevitably adds complexity to the legislation, it should have no impact on people who want to make a genuine commercial investment.
The hon. Lady asked specifically about partnerships. The Government are not yet convinced of the case for including partnerships within the relief. We remain concerned that extending the relief in that way might lead to large-scale avoidance unless complex anti-avoidance legislation was introduced. However, we are willing to consider the issue further to evaluate whether there is scope for widening the relief to include investments in partnerships in Finance Bill 2013. That brings me on to the broader question of whether there will be any further changes in this area.
In the Budget 2011 the Chancellor confirmed that there would be no substantive changes to the remittance basis rules, beyond the current reforms, for the remainder of the Parliament. The annual charge falls within that commitment, and I hope that that provides the certainty that non-doms seek. The Government have committed to considering changing the detail of the new business investment incentives and additional technical simplifications. They will consider legislation on those points only if they are convinced that it will better deliver the policy objectives outlined in the Budget 2011 and during the consultation.
The hon. Lady asked about the operational impact on HMRC. Any individual who pays the £50,000 charge will already be paying the £30,000 charge, so the measure is not expected to add significantly to increased operational costs for HMRC. The simplifications to the existing remittance basis rules will result in an overall reduction in compliance burdens and decreased operational costs for HMRC associated with remittance basis taxpayers.
Finally, the hon. Lady asked why the statutory residence test had been deferred to next year. The Government are committed to introducing a statutory residence test in next year’s Finance Bill, and I am grateful for the opportunity to clarify that. It is right to defer the measure until 2013 to ensure that we get the detail of such a complex and important area right. That decision has been broadly welcomed by external commentators and interested parties, because there is a recognition that the details need to be correct.
The hon. Lady asked, perfectly reasonably, why the introduction of the residence test had been deferred; there was a certain sense of “Why is this taking so long?” I must point out that for 13 years, when many people were calling for a statutory residence test, very little progress was made under the previous Government. My sense is that the progress we have made over the past two years, and will continue to make through to next year when we will bring this into legislation, has been warmly welcomed by interested parties and will provide a useful clarification of our tax system. With those comments, I hope that the clause can stand part of the Bill.