Clause 47 - Foreign income and gains
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?