With this we may discuss the following amendments: No. 56, in page 70, line 41, after 'section 349(1)', insert 'or (2)'.
No. 57, in page 71, line 4, after 'section 349(1)', insert 'or (2)'.
No. 58, in page 71, line 17, leave out from 'made;' to end of line 24.
No. 59, in page 71, line 42, after 'section 349(1)' insert 'or (2)'.
No. 60, in page 72, line 2, after 'section 349(1)', insert
'or, as the case may be, section 349(2)'.
The amendments are designed to extend the new arrangements under which companies will pay royalties to overseas recipients without either the deduction of tax at source or the prior approval of the Inland Revenue for the payment of interest. Under current legislation, a UK company paying interest or royalties to an overseas recipient has to withhold 20 per cent. tax, or 22 per cent. in the case of royalties, and account for that amount to the Inland Revenue. If a double tax treaty between the UK and the recipient's state provides for a reduced or nil-rate withholding tax, the recipient may make a claim for repayment of all or part of the amount deducted. With advance permission from the Inland Revenue, the payer may apply the reduced or nil-rate on making the payment, avoiding the need for the hassle of a repayment claim.
As regards royalties, the clause is extremely welcome, and is part of the simplification arrangements to which the Minister just referred. The Bill introduces the new regime for royalties, under which—subject to various conditions—the payer can apply the treaty rate without any advance permission, provided that there is a reasonable belief that the recipient is entitled to the benefit of the treaty. That, however, still leaves companies with the administrative burden and potential cash-flow cost of applying the existing system to the payment of interest, and to certain other annual payments from which tax has to be deducted.
The solution that the amendments propose is to extend the new system, which includes extensive safeguards for the Inland Revenue, to all such payments. That would complement the provisions introduced in last year's Finance Act to remove the obligation on companies to deduct tax from payment of interests and royalties, and certain other payments to recipients within the charge to UK corporation tax.
The amendment is designed to extend the scope of the new scheme for cross-border royalties introduced by the clause so that it would also apply to cross-border payments of interest, annuities and other annual payments. At present, a company making a cross-border payment of interest or royalties must deduct tax at source at 20 per cent. unless it has received approval from the Inland Revenue not to deduct, or to deduct at a reduced rate. Approval is given after the recipient has made a claim that has been endorsed by the recipient's tax authority. Those procedures enable checks to be made that relief is due under the relevant treaty.
Under the scheme proposed in the clause, which I am pleased to see that the hon. Gentleman has welcomed, a company will be able to make a cross-border payment without deducting tax at source, and without receiving prior approval from the Inland Revenue. The paying company will have that option, if it has a reasonable belief that the recipient qualifies for relief under a treaty.
We have been convinced of the value of such a scheme in the case of royalties, especially at a time when we are introducing important new rules for the taxation of intangible assets. Such a scheme will help UK businesses to gain access to the foreign-owned intellectual property that they need. In the case of cross-border payments of interest, however, different considerations are involved. There is considerable scope to use cross-border interest payments to reduce the UK tax liability for the payer. That can happen when a foreign-based business puts an excessive amount of debt into its UK operations. The imaginative use of debt by some multinational groups means that the Revenue have to apply considerable resources to that area in order to protect the Exchequer. Every year, substantial amounts of interest are denied the benefit of treaty relief as a result of such efforts.
The risk of a substantial loss of tax is much greater with interest than it is with royalties. We have not been persuaded that it would be appropriate to extend the new scheme to interest. The introduction of the scheme in clause 95 will have a cost. That will arise when payments are made without deduction at source, or at a reduced rate when treaty relief is not due, in cases where that is not picked up during the Revenue's examination, but would have been if it had been necessary to apply for prior Revenue approval. To have audit arrangements under the new scheme that will be as effective as those under the existing system would require every possible case under which payments are made to be checked, which would negate the whole value of the scheme.
The Revenue estimate that the cost of the new scheme would be negligible where royalties are concerned. The value of cross-border interest, however, is over 20 times the value of cross-border royalties, and the risk to the Exchequer is greater with interest than with royalties. The Revenue estimate that the cost of extending the new scheme to interest would be about £5 million a year. I will let the Committee draw its own conclusion as to whether £5 million is relevant. Special arrangements currently apply to some cross-border interest payments. When loans are arranged by syndicates of recognised banks, for example, a paying company may apply for provisional treaty relief in advance of a full claim's being approved. That speeds up procedures in cases where the risk to the Exchequer is perceived to be low.
I am grateful that the hon. Gentleman recognises the value of the clause, but I urge him to withdraw the amendment.
I simply make the point that an element of trust is involved, as I said when referring to royalties. As I understand the Financial Secretary's point about qualifying interest, because the figure is much larger the Revenue would incur substantial costs in checking the bona fides of qualification. That may seem a valid argument, but I repeat that I thought she was going to say £50 million, not £5 million. There is
an argument for consistency in making the changes to include both. I suspect that the Government may consider that eventually and we may find ourselves debating the matter next year. However, it is not a major point and in bona fide situations individual companies can make satisfactory arrangements. It is not an issue of principle that we want to press to a vote, but I hope that when the royalty system is up and running we shall round it off with interest next year. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Question proposed, That the clause stand part of the Bill.
I should be grateful if the Financial Secretary would clarify a technical point that has caught my eye. New subsection (1)(b) states that where
''the company reasonably believes that, at the time the payment is made, the payee is entitled to relief in respect of the payment'',
the company may, if it thinks fit, calculate the sum to be deducted from the payment under section 349(1) by reference to the rate of income tax appropriate to the payee pursuant to the arrangements. Can the Financial Secretary describe the mechanisms through which the person paying the royalty must go to establish beyond reasonable doubt that the person receiving it is entitled to the relief? It is not clear whether such relief by the receiver of the royalty is a moveable feast and, therefore, in practical terms, whether a United Kingdom company might believe at one moment that it was all right and, at the next, find itself in hot water. In the real world, how does the establishment of reasonableness on the part of the payer work?
It will be relatively easy for a company to know whether it has a reasonable belief or not as to whether the payer and payee are associated companies and know each other well, or whether they are not. For example, when a payment is made between associated companies, the payer is in a good position to know whether the recipient is the beneficial owner and meets the conditions to receive relief from UK tax under a double tax treaty. When the companies are not known to each other, the payer may want to obtain documentary evidence, if that is possible, to show that the recipient is eligible. Such a statement might contain confirmation that the recipient is beneficially entitled to the royalties, is resident in a particular country, and meets the conditions for relief from UK tax on royalties under the relevant double tax treaty.
If a genuine mistake is made, it can be corrected later and the Revenue would then require the payee to pay the tax that should have been deducted, plus interest. However, it would be very unlikely that a penalty would be incurred in such circumstances. In practice, the issue is not significant, but the right hon. Gentleman raised an interesting point.
Question put and agreed to.
Clause 95 ordered to stand part of the Bill.