Clause 100 - Distributions: reasonable commercial return for use of principal secured

Part of Finance Bill – in a Public Bill Committee at 1:30 am on 18 June 2002.

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Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 1:30, 18 June 2002

I hope that I shall be able to explain to the hon. Gentleman that his amendment is not necessary, as discussions with the industry have taken place. It is a complex matter, but I shall try to cover it. The hon. Gentleman explained in his introductory remarks the purpose of clause 100, and I am grateful for his comments.

The amendment would introduce a relaxation in the rules defining a distribution of profit. Where distribution treatment would otherwise apply to payments that to any extent depend on the results of the company's business, those payments would instead be deductible as interest in computing taxable profits if hedging arrangements exist. That is tantamount to providing interest relief for dividends. I am sure that that is not what the hon. Gentleman intends.

The Government believe that the clause provides carefully targeted changes that benefit the UK by making it more competitive while protecting the UK tax base. I assume that the hon. Gentleman is generally content with the clause, because the amendment does not change the way in which it operates. Instead, it uses the definition of hedging arrangements in the clause for a completely different purpose. The clause has been carefully drafted to include a specific type of security that is not motivated by UK tax considerations. It does little more than test the commerciality of the return on the investment by reference to the amount paid in, as the hon. Gentleman said. Any amount greater than a

reasonable commercial return will rightly continue to be treated as a distribution.

If payments under a security at least partly depend on the results of the company's business, there is no obvious reason why the simple presence or absence of hedging arrangements should determine whether there is a distribution of profit. Sums arising under hedging arrangements in such circumstances are already dealt with under the established tax code and are independent of the distributions legislation.

Having had legal advice and discussions with industry representatives, we are confident that hedging arrangements will not cause the returns on securities intended to gain the benefit of the clause to be treated as distributions under other legislation. In cases that do not involve the specific asset-linked securities at which the clause is targeted, other distributions legislation may apply in the normal way.

In discussions with the industry, it has been agreed that the Inland Revenue will provide detailed guidance in manuals that will be publicly available on the application of the clause and other relevant legislation, including the legislation referred to in the amendment, and that it will discuss the draft with industry representatives to ensure that the point is covered.

It is illogical for the presence or absence of hedging arrangements to influence the application of the distribution treatment in the circumstances set out in the amendment. We are confident that guidance will reassure on that matter. For those reasons, I hope that the hon. Gentleman will be satisfied that the point is now covered. Should he want to be involved, and should he have further comments to make, we could ensure that he had a draft copy of the regulations at the same time that it was provided to the industry.