Schedule 26 - Non-resident companies: transactions

Finance Bill – in a Public Bill Committee at 4:30 pm on 20th May 2003.

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Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General 4:30 pm, 20th May 2003

I beg to move amendment No. 92A, in

schedule 26, page 344, leave out lines 36 to 38 and insert—

'(c) either—

(i) the remuneration he receives in respect of the transaction for the provision of the services of a broker to the non-resident company is not less than is customary for that class of business; or

(ii) he acts on behalf of the non-resident company in relation to the transaction in an independent capacity; and'.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

With this it will be convenient to discuss the following:

Amendment No. 93, in

schedule 26, page 345, leave out lines 12 and 13 and insert—

'(c) either—

(i) the remuneration he receives in respect of the transaction for the provision to the non-resident company of investment management services is not less than is customary for that class of business; or

(ii) he acts on behalf of the non-resident company in relation to the transaction in an independent capacity; and'.

Amendment No. 94, in

schedule 26, page 345, leave out lines 15 to 17.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General 4:45 pm, 20th May 2003

We come to schedule 26; this is the first time that we have strayed into the second volume of the Bill. The amendments relate to a similar line of argument.

The schedule largely re-enacts the existing law in section 127 of the Finance Act 1995 and the Opposition find it broadly acceptable. However, paragraph 2(c)(ii) seems to be anti-competitive because, if a broker is prepared to carry on business for less than the usual level of fee or commission, he risks becoming a permanent establishment of a non-resident company and liable for any corporation tax chargeable on the non-resident company as a consequence of transactions carried out through it. Amendment No. 92A would provide that a lower-than-customary fee or commission could safely be charged provided that the broker acted in an ''independent'' capacity. That is covered by paragraph 7(2) of the schedule.

Photo of Mr John Burnett Mr John Burnett Liberal Democrat, Torridge and West Devon

I appreciate that the Opposition do not have armies of civil servants to help us. Does the hon. Gentleman mean by ''independent'' not connected within the meaning of the Taxes Act 1988 and not an associated or subsidiary company? Can he give a slightly more detailed description of what he means by ''independent''?

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

It is important that I do not seek to advance arguments for putting in legislation words and definitions that are not well established within the meaning of independence. The definition of a broker acting in an independent capacity is already contained in the Bill and earlier tax legislation. The issue at stake is not so much the question of how the action takes place in an independent capacity, which is established, but the way in which the provisions work. When a broker transacts business for a lower-than-customary fee or commission, he must act in an independent capacity; otherwise, there would be a link that would raise other presumptions.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

In paragraph 2(1) of the schedule, the words ''independent status'' are used. Under amendment No. 92A, paragraph 2(2)(c) would contain the word incapacity—that is a Freudian slip. I meant to say that the words ''independent capacity'' are used. It seems to me and, perhaps, the hon. Gentleman, that his amendment is suggesting a circular definition. Perhaps he can help the Committee by differentiating between independent status and independent capacity.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

The hon. Gentleman will accept that paragraph 3(2)(c) refers to ''independent capacity'' and that is replicated in the amendment. We tried to be consistent with the schedule and I shall delineate the issue. The schedule must work and is largely a re-enactment. It is not trying to reinvent anything, but it is trying to provide a greater degree of consistency and clarification.

Amendment No. 92A would solve the difficulty in paragraph 2(2)(c) of schedule 26, replacing what is in line 36 with new wording. Paragraph 3(2)(e) suffers from the same defect, so we propose both to delete that paragraph and replace paragraph 3(2)(c) with the wording in amendment No. 93, which picks up on the exact wording that amendment No. 92A identifies. We would then have total internal consistency because the phrase ''independent capacity'' is already used in paragraph 3 but not found in paragraph 2 as it stands. Hence, although the hon. Gentleman thought that our proposal was circular, we are actually attempting to square the circle in the schedule, providing internal consistency and ensuring that the measure works fairly and properly. Paragraph 3(2) already contains the requirement for an investment manager to act in an independent capacity, so if we replaced paragraph 3(2)(c) with the wording in amendment No. 93, that would improve the drafting.

A further, general point is supported by the Chartered Institute of Taxation, which has said:

''Schedule 26 paragraph 3 deals with investment transactions carried out through investment managers. Subsection (3) defines investment transactions. The wording in paragraph 3(a) needs to include contracts for differences. We understand that the provisions of schedule 26 are exclusive and not complementary to the main provisions relating to Permanent Establishments. We trust that this will be reflected in Revenue published guidance.''

Another general point is that the OECD model treaty does not contain anything along the lines of schedule 26, but I shall not take up that point because I have listened carefully to what the Paymaster General has said on the matching of these provisions with the OECD model treaty. I recognise that there are some distinctions to be drawn, not least to reflect the variation in more than 100 double tax treaties. I have been able to study some of those, but there are clearly various differences. I realise that that requires recognition in the drafting that the model cannot be adopted verbatim in all respects.

I hope that that proves to be a helpful explanation. It has taken not a little effort to reach this point, and I hope that the amendments are considered to be serious and to have a helpful intent. I hope that they will be accepted.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I have listened carefully to what the hon. Member for Eddisbury has said in support of his amendments, but I am still at a loss to understand why he wishes to change a part of the Bill that has been in place and operated without complaint for the past eight years. Schedule 26 maintains the current rules in section 127 of the Finance Act 1995. I cannot remember whether the right hon. Member for Fylde was Financial Secretary then, but I shall absolutely forgive him if this measure does not immediately spring to the front of his memory.

These rules were introduced in the 1995 Act to remove a potential impediment to the City winning and maintaining its investment business with non-residents. I understand that the original rules were drawn up after extensive consultation with the City to ensure that they worked well. Having established the rules in 1995, which the Government think have now operated well for eight years, the schedule will bring those same rules forward.

I was rather surprised to hear the hon. Member for Eddisbury introduce amendments that would weaken the anti-avoidance provision in those rules. Normally, Ministers get to hear requests and lobbying for the weakening of anti-avoidance legislation, and the Inland Revenue certainly does, but that came as something of a surprise. I assure the hon. Gentleman that there has been no change, but I must tell him that it is not our intention to countenance any change either. Although we are not seeking to strengthen any of the anti-avoidance provisions of the Finance Act 1995, we certainly will not support an amendment that would relax the anti-avoidance provisions that have been in place for eight years.

The amendments would weaken the anti-avoidance provisions by introducing an either/or test, whereas the existing legislation requires both conditions to be met for investment managers, and the first test to be met by brokers. Although I absolutely commend the hon. Gentleman for avidly reading the 1995 Act, on this occasion the advice that he has been given may not have been entirely appropriate, and I hope that he will withdraw his amendment. If he seeks to press the amendment to a Division, I will recommend that my hon. Friends oppose it. I hope that that is clear.

The rules introduced in 1995 worked for eight years following extensive consultation. They are not anti-competition. The schedule will present those rules again in the context of the change of permanent establishments. The rules have not been tightened or changed, so there is no need to disturb them, and I hope that the hon. Gentleman will not.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

I am grateful to the Paymaster General for setting out the matter so clearly. I could not help but detect a certain revelry in her response, for some reason. The year that I joined the Conservative party—let alone when I got involved in politics—was the year of that particular Finance Act.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I apologise if there was just a touch of glee in what I said. The hon. Gentleman has spoken a great deal about anti-avoidance measures, and I am afraid that he has to carry his party's responsibility for things that it has done in this House, as I do for things that my party may have done in the past, or may do in future.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

I fully accept without question the terms of appeal that the Paymaster General has just offered. There is no intention on my part to weaken the anti-avoidance provisions, which is why the clarification is helpful. My intention was to achieve a certain internal consistency. The Paymaster General points out that the amendment might weaken the anti-avoidance provisions, which is completely contrary to what was in my mind in introducing the amendments. I am delighted to confirm that my right hon. Friend the Member for Fylde got it right first time.

Photo of Michael Jack Michael Jack Conservative, Fylde

I am grateful to my hon. Friend for the view that he has just formed. Although it may be a distant dot in the past, his understanding of it now must be entirely correct. I am delighted that on this occasion he appears to be taking the Paymaster General's advice.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

This unity across all parts of the Committee is really something, as I will certainly not press the amendment to a vote.

The advantage of going through these matters with a fresh eye is that we at times find that the Conservatives' record in the last Parliament was something that we can be very proud of. It has stood the test of time, so much so that the current Government feel that there is no room for improvement on the very successful policies that were in place at the time.

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 26 agreed to.