Clause 36 - Balancing payments and elections to

Finance Bill – in a Public Bill Committee at 4:30 pm on 11th May 2004.

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Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 4:30 pm, 11th May 2004

I beg to move amendment No. 79, in

clause 36, page 39, line 18, leave out

'issued by the advantaged person'.

Photo of John Butterfill John Butterfill Conservative, Bournemouth West

With this it will be convenient to discuss the following amendments: No. 13, in

clause 36, page 39, line 19, leave out 'The disadvantaged person' and insert

'Any company other than the advantaged person (''the electing company'')'.

No. 14, in

clause 36, page 39, line 20, leave out

'condition in sub-paragraph (3) below is'

and insert

'conditions in both of sub-paragraph (3) and sub-paragraph (3A) below are'.

No. 15, in

clause 36, page 39, line 22, after 'condition', insert 'in this sub-paragraph'.

No. 16, in

clause 36, page 39, line 31, at end insert—

'(3A) The condition in this sub-paragraph is that arrangements are made by the electing company for securing the payment of any tax which, but for the election under this paragraph, would have been payable by the advantaged person in respect of the application of paragraph 1(2) above in relation to the relevant security by virtue of paragraph 1A above and those arrangements are approved by the Board for the purposes of this paragraph.

(3B) If any information furnished by the electing company for the purpose of securing the approval of the Board under sub-paragraph (3A) above does not fully and accurately describe all the facts and considerations material for the decision of the Board under that sub-paragraph, any resulting approval of the Board shall be void.'.

No. 17, in

clause 36, page 39, line 33, leave out 'the disadvantaged person'.

No. 18, in

clause 36, page 39, line 34, after '(a)', insert 'the disadvantaged person'.

No. 19, in

clause 36, page 39, line 36, leave out 'a chargeable period' and insert

'any chargeable period ending on or after the date of the election'.

No. 20, in

clause 36, page 39, line 38, after 'instead', insert 'the electing company'.

No. 21, in

clause 36, page 39, line 39, leave out 'that period' and insert

'any chargeable period ending on or after the date of the election'.

No. 22, in

clause 36, page 40, line 1, leave out 'disadvantaged person' and insert 'electing company'.

No. 23, in

clause 36, page 40, leave out lines 7 to 10 and insert—

'(aa) must be made no later than twelve months from the end of the chargeable period in which the relevant security is issued.'.

No. 24, in

clause 36, page 40, leave out lines 18 to 23.

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

I will briefly introduce amendment No. 79, but I will not talk about amendments Nos. 13 to 24 until the hon. Member for Hertford and Stortford has had the opportunity to speak to them.

Amendment No. 79 extends the range of circumstances in which a special provision for securitisation may apply. As drafted, the Bill allows the securitisation rule to apply only where a transfer pricing adjustment is made to a company that is a borrower of a loan. The amendment allows the rule to apply whether the adjustment is made to a lender or a borrower. All the other conditions for the application of the rule remain the same. The amendment is being made following representations made since the Bill's publication which argued that there are circumstances in which transfer pricing potentially applies to a lender in the context of a securitisation, and that that might affect the rating of bonds issued under securitisation. The amendment will allow the special rule to apply in all circumstances, subject to the other conditions that are set out in the clause being met.

The Government consulted widely with the City before publication of the Bill, but other specialist representative groups made points following publication; hence the need for the amendment. I hope that the Committee will agree that it is a sensible solution and will support it.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

I would welcome your guidance, Sir John, on whether I am correct in assuming that in addressing amendments Nos. 13 to 24, which overlap with the Government's amendment, I can respond to some of the points made by the Paymaster General.

Photo of John Butterfill John Butterfill Conservative, Bournemouth West

Absolutely. The proposal is that we should debate the Government amendment together with the hon. Gentleman's amendments, because they apply to the same issue. It would, of course, be possible to have a separate vote should the hon. Gentleman so wish.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

Thank you, Sir John. I asked because, in considering a number of linked amendments, we might stray beyond the scope of Government amendment No. 79, although securitisation and ratings are at the heart of the matter.

The neatest way to summarise the amendments is to say that their aim is to help the clause to achieve its purpose. They may overlap with the Government amendment, which has a similarly benign intention, but that will help us to draw out the meaning behind the clause. I take the point that the question raised in a previous deliberation about the interplay between securitisation and rating agencies is more appropriate to this discussion.

The securitisation market, to which the amendments refer, lays great emphasis on ratings given to securitisation and debt by rating agencies. I mentioned those earlier. The agencies have stringent requirements regarding the creditworthiness of the securitisation structure. If the new transfer pricing regime applied in full to companies within securitisation structures, there would be a risk that one or more of the companies concerned might not obtain tax relief for all interest payments. That would have an adverse effect on such things as cash flow. The existence of such a risk would have to be reflected in the legal opinions given to the rating agencies, and that might result in a downgrading of the securitisation debt.

The amendments deal with linked concerns arising from the current provisions relating to elections under new paragraph 7B. The election referred to in that paragraph is available only to the disadvantaged person, and part of that issue is addressed by the Government amendment. The disadvantaged person is a related person who is also involved in the transaction and is subject to UK tax in relation to it. Securitisation structures typically involve a group of companies, each of which has a specific role within the group. Limiting the election to the disadvantaged person might mean that the tax cannot be borne by the appropriate company within the group. The election should be capable of being made by any person, not just the disadvantaged person, with the important condition that the Inland Revenue is satisfied that the electing company will be in a position to meet the relevant tax liabilities; hence one of the amendments.

The election is capable of being revoked by the Revenue on notice, subject, of course, to paragraph 7. No time limit is imposed on the Revenue's ability to give such notice, and its right of revocation could be problematic in some cases, because the rating agencies will assume that the election is revoked and that some of the interest on the securitisation debt is not deductible. Part of the intention of the amendments is to try to ensure that groups are able to enter into arrangements with the Revenue with the result that the securitisation group is removed for all time from its liability under the transfer pricing rules. That would enable the Revenue to review the proposals in advance, but there would not be the risk of an election being revoked respectively.

Finally, an election under new paragraph 7B will be included in the tax return of the company making it for the tax accounting period in which the debt is issued. That could leave a period between a debt being issued and the return being made in which there is no

certainty that the election would be made. That happens sometimes, and it is a risk factor that rating agencies would need to take into account. One of the purposes of the amendments is to enable those elections to be made prior to the submission of the corporation tax return.

I fully understand that the Government amendment, which I saw after tabling my amendments, relates particularly to the question of advantaged or disadvantaged people. I welcome the Minister's comments on that. That in essence is the subject of the amendments—I say that having taken so long to explain them.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs) 4:37 pm, 11th May 2004

I think that the debate can be distilled to a relatively straightforward point. The rating agencies, which are crucial in these matters—

Sitting suspended for a Division in the House.

On resuming—

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs) 4:52 pm, 11th May 2004

I was saying that rating agencies in the securitisation market want certainty. The Paymaster General is aware how important these transactions are to the economy and that we want to make Britain the home for as many of them as possible.

I shall dwell briefly on the three simple points made by the hon. Member for Hertford and Stortford. First, the election provision is in clause 36(2). Limiting the election to the disadvantaged person may mean that the tax cannot be borne by the appropriate company. I am sure that the Paymaster General will concede that that is unfortunate, given that certainty is very important at the start of these transactions, for the reasons I gave earlier.

Secondly, clause 36(7) states:

''An election under this paragraph by a person is of no effect if the Board give that person a notice under this sub-paragraph refusing to accept the election.''

It is a fairly simple point, balancing up the taxpayer's position; no time limit is imposed on the Inland Revenue's ability to give such a notice. Surely, there should be a time limit on the Inland Revenue for the purposes of certainty and in the interests of a fair and equitable tax system.

Thirdly, the hon. Gentleman made the point that the elections under new paragraph 7B are to be included in the tax return of the company making it for the tax accounting period in which the securitisation debt is issued. That will leave a period between issue of the securitisation debt and making a return when there is not complete certainty that the election will be made. That third point is, again, an issue of certainty. I hope that the Paymaster General will consider the important amendments suggested by the Law Society, in the interests of fairness to the taxpayers and in the interests of our economy.

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

In response to the hon. Member for Hertford and Stortford's amendments and to the three points made by him and the hon. Member for Torridge and West Devon, I have to say that the amendments would alter the way in which the rules

dealing with a special case of securitisation finance worked. In short, where the effect of transfer pricing is to move tax liability from company A to company B, the Bill will allow an election to be made to transfer the tax liability from B back to A. The amendments would allow a group of companies to take a tax liability that had moved from company A to company B and move it to a third company, C. There is no need for such a change. By moving a tax liability back to where it came from, the rule will enable the impact of transfer pricing to be negated within the securitisation structure. It is not necessary to go further than that and to allow tax liabilities to be moved at a group's discretion.

Secondly, the amendments would also remove the Inland Revenue's right of refusal of an election into the scope of the special rule.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs)

Before the Paymaster General goes on to the second point, may I just say that I cannot see what the problem is with the first amendment? The Revenue will get the money and the fact is that it will not allow an election and that provisions can be drawn in if there is any risk that the third company will not pay the tax. If the Revenue is going to get the tax anyway, why bother? Why is the Inland Revenue concerned?

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

There is simply no need for such arrangements. As I explained to the hon. Gentleman, there is no need within the questions of securitisation raised by the clause to make arrangements to move tax liabilities to a third company. There is no need for such a change, so why make it? That is what I have been trying to make clear to the hon. Gentleman. No case has been made as to why it would be necessary to go further and to allow the tax liabilities to be moved at the group's discretion. That is how the transfer pricing rules have operated before and that is how we intend to proceed now.

Secondly, the amendments would remove the Inland Revenue's right of refusal of an election into the scope of the special rule, and so remove an important safeguard against abuse of the election. That safeguard is necessary in transferring thin capitalisation rules by taking them out and by using transfer pricing and the special provisions from the Bill for securitisation. No case has been made as to why this or the earlier amendment concerning moving to company C should be allowed. Nobody else has that provision; why should it be necessary in this case?

Thirdly, the amendments propose an election that can be made and accepted by the Revenue after a loan has been issued, but before the tax return is made. Again, the amendments are not necessary. The election to opt into the special securitisation arrangements is automatically effective unless the Revenue opposes it. It concerns the tax liability for a return period and so it is appropriate that it is made on a return. It is effective for the entire lifetime of the loan or loans to which it relates. It is sensible.

The Revenue has published draft guidance on circumstances in which it might refuse an election. They are circumstances in which the arrangements are a sham or might lead to loss of tax. In other cases, I

can confirm that the Revenue will discuss prospective arrangements with the group and will give a reassurance where possible that an election will not be opposed. Therefore amendments Nos. 13 to 24 are not necessary: some are undesirable and others are unjustified. If the hon. Member for Hertford and Stortford decides to push his amendments to a Division, I will ask my hon. Friends to oppose them.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs) 5:00 pm, 11th May 2004

I shall endeavour to pick up the challenge on clause 36(2) and who can make the appropriate election. These transactions are often complex and often involve groups of companies. The answer to the Paymaster General's question is that if one has a group of companies one wants an election to be made by the company that will bear the tax. There is no reason why that should not be possible. Provided that the company is in a position to meet those tax liabilities, the Revenue has nothing to lose. These matters are complex. The corporate structures themselves are complex. A little bit of flexibility is being requested to enable the market to function more satisfactorily.

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

I do not agree with the hon. Gentleman. He still has not made the case. The Bill will put tax liability back where it would be in the absence of the transfer pricing rules. That is sufficient to ensure that transfer pricing changes do not adversely affect securitisation. There is no need to go any further, as the amendment seeks to do, which is why I ask the Committee to reject it.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

It has been useful to table these probing amendments to try to elicit from the Minister a greater understanding of the Government's thinking. The benefits that might accrue in these circumstances are limited. The hon. Member for Torridge and West Devon has rightly added to the issue by trying to tease that out. While I understand that in one or two circumstances there is a legitimate risk about which the Revenue may have concerns, I am not entirely convinced by the Minister's argument as to the distinction between disadvantaged and other parties being able to participate or about the potential retrospectivity of the elections being revoked. That is a cause for concern.

This will be only the beginning of the debate on the securitisation. The Minister has not responded thoroughly enough to the wrinkles and problems addressed by the amendments, but they are probing amendments and I will not press them to a vote.

Amendment agreed to.

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

I beg to move amendment No. 80, in

clause 36, page 41, line 14, at end add—

'(4) After paragraph 7C insert—

''Guarantees etc: election to discharge tax liability instead of making balancing payments

7D (1) This paragraph applies where the following conditions are satisfied—

(a) both of the affected persons are companies,

(b) the circumstances are as described in paragraph 6(1) above,

(c) the actual provision falls within paragraph 1B(1) above.

(2) Sub-paragraphs (2) to (8) of paragraph 7B above apply in a case where this paragraph applies as they apply in a case where that paragraph applies, but with the modifications in sub-paragraphs (3) and (4) below.

(3) The relevant security is the security in paragraph 1B(1)(a) above.

(4) In sub-paragraph (4) (nature of the election)—

(a) for ''paragraph 7A above'' substitute ''paragraph 7C below'';

(b) for ''paragraph 1A'', in both places, substitute ''paragraph 1B''.''.'.

The amendment extends the range of circumstances in which special provisions for securitisation may apply. It is made following representations received since the publication of the Bill. Thin capitalisation restrictions can apply to loans made between two connected companies or they can apply to loans from independent lenders if the loan is guaranteed by a connected company.

The Bill allows a securitisation rule to apply only where a transfer pricing adjustment is made to a loan made between two connected companies, and not to guaranteed loans. As I said, the amendment has been tabled following representations made since the Bill was published. Those representations concern circumstances in which thin capitalisation rules might apply to a guaranteed loan from an independent lender in the context of a securitisation, and might affect the rating of bonds issued under the securitisation. The amendment will allow the special rule to apply to such a loan, subject to the other conditions in the clause. The amendment therefore provides further protection for existing and future financing arrangements, and I commend it to the Committee.

Amendment agreed to.

Clause 36, as amended, ordered to stand part of the Bill.