The clause introduces tax rules on a type of Islamic bond known as a sukuk. In the Finance Acts of 2005 and 2006, we introduced legislation that set out the tax treatment of several sharia-compliant financial products, on which interest is not paid, but an alternative financial return is paid instead. The broad principle of the tax rules is that when a return paid to or by a saver or borrower is economically equivalent to interest, it is taxed as though it were interest.
Those measures were part of our wider agenda to make the City of London a global, wholesale financial centre for Islamic financial products and to ensure that the Muslim community in our country has the widest possible access to Islamic retail financial products. In pursuing our agenda to take forward those twin, complementary objectives, we have established a standing committee of Islamic finance experts, the first meeting of which I chaired a few weeks ago.
At the meeting, there was acclaim around the table for the consensual steps forward that we have taken in this House in previous Finance Acts. I am sure that the signal that the UK is changing its tax law in the whole Islamic finance area to encourage the commercial issuing of sukuk has been widely welcomed around the world. Our subsequent announcement that we are considering a Government bond issue that is consistent with sukuk principles has also been widely welcomed. That sends out a powerful signal.
The amendments make small but important technical changes, and were drafted as a result of the consultation. Although sukuk are economically similar to debt securities in law, they are not debts or loans, which gives rise to difficulties with applying the tax rules that normally apply to debts and loans. The interaction of the rules in the clause with certain tax rules was not fully appreciated when the Bill was published, and the amendments deal with some of those interactions. I am happy to answer more detailed questions on the amendments, which ensure that the Bill will achieve our announced intentions.
I have a few remarks to make that embrace both the amendments and the clause, which I welcome. They are intended to enable UK-based companies to issue sharia-compliant bonds, which are commonly known as sukuk. I welcome also the greater clarity that the measures will bring to the tax treatment of people who invest in sukuk, whether they are issued by UK or foreign companies.
During Committee debates on clauses 95 and 96 of last year’s Finance Bill, on wakala and musharaka finance, I recall drawing the Committee’s attention to a range of other sharia-compliant financial products, including sukuk. Indeed, I believe that that was the sole reference to the word “sukuk” in the whole of Hansard until this afternoon, although I must acknowledge that I made an error by referring to the plural of sukuk as sukuks, which is incorrect.
I pointed out last year the growing importance of sukuk issuance, and I am therefore very pleased to see that the Government have subsequently chosen to legislate to make it easier for the City of London and UK-based operators to obtain a share of that increasingly important market. On many occasions during this year’s and last year’s Finance Bill proceedings, I have had harsh things to say about the Government and their failure to respond to people’s concerns, but I must say that I have had extremely positive feedback about the Government’s efforts on that issue and on the meeting to which the Economic Secretary referred. The amendments under consideration today are a direct result of the discussions at that meeting, which is why they are welcome.
I have only one qualification. There is in one way in which the proposals have disappointed. The new rules should assist people seeking to securitise Islamic mortgage portfolios using a sukuk, and the focus on mortgages is demonstrated by subsection (3)(b). It expands the definition of “financial institution” in section 46 of the Finance Act 2005, but only in relation to bond assets that fall within sections 47 and 47A, which include the tax provisions that govern the two main structures used by banks to provide Islamic mortgages.
I have received representations that the clause’s focus on mortgage securitisation limits its scope. The Treasury seems to view sukuk as the Islamic equivalent of securitisation, rather than the equivalent of corporate bonds in general. It is worth considering, perhaps for next year’s Finance Bill, ways of broadening the scope of the provisions to make them more usable for all companies that wish to raise long-term finance using sukuk. It may be worth consulting further on that point.
I appreciate that the measure represents a new area and that we are in relatively uncharted territory, so we must take care to ensure that changes that are meant to facilitate sharia-compliant financial products neither cause unintended consequences nor produce tax loopholes. However, if the Government are genuinely enthusiastic about making London an attractive destination for Islamic finance—and I believe that they are—it is worth taking time to determine whether it is possible to broaden the clause without causing any negative consequences.
I welcome the Economic Secretary’s announcement about considering whether the Government should issue debt that is structured as a sukuk. There is in the idea an interesting potential for gaining access to a wider range of investors, and it would be useful to hear what progress is being made with it. Some of the state governments in Germany have issued sharia-compliant bonds, so there is a precedent for it. It will be interesting to see what the progress the Government have made.
Finally, I recall again my speech last year on the issue, when I mentioned not only sukuk but a range of Islamic financial products, including ijara leasing transactions, ijara-wa-iqtina, which replicates hire purchase, takaful insurance products and Islamic risk-mitigating instruments. Just as the Government responded to my comments last year about sukuk, I hope that they might look into whether the tax structure might be adapted to facilitate other sharia-compliant products, not only for the reasons of allowing the City to take a significant share of the market, but for the reasons to which the Economic Secretary has referred regarding the importance of ensuring that financial inclusion is extended to all sectors of our community, including those of the Muslim faith.
The issue to which the hon. Lady refers was also raised at out Islamic finance working group. The initial reaction of Islamic finance experts in the Treasury was that the proposal risks opening up substantial tax-avoidance difficulties for us. One issue that the group will consider in the coming months is precisely the issue that she raises, so that if we could sensibly widen the scope without causing difficulties, we would.
On the wider issue raised by the hon. Lady, I am pleased about the consensual and cross-party nature of discussions about these matters, at least within Treasury-brief circles, and I shall continue to work closely with all Members of the House to take the agenda forward.
Amendment made: No. 85, in clause 52, page 35, line 50, at end insert—
‘(7) For the purposes of section 417 of ICTA (close companies)—
(a) a bond-holder is a loan creditor in respect of the bond-issuer;
(b) arrangements falling within section 48A shall be disregarded in the application of section 417(1)(d).
(8) For the purposes of Schedule 18 to ICTA (group relief)—
(a) a bond-holder is a loan creditor in respect of the bond-issuer;
(b) paragraph 1(5)(b) shall be disregarded in determining whether a person is an equity holder by virtue of arrangements falling within section 48A.”’.—[Ed Balls.]