Clause 54

Finance Bill – in a Public Bill Committee at 7:00 pm on 22nd May 2007.

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Trust income

Question proposed, That the clause stand part of the Bill.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

The clause provides a welcome correction for some errors contained in the trust modernisation legislation that we had the pleasure to consider in last year’s Finance Bill. I confess that the error escaped my research in preparation for the scrutiny of that Bill, although I recall that there was still a lengthy list of problems on which we sought clarification.

The clause appears to achieve the intended outcome. It will restore the mechanism that was in operation prior to the 2006 Act by which trustees of a settlement who receive a payment made by a company on the  purchase of its own shares are taxable only on the excess over the original subscription payment for the shares. The drafting error in the 2006 Act would have meant that they were taxed on the entire payment.

Like me, the Chartered Institute of Taxation welcomes the clause, but it has expressed serious concerns on two points. First, it expresses regret that the period for consultation was short. It pointed the problem out on 3 August 2006, which should have given the Government a period for consultation. Secondly, the CIOT highlights a more significant problem with the approach taken to implementation, stating that

“we reiterate our concern at how HMRC intend to implement aspects of these changes, given that the Notes and Tax Calculations for the 2006/07 Return are inaccurate.”

It goes on to state:

“It is most unsatisfactory that Returns for 2006/07 submitted before Royal Assent is given should be filed on the basis that the whole amount of payment received on a buy-back of a company’s shares is taxable, with a correction having to be made subsequently.

It is disappointing that our comments on improving the clarity of Explanatory Notes to the legislation have been ignored.”

I have some sympathy with the CIOT’s point of view. It does not seem to make a great deal of sense to require that tax returns submitted before Royal Assent have to comply with the existing and incorrect legislation. The CIOT states that that

“is a recipe for muddle and confusion” that is

“accentuated by numerous piecemeal changes to the trust taxation regime over the past few years”.

Bearing in mind that the provision will be backdated when the clause is enacted, it seems pointless to require people to submit returns that will have to be corrected. It also seems unfair to require people to include in their tax return a sum of money—the excess over the subscription price paid for the shares—that HMRC knows will not be taxable once the Bill comes into effect. The CIOT concludes:

“The taxpayer should not be penalised through enactment of defective legislation”.

If HMRC will not accept returns submitted on the basis of the legislation as corrected by clause 54, the notes to the 2006-07 return should at least be amended to alert taxpayers of the need to delay filing.

In conclusion, I should like to put on record a general comment about the provisions in the 2006 Act on the income and capital gains tax treatment of trusts, which the clause seeks to amend. The provisions were billed as simplifications and modernisations, but this is one of the most mind-boggling, opaque and complex structures it has ever been my misfortune to read about—and that is even before one gets into the twists and turns of the changes to the inheritance tax regime that caused such controversy in relation to schedule 20. I suspect that the Economic Secretary may return to this Committee in future years with further corrections to this problematic legislation.

Photo of Edward Balls Edward Balls The Economic Secretary to the Treasury 7:15 pm, 22nd May 2007

I hope that the next time the Minister responsible returns to this piece of legislation, we will  be celebrating the return of the Paymaster General, who is far more of an expert on these matters than myself.

The clause amends a minor omission in last year’s trust modernisation legislation concerning payments received by trustees, as the hon. Member for Chipping Barnet said. The omission in the Finance Act 2006 meant that in a buy-back the whole payment is taxed. The clause corrects the position so that only the whole payment, less the original subscription price, is taxable. Because the legislation that we are correcting came into force on 6 April 2006, we are backdating the clause to take effect from that date to ensure that nobody loses out. HMRC consulted on the draft legislation, and representative bodies said to us that they were content. A further minor omission in the same legislation has been identified and is corrected by clause 55.

The omission is regrettable but neither HMRC nor the representative bodies, nor any other interested parties, picked it up during the passage of last year’s Finance Bill. A small number of trusts will be affected. Each year, an estimated 20 trusts, out of some 200,000 trusts that make a return, will receive a payment from a company’s purchase of its own shares. The return for 2006-07 had to be finalised by HMRC last summer before it was aware of the omission. However, the return is based on how the legislation was always intended to work, and is rectified by the clause.

HMRC issued guidance advising trustees affected by the omission to wait until the Finance Bill received Royal Assent before making their return. For the small number of cases that are likely to be affected by the clause, return guidance will lead trustees to enter an amount in accordance with the legislation as was always intended. Therefore, taxpayers who are not aware of the omission will not be disadvantaged. The consultation did not last as long as we would have liked, but we are satisfied that we consulted properly and, as a result, we have addressed the omission that the hon. Lady identified.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

The Economic Secretary makes a reassuring point that the HMRC is trying to get the information out to ensure that the trusts affected know that they should not make their return before Royal Assent. However, those who do not receive, or are not aware of, the information will still be required to submit a return based on incorrect legislation. Is that correct? I just wanted to check that I have understood correctly.

Photo of Edward Balls Edward Balls The Economic Secretary to the Treasury

I think I said that we will ensure that the guidance for the 20 or so trusts operates so that people do not lose out as a result of the process of correcting the omission. I do not know whether we know the 20 trusts, but if we do that would mean fewer letters to write than those sent to Committee members. We ought at least to be able to manage 20.

Question put and agreed to.

Clause 54 ordered to stand part of the Bill.