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Schedule 7

Finance Bill – in a Public Bill Committee at 1:00 pm on 19th June 2008.

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Remittance basis

Amendment proposed [this day]: No. 362, in schedule 7, page 153, leave out lines 1 to 12.—[Mr. Hoban.]

Question again proposed, That the amendment be made.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

I can clarify that there are 16 double taxation agreements. None are A8 countries; I was asked a specific question about that. The only one that may be cause for concern is the double taxation agreement with Fiji, but we anticipate that very few taxpayers would be affected as a result.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

That was a very brief, succinct speech, which I am sure will be the order of the rest of this afternoon.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I think that small amounts of chocolate are apparently the best quantities to eat.

We are all relieved that it is Fiji, but there are Fijian soldiers serving in Her Majesty’s armed forces, so I am sure that the MOD will be reacting to that news and rushing forward with advice for Fijians enlisted in the armed forces.

I have listened to the arguments advanced by the Minister about personal allowances. We do have a difference of view here. It was never part of our proposals on the charging of a levy on non-doms to remove their personal allowances. We think that the impact on taxpayers could be quite significant, and it will lead to complexity. The Minister is a great advocate of choice for individuals, and we welcome that conversion to choice, but it is going to be challenging for some people to comply with the rules. It would have been more reassuring for all those engaged in the debate if the preparations of Her Majesty’s Revenues and Customs had been further advanced to assist those on low incomes to comply with  these rules, but I do not wish at this point to push the amendment to a vote, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: No. 341, in schedule 7, page 153, line 25, leave out ‘809B(3)’ and insert ‘809BA’.

No. 342, in schedule 7, page 153, leave out lines 27 to 31 and insert—

‘(4) If the relevant tax increase would otherwise be less than £30,000, subsection (2) has effect as if—

(a) in addition to the income and gains actually nominated under section 809BA in the individual’s claim under section 809B for the relevant tax year, an amount of income had been nominated so as to make the relevant tax increase equal to £30,000, and

(b) the individual’s income for that year were such that such a nomination could have been made (if that is not the case).’.

No. 343, in schedule 7, page 153, line 37, at end insert—

‘(6) Nothing in subsection (4) affects what is regarded, for the purposes of section 809H or 809I, as nominated under section 809BA.’.

No. 344, in schedule 7, page 154, line 9, leave out ‘809B(3)’ and insert ‘809BA’.

No. 345, in schedule 7, page 154, line 17, at beginning insert ‘If section 809H applies,’.

No. 346, in schedule 7, page 154, line 29, after ‘year’ insert

‘(other than income or chargeable gains nominated under section 809BA)’.

No. 347, in schedule 7, page 155, line 34, leave out ‘809B(3)’ and insert ‘809BA’.—[Jane Kennedy.]

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I beg to move amendment No. 363, in schedule 7, page 156, line 35, leave out from ‘is’ to end of line 36 and add

‘employed in the United Kingdom by a relevant person.’.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

With this it will be convenient to discuss the following amendments: No. 364, in schedule 7, page 157, line 37, after ‘(3)(a)’, insert ‘, subsection (11)’.

Government amendment No. 482.

No. 365, in schedule 7, page 157, line 41, at end insert—

‘(11) For the purpose of Condition A, property brought to, or received or used in, the United Kingdom by or for the benefit of a relevant person is to be disregarded in any of these cases—

(a) if the property or service is enjoyed virtually to the entire exclusion of the individual, his spouse or civil partner and his dependent children;

(b) if full consideration in money or money’s worth is given by the individual, his spouse or civil partner or his dependent children for the enjoyment; or

(c) the property or service is enjoyed by the individual, his spouse or civil partner or his dependent children in the same way and on the same terms as it may be enjoyed by the general public or by a section of the general public.

(12) The references in subsection (11) above to the spouse or civil partner of the individual do not include—

(a) a person to whom the individual is not for the time being married but may later marry, or a person of whom the individual is not for the time being the civil partner but of whom he may later be a civil partner, or

(b) a spouse or civil partner from whom the individual is separated under an order of a court or under a separation agreement or in such circumstances that the separation is likely to be permanent, or

(c) the widow or widower or surviving civil partner of the individual.

(13) In this section—

(a) “dependent child” means a child who—

(i) is under the age of 18 years,

(ii) is unmarried, and

(iii) does not have a civil partner, and

(b) “child” includes a stepchild.’.

Government amendment No. 483.

No. 366, in schedule 7, page 159, line 33, leave out ‘all relevant persons’ and insert

‘the individual, his spouse or civil partner and his dependent children’.

No. 367, in schedule 7, page 159, line 34, leave out ‘a relevant person’ and insert

‘the individual, his spouse or civil partner and his dependent children’.

No. 368, in schedule 7, page 159, line 36, leave out ‘relevant persons’ and insert

‘the individual, his spouse or civil partner and his dependent children’.

No. 369, in schedule 7, page 159, line 40, at end insert—

‘(11) The references in subsection (9) above to the spouse or civil partner of the individual do not include—

(a) a person to whom the individual is not for the time being married but may later marry, or a person of whom the individual is not for the time being the civil partner of whom he may later be a civil partner, or

(b) a spouse or civil partner from whom the individual is separated under an order of court or under a separation agreement or in such circumstances that the separation is likely to be permanent, or

(c) the widow or widower or surviving civil partner of the individual.

(12) In this section—

(a) “dependent child” means a child who—

(i) is under the age of 18 years,

(ii) is unmarried, and

(iii) does not have a civil partner, and

(b) “child” includes a stepchild.’.

No. 370, in schedule 7, page 160, line 23, leave out ‘all relevant persons’ and insert

‘the individual, his spouse or civil partner and his dependent children’.

No. 371, in schedule 7, page 160, line 24, leave out ‘a relevant person’ and insert

‘the individual, his spouse or civil partner and his dependent children’.

No. 372, in schedule 7, page 160, line 26, leave out ‘relevant persons’ and insert

‘the individual, his spouse or civil partner and his dependent children’.

No. 373, in schedule 7, page 160, line 28, at end insert—

‘(6A) The references in subsection (6) above to the spouse or civil partner of the individual do not include—

(a) a person to whom the individual is not for the time being married but may later marry, or a person of whom the individual is not for the time being the civil partner but of whom he may later be a civil partner, or

(b) a spouse or civil partner from whom the individual is separated under an order of a court or under a separation agreement or in such circumstances that the separation is likely to be permanent, or

(c) the widow or widower or surviving civil partner of the individual.

(6B) In this section—

(a) “dependent child” means a child who—

(i) is under the age of 18 years,

(ii) is unmarried, and

(iii) does not have a civil partner, and

(b) “child” includes a stepchild.’.

No. 374, in schedule 7, page 162, line 42, leave out from beginning to end of line 7 on page 163 and insert—

‘(4) The kinds of income and capital are—

(a) income and gains subject to a UK tax,

(b) employment income subject to a foreign tax,

(c) relevant foreign income subject to a foreign tax,

(d) foreign chargeable gains subject to a foreign tax,

(e) relevant foreign earnings (other than income within paragraph (b)),

(f) foreign specific employment income (other than income within paragraph (b)),

(g) relevant foreign income (other than income within paragraph (c)),

(h) foreign chargeable gains (other than chargeable gains within paragraph (d)), and

(i) income or capital not within another paragraph of this subsection.

(4A) Subsection (4) is subject to subsection (4B).

(4B) Where an individual has insufficient information to be able to determine whether foreign income or foreign gains has suffered foreign tax he shall not be deemed to have made an incorrect return if he treats the funds as relating to the appropriate income or gains paragraph with respect to which foreign tax has not been suffered.’.

Government amendments nos. 463, 464, 484, 485, 465 to 468 and 486.

No. 495, in schedule 7, page 202, line 30, after ‘809Q’, insert ‘and 809S’.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

This is an extensive group of amendments and the nature of them means that there are a number of issues to be discussed. All of them are of interest to outside bodies in terms of seeking clarification on the way in which the Government would interpret the rules around residence.

Amendment No. 363 picks up an issue that we will come back to in a later group of amendments, as there is a Government amendment that covers that area. Therefore, I will keep remarks on that point relatively brief and talk at greater length later.

Amendment No. 363 deals with the issue that, where fees are incurred, the rules at the moment focus on where the services arise. The amendment shifts that focus from where the services are performed to where the services are enjoyed. Under current rules, where a UK-based investment manager manages an offshore trust, the payment of his fees is treated as a remittance and therefore subject to tax.

Our amendment would say that, as the trust is offshore, when fees are settled they are not treated as remittance and therefore do not form part of the tax liability of the UK resident non-dom. There may also be a remittance if trustees of an overseas trust pay fees to investment advisers in the UK, or pay for UK legal accounting or other professional advice provided in the UK. In all those cases, the individual has not benefited, and those are not the circumstances, I believe, that the Government had in mind. I understand that the Government amendments that introduce new section 809SA seek to address those issues and I will come back to that when we debate the relevant amendments later.

The changes created widespread concern among the investment management industry and elsewhere. I know that British Bankers Association wrote to the Minister on 20 March highlighting its concerns about the extended definitions of remittances as set out in new section 809H. It indicated that one of its private banking members was considering moving a significant part of its operations overseas as a consequence of the effect of new section 809H. We want to try to refocus that by saying that, rather than looking at where the service is performed, we should look at who is enjoying the service and where those services are enjoyed. That is why we believe that any fees paid by an offshore trust would not be deemed to be a remittance.

That is an important issue. In the UK we are very skilled at providing investment management expertise and there was a concern that as new section 809H was drafted that would significantly impact on the effectiveness of London as a place to do business and would potentially affect the investment in equities in the UK and other assets. As a consequence, we seek to shift that focus from where the service is provided to where it is enjoyed, in a relatively simple way, to avoid a tax being charged on remittances to pay those fees.

I move on to amendments Nos. 364 to 374. As well as introducing a £30,000 charge for non-doms who have been in the UK for at least seven of the last 10 years, the Bill makes radical changes to the way in which the remittance basis will operate. It allows individuals who are resident for tax purposes in the UK but not domiciled here to be taxed on income and gains from outside the UK only to the extent that such income and gains are received or enjoyed—that is, remitted to the UK. Clearly the Government have taken the opportunity of the introduction of the charge to deal with various loopholes and anomalies, which they consider would allow remittance users to bring funds into the UK without paying UK tax on their overseas income and gains. In particular, the Government have sought to change the law to prevent individuals from giving away overseas taxable income and gains to a third party, such as a relative, who can then arrange for the individual to use or enjoy those funds in the UK without a tax liability arising.

To deal with that potential source of mischief, in proposed new section 809L on page 157, there have been wide-ranging changes so that where such funds are brought to the UK by a relevant person, which is defined to include many of an individual’s relatives as well as trusts and companies with which the individual  has a connection, that will be treated as a remittance by the individual of income or gains and therefore may be taxable.

There are some practical issues around that that I want to explore. It leads to a situation where there are transactions taking place which are not intended to achieve a tax advantage, and I think that that partly stems from the fact that the definition of a relevant person is too wide and results in a number of problems. As a consequence, our amendments Nos. 364 to 374 seek to narrow the definition of who a relevant person is and restrict the definition to close family members only.

Let me give some examples where the current rules give rise to some problems. The first is grandchildren under the age of 18. A relevant person does not include a child over the age of 18 but does include a grandchild under the age of 18—that is in new section 809L(2)(d). That could impose considerable burdens of compliance, since an individual will be taxed by reference to the actions of others, of which the individual will be completely unaware. For example, it would require an individual who has given funds to their adult child outside the UK to report a remittance if that adult child provided a benefit to their own minor child in the UK. One example has been given—funds to purchase a railway ticket for them—but clearly there are much wider examples than that. It means that the grandparent would be responsible for reporting transactions that his grandchild might undertake, without necessarily having knowledge of what the grandchild’s parent, or the child, will actually do. There is an issue there about compliance that we need to think about carefully.

On charitable trusts, new subsection (2)(g) adds a further new category of relevant person:

“the trustees of a settlement of which a person falling within any other paragraph of this subsection is a settlor or beneficiary”

That again could cause a number of problems. I will focus on one now which will create particular problems for charitable trusts established by non-domiciled, but UK-resident settlors. The concern is that that would deter the trustees of such a charity from investing in UK assets, so as not to give rise to a remittance for the settlor. From a practical point of view for the settlor, they are in an invidious position. They could never be in a position to complete a self-assessment return without having had detailed information regarding the investment activity of any trust that they have established since 5 April 2008 and where they have used unremitted foreign income or gains to do so.

I am sure that I could come up with further examples, but I do not think that it is necessarily in the interests of the debate to go down that route. However, it shows that the current definition of related person in new section 809L is very widely drafted. I understand that it is drafted widely to prevent new loopholes arising, but it creates problems for compliance in the two examples that I have quoted. That is why amendments Nos. 364 to 374 replace the broader definition of relevant persons to one that covers immediate family members, so that the tax liability will arise only in circumstances in which that individual, his spouse or other minor children receive a benefit other than an incidental, or otherwise minor, benefit.

I now turn to amendment No. 374 on mixed funds. The schedule sets out a particular order in which funds should be deemed to be remitted and that is a change from the previous guidance on mixed funds. Mixed funds are derived from various sources such as funds from before the individual became a UK resident, gifted funds, funds derived from UK income and gains and funds derived from foreign income and gains. In the tax years prior to 2008-09, there were no statutory rules on the treatment of remittances from mixed funds and one followed the prevailing non-statutory practice. Now we have the statutory provisions in the Bill which will apply to transfers from mixed fund accounts where the foreign income or foreign gains have arisen after 6 April 2008.

I will not go through the order in which these funds are remitted, but they start with employment income subject to UK tax, relevant foreign earnings where there is no foreign tax credit, foreign-specific employment income where there is no foreign tax credit, relevant foreign income where there is no foreign tax credit and so on. Towards the end of the list, in (f), (g) and (h), the funds are deemed to be from sources that are subject to foreign taxes. My amendment changes the order so that where there is income or gains from overseas that has been subject to foreign tax, it is deemed that they are remitted first, in preference to the untaxed income or gains. This reflects the current treatment and was set out in statement of practice 5/84. That statement of practice is more favourable to the taxpayer than the current order set out in new section 809P(4).

We do not believe that this unfavourable change has been adequately highlighted in the explanatory notes. We think that it is counter-intuitive and that it is penal to tax previously untaxed income before income that has already suffered tax. There is also a risk that taxpayers will not understand the rules. Well advised taxpayers will not operate mixed accounts, so it will be unrepresented taxpayers and those who make mistakes whose tax liability will be increased under these provisions.

Leaving aside the problems with the order of identification in new section 809P (4), I believe that the proposals are over-complex. The record keeping required to identify all sources of funds so as to categorise them correctly will present a problem for the unrepresented taxpayer, identifying remittances from mixed funds has always been extremely difficult, but codifying a rigid set of matching rules takes away the flexibility and ability to be pragmatic that existed previously. There is, therefore, a significant danger of inadvertent compliance, which is heightened by the fact that the rules apply from 6 April 2008, so there is no time to educate affected taxpayers in advance—by the time this Bill receives Royal Assent, we will be a quarter of the way through the tax year and people may well have made remittances from mixed funds without knowing and understanding the new rules. It would be helpful if HMRC would publish a statement as to how it plans to assist taxpayers with the additional compliance burden that this brings about.

Another weakness in this area is how overseas expenditure transfers between overseas accounts or gifts made overseas from mixed accounts is to be treated. I think that this has already been raised with HMRC and I do not know whether there will be further amendments, but we hope that the Minister will be able to clarify that the interaction of new section 809Q(2) and new  section 809P means that the amount of income or capital of the individual for the relevant tax year in mixed account immediately before the transfer does not include funds that have been removed from the account by earlier transfers or payments either to the UK or overseas.

In response to the treatment of mixed funds and the change in the order in which they are to be remitted, our proposal would put in place the concession that has existed in statement of practice 5/84 and reflects the fact that that treatment was more favourable to the taxpayer than the new rules are designed to be.

On amendment No. 495, it is not clear what happens if overseas earnings from employment income are used to pay the £30,000 remittance charge by means of a cheque payable to HMRC drawn on an overseas bank account. This is quite a technical point, so I will go slowly. On the face of it, such an example would not be a remittance under new section 809S. However, while amendments to the Income Tax (Earning and Pensions) Act 2003 specifically import new sections 809K to 809Q of the Income Tax Act 2007 into it, no mention is made of new section 809S. As those are two separate Acts, that suggests that new section 809S does not apply in determining whether relevant foreign earnings have been remitted. Is that clear?

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am indeed. If that explanation is right, it would have been highly misleading of HMRC not to have made that point clear when it said that the direct payment of £30,000 would not create a remittance. It may be that new section 809S is for reassurance only and that the direct payment would not in any event create a remittance under new sections 809K to 809Q. The payment is not a remittance of cash by the taxpayer, HMRC is not a relevant person and the payment is not a gift to the UK Government. Perhaps the Government would like there to be more gifts like that, but it is certainly not the case in this example.

We also doubt whether in this example the amount will be a relevant debt, as it will be brought into the UK by HMRC for the benefit of the Exchequer, not for the benefit of the taxpayer. HMRC will not be providing a service to the taxpayer.

The position is unclear. It would be helpful if the Financial Secretary could provide clarification. Amendment No. 495 would provide some clarification by inserting “and 809S” after “809Q” on line 30 of page 202 in schedule 7. I hope that she will comment on that and provide clarification and reassurance.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

It would be great if the immediate answer to that question was simply yes or no, but I fear that it will be somewhat more lengthy.

Before I get into the detail of the group, will the hon. Member for Fareham permit me to give a more substantive response to his questions about fees when we come to discuss Government amendment No. 354?

The Government amendments in this group deal with a number of issues that were raised in consultation. First, Government amendment No. 483 narrows the scope of the definition of “relevant person”. Under the  original wording, trustees of settlor-interested trusts were automatically treated as relevant persons, even if the individual or his close family members were not beneficiaries. This change will be particularly helpful for charitable trusts, a point that the hon. Gentleman asked about specifically. Following representations, we are amending the definition of “relevant person” to ensure that remittances to the UK by genuine charitable trusts will not be taxable upon a settlor. The change we are making removes the risk that the existing legislation might catch donors who did not arrange to make a donation in a particular way.

Amendment No. 486 prevents tax arising on remittance to the UK in certain circumstances where items are remitted to the UK before the income or gain to which they relate is treated as arising. Under the original wording, such payments might in certain circumstances become chargeable before the tax year in which they arose. The amendment ensures that that cannot now happen. Amendments Nos. 463 and 465 to 468 change the mixed funds rules, clarifying how transfers between offshore funds are treated. This change is being introduced in direct response to representations received.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

I am going to say more on mixed funds rules in a moment.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I have a quick question on Government amendment No. 468. The Minister may well be coming on to this, but could she tell us how people are meant to self-assess as a consequence of that amendment?

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

I shall come to that. Amendment No. 468 is a direct attempt to deal with potential anti-avoidance risks.

The hon. Gentleman’s amendments address issues that have been raised, some of which we have already sought to address. We have some sympathy with their aims. I realise that the “relevant person” provisions have caused considerable debate. It has been said that the changes will harm UK investment. I do not believe that our response to those concerns has meant that that is still the case. If there was a risk, I believe that we have reduced it substantially. The fundamentals of the remittance basis remain in place. Non-domiciles can still bring into the UK underlying capital and any taxed income and gains without incurring a charge under the remittance basis. Our changes make the remittance basis more sustainable.

Photo of Greg Hands Greg Hands Conservative, Hammersmith and Fulham

Has the Minister seen the report in today’s Financial Times of the latest CBI/KPMG London business survey, which says that the threats to capital’s competitiveness have doubled in the last year and that top of the list of complaints is the uncertainty surrounding the regulations on non-doms?

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

I have not seen that article, although I looked at the Financial Times today. I am aware of the concerns that have been expressed, but I am also aware  from my informal discussions with representatives of the City of London and so on, that there is now a great deal less anxiety than there was when we first introduced the detailed draft clauses for consideration in January. I will look at the article and the report.

I should like to comment briefly on the question of fees paid by offshore trusts and whether they should count as a remittance. If the fees paid were exempt, it would be possible for UK residents to fund their UK lifestyles, such as school fees, medical fees—I hesitate to say nanny’s fees—which non-remittance basis users patently could not. I believe that that is an unfair outcome, but neither would it make any clear contribution to competitiveness, which the Government amendments do.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I just wanted to touch on the issue of fees. My amendment, which leads the group, says that because the services of the driver, the nanny, the cook or the butler happen to be undertaken and enjoyed in the UK, they would still be covered by the remittance rules. However, where services are enjoyed offshore, for example if a trust managing UK-based investments is based offshore, they will not be covered. Services enjoyed in the UK would be caught, but not the investment fees charged to an overseas trust. We may have a longer debate on that later.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury 1:30 pm, 19th June 2008

I would rather do that later, and it is likely that we will.

Our changes in response to representations make the remittance basis more sustainable. Following consultation, we have made some changes. For example, we have introduced certain exemptions for existing funds. Those set up before 6 April will continue to be able to invest tax free with their existing funds, as long as the individual does not provide further funds.

The argument about the definition of “relevant person” is interesting. The relevant person rule prevents a significant amount of tax avoidance, whereby people could simply give something to another individual to import. Stopping that abuse was always going to be unpopular, but we had to strike a balance. We have got the balance right by focusing the rules on close individuals and immediate family, rather than using the much wider definition that we originally proposed. The inclusion of a minor grandchild as a relevant person follows broadly the same approach as that used to determine whether a non-resident trust is settlor-interested, except that the non-resident trust rules also include adult grandchildren. Individuals giving unremitted money or assets offshore to a relevant person would need to make arrangements with that person, to enable them to keep track of any remittances to the UK. I acknowledge that there is complexity there for the taxpayer.

Amendment No. 374 would cut across the Government’s amendments in this area by changing the ordering rule within the mixed-fund rule. There are various ways in which the mixed-fund rule could be ordered, and the way we have chosen again strikes a balance between fairness and simplicity. The ordering treats employment income as arising first and is therefore favourable to the taxpayer, as the hon. Member for Fareham suggests. That income has already been taxed and cannot be taxed again. However, it discourages avoidance by making  untaxed income and gains come out next. Representative bodies obviously would prefer the ordering rule to treat untaxed and already taxed income and gains as remitted first, but that would prolong an avoidance. Taxpayers still have the choice about whether they use a mixed fund. If they do not, the rule does not apply.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Well-advised taxpayers—the sort of people who might seek to use the rules for avoidance—would tend not to have mixed funds. I am particularly concerned that those people who are not represented, who know what the previous rules were, would find it potentially more difficult to comply with these rules. Changing the ordering may make it more difficult for the unrepresented taxpayer to comply.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

The hon. Gentleman makes a fair point. My understanding is that the vast majority of those using the funds would not be in that position; they would be getting good advice. However, I would want to consider whether his point is valid.

I understand the purpose of amendment No. 495, and would like to assure hon. Members that the exemption in new section 809S applies to untaxed foreign employment income as it does to other untaxed foreign income, because of the provisions in new section 809J(1). I knew that it was not a yes or no answer. As long as the payment is made directly to HMRC, it will not be treated as taxable remittance. The hon. Gentleman’s amendment is technically deficient as it would be made to the accrued income scheme provisions. However, I realise that the legislation on that point might justifiably be described as a little unclear. I am grateful to the hon. Gentleman for his suggestion, but if he will withdraw his amendment, I shall give serious consideration to whether an amendment on Report would bring the desired clarity to this point.

I shall make one or two final points. The ordering rule, on which he pressed me earlier, applies to funds remitted to the UK and so it is irrelevant whether funds have gone elsewhere—as long as it is not within the UK. On amendment No. 468, I do not really understand why he believes that there is a problem with how people are supposed to self-assess. If he has examples of where that might be a problem, he can write to me and I would be happy to give that some detailed consideration and reply to him in relation to a more specific case.

Finally, the hon. Member for Hammersmith and Fulham drew my attention to the article in the Financial Times, and I know that others have seen both that article and the report. However, on the survey, I shall simply say that a survey by Barclays Wealth states that the residence and domicile tax changes as they now stand, have not led to non-doms leaving the UK—that has not come from Government sources but from independent sources. The report to which he is referring states that the UK remains the most attractive place in the world for non-domiciles. I hope that he will accept that reassurance. We are conscious of the concerns in the business community about the changes that we have proposed. I believe that our response has been measured and responsible and I hope that the Committee will acknowledge that.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Although I do not wish to trade reports with the Minister, having read the press coverage of the Barclays report, my recollection was that one of the  reasons for non-doms not leaving the UK was the difficulty they were having selling houses in this troubled housing market. We understand the issues, but we are concerned that there is still a lack of clarity on some of the measures and that some work will have to be done to produce guidance to help taxpayers achieve their goals.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

I do not wish to prolong the debate, but on the point about clarity, will he accept that the remittance basis remains a complex area. We have gone a long way to try to help clarify that, but there will still be many instances where people with complex arrangements will probably need a lot of professional advice on how they manage their affairs.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am sure that outside advisers will be delighted to hear that people using remittance basis will continue to need to use their services—they will be reassured about that. I might touch on some of these issues in the next group of amendments, but I suspect that there is more work to be done in this area and that some of the matters relating to the way in which this debate has developed in recent months do give rise to some problems. I am grateful to the Minister for agreeing to look into amendment No. 495 and how that might be dealt with.

On amendment No. 365, although the Minister prays in aid precedents from trust legislation, I still believe that we are in danger of potentially creating quite a difficult regime for people to comply with. Although the wealthier end of the non-dom market might be able to find advice and put structures in place to ensure that their adult children report to them gifts or transfers that they have made to grandchildren, the legislation captures so many people that some taxpayers will inadvertently be caught in this net—through no fault of their own, but because of the complexity of the rules. It would be better to have a more restricted definition of relevant persons. I am disappointed that the Minister has not moved on that. However, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: No. 482, in schedule 7, page 157, line 39, at end insert—

‘(9A) The cases in which income or chargeable gains are used in respect of a debt include cases where income or chargeable gains are used to pay interest on the debt.’.

No. 483, in schedule 7, page 158, line 12, leave out ‘settlor or’.

No. 463, in schedule 7, page 163, leave out lines 20 to 23 and insert—

‘(2) If property which derives (wholly or in part, and directly or indirectly) from an individual’s income or gains within a relevant paragraph (and for a tax year) is transferred to a mixed fund, treat the transfer as consisting of or containing the income or gains.’.

No. 464, in schedule 7, page 163, line 25, leave out ‘has been’ and insert ‘is’.

No. 484, in schedule 7, page 163, line 26, leave out ‘capital’ and insert ‘gains’.

No. 485, in schedule 7, page 163, line 29, leave out ‘capital’ and insert ‘gains’.

No. 465, in schedule 7, page 163, line 30, leave out from ‘treat’ to end of line 31 and insert

‘the income or gains as transferred to the fund.

(3A) Treat an offshore transfer from a mixed fund as containing the appropriate proportion of each kind of income or capital in the fund immediately before the transfer.

“The appropriate proportion” means the amount (or market value) of the transfer divided by the market value of the mixed fund immediately before the transfer.’.

No. 466, in schedule 7, page 163, line 33, leave out ‘(d)’ and insert ‘(h)’.

No. 467, in schedule 7, page 163, line 33, at end insert—

‘(4A) A transfer from a mixed fund is an “offshore transfer” for the purposes of subsection (3A) if and to the extent that section 809P does not apply in relation to it.

(4B) Treat a transfer from a mixed fund as an “offshore transfer” (and section 809P as not applying in relation to it, if it otherwise would do) if and to the extent that, at the end of a tax year in which it is made—

(a) section 809P does not apply in relation to it, and

(b) on the basis of the best estimate that can reasonably be made at that time, section 809P will not apply in relation to it.’.

No. 468, in schedule 7, page 163, line 38, at end insert—

‘809QA Section 809P: anti-avoidance

(1) This section applies if, by reason of an arrangement the main purpose (or one of the main purposes) of which is to secure an income tax advantage or capital gains tax advantage, a mixed fund would otherwise be regarded as containing income or capital within any of paragraphs (f) to (i) of section 809P(4).

(2) Treat the mixed fund as containing so much (if any) of the income or capital as is just and reasonable.

(3) “Arrangement” includes any scheme, understanding, transaction or series or transactions (whether or not enforceable).

(4) “Income tax advantage” has the meaning given by section 683.

(5) “Capital gains tax advantage” means—

(a) a relief from capital gains tax or increased relief from capital gains tax,

(b) a repayment of capital gains tax or increased repayment of capital gains tax,

(c) the avoidance or reduction of a charge to capital gains tax or an assessment to capital gains tax, or

(d) the avoidance of a possible assessment to capital gains tax.’.—[Jane Kennedy.]

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I beg to move amendment No. 375, in schedule 7, page 164, line 2, at end insert—

‘(3) This section shall not have effect with respect to gains accruing to an individual on the disposal of an asset if the disposal took place prior to 6 April 2008.’.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

With this it will be convenient to discuss the following amendments:

No. 399, in schedule 7, page 184, line 37, leave out ‘2008’ and insert ‘2009’.

No. 400, in schedule 7, page 184, line 39, leave out ‘2008-09’ and insert ‘2009-10’.

No. 401, in schedule 7, page 184, line 39, at end insert

‘, except for the amendment made by paragraph 1 to insert a new section 809G in Part 14 of ITA 2007, which has effect for the tax year 2008-09 and subsequent tax years.’.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

There is one issue that I want to raise under amendment No. 375; and then, under amendments Nos. 399 to 401, I shall deal with some broader concerns about the handling of the legislation.

On amendment No. 375, the accepted position prior to 6 April 2008, where a foreign-domiciled individual gifted foreign-sited assets, was that once the deemed gain was realised, it could not be remitted, as the gain was not represented by any money or money’s worth in the hands of the individual making the gift. Accordingly, provided that there was a genuine gift, with the donee—who could be the trustee of an offshore settlor-interested trust—assuming full and unfettered control of the property gifted, the gain arising on the making of the gift could never be accessible. The HMRC capital gains tax manual, at CG25331, sets out the position as follows:

“Where an individual assessable on the remittance basis has gifted foreign assets to another person and has not received any disposal proceeds he or she may still be deemed to have realised a gain on the disposal. As that gain is not represented by any money or moneys worth in the hands of the individual making the gift, it is not possible for the individual to remit the gain. The gain arising on the making of the gift can therefore never become assessable.”

That is, I think, a clear statement of where practice prior to 6 April 2008 led people.

The new section 809R set out in schedule 7 creates some uncertainty in the minds of advisers as to meaning. The optimistic, preferred best interpretation is that new section 809R does not apply in relation to gains that arose prior to 6 April 2008. It is understood that that is also the view of HMRC. Accordingly, the old legislation states that, provided that there was a genuine gift, there would be no tax liability on the gain that arose when the gift was made. While it has been helpful for HMRC to have made its view known, doubt and concern still remain.

The potential sums will often be significant, and it is likely that inadequate records will have been kept to establish the position since, at the time, the law was clear that there could never be a tax charge as a result of the gift. Accordingly, taxpayers who made gifts of foreign assets offshore prior to 6 April 2008 will be concerned by the split in opinion; some suggest that new section 809R could exist retrospectively. Taxpayers who made absolute unfettered gifts of foreign assets offshore prior to 6 April 2008 had a legitimate expectation that the gain deemed to have been realised on the making of the gift would never come into charge. The new legislation should be clear, which is why amendment No. 375 seeks to insert:

“This section shall not have effect with respect to gains accruing to an individual on the disposal of an asset if the disposal took place prior to 6 April 2008.”

That makes the position clear so it is beyond doubt that new section 809R is not meant to have a retrospective impact. Advisers would be grateful for that conformation, and would perhaps be even more grateful—as would I—if the Minister felt obliged to accept the amendment, but when she hears what I am about to say next, she probably will not.

I am concerned about the process that we have gone through to get to this point, which is why amendments Nos. 399 to 401 seek to defer the commencement of major parts of the schedule to the start of the 2009-10 tax year, with one exception. Assuming that my drafting is correct, the amendments do not seek to defer the £30,000 charge. We have different views about the amount  of and the timing of the charge. Although we do not believe that it should be deferred, the complex rules surrounding the changes should be. Today’s debate is proof of why deferral of commencement is important.

Last Thursday night the Government tabled, I think, 90 amendments to the schedule, in addition to several earlier batches of amendments. Can the Minister tell the Committee how many amendments have been tabled to schedule 7 and whether that is a record number of amendments to a schedule in a Finance Bill? The volume of amendments is indicative of two things: first, the willingness to listen to the concerns raised by representative bodies during this process, and I give credit for that; and secondly, the state of the legislation when it was first published a couple of months ago. I suspect—I think that the Minister may have confirmed it this morning—that this is not the end of the amendments to the schedule and that we will see more tabled on Report.

The overall volume of amendments tabled is, in a way, reflected in the volume of amendments that I have tabled to the schedule. It reflects how the changes to very complex areas of taxation have been dealt with in a tight time scale. In October, the Chancellor announced a series of measures in the pre-Budget report: on the charge, the denial of allowances, changes to day-counting rules and on addressing anomalies in the rules on remittances. He promised consultation, and a document was published on 6 December 2007—just four months before the rules were to come into effect. Draft legislation was published on 18 January, which triggered much of the outcry about the Government’s intentions. John Cullinane of the Chartered Institute of Taxation said:

“but one of the unfortunate things is the way in which these proposals came in unannounced, caused brouhaha, and then were subject to a lot of compromises and have generally gone off at half cock. The result of all that is that any kind of genuine, rational, consultative look at the whole thing, to see how we can best give effect to this principle, that the greater your connection with the UK the more of a burden you should bear, has just been ruled out and we have a very complicated regime with as many anomalies as before”.

Those are quite harsh words from someone who is known to be measured in his comments about Government tax policy.

Malcolm Gammie from the Institute for Fiscal Studies said that the draft legislation

“apparently went very much further and had a very much greater impact than had generally been anticipated”.

He summarised the problem as follows:

“I think that really the general uncertainty it generated as to what precisely the rules were going to be, how wide-ranging they were going to be, really led to the degree of outcry that there was and the publicity it obtained”.

I think that that is a fair statement. The volume of comment in the aftermath of the publication of those draft rules was significant, and there was a sense that they went further than the Chancellor’s original intentions. As a consequence of opposition from investment managers, tax advisers and the art market, Dave Hartnett was forced to publish a letter clarifying the changes on 12 February, which was widely seen as yet another climbdown by the Government on their tax policy.

In the Budget, there were further concessions on assets to be remitted into the UK and the applicability of the charge on children and spouses. The de minimis  limit was increased from £1,000 to £2,000, as we discussed earlier, and there were relaxations on CGT and offshore mortgages.

One might have thought that that was a settled position and that after that the consultation would be perfect, but from the moment the Bill was published it was recognised that the content was incomplete. The explanatory notes flagged that up:

“Some of the clauses in the published version of the Finance Bill 2008 are not wholly complete.”

That is an understatement, given the volume and complexity of amendments that have been tabled. The explanatory notes went further and stated that there would be further discussions with interested parties, and there was an open day for advisers at the beginning of this month. The explanatory notes stated:

“Further changes will be introduced by way of Government amendments during the course of the Bill.”

That is where we are today, discussing a long series of amendments that arose from that process.

The Institute of Chartered Accountants, when commenting on the schedule, said:

“We are however concerned that a significant part of the legislation remained unfinished even as it came into effect on 6 April 2008. We understand that this is to enable the final legislation to be comprehensive and workable but are surprised that it was thought appropriate to lay before Parliament legislation that is admitted to be ‘incomplete.’”

The way in which the changes have been made has also caused concern. Ian Menzies-Conacher from the British Bankers Association summed it up very well when he gave evidence to the House of Lords Committee on Economic Affairs, saying that

“on balance it would have been better to have deferred [the proposals] for a year to allow a lot of the detailed problems that they are now seeing emerge to be resolved properly...we are rapidly running out of time in the present Finance Bill.”

Here we are, debating those two hours before the Committee is scheduled to adjourn. Some constructive discussions are taking place with officials and problems have been addressed, but late in the process. There is a great danger in drafting against rigid timetables, as we are almost as likely to create new problems as we are to solve old ones—that is the nature of drafting in a hurry. That concern was flagged up in February when the Institute of Chartered Accountants said:

“HM Treasury confirmed to us in a meeting in February 2008 that the overwhelming message from the representations that they had received had recommended deferring the more complex measures to enable workable legislation to be drafted.”

When the rules are finally determined, they will apply from 6 April 2008. Yet no one knows what they are going to be, as they are subject to further changes. This is an unreasonable situation for taxpayers. It will lead to confusion as the rules settle down and could lead to significant non-compliance in a system that is known for a very high degree of compliance. Many taxpayers will be making remittances without knowing their effect, which could turn out to be expensive if they make the wrong choice.

If the Government are not willing to postpone the changes until 6 April 2009, an alternative would be to ensure that the rules apply only from the date of Royal Assent and that remittances prior to that can be ignored. This is hastily drafted legislation which people have had relatively little time to digest, and there is concern that  even the amendments tabled by the Government in response to concerns raised by tax advisers do not appear to address adequately all the underlying concerns.

I fear that, by the time we get to Royal Assent, some issues will be left unresolved, and we will then be in a situation where we rely upon guidance being generated. People will look to the “frequently asked questions” section of the HMRC website for answers. There is a lot of work to be done to enable taxpayers to comply with these rules, and the Minister gave an indication of the type of work that needs to be done during the earlier debate about de minimis limits.

No one underestimates the amount of work that has taken place so far and the amount that needs to be done going forward to make this work. We are in a situation, a quarter of the way through the tax year in which the Finance Bill gains Royal Assent, where there has been significant uncertainty about how the rules will apply. The Government should step back from this and understand some of the concerns they have created by the way the legislation has been introduced. There are lessons to be learned about how these changes should have been made. Consultation in this area has apparently been going on since 2003, and there has been a sudden acceleration and pick-up in pace since the pre-Budget report. I am not quite sure what triggered that interest in amending these rules, but clearly a lot of work has had to be done and is not entirely finished. It is a lesson that we should all learn, on both sides of the House, about how not to make tax policy.

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster 1:45 pm, 19th June 2008

My hon. Friend the Member for Fareham is too polite to say that there has been a little too much politics involved in some of these proposals. While I accept that elements of this have been in play for five years since the initial consultation process in 2003, breakneck speed has apparently been required since October 2007 in order to get changes on to the statute book.

As I mentioned earlier, I have considerable sympathy with elements of what the Government are trying to achieve. I represent a constituency that contains the City of London, and have therefore heard some of the somewhat hysterical response to changes regarding non-doms. Some of the points raised are true, but other elements have been overplayed, not least because there is a level of uncertainty, about which I will say more later.

I also represent a large residential population in some of the most expensive real estate in the country, and it is a big concern, not only in the City of London, Westminster and Greater London, but beyond, in the home counties. There is real concern among people I speak to, particularly those in their 50s and 60s, who worry about how on earth their children are ever going to be able to have a quality of life akin to the one that they themselves have been accustomed to, particularly in relation to house prices. There is a sense that much of the concern has been focused unduly and slightly unfairly on the non-dom community as an extremely wealthy group, which is regarded as not paying its way. There is an element of truth in that, and those of us in the political world have to understand that that sense of inequality could be very damaging to the country if it is allowed to persist for long.

However, a significant number of non-domiciled individuals who live and work in this country do not earn huge amounts of money. Their voices have been almost silenced in this debate because it has focused on multi-millionaires. Their influence and the fact that they appear to pay little in direct tax because of the arrangements that they are able to work with HMRC are resented by an increasingly large number of people—not just the usual suspects, but relatively well-educated, middle-class, professional people who feel that they are being priced out of the property market and private schooling.

This matter needs to be addressed. The Government sensibly began this process in 2003, but it should have been an ongoing process and not accelerated as it has been in the past nine months. As my hon. Friend the Member for Fareham has rightly pointed out, when the Bill gets Royal Assent and as we approach the next Budget, we are still likely to have a whole range of uncertainties as people are being taxed. The risk is that we end up with the worst of all worlds and people will assume the worst rather than consider what is actually happening.

I have some sympathy with what the Government have tried to do. My party suggested a sensible and relatively straightforward approach at the last Budget. Rather than potentially open a can of worms by looking at the arrangements for individuals overseas, we should have had a simple, straightforward, one-off or annual charge for those with non-domiciled status. I fear that politics have played too big a part in this issue. I understand that we live in a political world, but we are, unfortunately, also at a time in the economic cycle when these things matter rather more than might have been the case two, three or four years ago.

Many of the changes have not been properly thought through. The real risk to the Government’s credibility and, more importantly—dare I say it—to the marketability of the UK across the world, is the sense of uncertainty and almost incompetence that seems to be an everyday part of the way in which the Government are addressing this issue. That is regrettable. Representing the seat that I do, I can see both sides of the argument. Time and again, I hear from people in the City who say, “This is appalling; we are going to lose loads of non-doms.” I do not think that there has been much evidence of that happening yet, although my hon. Friend the Member for Fareham might be right that the rather stagnant state of the property market could be playing a part in that.

It is wrong that we should be held to ransom by any group in society, such as the very rich, or by any organisation. We need to get the balance right, which means that we must think through the implications of this sort of legislation. My hon. Friend has skilfully pointed out time and again things that have not really been thought through. There will be a total lack of certainty. We live in a world and have a global economy in which labour has been at its most mobile in human history. We cannot afford to lose some of the brightest and best people. Those affected will not all be the richest individuals, although some inevitably will be, and will make a contribution beyond paying tax. Some of the very wealthy pay significant amounts of tax, such as council tax and VAT on their purchases, and often  employ many people. The non-domiciled sector therefore brings a range of benefits to our economy. That argument must be put forward if there is to be a balanced approach, which the Government have slightly lacked.

I have made some rather general points, and my hon. Friend has put his finger on more specific points. I fear that we are putting in place an ill-thought-through, rather uncertain framework, which will create the worst of all worlds. It will probably raise relatively little money and will dissuade people who would otherwise come to our shores from coming here. One has to remember that there are 20 million people a year emerging in the middle classes in India and China together. Those two countries have 4 million graduates a year. We would hope to attract, if only for a short period, some of the brightest and best of that talent. The real risk is that we are perhaps putting in place an ill-thought-through and uncertain programme on non-domiciles which will dissuade those people from coming here. There are other options and they might go to Singapore, New York or Dubai. Such places will seem attractive in the short or even the medium term. That is our broadest concern.

I hope that the Government will give real thought to the timetabling. We can try to put back the implementation of this so that there is a proper and rigorous system that will stand the test of time. The worst of all worlds would be for us to reassemble here next year and the year beyond and have to rewrite many of these provisions, not least because of the unworkability that may have been introduced. We will be advised by too many tax advisers about the loopholes that should have been thought through at the outset.

Thank you for your indulgence, Sir Nicholas. I am sure that we will not have a stand part debate. I hope that the Government and the Minister will give us some assurances about exactly how see they this playing out in the months and years ahead.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield 2:00 pm, 19th June 2008

I can fully support what the hon. Gentleman has said about a stand part debate.

Photo of Greg Hands Greg Hands Conservative, Hammersmith and Fulham

I am not going to detain the Committee for long but, I want to reinforce what has been said by my hon. Friends. It strikes me that the whole process has been deeply flawed. The consultation has been extremely poor, especially in relation to the data. Seven months later, we are not really any closer to having any more robust data.

I have a question for the Minister. Going back to the Institute for Fiscal Studies report and the pre-Budget report in October, the IFS outlined various questions. I want to see whether the Minister has any answers. What is her current estimate of the number of non-doms? How many have unremitted foreign income above £62,500 or £80,000? How much foreign income do the remainder have? How many does she believe would leave the country if these proposals came into force?

Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

I wonder whether the Minister will draw on the expert analysis provided by the Government when they estimated how many members would come from new accession EU countries.

Photo of Greg Hands Greg Hands Conservative, Hammersmith and Fulham

That is a very valid point. I represent a constituency where the current estimate is that 6 per cent. of the population is Polish. In the last year we had  7,300 foreign nationals apply for a national insurance number. The effect that these new regulations might have on the flow of people could be considerable, particularly in a constituency like mine.

In October, the IFS said that no one really knows the answers to these questions. I am assuming that, after seven months, the Minister, when faced with questions from a body such as the IFS, would be able to provide some reasonably good answers.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

There have been 135 Government amendments. I checked that quickly myself scanning through the amendment paper. I say to the hon. Member for Fareham—other hon. Members will be interested in this—that that is not a record. The previous record for a Finance Bill is more than 200. Guess when that was. It was in 1995.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Perhaps it is a sign of a Government coming to the end of their life when so many amendments are tabled to Finance Bills.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

My hon. Friend was right. I should not have given way.

On the very specific point about unfettered gifts of foreign assets offshore, HMRC made its view very clear in a frequently asked question some time ago. In simple terms, it is only when such gifts were made after 6 April 2008 that they would be taxed. I would like to answer a little more broadly than I would have done on these specific amendments, Sir Nicholas. Following the pre-Budget report, we have shared clauses in draft at the earliest opportunity. We actively looked to respond quickly to the concerns that were aired within our overall policy aim. Following the PBR in October, there was relatively muted reaction to the proposals on residence and domicile, but our response has been swift to concerns raised once the detailed clauses were put out in draft.

We have sought at every opportunity to address those concerns. That has resulted in several changes to our original proposals, and numerous improvements and simplifications to the Bill as first drafted. As has been pointed out on other occasions, when the Government respond to criticism, it is simply presented as a U-turn. One simply cannot win when one seeks to address proper concerns that have some basis, and try to amend the proposals accordingly.

On the IFS report, we have stated in both the PBR and the Budget that we assumed there were about 3,000 people who might leave, but our assumption has now fallen by about 400 as a result of the Budget changes. However, it is an area in which it is very difficult to make assumptions. We have not seen any convincing evidence that the numbers leaving the UK might be higher. As I have said repeatedly, the UK remains an attractive place to live, work and do business.

Photo of Greg Hands Greg Hands Conservative, Hammersmith and Fulham

It is certainly helpful to have some estimates of these numbers—3,000 and the latest estimate 2,400—could she tell us a little bit about the methodology involved in arriving at those estimates?

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

The fact is that we do not have hard data on many of these, simply because there has not previously been a need for people to declare their income offshore. So the hard data that he is seeking are not immediately available either to us or to other sources.

Photo of Greg Hands Greg Hands Conservative, Hammersmith and Fulham

The Minister says that we have no hard data, but figures of 3,000 and 2,400 sound as if they have a certain amount of precision. Can she at least tell us what factor has been most involved in downgrading that estimate from 3,000 to 2,400?

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

In large part it was the debate we held with representative bodies about the changes we have made that led to the clarity we were able to bring to the concerns in the early days. Although the hon. Gentleman dismissed the letter that Mr David Hartnett published, it did go a long way to allaying many fears about what the changes mean to individuals.

Photo of Greg Hands Greg Hands Conservative, Hammersmith and Fulham

I thank the Minister for giving way—she has been generous—but I do not think that she has come any closer to saying where the figures of 3,000 or 2,400 have come from. Have they come from a consulted body, which seems to be her implication? If so, presumably that body must have said what was driving the change. Is it the decline in house prices, or is it something else?

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

The hon. Gentleman should not try to put words into my mouth. I know that he is not trying to do it in a deliberately mischievous way—[Interruption.] I am being generous here. But for me to go into detail about the way in which we arrive at these assumptions would entail a great deal of debate in this Committee. I suggest that it may be of more value if I look in detail at the questions he has asked and see what data I can make available to the Committee. I will write to him and share the letter with the Committee.

I should like to make a more general point, Sir Nicholas, particularly in view of your advice on the stand part debate. Hon. Members criticised the fact that we had made the decisions and the fact that we had plans to proceed with the detail. The hon. Member for Cities of London and Westminster said that, on balance, he preferred the Conservative proposal, but that would have been for the flat rate charge of £25,000. Once a charge had been paid, no more questions would have been asked about an individual’s worldwide income. Their proposal would not have addressed the issue of fairness to which he rightly alluded.

There was without question a great deal of awareness within the House of the complaints of unfairness, but it is also important to bear in mind that the Conservative proposal, unlike our proposal, would have charged people from the day they arrived. The hon. Gentleman referred to Indian graduates who could come here for a short time and then return to the Indian sub-continent. We very much want to encourage people of quality from around the world to come here. We would want them to come and, having worked here, perhaps to stay longer. That is why we believe that beyond seven years it is right to invite remittance users to make a greater contribution.

That brings me back to the other main difference between the two proposals. The Conservative proposal would have raised in the region of £3.5 billion from a group of people—roughly 120,000—whereas the tax take already is around £13 billion. It is around £500 million now. We were inviting a greater contribution, but a much more modest one than the Conservatives proposed. That may be why the hon. Gentleman preferred their proposal. That is not widely appreciated.

The current arrangements for the taxation of non-domiciled people in the UK are very generous. They serve the British economy well. In terms of attracting the world’s best talent to the UK we have now arrived at a balance which maintains that. It is important to recall that the changes that we propose do not affect all non-domiciles. They affect those who choose to use the highly advantageous remittance basis. I have responded in a broader way to a debate that has gone slightly wide of the amendment.

Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury) 2:15 pm, 19th June 2008

I think all reasonable people would recognise that the Conservative party’s proposals were laughably ill-conceived and put together in a characteristically amateur fashion. I concede that point to the Minister. What still seems strange is that the Conservatives succeeded in panicking the Government into coming up with a corresponding set of proposals which, judging by the number of amendments, do not seem to have been much better thought-out than the Conservative ones.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

I have drawn attention to the comments of the hon. Member for Twickenham on the matter. I would not have characterised the proposals put forward by the hon. Member for Fareham as laughably ill-conceived.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

We acknowledge that there was some merit in the idea of a charge, but we did not agree with the way in which it was proposed to levy it. We have arrived at the right balance. Our proposals are reasonable and proportionate. They allow the remittance basis to settle at a point at which it is now sustainable for the very long-term future, without the shallow and partisan criticism that we occasionally hear from the Lib Dem Benches.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I thank the Minister for her clarification of what I was seeking to tackle in amendment No. 375. I shall not therefore push it to a vote. Any lingering ambiguity should have been dealt with by her very clear statement on pre-April 2008 gains.

In the Minister’s response to the broader issues, she highlighted the fundamental difference between the approach of our two parties, and the reason why the Government are in the mess they are in. When we consulted on our proposals for a charge on non-doms, we recognised some of the challenges there would be in trying to unpick the details of anomalies. It is a complex area. I return to one of the comments that was made in evidence to the House of Lords Select Committee: the Government have probably created as many anomalies as they have closed down.

I do not know whether I will be sitting on the Finance Bill Committee next year, but I fear that we may come back to revisit this matter, if not in terms of primary  legislation, perhaps in the form of guidance or some other way of getting around the Chancellor’s commitment to avoid reopening the topic.

The way in which issues other than the charge were dealt with created the weight of opposition to some of the measures. The Minister was right: there was an immediate response to the change announced in October’s pre-Budget report. When we announced our proposals in October, there was support for them because they struck the right balance between fairness and making sure we did not create more problems than we were trying to resolve. There was support for our proposals because they seemed proportionate and reasonable.

The Government got into trouble because of the broadening of their proposals when the consultation document came out, and particularly when the draft legislation came out. That is one of people’s concerns, and the problems with the proposals and their complexity has resulted in the process we are going through today to deal with 135 amendments in the space of six hours, or however many hours there are in today’s two sittings. I do not think it has created much certainty for taxpayers.

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster

For the record, although the Finance Act 1995 may have had slightly more amendments, it was not guillotined by the Government of the day, and therefore there was a chance to discuss in full detail the various amendments that had been put forward, which has not been the case with this Bill.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

Order. I have to correct the hon. Member for Cities of London and Westminster. The Bill is not guillotined or programmed. We have to make that clear. That does, however, give me the opportunity to say that we have—in expectation only, not according to a programme motion—just over an hour and 35 minutes to go, although it looks to me as though we will go on longer.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Thank you, Sir Nicholas. As you said, Finance Bills are traditionally not subject to programme motions and guillotines. In the interest of moving the debate on to the gripping topic of fees, on which I would like to say a few more words, I shall draw the debate on this group to a close. I think the Government are reaping the problems of acting in haste by trying to close down loopholes and anomalies, and I feel that in some shape or form we will relive these moments with pleasure, not only on Report, but in subsequent Bills. With that, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment made: No. 486, in schedule 7, page 164, line 2, at end insert—

‘809RA Deemed income or gains not to be regarded as remitted before time when they are treated as arising or accruing

Where—

(a) income or foreign chargeable gains are treated as arising or accruing, and

(b) by virtue of anything done in relation to anything regarded as deriving from the income or chargeable gains, the income or chargeable gains would otherwise be regarded as remitted to the United Kingdom before the time when they are treated as arising or accruing,

treat the income or chargeable gains as remitted to the United Kingdom at that time.’.—[Jane Kennedy.]

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

I beg to move amendment No. 354, in schedule 7, page 164, line 12, at end insert—

‘809SA Consideration for certain services

(1) This section applies to income or chargeable gains if—

(a) the income or gains would (but for subsection (2)) be taken to be remitted to the United Kingdom because conditions A and B in section 809K are met,

(b) condition A in section 809K is met because a service is provided in the United Kingdom (“the relevant UK service”), and

(c) condition B in section 809K is met because section 809K(3)(a) or (b) applies to the consideration for the relevant UK service (“the relevant consideration”).

(2) The income or chargeable gains are to be treated as not remitted to the United Kingdom if the following conditions are met.

(3) Condition A is that the relevant UK service relates wholly or mainly to property situated outside the United Kingdom.

(4) Condition B is that the whole of the relevant consideration is given by way of one or more payments to one or more bank accounts held outside the United Kingdom by or on behalf of the person who provides the relevant UK service.

(5) Sections 275 to 275C of TCGA 1992 (location of assets) apply for the purposes of subsection (3) as they apply for the purposes of TCGA 1992.’.

The amendment was drafted in consultation with representatives from the UK financial services industry. It enables the industry to continue to provide services to non-domiciled individuals. I am assured that the amendment meets the concerns that the industry has raised. The hon. Member for Fareham has indicated that he has a number of issues to raise, so I will allow him to do so and then hope to reply in more detail.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The Government have tabled an important amendment because it addresses the wider concerns about the impact of changes in the Bill on the competitiveness of the UK financial services sector. It is important we get these things right and I want to tease out some of the issues from the Minister.

The amendment introduces two new conditions which, if met, mean that a payment for a service does not become a remittance and therefore is not subject to tax. Condition A is that the relevant UK service relates to property situated outside the UK, and condition B is that the consideration is given by way of payments to one or more bank accounts held outside the UK by the person who provides the relevant UK service. What constitutes property situated outside the UK? I am clear in my own mind that it includes shares in overseas companies held by an offshore trust, but I am not clear whether UK shares held by an offshore trust would meet the definition as

“wholly or mainly property situated outside the UK.”

If UK shares held by an offshore trust do not meet that condition, investment management fees charged by a UK fund manager will be a remittance. My amendment No. 363 sought to get around that by saying that as the fees related to an offshore trust, the fees paid would not constitute a remittance.

What is a service? There has been considerable debate about what a service is in the context of VAT legislation, but one example that has been suggested to me is whether travel in or out of the UK would count as a service performed in the UK? Clearly checking in for a flight is more than an incidental activity, but it is not  wholly, or indeed mainly the activity, yet there is an element of the cost that would be a UK service. Would payment for that element constitute a remittance? Would the treatment differ if the travel was, say, to an overseas property owned by the non-dom?

Condition B states that the payment must be made to an offshore bank account. Will the Minister tell us why a UK-based service provider needs an offshore bank account. Surely the main point is that the payment for the service should go directly to the service provider. I am concerned that the Government’s proposals are in danger of becoming unnecessarily onerous.

In new section 809SA (1)(b), may I also raise an issue about the service being provided in the UK? It is common in many multinational service companies for a client to be sent a single bill for all the firm’s activities on their behalf, but the subsection would require those firms to issue separate bills. Is that really what the Government are expecting people to do? My understanding is that for the convenience of their clients, large, multinational accountancy firms would try to raise a single bill to a client for services rendered by a range of offices across the world, including their office in the UK, rather than separate bills. Their own internal accounting arrangements would deal with the rest. Is the Government really expecting companies to raise a series of separate invoices?

There are practical issues, too. For example, if a US citizen resident in the UK asks a UK-based firm of tax advisers to prepare their US tax return and their fees are paid from offshore income or gains, does that count as remittance, even though the work relates to an offshore—non-UK—tax return? How is advice on gains and investment income that could be linked back to offshore assets treated, compared to advice on earned income? Would a UK-based firm advising on that tax return have to submit different bills for different parts of the advice? Should work on assets as opposed to employment income be billed separately? There is a conflict, which I think the Financial Secretary is trying to address. She alluded to it earlier when we touched on payment for services received in the UK, where a non-dom might seek to establish a service company as a means of paying the costs of nannies, drivers and other personal staff.

I can see that the Financial Secretary is trying to close that loophole, on this side of the equation. I understand the purpose of that. However, on the other side, she is making it complicated for certain professional firms to comply with the rules in a way that is cost-effective and efficient for their clients. There is a tension there that we have not resolved. While new section 809SA may deal satisfactorily with the concerns of people in the investment management community—the issue of UK equities is still to be addressed by the Financial Secretary—it may create a ripple effect in other professional services firms, which may be important to understand. I appreciate that there is a challenge there for the Financial Secretary to address.

The Law Society has raised with me some points about private equity. They include the management fee, how the fees paid to the general partner might be dealt  with, and whether investing in property wholly or mainly situated outside the UK might disadvantage UK investments, as people may be less inclined to invest in a UK partnership or UK assets. I suspect that those representations have also been made to the Financial Secretary, so hopefully she will be able to offer some clarification, rather than my expanding on the points at length.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury 2:30 pm, 19th June 2008

The hon. Gentleman asks a number of questions. It became clear only recently that the issue he raises might be a problem. As soon as I became aware of that, I moved quickly to address what might have become a significant problem along the lines that the hon. Gentleman described. It has been longstanding practice that the payment for professional services under new section 809SA must be made outside of the UK. We specifically asked representatives of the financial services industry whether that would cause a problem, and they confirmed that it would not. The provision of travel is not the provision of a service in relation to a property outside of the UK.

The hon. Gentleman asked whether the fees exemption would apply to individuals who used a UK-based firm to advise on completing US returns. That could be within the terms of the exemption. However, it would depend on the details of the individual case. I am not deliberately trying to avoid the question; it genuinely will depend on the individual circumstances when the work is considered.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am grateful to the Financial Secretary for the honesty of that answer. Could she expand on what factors people should bear in mind when thinking about these invoices? To say that it depends on the circumstances of the case is not terribly helpful to professional advisers in that area. Some clarity this afternoon would be helpful. Perhaps she might be able to say how HMRC intends to go beyond what she says this afternoon in terms of providing support to professional firms.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

The amendment’s intention was to construct a change that would address all the concerns of the financial services industry, the British Bankers Association and the City of London regarding the impact of fees potentially becoming tangled up in the remittance basis and the possible damage that that might do to the City of London and the financial services industry, who receive a great deal of business from resident non-domiciles even under the rules as they stand. I do not want to be drawn into too much detail in Committee where I, as a non-expert—I freely admit—may give an answer that is either wider than intended or may mislead. My intention was always to provide a response that met the concerns of the BBA, which was the first to raise these issues, as well as the other organisations.

The hon. Member for Fareham asked for the definition of property held offshore, and if UK assets are involved. The key point is that the trust is offshore and that its assets, in whatever form—whether shares or other property—are also offshore. Property takes its natural meaning but certainly does cover shares, real estate, investments and other assets. Again, what constitutes a service takes its natural meaning.

We have to recall that this is a self-assessment system; it is not one where definitions apply directly to cases, but there will be guidance available. It will, however, be up to the individual to self-assess. As I have said, our aim in reforming the remittance basis and tabling this amendment was to address the concerns raised with us by representatives, particularly when it became clear that the definition of remittance had the effect of treating the fees paid to the UK service providers in respect of, for example, offshore investments, as a remittance. I am assured that our amendment fulfils my commitment to address that concern. The payment for the service must also be made outside the UK for the exemption to apply.

Photo of Greg Hands Greg Hands Conservative, Hammersmith and Fulham

How much are we talking about here? Are there very small sums of money in these remittances, or something really quite large? It would be helpful for the Committee to get some idea of the magnitude of the sums involved in the amendment.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

It is clear to me that our original proposals were very much wider than we originally intended. So, where we sought to prevent the payment of services that included the payment of school fees and fees for other services, where it could be defined as a service, people were paying with offshore funds and avoiding tax as a result. We sought to prevent that as we did not think that that was fair.

Our original drafting caught the very proper financial advice being offered by the City of London about the fact that UK advisers would have become uncompetitive in comparison with other financial centres and financial advice that could be obtained abroad. We shifted the definition in response to that criticism. All I can do is repeat the fact that I am assured that this amendment addresses those concerns.

It does not mean that we would allow the payment of fees for the types of services that I have described, which I do not think that the constituents that the hon. Gentleman and I represent, who pay their taxes through the arising basis without having the opportunity to use the remittance basis, would consider to be fair. I believe that the amendment is a good one and hope that it sees its way on to the statute book.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am not sure that the amendment goes far enough. In addressing the concerns raised by the BBA about investment management and private banking fees, the Financial Secretary has gone much of the way towards tackling this issue. However, there are further considerations, such as the issue of US tax returns. I am a little uncomfortable with her answer about assets based wholly or mainly offshore. It appears that her proposal will restrict the ability of offshore trusts to invest in UK equities, properties and so on. That was the sense that I got from her remarks, but I do not intend to oppose the amendment. However, I will look at her remarks in Hansard and we may wish to retaliate and table amendments on Report.

Amendment agreed to.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

I beg to move amendment No. 355, in schedule 7, page 164, line 19, leave out from ‘rule’ to end of line 28 and insert

‘(see sections 809V and 809VA).

(4) Clothing, footwear, jewellery and watches that derive from relevant foreign income are exempt property if they meet the personal use rule (see section 809VB).

(5) Property of any description that derives from relevant foreign income is exempt property if—

(a) the property meets the repair rule (see section 809VC),

(b) the property meets the temporary importation rule (see section 809W), or

(c) the notional remitted amount (see section 809X) is less than £1,000.’.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

With this it will be convenient to discuss the following amendments: No. 376, in schedule 7, page 164, line 21, leave out

‘that derive from relevant foreign income’.

No. 377, in schedule 7, page 164, line 24, leave out

‘that derives from relevant foreign income’.

Government amendments Nos. 487 to 489.

No. 378, in schedule 7, page 165, line 4, at end insert—

‘(6) For the purpose of subsection (4) property is to be treated as not ceasing to meet a relevant rule if it is lost, stolen, destroyed, scrapped or otherwise ceases to exist or it is disposed of by way of gift other than to a relevant person; and property gifted to a relevant person that is exempt property in the hands of that person immediately after the gift shall not be treated as ceasing to be exempt property solely by reason of that person subsequently ceasing to be a relevant person.

(7) If exempt property ceases to meet one of the relevant rules because it is sold to someone other than a connected person, the amount chargeable to tax shall be the sale proceeds received and not the amount referred to in section 809O above.’.

Government amendment No. 356.

No. 379, in schedule 7, page 165, leave out lines 10 to 20 and insert

‘it is for the purpose of public display at a museum, gallery or other premises within subsection (8) below.’.

No. 380, in schedule 7, page 166, line 1, leave out from ‘is’ to end of line 4 and insert

‘any museum, gallery or other premises at which it is usual to display items for access to the public and where the item will be on display to the public throughout the normal opening hours of that place or where throughout such times it will be available for public access.’.

Government amendments Nos. 490 and 357.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

The Government amendments, apart from No. 357, arose from discussions about the rules for the remittance basis treatment of moveable property brought to the UK. Government amendment No. 357 ensures that a reference to “the Commissioners” is supported by an appropriate definition. I say that as a brief opening comment and look forward to listening to the debate.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I rise to speak to amendments Nos. 376 to 380 that stand in my name and those of my hon. Friends. Amendments Nos. 376 and 377 relate to new sections that exempt certain property from remittance provisions. I have a number of concerns about the interaction of these sections, particularly in the case of property brought into the UK for personal use. My overriding concern is that, with the exception of property  brought in for public display, the exemptions apply only if the property derives from foreign income; that excludes things like gains.

I am unable to understand the logic of that restriction. It appears to complicate the law unnecessarily, particularly for the unrepresented taxpayer, who may well not appreciate the distinction. For example, when a Polish builder flies into the country, he will have to think about whether he is wearing a watch that he bought from the proceeds of the sale of his flat, rather than with relevant foreign income. It would aid compliance with the rules if he or she were able to exclude clothing, jewellery and watches bought from any source of income. I would like justification from the Financial Secretary of why relevant foreign income is so important in this matter.

On amendment No. 378, the provisions on exempt property are currently far too complicated. They are difficult to understand and are unlikely to be workable in practice. I should like to illustrate, using a few examples, some of the anomalies that might arise with items of personal use property.

Such property, which is defined as clothing, footwear, jewellery and watches costing under £1,000, is exempted under new sections 809T(4) and 809T(5)(a). Under new section 809U(3), if the item is sold whilst in the UK, there is remittance of the original cost at the time of sale even if the item is sold for £1. If it is sold in the UK while it is physically overseas, there is no remittance. There is no remittance if the item is scrapped or gifted in the UK or if it is stolen. That remains the case even if it is insured and moneys are received in settlement of an insurance claim.

An item of personal use property that costs more than £1,000 is exempt only under new section 809T(4). If it is gifted while in the UK to anyone other than a relevant individual, even to a charity shop, the cost of the item becomes a remittance at that date under new section 809U(4), but there is no remittance if the item is gifted to an overseas charity shop while abroad. There is remittance of the cost of the item if it is scrapped or stolen in the UK, but not if it is scrapped or stolen overseas. If, however, it had been in the UK for fewer than 275 days and the non-domiciled individual could show that it was taken overseas after it was stolen, which is, admittedly, unlikely, there will not be remittance.

If a gift is made of the item by a non-domiciled individual to their infant child, there is no remittance as it continues to meet the personal use rule under new section 809W(2). When that child reaches 18, however, a remittance will arise if the property is in the UK, but not if it is overseas on that day, even if it is brought back to the UK on the following day. Those provisions are not very straightforward, and I hope that my amendments would make them more comprehensible and accessible to the taxpayer, although I suspect that my explanation might not be particularly comprehensible or accessible to the average taxpayer.

On amendments Nos. 379 and 380, many of the original rules on public display, and in the Minister’s amendments, mirror the VAT treatment of relevant items. I should be interested to hear why the VAT  treatment should be used as a basis. My amendment No. 380 would broaden the location type beyond museums to any place where there is public access. I understand that the Treasury runs a scheme for other assets in which tax is waived or held over if an asset is available for public access. For example, we have artwork in the House, which has arrangements for people to visit, but it is not deemed to be a museum. Could the exemption be extended to cover such arrangements? I should like to go beyond the Government’s amendment, which extends the exemption to commercial auction houses. Could we go further than that?

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury 2:45 pm, 19th June 2008

I thought that the hon. Gentleman’s explanation was very clear, if I may compliment him.

Our amendments, which we have tabled in response to representations that we have received, clarify the conditions under which property that is brought to the UK will not trigger a tax charge under the remittance basis. The changes will ensure that the legislation works as intended, and will make things clearer for taxpayers and their advisers in this complex area. They will deliver the final parts of the new scheme that we are introducing to allow people to bring works of art to the UK for public display without triggering a remittance-basis tax charge.

The hon. Gentleman’s amendments Nos. 376 and 377 would extend the scope of the exempt property rules, which he has described to great effect. He wants to extend those rules to cover assets purchased abroad with any form of unremitted income or gains. I am not sure if he appreciates what the effect of his amendment would be.

Until now, remittance basis users bringing into the UK assets purchased from unremitted foreign employment income or offshore gains, have faced a charge to tax in the UK. That has been a long-standing practice. Only where the asset was purchased with unremitted relevant foreign income was there no liability to tax when it was enjoyed in the UK. Relevant foreign income is income such as bank interest, rental income or dividends. The hon. Gentleman’s amendments would remove a tax charge in situations where one has always arisen. It would therefore provide a new tax break for remittance basis users. I am not sure that he knew that would be a consequence of his amendment.

I appreciate that the amendments have been tabled in a probing manner, but the Government have already proposed generous provisions to exempt property bought with unremitted relevant foreign income where it is either of low value or falls into certain categories of personal use such as clothing and jewellery. We also have exemptions for assets bought with unremitted relevant foreign income and temporarily imported into the UK. Finally, in recognition of the importance of the UK’s repair and restoration sector, which is very significant—there is a centre of restoration in the city of Liverpool—assets bought with unremitted relevant foreign income can stay in the UK for an unlimited time while being repaired or restored.

The hon. Gentleman’s amendment No. 378 proposes two additions to the new section dealing with assets that cease to be exempt property. I understand the point that he is making but the issue was not raised with us during the extensive consultation on the new section introduced  by the schedule. The amendment as drafted would lead to higher tax charges in some circumstances. For example, if an asset cost £10,000 but increased in value and was sold for £50,000 his amendment would tax £50,000 rather than the £10,000. Furthermore, the amendments would provide new avoidance opportunities for the enjoyment of exempt assets without a tax charge in others. The outcomes are clearly at odds with the objective of schedule 7.

Amendments Nos. 379 and 380 seek to define the public access rule by reference to where the assets are displayed. There are two reasons why those changes are unnecessary. First, they remove the link between the public access rule and existing schemes for VAT. We explained the reasoning behind using that. The link between the public access rule and existing schemes for VAT and import due to relief on importation has been in place for some time. The alignment was developed in consultation with key stakeholders in the art world and it was agreed that basing the public access rule on those schemes was the most simple and straightforward approach. I am aware that there is wider lobbying on other types of what might be described as public access, but in consultation a persuasive argument was made for extending the type of venue from institutions such as galleries and museums to other commercial properties, such as a commercial auction house—the example cited by the hon. Gentleman. Our amendment No. 356 provides the framework to achieve what is needed to allow that to happen.

By bringing forward this particular package—it is a large group of amendments, but they address genuine concerns about the handling of movable property—we have responded to the points raised during consultation. I therefore press the amendments in my name. I am sure the hon. Gentleman was probing, but he may want to press some of his amendments. However I urge the Committee, if asked to consider his amendments, to reject them.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am grateful to the Minister for a helpful explanation as to why the existing terms have been drawn up as they are. It is not my intention deliberately to make the law less restrictive or more lenient than it is currently. So I am grateful for the clarification that she gave on personal use items and also for the explanation of why there is a link between public access, as far as non-domicile rules are concerned, and the VAT rules. With her comments in mind, I beg to withdraw the amendment in my name.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

The hon. Gentleman does not have to withdraw his amendment, as the lead amendment is a Government amendment.

Amendment agreed to.

Amendments made: No. 487, in schedule 7, page 164, line 35, after ‘where’ insert

‘the whole or part of’.

No. 488, in schedule 7, page 164, line 35, after ‘sold’ insert

‘, or otherwise converted into money’.

No. 489, in schedule 7, page 164, line 43, leave out ‘“relevant rule” means—’ and insert ‘—

“money” includes—

(a) a traveller’s cheque,

(b) a promissory note,

(c) a bill of exchange, and

(d) any other—

(i) instrument that is evidence of a debt, or

(ii) voucher, stamp or similar token or document which is capable of being exchanged for money, goods or services, and

“relevant rule” means—’.

No. 356, in schedule 7, page 165, line 5, leave out from beginning to end of line 11 on page 167 and insert—

‘809V Public access rule: general

(1) Property meets the public access rule if conditions A to D are met.

(2) Condition A is that the property is—

(a) a work of art,

(b) a collectors’ item, or

(c) an antique,

within the meaning of Council Directive 2006/112/EC (see, in particular, Annex IX to that Directive).

(3) Condition B is that—

(a) the property is available for public access at an approved establishment,

(b) the property is to be available for public access at an approved establishment and, in connection with its being so available, is in transit to, or in storage at, public access rule premises, or

(c) the property has been available for public access at an approved establishment and, in connection with its having been so available, is in transit from, or in storage at, public access rule premises.

(4) Property is “available for public access” at an approved establishment if the property is—

(a) on public display at the establishment,

(b) held by the establishment and made available to the public on request for viewing or for educational use, or

(c) held by the establishment for public exhibition in connection with the sale of the property.

(5) An “approved establishment” is—

(a) an approved museum, gallery or other institution within the meaning of Group 9 of Schedule 2 to the Value Added Tax (Imported Goods) Relief Order 1984, or

(b) any other person, premises or institution designated (or of a description designated) by the Commissioners.

(6) “Public access rule premises” are—

(a) premises in the United Kingdom at which the property is to be, or has been, available for public access, or

(b) other commercial premises in the United Kingdom used by the approved establishment for the storage of property in advance of its being, or after its having been, available for public access at the approved establishment.

(7) Condition C is that, during the relevant period, the property meets condition B for no more than—

(a) two years, or

(b) such longer period as the Commissioners may specify.

(8) “The relevant period” means the period—

(a) beginning with the importation of the property, and

(b) ending when it ceases to be in the United Kingdom after that importation.

(9) “Importation” means the property being brought to, or received or used in, the United Kingdom in circumstances in which section 809K(2)(a) applies.

(10) Condition D is that the property attracts a relevant VAT relief (see section 809VA).

809VA Public access rule: relevant VAT relief

(1) Property “attracts a relevant VAT relief” if any of conditions 1 to 4 are met.

(2) Condition 1 is that article 5(1) of the Value Added Tax (Imported Goods) Relief Order 1984 applies in relation to the importation of the property by virtue of Group 9 of Schedule 2 to that Order (importation of works of art or collectors’ pieces by museums etc).

(3) Condition 2 is that article 5(1) would so apply if the following requirements were disregarded—

(a) the requirement that the importation be from a third country, and

(b) the requirement that the purpose of the importation be a purpose other than sale.

(4) Condition 3 is that article 576(3)(a) of Commission Regulation (EEC) No 2454/93 (relief from import duties for works of art etc imported for the purposes of exhibition, with a view to possible sale) applies in relation to the importation of the property.

(5) Condition 4 is that article 576(3)(a) would so apply if the requirement that the importation be from a third country were disregarded.

(6) Where the property does not meet condition B in section 809V at the time of its importation it is to be assumed for the purposes of this section that the property was imported on the day during the relevant period when the property first meets that condition.

(7) “The relevant period” and “importation” have the same meaning as in section 809V and “imported” is to be read accordingly.

809VB Personal use rule

(1) Clothing, footwear, jewellery or watches meet the personal use rule if they—

(a) are property of a relevant person, and

(b) are for the personal use of a relevant individual.

(2) In this section—

(a) “relevant person” has the meaning given by section 809L, and

(b) “relevant individual” means an individual who is a relevant person by virtue of section 809L(2)(a), (b), (c) or (d) (the individual with income or gains, or a husband, wife, civil partner, child or grandchild).

809VC Repair rule

(1) Property meets the repair rule for the whole of the relevant period if, during the whole of that period, the property meets the repair conditions.

(2) Property meets the repair rule for a part of the relevant period if—

(a) during the whole of that part of that period, the property meets the repair conditions, and

(b) during the whole of the other part of that period, or the whole of each other part of that period, the property meets the repair conditions or the public access rule.

(3) Property meets the repair conditions if the property—

(a) is under repair or restoration,

(b) is in transit from a place outside the United Kingdom to repair rule premises, in transit between such premises, or in storage at such premises, in advance of repair or restoration, or

(c) is in storage at such premises, in transit between such premises, or in transit from such premises to a place outside the United Kingdom, following repair or restoration.

(4) “Repair rule premises” means—

(a) premises in the United Kingdom that are to be used, or have been used, for the repair or restoration referred to in subsection (3)(b) or (c), or

(b) other commercial premises in the United Kingdom used by the restorer for the storage of property in advance of, or following, repair or restoration of property by the restorer.

(5) “Restorer” means the person who is to carry out, or has carried out, the repair or restoration referred to in subsection (3)(b) or (c).

(6) Property meets the repair conditions, or the public access rule, during the whole of a period, or the whole of part of a period, if the property meets those conditions or that rule—

(a) on the whole of, or on part of, the first day of that period or part period,

(b) on the whole of, or on part of, the last day of that period or part period, and

(c) on the whole of each other day of that period or part period.

(7) “The relevant period” has the same meaning as in section 809V.

809W Temporary importation rule

(1) Property meets the temporary importation rule if the total number of countable days is 275 or fewer.

(2) A “countable day” is a day on which, or on part of which, the property is in the United Kingdom by virtue of being brought to, or received or used in, the United Kingdom in circumstances in which section 809K(2)(a) applies (whether the current case, or a past case, when the property was so brought, received or used).

(3) A day is not a countable day if, on that day or any part of that day—

(a) the property meets the personal use rule,

(b) the property meets the repair rule, or

(c) the notional remitted amount in relation to the property is less than £1,000.

(4) A day on which, or on part of which, the property meets the public access rule (the “relevant day”) is not a countable day if any of conditions A to C is met.

(5) Condition A is that the property meets the public access rule during the whole of the period of importation in which the relevant day falls.

(6) Condition B is that—

(a) the property does not meet the public access rule during the whole of the period of importation in which the relevant day falls, and

(b) that period of importation—

(i) begins with a period of no public access, and

(ii) ends with a period of public access which immediately follows that period of no public access.

(7) Condition C is that—

(a) the property does not meet the public access rule during the whole of the period of importation in which the relevant day falls, and

(b) during the parts, or each of the parts of the period of importation during which the property does not meet the public access rule it meets the repair conditions.

(8) Section 809VC(6) applies for the purposes of this section.

(9) “Period of importation” means a period that—

(a) begins when property is brought to, or received or used in, the United Kingdom in circumstances in which section 809K(2)(a) applies, and

(b) ends when the property ceases to be in the United Kingdom after having been so brought, received or used.

(10) “Period of no public access” means a period which is not a period of public access and “period of public access” means a period during the whole of which property meets the public access rule.

809X Notional remitted amount’.

No. 490, in schedule 7, page 167, line 28, at end insert—

‘( ) In subsection (2) “money” includes—

(a) a traveller’s cheque,

(b) a promissory note,

(c) a bill of exchange, and

(d) any other—

(i) instrument that is evidence of a debt, or

(ii) voucher, stamp or similar token or document which is capable of being exchanged for money, goods or services.’.—[Jane Kennedy.]

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

I beg to move amendment No. 316, in schedule 7, page 168, line 10, leave out from ‘is’ to end of line and insert

‘such of the individual’s specific employment income for that year as is’.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

With this it will be convenient to discuss Government amendments Nos. 317 to 328, 331, 329, 330, 332 to 334, 271 to 274, and 335 to 338.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

I believe the amendments will be widely welcomed. I will wait to hear if there are any specific questions arising from any elements of them. Again, they have arisen following our consultations, particularly in relation to employers and employee share schemes, share incentive plans and save-as-you-earn schemes.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I, too, understand that the amendments will be widely welcomed by those involved in the area. It would appear that the Government, in a spirit of generosity, thought that as they were intending to tax non-ordinarily resident employees more, they should also give them the benefit of exemptions. An act of kindness and gratitude has apparently led to all sorts of potential compliance problems for employee share schemes, which the Government have tried to address in the amendments, although the response I had from one of the interested groups was:

“The Revenue listened to companies and advisers and so what has come about is a return to the status quo ante...it is not simply enough to rip up the original amendments.”

That is a wise comment on the difficulty of changing these things. However, the Government amendments have not addressed the concerns brought to light only relatively recently by the Quoted Companies Alliance, one of many organisations—as I found out during a debate on capital gains tax—with a particular interest in employee share schemes.

I want to raise two points with the Minister to flag up the alliance’s concerns. The first problem that it identified is that the principle should be that a relevant person should not be taxed until a remittance is offered, in so far as share scheme income is concerned. HMRC is saying that if a person, who could otherwise claim the remittance basis for share scheme gains, receives income in UK shares, that income will be remitted to the UK  automatically, and so be taxable in full. The alliance believes that that is wrong on two counts.

First, the legislation can be interpreted that way in any event, as it requires the shares to be used or enjoyed in the UK and, in many cases, the shares will be transferred to the employee outside the UK only because most companies use employee trusts, which are based outside the UK for a variety of reasons—not just tax. Secondly, there is a policy issue. The stance is potentially extremely disadvantageous to UK-listed companies, whether they are operating in London or elsewhere. It means that if they are employing non-doms or non-ordinarily resident employees, all of their share scheme gains will be taxed in full, whereas, if their employee were working for, say, a US or German-listed banking group, the non-UK employment gain would not be taxed unless it is remitted to the UK, which is the broad policy intention.

It instinctively makes the UK-listed banking group a less attractive employer for such a person, as that group can pay out bonuses and share awards only in fully taxable form. Companies are being encouraged to pay out more bonuses as shares, to align the interests of the employees with those of the company as a whole. It cannot be right to discriminate against UK companies in that way, given that they need to attract talent to work in London. It goes back to the point about competitiveness. The way that the changes are drafted appear to put non-doms working for a UK banking group at a disadvantage compared with those working for a foreign banking group.

The second problem identified by the alliance is that HMRC is saying that there will automatically be a charge up front when employment income is received by non-dom employees, even if that income is not remitted. That goes against the principle that there should be such taxation of foreign income only as and when it is remitted. It could also lead to large amounts of NICs being payable, even though the non-dom or the non-ordinarily resident employee has only a very small amount of UK tax to pay. That could create an extra expense for companies, which has not existed previously, and it may lead to NICs being paid for an employee with little or no UK connection, and so with no benefit to that employee. The representation that I have received suggests that the alliance’s earlier understanding was that additional automatic up-front NIC payments did not apply, but since it has discussed the matter with HMRC it appears that those payments could arise.

Will the Minister take up those points? I have chosen to raise them on this grouping, rather then in a clause stand part debate, since we are dealing with the issue of employee share schemes.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury 3:00 pm, 19th June 2008

The hon. Member for Fareham asked whether it is fair to treat an automatic remittance for UK assets in this way. The remittance basis specifically treats cases differently depending on whether the employee is resident, ordinarily resident or domiciled in the UK, whether the employer is UK-based and whether the assets in question are used in the UK. Those distinctions exist in all contexts, not just in the context of employment-related securities. If the share is in the UK, taxing it as a remittance is in accordance with the overriding principle that income and assets enjoyed in the UK should be taxed as remittances. I do not see a case for making a special distinction for UK employment-related securities,  although I would like to read the hon. Gentleman’s comments and the representations he has received in detail when they are published in Hansard.

There are a number of instances where national insurance contributions and PAYE treatment differ so that a mismatch already exists. Although there is a broad policy to align national insurance contributions and PAYE whenever possible, there are necessary limits and alignment is not always practical or desirable. For example, where an employee meets the employer’s secondary NICs liability on payments by way of securities, the amount liable for class 1 NICs differs from the amount accountable for PAYE.

Government amendments Nos. 271 to 274 respond directly to representations from employers by ensuring that they are not obliged to offer the schemes to employees who are resident but not ordinarily resident. I anticipate that they will be welcome. Government amendments Nos. 316 to 338 ensure that the provisions of the schedule work as intended with relation to employment-related securities, including for awards of shares and share options.

Photo of Greg Hands Greg Hands Conservative, Hammersmith and Fulham

This is a simple question relating to the regulations on share options or securities options. The phraseology of Government amendment No. 323 seems a little odd. It states:

“The assignment or release of the relevant securities option,”

Does that include the exercise of the option?

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

Yes. I appreciate the points that have been raised in this short debate. I will look at the points raised by the hon. Member for Fareham when I have time to read them in Hansard, and give them detailed consideration to see whether there is any further merit in them.

Amendment agreed to.

Amendments made: No. 317, in page 168, leave out lines 13 to 16.

No. 357, in page 168, line 21, at end insert—

‘(8) “The Commissioners” means the Commissioners for Her Majesty’s Revenue and Customs.”’.

No. 318, in page 170, line 31, leave out sub-paragraph (3).

No. 319, in page 171, line 40, at end insert—

‘(2A) The reference in subsection (2) to an amount that counts as employment income under any of the provisions mentioned there does not include an amount which counts as employment income by virtue of any provision of Chapter 3A or 3B of Part 7.’.

No. 320, in page 172, line 8, leave out ‘section 41C’ and insert ‘sections 41C to 41E’.

No. 321, in page 172, line 13, leave out ‘earnings are’ and insert ‘foreign securities income is’.

No. 322, in page 172, line 16, leave out from beginning to ‘treat’ in line 25.

No. 323, in page 172, line 26, at end insert—

‘(7A) But where—

(a) the chargeable event is the disposal of the relevant securities or the assignment or release of the relevant securities option, and

(b) the individual receives consideration for the disposal, assignment or release of an amount equal to or exceeding the market value of the relevant securities or securities option,

for the purposes of those sections treat the consideration (and not the relevant securities or securities option) as deriving from the foreign securities income.’.

No. 324, in page 173, line 2, leave out ‘an employment-related’ and insert ‘a’.

No. 325, in page 173, line 6, leave out from ‘with’ to end of line.

No. 326, in page 173, line 8, leave out from ‘otherwise,’ to end of line 10 and insert ‘the relevant period is—

(i) the tax year in which the notional loan (within the meaning of Chapter 3C) is treated as made, or

(ii) if the chargeable event occurs in that year, the period beginning at the beginning of that year and ending with the day of that event.’.

No. 327, in page 173, line 16, leave out ‘such period as is just and reasonable’ and insert

‘the tax year in which the chargeable event occurs’.

No. 328, in page 173, leave out line 25 and insert

‘For the purposes of this section an option “vests”’.

No. 331, in page 174, line 21, at end insert—

‘(8) This section is subject to section 41E (foreign securities income: just and reasonable apportionment).’.

No. 329, in page 174, line 33, leave out ‘earnings’ and insert ‘employment income’.

No. 330, in page 174, line 35, leave out ‘those earnings that are’ and insert ‘that income that is’.

No. 332, in page 174, line 44, at end insert—

‘41E Foreign securities income: just and reasonable apportionment

(1) This section applies if the proportion of the securities income that would otherwise be regarded as “foreign” is not, having regard to all the circumstances, one that is just and reasonable.

(2) The amount of the securities income that is “foreign” is such amount as is just and reasonable (rather than the amount calculated in accordance with section 41C).’.

No. 333, in page 176, line 19, at end insert—

‘31A In section 446N (securities subject to restriction during relevant period), after subsection (6) insert—

“(7) If any of the employment income arising under section 426 by virtue of the chargeable event is foreign securities income within the meaning of section 41C, reduce the taxable amount mentioned in subsection (5) by the amount of the foreign securities income.

(8) If any of the employment income that would have arisen (if the non-commercial interests mentioned in subsection (6) had been disregarded) under section 426 by virtue of the chargeable event would have been foreign securities income (within that meaning), reduce the taxable amount mentioned in subsection (6) by the amount of the foreign securities income.”’.

No. 334, in page 176, line 31, at end insert—

‘34A In section 698 (PAYE: special charges on employment-related securities), after subsection (7) insert—

“(8) This section is subject to section 700A (employment-related securities etc: remittance basis).”

34B In section 700 (PAYE: gains from securities options), after subsection (6) insert—

“(7) This section is subject to section 700A (employment-related securities etc: remittance basis).”

34C After that section insert—

“700A Employment-related securities etc: remittance basis

(1) This section applies if—

(a) section 698 or 700 applies, and

(b) part or all of the amount that counts as employment income is foreign securities income or is likely to be foreign securities income.

(2) The amount of the payment treated under section 696 as made is limited to—

(a) the amount that, on the basis of the best estimate that can reasonably be made, is likely to count as employment income, minus

(b) the amount that, on the basis of such an estimate, is likely to be foreign securities income.

(3) References in this section to “foreign securities income” are to income that is foreign securities income for the purposes of section 41A.”’.

No. 271, in page 176, line 40, leave out ‘8(2)’ and insert ‘8’.

No. 272, in page 176, line 41, leave out from ‘plan),’ to end of line 42 and insert ‘for sub-paragraph (2) substitute—

“(2) An employee is a UK resident taxpayer if—

(a) the employee’s earnings from the employment by reference to which the employee meets the employment requirement are (or would be if there were any) general earnings to which section 15 applies (earnings for year when employee UK resident), and

(b) those general earnings are (or would be if there were any) earnings for a tax year in which the employee is ordinarily resident in the United Kingdom.”’.

No. 273, in page 176, line 43, leave out ‘6(2)(c)’ and insert ‘6(2)’.

No. 274, in page 176, line 44, leave out from ‘scheme),’ to end of line 45 and insert ‘for paragraph (c) substitute—

“(c) E’s earnings from the office or employment within paragraph (a) are (or would be if there were any) general earnings to which section 15 applies (earnings for year when employee UK resident),

(ca) those general earnings are (or would be if there were any) earnings for a tax year in which E is ordinarily resident in the United Kingdom, and”.’.—[Jane Kennedy.]

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I beg to move amendment No. 381, in page 178, line 2, at end insert

‘where the source ceased after 5 April 2007’.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

With this it will be convenient to discuss amendment No. 382, in page 178, leave out lines 40 to 45 and insert—

‘(1) Deductions are allowed from the income mentioned in section 832(2) where—

(a) the income is from a trade, profession or vocation carried on outside the United Kingdom; and

(b) the income is overseas property income.

(2) In the case of section 832B(1)(a) the same deductions are allowed as are allowed under the Income Taxes Acts where the trade, profession or vocation is carried out in the United Kingdom.

(3) In the case of section 832B(1)(b) the same deductions are allowed as are allowed under the Income Taxes Acts where the property business is carried on overseas and taxed on the arising basis.”’.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The first amendment deals with a particular area of tax planning that the rules on remittance facilitate. It is a concept called source ceasing, which is an interesting way in which people can tackle their tax affairs. For people who remitted to the UK an amount of income for which the source did not exist in the year in which it was remitted, it was untaxed. That enabled people to do all sorts of tax planning. The fact that this sort of thing was possible was in itself a revelation and an education. I do not think that there is any great dispute with the Government’s changes in the Bill. I get no sense from talking to representative bodies and others that there is any great outcry about the closure of that loophole, at least not in principle.

However—this is where my amendment comes into play—there is concern about the practical problems arising from the fact that HMRC has long recognised and accepted the source ceasing provision. It has, I understand, been widely used and it is a perfectly legal process. The problem that the change will potentially give rise to is one of identification. As drafted, any sum that is income would be taxed as income in the year in which it was remitted. The argument is that it would be difficult if not impossible correctly and accurately to identify these sums as they might have been treated as capitalised, assimilated into other funds or reinvested into other assets. How will it be possible for a taxpayer to link up any incomes remitted to sources that may have ceased in previous years? What happened when those sources ceased; where has the money gone? All of those identification and record-keeping issues will be raised.

The problem is particularly exacerbated by the fact there was no requirement at the time to keep records of those transactions and it might not be possible for many taxpayers to comply with the provision and complete correctly the self-assessment form. The Minister has said on a number of occasions that it is a self-assessment process. We want taxpayers to be able to do the best that they can in completing that form. However, it may be that through no fault of their own, given that this is a long-established HMRC approach to tax planning, they do not have adequate records to enable their compliance. That is why my amendment would delimit that situation by stating that the provision applies only where the source ceased after 5 April 2007. The Minister might come back and suggest that there are other alternative points at which that delimitation might come into effect, but I propose 5 April 2007. It would be easier for taxpayers to comply and for the self-assessment process to work correctly. I would be interested in the Minister’s comments on how we might make this practice work, given that it has been acceptable and legal to do it for some time in the past. That is amendment No. 381, which is a straightforward issue.

I turn to amendment No. 382. The position prior to 6 April 2008 was that deductions were not generally allowed from a relevant foreign income charter tax on the remittance basis. One exception to that rule was where the income in question was from a trade profession or vocation carried out outside the UK. The restriction and the exemption are in section 832(4) of the Income Tax (Trading and Other Income) Act 2005. This provision is being carried forward into new section 832B in the Bill. It would appear illogical and unfair that deductions  are not allowed from overseas property income for legitimate expenses that would have been allowed if the taxpayer were taxed on an arising basis. Again, it is not appropriate that an unrepresented taxpayer is expected to realise that he will be taxed on income received without the benefit for deductions. It does not seem fair that this should be so.

Let me give the Committee an example. Mr. X is UK resident and domiciled in Switzerland. He has a cottage in France which in the year to 5 April 2009 he rents out at €600 a month. He does not have a French bank account and the income is paid straight to his UK bank account. When legitimate income deductions are taken into account such as for the interest on the loan to purchase the property and agents fees, he would have a taxable profit of €3,600 if taxed on an arising basis. However, it is not in his interest to be taxed on an arising basis as he has significant Swiss investment income and trust income that he does not remit. Accordingly, he makes a remittance claim. The consequence of that is not that he would be taxed on the taxable profit of €3,600, but on the €7,200, which is the rental value, not taking into account any deductions.

It appears from the frequently asked question on the HMRC website that the Government agree that the position is as I have set it out. Can the Minister clarify this? We think that amendment No. 382 will make the necessary clarification to this Bill to allow that interest and any expenses to be offset against the rental income.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury 3:15 pm, 19th June 2008

If people choose to bring income from a ceased source, which is not a phrase that trips easily of the tongue, into the UK after 5 April 2008, they should pay tax on that untaxed income. The amendment would allow that any account closed before 5 April 2007 could still be remitted tax free at any time in the future. I appreciate that in some cases people may no longer have all the records to make a full and complete return. In such cases the individual will need to complete their tax return to the best of their ability and to explain their problem in the white space that is available on the tax return for that purpose. If HMRC inquires into the return—[Interruption.] Well, the hon. Gentleman asked what they would have to do. The individual and HMRC will need to work together to establish the correct figure, based on the facts which the individual is declaring.

I am confident that such problems can be dealt with pragmatically by HMRC and if problems arise in practice I am sure that they will be brought to my attention. Amendment No. 382 seeks to clarify that certain deductions are allowed in arriving at the tax amount of a remittance. The hon. Gentleman uses the example of rental income. I can assure the Committee that the current legislation already delivers what his amendment seeks to achieve. For the sake of clarity, I should point out that a deduction for expenses paid, such as interest on let property, is already given in arriving at the amount treated as remitted to the UK. It has been clarified in HMRC guidance. I am assured by my advisers that there is no need for an amendment along the lines that the hon. Gentleman has described. I know that it was a probing amendment, but I hope I have addressed the concern that he raised.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

In the example I outlined, the gross amount was remitted—the rent, because it was received into the UK and not held in a French bank account. I  suspect that the interest payments on that mortgage would have been paid out of the same UK bank account. I think that the Financial Secretary is saying that the net will be the remittance, rather than the gross, so I would be grateful for that clarification.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

My hon. Friend the Member for Telford assures me that the hon. Gentleman is right and I have no reason to doubt him. I believe that the hon. Gentleman’s description of the problem and its treatment is accurate. When I read Hansard, if I believe that something needs further clarification, I will be happy to provide it.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

With regard to amendment No. 382, I am grateful for the clarification that the hon. Member for Telford gave. His talents are wasted sitting behind the Minister. He could be either an official or a Minister, and I think I know which he would prefer—perhaps that recommendation from the Opposition Front Bench has ended his chances of ministerial office. I am grateful for that clarification, which tackles a particular concern.

I am less comfortable with the clarification that the Minister gave on source ceasing. I think we will be in difficult territory on a range of issues that we have discussed. There will have to be discussions between HMRC and the taxpayer in those situations, and I am anxious about where the balance will sit in those discussions. I would feel instinctively more comfortable with a hard and fast date than I would with having to fill out white space on a tax form—I am not sure what the on-line equivalent of the white space is, but I am sure there is one. I would rather have a delimitation on time than the Minister’s reassurance.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

I hesitate to prolong the discussion, but cannot see how shifting the date by a year would remove that requirement in cases where an individual does not have the records to indicate that on a return.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

The taxpayer will be dependent on a discussion with HMRC on whether it is comfortable with the explanation that is given on their return, and I think that it is reasonable to expect a taxpayer to have kept records that date back a year and from the previous tax year. It would be unreasonable to expect a taxpayer to have kept records from 10 years ago, but there is a continuum between 10 and one and I chose one year as a way of probing to get an explanation. The further back we allow that to go, the greater the uncertainty and risk that the taxpayer will have insufficient records to reassure HMRC that they are being open and transparent about source ceasing, and that is where the problem arises in having a cut-off point. It is more reasonable to expect taxpayers to have records relating to more recent transactions than records relating to historical ones, but it would be better to have that in the Bill, rather than leave it as an area for negotiation between HMRC and the taxpayer.

We are keen to see some certainty in a number of those areas, and I think that source ceasing would be a good area in which to see some of that certainty. Perhaps I have persuaded the Financial Secretary to  come back on Report with an amendment to put that limitation in. However, having had the explanation from her, I beg to ask leave to withdrawn the amendment.

Amendment, by leave, withdrawn.

Amendments made: No. 348, in schedule 7, page 180, line 25, at end insert—

‘(3A) Sections 42 and 43 of the Management Act (procedure and time limit for making claims), except section 42(1A) of that Act, apply in relation to an election under this section as they apply in relation to a claim for relief.’.

No. 335, in schedule 7, page 182, line 40, at end insert—

‘58A In section 119A (increase in expenditure by reference to tax charged in relation to employment-related securities), after subsection (5) insert—

“(5A) See also section 119B (unremitted foreign securities income).”

58B After that section insert—

“119B Section 119A: unremitted foreign securities income

(1) For the purposes of section 119A reduce the amount that counts as employment income by so much of that amount (if any) as is unremitted foreign securities income.

(2) In this section “unremitted foreign securities income” means income that—

(a) is foreign securities income for the purposes of section 41A of ITEPA 2003 (employment income from ERS charged on remittance basis), and

(b) has not been remitted to the United Kingdom by the end of the tax year in which the disposal mentioned in section 119A(1) occurs.

(3) The following provisions apply if any of the unremitted foreign securities income is remitted to the United Kingdom after the end of the tax year referred to in subsection (2)(b).

(4) The person liable for the capital gains tax on any chargeable gains arising on the disposal may make a claim for section 119A(2) to have effect as if the remitted income had been remitted before the end of that tax year.

(5) All adjustments (by way of repayment of tax, assessment or otherwise) are to be made which are necessary to give effect to a claim under subsection (4).

(6) Those adjustments may be made at any time, despite anything to the contrary in any enactment relating to capital gains tax.”’.

No. 349, in schedule 7, page 184, line 6, leave out paragraph 70.

No. 350, in schedule 7, page 184, line 20, leave out paragraph 73.

No. 336, in schedule 7, page 184, line 35, leave out ‘and 32’ and insert ‘to 32, 34C and 58B’.

No. 337, in schedule 7, page 184, line 37, at end insert

‘(except employment-related securities acquired pursuant to a securities option acquired before 6 April 2008).’.

No. 491, in schedule 7, page 186, line 25, at end insert—

‘(6) In this paragraph “property” does not include money.

(7) “Money” has the same meaning as in section 809U of ITA 2007.’.—[Jane Kennedy.]

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I beg to move amendment No. 383, in schedule 7, page 187, leave out lines 1 to 9 and insert ‘, and

(b) before 6 April 2008 the money was received in the United Kingdom.’.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

With this it will be convenient to discuss the following amendments: No. 386, in schedule 7, page 187, leave out lines 1 to 3 and insert—

‘(b) the loan was made for the purpose of enabling the individual to—

(i) acquire an interest in residential property in the United Kingdom,

(ii) carry out a remortgaging exercise with respect to residential property in the United Kingdom, or

(iii) furnish, decorate, repair or enhance a residential property in the United Kingdom, and’.

No. 387, in schedule 7, page 187, line 6, leave out from ‘money’ to ‘and’ in line 7 and insert

‘for any of the purposes referred to in subsection (1)(b),’.

No. 384, in schedule 7, page 187, line 10, leave out ‘Relevant foreign income’ and insert ‘Foreign income gains’.

No. 388, in schedule 7, page 187, line 10, leave out ‘Relevant foreign income’ and insert ‘Foreign income and gains’.

No. 385, in schedule 7, page 187, leave out lines 13 to 21.

No. 389, in schedule 7, page 187, leave out lines 13 to 19.

Government amendments Nos. 492 and 493.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I thought that I should give the Committee a break from the 10th group of amendments on schedule 7, and so did not seek any explanations from the Financial Secretary on amendment No. 491. Doubtless I will find out later today that there is something in that group that we should have asked about, but we can tackle any such issues on Report if necessary.

This is the 11th and penultimate group of amendments on the schedule. Group 12 is lurking. This group goes back to the issue of foreign property. Just to clarify for the Financial Secretary, I have tabled two sets of amendments in this group to tackle the same issue. Amendments Nos. 383 to 385 would provide an exemption for all property, meaning buildings rather than the wider definition of property. Amendments Nos. 386 to 389 apply simply to residential property.

I will give some background. Prior to 6 April 2008, someone repaying a capital element of an offshore-linked debt out of foreign income or gains constituted a remittance. For that purpose, UK-linked debt meant

“a debt for money lent to the person in the United Kingdom, or for interest on money so lent” or

“a debt for money lent to the person outside the United Kingdom and received in the United Kingdom”.

It could also be to repay a debt lent initially to the individual in the UK or subsequently received in the UK. If the funds were brought to the UK after the loan was paid off, that would also constitute a remittance.

The settlement offshore from foreign income or foreign gains of the interest as it fell due did not, however, constitute a remittance, as I understand the existing legislation. However, the Government have made it clear that, from 6 April 2008, the Finance Bill is to extend the debt provision. As well as catching the  repayment of UK-linked debt, the payment offshore of the interest on a UK-linked debt will constitute a remittance. That was not the case prior to 6 April 2008.

The Government have recognised some issues around that and introduced limited transitional provisions. To fall within the scope of those provisions, the loan must be a qualifying loan—the funds were lent prior to 12 March 2008, the date of the Budget—and must have been made for the sole purpose of enabling the individual to acquire an interest in UK residential property. Also, before 6 April 2008, loan funds must have been received in the UK, applied to acquire an interest in UK residential property and the loan itself secured on that property. Interest on the offshore loan must be paid offshore from relevant foreign income. That does not include funds representing the proceeds from offshore income gains.

Provided that all those conditions are met, the payment of loan interest would not constitute a remittance. Unless entitlement to the relief is forfeited, the transitional period will last until the repayment of the loan, or 5 April 2008 if earlier. Paragraph 86(3) provides that all entitlement to relief would be lost should the following occur after 11 March 2008: any term upon which the loan was made is varied or waived; the debt ceases to be secured on the residential property; or any other debt is secured on the residential property. The last point, which corresponds to paragraph 86(3)(c), goes further than the Budget day material, in that taking out an entirely new loan would mean that the entitlement to transitional provisions was forfeited. There appears to have been a tightening up from the Budget day proposals to the Bill proposals.

The problem identified is that non-doms could have taken out offshore-linked loans with the legitimate expectation that they could service the interest costs from foreign income and gains without that constituting a remittance. Given that, the transitional provisions appear to be very restrictive. For example, if any term of the loan is varied, the benefit of the transitional provisions will be lost and the interest payment will be treated as a remittance. We are not sure why the transitional provisions do not allow relief for interest paid overseas from foreign earnings on capital gains, where those could have been used under the old rules to pay interest on offshore mortgages secured on UK property, without that resulting in a remittance.

Although we understand that a special economic case can be made for allowing relief with respect to residential properties, that seems harsh on individuals who took out loans, say, to fund a UK business, as they may have borrowed more than they could normally afford, because they were going to be able to pay that interest from untaxed foreign income or gains. Even considering residential property, the subject of four out of the seven amendments in the group, the provisions appear unduly narrow, as they deny relief where there has been a remortgaging exercise, or part of the loan funds have been used to repair, renovate, decorate or furnish the property.

It has been further suggested that there is a problem with paragraph 86(1)(c)(iii), which specifies that there will only be relief where the debt is secured on the UK property. That is very restrictive, as in practice many offshore lenders prefer to have security over assets under management with them. Nevertheless, the loan  can be demonstrated as being for the purpose of purchasing the interest in the land that was acquired. Therefore, the provisions in paragraph 86(3) seem a little unnecessary and could result in foreign domiciliaries accidentally breaching the conditions to qualify for relief. Again, that goes back to a problem that we have highlighted previously. It seems unfair to tax those who perhaps do not have the access to special advice and could inadvertently be caught out by the provisions. It is the unrepresented taxpayers who could be the losers. It is particularly harsh because the restriction was not announced on Budget day.

In summary, my amendments Nos. 383 to 385 create much more flexibility for all property, but amendments Nos. 386 to 389 create flexibility only in respect of residential property.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury 3:30 pm, 19th June 2008

Amendment No. 493 is our response to calls for the provisions in the Bill to be extended so that relief is available for remortgages. As paragraph 86 stands, loans only qualify for exemption if they are made to acquire an interest in residential property in the UK. There would be no relief if the individual had switched the original mortgage—perhaps because they had found a better deal—because the replacement loan would not serve to acquire the interest in the property. Perhaps that is less of an occurrence in the current climate than had been the case.

I accept that some relaxation was needed and therefore amendment No. 493 extends the grandfathering so that remortgages can qualify so long as the remortgage took place prior to 12 March 2008. Amendment No. 492 is a relatively minor technical change.

The hon. Gentleman proposes very extensive changes—certainly in his first group of amendments Nos. 383 to 385—to grandfathering for mortgages. They would remove many of the restrictions on relief that currently apply. For example, they mean that relief would cover all manner of loans not just those for acquiring residential property. They would apply not just to relevant foreign income but to foreign employment income and gains where a payment of this sort has always been taxable as a remittance under existing law.

His proposed changes go too far. I suspect that the reason he has tabled two different groups is to elicit why we have chosen the structure we have, and why we have gone some way but not to such a generous extent as he proposes. The relief under paragraph 86 is none the less generous and the extension we are making to cover remortgaging under amendment No. 493 does strike a fair balance. Extending the grandfathering to all loans would effectively reinstate the loophole under which remittance basis users could enjoy tax-free loans which are not available to other UK taxpayers. While it is reasonable to grandfather mortgages rather than cast uncertainty over people’s housing arrangements, it is not reasonable to extend such relief to all loans.

The hon. Gentleman asked why relief is not allowed for interest paid overseas from foreign earnings and capital gains which could both be used to pay interest previously without resulting in a remittance. Payments out of employment income and capital gains have always been treated as remittance, so giving relief would be untaxing things which we have always taxed in practice.

His second group of amendments appears to be an alternative and rather more modest in scope. Unlike the others, these amendments would not seek to cover all manner of loans but would provide relief for remortgaging and home improvement loans. The first of those is now covered by our amendment No. 493 and, in view of my comments about paragraph 86 being generous, I do not consider that it would be right to cover loans for home improvement.

Having said that, my officials are currently in discussion with a number of banks about the status of certain offshore loans and mortgages and whether those, too, should be covered by the grandfathering rules. I hope to be able to provide an update to the House on Report. This is an area where we are continuing dialogue and I will be interested to hear the outcome of those detailed discussions.

I hope that I have given the hon. Gentleman some of the answers that he seeks. I ask the Committee to support my amendments and hope that the hon. Gentleman will withdraw his.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

This is a difficult area. The fact that the Financial Secretary’s officials are having a conversation with banks at the moment indicates that we need to get this right. The transitional provisions extend as far as March 2028 and indicate the complexity and long-standing nature of some of these arrangements. It is important to get them right. On occasion, we do not get the balance right—we try to close down appropriate tax loopholes, but at the same time the phrasing is so wide that it can inadvertently affect people. That goes back to my comment on the amendments about who would be caught out by this measure, and whether there is any risk of unrepresented tax payers falling foul of the arrangements.

I am grateful that the Financial Secretary is considering the matter again with the banks to try to get it right—she has addressed a number of issues in that spirit and tried to get a workable arrangement. One of the great assets of the scrutiny process in this House is that it provides the opportunity to get it right, either through the clarification that Ministers offer in such debates—and we have had a number of those clarifications already today—or through the opportunity to revisit issues up to and including Report. The Financial Secretary might throw those words back at me on Report if confronted by another 100 amendments on schedule 7, so I should be careful how fulsome I am when commenting on the effectiveness of the procedure. Given the Financial Secretary’s reassurance that the Government are talking to the banks and that there will be further opportunity to get the fine detail of the rules right, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: No. 492, in schedule 7, page 187, line 17, at end insert ‘or

(d) the interest ceases to be owned by the individual,’.

No. 493, in schedule 7, page 187, line 19, at end insert—

‘(3A) If—

(a) before 12 March 2008, money was lent to the individual outside the United Kingdom (“the subsequent loan”),

(b) the subsequent loan was made for the purpose of enabling the individual to repay—

(i) the loan mentioned in sub-paragraph (1), or

(ii) another loan in relation to which sub-paragraphs (2) and (3) apply (by virtue of this sub-paragraph),

and for no other purpose, and

(c) before 6 April 2008—

(i) the money was received in the United Kingdom,

(ii) the individual used the money to repay the loan referred to in paragraph (b)(i) or (ii), and

(iii) repayment of the subsequent loan was secured on the interest referred to in sub-paragraph (1)(c),

sub-paragraphs (2) and (3) apply in relation to the subsequent loan (and for this purpose references there to the debt or the loan are to be read as references to the subsequent loan).’.

No. 338, in schedule 7, page 187, line 21, at end insert—

‘86A (1) This paragraph applies in relation to employment-related securities if—

(a) the date of the acquisition is on or after 6 April 2008 and on or before 31 July 2008, and

(b) Chapter 2 of Part 7 of ITEPA 2003 (restricted securities) applies in relation to the securities by virtue only of amendments made by this Schedule.

(2) Section 431 of ITEPA 2003 (election for full or partial disapplication of Chapter) has effect in relation to the employment-related securities as if in subsection (5)(b) for “more than 14 days after the acquisition” there were substituted “after 14 August 2008”.’.—[Jane Kennedy.]

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

I beg to move amendment No. 402A, in schedule 7, page 187, line 31, at end insert—

‘(1A) In subsection (1), after paragraph (a) insert—

“(aa) any reference to anything accruing is to be read as a reference to it arising (and similar references are to be read accordingly);”.’.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

With this it will be convenient to discuss the following: Government amendments Nos. 403 to 411.

Amendment No. 390, in schedule 7, page 189, line 17, leave out from ‘12’ to end of line 18.

Amendment No. 494, in schedule 7, page 189, line 36, at end insert—

‘(5) In computing gains to which this section applies, those gains shall, if the company so elects, be calculated by reference to the value of the asset concerned at 6 April 2008.

(6) An election under subsection (5) is irrevocable and shall be made within two years of the end of the first accounting period ending after 5 April 2008.

(7) An election under subsection (5) shall be made in the way and form specified by the Commissioners for Her Majesty’s Revenue and Customs.’.

Amendment No. 391, in schedule 7, page 189, line 36, at end insert—

‘93A (1) The following provisions apply to a company if—

(a) section 13 of TCGA 1992 applies to the company for the tax year 2008-09, and

(b) the directors of the company have not opted out from the provisions within this paragraph.

(2) An election to opt out from the provisions within this paragraph may only be made on or before the anniversary of the first 31 January to occur after the end of the first tax year (beginning with the tax year 2008-09) in which chargeable gains are attributed under section 13 of TCGA 1992 to a participant in the offshore company.

(3) An election under sub-paragraph (2) is irrevocable and must be made in the way and form specified by the Commissioners for Her Majesty’s Revenue and Customs.

(4) The only information that need be provided in the course of making the election is the name of the offshore company and the name of the director making the election.

(5) Sub-paragraph (7) applies if—

(a) chargeable gains are treated under section 13 of TCGA 1992 as accruing to an individual in a tax year, and

(b) the individual is resident, but not domiciled, in the United Kingdom in that year.

(6) The individual is not charged to capital gains tax on so much of the aggregate chargeable gains attributed to him in the tax year as exceeds the relevant proportion of the gains.

(7) The relevant proportion is A/B where—

A is the portion of the gain that would what have been treated as accruing to the participator, if immediately before 6 April 2008 every relevant asset had been sold by the directors and immediately re-acquired by them at the market value at that time; and

B is the actual gain attributed to the individual.

(8) For the purposes of sub-paragraph (7) an asset is a “relevant asset” if—

(a) by reason of the asset, a chargeable gain or allowable loss accrues to the trustees in the relevant tax year, and

(b) the asset has been comprised in the company from the beginning of 6 April 2008 until the time of the event giving rise to the chargeable gain or allowable loss.’.

Government amendments Nos. 412 to 435.

Amendment No. 392, in schedule 7, page 196, line 28, leave out ‘made an election under this sub-paragraph’ and insert

‘have not opted out from the provisions within this paragraph’.

Amendment No. 393, in schedule 7, page 196, line 30, leave out ‘An election under sub-paragraph (1)’ and insert

‘An election to opt out from the provisions within this paragraph’.

Amendment No. 394, in schedule 7, page 196, line 30, after ‘the’, insert ‘anniversary of the’.

Government amendments Nos. 436 and 437.

Amendment No. 395, in schedule 7, page 196, line 40, leave out ‘(1)’ and insert ‘(2)’.

Amendment No. 396, in schedule 7, page 196, line 42, at end insert—

‘(4A) The only information that need be provided in the course of making the election is the name of the trust and the name of the trustee making the election.’.

Government amendment No. 438.

Amendment No. 397, in schedule 7, page 197, line 24, at end insert ‘and’.

Amendment No. 398, in schedule 7, page 197, line 27, leave out from ‘gains’ to end of line 34.

Government amendments Nos. 439 to 462.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

I almost say, “Hurrah”, Sir Nicholas. This is the final group of amendments and the vast majority of them are technical changes to ensure that the code on chargeable gains of non-resident trusts, and its interaction with the code for offshore income gains, works effectively. There are more substantive changes following our discussions with external stakeholders on  the draft Bill. I will not explore those further at this point, as I would benefit from hearing what concerns are raised in Committee before making more substantive comments.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Before I talk to amendments Nos. 390 to 398, I wish to make a couple of brief points about Government amendments Nos. 402A to 462. Matters are not quite as bad as they are presented on the order of consideration, but when we realise that the Government have tabled 60 amendments in the group under discussion, my own eight amendments pale into insignificance in respect of number, although perhaps not in points to discuss.

As for Government amendments Nos. 402A to 462, we may return to such matters on Report. External bodies consider that the volume of amendments tabled in Committee, although they would affect their understanding of matters from discussions with officials, show continuing thought. We do not know whether they would address the issues that they want dealt with, given that lurking in the amendments is the use of our old friend “just and reasonable”, which was dealt with an eternity ago. On new paragraph 108A under Government amendment No. 432, I do not know whether the intention is for HMRC to provide guidance about that or to discuss matters on a case-by-case basis, but it would be helpful to know if that is the route that the Government intend to take. It is also fair to say that some of the Government amendments address issues slightly more elegantly than do my amendments.

Amendments Nos. 390 and 391 deal with a matter that a number of people have raised with me, which almost pushes people to use more complex structures to manage their tax bills. I understand why people do that, but it would be better not to drive them down that route. I am talking about the treatment of capital gains tax. Offshore companies that do not have a United Kingdom branch or agency are not subject to United Kingdom capital gains tax. From the introduction of CGT, anti-avoidance provisions have been designed to prevent UK-domiciled, UK resident and ordinarily resident individuals from avoiding it by exploiting the fact that an offshore company is outside the territorial scope of CGT by holding its assets within offshore companies that they control.

Paragraph 93 to schedule 7 introduces new section 14A that extends the anti-avoidance provisions to UK residents or ordinarily resident non-doms. I wish to draw the Committee’s attention to a distinction and to present matters clearly. The current effect of the anti-avoidance provisions is such that they attribute gains arising to an offshore company that would be a closed company if it were resident in the UK—that is how companies are caught—to a UK resident or ordinarily resident person, or UK-domiciled qualifying participators who were chargeable to tax on the gain attributed in the year of attribution, and offshore trusts that meet the qualifying participator conditions.

The Finance Bill extends the provisions so that gains will be attributed to non-domiciled residents or ordinary residents. When the non-dom is a remittance basis user, they will be taxed on the gains attributed on the basis of UK gains subject to tax with respect to the tax year on  which the gains arise. Foreign gains on a remittance basis will apply such that they will suffer UK tax only if they are deemed to remit the gain attributed.

Part of the problem appears to be that the Finance Bill contains no transitional provisions, which means that the non-dom would be subject to tax on gains that relate to the period prior to 6 April 2008 and, as has been recognised by the Government, where trust structures are concerned, non-doms had a legitimate expectation that they would not be subject to UK capital gains tax with respect to gains and disposal of chargeable assets held within offshore structures. There are transitional arrangements in place for those non-doms who hold assets in trust structures, but there are no transitional provisions for offshore companies held directly by individuals in the same way as is provided for in the Finance Bill for assets held within trust structures immediately before 6 April 2008.

As I understand it, if in one situation a non-dom has a house in, say, Eaton square and that house is owned by a company, and in another, the non-dom has the house in Eaton square, a company and an off-shore trust on top of that, there are transition provisions for the offshore trust to rebase the capital gains, but there is not a mirroring provision for companies. That creates a bias in favour of complex trust structures rather than a more immediate way in which a company may own an asset.

Amendments Nos. 390 and 391 attempt to draw out that comparison. It was never expected that foreign domiciled individuals would receive a rebasing to 6 April 2008 in relation to their direct holdings and offshore companies, with respect to which they are qualifying participators, but it is hard to follow the logic of allowing a wholesale rebasing of assets within an offshore trust structure, including assets owned by an underlying company, when there are no comparable provisions to allow rebasing of assets owned by an offshore company.

My amendments seek to bring about two changes: first, the gains attributed to offshore companies should be taxed only if there is remittance to the UK and, secondly, to introduce a rebasing election that can be made by directors of offshore companies. The first group of amendments deals with the transitional provisions and what is available for companies as opposed to trusts. The second group comprises amendments Nos. 392 to 398. Amendment No. 494, which is also in that group, is an alternative way to address the issues that I have highlighted in amendments Nos. 390 and 391. It does have a broader impact as well, which relates back to amendments Nos. 392 and 398.

I have already mentioned the rebasing election that trustees can make. I have read the rules on rebasing—I lead a sad life, when I spend my afternoons doing things like that—and I am not going to go through them at this point for fairly obvious reasons. Trustees are able to elect for a settlement that is non-resident at 6 April 2008 to make what could be described as a rebasing election. The election is relevant only where the trust has beneficiaries who are non-doms and the election is irrevocable. It is an all-or-nothing provision, applying to every asset within the trust structure immediately before 6 April 2008.

The legislation states that the rebasing election

"must be made in the way and form specified by Her Majesty's Revenue and Customs". and I am sure that there will be a prescribed form on which to do that. I am sure that disclosures will be required, but I am not yet sure what they will be. The deadline for making the election is 31 January, following the end of the tax year in which the first of the following take place: capital payment is received or treated as received by a beneficiary regardless of their domicile of a settlement, and the beneficiary is a resident of the UK in the tax year in which it is received or; the trustees transfer part, but not all, of the trust property to a new settlement.

Again, this is a situation where well-advised taxpayers will receive the right advice. The concern is that not all taxpayers may benefit from rebasing elections if the trustees do not make the election in time. Prior to 6 April this year, offshore trustees did not necessarily need much knowledge of the UK tax system to act as trustees. So, my argument is that we should introduce into legislation a presumption that the election will be made. Broadly, people believe that the election is beneficial for the purposes of rebasing capital allowances. What we are seeking is, rather than having an election to opt for the rebasing, we have an election to opt out of the rebasing. It is probably in the best interests of taxpayers to start on the basis that they will be rebasing.

As I understand it, the Government thought that the arguments behind my amendments Nos. 397 and 398 were rather good, despite not having heard them. I understand that they tabled amendments Nos. 439, 440, 467 and 447 to address those issues.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield 3:45 pm, 19th June 2008

Order. I intend to suspend the sitting until 4.30 pm for a health break, a tea break and so that hon. Members can attend to any other matters.

Sitting suspended.

On resuming—

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

I hope that everyone feels a little better as a result of that break. I certainly do. I am right on top of things again, so watch out.

Photo of Greg Hands Greg Hands Conservative, Hammersmith and Fulham

I shall be brief, Sir Nicholas, but may I start by welcoming you to this extended sitting? I shall make a couple of general comments. I do not believe that there will be a stand part debate, but after our debate on the schedule I am struck by the number of Government amendments that were tabled. My hon. Friend the Member for Fareham counted 60, but I think it is only 59. We are embarking on something very dangerous. There is an almost unbelievable level of complexity involved in some of those amendments, particularly in amendments Nos. 402A, 404 and 406. I am worried about the possible effect, not only on the City of London, but on London as a whole.

My constituency contains the second highest proportion of residents born outside the UK. The highest is in Kensington and Chelsea. I am worried about the effect of the schedule, the Bill and these 59 or 60 Government amendments. One third of my constituents are foreign-born. It is not just a finance issue. I believe that skilled and  semi-skilled labourers will struggle with these new regulations, both in their complexity and their possible effect.

It still worries me that no real answers have been provided to the questions posed by the IFS last October about how much money is involved, how many non-domiciles there are, and the numbers who might emigrate as a result. From what we have seen this afternoon, if anything, the Government proposals are becoming ever more complicated. The situation in the UK economy and in the City of London economy is extremely delicate. I urge the Government in the remaining stages of this Bill to think carefully about the impact, not only of the 60 Government amendments, but of the whole set of regulations they are proposing, on my constituents and on the wider London economy.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

We have readjusted, in this modest group of amendments, the interaction between trusts and offshore income gains. I would be the first to admit that this is one of the most complex parts of a complex area of tax law that I have had a rapid lesson in learning. I would not pretend to be an expert. It is no surprise to me that this area of tax law generates its own industry in terms of advice. It is important not to confuse the complexity of the legislation with the way that it will apply to individual cases through the self-assessment system. Not to make the amendments that we are proposing would be a very great disadvantage to the UK. The amendments themselves have arisen from close and detailed discussions between HMRC, the Treasury and experts in this field of law. I take a great deal of comfort from the knowledge that they have done so.

The Bill, as drafted, changes the interaction between trusts and offshore income gains. Except in limited circumstances, it has the effect of denying the benefit of rebasing offshore income gains to the market value as at 6 Apri 2008. Our amendments restore the previous relationship between trusts and offshore income gains, so that rebasing on offshore income gains would be more widely accessible. It would be fair to concede that our proposals went much wider than we intended when the detail of the clauses become available, and when we received the response to them. I should add that the rules relating to offshore income gains will be translated into regulations next year, so there will be an opportunity for interested parties to make further representations on the rules over the next few months.

We have made a number of changes to the way in which the rebasing rules for trusts work. Those changes extend the application of rebasing to situations in which the trustee’s interest in a company have decreased since 6 April 2008, or in which an asset held at 6 April 2008 has been modified since then. Amendments No. 390, 391 and 494 seek to apply the same treatment to offshore companies as applies to offshore trusts. In developing our overall package of reforms, we have drawn a clear distinction between companies in which the shareholder or participator has a direct interest, and trusts, in which the beneficiary’s interest is indirect. Trusts are different from companies, and chargeable gains of non-resident trusts are taxed differently from companies. When a company is caught by the anti-avoidance measure that we are amending under schedule 7, the people who  control the company are treated as though a chargeable gain to the company was their own chargeable gain.

By contrast, the beneficiaries of a trust have an indirect interest in a trust. They do not have the control of a trust that the participators of a company have, and the way that the non-chargeable gains of a non-resident trust are attributed to a beneficiary reflects that fact. Instead of looking at individual chargeable gains, as we do with companies, we look at the aggregated gains of the trust. Those are very real differences in approach between companies and trusts, and they mean that we cannot assume that what works for a trust will also work for a company or that they are in any way equivalent.

It is not the case that the proposals that we are making would, as the hon. Member for Fareham put it, “push people into more complex structures”. The rebasing rule relates to trusts that existed before April. There is no scope for benefiting from rebasing by setting up a trust now.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I accept the Minister’s comment. The arrangement relates to transitional provisions, but the message that it sends out is that if there are complex tax structures, there is an incentive to use those structures—not necessarily in relation to the particular area that we are looking at today, but more generally. Rather than a simpler, more straightforward means of holding the house in Eaton square, or wherever it happens to be, people go down the route of that more complex structure, because there seems to be this arbitrage opportunity between a company and a trust.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

I have no reason to believe that the hon. Gentleman’s view is well founded. I have said this before, but I want to keep this area under review. I am sure that he will appreciate that the amendments have grown out of concern about the rebasing issue. If trustees elect for rebasing, they have to disclose detailed information about trust assets. It was made very clear to us during our consultation that some trustees did not want to disclose anything more about the assets that they held than they needed to. That can be achieved only by making rebasing optional. I hope that that resolves the problem that we he was probing in his amendments.

Our amendments deliver the commitment not to introduce new disclosure requirements. The practical effect of amendment No. 390 would be to exclude entirely the non-resident company’s gains from tax, where a non-domiciled individual was using a remittance basis. That would be unfair to non-domiciled individuals who use the arising basis, and non-domiciled individuals who own an asset directly, rather than through a non-resident company. Amendments Nos. 391 and 494 seek to apply rebasing to non-resident companies, the effect of which would be to offer individuals who own their own investments through offshore companies the tax re-uplift on their investments, without any clear rationale. The three amendments run counter to the overall thrust of the reform, although I appreciate that they may have been tabled to promote discussion.

Amendments Nos. 392 to 394 and amendment No. 396 would together result in rebasing being mandatory. I dealt with that issue in my comments on the representations we received on maintaining the option not to disclose, as it was feared our original proposals required. Under  the hon. Gentleman’s proposals, there would be an opt-out for trustees, with a longer deadline than we have specified and a limit on the amount of information that HMRC could require. The amendments are misconceived. They would not protect trustees from having to disclose information on offshore assets. Whatever form election for rebasing takes, trustees who use rebasing still need to disclose to HMRC additional information about assets disposed of, to compute the gains that will be left untaxed. Not all trustees will wish to make that level of disclosure or to engage in the additional evaluation work involved in rebasing, so the rebasing rules should be voluntary rather than imposed, albeit with an opt-out. Amendment No. 394 extends the deadline. The deadline already provides trustees with 19 months from now to make the decision, and I see no reason to extend it as proposed.

Finally, amendments Nos. 397 and 398 seek to change a provision of the trust rules that was brought up by many interested parties in discussions, namely the restriction on rebasing where the trustee’s interest in a company has decreased between 6 April 2008 and the date of disposal of the asset by the company. Our amendments Nos. 439, 440, 446 and 447 respond to calls for change in that area. Our approach is different from that proposed by the hon. Gentleman, but it delivers the same effect, with the advantage of guarding against avoidance and applying to property transferred between settlements. He suggested that our amendments were more elegant than his. Our amendments are not always described as elegant, so it is good to hear it on this occasion.

This is a complex area, and there is an argument that it is worthy of detailed debate. Our brief debate has helped to clarify some of the concerns out there. In my opening comments, I could not bring myself to alert the Committee to the fact that there were 61 Government amendments in this group. I skirted over it then, so I say it now, and shall quickly sit down.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I am grateful to the Financial Secretary for tabling 61 amendments.

I will focus on the election for rebasing. I wonder whether the issue is the right way round. Rightly, after publishing the draft legislation that gave rise to the concern about disclosure by trusts, the Government listened to that concern and responded to it. We seem to have produced a set of rules that benefited those who are particularly knowledgeable about how trusts will function. They are the very people who would be in a position to make the right decision about opting out of rebasing, if we went down the route that I proposed of automatic rebasing with the option to withdraw. I may have got the disclosure wrong in my amendments, but the Government seem to have gone a long way towards satisfying those who are very aware of the consequences and who want to manage their clients’ affairs in a particular way, without thinking about those people who are not so well advised and may not have access to trustees who are aware of the detail of UK law, so they might not recognise the importance of the rebasing election.

In tackling one issue, we have created another that affects those who are not as well advised or well represented as those who made the initial representation. My only  concern is that we have got the balance slightly wrong. I liked the Minister’s description of this “short” debate.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I thought the Minister meant the debate that has been going on since 9 o’clock this morning. One of the things I have tried to develop throughout my remarks today has been the question of how we can ensure that the unrepresented taxpayer is not disadvantaged by these rules. We should make it easy for them to comply with them, and not create widespread non-compliance, particularly in the self-assessment system. That is the thrust of these provisions, as of others.

Photo of Jane Kennedy Jane Kennedy Financial Secretary, HM Treasury

I very much appreciate the point that the hon. Gentleman is making. It is a fair point, and something I will watch carefully as we go forward.

Mr. Hobanrose—

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I was seeking to make an intervention, Sir Nicholas. I do not wish to audition to join the Chairmen’s Panel. Having listened to the Minister’s reassurances throughout the debate, I beg to ask leave to withdraw the amendment.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

Order. The lead amendment is in fact a Government amendment, so the hon. Gentleman does not have to withdraw his amendment. I am sure that he will go far within his party, and will not need to fall back on an alternative career chairing Committees in the House.

Amendment agreed to.

Amendments made: No. 403, in schedule 7, page 187, line 32, leave out ‘(4)’ and insert ‘(5)’.

No. 404, in schedule 7, page 187, line 33, leave out from beginning to end of line 17 on page 188 and insert—

‘“(2) If—

(a) offshore income gains arise to the trustees of a settlement in a tax year, and

(b) section 87 of the 1992 Act (gains of non-resident settlements) applies to the settlement for that year,

the OIG amount for the settlement for that year is the amount of the offshore income gains.

(3) Sections 87, 87A, 87C to 90 and 96 to 98 of, and Schedule 4C to, the 1992 Act apply in relation to OIG amounts as if—

(a) references to section 2(2) amounts (except those in paragraph 7B(2)(b) and (4) of Schedule 4C) were to OIG amounts,

(b) references to chargeable gains (except the one in paragraph 1(5) of Schedule 4C) were to offshore income gains,

(c) references to anything accruing were to it arising (and similar references, except the one in paragraph 1(5) of Schedule 4C, were read accordingly), and

(d) sections 87(4), 88(2) to (5), 89(4) and 97(6) and paragraphs 1(3A), 3 to 7, 8AA, 12 and 13 of Schedule 4C were omitted.

(4) Section 87A of the 1992 Act applies for a tax year by virtue of subsection (3) before it applies for that year otherwise than by virtue of that subsection.

(5) If, by virtue of subsection (1) or (3), offshore income gains are treated as arising to a person, for the purposes of section 761 as it applies in relation to the offshore income gains treat the person as having made the disposal in question.’.

No. 405, in schedule 7, page 188, line 18, leave out from ‘(6)’ to end and insert ‘—

(a) for “subsection (2) above” substitute “(3)”,

(b) for “accrued” substitute “arisen”, and

(c) omit “Chapter 2 of Part 13 of ITA 2007 or”.’.

No. 406, in schedule 7, page 188, leave out line 20 and insert—

‘“762ZA Offshore income gains: application of transfer of assets abroad provisions

(1) Chapter 2 of Part 13 of ITA 2007 (transfer of assets abroad) applies in relation to an offshore income gain arising to a person resident or domiciled outside the United Kingdom (and not resident or ordinarily resident in the United Kingdom) as if the offshore income gain were income becoming payable to the person.

(2) Income treated as arising under that Chapter by virtue of subsection (1) is regarded as “foreign” for the purposes of section 726, 730 or 735 of that Act.

(3) Subsection (1) does not apply in relation to an offshore income gain if (and to the extent that) it is treated, by virtue of section 762(1), as arising to a person resident or ordinarily resident in the United Kingdom.

(4) The following provisions apply if section 762(2) applies in relation to an offshore income gain (“the relevant offshore income gain”).

(5) If—

(a) by virtue of section 762(3) an offshore income gain is treated as arising in a tax year to a person resident or ordinarily resident in the United Kingdom, and

(b) it is so treated by reason of the relevant offshore income gain (or part of it),

for that and subsequent tax years subsection (1) does not apply in relation to the relevant offshore income gain (or that part).

(6) If, by virtue of subsection (1) as it applies in relation to the relevant offshore income gain, income is treated under Chapter 2 of Part 13 of ITA 2007 as arising in a tax year, reduce (with effect from the following tax year) the OIG amount in question by the amount of the income.’.

762ZB Income treated as arising under section 761(1): remittance basis’.

No. 407, in schedule 7, page 188, leave out lines 27 to 32 and insert—

‘(2) Treat the income as relevant foreign income of the individual.’.

No. 408, in schedule 7, page 188, line 33, leave out ‘those sections’ and insert

‘sections 809K to 809Q of ITA 2007 (meaning of “remitted to the United Kingdom” etc)’.

No. 409, in schedule 7, page 188, line 45, at end insert—

‘90A In section 830(4) of ITTOIA 2005 (meaning of “relevant foreign income”), after paragraph (a) insert—

“(aa) section 762ZB(2) of ICTA (offshore income gains),”.

90B In section 734 of ITA 2007 (reduction in amount charged: previous capital gains tax charge), after subsection (4) insert—

“(5) References in this section to chargeable gains treated as accruing to an individual include offshore income gains treated as arising to the individual (see section 762 of ICTA).”’.

No. 410, in schedule 7, page 189, line 1, leave out ‘90’ and insert ‘90B’.

No. 411, in schedule 7, page 189, line 2, at end insert—

‘91A Paragraph 108 or 108A applies in relation to offshore income gains as if—

(a) references to section 2(2) amounts were to OIG amounts,

(b) references to chargeable gains were to offshore income gains,

(c) Step 1 of paragraph 108(2) provided that OIG amounts are to be calculated in accordance with—

(i) section 762(2) of ICTA (the reference in the second sentence of that Step to section 87(4) of TCGA 1992 being read as a reference to section 762(2) of ICTA), or

(ii) section 87(5) of TCGA 1992 as applied by section 762(3) of ICTA.

91B (1) This paragraph applies if—

(a) by virtue of section 87 or 89(2) of, or Schedule 4C to, TCGA 1992 as applied by section 762 of ICTA, income is treated under section 761 of ICTA as arising to an individual in the tax year 2008-09 or any subsequent tax year, and

(b) the individual is not domiciled in the United Kingdom in that year.

(2) The individual is not charged to income tax on the income if and to the extent that it is treated as arising by reason of—

(a) a capital payment received (or treated as received) by the individual before 6 April 2008, or

(b) the matching of any capital payment with the OIG amount for the tax year 2007-08 or any earlier tax year.

91C (1) This paragraph applies if—

(a) the trustees of a settlement have made an election under paragraph 112(1) (re-basing election),

(b) income is treated under section 761 of ICTA as arising to an individual in the tax year 2008-09 or any subsequent tax year (“the relevant tax year”) by reason of the matching, under section 87A of TCGA 1992 as applied by section 762 of ICTA, of an OIG amount with a capital payment received by the individual from the trustees, and

(c) the individual is resident or ordinarily resident, but not domiciled, in the United Kingdom in the relevant tax year.

(2) The individual is not charged to income tax on so much of the income as exceeds the relevant proportion of that income.

(3) Sub-paragraphs (7) to (16) of paragraph 112 (meaning of “the relevant proportion”) apply for the purposes of sub-paragraph (2) above as if—

(a) references to section 2(2) amounts were to OIG amounts,

(b) references to chargeable gains were to offshore income gains,

(c) references to allowable losses were omitted, and

(d) references to anything accruing were to it arising (and similar references were read accordingly).

91D (1) This paragraph applies if—

(a) in the tax year 2008-09 or any subsequent tax year, the trustees of a settlement (“the transferor settlement”) transfer all or part of the settled property to the trustees of another settlement (“the transferee settlement”),

(b) section 90 of TCGA 1992 applies in relation to the transfer,

(c) the trustees of the transferor settlement have made an election under paragraph 112(1),

(d) by virtue of the matching (under section 87A of TCGA 1992 as applied by section 762 of ICTA) of a capital payment with an OIG amount of the transferee settlement, income is treated under section 761 of ICTA as arising to an individual in a tax year (“the relevant tax year”), and

(e) the individual is resident or ordinarily resident, but not domiciled, in the United Kingdom in the relevant tax year.

(2) If paragraph 91C applies in relation to the transferee settlement, paragraph 112(7) as applied by paragraph 91C(3) has effect as if the reference there to relevant assets included relevant assets within the meaning of paragraph 113(4) (as modified by sub-paragraph (4)(b) below).

(3) If paragraph 91C does not apply in relation to the transferee settlement, the individual is not charged to income tax on so much of the income mentioned in sub-paragraph (1)(d) above as exceeds the relevant proportion of that income.

(4) Sub-paragraphs (3) to (6) of paragraph 113 (meaning of “the relevant proportion”) apply for the purposes of sub-paragraph (3) above as if—

(a) references section 2(2) amounts were to OIG amounts,

(b) references to chargeable gains were to offshore income gains, and

(c) references to anything accruing were to it arising.’.

No. 412, in schedule 7, page 190, line 18, leave out ‘tax year’ and insert

‘settlement for a tax year for which this section applies to the settlement’.

No. 413, in schedule 7, page 190, line 19, after ‘trustees’ insert ‘of the settlement’.

No. 414, in schedule 7, page 190, line 25, at end insert—

‘(5) The section 2(2) amount for a settlement for a tax year for which this section does not apply to the settlement is nil.

(6) For the purposes of this section a settlement arising under a will or intestacy is treated as made by the testator or intestate at the time of death.’.

No. 415, in schedule 7, page 191, line 21, leave out from second ‘year’ to end of line 25 and insert ‘—

(a) which is before the last tax year for which Steps 1 to 4 have been undertaken, and

(b) for which the section 2(2) amount is not nil.’.

No. 416, in schedule 7, page 191, line 31, leave out ‘to which section 87 applies to the settlement’.

No. 417, in schedule 7, page 191, line 33, leave out from ‘(2)’ to end of line 36 and insert

‘is to be taken into account in any subsequent application of this section.’.

No. 418, in schedule 7, page 191, line 38, leave out from ‘applies’ to end of line 39 and insert ‘if—

(a) chargeable gains are treated under section 87 as accruing to an individual in a tax year,

(b) section 809B, 809C or 809D (remittance basis) applies to the individual for that year, and

(c) the individual is not domiciled in the United Kingdom in that year.’.

No. 419, in schedule 7, page 192, leave out lines 41 to 44.

No. 420, in schedule 7, page 193, line 15, leave out from ‘transfer)’ to ‘as’ in line 16.

No. 421, in schedule 7, page 193, leave out lines 41 to 43 and insert—

‘(9) When calculating the market value of property for the purposes of this section or section 90A in a case where the property is subject to a debt, reduce the market value by the amount of the debt.’.

No. 422, in schedule 7, page 194, line 2, at end insert—

‘90A Section 90: transfers made for consideration in money or money’s worth

(1) Section 90 does not apply to a transfer of settled property made for consideration in money or money’s worth if the amount (or value) of that consideration is equal to or exceeds the market value of the property transferred.

(2) The following provisions apply if—

(a) section 90 applies to a transfer of settled property made for consideration in money or money’s worth, and

(b) the amount (or value) of that consideration is less than the market value of the property transferred.

(3) If the transfer is of all of the settled property, for the purposes of section 90 treat the transfer as being of part only of the settled property.

(4) Deduct the amount (or value) of the consideration from the amount of the market value referred to in section 90(4)(a).’.

No. 423, in schedule 7, page 194, line 23, after ‘1998,’ insert ‘section 130(1) and (4), and’.

No. 424, in schedule 7, page 194, line 32, leave out paragraph (a).

No. 425, in schedule 7, page 194, line 40, at end insert—

‘106A (1) This paragraph applies if—

(a) section 87 of TCGA 1992 applies to a settlement for the tax year 2008-09 or any subsequent tax year (“the tax year”),

(b) the settlement was made before 17 March 1998,

(c) none of the settlors fulfilled the residence requirements when the settlement was made, and

(d) none of the settlors fulfils the residence requirements in the tax year.

(2) For the purposes of that section as it applies to the settlement for the tax year, no account is to be taken of—

(a) any gains or losses accruing to the trustees of the settlement before 17 March 1998, or

(b) any capital payments received before that date.

(3) A settlor “fulfils the residence requirements” when the settlor is—

(a) resident or ordinarily resident in the United Kingdom, and

(b) domiciled in any part of the United Kingdom.’.

No. 426, in schedule 7, page 195, leave out lines 1 to 6 and insert

‘section 87 or 89(2) of TCGA 1992 applied to it for the tax year 2007-08 or any earlier tax year.’.

No. 427, in schedule 7, page 195, line 8, leave out ‘or any earlier tax year’ and insert ‘and earlier tax years’.

No. 428, in schedule 7, page 195, line 11, leave out from ‘for’ to end of line 12 and insert

‘the settlement for the tax year 2007-08 and earlier tax years.’.

No. 429, in schedule 7, page 195, line 12, at end insert—

‘For this purpose, references in section 87(4) and (5) of TCGA 1992 (as substituted) to section 87 of that Act applying to a settlement for a tax year are to be read as references to section 87 of that Act (as it had effect before that substitution) applying to a settlement for a tax year.’.

No. 430, in schedule 7, page 195, leave out lines 18 to 20 and insert—

‘Find the earliest tax year for which the section 2(2) amount is not nil.

If the section 2(2) amount for that year is less than or equal to the total deemed gains, reduce that section 2(2) amount to nil.’.

No. 431, in schedule 7, page 195, leave out lines 28 to 31 and insert—

‘For this purpose, read references to the earliest tax year for which the section 2(2) amount is not nil as references to the earliest tax year—

(a) which is after the last tax year for which Steps 3 and 4 have been undertaken, and

(b) for which the section 2(2) amount is not nil.’.

No. 432, in schedule 7, page 195, line 31, at end insert—

‘(3) If, before 6 April 2008, the trustees of the settlement made a transfer of value to which Schedule 4B to TCGA 1992 applied, sub-paragraph (2) has effect subject to such modifications as are just and reasonable on account of Schedule 4C to that Act having applied in relation to the settlement.

(4) This paragraph does not apply if section 90 of TCGA 1992 applied to a transfer of settled property by or to the trustees of the settlement that was made before 6 April 2008 (see paragraph 108A).

108A (1) If section 90 of TCGA 1992 (as originally enacted) applied to a transfer of settled property made before 6 April 2008, this paragraph applies in relation to the transferor settlement and the transferee settlement.

(2) In this paragraph “the year of transfer” means the tax year in which the transfer occurred.

(3) The following steps are to be taken for the purpose of calculating the section 2(2) amount for the transferor and transferee settlements for the tax year 2007-08 and earlier tax years.

Step 1

Take the steps in paragraph 108(2) for the purpose of calculating the section 2(2) amount (at the end of the year of transfer) for the transferor settlement for the year of transfer and earlier tax years.

For this purpose, read references there to the tax year 2007-08 as references to the year of transfer.

Step 2

Take the steps in paragraph 108(2) for the purpose of calculating the section 2(2) amount (before the year of transfer) for the transferee settlement for the tax year before the year of transfer and earlier tax years.

For this purpose, read references there to the tax year 2007-08 as references to the tax year before the year of transfer.

Step 3

Calculate the section 2(2) amount for the transferee settlement for the year of transfer.

Step 4

Treat the section 2(2) amount for the transferee settlement for the year of transfer or any earlier tax year (as calculated under Step 2 or 3) as increased by—

(a) the section 2(2) amount for the transferor settlement for that year (as calculated under Step 1), or

(b) if part only of the settled property was transferred, the relevant proportion of the amount mentioned in paragraph (a).

“The relevant proportion” here has the same meaning as in section 90(4) of TCGA 1992 (as substituted by this Schedule).

Step 5

Treat the section 2(2) amount for the transferor settlement for any tax year as reduced by the amount by which the section 2(2) amount for the transferee settlement for that year is increased under Step 4.

Step 6

Take the steps in paragraph 108(2) for the purpose of calculating the section 2(2) amount for the transferor settlement for the tax year 2007-08 and earlier tax years.

For this purpose—

(a) treat the section 2(2) amount for the year of transfer or any earlier tax year as the amount calculated by taking Steps 1 and 5 above, and

(b) reduce the total deemed gains by the amount of the total deemed gains calculated by taking Step 1 above.

Step 7

Take the steps in paragraph 108(2) for the purpose of calculating the section 2(2) amount for the transferee settlement for the tax year 2007-08 and earlier tax years.

For this purpose—

(a) treat the section 2(2) amount for the year of transfer or any earlier tax year as the amount calculated by taking Steps 2 to 4 above, and

(b) reduce the total deemed gains by the amount of the total deemed gains calculated by taking Step 2 above.

(4) This paragraph applies with any necessary modifications in relation to a settlement as respects which more than one relevant transfer was made.

(5) In sub-paragraph (4) “relevant transfer” means a transfer—

(a) made before 6 April 2008, and

(b) to which section 90 of TCGA 1992 applied.

(6) If, before 6 April 2008, the trustees of the transferor or transferee settlement made a transfer of value to which Schedule 4B to TCGA 1992 applied, this paragraph has effect subject to such modifications as are just and reasonable on account of Schedule 4C to that Act having applied in relation to the settlement.’.

No. 433, in schedule 7, page 195, line 32, leave out sub-paragraph (1).

No. 434, in schedule 7, page 195, line 41, after ‘of’ insert

‘, or paragraph 8 of Schedule 4C to,’.

No. 435, in schedule 7, page 196, line 3, at end insert—

‘(5) References in this paragraph to section 87(6) of TCGA 1992 include that provision as it would (but for the amendments made by this Schedule) have applied by virtue of section 762(3) of ICTA (offshore income gains).

(6) References in this paragraph to chargeable gains include offshore income gains.

109A Section 89(2) of TCGA 1992 as substituted applies to a settlement for the tax year 2008-09 (and subsequent tax years) if section 89(2) of that Act as originally enacted would (but for the amendments made by this Schedule) have applied to the settlement for the tax year 2008-09.

109B In section 90(1)(a) of TCGA 1992, the reference to section 87 of TCGA 1992 includes that section as originally enacted.’.

No. 436, in schedule 7, page 196, line 37, leave out ‘part (but not all)’ and insert ‘all or part’.

No. 437, in schedule 7, page 196, line 39, at end insert—

‘(2A) For a tax year as respects which the settlement has a Schedule 4C pool, the reference in sub-paragraph (2)(a) above to a capital payment received (or treated as received) by a beneficiary of the settlement is to be read as a capital payment received (or treated as received) by a beneficiary of a relevant settlement from the trustees of a relevant settlement.

(2B) Paragraph 8A of that Schedule (relevant settlements) applies for the purposes of sub-paragraph (2A) above.’.

No. 438, in schedule 7, page 197, line 1, after ‘of’ insert

‘, or paragraph 8 of Schedule 4C to,’.

No. 439, in schedule 7, page 197, line 29, leave out ‘the same part (or a larger part)’ and insert ‘part’.

No. 440, in schedule 7, page 197, line 34, at end insert—

‘(11) If—

(a) by reason of an asset which would not otherwise be a relevant asset (“the new asset”), chargeable gains or allowable losses accrue, or are treated under section 13 as accruing, to the trustees in the relevant tax year,

(b) the value of the new asset derives wholly or in part from another asset (“the original asset”), and

(c) section 43 of TCGA 1992 applies in relation to the calculation of the chargeable gains or allowable losses,

the new asset (or part of that asset) is a “relevant asset” if the condition in sub-paragraph (8)(b) or the conditions in sub-paragraph (9)(b) and (c) would be met were the references there to the asset to be read as references to the new asset or the original asset.

(12) If—

(a) on or after 6 April 2008, a company (“company A”) disposes of an asset to another company (“company B”), and

(b) section 171 of TCGA (transfers within groups) (as applied by section 14(2) of that Act) applies in relation to the disposal,

for the purposes of sub-paragraph (9) (and this sub-paragraph) treat company B as having owned the asset throughout the period when company A owned it.

(13) If an asset is a relevant asset by virtue of sub-paragraph (12), for the purposes of sub-paragraph (7)—

(a) treat the chargeable gains as having accrued to the company which owned the asset at the beginning of 6 April 2008, and

(b) treat the proportion of those chargeable gains attributable under section 13 of TCGA 1992 to the trustees as being the proportion of the chargeable gains actually accruing that are so attributable.

(14) If—

(a) an asset would otherwise be a “relevant asset” within sub-paragraph (9), and

(b) the proportion of chargeable gains treated under section 13 of TCGA 1992 as accruing to the trustees by reason of the asset (“the relevant proportion”) is greater than the minimum proportion,

for the purposes of sub-paragraph (7) treat the appropriate proportion of the asset as a relevant asset and the rest of the asset as if it were not a relevant asset.

(15) “The minimum proportion” is the smallest proportion of chargeable gains (if any) that would have been attributable to the trustees on a disposal of the asset at any time in the relevant period (as defined by sub-paragraph (10)).

(16) “The appropriate proportion” is the minimum proportion divided by the relevant proportion.’.

No. 441, in schedule 7, page 197, line 46, after ‘of’ insert

‘, or paragraph 8 of Schedule 4C to,’.

No. 442, in schedule 7, page 198, line 2, at end insert—

‘(1A) If the trustees of the transferee settlement have made an election under paragraph 112(1), paragraph 112(5) to (7) have effect in relation to the transferee settlement for that year as if the reference in paragraph 112(7) to relevant assets included relevant assets within the meaning of this paragraph.’.

No. 443, in schedule 7, page 198, line 3, at beginning insert

‘If the trustees of the transferee settlement have not made an election under paragraph 112(1),’.

No. 444, in schedule 7, page 198, line 4, after first ‘gains’ insert ‘mentioned in sub-paragraph (1)(d) above’.

No. 445, in schedule 7, page 198, line 15, leave out ‘sub-paragraph (3)’ and insert ‘this paragraph’.

No. 446, in schedule 7, page 198, line 23, leave out ‘the same part (or a larger part)’ and insert ‘part’.

No. 447, in schedule 7, page 198, line 31, at end insert—

‘(6) Sub-paragraphs (11) to (16) of paragraph 112 apply for the purposes of this paragraph (with such modifications as are necessary) as they apply for the purposes of that paragraph.’.

No. 448, in schedule 7, page 198, line 35, after ‘losses)’ insert ‘—

(a) after subsection (2) insert—

“(2A) For the purposes of sections 87 to 89, no account is to be taken of any section 2(2) amount in a Schedule 4C pool (see paragraph 1 of Schedule 4C).”, and

(b) ’.

No. 449, in schedule 7, page 199, line 4, at end insert—

‘(5) The reference in subsection (4)(b) to chargeable gains treated as accruing includes offshore income gains treated as arising.”’.

No. 450, in schedule 7, page 199, line 12, after ‘the’ insert ‘original’.

No. 451, in schedule 7, page 199, line 26, leave out from second ‘for’ to first ‘as’ in line 28 and insert

‘the relevant tax year and earlier tax years,’.

No. 452, in schedule 7, page 199, line 37, at end insert—

‘(1A) For the purposes of Step 1 of sub-paragraph (1) take into account the effect of section 90 in relation to any transfer of settled property from or to the trustees of the settlement made in or before the relevant tax year.’.

No. 453, in schedule 7, page 199, line 40, at end insert—

‘119A In paragraph 4(2) (chargeable amount: non-resident settlement), at the end insert “(and had made the disposals which Schedule 4B treats them as having made)”.

119B In paragraph 5(2)(a) (chargeable amount: dual resident settlement), after “apply” insert “(and the disposals which Schedule 4B treats them as having made were made)”.’.

No. 454, in schedule 7, page 200, leave out lines 41 and 42.

No. 455, in schedule 7, page 200, leave out lines 46 and 47.

No. 456, in schedule 7, page 201, line 3, after ‘paragraph’ insert

‘; but this is subject to sub-paragraph (5).

(5) If section 87A applies for a tax year by virtue of section 762(3) of the Taxes Act (offshore income gains), it applies for that year by virtue of that provision before it applies for that year by virtue of this paragraph.’.

No. 457, in schedule 7, page 201, line 3, at end insert—

‘122A After paragraph 8A insert—

“Attribution of gains: remittance basis

8AA Section 87B (remittance basis) applies in relation to chargeable gains treated under paragraph 8 as accruing as it applies in relation to chargeable gains treated under section 87 as accruing.”’.

No. 458, in schedule 7, page 201, line 5, leave out paragraph 124 and insert—

‘124 For paragraph 9 (and the heading before it) substitute—

“Attribution of gains: disregard of certain capital payments

9 (1) For the purposes of paragraph 8 (and section 87A as it applies for the purposes of that paragraph), no account is to be taken of a capital payment to which any of sub-paragraphs (2) to (4) applies (or a part of a capital payment to which sub-paragraph (4) applies).

(2) This sub-paragraph applies to a capital payment received before the tax year preceding the tax year in which the original transfer is made.

(3) This sub-paragraph applies to a capital payment that—

(a) is received by a beneficiary of a settlement from the trustees in a tax year during the whole of which the trustees—

(i) are resident and ordinarily resident in the United Kingdom, and

(ii) are not Treaty non-resident,

(b) was made before any transfer of value to which Schedule 4B applies was made, and

(c) was not made in anticipation of the making of any such transfer of value or of chargeable gains accruing under that Schedule.

(4) This sub-paragraph applies to a capital payment if (and to the extent that) it is received (or treated as received) in a tax year from the trustees by a company that—

(a) is not resident in the United Kingdom in that year, and

(b) would be a close company if it were resident in the United Kingdom,

(and is not treated under any of subsections (3) to (5) of section 96 as received by another person).

124A In paragraph 10 (residence of trustees from whom capital payment received)—

(a) in sub-paragraph (1) for “sub-paragraph (2) below” substitute “paragraph 9(3)”, and

(b) omit sub-paragraphs (2) and (3).’.

No. 459, in schedule 7, page 201, line 43, at end insert—

‘129A For the purposes of paragraph 8 of Schedule 4C to TCGA 1992 (and section 87A of that Act as it applies for the purposes of that paragraph), no account is to be taken of any capital payment received before 21 March 2000.

129B A capital payment received before 6 April 2008 is not within paragraph 9(4) of Schedule 4C to TCGA 1992 (if it otherwise would be).

129C Paragraph 110 applies in relation to chargeable gains treated under paragraph 8 of Schedule 4C to TCGA 1992 as accruing as it applies in relation to chargeable gains treated under section 87 as accruing.

129D (1) This paragraph applies for the tax year 2008-09 or any subsequent tax year (“the relevant tax year”) if—

(a) an individual who was resident or ordinarily resident, but not domiciled, in the United Kingdom in the tax year 2007-08 received a capital payment from the trustees of a settlement on or after 12 March 2008 but before 6 April 2008, and

(b) the individual is resident or ordinarily resident, but not domiciled, in the United Kingdom in the relevant tax year.

(2) For the purposes of paragraph 8 of Schedule 4C to TCGA 1992 as it applies for the relevant tax year (and section 87A of that Act as it applies for those purposes), no account is to be taken of the capital payment.’.

No. 460, in schedule 7, page 202, line 3, after ‘2008’ insert ‘(“existing Schedule 4C pools”)’.

No. 461, in schedule 7, page 202, line 3, after ‘7B’ insert ‘and 9(2)’.

No. 462, in schedule 7, page 202, line 3, at end insert—

‘130A Any reduction in the amount of a capital payment has effect for the purposes of Schedule 4C to TCGA 1992 as it applies in relation to existing Schedule 4C pools (as well as for other purposes).

130B (1) If all of a capital payment ceases (in the tax year 2008-09 or any subsequent tax year) to be available, the amount of the capital payment is reduced to nil.

(2) If part of a capital payment ceases (in the tax year 2008-09 or any subsequent tax year) to be available, the amount of the capital payment is reduced by the amount of that part.

(3) A capital payment “ceases to be available” in a tax year if and to the extent that, by reason of the capital payment, chargeable gains are treated under paragraph 8 of Schedule 4C to TCGA 1992 (as it has effect in relation to existing Schedule 4C pools) as accruing in that year to the recipient.

(4) If—

(a) chargeable gains are treated under paragraph 8 of Schedule 4C to TCGA 1992 (as it has effect in relation to existing Schedule 4C pools) as accruing in a tax year,

(b) more than one capital payment that the beneficiary has received is taken into account for the purposes of determining the amount of chargeable gains treated as accruing to the beneficiary, and

(c) the amount of the chargeable gains is less than the total amount of capital payments taken into account,

sub-paragraph (3) applies in relation to earlier capital payments before later ones.

130C In any tax year—

(a) Schedule 4C to TCGA 1992 (as amended by paragraphs 114 to 128) applies in relation to a settlement before that Schedule (as it has effect without those amendments) applies in relation to the settlement, and

(b) that Schedule (as it has effect without those amendments) applies in relation to the settlement before section 87 or 89(2) of that Act applies in relation to the settlement.’.

No. 469, in schedule 7, page 202, line 7, leave out ‘, and’.

No. 470, in schedule 7, page 202, leave out lines 23 to 29 and insert—

‘(2) Treat the accrued income profits as relevant foreign income of the individual.’.

No. 471, in schedule 7, page 202, line 41, leave out ‘any’.

No. 472, in schedule 7, page 203, line 3, at end insert—

‘135A In section 46B(4)(c) of TMA 1970 (questions to be determined by Special Commissioners), for “sections 720, 727 and 731” substitute “any provision of Chapter 2 of Part 13”.

135B In section 830(4) of ITTOIA 2005 (meaning of “relevant foreign income”), after paragraph (h) insert “, and

(i) sections 726, 730 and 735 of that Act (transfer of assets abroad: foreign deemed income).”’.

No. 473, in schedule 7, page 203, leave out lines 19 to 26 and insert—

‘(3) Treat the foreign deemed income as relevant foreign income of the individual.’.

No. 474, in schedule 7, page 203, line 27, leave out ‘those sections’ and insert

‘sections 809K to 809Q (meaning of “remitted to the United Kingdom” etc)’.

No. 475, in schedule 7, page 204, leave out lines 4 to 11 and insert—

‘(3) Treat the foreign deemed income as relevant foreign income of the individual.’.

No. 476, in schedule 7, page 204, line 12, leave out ‘those sections’ and insert

‘sections 809K to 809Q (meaning of “remitted to the United Kingdom” etc)’.

No. 477, in schedule 7, page 204, leave out lines 31 to 38 and insert—

‘(3) Treat the foreign deemed income as relevant foreign income of the individual.’.

No. 478, in schedule 7, page 204, line 39, leave out ‘those sections’ and insert

‘sections 809K to 809Q (meaning of “remitted to the United Kingdom” etc)’.

No. 479, in schedule 7, page 205, line 8, leave out from ‘order’ to end of line 9 and insert ‘determined under subsection (3),’.

No. 480, in schedule 7, page 205, line 23, at end insert—

‘(3) The order referred to in subsection (1)(c) is arrived at by taking the following steps.

Step 1

Find the relevant income for the earliest tax year (of the tax years referred to in subsection (1)(c)).

Step 2

Place so much of that income as is not foreign in the order in which it arose (starting with the earliest income to arise).

Step 3

After that, place so much of that income as is foreign in the order in which it arose (starting with the earliest income to arise).

Step 4

Repeat Steps 1 to 3.

For this purpose, read references to the relevant income for the earliest tax year as references to the relevant income for the first tax year after the last tax year in relation to which those Steps have been undertaken.

(4) For the purposes of subsection (3) relevant income is “foreign” where it would be relevant foreign income if it were the individual’s.

(5) Subsection (1)(d) does not apply if the income may not be taken into account because the individual has been charged to income tax under section 731 by reason of the income.’.

No. 481, in schedule 7, page 205, line 24, leave out ‘137’ and insert ‘135A’.—[Jane Kennedy.]

Schedule 7, as amended, agreed to.