Schedule 7

Part of Finance Bill – in a Public Bill Committee at 3:30 pm on 19 June 2008.

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Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 3:30, 19 June 2008

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.