Schedule 14

Part of Finance Bill – in a Public Bill Committee at 12:00 pm on 9th June 2009.

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Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills) 12:00 pm, 9th June 2009

Amendments 50 and 100 centre on the way in which double taxation relief is given in the rare cases in which a dividend is taxable. Government amendment 100 deals with the interaction between the rules in part 9A that apply to taxable dividends and the double taxation relief rules. If a dividend is paid out of profits that have been subject to foreign tax, the double taxation relief rules allow the foreign tax to be given as a credit against the UK tax due on the dividend to ensure that the same income is not taxed twice. The rules currently allow a large amount of choice in the specification of the profits out of which the dividend is paid, which is important because the foreign tax paid on the specified profits determines the amount of foreign tax credit available. The distribution exemption schedule includes an anti-avoidance rule that considers the source of the profits out of which a dividend is paid. If those profits result from transactions designed to reduce UK tax, the dividend will be taxable in the UK.

Since the Bill was published, it has been brought to our attention that there is a risk that avoidance schemes might exploit the mismatch between how profits are specified for the purpose of the anti-avoidance rule and how they are specified for the purpose of double tax relief rules. The amendment therefore overrules the usual choice available in the double tax relief rules. It will ensure that, where a dividend is taxable in the UK because it is paid out of the profits of tax avoidance, double tax relief available on that dividend will be calculated by reference to those same profits. The amendment will remove a significant risk of tax avoidance exploiting a mismatch whereby a dividend intended to be taxed would escape any effective taxation.

Perhaps if the hon. Member for Fareham speaks to amendment 50, I will be able to respond later.