(Except clauses 7, 8, 9, 11, 14, 16, 20 and 92) - Schedule 27

Finance Bill – in a Public Bill Committee on 11th June 2009.

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Remittance basis

Question (thisday) again proposed, That the schedule be the Twenty-seventh schedule to the Bill.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I welcome you back to the chair for this afternoon’s sitting, Mr. Hood.

I was talking about the Poles referred to by my hon. Friend the Member for Hammersmith and Fulham in the debate last year on the residence and domicile rules. I was pointing out to the Minister that there was apparently a degree of confusion about what the limit would be in what is introduced by paragraph 3 of the schedule. The explanatory notes state:

“Paragraph 3 amends section 809D(1)...which provides that an individual unremitted foreign income and gains of less than £2,000 in a tax year does not need to file a self-assessment tax return”

Paragraph 3 (3)(1A) of the schedule states that

“the individual is not domiciled in the United Kingdom in that year and conditions A to F in section 828B are met.”

In clause 52, condition B in proposed new section 828B refers to the matter of £10,000. There is a mismatch somewhere between the explanatory notes and the Bill as to what the cut-off level would be, so I should be grateful for some clarification. I shall have a little more to say about the £10,000 when we come to the next clause.

The other issue that is resolved, in part, in the schedule, is that of the trailing spouse. That was debated last year. The Government helpfully made a positive move by introducing a de minimis limit of UK source income of £100—the hon. Member for Taunton has tabled an amendment to clause 52 about that. My only concern about the issue is that the limit may be insufficiently generous, because it would give rise to taxable income of £20. Do we want a trailing spouse to go through that process simply for £20-worth of tax? Is there not a higher, more pragmatic, limit? When we debated the issue last year the Minister’s predecessor, the right hon. Member for Liverpool, Wavertree (Jane Kennedy) was very much against increasing limits. Is the Treasury much more interested in increasing limits this year? The change from £2,000 to £10,000 is one increase. Perhaps the Government should think more carefully about imposing too high a burden in respect of a relatively small amount.

The other issue that had a great deal of debate last year, both in the run-up to the Committee stage of the Finance Bill and the Bill itself, was remittances of  personal property. This year the exemption has been extended so that it applies regardless of the source of income used to purchase a property. That is a welcome move by the Government, which takes account of some of the criticism made last year about the unworkability—if that is a word in the dictionary—of the reforms and has taken things further. However, one of the comments that has been made is that the exemption could have gone a little bit further than the Government have conceded so far.

The exemption does not apply when the assets cease to be personal property. That is entirely reasonable when the personal property has been sold, and I can understand that. There is concern that the exemption should be extended to include circumstances when the property has been lost or stolen. That would be a welcome relaxation of the rules.

We are grateful that the Government have made some progress in responding to the concerns we raised last year, but I wonder if the Minister could clarify the three issues that I have raised: the interaction between the £2,000 and the £10,000 limits; whether there could be a more generous amount for the so-called trailing spouse provision; and whether the exemption for personal property could be extended to include property that is either lost or stolen.

Photo of John Howell John Howell Conservative, Henley

I shall echo a couple of the points made by my hon. Friend. I am sure that the Minister is aware of the comments made by the Institute of Chartered Accountants on this matter. Although it has welcomed much of what is being proposed, it points out that the consultative committee established for last year’s Finance Bill needs to continue, to ensure that the changes come through. I would like to know what commitment the Minister will give about that.

I am not sure whether this is appropriate for clause 51 or for clause 52, but there is a point that needs clarification—it probably relates to both clauses: the interaction of this legislation with settlements legislation. It would be nice to know whether that issue has been addressed and whether there should be some clarification.

Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

I too welcome you back, Mr. Hood, after our lunch break.

I am glad that the hon. Member for Fareham (Mr. Hoban) was able to welcome the changes in the schedule. Perhaps it was a slightly grudging welcome. Nevertheless, it was a welcome and I am glad about that.

Our aim in introducing major changes to the remittance basis last year was to maintain our international competitiveness and to increase the fairness of the tax system. Of course, the UK needs to continue to be attractive to people overseas who have the skills we need for our own economy, but it is also absolutely right that those who have chosen to live and work in the UK should make a fair contribution through the tax system to support public services. That is the balance that the new arrangements were designed to deliver.

However, the Government are certainly prepared to listen to legitimate concerns that taxpayers from abroad and their advisers have raised with us, so my predecessor, my right hon. Friend the Member for Liverpool, Wavertree,  who was dealing with the Finance Bill a year ago, gave a commitment that officials from the Treasury and Her Majesty’s Revenue and Customs would meet interested parties to review the rules, to ensure that they operated as intended and imposed no unnecessary administrative obligations on potential users.

Since the autumn, officials from the Treasury and HMRC have talked with a wide range of representatives of external bodies, as the hon. Member for Henley has mentioned—I have met a number of them as well. They have identified issues that they felt should be addressed so that the new regime can be implemented as smoothly and effectively as possible. We have also taken the opportunity to make one or two other small adjustments.

The first change introduced by the schedule relates to gift aid tax relief as it applies to individuals who use the remittance basis. It was always the intention that the annual charge introduced by the remittance rules should be treated as a payment of tax for the purposes of gift aid and available to frank payments to charities. Due to a drafting error, the legislation does not deliver that result, so the amendments made by paragraphs 2 and 5 of the schedule ensure that the rules for gift aid operate as intended.

In the majority of cases, if somebody wishes to be taxed under the remittance basis they are required to make a formal claim to do so through the self-assessment system. An exception is when someone’s unremitted foreign income and gains are less than £2,000 in any tax year, when it is assumed that they will have chosen the remittance basis without any claim being made— the hon. Member for Fareham asked a question about the £2,000 and I will come to that in a moment. A case has been made that the legislation is not sufficiently clear on that point, so paragraph 3 of the schedule seeks to put beyond doubt the fact that a claim will not be required in those circumstances. Its effect will be that people in that position will be taxed on the remittance basis, but they will preserve their right to file a tax return and to be taxed under the arising basis if they wish to do so.

The figure of £2,000 is a general de minimis limit for those who use the remittance basis. The new £10,000 limit, which is introduced in the next clause, is a new tax exemption that applies to individuals from overseas, such as migrant workers who have a job in the UK and also have overseas employment income in the same year. The exemption would simply remove the obligation on people in that position to file a self-assessment return. It is a more generous arrangement for that group of people, and it applies whether or not the individual chooses to use the remittance basis; it does not affect whether they are eligible to pay tax on the remittance basis.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Will the Minister clarify that point? I am a little puzzled by how the provision will work? If there is a £10,000 exemption for employment income but a £2,000 exemption for other income, how will the circumstances in which each one works be made clear to people who may be covered by the remittance basis?

Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

As I said, the £2,000 is a general, de minimis limit for anyone. The £10,000 figure, which will be introduced in the next clause, applies specifically to  migrant workers, who frequently will have had some employment in the same year in another country, and will have gained an income. They will have a choice about which arrangement to apply to their circumstances.

Paragraph 4 of the schedule removes the obligation to file a self-assessment return when an individual has total UK income or gains of no more than £100, which has been taxed in the UK, provided they make no remittances to the UK in that tax year. At one point, I thought that the hon. Member for Fareham was referring to trading spouses, but the appropriate term is “trailing spouses”. HMRC was told that trailing spouses typically have a bank account in the UK that earns only a small amount of income, and £100 covers such cases. The measure has been widely welcomed as a positive move.

Paragraph 9 relates to the rules applying to assets brought into the UK. As the rules stand, someone who has chosen to use the remittance basis will be subject to UK tax if they use their foreign income and gains to purchase property and assets that they bring into the UK. There are some exceptions to that general rule—for example, when the assets in question are imported temporarily, or are worth less than £1,000.

In broad terms, those exemptions are not available when the items are purchased using overseas employment income, so the exemptions may be difficult to operate in practice and might give rise to inadvertent non-compliance. Following representations, the Government decided that the rules on exempt assets should be extended with effect from the start of the 2008-09 tax year.

The hon. Member for Fareham asked why the exemptions were not being extended to assets that are lost or destroyed. I suggest that introducing such an exemption could open up significant opportunities for abuse. We must remain vigilant, and although we have been able to take on board a number of the suggestions made to us, that one could give rise to difficulties.

Paragraphs 12 and 13 clarify the interaction between the new remittance regime and the tax rules that apply to overseas trusts. The remittance regime includes transitional provisions that prevent certain income arising before 6 April 2008 from being taxed as a remittance if it is brought to the UK on or after that date. The point has been made that those provisions do not work as intended, so we are amending them to ensure that they do.

The hon. Member for Fareham asked whether the problem he described with settlements legislation has been solved—I am sorry, it was the hon. Member for Henley who asked that. I think that paragraphs 13 and 14 of the schedule cover that point, and people we have talked to have not only welcomed the change, but told us they think it solves the problem.

There follow some provisions that remove ambiguity in the remittance basis regime and ensure that they are not targeted by those seeking to sidestep the rules. The hon. Member for Henley, while welcoming the progress we have made as a result of the discussions, asked whether we were going to keep the consultative committee going. I can reassure him that we have agreed to do that. I agree that it has been a useful forum, and one whose value will continue for a period yet.

Taking the changes introduced by the schedule together makes the remittance basis more straightforward to operate in practice. I again express my thanks for the constructive approach the interested parties and outside organisations have taken in their consultations with officials from the Treasury and HMRC, as it has allowed us to make these worthwhile improvements to the remittance basis.

Question put and agreed to.

Schedule 27 accordingly agreed to.