The clause deals with anti-fragmentation, a term I had not heard of until I started working on the Bill. However, I have been trying to get my head around the term and I will give it the best that I can.
The clause is another anti-avoidance measure that has our support. In essence, it is about banks, and in particular how they might find ways to book income and expenses in different accounting units to avoid tax. Following the decision in a 2005 court case, Legal and General Assurance Ltd v.Thomas, in front of the special commissioners, the Finance Act 2005 introduced legislation restricting the availability of double taxation relief for foreign taxes paid on schedule D case 1 income, which now of course are treated just as trading income under the Corporation Tax Act 2009, or income computed on a similar basis for UK tax purposes. The rules aim to ensure that the double taxation relief claimed cannot exceed the equivalent corporation tax on the net profits attributable to that source of income, after deducting an appropriate allocation of expenses, and are often referred to as a mini-D1 computation.
HMRC believes that certain banks have sought to avoid the impact of this legislation, either by routing loans through subsidiaries, which are taxed differently, or by financing in such a way that funding costs are not directly attributable to the income and therefore are not deducted in calculating the double taxation relief restriction. Although HMRC considers that the existing legislation should already have the desired effect, clause 60 is intended to put the matter beyond doubt.
The current rules provide that, where income that would otherwise have formed part of the trade receipts of a bank but instead is received by an affiliate that is differently taxed and can claim double tax relief without the restrictions affecting the bank, the income is treated as trade income of the subsidiary. With effect from Budget day, the new measures will extend the existing wording, with the intention that its scope mirrors HMRCs interpretation of the current rules. Furthermore, when allocating bank funding costs in calculating the relief due, this must now be done on the basis of a proportion of average funding costs, even when specific funds are used to finance an investment.
My understanding is that, if one has a pool of investments and a pool of different vehicles funding those investments, one would have to allocate things on a proportion of the average funding cost for the whole portfolio rather than specific funds underlying a specific asset and how that asset in particular has been funded. That is my understanding of the situation; I would be grateful if the Minister could confirm whether that is correct. These changes have effect from 22 April 2009.
Amendment 218 was suggested to me by the Law Society, which believes that both sets of amendments, as they are aimed at artificial manipulation of double tax relief, should be subject to a tax avoidance motive test. The basic rules, as they stand, already contain provisions relating to the allocation of expenses and these rules should apply over and above those rules only in exceptional cases where there has been deliberate manipulation for tax reasons.
That is what our amendment seeks to do. My understanding is that the language used is entirely normal for these tax avoidance motive tests and I would be grateful for the Ministers view on whether he will accept the amendment and on the importance of attaching motive to tax avoidance in this case.