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Schedule 61

Finance Bill – in a Public Bill Committee at 1:45 pm on 25th June 2009.

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Alternative finance investment bonds

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I beg to move amendment 321, in schedule 61, page 422, line 16, leave out from ‘2003)’ to end of line 19 and insert

‘except that it does not include a lease if the lease is for—

(a) a term of years of 21 years or less, or

(b) in Scotland, a period of 21 years or less.’.

Photo of Peter Atkinson Peter Atkinson Conservative, Hexham

With this it will be convenient to discuss Government amendments 322 to 332.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

The amendments ensure that the legislation functions as desired in the registration of the charge in all three Land Registry jurisdictions: England and Wales, Northern Ireland, and Scotland. The charge is an important anti-avoidance measure related to the allowances for tax treatment of alternative finance investment bonds, sometimes referred to as Islamic law compliant bonds, and help to level the playing field with conventional products.

Before turning to the details of the amendments, I will say a few words about Government policy on Islamic finance, which relates to clause 122 and schedule 61. The Government want everybody, irrespective of religious or ethical beliefs, to have access to financial products. As with other high potential growth areas in financial services, the Government are committed to the UK becoming a global leader in Islamic finance. We have made significant progress in recent years and the UK is currently by far the largest western centre for Islamic finance. More than 20 UK firms offer Islamic products and services—more than anywhere else in the western world. The UK has five stand-alone sharia-compliant banks and one stand-alone sharia-compliant insurance provider. The London stock exchange is one of the premier listing venues for sharia-compliant products globally, with 18 issuers listing sukuk on the London stock exchange to date, raising close to £6.5 billion. We are confident that we will strengthen and enhance our position in the future, with benefits to all UK taxpayers.

Let me comment very briefly on the issue of potential sovereign sukuk. In November 2008, the Government announced the decision not to proceed with the issuance of sovereign sukuk at that time. The decision was driven by a number of factors, mainly that sovereign sukuk would not have offered value for money owing to the economic conditions in world financial markets and our debt management policy. I emphasise that that decision does not reflect diminished Government commitment to Islamic finance in the UK. Our work, including the measures announced in the Finance Bill, which I hope we will pass today, will pave the way for the Islamic finance industry to issue corporate sukuk products as an alternative source of funding for UK and overseas funds. The Government will keep the situation with sovereign sukuk under review. Personally, I would like sovereign sukuk to be issued in the future.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

In Committee on last year’s Finance Bill, we had a lengthy debate with the then Economic Secretary in which we spoke a lot about sovereign sukuk. My hon. Friend the Member for Hammersmith and Fulham and I expressed concern about the cost, compared with other conventional methods of funding Government debt. The Minister has referred to the difference in cost. A number of people have said to me that it would be helpful to those interested in Islamic finance if the Government provided the data underpinning the argument that it would be too expensive to use sovereign sukuk. Would he be open-minded about publishing the data?

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I am always open-minded when considering publishing data. The decision that we took and announced in October last year was based on a number of factors. Clearly, given the financial climate at the time, issuing sovereign sukuk would demonstrably have had its difficulties. We did not believe that it would have offered good value for money. However, we shall continue to keep that under review, and, as I have indicated, I envisage strong advantages in the UK issuing sovereign sukuk when circumstances allow.

Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

Will the Minister tell us about the decision-making process? Why was a decision taken last October not to do that? Is the decision not to do something made every month or quarter? How frequently the decision made? It seems extraordinary to have a decision-making process not to do something. What sort of policy is he following?

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I said that we would keep the matter under view, as is normal Government procedure.

The clause introduces the legislation in schedule 61 on stamp duty land tax, capital gains tax and capital allowances relating to alternative finance investment bonds. It deals with anomalies in the tax treatment arising between AFIBs backed by land and conventional bonds backed by land. More specifically, when the transfer of such property forms part of the arrangements for issuing an AFIB, the transfer could be liable to stamp duty land tax. However, a conventional bond issued in essentially the same economic circumstances would not be liable.

In an effort to level the playing field, stamp duty land tax will not be charged when an AFIB is issued. The legislation will also remove charges for tax in respect of capital gains that might arise on the transfer of property under the same circumstances. The legislation will also  ensure that the entity using an AFIB to raise finances will retain its rights to claim capital allowances relating to property transferred under the arrangements for issuing the bond. We have consulted quite extensively with those interested in offering such products, and our efforts to level the playing field have been widely welcomed by them.

As part of the conditions for the relief accorded by the legislation and to protect Exchequer revenue in the event of default, a charge in favour of HMRC must be registered against the title of the property used in the alternative finance bond arrangements. That means that HMRC has an interest in the property registered with the relevant Land Registry. The charge will enable it to recover any SDLT and related interest and penalties that might be due in the event of default or avoidance. Without the amendments, the legislation would not function in all the Land Registry regions in relation to the registration of the charge. The amendments do not increase the scope of the legislation’s anti-avoidance provisions, but simply mean that the provisions will work as intended in all three of the Land Registry regions. I believe that they are uncontroversial, but I hope that my wider comments on schedule 61 will be of benefit to the Committee.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I, too, welcome you to the Chair of this final Committee sitting, Mr. Atkinson. I listened to the Minister’s broad remarks about Islamic finance. I do not have any remarks to make about the amendments, but I have some questions about the schedule. I hope, therefore, that this can be rolled into a schedule stand part debate. There is a broad agreement on the matter—

Sitting suspended for a Division in the House.

On resuming—

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

—between both Front Benches, Mr. Atkinson. [Laughter.]

The Financial Secretary and I, along with the hon. Member for Leicester, South, took part in a panel discussion on Islamic finance at the East London Muslim Centre a few months ago. There is a broad degree of understanding across the House about the right approach to Islamic finance and the importance of it, not just to the Muslim community in this country, who are able to purchase products that they would not otherwise be able to obtain, but to the financial services sector.

When at the East London Muslim Centre, I remarked that we were within sight of the Square Mile. A number of investment banks and other businesses have sharia-compliant products on sale through windows, as well as having the stand-alone institutions that the Economic Secretary referred to. It is right to highlight the fact that London is leading the western world in this area, based not only on the innovation and skills that we see in the City of London, but the regulatory and tax approach that has been adopted. The Financial Services Authority has described its approach as:

“no obstacles, no special favours”.

Sharia-compliant products should therefore be on a level playing field for both tax and regulation. That sentiment was echoed in the 2008 Treasury document which said,

“We will not champion Islamic finance over conventional finance, but will instead strive to create a level playing field between Islamic and conventional finance.”

We support that approach.

This is the fourth Finance Bill where these matters have been debated and we have always sought a degree of consensus. The only area where there has not been consensus—it is more a matter of emphasis than fundamental disagreement—is the issue of the sovereign sukuk product, on which I intervened on the Minister. Last year’s Finance Bill Committee debated the loose ends around the product when the Government introduced paving legislation in that Bill to introduce a sovereign issue. One loose end was cost. Time and again, people who specialise in the area make the point that it would assist the wider market if there were a sovereign sukuk issuance. We need to ensure, if people go down that route, that we fully understand the product and its cost implications.

Schedule 61 is a development of legislation established over recent years. A basic tax framework was set out in the Finance Act 2007 so that income payments on alternative finance and investment bonds are treated as a tax deductible expense of the payer and income of the recipient and receive the same tax treatment as interest. However, there were three outstanding issues. The first was the treatment of the sale of property and whether that was subject to stamp duty land tax. There would be a charge on the initial sale to a special purpose vehicle and a further charge when the special purpose vehicle sold the building back to the originator. If a conventional bond had been used, no stamp duty land tax would have been charged on the second purchase.

The second outstanding question was whether there is a capital gains tax charge on that sale to the special purpose vehicle and whether a further charge would arise on the appreciation in value of a building while it was being held by special purpose vehicle. Again, the issue and redemption of a secured conventional bond would not have given rise to that second charge on disposal. Finally, there was the matter of capital allowances, which the Minister has referred to. The structure of the bond gave rise to a number of possible additional tax charges that would not have occurred on a conventional product. It is right to ensure that the treatment is the same, not just for the interest but for all the underlying taxes that might be triggered by one of the bonds.

In the 2008 Budget, the Government announced they would issue a consultation document on stamp duty land tax. That and the impact assessment highlighted that the SDLT places an additional barrier to issuers, compared with the conventional equivalent. That extra charge therefore puts the structure at a considerable disadvantage relative to conventional securitisations. The principle behind this year’s changes is to facilitate the use of AFIBs on real property, so that those bonds will not incur SDLT, and so that entitlements and capital allowances will be preserved.

The legislation is detailed, but I will not go through the schedule in detail—the Committee will be relieved that to hear at quarter past 2 on a Thursday afternoon, with the end of our proceedings in sight. However, a couple of points have been made to me in relation to the detail, and I would like to explore them.

Paragraphs 3(2) and 20(2) use the word “control” and risk rendering the definition of “acquiring control” to be somewhat circular. Would not

“the right to manage or direct the disposal of bond assets” be a better phrase than

“the right of management and control of the bond assets”?

Paragraphs 4(2) and 21(2) use the phrase “transfer sufficient rights”, which appears to mean that the bond holder must transfer ownership of the bond. However, it has been suggested that it would be preferable, and as effective, if bond holders could also waive part or all of their control rights, rather than have to divest themselves of economic ownership to satisfy the exclusion.

Paragraphs 4(3) and 21(3) refer to a bond holder underwriting a public offer. Should the definition not include sub-underwriting as well?

Paragraph 5(9) sets out the quantum of the charge, that being the SDLT that will be payable, plus interests and penalties, assuming that SDLT is due and payable but not paid. The inclusion of penalties creates some uncertainty in determining the amount of the charge, particularly as the imposition of a penalty and the level at which one might be imposed are dependent on a number of factors; the penalty is therefore not easily predicted. The removal of penalties from the quantum of the charge would not prevent the imposition of penalties in appropriate situations, so penalties could still be levied, which is important, but it would pre-empt commercial uncertainty in the operation of satisfactory charge, which is a condition of relief.

In the event that SDLT relief is withdrawn, paragraph 7(4) provides for the amount chargeable to SDLT to be the market value of the interest at the time of the first transaction. The substitution of market value for actual consideration normally applies when the purchaser and vendor are connected. Transactions between non-connected parties are generally based on actual consideration. It is unclear why the apparently penal approach of applying market value regardless of the connection has been adopted. Perhaps the Minister could clarify that.

Paragraph 17 provides for the transfer of an asset by Q to any person other than P to be treated as a disposal or balancing event in relation to P for capital allowances purposes. However, if Q transfers the assets to P’s group member, there should be provision in the legislation for P and the group transferee to make the same elections for capital allowances purposes that would be available had a transfer been made by P directly to another company. I suppose that this is one of those paragraphs where one has to mind one’s Ps and Qs—I couldn’t resist that one. [Hon. Members: “Try harder.”] I will try harder. I only have another two paragraphs to go, so the possibility of further bad jokes about schedule 61 is quite limited.

Paragraph 22 sets out an anti-avoidance test for the reliefs provided under the schedule. We do not have any objections to a test, but will the Minister consider  whether there should be a statutory clearance mechanism? The Minister has already indicated that he is very open-minded in considering these matters; I want to push him further and ask him to tell us the outcome of his consideration. Given the sums involved in the issue of the bonds and the time that goes into such matters, rather than there being some uncertainty about anti-avoidance measures, it would be helpful if there was some mechanism to get clearance from HMRC to ensure that it is happy with the bond. The same sort of logic is used for transactions of securities or indeed share exchange.

There are some very detailed points to consider. However, we go back to the importance of ensuring that there is a level playing field for alternative finance investment bonds compared to conventional bonds. We must see whether we can continue to harness the ingenuity of those who work in the City to maintain the promotion of London as a centre for Islamic finance.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury 2:15 pm, 25th June 2009

There has been a widespread welcome for the actions that the Government have taken previously and in this Finance Bill with regard to Islamic finance. To quote a partner from Norton Rose:

“These tax changes will give a considerable boost to the UK Islamic Finance initiative and ensure that in these difficult times alternative sources of finance will be available in the UK”.

I could quote a number of other comments. Clearly, people who follow these matters have been very supportive of what we have been trying to achieve as a Government and there has been an ongoing process of discussion and dialogue between policy officials and experts in this area.

Let me respond specifically to the comments made by the hon. Member for Fareham. First, on the point of control and the waiving of rights, investors can hold as many bonds as they wish, provided that those bonds do not carry the right of management and control of the bond assets. The ability to waive the rights of management and control subsequently would require the agreement of the bond issuer and it would potentially create two classes of bond, which could relate to uncertainty among investors, the bond issuer being Q as opposed to P, who would be the originator, as is explained in the Bill.

HMRC has been advised that there is no requirement within Islamic law for these bonds to provide for management and control of the bond assets. If such rights are then provided, they can open up significant anti-avoidance possibilities. So we believe that the proposals contained in the Bill are clear and unambiguous, providing the certainty that is requested by industry.

He suggested some alternative wording. I note that the hon. Gentleman did not table an amendment, but officials will have noted what he has said. If there is any way in which the wording of the clause could be improved to make it clearer we would certainly look at that, although at the moment I doubt that improving the wording would be possible.

The Bill provides relief for sub-underwriters. It defines an underwriter as anyone in the context of the offerer of rights under a bond who will:

“agree to make payments of capital under the bond in the event that other persons do not make those payments.”

That definition includes sub-underwriters.

On the issue of penalties and why they are included in the charge, I again want to say that there are significant avoidance risks associated with this relief, which HMRC  has sought to address by introducing the charge as a deterrent to the abuse of the legislation. The charge provides a security required to protect Exchequer revenue. In the event of avoidance or in the event of the conditions of the relief not being complied with, the relief may be withdrawn. In such circumstances, the charge over the land will ensure that any tax that is due can be collected.

On the point about market value, the market value rule is again an anti-avoidance provision, which is intended to ensure that the arrangements are not used to transfer land to a third party without the payment of the right amount of stamp duty land tax. Without that rule, the value of the land could be artificially suppressed and any subsequent default leading to the withdrawal of relief would result in SDLT being paid on the suppressed value, which obviously would not be right.

On anti-avoidance in general and the point about the statutory clearance mechanism that the hon. Gentleman raised, I can confirm that HMRC operates some statutory clearance systems. In addition, it operates non-statutory clearance systems to provide certainty for businesses operating in the UK. Where there is material uncertainty about the tax consequences of a transaction or event, businesses can use the service to obtain written confirmation of HMRC’s view of the application of tax law to that specific transaction or event. That arrangement will cover alternative finance investment bonds. I know that some experts are concerned about statutory clearance, but I hope that my clarification is of use and that it makes the position very clear.

I think that I have covered the points raised by the hon. Member for Fareham. Alternative finance investment bonds are an important area, and it is right that that market continues to develop. The legislation before us today will help that to happen.

Amendment 321 agreed to.

Amendments made: 322, in schedule 61, page 424, line 15, at beginning insert ‘in England and Wales,’.

Amendment 323, in schedule 61, page 424, line 23, leave out paragraphs (a) and (b) and insert—

‘(a) is a first charge on, or a security ranking first granted over, the interest transferred to Q,

(b) is in favour of the Commissioners for Her Majesty’s Revenue and Customs, and’.

Amendment 324, in schedule 61, page 426, line 12, leave out ‘imposed or security granted’ and insert ‘or security registered’.

Amendment 325, in schedule 61, page 430, line 19, leave out ‘imposed on it, or security granted over it,’ and insert ‘or security registered’.

Amendment 326, in schedule 61, page 430, line 20, leave out ‘that condition is complied with’ and insert—

‘(a) Q provides HMRC with the prescribed evidence that condition G is met in relation to the original land, and

(b) condition D is met’.

Amendment 327, in schedule 61, page 430, line 23, leave out ‘imposed on it, or security granted over it,’ and insert ‘or security registered’.

Amendment 328, in schedule 61, page 430, line 25, after ‘that’, insert—

‘(a) condition G is met in relation to the original land, and

(b) ’.

Amendment 329, in schedule 61, page 430, line 36, after ‘charge’, insert ‘on land in England and Wales’.

Amendment 330, in schedule 61, page 430, line 38, leave out ‘and’.

Amendment 331, in schedule 61, page 430, line 39, after ‘security’, insert ‘granted over land in Scotland’.

Amendment 332, in schedule 61, page 430, line 40, at end insert ‘and

‘(c) in the case of a charge on land in Northern Ireland, notify the Registrar of Titles of the discharge.’.—(Ian Pearson.)

Schedule 61, as amended, agreed to.